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HELPING
BRITAIN
PROSPER
Lloyds Banking Group
Annual Report and Accounts
2016
Lloyds Banking Group
How we're
helping Britain
prosper
Helping Britain Prosper is our purpose. It means
responding to the social and economic issues we
believe we are best placed to address.
We already support people, businesses and communities
all over Britain through our iconic brands and extensive
range of clear and simple products and services, but we
want to do even more to play our part in making Britain
a more inclusive and prosperous country. To achieve this
we must continue to build a culture where our colleagues
put customers first.
We want to take a leading role in helping the UK
economy whether through supporting housing, trade,
growth, infrastructure or tackling disadvantage. Our
Helping Britain Prosper Plan, launched in 2014, helps us
achieve this, taking us beyond business as usual by setting
measurable targets in the areas where we believe we can
make the biggest difference. The Plan is an investment in
our long-term sustainable success which underpins our
aim to become the best bank for customers whilst
delivering superior and sustainable returns
for shareholders.
Key brands
We're helping
individuals, families,
businesses and
communities all across
Britain to prosper
HELPING PLAN FOR RETIREMENT>280,000customer visits to our Retirement Planning Website. We want to do more to support and guide more of our customers on their retirement options HELPING HOMEBUYERS
£39bn
of gross new mortgage lending in 2016 with
60 per cent going to help homebuyers get
on and move up the housing ladder
HELPING START-UPS
121,000
start-ups helped to get going and grow
through funding. We also provide advice
and mentoring – including vital support for
many charities and social enterprises
HELPING COMMUNITIES
£600m
given to support charities through our
independent charitable Foundations over
the last 30 years. We believe no other bank
has the reach or resources to help tackle
social disadvantage
HELPING THE
ECONOMY
£1.8bn
tax paid in 2015. We are a major contributor
to UK tax revenues and were ranked as the
highest payer of UK tax in the most recent
PwC Total Tax Contribution Survey for the
100 Group. This payment increased to
£2.3 billion in 2016
HELPING TO BUILD
DIGITAL BRITAIN
12.5m
customers banking online, making us the
UK’s largest digital bank. We are also helping
Britain’s charities and small businesses to
build their digital skills and capability
HELPING UK MANUFACTURING£1.2bnof new funding support for UK manufacturing companies. We are supporting future talent to make British manufacturing more productive and competitive, today and tomorrow CONTENTS
Strategic report
Our competitive strengths
Group highlights
Divisional highlights
Chairman's statement
Group Chief Executive's review
Market overview
Our business model
Our strategic priorities
Key performance indicators
Our Helping Britain Prosper Plan
Doing business responsibly
Risk overview
Financial results
Summary of Group results
Five year financial summary
Divisional results
Other financial information
Governance
Letter from the Chairman
Board of Directors
Group Executive Committee
Corporate governance report
Directors' report
Directors' remuneration report
Risk management
The Group’s approach to risk
Emerging risks
Capital stress testing
How risk is managed
Risk governance
Full analysis of risk drivers
Financial statements
Independent auditors' report
Consolidated financial statements
Parent company financial statements
Other information
Shareholder information
Forward looking statements
Abbreviations
Alternative performance measures
Glossary
Subsidiaries and related undertakings
02
03
04
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10
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33
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Reporting
Just as we operate in an integrated way, we aim to report in an
integrated way. We have taken further steps towards this goal
this year. As well as reporting our financial results, we also
report on our approach to operating responsibly and take
into account relevant economic, political, social, regulatory
and environmental factors.
View our Annual Report and Accounts and other information
about Lloyds Banking Group at www.lloydsbankinggroup.com
The 2016 Annual Report and Accounts incorporates the strategic report and
the consolidated financial statements, both of which have been approved by
the Board of Directors.
On behalf of the Board
Lord Blackwell
Chairman
Lloyds Banking Group
21 February 2017
This Annual Report and Accounts contains forward looking statements with respect to certain of the Group’s plans and its current goals and
expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference
should be made to the forward looking statements on page 288.
Please turn over
Lloyds Banking Group
Annual Report and Accounts 2016
ABOUT US
We are the leading provider of financial services to individual
and business customers in the UK.
Our main business activities are retail and commercial banking,
general insurance, and long-term savings, protection and investment.
We provide our services under a number of well recognised brands
including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows
and through a range of distribution channels including the largest
branch network and digital bank in the UK.
We are creating a simpler, more
responsive, customer focused business.
Doing the right thing for our customers
by meeting their financial needs, helping
them succeed, improving our service
proposition and creating value for them,
is key to the long-term sustainable
success of our business.
Right: Sophie Unwin's 'Remade in Edinburgh' which was awarded a grant
from the Lloyds Bank Social Entrepreneurs Scale Up Programme, teaches
local people, including those who are homeless, unemployed, or refugees,
to repair household goods to save money.
OUR PURPOSE
Helping Britain prosper
Read more on page 18
OUR AIM
To become the best bank for customers
whilst delivering superior and sustainable
returns for shareholders
OUR BUSINESS MODEL
Simple, low risk, UK focused,
retail and commercial bank
OUR STRATEGIC PRIORITIES
Creating the best customer experience
Becoming simpler and more efficient
Delivering sustainable growth
Supported by our colleagues
Building the best team
Read more on page 12
Read more on page 14
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Strategic report
Our competitive strengths
Our strengths and capabilities provide significant
advantage and differentiation, driving value creation
UK focus
Operating primarily in the UK means we are focused
on a single developed market that we truly understand
while avoiding the complexities and costs of multi-
jurisdictional operations.
Simple, low cost
operating model
Our simpler operating model and focus on operational
efficiency provides a cost advantage which benefits
both customers and shareholders.
Financial strength
Our balance sheet and funding position have both been
transformed in recent years and they are now amongst
the strongest in the banking sector worldwide.
Low risk business
Being a low risk bank is fundamental to our business model.
Our low risk appetite is reflected through the low level of
non-performing loans and non-core assets and our credit
default swap spread, which is amongst the best in the banking
sector worldwide.
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B U S I N ESS AREAS
P R O DUCTS
SIM PL E, L O W C O S T
RETAIL
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HELPING
BRITAIN PROSPER
BEST BANK FOR
CUSTOMERS
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Operating responsibly
A sustainable and responsible approach to doing business
is integral to everything we do.
Multi-channel approach
Operating in an integrated way through a range
of distribution channels, including the largest branch
network and digital bank in the UK, ensures our customers
can interact with us when and how they want.
Multi-brand proposition
Offering our services through a number of recognised
brands enables us to address the needs of different customer
segments more effectively.
Skilled and
engaged people
Our colleagues provide real advantage. We invest in skills
and training while ensuring alignment to our customer
focused strategy and commitment to build the best team.
Read more on page 12
02
Lloyds Banking Group
Group highlights
ANOTHER YEAR
OF GOOD PROGRESS
Underlying profit of
£7.9bn
Strong capital generation
c.190 bps
pre dividend
Statutory profit before tax more than doubled to
£4.2bn
Acquisition of
MBNA
credit card business, announced in December
Read more on pages 33 to 36
or visit www.lloydsbankinggroup.com
Annual Report and Accounts 2016
Strong balance sheet position with pro forma
CET1 ratio (post dividend) of
13.8%
Progressive and sustainable ordinary dividend
2.55p per share
with an additional special dividend of
0.5p per share
Cost:income ratio of
48.7%
Our market leading cost:income ratio reduced
further, reflecting our operational efficiency
Asset quality ratio of
15 bps
Asset quality remains strong with no
deterioration in the underlying portfolio
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Strategic report
Divisional highlights
We operate across four business areas
to execute our strategy and drive value
for all our stakeholders
Read more on pages 40 to 47
or visit www.lloydsbankinggroup.com
RETAIL
COMMERCIAL BANKING
Our Retail division is a leading provider of current accounts,
savings and mortgages to personal and small business
customers in the UK.
Our Commercial Banking division has a rich heritage of
supporting UK businesses from SMEs to large corporates
and financial institutions.
UNDERLYING PROFIT
£3,003m
40%1
UNDERLYING PROFIT
£2,468m
32%1
24%
market share of current
account switchers
£11.7bn
of lending to
first-time buyers
3%
growth in SME
lending
17%
share of mid-market
banking
relationships
Active online users
2016
2015
2014
Business start-ups supported
2016
2015
2014
m
12.5
11.5
10.5
000s
121
103
99
Return on risk-weighted assets
2016
2015
2014
Funding for UK manufacturers
2016
2015
2014
%
2.4
2.4
2.0
£bn
1.2
1.4
1.0
1 Proportion of Group underlying profit excluding run-off and central items.
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Lloyds Banking Group
Annual Report and Accounts 2016
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CONSUMER FINANCE
INSURANCE
Our Consumer Finance division provides motor
finance solutions, consumer loans and credit cards
to consumer and commercial customers.
Our Insurance division provides customers with
long‑term savings, investment and protection
products and general insurance.
UNDERLYING PROFIT
£1,283m
17%1
UNDERLYING PROFIT
£837m
11%1
15%
share of credit
card balances
9%
growth in UK
consumer finance
assets
6m
life, pensions and
investments customers
14%
share of the home
insurance market
Motor finance UK balances
2016
2015
2014
Credit card balance growth
2016
2015
2014
Corporate pension, planning
and retirement funds
2016
2015
2014
Annualised payments to annuity
customers in retirement
2016
2015
2014
£bn
15.6
13.0
10.2
%
4
4
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1 Proportion of Group underlying profit excluding run-off and central items.
£bn
42.7
35.4
33.3
£m
932
798
787
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Strategic report
Chairman's statement
Overview and strategy
2016 was another year of good progress for the Group, both
financially and strategically. Our strong financial performance, the
strength of our capital position and the progressive return of the
Group to private ownership are testament to the hard work of our
colleagues to transform and simplify our business since the depths
of the financial crisis. On the back of that recovery, the agreement
to acquire MBNA is a significant strategic step which reinforces our
ability to deliver sustainable growth whilst helping Britain prosper.
However, we recognise that future success will depend on adapting
our business model to provide the cost and quality of service
required to meet customer needs effectively in a rapidly evolving
digital future, and we are working hard to ensure we have the
strategy and plans to achieve that transformation.
Meanwhile, the UK financial services sector continues to face a
number of near term challenges. The economic environment
remains uncertain, the level of regulatory change remains high,
competition continues to be fierce and the pace of technological
change requires continuing innovation while posing new threats
from data and cyber security. This reinforces our conviction that our
differentiated, simple, low risk, UK retail and commercial strategy is
the right approach. It has helped us deliver over the last few years
and will, I believe continue to do so going forward.
As a result of our business performance and strong capital position,
I am pleased to announce that the Board has recommended a final
ordinary dividend of 1.7 pence per share, bringing the total ordinary
dividend for 2016 to 2.55 pence per share, an increase of 13 per cent
on last year. In addition the Board has felt able to propose an
additional distribution of 0.5 pence per share as a special dividend
after prudently holding back sufficient capital to cover the expected
cost of the MBNA acquisition. This is in line with the Group’s policy
to deliver a progressive and sustainable ordinary dividend whilst
distributing surplus capital when appropriate to do so.
Our purpose
Our purpose as the UK’s largest retail and commercial bank is to
help Britain prosper. This means not only providing outstanding
service to our customers, but also responding to the UK’s social
and economic issues we believe we are best placed to address.
Our investment programmes and extensive range of clear and
simple products and services already support this ambition, helping
to meet the needs and grow the prosperity of people, businesses
and communities across the UK while building the deep, long-term
customer relationships that are vital to our future. However, we want
to do even more. Our Helping Britain Prosper Plan sets out our
targets to support housing, growth, trade and infrastructure and to
tackle social disadvantage. We are not just a British bank – we take
pride in being a bank for Britain, at the heart of the UK’s economy.
06
Our purpose as a UK focused bank
is to help Britain prosper and we are
playing a vital role in supporting
people, businesses and communities
across the UK.
Lord Blackwell
Chairman
Corporate culture
The Board and senior management have a vital role to play in
shaping and embedding a healthy corporate culture, and this
continued to be a major focus in 2016. At the heart is our core
value of ‘doing the right thing for customers’ – rebuilding trust
that is the foundation for our customer franchise.
Over the last year the Group has made significant strides in
removing past practices and organisational barriers that we
believed were inconsistent with those values. We have also taken
important steps in defining the culture and behaviours we believe
we need to support our values and embedding those in the way we
operate. While we still have further to go, I know that this approach
is aligned with the commitment of our dedicated colleagues across
the organisation who come to work every day wanting to deliver
great customer service. Getting this culture right will be critical to
our success in an increasingly competitive environment.
Communities
As well as their commitment to customers, I am extremely proud
of the way our colleagues support communities across the country
− another aspect of helping Britain prosper. I am particularly
pleased that so many have once again taken the time to volunteer
and raise funds for charities and community groups. Over the
course of this year 34,000 of our colleagues took part in volunteering
activities, contributing 240,000 hours of their time by sharing their
skills and experience to help make sustainable differences to local
charities, schools, colleges and businesses.
Another way we support millions of people across Britain is
through the funding of our independent Foundations. Since the
Foundations were set up over 30 years ago, they have donated
almost £600 million to charities across the UK. This year, I have once
again been delighted to meet with the Foundations and some of the
amazing charitable organisations they support, and to see the
huge difference our funding makes to so many local communities.
Our charity partnership provides another part of our overall
approach to addressing social disadvantage throughout the UK.
Over the past two years our colleagues have raised more than
£12.5 million for BBC Children in Need, over £4 million more than
our original target. There is no doubt that this will make a significant
impact across the UK, directly benefiting more than 40,000
disadvantaged children and young people.
Our target is to raise £22 million by 2020 for our chosen charity
partners. Starting this year, our new charity partner is Mental Health
UK. There is a growing recognition that mental health and financial
health are closely linked, and yet there is no single source of support
in this area. By bringing our two organisations together we aim to
create the perfect partnership to start developing this support for
people across the UK.
Lloyds Banking Group
Annual Report and Accounts 2016
Directors
We review the Board’s composition and diversity regularly and
are committed to ensuring we have the right balance of skills and
experience within the Board. As announced last year, Stuart Sinclair
joined the Board in January 2016 and Dyfrig John retired from the
Board at our AGM in 2016. We are very grateful to Dyfrig for his
contribution to the Group.
We have agreed a number of changes to our Board composition for
2017. Anthony Watson, our Senior Independent Director, will retire
at the 2017 AGM after serving more than eight years on the Board.
Anita Frew will succeed Anthony as Senior Independent Director,
combining this with the role of Deputy Chairman, which she has
held since May 2014. Nick Luff, an independent Non-Executive
Director, has notified the Board that in light of his other
commitments he does not intend to seek re-election at the 2017
AGM. Nick will be succeeded as Chairman of the Audit Committee
by Simon Henry. Both Anthony and Nick leave with our thanks and
best wishes for the future.
Remuneration
Our approach to reward aims to provide a clear link between
remuneration and delivery of the Group's key strategic objectives,
namely, becoming the best bank for customers whilst delivering
long-term, superior and sustainable returns to shareholders. We
believe in offering fair reward where colleagues are rewarded for
performance aligned to the long-term sustainable success of the
business, our commitment to rebuilding trust and changing the
culture of the Group.
Despite the uncertain environment, the Group continued to perform
strongly with good underlying profits, significantly increased statutory
profits, strong capital generation and increased ordinary dividends.
As a result, the Group’s total bonus outcome has increased to
£392.9 million. This is after a 19 per cent collective performance
adjustment reflecting additional conduct-related provisions which
impacted negatively on profitability and shareholder returns.
Total bonus outcome remains a small proportion of underlying
profit at 4.8 per cent. Cash bonuses are capped at £2,000 with
additional amounts paid in shares and subject to deferral and
performance adjustment.
More information on how we ensure our approach to remuneration
supports our strategy can be found in the Directors’ remuneration
report on page 84.
Outlook
I would like to thank all my colleagues across the Group for their
continued hard work and commitment. We have made significant
progress. There is always more to do and we will have further
challenges to face as we transform the bank to reflect the changing
environment. However, we remain committed to our strategy and
believe that our customer focus and simple business model with its
multi-brand, multi-channel proposition continue to provide the best
opportunities for competitive advantage and future success. As we
rebuild trust, my ambition is for Lloyds to earn its place as one of the
great British institutions, in which both colleagues and customers
can take shared pride.
Lord Blackwell
Chairman
CONTINUING TO HELP BRITAIN
PROSPER IN TIMES OF CHANGE
In 2014 we launched our Helping Britain Prosper Plan, focused
on the social and economic issues that we believe we are best
placed to help people in Britain address. The Plan contains
measurable targets to support people, businesses and
communities in the UK.
Despite the uncertainty created by the political and economic
events of 2016, we have continued to achieve many of our
targets. Highlights include:
– provided £1.2 billion of new funding to UK manufacturing
businesses
– helped more than 10,000 clients to start exporting
for the first time
– helped more than 75,000 first-time buyers
– supported more than 121,000 start-up businesses
– created more than 1,000 new apprenticeship positions
We operate the UK's largest digital bank and, in response to
the rapidly evolving digital environment, we have also met our
overall target to create 20,000 digital champions (of which 7,000
were in 2016) to help improve the digital skills and financial
capability of individuals and organisations.
Looking ahead we have set a new target to support the low
carbon economy by incentivising energy efficient commercial
property development through Britain’s first Green Loan Initiative.
Read more about our Plan on page 18 and online
at www.lloydsbankinggroup.com/ProsperPlan
A STRONG FOCUS ON
CORPORATE CULTURE
The Board places great emphasis on shaping and embedding
a healthy corporate culture. Our core values of 'putting
customers first', 'keeping it simple' and 'making a difference
together' are central to our next stage of cultural
transformation.
Measurement and monitoring
The Responsible Business Committee (RBC) provides
oversight of the work being done to develop measures
for reporting on cultural change. The RBC is supported
in particular by the work of two executive committees: the
Responsible Business Management Committee and the
Group Customer First Committee, who drive the development
of a culture framework and a culture dashboard to enable
us to monitor progress.
Quantitative components we measure include our net
promoter score, complaints data, colleague engagement
surveys, whistleblowing, regulatory engagement information
and assurance from risk on compliance with policies and the
Risk Framework. We also host breakfasts, dinners, branch visits
and staff engagement events.
The culture of the Board itself is measured in the Board
Effectiveness Review which is facilitated externally every three
years. You can read more about this review in our corporate
governance report on page 66.
Read more on corporate culture
in the corporate goverance report on page 52
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Strategic report
Group Chief Executive's review
We have delivered strong
financial performance in 2016
as we continue to make good
progress against our strategic
priorities. We are well positioned
for future success.
António Horta-Osório
Group Chief Executive
Our balance sheet remains strong with a pro forma CET1 ratio of
13.8 per cent, a total capital ratio of 21.4 per cent and a pro forma
leverage ratio of 5.0 per cent. In line with our progressive and
sustainable ordinary dividend policy, the Board has recommended
a final ordinary dividend of 1.7 pence per share, taking the total
ordinary dividend for the year to 2.55 pence per share, an increase
of 13 per cent on 2015. The Group has held back c.80 basis points of
CET1 capital to cover the estimated capital impact of the MBNA
acquisition; however, given our strong capital generation in the year,
the Board has also recommended a special dividend of 0.5 pence
per share.
Strategic progress
We have continued to make good progress on our strategic
priorities in 2016.
Creating the best customer experience
We are committed to meeting our customers’ evolving needs and
preferences through our multi-brand and multi-channel approach.
We operate the UK’s largest branch network and the largest digital
bank with over 12.5 million active online users. We have more than
8 million mobile banking users and for the second consecutive year,
the Lloyds Bank app has been rated the best banking app of all the
UK major banks for functionality.
Customer migration to digital channels continues at pace with more
than 60 per cent of our simple customer needs now met online and
digital is now the number one channel for new loans and credit
cards. We continue to invest in our customer propositions to
improve processes and the way our customers interact with us.
In Commercial Banking we have continued to improve the online
banking platform and in Retail Business Banking we are now able
to open new customer accounts in 5-6 days, down from 21 days
previously, with a best-in-class automated digital ID and verification
process. In Consumer Finance, Black Horse has reduced processing
times for new loans, while increasing security and protection for
customers. In Insurance we have introduced online tools which will
allow customers to consolidate their workplace pension assets and
employers to process employee monthly pension contributions on
the same day, down from 22 days in 2014.
This progress has been reflected in further reductions in the level of
customer complaints and our net promoter score, which continued
to improve in 2016 and is now nearly 50 per cent higher than at
the end of 2011. Our latest ‘Building the Best Team’ survey results
show that colleague engagement is at an all-time high and in line
with top performing UK corporates. Our strong performance in
2016 reflects the hard work undertaken by colleagues across the
Group and I would like to thank everyone for their significant efforts
and commitment.
We have delivered strong financial performance in 2016 as we
continue to make good progress against our strategic priorities.
Underlying profit was £7.9 billion and statutory profit has more than
doubled to £4.2 billion. We continue to improve our customers’
experience, simplifying the business whilst growing in targeted
areas and in December announced the acquisition of MBNA’s prime
UK credit card business. Strong capital generation, which is a
consequence of our business model, has enabled us to fully cover
the expected capital impact of the MBNA acquisition, increase our
ordinary dividend by 13 per cent and pay a special dividend. As
a simple, low risk, UK focused bank we are committed and well
positioned to help Britain prosper and become the best bank for
customers and shareholders.
Operating environment
Given our UK focus, our performance is inextricably linked to the
health of the UK economy which has been more resilient than the
market expected post referendum, with GDP growth of 2 per cent
in 2016. The UK’s decision to leave the European Union means the
exact nature of our relationship with Europe going forward remains
unclear and the economic outlook is uncertain. However, the
recovery in recent years with low unemployment, reduced levels
of household and corporate indebtedness and increased house
prices means the UK is well positioned.
The regulatory environment also continues to evolve and there are
a number of areas on which we await further clarity but, given the
strength of our balance sheet and the capital generative nature of
our business model, we are well placed to meet these regulatory
requirements and the economic uncertainty. Following the
de-risking of the balance sheet in recent years our PRA Buffer has
been reduced but, in light of expected future regulatory capital
developments, the Group will continue to target a CET1 ratio of
around 13 per cent.
Financial performance
The Group has delivered strong financial performance in the year.
Underlying profit was £7.9 billion with an underlying return on
required equity of 13.2 per cent (return on tangible equity of
14.1 per cent). Income was slightly lower which was more than offset
by lower operating costs, resulting in an improved cost:income
ratio of 48.7 per cent. Impairment increased, primarily due to lower
releases and write-backs, but asset quality remains strong with no
signs of deterioration in the portfolio. The difference between
underlying profit and statutory profit reduced significantly in 2016,
as statutory profit before tax more than doubled to £4.2 billion,
largely due to lower PPI provisions, and this enabled the Group to
generate approximately 190 basis points of CET1 capital during
the year.
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Annual Report and Accounts 2016
Becoming simpler and more efficient
Our cost leadership is a significant source of competitive advantage
and cost management remains a strategic priority. In response to
the lower rate environment we have accelerated the delivery of
our cost initiatives, and announced at the half year an increase to
the Simplification run-rate savings target and a reduction in our
non-branch property portfolio. We remain on track to deliver both,
having already achieved £0.9 billion of the increased £1.4 billion
Simplification run-rate target. As a result of the continued focus
on costs, our market-leading cost:income ratio has improved and
we continue to target further reductions.
Delivering sustainable growth
The Group aims to deliver sustainable growth in line with its low
risk business model. We have continued to make good progress
in growing market share in areas where we are underrepresented,
and have grown lending to SME and Mid Markets clients by around
£2 billion in the year. In Consumer Finance we have continued to
grow our motor finance and credit card portfolios organically and
the agreement to acquire MBNA’s prime UK credit card business
will give us the opportunity to create a best-in-class credit card
operation. In Insurance, we will continue to invest in developing
the brand and the business, including our financial planning and
retirement capabilities, and have also completed four bulk annuity
deals. In addition, we are committed to supporting first-time home
buyers and remain the largest lender to this customer group.
Helping Britain prosper
We remain committed to supporting the people, businesses and
communities in the UK through our Helping Britain Prosper Plan.
Notably, we have provided £1.2 billion of new funding to
manufacturing businesses, supported 121,000 start-ups and helped
10,000 clients to start exporting in 2016. Our economic contribution
to Britain extends beyond the products and services we offer and
the funding we provide to our customers and clients. Since we
launched our Apprenticeship Scheme we have created more than
4,000 roles, including 1,000 in 2016 and we have committed to
creating 8,000 by 2020. We have also exceeded our target to create
20,000 digital champions, a year earlier than expected. Furthermore,
we are the highest payer of UK tax in the most recent PwC Total Tax
Contribution Survey for the 100 Group, having paid £1.8 billion in
2015. Our tax payment in 2016 was £2.3 billion.
The combination of the progress we have made towards our
strategic priorities and our strong financial performance has
enabled the UK government to further reduce its stake in the Group
to less than 5 per cent, at a profit, returning over £18.5 billion to the
UK taxpayer since 2009.
Outlook
Our financial targets reflect our confidence in the future prospects
of the Group. In 2017 we expect the net interest margin to be
greater than 2.70 per cent and the asset quality ratio to increase
to around 25 basis points (before MBNA). We continue to target a
cost:income ratio of around 45 per cent exiting 2019, with reductions
every year. We now expect a return on required equity of between
12.0 and 13.5 per cent and a return on tangible equity of between
13.5 and 15.0 per cent in 2019. Going forward, the Group expects
to generate between 170 and 200 basis points of CET1 capital
per annum, pre dividend.
Summary
Following the simplification and transformation of our business
in recent years, the Group is now focused on delivering the best
customer experience and on continuing to develop our digital
capabilities. Our cost leadership and lower risk positioning provide
competitive advantage which enables us to deliver superior returns
to shareholders. We continue to believe that our simple, low risk
business model is the right one, and our strategic progress and
strong financial performance position us well for future success.
António Horta-Osório
Group Chief Executive
KEY EVENTS IN THE YEAR
There have been a number of notable events and
achievements for the Group in 2016, both within the Group
and more widely across the UK. Read our timeline for some
key events of the past 12 months.
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JANUARY
Ambassador
programme launch
Our senior leaders represent
the Group, build strategic
relationships and promote
our ambition to help
Britain prosper across
the regions
MAY
Help to Grow scheme
We were the first bank
to take part in a scheme
designed to boost lending
to fast growing businesses,
committing £30 million
of growth loans
JULY
Euromoney awards
We won Best Bank in the
UK for the fourth year
running and World’s Best
Bank for Adapting to the
Regulatory Environment
Cost guidance updated
in half year results
announcement
Run-rate savings target
increased from £1 billion
to £1.4 billion per annum
SEPTEMBER
Commitment to
helping Britain prosper
We announced our aim
to provide over £60 billion
of lending in the next
12 months
DECEMBER
MBNA acquisition
The Group announced
it is to buy the credit card
business, MBNA, from
Bank of America, subject
to competition and
regulatory approval
FEBRUARY
Full year 2015 results
Total ordinary dividend
declared for 2015 of 2.25 pence
per ordinary share as well as a
special dividend of 0.5 pence
per share
APRIL
Top 50 employer
The Group was named in
The Times 2016 Top 50
Employers for Women for
the fifth consecutive year
JUNE
EU referendum
The UK voted to leave
the European Union
AUGUST
Interest rate cut
The Bank of England's
Monetary Policy
Committee cut UK
interest rates to a
record low of 0.25 per cent
OCTOBER
Top 10 employer
The Group was named
as one of the UK’s
Top 10 Employers
for Working Families
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Market overview
Given our UK focus, our financial
performance is inextricably linked to the
performance of the UK economy and its
regulatory and competitive environment
ECONOMIC ENVIRONMENT
Resilient UK economy post referendum
During 2016 the UK economy performed broadly in line with market
expectations at the start of the year despite the decision to leave
the European Union and significant changes in the political
landscape, both in the UK and abroad.
Although post referendum most forecasters were predicting a
reduction in growth, in practice growth has been resilient and the
UK economy is estimated to have grown by 2 per cent in 2016, just
shy of 2.2 per cent in 2015. Business and consumer confidence did
fall immediately post referendum, but most of this has now been
recovered and consumers’ retail spending growth actually
accelerated in the months after the referendum.
Manufacturers are expecting exports to benefit from the weaker
pound, but confidence in the service sector has weakened. Towards
the end of 2016 inflation started to rise and is likely to become
a bigger headwind to consumers' spending growth through the
coming year.
UK house prices increased by around 7 per cent during the year,
largely driven by strong growth in the first quarter. Prices have
continued to increase, albeit at slower rates, during the rest
of the year in almost all geographic areas, although the most
expensive parts of London have seen some reductions over
the last six months.
Growth in our markets
Household and business deleveraging since 2009 has created
capacity for an increased pace of borrowing and the markets
in which we operate continued to grow in 2016. Specifically:
– Mortgage market growth increased to 3 per cent, from 2.7 per cent
in 2015, the strongest since 2007, and although buy-to-let growth
was impacted by the change in stamp duty policy in April, it still
grew significantly faster than the market as a whole
– Unsecured consumer credit growth rose to 8 per cent led by motor
finance. Although the strongest growth since before the financial
crisis, the level of unsecured debt remains close to a 20 year low
relative to households’ income
Mortgages
2016
2015
2014
Consumer unsecured
2016
2015
2014
SME borrowing
2016
2015
2014
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2.0
0.1
(3.7)
– Business borrowing from banks increased by 2 per cent,
the first growth since 2008, and SMEs by 2 per cent also
– Household deposit growth rose to 6 per cent, the strongest
since 2008
– Business deposit growth weakened, to 6 per cent, but remains
strong after three years of elevated growth and a very high level
of liquidity
Interest rates low for longer
Interest rates remain at historical lows with the base rate having
been cut to 0.25 per cent in August, and are expected to remain
low in the foreseeable future. Market rates currently imply an
increase to the base rate to 0.5 per cent during 2018, and to
0.75 per cent a year later. This flattening of the yield curve along
with continued competition has meant bank margins remain under
pressure. Significant competition has meant lending rates across
the market remain low, particularly in mortgages, although deposit
rates have fallen further during the year, offsetting the impact of
lower lending rates.
Impairment expected to remain benign
Improving indebtedness, along with the continued low interest rate
environment, is continuing to keep impairment levels low and they
remain below through-the-cycle levels.
The expected mild rise in unemployment is likely to lead to an
increase in impairment from the very low level of 2016, but it
should remain low over the longer term.
Outlook for 2017
How the economy evolves in 2017 is highly dependent on the type
of EU-exit deal that companies expect to be achieved in 2019, how
deeply that impacts investment and employment plans, and how
much squeezed consumer spending power is offset by improved
competitiveness of exports following the fall in sterling. Each of
these carries a high degree of uncertainty.
The UK economic environment will also continue to be impacted
by global uncertainties including the slowdown in China, European
elections and the global trade environment, particularly in light
of the recent US presidential election.
The consensus expectation is that UK GDP growth will slow from
2 per cent in 2016 to 1.6 per cent in 2017, and unemployment will
remain low, but will rise from 4.9 per cent at the end of 2016 to
5.2 per cent at the end of 2017. House prices are expected to
continue to rise, by around 3 per cent, supported by the ongoing
shortage of property for sale, low levels of housebuilding and
exceptionally low interest rates, while commercial real estate
prices are expected to fall by 4 per cent.
If the economy evolves in line with this consensus view, we would
expect growth across our markets to remain broadly stable in
aggregate, with a mild weakening in the growth of unsecured
consumer credit and commercial real estate lending offset by
a marginal rise in mortgages and other lending to businesses.
Lloyds Banking Group
Annual Report and Accounts 2016
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REGULATORY ENVIRONMENT
The regulatory landscape in which we operate continues to evolve,
but the key themes of protecting consumers and small business
customers, ensuring competitive markets and strengthening the
prudential and capital framework remain.
Competition
During 2016 the Competition and Markets Authority (CMA) review
of current accounts and SME Banking concluded that it needed to
intervene in these markets only to increase levels of transparency
and comparability in order to promote greater levels of customer
switching. In addition, the FCA and PSR reviewed a series of
individual markets ranging from credit cards to payments
infrastructure. Ensuring fair competition remains a core element
of regulatory reform with the mortgage market a key area of
focus for 2017.
Conduct
In 2016 the Senior Manager & Certification Regimes were
implemented, introducing greater clarity and accountability into
decision making for financial institutions. In addition, the FCA
announced in December it would extend the timetable for its
announcement on a potential deadline for PPI complaints until
the first quarter of 2017. We continue to work to ensure we provide
appropriate and fair products with clear, simple and relevant terms.
Capital
Although the Bank of England is comfortable with the capital level
for the UK banking sector as a whole, a number of changes to capital
requirements, particularly with regard to credit and operational risk,
have been proposed by the Basel Committee for Banking Supervision
and further discussions are scheduled for March 2017. We performed
well in the recent Bank of England stress tests and remain comfortably
in excess of minimum requirements on our key capital and leverage
ratios. Given this and our strong capital generation, we are well
positioned in the event of any changes.
Ring-fencing and resolution
Good progress continues to be made towards implementation of
ring-fencing in January 2019 in line with the EU Bank Recovery and
Resolution Directive and additionally for UK banks, the Financial
Services (Banking Reform) Act. Due to our UK retail and commercial
focus the vast majority of our business will sit within the ring-fence,
and we therefore expect ring-fencing to be less onerous for us than
many of our UK peers.
Summary
There are a number of other regulatory changes that have
been implemented or developed through 2016, several of which
are relevant to our business, including caps and prohibitions
on early-exit charges for pension-scheme members,
the implementation of the revised Markets in Financial Instruments
Directive, the application of the Interchange Fee Regulation,
changes to the regulation of claims-management companies,
the final report of the Financial Advice Market Review, the entry
into force of the General Data Protection Regulation and the
cancellation of plans to create a secondary annuities market.
Overall however, we believe our simple, low risk, UK focused
strategy puts us in a strong position to adapt to the evolving
regulatory landscape.
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CUSTOMER TRENDS AND
COMPETITION
In the competitive open markets in which we operate, customers
are benefiting from an increasing range of products and services
from a growing choice of providers and via a range of channels.
Access through digital platforms, including via mobile devices,
has increased significantly in recent years, changing customer
behaviours and expectations in terms of how they shop for
goods and undertake banking, and these trends are expected
to accelerate.
Customers require different products and services at different
stages of their lives, with many motivated by their desire to achieve
better value for money, not least in the current low interest rate
environment. Security and reputation remain important factors,
with customers wanting clear and transparent products delivered
with good service and access to relevant, expert advice.
We have seen an influx of new entrants to the market, with a variety
of business models. Many of these have expertise and experience
in digital product offerings, with strong funding positions, credible
brands, and in some cases pre-existing customer bases and branch
networks. In addition, non-banks such as technology firms and
supermarkets are disrupting the banking industry.
Our strategy, which focuses on our multi-brand, multi-channel
distribution model, simpler processes, customer-driven product
range and expertise across insurance and banking, puts us in a
unique position to respond to these market conditions and meet
the needs of individual and corporate customers. Above all, it
recognises that our market is competitive, additional challengers
continue to emerge and that to succeed we need to focus on the
ever-changing needs of our customers.
Key opportunities
– Customer needs: our differentiated customer focused
strategy along with our multi-channel distribution network,
in particular our evolving digital capability, position us well
to address changing customer needs.
– Regulatory environment: greater clarity is emerging
on regulatory requirements and our simple, low risk,
UK focused strategy places us in a strong position.
– Low cost position: this enables us to provide competitive
differentiation for the benefit of customers and shareholders.
Key challenges
– Economic environment: uncertain impact of EU referendum
decision and continued low interest rates.
– Regulatory environment: the level of regulatory change
remains high with continued focus on ring-fencing,
resolution, competition, capital and conduct.
– Competition: increased competition for lending and
deposits could further impact margins.
– Digital transformation: the pace of change is significant
and we will need to continue to invest to meet evolving
customer needs.
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Strategic report
Our business model
As a UK focused bank we are well placed to
help Britain prosper, delivering for customers,
shareholders and wider society. Our
differentiated business model gives us
competitive advantage, enabling us to
continue to deliver for our customers
in a challenging environment
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C O MPETITIVE
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B U S I N ESS AREAS
P R O DUCTS
SIM PL E, L O W C O S T
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HELPING
BRITAIN PROSPER
BEST BANK FOR
CUSTOMERS
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BUSINESS AREAS
Our business areas are structured according
to the products and services we provide to
best serve our customers' financial needs.
We currently have four business areas:
PRODUCTS
Our product range is driven by the needs of
our retail and commercial customers and
informed through comprehensive customer
analysis and insight.
Retail
Insurance
Consumer Finance
Commercial Banking
Lending
mortgages, credit cards, personal
and business loans
Deposit taking
current accounts, savings accounts
Insurance
home insurance, motor insurance, protection
Investment
pensions and investment products
Commercial financing
term lending, debt capital markets,
private equity
Risk management
interest rate hedging, currency, liquidity
EXTERNAL
ENVIRONMENT
EXTERNAL ENVIRONMENT
Our business model is influenced by external
factors which continue to evolve.
We are adapting to changing customer
behaviour such as the increased adoption
of digital products.
Our focus on the UK means our future is
inextricably linked to the UK economic and
political environment, so we need to be
agile to adapt to the uncertainty following
the vote to leave the European Union.
The level of regulation remains high,
although we are now seeing more clarity
around competition, conduct, capital and
ring-fencing and resolution.
In a very competitive market, we continue
to differentiate ourselves (see panel below
for more information).
As a bank that supports millions of people,
businesses and communities, we believe we
are in a unique position to help tackle some
of the biggest social and economic issues
facing the UK today.
OUR COMPETITIVE STRENGTHS
UK focus
Operating primarily in the UK means we are focused on a single
developed market that we truly understand while avoiding the
complexities and costs of multi-jurisdictional operations.
Simple, low cost operating model
Our simpler operating model and focus on operational efficiency
provides a cost advantage which benefits both customers and
shareholders.
Low risk business
Being a low risk bank is fundamental to our business model.
Our low risk appetite is reflected through the low level of non-
performing loans and non-core assets and our credit default swap
spread, which is amongst the best in the banking sector worldwide.
Financial strength
Our balance sheet and funding position have both been
transformed in recent years and they are now amongst the
strongest in the banking sector worldwide.
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Annual Report and Accounts 2016
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STRATEGIC
PRIORITIES
CREATING VALUE
STRATEGIC PRIORITIES
We are adapting to the changes brought about
by technology, changing customer behaviour
and regulation in a competitive market
environment. To achieve this, we are focusing
on three strategic priorities whilst building the
best team.
CREATING VALUE
Outcomes for our stakeholders:
Best bank for customers
Doing the right thing for our customers by meeting their financial needs, helping them
succeed, improving our service proposition and creating value for them, is fundamental
to our business model and the long-term sustainability of the business.
Creating the best customer experience
Becoming simpler and more efficient
Superior and sustainable returns
The successful delivery of our business model and strategy should enable delivery
of superior and sustainable returns for our shareholders.
Delivering sustainable growth
Supported by our colleagues
Building the best team
Helping Britain Prosper Plan
Our response to some of the social and economic issues facing the UK is our
Helping Britain Prosper Plan which sets out clear targets to address issues where
we can make a measurable and meaningful contribution. These include the shortage
of affordable homes; supporting small businesses and the UK's manufacturing base;
helping people and organisations acquire the digital skills and capabilities they need;
and tackling disadvantage in local communities.
Read more on pages 14 to 15 or
visit www.lloydsbankinggroup.com
Multi-brand proposition
Offering our services through a number of recognised brands
enables us to address the needs of different customers segments
more effectively.
Multi-channel approach
Operating in an integrated way through a range of distribution
channels, including the largest branch network digital bank
in the UK, ensures our customers can interact with us when and
how they want.
Skilled and engaged people
Our colleagues provide real advantage. We invest in skills and
training while ensuring alignment to our customer focused
strategy and commitment to build the best team.
Operating responsibly
A sustainable and responsible approach to doing business
is integral to everything we do.
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Our strategic priorities
In order to help Britain prosper and to achieve our aim of
becoming the best bank for customers, we are focusing
on three strategic priorities. These are supported by our
commitment to building the best team
AREAS OF FOCUS
Progress in 2016
21%
digital market
share
5-6 days
to open a business
account, down from
21 days
Progress in 2016
48.7%
continued reduction
in cost:income ratio
£0.9bn
Simplification run-rate
savings on track
>60%
of simple customer
needs met via online
and mobile
62.7 pts
customer satisfaction
is increasing, up
3.4 points in the year
c.50%
reduction in time
taken to open a
savings account
55%
of approved mortgage
applications to offer in
less than 14 days
– Largest UK digital bank and enhanced digital offering
– Cost leadership with continued reductions in cost:income ratio
- 12.5 million active online users including 8 million mobile users
with more than 2 billion logons in 2016
- Increasing market share
- Number 1 rated UK banking app for functionality
– Faster and easier banking
- Introduction of 'selfie' verification for account applications
- Video meetings and live webchat support for mortgage
and remortgage applicants
- Instant mortgage lending decisions through our online
Agreement in Principle
– Further investment in UK's largest branch network
- Branches reformatted to reflect changing customer needs
with the number of mobile banking vans increased
– Net promoter score of 62.7 points, an increase of nearly
50 per cent since the end of 2011
– Total customer complaints have been on a downward
trend since 2012
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to 48.7 per cent
– Actively responding to lower interest rates through accelerated
cost delivery and targeting further efficiency savings
– On track to deliver £1.4 billion of Simplification run-rate savings:
£0.9 billion achieved to date
– Transforming our key customer journeys, making it simpler, faster
and more convenient to meet our customers’ financial needs
- Time taken to open savings account in branch down from
45 minutes to 15-30 minutes
- 55 per cent of approved mortgage applications proceed
to offer in less than 14 calendar days, up from 37 per cent
- Introduced a flexible online home insurance offering with new
functionality and more choice for customers
- Launched a new digital service for employers, significantly
reducing processing times for monthly corporate pension
scheme management
- Simplification of SME on-boarding process from 15 paper
application forms to 1 digital form
CREATING THE BEST CUSTOMER EXPERIENCE –Improving customer experience with our multi-brand, multi-channel approach, combining digital capabilities with face-to-face services –Transforming our digital presence, providing simpler, seamless interactions across online and mobile while sustaining extensive customer reach through our leading branch networkBECOMING SIMPLER AND MORE EFFICIENT –Creating operational capability which is simpler and more efficient through further system enhancement and integration –Becoming more responsive to changing customer expectations while maintaining our cost leadership amongst UK high street banks Lloyds Banking Group
Annual Report and Accounts 2016
SUPPORTED BY
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Progress in 2016
3%
SME lending growth,
ahead of the market
£2.8bn
Consumer Finance UK
customer asset growth
121,000
new business start-ups
supported
75,000
first-time buyers
supported
– Growth in targeted areas
- SME lending growth of 3 per cent, ahead of the market
- Consumer Finance UK customer asset growth of £2.8 billion
- Black Horse motor finance growth of 20 per cent
- Completion of four bulk annuity transactions, taking external
deal size to more than £1.85 billion since our entry into the
market in 2015
- Announced the acquisition of MBNA, a prime UK credit card
business, in line with strategic goal to grow in consumer finance
– Maintain market leadership in key retail business lines
- Market leadership retained in current accounts and deposits
- Focus on protecting margin in current competitive low growth
mortgage market. £39 billion of gross new mortgage lending
in 2016 and remain largest lender to first-time buyers
Progress in 2016
71pts
employee
engagement at an
all-time high
No.1
private sector
employer for
LGBT people
32.4%
of senior roles
held by women
6 days
formal training
per colleague on
average per year
– Employee engagement at 71 points, equalling our
highest ever score
– Line Manager Index at 86 points, our highest score ever
– Our Line Manager Academy, launched in 2015, won the
‘Most effective cultural transformation initiative’ award
at the London Institute of Banking & Finance’s Financial
Innovation Awards 2016
– Average of 6 days formal training per colleague per year
– 32.4 per cent of senior roles now held by women
– Number 1 private sector employer in the Stonewall Top 100
– Launch of Families Matter, a network for parents and carers
– 40,000 colleagues on boarded to HIVE, a new collaboration
platform; 59 per cent are active users against industry
benchmarks of 20-24 per cent
– Provided new opportunities for colleagues to become
shareholders; over 80 per cent now have an ownership interest
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15
DELIVERING SUSTAINABLE GROWTH –Further developing Group-wide growth opportunities within our prudent risk appetite –Helping Britain prosper –maintaining market leadership in our main retail businesses, making the most of our multi-brand, multi-channel strategy –leverage Group strengths to capture growth in underrepresented areasBUILDING THE BEST TEAM –Committed to building a business our colleagues are proud to work for by creating the best environment for our colleagues to succeed –Providing colleagues with the right skills and tools; and giving them the opportunity to share their views
Strategic report
Key performance indicators
Delivering for customers and shareholders
Our key performance indicators have been considered by
the Board and identify the most effective output measures for
assessing financial performance and progress towards becoming
the best bank for customers. As a result of strategic progress in
2016, we have reported good underlying profits, significantly
increased statutory profit, strong capital generation, increased
ordinary dividends and a special dividend.
Customer relationships are key to our strategy and we specifically
measure customer satisfaction and complaint levels. We also track
our performance against the targets of our Helping Britain Prosper
Plan, about which you can read more on page 17.
This year an additional key performance indicator has been included
to reflect our performance on employee engagement, a key metric
for becoming the best bank for customers.
Remuneration aligned with performance
To ensure our employees act in the best interests of customers
and shareholders, remuneration at all levels of the organisation
is aligned to the strategic priorities and financial performance of
the business and also takes into account specific risk management
controls. Variable remuneration including bonuses for all colleagues,
including our Executive Directors, is based on the performance of
the individual, the business area and the Group as a whole.
Performance is assessed against a balanced scorecard of
objectives across five areas (customer, people, control
environment, building the business, finance) which are reviewed
on a regular basis. Executive management are also eligible to
participate in a long-term incentive plan, which encourages
delivery of superior and sustainable long-term returns for
shareholders, whilst supporting the Group's aim of becoming
the best bank for customers and helping Britain prosper. KPIs
that are directly linked to remuneration are marked with this
symbol
.
Underlying profit before tax
2016
2015
2014
£m
7,867
8,112
7,756
Common equity tier 1 ratio
20161
20151
2014
%
13.8
13.0
12.8
Underlying profit decreased slightly in 2016, largely due to slightly
lower income and higher impairments, partly offset by lower costs.
Our common equity tier 1 ratio remains strong at 13.8 per cent
despite increased dividends. It also remains one of the strongest
compared to our major UK banking peers.
1 Pro forma
Statutory profit before tax
2016
2015
2014
£m
4,238
1,644
1,762
Cost:income ratio
2016
2015
2014
Pre-tax statutory profit increased significantly to £4,238 million in
2016 compared to £1,644 million in 2015, with the increase largely
driven by lower PPI charges.
Our cost:income ratio further improved to 48.7 per cent
and remains the lowest of our major UK banking peers.
Ordinary dividend
2016
2015
2014
p
2.55
2.25
0.75
Asset quality ratio
2016
2015
2014
An increased ordinary dividend of 2.55 pence per share, in line with
our progressive and sustainable dividend policy. In addition, the
Board has recommended a special dividend of 0.5 pence per share.
Our asset quality ratio remains low at 15 basis points, reflecting
our effective risk management and continued low interest rates.
Underlying return on required equity
2016
2015
2014
The underlying return on required equity reduced in 2016,
reflecting lower underlying profit and a higher tax charge.
Earnings per share
2016
2015
2014
Earnings per share increased in the year, largely due to the
significant increase in statutory profit.
%
13.2
15.0
13.6
p
2.9
0.8
1.7
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Total shareholder return
2016
2015
2014
Our share price fell by 13 per cent in 2016, and although dividends
increased in the year, our total shareholder return still fell by
10 per cent.
Read more about our financial performance on
page 33 or online at www.lloydsbankinggroup.com
%
48.7
49.3
49.8
bp
15
14
23
%
(10)
(2)
(4)
Lloyds Banking Group
Annual Report and Accounts 2016
Customer satisfaction
Digital active customer base
2016
2015
2014
62.7
59.3
59.2
2016
2015
2014
m
12.5
11.5
10.4
Our net promoter score is the measure of customer service at key
touch points and the likelihood of customers recommending us. It
has continued to improve in the year and is now nearly 50 per cent
higher than at the end of 2011.
Best bank for customers index
% favourable
2016
2015
2014
78
78
72
The index is the outcome of a survey of more than 70,000 colleagues
which shows how strongly they believe we are committed to
becoming the best bank for customers. Our score remained
the same as in 2015.
Employee engagement index
% favourable
Reflecting the pace of digital adoption, our number of active digital
customers increased in the year, from 11.5 million to 12.5 million.
Customer complaints
(FCA reportable complaints per 1,000 accounts1)
H1
2016
2015
2014
H2
2016 n/a
2015
2014
1.9
2.0
1.6
0.0
1.9
1.5
The FCA changed the approach to complaint classification and
reporting from 30 June 2016. Updated complaint data is not yet
available on the new basis but will be available by the end of the first
quarter. Total customer complaints have been on a downward trend
since 2012 and have continued to fall in the second half of 2016.
2016
2015
2014
1 Excluding PPI.
71
70
71
Colleague engagement remains high with our employee
engagement index at 71, equalling our previous highest score. Our
performance excellence and line management indices both reached
their highest ever scores. These results indicate our colleagues have
a sense of pride and are motivated to succeed while believing we are
committed to delivering great products and services for customers.
Helping Britain Prosper Plan performance 2016
This is the third year we have tracked and reported
performance against all our Plan metrics and targets.
People
Businesses
Communities
This year we made good progress and achieved 20 of our
24 targets.
Apprenticeships: we created more than 1,000 new
apprenticeship places, with a third of them being offered
to candidates from the UK’s most disadvantaged areas
Manufacturing: we provided £1.2 billion in new funding
to Britain’s manufacturing businesses – helping support
a crucial sector of the UK economy
Trade: we helped business grow and trade – we supported
121,000 start-up businesses and helped more than 10,000 clients
export for the first time
Digital: we reached our target to recruit more digital champions
in local communities – we now have 23,000 colleagues helping to
build Britain’s digital capability
NUMBER OF
TARGETS
ACHIEVED
NOT
ACHIEVED
9
8
7
6
7
7
3
1
0
First-time buyers: we helped 75,000 first-time buyers, and
remained one of the largest lenders to this market in the UK but
fell short of our target to support 1 in 4 of all first-time buyers this
year. We want to remain a leading provider in this market
Lending: we increased our net lending to SME and Mid Markets
companies by £1.6 billion, despite the challenging market
conditions, meaning we missed our £2 billion Plan target1 this year.
We remain open for business and committed to helping
businesses prosper in the UK and globally
Disabled colleagues: we maintained the engagement scores of
disabled colleagues at 2015 levels but didn’t increase them – so
we’ll do more to help them in 2017 through training, development
and our award-winning workplace adjustment programme
Senior women: our 2016 progress was below our 33 per cent
target. However we remain committed to our 2020 goal of
40 per cent women in senior roles. Our 2016 focus was on
improving our internal female talent pipeline
Read more about our 2016 performance
at www.lloydsbankinggroup.com/ProsperPlan
1 The Plan target excludes net lending to the Social Housing and CRE sectors.
Social Housing is included under a separate target in the 2016 Plan: we delivered
£955 million of new funding support.
17
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Strategic report
Our Helping Britain Prosper Plan
People, businesses and communities
across Britain are facing significant
challenges. We’re helping to address
them through our Helping Britain
Prosper Plan
A plan to help Britain
We believe no other bank is better placed to help Britain prosper.
We serve approximately 25 million customers and 1 million small
businesses but we want to be more than just a bank. We want to go
beyond business as usual and help address social and economic
challenges such as Britain’s housing shortage, the skills gap in key
industries, social mobility and social disadvantage.
We are part of the fabric of Britain, visible on almost every high
street through our iconic brands. The challenges Britain faces
affect us directly, our operations and our colleagues.
Through our independent charitable Foundations, which support
thousands of charities, we help some of the most disadvantaged
people in Britain. In 2016 we invested £18.5 million in our
Foundations and our colleagues donated their skills and expertise
to help the charities they support become more sustainable.
The Plan is core to our strategy: we know from long experience that
when Britain prospers, so do we. So the Plan is an investment in our
collective long-term success. It supports our strategy to become the
best bank for customers and it’s fundamental to rebuilding trust in
our brands and the sector.
Evolving the Plan
We launched the Plan in 2014, drawing on advice from our senior
leaders and many external stakeholders, including our Independent
Stakeholder Panel and Foundations, to help us shape it. These
stakeholders play a role in its continuing evolution.
Since the launch of the Plan we have achieved a lot, meeting 20 of
our 25 targets in 2014, and 27 of our 28 targets in 2015. In 2016, we
adjusted the Plan to make it more focused on what we can do best
for Britain, more ambitious and more measurable in terms of the
outcomes we want to achieve. In 2016 we achieved 20 out of our
24 targets.
Helping Britain prosper is about creating
opportunities for all to share in the
economic and social benefits of a
successful UK. As a sustainable, low-risk
business we can support this success in
many ways
Sara Weller
Independent Director and
Chairman, Responsible Business Committee
Read more about our Plan online at
www.lloydsbankinggroup.com/ProsperPlan
18
OUR FOCUS AREAS
Key actions
We have made good progress against our People targets.
Recognising the potential shortfall in many people’s pension
provisions, we have exceeded our target and had over 280,000
visits to our retirement planning website.
We supported 75,000 first-time homebuyers, but missed our target
to support 1 in 4. We want to do more to support the whole housing
market by making first-time buyer mortgages easier to access and
by being a leading supporter of new build mortgages. Our 2017
Plan reflects this ambition. Our new mortgage lending totalled
£38.7 billion in 2016 and we are a leading supporter of the
government’s Help to Buy scheme, having advanced £5.3 billion
under the mortgage guarantee element since 2013.
We continue to make progress against our target that women
hold 40 per cent of our senior roles by 2020. In 2016, despite
focusing on building a talent pipeline of female managers, we fell
slightly short of our 33 per cent senior management goal. We also
fell just short of our target to fully engage more of our disabled
colleagues but we will continue to support them through our
award-winning workplace adjustment programme and our
colleague network.
Progress in 2016
1 in 4
new build mortgages
provided in 2016
32.4%
of senior roles now
held by women
Supporting
mental health
We have launched a mental
health awareness campaign
for colleagues and are
introducing training so that line
managers can understand and
help those affected.
HELPING PEOPLE PROSPERWe are providing more support for individuals and families whether they are buying a home, planning for later life or looking for a rewarding job. We are making our Group more diverse and inclusive to reflect the Britain we serve.
Lloyds Banking Group
Annual Report and Accounts 2016
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Key actions
We have provided £1.2 billion of new funding support to
manufacturing businesses and, through our £5 million investment
in the Lloyds Bank Advanced Manufacturing Training Centre in
Coventry, we are helping to train the next generation of highly
skilled manufacturing apprentices, graduates and engineers.
We have helped more than 10,000 of our clients to start exporting for
the first time, exceeding our Helping Britain Prosper Plan target of
5,000 businesses a year. This puts us on course to exceed our target
of helping 25,000 businesses export for the first time, by 2020.
We increased net lending to SME and Mid Markets companies by
£1.6 billion, but fell short of our £2 billion Plan target1. Since 2011, our
net lending to SMEs has increased by 30 per cent whilst the market
has contracted 11 per cent, and since 2012 our lending to Mid
Markets companies has increased by 15 per cent, compared to a
market that has declined 3 per cent. We aim to increase lending
to the sector by £2 billion in 2017.
We also want to do more to support green business initiatives, so
we’ve set a new environmental target to provide funding to help
10 million square feet of commercial real estate, equivalent to 10
London Shards, become more energy efficient by 2020.
Key actions
By working with our independent charitable Foundations we have
continued to support communities across the UK. In 2016 we gave
£18.5 million to our Foundations and have supported 3,700 charities,
which reach some of the most disadvantaged people in Britain today.
Our colleagues completed more than 260,000 hours of volunteering
putting us on track to deliver 2.3 million hours by 2020. We are doing
more to encourage colleagues to use their skills and expertise,
though mentoring and skills-based volunteering, which accounted
for 35 per cent of all colleague volunteering hours in 2016.
In 2016 the number of Digital Champions reached 23,000 and
we have trained almost 10,000 of these to offer digital support to
people and organisations in their local communities. This means
we have achieved our Helping Britain Prosper Plan target of 20,000
Digital Champions early. We’ve set a new target for 2017 to train
700,000 individuals, SMEs and charities in digital skills, including
internet banking.
Progress in 2016
Progress in 2016
£10bn 121,000
of infrastructure
projects supported
start-up businesses
helped
£955m 23,000
new funding support
for social housing
colleague digital
champions
Housing Growth
Partnership
Mike and Ali Afshar of AMA
Homes are one of many smaller
house building businesses
benefiting from our £30 million
Partnership with the
government.
Helping the homeless
Edinburgh charity Fresh Start
helps previously homeless people
to resettle when they find a home.
A Bank of Scotland Foundation
grant helped them to pay an
Operations Manager’s salary
and fund project work.
1 The Plan target excludes net lending to the Social Housing and CRE sectors.
Social Housing is included under a separate target in the 2016 Plan: we delivered £955 million of new funding support.
19
HELPING BUSINESSES PROSPERWe are helping businesses of all types and sizes to prosper by offering them the funding, support and encouragement they need to grow at home or abroad. We are supporting the transition to a low carbon economy.HELPING COMMUNITIES PROSPERWe are helping communities by addressing inequality, supporting disadvantaged people and championing Britain’s diversity.
Strategic report
Doing business responsibly
A sustainable and responsible
approach to doing business is
integral to everything we do
Responding to a changing Britain
2016 was a year of significant change in Britain and considerable
change worldwide. As Britain faces an uncertain period it is vitally
important that we help people, businesses and communities
to address the challenges they face: challenges related to housing,
employability, savings, business growth, international trade,
financial exclusion and disadvantage.
A responsible approach
Doing business responsibly is fundamental to our strategy to
become the best bank for customers, our Helping Britain Prosper
Plan, our Code of Responsibility and all of our Group policies and
standards and the future success of the business.
We are committed to sustainable development and delivering a
prosperous Britain for all. This includes working with others to deliver
relevant areas of the United Nation’s agenda, such as the Sustainable
Development Goals. As signatories to the UN Global Compact we
have pledged to embed their 10 principles, including human rights,
labour, environment and anti-corruption, into the way we operate.
Our first annual Communication on Progress will be published online
in April 2017.
We aspire to conduct business in a way that values and respects
the human rights of our colleagues, suppliers, customers and the
communities we operate in.
Our responsible approach is reflected by our continued presence
in the FTSE4Good Index and our position in the CDP Climate A list
in recognition of our transparent reporting and efforts to reduce
our emissions.
Focusing on what matters most
In 2016 we undertook a comprehensive materiality survey to analyse
and rank the responsible business issues that our stakeholders
deem most important to our business. Using a range of internal and
external sources, we identified 30 economic, social, environmental
and governance issues across eight key categories and asked
stakeholder groups to share their views: colleagues, customers,
investors, community groups, government and legislators and
special interest groups and opinion formers.
In 2016 many of the same issues as 2015 emerged as the most
material, with human rights, colleague diversity and wellbeing,
economic impact, and data privacy and security growing in
importance. The top material issues are as follows:
1. HOW WE RUN OUR BUSINESS
2. BUILDING TRUST
3. ECONOMIC IMPACT
4. SERVING OUR CUSTOMERS FAIRLY
5. HUMAN RIGHTS, DIVERSITY AND WELLBEING
Visit www.lloydsbankinggroup.com/responsible-business
for more information
20
1. HOW WE RUN OUR BUSINESSWe must run our business in a responsible and sustainable manner, complying with laws and regulations, managing and mitigating risks and delivering sustainable returns for customers and shareholders.Ensuring good governance We have an effective top-to-bottom governance structure, providing an environment in which colleagues are encouraged and supported to do the right thing and to work responsibly. This governance structure includes our Group Board and the Board-level Responsible Business Committee and cascades to every part of our business. In 2016 we established an Executive level Responsible Business Management Committee which reports to the Chief Executive and is responsible for recommending and implementing the Group’s Responsible Business strategy. Read more about the Responsible Business Committee’s activity in 2016 on page 79.Beyond regulatory compliance Operating responsibly requires running our business in ways that meet relevant legal and regulatory requirements. In addition, we have a number of internal policies and procedures related to doing business responsibly including our Ethics Policy. We support the UN’s wider development agenda, including the Guiding Principles on Business and Human Rights. We welcome the Modern Slavery Act and increased transparency and will publish our first Transparency Statement on or before 30 June 2017. Engaging with stakeholders We know that engaging with different stakeholder groups is extremely important. It enables us to understand the issues they face and their expectations of the Group. Their contributions influence our strategic thinking and also help us to shape our corporate reporting.We held more than 1,100 meetings with investors in 2016. We regularly engage SRI/ESG investors as well as mainstream investors and investment analysts to provide them with information on our performance, strategic plans and how we do business responsibly. This year we held a number of responsible business webinars and roadshows with investors and analysts and undertook a governance lunch for major investors at which responsible business was actively discussed. We also briefed ratings agencies about our performance against our Conduct Risk Appetite Metrics. Read more on page 145.OUR STAKEHOLDER PANELWe’ve had a Panel in place since 2012 but in 2016 we established a smaller and more focused Independent Stakeholder Advisory Panel. It will provide informed and constructive external challenge and advice on our Responsible Business strategy and programmes, including the Helping Britain Prosper Plan. 'The Stakeholder Panel will be powerful in helping us to stay focused on our priorities, to advise us and to challenge us to think innovatively about emerging issues.'Sara Weller, Chairman, Responsible Business Committee Lloyds Banking Group
Annual Report and Accounts 2016
Responsible lending and investment
We recognise the need to address climate change, protect
biodiversity, support local communities and ensure human
rights are protected. We assess and manage social, ethical and
environmental risk in our lending activity and the Group is a
signatory to the Equator Principles, which provide a framework
for determining, assessing and managing environmental and
social risk in project finance transactions.
We do not finance any activities prohibited by international
conventions supported by the UK government, such as the
Oslo Convention on Cluster Munitions and the Ottawa Treaty
on Anti-Personnel Landmines. Consequently, we will not enter
into credit or investment relationships with businesses believed
to be in breach of these conventions.
The management of risk for investment funds offered to customers
by Scottish Widows is effected through a robust and comprehensive
end to end governance and oversight reporting process, including
a Responsible Investment Governance Framework. This covers the
ongoing engagement process with fund managers, monitoring of
mandate adherence and onward reporting through Investment
Committees and Boards. The Group is a signatory of the
Stewardship Code and the UN Principles of Responsible Investment.
3. ECONOMIC IMPACT
We contribute to the UK economy through our products and
services, and through the commitments in our Helping Britain
Prosper Plan. We also make a positive economic impact as a major
employer and purchaser.
Sustainable business performance and growth
During 2016 we have made good progress against our strategic
priorities whilst delivering strong financial performance. Our cost
leadership and lower risk positioning provide competitive
advantage. Our differentiated, UK focused business model
continued to deliver for customers and shareholders.
Operating sustainably and responsibly is critical to the long-term
success of the business and creating value for our stakeholders,
and benefits the wider UK economy.
Making an economic contribution to Britain
We make a significant direct and indirect contribution to the
economy. We employ approximately 75,000 colleagues (full time
equivalent). We are helping to create additional jobs and bring
talented people into our business through our Graduate and
Apprenticeship Schemes. We’ve created more than 4,000
apprenticeships since we launched our Apprenticeship scheme
in October 2012. We run a sector-leading and award-winning
programme, offering a broad range of apprenticeships at all levels,
including a degree-level apprenticeship in IT and Digital. In 2016,
we provided a further 1,000 new roles, a third of which have been
offered to external candidates from the UK’s most disadvantaged
areas. We have committed to create 8,000 new apprenticeships by
2020, as part of our Helping Britain Prosper Plan.
21
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2. BUILDING TRUSTOur Group strategy highlights our intention to build the best team in a responsible culture where colleagues put customers first. To embed this culture, we need to be clear about how we expect colleagues to behave at work.Building a more responsible culture We have established a clear and simple view of the culture we want to build, which is based on our Values. Throughout 2016, we continued to reinforce these Values and the behaviours that define them, through our Group Culture plan. We have created a Culture Dashboard, which helps us to monitor progress and a Group Customer First Committee, which ensures that ‘Customer, Culture and Conduct’ remain key considerations. We also encourage colleagues to share their concerns, without fear of reprisal, if they believe the codes, policies and procedures that support our culture are being contravened. They can do this in a number of ways, including through our Speak Up service which is managed independently of the Group. During 2016, 286 concerns were raised with the Speak Up team and 171 progressed to investigations. Of the investigations completed by year end 57 per cent were upheld and remedial action was taken where appropriate.We have a comprehensive Anti-Bribery Policy in place which complies with laws and regulations wherever we operate, and which applies to all directors, colleagues, and anyone else acting on our behalf. All colleagues, including contractors, complete annual anti-bribery training and are encouraged to report confidentially any instances of suspected bribery. The Group is a member of Transparency International UK’s Business Integrity Forum, a network of major international companies committed to anti-corruption and high ethical standards in business practices.Making our business more transparentWe are committed to conducting our business responsibly and dealing transparently and fairly with any queries or concerns our stakeholders may have about our business. We maintain regular dialogue with colleagues to assess their views. We measure our progress in building our culture along with colleagues’ pride in the Group through our colleague surveys. The ‘Best Bank for Customers’ and the ‘Building the Best Team’ surveys are conducted by an independent third party and provide a clear view of colleagues’ thoughts and feelings. We use the results to inform decisions about the Group’s future direction and to support improvement of each team’s performance. The 2016 results show that colleagues are engaged and they believe collaboration and working in an agile way are improving. We asked colleagues if they think Lloyds Banking Group is a responsible business. 87 per cent of them agreed that ‘The behaviour of the people I work with is consistent with Lloyds Banking Group’s Values and Codes of Responsibility’.We regularly provide colleagues with information on the Group’s performance and matters that concern their role, such as changes in the economic and regulatory environment, organisational changes and reward and remuneration. Colleagues are offered share schemes as part of wider incentive arrangements, to encourage shared ownership of the business. Details of how rights relating to the control of the company attaching to such shares are exercised, which are incorporated by reference in the strategic report, are available on page 234.
Strategic report
Doing business responsibly continued
Our approach to tax
The Group continues to be one of the largest contributors to
UK tax revenues. We were ranked as the highest payer of UK
taxes in the most recent PwC Total Tax Contribution Survey for
the 100 Group which is broadly the FTSE100 and some large
UK private companies, having paid £1.8 billion in 2015.
In 2016, we paid £2.3 billlion in tax. We are also a major tax collector,
gathering £2 billion on behalf of HMRC in 2016 (2015: £2.2 billion).
Our approach to tax is governed by a Board-approved Tax Policy
which we have discussed with HMRC. We comply with the HMRC
Code of Practice on Taxation for Banks and the Confederation of
British Industry’s Statement of tax principles. We do not interpret
tax laws in a way that we believe is contrary to the intention of
Parliament, and we do not promote tax avoidance products to
our customers.
Tax paid in 2016: £2.3 billion
Corporation tax: £676m
Bank levy: £253m
Bank surcharge: £118m
Irrecoverable VAT: £710m
Employers NIC: £375m
Business rates, stamp duties and other levies: £163m
Helping businesses trade
During 2016, we helped more than 10,000 of our clients to start
exporting for the first time, exceeding our Helping Britain Prosper
Plan target of 5,000 businesses a year. This puts us on course to
exceed our target of helping 25,000 businesses export for the first
time, by 2020.
Supporting manufacturing and infrastructure
In 2016 we exceeded our target to support £10 billion of
infrastructure projects within the government's National
Infrastructure Plan. Projects supported include finance provision for
the Port of Dover, with the creation of its new cargo terminal, the
Beatrice Offshore Windfarm, one of the largest private investments
ever made in Scottish infrastructure, and the creation of a wood
pellet power plant in Teesside which will generate enough electricity
to power 600,000 homes.
We've provided £1.2 billion of new funding support to UK
manufacturing businesses in 2016. We have also committed a
£5 million sponsorship over five years to the Lloyds Bank Advanced
Manufacturing Training Centre, where over 1,000 apprentices,
graduates and engineers will acquire valuable specialist
manufacturing skills by 2020, to help secure a pipeline of
new talent into UK manufacturing.
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4. SERVING OUR CUSTOMERS FAIRLYWe serve a diverse customer base through many different channels. Ensuring our products and services are accessible and suitable to the individual needs of our customers is at the heart of everything we do; consistently offering the best experience, providing products and services when they need our support.Protecting our customersWe protect our 25 million customers including those who bank digitally, using state of the art security measures, including secure log-on and log-off features as well as systems that detect possible anomalies in calls we receive and highlight fraudulent payments in real time. We help customers keep themselves safe by providing best practice information and championing public information campaigns, such as Take 5.We are a strategic partner of Get Safe Online, a joint initiative between the government, the National Crime agency and many public and private sector organisations. In 2016, we made a significant contribution to the Joint Fraud Task Force, which brings together government, law enforcement and industry partners to set a strategic direction for fraud prevention measures. In London, the Task Force has spearheaded the Banking Protocol, enabling bank colleagues to request immediate police support when they believe that customers are being targeted by fraudsters. We will champion the Protocol’s national rollout in 2017.Tackling money laundering and terrorist financingWe take steps to make sure our products are not used for criminal purposes such as money laundering and terrorist financing, in liaison with legislators and regulators. We undertake due diligence on customers throughout the duration of their relationship with us, and monitor unusual activity on all accounts using advanced technology to detect potential criminal activity. If we spot anything suspicious we take immediate and appropriate action. All our colleagues are aware of our Anti-Money Laundering and Counter Terrorist Policy and have access to training to help them understand what is required of them.Widening financial inclusion and supporting vulnerable customersWe want to do more to help customers who are financially excluded or at risk of becoming so. Our financial inclusion strategy, launched in 2014, focuses on four themes: providing accessible products and services that meet customers’ needs; improving awareness and understanding of the impacts of financial exclusion across the bank; working in partnership with and signposting to other organisations that might be better suited to meet customer needs; and continuing to invest in financial education.Opening a basic bank account can be the first step towards financial inclusion for many customers. In 2016, we provided almost 350,000 (2015: over 300,000) new basic bank accounts and also helped 70,000 customers upgrade from basic to more mainstream products. We also recognise that not having the right ID can be a major barrier to opening an account, so we aim to treat each customer as an individual, and ensure our colleagues have ways to accept many different forms of ID, in order to help them onto the banking platform. We know we have more to do to achieve this level of personal service.OUR TRADE PORTALBusinesses who want to trade internationally can use our new International Trade Portal to access a wealth of practical information and advice. We also make it easy for them by linking with 100 partner banks outside the UK and we have launched a marketing campaign promoting the benefits of doing business internationally.
Lloyds Banking Group
Annual Report and Accounts 2016
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Digital technology also offers an important opportunity to make
financial services more accessible. Almost 6 million adults in the UK
have never used the internet and just under 50 per cent of charities
and more than 1 million small and medium-sized businesses lack
basic digital skills. Increasing digital capability is one of the most
important factors that will drive financial inclusion over the coming
years, so we aim to use our expertise and reach to promote wider
understanding and access, as shown in our Lloyds Bank Consumer
Digital Index which surveys 1 million customers.
We have improved our services for customers who are disabled or
have suffered bereavement and work with third sector organisations
such as Macmillan to support customers affected by cancer. We
provide assistance for customers with mental health problems or
dementia, and run dementia awareness training for branch and
telephony colleagues. This year, we also reviewed our digital services,
together with the charity Abilitynet, to ensure we provide the best
service for our 4 million vulnerable customers who bank with us online.
Improving customer experience and satisfaction
Improving our customers’ experience of and satisfaction with
our products and services is central to our Customer Journey
Transformation (CJT) initiative. CJT involves rethinking and
redesigning customer journeys to meet our customers’ evolving
needs, particularly as digital becomes more mainstream in the
way people and businesses bank.
We have improved the customer experience in branch and online
using digital. We opened more than 40,000 savings accounts in our
branches using digital technology this year, saving customers as
much as 20 minutes of their time. We introduced processes to make
banking faster and easier, including ‘selfie’ verification for account
applications and video meetings and live webchat support for
mortgage and remortgage applicants. Our in-house customer
innovation labs tested more than 30 new technologies and services
with our customers in 2016 including ‘smart’ customer alert services
and new ways to upload documents digitally.
Dealing with customer complaints
In 2016 we emphasised the need to identify, understand and eradicate
the root causes of customer complaints. We encourage colleagues to
share ideas about how to remove the issues that drive complaints and
improve customers’ experience. When customers do complain, we
resolve complaints as quickly as possible, focusing on achieving fair
outcomes. Where a complaint is referred to the Financial Ombudsman
Service, they tend to agree with our decisions in the majority of cases.
We welcome the changes the Financial Conduct Authority has
made to complaint classification and reporting, which came into
effect from 30 June 2016. These changes ensure a transparent
approach to complaints reporting, ensuring that businesses are
clear on the root causes of customer dissatisfaction, and that the
volume of complaints that businesses receive are contextualised
to the size of the organisation.
The impact we‘re making
The impact we‘re making
Gold rated
by the Business Disability Forum
for our work with customers
and colleagues
86%
of colleagues believe
the Group is an inclusive
place to work
25,000
members of our five
colleague diversity
networks
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CREDIT UNIONSAs part of our commitment to help financially disadvantaged people across Britain, we announced a further £1 million to support 21 credit unions in January 2016, the third stage of our £4 million four year commitment. Our support should allow each credit union to lend additional funds, resulting in an increase in sustainable sector lending of around £20 million from 2014 to 2017. 5. HUMAN RIGHTS, DIVERSITY AND WELLBEINGWe believe that everyone should have the opportunity to reach their full potential at Lloyds Banking Group – whatever their role or background. Our aim is to build a bank that represents modern Britain where colleagues' talents are recognised, and their human rights are respected. We aim to align our activity and policies with international best practice and recognised standards, such as the UN Declaration on Human Rights.Promoting equal opportunities and Inclusion & DiversityWe widen and promote Inclusion & Diversity (I&D) through our Group Executive Committee, executive level I&D sponsors, quarterly I&D forum and I&D Operational committee, which oversees implementation of our strategy. During 2016, we launched a new Group-wide ‘everyone’ campaign to explain the relevance and importance of inclusion to all colleagues, introduced our new ‘Family Matters’ network for parents and carers and re-launched our REACH (Race, Ethnicity and Cultural Heritage) network. We became the first UK company to include gender dysphoria in our Private Medical Benefit provision and were ranked number one private sector employer in the Stonewall Top 100. The Group was also named a Times Top 50 Employer for Women and Top 10 Employer for Working Families. Occupational health, safety and wellbeing We provide access to comprehensive online tools to support common health topics, such as fitness, smoking, diet and mental health. We also issue monthly colleague newsletters on relevant issues and support national health and wellbeing campaigns such as National Worklife Balance Week. In November we held a Mental Health and Wellbeing week. We are now working with our new charity partner, Mental Health UK, to create an environment which is fully inclusive and supportive of colleagues living with mental health conditions. Working in partnership with external, market leading specialists, we support colleagues’ health and wellbeing by providing access to an Occupational Health Service, an Employee Assistance Programme (EAP) and company paid private medical cover. Colleagues can obtain independent advice through the EAP and also have access to our award-winning Issue Resolution Scheme.
Strategic report
Doing business responsibly continued
Our inclusion and diversity data
2016
2015
Male
Female
Male
Female
Male
Female
Gender
Board members
Senior managers1
Colleagues1
Ethnicity
Percentages of colleagues from
an ethnic minority
Ethnic minority managers
Ethnic minority senior managers
Disability
Percentage of colleagues who
disclose they have a disability
Sexual orientation
Percentage of colleagues who
disclose they are lesbian, gay,
bisexual or transgender
10
3
5,019
2,317
32,669
43,519
7.9%
6.4%
4.8%
10
3
5,561
2,405
34,602
46,920
6.8%
6.4%
3.7%
2.2%
1.1%
1.5%
1.2%
1 Colleague scope of reporting: UK payroll headcount includes established and fixed
term contract colleagues. Excludes parental leavers, Non-Executive Directors,
contractors, temp, agency and internationals.
Seniors Managers: Grades F+
Managers: Grade D-E
Data source: HR system (HR Online). Apart from gender data, all diversity information is
based on colleagues’ voluntary self-declaration. As a result this data is not 100 percent
representative; our systems do not record diversity data for the proportion of colleagues
who have not declared this information.
RESPONSIBLE BUSINESS
PERFORMANCE
In addition to the issues highlighted as most material by our
stakeholders, we also report annually on other aspects of
responsible business, which we regard as integral to our operations.
Developing and rewarding our colleagues
We want to ensure that every colleague feels valued and
empowered to thrive in a truly inclusive business. We offer a
competitive and fair reward package that supports our aims as a
responsible business. After a detailed review in 2015 of the variable
pay arrangements used to incentivise customer-facing colleagues,
variable pay for colleagues in the Retail division is no longer linked
to individual or branch level sales or product targets. To build on
these changes, a single variable pay arrangement was introduced
for these colleagues in 2016. Customer-facing colleagues in Retail
are now incentivised by reference to balanced scorecard metrics
with clearly identified performance descriptors, in line with the
Group annual bonus plan approach. These changes ensure that
colleagues are rewarded for action and behaviour which puts
customers first. We have recognition agreements with two trade
unions, Accord and Unite, which collectively negotiate and consult
on behalf of around 95 per cent of our colleagues.
Learning and development
All colleagues have access to our learning management system,
Discover Learning, and with the launch of our Career Development
Resource Centre it is now even easier for them to access learning
materials to develop in their current roles or for career moves.
During 2016, colleagues logged-in more than 11 million times;
overall, almost 480,000 days of formal training were undertaken, an
average of 6 days per colleague. In addition, 30,000 active learners
use e-learning provided by one of our partners, Skillsoft.
We launched the Group’s Digital Academy, a suite of learning
modules available to all colleagues supporting our aim of creating
the most digitally capable workforce in Financial Services. In the
first six months this received 15,500 colleague visits. We also
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launched a Personal Learning Calendar which focuses on a relevant
topic each month such as delivering the best customer experience.
An average of 77 per cent of the colleagues who participated in this
year’s ‘Building the Best Team Survey’, responded favourably to
questions about training confirming that they believe they get the
training and development needed to do their job effectively and
meet customer demands. This is an increase of 2 per cent from last
year, putting us 15 per cent above the UK average.
Throughout 2016, we continued to support colleagues studying for
professional qualifications and contributed to the developing work
of the Banking Standards Board, including their independent
research into, and subsequent Report on, ‘Professionalism
in Banking’.
Supporting line managers and senior leaders
We have continued to develop our Line Manager Academy to
meet the changing needs of our line manager population. During
the year colleagues attended Academy training programmes more
than 3,200 times. Our Leadership Academy provides senior leaders
with relevant development solutions. In 2016 we developed five new
Programmes for the Academy which together attracted almost
300 attendees. In March 2016 we launched our Strategic Leaders
Programme which supports our senior 175 leaders in the Group
with the aim of driving the culture we need to be the best bank
for customers.
Support for disabled colleagues
We are committed to being a more disability confident employer.
More than 5,000 colleagues disclosed a disability in our most recent
colleague survey. We also potentially serve around 6 million
customers affected by disability or long-term health issues. We are
recognised as a leading employer for disabled people with cutting
edge practices for customers and colleagues; in 2016 we won a
Business Disability SMART Award for the third year running for our
workplace adjustments process and were highly commended for
our colleague disability network. We have a range of programmes
to support colleagues who become disabled or develop a
long-term health condition. Our workplace adjustments process,
which includes physical equipment, has supported over 18,000
colleagues to date.
Since 2002 we have been running Personal Development and
Career Development Programmes for disabled colleagues. 1,500
of our colleagues have completed this programme to date.
We aim to appoint the best person available into any role and to
attract talented people from diverse backgrounds. We encourage
and give full and fair consideration to job applications from people
with a disability and are unbiased in the way we assess, select,
appoint, train and promote people. We offer a guaranteed interview
scheme for candidates who declare a disability and meet the
minimum requirements of the role. We continue to run a work
a Disability Work Experience Programme in partnership with
Remploy. This is one of the largest disability-focused work
experience initiatives in the financial services sector.
Agile working
As a founder member of a group of leading employers supporting
workforce agility in the UK, we’ve been looking closely at ways to
become more agile as an organisation over the past 18 months. To
bring agile working to life we launched a ‘Getting Smart about Agile
Working’ campaign, which had a high profile across the whole
Group. Our most recent survey indicates that over 26,000 of our
colleagues work in an agile way. In 2016 we’ve also implemented a
new job sharing website, a new approach to agile hiring and agile
working training for all colleagues.
The impact we‘re making
26,000 4,000
colleagues work
in an agile way
members of our colleague
disability network 'Access'
Lloyds Banking Group
Annual Report and Accounts 2016
Managing and reducing our
environmental impacts
Our ability to help Britain prosper is inextricably linked to wider
environmental issues. Man-made climate change and global
trends, such as resource scarcity, extreme weather and rising
energy and commodity prices, have an impact on our stakeholders
and our own operations. We are committed to managing our direct
environmental impact and reducing our greenhouse gas emissions.
We manage our impacts through our Environmental Action Plan,
which focuses on reducing risk and creating value through
improved efficiency.
Our emissions
This year our overall carbon emissions, measured in CO2 equivalent
tonnes (CO2e), have decreased by 12.95 per cent year-on-year
and by 38.83 per cent against our 2009 baseline. This is mainly
attributable to the reduction in consumption of gas and electricity
(which make up the largest proportion of our emissions) and our
energy optimisation programme. Read more about our emissions
in the Directors' report on page 81.
CO2e emissions
Total CO2e tonnes
Total scope 1
Total scope 2
Total scope 3
Oct 2015 –
Sept 2016
Oct 2014 –
Sept 20151
Oct 2013 –
Sept 20141
344,316
395,554
437,721
52,438
57,255
59,856
205,127
239,721
261,623
86,752
98,579
116,242
1 Restated 2013/2014 and 2014/2015 emissions data to improve the accuracy of reporting,
using actual data to replace estimations.
Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard (2004).
We are in the process of transitioning to the revised Scope 2 guidance.
Criteria used to measure and report Scope 1, 2, 3 emissions is provided in the
Lloyds Banking Group Reporting Criteria statement available online at
www.lloydsbankinggroup.com/responsible-business
Scope 1 emissions include mobile and stationary combustion of fuel and operation
of facilities.
Scope 2 emissions have been calculated using a location based methodology,
as set out by the GHG Protocol.
Supporting the low carbon economy
We continue to develop products and services to support
customers’ transition to a lower carbon, more resource efficient
economy. Since 2014 we have launched two Environmental, Social
and Governance (ESG) bonds totalling £500 million. Lloyds Bank
became the first UK bank to develop an ESG deposit scheme
in response to client demand to invest in products that create
positive impacts.
In March 2016 Lloyds Bank launched its innovative £1 billion Green
Loan Initiative for commercial real estate lending. The initiative – the
first of its kind in the UK – provides clients with loans at discounted
margins to help incentivise energy efficiency and finance investment
in green buildings. We completed the first tranche of deals in the
second half of 2016, totalling £72 million, and have helped borrowers
like HPH, a Bath-based property company with a diverse property
portfolio, to fund energy efficiency projects. We have now set a
target in our Helping Britain Prosper Plan to fund 10 million square
feet of commercial real estate to become more energy efficient by
2020, the equivalent of 10 London Shards.
In 2016 our UK-based team was responsible for financing renewable
projects with a combined capacity of more than 1.78GW. Globally,
our investments in renewable energy are in excess of 7.4GW in
capacity and cover solar, offshore and onshore wind, waste to
energy and biomass.
In 2016 Lloyds Bank played a key part in financing a major offshore
wind farm off the Norfolk coast, with operations in Grimsby. Race
Bank will provide enough energy to power 400,000 homes with a
potential capacity of 573MW. It is anticipated the project, when in
operation, will create more than 100 jobs associated with building
and maintaining turbines for the Humber region.
Indicator is subject to limited ISAE3000 (revised) assurance by Deloitte LLP for the 2016
Annual Responsible Business Reporting. Deloitte’s 2016 assurance statement and the 2016
Reporting Criteria are available online at www.lloydsbankinggroup.com/rbdownloads
Supporting communities and tackling
social disadvantage
We are an integral part of communities across the UK and believe
we are in a unique position to help them prosper through our
community programmes and investment. These programmes
are focused on three themes: education, employability and
enterprise. Our total community investment in 2016 was over
£63 million
which includes our colleagues’ time, direct donations
and the money we give to our independent charitable Foundations.
The Foundations receive a share of the Group’s profits annually.
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Our charity of the year
In 2016 we raised £6.1 million
for our charity of the year, BBC
Children in Need. This brings the total raised over our two year
partnership to more than £12.5 million. The money we have raised
will make a significant impact across the UK.
In 2017 we will begin a two year partnership with Mental Health UK,
a collaboration of four national mental health charities. Our target
is to raise £4 million to help develop and launch the first helpline
dedicated to supporting people experiencing mental health and
money management issues. We plan to use the partnership to
further improve the awareness and management of mental health
within the organisation, and to help our frontline colleagues to
improve their service to customers.
Engaging with our stakeholders
Working with our suppliers
We are working together with our suppliers and others in our supply
chain to ensure we source goods and services in ways that are
responsible, sustainable and mutually beneficial. Our supply base
comprises around 4,000 companies supplying us mainly with
services, ranging from HR and recruitment through to marketing
and legal advice. We also buy products to enable us to operate our
banking services such as IT hardware and property-related goods.
In 2016, we reduced our supplier expenditure to £5.3 billion from
£5.8 billion in 2015. 94 per cent of this was spent with suppliers
based in the UK.
Supporting regional prosperity
Our Group Ambassador Programme supports our ambition to
enable social and economic prosperity in all parts of the UK. Our
ten Ambassadors, who are all senior colleagues, have a mandate
from the Group Chief Executive to support economic and social
development across the whole of the UK. They work with politicians,
government officials, regional development agencies and local
enterprise partnerships as well as local councils to help achieve this.
In 2016 the Ambassadors have worked on three core themes:
housing, the rural economy and agriculture, and education and skills
with a supporting focus on digital.
The impact we‘re making
97%
of supplier invoices paid within 30 days
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THE FOUNDATIONSWe want to do more to help tackle disadvantage through our independent charitable Foundations. Our England and Wales Foundation is the UK’s largest corporate foundation. Since 1985, we have given almost £600 million to tackle disadvantage in communities across the UK.£18.5mgiven to our Foundations in 2016
Strategic report
Risk overview
Effective risk management,
governance and control
As a Group, managing risk effectively is fundamental to our strategy
and to operating successfully. We are a simple, low risk, UK focused,
retail and commercial bank with a culture founded on a prudent
through-the-economic-cycle appetite for risk.
A strong risk management culture is crucial for sustainable growth
and within Lloyds it is at the heart of everything we do.
Our approach to risk is founded on an effective control framework
which guides how our colleagues approach their work, the way they
behave and the decisions they make. Risk appetite – defined as the
amount and type of risk that we are prepared to seek, accept or
tolerate – is approved by the Board and is embedded within
policies, authorities and limits across the Group.
Achievements in 2016
As a Group we have continued to deliver against our strategic
priorities in 2016, simplifying and strengthening the business whilst
growing in targeted areas. Risk has created a strong foundation to
enable this progress, ensuring we react appropriately to the ever
changing macro-economic and regulatory environment. Our
prudent risk culture and appetite, along with close collaboration
with the business, has enabled effective decision making and the
achievement of a number of risk related deliverables in the year.
These included:
Conduct
The Group's conduct strategy programme was fully implemented
in 2016, embedding conduct into the everyday management of our
business, ensuring that we retain a consistent and relentless focus
on delivering improved customer outcomes through an open
transparent culture.
Capital strength
The Group continues to maintain a strong capital position, with
a pro forma CET1 ratio of 13.8 per cent, through a combination of
strong statutory profit driven by good underlying profit and lower
PPI, along with lower risk-weighted assets. Risk-weighted assets
reduced by 3 per cent to £216 billion, reflecting the continued
de-risking of the portfolio, and were primarily driven by active
portfolio management including asset sales, an improvement
in asset quality and capital efficient securitisation activity.
The Group was also subject to the UK stress testing run
by the Bank of England; passing on all levels, with no capital
inadequacies identified.
Asset quality
Effective risk management ensured asset quality remained strong
with no deterioration in the underlying portfolio. The impairment
charge increased to £645 million (2015: £568 million) with the asset
quality ratio increasing slightly to 15 basis points, but this was largely
due to lower provision releases and write-backs. The gross asset
quality ratio remained unchanged at 28 basis points. Our prudent
risk appetite and robust risk management framework were also
reflected in impaired loans, which reduced by over £1 billion to
£8.5 billion, and the impaired loans ratio, which continued to fall
and is now below 2 per cent.
RISK AS A STRATEGIC DIFFERENTIATOR
Group strategy and risk appetite are developed together to ensure one informs the other to deliver on our purpose to help Britain prosper
whilst becoming the best bank for customers.
Risks are identified, managed and mitigated using our comprehensive Risk Management Framework (RMF), (see page 27) and our clearly
defined risk appetite, embedded in policies, authorities and limits provides a clear framework for effective business decision making.
The principal risks we face, which could significantly impact the delivery of our strategy, are discussed on pages 28 to 31.
We believe effective risk management can be a strategic differentiator, in particular:
Prudent approach to risk
Implementing a prudent approach to risk appetite across the Group, aligned to the embedding of a strong risk culture, driven both from
the top and across the wider business, ensures we operate within risk appetite.
Strong control framework
The Group’s RMF acts as the foundation for the delivery of effective risk control and ensures that the Group risk appetite is continually
developed and adhered to.
Business focus and accountability
Effective risk management is a key focus and is included in key performance measures against which individual business units are
assessed. The business areas in the first line of defence are accountable for risk but with oversight from a strong and importantly
independent, second line of defence Risk Division.
Effective risk analysis, management and reporting
Continuing to deliver close monitoring and stringent reporting to all levels of management and the Board on a regular basis ensures
appetite limits are maintained and subject to stressed analysis at a risk type and portfolio level.
Sustainable growth
Embedding a risk culture that ensures proactive support and constructive challenge takes place across the business is important
for delivering sustainable growth.
26
Lloyds Banking Group
Annual Report and Accounts 2016
Risk governance
The Board approves the Group’s overall RMF and sets risk appetite,
both of which are designed to ensure that we manage our risks in
the right way to achieve our agreed strategic objectives. It has a
dedicated Risk Committee of Non-Executive Directors who keep
the design and performance of the Group’s RMF under close
and regular scrutiny and interact closely with the executive risk
management committee operating at Group Executive Committee
level. The Board and senior management encourage a culture of
transparency and openness to ensure that issues are escalated
promptly to them where required.
The Board approved RMF and risk appetite are put into effect using
an enterprise-wide framework which applies to every area of the
business and covers all types of risk. The framework is designed
to ensure we follow a consistent approach to risk management
and reporting throughout the Group, so that all risks are fully
understood and managed in relation to our agreed risk appetite.
It includes our policies, procedures, controls and reporting.
A high level structure is shown in the diagram below.
The framework is reviewed, updated and approved by the Board at
least annually to reflect any changes in the nature of our business
and external regulations, law, corporate governance and industry
best practice. This helps us to ensure we continue to meet our
responsibilities to our customers, shareholders and regulators.
Our risk appetite and the policy framework define clear parameters
within which our business units must operate in order to deliver the
best outcome for customers and stakeholders. An updated risk
appetite statement was approved by the Board in 2016.
The Board delegates authorities for risk management through
the Group Chief Executive and the management hierarchy to
individuals, an approach which is consistent with the focus of
the Senior Managers and Certification Regime (SM&CR) on the
principle of individual accountability. At a senior level, executives
are supported in their decision making by a committee-based
governance structure. The concept of individual accountability
for risk management is embedded in the RMF and culture at
every level, and guides the way all employees approach their
work, behave and make decisions.
An important element of the framework is the maintenance
of strong internal controls which are owned and operated by
individual business areas. The Group’s risk governance
arrangements supported the effective implementation of the
requirements of the SM&CR which came into force in 2016.
Accountability for ensuring risk is
managed consistently with the Risk
Framework approved by the Board
Setting risk appetite and strategy. Approval
of the risk management framework and
Group-wide risk principles
Review risk appetite, frameworks and principles
to be recommended to the Board. Be exemplars of
risk management
Determined by the Board and Senior
Management. Business units formulate their
strategy in line with the Group’s risk appetite
Supporting a consistent approach to
Group-wide behaviour and risk decision making.
Consistency is delivered through the policy
framework and risk committee structures
Monitoring, oversight and assurance
ensures effective risk management
across the Group
Confirmation of the effectiveness
of the Risk Framework and
underlying risk and control
Board Authorities
Through Board-delegated Executive
Authorities there is effective oversight of risk
management consistent with risk appetite
The Risk Appetite Framework ensures
our risks are managed in line
with our risk appetite
Supports a consistent approach
to enterprise-wide behaviour
and decision making
Board
Role
Senior
Management
Role
Risk appetite
Governance frameworks
Three Lines of
defence model
Mandate of the
Risk Division
Maintains a robust control framework,
identifying and escalating emerging risks
and supporting sustainable growth
Defined processes exist to
identify, measure and control
our current and emerging risks
In line with our Codes of
Responsibility. Culture
ensures performance, risk
and reward are aligned
Risk-specific needs
defined in detail for
implementation by
each business
Risk identification,
measurement
and control
Risk monitoring,
aggregation and
reporting
Risk culture
Risk resources
and capabilities
Primary risk drivers
Carried out by all three
lines of defence and is an
integral part of our control
effectiveness assessment
Processes and infrastructure
are being invested in to
further improve our risk
management capabilities
Risk-type specific
sub-frameworks
e.g. credit risk
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Strategic report
Risk overview continued
The most significant risks which could
impact the delivery of our long-term
strategic objectives and our response,
are detailed below
The Group has considered many of the potential implications
following the UK’s vote to leave the European Union and the
impact to its customers, colleagues and products − as well
as legal, regulatory, tax, finance and capital implications.
Continued uncertainty surrounding the political and
macroeconomic environment remains but the potential impacts
of external factors have been considered in all principal risks and
uncertainties to ensure any material uncertainties continue to
be monitored and are appropriately mitigated.
Principal risks and uncertainties are reviewed and reported
regularly and no new risks have been identified in the year.
PRINCIPAL RISKS
KEY MITIGATING ACTIONS
KEY RISK INDICATORS
ALIGNMENT TO STRATEGIC PRIORITIES AND FUTURE FOCUS
Credit risk
The risk that customers and/or other counterparties whom we have
either lent money to or entered into a financial contract with, or other
counterparties with whom we have contracted, fail to meet their
financial obligations, resulting in loss to the Group.
– Credit policy, incorporating prudent lending criteria, aligned
with Board approved risk appetite, to effectively manage risk.
– Robust risk assessment and credit sanctioning to ensure we
lend appropriately and responsibly.
Adverse changes in the economic and market environment we operate in
or the credit quality and/or behaviour of our customers and counterparties
could reduce the value of our assets and potentially increase our write downs
and allowances for impairment losses, adversely impacting profitability.
– Extensive and thorough credit processes and controls to ensure
effective risk identification, management and oversight.
– Effective, well-established governance process supported
by independent credit risk assurance.
Example:
– Whilst we have a deep understanding of credit risks across our commercial,
mortgage and other portfolios; a changing economic environment, e.g. interest
rate rises, can impact on customer affordability and therefore our performance.
Regulatory and legal risk
The risks of changing legislation, regulation, policies, voluntary codes of
practice and their interpretation in the markets in which we operate can have
a significant impact on the Group’s operations, business prospects, structure,
costs and/or capital requirements and ability to enforce contractual obligations.
Examples:
– Increased regulatory oversight and Prudential regulatory requirements.
– Increased legislative requirements, such as ring-fencing legislation.
Conduct risk
Conduct risk can arise from a number of areas including selling products
to customers which do not meet their needs; failing to deal with customers’
complaints effectively; not meeting customers’ expectations; and exhibiting
behaviours which do not meet market or regulatory standards.
Example:
– The most significant conduct cost in recent years has been PPI mis-selling.
Operational risk
We face significant operational risks which may result in financial loss,
disruption of services to customers, and damage to our reputation. These
include the availability, resilience and security of our core IT systems and
the potential for failings in our customer processes.
Examples:
– A resilient IT environment is critical to providing reliable services to
customers and enabling sustainable growth.
– The dynamic threat posed by cyber risk on the integrity of electronic
data or the availability of systems.
People risk
Key people risks include the risk that we fail to maintain organisational skills,
capability, resilience and capacity levels in response to increasing volumes
of organisational, political and external market change.
Example:
– Inability to attract or retain colleagues with key skills could impact the
achievement of business objectives.
– Early identification of signs of stress leading to prompt action
in engaging the customer.
– Ensure we develop comprehensive plans for delivery of all legal
and regulatory changes and track their progress. Group-wide
projects implemented to address significant impacts.
– Continued investment in people, processes, training and IT to assess
impact and help meet our legal and regulatory commitments.
– Engage with regulatory authorities and industry bodies on
forthcoming regulatory changes, market reviews and investigations.
– Conduct risk appetite metrics provide a granular view on how
our products and services are performing for customers.
– Product approval, review processes and outcome testing
supported by conduct management information.
– Learning from past mistakes through root cause analysis and
clear customer accountabilities for colleagues, with rewards
driven by customer-centric metrics.
– The development of a refined framework for addressing thematic
issues impacting customers in vulnerable circumstances.
– Continual review of our IT environment to ensure that systems
and processes can effectively support customers’ requirements.
– Enhancing the resilience of systems that support critical business
processes with independent verification of progress on an
annual basis.
– Investing in enhanced cyber controls to protect against external
threats to the confidentiality or integrity of electronic data, or the
availability of systems and responding to findings from third
party industry testing.
– Focused action to attract, retain and develop high calibre
people. Delivering initiatives which reinforce behaviours to
generate the best outcomes for customers and colleagues.
– Managing organisational capability and capacity to ensure there
are the right skills and resources to meet our customers’ needs.
– Effective remuneration arrangements to promote appropriate
colleague behaviours and meet regulatory expectations.
2016
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2016
2015
0
2016
2015
2016
2015
2016
2015
Heading
2016
2015
0
0
Impairment charge
Delivering sustainable growth
Read more on page 124
We have a conservative and well balanced UK credit portfolio, managed through the economic cycle
645
and supported by strong credit portfolio management.
Impaired assets
Credit risk decisions are consistent, fair and responsible, taking account of customers’ circumstances.
We support sustainable growth and meet our targets in the Helping Britain Prosper Plan while staying
within prudent risk appetite.
£645m
£568m
£8,495m
£9,590m
Impairments remain below long term levels and are expected to increase as the level of write-backs
and releases normalise. Emerging credit risks that have the potential to increase impairment include
the global and UK economic environment, in particular increasing interest rates, as it can impact
customer and counterparties’ affordability.
Mandatory, legal and regulatory
investment spend
Delivering sustainable growth
Read more on page 166
£555m
£454m
We are committed to operating sustainably and responsibly, and commit significant resource
and expense to ensure we meet our legal and regulatory obligations.
555
We respond as appropriate to impending legislation and regulation and associated consultations
and participate in industry bodies. We continue to be subject to significant ongoing and new
legislation, regulation and court proceedings.
Conduct risk appetite metric
performance-Group
Creating the best customer experience
Read more on page 145
0.0
92.1
As we transform and simplify our business, minimising conduct risk is critical to achieving our strategic
goals and meeting market and regulatory standards.
The successful transition of our customer-focused Conduct Strategy into Business as Usual, following
robust review by the Group Customer First Committee, supports our vision of being the best bank for
customers, enabling the creation of the best customer experience through learning from past mistakes.
Availability of core systems
Creating the best customer experience
Read more on page 152
We recognise that resilient and secure technology is critical to creating the best customer experience
100
and maintaining trust across the wider industry.
The availability and resilience of IT systems remains a key strategic priority and the Cyber programme
continues to focus on enhancing cyber security controls. The control environment is regularly assessed
through internal and third party testing.
Best bank for customers index
Creating the best customer experience
Read more on page 168
Continued regulatory change relating to personal accountability and remuneration rules could affect the
100
Group’s ability to attract and retain the calibre of colleagues required to meet our changing customer
needs. We continue to focus on developing colleagues, their capabilities and skills in order to create the
best customer experience and to respond quickly to the rapidly evolving change in customers’ decision
making, in an increasingly digital marketplace.
92.1%
87.4%
99.97%
99.97%
00,000
00,000
78%
78%
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1 This key risk indicator is also a key performance indicator (KPI).
Lloyds Banking Group
Annual Report and Accounts 2016
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KEY RISK INDICATORS
ALIGNMENT TO STRATEGIC PRIORITIES AND FUTURE FOCUS
Impairment charge
2016
2015
0
Impaired assets
2016
2015
£645m
£568m
645
£8,495m
£9,590m
Delivering sustainable growth
Read more on page 124
We have a conservative and well balanced UK credit portfolio, managed through the economic cycle
and supported by strong credit portfolio management.
Credit risk decisions are consistent, fair and responsible, taking account of customers’ circumstances.
We support sustainable growth and meet our targets in the Helping Britain Prosper Plan while staying
within prudent risk appetite.
Impairments remain below long term levels and are expected to increase as the level of write-backs
and releases normalise. Emerging credit risks that have the potential to increase impairment include
the global and UK economic environment, in particular increasing interest rates, as it can impact
customer and counterparties’ affordability.
Mandatory, legal and regulatory
investment spend
Delivering sustainable growth
Read more on page 166
2016
2015
0
£555m
£454m
555
We are committed to operating sustainably and responsibly, and commit significant resource
and expense to ensure we meet our legal and regulatory obligations.
We respond as appropriate to impending legislation and regulation and associated consultations
and participate in industry bodies. We continue to be subject to significant ongoing and new
legislation, regulation and court proceedings.
Conduct risk appetite metric
performance-Group
2016
2015
92.1%
87.4%
0.0
92.1
Creating the best customer experience
Read more on page 145
As we transform and simplify our business, minimising conduct risk is critical to achieving our strategic
goals and meeting market and regulatory standards.
The successful transition of our customer-focused Conduct Strategy into Business as Usual, following
robust review by the Group Customer First Committee, supports our vision of being the best bank for
customers, enabling the creation of the best customer experience through learning from past mistakes.
Availability of core systems
Creating the best customer experience
Read more on page 152
2016
2015
0
Heading
2016
2015
99.97%
99.97%
100
00,000
00,000
We recognise that resilient and secure technology is critical to creating the best customer experience
and maintaining trust across the wider industry.
The availability and resilience of IT systems remains a key strategic priority and the Cyber programme
continues to focus on enhancing cyber security controls. The control environment is regularly assessed
through internal and third party testing.
Best bank for customers index
Creating the best customer experience
Read more on page 168
2016
2015
0
78%
78%
100
Continued regulatory change relating to personal accountability and remuneration rules could affect the
Group’s ability to attract and retain the calibre of colleagues required to meet our changing customer
needs. We continue to focus on developing colleagues, their capabilities and skills in order to create the
best customer experience and to respond quickly to the rapidly evolving change in customers’ decision
making, in an increasingly digital marketplace.
1 This key risk indicator is also a key performance indicator (KPI).
29
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Strategic report
Risk overview continued
PRINCIPAL RISKS
KEY MITIGATING ACTIONS
KEY RISK INDICATORS
ALIGNMENT TO STRATEGIC PRIORITIES AND FUTURE FOCUS
Insurance risk
Key insurance risks within the Insurance business are longevity, persistency and
property insurance. Longevity risk is expected to increase as our presence in the
bulk annuity market increases. Longevity is also the key insurance risk in the Group’s
Defined Benefit Pension Schemes.
Examples:
– Increases in life expectancy (longevity) beyond current assumptions will increase
the cost of annuities and pension scheme benefits.
– Uncertain property insurance claims impact Insurance earnings and capital, e.g. extreme
weather conditions, such as flooding, can result in high property damage claims.
– Processes for underwriting, claims management, pricing
and product design seek to control exposure. Longevity
and bulk pricing experts support the bulk annuity
proposition.
– The merits of longevity risk transfer and hedging solutions
are regularly reviewed for both the Insurance business and
the Group’s Defined Benefit Pension Schemes.
– Property insurance exposures are mitigated by a broad
reinsurance programme.
Capital risk
The risk that we have a sub-optimal quantity or quality of capital or that capital
is inefficiently deployed across the Group.
Example:
– A worsening macroeconomic environment could lead to adverse financial
performance, which could deplete capital resources and/or increase capital
requirements due to a deterioration in customers’ creditworthiness.
– A comprehensive capital management framework
that sets and monitors capital risk appetite, including
dividend policy appropriately.
– Close monitoring of capital and leverage ratios to ensure
we meet current and future regulatory requirements.
– Comprehensive stress testing analysis to evidence
capital adequacy under various adverse scenarios.
Funding and liquidity risk
The risk that we have insufficient financial resources to meet our commitments
as they fall due, or can only secure them at excessive cost.
Example:
– Our funding and liquidity position is underpinned by a significant and stable customer
deposit base and is supported by strong relationships with corporate customers and
certain wholesale market segments. A deterioration in either the Group’s or the UK’s
credit rating, or a sudden and significant withdrawal of customer deposits, would
adversely impact our funding and liquidity position.
– Holding liquid assets to meet potential cash and
collateral outflows, regulatory requirements and
maintaining a further pool of secondary assets that
can be used to access central bank liquidity facilities.
– Undertaking daily monitoring against a number of
market and Group-specific early warning indicators,
maintaining a contingency funding plan detailing
actions and strategies available in stressed conditions.
Governance risk
Against a background of increased regulatory focus on governance and risk
management, the most significant challenges arise from the requirement to improve
the resolvability of the Group and to ring-fence core UK financial services and activities
from January 2019 and further requirements under the SM&CR which come into force
from March 2017.
Example:
– Non-compliance with or breaches of ring-fencing, resolution and SM&CR
requirements will result in legal and regulatory consequences.
– Leveraging our considerable change experience to
meet ring-fencing and resolution planning requirements
and the continuing evolution of SM&CR.
– Programme in place to address ring-fencing and
resolution planning. In close and regular contact with
regulators to develop plans for our anticipated
operating and legal structure.
– Evolving risk and governance arrangements that
continue to be appropriate to comply with regulatory
objectives.
Insurance (Life and Pensions) present
value of new business premiums
Creating the best customer experience
Read more on page 167
£8,919m
£9,460m
9460
We are committed to meeting the changing needs of customers by working to provide a range of
insurance products via multiple channels. The focus is on creating the best customer experience by
helping customers protect themselves today whilst preparing for a secure financial future.
Insurance (General Insurance)
gross written premiums
Strategic growth initiatives within Insurance are developed and managed in line with a defined risk
appetite, aligned to the Group risk appetite and strategy.
Common equity tier 1 ratio1,2
Delivering sustainable growth
Read more on page 159
0.0
13.8
Leverage ratio2
Ensuring we hold an appropriate level of capital to maintain financial resilience and market confidence,
underpins our strategic objectives of supporting the UK economy and delivering sustainable growth.
Looking ahead, there are a number of regulatory capital framework changes which are yet to be finalised.
These changes are being monitored closely as there is a risk that these could lead to higher capital
requirements in the longer term.
Regulatory liquidity
Delivering sustainable growth
Read more on page 154
0.0
123.4
We maintain a strong funding position in line with our low risk strategy. Our funding position has been
significantly strengthened in recent years and our loan to deposit ratio remains within our target range.
Loan to deposit ratio
Liquid assets now exceed our total wholesale funding. This provides a substantial buffer in the event of
a market-wide stress which could reduce our options to fund our balance sheet in future.
£1,108m
£1,148m
1148
13.8%
13.0%
5.0%
4.8%
£121bn
£123bn
109%
109%
2016
2015
2016
2015
0
0
2016
2015
2016
2015
2016
2015
2016
2015
N/A
facilitating the options available in resolution.
Delivering sustainable growth
Read more on page 169
Ring-fencing will ensure we become safer and continue to create the best customer experience by providing
further protection to core Retail and SME deposits, increasing transparency of our operations and
Resolution planning is intended to reduce the probability of failure and, through ensuring continuity
of critical banking services, the impact on customers should we fail.
Our Governance framework and strong culture of ownership and accountability enabled effective, on time,
compliance with the SM&CR requirements which came into force from March 2016 and preparation for the
SM&CR Certification requirements effective from March 2017.
Market risk
The risk that our capital or earnings profile is affected by adverse market rates, in particular
interest rates and credit spreads in the Banking business, equity and credit spreads in the
Insurance business, and credit spreads in the Group’s Defined Benefit Pension Schemes.
– Structural hedge programmes implemented to manage
liability margins and margin compression, and the
Group’s exposure to Bank Base Rate.
2016
2015
(£244m)
£736m
-244
736
Pension surplus/(deficit)
Delivering sustainable growth
Read more on page 146
Examples:
– Earnings are impacted by our ability to forecast and model customer behaviour
accurately and establish appropriate hedging strategies.
– The Insurance business is exposed indirectly to equity through the value of future
management charges on policyholder funds. Credit spread risk within the Insurance
business primarily arises from bonds and loans used to back annuities. Credit spreads
affect the value of the Group’s Defined Benefit Pension Schemes’ liabilities.
– Equity and credit spread risks are closely monitored
and, where appropriate, asset liability matching is
undertaken to mitigate risk.
– The Group’s Defined Benefit Pension Schemes have
increased their credit allocation and hedged against
nominal rate/inflation movements.
– Stress and scenario testing of Group risk exposures.
We manage our exposure to movements in market rates throughout the year, leading us to promote low
volatility earnings and offer a comprehensive customer proposition with market risk hedging strategies
to support strategic aims, including delivering sustainable growth.
Mitigating actions are implemented to reduce the impact of market movements, resulting in a more
stable capital position. This allows us to more efficiently utilise available capital resources to deliver
sustainable growth.
Consistent with similar pension schemes, the Group’s Defined Benefit Pension Schemes were adversely
impacted by the credit spread volatility in the third quarter of 2016. The interest rate and inflation hedging
programmes remain effective.
30
1 This key risk indicator is also a key performance indicator (KPI).
and February 2016 respectively, in relation to prior year earnings.
2 The CET1 and leverage ratios at 31 December 2016 and 31 December 2015 are reported on a pro forma basis, including dividends paid by the Insurance business in February 2017
Lloyds Banking Group
Annual Report and Accounts 2016
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KEY RISK INDICATORS
ALIGNMENT TO STRATEGIC PRIORITIES AND FUTURE FOCUS
Insurance (Life and Pensions) present
value of new business premiums
Creating the best customer experience
Read more on page 167
2016
2015
0
£8,919m
£9,460m
9460
We are committed to meeting the changing needs of customers by working to provide a range of
insurance products via multiple channels. The focus is on creating the best customer experience by
helping customers protect themselves today whilst preparing for a secure financial future.
Insurance (General Insurance)
gross written premiums
2016
2015
0
£1,108m
£1,148m
1148
Strategic growth initiatives within Insurance are developed and managed in line with a defined risk
appetite, aligned to the Group risk appetite and strategy.
Common equity tier 1 ratio1,2
Delivering sustainable growth
Read more on page 159
2016
2015
0.0
13.8
Leverage ratio2
2016
2015
Regulatory liquidity
2016
2015
0.0
123.4
Loan to deposit ratio
2016
2015
13.8%
13.0%
5.0%
4.8%
£121bn
£123bn
109%
109%
Ensuring we hold an appropriate level of capital to maintain financial resilience and market confidence,
underpins our strategic objectives of supporting the UK economy and delivering sustainable growth.
Looking ahead, there are a number of regulatory capital framework changes which are yet to be finalised.
These changes are being monitored closely as there is a risk that these could lead to higher capital
requirements in the longer term.
Delivering sustainable growth
Read more on page 154
We maintain a strong funding position in line with our low risk strategy. Our funding position has been
significantly strengthened in recent years and our loan to deposit ratio remains within our target range.
Liquid assets now exceed our total wholesale funding. This provides a substantial buffer in the event of
a market-wide stress which could reduce our options to fund our balance sheet in future.
N/A
Delivering sustainable growth
Read more on page 169
Ring-fencing will ensure we become safer and continue to create the best customer experience by providing
further protection to core Retail and SME deposits, increasing transparency of our operations and
facilitating the options available in resolution.
Resolution planning is intended to reduce the probability of failure and, through ensuring continuity
of critical banking services, the impact on customers should we fail.
Our Governance framework and strong culture of ownership and accountability enabled effective, on time,
compliance with the SM&CR requirements which came into force from March 2016 and preparation for the
SM&CR Certification requirements effective from March 2017.
Pension surplus/(deficit)
Delivering sustainable growth
Read more on page 146
2016
2015
(£244m)
£736m
-244
736
We manage our exposure to movements in market rates throughout the year, leading us to promote low
volatility earnings and offer a comprehensive customer proposition with market risk hedging strategies
to support strategic aims, including delivering sustainable growth.
Mitigating actions are implemented to reduce the impact of market movements, resulting in a more
stable capital position. This allows us to more efficiently utilise available capital resources to deliver
sustainable growth.
Consistent with similar pension schemes, the Group’s Defined Benefit Pension Schemes were adversely
impacted by the credit spread volatility in the third quarter of 2016. The interest rate and inflation hedging
programmes remain effective.
1 This key risk indicator is also a key performance indicator (KPI).
2 The CET1 and leverage ratios at 31 December 2016 and 31 December 2015 are reported on a pro forma basis, including dividends paid by the Insurance business in February 2017
and February 2016 respectively, in relation to prior year earnings.
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FINANCIAL RESULTS
BUILDING BRITAIN’S
CONSTRUCTION SKILLS
Summary of Group results
Five year financial summary
Divisional results
Other financial information
33
39
40
49
Afaque Quareshi is retraining for a career in construction
thanks to the collaboration between Lloyds Bank, London
Borough of Newham and Lendlease. The Group has
provided £1 million to support training and recruitment
through its Construction Skills Fund, which was established
to address the skills gap in the construction sector.
139
industry recognised qualifications delivered in 2016 thanks
to the Skills Fund
Lloyds Banking Group
Annual Report and Accounts 2016
Summary of Group results
Good underlying performance with strong improvement in statutory profit
The Group’s underlying profit was £7,867 million, 3 per cent lower than 2015, with slightly lower income and higher impairments, partly offset by lower
costs. The underlying return on required equity was 13.2 per cent and the underlying return on tangible equity was 14.1 per cent. Statutory profit
before tax more than doubled to £4,238 million, compared with £1,644 million in 2015, as the level of PPI provisions reduced significantly.
Total loans and advances to customers were £450 billion, compared with £455 billion at 31 December 2015, and customer deposits were similarly
£5 billion lower than a year ago at £413 billion.
The balance sheet remains strong and the CET1 ratio at 31 December 2016 was 13.8 per cent on a pro forma basis and reflects the retention of
c.80 basis points of CET1 capital to cover the estimated capital impact of the MBNA acquisition. The Group generated c.190 basis points of CET1
capital, pre dividends, in the period and tangible net asset value per share increased to 54.8 pence (31 December 2015: 52.3 pence).
Given the significant amount of capital generated in the year, the Board has recommended a final ordinary dividend of 1.7 pence per share, making a
total ordinary dividend of 2.55 pence per share, an increase of 13 per cent on 2015 and in line with our progressive and sustainable ordinary dividend
policy. In addition, the Board has recommended a special dividend of 0.5 pence per share.
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Total income
Net interest income
Other income
Total income
Operating lease depreciation1
Net income
Banking net interest margin
Average interest-earning banking assets
1 Net of gains on disposal of leased assets.
2016
£ million
11,435
6,065
17,500
(895)
16,605
2.71%
2015
£ million
11,482
6,155
17,637
(764)
16,873
2.63%
£435.9bn
£441.9bn
Change
%
–
(1)
(1)
(17)
(2)
8bp
(1)
Total income of £17,500 million was 1 per cent lower than 2015, with a small reduction in net interest income and a 1 per cent fall in other income.
Net interest income fell by £47 million to £11,435 million. The net interest margin increased to 2.71 per cent (2015: 2.63 per cent), with lower deposit
and wholesale funding costs, including the benefit from the ECN redemptions in the first quarter, more than offsetting the continuing pressure on
asset pricing. Average interest-earning banking assets reduced by 1 per cent with growth in SME and Consumer Finance balances more than offset
by reductions in the mortgage and run-off portfolios. The Group expects that the net interest margin for 2017 will be greater than 2.70 per cent
(before MBNA).
The Group manages the risk to its capital and earnings from adverse movements in interest rates centrally by hedging liabilities which are deemed to
be stable or less sensitive to change in market interest rates. As at 31 December 2016, the balance hedged was c.£111 billion with an average duration
of c.3 years and an earning rate of approximately 1.6 per cent over LIBOR. In 2016, the benefit from the structural hedge totalled £1.7 billion over
LIBOR (2015: £1.8 billion).
Other income was £6,065 million in 2016 (2015: £6,155 million). Other income increased in the fourth quarter compared with the same period last
year largely as a result of improved Insurance income and was higher than the third quarter of 2016, largely due to increased Commercial Banking
fees and commissions and improved Insurance income. The year-on-year reduction of 1 per cent was largely due to continued pressure on fees and
commissions, including the impact of the market-wide cap on card interchange fees introduced in late 2015, lower returns in the Insurance business
and reduced income from the run-off portfolio.
Operating lease depreciation increased 17 per cent to £895 million due to continued growth in the Lex Autolease business and additional charges
in Commercial Banking related to certain leasing assets.
Operating costs
Operating costs
Cost:income ratio
Operating jaws
Simplification savings annual run-rate
2016
£ million
2015
£ million
8,093
48.7%
1.0%
947
8,311
49.3%
1.0%
373
Change
%
3
(0.6)pp
–
Operating costs were £8,093 million, 3 per cent lower than 2015, driven by the continued focus on cost management and actions to simplify the
business. Investment in the business continues to increase, particularly in digital, and in 2016 the Group made further improvements to the branch
network to meet changing customer preferences, investing in new distribution technology, designing new branch formats and upgrading call
centre technology.
The Simplification programme remains on track to deliver the increased target of £1.4 billion of annual run-rate savings by the end of 2017, with
£0.9 billion of run-rate savings delivered to date. The total spent on the Simplification programme to date is £1.6 billion with an expected further
spend of £0.6 billion by the end of 2017, of which around £0.2 billion will be included in restructuring costs.
The Group’s market-leading cost:income ratio improved to 48.7 per cent (2015: 49.3 per cent) with positive operating jaws of 1 per cent. The Group
remains committed to achieving annual improvements in the cost:income ratio and continues to target a cost:income ratio of around 45 per cent
exiting 2019.
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Financial results
Summary of Group results continued
Impairment
Total impairment charge
Asset quality ratio
Gross asset quality ratio
Impaired loans as a % of closing advances
Provisions as a % of impaired loans
Provisions as a % of impaired loans excluding run-off
2016
£ million
2015
£ million
Change
%
645
0.15%
0.28%
1.8%
43.4%
41.2%
568
0.14%
0.28%
2.1%
46.1%
43.0%
(14)
1bp
–
(0.3)pp
(2.7)pp
(1.8)pp
Asset quality remains strong with no deterioration in the underlying portfolio. The impairment charge increased to £645 million from £568 million in
2015 with the asset quality ratio increasing slightly to 15 basis points. This increase was largely due, as expected, to a reduction in the level of provision
releases and write-backs. The gross asset quality ratio (excluding releases and write-backs) remained unchanged at 28 basis points. Looking forward
the Group expects a further reduction in releases and write-backs in 2017 and, as a result, the asset quality ratio to increase to around 25 basis points.
The average indexed loan to value (LTV) of the Retail mortgage portfolio improved to 44.0 per cent (31 December 2015: 46.1 per cent) and the
percentage of lending with an indexed LTV of greater than 100 per cent improved to 0.7 per cent (31 December 2015: 1.1 per cent).
Impaired loans continued to fall and at 31 December 2016 were £8.5 billion, 1.8 per cent of total loans and advances compared with £9.6 billion,
and 2.1 per cent at 31 December 2015.
Statutory profit
Underlying profit
Volatility and other items
Enhanced Capital Notes
Market volatility and asset sales
Amortisation of purchased intangibles
Restructuring costs
Fair value unwind and other items
TSB costs
Payment protection insurance provision
Other conduct provisions
Statutory profit before tax
Taxation
Profit for the year
2016
£ million
7,867
(790)
439
(340)
(622)
(231)
–
(1,544)
(1,000)
(1,085)
4,238
(1,724)
2,514
2015
£ million
8,112
(101)
(81)
(342)
(170)
(192)
(745)
(1,631)
(4,000)
(837)
1,644
(688)
956
Change
%
(3)
158
163
Statutory profit before tax more than doubled to £4,238 million (2015: £1,644 million) primarily due to lower PPI provisions of £1,000 million
(2015: £4,000 million).
The charge of £790 million for Enhanced Capital Notes in 2016 represented the write-off of the embedded derivative and the premium paid
on the redemption of the remaining notes in the first quarter.
Market volatility and asset sales of £439 million included a gain on sale of the Group’s interest in Visa Europe of £484 million and negative insurance
volatility of £91 million. The main item in the 2015 charge of £81 million was negative insurance volatility of £105 million.
Restructuring costs were £622 million in 2016 and comprised costs relating to the Simplification programme, the announced rationalisation of the
non-branch property portfolio and the work on implementing the ring-fencing requirements.
A provision of £1 billion to cover further operating costs and redress relating to PPI was recognised in the third quarter and complaint levels in the
second half have been around 8,300 per week on average. The Group’s current PPI provision reflects our interpretation of the Financial Conduct
Authority’s (FCA) consultation paper regarding a potential time bar of the end of June 2019 and the Plevin case.
In addition there was a charge of £1,085 million to cover a range of other conduct issues of which £475 million was recognised in the fourth quarter.
The charge for the year included £280 million in respect of complaints relating to packaged bank accounts, £261 million in respect of arrears-related
activities on secured and unsecured retail products and £94 million related to insurance products sold in Germany, together with a number of other
conduct risk provisions totalling £450 million across all divisions.
Statutory profit in 2015 included a charge of £745 million, comprising £660 million relating to the sale of TSB and £85 million of TSB dual-running costs.
Taxation
The tax charge was £1,724 million (2015: £688 million) representing an effective tax rate of 41 per cent (2015: 42 per cent). The high effective tax rate in
2016 was due to the banking surcharge, restrictions on the deductibility of conduct provisions, and the negative impact on the net deferred tax asset
of both the change in corporation tax rate and the expected utilisation by the insurance business. The Group continues to expect a medium term
effective tax rate of around 27 per cent.
34
Lloyds Banking Group
Annual Report and Accounts 2016
Return on required equity and tangible equity
The underlying return on required equity was 13.2 per cent (2015: 15.0 per cent) and the underlying return on tangible equity was 14.1 per cent
(2015: 16.0 per cent). The reduction in both return measures reflects the lower underlying profit and higher underlying tax charge following
implementation of the banking tax surcharge.
The return on required equity increased to 5.3 per cent (2015: 1.5 per cent) and the return on tangible equity increased to 6.6 per cent
(2015: 2.6 per cent) both largely reflecting the lower PPI provision made in the year.
Going forward, the Group remains confident in its future prospects and now expects to deliver a return on required equity of between
12.0 and 13.5 per cent and a return on tangible equity of between 13.5 and 15.0 per cent in 2019.
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Balance sheet
Loans and advances to customers1
Customer deposits2
Loan to deposit ratio
Wholesale funding
Wholesale funding <1 year maturity
Of which money-market funding <1 year maturity3
Liquidity coverage ratio – eligible assets
1 Excludes reverse repos of £8.3 billion (31 December 2015: £nil).
2 Excludes repos of £2.5 billion (31 December 2015: £nil).
At 31 Dec
2016
At 31 Dec
2015
Change
%
£450bn
£413bn
109%
£111bn
£35bn
£14bn
£121bn
£455bn
£418bn
109%
£120bn
£38bn
£22bn
£123bn
(1)
(1)
–
(8)
(7)
(36)
(2)
3 Excludes balances relating to margins of £3.2 billion (31 December 2015: £2.5 billion) and settlement accounts of £1.8 billion (31 December 2015: £1.4 billion).
Loans and advances to customers were £450 billion compared with £455 billion at 31 December 2015. The reduction reflects continued strong growth
in Consumer Finance, up 11 per cent, and SME lending, up 3 per cent, with both segments outperforming the market. This was offset by further
reductions in ‘closed’ portfolios, reduced lending to financial institutions and lower ‘open book’ mortgage balances, reflecting the Group’s prudent
stance on risk and its focus on protecting margin in the current competitive low growth market. Mortgage open book balances fell by £4.5 billion
to £266 billion during the year, of which £3.4 billion was in the first half and £1.1 billion was in the second half. Mortgage open book balances are
expected to be broadly stable in 2017.
Deposits fell 1 per cent to £413 billion, with increased high quality deposits from Commercial clients offset by lower Retail and Consumer Finance
tactical balances, largely in response to the active management of deposit and funding requirements. The Group has maintained its strong funding
position with a loan to deposit ratio of 109 per cent (2015: 109 per cent).
Wholesale funding decreased by £9 billion to £111 billion as excess liquidity is managed down. Wholesale funding with a residual maturity of less
than one year was £35 billion (2015: £38 billion), and the Group’s term funding ratio was unchanged at 68 per cent.
The Group’s liquidity position remains strong, with the liquidity coverage ratio comfortably meeting regulatory requirements.
Capital ratios and risk-weighted assets
Pro forma common equity tier 1 ratio1
Pro forma common equity tier 1 ratio pre dividend1
Transitional tier 1 capital ratio
Transitional total capital ratio
Pro forma leverage ratio1
Risk-weighted assets
Shareholders’ equity
Tangible net assets per share
At 31 Dec
2016
13.8%
14.9%
17.0%
21.4%
5.0%
At 31 Dec
2015
13.0%
16.4%
21.5%
4.8%
£216bn
£223bn
£43bn
54.8p
£41bn
52.3p
Change
%
0.8pp
0.6pp
(0.1)pp
0.2pp
(3)
4
2.5p
1 The CET1 and leverage ratios at 31 December 2016 and 31 December 2015 are reported on a pro forma basis, including dividends paid by the Insurance business in February 2017 and
February 2016 respectively, in relation to prior year earnings.
The CET1 ratio improved to 13.8 per cent (2015: 13.0 per cent) on a pro forma basis and reflects the retention of c.80 basis points of CET1 capital
to cover the estimated capital impact of the MBNA acquisition. The pro forma ratio includes the 2016 dividend paid by the Insurance business in
February 2017.
The Group continues to be strongly capital generative and over the year generated c.190 basis points of CET1 capital, pre dividend. This largely
comprised c.220 basis points of underlying capital generation, along with benefits from a reduction in risk-weighted assets (c.40 basis points) and the
insurance dividend (c.20 basis points) partially offset by conduct (c.100 basis points) and other items. This strong capital generation has enabled us to
fully cover the expected CET1 capital impact of the MBNA acquisition, increase the ordinary dividend and pay a special dividend. Going forward we
now expect to generate 170 to 200 basis points of capital per annum pre dividends. This will enable us to support sustainable growth in the business
and help Britain prosper whilst delivering sustainable returns to shareholders.
The Group is pleased to announce that following their annual review the PRA has reduced our PRA Buffer to reflect the significant de-risking
undertaken by the Group in recent years. Going forward however, there remain a number of potential regulatory capital developments (including the
introduction of the systemic risk buffer in 2019) and as a result the Board’s view of the current level of CET1 capital required to grow the business, meet
regulatory requirements and cover uncertainties remains unchanged at around 13 per cent.
The amount of capital we believe is appropriate to hold is likely to vary from time to time depending on circumstances and the Board will continue to give
due consideration, subject to the situation at the time, to the distribution of any surplus capital through the use of special dividends or share buy backs.
35
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Financial results
Summary of Group results continued
The Group’s total capital ratio remains strong at 21.4 per cent, significantly in excess of regulatory requirements.
Risk-weighted assets fell by 3 per cent to £216 billion with the reduction mainly arising in the fourth quarter primarily as a result of active balance sheet
management including securitisations.
The leverage ratio on a pro forma basis increased to 5.0 per cent (2015: 4.8 per cent), largely reflecting the increase in tier 1 capital.
The tangible net asset value per share increased to 54.8 pence (31 December 2015: 52.3 pence) after payment of the 2015 final and 2016 interim
dividends totalling 2.85 pence. The increase reflects good underlying profitability partly offset by tax and other statutory items.
Dividend
The Board has recommended a final ordinary dividend of 1.7 pence per share, together with a capital distribution in the form of a special dividend
of 0.5 pence per share. This is in addition to the interim ordinary dividend of 0.85 pence per share that was announced at the 2016 half year results.
The total ordinary dividend per share for 2016 of 2.55 pence per share has increased by 13 per cent, from 2.25 pence per share in 2015 and is in line
with our progressive and sustainable ordinary dividend policy. We continue to expect ordinary dividends to increase over the medium term with a
dividend payout ratio of at least 50 per cent of sustainable earnings.
The special dividend of 0.5 pence per share represents the distribution of capital over and above the Board’s view of the current level
of capital required to grow the business, meet regulatory requirements and cover uncertainties, and allows for the estimated capital impact
of the MBNA acquisition.
36
Lloyds Banking Group
Annual Report and Accounts 2016
Underlying basis – segmental analysis
2016
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment
Underlying profit
Retail
£m
6,497
1,053
7,550
−
7,550
(4,174)
(373)
3,003
Commercial
Banking
£m
Consumer
Finance
£m
2,735
1,987
4,722
(105)
4,617
(2,133)
(16)
2,468
1,941
1,338
3,279
(775)
2,504
(939)
(282)
1,283
Run-off and
Central
items
£m
408
(68)
340
(15)
325
(75)
26
276
Insurance
£m
(146)
1,755
1,609
−
1,609
(772)
–
837
Banking net interest margin
2.20%
3.26%
5.88%
Group
£m
11,435
6,065
17,500
(895)
16,605
(8,093)
(645)
7,867
2.71%
Average interest-earning banking assets
£302.7bn
£88.6bn
£33.9bn
£10.7bn
£435.9bn
Asset quality ratio
Return on risk-weighted assets
Loans and advances to customers1
Customer deposits2
0.12%
5.45%
0.02%
2.44%
0.83%
4.09%
£297.7bn
£100.4bn
£35.1bn
£271.0bn
£132.6bn
£7.9bn
0.15%
3.55%
£16.5bn
£449.7bn
£1.5bn
£413.0bn
2015
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment
TSB
Underlying profit
Retail3
£m
6,664
1,115
7,779
−
7,779
(4,339)
(349)
−
3,091
Commercial
Banking3
Consumer
Finance3
Insurance
£m
2,576
2,072
4,648
(30)
4,618
(2,162)
22
−
2,478
£m
1,954
1,359
3,313
(720)
2,593
(977)
(235)
−
1,381
£m
(163)
1,827
1,664
−
1,664
(702)
–
−
962
Run-off and
Central
items
£m
451
(218)
233
(14)
219
(131)
(6)
118
200
Banking net interest margin
2.22%
2.98%
6.61%
Group
£m
11,482
6,155
17,637
(764)
16,873
(8,311)
(568)
118
8,112
2.63%
Average interest-earning banking assets
£307.0bn
£90.0bn
£30.5bn
£14.4bn
£441.9bn
Asset quality ratio
Return on risk-weighted assets
Loans and advances to customers
Customer deposits
0.11%
5.71%
0.01%
2.36%
£305.6bn
£102.0bn
£273.7bn
£131.9bn
0.77%
4.27%
£31.5bn
£11.1bn
0.14%
3.53%
£16.1bn
£455.2bn
£1.6bn
£418.3bn
1 Excludes reverse repos of £8.3 billion (31 December 2015: £nil).
2 Excludes repos of £2.5 billion (31 December 2015: £nil).
3 Restated.
Alternative performance measures
The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial
position. Further information is provided on page 289.
Underlying basis
In order to allow a comparison of the Group’s underlying performance, the results are adjusted for certain items including losses on redemption of the
Enhanced Capital Notes and the volatility in the value of the embedded equity conversion feature; market volatility and asset sales, which includes
the effects of certain asset sales, the volatility relating to the Group’s own debt and hedging arrangements and that arising in the insurance businesses
and insurance gross up; the amortisation of purchased intangible assets; restructuring costs, comprising severance related costs relating to the
Simplification programme, the costs of implementing regulatory reform and ring-fencing and the rationalisation of the non-branch property portfolio;
the unwind of acquisition-related fair value adjustments; TSB build and dual-running costs and the loss relating to the TSB sale in 2015; and payment
protection insurance and other conduct provisions.
37
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Financial results
Summary of Group results continued
Consolidated income statement – underlying basis
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment
TSB
Underlying profit
Volatility and other items
Payment protection insurance provision
Other conduct provisions
Statutory profit before tax
Taxation
Profit for the year
Earnings per share
Dividends per share – ordinary
– special
Total dividends
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
Asset quality ratio
Return on risk-weighted assets
Underlying return on required equity
Return on required equity
Underlying return on tangible equity
Return on tangible equity
Balance sheet and key ratios
Loans and advances to customers1
Customer deposits2
Loan to deposit ratio
Total assets
Pro forma common equity tier 1 ratio3
Pro forma common equity tier 1 ratio pre dividend3
Transitional total capital ratio
Pro forma leverage ratio3
Risk-weighted assets
Tangible net assets per share
1 Excludes reverse repos of £8.3 billion (31 December 2015: £nil).
2 Excludes repos of £2.5 billion (31 December 2015: £nil).
2016
£ million
11,435
6,065
17,500
(895)
16,605
(8,093)
(645)
–
7,867
(1,544)
(1,000)
(1,085)
4,238
(1,724)
2,514
2.9p
2.55p
0.5p
3.05p
2.71%
£436bn
48.7%
0.15%
3.55%
13.2%
5.3%
14.1%
6.6%
At 31 Dec
2016
£450bn
£413bn
109%
£818bn
13.8%
14.9%
21.4%
5.0%
£216bn
54.8p
2015
£ million
11,482
6,155
17,637
(764)
16,873
(8,311)
(568)
118
8,112
(1,631)
(4,000)
(837)
1,644
(688)
956
0.8p
2.25p
0.5p
2.75p
2.63%
£442bn
49.3%
0.14%
3.53%
15.0%
1.5%
16.0%
2.6%
At 31 Dec
2015
£455bn
£418bn
109%
£807bn
13.0%
21.5%
4.8%
£223bn
52.3p
Change
%
–
(1)
(1)
(17)
(2)
3
(14)
(3)
158
163
263
13
11
8bp
(1)
(0.6)pp
1bp
2bp
(1.8)pp
3.8pp
(1.9)pp
4.0pp
Change
%
(1)
(1)
–
1
0.8pp
(0.1)pp
0.2pp
(3)
2.5p
3 The common equity tier 1 and leverage ratios at 31 December 2016 and 2015 are reported on a pro forma basis, including the dividends paid by the Insurance business in February 2017
and February 2016 respectively, in relation to prior year earnings.
38
Lloyds Banking Group
Annual Report and Accounts 2016
Five year financial summary
The financial statements (statutory basis) for each of the years presented have been audited by PricewaterhouseCoopers LLP, independent auditors.
2016
2015
2014
2013
20121
Income statement data for the year ended 31 December (£m)
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Profit (loss) before tax
Profit (loss) after tax for the year
Profit (loss) for the year attributable to ordinary shareholders
17,267
(12,277)
4,990
(752)
4,238
2,514
2,001
17,421
(15,387)
2,034
(390)
1,644
956
466
16,399
(13,885)
2,514
(752)
1,762
1,499
1,125
18,478
(15,322)
3,156
(2,741)
415
(802)
(838)
20,517
(15,974)
4,543
(5,149)
(606)
(1,387)
(1,471)
31 December
2016
31 December
2015
31 December
2014
31 December
2013
31 December
20121
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Balance sheet data (£m)
Share capital
Shareholders’ equity
Other equity instruments
Net asset value per ordinary share
Customer deposits
Subordinated liabilities
Loans and advances to customers
Total assets
Share information
Basic earnings (loss) per ordinary share
Diluted earnings (loss) per ordinary share
Dividends per ordinary share2,3
Market price (year end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions)4
Financial ratios (%)5
Dividend payout ratio6
Post-tax return on average shareholders’ equity
Post-tax return on average assets
Cost:income ratio7
Capital ratios (%)8, 9
Total capital
Tier 1 capital
Common equity tier 1 capital/Core tier 1 capital
1 Restated in 2013 for IAS 19 (Revised) and IFRS 10.
7,146
43,020
5,355
60.2p
415,460
19,831
457,958
817,793
7,146
41,234
5,355
57.9p
418,326
23,312
455,175
806,688
7,146
43,335
5,355
60.7p
447,067
26,042
482,704
854,896
7,145
38,989
–
54.6p
439,467
32,312
492,952
842,380
7,042
41,896
–
59.5p
426,216
34,092
516,764
933,064
2016
2015
2014
2013
20121
2.9p
2.9p
3.05p
62.5p
2,510
71,374
2016
104.0
4.9
0.30
71.1
0.8p
0.8p
2.75p
73.1p
2,563
71,374
2015
359.3
1.3
0.11
88.3
1.7p
1.6p
0.75p
75.8p
2,626
71,374
2014
45.1
2.9
0.17
84.7
(1.2)p
(1.2)p
–
78.9p
2,681
71,368
2013
–
(2.0)
(0.09)
82.9
(2.1)p
(2.1)p
–
47.9p
2,733
70,343
20121
–
(3.3)
(0.14)
77.9
31 December
2016
31 December
2015
31 December
2014
31 December
2013
31 December
2012
21.4
17.0
13.6
21.5
16.4
12.8
22.0
16.5
12.8
20.8
14.5
14.0
17.3
13.8
12.0
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2 Annual dividends comprise both interim and 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.
3 Dividends per ordinary share in 2016 include a recommended special dividend of 0.5 pence; and in 2015 included a special dividend of 0.5 pence.
4 This figure excludes the limited voting ordinary shares owed by the Lloyds Bank Foundations.
5 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
6 Total dividend for the year divided by earnings attributable to ordinary shareholders adjusted for tax relief on distributions to other equity holders.
7 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims).
8 Capital ratios for 2014 reflected CRD IV transitional rules as implemented by the PRA on 1 January 2014. Capital ratios for 2013 and earlier years have not been restated
to reflect the implementation of CRD IV.
9 Capital ratios for 2012 were not restated to reflect the adoption of IAS 19 (Revised).
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39
Financial results
Divisional results – Retail
Retail offers a broad range of financial
service products, including current accounts,
savings and mortgages, to UK personal
customers, including Wealth and small
business customers
It is also a distributor of insurance, and a range of long-term savings
and investment products. Its aim is to be the best bank for customers
in the UK, by building deep and enduring relationships that deliver
value to customers, and by providing them with greater choice and
flexibility. It will maintain its multi-brand and multi-channel strategy,
and continue to simplify the business and provide more transparent
products, helping to improve service levels and reduce conduct risks.
m
12.5
11.5
10.5
000s
121
103
99
Active online users
2016
2015
2014
Business start-ups supported
2016
2015
2014
24%
market share of current account switchers
£11.7bn
of lending to first-time buyers
40
Progress against strategic initiatives
The division has made good progress against its strategic objectives;
improving the customer experience and realigning branch and other
capabilities in line with changing customer needs.
Creating the best customer experience
– Largest UK digital bank with over 12.5 million active online users
including over 8 million mobile users.
– 55 per cent of approved mortgage applications proceed to offer
within 14 days compared to 37 per cent in 2015.
– Instant mortgage lending decisions through the online Agreement
in Principle.
– Customers can now complete their full remortgage application
online.
– Reduced appointment times for opening a new savings account
by 44 per cent and matured savings accounts can now be renewed
in just a few minutes.
– Extended online and mobile phone application processes to all
current accounts.
– Lloyds Bank and Bank of Scotland current account online journeys
have been rated #1 and #2 respectively by industry researcher
eBenchmarkers.
Becoming simpler and more efficient
– Continued the branch network optimisation programme in response
to changing customer behaviour.
- Investing in new distribution technology and rolling out WIFI
and tablet solutions.
- Designing new branch formats and upgrading call centre
technology.
- Closed further branches, but maintaining the UK’s largest branch
network with a 21 per cent market share.
Delivering sustainable growth
– Continued to attract new customers through positive switching
activity, accounting for more than 1 in 5 switchers in 2016.
– Since the launch of the Group’s Helping Britain Prosper Plan in 2014
the Group has continued to be the leading supporter of first-time
house buyers, with £11.7 billion lent in 2016.
– Exceeded Helping Britain Prosper target by supporting over
121,000 start-up businesses whilst also launching a range of new
products and services to improve the customer experience for
small businesses.
Financial performance
– Underlying profit decreased 3 per cent to £3,003 million reflecting
the challenging interest rate environment, continued pressure on
other operating income and increased investment in the business.
– Net interest income decreased 3 per cent driven largely by a
reduction in mortgage balances reflecting the focus on protecting
margins. Banking margin fell by just 2 basis points despite the
continuing low interest rate environment.
– Other income was 6 per cent lower than 2015 driven by changing
customer behaviour and improvements to the customer proposition.
– Operating costs decreased 4 per cent to £4,174 million as efficiency
savings more than covered an increase in investment. Staff numbers
have reduced by 11 per cent in the year.
– Impairment charge increased 7 per cent to £373 million, however
underlying credit quality remains stable.
– Loans and advances to customers fell 3 per cent to £297.7 billion,
with the open mortgage book (excluding specialist mortgage
books and Intelligent Finance) reducing by £4.5 billion to £266
billion during the year, of which £3.4 billion was in the first half and
£1.1 billion in the second half. The fall reflects the decision to protect
net interest margin in the current competitive low growth market.
– Customer deposits decreased 1 per cent to £271.0 billion, driven
by the decision to reduce tactical balances.
– Risk-weighted assets increased £0.6 billion to £55.2 billion reflecting
the Group’s focus on balancing margin and risk considerations
offset by a more prudent approach to secured risk-weighted
asset modelling.
Lloyds Banking Group
Annual Report and Accounts 2016
Performance summary
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment
Underlying profit
Banking net interest margin
Average interest-earning banking assets
Asset quality ratio
Impaired loans as % of closing advances
Return on risk-weighted assets
Return on assets
Key balance sheet items
Loans and advances excluding closed portfolios
Closed portfolios
Loans and advances to customers
Relationship balances
Tactical balances
Customer deposits
Risk-weighted assets
1 Restated.
20151
£m
Change
%
2016
£m
6,497
1,053
7,550
–
7,550
(4,174)
(373)
3,003
6,664
1,115
7,779
–
7,779
(4,339)
(349)
3,091
2.20%
2.22%
£302.7bn
£307.0bn
0.12%
1.5%
5.45%
0.99%
0.11%
1.3%
5.71%
1.00%
(3)
(6)
(3)
(3)
4
(7)
(3)
(2)bp
(1)
1bp
0.2pp
(26)bp
(1)bp
At 31 Dec
2016
£bn
At 31 Dec1
2015
£bn
Change
%
271.0
26.7
297.7
253.8
17.2
271.0
55.2
275.5
30.1
305.6
249.3
24.4
273.7
54.6
(2)
(11)
(3)
2
(30)
(1)
1
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41
Financial results
Divisional results – Commercial Banking
Commercial Banking has a client-led, low
risk, capital efficient strategy, helping
UK-based clients and international clients
with a link to the UK
Through its four customer facing divisions − SME, Mid Markets,
Global Corporates and Financial Institutions – it provides clients
with a range of products and services such as lending, transactional
banking, working capital management, risk management, debt
capital markets services, as well as access to private equity through
Lloyds Development Capital.
Return on risk-weighted assets
2016
2015
2014
Funding for UK manufacturers
2016
2015
2014
%
2.4
2.4
2.0
£bn
1.2
1.4
1.0
3%
growth in SME lending
17%
share of mid-market banking relationships
42
Progress against strategic initiatives
The division has made significant progress against its strategic
objectives; delivering a return on risk-weighted assets of
2.44 per cent, exceeding the investor commitment of returns
greater than 2.40 per cent by the end of 2017 while continuing to
grow lending in key client segments.
Creating the best customer experience
– Awarded Business Bank of the Year at the FD’s Excellence Awards
for the 12th consecutive year.
– Increased net promoter scores across all client divisions surveyed
in 2016.
– Supported over 10,000 first time exporters which is helping the UK
government achieve its ambition to deliver 100,000 new exporters
by 2020.
Becoming simpler and more efficient
– Reduced SME relationship manager hours spent on business
account opening from seven to two hours, enabling more time
to be spent face to face with clients.
– Continued to invest in next generation digital capabilities and
client analytics to transform clients’ experiences. The ‘CB Online’
transaction banking platform now has over 2,000 clients registered.
Delivering sustainable growth
– Increased lending in SME and Mid Markets by around £2 billion in
2016 and provided UK manufacturers with over £1 billion of funding
support in 2016.
– Facilitated over £10.5 billion of financing to support UK government
infrastructure projects, including the creation of a wood pellet power
plant in Teesside which will provide energy to 600,000 homes and
Race Bank Offshore Windfarm which will play a key part in the UK’s
green energy future.
Financial performance
– Underlying profit in line with prior year at £2,468 million.
– Return on risk-weighted assets of 2.44 per cent with a 7 per cent
reduction in risk-weighted assets, total income growth and
disciplined cost management.
– Total income up 2 per cent with growth across SME, Mid Markets
and Financial Institutions.
– Net interest income up 6 per cent with a 28 basis points
improvement in net interest margin, supported by high quality
deposit growth, disciplined deposit pricing and reduced funding
costs. Other income down 4 per cent due to non-recurring income
recognised in 2015 relating to refinancing support of Global
Corporates clients. This has been partially offset by growth in
CB Markets of 8 per cent and increased momentum in the second
half of the year with other income up 9 per cent against the first half
of 2016.
– Operating lease depreciation increased due to additional charges
relating to certain leasing assets.
– Operating costs down 1 per cent with performance reflecting
disciplined cost management and headcount rationalisation,
supported by efficiency initiatives resulting in positive jaws.
– Impairment charge of £16 million reflects the benefit of active risk
management and the continued low interest rate environment.
Asset quality ratio remains low at 2 basis points.
– Risk-weighted assets decreased by £7.2 billion, reflecting the
disciplined approach to capital, including capital efficient
securitisation activity and credit management. This has received
global recognition through the award of Credit Portfolio Manager
of the Year at the 2016 Risk Awards.
– Loans and advances to customers fell by 2 per cent to £100.4 billion.
Above market growth in SME lending and increases in Mid Markets
and Global Corporates offset by lower lending in Financial
Institutions.
– Deposits increased 1 per cent to £132.6 billion. Strong momentum
in attracting high quality deposits with Global Transactional Banking
balances up 10 per cent, further optimising the portfolio and
strengthening the Group balance sheet.
Lloyds Banking Group
Annual Report and Accounts 2016
Performance summary
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment (charge) release
Underlying profit
Banking net interest margin
Average interest-earning banking assets
Asset quality ratio
Impaired loans as % of closing advances
Return on risk-weighted assets
Return on assets
Key balance sheet items
Loans and advances to customers
Customer deposits
Risk-weighted assets
1 Restated.
20151
£m
Change
%
2016
£m
2,735
1,987
4,722
(105)
4,617
(2,133)
(16)
2,468
2,576
2,072
4,648
(30)
4,618
(2,162)
22
2,478
3.26%
2.98%
£88.6bn
£90.0bn
0.02%
2.2%
2.44%
1.29%
0.01%
2.5%
2.36%
1.18%
At 31 Dec
2016
£bn
At 31 Dec1
2015
£bn
100.4
132.6
96.0
102.0
131.9
103.2
6
(4)
2
–
1
–
28bp
(2)
1bp
(0.3)pp
8bp
11bp
Change
%
(2)
1
(7)
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43
Financial results
Divisional results – Consumer Finance
Consumer Finance comprises all the
Group’s consumer lending products
including motor finance, credit cards,
and unsecured personal loans along
with its European business
Its aim is to deliver sustainable growth, within a prudent risk
appetite, in these markets through its multi-brand, multi-channel
distribution model.
Motor finance UK balances
2016
2015
2014
Credit card balance growth
2016
2015
2014
£bn
15.6
13.0
10.2
%
4
4
2
15%
share of credit card balances
9%
growth in UK consumer finance assets
44
Progress against strategic initiatives
The division continues to make significant progress against its
strategic objectives, and has delivered its original target of increasing
UK customer assets by £6 billion a year ahead of target, whilst
maintaining a prudent approach to new business and managing
residual value risk conservatively. In line with its strategy to grow
in consumer finance the Group has entered into an agreement to
acquire MBNA’s prime UK credit card business with £7.0 billion of
assets and c.2.8 million customers, which will give us the opportunity
to create a best-in-class credit card operation.
Creating the best customer experience
– Credit Cards launched the innovative Halifax FlexiCard, giving
customers more control, with dedicated repayment plans.
– In the Motor business, Black Horse launched a personal contract
purchase (PCP) product for caravans and motorhomes, which now
accounts for 11 per cent of applications in this sector.
– Lex Autolease built a bespoke system to manage vehicle servicing
and maintenance, including online self-service functionality and has
been used by over 10,000 customers since May.
– Loans have significantly enhanced the digital sales process with
the introduction of an upfront eligibility checker.
Becoming simpler and more efficient
– Consumer Finance continues to focus on efficiency with further
significant improvements to processes implemented in the year.
This has also helped reduce customer complaints by 11 per cent.
– Lex Autolease simplified the way it sells c.80,000 vehicles per annum
at end of contract, reducing the number of operating sites and
associated costs, whilst increasing speed of vehicle disposals.
– Black Horse launched the Mobile Finance Calculator across the
dealer network, allowing dealers to provide more accurate indicative
customer pricing early on in the process.
Delivering sustainable growth
– Black Horse balances have grown by 20 per cent in the year, ahead
of market growth, and continue to benefit from partnerships with
key manufacturers such as Jaguar Land Rover.
– Credit card balances grew broadly in line with the market at
4 per cent, and the Group was the number one issuer of new
cards in the UK.
– The acquisition of MBNA will enable the Group to enhance its
position and offering within the UK prime credit card market and
brings capabilities including data analytics and digital expertise in
addition to a well-recognised brand. This will be complementary to
the Group’s existing operation and provides further opportunities
for growth and delivering excellent customer service.
– Unsecured loan balances contracted marginally in the year as the
Group continues to focus on low risk franchise customers.
Financial performance
– Underlying profit at £1,283 million was down 7 per cent, driven
by slightly lower income and increased impairment, but return
on risk-weighted assets remained strong at 4.09 per cent.
– Net interest income at £1,941 million was down 1 per cent with
strong asset growth offset by the 73 basis point reduction in net
interest margin. This was largely due to the focus on high quality,
lower margin motor finance business, with the margin also impacted
by lower Euribor and planned reductions in deposits, in line with the
Group’s funding strategy.
– Other income was down 2 per cent at £1,338 million due to the
market-wide reduction in card interchange fees. Excluding this,
other income was 3 per cent higher driven by continued fleet
growth in Lex Autolease.
– Operating costs fell 4 per cent to £939 million with continued
investment in the business more than offset by underlying efficiency
savings. The division maintained a strong cost:income ratio, in line
with 2015 at 37.4 per cent.
– The impairment charge of £282 million increased by £47 million,
primarily due to overall growth and the non-recurrence of a
favourable one-off release in 2015. Credit quality remains good
with new business written within the Group’s prudent credit and
conduct appetite.
– UK customer assets were up 9 per cent year-on-year, driven primarily
by growth in Black Horse.
– Customer deposits were down 29 per cent to £7.9 billion driven by
re-pricing activity and the Group’s deposit strategy.
Lloyds Banking Group
Annual Report and Accounts 2016
Performance summary
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment
Underlying profit
Banking net interest margin
Average interest-earning banking assets
Asset quality ratio
Impaired loans as % of closing advances
Return on risk-weighted assets
Return on assets
Key balance sheet items
Loans and advances to customers
Operating lease assets
Total customer assets
Of which UK
Customer deposits
Risk-weighted assets
1 Restated.
2016
£m
1,941
1,338
3,279
(775)
2,504
(939)
(282)
1,283
20151
£m
1,954
1,359
3,313
(720)
2,593
(977)
(235)
1,381
Change
%
(1)
(2)
(1)
(8)
(3)
4
(20)
(7)
5.88%
6.61%
(73)bp
£33.9bn
£30.5bn
0.83%
2.1%
4.09%
3.29%
0.77%
2.9%
4.27%
3.95%
11
6bp
(0.8)pp
(18)bp
(66)bp
At 31 Dec
2016
£bn
At 31 Dec1
2015
£bn
Change
%
35.1
4.1
39.2
32.8
7.9
32.1
31.5
3.5
35.0
30.0
11.1
30.7
11
17
12
9
(29)
5
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45
Financial results
Divisional results – Insurance
The Insurance division is committed
to providing a range of trusted and
value-for-money protection, pension
and investment products to meet the
needs of its customers
With over £110 billion of funds under management, Scottish Widows
is helping 6 million customers protect what they value most and plan
financially for the future. In addition, the general insurance business is
protecting the homes, belongings, cars and businesses of over three
million customers.
£bn
42.7
35.4
33.3
£m
932
798
787
Corporate pension, planning
and retirement funds
2016
2015
2014
Annualised payments to annuity
customers in retirement
2016
2015
2014
6m
life, pensions and investments customers
14%
share of the home insurance market
46
Progress against strategic initiatives
The Group will continue to invest in developing the Insurance business
and will seek to grow in areas where it has competitive advantage
and is underrepresented, for the benefit of both customers and
shareholders.
Creating the best customer experience
– Regained ‘5 star’ Service Awards in both Life & Pensions and
Investment categories at the 2016 Financial Adviser Service Awards
together with ‘Most Improved Provider’ award. These accolades
are voted on by 5,000 UK financial advisers and reflect improved
customer service alongside simplified and streamlined processes.
– Strengthened the general insurance business with the launch of a
flexible online home insurance offering, delivering increased direct
sales, significant new functionality and more choice for customers.
– A founder member of the UK government’s Flood Re initiative
and played a lead role in setting up the scheme, which has
enabled customers in high flood risk areas to secure affordable
home insurance.
Becoming simpler and more efficient
– Launched a new digital service for employers, significantly
reducing processing times for monthly corporate pension scheme
management.
– Introduced an online tool allowing customers to consolidate other
workplace pensions assets into the Group. This builds on the
existing ‘5 Steps to Retirement’ website, enabling customers to
take control of their retirement plans.
Delivering sustainable growth
– Successfully completed four bulk annuity transactions in 2016, taking
the combined external deal size to over £1.85 billion since entering
the market in late 2015.
– Continued to leverage Group capabilities to source attractive, low
risk, higher yielding assets to back annuity liabilities. Total assets
acquired to date are £7 billion.
– Growth in corporate pension sales in a competitive environment,
driven by increased uptake of new schemes.
– Scottish Widows Protect monthly applications have increased
tenfold, providing £2.4 billion of life assurance and critical illness
cover to individuals and businesses across the UK.
– Corporate pension, planning and retirement funds under
management increased to over £42 billion reflecting net inflows
and positive market movements.
Financial performance
– Underlying profit decreased by 13 per cent to £837 million.
A 17 per cent increase in new business income was more than offset
by adverse economics impacting existing business income together
with increased investment costs.
– Life and pensions sales (PVNBP) decreased by 6 per cent. Excluding
the internal With-Profits fund bulk annuity transfers in 2015 and 2016,
PVNBP increased 23 per cent reflecting the four bulk annuity deals
secured, growth in corporate pensions and increased momentum
in both planning and retirement and protection.
– General insurance gross written premiums (GWP) decreased by
3 per cent, reflecting the continued softening of the Home market
and the run off of legacy products.
– Costs increased by 10 per cent to £772 million, reflecting
increased investment and £28 million annual levy associated with
the Flood Re scheme.
Capital
– The estimated pre dividend Solvency II ratio of 160 per cent
(1 January 2016 pre dividend position: 160 per cent) represents
the shareholder view of Solvency II surplus. Benefits from capital
optimisation initiatives have been offset by adverse interest
rate volatility and the payment of a £500 million dividend in
February 2016.
– Paid a further £500 million to the Group in February 2017, bringing
total dividends paid since the formation of the Group in 2009, to
£7.1 billion.
Lloyds Banking Group
Annual Report and Accounts 2016
Performance summary
Net interest income
Other income
Total income
Operating costs
Underlying profit
Life and pensions sales (PVNBP)1
New business income
General Insurance total GWP
General Insurance combined ratio
Solvency II ratio (pre dividend)
2016
£m
(146)
1,755
1,609
(772)
837
8,919
381
1,108
85%
160%
2015
£m
(163)
1,827
1,664
(702)
962
9,460
326
1,148
83%
160%
Change
%
10
(4)
(3)
(10)
(13)
(6)
17
(3)
2pp
–
1 Present value of new business premiums. With-Profit fund bulk annuity transfer sales were £2,386 million in 2015 and £243 million in 2016. Excluding these transfers, LP&I sales have improved
23 per cent in 2016.
Profit by product group
Corporate pensions
Bulk annuities
Planning and retirement
Protection
Longstanding LP&I
Life and pensions experience and other items
General insurance
Net interest income and free asset return
Total costs
Underlying profit
New business
income
£m
123
121
109
19
9
381
2016
Existing
business
income
£m
135
16
95
33
393
672
New business
income
£m
140
125
40
12
9
326
2015
Existing
business
income
£m
175
–
94
37
467
773
Total
income
£m
258
137
204
52
402
1,053
223
354
(21)
(772)
837
Total
income
£m
315
125
134
49
476
1,099
235
323
7
(702)
962
New business income has increased by £55 million, or 17 per cent, driven by growth in planning and retirement and protection propositions.
This has more than offset lower income from corporate pensions.
Existing business income has decreased by £101 million, primarily driven by adverse economics.
There was a net benefit of £223 million (2015: £235 million) as a result of experience and other items. This included one off benefits following an update
to the methodology for calculating the illiquidity premium and the addition of a new death benefit to legacy pension contracts, to align terms with
other pensions products. These were partly offset by the effect of recent reforms on activity within the pensions market.
General insurance income net of claims has increased by £31 million primarily driven by lower weather related claims.
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47
Financial results
Divisional results – Run-off and Central items
Run-off
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment release / (charge)
Underlying loss
Loans and advances to customers
Total assets
Risk-weighted assets
The lower income and costs reflect further reductions in the run-off portfolios.
Central items
Total income
Costs
Impairment release
TSB
Underlying profit
2016
£m
(110)
120
10
(15)
(5)
(77)
26
(56)
2016
£bn
9.6
11.3
8.5
2015
£m
(88)
145
57
(14)
43
(150)
(8)
(115)
2015
£bn
10.3
12.2
10.2
2016
£m
330
2
–
–
332
Change
%
(25)
(17)
(82)
(7)
49
51
Change
%
(7)
(7)
(17)
2015
£m
176
19
2
118
315
Central items includes income and expenditure not attributed to divisions, including the costs of certain central and head office functions.
Total income increased to £330 million (2015: £176 million) largely as a result of sales of liquid assets including gilts, and the timing of dividends from
the Group’s strategic investments.
The results in 2015 include TSB for the first quarter only.
48
Lloyds Banking Group
Annual Report and Accounts 2016
Other financial information
Banking net interest margin
The banking net interest margin is calculated by dividing banking net interest income by average interest-earning banking assets. Non-banking net
interest income includes the net interest expense reported by the Insurance business, net interest income earned from non-banking assets, negative
fair value adjustments relating to certain past liability management exercises and consolidation adjustments between net interest and other income
to eliminate the impact of certain intragroup transactions. Non-banking assets include loans and advances within Commercial Banking where the
predominant income stream is fees rather than net interest, and loans sold by Commercial Banking and Retail to Insurance to back annuitant liabilities.
The table below shows the reconciliation between the statutory net interest income and the underlying net interest income.
Group net interest income – statutory basis
Insurance gross up
Volatility and other items
TSB
Group net interest income – underlying basis
Insurance division net interest expense
Other non-banking net interest expense / (income)
Banking net interest income – underlying basis
Average interest-earning banking assets
Banking net interest margin
2016
£m
9,274
1,898
263
–
2015
£m
11,318
38
318
(192)
11,435
11,482
146
245
163
(15)
11,826
11,630
£435.9bn
£441.9bn
2.71%
2.63%
Other non-banking net interest expense was £245 million (2015: net interest income £15 million). The change in the year was largely driven by
a reduction in the net interest income reported by the non-banking businesses, the continued reduction in run-off non-banking assets together
with a change to the funding cost charged to the remaining run-off non-banking assets to better reflect their maturity profile.
The insurance gross up of £1,898 million (2015: £38 million) largely represents amounts payable to unitholders in consolidated open-ended investment
vehicles managed by the Insurance business. The increased expense in the year reflects strong market performance in the second half of 2016.
The table below shows the reconciliation between loans and advances and average interest-earning banking assets.
Net loans and advances to customers
Impairment provision and fair value adjustments
Non-banking items:
Fee based loans and advances
Sale of assets to Insurance
Other non-banking
Gross banking loans and advances
Averaging
Average interest-earning banking assets (quarter)
Average interest-earning banking assets (year-to-date)
Volatility arising in insurance businesses
Volatility included in the Group’s statutory results before tax comprises the following:
Insurance volatility
Policyholder interests volatility
Total volatility
Insurance hedging arrangements
Total
Quarter
ended
31 Dec
2016
£bn
449.7
3.7
(9.4)
(6.7)
(5.0)
432.3
1.7
434.0
435.9
Quarter
ended
30 Sept
2016
£bn
451.7
3.8
(8.7)
(6.2)
(5.5)
435.1
0.8
435.9
436.6
Quarter
ended
30 June
2016
£bn
453.0
4.1
(9.1)
(6.1)
(4.9)
437.0
(1.4)
435.6
436.9
2016
£m
(152)
241
89
(180)
(91)
Quarter
ended
31 Mar
2016
£bn
456.7
4.3
(10.9)
(5.7)
(5.3)
439.1
(0.9)
438.2
438.2
2015
£m
(303)
87
(216)
111
(105)
Insurance volatility
The Group’s insurance business has policyholder liabilities that are supported by substantial holdings of investments. IFRS requires that the changes
in both the value of the liabilities and investments are reflected within the income statement. The value of the liabilities does not move exactly in
line with changes in the value of the investments. As the investments are substantial, 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 impact of the actual return on these investments differing from the expected return is included within
insurance volatility.
49
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Financial results
Other financial information continued
Return measures
The Group’s underlying return on required equity for 2016 was 13.2 per cent (2015: 15.0 per cent) and the underlying return on tangible equity
was 14.1 per cent (2015: 16.0 per cent). The reduction in both return measures was as a result of lower underlying profit and higher tax.
Underlying return on required equity
Average shareholders' equity
Average non-controlling interests
Excess equity based on 12 per cent CET 1 requirement
Average required equity
Underlying profit after tax and profits attributable to other equity holders (£m)
Notional earnings on excess equity (£m)
2016
£bn
42.7
0.4
(2.4)
40.7
5,410
(24)
5,386
2015
£bn
42.8
0.6
(2.7)
40.7
6,155
(37)
6,118
Underlying return on required equity
13.2%
15.0%
Underlying return on tangible equity
Average shareholders' equity
Average intangible assets
Average tangible equity
Underlying profit after tax and profits attributable to other equity holders (£m)
Amortisation of intangible assets (post tax) (£m)
Profit attributable to non-controlling interests (£m)
42.7
(3.8)
38.9
5,410
174
(101)
5,483
42.8
(4.0)
38.8
6,155
156
(96)
6,215
Underlying return on tangible equity
14.1%
16.0%
Tangible net assets per share
The table below sets out a reconciliation of the Group’s shareholders’ equity to its tangible net assets.
2016
£m
43,020
(2,016)
(1,681)
(340)
170
2015
£m
41,234
(2,016)
(1,838)
(377)
264
39,153
37,267
71,413m
71,263m
54.8p
52.3p
Shareholders’ equity
Goodwill
Intangible assets
Purchased value of in-force business
Other, including deferred tax effects
Tangible net assets
Ordinary shares in issue, excluding Own shares
Tangible net assets per share
50
GOVERNANCE
Letter from the Chairman
Board of Directors
Group Executive Committee
Corporate governance report
Directors‘ report
Directors' remuneration report
52
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81
84
HELPING RECENTLY HOMELESS PEOPLE
REBUILD THEIR LIVES
With a grant from the Bank of Scotland Foundation, the
charity Fresh Start helps recently homeless people in
Edinburgh to rebuild their lives in secure, well-equipped
accommodation. Fresh Start is one of thousands of charities
supported by our four Foundations and by colleagues who
volunteer their expertise to help them.
£18.5 million
given to support our Foundations in 2016
Governance
Letter from the Chairman
Dear Shareholders
I am pleased to present our corporate governance report for 2016.
This report sets out our approach to governance in practice, the
work of the Board and includes reports from each of the Board’s
Committees.
The Board’s approach, led by me, your Chairman, is to ensure
corporate governance is embedded into the thinking and processes
of the business. This is vitally important because we believe a
commitment to good governance ensures we continually challenge
our assumptions and risks, and underpins the delivery of our
strategy to become the best bank for customers and generate
sustainable returns for shareholders.
Board changes
There were two changes to the Board in 2016. Stuart Sinclair joined
the Board in January 2016 and Dyfrig John retired from the Board
in May 2016.
The Board has agreed the following changes to our Board
composition. Anthony Watson, our Senior Independent Director, will
retire at the 2017 annual general meeting (AGM) after serving more
than eight years on the Board. Anita Frew will succeed Anthony as
Senior Independent Director. Anita will combine the role of Senior
Independent Director with the role of Deputy Chairman, which she has
held since May 2014. Anita’s significant board, financial and investment
management experience, including as a Senior Independent Director,
make her ideally suited to take on this role. Nick Luff, an independent
Non-Executive Director, has notified the Board that in light of his
other commitments he does not intend to seek re-election at the 2017
AGM. Nick will be succeeded as Chairman of the Audit Committee
by Simon Henry. Simon has significant financial experience in the UK
listed environment, retiring as Chief Financial Officer of Royal Dutch
Shell plc in March 2017. His background and experience enable him to
fulfil the role of Audit Committee Chairman and for SEC purposes the
role of Audit Committee financial expert. Both Anthony and Nick leave
with our thanks and best wishes for the future.
The structure, size and composition of the Board and its Committees
will continue to be kept under review.
Culture and values
One of my goals as Chairman is to ensure we continue to build
a culture in which our colleagues are empowered, inspired and
rewarded to do the right thing for customers. Our approach
to culture and values is led by the Board, where there is a clear
emphasis on setting the ‘tone from the top’. This is reflected
in the focus we give in the Board to ensuring every aspect of
our management approach – including targets and incentives,
organisational structures, values and behaviours – helps support the
right culture, and is cascaded through our governance structure to
every part of the business. We recognise that everyone is different
and a key element to achieving our vision is having a diverse and
inclusive workforce that reflects the diversity of modern Britain.
Diversity and succession planning
The Board has always placed great emphasis on seeking membership
that reflects diversity in its broadest sense while maintaining the
necessary levels of skills and experience required to oversee a major
financial institution. During the year, we reviewed our Board Diversity
Policy and agreed a specific target to maintain at least three female
Board members and, recognising the emerging target for FTSE
companies to move towards 33 per cent female representation, to
take opportunities to increase the number of female Board members
over time where that is consistent with other skills and diversity
requirements.
The Board also places high emphasis on ensuring the development
of diversity in the senior management roles within the Group and
supports and oversees the Group’s objective of achieving 40 per cent
of senior roles held by female executives by 2020, along with other
metrics which promote the engagement of other underrepresented
groups within the business. The role of succession planning in
promoting diversity is recognised and the Group has a range of
policies to help provide mentoring and development opportunities.
Corporate governance framework
The Board recognises that governance is not static but must adapt to
continually changing risks and changes in the regulatory environment.
The corporate governance arrangements are therefore regularly
reviewed to ensure they remain effective.
In 2016 we established two further sub-committees of the Board
Risk Committee to focus on Financial Markets and IT Resilience &
Cyber, in addition to an existing Stress Testing & Recovery Planning
sub-committee. The sub-committees were constituted to enable
members of the Board Risk Committee to dedicate additional time and
resource to better understand and to enable fuller review and challenge
of these risks. Additionally, a Cyber Security Advisory Panel was
established to bring an industry perspective and allow for discussion
of the key cyber related activities and threats.
Building stakeholder relationships
Understanding our stakeholders’ concerns supports us in the
delivery of our strategy to become the best bank for customers
as it helps us to focus on what is important.
We define our stakeholders as ’those who affect and are affected
by our operations’. In addition to our shareholders, customers and
colleagues, they include government, regulatory bodies,
suppliers and wider society.
Stakeholder engagement takes many different forms, both
through formal updates at Board and through more in-formal
channels, such as site and branch visits. You can read more on
page 64. We place great importance on colleague surveys and
customer satisfaction measures, which help inform our decisions
and track progress.
We engage with our shareholders through a full calendar of
meetings and events, including the AGM and webcasts. The
Board is briefed regularly through the year on both retail
shareholder and institutional investor issues and concerns. More
details of our shareholder relationship programme can be found
on page 68.
As reported in 2015, we established a board-level Responsible
Business Committee, underlining the Group’s commitment to
being a responsible business. The Committee focuses its work
on the three areas of People, Businesses and Communities and
reports on its first full year of activities on page 79.
We have had an independent Stakeholder Panel for a number
of years who represent the views of a range of stakeholders.
52
Lloyds Banking Group
Annual Report and Accounts 2016
OUR CULTURE AND VALUES
It is important to define culture in a
way that makes it actionable. This is
why we have defined our culture based
on behaviours we expect to see from
all colleagues in their day-to-day work
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In September 2016 the Chairman and members of the Scottish Widows Board
visited the Financial Planning & Retirement Lab in Edinburgh, to learn about
innovative solutions for meeting the evolving needs of customers as they plan
for retirement.
Board effectiveness review
The Board carries out an annual evaluation of its effectiveness.
Having undertaken an external review in 2015, in 2016 this was
conducted internally and was overseen by the Nomination and
Governance Committee. The results of the review are set out on
page 66, together with information about our progress against
the 2015 review actions.
Remuneration
Our approach to reward aims to provide a clear link between
remuneration and delivery of the Group's key strategic objectives,
supporting the aim of becoming the best bank for customers,
whilst delivering long-term, superior and sustainable returns to
shareholders. This year, we will be seeking shareholder support
for a new remuneration policy, which will formally apply, subject
to shareholder approval, from the date of the AGM in 2017.
Strategy
As well as reviewing progress in implementing the Group’s 2015-2017
strategic review, the Board spent considerable time in 2016 exploring
the challenges arising from the rapidly emerging digital environment.
There were several meetings which focused on Group strategy,
including a two day offsite which debated the transformation required
to be 'Bank of the Future' in order to underpin continued competitive
success. This will provide the backdrop to the next phase of our
strategic development, on which we will report later this year.
The announcement in December 2016 that we had agreed to acquire
MBNA is a significant step which reinforces our ability to deliver
sustainable growth whilst helping Britain prosper.
Looking forward to 2017, our corporate governance priorities will
be completing the Group’s strategic review and ensuring we are
equipped to deliver the key programmes; implementing the actions
from the 2016 Board Effectiveness Review; and taking forward the
necessary changes to implement our ring-fencing preparations.
Managing extensive change while maintaining high levels of current
performance and managing continually changing risks is an
immensely challenging task. I would like to thank the Board and
all our colleagues for their tremendous support and commitment
throughout the year in meeting these challenges.
Lord Blackwell
Chairman
The Board and senior leaders have a vital role to play in shaping
and embedding a healthy corporate culture, and this has been
a major focus for the Board’s attention over the last year. As a
Group we are clear that our Values of ‘putting customers first’,
‘keeping it simple’ and ‘making a difference together’, remain
central to the next stage of our cultural evolution. Our Group
Values are core to our strategy and are at the heart of what we
do and how we work.
We have established a clear and simple approach to our culture
that sets out how our purpose of helping Britain prosper and
our vision of becoming the best bank for customers will be
achieved by all colleagues living the Values in everything they
do. We believe it is important to define culture in a way that
makes it actionable, so we have described it based on
behaviours we expect to see from all colleagues in their
day-to-day work.
In 2017 we are embedding these behaviours in our key people
processes, so our Values will be reinforced across all colleague
experiences such as recruitment, performance management
and career development. We want to ensure colleagues are
empowered, inspired and incentivised to do the right thing for
our customers. Our colleague surveys show continued strong
engagement and commitment to helping us be the best bank
for customers.
Governance and oversight
We have an effective top-to-bottom governance structure
providing active oversight of our Culture, Conduct and
Customer objectives, which cascades to every part of
the business.
We have a Group Customer First Committee to provide
senior level active oversight and governance to upgrade and
accelerate our customer focus, embed our target culture and
conduct agenda. This committee drives our focus on culture
and has encouraged the creation of a culture dashboard, to
enable us to monitor our progress. Colleague feedback is
combined alongside regular metrics to provide a view that
is truly representative.
The Group Executive Committee, the Responsible Business
Committee and the Board receive regular updates on progress.
The culture dashboard is also shared with the Board to ensure
further opportunity for oversight. During the June Board
strategy offsite, the Group Chief Executive led the presentation
of a 'deep dive' session on culture, providing the Board with an
opportunity to offer feedback on our culture plans.
53
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Governance
Board of Directors
Comprising Directors with the right mix
of skills and experience, the Board is
collectively responsible for overseeing
delivery of the Group’s strategy
01 Lord Blackwell
Chairman
Appointed: June 2012 (Board), April 2014 (Chairman)
NG
Re
RB
Ri
Skills and experience: Lord Blackwell has deep financial services knowledge
including in insurance and banking, as well as regulatory and public policy
experience gained from senior positions in a wide range of industries. His
breadth of experience, credibility with key stakeholders and strong leadership
qualities make him an effective Chairman. Lord Blackwell was previously the
Chairman of Scottish Widows Group, and Interserve plc, Director of Group
Development at NatWest Group, a Senior Independent Director of Standard
Life and also chaired their UK Life and Pensions Board. His past Non-Executive
Directorships have included Halma plc, Dixons Group, SEGRO and Ofcom.
He was Head of the Prime Minister’s Policy Unit from 1995 to 1997 and was
appointed a Life Peer in 1997. He has an MA in Natural Sciences from the
University of Cambridge, a Ph.D in Finance and Economics and an MBA
from the University of Pennsylvania.
External appointments: Governor of the Yehudi Menuhin School.
3
3
3
92%
BOARD DIVERSITY
Gender diversity
2016
2015
2014
Male
Female
10
10
10
Skills and experience
Retail/commercial banking
54%
Financial markets/wholesale banking/corporate clients
Insurance
31%
Core technology operations/digital impact
54%
Government/regulator interface
CEO/CFO/CRO
Consumer/marketing/distribution
62%
62%
77%
Board tenure
2
2
4
5
Age
2
5
6
0–2 yrs
2–4 yrs
4–6 yrs
6–8 yrs
46–55
56–65
66–75
This information is provided at 31 December 2016
02 Anita Frew
Deputy Chairman and Independent Director
Appointed: December 2010 (Board), May 2014 (Deputy Chairman)
NG
A
Re
RB
=
Ri
Skills and experience: Anita has significant board, financial and general
management experience across a range of sectors, including banking, asset
and investment management, manufacturing and utilities. She was previously
Chairman of Victrex plc, the Senior Independent Director of Aberdeen Asset
Management and IMI plc, an Executive Director of Abbott Mead Vickers,
a Non-Executive Director of Northumbrian Water and has held various
investment and marketing roles at Scottish Provident and the Royal Bank
of Scotland. Her extensive board level, asset and investment management
experience makes her a strong Deputy Chairman and Chairman of the
Remuneration Committee. She has a BA (Hons) in International Business from
the University of Strathclyde, a MRes in Humanities and Philosophy from the
University of London and an Honorary DSc for contribution to industry and
finance from the University of Cranfield.
External appointments: Chairman of Croda International Plc and
a Non-Executive Director of BHP Billiton.
54
Lloyds Banking Group
Annual Report and Accounts 2016
A
Ri
Re
NG
03 Alan Dickinson
Independent Director
Appointed: September 2014
Skills and experience: Alan is a highly regarded retail and commercial banker
having spent 37 years with the Royal Bank of Scotland, most notably as
Chief Executive of RBS UK. More recently, he was a Non-Executive Director of
Willis Limited and Chairman of its Risk Committee. He was formerly Chairman
of Brown, Shipley & Co. Limited and a Non-Executive Director of Nationwide
Building Society where he was Chairman of its Risk Committee. Alan’s strategic
focus and core banking experience complements the balance of skills on
our Board and makes him ideal for the role of Chairman of the Board Risk
Committee. He is a Fellow of the Chartered Institute of Bankers and the Royal
Statistical Society and has an MBA from the Manchester Business School and
a Bachelor of Science from the University of Birmingham.
External appointments: Chairman of Urban & Civic plc and a Governor
of Motability.
A
Ri
NG
05 Nick Luff
Independent Director
Appointed: March 2013
Skills and experience: Nick has significant financial experience in the UK listed
environment having served in a number of senior finance positions within a
range of sectors. His background and experience enables him to fulfil the role
of Audit Committee Chair and, for SEC purposes, the role of Audit Committee
Financial Expert. Nick was previously the Group Finance Director of Centrica
plc, Finance Director of The Peninsular & Oriental Steam Navigation Company
and Chief Financial Officer of P&O Princess Cruises plc. He previously served
as a Non-Executive Director and was the Audit Committee Chair of QinetiQ
Group plc. He is a Mathematics graduate from the University of Oxford and
a Chartered Accountant.
External appointments: Executive Director and Chief Financial Officer
of RELX Group.
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04 Simon Henry
Independent Director
Appointed: June 2014
Skills and experience: Simon has deep international experience in board level
strategy and execution. His extensive knowledge of financial markets, treasury
and risk management and his qualification as an Audit Committee Financial
Expert is of particular value in our Board Risk and Audit Committees. Simon
has a BA in Mathematics, an MA from the University of Cambridge and is a
fellow of the Chartered Institute of Management Accountants.
Ri
A
External appointments: Chief Financial Officer and an Executive Director of
Royal Dutch Shell plc with responsibility for Shell’s Finance, IT, Strategy and
Planning functions (until 9 March 2017). Non-Executive Director of Rio Tinto plc
and Rio Tinto Limited (from 1 July 2017). Chair of the European Round Table
CFO Taskforce, Member of the Main Committee of the 100 Group of UK FTSE
CFOs, the Advisory Panel of CIMA and of the Advisory Board of the Centre for
European Reform.
A
Ri
06 Deborah McWhinney
Independent Director
Appointed: December 2015
Skills and experience: Deborah has an extensive executive background in
managing technology, operations and new digital innovations across banking,
payments and institutional investment. She broadens the Board’s diversity
from a global market perspective. Deborah is a former Chief Executive
Officer, Global Enterprise Payments and President, Personal Banking and
Wealth Management at Citibank. She was previously President of Institutional
Services at Charles Schwab Corporation and held executive roles at Engage
Media Services Group, Visa International and Bank of America, where she held
senior roles in Consumer Banking. She holds a BSc in Communications from
the University of Montana.
External appointments: Member of the Supervisory Board of Fresenius
Medical Care AG & Co. KGaA, Independent Director of Fluor Corporation
and IHS Markit Ltd, a Trustee of the California Institute of Technology and
of the Institute for Defense Analyses.
KEY
Member of Audit Committee
Member of Nomination and Governance Committee
Member of Remuneration Committee
Member of Responsible Business Committee
Member of Risk Committee
Committee Chairman
BOARD OF DIRECTORS KEY
10 01 09
08 06 07 14
A
NG
Re
RB
Ri
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09 Anthony Watson CBE
Senior Independent Director
Appointed: April 2009 (Board), May 2012 (Senior Independent Director)
Skills and experience: Tony is our Senior Independent Director and with
over 40 years of experience in the investment management industry and
related sectors, he is well placed to carry out this role. His former positions
include Chief Executive of Hermes Pensions Management and Chairman of
the Asian Infrastructure Fund, MEPC, the Marks & Spencer Pension Trustees
and of the Strategic Investment Board (Northern Ireland). He is also a former
Member of the Financial Reporting Council, a Senior Independent Director of
Hammerson and a Non-Executive Director of the Shareholder Executive and
Vodafone Group. He has a BSc (Hons) in Economics from Queen’s University
Belfast, a Diploma in Security Analysis from the New York Institute of Finance
and is a Barrister at Law, England and Wales.
External appointments: Senior Independent Director of Witan Investment
Trust, Chairman of the Lincoln’s Inn Investment Committee and a member
of the Norges Bank Investment Management Corporate Governance
Advisory Board.
Ri
Re
RB
10 Sara Weller CBE
Independent Director
Appointed: February 2012
Skills and experience: With a background in retail and associated sectors,
including financial services, Sara brings a broad perspective to the Board.
She is a passionate advocate of customers, the community, financial inclusion
and the development of digital skills which directly support Lloyds Banking
Group’s strategy and her role as Chairman of the Responsible Business
Committee. Sara has considerable experience of boards at both executive and
non-executive level. Her previous appointments include Managing Director
of Argos, various senior positions at J Sainsbury including Deputy Managing
Director, Lead Non-Executive Director at the Department of Communities
and Local Government, a Non-Executive Director of Mitchells & Butlers
as well as a number of senior management roles for Abbey National and
Mars Confectionery. She has an MA in Chemistry from Oxford University.
External appointments: Non-Executive Director of United Utilities Group
and Chair of their Remuneration Committee, a Governing Council Member
of Cambridge University, Chairman of the Planning Inspectorate and Board
member at the Higher Education Funding Council.
Governance
Board of Directors continued
A
Ri
07 Nick Prettejohn
Independent Director and Chairman
of Scottish Widows Group
Appointed: June 2014
Skills and experience: Nick has significant financial services experience,
particularly in insurance where he has served as Chief Executive of Lloyd’s of
London and Prudential UK and Europe as well as Chairman of Brit Insurance.
He is a former Non-Executive Director of the Prudential Regulation Authority
and of Legal & General Group Plc as well as Chairman of the Financial Services
Practitioner Panel. He has the knowledge and experience to provide valuable
insight and contribute effectively as a Non-Executive Director and Member
of the Audit Committee and Risk Committee as well as the governance
experience and leadership qualities to chair Scottish Widows Group. Nick has
a First Class Degree in Philosophy, Politics and Economics from Balliol College,
University of Oxford.
External appointments: Member of the BBC Trust (until 31 March 2017),
Chairman of the Britten-Pears Foundation, the Royal Northern College of
Music and the Financial Conduct Authority's Financial Advice Working Group.
Ri
Re
08 Stuart Sinclair
Independent Director
Appointed: January 2016
Skills and experience: Stuart has extensive experience in retail banking,
insurance and consumer finance. He is a former Non-Executive Director of TSB
Banking Group plc, TSB Bank plc, LV Group and Virgin Direct. In his executive
career, he was President and Chief Operating Officer of Aspen Insurance after
spending nine years with General Electric, as Chief Executive Officer of the
UK Consumer Finance business then President of GE Capital China. Before
that he was Chief Executive Officer of Tesco Personal Finance and Director of
UK Retail Banking at the Royal Bank of Scotland. He was a Council member of
The Royal Institute for International Affairs (Chatham House). He has an MA in
Economics from the University of Aberdeen and an MBA from the University
of California.
External Appointments: Non-Executive Director and Chair of the Risk
Committee at Provident Financial plc; Senior Independent Director and Chair
of Risk at QBE Insurance (Europe) Limited and Senior Independent Director
and Chair of Risk at Swinton Group Limited.
56
Lloyds Banking Group
Annual Report and Accounts 2016
BOARD OF DIRECTORS KEY
03 02 05
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11 António Horta-Osório
Executive Director and Group Chief Executive
Appointed: January 2011 (Board), March 2011 (Group Chief Executive)
Skills and experience: António brings extensive experience in, and
understanding of, both retail and commercial banking. This has been
built over a period of more than 30 years, working both internationally
as well as in the UK. António’s drive, enthusiasm and commitment
to customers, along with his proven ability to build and lead strong
management teams, brings significant value to all stakeholders of
Lloyds Banking Group. Previously he worked for Goldman Sachs,
Citibank and held various senior management positions at Grupo
Santander before becoming its Executive Vice President. He was a
Non-Executive Director of Santander UK and subsequently its Chief
Executive. He is also a former Non-Executive Director of the Court of
the Bank of England and Governor of the London Business School.
António has a Degree in Management & Business Administration
from the Universidade Católica Portuguesa, an MBA from INSEAD
and has completed the Advanced Management Program at Harvard
Business School.
External appointments: Non-Executive Director of EXOR N.V.,
Fundação Champalimaud and Sociedade Francisco Manuel dos Santos
in Portugal, a member of the Board of Stichting INPAR and Chairman of
the Wallace Collection.
12 George Culmer
Executive Director and Chief Financial Officer
Appointed: May 2012 (Board)
Skills and experience: George has extensive operational and financial
expertise including strategic and financial planning and control. He has
worked in financial services in the UK and overseas for over 25 years.
George was an Executive Director and Chief Financial Officer of RSA
Insurance Group, the former Head of Capital Management of Zurich
Financial Services and Chief Financial Officer of its UK operations as
well as holding various senior management positions at Prudential. He
is a Non-Executive Director of Scottish Widows. George is a Chartered
Accountant and has a history degree from the University of Cambridge.
External appointments: None.
13 Juan Colombás
Executive Director and Chief Risk Officer
Appointed: January 2011 (Chief Risk Officer), November 2013 (Board)
Skills and experience: Juan has significant banking and risk management
experience, having spent 31 years working in these fields both
internationally and in the UK. Juan is responsible for developing the
Group’s risk framework, recommending its risk appetite and ensuring
that all risks generated by the business are measured, reviewed and
monitored on an ongoing basis. He was previously the Chief Risk
Officer and an Executive Director of Santander’s UK business. Prior
to this position, he held a number of senior risk, control and business
management roles across the Corporate, Investment, Retail and Risk
Divisions of the Santander Group. He has served as the Group’s Chief
Risk Officer and as a member of the Group Executive Committee since
January 2011. Juan has a BSc in Industrial Chemical Engineering from
the Universidad Politécnica de Madrid, a Financial Management degree
from ICADE School of Business and Economics and an MBA from the
Institute de Empresa Business School.
External appointments: Vice Chairman of the International Financial
Risk Institute.
14 Malcolm Wood
Company Secretary
Appointed: November 2014
Skills and experience: Malcolm was previously General Counsel and
Company Secretary of Standard Life after a career as a corporate
lawyer in private practice in London and Edinburgh. He has a wealth of
experience in governance, policy and regulation. He is a Fellow of the
Institute of Chartered Secretaries and Administrators and a Member of
the Chartered Institute for Securities and Investment and the GC100.
Directors’ biographies can be found at
www.lloydsbankinggroup.com/our-group/directors
57
Governance
Group Executive Committee
Delivering our vision and managing
a more agile organisation
The depth of diverse experience and complementary skills in our
management team strengthens our ability to adjust to changing
market environments and deliver our strategy to become the best
bank for customers.
01 António Horta-Osório
Executive Director and Group Chief Executive
António joined the Board in January 2011 as an Executive Director and
became Group Chief Executive in March 2011. Full biography on page 57.
02 George Culmer
Executive Director and Chief Financial Officer
George joined the Board as an Executive Director in May 2012.
Full biography on page 57.
03 Juan Colombás
Executive Director and Chief Risk Officer
Juan joined the Group as Chief Risk Officer in January 2011 and joined the
Board as an Executive Director in November 2013. Full biography on page 57.
04 Andrew Bester
Group Director and CEO, Commercial Banking
Andrew joined the Group in 2012 from Standard Chartered Bank where he
held a variety of senior roles including Global COO and, later, Chief Financial
Officer of Consumer Banking. Previously, Andrew worked at Xchanging Plc
and Deutsche Bank and trained as a Chartered Accountant. Andrew sits on
the Board of the Global Financial Markets Association (GFMA) and the
Advisory Board of the University of Cambridge Programme for Sustainability
Leadership and is a member of The Prince of Wales’s UK Corporate Leaders’
Group. Andrew is Executive Sponsor for Inclusion & Diversity and the Group’s
Ambassador’s programme.
58
05 Karin Cook
Group Director, Operations
Karin joined the Group in 2013 as Chief Operating Officer, Commercial
Banking and became Group Director, Operations in 2015. Karin joined from
HSBC where she was Global Chief Operating Officer for Private Banking and
previously, Global Head of OTC Derivative Operations. Prior to HSBC, Karin
spent nine years at Morgan Stanley in London and five years at Goldman
Sachs in Paris, in a variety of Operations and Finance roles. She holds a
degree in Modern Languages from Cambridge University. Karin is a
Non-Executive Director of Scottish Widows Ltd and is also the Group’s
Executive Sponsor for Sexual Orientation and Gender Identity.
06 Simon Davies
Chief People, Legal and Strategy Officer
Simon joined the Group in 2016 from Linklaters LLP where he was Firmwide
Managing Partner, a position he held from January 2008. Prior to this, Simon
spent 12 years in Asia, specialising in M&A and securities advice, serving
terms in each of Hong Kong and Tokyo and was Managing Partner for Asia
from 2003-2007. He is a Solicitor of the High Court of the Hong Kong Special
Administrative Region, as well as a Solicitor of the Senior Courts of England
and Wales. Simon joined Linklaters in London in 1990, having studied at
Emmanuel College, Cambridge. Simon is Group Executive sponsor for
Ethnicity. He is also a member of TheCityUK China Market Advisory Group
and a trustee of the National Youth Theatre of Great Britain.
07 Antonio Lorenzo
Chief Executive, Scottish Widows and Group Director, Insurance
Antonio joined the Group in 2011 as head of the Wealth and International
division and Group Corporate Development, leading a strategic review
and subsequent programme of reducing non-core assets and exiting
international locations. From 2013, he assumed the role of Group Director,
Consumer Finance & Group Corporate Development, leading the division’s
growth strategy whilst completing the sale of TSB, before being appointed
as Chief Executive, Scottish Widows and Group Director, Insurance. Antonio
is also Group Executive Sponsor for Emerging Talent.
Antonio joined the Group from Santander, where he had worked in a number
of different leadership roles and jurisdictions since 1998. He was part of the
management team that completed the take-overs of Abbey National in 2004
then Bradford & Bingley and Alliance & Leicester in 2008, and was
Chief Financial Officer of Santander UK. Before Santander, Antonio spent
over nine years at Arthur Andersen.
Lloyds Banking Group
Annual Report and Accounts 2016
08 Vim Maru
Group Director, Customer Products and Marketing
Vim is the Group Director for the Customer Products and Marketing division
responsible for Retail customer products and all marketing across Lloyds
Banking Group. Vim joined the Group in June 2011 as Managing Director,
Customer Products, responsible for Retail product design and management
across all of the Group’s brands. He was appointed to the Group Executive
Committee in August 2013. Vim is a non-executive member of the Group’s
Insurance Board. Previously Vim worked for over 12 years at Santander, in a
range of roles in Corporate Strategy, Mergers & Acquisitions, the Life Division
and most recently held the position of Director, Retail Products. Vim holds an
Economics degree from the London School of Economics and is a member of
the Institute of Chartered Accountants.
11 Janet Pope
Chief of Staff (GEC attendee)
Janet joined the Group in 2008 to run the Savings business. She was
previously Chief Executive at Alliance Trust Savings, prior to which she
was EVP Global Strategy at Visa International. Janet spent 10 years at
Standard Chartered Bank where she held a variety of roles including
Retail Banking MD for Africa and non-executive directorships at Standard
Chartered Bank Zimbabwe, Kenya, Zambia and Botswana. Janet has held
non-executive positions on the audit committees of the Department for
Communities and Local Government, The Rent Service (Department for Work
and Pensions) and the Office of the Deputy Prime Minister. Janet studied at
the London School of Economics. She has a Master’s degree in Economics
and holds an MBA from Cass Business School.
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Group Director, Digital and Transformation
Zak joined the Group in 1989 as a Business Analyst in IT. He was appointed
Group Director, Digital and Transformation in 2016 and is responsible for
the Group-wide digital business across Retail, Consumer Finance, Insurance
and Commercial divisions, and the associated Transformation programmes.
Before his current role, Zak led the Digital Transformation programme for
a number of years and was also Retail CIO and head of IT architecture.
Zak has a computer science degree from York University.
10 David Oldfield
Group Director, Retail and Consumer Finance
David was appointed in June 2015 as Group Director for the Retail division
responsible for the retail branch network across Lloyds, Halifax and Bank of
Scotland brands, along with UK Wealth and Business Banking. Additionally,
in February 2016, David assumed responsibility for the Consumer Finance
division. David started his career with Lloyds Bank 32 years ago on the
graduate entrant programme and has held a number of key leadership
roles across all divisions of the Group since that time. Immediately prior to
this role he was appointed to the Group Executive Committee in May 2014
as Group Director, Operations. David is a Fellow of the Chartered Institute
of Bankers. He is also Group Executive Sponsor for Disability.
12 Matthew Young
Group Corporate Affairs Director
Matt joined the Group as Corporate Affairs Director in 2011. Prior to Lloyds,
he was Communications Director at Santander during a period when the
bank made a successful entry into the UK market following the acquisition
and subsequent rebranding of Abbey National, Alliance & Leicester, and
Bradford & Bingley. Matt joined Santander from NatWest in 1999 where
he held a number of senior communications roles. Matt has a degree in
Political Science and a postgraduate certificate in Education. He is a Board
member of the British Bankers Association, a member of the PR Guild, and
a former trustee of the Prince of Wales sponsored charity, In Kind Direct.
GROUP EXECUTIVE COMMITTEE KEY
04 05 09 12
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59
Governance
Corporate governance report
This report sets out our approach to
governance in practice, the work of the
Board and its committees and explains
how the Group applied the principles of
the UK Corporate Governance Code
(the Code) during 2016
LEADERSHIP
The Board
The Group is led by an effective, committed and unitary Board,
which is collectively responsible for the long-term success of the
Company. The Board comprises a Chairman (who was independent
on appointment), independent Non-Executive Directors and
Executive Directors. The names and biographies of current
Directors are set out on pages 54 to 57.
There is a clear division of responsibility at the head of the
Company, which is documented in the Group’s Corporate
Governance Framework. The Chairman has overall responsibility
for the leadership of the Board and for ensuring its effectiveness
while the Group Chief Executive manages and leads the business.
The Corporate Governance Framework, which is reviewed annually
by the Board, sets out a number of key decisions and matters that
are reserved for the Board’s approval.
The Board sets the strategy, oversees its delivery and establishes
the culture, values and standards of the Group.
The Board ensures that the Group manages risk effectively,
monitors financial performance and reporting and ensures that
appropriate and effective succession planning arrangements and
remuneration policies are in place. It provides and encourages
entrepreneurial leadership across the Group within this framework.
Key roles and responsibilities
Chairman
Lord Blackwell
Lord Blackwell leads the Board and promotes
the highest standards of corporate
governance. He sets the Board’s agenda
and builds an effective and complementary
Board. The Chairman leads Board succession
planning and ensures effective
communication with shareholders.
Deputy Chairman
Anita Frew
Anita Frew as Deputy Chairman ensures
continuity of Chairmanship during any
change of chairmanship. She supports the
Chairman in representing the Board and
acting as a spokesperson. She deputises for
the Chairman and is available to the Board
for consultation and advice. The Deputy
Chairman represents the Group’s interests
to official enquiries and review bodies.
Senior Independent Director
Anthony Watson
As the Senior Independent Director, Anthony
Watson is a sounding board for the Chairman
and Group Chief Executive. He acts as a
conduit for the views of other Non-Executive
Directors and conducts the Chairman’s
annual performance appraisal. He is available
to help resolve shareholders’ concerns and
attend meetings with major shareholders
and financial analysts to understand issues
and concerns.
Non-Executive Directors
Alan Dickinson, Simon Henry, Nick Luff,
Deborah McWhinney, Nick Prettejohn,
Stuart Sinclair, Sara Weller
The Non-Executive Directors challenge
constructively and help develop and set the
Group’s strategy. They actively participate
in Board decision making and scrutinise
management performance. The Non-
Executive Directors satisfy themselves on the
integrity of financial information and review
the Group’s risk exposures and controls.
The Non-Executive Directors, through the
Remuneration Committee, determine the
remuneration of Executive Directors.
Group Chief Executive
António Horta-Osório
António Horta-Osório manages the Group
on a day-to-day basis and makes decisions
on matters affecting the operation,
performance and strategy of the Group’s
business. He delegates aspects of his own
authority, as permitted under the Corporate
Governance Framework, to members of the
Group Executive Committee (GEC). He
provides leadership and direction to senior
management and coordinates all activities to
implement the strategy and for managing the
business in accordance with the Group’s risk
appetite and business plan set by the Board.
Executive Directors
Juan Colombás, George Culmer
Under the leadership of the Group Chief
Executive, the Executive Directors make and
implement decisions in all matters affecting
operations, performance and strategy. They
provide specialist knowledge and experience
to the Board. They are responsible for the
successful leadership and management of
the Risk and Finance divisions respectively.
The Executive Directors design, develop and
implement strategic plans and deal with
day-to-day operations of the Group.
Company Secretary
Malcolm Wood
The Company Secretary advises the Board and ensures good information flows and comprehensive practical support are provided to
Directors. He maintains the Group’s Corporate Governance Framework and organises Directors’ induction and training. The Company
Secretary communicates with shareholders as appropriate and ensures due regard is paid to their interests. Both the appointment and
removal of the Company Secretary is a matter for the Board as a whole.
60
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Annual Report and Accounts 2016
BOARD AND GOVERNANCE STRUCTURE
LLOYDS BANKING GROUP BOARD
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Group Chief
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Nomination and
Governance
Committee
Read more
on page 69
Board Risk
Committee
Read more
on page 76
Remuneration
Committee
Read more
on page 113
Group Chief
Executive
Committees
Read more
on page 121
Audit
Committee
Read more
on page 72
Responsible
Business
Committee
Read more
on page 79
A full schedule of all matters reserved to the Board and Terms of Reference for each of the Board Committees
can be found at www.lloydsbankinggroup.com/our-group/corporate-governance
Board Committees
The Board is supported by its Committees which make
recommendations on matters delegated to them under the Corporate
Governance Framework, in particular in relation to internal control, risk,
financial reporting, governance and remuneration matters.
This enables the Board to spend a greater proportion of its time
on strategic, forward looking agenda items. Each Committee
comprises Non-Executive Directors only and is chaired by an
experienced Chairman. The Committee Chairmen report to the
Board on the activities of the Committee at each Board meeting.
The Board recognises that governance must be dynamic and evolve
to meet current and future demands. Therefore, in 2016 two further
sub-committees of the Board Risk Committee were established to
focus on Financial Markets and IT Resilience & Cyber, in addition to
an existing Stress Testing & Recovery Planning sub-committee. The
sub-committees were constituted to enable members of the Board
Risk Committee to dedicate additional time and resource to better
understand and to enable fuller review and challenge of the risks
associated with the topic of the sub-committee. Current direct Board
level oversight of these activities through regular updates and annual
review continues unchanged.
Additionally, a Cyber Security Advisory Panel was established to
bring an industry perspective and allow for discussion of the key
cyber related activities and threats.
The Board in 2016
Non-Executive Directors see attendance at Board and Committee
meetings as only one part of their role. In addition to the annual
schedule of Board and Committee meetings, the Non-Executive
Directors undertake a full programme of activities each year, as set
out on page 64.
Non-Executive Directors regularly meet with senior management
and spend time increasing their understanding of the business
through site visits, formal briefing sessions or more informal events
including breakfast meetings with senior staff, which the Chief
People, Legal and Strategy Officer also attends. Board dinners
are held prior to each scheduled Board meeting. This allows the
Directors greater time to discuss their views, ensuring that there is
sufficient time for the Board to discuss matters of a material nature at
Board meetings. Some of these pre meetings are for Non-Executive
Directors only, some also include the Group Chief Executive and
others the full Board and GEC members. At least once a year,
a meeting is held without the Chairman in attendance.
Prior to the AGM in Scotland the Board held a joint discussion with
the Board of Scottish Widows Group Limited allowing in-depth
focus on insurance matters.
Attendance at Board meetings in 2016
Eligible to attend1
Attended
Directors who served during 2016
António Horta-Osório
Lord Blackwell
Juan Colombás
George Culmer
Alan Dickinson
Anita Frew
Simon Henry2
Nick Luff
Deborah McWhinney
Nick Prettejohn3
Stuart Sinclair4
Anthony Watson
Sara Weller
Former directors who served
during 2016
Dyfrig John5
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1 The attendance of Directors at Committee meetings is displayed within the individual
Committee reports found on pages 69 to 80 and for the Remuneration Committee on
page 113. Whilst all Non-Executive Directors are, where appropriate, invited to and
regularly attend other Committee meetings, only their attendance at Committees of
which they are members is recorded.
2 Mr Henry was unable to join the July Board meeting due to the second quarter 2016
results announcement for Royal Dutch Shell plc, of which he is Chief Financial Officer,
being presented on the same day.
3 Mr Prettejohn was unable to join the June Board meeting due to a prior commitment.
4 Joined the Board on 4 January 2016.
5 Retired on 11 May 2016.
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Governance
Corporate governance report continued
How Board meetings are run
The Chairman ensures Board meetings are structured to facilitate
open discussion, debate and challenge. Through his opening
remarks, the Chairman sets the focus of each meeting.
In the rare event of a Director being unable to attend a meeting,
the Chairman discusses the matters proposed with the Director
concerned, seeking their support and or feedback accordingly.
The Chairman subsequently represents those views at the meeting.
Directors are sent papers for the Board meeting typically seven days
in advance of the meeting in order that they may have the time to
consider the proposals put forward and seek clarification or further
information as required. The Board makes full use of technology
such as video conferencing, teleconferencing, a Board portal and
tablets in its meeting arrangements. This leads to greater flexibility,
security and efficiency in Board paper distribution.
Ensuring the right focus to deliver
the Group’s strategy
The Board recognises the need to be adaptable and flexible
to respond to changing circumstances and emerging business
priorities, whilst ensuring the continuing monitoring and oversight
of core issues.
The Group has a comprehensive and continuous agenda setting
and escalation process in place for ensuring the Board has the right
information at the right time and in the right format to enable the
Directors to make the right decisions. The Chairman leads the
process, assisted by the Group Chief Executive and Company
Secretary. The process ensures that sufficient time is being set
aside for strategic discussions and business critical items.
The process of escalating issues and agenda setting is reviewed
at least annually as part of the Board Effectiveness Review with
enhancements made to the process, where necessary, to ensure
it remains effective.
The Non-Executive Directors also receive regular updates from the
Group Chief Executive’s office including a weekly email which gives
context to current issues. In-depth and background materials are
regularly provided via a reading room on the Board portal.
Senior Managers and Certification Regime
Last year, the Corporate Governance Framework was reviewed
in preparation for the introduction in March 2016 of the Senior
Managers and Certification Regime (SM&CR) and, as relevant to
the Scottish Widows Group, the Senior Insurance Managers Regime.
The review, which was part of a wider range of initiatives undertaken
to prepare the Group for the introduction of SM&CR, found that the
framework was generally aligned with the requirements of the
SM&CR but a number of changes were recommended.
These included amendments to the statements of responsibilities
of the Directors and members of the GEC and minor amendments
to the terms of reference of a number of Board and Group Chief
Executive Committees.
AGENDA SETTING PROCESS
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Yearly planner prepared by the Company
Secretary to map out the flow of key items of
business to the Board
The Chairman holds monthly meetings to
review the draft agenda and planner with the
Company Secretary and the Chief of Staff
Draft Board agenda discussed between the
Chairman and the Group Chief Executive and
reviewed at GEC meetings
Matters may be added to agendas in response
to external events, Non-Executive Director
requests and the quarterly Board Topic Review
meetings
PROCESS FOR ESCALATING ISSUES
Board and Committee agendas and topics
Corporate
Governance
Framework
imposes clear
responsibility on
GEC members to
escalate matters
Time allocated at
each GEC meeting
to consider
whether any
matters require
escalation
Quarterly Board
Topic Review
meetings led
by the Chairman
Board oversight: MBNA acquisition
In December 2016 the Group announced that it had agreed to
acquire MBNA, a UK consumer credit card business, from Bank
of America. This is a significant strategic step which reinforces the
Group's ability to deliver sustainable growth whilst helping Britain
prosper and will enhance the Group's position and offering in the
UK prime credit card market. The transaction is expected to
complete by the end of the first half of 2017, subject to the receipt
of competition and regulatory approval.
The Board considered the opportunity at a number of meetings
during 2016 and spent considerable time at each meeting
discussing and reviewing the acquisition and approving next
steps. As part of its oversight role, the Board challenged and
scrutinised the rationale for the acquisition and received detailed
progress updates and papers. Key issues considered by the Board
in reaching the decision to approve the acquisition included:
strategic context; funding options; financial effects; due diligence
findings; cost synergies; risks; and their impact on the Group.
62
Lloyds Banking Group
Annual Report and Accounts 2016
BOARD FOCUS IN 2016
Financial
– Budget for 2016
– Group operating plan
– Draft results and presentation to analysts
– Approval of dividends
– Funding and Liquidity plan
– Capital plan
Strategy
– Review of progress in implementing
the Group’s 2015-17 strategy
– Approval of large transactions
– MBNA acquisition
– EU referendum outcome
– Review of future environment
and business model
Culture and values
– Customer performance dashboard
– Conduct, culture and values
– Responsible Business report
– Helping Britain Prosper Plan
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Regular agenda items
– Group performance report from the Group Chief Executive
– Report on financial performance, including budgets, forecasts and capital position from the Chief Financial Officer
– Risk report from the Chief Risk Officer
– Chairman’s activities report
– Reports from Committee Chairmen
Governance and shareholders
– Board effectiveness and Chairman’s
performance reviews
– Board Diversity Policy
– Review of Corporate Governance
Framework
– Investor Relations updates
– AGM briefing
– In the first half of 2016, preparation for
proposed public offering of shares in
the Company by HM Treasury
Regulatory
– Ring-fencing and resolution
– SM&CR updates
– Regulatory updates
– Whistleblowing updates
Risk management
– Approval of Group risk appetite
– Approval of Risk Management Framework
– Review of internal control systems
– Review and approval of PRA and
EBA stress testing results
– CMA market review into retail banking services
– IT resilience and cyber security
BOARD MEETINGS AND ACTIVITY IN 2016
B
BD
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B
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BD
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JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
2015 full
year
results and
dividend
Q1
results
AGM
Strategy
offsite
meeting
Half year
results
and
dividend
Q3
results
Board site
visit to Halifax
and Group
operating
plan with
strategic focus
KEY
Board meeting
Board meeting and deep dive
Deep dive
The deep dive sessions, strategy offsite meeting
and site visit to Halifax are described on page 64
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Governance
Corporate governance report continued
BOARD ACTIVITIES IN 2016 – SUPPORTING DELIVERY OF THE GROUP’S STRATEGIC PRIORITIES
Deep dives
The Board regularly takes the opportunity to hold ‘deep dive’
sessions with senior management outside of formal Board
meetings.
The purpose of the sessions is to provide the Board with
deeper insight into key areas of strategic focus. The sessions
are structured to allow for plenty of opportunity for discussion
and include presentations and videos.
In 2016 ‘deep dive’ sessions were held on the following topics:
– Commercial Banking
– Customer perspective
– Data infrastructure and information security
– Consumer Finance
– Customer segmentation
– Retail product pricing
Board strategy offsite
The Board sets aside time each year outside of the annual
Board calendar to hold a strategy offsite giving the Directors
the opportunity to solely focus on strategic issues.
This year the Board and the GEC held a two day offsite in June
to discuss the strategic challenges and opportunities the Group
faces in the future, based on four scenarios for how banking
could evolve over the next ten years. The offsite enabled the
Board to take a view of the longer-term outlook for the Group.
The Board debated the transformation required to be ‘Bank of
the Future’ in order to underpin continued competitive success.
This will provide the backdrop to the next phase of strategic
development, on which the Group will report later in 2017.
The agenda included case studies from banking and other
industries, and presentations from senior management and
smaller break-out sessions on specific topics.
The offsite concluded with a group discussion leveraging the broad
range of experience and perspectives from across the Board.
Creating the best
customer experience
Becoming simpler
and more efficient
Delivering sustainable growth
Board visit to Halifax
Over two days in November the Board visited the Group’s
Halifax offices. In addition to the Board and Committee
meetings, a separate strategy meeting, attended by GEC
members, was held reviewing the Group operating plan. During
the visit, the Chairman and several Non-Executive Directors,
spent half a day with some of the c.3,000 colleagues based in
Halifax. The visit included a walk through the Mortgage
Transformation lab to learn about the improvements being
made to the customer mortgage journey.
The Chairman and Non-Executive Directors also spent time with
the Banking Complaints Team, where they followed a complaint
through to its outcome and joined a ‘huddle’ discussing how
Financial Ombudsmen Service learnings could be used to
ensure fair customer outcomes in the future.
Chairman’s engagement programme
The Chairman undertakes an extensive engagement
programme each year representing the Group at industry
events, acting as a spokesperson for the Group and meeting
with clients, regulators, investors, the media, the Foundations
and their beneficiaries.
The programme includes visits to regional offices, branches,
IT and operations centres, where the Chairman meets local
management and colleagues through meetings, floor walks,
team talks and Town Hall sessions.
The Town Hall sessions are an opportunity for colleagues to
hear from the Chairman on the Group’s performance and
strategic direction, and importantly, to ask questions. These
events are very popular and are always well attended.
Showing support for customers and the community
In September, Lord Blackwell spent two days in Aberdeen where he met with more than 100
business customers. During his visit, he delivered the keynote speech at a dinner for customers
and local influencers, emphasising the Group's vital role in helping Britain prosper and the
importance of building long-term customer relationships. At a breakfast for Mid Markets clients
and local business leaders, he outlined his views on the economy and the importance of
supporting local businesses.
Lord Blackwell also found time to host a Town Hall and Q&A session for colleagues at the Group's
Albyn Place office. His final stop was an inspiring visit to Fly Cup Catering in Inverurie, a charity
funded by the Bank of Scotland Foundation which provides catering training, employment
experience and placements for adults with learning difficulties.
Speaking about the visit, he said: ‘I came away enthused by the commitment and enthusiasm of
everyone I met, and by the general sense of cautious optimism from our commercial clients and
relationship managers. It is extremely helpful to me to hear these perspectives first hand and to
meet more of our tremendous colleagues.’
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Annual Report and Accounts 2016
EFFECTIVENESS
Board induction
The Chairman personally ensures that on appointment each Director
receives a full, formal and tailored induction. The emphasis is on
ensuring the induction brings the business and its issues alive for
the new Director, taking account of the specific role they have been
appointed to fulfil and the skills/experience of the Director to date.
Directors who take on or change roles during the year attend
induction meetings in respect of those new roles.
An outline of the induction programme is set out opposite and
Deborah McWhinney and Stuart Sinclair share their experiences
on joining the Board on page 71.
Professional development and training
The Chairman leads the learning and development of Directors
and the Board generally and regularly reviews and agrees with
each Director their training and development needs.
Ample opportunities, support and resources for learning are
provided through a comprehensive programme, which is in place
throughout the year comprising both formal and informal training
and information sessions.
The Company Secretary maintains a training and development
log for each Director.
Time commitments
Non-Executive Directors are required to devote such time as is
necessary for the effective discharge of their duties. The estimated
minimum time commitment set out in the terms of appointment
is 35-40 days per annum including attendance at Committee
meetings. For Committee Chairmen and the Senior Independent
Director, this increases to a minimum of 45 to 50 days. As described
elsewhere , the time devoted on the Group’s business by the
Non-Executive Directors is in reality considerably more than
the minimum requirements.
Executive Directors are restricted to taking no more than one
non-executive director role in a FTSE 100 company and may not
take on the chairmanship of such a company. The Chairman is
committed to this being his primary role, limiting his other
commitments to ensure he can spend as much time as the role
requires. In February 2016, the Chairman retired as Chairman of
Interserve plc. The Chairman’s biography can be found on page 54.
Conflicts of interest
The Board has a comprehensive procedure for reviewing and, as
permitted by the Companies Act 2016 and the Company’s articles
of association, approving actual and potential conflicts of interests.
Directors have a continuing duty to notify the Chairman and
Company Secretary as soon as they become aware of actual or
potential conflict situations. Changes to the commitments of all
Directors are reported to the Nomination and Governance
Committee and the Board and a register of potential conflicts and
time commitments is regularly reviewed and authorised by the
Board to ensure the authorisation status remains appropriate.
Stuart Sinclair is Senior Independent Director at both QBE Insurance
(Europe) Limited, a general insurance and reinsurance company, and
Swinton Group Limited, an insurance broker for home and motor
insurance. The Board has recognised that potential conflicts may
arise in relation to his position at QBE Insurance and in relation
to Swinton Group. The Board has authorised the potential conflicts
and requires Mr Sinclair to recuse himself from discussions, should
the need arise.
Access to advice
The Group provides access, at its expense, to the services of
independent professional advisers in order to assist Directors
in their role. Board Committees are also provided with sufficient
resources to undertake their duties. All Directors, including
Non-Executive Directors, have access to the services of the
Company Secretary in relation to the discharge of their duties.
BOARD INDUCTION PROGRAMME
Core
programme
– Strategic and corporate induction
– Governance and Director
responsibilities
– Senior Managers and
Certification Regime
– Detailed risk induction programme
– Detailed briefings on each of the
Group’s business divisions
– Branch and site visits
– Opportunity to meet with major
shareholders as requested
– Chairman
– Company Secretary
– Executive Directors
– GEC members
– Group Audit Director
– Senior executives from across
the Group
– The Chairman personally ensures a new
Director receives a tailored induction.
– Specific briefings are provided on the
Committees on which the new Director
will serve.
One-to-one
briefings
Bespoke
programme
Briefing and reading materials
Briefing and reading materials are made available on the Board portal.
PROFESSIONAL DEVELOPMENT AND
TRAINING PROGRAMME AT A GLANCE
Training and
information sessions
Briefing material
on Board portal
Site visits,
Board dinners and
breakfast meetings
Management and
one-to-one meetings on
key topics
Deep dives
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Governance
Corporate governance report continued
Board effectiveness
The Chairman of the Board leads the annual review of the Board’s
effectiveness and that of its Committees and individual Directors
with the support of the Nomination and Governance Committee,
which he also chairs. The annual evaluation is facilitated externally
at least once every three years.
2016 evaluation of the Board’s performance
The 2016 evaluation was conducted internally between November
2016 and December 2016 by the Company Secretary, and was
overseen by the Nomination and Governance Committee.
The 2016 review sought the Directors’ views on a range of topics
including: strategy; planning and performance; risk and control;
Board composition and size; balance of skills and experience;
diversity; culture and dynamics; the Board’s calendar and agenda;
the quality and timeliness of information; and support for Directors
and Committees.
If Directors have concerns about the Company or a proposed action
which cannot be resolved, it is recorded in the Board minutes. Also
on resignation, Non-Executive Directors are encouraged to provide
a written statement of any concerns to the Chairman, for circulation
to the Board. No such concerns were raised in 2016 and up to the
date of this report.
Anthony Watson, Senior Independent Director, is due to retire at the
2017 AGM. At the time of the 2017 AGM, he will have served on the
Board for more than eight years and therefore, in compliance with
the Code, his review was particularly rigorous.
Outcome of 2016 Board effectiveness review
The reviews concluded that the performance of the Board, its
Committees, the Chairman and each of the Directors continues to
be effective. All Directors demonstrated commitment to their roles.
Many Directors commented favourably on the performance of
the Board as a whole, describing it as hardworking, collegiate,
questioning and highly engaged. Developments during 2016,
including the continued use of deep dives, the establishment of
sub-committees of the Board Risk Committee and the Cyber Security
Advisory Panel have generally been welcomed and Directors have
commented on the high quality of debate within the Board. Highlights
mentioned by several Directors were the strategy offsite in June and
governance of the acquisition of the MBNA UK consumer credit
card business, where the Board was highly engaged in oversight and
challenge of the acquisition process. Directors also spoke highly of
the work done by the Chairman and the Chairs of the Committees
in structuring agendas and ensuring that business is covered at
the meetings.
2016 EVALUATION PROCESS
Step 1 Detailed questionnaire completed by each Director
Step 2
Individual meetings held between each Director and
the Company Secretary
Step 3
Evaluation of the findings by the Company Secretary
and report prepared
Step 4
Draft conclusions discussed by the Company
Secretary with the Chairman
Step 5
Discussion of the Company Secretary’s report and
draft conclusions and actions agreed
Chairman’s evaluation
The Senior Independent Director carried out the evaluation of
the Chairman’s performance using a questionnaire and individual
meetings with Directors other than the Chairman. The outcome
of the evaluation of the Chairman‘s performance was discussed
by the Directors in the absence of the Chairman.
Recommendations from the 2016 Board
effectiveness review (internal)
The review identified a number of actions to maintain and improve
the Board’s effectiveness.
Volume of Board/Committee papers
The most common observation by Directors concerned the volume
of information which they received. Directors would like to receive
more concise reports with clearer signposting of the key issues.
Links to strategy
Several Directors said they would welcome more frequent linkage
to strategy in the regular business of the Board.
Conduct of Board/Committees
Several Directors said that they would value more time in agendas
for discussion, while recognising the pressures on meeting time.
2015 Board effectiveness review (external)
In accordance with the three year cycle, the 2015 evaluation was facilitated externally by JCA Group between October 2015 and January 2016.
The review was commissioned by the Chairman, assisted by the Company Secretary and overseen by the Nomination and Governance
Committee. A summary of the Board’s progress against the actions arising from the 2015 effectiveness review are set out below.
Recommendations
Strategy
Actions taken/progress
– Continue to focus on strategy, with particular attention to the longer
– 2016 strategy offsite focused on reviewing future environment and
term horizon and the impact of the changing technology and
competitive landscape
business model
– Regular Board deep dives and discussion topics related to digital
disruption and strategic development held during the year
Succession planning
– Maintain a proactive approach to succession planning for Executive
and Non-Executive Directors and for senior management
– Non-Executive Director discussion on Executive succession carried out
– Non-Executive Directors are informed about and able to input
on Group Chief Executive succession planning
– Chairman and Nomination and Governance Committee continued
to review Non-Executive Director profile and succession
Board information
– Continue the progress made in 2015 in ensuring that information
– Continued progress on reducing unnecessary material and
provided to the Board and its Committees is clear, concise, relevant
and focused
– Review and continue to evolve metrics used to assess business
performance to ensure that they provide an appropriate level of
detail and insight for the Board
presentations
– Revised Board template and guidance in place
– Regular reporting on business performance has continued
to develop in response to Board feedback
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Lloyds Banking Group
Annual Report and Accounts 2016
INTERNAL CONTROL
Board responsibility
The Board is responsible for the Group’s risk management and
internal control systems, which are designed to facilitate effective
and efficient operations and to ensure the quality of internal and
external reporting and compliance with applicable laws and
regulations. The Directors and senior management are committed
to maintaining a robust control framework as the foundation for the
delivery of effective risk management. The Directors acknowledge
their responsibilities in relation to the Group’s risk management and
internal control systems and for reviewing their effectiveness.
In establishing and reviewing the risk management and internal
control systems, the Directors carried out a robust assessment of
the principal risks facing the Company, including those that would
threaten its business model, future performance, solvency or
liquidity, the likelihood of a risk event occurring and the costs of
control. The process for identification, evaluation and management
of the principal risks faced by the Group is integrated into the
Group’s overall framework for risk governance. The Group is
forward-looking in its risk identification processes to ensure
emerging risks are identified. The risk identification, evaluation and
management process also identifies whether the controls in place
result in an acceptable level of risk. At Group level, a consolidated
risk report and risk appetite dashboard are reviewed and regularly
debated by the Group Risk Committee, Board Risk Committee and
the Board to ensure that they are satisfied with the overall risk
profile, risk accountabilities and mitigating actions. The report and
dashboard provide a monthly view of the Group’s overall risk profile,
key risks and management actions, together with performance
against risk appetite and an assessment of emerging risks which
could affect the Group’s performance over the life of the operating
plan. Information regarding the main features of the internal control
and risk management systems in relation to the financial reporting
process is provided within the risk management report on pages 116
to 169. The Board concluded that the Group’s risk management
arrangements are adequate to provide assurance that the risk
management systems put in place are suitable with regard to the
Group’s profile and strategy.
Control effectiveness review
An annual control effectiveness review (CER) is undertaken to
evaluate the effectiveness of the Group’s control framework with
regard to its material risks, and to ensure management actions are
in place to address key gaps or weaknesses in the control
framework. Business areas and head office functions assess the
controls in place to address all material risk exposures across all risk
types. The CER considers all material controls, including financial,
operational and compliance controls. Senior management complete
an attestation to confirm the CER findings which are reviewed and
independently challenged by the Risk Division and Group Audit
and reported to the Board. Action plans are implemented to
address any control deficiencies.
Reviews by the Board
The effectiveness of the risk management and internal control
systems is reviewed regularly by the Board and the Audit
Committee, which also receives reports of reviews undertaken by
the Risk Division and Group Audit. The Audit Committee receives
reports from the Company’s auditor, PricewaterhouseCoopers LLP
(which include details of significant internal control matters that they
have identified), and has a discussion with the auditor at least once
a year without executives present, to ensure that there are no
unresolved issues of concern.
The Group’s risk management and internal control systems are
regularly reviewed by the Board and are consistent with the
Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting issued by the Financial Reporting
Council and compliant with the requirements of CRD IV. They have
been in place for the year under review and up to the date of the
approval of the annual report. The Group has determined a
pathway to compliance with BCBS 239 risk data aggregation
and risk reporting requirements and continues to actively
manage enhancements.
Conclusion
Our Controls Frameworks are continuously improved and enhanced,
addressing known issues and keeping pace with the dynamic
environment. Progress continues to be made in IT, Cyber, and
Financial Crime. The 2016 CER assessment provides reasonable
assurance that the Group's controls are effective or that where
control weaknesses are identified, they are subject to management
oversight and action plans. The Audit Committee, in conjunction
with the Board Risk Committee, concluded that the assessment
process was effective and recommended them to the Board
for approval.
REMUNERATION
The statement by the Chairman of the Remuneration Committee, the Directors’ Remuneration policy and the Directors’ Remuneration
Implementation Report are set out on pages 84 to 114.
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Spotlight on subsidiary governance
The Group conducts the majority of its business through
a number of subsidiary entities. The Corporate Governance
Framework sets out minimum governance standards and
a subsidiary directors’ handbook sets out detailed guidance
on the role and responsibilities of a subsidiary director.
An annual certification process, at individual entity level, of
compliance with the minimum governance standards set out in
the Corporate Governance Framework enhances management
of any legal, regulatory and reputational risks associated with the
Group’s subsidiary entities. The process provides GEC members
with additional oversight of subsidiary entities within their
respective business area, including an escalation process for any
matters of non-compliance. In addition, the process provides
continued focus on simplification of the Group’s legal entity
structure through consideration of the lifecycle of each entity.
Scottish Widows Group Limited
The Board of the Group’s insurance subsidiary, Scottish Widows
Group Limited, which also sits as the Board of its major
subsidiaries, is chaired by a Non-Executive member of the Lloyds
Banking Group Board and contains a balance of independent
Non-Executive Directors, Group executives (serving as Non-
Executives) and Insurance Division executives. This composition
supports its legal and regulatory requirements for independent
decision making within the overall framework of Group policies
and controls.
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Governance
Corporate governance report continued
SHAREHOLDER RELATIONSHIPS
The Board recognises and values greatly the need to deliver
a programme of engagement that offers all shareholders the
opportunity to receive Company communications and to share
their views with the Board.
The Group has a diverse range of shareholders and investors
with different communication and engagement needs which
are addressed by specialist teams.
The Group’s website enables access to documents and
communications as soon as they are published, including a
live webcast of the AGM. Recordings of webcasts and other
analyst presentations are also available.
Relationships with institutional investors
Investor Relations has primary responsibility for managing and
developing the Group’s external relationships with existing and
potential institutional equity investors and analysts. With support
from senior management, they achieved this through a combination
of more than 1,100 meetings and various presentations in 2016. The
presentations were primarily aligned to results and included content
on strategic progress and financial and operational performance.
In addition to this direct shareholder engagement, Investor Relations
provides regular reports to the executive team and Board on key
market issues and shareholder concerns.
Corporate governance meeting with
institutional shareholders
In October 2016, the Chairman hosted a meeting with a number of
large institutional shareholders focused on the Group’s corporate
governance arrangements. Following an overview from the
Chairman on the Group’s strategy and culture and Board
governance, the shareholders heard from each of the Chairmen
of the Audit, Board Risk, Remuneration and Responsible Business
Committees and the Senior Independent Director. The meeting
was also attended by the Company Secretary and the Group
Investor Relations Director. The meeting was structured to allow
for an open dialogue and discussion on the matters of importance
to institutional shareholders. Those in attendance were especially
interested in hearing about the Group’s approach to becoming a
more responsible business.
Governance and executive remuneration
Lord Blackwell (Chairman and Chairman of the Nomination
and Governance Committee) and Anita Frew (Deputy Chairman
and Chairman of the Remuneration Committee) participated in
meetings and discussions with investors and other stakeholders,
including the Group’s regulators, regarding governance and the
strategic direction of the Group. They also engaged with proxy
advisors, regulators and shareholders on issues relating specifically
to executive remuneration.
Relationships with retail shareholders
The Company Secretary has a team dedicated to engage with retail
shareholders who, with support from the Company's registrar
Equiniti Limited, deliver the Group’s shareholder service strategy,
including the AGM. Group Secretariat provides feedback to the
Board and appropriate Committees to ensure the views of retail
shareholders are received and considered. Important shareholder
information, including details on the arrangements for the 2017
AGM, can be found on pages 286 and 287.
Annual General Meeting 2016 at a glance
The AGM is an opportunity for shareholders to hear directly from
the Board on the Group’s performance and strategic direction,
and importantly, to ask questions.
– nearly 200 shareholders represented
– over 70 per cent of total voting rights voted
– over 97 per cent of votes cast ‘in favour’ of the Directors’
Remuneration Report
– all resolutions voted on by way of a poll
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2016 RELATIONSHIP PROGRAMME
JANUARY
TO MARCH
Preliminary results
Analyst briefings
Mailing of Annual Report and
Accounts, which includes an
update from the Group Chief
Executive
Notice of AGM and voting
materials
JULY
TO SEPTEMBER
Half year results
Analyst briefings
Group Chief Executive
half-year update to
shareholders
APRIL TO JUNE
Q1 interim management
statement
Annual General Meeting
OCTOBER
TO DECEMBER
Q3 interim management
statement
Corporate governance meeting
with institutional shareholders
A summary of the reports and communications to be issued
in 2017 can be found on page 286.
Statement of compliance
UK Corporate Governance Code - The UK Corporate
Governance Code 2014 (the 'Code') applied to the 2016
financial year. The Group confirms that it applied the main
principles and complied with all provisions of the Code
throughout the year, and that it has applied the UK Corporate
Governance Code 2016 since its financial year end. The Code
is publicly available at www.frc.org.uk
The British Bankers’ Association Code for Financial Reporting
Disclosure - The Group has adopted the British Bankers’
Association’s Code for Financial Reporting Disclosure and its
2016 financial statements have been prepared in compliance
with its principles.
Lloyds Banking Group
Annual Report and Accounts 2016
NOMINATION AND GOVERNANCE
COMMITTEE REPORT
Committee meetings
Eligible to attend
Attended
Committee Chairman
Lord Blackwell
Committee members who
served during 2016
Alan Dickinson
Anita Frew
Nick Luff1
Anthony Watson
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1 Mr Luff was unable to attend the February Committee meeting due to a prior
commitment.
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We are committed to the highest
standards of corporate governance,
designed to ensure rigour in the Board’s
discussions and decision making
Dear Shareholder
A key priority for the Committee, under my leadership, is to keep
the composition of the Board and its Committees under review
and to make appropriate recommendations to the Board. There
were two changes to the Board in 2016. Stuart Sinclair joined the
Board in January 2016 and Dyfrig John retired from the Board in
May 2016. Stuart’s appointment followed that of Deborah
McWhinney, who joined the Board in December 2015.
As set out earlier in the report, a number of Board changes have
been agreed since the year end. Anthony Watson, our Senior
Independent Director, will retire at the 2017 AGM after serving
more than eight years on the Board, and Nick Luff, an
independent Non-Executive Director and Chairman of the Audit
Committee, has notified the Board that in light of his other
commitments he does not intend to seek re-election at the 2017
AGM. On the Committee’s recommendation, the Board has
appointed Anita Frew to succeed Anthony as Senior Independent
Director, which she will combine with the role of Deputy
Chairman. Anita’s significant board, financial and investment
management experience, including as a Senior Independent
Committee purpose and responsibilities
The purpose of the Committee is to keep the Board’s governance,
composition, skills, experience, knowledge, independence and
succession arrangements under review and to make appropriate
recommendations to the Board to ensure the Company’s
arrangements are consistent with the highest corporate
governance standards.
The Committee reports to the Board on how it discharges its
responsibilities and makes recommendations to the Board, all of
which have been accepted during the year. The Committee’s terms
of reference can be found at www.lloydsbankinggroup.com/
our-group/corporate-governance
Committee composition, skills and experience
To ensure a broad representation of experienced and independent
Directors, membership of the Committee comprises the Chairman,
the Deputy Chairman, who is also the Chairman of the
Remuneration Committee, the Senior Independent Director,
the Chairman of the Audit Committee and the Chairman of the
Risk Committee. The Group Chief Executive attends meetings
as appropriate.
Director, make her ideally suited to take on this role. On the
Committee’s recommendation, the Board has appointed Simon
Henry to succeed Nick as Chairman of the Audit Committee.
Simon has been a member of the Audit Committee since June
2014 and his background and experience enable him to fulfil the
role of Audit Committee Chairman and for SEC purposes the role
of Audit Committee financial expert.
The Committee will continue to keep under review the structure,
size and composition of the Board and its Committees and to
make appropriate recommendations to the Board.
Another important role for the Committee is ensuring the
adequacy of succession planning, including contingency
arrangements, both for Board appointments and key senior
management roles. An in-depth review was conducted during the
year of the Group’s talent management approach and succession
pipeline and this will continue to be a focus during 2017.
Lord Blackwell
Chairman, Nomination and Governance Committee
Annual effectiveness review
During the year, the Committee met its key objectives and carried
out its responsibilities effectively, as confirmed by the annual
effectiveness review.
How Committee meetings are run
The management of the Committee is in keeping with the basis on
which meetings of the Board are managed, as detailed on page 62.
Its structure facilitates open discussion and debate, with steps taken
to ensure adequate time for members of the Committee to consider
proposals which are put forward.
Matters considered by the Committee
During the year the Committee considered a number of issues
relating to the Group’s governance arrangements, both internal
and external. It assisted the Chairman in keeping the composition
of the Board and its Committees under review and to lead the
appointment process for nominations to the Board.
These issues are summarised on the next page.
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Governance
Corporate governance report continued
How the Nomination and Governance Committee spent its time in 2016
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
Board and Committee size
and composition
During the year the Committee, led by the Chairman, continued to keep under review the structure, size and
composition of the Board and its Committees and to make appropriate recommendations to the Board.
The Board should be of sufficient size to reflect a broad range of views and perspectives whilst allowing all
Directors to participate effectively in meetings. The Board currently comprises three Executive Directors,
nine independent Non-Executive Directors and the Chairman who was independent on appointment.
Details of Board changes are set out on page 52.
Succession planning
The Committee, led by the Chairman, continued to keep the adequacy of succession arrangements under review
to ensure the desired mix of skills and experience of Board members now and in the future. Full details of the
Group’s approach to succession planning can be found on the next page.
Diversity policy
Effectiveness
The Committee reviewed the Board Diversity Policy in light of new and emerging best practice and recommended
to the Board a specific target to maintain at least three female Board members and to take opportunities to
increase the number of female Board members over time. The Board Diversity Policy is set out below.
The Committee oversaw the annual evaluations of the performance of the Board and its Committees. In January 2016,
the Committee reviewed the findings of the 2015 Board Effectiveness Review and recommended actions to the Board
to address the areas identified for improvement. Progress against the plan was reviewed during the year. In preparation
for the 2016 Board Effectiveness Review, the Committee made recommendations to the Board on the process and
timing of the review, which was carried out internally by the Company Secretary. Full details of the 2016 Board
Effectiveness Review together with details of the progress against the 2015 review actions are set out on page 66.
Corporate governance
In 2016, the Committee:
– oversaw the annual review of the Corporate Governance Framework, including the amendments necessary
to accommodate the SM&CR and recommended it to the Board for approval
– received regular corporate governance updates from the Company Secretary
– recommended to the Board a revised share dealing policy for Directors and GEC in light of the new Market
Abuse Regulation
– reviewed reports from the Chairman on communications from shareholders
– received updates on the SM&CR
– approved the appointment of Trustees to the Bank’s Foundations
– received updates on ring-fencing governance
Independence and time
commitments
In assessing independence, the Committee did not rely solely on the Code criteria but considered whether, in fact,
the Non-Executive Director was demonstrably independent and free of relationships and other circumstances that
could affect their judgement. It did this with reference to the individual performance and conduct in reaching
decisions. It also took account of any relationships that had been disclosed and authorised by the Board.
Based on its assessment for 2016, the Committee is satisfied that, throughout the year, all Non-Executive
Directors remained independent as to both character and judgement.
The Committee reviewed the role, including capabilities and time commitment, of the Chairman,
Deputy Chairman, Senior Independent Director, Non-Executive Directors, the Group Chief Executive
and Executive Directors and found them to be appropriate.
Board Diversity Policy
The Board places great emphasis on ensuring that its membership reflects diversity in its broadest sense. A combination of demographics,
skills, experience and personal attributes on the Board is important in providing a range of perspectives, insights and challenge needed to
support good decision making.
New appointments are made on merit, taking account of the specific skills and experience needed to ensure a rounded Board and the
diversity benefits each candidate can bring to the overall Board composition. On gender diversity the Board has a specific target to maintain
at least three female Board members and, recognising the emerging target for FTSE companies to move towards 33 per cent female
representation, to take opportunities to increase the number of female Board members over time where that is consistent with other skills
and diversity requirements.
The Board also places high emphasis on ensuring the development of diversity in the senior management roles within the Group and
supports and oversees the Group’s objective of achieving 40 per cent of senior roles held by female executives by 2020, along with other
metrics which promote the engagement of other underrepresented groups within the business. This is underpinned by a range of policies
within the Group to help provide mentoring and development opportunities for female executives and to ensure unbiased career progression
opportunities. Progress on this objective is monitored by the Board and built into its assessment of executive performance.
You can read more on the Group’s diversity programmes, including details of the Group’s commitment to raise the percentage of women
employed in senior management roles to 40 per cent by 2020 on page 18 of the strategic report.
A copy of the Board Diversity Policy is available on our website at www.lloydsbankinggroup.com/responsible-business and information on
Board diversity can be found on page 54.
Female representation on the Board is currently 23 per cent (based on three female directors and 10 male directors).
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Our approach to succession planning
Good succession planning contributes to the delivery of the Group’s
strategy by ensuring the desired mix of skills and experience of
Board members now and in the future. The Board is also committed
to recognising and nurturing talent within executive and
management levels across the Group to ensure the Group creates
opportunities to develop current and future leaders. The role of
succession planning in promoting diversity is recognised and the
Group has a range of policies which promote the engagement of
underrepresented groups within the business in order to build a
diverse talent pipeline.
Board size and composition
Under the leadership of the Chairman, the Committee continued to
keep under review the structure, size and composition of the Board
and its Committees. At the core of the process is an ongoing
assessment led by the Chairman of the collective Board’s technical
and governance skill set. From this the Chairman creates a board
skills matrix which the Committee uses to track the Board’s
strengths and identify gaps in the desired collective skills profile
of Board members, giving due weight to diversity in its broadest
sense. Recommendations are made to the Board as appropriate.
Senior management succession
During the year, the Committee, led by the Chairman, also reviewed
the succession plans for the Group Chief Executive and other key
senior management roles.
The Committee’s review was shaped by an in-depth review and
broader discussion by the Non-Executive Directors of the Group’s
talent management approach and succession pipeline for key senior
executive roles. This annual talent review allows the Board to
identify talent and ensure the Group has the right succession plans
and development programmes in place. The review noted the work
done to strengthen the approach to talent and development during
the year, including the extension of the annual talent review
programme and improved tracking and review of succession plans.
There was recognition of the further work to be done to continue to
increase the diversity of the succession pipeline. The robustness of
the succession plans for the Group Chief Executive and other key
senior management roles in terms of contingency arrangements
and over the medium to longer term were also reviewed.
BOARD INDUCTION
Deborah McWhinney and Stuart Sinclair share their insights
Deborah McWhinney and Stuart Sinclair who joined the Board in December 2015 and January 2016 respectively,
share their insights on their induction and first year on the Board
How did the induction programme help you
prepare for your role on the Board?
How will you reflect on your first year
on the Board?
Deborah
Deborah
I found the programme very well structured and comprehensive.
There was a good mix of formal presentations and more informal
sessions. It really brought the business and its issues alive for me
and, having spent my career in the United States, the tailored and
in-depth overview of the UK regulatory landscape was especially
instructive.
Colleagues were always very open and willing to spend time
with me to ensure my questions were fully answered. The level
of openness within the senior management team is reflective
of the Group’s wider culture.
I have extensive experience in managing IT operations and digital
innovations. I was therefore delighted to be asked to join the new
sub-committee of the Board Risk Committee, solely focusing on
IT resilience and cyber security, bringing an independence of
judgement and challenge to Board discussions.
What also struck me during my first year is the very genuine
commitment to diversity in its broadest sense. There is a real
understanding that diversity is more than gender, it’s a ‘frame
of mind’ that helps bring diversity of thought to Board debate
and conversations. I support the Group’s diversity programmes
through mentoring women in senior roles and by speaking
at diversity events.
Stuart
Stuart
I have been through quite a few inductions over the years and
what was especially effective about the Group’s induction was
the mixture of highly structured overviews on key topics such
as capital, liquidity and conduct, together with self-selected
‘top-ups’ and site visits. Attending functions, conferences,
product forums, customer focus groups and branches provided
valuable context too.
At all times colleagues were welcoming and never failed to find
answers to my questions. As a newly appointed Non-Executive
Director, I felt that a ‘go anywhere, ask anything’ culture
was apparent.
I have really enjoyed my first year on the Board because the
Group to me was a mixture of relatively familiar topics such as
retail network analysis, product testing, capital models and
conduct requirements and newer topics such as ring-fencing.
Board and Committee meetings are open, fact-based and
collegiate in the best sense: on any given topic there will
typically be both experts and generalists. The Board culture
works to draw all Directors into the subject, allowing for
appropriate consideration and challenge from many angles,
which enables an appropriate decision to be reached.
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Report
Governance
Corporate governance report continued
AUDIT COMMITTEE REPORT
Committee meetings
Eligible to attend
Attended
Committee Chairman
Nick Luff
Committee members
who served during 2016
Alan Dickinson
Anita Frew
Simon Henry
Deborah McWhinney
Nick Prettejohn
Anthony Watson
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1 Mr Henry was unable to attend Audit Committee meetings in January, July, October
and December due to prior executive commitments. Mr Henry will succeed Mr Luff as
Audit Committee Chairman following Mr Luff’s retirement at the AGM in May 2017. Prior
to taking on the Chairmanship of the Audit Committee, Mr Henry is retiring as Chief
Financial Officer of Royal Dutch Shell plc in March 2017.
2 Mr Prettejohn was unable to attend the June Audit Committee meeting due to
a prior commitment.
The Committee also considered other areas of significant
judgement that were relevant to the financial statements. These
included other conduct provisions, loan impairments, tax matters,
actuarial assumptions for insurance and pension accounting, and
the appropriate classification of gilts held by the Group for
liquidity purposes. Further details are set out in this report.
The transformation of the internal audit function has also been
a focus for the Committee. This has included reviewing the scope
and direction of internal audit’s work, overseeing changes to the
leadership of the function, supporting independence of audit,
and encouraging improved reporting of audit findings. The
Committee has also monitored the effectiveness of the external
audit as the new lead audit partner was introduced.
Nick Luff
Chairman, Audit Committee
It is the Audit Committee’s job to review
the integrity of the financial statements
and the effectiveness of the internal and
external auditor. The Audit Committee
has delivered on its responsibilities
Dear Shareholder
Throughout 2016, the Audit Committee has continued to focus on
its key objectives, overseeing financial reporting, internal controls,
whistleblowing, and internal and external audit.
Overseeing financial reporting requires an assessment of key
accounting judgements and related disclosures. The cost of
redress relating to Payment Protection Insurance (PPI) has been
substantial, and accounting provisions for this cost remain the
most significant judgement made in drawing up the Group’s
financial statements.
Estimates of the cost have changed as complaint trends and
regulatory factors have evolved. The Committee has reviewed
these estimates, and challenged the assumptions behind them,
as well as ensuring that appropriate disclosures have been made
to explain the uncertainties that remain.
Committee purpose and responsibilities
The purpose of the Committee is to monitor and review the Group’s
financial and narrative reporting arrangements, the effectiveness
of the internal controls over financial reporting and the risk
management framework, whistleblowing arrangements and
each of the internal and external audit processes.
The Audit Committee reports to the Board on how it discharges
its responsibilities and makes recommendations to the Board,
all of which have been accepted during the year. A full list of
responsibilities is detailed in the Committee’s terms of reference,
which can be found at www.lloydsbankinggroup.com/our-group/
corporate-governance
Committee composition, skills and experience
The Committee acts independently of the executive to ensure that
the interests of the shareholders are properly protected in relation
to financial reporting and internal control.
sector. Nick Luff is a Chartered Accountant and has significant
financial experience in the UK listed environment enabling him to
fulfil the role of Audit Committee Chairman, for the purposes of the
UK Corporate Governance Code (the ‘Code’) as a member having
recent and relevant financial experience, and for SEC purposes, the
role of Audit Committee financial expert. In addition, Simon Henry is
a Chartered Global Management Accountant and has extensive
knowledge of financial markets, treasury and risk management, and
also qualifies as a member having recent and relevant financial
experience under the Code and an Audit Committee financial
expert under SEC rules.
How Committee meetings are run
The management of the Committee is in keeping with the basis on
which meetings of the Board are managed, as detailed on page 62.
Its structure facilitates open discussion and debate, with steps taken
to ensure adequate time for members of the Committee to consider
proposals which are put forward.
All members of the Committee are independent Non-Executive
Directors with competence in the financial sector with the
Committee as a whole having competence relevant to the financial
During the course of the year, the Committee held separate
sessions with the internal and external audit teams, without
members of the executive management present.
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Annual Report and Accounts 2016
Based on the outcome of the annual board effectiveness review
in 2015 additional training for Committee members has been
introduced. Targeted training on risk weighted assets, derivative
accounting, IFRS9 and insurance accounting has been provided.
This year’s annual effectiveness review confirmed the Committee
met its key objectives and carried out its responsibilities effectively.
Whilst the Committee’s membership comprises the Non-Executive
Directors noted above, all Non-Executive Directors may attend
meetings as agreed with the Chairman of the Committee. The
Interim Group Audit Director, the external auditor, the Group Chief
Executive, the Chief Financial Officer and the Chief Risk Officer also
attend meetings of the Committee as appropriate.
During the year the Committee considered a number of issues
relating to the Group’s financial reporting, these issues are
summarised below, including discussion of the conclusions
the Committee reached, and the key factors considered by
the Committee in reaching its conclusions.
In addition, the Committee considered a number of other significant
issues not related directly to financial reporting, including internal
controls, internal audit and external audit. These issues are also
discussed in detail in the next section, including insight into the key
factors considered by the Committee in reaching its conclusions.
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Matters considered by the Committee
How the Audit Committee spent its time in 2016
Financial reporting
During the year, the Committee considered the following significant financial issues in relation to the Group’s financial statements and disclosures,
with input from management, Group Audit and the external auditor:
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
Payment Protection Insurance (PPI)
In determining the adequacy of the
provision for redress payments and
administration costs in connection with the
mis-selling of PPI the Group makes a number
of assumptions based on management
judgement. Such assumptions include the
number of future complaints that will be
received and the extent to which they will
be upheld; average redress payments; and
related administrative costs.
During the year the Group provided a
further £1,000 million to cover further
operating costs and redress, including the
impact of a proposed June 2019 deadline.
To 31 December 2016, the Group has
provided a total of £17,025 million in respect
of PPI mis-selling redress and
administration costs.
Other conduct provisions
The Group has also made provisions
totalling £1,085 million in respect of other
conduct matters, including £280 million
for packaged back accounts and
£261 million for secured and unsecured
arrears handling activities.
– The Committee continued to challenge the assumptions made by management to determine
the provision for PPI redress and administration costs. The Committee oversaw continued use
of sensitivities reflecting the uncertainty that remains around the ultimate cost of PPI redress.
– The Committee also reviewed management’s assessment of the potential impact of a
consultation paper by the Financial Conduct Authority which set a proposed deadline of June
2019 for consumers to make their PPI complaints and on the potential impact of the Plevin case.
– Group Audit undertook periodic agreed upon procedures over the process used by
management to calculate the PPI provision. Procedures undertaken were designed to identify
the use of reasonable, consistent and supportable assumptions and inputs. No items were raised
by exception for consideration by the Committee.
– The Committee concluded that the provision for PPI redress and the Group’s external
disclosures were appropriate.
– The disclosures relating to PPI are set out in note 38: ‘Other provisions’ on page 230 of the
financial statements.
– For packaged bank accounts, the Committee has continued to monitor the utilisation of the
provision and management’s assessment of both the remaining exposure and the additional
provisions required. This has included reviewing the expected level of complaints and the
average redress payments.
– The Committee has understood the basis for determining the provision in respect of the Group’s
secured and unsecured arrears handling activities. The provision includes the cost of both
identifying and rectifying the customers affected.
– Group Audit undertook periodic agreed upon procedures over the process that has been used
by management to calculate the extent of conduct related provisions. Procedures undertaken
were designed to identify the use of reasonable, consistent and supportable assumptions and
inputs. No items were raised by exception for consideration by the Committee.
– The Committee was satisfied that the provisions for other conduct matters were appropriate.
The disclosures relating to other conduct provisions are set out in note 38: ‘Other provisions’
on page 230 of the financial statements.
Allowance for impairment losses on
loans and receivables
Determining the appropriateness of
impairment losses requires the Group to
make assumptions based on management
judgement.
– The Committee challenged the level of provisions made and the assumptions used to calculate
the impairment provisions held by the Group.
– Group Audit has provided assurance to the Audit Committee that the impairment governance
processes are effective.
– The Committee was satisfied that the impairment provisions were appropriate. The disclosures
relating to impairment provisions are set out in note 52: ‘Financial risk management’ on page 261
of the financial statements.
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Governance
Corporate governance report continued
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
Recoverability of the deferred tax asset
– The Committee considered the recognition of deferred tax assets, in particular the forecast
A deferred tax asset can be recognised
only to the extent that it is recoverable.
The recoverability of the deferred tax
asset in respect of carry forward losses
requires consideration of the future levels
of taxable profit in the Group.
Uncertain tax positions
The Group has open tax matters which
require it to make judgements about the
most likely outcome for the purposes of
calculating its tax position.
taxable profits based on the Group’s operating plan, the split of these forecasts by legal entity
and the Group’s long-term financial and strategic plans.
– The Committee agreed with management’s judgement that the deferred tax assets were
appropriately supported by forecast taxable profits, taking into account the Group’s long-term
financial and strategic plans. The disclosures relating to deferred tax are set out in note 37:
‘Deferred tax’ on page 228 of the financial statements.
– The Committee took account of the respective views of both management and the relevant tax
authorities when considering the uncertain tax positions of the Group. The Committee also
understood the external advice obtained by management to support the views taken.
– The Committee was satisfied that the provisions and disclosures made in respect of uncertain
tax positions were appropriate. The relevant disclosures are set out in note 48: ‘Contingent
liabilities and commitments’ on page 242 of the financial statements.
Retirement benefit obligations
The Group must make both financial
and demographic assumptions of a
judgemental nature to determine the
value of the defined benefit obligation.
– The Committee considered the financial and demographic assumptions used to determine the
defined benefit liabilities, in particular mortality assumptions and the discount rate, which have
been updated to reflect recent experience.
– The Committee was also satisfied that the Group’s quantitative and qualitative disclosures made
in respect of retirement benefit obligations are appropriate. The relevant disclosures are set out
in note 36: ‘Retirement benefit obligations’ on page 222 of the financial statements.
Value-In-Force (VIF) asset and
insurance liabilities
Determining the value of the VIF asset and
insurance liabilities is judgemental and
requires economic and non-economic
actuarial assumptions.
– The Committee challenged the economic and non-economic actuarial assumptions made by
management which underpin the calculation of the VIF asset and the insurance liabilities. The
Committee also reviewed the movements in the key assumptions since 31 December 2015.
– The Committee was satisfied that the value of the VIF asset and insurance liabilities were
appropriate. The disclosures are set out in note 24: ‘Value of in-force business’ on page 213 and
note 32: ‘Liabilities arising from insurance contracts and participating investment contracts’ on
page 217 of the financial statements.
Reclassification of gilts held within the
liquidity portfolio
– During the year, the Group reclassified approximately £20 billion of gilts within the liquidity
portfolio as ‘available-for-sale’; the gilts were previously classified as ‘held-to-maturity’.
Determining the appropriate accounting
treatment for gilts held within the liquidity
portfolio.
– The Committee considered and was satisfied with management’s assessment
of the circumstances which support the reclassification of the gilts, the appropriateness
of the accounting treatment and related disclosure.
– The disclosure is set out in note 49: ‘Financial instruments’ on page 245 of the financial
statements.
One-off transactions
– The sale of Visa Europe is one example of one-off transactions considered by the Audit
Determining the appropriate accounting
for certain one-off transactions requires
management to assess the facts and
circumstances specific to each transaction.
Viability statement
The Directors are required to confirm
whether they have a reasonable
expectation that the Company and the
Group will be able to continue to operate
and meet their liabilities as they fall due
for a specified period. The viability
statement must also disclose the basis for
Directors’ conclusions and explain why the
period chosen is appropriate.
Committee during the year.
– The Committee was satisfied that the accounting treatment of the sale was appropriate.
– The Committee assisted the Board in performing its assessment of the viability of the Company
and the Group with input from management. The viability assessment, which was based on the
Group’s operating, capital and funding plans, included consideration of the principal and
emerging risks which could impact the performance of the Group, and the liquidity and capital
projections over the period.
– The Committee was satisfied that the viability statement could be provided and advised the
Board that three years was a suitable period of review.
– The viability statement is disclosed on page 82 of the Directors’ report.
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Annual Report and Accounts 2016
Other significant issues
The following matters were also considered by the Committee:
Risk management and internal control systems
Full details of the internal control and risk management systems in
relation to the financial reporting process are given within the risk
management section on pages 116 to 169. Specific matters that the
Committee considered during the year included:
– the effectiveness of systems for internal control, financial reporting
and risk management;
– the extent of the work undertaken by the Finance teams across
the Group and consideration of the resources to ensure that the
control environment continued to operate effectively; and
– the major findings of internal investigations into control
weaknesses, fraud or misconduct and management’s response
along with any control deficiencies identified through the
assessment of the effectiveness of the internal controls over
financial reporting under the US Sarbanes-Oxley Act.
The Committee was satisfied that internal controls over financial
reporting were appropriately designed and operating effectively.
Group Audit
In monitoring the activity, role and effectiveness of the internal
audit function and their audit programme the Committee:
– monitored the effectiveness of Group Audit and their audit
programme through quarterly reports on the activities undertaken
and a report from the Quality Assurance function within
Group Audit;
– approved the annual audit plan and budget and reviewed
progress against the plan through the year;
– oversaw the process for the appointment of an Interim Group
Audit Director; and
– considered the major findings of significant internal audits,
and management’s response.
Speak Up (the Group’s whistleblowing service)
The Committee received and considered reports from management
on the Group’s whistleblowing arrangements including summaries
of cases and ongoing reviews of the Whistleblowing Governance
Structure. On consideration of the reports submitted, the
Committee was satisfied with the actions which had been taken, the
report first having been considered and approved by the Board’s
Whistleblowing Champion, Anita Frew.
Auditor independence and remuneration
Both the Board and the external auditor have safeguards in place to
protect the independence and objectivity of the external auditor. In
2016 the Audit Committee approved an amended policy to regulate
the use of the auditor for non-audit services to ensure compliance
with the revised Ethical Standards for Auditors from the Financial
Reporting Council (FRC).
In order to ensure the objectivity and independence of the
external auditor, the policy sets a financial threshold above which
all non-audit services provided by the external auditor must be
approved in advance by the Committee, with additional provision
made for the approval of non-material services which are below the
threshold by certain members of senior management. The policy
further formalises within the Group the restriction on the provision
of non-audit services by the external auditor which the FRC consider
to be prohibited.
The total amount of fees paid to the auditor for both audit and non
audit related services in 2016 is disclosed in note 11 to the financial
statements on page 201.
External auditor
The Committee oversees the relationship with the external auditor.
During the year, the Committee considered the auditors’ terms of
engagement (including remuneration), their independence and
objectivity and approved the audit plan (including methodology
and risk identification processes).
In accordance with regulations there was a change of lead
audit partner.
The Committee also considered the effectiveness and performance
of the auditor and the audit process.
These assessments considered data and information from a number
of sources including:
– the results of an internal effectiveness survey; and
– the FRC’s Audit Quality Inspection Report (AQIR) on PwC
published in May 2016.
The Committee concluded that it was satisfied with the auditor’s
performance and recommended to the Board a proposal
for the reappointment of the auditor, to be approved at the
Company’s AGM.
Statutory Audit Services compliance
The Company and the Group confirm compliance with the
provisions of The Statutory Audit Services for Large Companies
Market Investigation (Mandatory Use of Competitive Tender
Processes and Audit Committee Responsibilities) Order 2014
for the year to 31 December 2016.
PwC have been auditor to the company and the Group since 1995,
having previously been auditor to certain of the Group’s constituent
companies. PwC were re-appointed as auditor with effect from
1 January 2016 following a tender process conducted during 2014.
There will be a mandatory rotation for the 2021 audit, if not earlier.
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Governance
Corporate governance report continued
BOARD RISK COMMITTEE REPORT
Committee meetings
Eligible to attend
Attended
Committee Chairman
Alan Dickinson
Committee members
who served during 2016
Lord Blackwell
Anita Frew
Simon Henry
Nick Luff
Deborah McWhinney
Nick Prettejohn
Stuart Sinclair
Anthony Watson
Sara Weller
Former Committee members
who served during 2016
Dyfrig John3
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1 Mr Henry was unable to attend the May Risk Committee meeting due to prior executive
commitments.
2 Mr Luff was unable to attend the July Risk Committee meeting due to prior executive
commitments.
3 Mr John retired on 11 May 2016.
lending portfolios within both the Mortgage and Commercial
businesses. The Committee will continue to review progress
and developments during 2017.
The Group continues to operate in an environment subject to
considerable change and, during 2016, another key area of
activity for the Committee has been the proactive review,
oversight and management of risks arising from the outcome of
the EU referendum and wider geo-political risks. The Committee
will continue to monitor developments and any impact on the
Group’s risk profile.
The Committee has concluded, through its detailed work, that
the Group continues to have strong discipline in the management
of both emerging and existing risks, and the Committee’s work
continues to help support the Group in achieving its core aim of
operating as a safe, low risk bank.
Alan Dickinson
Chairman, Board Risk Committee
The Committee has continued to take
a dynamic approach to the consideration
of existing and emerging risks
Dear Shareholder
I am pleased to report on how the Board Risk Committee has
discharged its responsibilities throughout 2016.
The Committee has continued to take a dynamic approach to the
consideration of existing and emerging risks, through a balanced
agenda which included standing areas of risk management,
together with specific focus on emerging risks focusing significant
additional resource where considered necessary. An example of
this has been the establishment of dedicated sub-committees to
further enhance focus on particular areas, such as IT resilience
and cyber security, enabling members of the Committee to direct
more time to better understand, and challenge, the associated
risks and actions being taken by management.
The Committee has continued to build upon the progress
reported last year around furthering the understanding of
complex risks and seeking to enhance risk management. I am
pleased to report that good progress continued to be made
throughout 2016 in reducing risks across the Group’s material
Committee purpose and responsibilities
The purpose of the Board Risk Committee is to review the risk
culture of the Group, setting the tone from the top in respect of risk
management. The Committee is also responsible for ensuring the
risk culture is fully embedded and supports at all times the Group’s
agreed risk appetite, covering the extent and categories of risk which
the Board considers as acceptable for the Company.
In seeking to achieve this, the Committee assumes responsibility
for monitoring the Group’s Risk Management Framework, which
embraces risk principles, policies, methodologies, systems, processes,
procedures and people. It also includes the review of new, or material
amendments to risk principles and polices, and overseeing any action
resulting from material breaches of such policy.
More details on the Group’s wider approach to risk management
can be found in the risk management section on pages 116 to 169.
Full details of the Committee’s responsibilities are set out in its terms
of reference, which can be found at www.lloydsbankinggroup.com/
our-group/corporate-governance
Committee composition, skills and experience
Alan Dickinson, Chairman of the Committee, is a highly regarded retail
and commercial banker, having spent 37 years with the Royal Bank
of Scotland, most notably as Chief Executive of RBS UK, overseeing
the group’s Retail and Commercial operations in the UK. The
Committee is composed of independent Non-Executive Directors,
who provide core banking and risk knowledge, together with breadth
of experience which brings knowledge from other sectors, and a clear
awareness of the importance of putting the customer at the centre of
all that the Group does.
Since January 2016, all Non-Executive Directors have been members
of the Board Risk Committee. The Chief Risk Officer has full access
to the Committee and attends all meetings. The Interim Group
Audit Director and members of the Executive also attend meetings
as appropriate.
During the year the Committee met its key objectives and carried
out its responsibilities effectively, as confirmed by the annual
effectiveness review.
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Lloyds Banking Group
Annual Report and Accounts 2016
How Committee meetings are run
The management of the Committee is in keeping with the basis on
which meetings of the Board are managed, as detailed on page 62,
with a structure which facilitates open discussion and debate. Steps
are taken to ensure adequate time for members to consider proposals
which are put forward.
As the most senior risk forum in the Group, the Committee interacts
with other related risk forums, including the Executive Group Risk
Committee. Such interaction assists with the agenda planning
process, where in addition to annual agenda planning, matters
considered by the Group Risk Committee are reviewed to ensure
escalation of all relevant matters to the Board Risk Committee.
Matters considered by the Committee
Over the course of the year the Committee considered a wide range
of risks facing the Group, both standing and emerging, across all key
areas of risk management, in addition to risk culture and risk appetite,
as noted above.
As part of this review, certain risks were identified which required
further detailed consideration. Set out below is a summary of these
risks, with an outline of the material factors considered by the
Committee, and the conclusions which were ultimately reached.
In addition, during 2016, two further sub-committees of the Board
Risk Committee were established to focus on Financial Markets and IT
Resilience & Cyber, in addition to an existing Stress Testing & Recovery
Planning sub-committee. The sub-committees were constituted to
enable members of the Board Risk Committee to dedicate additional
time and resource to better understand and to enable fuller review and
challenge of the risks associated with the topic of the sub-committee.
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
EU referendum
The Committee regularly reviewed a range
of lead economic and Key Performance
Indicators across the portfolios, to help
identify any early signs of deterioration
in the economy and the Group’s credit
risk profile.
As a result of the referendum outcome and to manage the impact of uncertainty caused by the
referendum process and ensuing economic concerns, detailed EU exit portfolio assessments were
undertaken to understand potential impacts on the Bank’s credit risk profile and to assess the
potential need for any changes to Group risk appetite. Additional regular monitoring of internal and
external early warning and key performance indicators was instigated and continues to be closely
monitored by the Committee to track any adverse movement in the risk profile of the Retail and
Commercial portfolios, and to ensure that risk appetite remains appropriate.
Conclusion: Regular monitoring continues to assist the Committee in its assessment of the portfolios,
with management continuing to take action to mitigate potential risks associated with the EU exit
decision. Key credit risks continue to be well managed through strong, effective risk management
and risk appetite, including early identification and management of potential concern customers.
Cyber risk and IT resilience
A resilient IT environment is critical to
providing reliable services to customers and
enabling sustainable growth. The dynamic
threat posed by cyber risk and the potential
for external attacks on the integrity of
electronic data or the availability of systems
are key risks for the Group and central area
of focus for the Committee.
Given the dynamic nature and significance of IT and cyber risks the Committee has established
a sub-committee to enable more in depth consideration of IT resilience and cyber risks. During
the year the sub-committee gave consideration to a wide range of issues including insider risk,
cyber reverse stress testing, IT Resilience and Cyber Programme updates, cyber insurance and
cloud technology. Alongside this an advisory panel comprising external industry experts has been
established to provide the sub-committee with an external view of current and evolving industry
wide cyber security threats, challenges and developments.
Conclusion: Much has been achieved in respect of IT resilience and cyber security initiatives and
the focus given by the Committee during 2016 has raised awareness across the Group. However,
IT resilience and cyber security risk will remain a key area of focus for the Committee in 2017.
Conduct risk
The Committee continues to focus closely
on the Group’s approach to conduct risk.
UK Secured and buy-to-let
Regular reviews were undertaken of
the risks associated with the UK Secured
portfolio, including specifically the
buy-to-let segment.
Throughout 2016, the Committee considered reports on the proactive identification and resolution
of conduct issues which have had an impact on customers. The pace and quality of required
remediation received particular attention together with actions taken to address root cause analysis
and the prevention of similar issues. Consideration was also given to the conduct risks within the
collections process for customers in arrears as well as customers in financial difficulties. In addition
the Committee considered developments in the Group’s conduct culture as well as reports on
complaints, conduct risk appetite metrics and product governance.
Conclusion: Whilst good progress has been made as a result of the Group’s conduct strategy
initiatives, continued improvement in the Group’s conduct risk profile will remain a priority for the
Group in 2017 and will continue to be a subject of focus for the Committee.
In reviewing the UK Secured portfolio, consideration was given to the quality of new lending, the
credit performance of the portfolio, the risk adjusted returns, and the adequacy of impairment
and capital provisions under both expected and stressed conditions. The Committee specifically
considered appetite for higher loan to value lending following the government’s announcement
to discontinue the Help to Buy 2 scheme. Additionally, for the buy-to-let segment, the Committee
reviewed management’s plans to implement changes in response to the revised tax regime and
additional regulatory requirements for underwriting.
Conclusion: The Group’s mortgage portfolio remains well balanced, with overall debt to value ratios
having improved and concentration risks reduced. Management continues to take appropriate
action to address the risks arising from these portfolios and the Committee will continue to review
developments during the course of 2017.
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Governance
Corporate governance report continued
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
Data risk
Data risk has been identified as a key focus
within the Group to take into account the
growing importance of data as a means of
competitive advantage and to underpin key
risk decision making and risk management.
The Committee continued to focus attention on key data initiatives within the Group. The Committee
considered a number of reports on data risk throughout 2016 covering, amongst other topics,
user access management, risk data aggregation and reporting and data privacy, all of which have
impacts across the Group. Additionally, regular reporting on data risk, as a distinct risk type, has been
introduced in 2016 in recognition of the growing importance of data as an asset to the Group as well
as the forthcoming EU General Data Protection Regulation (GDPR).
Conclusion: Improvement to risk data systems, governance and controls over the last two years have
strengthened risk reporting, whilst there remains opportunity to develop further. Data risk will remain
a key area of focus for the Committee in 2017 in line with the growing importance of data as an asset
to the Group and maturity of the Group Chief Data Office.
Residual value risk
A review of the impact of used car prices
on the residual value risk of motor finance
businesses was undertaken.
Given the increased uncertainty around used car prices in the current market environment,
consideration was given to the residual value risk associated with the Group’s growing motor finance
businesses and the impact of a range of possible scenarios for the future path of used car prices and
deteriorating macro environment.
Stress testing
The review of stress testing exercises and
their results continued to be a key area of
focus during the year.
Model risk
The approach to model risk management,
including the Group’s model governance
framework, material models and regulatory
requirements were reviewed.
Commercial Banking portfolios
The Committee considered a range of
regular and ad-hoc papers covering key
risks associated with the Commercial
Banking portfolios.
Conclusion: The combination of pricing that reflects the future value of vehicles, and prudent
provisioning, appropriately reflects potential risk. The Committee introduced a new risk appetite
limit to reflect planned business growth and manage the concentration of residual value risk. The
Committee will continue to monitor this throughout 2017.
The Committee reviewed a diverse set of stress testing scenarios in 2016, including internally defined
moderate and severe economic downturns, reverse stress test events including a large scale cyber-
attack and external scenarios set by the Bank of England and the European Banking Authority.
The assessment included a review of the resilience of the Group, including specific areas of focus
such as credit risk as well as impacts on the Group’s capital and liquidity positions. An assessment
of the impact on dividends and mitigating actions proposed by management in each scenario was
also undertaken.
Conclusion: The Group’s capital and liquidity positions remained above required minimums and the
relevant risk appetite metric, with outcomes reflecting the ongoing de-risking by the Group. The
implementation and assessment of robust and well managed stress testing arrangements will remain
a key area of focus for the Committee in the coming year.
Assessment was made of the overall governance framework for models including scope, the
model landscape, the role of the Group Model Governance Committee and modelling standards.
Additionally, the Committee considered the Group’s material models at Divisional level, including
their purpose, design and how regular performance monitoring and validation ensure they
remain fit-for-purpose and identify areas for improvement in an evolving regulatory environment.
The Committee also observed a structured reporting framework which facilitates good senior
management awareness and escalation, when required.
Conclusion: The Group’s management of model risk is robust with a strong control framework,
consisting of specialist teams, regular performance monitoring, annual validation and appropriate
escalation of issues. Model risk will continue to be an area of focus for the Committee via regular
reporting, including risk appetite measures.
The Committee continued to provide oversight of the risks in the Commercial Banking portfolios
via a regular update on the credit quality in key sectors such as Commercial Real Estate, Acquisition
Finance and SME as well as oversight of large single name exposures.
Additional topics covered in 2016 included country risk, the potential impact of the EU referendum,
a review of the exposure to European Banks and deep dives in to the oil and gas sector. There was
also increased focus on the Financial Markets business and the associated traded market risk through
a newly created sub-committee.
Conclusion: Regular and cyclical assessments of key portfolios has assisted the Committee in its
oversight of risk management within Commercial Banking and any impact arising from both existing
and emerging risks. Management continues to take satisfactory action to mitigate and address
risks and the Committee will continue to review core aspects of the Commercial Banking business
during 2017.
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Lloyds Banking Group
Annual Report and Accounts 2016
RESPONSIBLE BUSINESS
COMMITTEE REPORT
Committee meetings
Eligible to attend
Attended
Committee Chairman
Sara Weller
Committee members who
served during 2016
Lord Blackwell
Anita Frew
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1 Ms Frew was unable to attend the Committee meeting in April 2016 due to a prior
business commitment.
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Being a responsible business is
fundamental to our strategy. We are
proud that our colleagues support so
many people, businesses and communities
across the UK to achieve a better future
through the work of our Helping Britain
Prosper Plan
Dear Shareholder
I am pleased to present the second Responsible Business
Committee report, following its establishment in July 2015.
Responsible Business practices are fundamental building blocks
of our strategy, and the Committee has made good progress in
continuing to support the embedding of responsible business
activities during 2016.
The Committee focuses its work on the three areas of People,
Businesses and Communities. At each meeting we explore in
depth the progress made towards achieving the Group's
purpose of helping Britain prosper, through becoming the best
bank for customers.
Key areas reviewed have been: work to deepen our
customer‑centric culture; programmes to tackle disadvantage,
including through our Foundations, our role in supporting UK
businesses build for the future; and the development of the
programme of skills‑based volunteering undertaken by
colleagues across the Group.
The Committee is supported in its work by two business‑wide
committees which report to the Group Chief Executive: the
Group Customer First Committee and the Responsible Business
Management Committee. Information on the work of these
committees can be found on page 122.
I welcomed the opportunity during the year to get involved in
responsible business activities in different parts of the country,
including taking part in a panel for the School for Social
Entrepreneurs (more detail on page 80). And I very much enjoyed
meeting the profoundly deaf founder of the Yumma Café, a
catering business aimed specifically at supporting deaf people.
This was a great example of how the personal experience which
drives many social entrepreneurs is making a significant
difference. I would like to thank all those who attended our
meetings this year for their support.
I would like to thank all the Board Directors and executives
who attended and contributed to the Committee during the
year. Most of all, I would like to recognise the tremendous
contribution of our colleagues who have given their support
to people, businesses and communities across the country,
to help Britain prosper.
Sara Weller
Chairman, Responsible Business Committee
Committee composition and effectiveness
The membership of the Committee comprises Sara Weller,
independent Non‑Executive Director (Chairman of the Committee)
the Group Chairman and the Deputy Chairman. All Non‑Executive
Directors are invited to attend the Committee’s meetings.
The Group Chief Executive attended two meetings in 2016.
During the year, the Committee met its key objectives and
carried out its responsibilities effectively, as confirmed by the
annual effectiveness review.
The operation of the Committee
Committee meetings are managed in accordance with the principles
outlined on page 62 for the management of Board agendas and
meetings. These principles are intended to facilitate open debate and
constructive challenge. The Committee Chairman reviews the draft
agenda regularly to ensure that adequate time is devoted to issues of
interest to Committee members and that its key responsibilities are
addressed. The Committee Chairman reports regularly to the Board
on the Committee’s work and presents the Helping Britain Prosper
Plan to the Board for approval prior to publication.
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Governance
Corporate governance report continued
How the Committee spent its time in 2016
The Committee has reviewed and discussed the following topics:
– the development of the Group’s responsible business strategy,
with input from the Group Chief Executive
– the Group’s approach to measuring stakeholder and customer
trust against its peers in financial services and acknowledged
leaders in generating trust
– the continuing development of the Group’s culture programme, in
conjunction with the Board
– the results of colleague surveys as they relate to the Group’s
responsible business activities
– the steps taken to identify vulnerable customers and to ensure the
Group’s products and customer service approach take account of
their varying needs
– the initiatives in place to tackle financial disadvantage amongst
customers and to promote financial and digital inclusion
– the work of the School for Social Entrepreneurs and the Schools
Activity Programme
– a report on the Group’s charitable Foundations, and their planned
future activities, from the Chief Executive of the Lloyds Bank
Foundation for England and Wales
– the Group’s responsible and sustainable finance approach,
including the creation of the Green Loan Initiative and the work
being done to develop innovative solutions to meet the increasing
demand of customers for responsible lending products
Responsible Business Committee and
external stakeholders
The members of the Committee have an ongoing dialogue with
key stakeholders with an interest in the Committee’s activities.
Committee members look forward to engaging with key
stakeholders, including the independent Stakeholder Panel, in 2017.
HELPING BRITAIN PROSPER PLAN:
THE COMMITTEE'S ROLE
The Committee is responsible for overseeing the design and
development of the Helping Britain Prosper Plan, the
measurement of performance against the Plan and the internal
and external communication of the Plan.
APRIL 2016
Review of campaign for
the 2016 Plan and its impact
on colleague and
stakeholder engagement in
order to identify
opportunities to raise the
profile of the Plan and the
activities which underpin it
OCTOBER
Detailed review of metrics
and design of the 2016/17
Plan and outline of 2017
campaign
JANUARY 2017
Final review of draft 2016/17
Plan before recommending
to the Board for approval
JULY
Report on progress against
the metrics in the 2015/16
Plan with updates from
divisional sponsors and
review of outline approach
to the 2016/17 Plan
DECEMBER
Detailed consideration of
an agreement on the
metrics to include in the
2016/17 Plan to be
presented to the Board
Sara Weller joined colleagues, representatives from the SSE Dartington
school and a member of South Gloucestershire Council on a panel
to select the next cohort of Social Entrepreneurs.
Responsible business in action: School for Social Entrepreneurs
The Lloyds Bank and Bank of Scotland Social Entrepreneurs
programme is delivered through a partnership with the School for
Social Entrepreneurs and the Big Lottery. The programme aims to
support 2,000 social entrepreneurs by 2020.
In July 2016, Sara Weller was asked to join a panel to select the
next cohort of 21 Social Entrepreneurs to secure a place on the
programme. This was an opportunity to understand how each of
the social entrepreneurs is supported through a 12 month package
comprising a series of interactive learning sessions, a senior
colleague from within Lloyds Bank to support them as they
develop their social business, and a small grant.
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The panel membership comprised local colleagues, representatives
from the SSE Dartington school and a member of South
Gloucestershire Council. Each candidate ‘pitches’ their social
business idea for three minutes before being interviewed by
the panel.
The programme attracts a diverse array of applicants, ranging from
an artisan bakery providing employment opportunities for young
adults with learning difficulties to an artists' space dedicated to
tackling problems of isolation through arts and creativity.
Lloyds Banking Group
Directors' report
Corporate governance statement
The corporate governance report found on pages 52 to 80 together
with this report of which it forms part, fulfils the requirements of the
Corporate Governance Statement for the purpose of the Financial
Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR).
Profit and dividends
The consolidated income statement shows a statutory profit before
tax for the year ended 31 December 2016 of £4,238 million
(2015: £1,644 million).
The Directors have recommended a final dividend, which is subject
to approval by the shareholders at the AGM, of 1.7 pence per share
(2015: 1.5 pence per share) totalling £1,212 million (2015: £1,070 million).
The Directors have also recommended a special dividend of
0.5 pence per share (2015: 0.5 pence per share) totalling £356 million
(2015: £357 million). The final and special dividend will be paid on
16 May 2017.
The final dividend in respect of 2015 of 1.5 pence per ordinary share
was paid to shareholders on 17 May 2016, the special dividend in
respect of 2015 of 0.5 pence per ordinary share was paid to
shareholders on 17 May 2016 and an interim dividend for 2016 of
0.85 pence per ordinary share was paid on 28 September 2016; these
dividends totalled £2,034 million. Further information on dividends is
shown in note 45 on page 238 and is incorporated by reference.
Appointment and retirement of Directors
The appointment and retirement of Directors is governed by the
Company’s articles of association, the UK Corporate Governance
Code and the Companies Act 2006. The Company’s articles of
association may only be amended by a special resolution of the
shareholders in a general meeting.
No Directors have been appointed to the Board since the 2016 AGM.
In the interests of good governance and in accordance with the
provisions of the UK Corporate Governance Code, all Directors will
however retire, and those wishing to serve again, will submit
themselves for re-election at the forthcoming AGM. Anthony Watson,
Senior Independent Director, will retire at the 2017 AGM after serving
more than eight years on the Board and Nick Luff, an independent
Non-Executive Director, has notified the Board that he does not
intend to seek re-election at the 2017 AGM.
Biographies of current Directors are set out on pages 54 to 57.
Details of the Directors seeking re-election at the AGM are set out
in the Notice of Meeting.
Board composition changes
Changes to the composition of the Board since 1 January 2016 up
to the date of this report are shown in the table below:
Annual Report and Accounts 2016
Directors’ and Officers’ liability insurance
Throughout 2016 the Group had appropriate insurance cover
in place to protect Directors, including the former Director who
retired during the year, from liabilities that may arise against them
personally in connection with the performance of their role. As well
as insurance cover, the Group agrees to indemnify the Directors to
the maximum extent permitted by law. Further information on the
Group’s indemnity arrangements is provided below. No Director
or former Director sought to recover costs or expenses under their
indemnity in 2016.
Directors’ indemnities
The Directors of the Company, including the former Director who
retired during the year, have entered into individual deeds of
indemnity with the Company which constituted ‘qualifying third party
indemnity provisions’ for the purposes of the Companies Act 2006.
The deeds indemnify the Directors to the maximum extent permitted
by law and remain in force for the duration of a Director’s period of
office. The deeds were in force during the whole of the financial year
or from the date of appointment in respect of the Director appointed
in 2016. In addition, the Group had appropriate Directors' and
Officers' liability insurance cover in place throughout 2016.
Deeds for existing Directors are available for inspection at the
Company’s registered office.
The Company has also granted deeds of indemnity by deed poll
and by way of entering into individual deeds, which constitute
‘qualifying third party indemnity provisions’ to the Directors of the
Group’s subsidiary companies, including to former Directors who
retired during the year and since the year end. Such deeds were in
force during the financial year ended 31 December 2016 and remain
in force as at the date of this report.
Qualifying pension scheme indemnities have also been granted to
the Trustees of the Group’s Pension Schemes, which were in force
for the whole of the financial year and remain in force as at the date
of this report.
Power of Directors in relation to shares
The Board manages the business of the Company under the powers
set out in the articles of association, these powers include the
Directors’ ability to issue or buy back shares. The Directors were
granted authorities to issue and allot shares and to buy back shares
at the 2016 AGM. Shareholders will be asked to renew these
authorities at the 2017 AGM. The authority in respect of purchase
of the Company’s ordinary shares is limited to 7,145,465,640 ordinary
shares, equivalent to 10 per cent of the issued ordinary share capital
of the Company.
Stuart Sinclair
Dyfrig John
Joined the Board
Retired from the Board
4 January 2016
The Company did not repurchase any of its shares during the year
(2015: none).
11 May 2016
Information incorporated by reference
The following additional information forms part of the Directors’ report, and is incorporated by reference.
Content
Group results
Ordinary dividends
Directors’ biographies
Directors in 2016
Directors’ emoluments
Summary of Group results
Dividends on ordinary shares
Board of Directors
Board of Directors
Directors’ remuneration report
Internal control and financial
risk management
Financial reporting risk
Risk management and Financial instruments
Information included in the
strategic report
Future developments
Greenhouse gas emissions (additional information)
Inclusion and diversity
Engaging colleagues
Significant contracts
Dividend waivers
Disclosures required under
Listing Rule 9.8.4R
Principal risks and uncertainties Funding and liquidity
Share capital and control
Capital position
Share capital and restrictions on the transfer of shares or voting rights – note to the accounts
Special rights with regard to the control of the Company – note to the accounts
Pages
33 to 36
238
54 to 57
54 to 57
84 to 114
168 to 169
116 to 169 and
245 to 257
6 to 31
25
23 to 24
21
241 to 242
238
30 and 154 to 158
159 to 166
234
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Governance
Directors' report continued
Substantial shareholders
Information provided to the Company by substantial shareholders
pursuant to the DTR is published via a Regulatory Information Service.
conclude that it is appropriate to continue to adopt the going
concern basis in preparing the accounts over the next 12 months,
from the date of approval of the financial statements.
As at 31 December 2016, the Company had been notified by its
substantial shareholders under Rule 5 of the DTR of the following
interests in the Company’s shares:
% of issued share
capital with rights
to vote in all
circumstances at
general meetings1
6.93%
5.14%
2.99%
Interest in shares
4,943,698,4902
3,668,756,7653
2,133,494,6254
The Solicitor for the Affairs of
Her Majesty’s Treasury
BlackRock Inc.
Norges Bank
1 Percentage provided was correct at the date of notification.
2 A direct holding. The Solicitor for the Affairs of Her Majesty’s Treasury notified the
Company on 6 January 2017 that their holding had decreased, to 4,243,603,868 shares,
representing 5.95 per cent of the issued share capital, and on 27 January 2017 that their
holding had decreased, to 3,567,130,415 shares, representing 4.998 per cent of the issued
share capital.
3 The most recent notification provided by BlackRock Inc. under Rule 5 of the DTR
identifies (i) an indirect holding of 3,599,451,380 shares in the Company representing
5.04 per cent of the voting rights in the Company, and (ii) a holding of 69,305,385 in other
financial instruments in respect of the Company representing 0.09 per cent of the voting
rights of the Company. BlackRock Inc.’s holding most recently notified to the Company
under Rule 5 of the DTR varies from the holding disclosed in BlackRock Inc.’s Schedule
13-G filing with the US Securities and Exchange Commission dated 24 January 2017,
which identifies beneficial ownership of 4,566,352,317 shares in the Company
representing 6.4 per cent of the issued share capital in the Company. This variance is
attributable to different notification and disclosure requirements between these
regulatory regimes.
4 A direct holding.
No further notifications have been received under Rule 5 of the DTR
as at the date of this report.
Change of control
The Company is not party to any significant contracts that are subject
to change of control provisions in the event of a takeover bid. There
are no agreements between the Company and its Directors or
employees providing compensation for loss of office or employment
that occurs because of a takeover bid.
The Company is party to a deed of covenant with each of the four
Lloyds Foundations (the Foundations) which hold limited voting
shares in the Company (the limited voting shares are further
described in note 40 on page 234). 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.
Branches
The Group provides a wide range of banking and financial services
through branches and offices in the UK and overseas.
Research and development activities
During the ordinary course of business the Group develops new
products and services within the business units.
Post balance sheet events
There have been no other material post balance sheet events.
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 and uncertainties: funding
and liquidity on page 30 and pages 154 to 158 and capital position on
pages 159 to 166 and additionally have considered projections for the
Group’s capital and funding position. Accordingly, the Directors
82
Viability statement
The Directors have an obligation under the UK Corporate
Governance Code to state whether they believe the Company
and the Group will be able to continue in operation and meet their
liabilities as they fall due over a specified period determined by the
Directors, taking account of the current position and the principal
risks of the Company and the Group.
In making this assessment, the Directors have considered a wide
range of information, including the principal and emerging risks
which could impact the performance of the Group, and the Group’s
five year operating plan which comprises detailed customer,
financial, capital and funding projections together with an
assessment of relevant risk factors. In particular in 2016, the
assessment included consideration of the effects of the continuing
low interest rate environment, the impact of a potential slow-down
in economic growth as a result of the uncertainty surrounding the
UK’s exit from the EU, the possible effect upon the Group’s financial
position of the implementation of IFRS 9 “Financial Instruments” and
the implications of ring-fencing, which over the next two years will
lead to internal restructuring and the establishment of the ring-
fenced sub-group and a non-ring-fenced sub-group.
Group, divisional and business unit operating plans covering a period
of five years are produced and subject to rigorous stress testing on
an annual basis. The planning process takes account of the Group’s
business objectives, the risks taken to seek to meet those objectives
and the controls in place to mitigate those risks to remain within the
Group’s overall risk appetite.
The Group’s planning process comprises the following key stages:
– Each year, divisional teams develop their operating plans which
are based on Group and divisional targets. These targets are
driven by the Group’s strategy, risk appetite and objectives in
the context of the operating environment and external market
commitments, which are revised annually by the Board.
– The financial projections and the underlying assumptions in
respect of expected market and business changes, and future
expected legal, accounting and regulatory changes are subject
to rigorous review and challenge from both divisional and Group
executives. The Board obtains independent assurance from Risk
Division over the alignment of the plan with Group strategy and
Board risk appetite. This assessment also identifies the key risks
to delivery of the Group’s operating plan.
– The Group operates a robust stress testing framework to assess
compliance of the operating plan with the Group risk appetite.
The plan, which incorporates detailed capital and funding plans,
is subject to both regulatory and internal stress testing scenarios,
in addition to reverse stress testing. Further information on stress
testing and reverse stress testing is provided on page 119. The
internal stress testing scenarios are designed to be severe but
plausible; and take full account of the availability and likely
effectiveness of the mitigating actions that could be taken to avoid
or reduce the impact or occurrence of the underlying risks. In
considering the likely effectiveness of such actions, the conclusions
of the Board’s regular monitoring and review of risk and internal
control systems, as discussed on page 67, is taken into account.
– The final five year operating plan, Risk Division assessment and
the results of the stress testing are presented to the Board for
approval. Once approved, the operating plan drives detailed
divisional and Group targets for the following year.
The Directors have specifically assessed the prospects of the
Company and the Group over the first three years of the current
plan. The uncertain economic and political environment caused
by the UK's plans to leave the EU and the pace of regulatory change
mean that the assumptions supporting the fourth and fifth years of
the operating plan are likely to be less reliable. As a result, the Board
considers that a three year period continues to present a reasonable
degree of confidence over expected events and macroeconomic
assumptions, whilst still providing an appropriate longer-term
outlook, although the remaining period of the operating plan
contains no information which would cause different conclusions
Lloyds Banking Group
Annual Report and Accounts 2016
to be reached over the longer-term viability of the Company
and Group.
Information relevant to the assessment can be found in the
following sections of the annual report and accounts:
– The Group’s principal activities, business and operating models
and strategic direction are described in the strategic report on
pages 1 to 31;
– Emerging risks are disclosed on page 118;
– The principal risks, including the Group’s objectives, policies and
processes for managing credit, capital, liquidity and funding, are
provided in the risk management section on pages 124 to 169; and
– The Group’s approach to stress testing and reverse stress testing,
including both regulatory and internal stresses, is described on
page 119.
Based upon this assessment, the Directors have a reasonable
expectation that the Company and the Group will be able to
continue in operation and meet its liabilities as they fall due over
the next three years to 31 December 2019.
Greenhouse gas emissions
The Group has voluntarily reported greenhouse gas emissions and
environmental performance since 2009, and since 2013 this has been
reported in line with the requirements of the Companies Act 2006.
Our total emissions, in tonnes of CO2 equivalent, are reported in the
strategic report on page 25.
Deloitte LLP has provided limited level ISAE 3000 (Revised)
assurance over selected non-financial indicators as noted by
.
Their full, independent assurance statement is available online
at www.lloydsbankinggroup.com/rbdownloads
Methodology
The Group follows the principles of the Greenhouse Gas (GHG)
Protocol Corporate Accounting and Reporting Standard to calculate
our Scope 1, 2 and 3 emissions from our worldwide operations.
The reporting period is 1 October 2015 to 30 September 2016,
which is different to that of our Directors’ report (January 2016 –
December 2016). This is in line with Regulations in that the majority
of the emissions reporting year falls within the period of the
Directors’ report. Emissions are reported based on an operational
boundary. The scope of reporting is in line with the GHG Protocol
and covers Scope 1, Scope 2 and Scope 3 emissions. Reported
Scope 1 emissions cover emissions generated from gas and oil used
in buildings, emissions from UK company-owned vehicles used for
business travel and emissions from the use of air conditioning and
chiller/refrigerant plant. Reported Scope 2 emissions cover
emissions generated from the use of electricity, calculated using the
location based methodology. Reported Scope 3 emissions relate to
business travel undertaken by colleagues and emissions associated
with the extraction and distribution of each of our energy sources –
electricity, gas and oil. A detailed definition of these emissions can
be found in our 2016 Reporting Criteria online at
www.lloydsbankinggroup.com/rbdownloads
Intensity ratio
An intensity ratio of GHG gases (CO2e) per £m of underlying income
has been selected.
GHG emissions per unit of
underlying income
Oct 2015 –
Sept 2016
Oct 2014 –
Sept 2015
19.7
22.4
Omissions
Emissions associated with joint ventures and investments are not
included in this disclosure as they fall outside the scope of our
operational boundary. The Group does not have any emissions
associated with heat, steam or cooling and is not aware of any
other material sources of omissions from our reporting.
Independent auditor 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 auditor is 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 auditor is 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 auditor and authorising the Audit
Committee to set its remuneration will be proposed at the AGM.
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
Group and parent Company financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union. Under company law, the Directors must not
approve the financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the Group and the
Company and of the profit or loss of the Company and Group for
that period. In preparing these financial statements, the Directors
are required to: select suitable accounting policies and then apply
them consistently; make judgements and accounting estimates that
are reasonable and prudent; and state whether applicable IFRSs as
adopted by the European Union have been followed.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and the Group and enable
them to ensure that the financial statements and the Directors’
remuneration report comply with the Companies Act 2006 and,
as regards the Group financial statements, Article 4 of the IAS
Regulation. They are also responsible for safeguarding the assets of
the Company and the Group and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
A copy of the financial statements is placed on our website at
www.lloydsbankinggroup.com. The Directors are responsible for the
maintenance and integrity of the Company’s website. Legislation in
the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Each of the current Directors who are in office as at the date of this
report, and whose names and functions are listed on pages 54 to 57
of this annual report, confirm that, to the best of his or her
knowledge:
– the Group financial statements, which have been prepared in
accordance with IFRSs 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 strategic report and the
Directors’ report 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 that they face.
The Directors consider that the annual report and accounts, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s
position and performance, business model and strategy.
The Directors have also separately reviewed and approved the
strategic report.
On behalf of the Board
Malcolm Wood
Company Secretary
21 February 2017
Lloyds Banking Group plc
Registered in Scotland
Company number SC95000
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Governance
Directors' remuneration report
STATEMENT BY THE CHAIRMAN OF
THE REMUNERATION COMMITTEE
The Committee’s focus goes beyond
executive pay to ensure that the interests
of all colleagues and shareholders are
considered fairly and consistently
KEY MESSAGES
– Remuneration review concluded in 2016, resulting in revised
Reward Principles and variable remuneration design aligned
to the Group’s strategic priorities.
– Strong financial performance overall and further progress
against strategic priorities, supporting bonus outcome of
£392.9 million. This included a 19 per cent downward
collective adjustment and equates to 4.8 per cent of
pre bonus underlying profit.
– Executive Director 2016 bonus awards approximately
77 per cent of maximum.
– Executive Director single figure remuneration outcomes
approximately 35 per cent lower than 2015, with 2014
Long-Term Incentive Plan awards vesting at 55 per cent
of maximum.
– Consistent 2 per cent base salary budget applied to all
colleagues, including Executive Directors.
– To build a long-term ownership culture, all colleagues will,
for the first time, receive an award of shares under the new
Group Ownership Share Plan.
Dear Shareholder
On behalf of the Board and as Chair of the Group’s Remuneration
Committee, I have pleasure in presenting the Directors’
remuneration report for the year ended 31 December 2016. I am
very grateful for the continued support and engagement we have
had with shareholders and their representative bodies, especially
during consultations on the outcomes of the remuneration review
which I outlined in last year’s statement and which was a key priority
for 2016.
Outcomes of the remuneration review
The Committee conducted a full review of the Group’s
remuneration arrangements in 2016. The main focus of this review
was to ensure the remuneration arrangements support our purpose
of helping Britain prosper and align to the Group’s aim of becoming
the best bank for customers whilst delivering superior and
sustainable returns for shareholders. With this in mind, the
Committee simplified and updated the Reward Principles that
apply across the Group to ensure they support the strategic
priorities, as set out below:
Strategic priorities
Reward principle
Creating the best
customer experience
Customer alignment
Becoming simpler and
more efficient
Simple, affordable and
motivating
Delivering sustainable
growth
Shareholder alignment
Building the best team
Competitive, performance-
driven and fair
Further detail is set out in the ‘Summary of the remuneration review'.
There are no significant changes to the remuneration policy for
Executive Directors that is being put to a binding vote at the 2017
AGM, and the maximum opportunity for both the short-term and
long-term elements of variable remuneration will remain the same.
84
Lloyds Banking Group
Annual Report and Accounts 2016
Fair reward for colleagues
The Committee’s focus goes beyond executive pay. I have engaged
with the Group’s recognised unions, and I am keen to ensure that
the interests of all colleagues are considered in the Committee’s
deliberations. We are mindful of the relationship between pay for
executives and more junior colleagues, and to that end have sought
to ensure consistency of pay outcomes with a salary budget of
2 per cent applied across the whole Group. In order to ensure that
the Committee’s approach to remuneration aligns to Group
strategy, I have engaged the Responsible Business Committee
in discussions on pay. This dialogue will continue during 2017.
In 2016, the Group has completed the moves to ensure that all
customer-facing colleagues in Retail are now incentivised by
reference to Balanced Scorecard metrics, rather than individual
or branch level sales or product targets. This change ensures that
colleagues are rewarded for action and behaviour that puts
customers first. All variable remuneration decisions take into
consideration the Group’s Value, Codes of Responsibility, and
the Conduct Pillars (Integrity, Compliance and Competence).
Sharing in the Group’s performance
As part of considering the structure of remuneration, the
Committee concluded that it was important all colleagues should
understand that they share in the overall performance of the Group
alongside other stakeholders. The short-term variable remuneration
element that supports this will be known as the ‘Group Performance
Share plan'.
The plan outcome will be determined ‘top-down’ as a percentage
of the Group’s underlying profit, modified based on the Group’s
Balanced Scorecard performance and any collective adjustment for
risk and conduct matters. The clear and transparent link between
risk-adjusted profit and the Group Performance Share plan outcome
ensures direct alignment between the interests of colleagues
(including Executive Directors) and shareholders.
Building a long-term ownership culture
The Group promotes the broadest possible share ownership by
colleagues to build a culture of acting as stewards of the long-term
interests of the Group.
Over 80 per cent of colleagues hold an interest in the Group
through participation in one of our existing share plans. To achieve
100 per cent share ownership, for the first time in 2017, all colleagues
in the Group will receive an award of shares valued at £200, which they
will be required to hold for at least three years. We will look to repeat
awards in future years, dependent on delivering against the Group’s
strategic aims.
Executive-level share ownership is high, with all Executive Director
shareholdings well above their minimum requirement under the
shareholding policy. The Group Chief Executive’s current shareholding
significantly exceeds the level required, as detailed in the annual
report on remuneration.
To align with the culture of broader share ownership, the long-term
element of variable remuneration will be known as the ‘Group
Ownership Share plan’. This plan incentivises and rewards Executive
Directors and senior colleagues against Group financial and strategic
objectives designed to deliver superior and sustainable long-term
returns for shareholders. Executives will build a direct ownership
interest in the Group if those strategic objectives are met over the
three-year performance period. The Committee decided that the
performance measures for the 2017 awards should align to the revised
Reward Principles, and with that, the Group’s strategic priorities.
Remuneration outcomes for 2016
The Group has delivered strong financial performance in 2016
following further strategic progress. Underlying profit was £7.9 billion
and statutory profit has more than doubled to £4.2 billion. The
Group’s balance sheet remains strong and capital generation of
approximately 190 basis points has enabled the Group to increase the
ordinary dividend, pay a special dividend and fully cover the expected
capital impact of the MBNA acquisition.
The gross bonus that results from underlying profit modifiers and
Balanced Scorecard performance is £484.1 million. In reaching the
final decision on the 2016 bonus outcome, the Committee considered
the conduct-related provisions, including an additional provision
for PPI in 2016. This led to a downward adjustment of 19 per cent
resulting in a final bonus outcome for 2016 of £392.9 million. This
is an increase of 11 per cent compared to 2015.
The Group’s bonus outcome is amongst the lowest of large UK banks
and at 4.8 per cent of pre bonus underlying profit, significantly
lower than the Group’s funding limit of 10 per cent of pre bonus
underlying profit.
A formulaic approach has been used to set the Executive Directors’
bonus awards, consistent with other colleagues across the Group. The
Committee determined that bonus awards of between 77 per cent
and 78 per cent of maximum should be made to Executive Directors.
Each of these awards, as well as the proposed Group Ownership
Share awards detailed in the report, reflect the Group’s strong
underlying performance against both financial and Balanced
Scorecard metrics.
The long-term incentive plan (LTIP) awards made in 2014 are
proposed to vest at 55 per cent, reflecting performance in the
period to 31 December 2016.
Overall, the total remuneration for the Executive Directors is down by
around 35 per cent compared to 2015. Further details on the reward
outcomes for Executive Directors are outlined in the annual report
on remuneration.
The Group’s approach to deferral of total variable remuneration
ensures that both the short-term and long-term elements are subject
to deferral in a way that results in a slower release of variable
remuneration than the minimum regulatory requirements. In line
with the new PRA remuneration requirements for PRA Senior
Managers, the Group Ownership Share element is deferred over
seven years with pro rata vesting between the third and seventh year.
Across all colleagues, less than 3.5 per cent of annual bonus plan
awards are above £25,000 and relate to high performing colleagues
at senior levels. The first £2,000 of any bonus award continues to be
paid in cash in March 2017, with the balance deferred in shares which
are released periodically over subsequent months and years.
2017 Executive Director salaries
It was the Committee’s intent that Executive Director salary
increases remain aligned with the 2 per cent budget for all
colleagues. With that principle in mind, the Committee proposes
to increase the base salaries of the Chief Financial Officer and the
Chief Risk Officer by 2 per cent.
As disclosed in the 2015 Directors’ remuneration report, for the first
time since 2011, a salary increase was applied in 2016 for the Group
Chief Executive to begin to adjust his base salary to the previously
disclosed Reference Salary of £1.22 million, which was set relative
to the market when he joined in 2011, and for the adjustment to
be staged over two years. As a result the second stage of the
adjustment to £1.22 million is to be implemented with effect from
January 2017, with 2 per cent of the increase delivered in cash and
the remainder in shares.
2017 Annual General Meeting
Approval for the Directors’ remuneration policy will be sought at the
AGM on 11 May 2017; if approved, it will take effect from that date.
I hope you will support the resolutions relating to remuneration.
Anita Frew
Chairman, Remuneration Committee
85
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Governance
Directors' remuneration report continued
SUMMARY OF THE REMUNERATION REVIEW
Enhancing the link between remuneration and strategy
As part of the review of the Group’s variable remuneration arrangements in 2016, the existing reward principles were simplified and updated
to ensure they support the Group’s strategic priorities. The table below shows the link between strategic priorities, the reward principles
and performance measures for the Group Ownership Share and Group Performance Share plans. Further detail can be found in the
strategic report.
Strategic
priorities
Creating
the best
customer
experience
Reward principle
Customer alignment
– Rewards action and behaviour which puts customers first
– Builds a responsible business plan that helps Britain prosper
– Supports the Culture Plan
Becoming
simpler
and more
efficient
Simple, affordable and motivating
– Flexible and simple
– Transparent and understood (by colleagues
and other stakeholders)
– Motivating awards which colleagues value
Delivering
sustainable
growth
Shareholder alignment
– Supports delivery of long-term, superior
and sustainable returns
Building the
best team
– Promotes sound and effective risk management
– Complies with regulations
Competitive, performance-driven and fair
– Drives successful change towards Bank of the Future
– Encourages working together as one team
– Delivers fair outcomes, based on performance,
not personal characteristics
Long-term measures
(Group Ownership
Share plan)
– Net promoter score
– FCA total reportable
complaints per 1,000
accounts and Financial
Ombudsman Service
(FOS) uphold rate
– Digital active
customer base
– Cost:income ratio
– Economic profit
Short-term measures
(Group Performance
Share plan), examples
include:
– Helping Britain
Prosper Plan
– Best Bank for
Customers index
– Digital active
customer base
– Cost:income ratio
– Absolute Total
Shareholder Return
– Underlying profit
before tax
– Employee
engagement index
– Common equity tier 1
(CET1) ratio
– PRA stress test
– Performance
excellence index
– Employee
engagement index
– Inclusion & Diversity
The Group’s remuneration arrangements support its purpose of helping Britain prosper and align to the Group’s aim of becoming the best bank
for customers, whilst delivering long-term, superior and sustainable returns for shareholders.
The Group believes in offering fair reward. It fosters a performance-driven and meritocratic culture where colleagues share in the collective success
of the Group and are rewarded for performance aligned to the long-term sustainable success of the business and the commitment to changing the
culture of the Group.
The new variable remuneration arrangements have been designed to reinforce the simplified reward principles and maintain a separate short-term and
long-term model. Remuneration remains weighted towards the long-term and the design closely aligns to the Group’s strategic priorities. There have
not been any changes to the maximum potential under either plan.
EXECUTIVE DIRECTORS REMUNERATION
The graphic below summarises the elements of the Executive Directors’ total remuneration package for 2017.
BASE
SALARY
FIXED
SHARE
AWARD
PENSION
BENEFITS
SHORT-
TERM PLAN
Group
Performance
Share
LONG-
TERM PLAN
Group
Ownership
Share
TOTAL
REMUNERATION
Fixed remuneration
Variable remuneration
Simplifying the approach to short-term variable remuneration: Group Performance Share
The Group Performance Share plan provides Executive Directors and colleagues with a reward for delivery against the Group’s short-term financial
and strategic priorities. The annual performance share outcome is based on a percentage of the Group’s underlying profit, adjusted by a strategic
multiplier based on the Group’s Balanced Scorecard (BSC) metrics and risk matters. This approach replaces the more complex methodology used
in recent years where the Group’s total bonus outcome was driven by the aggregate divisional and functional bonus outcomes and provides a
clear line of sight for Executive Directors, colleagues and shareholders.
86
Lloyds Banking Group
Annual Report and Accounts 2016
In order to ensure that the opportunity under the Group Performance Share plan is not increased when compared to the previous annual bonus
plan, the Committee has included threshold and maximum payout levels. The maximum for 2017 is 20 per cent above the underlying profit target
and a ‘Top’ rating against Balanced Scorecard objectives. This is consistent with prior years. The threshold is set at 20 per cent below the Group’s
underlying profit target.
GROUP
PERFORMANCE
SHARE
% OF
UNDERLYING
PROFIT
GROUP BSC
MODIFIER
COLLECTIVE
RISK
ADJUSTMENT
Long-term variable remuneration: Group Ownership Share
From 2017, the long-term incentive plan will be known as the Group Ownership Share plan to reinforce its link to the Group’s strategic priorities
and provide greater shareholder alignment. The Group Ownership Share plan ensures Executive Directors and senior colleagues build an
ownership interest in the Group and are motivated by delivering long-term superior and sustainable returns for shareholders. Vesting is subject
to future three-year performance with a clear link between measures and key strategic priorities.
GROUP
OWNERSHIP
SHARE
65%
FINANCIAL
MEASURES
35%
STRATEGIC
MEASURES
2017 deferral of variable remuneration
Under new PRA remuneration requirements, 60 per cent of variable remuneration awarded to PRA Senior Managers must be deferred for seven years
with pro rata vesting between the third and seventh year. The Group’s approach ensures that both short-term and long-term variable remuneration
is subject to deferral and is more onerous than the minimum PRA requirements, as over 60 per cent of variable remuneration awarded to Executive
Directors is deferred under the Group Ownership Share plan and vests over a period of seven years from the date of grant.
Due to this more onerous approach under the Group Ownership Share plan, awards for Executive Directors under the Group Performance Share plan
are deferred for two years as follows:
– 40 per cent will be released in the first year following award;
– 40 per cent will be released in the second year; and
– the remaining 20 per cent will be released in the third year.
The graphic below illustrates how the Group’s deferral approach for Executive Directors (who are PRA Senior Managers for regulatory purposes)
continues to be weighted to the long term, underpinning the strategic priority and reward principle of delivering sustainable growth. Any shares
released are subject to a further holding period in line with regulatory requirements and market practice. In line with shareholder expectations,
no Group Ownership Share awards are unconditionally released until at least five years after grant.
20%
(held for
6 months)
20%
(held for
6 months)
20%
(held for
6 months)
Holding
period
(1 year)
2017 Group Ownership Share
Performance period:
2017 awards are subject to a three-year
performance period
Individual
performance
determines
2017 Group
Ownership
Share award
Group Performance Share
(For the 2017 performance period)
Performance
period
20%
Holding
period
(2 years)
Holding
period
(12 months)
20%
20%
Holding
period
(12 months)
40%
Holding
period
(12 months)
40%
2016
2017
2018
2019
2020
2021
2022
2023
2024
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Governance
Directors' remuneration report continued
REMUNERATION AT A GLANCE
How Lloyds Banking Group performed
Key performance measures
The table below illustrates outcomes against the Group’s key
performance measures relevant to remuneration.
The annual bonus outcome is driven by a combination of Group
underlying profit and Balanced Scorecard performance. The
long-term incentive plan measures Group performance over a
three-year period, using a range of financial and strategic measures.
Measure
2016
2015
Underlying profit before tax
£7,867m
£8,112m1
Group Balanced Scorecard
Strong plus
Strong
Economic profit
£3,377m
£2,233m
Total Shareholder Return (TSR)
Per annum for the three years ended
31 December
Cost:income ratio
Net promoter score
Digital active customer base
Employee engagement index
(5%)
48.7%2
62.7
12.5m
71
16.6%
49.3%
59.3
11.5m
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1 The underlying profit result used for remuneration purposes was £7,994 million
(excluding TSB).
2 The adjusted cost:income ratio result used for remuneration purposes was 50.5 per cent.
Annual bonus plan outcome
The Group has delivered strong financial performance in 2016
following further strategic progress. In reaching the decision on
the 2016 bonus outcome, the Committee considered the
conduct-related provisions, including an additional provision for
PPI in 2016. This led to a downward adjustment of 19 per cent.
The total bonus award as a percentage of pre-bonus underlying
profit before tax increased from 4.2 per cent in 2015 to 4.8 per cent
in 2016. This compares favourably to shareholder return from
dividend payments over the same period which increased to
26.3 per cent of underlying profit and remains significantly lower
than the Group’s funding limit of 10 per cent of pre bonus
underlying profit.
For Executive Directors, awards of between 77 per cent and
78 per cent of maximum opportunity were determined reflecting
Group and individual performance.
2016
2015
26.3% of
underlying profit
4.8% of
underlying profit
23.5% of
underlying profit
4.2% of
underlying profit
0
500
1000
1500
2000
2500
Bonus amount post adjustment £m
Dividend £m
(Dividend includes ordinary
special dividend)
and
Long-term incentive plan outcome
The Group has delivered a good financial performance over the performance period of the 2014 Long-Term Incentive Plan (LTIP) awards,
continuing to transform the business for the benefit of its shareholders. Performance was measured over three financial years ended 31 December
2016. The performance conditions attached to these awards and actual performance are set out in the table below. At the end of the performance
period, it has been assessed that awards will vest at 55 per cent of maximum. Executive Directors are required to retain any shares vesting for a
further two years post vesting.
Weighting Measure
30%
Economic profit
30%
Absolute TSR
10%
Cost:income ratio1
10%
Customer satisfaction2
Threshold
£2,154m
8% p.a
48.9%
0.54
10%
Net promotor score
3rd place
5%
SME lending
5%
Share of first-time buyer market
LTIP (% maximum) vesting
14%
20%
Performance achievement versus targets
Vesting as %
maximum
(for that element)
Maximum
£3,231m
Actual: £3,377m
16% p.a.
Actual: (5%)
46.5%
Actual: 50.5%
0.50
Actual: 0.46
1st place
Actual: 1st place
18%
Actual: 13.4%
25%
Actual: 25.5%
30%
0%
0%
10%
10%
0%
5%
55%
1 Adjusted total costs.
2 FCA reportable complaints per 1,000 for the period up to and including H1 2016 and formally closed FCA complaints per 1,000 accounts for the period from H2 2016. Both exclude PPI
complaints, any complaints received via Claims Management Companies (CMC) and any complaints relating to TSB activity. With the introduction of the FCA guidance contained in PS15/19
applicable from 1 July 2016, the complaint classification and reporting for the original metric ceased on 30 June 2016. Accordingly, the Remuneration Committee has rebased the original
2014 metrics in line with the new FCA reporting regime. The Remuneration Committee considers the rebased targets equally stretching.
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Annual Report and Accounts 2016
Executive Director remuneration outcomes
The charts below summarise the Executive Directors’ remuneration for the years ended 31 December 2015 and 2016.
Single total remuneration figure
(£000)
2016 variable remuneration outcome
£000
António Horta-Osório
Group Chief Executive
2016
2015
49%
22%
29%
30%
10%
George Culmer
Chief Financial Officer
2016
2015
51%
20% 29%
31%
10%
59%
Juan Colombás
Chief Risk Officer
2016
2015
53%
20% 27%
33%
10%
57%
60%
5,541
8,704
7,4751
2,909
4,726
2,2541
2,833
4,428
2081,2
Bonus
LTIP
Bonus
LTIP
Bonus
LTIP
1,2201
1,5842
(77% of maximum)
(55% of maximum)
5741
8572
(77% of maximum)
(55% of maximum)
5781
7632
(78% of maximum)
(55% of maximum)
Fixed remuneration
Annual bonus
LTIP
1 2016 bonus, awarded in March 2017.
2 2014 LTIP vesting and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 15 February 2017. The average share price between
1 October 2016 and 31 December 2016 (58.30 pence) has been used to calculate the value. The shares were awarded in 2014 based on a share price of 78.878 pence.
Directors’ fixed remuneration for 2017
Base salary
2017 base salaries will be as follows:
Group Chief Executive: £1,220,000 (1 January 2017)
Chief Financial Officer: £764,070 (1 April 2017)
Chief Risk Officer: £753,458 (1 January 2017)
Fixed share award
The levels of award set for 2017 remain unchanged and are as follows:
Group Chief Executive: £900,000
Chief Financial Officer: £504,000
Chief Risk Officer: £497,000
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Governance
Directors' remuneration report continued
DIRECTORS’ REMUNERATION POLICY
Approval for this remuneration policy will be sought at the AGM on 11 May 2017 and, if approved, will take effect from that date.
It is intended that approval of the remuneration policy will be sought at three-year intervals, unless amendments to the policy are required, in which case
further shareholder approval will be sought. Information on how the Policy will be implemented in 2017 is included in the annual report on remuneration.
The Group’s policy continues to help ensure that the remuneration proposition is both cost effective and enables the Group to attract and retain
executives of the highest calibre. The objective is to align individual reward with the Group’s performance, the interests of its shareholders
and a prudent approach to risk management. In this way, the requirements of the major stakeholders are balanced: customers, shareholders,
employees, and regulators.
The policy is based on principles which are applicable to all employees within the Group and, in particular, the principle that the reward package
should support the delivery of the Group's purpose of helping Britain prosper and the strategic aim of becoming the best bank for customers
whilst delivering long-term superior and sustainable returns to shareholders. It fosters a performance-driven and meritocratic culture, encourages
effective risk disciplines and is in line with relevant regulations and codes of best practice. There is no significant difference between the policy
for Executive Directors and that for other senior employees. If a significant difference for any individual were proposed, this would be subject to
approval by the Remuneration Committee (within regulatory requirements). The table below summarises how the policy applies across the Group.
Fixed
Base salary
Variable
Fixed share award1
Pension and benefits
Short-term incentive
Long-term incentive
Executive Directors
Group Executive
Committee
Other Material
Risk Takers
Other employees
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔1
✔
✔
✔
✔
✔1
1 Eligibility based on seniority, grade and role.
Consideration of shareholders’ and employees’ views
The Group is committed to regular dialogue with stakeholders. In formulating the policy, the Remuneration Committee has consulted extensively
with a number of shareholders and key stakeholders, such as the Group’s main regulators, the Prudential Regulation Authority (PRA) and the
Financial Conduct Authority (FCA). The following topics were discussed:
– Alignment of variable remuneration to Group strategic priorities
– Structure of variable remuneration
– Latest regulatory requirements
– Latest shareholder guidelines
Formal consultation on the remuneration of Executive Directors is not undertaken with employees and no formal remuneration comparison
measurements were used. However, surveys are undertaken semi-annually on employee engagement and discussion on the Group’s remuneration
approach takes place with union representatives during the annual pay review cycle and on relevant employee reward matters, on which the
Remuneration Committee receives and considers relevant feedback. In addition, the Remuneration Committee has reviewed equal pay analysis
undertaken by an independent third party and will continue to monitor this on an ongoing basis.
Colleague opinion is also sought through regular engagement surveys. This includes questions relating to remuneration, the results of which in
2016 positioned colleague satisfaction with the Group’s reward arrangements, including the link to performance, above the high performing norm
of UK companies.
Remuneration policy table for Executive Directors
Base salary
Purpose and link to strategy
Operation
Maximum potential
To support the recruitment and retention of Executive Directors of the calibre required to develop and deliver
the Group’s strategic priorities. Base salary reflects the role of the individual, taking account of market
competitiveness, responsibilities and experience, and pay in the Group as a whole.
Base salaries are typically reviewed annually with any increases normally taking effect from 1 January. When
determining and reviewing base salary levels, the Committee takes into account base salary increases for
employees throughout the Group and ensures that decisions are made within the following two parameters:
– An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective
job-sizing methodologies.
– Pay for comparable roles in comparable publicly listed financial services groups of a similar size.
Salary may be paid in sterling or other currency and at an exchange rate determined by the Committee.
The Committee will make no increase which it believes is inconsistent with the two parameters above. Increases
will normally be in line with the increase awarded to the overall employee population. However, a greater salary
increase may be appropriate in certain circumstances, such as a new appointment made on a salary below a
market competitive level, where phased increases are planned, or where there has been an increase in the
responsibilities of an individual. Where increases are awarded in excess of the wider employee population,
the Committee will provide an explanation in the relevant annual report on remuneration.
Performance measures
N/A
Changes
90
Previously, the Group Chief Executive (GCE) had a reference salary of £1.22 million which was used to calculate
certain elements of long-term remuneration and the pension allowance. Due to the GCE’s base salary being
increased to his reference salary (effective from 1 January 2017), the concept of reference salary is being
removed. Elements of long-term remuneration and the pension allowance which were previously calculated with
regard to reference salary will be calculated with regard to the GCE’s base salary.
Lloyds Banking Group
Annual Report and Accounts 2016
Fixed share award
Purpose and link to strategy
To ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package
for Executive Directors with an appropriate balance of fixed and variable remuneration, in line with regulatory
requirements.
Operation
The fixed share award will initially be delivered entirely in Lloyds Banking Group shares, released over five years
with 20 per cent being released each year following the year of award. The Committee can, however, decide to
deliver some or all of it in the form of cash.
Maximum potential
The maximum award is 100 per cent of base salary.
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N/A
Changes
Pension
No change to policy
Purpose and link to strategy
To provide cost effective and market competitive retirement benefits, supporting Executive Directors in building
long-term retirement savings.
Operation
Executive Directors are entitled to participate in the Group’s defined contribution scheme with company
contributions set as a percentage of salary.
An individual may elect to receive some or all of their pension allowance as cash in lieu of pension contribution.
Maximum potential
The maximum allowance for the GCE is 50 per cent of base salary less any flexible benefits allowance.
The maximum allowance for other Executive Directors is 25 per cent of base salary.
Performance measures
N/A
Changes
Benefits
No change to policy for existing Executive Directors. All future appointments as Executive Directors will attract
a maximum allowance of 25 per cent of base salary.
Purpose and link to strategy
To provide flexible benefits as part of a competitive remuneration package.
Operation
Benefits may include those currently provided and disclosed in the annual report on remuneration.
Core benefits include a company car or car allowance, private medical insurance, life insurance and other
benefits that may be selected through the Group’s flexible benefits plan.
Additional benefits may be provided to individuals in certain circumstances such as relocation. This may include
benefits such as accommodation, relocation, and travel. The Committee retains the right to provide additional
benefits depending on individual circumstances.
When determining and reviewing the level of benefits provided, the Committee ensures that decisions are made
within the following two parameters:
– An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective
job-sizing methodologies.
– Benefits for comparable roles in comparable publicly listed financial services groups of a similar size.
Maximum potential
The Committee will make only increases in the benefits currently provided which it believes are consistent with
the two parameters above. Executive Directors receive a flexible benefits allowance, in line with all other
employees. The flexible benefits allowance does not currently exceed 4 per cent of base salary.
Performance measures
N/A
Changes
No change to policy
All-employee plans
Purpose and link to strategy
Operation
Maximum potential
Executive Directors are eligible to participate in HMRC-approved share plans which promote share ownership
by giving employees an opportunity to invest in Group shares.
Executive Directors may participate in these plans in line with HMRC guidelines currently prevailing (where
relevant), on the same basis as other eligible employees.
Participation levels may be increased up to HMRC limits as amended from time to time. The monthly savings
limits for Save As You Earn (SAYE) is currently £500. The maximum value of shares that may be purchased under
the Share Incentive Plan (SIP) in any year is currently £1,800 with a two-for-one match. Currently a three-for-two
match is operated up to a maximum employee investment of £30 per month.
The maximum value of free shares that may be awarded in any year is £3,600.
Performance measures
N/A
Changes
No change to policy
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Governance
Directors' remuneration report continued
Group Performance Share plan
Purpose and link to strategy
To incentivise and reward the achievement of the Group’s annual financial and strategic targets whilst supporting
the delivery of long-term superior and sustainable returns.
Operation
Measures and targets are set annually and awards are determined by the Committee after the year end based
on performance against the targets set. The Group Performance Share may be delivered partly in cash, shares,
notes or other debt instruments including contingent convertible bonds. Where all or part of any award is
deferred, the Committee may adjust these deferred awards in the event of any variation of share capital,
demerger, special dividend or distribution or amend the terms of the plan in accordance with the plan rules.
Where an award or a deferred award is in shares or other share-linked instrument, the number of shares to
be awarded may be calculated using a fair value or based on discount to market value, as appropriate.
The Committee applies its judgement to determine the payout level commensurate with business and/or
individual performance. The Committee may reduce the level of award (including to zero), apply additional
conditions to the vesting, or delay the vesting of deferred awards to a specified date or until conditions set by
the Committee are satisfied, where it considers it appropriate as a result of an event occurring before vesting.
Awards may be subject to malus and clawback for a period of up to seven years after the date of award which
may be extended to 10 years where there is an ongoing internal or regulatory investigation.
Maximum potential
The maximum Group Performance Share opportunities are 140 per cent of base salary for the GCE
and 100 per cent of base salary for other Executive Directors.
Performance measures
Measures and targets are set annually by the Committee in line with the Group’s strategic business plan
and further details are set out in the annual report on remuneration for the relevant year.
Measures consist of both financial and non-financial measures and the weighting of these measures will be
determined annually by the Committee. The weightings of the performance measures for the 2017 financial year
are set out on page 99. All assessments of performance are ultimately subject to the Committee’s judgement,
but no award will be made if threshold performance (as determined by the Committee) is not met for financial
measures or the individual is rated ‘Developing performer’ or below. The expected value of the Group
Performance Share is 30 per cent of maximum opportunity.
The Committee is committed to providing transparency in its decision making in respect of Group Performance
Share awards and will disclose historic measures and target information together with information relating to how
the Group has performed against those targets in the annual report on remuneration for the relevant year except
to the extent that this information is deemed to be commercially sensitive, in which case it will be disclosed once
it is deemed not to be sensitive.
Changes
Due to regulatory changes, Executive Directors can no longer receive dividend equivalents on deferred shares.
The number of shares to be awarded may be calculated using a fair or discounted value. If regulatory
requirements change, dividend equivalents may be paid. There are no changes to maximum opportunity.
Group Ownership Share plan
Purpose and link to strategy
To incentivise and reward Executive Directors and senior management to deliver against strategic objectives designed to
support the long-term success of the Group and encourage working as a team. It ensures executives build an ownership
interest in the Group and are motivated by delivering long-term superior and sustainable returns for shareholders.
Operation
Awards are granted under the rules of the 2016 Long-Term Incentive Plan approved at the AGM on 12 May 2016.
Awards are made in the form of conditional shares or nil cost options. Award levels are set at the time of grant,
in compliance with regulatory requirements, and may be subject to a discount in determining total variable
remuneration under the rules set by the European Banking Authority.
The number of shares to be awarded may be calculated using a fair value or based on a discount to market value,
as appropriate.
Vesting will be subject to the achievement of performance conditions measured over a period of three years,
or such longer period, as determined by the Committee.
The Committee retains full discretion to amend the payout levels should the award not reflect business and/or
individual performance. The Committee may reduce (including to zero) the level of the award, apply additional
conditions to the vesting, or delay the vesting of awards to a specified date or until conditions set by the
Committee are satisfied, where it considers it appropriate as a result of an event occurring before vesting.
Awards may be subject to malus and clawback for a period of up to seven years after the date of award which
may be extended to 10 years where there is an ongoing internal or regulatory investigation.
Maximum potential
The maximum annual award for Executive Directors will normally be 300 per cent of salary. Under the plan rules,
awards can be made up to 400 per cent of salary in exceptional circumstances.
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Annual Report and Accounts 2016
Performance measures
Measures and targets are set by the Committee annually and are set out in the annual report on remuneration each year.
At least 60 per cent of awards are weighted towards typical market (e.g. Total Shareholder Return) and/or financial
measures (e.g. economic profit), with the balance on strategic measures.
25 per cent will vest for threshold performance, 50 per cent for on-target performance and 100 per cent for
maximum performance.
The measures are chosen to support the best bank for customers strategy and to align management and
shareholder interests. Targets are set by the Committee to be stretching within the context of the strategic
business plan. Measures are selected to balance profitability, achievement of strategic goals and to ensure
the incentive does not encourage inappropriate risk-taking.
Following the end of the relevant performance period, the Committee will disclose in the annual report on
remuneration for the relevant year historic measure and target information, together with how the Group has
performed against those targets, unless this information is deemed to be commercially sensitive, in which case
it will be disclosed once it is deemed not to be sensitive.
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Changes
Due to regulatory changes, Executive Directors can no longer receive dividend equivalents on deferred shares.
The number of shares to be awarded may be calculated using a fair or discounted value. If regulatory
requirements change, dividend equivalents may be paid. There are no changes to maximum opportunity.
Deferral of variable remuneration and holding periods
Operation
The Group Performance Share and Group Ownership Share plans are both considered variable remuneration
for the purpose of regulatory payment and deferral requirements. The payment of variable remuneration and
deferral levels are determined at the time of award and in compliance with regulatory requirements (which
currently require that at least 60 per cent of total variable remuneration is deferred for seven years with pro rata
vesting between the third and seventh year, and at least 50 per cent of total variable remuneration is paid in
shares or other equity linked instruments subject to a holding period in line with current regulatory
requirements).
A proportion of the aggregate variable remuneration may vest immediately on award. The remaining proportion
of the variable remuneration is then deferred in line with regulatory requirements.
Changes
The deferral period has been extended to comply with new regulatory requirements.
Further information on which performance measures were chosen and how performance targets are set are disclosed in the relevant sections
throughout the report.
Discretion in relation to Group Performance Share and Group Ownership Share plans
The Committee retains discretion with regards to these plans. This relates to:
– the timing, size and type of awards and holding periods, subject to policy maxima;
– adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends);
– where qualitative performance measures are used and performance against those measures is not commensurate with the Group’s overall
financial performance over the performance period;
– adjustment of targets and measures if events occur which cause it to determine that the conditions are no longer appropriate. The Committee
also retains the right to change performance targets and measures and the weighting of measures, including following feedback from regulators,
shareholders and/or other stakeholders; and
– amending the plan rules in accordance with their terms.
The exercise of the Committee’s discretion will be disclosed in accordance with regulatory requirements.
Legacy awards and restrictions on payments
The Committee reserves the right to make any remuneration payments/awards and any payments/awards for loss of office, notwithstanding that
they are not in line with the policy set out above where the terms of the payment/award were agreed (i) before the Directors’ remuneration policy
approved by shareholders on 15 May 2014 (the ‘2014 policy’) came into effect; (ii) pursuant to the 2014 policy; or (iii) at a time when the relevant
individual was not a Director of the Group and, in the opinion of the Committee, the payment/award was not in consideration for the individual
becoming a Director of the Group. Such payments/awards will have been set out in the annual report on remuneration for the relevant year.
They include awards and payments made under previous approved remuneration policy and payments in relation to deferred bonus awards
and long-term incentive awards granted in 2012 and 2013.
Illustration of application of remuneration policy
The charts below illustrate possible remuneration outcomes under the following three scenarios:
1. The maximum that may be paid, assuming full Group Performance Share payout and full vesting under the Group Ownership Share plan.
2.
The expected value of remuneration for performance midway between threshold and maximum, assuming 30 per cent of maximum Group
Performance Share opportunity and 50 per cent vesting under the Group Ownership Share plan.
3. The minimum that may be paid, where only the fixed element is paid (salary, benefits, pension and the fixed share award).
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Governance
Directors' remuneration report continued
No share price growth has been assumed. The amounts are based on salaries as at 1 January 2017 (GCE and CRO) and 1 April 2017 (CFO)
and implementation of the policy in 2017 as set out in the annual report on remuneration.
António Horta-Osório
Value of package (£000)
Maximum
15%
9%
10%
21%
45%
£8,199
Mid-Performance
24%
14%
17%
10%
35%
£5,173
Minimum
43%
25%
32%
£2,831
£0
£1,000
£2,000
£3,000
£4,000
£5,000
£6,000
£7,000
£8,000
£9,000
Salary
Benefits and pension
Fixed share award
Group Performance Share
Group Ownership Share
George Culmer
Value of package (£000)
Maximum
17% 5%
11%
17%
50%
£4,552
Mid-Performance
27% 8%
17%
8%
40%
£2,871
Minimum
51% 15%
34% £1,496
£0
£500
£1,000
£1,500
£2,000
£2,500
£3,000
£3,500
£4,000
£4,500
£5,000
Salary
Benefits and pension
Fixed share award
Group Performance Share
Group Ownership Share
Juan Colombás
Value of package (£000)
Maximum
17% 5%
11%
17%
50%
£4,517
Mid-Performance
26% 9%
17%
8%
40%
£2,860
Minimum
50% 17%
33% £1,505
£0
£500
£1,000
£1,500
£2,000
£2,500
£3,000
£3,500
£4,000
£4,500
£5,000
Salary
Benefits and pension
Fixed share award
Group Performance Share
Group Ownership Share
Approach to recruitment and appointment to the Board
In determining appropriate remuneration arrangements on hiring a new Executive Director, the Committee will take into account all relevant
factors. This may include the experience and calibre of the individual, local market practice, the existing remuneration arrangements for other
executives and the business circumstances. The Committee will seek to ensure that arrangements are in the best interests of both the Group
and its shareholders and will seek not to pay more than is necessary.
The Committee may make awards on hiring an external candidate to ‘buy-out’ remuneration arrangements forfeited on leaving a previous
employer. In doing so the Committee will take account of relevant factors including any performance conditions attached to these awards, the
form in which they were granted (e.g. cash or shares), the currency of the awards, and the timeframe of awards. Any such award made will be made
in accordance with the PRA’s Rulebook and made on a comparable basis to those forfeited and subject to malus and clawback at the request of
the previous employer as required by the PRA rules.
The package will normally be aligned with the remuneration policy as described in the policy report. However, the Committee retains the
discretion to make appropriate remuneration decisions outside the standard policy to facilitate the recruitment of an individual of the calibre
required and in exceptional cases.
This may, for example, include the following circumstances:
– An interim recruit, appointed to fill an Executive Director role on a short-term basis.
– Exceptional circumstances requiring the Chairman to take on an executive function on a short-term basis.
– An Executive Director recruited at a time in the year when it would be inappropriate to provide a Group Performance Share or Group Ownership
Share award for that year, for example, where there may be insufficient time to assess performance. In this situation the Committee may feel it
appropriate to transfer the quantum in respect of the months employed during the year to the subsequent year so that reward is provided on
a fair basis.
– An Executive Director recruited from a business or location where benefits are provided that do not fall into the definition of ‘variable
remuneration forfeited’ but where the Committee considers it reasonable to buy-out these benefits.
– Transitional arrangements for overseas hires, which might include relocation expenses and accommodation.
The maximum level of variable remuneration (excluding buy-out awards) that may be awarded to new Executive Directors is equal to 200 per cent
of fixed remuneration, including any discount permitted by the European Banking Authority for Group Ownership Share awards. In making any
such remuneration decisions, the Committee will apply any appropriate performance measures in line with those applied to other
Executive Directors.
A full explanation will be provided of any buy-out award or discretionary payment.
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Service agreements
The service contracts of all current Executive Directors are terminable on 12 months’ notice from the Group and six months’ notice from the
individual. The Chairman also has a letter of appointment. His engagement may be terminated on six months’ notice by either the Group or him.
Lord Blackwell
António Horta-Osório
George Culmer
Juan Colombás
Notice to be given by the Group
Date of service agreement
6 months
12 months
12 months
12 months
31 March 2014
3 November 2010
1 March 2012
30 November 2010
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Under his contract (dated 3 November 2010), António Horta-Osório (GCE) is entitled to an amount equivalent to base salary and pension
allowance as a payment in lieu of notice if notice to terminate is given by the Group. If notice to terminate is given by the GCE, he is entitled
to an amount equivalent to base salary if the Group chooses to make a payment in lieu of notice. Such payments in lieu will be made in monthly
instalments subject to mitigation. He is also entitled to six months’ notice from the Group in the event of his long-term incapacity. As part of a
buy-out of a pension forfeited on joining from Santander, the GCE is also entitled to the provision of a conditional unfunded pension commitment,
subject to performance conditions as described further in the annual report on remuneration. In the event of long-term incapacity, if the GCE does
not perform his duties for a period of at least 26 weeks (in aggregate over a 12 month period), the Group shall be entitled to terminate his
employment by giving six months’ notice. In all other respects, the terms of the GCE’s contract in relation to payments for loss of office match
those set out below for new directors.
Under terms agreed when joining the Group, Juan Colombás is entitled to a conditional lump sum benefit, payable either (i) on reaching normal
retirement age unless he voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death, as described further in
the annual report on remuneration.
The service contracts and letters of appointment are available for inspection at the Company’s registered office.
Notice periods
Newly-appointed Executive Directors will be employed on contracts that include the following provisions:
– The individual will be required to give six months’ notice if they wish to leave and the Group will give 12 months’ notice other than for material
misconduct or neglect or other circumstances where the individual may be summarily dismissed by written notice. In exceptional circumstances,
new joiners will be offered a longer notice period (typically reducing to 12 months within two years of joining).
– In the event of long-term incapacity, if the Executive Director does not perform their duties for a period of at least 26 weeks (in aggregate over
a 12 month period), the Group shall be entitled to terminate the executive’s employment by giving three months’ notice.
– At any time after notice to terminate is given by either the Group or the Executive Director, the Group may require the Executive Director to take
leave for some or all of the notice period.
– At any time, at its absolute discretion, the Group may elect to terminate the individual’s employment by paying to the Executive Director, in lieu
of the notice period, an amount equivalent to base salary, subject to mitigation as described more fully in the termination payments section of
this report, below.
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Termination payments
It is the Group’s policy that where compensation on termination is due, it should be paid on a phased basis, mitigated in the event that alternative
employment is secured. Where it is appropriate to make a bonus payment (now known as Group Performance Share) to the individual, this should
relate to the period of actual service, rather than the full notice period. Any Group Performance Share payment will be determined on the basis of
performance as for all continuing employees and will remain subject to performance adjustment (malus and clawback) and deferral. Generally, on
termination of employment, Group Performance Share awards, long-term incentive awards (now known as Group Ownership Share) and other
rights to payments will lapse except where termination falls within one of the reasons set out below. In the event of redundancy, the individual may
receive a payment in line with statutory entitlements at that time. If an Executive Director is dismissed for gross misconduct, the Executive Director
will receive normal contractual entitlements until the date of termination and all deferred Group Performance Share and Group Ownership Share
awards will lapse.
Base salary
Fixed share award
Pension, benefits and
other fixed remuneration
Resignation
Redundancy or termination
by mutual agreement
In the case of resignation to take up
new employment, paid until date of
termination (including any period of
leave required by the Group). In the
case of resignation for other reasons,
base salary will be paid in monthly
instalments for the notice period
(or any balance of it), offset by
earnings from new employment
during this period.
Paid until date of termination
(including any period of leave
required by the Group). In respect
of the balance of any notice period,
base salary will be paid in monthly
instalments, offset by earnings from
new employment during this period.
Retirement/ill health, injury,
permanent disability/death
Paid until date of retirement/death.
For ill health, injury or permanent
disability which results in the loss of
employment, paid for the applicable
notice period (including any period
of leave required by the Group).
Change of control or merger N/A
Awards continue and are released at
the normal time and the number of
shares subject to the award in the
current year will be reduced to
reflect the date of termination.
Paid until date of termination
including any period of leave
required by the Group (subject to
individual benefit scheme rules).
Paid until date of termination
including any period of leave
required by the Group (subject to
individual benefit scheme rules).
Paid until date of death/ retirement
(subject to individual benefit scheme
rules). For ill health, injury, permanent
disability, paid for the notice period
including any period of leave
required by the Group (subject to
individual benefit scheme rules).
N/A
Awards will normally continue and
be released at the normal time and
the number of shares subject to
the award in the current year will be
reduced to reflect the date of
termination unless, in the case of
mutual agreement, the Committee
determines that exceptional
circumstances apply in which case
shares may be released on
termination.
Awards will normally continue and be
released at the normal time and the
number of shares subject to the
award in the current year will be
reduced to reflect the date of
termination except for (i) death
where shares are released on the
date of termination; or (ii) in the
case of permanent disability the
Committee determines that
exceptional circumstances apply in
which case shares may be released
on the date of termination.
Awards will be payable on the date
of the Change of Control and the
number of shares subject to the
award will be reduced to reflect the
shorter accrual period. The
Committee may decide that vested
awards will be exchanged for (and
future awards made over) shares in
the acquiring company or other
relevant company.
Other reason where the
Committee determines that
the executive should be
treated as a good leaver
Paid until date of termination
(including any period of leave
required by the Group). In respect
of the balance of any notice period,
base salary will be paid in monthly
instalments, offset by earnings from
new employment during this period.
Awards continue and are released at
the normal time and the number of
shares subject to the award in the
current year will be reduced to reflect
the date of termination.
Paid until date of termination
including any period of leave
required by the Group (subject to
individual benefit scheme rules).
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Annual bonus (now known as
Group Performance Share)1
Long-term incentive (now known as
Group Ownership Share)2
Chairman and
Non-Executive Director fees3
Resignation
Redundancy or termination
by mutual agreement
Retirement/ill health, injury,
permanent disability
Death
Change of control
or merger2
Other reason where the
Committee determines that
the executive should be
treated as a good leaver
Awards lapse on date of leaving (or on
notice of leaving) unless the
Committee determines otherwise in
exceptional circumstances that they
will vest on the original vesting date (or
exceptionally on the date of leaving).
Where award is to vest it will be subject
to the performance conditions and
time pro-rating (for months worked in
performance period). Malus and
clawback will apply.
Awards vest on the original vesting
date (or exceptionally on the date of
leaving). Vesting is subject to the
performance conditions and time
pro-rating (for months worked in
performance period). Malus and
clawback will apply.
Awards vest on the original vesting
date (or exceptionally on the date of
leaving). Vesting is subject to the
performance conditions and time
pro-rating (for months worked in
performance period). Malus and
clawback will apply.
Awards vest on death subject to the
performance conditions and time
pro-rating (for months worked in
performance period unless
determined otherwise). Malus
and clawback will apply.
Awards vest on date of event.
Vesting is subject to the performance
conditions and time pro-rating (for
months worked in performance
period unless determined otherwise).
Malus and clawback will normally
apply. Instead of vesting, awards may
be exchanged for equivalent awards
over the shares of the acquiring
company or another company.
Awards vest on the original vesting
date (or exceptionally on the date
of leaving). Vesting is subject to the
performance conditions and time
pro-rating (for months worked in
performance period). Malus and
clawback will apply.
Unvested deferred Group
Performance Share awards are
forfeited and in-year Group
Performance Share awards are
accrued until the date of termination
(or the commencement of garden
leave if earlier) unless the Committee
determines otherwise in exceptional
circumstances.
For cases of redundancy, unvested
deferred Group Performance Share
awards are retained and in-year
Group Performance Share awards are
accrued until the date of termination
(or the commencement of garden
leave if earlier). Such awards would
be subject to deferral, malus and
clawback. For termination by mutual
agreement, the same approach as
for resignation would apply.
Unvested deferred Group
Performance Share awards are
retained and in-year Group
Performance Share awards are accrued
until the date of termination (or the
commencement of garden leave if
earlier). Such awards would be subject
to deferral, malus and clawback.
Unvested deferred Group
Performance Share awards are
retained and in-year Group
Performance Share awards are
accrued until the date of termination.
Deferred Group Performance Share
awards vest on death in cash, unless
the Committee determines otherwise.
In-year Group Performance Share
accrued up until date of change of
control or merger (current year).
Where there is a Corporate Event,
deferred Group Performance Share
awards vest to the extent and timing
determined by the Committee in its
absolute discretion.
Unvested deferred Group
Performance Share awards are
retained and in-year Group
Performance Share awards are
accrued until the date of termination
(or the commencement of garden
leave if earlier). Deferred Group
Performance Share awards vest in
line with normal timeframes and are
subject to malus and clawback. The
Committee may allow awards to vest
early if it considers it appropriate.
Paid until date of leaving Board.
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Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
1 If any Group Performance Share is to be paid to the Executive Director for the current year, this will be determined on the basis of performance for the period of actual service, rather than the
full notice period (and so excluding any period of leave required by the Group).
2 Reference to change of control or merger includes a compromise or arrangement under section 899 of the Companies Act 2006 or equivalent. Fixed share awards may also be released/
exchanged in the event of a resolution for the voluntary winding up of the Company; a demerger, delisting, distribution (other than an ordinary dividend) or other transaction, which, in the
opinion of the Committee, might affect the current or future value of any award; or a reverse takeover, merger by way of a dual listed company or other significant corporate event, as
determined by the Committee. In the event of a demerger, special dividend or other transaction which would in the Committee’s opinion affect the value of awards, the Committee may allow
a long-term incentive award to vest to the extent relevant performance conditions are met to that date and if the Committee so determined, on a time pro-rated basis (unless determined
otherwise) to reflect the number of months of the performance period worked.
3 The Chairman is entitled to six months’ notice.
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On termination, the Executive Director will be entitled to payment for any accrued but untaken holiday calculated by reference to base salary
and fixed share award.
The cost of legal, tax or other advice incurred by an Executive Director in connection with the termination of their employment and/or the cost of
support in seeking alternative employment may be met up to a maximum of £100,000. Additional payments may be made where required to settle
legal disputes, or as consideration for new or amended post-employment restrictions.
Where an Executive Director is in receipt of expatriate or relocation expenses at the time of termination (as at the date of the AGM no current
Executive Directors are in receipt of such expenses), the cost of actual expenses incurred may continue to be reimbursed for up to 12 months after
termination or, at the Group’s discretion, a one-off payment may be made to cover the costs of premature cancellation. The cost of repatriation
may also be covered.
Remuneration policy table for Chairman and Non-Executive Directors
The table below sets out the remuneration policy for Non-Executive Directors (NEDs).
Chairman and Non-Executive Director fees
Purpose and link to strategy
To provide an appropriate reward to attract and retain a high-calibre individual with the relevant skills, knowledge
and experience.
Operation
The Committee is responsible for evaluating and making recommendations to the Board with regards to the
Chairman’s fees. The Chairman does not participate in these discussions.
The GCE and the Chairman are responsible for evaluating and making recommendations to the Board in relation
to the fees of the NEDs.
When determining and reviewing fee and benefit levels, the Committee ensures that decisions are made within
the following parameters:
– The individual’s skills and experience.
– An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective
sizing methodologies.
– Fees and benefits for comparable roles in comparable publicly listed financial services groups of a similar size.
The Chairman receives an all-inclusive fee, which is reviewed periodically plus benefits including life insurance, car
allowance, medical insurance and transportation. The Committee retains the right to provide additional benefits
depending on individual circumstances.
NEDs are paid a basic fee plus additional fees for the chairmanship/membership of committees and for
membership of Group companies/boards/non-board level committees.
Additional fees are also paid to the senior independent director and to the deputy chairman to reflect additional
responsibilities.
Any increases normally take effect from 1 January of a given year.
The Chairman and the NEDs are not entitled to receive any payment for loss of office (other than in the case of the
Chairman’s fees for the six month notice period) and are not entitled to participate in the Group’s bonus, share
plan or pension arrangements.
NEDs are reimbursed for expenses incurred in the course of their duties, such as travel and accommodation
expenses, on a grossed-up basis (where applicable).
Maximum potential
The Committee will make no increase in fees or benefits currently provided which it believes is inconsistent
with the parameters above.
Performance metrics
N/A
Changes
No change to policy.
Letters of appointment
The Non-Executive Directors all have letters of appointment and are appointed for an initial term of three years after which their appointment may
continue subject to an annual review. Non-Executive Directors may have their appointment terminated, in accordance with statute and the articles
of association, at any time with immediate effect and without compensation.
Date of letter of appointment
Alan Dickinson
26 June 2014
Deborah McWhinney
26 November 2015
Anita Frew
Simon Henry
Dyfrig John
Nick Luff
17 November 2010
1 May 2014
28 October 2013
25 February 2013
Nick Prettejohn
Stuart Sinclair
Anthony Watson
Sara Weller
1 April 2014
26 November 2015
23 February 2009
31 January 2012
All Directors are subject to annual re-election by shareholders.
The service contracts and letters of appointments are available for inspection at the Company’s registered office.
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Annual Report and Accounts 2016
ANNUAL REPORT ON REMUNERATION
Implementation of the policy in 2017
It is proposed to operate the policy in the following way in 2017:
Base salary
The Group has applied a 2 per cent overall salary budget increase for the general population differentiated by performance and market position
(with increases of around 4 per cent for strongly performing colleagues). Salary increases of 2 per cent are proposed for the Chief Financial Officer
(CFO) and the Chief Risk Officer (CRO).
As announced last year, for the first time since 2011 a salary increase was applied in 2016 for the Group Chief Executive to begin to adjust his base
salary to the previously disclosed reference salary of £1,220,000 which was set relative to the market when he joined in 2011. After discussing the
proposed increase with shareholders, the Remuneration Committee decided to stage the adjustment over two years, with an initial increase to
£1,125,000 effective from 1 January 2016 and the second stage increase to £1,220,000 due to be implemented with effect from 1 January 2017. The
form of the increase will follow that for 2016, with 2 per cent delivered in cash (in line with other colleagues) and the remainder in shares, held until
the government has sold its shareholding in the Group.
Salaries will therefore be as follows, effective dates shown below:
GCE: £1,220,000 (1 January 2017)
CFO: £764,070 (1 April 2017)
CRO: £753,458 (1 January 2017)
Due to the GCE’s base salary being increased in line with his reference salary (effective from 1 January 2017), the concept of a separate reference
salary will be removed. Reference salary will therefore no longer be used when calculating certain elements of long-term remuneration and the
pension allowance. Instead, these elements will be calculated with reference to the GCE’s base salary.
Fixed share award
The levels of the 2017 award are unchanged from 2016 and are as follows:
GCE: £900,000
CFO: £504,000
CRO: £497,000
Shares will be released in equal tranches over a five year period.
Pension
Executive Directors are entitled to a pension allowance which they may choose to take as cash in lieu of pension contributions.
The level of allowances has not been increased for 2017.
GCE: 50 per cent of base salary less flexible benefits allowance
CFO: 25 per cent of base salary
CRO: 25 per cent of base salary
Benefits
For 2017, the benefits provided to Executive Directors include a car allowance, transportation, private medical insurance, life assurance and other
benefits selected through the flexible benefits allowance which is currently capped at 4 per cent of base salary (unchanged from 2016).
All-employee plans
Executive Directors are eligible to participate in the Group’s Sharesave and Sharematch plans on the same basis as other employees.
Group Performance Share plan
Opportunity
Deferral
The maximum Group Performance Share opportunity is 140 per cent of base salary for the GCE and 100 per cent
of base salary for other Executive Directors (unchanged from 2016). All assessments of performance are ultimately
subject to the Committee’s judgement, but no award will be made if threshold performance for the financial
measure is not met and/or the individual is rated ‘Developing performer’ or below. The threshold is set at
20 per cent below the Group’s underlying profit target.
For the 2017 performance year, the Group Performance Share opportunity will be awarded in a combination of cash
(up to 50 per cent) and shares. 40 per cent will be released in the first year following award, 40 per cent will be released
in the second year and the remaining 20 per cent will be released in the third year. Any shares released are subject to
a further holding period in line with regulatory requirements and market practice.
Performance measures
and targets
For 2017, the Group Performance Share will be based on a percentage of the Group’s underlying profit, adjusted by
a strategic multiplier of up to 130 per cent based on the Group’s Balanced Scorecard (BSC) metrics and risk matters.
In 2017, at least 75 per cent of performance is weighted towards a financial measure.
Individual awards are adjusted to reflect a balanced scorecard approach with clearly identified performance metrics
used to assess Group performance in key areas. Stretching objectives for each division and function are approved
around the start of the performance year. The objectives are aligned to the Group’s strategy and split across five
categories: Customer, People, Control environment, Building the business and Finance.
Each measure in the Group and divisional/functional BSC is assigned targets aligned to a five-point rating scale.
BSC ratings are based on a scale ranging from ‘Under’ (at the lowest level), through ‘Developing’, ‘Good’, ‘Strong’
and up to ‘Top’, which is the highest rating. Each of these ratings may be further differentiated by the addition of
‘minus’ or ‘plus’.
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The Committee considers the targets that apply to these measures to be commercially sensitive but will provide
information on the level of payout relative to the performance achieved in next year’s annual report on remuneration.
The Committee applies its judgement to determine the payout level commensurate with Group, business and/or
individual performance.
Performance adjustment is determined by the Remuneration Committee and/or Board Risk Committee and may
result in a reduction of up to 100 per cent of the bonus opportunity for the relevant period. It can be applied on
a collective or individual basis. When considering collective adjustment, the Senior Independent Performance
Adjustment and Conduct Committee (SIPACC) submits a report to the Remuneration Committee and Board Risk
Committee regarding any adjustments required to BSCs or the overall bonus outcome to reflect in-year or prior
year risk matters.
The application of malus will generally be considered when:
– there is reasonable evidence of employee misbehaviour or material error or that they participated in conduct
which resulted in losses for the Group or failed to meet appropriate standards of fitness and propriety;
– there is material failure of risk management at a Group, business area, division and/or business unit level;
– the Committee determines that the financial results for a given year do not support the level of variable
remuneration awarded; and/or
– any other circumstances where the Committee consider adjustments should be made.
Judgement on individual performance adjustment is informed by taking into account the severity of the issue, the
individual’s proximity to the issue and the individual’s behaviour in relation to the issue. Individual adjustment may
be applied through adjustments to BSC assessments and/or through reducing the bonus outcome.
Awards are subject to clawback for a period of up to seven years after the date of award which may be extended
to 10 years where there is an ongoing internal or regulatory investigation.
The application of clawback will generally be considered when:
– there is reasonable evidence of employee misbehaviour or material error; or
– there is material failure of risk management at a Group, business area, division and/or business unit level.
Group Ownership Share plan
Opportunity
Performance measures
and targets
The maximum Group Ownership Share award for Executive Directors is 300 per cent of salary (unchanged from 2016).
Awards in 2017 are being made as follows:
GCE: 300 per cent of reference salary
CFO: 275 per cent of base salary
CRO: 275 per cent of base salary
2017 awards will be subject to a three-year performance period with vesting between the third and seventh
anniversary of award, on a pro-rata basis. Any shares released are subject to a further holding period in line with
regulatory requirements and market practice. During 2016 and early 2017, the Committee consulted widely with
shareholders on appropriate performance measures, particularly the link between performance measures and the
Group’s strategic priorities.
The awards made in 2017 will vest based on the Group’s performance against the following key financial
and strategic measures:
– Absolute Total Shareholder Return (30 per cent)
– Cost:income ratio (10 per cent)
The following table provides a breakdown of these measures and the targets applicable.
The Committee believes that these measures appropriately capture risk management and long-term sustainable
growth, aligning management and shareholder interests. Each of the measures aligns to the reward principles
and, through that, the Group’s strategic priorities.
Awards are subject to malus and clawback for a period of up to seven years after the date of award which may be
extended to 10 years where there is an ongoing internal or regulatory investigation. The Committee may consider
the application of malus and clawback as outlined in the Group Performance Share plan section above.
– Economic profit (25 per cent)
– Strategic measures (35 per cent))
Strategic priorities
Measure
Basis of payout range
Metric
Weighting
Creating the best customer
experience
FCA total reportable complaints
per 1,000 accounts1 and
Set relative to 2019 targets
See note 1 below
10%
Financial Ombudsman Service
(FOS) uphold rate (excl PPI)
Average rates over 2019
Threshold: =<29%
Maximum: =<25%
Net promoter score
Major Group average ranking over
2019
Threshold: 3rd
Maximum: 1st
Digital active customer base
Set relative to 2019 targets
Becoming simpler and more
efficient
Economic profit2
Set relative to 2019 targets
Cost:income ratio
Set relative to 2019 targets
Threshold: 14.3m
Maximum: 14.9m
Threshold: £3,074m
Maximum: £3,769m
Threshold: 47.2%
Maximum: 45.7%
Delivering sustainable growth Absolute Total Shareholder
Building the best team
Return (TSR)
Employee
engagement index
Growth in share price including
dividends over three-year period
Threshold: 8%
Maximum: 16%
Set relative to 2019 targets
Threshold: 67%
Maximum: 73%
10%
7.5%
25%
10%
30%
7.5%
1 The FCA changed the approach to complaint classification and reporting from 30 June 2016. Updated complaint data is not yet available on the new basis, but will be available by the end
of the first quarter at which point, or shortly thereafter, the metric will be disclosed.
2 A measure of profit taking into account Expected Losses, tax and a charge for equity utilisation.
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Chairman and Non-Executive Director fees in 2017
The annual fee for the Chairman was increased by 2 per cent to £728,280, in line with the overall salary budget for the general colleague
population.
The annual Non-Executive Director fees were reviewed and as result of this review some of the fees were increased, as follows, to reflect market
practice in financial services groups of a similar size. These changes took effect from 1 January 2017.
Basic Non-Executive Director fee
Deputy Chairman
Senior Independent Director
Audit Committee Chairmanship
Remuneration Committee Chairmanship
Board Risk Committee Chairmanship
Responsible Business Committee Chairmanship
Audit Committee membership
Remuneration Committee membership
Board Risk Committee membership
Responsible Business Committee members
Nomination and Governance Committee membership
2017
2016
£76,500
£100,000
£60,000
£70,000
£70,000
£70,000
£40,000
£32,000
£32,000
£32,000
£15,0001
£15,0002
£75,000
£100,000
£60,000
£60,000
£60,000
£60,000
£40,0004
£30,000
£30,000
£30,000
£10,0001
£5,0003
1 New members only.
2 Including payments to Chairmen of other Committees who are members.
3 Where individual was not Chairman of another Committee.
4 During 2016, the fee for Chairmanship of the Responsible Business Committee increased from £30,000 to £40,000.
Non-Executive Directors may receive more than one of the above fees.
Remuneration outcome for 2016
Executive directors (audited)
The following table summarises the total remuneration delivered during 2016 in relation to service as an Executive Director.
£000
Base salary
Fixed share award
Benefits
Other remuneration2
Annual bonus
Long-term incentive3
Pension allowance4
Total remuneration
Less: performance adjustment5
Total remuneration less
performance adjustment
António Horta-Osório1
George Culmer
Juan Colombás
Totals
2016
1,125
900
143
1
1,220
1,584
568
5,541
–
2015
1,061
900
140
2
850
5,183
568
8,704
(234)
2016
745
504
42
1
574
857
186
2,909
2015
731
504
41
2
462
2,804
182
4,726
–
(65)
2016
739
497
70
1
578
763
185
2,833
–
2015
724
497
73
2
455
2,496
181
2016
2,609
1,901
255
3
2,372
3,204
939
2015
2,516
1,901
254
6
1,767
10,483
931
4,428
11,283
17,858
(3)
–
(302)
5,541
8,470
2,909
4,661
2,833
4,425
11,283
17,556
1 2016 base salary increase: 6 per cent (2 per cent in cash and the remainder in shares, held until the government has sold its shareholding in the Group).
2 Other remuneration payments comprise income from all employee share plans, which arises through employer matching or discounting of employee purchases.
3 The LTIP vesting and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 15 February 2017. The average share price between
1 October 2016 and 31 December 2016 (58.30 pence) has been used to indicate the value. The shares were awarded in 2014 based on a share price of 78.878 pence. LTIP and dividend
equivalent figures for 2015 have been adjusted for the share price on the date of vesting (72.75 pence).
4 Following changes to the amount of tax relief available on pension contributions in each year, Executive Directors may elect to receive some or all of their allowances as cash. The breakdown
of payments made in cash and contributions into the pension scheme are shown below.
5 In June 2015, the Group reached a settlement with the Financial Conduct Authority (FCA) with regard to aspects of its Payment Protection Insurance (PPI) complaint handling process during
the period March 2012 to May 2013. As a result, the Committee decided to make performance adjustments in respect of bonuses awarded in 2012 and 2013 to the Group Executive
Committee and some other senior executives given their ultimate oversight of the PPI operations. The number of shares adjusted was 409,039 for the Group Chief Executive (GCE), 109,464 for
the Chief Financial Officer (CFO) and 376,055 for the Chief Risk Officer (CRO) (pro-rated in the above table to reflect his appointment to Executive Director on 29 November 2013). The share
price used for the valuation was the market price for a share in the Group at the award dates, 49.29 pence and 78.878 pence, respectively.
Pension and benefits (audited)
Pension/Benefit £
Employer contribution to pension scheme
Cash allowance in lieu of pension contribution
Car or car allowance
Flexible benefits payments
Private medical insurance
Tax preparation
Transportation
António
Horta-Osório
9,542
George
Culmer
4,492
Juan
Colombás
12,068
558,018
181,862
172,711
12,000
42,440
30,950
24,000
33,760
12,183
29,376
760
–
–
12,000
28,968
14,068
11,940
2,900
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Defined benefit pension arrangements (audited)
The GCE has a conditional unfunded pension commitment, subject to share price performance. This was a partial buy-out of a pension forfeited
on joining from Santander Group. It is an Employer-Financed Retirement Benefits Scheme (EFRBS). The EFRBS provides benefits on a defined
benefit basis at a normal retirement age of 65. The EFRBS applies for a maximum of six years following the commencement of employment
and the maximum allowance over that period is 26.5 per cent of the higher of the GCE’s base salary or reference salary in the 12 months before
retirement or leaving, subject to performance conditions. No additional benefit is due in the event of early retirement. The rate of pension accrual
in each year depends on share price conditions being met. Accrual at 31 December 2016 is a pension of 6 per cent of the reference salary or
£73,200. No new pension entitlement was accrued in 2016.
There are no other Executive Directors with defined benefit pension entitlements.
Under terms agreed when joining the Group, the CRO is entitled to a conditional lump sum benefit of £718,996 either (i) on reaching normal
retirement age unless the CRO voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death.
2014 LTIP vesting (audited)
António Horta-Osório
George Culmer
Juan Colombás
Number
of shares
awarded
4,640,077
2,510,205
2,234,780
Vesting %1
55%
55%
55%
Number
of shares
vesting
Indicative
share price
at vesting
Indicative
value of award
at vesting
Indicative
dividend
equivalent
Indicative
total value
2,552,042
58.30 pence
£1,487,840
£95,940
£1,583,780
1,380,612
58.30 pence
1,229,129
58.30 pence
£804,897
£716,582
£51,902
£46,207
£856,799
£762,789
1 For details of the performance outcome please refer to section ‘Long-term awards made in March 2014 vesting for the period ended on 31 December 2016‘.
Annual bonus (audited)
The individual bonus awards for Executive Directors are determined in the same way as for colleagues across the Group, with outcomes based
on the individual on-target award adjusted for the Group annual bonus outcome and for individual performance outcomes.
The Group total bonus outcome is the sum of the divisional and functional bonus outcomes. Performance outcomes are determined by adjusting
the Group’s target bonus outcome according to Group underlying profit and Balanced Scorecard performance. These are each used as a modifier
to increase or decrease the target bonus outcome in the range of 0 per cent – 145 per cent, subject to an overall funding limit of 10 per cent of
pre bonus underlying profit. A collective performance adjustment is then applied.
The individual on-target award is then adjusted for the Group annual bonus outcome and for individual performance outcomes. Awards are
approved by the Committee, which has discretion to adjust outcomes for any reason.
The approach to determining annual bonus awards is summarised below:
Group target bonus outcome, modified subject to
1. Group underlying profit modifier (50%)
2. Balanced scorecard performance (50%)
Modify target bonus outcome from 0% – 145%
Bonus outcome for each division and function
Sum of divisional and functional bonus outcomes
Group's modified total bonus outcome
3. Collective performance adjustment
Group total bonus outcome
Subject to a limit of 10% of pre bonus underlying profit
Individual performance
outcomes
Individual bonus awards
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Annual Report and Accounts 2016
Annual bonus outcome for 2016 (audited)
The target bonus outcome for 2016 (£397.1 million) was adjusted for:
(1) Group underlying profit performance
A target of £7,572 million was approved by the Board. In line with regulatory requirements, the underlying profit of £7,867 million has been adjusted
by the incremental movement in Prudential Valuation Adjustment (PVA) from year-end 2015 to year-end 2016. The adjustment of £126 million
reduces the underlying profit figure to £7,741 million, resulting in a modifier of 1.22.
UNDERLYING PROFIT
Below threshold (0%)
|
Threshold (55%)
|
On-target (100%)
|
<£6,525m
£6,525m
£7,572m
Maximum (145%)
|
£8,113m
Actual £7,741m
(adjusted for
PVA)
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BALANCED SCORECARD
Under (0%)
|
Developing (55%)
|
Good (100%)
|
Strong (125%)
|
Top (145%)
|
A balanced scorecard approach with clearly identified performance descriptors is used to assess Group performance in key areas. Stretching
objectives for each division and function were approved by the Committee around the start of the performance year. The objectives are aligned
to the Group’s strategy and split across five categories: customer, people, control environment, building the business and finance.
Approach to the Balanced Scorecard (BSC)
Targets set
Assigned to the five-point rating scale
Each measure in the Group and divisional/functional BSC is assigned targets aligned
to a five-point rating scale.
Ratings determined by comparison
of results with targets
Overall Group rating was Strong plus
BSC ratings are based on a scale ranging from ‘Under’ (at the lowest level), through ‘Developing’,
‘Good’, ‘Strong’ and up to ‘Top’, which is the highest rating. Each of these ratings may be further
differentiated by the addition of ‘minus’ or ‘plus’. The Committee reviewed performance in depth
to determine ratings for the Group and each division and function, including consideration of risk
matters arising in 2016. Risk adjustments were approved by the Board Risk Committee.
Modifier applied based
upon rating
Average modifier was 1.26
The ratings for each division and function are communicated to all colleagues within the business area
to ensure bonus outcomes are transparent and understood. The ratings are considered commercially
sensitive; however, as an indication of performance, the overall rating for the Group (as determined by
the Committee) was Strong plus and the average of the divisional/functional modifiers applied was 1.26.
Key performance factors considered by the Committee in arriving at the performance assessment for the Group included:
Strong financial performance Underlying profit was £7.9 billion and statutory profit has more than doubled to £4.2 billion. Despite an additional
PPI provision and the challenging macroeconomic environment, the Group remains strongly capital generative
with a pro forma CET1 ratio of 13.8 per cent after increased dividend.
Growth in the key customer
segments
The Group continued to make good progress in growing market share in areas where it is under represented,
growing lending to SME clients and in consumer finance.
Lower risk bank
Effective cost leadership
Continued efforts to de-risk the bank, combined with sustained improvements in core prudential risks (capital,
credit, funding) and a customer centric culture are delivering a lower risk bank. From a credit perspective, asset
quality remained strong with no deterioration in the underlying portfolio. Prudent risk appetite and robust risk
management framework reflected in lower impaired loans and an improved impaired loan ratio.
Cost management remains a strategic priority and the acceleration of cost initiatives in response to the lower
interest rate environment has enabled the Group to reduce operating costs by 3 per cent. The market leading
cost:income ratio also improved to 48.7 per cent.
Increased dividends
Increased ordinary dividend of 2.55 pence per share in 2016 (2015: 2.25 pence), in line with the Group’s progressive
and sustainable dividend policy. Additional special dividend of 0.5 pence.
PRA stress test threshold
exceeded
The resilience of the Group’s capital position was demonstrated again in 2016 when it comfortably exceeded the
threshold for the latest PRA stress test and performed well compared to peers.
Customer focus in the
business
Culture and reputation
Development and launch of the Customer Journey framework and strategy which will be the basis to manage the
Group and its control environment in a customer centric way. Further reductions in the level of customer complaints.
Net promotor score continued to improve and is now nearly 50 per cent higher than at the end of 2011.
Accelerated progress towards the desired culture, developing new Management Information, further embedding
the Group Customer First Committee and the work to establish the Customer Journey strategy.
The Group’s reputation with external stakeholders.
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Governance
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(3) Collective performance adjustment
Consideration was given to items not factored into the Group underlying profit or divisional or functional Balanced Scorecards. These included
the provisions for legacy conduct-related matters relevant to the year. As a result of these items, the Committee approved an overall collective
adjustment of £91.2 million or approximately 19 per cent, resulting in a final bonus outcome of £392.9 million as shown in the table below.
The bonus outcome of £392.9 million is significantly below the overall funding limit of 10 per cent of pre bonus underlying profit.
Total bonus outcome
£397.1m
£36.3m
(1.22)
£392.9m
£50.7m
(1.26)
£484.1m
£91.2m
(19%)
Adjusted based
on 50% of each
Target
Group underlying profit
modifier
Divisional/functional
performance modifier
(weighted average of all
divisions/functions)
Modified total outcome
Collective performance
adjustment
Total bonus
outcome
Individual outcomes for Executive Directors (audited)
The individual bonus awards for Executive Directors are determined in the same way as for colleagues across the Group,
with outcomes based on annual bonus outcome, weighted by:
1.
Individual performance
2. On-target award
Awards are approved by the Committee, which has discretion to adjust outcomes for any reason.
António Horta-Osório
The Group Chief Executive’s (GCE) individual performance assessment for 2016, as confirmed by the Committee, reflected the Group’s
performance as outlined on page 103 and a number of other considerations including:
Strong financial performance Improvement in market-leading cost:income ratio delivered, with statutory profit more than doubled
and key balance sheet metrics strengthened.
Low risk business model
maintained
Increased dividends
Strong employee
engagement
Creating the best
customer experience
Continued improvement in credit quality of lending portfolio, strong performance in 2016 PRA stress test.
Increase in ordinary dividend to 2.55 pence per share (2015: 2.25 pence) in line with the Group’s progressive
and sustainable dividend policy, with additional special dividend of 0.5 pence per share.
Employee engagement survey results strengthened despite uncertain economic outlook and announcement
of further role reductions – scores significantly higher than UK benchmark and close to UK high-performing
benchmark.
Key Customer Journeys across retail and commercial banking and insurance significantly enhanced, leading
to improved customer feedback and trust scores as well as complaints reducing from their low levels relative
to the sector.
Continued growth in
digital channels
With 12.5 million online and 8 million mobile banking customers, the Group operates the UK’s largest digital bank,
and now meets over 60 per cent of customers’ banking needs digitally.
Supporting the UK economy
and helping Britain prosper
Remaining the largest lender to first-time buyers and maintaining the recent record of above-market growth
in lending to SMEs. Commitments to support communities and charities also exceeded.
Leading the Group’s strategic
development
Lead Board and executive team in highly impactful exercise to review the impact of digital technology and market
change on the ‘Bank of the Future’, enabling the Group to develop critically important plans for the evolution of its
business model and technology base.
UKFI reduction in
government shareholding
Continued successful delivery of the Group’s strategy enabling a significant reduction in the government
shareholding to less than 5 per cent. UKFI no longer the Group’s largest shareholder, with £18.5 billion now
having been returned to the UK taxpayer at a profit.
Based on a full assessment of performance, the Committee agreed an individual rating for 2016 of Strong plus for the GCE, an improvement
from Strong in 2015.
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Annual Report and Accounts 2016
Expected outcomes are based on individual performance before taking into account a modifier based on underlying profit
and the Group BSC, as follows:
Rating
Expected outcome as % of salary
Under
Developing
0%
0%
Good
42%
Strong
91%
Top
140%
Following the Committee’s assessment of performance against the underlying profit target and Group BSC objectives, and taking into account the
collective performance adjustment of 19 per cent and the improvement to the individual rating of Strong plus, the Committee determined a 2016
bonus award for the GCE of £1,219,537 (108 per cent of salary and 77 per cent of maximum).
George Culmer
The Chief Financial Officer’s (CFO) personal performance assessment for 2016, as confirmed by the Committee, reflected a number
of considerations including:
Strong financial performance Strong financial performance delivered in challenging low interest rate and volatile market environment –
key liquidity, funding and capital metrics either strengthened or maintained.
Cost leadership
Continued improvement in the Group’s market-leading cost:income ratio to 48.7 per cent (2015: 49.3 per cent) –
efficiency programme successfully accelerated in response to customers’ changing preferences.
Strong capital generation
Group’s pro forma CET1 capital ratio of 13.8 per cent comfortably above regulatory requirements after increased
ordinary dividend of 2.55 pence per share and an additional special dividend of 0.5 pence per share.
Resilient business model
‘Stressed’ CET1 capital and leverage ratios of 10.3 per cent and 4.3 per cent from 2016 regulatory (PRA) stress test
comfortably above regulatory requirements and strongest across major UK banking peers.
Successful outcome of
ECN court case
Well managed external
stakeholder relations
Successful outcome of ECN (‘enhanced capital notes’) court case – enabling the Group to improve the efficiency
of its balance sheet and reduce funding costs.
Well-managed relationships with key external stakeholders, e.g. debt and equity investors, regulators, and credit
rating agencies.
Based on a full assessment of performance, the Committee agreed an individual rating for 2016 of Strong plus for the CFO. Expected outcomes
are based on individual performance before taking into account a modifier based on underlying profit and the Finance division’s BSC, as follows:
Rating
Expected outcome as % of salary
Under
Developing
0%
0%
Good
30%
Strong
65%
Top
100%
Following the Committee’s assessment of performance against the underlying profit target and the Finance division’s BSC objectives, and taking
into account the collective performance adjustment of 19 per cent and the individual rating of Strong plus, the Committee determined a 2016
bonus award for the CFO of £574,326 (77 per cent of maximum).
Juan Colombás
The Chief Risk Officer’s (CRO) personal performance assessment for 2016, as confirmed by the Committee, reflected a number
of considerations including:
Strong risk management
framework
The Group remains comfortably within risk appetite set by the Board, with strengthened processes and controls,
aligning to the Group’s objective of being a low risk bank.
Strengthened management
of operational risk
Management of operational risk strengthened through the development of a robust control framework for key
risk categories.
Credit quality
Prudent lending criteria reflected in credit quality across all lending portfolios and reduced gross impairment
charges.
Low risk culture and
effective controls
Low risk culture and effective controls reflected in very low level of financial losses following EU Referendum result
and other periods of market volatility.
Effective optimisation of
balance sheet
Effective optimisation of balance sheet leading to further reductions in risk-weighted assets (RWAs) – in turn
supporting capital generation.
Low risk model recognised
by the market
Group’s low risk model recognised by the market; tight credit default swap (CDS) spreads and resilient credit
ratings confer tangible funding cost benefits to the Group.
Based on a full assessment of performance, the Committee agreed an individual rating for 2016 of Strong plus for the CRO.
Expected outcomes are based on individual performance, before taking into account a modifier based on underlying profit and the Risk division’s
BSC, as follows:
Rating
Expected outcome as % of salary
Under
Developing
0%
0%
Good
30%
Strong
65%
Top
100%
Following the Committee’s assessment of performance against the underlying profit target and the Risk division’s BSC objectives, and taking into
account the collective performance adjustment of 19 per cent and the individual rating of Strong plus, the Committee determined a 2016 bonus
award for the CRO of £577,676 (78 per cent of maximum).
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Deferral
The 2016 annual bonus for all Executive Directors is awarded in a combination of cash and shares. 40 per cent of the annual bonus will be released
in 2017 (£2,000 cash in March, the remainder in shares), 40 per cent will be released in 2018 and the remaining 20 per cent will be released in 2019,
subject to remaining in the Group’s employment. Any shares released are subject to a further holding period in line with regulatory requirements.
Annual Bonus
(For the 2016
performance period)
Performance
period
20%
(10% held for
6 months)
40%
(20% held for
6 months)
40%
(20% held for
6 months)
2016
2017
2018
2019
The Group’s malus and clawback provisions cover all material risk takers, in line with regulatory requirements. Vested variable remuneration can be
recovered from employees for a period of up to seven years after the date of award which may be extended to 10 years where there is an ongoing
internal or regulatory investigation. The Committee reserves the right to exercise its discretion in reducing any payment that otherwise would have
been earned, if it deems appropriate as a result of an event occurring before vesting.
Long-term awards made in March 2014 vesting for the period ended on 31 December 2016 (audited)
Awards (in the form of conditional rights to free shares) in 2014 were made over shares with a value of 300 per cent of reference salary for the GCE
and 275 per cent of salary for the CFO and CRO.
The Group has delivered a good financial performance over the performance period of the 2014 Long-Term Incentive Plan (LTIP) awards,
continuing to transform the business for the benefit of our shareholders. Performance was measured over three financial years ended
31 December 2016. The performance conditions attached to these awards and actual performance are set out in the table below. At the end of the
performance period, it has been assessed that awards will vest at 55 per cent of maximum. Executive Directors are required to retain any shares
vesting for a further two years post vesting.
Weighting Measure
30%
Economic profit
30%
Absolute TSR
10%
Cost:income ratio1
10%
Customer satisfaction2
Threshold
£2,154m
8% p.a
48.9%
0.54
10%
Net promotor score
3rd place
5%
SME lending
5%
Share of first-time buyer market
LTIP (% maximum) vesting
14%
20%
Performance achievement versus targets
Vesting as %
maximum
(for that element)
Maximum
£3,231m
Actual: £3,377m
16% p.a.
Actual: (5%)
46.5%
Actual: 50.5%
0.50
Actual: 0.46
1st place
Actual: 1st place
18%
Actual: 13.4%
25%
Actual: 25.5%
30%
0%
0%
10%
10%
0%
5%
55%
1 Adjusted total costs.
2 FCA reportable complaints per 1,000 for the period up to and including H1 2016 and formally closed FCA complaints per 1,000 accounts for the period from H2 2016. Both exclude PPI
complaints, any complaints received via Claims Management Companies (CMC) and any complaints relating to TSB activity. With the introduction of the FCA guidance contained in PS15/19
applicable from 1 July 2016, the complaint classification and reporting for the original metric ceased on 30 June 2016. Accordingly, the Remuneration Committee has rebased the original
2014 metrics in line with the new FCA reporting regime. The Remuneration Committee considers the rebased targets equally stretching.
Percentage change in remuneration of the Group Chief Executive
versus the wider employee population
Figures for ‘All Employees’ are calculated using figures for UK-based colleagues subject to the Group Annual Bonus Plan. This population
is considered to be the most appropriate group of employees for these purposes because its remuneration structure is consistent with that
of the GCE. For 2016, 46,963 colleagues were included in this category.
GCE
All employees
1 2 per cent delivered in cash (in line with other colleagues) the remainder in shares.
2 The performance rating for the GCE improved from Strong in 2015 to Strong plus in 2016.
3 Adjusted for movements in staff numbers and other impacts to ensure a like-for-like comparison.
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% change in
base salary
(2015 – 2016)
% change in
bonus
% change in
benefits
(2015 – 2016)
(2015 – 2016)
8.4%1
2%3
44%2
17%3
2%
2%3
Lloyds Banking Group
Annual Report and Accounts 2016
Relative spend on pay (£m)
The graph below illustrates the relative importance of spend on pay (total remuneration of all Group employees) compared with distributions
to shareholders. Distributions to shareholders are ordinary and special dividends.
Dividend
1
2016
2015
+10.9%
£m
2,175
1,962
Salaries and
performance-based compensation
2016
2015
2
+1%
£m
3,245
3,217
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1 2016: Ordinary and special dividend in respect of the financial year ended 31 December 2016, partly paid in 2016 and partly to be paid in 2017. 2015: Ordinary and special dividend in respect
of the financial year ended 31 December 2015, partly paid in 2015 and partly paid in 2016.
2 In addition to the annual bonus of £392.9 million awarded in respect of 2016 performance, the Group made Group Ownership Share awards of £47.6 million and paid approximately £84 million
under variable pay arrangements used to incentivise customer-facing colleagues, primarily in the Retail division.
Loss of office payments and payments within the reporting year to past Directors (audited)
There were no payments for the loss of office or any other payments made to former Directors during 2016.
External appointments held by the Executive Directors
António Horta-Osório – During the year ended 31 December 2016, the Group Chief Executive served as a Non-Executive Director of Exor,
Fundação Champalimaud, Stichting INPAR and Sociedade Francisco Manuel dos Santos for which he received fees of £217,098 in total.
Chairman and Non-Executive Directors (audited)
Chairman and current Non-Executive Directors
Lord Blackwell
Alan Dickinson
Anita Frew
Simon Henry
Nick Luff
Deborah McWhinney
Nick Prettejohn
Stuart Sinclair
Anthony Watson
Sara Weller
Former Non-Executive Directors
Carolyn Fairbairn (retired October 2015)
Dyfrig John (retired May 2016)
Total
1 Car allowance.
Fees £000
Taxable benefits £000
Total £000
2016
2015
2016
2015
2016
2015
714
195
295
135
165
135
412
135
230
171
–
49
700
144
236
105
135
9
350
–
209
135
88
105
121
121
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
726
195
295
135
165
135
412
135
230
171
–
49
712
144
236
105
135
9
350
–
209
135
88
105
2,636
2,216
12
12
2,648
2,228
Breakdown of Non-Executive Directors’ fees (£000s)
Deputy
Chairman
Senior
Independent
Director
Board fee
Audit
Committee
Remuneration
Committee
Board Risk
Committee
SWG
Board fees1
Other
Committees
2016
Total
Alan Dickinson2
Anita Frew2,3
Simon Henry
Dyfrig John
Nick Luff2
Deborah McWhinney
Nick Prettejohn
Stuart Sinclair
Anthony Watson
Sara Weller
100
75
75
75
27
75
75
75
75
75
75
30
30
30
60
30
30
30
30
60
11
30
30
30
60
30
30
11
30
30
30
30
30
30
60
277
54
365
1 Scottish Widows Group Limited.
2 Due to their role as Chairmen of other Board Committees, Alan Dickinson, Anita Frew and Nick Luff do not receive any fees for their membership of the Nomination and Governance
Committee.
3 As Deputy Chairman, Anita Frew does not receive any fee for membership of the Responsible Business Committee.
4 Nomination and Governance Committee.
5 Responsible Business Committee.
195
295
135
49
165
135
412
135
230
171
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Governance
Directors' remuneration report continued
Historical total shareholder return (TSR) performance
The chart below shows the historical TSR of Lloyds Banking Group plc compared with the FTSE 100 as required by the regulations, rebased as at
31 December 2008. The FTSE 100 index has been chosen as it is a widely recognised equity index of which Lloyds Banking Group plc has been
a constituent throughout this period.
Total shareholder return indices – Lloyds Banking Group and FTSE 100
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Lloyds return index
FTSE 100 return index
200
175
150
125
100
75
50
25
0
Rebased to 100 on 31 December 2008.
Source: Kepler
Historical Group Chief Executive (GCE) remuneration outcomes
GCE single figure of
remuneration £000
Annual bonus payout
(% of maximum opportunity)
Long-term incentive vesting
(% of maximum opportunity)
GCE
J E Daniels
António Horta-Osório
J E Daniels
António Horta-Osório
J E Daniels
António Horta-Osório
2009
1,121
–
Waived
–
0%
–
2010
2,572
–
62%
–
0%
–
2011
855
1,765
0%
Waived
0%
0%
2012
–
3,398
–
62%
–
0%
2013
–
2014
–
7,475
11,540
–
71%
–
54%
–
54%
–
2015
–
8,704
–
57%
–
97%
94.18%
2016
–
5,541
–
77%
–
55%
Notes: J E Daniels served as GCE until 28 February 2011; António Horta-Osório was appointed GCE from 1 March 2011. J E Daniels declined to take a bonus in 2009 and António Horta-Osório
declined to take a bonus in 2011.
Outstanding share awards
Directors’ interests (audited)
Shareholding guidelines
Executive Directors were required to build up a holding in Lloyds Banking Group plc shares of value equal to 150 per cent of base salary
(200 per cent for the GCE) within three years from the later of 1 January 2012 or their date of joining the Board. Following the introduction of
the fixed share award in 2014, the gross annual value of this award was added to salary to determine the personal shareholding requirement.
For the purposes of assessing the additional shareholding requirement related to the fixed share award, Executive Directors had up to three
years from 1 January 2014 to build up the additional shareholding created by the addition of the fixed share award. As at 31 December 2016,
all Executive Directors significantly exceeded the requirements.
In order to provide greater transparency in the measurement of the shareholding requirements, from 1 January 2017 the measure is to be focused
on base salary only. There will be a consequent increase in the percentage required as a multiple of salary; however the number of shares required
to be held will remain approximately the same. The new requirements are 350 per cent of base salary for the GCE and 250 per cent of base salary
for the other Executive Directors.
Executive Directors are required to retain any shares vesting from 2014 LTIP awards onwards for a further two years post vesting (although vested
shares count towards the shareholding requirement immediately after vesting).
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Lloyds Banking Group
Annual Report and Accounts 2016
Number of shares
Number of options
Total shareholding1
Value
Unvested
subject to
continued
employment
Unvested
subject to
performance
Unvested
subject to
continued
employment
Owned
outright
Vested
unexercised
Totals at
31 December
2016
Totals at
21 February
2017
Expected value
at
31 December
2016
(£000s)2
Executive Directors
António Horta-Osório3
17,893,726
4,212,594
14,234,293
George Culmer
Juan Colombás
10,547,315
1,253,398
7,754,781
6,362,996
1,209,441
7,406,515
29,549
29,549
29,109
Non-Executive Directors
Lord Blackwell
Alan Dickinson
Anita Frew
Simon Henry
Dyfrig John4
Nick Luff
Deborah McWhinney3
Nick Prettejohn5
Stuart Sinclair
Anthony Watson
Sara Weller
100,000
200,000
450,000
200,000
27,385
400,000
250,000
69,280
–
576,357
340,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
36,370,162 36,370,7576
18,286
19,585,043 19,585,5626
15,008,061 15,008,5806
9,819
7,067
100,000
200,000
450,000
200,000
27,385
400,000
250,000
69,280
–
576,357
340,000
n/a6
n/a6
n/a6
n/a6
n/a6
n/a6
n/a6
n/a6
n/a6
n/a6
n/a6
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1 Including holdings of connected persons.
2 Awards subject to performance under the LTIP had an expected value of 50 per cent of face value at grant (in line with the Remuneration Policy). Values are based on the 31 December 2016
closing price of 62.51 pence. Full face value of awards are £22,734,988 for António Horta-Osório, £12,242,610 for George Culmer and £9,381,538 for Juan Colombás.
3 Shareholdings held by António Horta-Osório and Deborah McWhinney are either wholly or partially in the form of ADRs.
4 Shares held as at date of retirement.
5 In addition, Nick Prettejohn held 400 6.475% preference shares at 1 January 2016 and 31 December 2016.
6 The changes in beneficial interests for António Horta-Osório (595 shares), George Culmer (519 shares) and Juan Colombás (519 shares) relate to ‘partnership’ and ‘matching’ shares acquired
under the Lloyds Banking Group Share Incentive Plan between 31 December 2016 and 21 February 2017. There have been no other changes up to 21 February 2017.
A summary of transactions undertaken in the year, including share plan awards vested plus open market purchases and sales made by Directors,
is shown on page 111.
As a result of the above shareholdings, the position for each Executive Director is as follows:
2016 Shareholding
requirement
Current shareholding
New shareholding
requirement from
1 January 2017
Current shareholding
(based on new
requirement)
Base salary
plus fixed
share award
(£000s)
% of base
salary plus
fixed share
award
Number of
shares1
% of base
salary plus
fixed share
award1
Number of
shares as at
31/12/162
Old
requirement
met
% of base
salary
Number of
shares1
% of base
salary1
New
requirement
met
Executive Directors
António Horta-Osório
George Culmer
Juan Colombás
2,025
1,253
1,236
200% 6,560,829
545% 17,891,894
150% 3,044,925
519% 10,545,483
150% 3,002,634
318% 6,361,547
Yes
Yes
Yes
350% 6,917,220
250% 3,094,403
250% 3,051,426
905%
852%
521%
Yes
Yes
Yes
1 Number of shares required and current shareholding percentage of base salary plus fixed share award figures are calculated using the average share price for the period 1 January 2016 to
31 December 2016 (61.73 pence).
2 Includes shares owned outright reduced by forfeitable ‘matching’ shares under the Share Incentive 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.
109
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Governance
Directors' remuneration report continued
Breakdown of shares interests and interests in share options (audited)
At 1 January
2016
Granted/
awarded
Dividends
awarded
Vested /
exercised
Lapsed
At 31 December
2016
Exercise
price
From
To
Notes
Exercise periods
António Horta-Osório
7,425,441
4,640,077
4,579,006
22,156
14,995
4,017,041
2,510,205
2,477,167
22,156
14,995
3,576,283
2,234,780
2,442,762
LTIP 2013-2015
LTIP 2014-2016
LTIP 2015-2017
LTIP 2016-2018
Deferred bonus
awarded in 2016
2013 Sharesave
2014 Sharesave
2016 Sharesave
George Culmer
LTIP 2013-2015
LTIP 2014-2016
LTIP 2015-2017
LTIP 2016-2018
Deferred bonus
awarded in 2016
2013 Sharesave
2014 Sharesave
2016 Sharesave
Juan Colombás
LTIP 2013-2015
LTIP 2014-2016
LTIP 2015-2017
LTIP 2016-2018
Deferred bonus
awarded in 2016
Share buy-out award
(share options)
Share buy-out award
(share options)
2014 Sharesave
2016 Sharesave
235,499
299,732
29,990
–
–
–
5,015,210
1,164,253
–
–
14,554
–
–
–
2,767,409
632,856
–
–
14,554
–
–
–
2,728,973
624,065
–
–
–
29,109
1, 2, 3
3
3
3, 4
5
8
130,641 6,993,280
432,161
–
–
–
–
–
–
–
–
–
–
22,156
–
–
–
–
–
–
–
–
–
–
–
4,640,077
4,579,006
5,015,210
1,164,253
–
40.62p
14,995
14,554
60.02p 01/01/2018 30/06/2018
47.49p 01/01/2020 30/06/2020
10
70,674 3,783,249
233,792
–
–
–
–
–
–
–
–
–
–
–
–
22,156
–
–
–
–
–
–
–
–
–
2,510,205
2,477,167
2,767,409
632,856
–
40.62p
14,995
60.02p 01/01/2018 30/06/2018
14,554
47.49p 01/01/2020 30/06/2020
62,920 3,368,143
208,140
–
–
–
–
–
–
–
–
–
–
–
–
–
235,499
299,732
–
–
–
–
–
–
–
–
29,990
2,234,780
2,442,762
2,728,973
624,065
–
–
–
60.02p
–
29,109
47.49p 01/01/2020 30/06/2020
1, 2, 3
3
3
3, 4
5
9
10
1, 2, 3
3
3
3, 4
5
6, 7
6, 7
10
1 The shares awarded in March 2013 vested on 7 March 2016. The closing market price of the Group’s ordinary shares on that date was 72.75 pence. Shares vested are subject to a further
2
two-year holding period.
2013 LTIP award was eligible to receive an amount equal in value to any dividends paid during the performance period. Dividend equivalents have been paid based on the number of shares
vested and have been paid in shares. The dividend equivalent shares were paid on 7 March 2016. The closing market price of the Group’s ordinary shares on that date was 72.75 pence. The
dividend equivalent shares are not subject to any holding period.
3 All LTIPs have performance periods ending 31 December at the end of the three-year period. Awards were made in the form of conditional rights to free shares.
4 Awards (in the form of conditional rights to free shares) in 2016 were made over shares with a value of 300 per cent of reference salary for António Horta-Osório (5,015,210 shares with a face
value of £3,660,000); 275 per cent for George Culmer (2,767,409 shares with a face value of £2,019,600); and 275 per cent for Juan Colombás (2,728,973 shares with a face value of £1,991,550).
The share price used to calculate face value is the average price over the five days prior to grant (1 March to 7 March 2016), which was 72.978 pence. This was the average share price used to
determine the number of shares awarded. Performance conditions for this award have been disclosed in last year’s annual report on remuneration (page 91).
5 Bonus is deferred into shares. The face value of the share awards in respect of bonuses granted in March 2016 was £849,649 (1,164,253 shares) for António Horta-Osório; £461,846
(632,856 shares) for George Culmer; and £455,431 (624,065 shares) for Juan Colombás. The share price used to calculate the face value is the average price over the five days prior to grant
(1 March to 7 March 2016), which was 72.978 pence.
6 Share buy-out award granted on 30 March 2011 for the loss of deferred share awards forfeited on leaving the Santander Group. Awards are consistent with those forfeited and have
a nil option price.
7 Options exercised on 8 March 2016. The closing market price of the Group’s ordinary shares on that date was 70.63 pence.
8 Options exercised on 6 June 2016. The closing market price of the Group’s ordinary shares on that date was 69.64 pence.
9 Options exercised on 1 June 2016. The closing market price of the Group’s ordinary shares on that date was 71.34 pence.
10 Sharesave options granted on 10 October 2016.
The aggregate amount of gains made by Directors on the exercise of share options was £391,270.
None of the other Directors at 31 December 2016 had options to acquire shares in Lloyds Banking Group plc or its subsidiaries.
110
Lloyds Banking Group
Annual Report and Accounts 2016
Directors’ interests – summary of awards vested, purchases and sales
made by directors in 2016 (unaudited)
Holding at
1 January 2016
(or appointment
date)
Transactions
during the year
Number of
shares1
Notes
Executive Directors
António Horta-Osório2
11,761,072
08/03/2016
3,706,439
Vesting of 2013 LTIP
Holding at
31 December
2016
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08/03/2016
16/03/2016
18/03/2016
18/04/2016
69,239
Dividend equivalent shares paid on 2013 LTIP
173,707
Fixed Share Award
8,256
2,803
Salary for shares
Salary for shares
16/05/2016
1,437,096
Release of 2012 Deferred Bonus
16/05/2016
06/06/2016
17/06/2016
17/06/2016
28/06/2016
18/07/2016
17/08/2016
19/09/2016
19/09/2016
18/10/2016
16/11/2016
14/12/2016
14/12/2016
2,873
22,156
2,920
184,317
100,000
3,377
3,482
3,330
Salary for shares
2013 Sharesave
Salary for shares
Fixed Share Award
Share purchase
Salary for shares
Salary for shares
Salary for shares
210,206
Fixed Share Award
3,549
3,069
2,994
Salary for shares
Salary for shares
Salary for shares
189,000
Fixed Share Award
George Culmer
7,090,093
08/03/2016
295,534
Release of 2013 Deferred Bonus
08/03/2016
2,005,122
Vesting of 2013 LTIP
Monthly
3,841
Share Incentive Plan purchase and
matching shares
17,893,726
08/03/2016
16/03/2016
19/05/2016
02/06/2016
17/06/2016
30/06/2016
19/09/2016
19/09/2016
28/09/2016
14/12/2016
Monthly
37,457
97,276
Dividend equivalent shares paid on 2013 LTIP
Fixed Share Award
210,244
Dividend Reinvestment
22,156
2013 Sharesave
103,218
Fixed Share Award
50,000
Share purchase
295,534
117,715
113,779
105,840
3,347
Release of 2013 Deferred Bonus
Fixed Share Award
Dividend Reinvestment
Fixed Share Award
Share Incentive Plan purchase and
matching shares
10,547,315
Juan Colombás
3,145,458
08/03/2016
44,355
Release of 2012 Deferred Bonus
08/03/2016
277,981
Release of 2013 Deferred Bonus
08/03/2016
1,785,116
Vesting of 2013 LTIP
08/03/2016
16/03/2016
16/03/2016
17/06/2016
30/06/2016
19/09/2016
19/09/2016
19/09/2016
14/12/2016
Monthly
33,347
Dividend equivalent shares paid on 2013 LTIP
282,898
Exercise of Share buy out
95,924
Fixed Share Award
101,784
Fixed Share Award
50,000
44,355
277,981
116,080
104,370
3,347
Share purchase
Release of 2012 Deferred Bonus
Release of 2013 Deferred Bonus
Fixed Share Award
Fixed Share Award
Share Incentive Plan purchase and
matching shares
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6,362,996
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Governance
Directors' remuneration report continued
Holding at
1 January 2016
(or appointment
date)
Transactions
during
the year
Number of
shares
Notes
Non-Executive Directors
Lord Blackwell
Alan Dickinson
Anita Frew
Simon Henry
Dyfrig John3
Nick Luff
Deborah McWhinney4
Nick Prettejohn
Stuart Sinclair
Anthony Watson
Sara Weller
50,000
100,000
300,000
100,000
27,385
300,000
200,000
–
–
476,357
200,000
05/05/2016
29/06/2016
29/06/2016
30/06/2016
–
29/06/2016
29/06/2016
26/02/2016
–
29/06/2016
04/05/2016
29/06/2016
50,000
100,000
150,000
100,000
–
100,000
50,000
69,280
–
100,000
100,000
40,000
Share purchase
Share purchase
Share purchase
Share purchase
–
Share purchase
Share purchase
Share purchase
–
Share purchase
Share purchase
Share purchase
1 After the settlement of tax and National Insurance contributions, where applicable.
2 Part of António Horta-Osório's 2016 salary increase was delivered in shares.
3 Shares held as at date of retirement.
4 Held in the form of ADRs.
Additional disclosures
Holding at
31 December
2016
100,000
200,000
450,000
200,000
27,385
400,000
250,000
69,280
–
576,357
340,000
Total remuneration of the eight highest paid senior executives1
The following table sets out the total remuneration of the eight highest paid senior executives (excluding Executive Directors) in respect of the
2016 performance year.
8
£000
7
£000
6
£000
Executive
5
£000
4
£000
3
£000
2
£000
1
£000
Fixed
Cash-based
Share-based
Total fixed
Variable
Upfront cash
Deferred cash
Upfront shares
Deferred shares
Long-term incentive plan2
Total variable pay
Pension cost3
Total remuneration
305
200
505
2
0
273
213
1,042
1,530
46
2,081
589
406
995
2
0
152
231
744
1,129
147
2,271
300
250
550
2
0
416
432
884
1,734
45
2,329
740
490
1,230
2
0
187
284
833
1,306
181
2,717
799
500
1,299
2
0
217
328
780
1,327
182
2,808
315
500
815
2
0
462
196
2,020
2,680
63
3,558
330
740
1,070
2
0
658
165
2,571
3,396
66
4,532
420
650
1,070
2
0
238
360
2,886
3,486
84
4,640
1 Includes members of the Group Executive Committee and Senior Executive level colleagues.
2 Values shown reflect awards for which the performance period ended on 31 December 2016, including the 2014 LTIP and 2014 Commercial Banking Transformation Plan. Dividend equivalents
are included where applicable.
3 Pension costs based on a percentage of salary according to level.
Total remuneration of employees across the Group
Total remuneration1
£0 to £100,000
£100,001 to £500,000
£500,001 to £1,000,000
Above £1,000,000
Number of employees
73,415
4,432
145
58
1 Total remuneration of UK-based colleagues. Includes base salary, bonus awards for the 2016 performance year, the estimated values of LTIP and Commercial Banking Transformation Plan
awards for the performance period ended 31 December 2016 (including dividend equivalents where applicable), pension and benefits.
112
Lloyds Banking Group
Annual Report and Accounts 2016
Remuneration Committee
Committee purpose and responsibilities
The Remuneration Committee has responsibility for setting remuneration for all Executive Directors and the Chairman, including pension rights
and any compensation payments. The Committee also recommends and monitors the level and structure of remuneration for senior management
and material risk takers.
The Committee’s purpose is to consider, agree and recommend to the Board an overall remuneration policy and philosophy for the Group
that is aligned with its long-term business strategy, its business objectives, its risk appetite, values and the long-term interests of the Group
that recognises the interests of relevant stakeholders. The Committee’s Terms of Reference can be found on the Company’s website at
www.lloydsbankinggroup.com/our-group/corporate-governance
The Directors who served on the Committee during the year and their attendance at Committee meetings is set out in the table below.
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Committee Chairman
Anita Frew
Committee members who served during 2016
Lord Blackwell
Alan Dickinson
Stuart Sinclair1
Anthony Watson2
Sara Weller
Former members who served during 2016
Dyfrig John3
1 Joined the Committee on 4 January 2016.
2 Anthony Watson was unable to attend the Committee meeting in May 2016 due to a prior commitment.
3 Retired on 11 May 2016.
Remuneration
Committee meetings
Eligible to
attend
Attended
7
7
7
7
7
7
3
7
7
7
7
6
7
3
Committee composition, skills and experience
The Committee comprises Non-Executive Directors from a wide background to provide a balanced and independent view on remuneration
matters. Stuart Sinclair was appointed as an independent Non-Executive Director and as a member of the Committee on 4 January 2016.
Dyfrig John retired as an independent Non-Executive Director and as a member of the Committee on 11 May 2016.
How Committee meetings are run
The management of the Committee is in keeping with the basis on which meetings of the Board are managed, as detailed on page 62, with a
structure which facilitates open discussion and debate, with steps taken to ensure adequate time for members of the Committee to consider
proposals which are put forward.
During 2016, the Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review.
Matters considered by the Committee
The Committee had seven scheduled meetings during 2016 to consider the following principal matters:
– Review of remuneration arrangements for senior executives;
– Determination of 2015 bonus outcome based on divisional and functional performance and adjustment for risk;
– Review of the Balanced Scorecard for the determination of 2016 bonuses in divisions and functions;
– Vesting of the 2013 long-term incentive plan (LTIP);
– Performance conditions for the 2016 LTIP;
– Bonus and salary awards for Executive Directors and key senior managers;
– Performance adjustments in respect of staff, in relation to risk matters in its purview;
– Feedback from the Committee Chairman on her meetings with the PRA and shareholders;
– Review of services and consideration of a number of advisors with subsequent appointment of Kepler, a brand of Mercer (Kepler);
– Results of the Remuneration Committee effectiveness review and the suggestions for improvement;
– Variable remuneration and simplification of reward principles;
– Approval of the 2015 and 2016 Directors’ remuneration report for publication within the annual report and Form 20-F;
– Review and approval of material risk taker identification and approval of the Remuneration Policy Statement; and
– Remuneration governance in the light of regulatory changes.
In addition to the scheduled meetings, the Committee met on a number of other occasions to allow the Directors greater time to discuss
their views and for an in-depth review of key areas including this year the review of the Directors’ Remuneration Policy.
The Committee appoints independent consultants to provide advice on specific matters according to their particular expertise. In May 2016,
the Committee conducted a review of their independent advisers and appointed Kepler to advise the Committee following a competitive
tendering process. Kepler has voluntarily signed up to the Remuneration Consultants’ Code of Conduct and is judged by the Committee
to be independent. Kepler is not connected with the Group. Kepler’s fees for services to the Committee in 2016 were on a time and materials
basis and amounted to £175,400. Kepler did not provide any other services to the Group. Mercer provides unrelated advice regarding pensions
and investments to the Group.
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Governance
Directors' remuneration report continued
The Committee has not formally evaluated Kepler’s performance since their appointment in mid-2016. A review is due to be undertaken
in early 2017. Deloitte LLP, independent consultants to the Committee since 2010, provided advice for the first five months of the year. Deloitte LLP
is not connected with the Group. Deloitte’s fees for services to the Committee in 2016 were on a time and materials basis and amounted to
£240,800. In addition, Deloitte LLP provided the Group with advice on taxation and other consulting services, and assurance services.
António Horta-Osório (Group Chief Executive), Simon Davies (Chief People, Legal and Strategy Officer), Paul Hucknall (People Director,
Centres of Excellence), Chris Evans (Director, Reward Policy and Partnering), Stuart Woodward (Head of Reward Regulation and Governance)
and Matthew Elderfield (Group Director, Conduct, Compliance and Operational Risk) (until September 2016) and Letitia Smith thereafter provided
guidance to the Committee (other than for their own remuneration).
Juan Colombás (Chief Risk Officer) and George Culmer (Chief Financial Officer) also attended the Committee to advise as and when necessary
on risk and financial matters.
Statement of voting at Annual General Meeting
The Group’s remuneration policy, which was effective during 2016, was detailed within the Directors’ remuneration report for 2013 and voted on
at the 2014 AGM. The remuneration awarded to the Executive Directors in 2015 was disclosed in last year’s annual report on remuneration and
was voted on at the 2016 AGM. The shareholder votes submitted at the meetings, either directly, by mail or by proxy, were as follows:
Votes cast in favour
Votes cast against
Number of
shares
(millions)
48,261
48,674
Percentage of
votes cast
97.97%
97.67%
Number of
shares
(millions)
Percentage of
votes cast
999
1,163
2.03%
2.33%
Votes
withheld
Number of
shares
(millions)
1,391
176
Remuneration policy (2014 vote)
Annual report on remuneration (2016 vote)
On behalf of the Board
Anita Frew
Chairman, Remuneration Committee
114
RISK MANAGEMENT
All narrative and quantitative tables are unaudited unless
otherwise stated. The audited information is required to
comply with the requirements of relevant International
Financial Reporting Standards.
The Group’s approach to risk
Emerging risks
Capital stress testing
How risk is managed in Lloyds Banking Group
Risk governance
Full analysis of risk drivers
Further information on risk management can be found:
Risk overview
Note 52: Financial risk management
116
118
119
119
121
123
26
261
Other information for an analysis of where
Enhanced Disclosure Task Force (EDTF) recommendations
are disclosed
292
Pillar 3 Report: www.lloydsbankinggroup.com
BOOSTING BRITAIN’S HOUSING STOCK
AMA Home is one of many smaller construction businesses
benefiting from our Housing Growth Partnership with the
Government. We have invested more than £30 million
through the Partnership and have a target to reach
1,500 homes by 2017.
1,500
new homes to be built by 2017
Risk management
Risk management
Risk management is at the heart of
our strategy to become the best bank
for customers
Our mission is to support the business
in delivering sustainable growth. This
is achieved through informed risk
decision making and superior risk and
capital management, supported by a
consistent risk-focused culture
The risk overview (pages 26 to 31) provides a summary of risk
management within the Group. It highlights the important role of
risk as a strategic differentiator, risk achievements in 2016 along with
a brief overview of the Group’s risk governance structure and the
principal risks faced by the Group and key mitigating actions.
This full risk management section provides a more in-depth picture of
how risk is managed within the Group, detailing the Group’s emerging
risks, approach to stress testing, risk governance, committee structure,
appetite for risk (pages 116 to 122) and a full analysis of the primary
risk drivers (pages 123 to 169) – the framework by which risks are
identified, managed, mitigated and monitored.
Each risk driver is described and managed using the following
standard headings: definition, exposures, measurement, mitigation
and monitoring.
THE GROUP’S APPROACH TO RISK
The Group operates a prudent approach to risk with rigorous
management controls to support sustainable business growth and
minimise losses. Through a strong and independent risk function
(Risk Division) a robust control framework is maintained to identify
and escalate current and emerging risks to support sustainable
business growth within Board Risk Appetite and through good
risk reward decision making.
Risk culture
The Board ensures that senior management implements risk policies
and risk appetites that either limit or, where appropriate, prohibit
activities, relationships and situations that could be detrimental to
the Group’s risk profile.
As part of a conservative business model that embodies a risk
culture founded on a prudent approach to managing risk, the Group
reviewed its Codes of Business and Personal Responsibility in 2016
reinforcing its approach where colleagues are accountable for the
risks they take and where the needs of customers are paramount.
The focus remains on building and sustaining long-term relationships
with customers cognisant of the economic climate.
116
Risk appetite
Risk appetite is defined as ‘the amount and type of risk that the Group
is prepared to seek, accept or tolerate.’
Risk appetite is documented in a Board Risk Appetite Statement
which is reviewed by the Board Risk Committee and approved
annually by the Board.
The Board metrics are supported by more detailed sub-Board
functional and divisional risk appetite metrics.
The Board Risk Appetite is aligned to the Risk Appetite Framework,
and in turn the Risk Management Framework and Group Risk Principles.
Risk appetite is embedded within principles, policies, authorities and
limits across the Group and continues to evolve to reflect external
market developments and composition of the Group.
The Group’s strategy operates in tandem with the Board Risk Appetite
and business planning is undertaken with a view to meeting the
requirements of the Board Risk Appetite.
Performance is optimised by allowing business units to operate
within approved risk appetite and limits.
The Board Risk Committee is responsible for overseeing the
development, implementation and maintenance of the Group’s
overall risk management framework and its risk appetite, to ensure
they are in line with emerging regulatory, corporate governance and
industry best practice.
Board Risk Appetite includes the following areas:
– Credit – the Group has a conservative and well balanced credit
portfolio through the economic cycle.
– Conduct – the Group’s product design and sales practices ensure
that products are transparent and meet customer needs.
– Market – the Group takes minimal proprietary trading risk,
reflecting the customer focused nature of the Group’s activities.
– Operational – the Group has robust controls in place to manage
operational losses, reputational events and regulatory breaches.
It identifies and assesses emerging risks and acts to mitigate these.
– Funding and liquidity – the Group maintains a prudent liquidity
profile to ensure it can survive under stressed conditions, and a
balance sheet structure that limits its reliance on potentially volatile
sources of funding.
– Capital and earnings – the Group maintains capital levels
commensurate with a prudent level of solvency, even under stressed
conditions. It aims to deliver consistent and high quality earnings
and has low appetite for earnings shocks or surprises from any
risk type.
– Regulatory and legal – the Group complies with all relevant
regulation and all applicable laws (including Codes of Practice
which could have legal implications) and/or legal obligations.
– People – the Group leads responsibly and proficiently, manages its
people resource effectively, supports and develops colleague talent,
and meets legal and regulatory obligations related to its people.
– Financial reporting – the Group meets regulatory reporting and
tax requirements in jurisdictions where it operates and ensures the
timely and transparent disclosure and dissemination of information
relating to its listed debt or equity.
– Governance – the Group has governance arrangements that
support the effective long-term operation of the business, maximise
shareholder value and meet regulatory and societal expectations.
– As a separate regulated entity with its own Board, the Insurance
business has its own Risk Appetite and maintains its own Risk
Appetite framework, aligned to the Group Risk Appetite framework.
Lloyds Banking Group
Annual Report and Accounts 2016
Risk decision making and reporting
– Taking risks which are well understood, consistent with strategy
and with appropriate return is a key driver of shareholder value.
– Risk analysis and reporting supports the identification of
opportunities as well as risks.
– An aggregate view of the Group’s overall risk profile, key risks and
management actions, and performance against risk appetite, is
reported to and discussed monthly at the Group Risk Committee
(and a subset at the Group Asset and Liability Committee), with
regular reporting to the Board Risk Committee and the Board.
– Rigorous stress testing exercises are carried out to assess the impact
of a range of adverse scenarios with different probabilities and
severities to inform strategic planning.
– The Chief Risk Officer regularly informs the Board Risk Committee
(BRC) of the aggregate risk profile and as a member of the Board,
has direct access to the Chairman and members of BRC.
Governance and control
– The Group’s approach to risk is founded on a robust control framework
and a strong risk management culture which are the foundation for the
delivery of effective risk management and guide the way all employees
approach their work, behave and make decisions.
– Governance is maintained through delegation of authority from
the Board down to individuals through the management hierarchy.
Senior executives are supported by a committee based structure
which is designed to ensure open challenge and support effective
decision making.
– The Group’s risk appetite, principles, policies, procedures, controls
and reporting are regularly reviewed and updated where needed
to ensure they remain fully in line with regulations, law, corporate
governance and industry good-practice.
– The interaction of the executive and non-executive governance
structures relies upon a culture of transparency and openness that
is encouraged by both the Board and senior management.
– Board-level engagement, coupled with the direct involvement of
senior management in Group-wide risk issues at Group Executive
Committee level, ensures that escalated issues are promptly
addressed and remediation plans are initiated where required.
– Line management is directly accountable for identifying and
managing risks in their individual businesses, ensuring that business
decisions strike an appropriate balance between risk and reward
consistent with the Group’s risk appetite.
– Clear responsibilities and accountabilities for risk are defined
across the Group through a Three Lines of Defence model which
ensures effective independent oversight and assurance in respect
of key decisions.
Table 1.1: Exposure to risk arising from the business activities of the Group
The table below provides a high level guide to how the Group’s business activities are reflected in its risk measures and balance sheet. Details of the
business activities for each division are provided in the Divisional Results on pages 40 to 48.
Risk-weighted assets (RWAs)
– Credit risk
– Counterparty credit risk3
– Market risk
– Operational risk
Total (excluding threshold)
– Threshold4
Total
Retail
£bn
39.7
–
–
15.5
55.2
–
55.2
Commercial
Banking
£bn
Consumer
Finance
£bn
Run-off
£bn
Central
Items1
£bn
Insurance2
£bn
78.2
8.6
3.1
6.1
96.0
–
96.0
28.6
–
–
3.5
32.1
–
32.1
8.3
–
–
0.2
8.5
–
8.5
11.9
1.0
–
–
12.9
10.8
23.7
–
–
–
–
–
–
–
Group
£bn
166.7
9.6
3.1
25.3
204.7
10.8
215.5
1 Central Items include assets held outside the main operating divisions, including exposures relating to Group Corporate Treasury which holds the Group's liquidity portfolio, and
Group Operations.
2 As a separate regulated business, Insurance maintains its own regulatory solvency requirements, including appropriate management buffers, and reports directly to the Insurance Board.
Insurance does not hold any RWAs, as its assets are removed from the Banking Group's regulatory capital calculations. However, part of the Group's investment in Insurance is included In
the calculation of Threshold RWAs, subject to CRD IV rules, while the remainder is taken as a capital deduction.
3 Exposures relating to the default fund of a central counterparty and credit valuation adjustment risk are included in counterparty credit risk.
4 Threshold is presented on a fully loaded CRD IV basis. Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be
risk-weighted instead of deducted from CET1 capital. Significant investments primarily arise from the investment in the Group’s Insurance business.
Principal risks
The Group’s principal risks are shown in the risk overview (pages 28 to 31). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s
risk drivers is on pages 123 to 169.
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Risk management
Risk management continued
EMERGING RISKS
The Group considers the following to be risks that have the potential to increase in significance and affect the performance of the Group.
These risks are considered alongside the Group’s operating plan.
Risk
Key mitigating actions
Regulatory and legal: The industry continues to witness increased
government and regulatory intervention in the financial sector with
increasing regulatory rules and laws from both the UK and overseas
affecting the Group’s operation.
– We continue to embed the strategic conduct agenda across all areas
of the Group ensuring that the customer is at the heart of our business
planning, whilst working closely with regulatory authorities and industry
bodies to ensure that the Group can identify and respond to the
evolving regulatory and legal landscape.
– Programmes in place to deliver regulatory and legal change
requirements.
Macroeconomic headwinds and political uncertainties: Political
uncertainties over the UK’s relationship with EU Countries remains with
US election outcomes and European elections adding to a globally
uncertain political and macroeconomic outlook.
– Internal contingency plans recalibrated and regularly reviewed
for potential strategic, operational and reputational impacts.
– Engagement with politicians, officials, media, trade and other
bodies to reassure our commitment to Helping Britain Prosper.
– Wide array of risks considered in setting strategic plans.
– Capital and Liquidity is reviewed regularly through committees,
ensuring compliance with risk appetite/regulatory requirements.
IT resilience and cyber: Increasing digitisation places greater reliance
on the provision of resilient and secure services to customers. Potential
increases in the volume of cyber-attacks could disrupt service for
customers, causing financial loss/reputational damage.
– Continued delivery of cyber control framework and investment
in Cyber programme.
– Operational Resilience activities will be combined with currency
upgrades to form a new Technology Resilience programme.
Response to market changes (agility): As technology and customer
needs change, the typical banking model is evolving and as such,
operational complexity has the potential to restrict our speed of
response.
– Organisational and behavioural effectiveness is regularly reviewed,
ensuring simplicity/efficiency, supporting the Group's strategy.
– Sustained and continuing investment in digital capability and customer
channels; plans updated to reflect market trends/customer behaviour.
Strategic use of customer data: Impacts of Data Regulation in
respect of data sharing, data privacy and data loss, noting the need
to defend against dynamic external challengers and consumer
expectations. Failure to address growth in data movement or
understand the Supply Chain/Third party controls may increase
exposure to Cyber/Fraud leading to conduct/reputational issues.
– Assessment of the possible impacts of legislation is ongoing; delivery
of enhanced systems and processes to fulfil related regulatory
requirements.
– Chief Data Officer reviewing operating model and identifying
opportunities to enhance the associated control environment.
Ring-fencing: Legislation and rules impact the business and operating
model and cost of serving customers effectively. EU Exit/heightened
implementation risk may require a change to target business/
operational model adding complexity, timescales and execution costs.
Resolution: Plans are in place to deliver on bail-in-able debt (MREL)
for the Group by 1 January 2022 (interim target 1 January 2020);
uncertainty surrounds investor appetite/pricing as many banks will
approach the same investor base over a similar period.
– Updates reported to Board and GEC on key components of
non ring-fence programmes.
– The Group is actively engaged with HM Treasury, the PRA and FCA
to ensure that it is able to fully implement the restructuring required
to implement ring-fencing by the January 2019 deadline.
– Early engagement with investors; capitalising on our name in the
market, and spread issuance over the time window available.
Geopolitical shocks: Current uncertainties could further impede the
global economic recovery. Events in China, Russia, the Middle-East, as
well as terrorist activity, have the potential to worsen economic outlook
and funding conditions.
– Risk appetite criteria limits single counterparty bank/non-bank
exposures complemented by a UK-focused strategy.
– Financial Stability Forum develops and maintains Stability Response
Plan; acting as a Rapid Reaction Group, when external crises occur.
118
Lloyds Banking Group
Annual Report and Accounts 2016
CAPITAL STRESS TESTING
Overview
Stress testing is recognised as a key risk management tool within the
Group by the Board, senior management, the businesses and the Risk
and Finance functions. It is fully embedded in the planning process
of the Group as a key activity in medium term planning and senior
management is actively involved in stress testing activities via a strict
governance process.
The Group uses scenario stress testing for:
Risk identification:
– To understand key vulnerabilities of the Group under adverse
economic conditions.
Risk appetite:
– Assess the results of the stress test against the Group’s risk appetite
to ensure the Group is managed within its risk parameters.
– Inform the setting of risk appetite by assessing the underlying risks
under stress conditions.
Strategic and capital planning:
– Allow senior management and the Board to adjust strategies if the
plan does not meet risk appetite in a stressed scenario.
– Support the Internal Capital Adequacy Assessment Process (ICAAP)
by demonstrating capital adequacy, and meet the requirements
of regulatory stress tests that are used to inform the setting of
the Group’s PRA and management buffers (see Capital Risk on
pages 159 to 166).
Risk mitigation:
– Drive the development of potential actions and contingency plans
to mitigate the impact of adverse scenarios. Stress testing also links
directly to the Group’s Recovery Planning process.
Regulatory stress tests
During 2016, the Group was subject to the European Banking
Authority’s Europe-wide stress test with the Group's results
significantly above our minimum capital requirements. The concurrent
UK stress test run by the Bank of England was also undertaken in 2016.
As announced in November, the Group comfortably exceeded the
capital thresholds set by the Prudential Regulation Authority and was
not required to take any action as a result of this test.
Internal stress tests
At least on an annual basis, the Group conducts macroeconomic
stress tests of the operating plan, which is supplemented with
higher-level refreshes if necessary. The exercise aims to highlight the
key vulnerabilities of the Group’s business plan to adverse changes
in the economic environment, and to ensure that there are adequate
financial resources in the event of a downturn.
Reverse stress testing
Reverse stress testing is used to explore the vulnerabilities of the
Group’s strategies and plans to extreme adverse events that would
cause the business to fail, in order to facilitate contingency planning.
The scenarios used are those that would cause the Group to be
unable to carry on its business activities. Where reverse stress testing
reveals plausible scenarios with an unacceptably high risk when
considered against the Group’s risk appetite, the Group will adopt
measures to prevent or mitigate that risk, which are then reflected
in strategic plans.
Other stress testing activity
The Group’s stress testing programme also involves undertaking
assessment of liquidity scenarios, market risk sensitivities and
scenarios and business specific scenarios (see the principal risks on
pages 123 to 169 for further information on risk specific stress testing).
If required, ad hoc stress testing exercises are also undertaken to
assess emerging risks, as well as in response to regulatory requests.
This wide ranging programme provides a comprehensive view of the
potential impacts arising from the risks to which the Group is exposed
and reflects the nature, scale and complexity of the Group.
Methodology
The stress tests at all levels must comply with all regulatory
requirements, achieved through comprehensive construction of
macroeconomic scenarios and a rigorous divisional, functional, risk
and executive review and challenge process, supported by analysis
and insight into impacts on customers and business drivers.
The engagement of all required Risk and Finance areas is built
into the preparation process, so that the appropriate analysis of
each risk driver’s impact upon the business plans is understood
and documented. The methodologies and modelling approach
used for stress testing ensure that a clear link is shown between the
macroeconomic scenarios, the business drivers for each area and
the resultant stress testing outputs. All material assumptions used in
modelling are documented and justified, with a clearly communicated
review and sign-off process. Modelling is supported by expert
judgement and is subject to the Group Model Governance Policy.
Governance
Clear accountabilities and responsibilities for stress testing are
assigned to senior management and the Risk and Finance functions
throughout the Group. This is formalised through the Group Business
Planning and Stress Testing Policy and Procedure, which are reviewed
at least annually.
The Group Financial Risk Committee (GFRC), chaired by the Chief
Risk Officer and attended by the Chief Financial Officer and other
senior Risk and Finance colleagues, is the Committee that has primary
responsibility for overseeing the development and execution of the
Group’s stress tests.
The review and challenge of the detailed stress forecasts, the key
assumptions behind these, and the methodology used to translate
the economic assumptions into stressed outputs conclude with the
divisional Finance Director’s, appropriate Risk Director’s and Managing
Director’s sign-off. The outputs are then presented to GFRC, Group
Asset and Liability Committee/Group Risk Committee/Group
Executive Committee and Board Risk Committee for Group-level
executive review and challenge, before being approved by the Board.
HOW RISK IS MANAGED IN
LLOYDS BANKING GROUP
The Group’s Risk Management Framework (RMF) (see risk overview,
page 27) is structured around the following nine components which
meet and align with the industry-accepted internal control framework
issued by the Committee of Sponsoring Organisations of the
Treadway Commission.
The RMF provides 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.
Role of the Board and senior management
Key responsibilities of the Board and senior management include:
– setting risk appetite and approval of the RMF;
– approval of Group-wide risk principles and policies;
– the cascade of delegated authority (for example to Board
sub-committees and the Group Chief Executive); and
– effective oversight over risk management consistent with the
risk appetite.
Risk appetite
– Risk appetite is defined within the Group as ‘the amount and type of
risk that the Group is prepared to seek, accept or tolerate’ (see The
Group’s approach to Risk page 116).
119
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Risk management
Risk management continued
Governance frameworks
– The Policy framework is founded on Board-approved key principles
for the overall management of risk in the organisation, which are
aligned with Group strategy and risk appetite and based on a
current and comprehensive risk profile that identifies all material
risks to the organisation. The principles are underpinned by a
hierarchy of policies which define mandatory requirements for risk
management and control which are consistently implemented
across the Group.
– The risk committee governance framework is outlined below.
Three Lines of Defence model – the RMF is implemented through
a ‘Three Lines of Defence’ model which defines clear responsibilities
and accountabilities and ensures effective independent oversight and
assurance activities take place covering key decisions.
– Business lines (first line) have primary responsibility for risk decisions,
identifying, measuring, monitoring and controlling risks within their
areas of accountability. They are required to establish effective
governance, and control frameworks for their business to be
compliant with Group Policy requirements, to maintain appropriate
risk management skills, mechanisms and toolkits, and to act within
Group risk appetite parameters set and approved by the Board.
– Risk Division (second line) is a centralised function providing
oversight and independent constructive challenge to the
effectiveness of risk decisions taken by business management,
providing proactive advice and guidance, reviewing challenging
and reporting on the risk profile of the Group and ensuring that
mitigating actions are appropriate.
– Group Audit (third line) provides independent and objective
assurance designed to add value and improve the organisation’s
operations. It helps the Group accomplish its objectives by bringing
a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, control and governance
processes. 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 the business and
the Risk Division, and seeks to ensure objective challenge to the
effectiveness of the risk governance framework.
Mandate of the Risk Division – the objective of Risk Division is
to provide both proactive advice and constructive challenge to the
business. It also has a key role in promoting the implementation of
a strategic approach to risk management reflecting the risk appetite
and RMF agreed by the Board that encompasses:
– embedded effective risk management processes;
– transparent focused risk monitoring and reporting;
– provision of expert and high quality advice and guidance to the
Board, executives and management on strategic issues and horizon
scanning including pending regulatory changes; and
– a constructive dialogue with the first line through provision of
advice, development of common methodologies, understanding,
education, training, and development of new tools.
Risk Division, headed by the Chief Risk Officer, consists of eight Risk
Directors and their specialist teams. These teams provide oversight
and independent challenge to business management and support
senior management and the Board with independent reporting on
risks and opportunities. Risk Directors, responsible for each risk type,
meet on a regular basis under the chairmanship of the Chief Risk
Officer to review and challenge the risk profile of the Group and to
ensure that mitigating actions are appropriate.
The Chief Risk Officer is accountable for developing and leading
an industry-wide recognised Risk function that adds value to the
Group by:
– providing a regular comprehensive view of the Group’s risk profile,
both current and emerging key risks, and management actions;
– (with input from the business areas and Risk Division) proposing
Group risk appetite to the Board for approval, and overseeing
performance of the Group against risk appetite;
– developing an effective RMF which meets regulatory requirements
for approval by the Board, and overseeing execution and
compliance; and
120
– challenging management on emerging risks and providing expert
risk and control advice to help management maintain an effective
risk and control framework.
The Risk Directors:
– provide independent advice, oversight and challenge
to the business;
– design, develop and maintain policies, specific functional risk
type frameworks and guidance to ensure alignment with business
imperatives and regulatory requirements;
– establish and maintain appropriate governance structures, culture,
oversight and monitoring arrangements which ensure robust
and efficient compliance with relevant risk-type risk appetites
and policies;
– lead regulatory liaison on behalf of the Group including horizon
scanning and regulatory development for their risk type; and
– propose risk appetite and oversight of the associated risk profile
across the Group.
Risk identification, measurement and control – the process for
risk identification, measurement and control is integrated into the
overall framework for risk governance. Risk identification processes
are forward looking to ensure emerging risks are identified. Risks
are captured in comprehensive risk logs/registers, and measured
using robust and consistent quantification methodologies. The
measurement of risks includes the application of stress testing
and scenario analysis, and considers whether relevant controls
are in place before risks are incurred.
Risk monitoring, aggregation and reporting – identified risks are
logged and reported on a monthly basis or as frequently as necessary
to the appropriate committee. The extent of the risk is compared to
the overall risk appetite as well as specific limits or triggers. When
thresholds are breached, committee minutes are clear on the actions
and timeframes required to resolve the breach and bring risk within
given tolerances. There is a clear process for escalation of risks and
risk events.
All business areas complete a Control Effectiveness Review (CER)
annually, reviewing the effectiveness of their internal controls and
putting in place a programme of enhancements where appropriate.
The CER reports are approved at Divisional Risk Committees or
directly by the relevant member of the Group Executive Committee to
confirm the accuracy of the assessment. This key process is overseen
and independently challenged by Risk Division, reviewed by Group
Audit against the findings of its assurance activities, and reported to
the Board.
Risk culture – supporting the formal frameworks of the RMF is the
underlying culture, or shared behaviours and values, which sets out
in clear terms what constitutes good behaviour and good practice.
In order to effectively manage risk across the organisation, the
functions encompassed within the Three Lines of Defence have
a clear understanding of risk appetite, business strategy and an
understanding of (and commitment to) the role they play in delivering
it. A number of levers are used to reinforce the risk culture, including
tone from the top, clear accountabilities, effective communication
and challenge and an appropriately aligned performance incentive
and structure.
Risk resources and capabilities – appropriate mechanisms are in
place to avoid over-reliance on key personnel or system/technical
expertise within the Group. Adequate resources are in place to serve
customers both under normal working conditions and in times of
stress, and monitoring procedures are in place to ensure that the
level of available resource can be increased if required. Colleagues
undertake appropriate training to ensure they have the skills and
knowledge necessary to enable them to deliver fair outcomes for
customers, being mindful of the Group’s strategic conduct agenda,
Customer Treatment Policy/Standards and Financial Conduct
Authority requirements.
There is ongoing investment in risk systems and models alongside the
Group’s investment in customer and product systems and processes.
This drives improvements in risk data quality, aggregation and
reporting leading to effective and efficient risk decisions.
Lloyds Banking Group
Annual Report and Accounts 2016
RISK GOVERNANCE
The risk governance structure below is integral to effective risk management across the Group. Risk Division is appropriately represented on key
committees to ensure that risk management is discussed in these meetings. This structure outlines the flow and escalation of risk information and
reporting from business areas and Risk Division to GEC and Board. Conversely, strategic direction and guidance is cascaded down from the Board
and GEC.
Company Secretariat support senior and Board level committees, and support the Chairs in agenda planning. This gives a further line of escalation
outside the Three Lines of Defence.
Table 1.2: Risk governance structure
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Reporting
Audit
Committee
Board
Board Risk
Committee
Reporting
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Aggregation,
escalation
Independent
challenge
Independent
challenge
Reporting
GROUP CHIEF EXECUTIVE
GROUP CHIEF EXECUTIVE
COMMITTEES
Primary escalation
BUSINESS AREA
PRINCIPAL ENTERPRISE
RISK COMMITTEES
FIRST LINE OF DEFENCE
— RISK MANAGEMENT
Independent challenge of both
First and Second lines of defence
Aggregation,
escalation
Independent
challenge
Independent
challenge
Reporting
Group Chief Executive
Committees
Group Executive Committee (GEC)
Group Risk Committee (GRC)
Group Asset and Liability Committee
(GALCO)
Group Customer First Committee
Group Cost Management Committee
Conduct Review Committee
Executive Compensation Committee
Responsible Business
Management Committee
Business area principal
Enterprise Risk Committees
Retail Risk Committee
Consumer Finance Risk Committee
Customer Products and Markets Risk
Committee
Commercial Banking Risk Committee
Digital Risk Committee
Insurance Risk Committee
Finance Risk Committee
Group Operations Risk Committee
Group Functions Executive/Risk
Committees
Risk Division Risk Committee
RISK DIVISION
COMMITTEES AND
GOVERNANCE
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Risk Division Committees
and Governance
Credit Risk
– Executive Credit Approval Committee
– Commercial Banking Credit Risk
Committees
– Retail & Consumer Credit Risk Committees
Market Risk
– Group Market Risk Committee
Conduct, Compliance and Operational Risk
– Group Conduct, Compliance
& Operational Risk Committee
Fraud and Financial Crime Risk
– Group Financial Crime Prevention
Committee
– Group Fraud Committee
Financial Risk
– Group Financial Risk Committee
Capital Risk
– Group Capital Risk Committee
Model Risk
– Group Model Governance Committee
Insurance Risk through the governance
arrangements for Insurance Group
(Insurance Group is a separate regulated
entity with its own Board, governance
structure and Chief Risk Officer)
121
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Risk management
Risk management continued
Board, Executive and Risk Committees
The Group’s risk governance structure (see table 1.2) strengthens risk evaluation and management, while also positioning the Group to manage
the changing regulatory environment in an efficient and effective manner.
Assisted by the Board Risk and Audit Committees, the Board approves the Group’s overall governance, risk and control frameworks and risk appetite.
Refer to the Corporate Governance section on pages 60 to 80, for further information on Board committees.
The divisional/functional risk committees review and recommend divisional/functional risk appetite and monitor local risk profile and adherence
to appetite.
Insurance, which is subject to separate regulation, has its own Board and governance structure. The Insurance Board, assisted by a Risk Oversight
Committee and Audit Committee, approves the governance, risk and control frameworks for the Insurance business and the Insurance business
risk appetite, ensuring it aligns with the Group’s framework and risk appetite.
Table 1.3: Executive and Risk Committees
The Group Chief Executive is supported by the following:
Committees
Risk focus
Group Executive Committee (GEC)
Supports the Group Chief Executive in exercising his authority in relation to material matters having
strategic, cross-business area or Group-wide implications.
Group Risk Committee (GRC)
Reviews and recommends the Group’s risk appetite and governance, risk and control frameworks, material
Group policies and the allocation of risk appetite. The committee also regularly reviews risk exposures and
risk/reward returns and approves material risk models.
Group Asset and Liability
Committee (GALCO)
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 Customer First Committee
(GCFC)
Group Cost Management
Committee
Conduct Review Committee
Executive Compensation
Committee
Provides a Group-wide perspective on the progress of Group’s, Divisions’ and Functions’ implementation
of initiatives which enhance the delivery of customer outcomes and customer trust, and set and promote
the appropriate tone from the top to fulfil the Group’s vision to become the best bank for customers and
Help Britain Prosper.
Leads and shapes the Group’s approach to cost management, ensuring appropriate governance and
process over Group-wide cost management activities and effective control of the Group’s cost base.
Provides oversight and challenge in connection with the Group’s engagement with conduct review matters
as agreed with the Group Chief Executive.
Provides governance and oversight for Group-wide remuneration matters and policies.
Responsible Business Management
Committee
Recommends and implements the strategy and plans to deliver the Group’s aspiration to be a leader
in responsible business as part of the objective of helping Britain prosper.
The Group Risk Committee is supported through escalation and ongoing reporting by business area risk committees, cross-divisional committees
addressing specific matters of Group-wide significance and the following Risk committees which ensure effective oversight of risk management:
Credit Risk Committees
Responsible for the development and effectiveness of the relevant credit risk management framework,
clear description of the Group’s credit risk appetite, setting of credit policy, and compliance with regulatory
credit requirements.
Group Market Risk Committee
(GMRC)
Monitors and reviews the Group’s aggregate market risk exposures and concentrations and provides
a proactive and robust challenge around business activities giving rise to market risks.
Group Conduct, Compliance and
Operational Risk Committee
Responsible for monitoring breaches, material events and risk issues and conducting deep dive
assessments on specific Conduct, Compliance or Operational Risk subjects to inform corrective action
along with the sharing of information and best practice.
Group Financial Crime
Prevention Committee
Group Fraud Committee
Group Financial Risk Committee
Group Capital Risk Committee
Group Model Governance
Committee
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Reviews and challenges the management of financial crime risk including the overall strategy and
performance and engagement with financial crime authorities. The committee is accountable for ensuring
that, at Group level, financial crime risks are effectively identified and managed within risk appetite and that
strategies for financial crime prevention are effectively co-ordinated and implemented across the Group.
Is responsible for ensuring that the development and application of fraud risk management complies with
the Group’s strategic aims and risk appetite, and our broader corporate responsibilities. The committee
provides direction and focus to priorities which enhance the Group’s fraud risk management capabilities
in line with business and customer objectives, including engagement with external fraud detection and
prevention bodies.
Responsible for reviewing, challenging and recommending to GEC/GRC/GALCO, the Group Individual
Liquidity Adequacy Assessment and Internal Capital Adequacy Assessment Process (ICAAP) submissions,
the Group Recovery Plan, and the annual stress testing of the Group’s operating plan, PRA and EBA stress
tests, and any other analysis as required.
Provides oversight of capital matters within the Group including the Group’s capital position, Pillar 2
requirements, regulatory reform and accounting developments specific to capital, and reviews regulatory
submissions including the ICAAP and Recovery Plan prior to submission to GFRC.
Responsible for setting the framework and standards for model governance across the Group, including
establishing appropriate levels of delegated authority and principles underlying the Group’s risk modelling
framework, specifically regarding consistency of approach across business units and risk types. It approves
risk models other than material models which are approved by GRC.
Lloyds Banking Group
Annual Report and Accounts 2016
FULL ANALYSIS OF RISK DRIVERS
The Group’s risk framework covers all types of risk which affect the Group and could impact on the achievement of its strategic objectives.
A detailed description of each category is provided below.
Primary risk drivers
Credit risk
Conduct
risk
Market
risk
Operational
risk
Funding
and liquidity
risk
Capital
risk
Regulatory
and legal
risk
Insurance
risk
People risk
Financial
reporting
risk
Governance
risk
Page 124
Page 145
Page 146
Page 152
Page 154
Page 159
Page 166
Page 167
Page 168
Page 168
Page 169
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Secondary risk drivers
Capital
sufficiency
Capital
efficiency
Compliance risk
Longevity risk
Resourcing
Competition
risk
Legal risk
Mortality risk
Morbidity risk
Customer
behaviour
risk (including
persistency risk)
Property
insurance risk
Expenses risk
Performance
and reward
Culture and
engagement
Talent and
succession
Learning
Well-being
Legal and
regulatory
(people)
Financial and
prudential
regulatory
reporting
Governance
Disclosure
Model risk
Tax reporting
and compliance
Ethics
Pillar 3
disclosure
Portfolio
concentration
risk
Counterparty
credit risk
Country risk
Collateral
management
risk
Customer risk
Interest rate risk
Product risk
Equity risk
Regulatory and
legal process
Funding risk
Liquidity risk
Product
distribution/
advice risk
Foreign
exchange risk
Credit spread
risk
Inflation risk
Property risk
Alternative
asset risk
Basis risk
Commodity risk
Client money/
fiduciary
obligations
Conduct
process
Financial crime
Fraud
People process
Sourcing
Internal service
provision
External service
provision
(divested
clients)
Physical security
and health and
safety
Information
security and
cyber
IT systems
Change
Business
process
Financial
reporting
process
Governance
process
Risk process
Operational
resilience
The Group considers both reputational and financial impact in the course of managing all its risks and therefore does not classify reputational impact
as a separate risk driver.
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Risk management
Risk management continued
CREDIT RISK
Definition
Credit Risk is defined as the risk that parties with whom the Group has contracted fail to meet their financial obligations (both on or off balance sheet).
Exposures
The principal sources of credit risk within the Group arise from loans and advances, contingent liabilities, commitments, debt securities and derivatives
to customers, financial institutions and sovereigns. The credit risk exposures of the Group are set out in note 52 on page 261. Credit risk exposures are
categorised as ‘retail’, arising primarily in the Retail, Consumer Finance and Run-off divisions, and some small and medium sized enterprises (SMEs)
and ‘corporate’ (including larger SMEs, corporates, banks, financial institutions and sovereigns) arising primarily in the Commercial Banking, Run-off
and Insurance Divisions and Group Corporate Treasury (GCT).
In terms of loans and advances, (for example loans and overdrafts) and contingent liabilities (for example credit instruments such as guarantees
and standby, documentary and commercial letters of credit), credit risk arises both from amounts advanced and commitments to extend credit to a
customer or bank. 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 may be
cancelled and the creditworthiness of customers is monitored regularly. Most commercial term commitments to extend credit are contingent upon
customers maintaining specific credit standards, which together with the creditworthiness of customers are monitored regularly.
Credit risk also arises from debt securities and derivatives. The total notional principal amount of interest rate, exchange rate, credit derivative and
other contracts outstanding at 31 December 2016 is shown on page 131. 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 52 on page 261.
Additionally, credit risk arises from leasing arrangements where the Group is the lessor. Note 2(J) on page 190 provides details on the Group’s
approach to the treatment of leases.
Credit risk exposures in the Insurance Division largely result from holding bond and loan assets in the shareholder funds (including the annuity
portfolio) and from exposure to reinsurers.
The investments held in the Group’s defined benefit pension schemes also expose the Group to credit risk. Note 36 on page 222 provides further
information on the defined benefit pension schemes’ assets and liabilities.
Loans and advances, contingent liabilities, commitments, debt securities and derivatives also expose the Group to refinance risk. Refinance risk is
the possibility that an outstanding exposure cannot be repaid at its contractual maturity date. If the Group does not wish to refinance the exposure
then there is refinance risk if the obligor is unable to repay by securing alternative finance. This may be because the borrower is in financial difficulty,
or because the terms required to refinance are outside acceptable appetite at the time. Refinance risk exposures are managed in accordance with
the Group’s existing credit risk policies, processes and controls, and are not considered to be material given the Group’s prudent and through the
cycle credit risk appetite. Where heightened refinance risk exists (such as in Commercial Banking’s Business Support Unit (BSU) or the run-off book)
exposures are minimised through intensive account management and are impaired and forborne where appropriate.
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 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’).
For regulatory capital purposes the Group’s rating systems assess probability of default and if appropriate, exposure at default and loss given default,
in order to derive Risk Weighted Assets (RWAs) and regulatory Expected Loss (EL). If not appropriate, regulatory prescribed exposure at default and
loss given default values are used in order to derive RWAs and EL.
Impairment allowances are recognised for financial reporting purposes only for loss events that have occurred at the balance sheet date, based on
objective evidence of impairment. 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 regulatory expected loss models. Note 2(H) on page 189 provides details of the Group’s
approach to the impairment of financial assets.
The obligor quality measurement of both retail and commercial counterparties is largely based on the outcomes of credit risk (probability of
default PD) models. The Group operates a number of different regulatory rating models, typically developed internally using statistical analysis
and management judgement – retail models rely more on the former, commercial models include more of the latter, especially in the larger
corporate and more specialised lending portfolios. Internal data is supplemented with external data in model development, where appropriate.
The models vary, inter alia, in the extent to which they are ‘point in time’ versus ‘through the cycle’. The models are subject to rigorous validation
and oversight/governance including, where appropriate, benchmarking to external information.
In the principal retail portfolios, exposure at default and loss given default models are in use. For regulatory reporting purposes, counterparties are
segmented into a number of rating grades, each representing a defined range of default probabilities and exposures migrate between rating grades
if the assessment of the counterparty probability of default changes. The Retail Master scale comprises 13 non-default ratings and one default rating.
In commercial portfolios the PD models also segment counterparties into a number of rating grades, with each grade representing a defined range
of default probabilities. Counterparties migrate between rating grades if the assessment of the PD changes. The Corporate (non-retail) Master Scale
comprises of 19 non-default ratings and 4 default rating grades, and forms the basis on which internal reporting is completed.
Mitigation
The Group uses a range of approaches to mitigate credit risk.
Prudent, through the cycle credit principles, risk policies and appetite statements: The independent Risk Division sets out the credit principles,
risk policies and risk appetite statements. Principles and policies are reviewed regularly, and any changes are subject to a review and approval process.
Policies and risk appetite statements, where appropriate, are supported by procedures, which provide a disciplined and focused benchmark for credit
decisions. Risk 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, which includes tracking portfolio performance against an agreed set of key
appetite tolerances. Oversight and reviews are also undertaken by Credit Risk Oversight and Group Audit.
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Lloyds Banking Group
Annual Report and Accounts 2016
Strong rating systems and controls: The Group has established an independent team in the Risk Division that sets common minimum standards,
designed to ensure risk models and associated rating systems are developed consistently and are of sufficient quality to support business decisions
and meet regulatory requirements. Internal rating models are developed and owned by the Risk Division. The designated model owner takes
responsibility for ensuring the validation of the rating systems, supported and challenged by an independent specialist Group function.
Limitations on concentration risk: Credit risk management includes portfolio controls on certain industries, sectors and product lines to reflect risk
appetite as well as individual, customer and bank limit guidelines. Credit policies and appetite statements are aligned to the Group’s risk appetite
and restrict exposure to higher risk countries and more vulnerable sectors and asset classes. Note 18 on page 208 provides an analysis of loans
and advances to customers by industry (for commercial customers) and product (for retail customers). Exposures are monitored to prevent both
an excessive concentration of risk and single name concentrations. These concentration risk controls are not necessarily in the form of a maximum
limit on exposure, but may instead require new business in concentrated sectors to fulfil additional minimum policy and/or guideline requirements.
The Group’s large exposures are detailed to the Board and reported in accordance with regulatory reporting requirements.
Robust country risk management: The Board sets country risk appetite. Within this, country limits are authorised by the Group Country Risk
Appetite Committee, taking into account economic, financial, political and social factors. Group policies stipulate that these limits must be consistent
with, and support, the approved business and strategic plans of the Group.
Specialist expertise: Credit quality is managed and controlled by a number of specialist units within Risk Division providing, for example:
intensive management and control (see Intensive care of customers in financial difficulty); 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.
Stress testing and scenario analysis: The Group’s credit portfolios are also subjected to regular stress testing, with stress scenario assessments
run at various levels of the organisation. Exercises focused on individual Divisions and portfolios are performed in addition to the Group led and
regulatory stress tests. For further information on the stress testing process, methodology and governance refer to page 119.
Frequent and robust credit risk oversight and assurance: Undertaken by independent Credit Risk Oversight functions operating within Retail
and Consumer Credit Risk and Commercial Banking Risk which are part of the Group’s second line of defence. Their primary objective is to provide
reasonable and independent oversight that credit risk is being managed with appropriate and effective controls.
Group Audit performs the third line of credit risk assurance. A specialist team within Group Audit, comprising experienced credit professionals, is in
place to carry out independent risk based internal control audits, providing an assessment of the effectiveness of internal credit controls, across the
full credit lifecycle including the raising of impairment provisions. These audits cover the diverse range of the Group’s businesses and activities, and
include both ‘standard’ risk based audits and reviews as well as agreed upon procedures to respond to any emerging risks or regulatory requirement.
The work of Group Audit therefore continues to provide executive, senior management and Board Audit Committee with assurance on effectiveness
of credit risk controls, as well as appropriateness of impairments.
Additional mitigation for Retail and Consumer Finance customers
The Group uses a variety of lending criteria when assessing applications for mortgages and unsecured lending. The general approval process uses
credit acceptance scorecards and involves a review of an applicant’s previous credit history using information held by Credit Reference Agencies (CRA).
The Group also assesses the affordability and sustainability of lending for each borrower, for secured lending this includes use of an appropriate
stressed interest rate scenario. Affordability assessments are compliant with relevant regulatory conduct guidelines. The Group takes reasonable steps
to validate information used in the assessment of a customer’s income and expenditure.
In addition, the Group has in place quantitative limits such as product maximum limits, the level of borrowing to income and the ratio of borrowing to
collateral. Some of these limits relate to internal approval levels and others are policy limits above which the Group will reject borrowing applications.
The Group also applies certain criteria that are applicable to specific products such as for applications for a mortgage on a property that is to be let by
the applicant.
For UK Secured, the Group’s policy permits owner occupier applications with a Loan to Value (LTV) maximum of 95 per cent. Applications with an LTV
above 90 per cent are subject to enhanced underwriting criteria, including higher scorecard cut-offs. Loans above £500,000 are subject to a range of
further controls, including reduced maximum income multiples, and increased case review via manual underwriting.
Buy-to-let mortgages are limited to a maximum loan size of £1,000,000 and 75 per cent LTV. Buy-to-let applications must pass a minimum Rental Cover
Ratio of 125 per cent under stressed interest rates, after applicable tax liabilities.
The Group’s policy is to reject any application for a lending product where a customer is registered as bankrupt or insolvent, or has a recent County
Court Judgment or financial default registered at a CRA used by the Group above de minimis thresholds. In addition, the Group rejects applicants
where total unsecured debt, debt-to-income ratios, or other indicators of financial difficulty exceed policy limits.
Where credit acceptance scorecards are used, new models, model changes and monitoring of model effectiveness are independently reviewed and
approved in accordance with the governance framework set by the Group Model Governance Committee.
Additional mitigation for Commercial customers
Individual credit assessment and independent sanction of customer and bank limits: With the exception of small exposures to SME customers
where relationship managers have limited delegated sanctioning authority, credit risk in commercial customer portfolios is subject to sanction by the
independent Risk Division, which considers the strengths and weaknesses of individual transactions, the balance of risk and reward, and how credit risk
aligns to the Group’s risk appetite. Exposure to individual counterparties, groups of counterparties or customer risk segments is controlled through a
tiered hierarchy of delegated sanctioning authorities and limit guidelines. Approval requirements for each decision are based on a number of factors
including, but not limited to, the transaction amount, the customer’s aggregate facilities, credit policy/risk appetite, credit risk ratings and the nature
and term of the risk. The Group’s credit risk appetite criteria for counterparty and customer underwriting is generally the same as that for assets
intended to be held to maturity. All hard underwriting must be sanctioned via credit limits and a pre-approved credit matrix may be used for Best
Efforts underwriting.
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 from market movements
against agreed confidence intervals. Aggregate facility levels by counterparty are set and limit breaches are subject to escalation procedures.
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 relevant counterparty to cover the aggregate
of all settlement risk arising from the Group’s market transactions on any single day.
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Risk management
Risk management continued
Collateral
The principal collateral types for loans and advances, contingent liabilities and derivatives with commercial and bank counterparties/customers are:
– properties;
– charges over business assets such as premises, inventory and accounts receivables;
– financial instruments such as debt securities;
– vehicles;
– cash; and
– guarantees received from third parties.
The Group maintains appetite 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 underlying exposure. Debt securities,
including treasury and other bills, are generally unsecured, with the exception of asset-backed securities and similar instruments such as covered
bonds, 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. Derivative transactions with wholesale counterparties are typically collateralised under a Credit Support Annex
(CSA) in conjunction with the ISDA Master Agreement. Derivative transactions with non-bank customers are not usually supported by a CSA.
No collateral is held in respect of retail credit card or unsecured personal lending. For non-mortgage retail lending to small businesses, collateral may
include second charges over residential property and the assignment of life cover.
Commercial lending decisions must be based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of
any security provided. The requirement for collateral and the type to be taken at origination will be based upon the nature of the transaction and the
credit quality, size and structure of the borrower. For non-retail exposures, the Group will often require the collateral to include a first charge over land
and buildings owned and occupied by the business, a debenture over one or more of the assets of a company or limited liability partnership, personal
guarantees, limited in amount, from the directors of a company or limited liability partnership and key man insurance. The Group maintains policies
setting out acceptable collateral bases for valuation maximum LTV ratios and other criteria to be considered when reviewing an application. Other than
for project finance, object finance and income producing real estate where charges over the subject assets are required, the provision of collateral will
not determine the outcome of an application. Notwithstanding this, the fundamental business proposition must evidence the ability of the business to
generate funds from normal business sources to repay a customer/counterparty’s financial commitment.
The extent to which collateral values are actively managed will depend on the credit quality and other circumstances of the obligor and type of
underlying transaction. Although lending decisions are based on expected cash flows, any collateral provided may impact the pricing and other
terms of a loan or facility granted. This will have a financial impact on the amount of net interest income recognised and on internal loss given default
estimates that contribute to the determination of asset quality and returns.
Collateral values are assessed at the time of loan origination. The Group requires collateral to always be realistically valued by an appropriately
qualified source, independent of both the credit decision process and the customer, at the time of borrowing. In certain circumstances, for Retail
residential mortgages this may include the use of automated valuation models based on market data, subject to accuracy criteria and loan to value
limits. Collateral values are reviewed on a regular basis which will vary according to the type of lending, collateral involved and account performance.
Such reviews are undertaken to confirm that the value recorded in the Bank’s systems remains appropriate and whether revaluation is required,
considering for example, account performance, market conditions and any information available that may indicate that the value of the collateral has
materially declined. In such instances, the Group may seek additional collateral. For Retail residential mortgages, the Group adjusts open market
property values to take account of the costs of realisation and any discount associated with the realisation of the collateral when estimating credit
losses.
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.
The Group seeks to avoid correlation or wrong way risk where possible. Under repo policy, the issuer of the collateral and the repo counterparty should
be neither the same nor connected. The same rule applies for derivatives. The Risk Division has the necessary discretion to extend this rule to other
cases where there is significant correlation. Countries with a rating equivalent to AA- and above may be considered to have no adverse correlation
between the counterparty domiciled in the country and that country of risk (issuer of securities).
Refer to note 52 for further information on collateral.
Master netting agreements
It is credit policy that a Group approved Master Netting Agreement must be used for all transactions and must be in place prior to trading. Any
exceptions must be approved by the Credit Sanctioner. Although master netting agreements do not generally result in an offset of balance sheet
assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis, within relevant jurisdictions and for appropriate
counterparty types they do reduce the credit risk to the extent that, if an event of default occurs, all trades with the counterparty may be 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 this is the net position of all trades under the master netting agreement.
Other credit risk transfers
The Group also undertakes asset sales, credit derivative based transactions and securitisations as a means of mitigating or reducing credit risk,
taking into account the nature of assets and the prevailing market conditions.
Monitoring
In conjunction with Risk Division, businesses identify and define portfolios of credit and related risk exposures and the key benchmarks, behaviours
and characteristics by which those portfolios are managed and monitored in terms of credit risk exposure. This entails the production and analysis of
regular portfolio monitoring reports for review by senior management. Risk Division in turn produces an aggregated review of credit risk throughout
the Group, including reports on significant credit exposures, which are presented to the Divisional Risk Committees, Group Risk Committee and the
Board Risk Committee.
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The performance of all rating models is monitored on a regular basis, in order to seek to ensure that models provide appropriate risk differentiation
capability, the generated ratings remain as accurate and robust as practical, 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 the monitoring identifies material exceptions or deviations
from expected outcomes, these will be escalated in accordance with the governance framework set by the Group Model Governance Committee.
Intensive care of customers in financial difficulty
The Group operates a number of solutions to assist borrowers who are experiencing financial stress. The material elements of these solutions through
which the Group has granted a concession, whether temporarily or permanently, are set out below.
Retail and Consumer Finance customers
The Group’s aim in offering forbearance and other assistance to customers in financial distress is to benefit both the customer and the Group by
discharging the Group’s regulatory and social responsibilities to support its customers and act in their best long-term interests and by bringing
customer facilities back into a sustainable position which, for residential mortgages, also means keeping customers in their homes. The Group
offers a range of tools and assistance to support customers who are encountering financial difficulties. Cases are managed on an individual basis,
with the circumstances of each customer considered separately and the action taken judged as being affordable and sustainable for the customer.
Operationally, the provision and review of such assistance is controlled through the application of an appropriate policy framework, controls around
the execution of policy, regular review of the different treatments to confirm that they remain appropriate, monitoring of customers’ performance
and the level of payments received, and management visibility of the nature and extent of assistance provided and the associated risk.
Assistance is provided through trained colleagues in branches and dedicated telephony units, and via online guidance material. 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 when they have multiple credit facilities, including those at other
lenders that require restructuring. Within the Collections and Recoveries functions, 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 specific tools available to assist customers vary by product and the customer’s status. In defining the treatments offered to customers who have
experienced financial distress, the Group distinguishes between the following categories:
– Reduced payment arrangements: a temporary arrangement for customers in financial distress where arrears accrue at the contractual payment,
for example short-term arrangements to pay.
– Term extensions: a permanent account change for customers in financial distress where the overall term of the mortgage is extended, resulting
in a lower contractual monthly payment.
– Repair: a permanent account change used to repair a customer’s position when they have emerged from financial difficulty, for example capitalisation
of arrears.
Forbearance identification, classification and measurement
The Group classifies Retail and Consumer Finance accounts as forborne at the time a customer in financial difficulty is granted a concession. Accounts
are classified as forborne only for the period of time which the exposure is known to be, or may still be, in financial difficulty. Where temporary
forbearance is granted, exit criteria are applied to include accounts until they are known to no longer be in financial difficulty. Where the treatment
involves a permanent change to the contractual basis of the customer’s account such as a capitalisation of arrears or term extension, the Group
classifies the balance as forborne for a period of 24 months, after which no distinction is made between these accounts and others where no change
has been made.
Those forborne loans which fall below individual assessment limits are grouped with other assets of similar characteristics and assessed collectively
for impairment in accordance with the Group impairment policy detailed in note 2(H). The Group’s approach is to ensure that provisioning models,
supported by management judgement, appropriately reflect the underlying loss risk of exposures. The performance and output of models are
monitored and challenged on an ongoing basis, in line with the Group’s model governance policies.
The Group measures the success of a forbearance scheme for Secured customers based upon the proportion of customers performing (less than
or equal to three months in arrears) over the 24 months following the exit from a forbearance treatment. For temporary treatments, 80 per cent of
customers accepting reduced payment arrangements are performing. For permanent treatments, 83 per cent of customers who have accepted
capitalisations of arrears and 84 per cent of customers who have accepted term extensions are performing.
Customers receiving support from UK government sponsored programmes
To assist customers in financial distress, the Group also participates in UK government sponsored programmes for households the most significant
of which is the Income Support for Mortgage Interest which provides certain defined categories of customers access to a benefit scheme, paid for
by the government, which covers all or part of the interest on the mortgage. There are two primary categories:
– Unemployed customers claiming Jobseekers Allowance: Qualifying customers are able to claim for mortgage interest at 3.12 per cent on up to
£200,000 of the mortgage. There is a two year time limit on claims.
– Pension Credit customers: Qualifying customers are able to claim for mortgage interest at 3.12 per cent on up to £100,000 of the mortgage
and there is no time limit as to how long they can claim.
For both categories, all decisions regarding an individual’s eligibility and any amounts payable under the scheme rest solely with the government.
Payments are made directly to the Group by the Department of Work and Pensions. The Group estimates that customers representing approximately
£1.8 billion of its mortgage exposures are receiving this benefit, including those who are also receiving other treatments for financial difficulty.
Commercial customers
Early identification, control and monitoring are key to supporting the customer and protecting the Group. With the exception of small exposures in
SME all non-retail exposures in the Commercial Banking and Run-off Divisions are reviewed at least annually (and more frequently where required) by
the independent Risk Division. As part of the Group’s established Credit Risk Classification system, every exposure in the good book is categorised
as either ‘good’ or ‘watchlist’. The term watchlist refers to cases which require closer monitoring on the good book and are split between Special
Mention and Special Review (the latter being the more serious of the two). This complements the Group’s risk rating tools and is designed to identify
and highlight portfolio levels of asset quality as well as individual problem credits. All watchlist names are reviewed by the Business and Risk Division
regularly, and the classification is updated if required. This process seeks to ensure that relationship managers act promptly to identify, and highlight
to senior management those customers who have greater potential to become higher risk in the future.
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Risk management
Risk management continued
Those customers deemed higher risk where there is cause for concern over future repayment capability or where there is a risk of the asset becoming
impaired will be transferred to the Business Support Unit (BSU) at an early stage. BSU will take over the ‘credit’ responsibility for the customer
relationship whilst the ‘servicing’ responsibility remains with the original Relationship Manager. The over-arching aim of the BSU is to provide support
and work consensually with each customer to try and resolve the issues, restore the business to a financially viable position and thereby bring about
a business turnaround. This may involve a combination of restructuring, work out strategies and other types of forbearance.
With the exception of small exposures in SME, BSU case officers manage stressed and doubtful assets in Commercial Banking and are part of the
independent Risk Division. They are highly experienced and operate in a closely controlled and monitored environment, including regular oversight
and close scrutiny by senior management. Distressed run-off assets are managed to the same standards by Client Asset Management (CAM).
A detailed assessment is undertaken for cases in BSU to assist in reducing and minimising risk exposure and to also highlight potential strategic
options. A range of information is required to fully appraise and understand the customer’s business and cashflow (and therefore debt serviceability)
and may involve the Group, in addition to using its own internal sector experts, engaging professional advisers to perform asset valuations, strategic
reviews and where applicable, independent business reviews. The assessment may also involve:
– critically assessing a customer’s ability to effectively manage the business in a distressed situation where a turnaround needs to be delivered;
– analysis of market sector factors, i.e. products, customers, suppliers, pricing and margin issues;
– performance review of operational areas that should be considered in terms of current effectiveness and efficiency and scope for improvements;
– financial analysis to model plans and factor in potential sensitivities, vulnerabilities and upsides; and
– determining the most appropriate corporate and capital structure suitable for the work-out strategy concerned.
The above assessment, monitoring and control processes continue throughout the period the case is managed within the BSU. All the analysis
performed around cash flows is used to determine appropriate impairment provisions.
The level of Commercial Banking Division BSU gross lending to customers reduced from £4.2 billion to £3.4 billion between 31 December 2015 and
31 December 2016. The net reduction of £0.8 billion in BSU managed lending in Commercial Banking was driven by returns to mainstream, disposals,
write-offs and repayments.
The Group’s treatment of loan renegotiations is included in the impairment policy in note 2(H) on page 189. Income statement information set out
in the credit risk tables is on an underlying basis (see page 37).
Forbearance
A key factor in determining whether the Group treats a commercial customer as forborne is the granting of a concession which is outside the Group’s
current risk appetite to a borrower who experiences, or is believed to be about to experience, financial difficulty. Where a concession is granted
to a customer that is not in financial difficulty or the risk profile is considered within the Group’s current risk appetite, the concession would not be
considered to be an act of forbearance. The Group does not believe forbearance reporting is appropriate for derivatives, available for sale assets
and the trading book where assets are marked to market daily.
The Group recognises that forbearance alone is not necessarily an indicator of impaired status, but it is a trigger for the review of the customer’s
credit profile. If there is any concern over the future cash flows and/or the Group incurring a loss, then forborne loans will be classified as impaired
in accordance with the Group’s impairment policy. All impaired loans, including recoveries portfolios, are currently reported as forborne.
Recovery can sometimes be through improvement in market or economic conditions, or the customer may benefit from access to alternative sources
of liquidity, such as an equity injection. These can be especially relevant in real estate or other asset backed transactions where a fire sale of assets in
a weak market may be unattractive.
Depending on circumstances and when operated within robust parameters and controls, the Group believes forbearance can help support the
customer in the short to medium-term. The Group expects to have unimpaired forborne assets within its portfolios, where default has been avoided,
or when no longer considered impaired, although the majority of these cases will be managed in the BSU, where more intensive management and
monitoring is available.
Unimpaired forborne assets are included in calculating the overall collective unidentified impairment provision, which uses the historical observed
default rate and loss emergence period of the relevant portfolio as a whole as part of its calculation.
Whilst the material portfolios have been reviewed for forbearance, some non-retail loans and advances in Commercial Banking and Run-off Divisions
have not been reviewed on the basis that the level of unimpaired forbearance is relatively immaterial, or because the concept of forbearance is not
relevant. These include Lloyds Bank Commercial Finance Ltd and The Agricultural Mortgage Corporation Plc.
Types of forbearance
The Group’s strategy and offer of forbearance is largely dependent on each customers individual situation. Early identification, control and monitoring
are key to supporting the customer and protecting the Group. Concessions are often provided to help the customer with their day to day liquidity and
working capital. A number of options are available to the Group where a customer is facing financial difficulty and each case is treated depending on
its own specific circumstances.
For commercial customers, the Group currently looks at forbearance concessions including changes to:
– Contractual payment terms (for example loan maturity extensions, or changes to capital and/or interest servicing arrangements, including capital
repayment holidays or conversion to interest only terms); and
– Non-payment contractual terms (for example covenant amendments or waivers) where the concession enables default to be avoided.
The main types of forbearance concessions to commercial customers in or facing financial difficulty are set out below:
– Covenants: This includes temporary and permanent waivers, amendment or resetting of non-payment contractual covenants (including LTV and
interest cover). The granting of this type of concession in itself would not result in the loan being classified as impaired and the customer is kept
under review in the event that further forbearance is necessary;
– Extensions/Alterations: This includes extension and/or alteration of repayment terms to a level outside of market or the Group’s risk appetite due to
the customer’s inability to make existing contractual repayment terms; amendments to an interest rate to a level considered outside of market or the
Group’s risk appetite, or other amendments such as changes to capital and/or interest servicing arrangements including capital repayment holidays
or conversion to interest only terms; and
– Multiple type of forbearance (a combination of the above two).
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Annual Report and Accounts 2016
Forbearance identification, classification and measurement
All non-retail loans and advances on the watchlist are further categorised depending on the current and expected credit risk attaching to the customer
and the transaction. All watchlist names are reviewed by the business and independent Risk function regularly and the classification is updated if
required.
Any event that causes concern over future payments is likely to result in the customer being assessed for impairment and, if required, an impairment
allowance recognised. If impairment is identified, the customer is immediately transferred to BSU (if not already managed there) and the lending will
be treated as impaired.
All of a customer’s impaired loans are treated as forborne as they are considered as having been (or will be) granted some form of forbearance.
Most impaired loans and advances exist only in the BSU within Commercial Banking Division and Run-off Division.
A portfolio approach is taken for SME customers with exposures below £1 million managed in BSU. All customers with exposures below £1 million
are reported as forborne whilst they are managed by SME BSU (whether impaired or unimpaired).
All reviews performed in the good book, BSU within Commercial Banking or in the Run-off Division include analysis of latest financial information,
a consideration of the market and sector the customer operates in, performance against plan and revised terms and conditions granted as part of
any forbearance concession that may have been provided.
Exit from forbearance
A customer where forbearance has been granted will remain treated and recorded as forborne until it evidences acceptable performance over a
period of time. This period will depend on a number of factors such as whether the customer is trading in line with its revised plan, it is operating within
the new terms and conditions (including observation to revised covenants and contractual payments), its financial performance is stable or improving
and there are no undue concerns over its future performance. As a minimum, this cure period is currently expected to be at least 12 months following
a forbearance event. Customers curing are managed according to their overriding Credit Risk Classification categorisation; this could be in BSU,
Run-off or in mainstream Good Book.
The exception to this 12 month minimum period is where a permanent structural cure is made (for example, an injection of new collateral security
or a partial repayment of debt to restore an LTV back to within a covenant). In this case, the customer may exit forbearance once the permanent cure
has been made.
However, notwithstanding this, the overriding requirement for exit from forbearance in all cases is that the customer is not impaired and the reason
for the forbearance event is no longer present.
Upon exit from forbearance the customer may be returned to the mainstream good classification. It is important to note that such a decision can
be made only by the independent Risk Division.
The Group credit risk portfolio in 2016
Overview
– Asset quality remains strong with portfolios continuing to benefit from the Group’s pro-active approach to risk management, continued low interest
rates and a resilient UK economic environment.
– The impairment charge increased by 14 per cent to £645 million in 2016 compared to £568 million in 2015. Gross charges remained broadly flat with
the increase in net charges largely due to lower levels of releases and write-backs.
– The asset quality ratio for 2016 was 15 basis points compared to 14 basis points during 2015 and the gross asset quality ratio (excluding releases
and write-backs) was stable at 28 basis points.
– Looking forward the 2017 full year asset quality ratio is expected to increase to around 25 basis points primarily reflecting lower releases and
write-backs.
– Impaired loans as a percentage of closing loans and advances reduced to 1.8 per cent at 31 December 2016, from 2.1 per cent at 31 December 2015,
with impaired loans reducing by £1,095 million to £8,495 million during the period, due to further reductions in the Commercial Banking, Consumer
Finance and Run-off portfolios.
Low risk culture and prudent risk appetite
– The Group continues to operate a prudent approach to credit risk, with the portfolios benefiting from the focus on credit at origination and a prudent
through the cycle approach to credit risk appetite. The Group’s portfolios are well positioned against current economic concerns and market volatility.
– The Group’s credit processes and controls ensure effective risk management, including early identification and management of customers and
counterparties who may be showing signs of distress.
– The Group has delivered lending growth in key segments without relaxing credit criteria despite terms and conditions in some of the Group’s
markets being impacted by increased competition and, in Commercial Banking, uncertainty in some sectors.
– Sector concentrations within the lending portfolios are closely monitored and controlled, with mitigating actions taken where appropriate.
Sector and product caps limit exposure to certain higher risk and vulnerable sectors and asset classes. In particular:
- The average indexed LTV of the Retail UK Secured portfolio at 31 December 2016 was 44.0 per cent (31 December 2015: 46.1 per cent). The
percentage of closing loans and advances with an indexed LTV greater than 100 per cent was 0.7 per cent (31 December 2015: 1.1 per cent).
- Total UK Direct Real Estate gross lending across the Group was £19.9 billion (31 December 2015: £19.7 billion). This mainly includes Commercial
Banking lending of £18.5 billion, £0.5 billion booked in the Islands Commercial business and £0.2 billion within Retail Business Banking (within
Retail Division) with the Group continuing to write new business within conservative risk appetite parameters. The Group’s significantly reduced
legacy run-off direct real estate portfolio has continued to fall to £0.7 billion at 31 December 2016 (31 December 2015: £1.1 billion), and now
represents a very modest element of the total UK Direct Real Estate lending portfolio.
– Run-off net external assets stood at £11,336 million at 31 December 2016, down from £12,154 million at 31 December 2015. The portfolio represents
only 2.1 per cent of the overall Group’s loans and advances (31 December 2015: 2.3 per cent).
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Risk management
Risk management continued
Table 1.4: Group impairment charge
2016
Retail
Commercial Banking
Consumer Finance
Run-off
Central items
Total impairment charge
Asset quality ratio
Gross asset quality ratio
1 Restated.
Table 1.5: Movement in gross impaired loans
At 1 January1
Classified as impaired during the year
Transferred to not impaired during the year
Repayments
Amounts written off
Impact of disposal of business and asset sales
Exchange and other movements
At 31 December
1 Restated.
Loans and
advances to
customers
£m
Debt securities
classified as
loans and
receivables
£m
Available-
for-sale
financial
assets
£m
Other
credit risk
provisions
£m
373
21
282
(17)
(2)
657
–
–
–
–
–
–
–
–
–
–
–
–
–
(5)
–
(9)
2
(12)
Retail
£m
4,112
1,947
(800)
(517)
(391)
–
3
Commercial
Banking
£m
2,543
671
(112)
(595)
(311)
(33)
16
4,354
2,179
2016
Consumer
Finance
£m
910
425
(81)
(121)
(285)
(49)
(54)
745
Run-off
£m
2,025
111
(54)
(94)
(485)
(410)
124
1,217
Total
£m
373
16
282
(26)
–
645
0.15%
0.28%
Total
£m
9,590
3,154
(1,047)
(1,327)
(1,472)
(492)
89
8,495
20151
£m
349
(22)
235
8
(2)
568
0.14%
0.28%
2015
Total
£m
14,308
3,401
(1,358)
(1,729)
(1,503)
(3,403)
(126)
9,590
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Annual Report and Accounts 2016
Table 1.6: Group impaired loans and provisions
At 31 December 2016
Retail
Commercial Banking
Consumer Finance
Run-off
Reverse repos and other items3
Total gross lending
Impairment provisions
Fair value adjustments4
Total Group
At 31 December 20155
Retail
Commercial Banking
Consumer Finance
Run-off
Reverse repos and other items3
Total gross lending
Impairment provisions
Fair value adjustments4
Total Group
Loans and
advances to
customers
£m
299,493
101,176
35,494
10,259
15,249
Impaired
Loans
£m
4,354
2,179
745
1,217
Impaired
loans as %
of closing
advances
%
Impairment
provisions1
£m
Provision
as % of
impaired
loans2
%
1.5
2.2
2.1
11.9
1,630
824
396
682
38.2
37.8
85.0
56.0
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c
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p
o
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t
461,671
8,495
1.8
3,532
43.4
(3,532)
(181)
457,958
307,500
103,082
31,827
11,422
5,798
4,112
2,543
910
2,025
1.3
2.5
2.9
17.7
1,564
1,091
367
1,150
39.2
42.9
75.5
56.8
459,629
9,590
2.1
4,172
46.1
(4,172)
(282)
455,175
1 Impairment provisions include collective unidentified impairment provisions.
2 Impairment provisions as a percentage of impaired loans are calculated excluding loans in recoveries in Retail (31 December 2016: £86 million; 31 December 2015: £118 million) and in
Consumer Finance (31 December 2016: £279 million; 31 December 2015: £424 million).
3 Includes £6.7 billion (December 2015: £5.7 billion) of lower risk loans sold by Commercial Banking and Retail to Insurance to back annuitant liabilities.
4 The fair value adjustments relating to loans and advances were those required to reflect the HBOS assets in the Group’s consolidated financial records at their fair value and took into account
both the expected losses and market liquidity at the date of acquisition. The fair value unwind in respect of impairment losses incurred was £70 million for the year ended 31 December 2016
(31 December 2015: £97 million). The fair value unwind in respect of loans and advances is expected to continue to decrease in future years and will reduce to zero over time.
5 Restated.
Table 1.7: Derivative credit risk exposures
2016
Traded over the counter
2015
Traded over the counter
Traded on
recognised
exchanges
£m
Settled
by central
counterparties
£m
Not settled
by central
counterparties
£m
Traded on
recognised
exchanges
£m
Settled
by central
counterparties
£m
Not settled
by central
counterparties
£m
Total
£m
Total
£m
–
254
369,368
369,622
167,399
3,023,742
423,709
3,614,850
32,172
–
–
–
11,046
8,098
43,218
8,098
6,568
31,128
4,837
–
–
3,598,307
–
–
383,722
791,351
9,337
4,566
390,290
4,420,786
14,174
4,566
199,571
3,023,996
812,221
4,035,788
42,533
3,598,307
1,188,976
4,829,816
262
(1)
261
35,563
(34,506)
1,057
103
(131)
(28)
28,811
(26,149)
2,662
Notional balances
Foreign exchange
Interest rate
Equity and other
Credit
Total
Fair values
Assets
Liabilities
Net asset
The total notional principal amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2016
and 31 December 2015 is shown in the table above. 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 52 on page 261.
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Risk management continued
Retail
– Asset quality remains strong across all portfolios, with stable new business quality and fewer loans entering arrears.
– The impairment charge increased by £24 million to £373 million for 2016, an increase of 7 per cent compared to 2015.
– The Overdrafts impairment charge increased by £12 million to £241 million, driven by a change to collections entry criteria.
– The Secured impairment charge increased by £6 million to £104 million, reflecting a continued prudent approach to provisioning.
– The Retail Business Banking impairment charge increased by £6 million to £27 million, following a revised modelling approach
and an increase in lending balances.
– Impairment provisions as a percentage of impaired loans decreased to 38.2 per cent from 39.2 per cent at the end of 2015.
Table 1.8: Retail impairment charge
Secured
Overdrafts
Wealth
Retail Business Banking
Total impairment charge
Asset quality ratio
1 Restated.
Table 1.9: Retail impaired loans and provisions
At 31 December 2016
Secured
Overdrafts
Wealth
Retail Business Banking
Total gross lending
Impairment provisions
Fair value adjustments
Total
At 31 December 20153
Secured
Overdrafts
Wealth
Retail Business Banking
Total gross lending
Impairment provisions
Fair value adjustments
Total
2016
£m
104
241
1
27
373
0.12%
20151
£m
98
229
1
21
349
0.11%
Change
%
(6)
(5)
–
(29)
(7)
1bp
Loans and
advances to
customers
£m
Impaired
loans
£m
Impaired
loans as a %
of closing
advances
%
Impairment
provisions1
£m
Impairment
provisions
as a %
of impaired
loans2
%
294,503
4,104
1,952
2,034
1,004
179
44
27
299,493
4,354
(1,630)
(181)
297,682
302,413
2,028
2,164
895
307,500
(1,564)
(273)
305,663
3,818
211
40
43
4,112
1.4
9.2
2.2
2.7
1.5
1.3
10.4
1.8
4.8
1.3
1,503
90
15
22
1,630
1,431
95
19
19
1,564
36.6
82.6
34.1
200.0
38.2
37.5
78.5
47.5
126.7
39.2
1 Impairment provisions include collective unidentified impairment provisions.
2 Impairment provisions as a percentage of impaired loans are calculated excluding loans in recoveries for Overdrafts (31 December 2016: £70 million; 31 December 2015: £90 million) and Retail
Business Banking (31 December 2016: £16 million; 31 December 2015: £28 million).
3 Restated.
132
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Annual Report and Accounts 2016
Secured
– The impairment charge increased by £6 million to £104 million in 2016 (31 December 2015: £98 million).
– Loans and advances reduced by 2.6 per cent on the Secured book to £295 billion, with reductions in both the Mainstream and buy-to-let portfolios.
The closed Specialist portfolio has continued to run-off, reducing by 10.0 per cent to £18 billion.
– Impaired loans increased by £286 million to £4,104 million in 2016 and the value of mortgages greater than three months in arrears (excluding
repossessions) increased by £128 million to £6,033 million at 31 December 2016 (31 December 2015: £5,905 million). These are both principally
due to delayed litigation while changes were made to legal processes. New business quality remained stable and flows into arrears improved.
– Impairment provisions as a percentage of impaired loans was 36.6 per cent (31 December 2015: 37.5 per cent).
– Against a backdrop of strong improvement in the housing market, with UK prices rising 6 per cent over 2016 (on a quarterly non-seasonally adjusted
basis), provisions remain prudent and reflect the latent risks of the current low interest rate environment.
– The average indexed LTV of the portfolio at 31 December 2016 improved to 44.0 per cent compared with 46.1 per cent at 31 December 2015.
The percentage of closing loans and advances with an indexed LTV in excess of 100 per cent improved to 0.7 per cent at 31 December 2016,
compared with 1.1 per cent at 31 December 2015.
– The average LTV for new mortgages written in 2016, including participation in the UK Government’s Help To Buy scheme, was 64.4 per cent
compared with 64.7 per cent for 2015.
– Additional controls for new buy-to-let lending were implemented ahead of the regulatory deadline, with no relaxation in risk appetite.
Table 1.10: Retail Secured loans and advances to customers
Mainstream
Buy-to-let
Specialist1
Total Secured
At 31 Dec
2016
£m
At 31 Dec
2015
£m
222,450
227,267
54,460
17,593
55,598
19,548
294,503
302,413
1 Specialist lending has been closed to new business since 2009.
Table 1.11: Mortgages greater than three months in arrears (excluding repossessions)
At 31 Dec
Mainstream
Buy-to-let
Specialist
Total
Number of cases
Total mortgage accounts %
Value of loans1
Total mortgage balances %
2016
Cases
2015
Cases
35,254
34,850
5,324
9,078
5,021
8,777
49,656
48,648
2016
%
1.7
1.1
7.2
1.8
2015
%
1.6
1.0
6.4
1.7
2016
£m
3,865
660
1,508
6,033
2015
£m
3,803
626
1,476
5,905
2016
%
1.7
1.2
8.6
2.0
2015
%
1.7
1.1
7.6
2.0
1 Value of loans represents total gross book value of mortgages more than three months in arrears.
The stock of repossessions increased to 678 cases at 31 December 2016 compared to 654 cases at 31 December 2015.
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Risk management
Risk management continued
Table 1.12: Period end and average LTVs across the Retail mortgage portfolios
Mainstream
%
Buy-to-let
%
Specialist
%
Total
%
Unimpaired
%
Impaired
%
At 31 December 2016
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Total
Outstanding loan value (£m)
Average loan to value:1
Stock of residential mortgages
New residential lending
Impaired mortgages
At 31 December 2015
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Total
Outstanding loan value (£m)
Average loan to value:1
Stock of residential mortgages
New residential lending
Impaired mortgages
56.8
17.8
14.0
8.4
2.4
0.6
52.0
25.4
14.4
6.1
1.5
0.6
53.8
17.8
13.6
8.6
3.1
3.1
55.8
19.2
14.0
8.0
2.3
0.7
56.0
19.3
14.0
7.9
2.2
0.6
100.0
222,450
100.0
54,460
100.0
17,593
100.0
100.0
294,503
290,399
41.8
65.0
51.8
52.2
19.1
15.5
9.0
3.2
1.0
53.7
61.9
69.0
45.4
26.8
15.0
8.0
3.9
0.9
49.2
n/a
61.9
43.7
19.7
15.5
11.6
5.5
4.0
44.0
64.4
55.8
50.4
20.6
15.4
9.0
3.5
1.1
50.7
20.6
15.4
8.9
3.4
1.0
100.0
227,267
100.0
55,598
100.0
19,548
100.0
100.0
302,413
298,595
43.6
65.2
55.6
56.3
63.0
74.6
53.3
n/a
66.8
46.1
64.7
60.0
38.3
18.4
15.3
11.9
6.8
9.3
100.0
4,104
30.9
17.5
16.9
13.3
9.5
11.9
100.0
3,818
1 Average loan to value is calculated as total loans and advances as a percentage of the total indexed collateral of these loans and advances.
Interest only mortgages
The Group provides interest only mortgages to owner occupier mortgage customers whereby only payments of interest are made for the term of
the mortgage with the customer responsible for repaying the principal outstanding at the end of the loan term. At 31 December 2016, interest only
balances as a proportion of total owner occupier balances had reduced to 31.3 per cent (31 December 2015: 33.9 per cent). The average indexed loan
to value improved to 43.8 per cent (31 December: 46.6 per cent).
New owner occupier interest only mortgages are subject to conservative underwriting criteria with rigorous controls on customers' ability to repay
the principal at the end of term. New interest only mortgages, including those with any element of capital repayments represented 1.9 per cent of
new residential mortgages in 2016 (2.8 per cent in 20152).
For existing interest only mortgages, a contact strategy is in place throughout the term of the mortgage to ensure that customers are aware of their
obligations to repay the principal upon maturity of the loan.
Treatment strategies are in place to help customers anticipate and plan for repayment of capital at maturity and support those who may have difficulty
in repaying the principal amount. A dedicated specialist team supports customers who have passed their contractual maturity date and are unable to
fully repay the principal. A range of treatments are offered such as full (or part) conversion to capital repayment, and extension of term to match the
maturity dates of any associated repayment vehicles.
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Lloyds Banking Group
Annual Report and Accounts 2016
Table 1.13: Analysis of owner occupier interest only mortgages
Interest only balances (£m)1
Of which, impaired (%)
Average loan to value (%)
Maturity profile (£m)2:
1 year
2-5 years
6-10 years
>11 years
Past term interest only balances (£m)3
Of which, impaired (%)
Average loan to value (%)
Negative equity (%)
2016
72,651
3.1
43.8
2,496
9,877
16,990
41,927
1,361
10.5
31.5
1.4
2015
81,558
2.5
46.6
1,709
10,123
17,084
51,502
1,140
9.7
32.5
1.8
1 In addition the Group has buy-to-let interest only balances of £48,575 million (2015: £49,751 million) and certain other interest only balances of £3,703 million (2015: £3,705 million).
2 December 2015 values have been restated to now include the interest only elements of mortgage accounts which consist of partial interest only and partial capital repayment.
3 Past term interest only balances are reported excluding any element being repaid on a capital and interest basis. December 2015 balances have been restated on the same basis.
Forborne loans
UK Secured forborne loans and advances reduced by £1,006 million in 2016 to £2,096 million, primarily due to a reduction in recapitalisations with
higher levels of historic cases exiting the two year probation period, and a tightening of eligibility criteria during the year. At 31 December 2016,
UK Secured loans and advances currently or recently subject to forbearance improved to 0.7 per cent (31 December 2015: 1.0 per cent) of total UK
Secured loans and advances.
Overdrafts forborne loans and advances have reduced by £9 million in 2016 to £78 million. At 31 December 2016, Overdrafts loans and advances
currently or recently subject to forbearance were 4.0 per cent (31 December 2015: 4.3 per cent) of total overdrafts loans and advances.
Further analysis of the Retail forborne loan balances is set out below:
Table 1.14: UK Retail forborne loans and advances (audited)
UK Secured lending:
Temporary forbearance arrangements
Reduced payment arrangements1
Permanent treatments
Repair and term extensions2
Total
Overdrafts3
Total loans and advances which
are forborne
Total forborne loans and
advances which are impaired
Impairment provisions as % of
loans and advances which are
forborne
At Dec
2016
£m
At Dec
2015
£m
At Dec
2016
£m
At Dec
2015
£m
At Dec
2016
%
At Dec
2015
%
428
414
101
41
4.9
4.2
1,668
2,096
2,688
3,102
78
87
116
217
61
132
173
4.7
4.7
4.2
4.2
63
38.0
35.0
1 Includes customers who had an arrangement to pay less than the contractual amount at 31 December or where an arrangement ended within the previous three months.
2 Includes capitalisation of arrears and term extensions which commenced during the previous 24 months and where the borrowers remain as customers at 31 December.
3 Includes temporary treatments where the customer is currently benefiting from the change or the treatment has ended within the last six months.
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Risk management
Risk management continued
The movements in Retail forborne loans and advances during the year are as follows:
Table 1.15: Movement in UK Retail forborne loans and advances (audited)
At 1 January
Classified as forborne during the year
Written-off/sold
Exit from forbearance
Redeemed or repaid
Exchange and other movements
At 31 December
2016
2015
UK
Secured
£m
3,102
975
(12)
(1,741)
(200)
(28)
2,096
Overdrafts
£m
87
50
(31)
(24)
–
(4)
78
UK
Secured
£m
4,394
1,290
(25)
(2,252)
(263)
(42)
3,102
Overdrafts
£m
89
53
(26)
(22)
–
(7)
87
Commercial Banking
– The Commercial Banking net impairment charge was £16 million in 2016, compared to a net impairment release of £22 million in 2015, with the
increase largely due to one material charge related to a case within the oil & gas sector, rather than a deterioration in the underlying portfolio.
Other than this, gross charges remained relatively low in 2016.
– The portfolio continues to benefit from effective risk management and the continued low interest rate environment.
– Credit quality of the portfolio and new business remains generally good.
– Impaired loans reduced by 14 per cent to £2,179 million at 31 December 2016 compared with £2,543 million at 31 December 2015 and
as a percentage of closing loans and advances reduced to 2.2 per cent from 2.5 per cent at 31 December 2015.
– Impairment provisions reduced to £824 million at 31 December 2016 (31 December 2015: £1,091 million) and includes collective unidentified
impairment provisions of £183 million (31 December 2015: £229 million). Provisions as a percentage of impaired loans reduced from 42.9 per cent
to 37.8 per cent during 2016, heavily influenced by the net movement of three material cases with different coverage levels that has impacted the
portfolio average.
– The UK faces a number of significant headwinds including the changing global economic outlook and the impact of the EU Exit referendum
outcome which have the ability to impact the Commercial Banking portfolios.
– Commercial Banking remains disciplined within its low risk appetite approach and key credit risks continue to be effectively managed, including
early identification and management of potential concern customers. We manage and limit exposure to certain sectors and asset classes, and
closely monitor credit quality, sector and single name concentrations.
– Detailed EU Exit portfolio impact assessments have been undertaken and internal and external key performance indicators are being monitored
closely to help identify early signs of any deterioration.
– Despite the uncertain economic headwinds, the portfolios are well positioned and monitoring confirms that we have yet to see any material
deterioration in the credit quality of our portfolios. However, given the challenging environment our portfolios will not be immune and impairments
are likely to increase from their historic low levels, driven mainly by lower levels of releases and write-backs and an element of credit normalisation.
Table 1.16: Commercial Banking impairment charge
SME
Other
Total impairment charge
Asset quality ratio1
1 In respect of loans and advances to customers.
2016
£m
(7)
23
16
2015
£m
(22)
–
(22)
Change
%
(68)
0.02%
0.01%
1bp
136
Lloyds Banking Group
Annual Report and Accounts 2016
Table 1.17: Commercial Banking impaired loans and provisions
At 31 December 2016
SME
Other
Total gross lending
Impairment provisions
Total
At 31 December 20152
SME
Other
Total gross lending
Impairment provisions
Total
Impaired
loans as a %
of closing
advances
%
Impairment
provisions1
£m
Impairment
provisions
as a %
of impaired
loans
%
3.1
1.8
2.2
3.9
1.9
2.5
173
651
824
213
878
1,091
18.7
51.8
37.8
18.5
63.0
42.9
Loans and
advances to
customers
£m
29,959
71,217
101,176
(824)
100,352
29,393
73,689
103,082
(1,091)
101,991
Impaired
loans
£m
923
1,256
2,179
1,149
1,394
2,543
1 Impairment provisions include collective unidentified impairment provisions.
2 Restated.
SME
– The SME Banking portfolio continues to grow within prudent credit risk appetite parameters.
– Portfolio credit quality has remained stable or improved across all key metrics.
– SME continues to benefit from write-backs/releases. There was a net impairment release of £7 million in 2016 compared to a net release
of £22 million during 2015.
Other Commercial Banking
– Other Commercial Banking comprises £71,217 million of gross loans and advances to customers in Mid Markets, Global Corporates and Financial
Institutions.
– The Mid Markets business remains UK-focused and credit quality has been generally stable during 2016. The downturn in global oil and gas prices,
which began in 2015, has created pressure on some parts of the oilfield services portfolio but this has not translated into a significant increase in
defaults or impairment in the Mid Markets book. Political events during 2016, in particular the EU Exit referendum outcome, have brought volatility
to financial markets but to date this has not led to a material increase in stress within the Mid Markets portfolio.
– The Global Corporates business continues to have a predominance of investment grade clients, primarily UK based. The portfolio remains of good
quality despite the current global economic headwinds particularly relating to the EU Exit referendum outcome and volatile commodity prices in the
oil & gas and mining sectors.
– The real estate business within the Group’s Mid Markets and Global Corporate portfolio is focused on clients operating in the UK commercial
property market ranging in size from medium sized private real estate entities up to publicly listed property companies. The uncertainties created by
the EU Exit referendum outcome have reduced activity in the second half of 2016 but the market for UK real estate has continued to be resilient and
credit quality remains good with minimal impairments/stressed loans. Recognising this is a cyclical sector, appropriate caps are in place to control
exposure and business propositions continue to be written in line with a prudent, through the cycle risk appetite with conservative LTVs, strong
quality of income and proven management teams.
– Financial Institutions serves predominantly investment grade counterparties with whom relationships are either client focused or held to support
the Group’s funding, liquidity or general hedging requirements. Overall limits have been relatively stable as we continue to prudently manage the
portfolio within our conservative risk appetite and clearly defined sector strategies.
– The Group continues to adopt a conservative stance across the Eurozone maintaining close portfolio scrutiny and oversight particularly given the
current macro environment and horizon risks.
Commercial Banking UK Direct Real Estate LTV analysis
– The Group classifies Direct Real Estate as exposure which is directly supported by cash flows from property activities (as opposed to trading activities,
such as hotels, care homes and housebuilders).
– Focus remains on the UK market, on good quality customers, with a proven track record in Real Estate and where cash flows are robust.
– Commercial Banking saw some growth in its UK Direct Real Estate core portfolio during 2016 with business continuing to be written within
conservative risk appetite parameters. Excluding £0.5 billion in the Islands Commercial business, Commercial Banking UK Direct Real Estate
gross lending stood at £18.5 billion at 31 December 2016.
– Approximately 70 per cent of loans and advances to UK Direct Real Estate relate to commercial real estate with the remainder relating to residential
real estate. The portfolio continues to be heavily weighted towards investment real estate (c.90 per cent) over development.
– The LTV profile of the UK Direct Real Estate portfolio in Commercial Banking continues to improve.
137
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Risk management
Risk management continued
Table 1.18: LTV – UK Direct Real Estate
UK exposures >£5m
Less than 60%
60% to 70%
70% to 80%
80% to 100%
100% to 120%
120% to 140%
Greater than 140%
Unsecured2
UK exposures <£5m3
Total
At 31 December 20161
At 31 December 20151
Unimpaired
£m
Impaired
£m
Total
£m
%
Unimpaired
£m
Impaired
£m
Total
£m
5,721
1,470
506
20
–
–
–
689
8,406
9,563
17,969
14
–
9
6
–
–
68
26
123
429
552
5,735
1,470
515
26
–
–
68
715
8,529
9,992
18,521
67.2
17.2
6.1
0.3
–
–
0.8
8.4
100.0
4,989
1,547
610
75
–
–
5
487
7,713
9,656
17,369
72
6
13
36
8
–
100
–
235
508
743
5,061
1,553
623
111
8
–
105
487
7,948
10,164
18,112
%
63.7
19.5
7.9
1.4
0.1
–
1.3
6.1
100.0
1 Excludes Islands Commercial UK Direct Real Estate.
2 Predominantly investment grade corporate CRE lending where the Group is relying on the corporate covenant.
3 December 2016 <£5m exposures include £9.4 billion within SME which has an LTV profile broadly similar to the >£5m exposures.
Forborne loans
Commercial Banking forbearance
At 31 December 2016, £2,645 million (31 December 2015: £3,529 million) of total loans and advances were forborne of which £2,179 million
(31 December 2015: £2,543 million) were impaired. Impairment provisions as a percentage of forborne loans and advances increased marginally
from 30.9 per cent at 31 December 2015 to 31.2 per cent at 31 December 2016.
Table 1.19: Commercial Banking forborne loans and advances (audited)
Impaired
Unimpaired
Total
1 Restated.
All impaired assets are considered forborne.
Impaired loans and advances
Total loans and advances
which are forborne
Impairment provisions as %
of loans and advances which
are forborne
2016
£m
2,179
466
2,645
20151
£m
2,543
986
3,529
2016
%
37.8
–
31.2
20151
%
42.9
–
30.9
The movements in Commercial Banking impaired forborne loans and advances were as follows:
Table 1.20: Movement in Commercial Banking impaired forborne loans and advances (audited)
At 1 January
Classified as impaired during the year:
Exposures >£5m
Exposures <£5m
Transferred to unimpaired:
Exposures >£5m but still reported as forborne
Exposures >£5m no longer reported as forborne
Exposures <£5m
Written-off
Asset disposal/sales of impaired assets
Drawdowns/repayments
Exchange and other movements
At 31 December
1 Restated.
138
2016
£m
2,543
20151
£m
3,241
547
124
671
–
(31)
(81)
(112)
(311)
(33)
(595)
16
505
126
631
(15)
(20)
(111)
(146)
(225)
(48)
(693)
(217)
2,179
2,543
Lloyds Banking Group
Annual Report and Accounts 2016
Unimpaired loans and advances
Unimpaired forborne loans and advances were £466 million at 31 December 2016 (31 December 2015: £986 million).
The table below sets out the largest unimpaired forborne loans and advances to Commercial Banking customers (exposures over £5 million)
as at 31 December 2016 by type of forbearance:
Table 1.21: Commercial Banking unimpaired forborne loans and advances1 (audited)
Type of unimpaired forbearance:
Exposures >£5m
Covenants
Extensions/alterations
Multiple
Exposures <£5m
Total
1 Material portfolios only.
Table 1.22: Movement in Commercial Banking unimpaired forborne loans and advances >£5m1 (audited)
At 1 January
Classified as impaired during the year
Cured no longer forborne
Classified as forborne during the year
Transferred from impaired but still reported as forborne1
Asset disposal/sales
Net drawdowns/repayments
Exchange and other movements
At 31 December
1 Balances exclude intra-year movements.
31 Dec
2016
£m
31 Dec
2015
£m
153
7
21
181
285
466
2016
£m
669
(63)
(413)
88
–
–
(100)
–
181
310
350
9
669
317
986
2015
£m
1,450
(141)
(655)
156
15
–
(153)
(3)
669
Consumer Finance
– UK Loans and advances increased during 2016, driven by strong growth ahead of the market in the UK Motor Finance portfolio, and continued
growth in line with the market in the Credit Cards portfolio.
– Asset quality remains strong, and the quality of new business continues to be good.
– Credit risk appetite has been maintained, and the Group has robust indebtedness and affordability controls to ensure new lending is sustainable
for our customers.
– The impairment charge increased by £47 million to £282 million largely due to the UK Motor Finance portfolio, in which there was overall growth
as well as the non-recurrence of a favourable one-off in 2015.
– Credit Cards balances grew broadly in line with the market, and underlying credit quality remained strong. Impaired loans fell by £59 million due
to continued reductions in recoveries, and impairment provisions as a percentage of impaired loans remained stable.
– Loans balances contracted marginally and underlying credit quality remained strong. Impaired loans fell by £90 million largely due to reductions
in recoveries, and impairment provisions as a percentage of impaired loans remained broadly stable.
– Growth in UK Motor Finance loans and advances was ahead of the market, in part due to strategic relationships with business partners such as
Jaguar Land Rover, which also contributed to the strong underlying credit quality in the portfolio. Impaired loans fell by £14 million largely due
to a reclassification of impaired balances for some finance leases, and on an underlying basis grew broadly in line with the portfolio. Impairment
provisions as a percentage of impaired loans increased, reflecting the reclassification of impaired balances, and portfolio growth coupled with
a prudent approach to residual value.
Table 1.23: Consumer Finance impairment charge
Credit Cards
Loans
UK Motor Finance
Europe
Asset quality ratio
2016
£m
136
70
75
1
2015
£m
129
83
22
1
282
0.83%
235
0.77%
Change
%
(5)
16
–
(20)
6bp
139
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
i
F
n
a
n
c
a
i
l
r
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
e
R
i
s
k
m
a
n
a
g
e
m
e
n
t
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
O
t
h
e
r
i
n
f
o
r
m
a
t
i
o
n
Risk management
Risk management continued
Table 1.24: Consumer Finance impaired loans and provisions
At 31 December 2016
Credit cards
Loans
UK Motor Finance
Europe
Total gross lending
Impairment provisions
Fair value adjustments
Total
At 31 December 20153
Credit cards
Loans
UK Motor Finance
Europe
Total gross lending
Impairment provisions
Fair value adjustments
Total
Loans and
advances to
customers
£m
Impaired
loans
£m
Impaired
loans as a %
of closing
advances
%
Impairment
provisions1
£m
307
277
120
41
745
366
367
134
43
910
3.1
3.6
1.0
0.6
2.1
3.9
4.7
1.4
0.9
2.9
157
92
127
20
396
153
102
90
22
367
9,843
7,767
11,555
6,329
35,494
(396)
–
35,098
9,425
7,889
9,582
4,931
31,827
(367)
(9)
31,451
Impairment
provisions
as a % of
impaired
loans2
%
81.8
81.4
105.8
48.8
85.0
81.8
83.6
67.2
51.2
75.5
1 Impairment provisions include collective unidentified impairment provisions.
2 Impairment provisions as a percentage of impaired loans are calculated excluding loans in recoveries for Cards (31 December 2016: £115 million; 31 December 2015: £179 million) and Loans
(31 December 2016: £164 million; 31 December 2015: £245 million).
3 Restated.
Forborne loans
At 31 December 2016, total loans and advances currently or recently subject to forbearance as a percentage of total loans and advances had reduced
across the major Consumer Finance portfolios with decreases in Consumer Credit Cards and Loans offset by an increase in UK Motor Finance.
(31 December 2016: 1.4 per cent; 31 December 2015: 1.6 per cent).
Table 1.25: Consumer Finance forborne loans and advances (audited)
Consumer Credit Cards1
Loans2
UK Motor Finance Retail2
Total loans and advances
which are forborne
Total forborne loans and
advances which are impaired
Impairment provisions
as % of loans and advances
which are forborne
31 Dec
2016
£m
212
49
117
31 Dec
2015
£m
225
60
100
31 Dec
2016
£m
119
46
62
31 Dec
2015
£m
120
56
51
31 Dec
2016
%
29.0
44.4
27.0
31 Dec
2015
%
26.8
47.2
25.5
1 Includes temporary treatments where the customer is currently benefiting from the change or the treatment has ended within the last six months. Permanent changes, such as returning
a Card account in arrears to an in-order status, which commenced during the last 24 months for existing customers as at 31 December are also included.
2 Includes temporary treatments where the customer is currently benefiting from the change or the treatment has ended within the last six months. Permanent changes, such as refinancing,
for existing customers as at 31 December are also included.
140
Lloyds Banking Group
Annual Report and Accounts 2016
The movements in forborne loans and advances during the year were:
Table 1.26: Movement in Consumer Finance forborne loans and advances (audited)
At 1 January
Classified as forborne during the year
Written off/sold
Exit from forbearance
Redeemed or repaid
Exchange and other movements
At 31 December
2016
2015
Consumer
credit cards
£m
225
110
(46)
(43)
(9)
(25)
212
Loans
£m
60
34
(24)
(4)
(6)
(11)
49
UK Motor
Finance Retail
£m
100
82
(16)
(22)
(16)
(11)
117
Consumer
credit cards
£m
Loans
£m
UK Motor
Finance Retail
£m
234
108
(48)
(36)
(9)
(24)
225
73
16
(29)
(4)
(6)
10
60
109
61
(15)
(21)
(19)
(15)
100
Run-off
– The Ireland retail portfolio continues to reduce in volume due to closed book attrition (3 per cent year on year), however exposure has increased
by £457 million to £4,497 million in 2016 (31 December 2015: £4,040 million) due to the foreign exchange impact of sterling weakening, partly
offset by capital repayments.
– Ireland retail loans and advances with an indexed LTV in excess of 100 per cent improved to £1,240 million (27.8 per cent) at 31 December 2016,
compared with £1,269 million (31.4 per cent) at 31 December 2015. Of this amount £70 million were impaired (31 December 2015: £71 million).
– The Corporate real estate and other corporate portfolio has continued to reduce in line with expectations. Net loans and advances reduced by
£337 million, from £1,128 million at 31 December 2015 to £791 million at 31 December 2016.
– Total net external assets for the Specialist finance asset based run-off portfolio reduced to £4,668 million at 31 December 2016 (gross £4,779 million),
from £5,552 million (gross £5,742 million) for 2015. Assets include Ship Finance, Aircraft Finance, Leasing and Infrastructure loans and advances,
as well as the reducing Treasury Asset legacy investment portfolio and operating leases.
Table 1.27: Run-off impairment charge
Ireland retail
Ireland corporate and commercial real estate
Corporate real estate and other corporate
Specialist finance
Other
Total
Asset quality ratio1
1 In respect of loans and advances to customers.
2016
£m
(1)
(13)
1
(2)
(11)
(26)
2015
£m
(5)
72
21
(45)
(35)
8
Change
%
(80)
95
(96)
(69)
(0.15%)
0.20%
(35)bp
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
i
F
n
a
n
c
a
i
l
r
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
e
R
i
s
k
m
a
n
a
g
e
m
e
n
t
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
O
t
h
e
r
i
n
f
o
r
m
a
t
i
o
n
141
Risk management
Risk management continued
Table 1.28: Run-off impaired loans and provisions
At 31 December 2016
Ireland retail
Ireland corporate
Corporate real estate and other corporate
Specialist finance
Other
Total gross lending
Impairment provisions
Total
At 31 December 2015
Ireland retail
Ireland corporate
Ireland commercial real estate
Corporate real estate and other corporate
Specialist finance
Other
Total gross lending
Impairment provisions
Total
Forborne loans
Loans and
advances to
customers
£m
Impaired loans
as a % of
closing
advances
%
Impaired
loans
£m
Impairment
provisions as a
% of impaired
loans
%
Impairment
provisions
£m
4,497
1
1,190
3,374
1,197
138
1
896
99
83
10,259
1,217
(682)
9,577
4,040
29
8
1,873
4,190
1,282
11,422
(1,150)
10,272
132
–
5
1,410
361
117
2,025
3.1
100.0
75.3
2.9
6.9
11.9
3.3
62.5
75.3
8.6
9.1
17.7
133
–
399
111
39
682
120
–
–
745
189
96
1,150
96.4
–
44.5
112.1
47.0
56.0
90.9
52.8
52.4
82.1
56.8
Run-off Ireland retail lending
At 31 December 2016, £156 million or 3.5 per cent (31 December 2015: £169 million or 4.2 per cent) of Irish retail secured loans and advances
were subject to current or recent forbearance. Of this amount, £19 million (31 December 2015: £26 million) were impaired.
Run-off Corporate real estate, other corporate and Specialist Finance
At 31 December 2016 £998 million (31 December 2015 £1,780 million) of total loans and advances were forborne of which £995 million
(31 December 2015: £1,771 million) were impaired. Impairment provisions as a percentage of forborne loans and advances decreased
from 52.5 per cent at 31 December 2015 to 51.1 per cent at 31 December 2016.
Unimpaired forborne loans and advances were £3 million at 31 December 2016 (31 December 2015: £9 million).
Impaired loans and advances
The movements in Run-off corporate real estate, other corporate and Specialist Finance impaired forborne loans and advances were as follows:
Table 1.29: Movement in Run-off corporate real estate, other corporate and Specialist Finance impaired forborne loans
and advances (audited)
At 1 January
Classified as impaired during the year:
Exposures >£5m
Exposures <£5m
Transferred to unimpaired:
Exposures >£5m but still reported as forborne during the year
Exposures <£5m
Write offs
Asset disposal/sales of impaired assets
Drawdowns/repayments
Exchange and other movements
At 31 December
142
2016
£m
1,771
20
19
39
–
(8)
(8)
(478)
(405)
(24)
100
995
2015
£m
1,912
414
11
425
(13)
(11)
(24)
(238)
(763)
(19)
478
1,771
Lloyds Banking Group
Annual Report and Accounts 2016
Eurozone exposures
The following section summarises the Group’s direct exposure to Eurozone countries at 31 December 2016. The exposures comprise on balance sheet
exposures based on their balance sheet carrying values net of provisions and off balance sheet exposures, and are based on the country of domicile of
the counterparty unless otherwise indicated.
The Group manages its exposures to individual countries through authorised country limits which take into account economic, financial, political and
social factors. In addition, the Group manages its direct risks to the selected countries by establishing and monitoring risk limits for individual banks,
financial institutions, corporates and individuals.
Identified indirect exposure information, where available is also taken into account when setting limits and determining credit risk appetite for
individual counterparties. This forms part of the Group’s credit analysis undertaken at least annually for counterparty and sector reviews, with interim
updates performed as necessary. Interim updates would usually be triggered by specific credit events such as rating downgrades, sovereign events
or other developments such as spread widening. Examples of indirect risk which have been identified, where information is available, are: European
Banking groups with lending and other exposures to certain Eurozone Countries; corporate customers with operations or significant trade in certain
European jurisdictions; major travel operators known to operate in certain Eurozone Countries; and international banks with custodian operations
based in certain European locations.
The Group Financial Stability Forum (GFSF) monitors developments within the Eurozone, carries out stress testing through detailed scenario analysis
and completes appropriate due diligence on the Group’s exposures. The Group has pre-determined action plans that would be executed in certain
scenarios which set out governance requirements and responsibilities for the key actions which would be carried out and cover risk areas such as
payments, liquidity and capital, communications, suppliers and systems, legal, credit, delivery channels and products, employees and the impact
on customers.
Derivative balances are included within exposures to financial institutions or corporates, as appropriate, at fair value adjusted for master netting
agreements at obligor level and net of cash collateral in line with legal agreements. Exposures in respect of reverse repurchase agreements are
included on a gross IFRS basis and are disclosed based on the counterparty rather than the collateral (repos and stock lending are excluded);
reverse repurchase exposures are not, therefore, reduced as a result of collateral held. Exposures to central clearing counterparties are shown net.
For multi-country asset backed securities exposures, the Group has reported exposures based on the largest country exposure. The country of
exposure for asset backed securities is based on the location of the underlying assets which are predominantly residential mortgages not on the
domicile of the issuer.
For Insurance, the Group has reported shareholder exposures i.e. where the Group is directly exposed to risk of loss. These shareholder exposures
relate to direct investments where the issuer is resident in the named Eurozone country and the credit rating is consistent with the tight credit criteria
defined under the appropriate investment mandate. Insurance also has interests in funds domiciled in Ireland and Luxembourg where, in line with
the investment mandates, cash is invested in short term financial instruments. For these funds, the exposure is analysed on a look through basis to
the country of risk of the obligors of the underlying assets rather than treating as exposure to country of domicile of the fund.
Exposures to selected Eurozone countries
The Group continues to have minimal exposure, in aggregate, which could be considered to be direct recourse to the sovereign risk of the
selected countries.
Table 1.30: Selected Eurozone exposures
Sovereign debt
Financial institutions
At 31 December 2016
Ireland
Spain
Portugal
Italy
Greece
At 31 December 2015
Ireland
Spain
Portugal
Italy
Greece
Direct
sovereign
exposures
£m
–
23
–
–
–
23
–
–
–
–
–
–
Cash at
central
banks
£m
Banks
£m
Other1
£m
Asset
backed
securities
£m
Corporate
Personal2
£m
£m
Insurance
assets1
£m
Total
£m
–
–
–
–
–
–
–
–
–
–
–
–
215
76
7
38
–
512
126
–
–
–
91
–
–
–
–
929
630
22
59
–
4,363
41
7
–
–
336
638
91
1,640
4,411
748
77
7
32
–
864
445
102
–
–
–
87
–
–
–
–
731
870
86
51
1
3,921
39
6
–
–
547
87
1,739
3,966
–
19
–
67
–
86
–
9
–
73
–
82
6,110
915
36
164
–
7,225
5,932
1,097
99
156
1
7,285
1 Excludes reverse repurchase exposure to Institutional funds domiciled in Ireland secured by UK gilts of £14,506 million (2015: £11,267 million) on a gross basis.
2 Ireland Retail exposures have increased by c.£0.4 billion as a result of the depreciation of sterling against the Euro c.£0.7 billion offset by asset reductions primarily driven by repayments of
c.£0.3 billion.
143
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
i
F
n
a
n
c
a
i
l
r
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
e
R
i
s
k
m
a
n
a
g
e
m
e
n
t
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
O
t
h
e
r
i
n
f
o
r
m
a
t
i
o
n
Risk management
Risk management continued
In addition to the exposures detailed above, the Group has exposures in the following Eurozone countries:
Table 1.31: Other Eurozone exposures
Sovereign debt
Financial institutions
At 31 December 2016
Netherlands
France
Germany
Luxembourg
Belgium
All other Eurozone countries
At 31 December 2015
Netherlands
France
Germany
Luxembourg
Belgium
All other Eurozone countries
Direct
sovereign
exposures
£m
Cash at
central
banks
£m
Banks
£m
Other1
£m
Asset
backed
securities
£m
Corporate
Personal
£m
£m
Insurance
assets
£m
Total
£m
–
–
1,543
7
35
38
8,795
–
93
–
–
–
343
1,907
538
306
1,009
95
324
620
31
1,484
300
–
50
41
224
619
–
–
1,610
2,648
1,598
923
114
354
6,315
96
443
–
–
–
423
851
477
–
49
62
17,860
6,163
4,947
3,339
1,507
549
1,623
8,888
4,198
2,759
934
7,247
6,854
1,862
34,365
281
173
151
–
20
15
11,515
–
97
–
–
–
328
1,809
888
74
830
403
164
216
21
1,178
1
–
37
98
66
618
–
–
1,275
1,953
1,924
1,614
298
342
4,863
64
177
–
–
–
428
953
573
36
51
80
18,891
5,266
3,897
3,520
1,200
840
640
11,612
4,332
1,580
819
7,406
5,104
2,121
33,614
1 Excludes reverse repurchase exposure to Institutional funds secured by UK gilts of £2,679 million (2015: £1,955 million) on a gross basis.
Environmental risk management
The Group ensures appropriate management of the environmental impact of its lending activities. The Group-wide credit risk principles require
all credit risk to be incurred with due regard to environmental legislation and the Group’s Code of Business Responsibility.
Within Commercial Banking, an electronic environmental risk screening system has been the primary mechanism for assessing environmental risk
in lending transactions. This system provides screening of location specific and sector based risks that may be present in a transaction. Identified
risk results in the transaction referred to the Group’s expert in-house environmental risk team for further review and assessment, as outlined below.
Where required, the Group’s panel of environmental consultants provide additional expert support.
The Group provides colleague training in environmental risk management as part of the standard suite of credit risk courses. Supporting this training,
a range of online resource is available to colleagues and includes environmental risk theory, procedural guidance, and information on environmental
legislation and sector-specific environmental impacts.
The Group has been a signatory to the Equator Principles since 2006 and has adopted and applied the expanded scope of Equator Principles III.
The Equator Principles support the Group’s approach to assessing and managing environmental and social issues in Project Finance, Project-Related
Corporate loans and Bridge loans.
Table 1.32: Environmental risk management approach
Initial transaction
screening
Relationship
teams
Detailed
review
In-house team,
retained
consultancy
Environmental
due diligence
Panel
consultants
Environmental
risk approval
(including any
conditions)
Supporting tools
Sector briefings
Legislation briefings
Group credit principles
Environmental Risk
Credit policies
Business unit processes
144
Lloyds Banking Group
Annual Report and Accounts 2016
CONDUCT RISK
Definition
Conduct risk is defined as the risk of customer detriment or regulatory censure and/or a reduction in earnings/value, through financial or reputational
loss, from inappropriate or poor customer treatment or business conduct.
Exposures
The Group faces significant conduct risks, which affect all aspects of the Group’s operations, all types of customers and other stakeholders. These
can be considered across two main categories; customer conduct risks and market conduct risks. Customer conduct risks are those that have a direct
impact on a customer – or group of customers – and can materialise through products or services not meeting the needs of its customers; sales
processes resulting in poor customer outcomes; or the failure to deal with a customer’s complaint effectively which in turn may lead to a referral to the
Financial Ombudsman Service. Market conduct risks can exist where activity taken can disrupt the fair and effective operation of a market in which the
Group is active. Market conduct risks can arise from the mismanagement of market sensitive information, the failure to identify and report suspicious
transactions or orders, or through inaccurate benchmark submissions.
There is an ongoing high level of scrutiny regarding financial institutions’ treatment of customers, including those in vulnerable circumstances, from
regulatory bodies, the media, politicians and consumer groups. As a result, there is a risk that certain aspects of the Group’s current or legacy business may
be determined by the Financial Conduct Authority, other regulatory bodies or the courts as not being conducted in accordance with applicable laws or
regulations, or in a manner that fails to deliver fair and reasonable customer treatment. The Group may also be liable for damages to third parties harmed
by the conduct of its business. There is also a significant regulatory focus on market misconduct, resultant from previous issues around LIBOR and FX.
Measurement
To articulate its conduct risk appetite, the Group has sought more granularity through the use of suitable conduct risk metrics and tolerances that
indicate where it may potentially be operating outside its conduct appetite. Conduct Risk Appetite Metrics (CRAMs) have been designed for all
product families offered by the Group; a set of common metrics have been agreed for all products to support a consistent approach. These contain
a range of product design, sales and post-sales metrics to provide a more holistic view of conduct risks; each product also has additional bespoke
metrics. The common metrics are sales volume, product governance adherence, target market, outcome testing: meets customer needs, outcome
testing: information disclosure, outcome testing: regulatory compliance, retention, usage, claims (decline rates), complaints, Financial Ombudsman
Service uphold rate and complaints outcome testing. Each of the tolerances for the metrics are agreed for the individual product and are tracked
monthly. At a consolidated level these metrics are part of the Board approved risk appetite. The Group also continues to measure the effectiveness
of the overall strategic focus on conduct within the divisions and functions and its impact on customer outcomes and the effective implementation
of the Customer Vulnerability agenda through the Group Customer First Committee (GCFC).
In relation to market conduct, relevant metrics are being established, and will continue to evolve in line with external developments. These cover a
range of topics including the management of confidential and market sensitive information; and the way in which conflicts of interest are managed.
Mitigation
The Group takes a range of mitigating actions with respect to this risk. The transition of the customer-focused UK centric strategy into the Business
has strengthened its culture and values, improved systems and processes, and implemented more effective controls. These actions are being further
embedded throughout the Group (across all business areas and all supporting functional areas) through the continued evolution of the strategic focus
on conduct within business as usual supported by the GCFC, including:
– Conduct risk appetite established at Group and business area level, with metrics included in the Board Risk Appetite to ensure ongoing due-focus;
– Customer needs explicitly considered within business and product level planning and strategy, with Divisional plans reviewed and challenged by the
GCFC;
– Cultural transformation, supported by strong direction and tone from senior executives and the Board. This is underpinned by the Group’s values
and Codes of Responsibility, to deliver the best bank for customers;
– Establishment of the Customer Vulnerability Framework, which operates at a senior level to prioritise change, drive implementation and ensure
consistency across the Group;
– Development of the Group’s Customer Journey Strategy and Framework to support our focus on conduct from an end-to-end customer perspective;
– Enhanced product governance framework to ensure products continue to offer customers fair value, and consistently meet their needs throughout
their product life cycle;
– Enhanced complaints management through effectively responding to, and learning from, root causes to reduce complaint volumes and the Financial
Ombudsman Service change rate;
– Enhanced recruitment and training, with a focus on how the Group manages colleagues’ performance with clearer customer accountabilities; and
– Ongoing focus on the strategic conduct agenda in our interactions with third parties involved in serving the Group’s customers to ensure consistent
delivery of needs met.
The Group has also prioritised activity designed to reinforce good conduct in its engagement with the markets in which it operates. This has
included the creation of a Market Conduct Steering Committee, training for relevant colleagues, the development of enhanced procedures,
and the enhancement of preventative and detective controls including the Group’s trade surveillance and continuous surveillance capability.
The Group’s leadership team, through the GCFC, has oversighted and approved the transition of the Conduct Strategy within the business as usual
to support the development of the right customer centric culture. The Board and Group Risk Committee receive regular qualitative and quantitative
reports to track progress on how the Group is meeting customer needs and minimising conduct risk across all areas of the business.
The Group actively engages with regulatory bodies and other stakeholders in developing its understanding of current customer treatment concerns,
and those relating to the fairness and effectiveness of markets, to ensure that the Group’s strategic conduct focus in business as usual continues to
meet evolving stakeholder expectations.
Monitoring
Monitoring and reporting is undertaken at Board, Group and business area committees. As part of the reporting of CRAMs, a robust outcomes testing
regime, for both sales and complaints processes, is in place to test performance of customer critical activities. The GCFC has responsibility for monitoring
and reviewing integrated measurement of enhanced outcomes, customer views and cultural transformation, including challenging Divisions to make
changes based on key learnings to support the delivery of the Group’s vision and foster a customer centric culture. Monitoring activity has also increased
in scope to cover trading and communication surveillance, and the monitoring and testing of controls relevant to our market conduct agenda.
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Risk management
Risk management continued
MARKET RISK
Definition
Market risk is defined as the risk that unfavourable market moves (including changes in and increased volatility of interest rates, market-implied
inflation rates, credit spreads and prices for bonds, foreign exchange rates, equity, property and commodity prices and other instruments) lead
to reductions in earnings and/or value.
Balance sheet linkages
The information provided in table 1.33 (below) aims to facilitate the understanding of linkages between banking, trading, and insurance balance sheet
items and the positions disclosed in the Group’s market risk disclosures.
Table 1.33: Market risk linkage to the balance sheet
Banking
2016
Assets
Total
£m
Cash and balances at central banks
47,452
Trading
book only
£m
–
Non-trading
Insurance
£m
£m
Primary market risk factor
47,452
–
Interest rate
Trading and other financial assets at fair
value through profit or loss
151,174
45,247
4,039
101,888
Derivative financial instruments
36,138
30,951
2,713
2,474
Interest rate, foreign exchange,
credit spread
Interest rate, foreign exchange,
credit spread
Loans and receivables:
Loans and advances to banks
Loans and advances to customers1
Debt securities
Available-for-sale financial assets
Value of in-force business
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
26,902
457,958
3,397
488,257
56,524
5,042
33,206
–
–
–
–
–
–
–
5,583
457,958
3,397
466,938
56,522
21,319
Interest rate
–
–
21,319
Interest rate
Interest rate, credit spread
Interest rate, foreign exchange,
credit spread
2
–
5,042
Equity
16,811
16,395
Interest rate
817,793
76,198
594,475
147,120
Trading and other financial liabilities at fair
value through profit or loss
54,504
45,079
9,425
16,384
415,460
–
–
16,384
415,460
–
–
–
Interest rate
Interest rate
Interest rate, foreign exchange
Derivative financial instruments
Debt securities in issue
Liabilities arising from insurance and
investment contracts
Subordinated liabilities
Other liabilities
Total liabilities
34,924
76,314
114,502
19,831
37,059
30,143
–
–
–
–
1,967
76,314
2,814
Interest rate, foreign exchange,
credit spread
–
Interest rate, credit spread
–
114,502
Credit spread
18,012
9,376
1,819
Interest rate, foreign exchange
27,683
Interest rate
768,978
75,222
546,938
146,818
1 Includes £6.7 billion of lower risk loans within the banking book sold by Commercial Banking and Retail to Insurance to manage market risk arising from annuitant liabilities within the Insurance
business.
The defined benefit pension schemes’ assets and liabilities are included under Other assets and Other liabilities in this table and note 36 on page 222
provides further information.
The Group’s trading book assets and liabilities are originated by Financial Markets within the Commercial Banking division. Within the Group’s balance
sheet these fall under the trading assets and liabilities and derivative financial instruments. The assets and liabilities are classified as trading books if
they have been acquired or incurred for the purpose of selling or repurchasing in the near future. These consist of government, corporate and financial
institution bonds and loans/deposits and repos. Further information on these activities can be found under the Trading portfolios section on page 151.
Derivative assets and liabilities are held by the Group for three main purposes; to provide risk management solutions for clients, to manage portfolio
risks arising from client business and to manage and hedge the Group’s own risks. The majority of derivatives exposure arises within Financial Markets.
Insurance business assets and liabilities relate to policyholder funds, as well as shareholder invested assets, including annuity funds. The Group
recognises the value of in-force business in respect of Insurance’s long-term life assurance contracts as an asset in the balance sheet (see note 24,
page 213).
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The Group ensures that it has adequate cash and balances at central banks and stocks of high quality liquid assets (e.g. Gilts or US Treasury Securities)
that can be converted easily into cash to meet liquidity requirements. The majority of these assets are held as available-for-sale with the remainder held
as financial assets at fair value through profit and loss. Further information on these balances can be found under the Funding and Liquidity Risk on
page 155. Interest rate risk in the asset portfolios is swapped into a floating rate.
The majority of debt issuance originates from the Issuance, Capital Vehicles and Medium Term Notes desks and the interest rate risk of the debt issued
is hedged by swapping them into a floating rate.
The non trading book primarily consists of customer on balance sheet activities and the Group’s capital and funding activities, which expose it to the
risk of adverse movements in market prices, predominantly interest rates, credit spreads, exchange rates and equity prices, as described in further
detail within the Banking activities section (page 148).
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Table 1.34 shows the key material market risks for the Group’s banking, defined benefit pension schemes, Insurance and trading activities.
Table 1.34: Key material market risks for the Group by individual business activity (profit before tax impact measured
against Group single stress scenarios)
2016
Interest Rate
Basis Risk
FX
Credit Spread
Equity
Inflation
Risk type
Banking activities1
Defined benefit pension scheme1
Insurance portfolios1
Trading portfolios2
Profit before tax
>£500m
£250m – £500m
£50m – <£250m
Immaterial/zero
l
l
l
–
Loss
l
l
l
–
l
–
–
–
Gain
n
n
n
–
–
–
–
–
l
n
l
–
l
–
l
–
–
–
–
–
1 Banking Activities: Insurance and Pensions stresses; Interest rate -100 bps, Basis 3 month Libor +100bps/Bank Base Rate -25bps, FX -15 per cent GBP.
Credit Spread +100 per cent, Equity -30 per cent, Inflation +50 bps.
2 Trading Portfolios; Interest rate -30bps, FX -5 per cent GBP, Credit spread +20 per cent, Inflation +30bps.
Measurement
In addition to measuring single factors, board risk appetite is calibrated primarily to five economic multirisk scenarios, and is supplemented with
sensitivity based measures. The scenarios assess the impact of unlikely, but plausible adverse stresses on income, with the worst case for banking
activities, defined benefit pensions, insurance and trading portfolios reported against independently, and across the Group as a whole.
The Board risk appetite is cascaded first to the Group Asset and Liability Committee (GALCO), chaired by the Chief Financial Officer, where risk
appetite is approved and monitored by risk type, and then to Group Market Risk Committee (GMRC) where risk appetite is sub allocated by Division.
These metrics are reviewed regularly by senior management to inform effective decision making.
Mitigation
GALCO is responsible for approving and monitoring group market risks, management techniques, market risk measures, behavioural assumptions,
and the market risk policy. Various mitigation activities are assessed and undertaken across the Group to manage portfolios and seek to ensure they
remain within approved limits. The mitigation actions will vary dependent on exposure, but will, in general, look to reduce risk in a cost effective
manner, by offsetting balance sheet exposures and externalising through to the financial markets dependent on market liquidity. The market risk
policy is owned by Group Corporate Treasury (GCT) and refreshed annually. The policy is underpinned by supplementary market risk procedures,
which define specific market risk management and oversight requirements.
Monitoring
GALCO and the GMRC regularly review high level market risk exposure, as part of the wider risk management framework. They also make
recommendations to the Group Chief Executive concerning overall market risk appetite and Group 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 and triggers are monitored by Risk Division and where appropriate,
escalation procedures are in place.
How market risks arise and are managed across the Group’s activities is considered in more detail below.
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Risk management
Risk management continued
Banking activities
Exposures
The Group’s banking activities expose it to the risk of adverse movements in market prices, predominantly interest rates, credit spreads, exchange
rates and equity prices. 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 or liability.
Interest rate risk
Interest rate risk in the Group’s divisional portfolios and in the Group’s capital and funding activities arises from the different repricing characteristics of
the Group’s non-trading assets, liabilities (see loans and advances to customers and customer deposits in table 1.36) and off balance sheet positions.
Behavioural assumptions are applied to (i) embedded optionality within products; (ii) the duration of balances that are contractually repayable on
demand, such as current accounts and overdrafts, together with net free reserves of the group; and (iii) to the re-pricing behaviour of managed rate
liabilities namely variable rate savings.
Basis risk arises from the possible changes in spreads, for example where the bank lends with reference to a central bank rate but funds with reference
to LIBOR and the spread between these two rates widens or tightens.
Prepayment risk arises, predominantly in the Retail division, as customer balances amortise more quickly or slowly than anticipated due to economic
conditions or customer’s response to changes in economic conditions. Pipeline and pre hedge risk arises where new business volumes are higher or
lower than forecasted.
Foreign exchange risk
Economic foreign exchange exposure arises from the Group’s investment in its overseas operations (net investment exposures are disclosed in note 52
on page 261). In addition, the Group incurs foreign exchange risk through non-functional currency flows from services provided by customer facing
divisions and the Group’s debt and capital management programmes.
Equity risk
Equity risk arises primarily from three different sources; (i) the Group’s strategic equity holdings in Banco Sabadell, Aberdeen Asset Management,
and Visa Europe; (ii) exposure to Lloyds Banking Group share price through deferred shares and deferred options granted to employees as part of
their benefits package; and (iii) the Group’s private equity investments held by Lloyds Development Capital.
Credit spread risk
Credit spread risk arises largely from (i) the liquid asset portfolio held in the management of Group liquidity, comprising of government, supranational,
and other eligible assets; and (ii) the Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA) sensitivity to credit spreads; and
(iii) a number of the Group’s structured medium term notes where we have elected to fair value the notes through the profit and loss account.
Measurement
Interest rate risk exposure is monitored monthly using, primarily:
(i) Market value sensitivity: this methodology considers all repricing mismatches (behaviourally adjusted where appropriate) in the current balance
sheet and calculates the change in market value that would result from an instantaneous 25, 100 and 200 basis points parallel rise or fall in the yield
curve (subject to an appropriate floor).
(ii) Interest income sensitivity: this measures the impact on future net interest income arising from an instantaneous 25, 100 and 200 basis points parallel
rise or fall in all the yield curves over a rolling 12 month basis (subject to an appropriate floor). Unlike the market value sensitivities, the interest income
sensitivities incorporate additional behavioural assumptions as to how and when individual products would reprice in response to such change.
(iii) Market Value limit: this caps the amount of conventional and inflation-linked government bonds held by the Group for liquidity purposes.
(iv) Structural hedge limits; these metrics enhance understanding of assumption and duration risk taken within the behaviouralisation of this portfolio.
The Group has an integrated Asset and Liability Management (ALM) system which supports non traded asset and liability management of the Group.
This provides a single consolidated tool to measure and manage interest rate repricing profiles (including behavioural assumptions), perform stress
testing and produce forecast outputs. The Group is aware that any assumptions based model is open to challenge. A full behavioural review is
performed annually to ensure the assumptions remain appropriate.
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.
Table 1.35 below shows, split by material currency, the Group’s market value sensitivities to an instantaneous parallel up and down 25 and 100 basis
points change to all interest rates.
Table 1.35: Banking activities: market value sensitivity
Sterling
US Dollar
Euro
Other
Total
2016
2015
Up 25bps
£m
Down 25bps
£m
Up 100bps
£m
Down 100bps
£m
Up 25bps
£m
Down 25bps
£m
Up 100bps
£m
Down 100bps
£m
(11.4)
3.2
(6.0)
(0.2)
(14.4)
11.5
(3.2)
(3.7)
0.2
4.8
(45.1)
12.6
(23.2)
(0.9)
(56.6)
31.6
(13.7)
(12.1)
0.6
6.4
48.7
1.9
1.7
(0.4)
51.9
(48.8)
194.2
(115.9)
(1.9)
(2.1)
0.4
7.5
6.9
(1.6)
(5.9)
(6.8)
1.1
(52.4)
207.0
(127.5)
This is a risk based disclosure and the amounts shown would be amortised in the income statement over the duration of the portfolio.
The market value sensitivity is driven by temporary customer flow positions not yet hedged plus other positions occasionally held within limits, by
the Group’s wholesale funding desks in order to minimise overall funding and hedging costs. The level of risk is low relative to the size of the total
balance sheet.
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Table 1.36 below shows supplementary value sensitivity to a steepening and flattening in the yield curve. This ensures there are no unintended
consequences to managing risk to parallel shifts in rates.
Table 1.36: Banking activities: market value sensitivity to a steepening and flattening of the yield curve
Sterling
US Dollar
Euro
Other
Total
2016
2015
Steepener
£m
Flattener
£m
(5.8)
0.7
(15.3)
(0.2)
(20.6)
(13.2)
(1.3)
(12.8)
0.2
(27.1)
Steepener
£m
(105.7)
(3.4)
(0.5)
0.2
Flattener
£m
97.1
4.8
2.0
(0.2)
(109.4)
103.7
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The table below shows the banking book income sensitivity to an instantaneous parallel up and down 25 and 100 basis points change to all
interest rates.
Table 1.37: Banking activities: net interest income sensitivity (audited)
2016
2015
Up 25bps
£m
Down 25bps
£m
Up 100bps
£m
Down 100bps
£m
Up 25bps
£m
Down 25bps
£m
Up 100bps
£m
Down 100bps
£m
Client facing activity and
associated hedges
176.8
(286.1)
724.9
(408.0)
152.4
(140.1)
604.7
(464.2)
Income sensitivity is measured over a rolling 12 month basis.
The interest income sensitivity continues to reflect structural hedging against margin compression. The increased sensitivity reflects both the timing
of margin management, and the level of floors giving rise to increased compression risk in the Group.
Basis risk, foreign exchange, equity, and credit spread risks are measured primarily through scenario analysis by assessing the impact on profit before
tax over a 12 month horizon arising from a change in market rates, and reported within the Board Risk Appetite on a monthly basis. Supplementary
measures such as sensitivity and exposure limits are applied where they provide greater insight into risk positions. Frequency of reporting
supplementary measures varies from daily to quarterly appropriate to each risk type.
Mitigation
The Group’s policy is to optimise reward whilst managing its market risk exposures within the risk appetite defined by the Board. The Group Market
Risk policy and procedures outlines the hedging process, and the centralisation of risk from divisions into GCT, e.g. via Transfer Pricing Framework.
GCT is responsible for managing the centralised risk and does this through natural offsets of matching assets and liabilities, and appropriate hedging
activity of the residual exposures, subject to the authorisation and mandate of GALCO within the Board risk appetite. Derivative desks in Financial
Markets will then externalise the hedges to the market. The Group has hedge accounting solutions in place, which reduce the accounting volatility
arising from the Group’s economic hedging activities by utilising both Libor based and Bank base rate assets.
The largest residual risk exposure arises from balances that are deemed to be insensitive to changes in market rates (including current accounts,
a portion of variable rate deposits and investable equity), and is managed through the Group’s structural hedge. Consistent with the Group’s strategy
to deliver stable returns, GALCO seeks to minimise large reinvestment risk, and to smooth earnings over a range of investment tenors. The amount
and duration of the hedging activity is reviewed regularly by GALCO, with current maximum duration of around four years.
Whilst the bank faces margin compression in the current low rate environment, its exposure to pipeline and prepayment risk are not considered
material, and are hedged in line with expected customer behaviour. These are appropriately monitored and controlled through Divisional ALCOs.
Net investment foreign exchange exposures are managed centrally by GCT, by hedging non GBP asset values with currency borrowing. Economic
foreign exchange exposures arising from non-functional currency flows are identified by divisions and transferred and managed centrally. The Group
also has a policy of forward hedging its forecasted currency profit and loss to year end.
Monitoring
The appropriate limits and triggers are monitored by senior executive Committees within the Banking divisions. Banking assets, liabilities and
associated hedging are actively monitored and if necessary rebalanced to be within agreed tolerances.
Defined benefit pension schemes
Exposures
The Group’s defined benefit pension schemes are exposed to significant risks from their assets and liabilities. The liability discount rate provides
exposure to interest rate risk and credit spread risk, which are partially offset by fixed interest assets (such as gilts and corporate bonds) and swaps.
Equity and alternative asset risk arises from direct asset holdings.
For further information on defined benefit pension scheme assets and liabilities please refer to note 36 on page 222.
Measurement
Management of the assets is the responsibility of the Trustees of the schemes who are responsible for setting the investment strategy and for agreeing
funding requirements with the Group. Should a funding deficit arise, the Group will be liable for meeting it, and as part of a triennial valuation process
will agree with the Trustees a funding strategy to eliminate the deficit over an appropriate period.
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Risk management
Risk management continued
Mitigation
The Group takes an active involvement in agreeing risk management and mitigation strategies with the schemes’ Trustees. An interest rate and
inflation hedging programme is in place to reduce liability risk. In recent years the schemes have also reduced equity allocation and invested the
proceeds in credit assets as part of a programme to de-risk the portfolio.
Monitoring
In addition to the wider risk management framework, governance of the schemes includes two specialist pensions committees (one Group executive
sub-committee and a supporting management committee).
The surplus or deficit in the schemes is tracked on a monthly basis along with various single factor and scenario stresses which consider the assets
and liabilities holistically. The impact on Group capital resources of the schemes is monitored monthly. Performance against risk appetite triggers
is also monitored monthly. Hedges are in place and asset/liability matching positions are also actively monitored.
Insurance portfolios
Exposures
The main elements of market risk to which the Group is exposed through the Insurance business are equity, credit spread, interest rate and inflation.
– Equity risk arises indirectly through the value of future management charges on policyholder funds. These management charges form part of the
value of in-force business (see note 24 on page 213). Equity risk also arises in the with-profits funds but is less material.
– Credit spread risk mainly arises from annuities where policyholders’ future cashflows are guaranteed at retirement. Exposure arises if the market value
of the assets which are held to back these liabilities, mainly corporate bonds and loans, do not perform in line with expectations. Within the Group
accounts a large amount of the exposure to market value movements, but not actual default losses, is removed as accounting rules require that
assets Insurance have acquired from Group are maintained at the original amortised book value.
– Interest rate risk arises through holding credit and interest assets mainly in the annuity book and also to cover general insurance liabilities, capital
requirements and risk appetite.
– Inflation exposure arises from a combination of inflation linked policyholder benefits and inflation assumptions used to project future expenses.
Measurement
Current and potential future market risk exposures within Insurance are assessed using a range of stress testing exercises and scenario analyses.
Risk measures include 1-in-200 year stresses used for regulatory capital assessments and single factor stresses for profit before tax.
Table 1.38 demonstrates the impact of the Group’s UK Recession stress scenario (with no diversification benefit) on Insurance’s portfolio; this is the most
onerous scenario for Insurance out of the Group scenarios. The amounts include movements in assets, liabilities and the value of in-force business in
respect of insurance contracts and participating investment contracts.
Table 1.38: Insurance business: profit before tax sensitivities
Interest rates – decrease 100 basis points
Inflation – increase 50 basis points
Credit spreads – 100% widening
Equity – 30% fall
Property – 25% fall
Increase (reduction) in
profit before tax
2016
£m
(142)
(34)
(812)
(681)
(58)
20151
£m
9
(23)
(864)
(616)
(51)
1 Restated. The most onerous scenario has changed to UK Recession from Fiscal Solvency.
Further stresses that show the effect of reasonably possible changes in key assumptions, including the risk-free rate, equity investment volatility,
widening of credit default spreads on corporate bonds and an increase in illiquidity premia, as applied to profit before tax are set out in note 33.
Mitigation
Equity and credit spread risks are closely monitored and, where appropriate, asset liability matching is undertaken to mitigate risk. A hedging strategy
is in place to reduce exposure from the with-profit funds.
Interest rate risk in the annuity book is mitigated by investing in assets whose cash flows closely 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.
Other market risks (e.g. interest rate exposure outside the annuity book and inflation) are also closely monitored and where considered appropriate,
hedges are put in place to reduce exposure.
Monitoring
Market risks in the Insurance business are monitored by Insurance senior executive committees and ultimately the Insurance Board. Monitoring
includes the progression of market risk capital against risk appetite limits, as well as the sensitivity of profit before tax to combined market risk stress
scenarios and in year market movements. Asset/liability matching positions and hedges in place are actively monitored and if necessary rebalanced
to be within agreed tolerances. In addition market risk is controlled via approved investment policies and mandates.
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Trading portfolios
Exposures
The Group’s trading activity is small relative to its peers and the Group does not have a programme of proprietary trading activities. The Group’s
trading activity is undertaken solely to meet the financial requirements of commercial and retail customers for foreign exchange, credit and interest
rate products. These activities support customer flow and market making activities.
All trading activities are performed within the Commercial Banking division. While the trading positions taken are generally small, any extreme moves
in the main risk factors and other related risk factors could cause significant losses in the trading book depending on the positions at the time. The
average 95 per cent 1-day trading VaR (diversified across risk factors) was £1.3 million for year end 2016 compared to £1.4 million for year end 2015.
This decrease was due to the significant de-risking activities that took place at the portfolio level.
Trading market risk measures are applied to all the Group’s regulatory trading books and they include daily VaR (table 1.39), sensitivity based measures,
and stress testing calculations.
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The Group internally uses VaR as the primary risk measure for all trading book positions.
Table 1.39 shows some relevant statistics for the Group’s 1-day 95 per cent confidence level VaR that are based on 300 historical consecutive business
days to year end 2016 and year end 2015.
The risk of loss measured by the VaR model is the minimum expected loss in earnings given the 95 per cent confidence. The total and average trading
VaR numbers reported below have been obtained after the application of the diversification benefits across the five risk types. 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 at Group level.
Table 1.39: Trading portfolios: VaR (1-day 95 per cent confidence level) (audited)
At 31 December 2016
At 31 December 2015
Interest rate risk
Foreign exchange risk
Equity risk
Credit spread risk
Inflation risk
All risk factors
before diversification
Portfolio diversification
Total VaR
Close
£m
0.7
0.1
–
0.2
0.2
1.2
(0.5)
0.7
Average
Maximum
Minimum
£m
1.3
0.3
–
0.2
0.3
2.1
(0.8)
1.3
£m
7.7
0.8
–
0.4
5.9
14.3
5.7
£m
0.5
0.1
–
0.1
0.1
1.1
0.6
Close
£m
Average
£m
Maximum
£m
Minimum
£m
0.8
0.2
–
0.2
0.1
1.3
(0.4)
0.9
1.4
0.3
–
0.4
0.3
2.3
(0.9)
1.4
3.5
0.8
–
1.0
1.6
6.2
3.1
0.8
0.1
–
0.2
0.1
1.3
0.8
The market risk for the trading book continues to be low with respect to the size of the Group and compared to our peers. This reflects the fact that
the Group’s trading operations are customer-centric and focused on hedging and recycling client risks. Note that the maximum VaR reported at
£5.7 million was due to the incomplete booking of a position by end of day 22 March 2016 and hence did not reflect the true end of day position and
was not a real limit breach. The VaR returned to normal levels once the booking was completed the next day. The next highest VaR was £3.8 million.
Although it is an important market standard measure of risk, VaR has limitations. One of them is the use of limited historical data sample which
influences the output by the implicit assumption that future market behaviour will not differ greatly from the historically observed period. Another
known limitation is the use of defined holding periods which assumes that the risk can be liquidated or hedged within that holding period. Also
calculating the VaR at the chosen confidence interval does not give enough information about potential losses which may occur if this level is
exceeded. The Group fully recognises these limitations and supplements the use of VaR with a variety of other measurements which reflect the
nature of the business activity. These include detailed sensitivity analysis, position reporting and a stress testing programme.
Trading book VaR (1-day 99 per cent) is compared daily against both hypothetical and clean profit and loss. 1-day 99 per cent VaR charts for Lloyds
Bank, HBOS and Lloyds Banking Group models can be found in the Group’s Pillar 3 Report.
Mitigation
The level of exposure is controlled by establishing and communicating the approved risk limits and controls through policies and procedures
that define the responsibility and authority for risk taking. Market risk limits are clearly and consistently communicated to the business. Any new
or emerging risks are brought within risk reporting and defined limits.
Monitoring
Trading risk appetite is monitored daily with 1-day 95 per cent VaR and Stress Testing limits. These limits are complemented with position level action
triggers and profit and loss referrals. Risk and position limits are set and managed at both desk and overall trading book levels. They are reviewed at
least annually and can be changed as required within the overall Group risk appetite framework.
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Risk management continued
OPERATIONAL RISK
Definition
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
The aim of operational risk management is to manage operational risks, protecting customers and the Group, whilst delivering sustainable growth.
Operational risks are managed in line with defined appetites through the Group Operational Risk Management Framework, evaluating key exposures,
measuring risks, mitigating risks, and monitoring risks on an ongoing basis, as set out below.
Exposures
The principal operational risks to the Group are:
– The risk that the Group is unable to provide services to customers as a result of an IT systems failure;
– Cyber risks associated with malicious attacks on the confidentiality or integrity of electronic data, or the availability of systems;
– Fraud and financial crime arising from acts of deception or omission;
– Ensuring compliance with increasingly complex and detailed anti-money laundering, anti-terrorism, sanctions and prohibitions laws and regulations,
as failure to do so would adversely impact the Group’s reputation and potentially incur fines and other legal enforcements;
– Risks arising from inadequate delivery of services to customers;
– The risk associated with the ongoing provision of services to TSB and other organisations; and
– Terrorist acts, other acts of war or hostility, geopolitical, pandemic or other such events.
A number of these risks also apply where there is a reliance on third party suppliers to provide services to the Group or its customers.
Measurement
Operational risk is managed within a Board approved framework and risk appetite. A variety of measures are used such as: scoring of potential risks,
using impact and likelihood, with impact thresholds aligned to risk appetite statements; assessment of the effectiveness of controls; monitoring of
events and losses by size, business unit and internal risk categories.
Table 1.40 below shows high level loss and event trends for the Group using Basel II categories. Based on data captured on the Group’s Operational
Risk System, in 2016, the highest frequency of events occurred in external fraud (61.58 per cent) and execution, delivery and process management
(24.80 per cent). Clients, products and business practices accounted for 77.62 per cent of losses by value, driven by legacy issues where impacts
materialised in 2016 (excluding PPI).
Table 1.40: Operational risk events by risk category (losses greater than or equal to £10,000), excluding PPI
Business disruption and system failures
Clients, products and business practices
Damage to physical assets
Employee practices and workplace safety
Execution, delivery and process management
External fraud
Internal fraud
Total
% of total volume
% of total losses
2016
1.01
11.31
1.05
0.04
24.80
61.58
0.21
2015
0.40
11.46
0.06
0.03
15.81
71.96
0.28
2016
0.55
77.62
0.27
–
19.23
2.31
0.02
2015
0.13
83.43
0.04
–
11.08
5.27
0.05
100.00
100.00
100.00
100.00
Operational risk scenario assessments and actual losses are used by the Group to calculate the appropriate holding of operational risk regulatory
capital under the Internal Capital Adequacy Assessment Process (ICAAP). The Group calculates its minimum (Pillar I) operational risk capital
requirements using The Standardised Approach (TSA), which the Basel Committee has stated as being appropriate for an ‘internationally active’ bank.
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Mitigation
The Group continues to review and invest in its control environment to ensure it addresses the inherent risks faced. Risks are reported and discussed
at local governance forums and escalated to executive management and Board as appropriate. This ensures the correct level of visibility and
engagement. The Group employs a range of risk management strategies, including: avoidance, mitigation, transfer (which would also include
insurance) and acceptance. Where there is a reliance on third party suppliers to provide services, the Group’s Sourcing Policy ensures that outsourcing
initiatives follow a defined sourcing process including due diligence and risk evaluation. Contingency plans are maintained for a range of potential
scenarios, with regular disaster recovery and scenario testing scheduled to test and challenge the readiness of the Group to respond in the event
of an incident.
– The Group continues to mature its approach to operational resilience by enhancing the resilience of systems that support the Group’s critical
business processes through the IT Resilience programme, with independent verification of progress on an annual basis. The Board recognises the
role that resilient technology plays in achieving the Group’s strategy of becoming the best bank for customers and in maintaining banking services
across the wider industry. As such, the Board dedicates considerable time and focus to this subject at both the Board and the Board Risk Committee,
and continues to sponsor key investment programmes that enhance its resilience.
– The threat landscape associated with cyber risk continues to evolve and regulatory attention continues. The Board has defined a Cyber Risk Appetite
and is supporting initiatives to protect the Group against malicious cyber-attacks. The Group continues to invest in enhanced protection of customer
information, including limiting access to key systems and enhancing the security, durability and accessibility of critical information.
– The Group adopts a risk based approach to mitigate the internal and external fraud risks it faces, reflecting the current and emerging fraud risks
within the market. Fraud Risk Appetite metrics have been defined, holistically covering the impacts of fraud in term of losses to the Group, costs
of fraud systems and operations, and customer experience of actual and attempted fraud. Oversight of the appropriateness and performance of
these metrics is undertaken regularly through business area and Group-level committees. This approach drives a continual programme of prioritised
enhancements to the Group’s technology, process and people related controls, with an emphasis on preventative controls supported by real time
detective controls wherever feasible. Group-wide policies and operational control frameworks are maintained and designed to provide customer
confidence, protect the Group’s commercial interests and reputation, comply with legal requirements and meet regulatory expectations. The Group’s
fraud awareness programme remains a key component of its fraud control environment, and awareness of fraud risk is supported by mandatory
training for all colleagues.
– The Group has adopted policies and procedures designed to detect and prevent the use of its banking network for money laundering, terrorist
financing, bribery and activities prohibited by legal and regulatory sanctions. The Group regularly reviews and assesses these policies to keep them
current, effective and consistent across markets and jurisdictions, against a background of increasingly complex and detailed laws and regulations.
The Group requires mandatory training on these topics for all employees. Specifically, the anti-money laundering procedures include ‘know-your-
customer’ requirements, transaction monitoring technologies and reporting of suspicions of money laundering or terrorist financing to the applicable
regulatory authorities and the Anti-Bribery Policy prohibits the payment, offer, acceptance or request of a bribe, including ‘facilitation payments’ by
any employee or agent and provides a confidential reporting service for anonymous reporting for suspected or actual bribery activity. The Sanctions
and Related Prohibitions Policy sets out a framework of controls for compliance with legal and regulatory sanctions.
– The Group remediates issues that are identified in its customer processes, addressing root cause and rectifying customers as required. Enhancing
the overall servicing environment remains a focus of dedicated Group programmes such as Customer Journey Transformation.
– Following the successful divestment of TSB the Group retains responsibility for the ongoing provision of key services which are managed via robust
service and change management processes. There are separate governance arrangements and additional controls in place to ensure contractual
commitments are met.
– Operational resilience measures and recovery planning defined in the Group’s Resilience & Continuity (including Incident Management) policy ensure
an appropriate and consistent approach to the management of continuity risks, including potential interruptions from a range of internal and external
incidents or threats including environmental and climatic issues, terrorism, cyber, economic instability, pandemic planning and operational incidents.
Monitoring
Monitoring and reporting is undertaken at Board, Group and business area committees, in accordance with delegated limits of authority which are
regularly reviewed and refreshed. Business unit risk exposure is aggregated and discussed at oversight committees, and matters are escalated to
the Chief Risk Officer, or higher committees, if appropriate. A combination of: regular management information and reporting from business areas,
oversight and challenge from Risk Division, Group Audit and other assurance activities ensures that key risks are regularly presented and debated
by executive management.
The Group maintains a formal approach to operational risk event escalation, whereby material events are identified, captured and escalated. Root
causes of events are determined, where possible and action plans put in place to ensure an optimum level of control to keep customers and the
business safe, reduce costs, and improve efficiency.
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.
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Risk management
Risk management continued
FUNDING AND LIQUIDITY RISK
Definition
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.
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.
Exposure
Liquidity exposure represents the amount of potential stressed outflows in any future period less expected inflows. Liquidity is considered from both
an internal and a regulatory perspective.
Measurement
Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturity. Note 52 on page 261 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. Divisional teams form a view of customer behaviour based
on quantitative and qualitative analysis.
Mitigation
The Group manages the liquidity profile of the balance sheet through short term liquidity management and over the life of the funding plan,
combining business as usual and stressed conditions. Longer term funding, defined as having an original maturity of more than one year, is used
to manage the Group’s strategic liquidity profile, determined by the Group’s balance sheet structure.
The Group’s funding and liquidity position is underpinned by its significant customer deposit base, and is supported by strong relationships with
corporate customers and certain wholesale market segments. A substantial proportion of the retail deposit base is made up of customers’ current
and savings accounts which, although mostly repayable on demand, have traditionally in aggregate provided a stable source of funding. Funding
concentration by counterparty and currency is monitored on an ongoing basis. Where concentrations do exist (for example, maturity profile), these
are limited by the internal risk appetite and considered manageable. 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.
To assist in managing the balance sheet the Group operates a Liquidity Transfer Pricing (LTP) process which: allocates relevant interest expenses from
the centre to the Group’s Banking businesses within the internal management accounts in a manner consistent with the Group Funding and Liquidity
Policy; helps drive the correct inputs to customer pricing and supports the overall Group balance sheet strategy; and is consistent with regulatory
requirements. LTP makes extensive use of behavioural maturity profiles, taking account of expected customer loan prepayments and stability of
customer deposits, modelled on data gathered over several years.
Liquidity risk within the Insurance business may result from: the inability to sell financial assets quickly at their fair values; an insurance liability falling
due for payment earlier than expected; the inability to generate cash inflows as anticipated; an unexpected large operational event; or from a general
insurance catastrophe e.g. a significant weather event. Following the implementation of Solvency II, the annuity portfolio is ring-fenced and assets held
to match annuity liability cashflows are excluded from shareholder liquidity. In the event a liquidity shortfall arises on the annuity portfolio, shareholder
liquidity will be required to support this. As a result, the shareholder’s exposure to liquidity risk is through Insurance’s non-annuity and surplus assets,
any shortfall arising in the annuity portfolio and the investment portfolios within the general insurance business. Liquidity risk is actively managed and
monitored within the Insurance business to ensure that, even under stress conditions, there is sufficient liquidity to meet obligations and remain within
approved risk appetite.
Monitoring
Liquidity is actively monitored at Group level. Daily monitoring and control processes are in place to address internal and regulatory liquidity
requirements. Liquidity policies and procedures are subject to independent internal oversight by Risk.
The Group carries out stress testing of its liquidity and potential cash flow mismatch position over both short (up to one month) and longer term (up
to three months) horizons against a range of scenarios. The scenarios and the assumptions are reviewed at least annually to gain assurance that they
continue to be relevant to the nature of the business. For further information on the Group’s 2016 liquidity stress testing results refer to page 157. The
Group funding plan is also stressed against a range of macroeconomic scenarios. Regulatory metrics are calculated and monitored over the life the
plan under base and stress conditions.
The Group maintains a Contingency Funding Plan which is designed to identify emerging liquidity concerns at an early stage, so that mitigating
actions can be taken to avoid a more serious crisis developing. Contingency Funding Plan invocation and escalation processes are based on analysis
of five major quantitative and qualitative components, comprising assessment of: early warning indicators, prudential and regulatory liquidity risk limits
and triggers, stress testing results, event and systemic indicators and market intelligence.
Funding and liquidity management in 2016
During 2016 the Group has maintained its strong funding and liquidity position, with a loan to deposit ratio of 108.9 per cent.
Total funded assets reduced by £5.8 billion to £465.4 billion during 2016. Loans and advances to customers, excluding reverse repos, reduced by
£5.5 billion. Growth in Consumer Finance was strong at 11 per cent and SME lending growth was 3 per cent, both outperforming the market. This was
offset by a reduction in mortgage balances as the Group continues to balance risk and margin considerations versus volumes in a competitive low
growth market. Total customer deposits fell by £5.3 billion to £413.0 billion at 31 December 2016, largely due to lower Retail and Consumer Finance
tactical balances.
Wholesale funding has decreased by £9.1 billion to £110.8 billion as excess liquidity is managed down; the amount with a residual maturity less than
one year fell to £35.1 billion (£37.9 billion at 31 December 2015). The Group’s term funding ratio (wholesale funding with a remaining life of over one
year as a percentage of total wholesale funding) is unchanged at 68 per cent. During 2016 the Group’s term issuance costs have remained broadly in
line with other post-crisis years and significantly lower than levels seen during the economic downturn. The Group’s overall cost of wholesale funding
has reduced as more expensive funding raised in previous years mature. The Group’s market capacity for term funding is considered across the
planning horizon as part of the funding plan and the Group expects term funding requirements to remain stable.
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The credit ratings on Lloyds Bank were unchanged over 2016, and the median credit rating among the three major credit rating agencies remains
‘A+’. Following the EU referendum in June, both S&P and Moody’s revised their outlooks on Lloyds Bank, among other UK banks, in order to reflect
increased macroeconomic uncertainty. S&P revised the outlook on Lloyds Bank’s ‘A’ rating to ‘Negative’ from ‘Stable’ whilst Moody’s revised the
outlook on Lloyds Bank’s ‘A1’ rating to ‘Stable’ from ‘Positive’. Moody’s also revised their outlook on the UK banking system to ‘Negative‘ from ‘Stable’.
Fitch’s outlook on Lloyds Bank’s ‘A+’ rating remained ‘Stable’ as Fitch expect the economic effects of the referendum to be manageable. The effects of
a potential downgrade from all three credit rating agencies are included in Group liquidity stress testing.
The LCR became the Pillar 1 standard for liquidity in the UK in October 2015. The Group comfortably meets the requirements. Liquid asset holdings
have fallen during the second half of 2016 as excess liquidity held during the EU Referendum is managed down. The Group continues to monitor the
Net Stable Funding Ratio (NSFR) requirements and expects to meet them once confirmed by the PRA.
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Table 1.41: Group funding position
Funding requirement
Loans and advances to customers1
Loans and advances to banks2
Debt securities
Reverse repurchase agreements
Available-for-sale financial assets – non-LCR eligible3
Cash and balances at central bank – non LCR eligible4
Funded assets
Other assets5
On balance sheet LCR eligible liquidity assets
Reverse repurchase agreements
Cash and balances at central banks4
Available-for-sale financial assets6
Held-to-maturity financial assets6
Trading and fair value through profit and loss
Repurchase agreements
Total Group assets
Less: other liabilities5
Funding requirement
Funded by
Customer deposits7
Wholesale funding8
Repurchase agreements
Total equity
Total funding
At 31 Dec
2016
£bn
At 31 Dec
2015
£bn
Change
%
449.7
455.2
5.1
3.4
0.5
1.9
4.8
465.4
249.9
715.3
8.7
42.7
54.6
–
1.8
(5.3)
102.5
817.8
(245.2)
572.6
413.0
110.8
523.8
–
48.8
572.6
3.4
4.2
1.0
2.7
4.7
471.2
234.2
705.4
–
53.7
30.3
19.8
3.0
(5.5)
101.3
806.7
(221.5)
585.2
418.3
119.9
538.2
–
47.0
585.2
(1)
50
(19)
(50)
(30)
2
(1)
7
1
(20)
80
(40)
(4)
1
1
11
(2)
(1)
(8)
(3)
4
(2)
1 Excludes £8.3 billion (31 December 2015: £nil) of reverse repurchase agreements.
2 Excludes £20.9 billion (31 December 2015: £20.8 billion) of loans and advances to banks within the Insurance business and £0.9 billion (31 December 2015: £0.9 billion) of reverse repurchase
agreements.
3 Non-LCR eligible liquid assets comprise a diversified pool of highly rated unencumbered collateral (including retained issuance).
4 Cash and balances at central banks are combined in the Group’s balance sheet.
5 Other assets and other liabilities primarily include balances in the Group’s Insurance business and the fair value of derivative assets and liabilities.
6 The Group reclassified gilts held within the liquidity portfolio as ‘available-for-sale’ (previously been classified as ‘held-to-maturity’) during the third quarter of 2016 as the Group has decided
it is no longer appropriate to commit to holding any gilts to maturity.
7 Excludes £2.5 billion (31 December 2015: £nil) of repurchase agreements.
8 The Group’s definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities.
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Risk management
Risk management continued
Table 1.42: Reconciliation of Group funding to the balance sheet (audited)
At 31 December 2016
At 31 December 2015
Included in
funding
analysis
Repos
and cash
collateral
received by
Insurance
£bn
8.1
83.0
19.7
110.8
413.0
523.8
£bn
8.0
–
–
8.0
2.5
10.5
Fair value
and other
accounting
methods
£bn
0.3
(6.7)
0.1
Balance
sheet
£bn
16.4
76.3
19.8
–
415.5
Included in
funding
analysis
£bn
8.5
88.1
23.3
119.9
418.3
538.2
Repos
and cash
collateral
received by
Insurance
£bn
Fair value
and other
accounting
methods
£bn
8.4
–
–
8.4
–
8.4
–
(6.0)
–
–
Balance
sheet
£bn
16.9
82.1
23.3
418.3
Deposits from banks
Debt securities in issue
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
Table 1.43: Analysis of 2016 total wholesale funding by residual maturity
Three to
six months
Six to nine
months
Nine
months to
one year
One to
two years
Two to
five years
More than
five years
Less
than one
month
£bn
6.1
0.4
2.0
–
2.1
0.6
5.1
–
11.2
One to
three
months
£bn
1.0
2.1
0.8
1.5
2.8
1.0
8.2
0.5
9.7
£bn
0.5
3.0
–
2.7
1.1
0.4
7.2
0.1
7.8
£bn
0.4
1.7
0.4
1.4
–
0.7
4.2
0.4
5.0
£bn
–
0.3
–
0.3
–
0.8
1.4
–
£bn
0.1
–
–
5.1
2.2
0.7
8.0
2.4
£bn
–
–
–
12.3
10.7
1.8
24.8
3.7
£bn
–
–
–
13.6
10.2
0.3
24.1
12.6
Total at
31 Dec
2016
£bn
8.1
Total at
31 Dec
2015
£bn
8.5
7.5
3.2
36.9
29.1
6.3
83.0
19.7
10.6
6.6
37.6
25.8
7.5
88.1
23.3
1.4
10.5
28.5
36.7
110.8
119.9
Deposit from banks
Debt securities in issue:
Certificates of deposit
Commercial paper
Medium-term notes1
Covered bonds
Securitisation
Subordinated liabilities
Total wholesale
funding2
Of which issued by
Lloyds Banking
Group plc3
–
–
–
–
–
–
1.7
5.7
7.4
3.4
1 Medium-term notes include funding from the National Loan Guarantee Scheme (31 December 2016: £1.4 billion; 31 December 2015: £1.4 billion).
2 The Group’s definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities.
3 Consists of medium-term notes (£2.5 billion) and subordinated liabilities (£4.9 billion).
Table 1.44: Total wholesale funding by currency (audited)
At 31 December 2016
At 31 December 2015
Table 1.45: Analysis of 2016 term issuance (audited)
Securitisation
Medium-term notes
Covered bonds
Private placements1
Subordinated liabilities
Total issuance
Of which issued by Lloyds Banking Group plc2
1 Private placements include structured bonds and term repurchase agreements (repos).
2 Consists of medium-term notes (£2.5 billion) and subordinated liabilities (£3.0 billion).
Sterling
US Dollar
£bn
30.6
34.9
£bn
33.0
37.6
Sterling
US Dollar
£bn
0.3
–
1.2
0.1
–
1.6
–
£bn
0.4
1.5
–
1.0
1.1
4.0
3.8
Euro
£bn
41.4
41.3
Euro
£bn
–
1.2
2.4
0.8
–
4.4
1.2
Other
currencies
£bn
5.8
6.1
Other
currencies
£bn
–
0.4
–
–
–
0.4
0.4
Total
£bn
110.8
119.9
Total
£bn
0.7
3.1
3.6
1.9
1.1
10.4
5.4
Gross term issuance for 2016 totalled £10.4 billion. The Group maintained a diversified approach to funding markets with trades in public and private
format, secured and unsecured products and a wide range of currencies and markets. In 2016, the Group drew down £1.0 billion under the Funding for
Lending Scheme (FLS), taking peak usage to £33.1 billion, with £3.0 billion of maturities during the year. A further £4.5 billion was drawn under the Bank
of England’s Term Funding Scheme (TFS), underlining the Group’s support to the UK economy. The maturities for the FLS and TFS are fully factored
into the Group’s funding plan.
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Liquidity portfolio
At 31 December 2016, the Banking business had £120.8 billion of highly liquid unencumbered LCR eligible assets, of which £120.3 billion is LCR level 1
eligible and £0.5 billion is LCR level 2 eligible. These assets are available to meet cash and collateral outflows and PRA regulatory requirements.
A separate liquidity portfolio to mitigate any insurance liquidity risk is managed within the Insurance business. LCR eligible liquid assets represent
over 8 times the Group’s money market funding less than one year maturity (excluding derivative collateral margins and settlement accounts) and
exceed total wholesale funding, and thus provides a substantial buffer in the event of continued market dislocation.
Table 1.46: LCR eligible assets
Level 1
Cash and central bank reserves
High quality government/MDB/agency bonds2
High quality covered bonds
Total
Level 23
Total LCR eligible assets
1 Average for 2015 includes fourth quarter 2015 only.
2 Designated multilateral development bank (MDB).
3 Includes Level 2A and Level 2B.
Table 1.47: LCR eligible assets by currency
At 31 December 2016
Level 1
Level 2
Total
At 31 December 2015
Level 1
Level 2
Total
At 31 Dec
2016
£bn
At 31 Dec
2015
£bn
Change
%
Average
2016
£bn
Average1
2015
£bn
42.7
75.3
2.3
120.3
0.5
120.8
53.7
65.8
3.4
122.9
0.5
123.4
(20)
14
(32)
(2)
–
(2)
53.7
72.4
2.4
128.5
0.5
129.0
57.2
63.0
3.3
123.5
0.7
124.2
Sterling
US Dollar
£bn
£bn
Euro
£bn
Other
currencies
£bn
96.0
0.2
96.2
90.9
0.1
91.0
12.5
0.3
12.8
15.8
-
15.8
11.8
–
11.8
16.2
0.4
16.6
–
–
–
–
–
–
Total
£bn
120.3
0.5
120.8
122.9
0.5
123.4
The Banking business also had £113.8 billion of secondary, non-LCR eligible liquidity, the vast majority of which is eligible for use in a range of central
bank or similar facilities and the Group routinely makes use of as part of its normal liquidity management practices. Future use of such facilities will be
based on prudent liquidity management and economic considerations, having regard for external market conditions.
The Group considers diversification across geography, currency, markets and tenor when assessing appropriate holdings of liquid assets. This liquidity
is managed as a single pool in the centre and is under the control of the function charged with managing the liquidity of the Group. It is available for
deployment at immediate notice, subject to complying with regulatory requirements.
Stress testing results
Internal stress testing results at 31 December 2016 showed that the Banking business had liquidity resources representing 167.0 per cent of modelled
outflows from all wholesale funding sources, retail and corporate deposits, intraday requirements and rating dependent contracts under the Group’s
most severe liquidity stress scenario.
A hypothetical idiosyncratic two notch downgrade of the Group’s current long-term debt rating and accompanying short-term downgrade
implemented instantaneously by all major rating agencies, could result in a contractual outflow of £3.1 billion of cash over a period of up to one year,
£1.8 billion of collateral posting related to customer financial contracts and £9.0 billion of collateral posting associated with secured funding.
Encumbered assets
This disclosure provides further detail on the availability of assets that could be used to support potential future funding requirements of the Group.
The disclosure is not designed to identify assets that would be available in the event of a resolution or bankruptcy.
The Group’s analysis separately identifies those assets held at central banks; assets not held at central banks are classified as either encumbered or
unencumbered.
The Board and GALCO monitor and manage total balance sheet encumbrance via a number of risk appetite metrics. At 31 December 2016, the Group
had £83.5 billion (31 December 2015: £77.4 billion) of externally encumbered on balance sheet assets with counterparties other than central banks.
The increase in encumbered assets was driven by an increase in the use of on balance sheet available-for-sale financial assets for repo activity. The
Group also had £580.9 billion (31 December 2015: £573.7 billion) of unencumbered on balance sheet assets, and £153.5 billion (31 December 2015:
£155.6 billion) of pre-positioned and encumbered assets held with central banks. Primarily the Group encumbers mortgages, unsecured lending and
credit card receivables through the issuance programmes and tradable securities through securities financing activity. The Group mainly positions
mortgage assets at central banks.
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Risk management
Risk management continued
Table 1.48: On balance sheet encumbered and unencumbered assets
Encumbered with counterparties other
than central banks
Securitisations
£m
Covered
bond
£m
Other
£m
Total
£m
Pre-
positioned
and
encumbered
assets
held with
central
banks
£m
Unencumbered assets not pre-positioned
with central banks
Readily
realisable
£m
Other
realisable
assets
£m
Cannot
be used1
£m
Total
£m
Total
£m
At 31 December 2016
Cash and balances at
central 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
–
–
–
–
–
–
–
–
–
–
–
42,998
–
4,454
47,452
47,452
4,806
4,806
–
–
32
32
–
–
–
9,175
22
137,171
146,368
151,174
–
–
36,138
36,138
36,138
528
1,825
24,517
26,870
26,902
14,542
30,883
7,305
52,730
153,482
7,032
152,997
91,717
251,746
457,958
Debt securities
–
–
904
904
–
2,344
5
144
2,493
3,397
14,542
30,883
8,241
53,666
153,482
9,904
154,827
116,378
281,109
488,257
154
–
–
–
–
–
24,824
24,978
–
–
–
–
–
–
–
31,017
–
34
31
–
498
31,546
56,524
–
–
–
1,737
36,477
38,248
38,248
14,696
30,883
37,871
83,450
153,482
93,128
156,617
331,116
580,861
817,793
Available-for-sale
financial assets
Held-to-maturity
investments
Other2
Total assets
At 31 December 2015
Cash and balances at
central 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
Held-to-maturity
investments
Other2
Total assets
–
–
6,922
6,922
–
37
–
37
7,418
855
8,310
–
–
–
–
–
–
–
–
13,668
32,641
–
–
13,668
32,641
–
–
–
–
–
–
53,727
150,086
855
–
7,678
3,150
159,510
84,174
251,362
455,175
62
124
3,336
4,191
54,619
150,086
11,259
160,482
108,037
279,778
484,483
15,810
15,810
5,548
11,048
595
11,674
33,032
31
–
–
–
–
–
–
–
19,808
10
2,716
38,219
–
19,808
40,945
19,808
40,945
13,668
32,641
31,042
77,351
155,634
105,907
163,246
304,550
573,703
806,688
1 The following assets are classified as unencumbered – cannot be used: assets held within the Group’s Insurance businesses which are generally held to either back liabilities to policyholders
or to support the solvency of the Insurance subsidiaries; assets held within consolidated limited liability partnerships which provide security for the Group’s obligations to its pension schemes;
assets pledged to facilitate the use of intra-day payment and settlement systems; and reverse repos and derivatives balance sheet ledger items.
2 Other comprises: items in the course of collection from banks, investment properties, goodwill, value in-force business, other tangible assets, tangible fixed assets, current tax recoverable,
deferred tax assets, retirement benefit assets and other assets.
The above table sets out the carrying value of the Group’s encumbered and unencumbered assets, separately identifying those that are available to
support the Group’s funding needs. The table does not include collateral received by the Group (i.e. from reverse repos) that is not recognised on its
balance sheet, the vast majority of which the Group is permitted to repledge.
158
–
–
–
–
56,323
–
2,094
58,417
58,417
7,459
17
126,138
133,614
140,536
–
–
29,467
29,467
29,467
431
910
23,739
25,080
25,117
Lloyds Banking Group
Annual Report and Accounts 2016
CAPITAL RISK
Definition
Capital risk is defined as the risk that the Group has a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.
Exposures
A capital risk exposure arises when the Group has insufficient capital resources to support its strategic objectives and plans, and to meet external
stakeholder requirements and expectations. This could arise due to a depletion of the Group’s capital resources as a result of the crystallisation of any
of the risks to which it is exposed. Alternatively a shortage of capital could arise from an increase in the amount of capital that is needed to be held.
The Group’s capital management approach is focused on maintaining sufficient capital resources to prevent such exposures while optimising value
for shareholders.
Measurement
The Group measures the amount of capital it holds using the regulatory framework defined by the Capital Requirements Directive and Regulation
(CRD IV) as implemented in the UK by the Prudential Regulation Authority (PRA). Full details of the Group’s regulatory capital and leverage frameworks
will be provided in the Group’s Pillar 3 Report.
The minimum amount of total capital, under Pillar 1 of the regulatory framework, is determined as 8 per cent of aggregate risk-weighted assets. At
least 4.5 per cent of risk-weighted assets are required to be covered by common equity tier 1 (CET1) capital and at least 6 per cent of risk-weighted
assets are required to be covered by tier 1 capital. These minimum Pillar 1 requirements are supplemented by additional minimum requirements
under Pillar 2 of the regulatory framework and a number of regulatory capital buffers as described below.
Additional minimum requirements are set by the PRA by the issuance of bank specific Individual Capital Guidance (ICG). This reflects a point in time
estimate by the PRA, which may change over time, of the minimum amount of capital that is needed by the bank. It includes the assessment of risks
that are not fully covered by Pillar 1, such as credit concentration and operational risk, and those risks not covered at all by Pillar 1, such as pensions
and interest rate risk in the banking book (IRRBB).
The Group is also required to maintain a number of regulatory capital buffers, which are required to be met with CET1 capital.
Systemic buffers are designed to hold systemically important banks to higher capital standards, so that they can withstand a greater level of stress
before requiring resolution.
There are three systemic buffers in the Capital Requirements Directive:
– The G-SII buffer is applied to global systemically important institutions. The Group has not been classified as a G-SII.
– The O-SII buffer may be applied to other systemically important institutions. The Group has been classified as an O-SII by the PRA, but the O-SII
buffer is set to zero in the UK.
– The Systemic Risk Buffer (SRB) will be applied to ring-fenced banks from 1 January 2019. In July 2016 the FPC published their methodology
for quantifying the buffer for each ring-fenced bank and in December 2016 the PRA published their statement of policy on their approach for
implementing the SRB. The size of buffer applied to the Group’s ring-fenced bank (RFB) sub-group in 2019 will be dependent upon the total
assets of the sub-group. The largest buffer the FPC anticipates applying to any ring-fenced bank is 2.5 per cent.
Although the SRB will apply at a sub consolidated level within the Group’s structure, the PRA have indicated that they will include in the PRA Buffer
that applies to the Group an amount equivalent to the RFB’s Systemic Risk Buffer. The amount included in the PRA Buffer is expected to be lower
as a percentage of Group RWAs reflecting the assets of the Group that will not be held in the RFB sub-group and for which the SRB will not apply to.
The capital conservation buffer (CCB) is a standard buffer of 2.5 per cent of risk-weighted assets designed to provide for losses in the event of stress
and is being phased in over the period from 1 January 2016 to 1 January 2019. During 2016 it was 0.625 per cent and during 2017 it is 1.25 per cent.
The countercyclical capital buffer (CCYB) is time-varying and is designed to require banks to hold additional capital to remove or reduce the build-up
of systemic risk in times of credit boom, providing additional loss absorbing capacity and acting as an incentive for banks to constrain further credit
growth. The amount of the buffer is determined by reference to buffer rates set by the FPC for the individual countries where the Group has relevant
credit risk exposures. The buffer is currently set at zero for the UK, however non-zero rates for Norway, Sweden and Hong Kong were in place at
31 December 2016. Given that the Group has minimal exposures to these jurisdictions, the overall requirement is negligible. The UK CCYB rate was
set to increase from 0 per cent to 0.5 per cent of risk-weighted assets on 29 March 2017, at which time the overlapping aspects of Pillar 2 supervisory
capital buffers would be removed or reduced. However, following the EU referendum, on 5 July 2016 the FPC announced in their Financial Stability
Report that the planned 0.5 per cent UK CCYB would not be implemented in March 2017 and the zero per cent rate was expected to remain until at
least June 2017. The FPC also recommended that where existing Pillar 2 supervisory buffers reflect risks that would be captured by a UK CCYB rate,
the PRA should reduce those buffers by an amount of capital which is equivalent to the effect of a UK CCYB rate of 0.5 per cent. The FPC has also
indicated that it expects to review the UK CCYB and to set a rate in the region of 1 per cent of risk-weighted assets when risks are judged to be neither
subdued nor elevated, but the rate can be set in excess of this level. Any increase in CCYB would take effect 1 year after it is set.
The FPC can also set sectoral capital requirements which are temporary increases to banks’ capital requirements on exposures to specific sectors, if the
FPC judges that exuberant lending to those sectors poses risks to financial stability. No sectoral capital requirements currently apply to the Group.
As part of the capital planning process, forecast capital positions are subjected to extensive stress analyses to determine the adequacy of the Group’s
capital resources against the minimum requirements, including ICG. The PRA uses the outputs from some of these stress analyses as one of the inputs
that inform the setting of a bank-specific capital buffer for the Group, known as the PRA Buffer. The PRA Buffer also takes into account the CCB, CCYB
and any sectoral capital requirements that already apply to the Group. The PRA requires the PRA Buffer to remain confidential between the Group and
the PRA.
All buffers are required to be met with CET1 capital. A breach of the PRA buffer would trigger a dialogue between the Group and the PRA to agree
what action is required whereas a breach of the CRD IV combined buffer (all regulatory buffers excluding the PRA buffer) would give rise to automatic
constraints upon any discretionary capital distributions by the Group.
In addition to the risk-based capital framework outlined above, the Group is also subject to minimum capital requirements under the UK’s Leverage
Ratio Framework. The leverage ratio is calculated by dividing fully loaded tier 1 capital resources by a defined measure of on balance sheet assets
and off balance sheet items.
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Risk management
Risk management continued
The minimum leverage ratio in the UK is 3 per cent, in line with current Basel requirements. In addition the UK framework requires two buffers to be
maintained: an Additional Leverage Ratio Buffer (ALRB), which is calculated as 35 per cent of the Systemic Risk Buffer (applicable from 2019) and
a time-varying Countercyclical Leverage Buffer (CCLB) which is calculated as 35 per cent of the countercyclical capital buffer rate (currently set at
0 per cent). At least 75 per cent of the minimum 3 per cent requirement and the entirety of any buffers that may apply must be met by CET1 capital.
The leverage ratio framework does not currently give rise to higher capital requirements for the Group than the risk-based capital framework.
Mitigation
The Group has a capital management framework including policies and procedures that are designed to ensure that it operates within its risk appetite,
uses its capital resources efficiently and continues to comply with regulatory requirements.
The Group is able to accumulate additional capital through the retention of profits over time, which can be enhanced through cutting costs and
reducing or cancelling dividend payments, by raising new equity via, for example, a rights issue or debt exchange and by raising additional tier 1
or tier 2 capital through issuing tier 1 instruments or subordinated liabilities. The cost and availability of additional capital is dependent upon market
conditions and perceptions at the time. The Group is also able to manage the demand for capital through management actions including adjusting
its lending strategy, risk hedging strategies and through business disposals.
Additional measures to manage the Group’s capital position include seeking to optimise the generation of capital demand within the Group’s
businesses to strike an appropriate balance of capital held within the Group’s Insurance and banking subsidiaries and through improving the quality
of its capital through liability management exercises.
Monitoring
Capital is actively managed and regulatory ratios are a key factor in the Group’s planning processes and stress analyses. Multi-year forecasts of the
Group’s capital position, based upon the Group’s operating plan, are produced at least annually to inform the Group’s capital strategy whilst shorter
term forecasts are more frequently undertaken to understand and respond to variations of the Group’s actual performance against the plan. The
capital plans are tested for capital adequacy using a range of stress scenarios covering adverse economic conditions as well as other adverse factors
that could impact the Group and the Group maintains a Recovery Plan which sets out a range of potential mitigating actions that could be taken in
response to a stress.
Regular reporting of actual and projected ratios, including those in stressed scenarios, is undertaken, including submissions to the Group Capital Risk
Committee (GCRC), Group Financial Risk Committee (GFRC), Group Asset and Liability Committee (GALCO), Group Risk Committee (GRC), Board
Risk Committee (BRC) and the Board. Capital policies and procedures are subject to independent oversight.
The regulatory framework within which the Group operates continues to evolve and further detail on this will be provided in the Group’s Pillar 3 report.
The Group continues to monitor these developments very closely, analysing the potential capital impacts to ensure that, through organic capital
generation, the Group continues to maintain a strong capital position that exceeds the minimum regulatory requirements and the Group’s risk appetite
and is consistent with market expectations.
Target capital ratios
The Board’s view of the current level of CET1 capital required to grow the business, meet regulatory requirements and cover uncertainties and future
regulatory developments remains at around 13 per cent.
This takes into account, amongst other things:
– the Pillar 2A Individual Capital Guidance (ICG) set by the PRA, reflecting their point in time estimate, which may change over time, of the amount
of capital that is needed in relation to risks not covered by Pillar 1. During the year the PRA updated the Group’s ICG representing a reduction from
4.6 per cent to 4.5 per cent of risk-weighted assets at 31 December 2016, of which 2.5 per cent has to be covered by CET1 capital.
– the PRA Buffer, which they set taking into account the results of the PRA stress tests and other information, as well as outputs from our internal stress
tests and other information. In November 2016 the PRA published the results of its 2016 stress tests which showed the Group’s capital depletion to
be 2.5 per cent after management actions compared to 3.3 per cent in the 2015 PRA stress tests and 4.8 per cent in the 2014 PRA stress tests. The
PRA requires the PRA buffer to remain confidential between the Group and the PRA.
– future regulatory developments, including the introduction of the Systemic Risk Buffer in 2019.
In addition, the Group targets a transitional total capital ratio of around 20 per cent.
Dividend policy
The Group has established a dividend policy that is both progressive and sustainable. We expect ordinary dividends to increase over the medium
term to a dividend payout ratio of at least 50 per cent of sustainable earnings. The Board interprets progressive to indicate a dividend per share
that is expected to increase over the medium term. Sustainable earnings represents the long term earnings generation of the business. Sustainable
earnings are defined as earnings after tax attributable to ordinary shareholders adjusted to remove the effects of market volatility, exceptional conduct
or litigation events, major liability management or restructuring and other one off items such as the sale of businesses, and exceptional underlying
business performance.
The Board also gives due consideration to the distribution of surplus capital through the use of special dividends or share buy-backs. Surplus capital
represents capital over and above the amount management wish to retain to grow the business, meet regulatory requirements and cover uncertainties.
The amount of required capital may vary from time to time depending on circumstances and the Board will continue to give due consideration, subject
to the situation at the time, to the distribution of any surplus capital. By its nature, there can be no guarantee that this level of special dividends or any
surplus capital distribution will be appropriate in future years.
The ability of the Group to pay a dividend is also subject to constraints including the availability of distributable reserves, legal and regulatory
restrictions and the financial and operating performance of the entity.
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company’s individual financial statements. At
31 December 2016 Lloyds Banking Group plc (‘the Company’) had accumulated distributable reserves of approximately £8,500 million. Substantially
all of the Company’s merger reserve is available for distribution under UK company law as a result of transactions undertaken to recapitalise the
Company in 2009.
160
Lloyds Banking Group
Annual Report and Accounts 2016
Lloyds Banking Group plc acts as a holding company which also issues capital and other securities to capitalise and fund the activities of the Group.
The profitability of the holding company, and consequently its ability to sustain dividend payments, is therefore dependent upon the continued receipt
of dividends from its subsidiaries (representing both banking and insurance). A number of Group subsidiaries, principally those with banking and
insurance activities, are also subject to regulatory capital requirements. These require entities to maintain minimum amounts of capital related to their
size and risk. The principal operating subsidiary is Lloyds Bank plc which, at 31 December 2016, had a consolidated CET1 capital ratio of 15.2 per cent
(31 December 2015: 15.2 per cent). The Group actively manages the capital of its subsidiaries, which includes monitoring the regulatory capital ratios
for its banking and insurance subsidiaries against approved risk appetite limits. It operates a formal capital management policy which requires all
subsidiary entities to remit any surplus capital to their parent companies.
During 2016 the Group has continued to simplify the Group’s internal capital structure and to ensure that profits generated by subsidiary entities
can be more easily remitted to the Company. This included the court approved capital reduction by Lloyds Bank plc.
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Analysis of capital position
During 2016 the Group continued to strengthen its capital position with a fully loaded CET1 ratio, after accruing for foreseeable dividends, of
13.6 per cent and 13.8 per cent on a pro forma basis upon recognition of the dividend paid by the Insurance business in February 2017 in relation to its
2016 earnings (31 December 2015: 13.0 per cent pro forma). The accrual for foreseeable dividends includes both the recommended full year ordinary
dividend of 2.55 pence per ordinary share and a special dividend of 0.5 pence per ordinary share.
The CET1 ratio on a pro forma basis reflects the prudent retention of circa 0.8 per cent of capital, above the current target level, to cover the estimated
capital impact of the MBNA acquisition that was announced in December 2016.
Over the year the Group generated around 1.9 per cent of CET1 capital on a pro forma basis, pre dividend, primarily as a result of the following:
– Strong underlying capital generation of 2.2 per cent, largely driven by underlying profits;
– The dividend paid by the Insurance business in February 2017 in relation to its 2016 earnings of 0.2 per cent;
– Impact of conduct charges of (1.0) per cent;
– Impact of market movements, netting to 0.2 per cent. This included 0.8 per cent from the impact of the accounting reclassification of c.£20 billion of
gilts within the liquidity portfolio from ‘held-to-maturity’ to ‘available-for-sale’, offset by a number of market related movements, including an adverse
impact of movements in the defined benefit pension schemes of (0.4) per cent;
– Other items largely representing a reduction in risk-weighted assets, most notably in the fourth quarter, largely relating to active portfolio
management, disposals, an improvement in credit quality and capital efficient securitisation activity, partially offset by model updates related
to UK mortgage portfolios and the impact of the redemption of the remaining series of Enhanced Capital Notes in the first quarter.
After accruing for foreseeable dividends, the transitional total capital ratio reduced by 0.1 percentage points to 21.4 per cent, primarily
reflecting managed reductions in tier 2 capital, largely due to calls and redemptions, offset by the increase in CET1 capital and the reduction
in risk-weighted assets.
In 2020 the Group will have to meet a Minimum Requirement for Own Funds and Eligible Liabilities (MREL). During 2016 the Group commenced
issuance of senior unsecured securities from Lloyds Banking Group plc, which, while not included in total capital, are eligible to meet MREL, £2.5 billion
(Sterling equivalent) was issued in 2016 and a further £2.2 billion (Sterling equivalent) was issued in January 2017 leaving the Group well positioned to
meet MREL requirements from 2020.
The leverage ratio, after accruing for foreseeable dividends, increased from 4.8 per cent to 4.9 per cent (5.0 per cent on a pro forma basis), largely
reflecting the increase in tier 1 capital.
An analysis of the Group’s capital position as at 31 December 2016 is presented in the following section applying CRD IV transitional arrangements
and also on a fully loaded CRD IV basis, both as implemented in the UK by the PRA.
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161
Risk management
Risk management continued
The table below summarises the consolidated capital position of the Group. The Group’s Pillar 3 Report will provide a comprehensive analysis
of the own funds of the Group.
Table 1.49: Capital resources (audited)
Capital resources
Common equity tier 1
Shareholders’ equity per balance sheet
Adjustment to retained earnings for foreseeable dividends
Deconsolidation adjustments1
Adjustment for own credit
Cash flow hedging reserve
Other adjustments1
less: deductions from common equity tier 1
Goodwill and other intangible assets
Prudent valuation adjustment
Excess of expected losses over impairment provisions and value adjustments
Removal of defined benefit pension surplus
Securitisation deductions
Significant investments1
Deferred tax assets
Common equity tier 1 capital
Additional tier 1
Other equity instruments
Preference shares and preferred securities2
Transitional limit and other adjustments
less: deductions from tier 1
Significant investments1
Total tier 1 capital
Tier 2
Other subordinated liabilities2
Deconsolidation of instruments issued by insurance entities1
Adjustments for transitional limit and non-eligible instruments
Amortisation and other adjustments
Eligible provisions
less: deductions from tier 2
Significant investments1
Total capital resources
Transitional
Fully loaded
At 31 Dec
2016
£m
At 31 Dec
20151
£m
At 31 Dec
2016
£m
At 31 Dec
20151
£m
43,020
(1,568)
1,342
87
(2,136)
(276)
41,234
(1,427)
1,119
67
(727)
(97)
43,020
(1,568)
1,342
87
(2,136)
(276)
41,234
(1,427)
1,119
67
(727)
(97)
40,469
40,169
40,469
40,169
(1,623)
(1,719)
(1,623)
(1,719)
(630)
(602)
(267)
(217)
(4,282)
(3,564)
29,284
5,320
4,998
(1,692)
8,626
(1,329)
36,581
14,833
(1,810)
1,351
(3,447)
10,927
186
(1,571)
46,123
(372)
(270)
(721)
(169)
(4,500)
(3,874)
28,544
5,355
4,728
(906)
9,177
(1,177)
36,544
18,584
(1,665)
(52)
(3,880)
12,987
221
(1,756)
47,996
(630)
(602)
(267)
(217)
(4,282)
(3,564)
29,284
(372)
(270)
(721)
(169)
(4,529)
(3,884)
28,505
5,320
5,355
–
–
–
–
5,320
5,355
–
–
34,604
33,860
14,833
(1,810)
(1,694)
(3,597)
7,732
186
(2,900)
39,622
18,584
(1,665)
(3,066)
(4,885)
8,968
221
(2,933)
40,116
Risk-weighted assets
215,534
222,845
215,534
222,747
Common equity tier 1 capital ratio3
Tier 1 capital ratio
Total capital ratio
13.6%
17.0%
21.4%
12.8%
16.4%
21.5%
13.6%
16.1%
18.4%
12.8%
15.2%
18.0%
1 For regulatory capital purposes, the Group’s Insurance business is deconsolidated and replaced by the amount of the Group’s investment in the business. A part of this amount is deducted
from capital (shown as ‘significant investments’ in the table above) and the remaining amount is risk-weighted, forming part of threshold risk-weighted assets. The presentation of the
deconsolidation of the Group’s insurance entities has been amended for 2016 with comparative figures restated accordingly.
2 Preference shares, preferred securities and other subordinated liabilities are categorised as subordinated liabilities in the balance sheet.
3 The common equity tier 1 ratio is 13.8 per cent on a pro forma basis upon recognition of the dividend paid by the Insurance business in February 2017 in relation to its 2016 earnings
(31 December 2015: 13.0 per cent pro forma).
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The key differences between the transitional capital calculation as at 31 December 2016 and the fully loaded equivalent are as follows:
– Capital securities that previously qualified as tier 1 or tier 2 capital, but do not fully qualify under CRD IV, can be included in tier 1 or tier 2 capital
(as applicable) up to specified limits which reduce by 10 per cent per annum until 2022.
– The significant investment deduction from additional tier 1 (AT1) will gradually transition to tier 2.
The movements in the transitional CET1, AT1, tier 2 and total capital positions in the period are provided below.
Table 1.50: Movements in capital resources
Common
Equity Tier 1
£m
Additional
Tier 1
£m
Tier 2
£m
At 31 December 2015
Profit attributable to ordinary shareholders1
Movement in foreseeable dividends2
Dividends paid out on ordinary shares during the year
Dividends in respect of 2015 earnings received from the insurance business1
Movement in treasury shares and employee share schemes
Pension movements:
Removal of defined benefit pension surplus
Movement through other comprehensive income
Available-for-sale reserve
Prudent valuation adjustment
Deferred tax asset
Goodwill and other intangible assets
Excess of expected losses over impairment provisions and value adjustments
Significant investments
Eligible provisions
Movements in subordinated debt:
Repurchases, redemptions and other
Issuances
Other movements
At 31 December 2016
28,544
2,070
(141)
(2,014)
500
134
454
(954)
1,197
(258)
310
96
(332)
218
–
–
–
(540)
29,284
8,000
11,452
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(152)
–
(551)
–
–
185
(35)
(3,211)
1,151
–
Total
capital
£m
47,996
2,070
(141)
(2,014)
500
134
454
(954)
1,197
(258)
310
96
(332)
251
(35)
(3,762)
1,151
(540)
7,297
9,542
46,123
1 Under the regulatory framework, profits made by Insurance are removed from CET1 capital. However, when dividends are paid to the Group by Insurance these are recognised through
CET1 capital.
2 Includes the accrual for the 2016 full year ordinary and special dividends and the reversal of the accrual for the 2015 full year ordinary and special dividends which were paid during the year.
CET1 capital resources have increased by £740 million in the year largely as a result of profit generation in the year, dividends received from the
Insurance business and the favourable movement in the available-for-sale reserve following the accounting reclassification of gilts within the liquidity
portfolio from held-to-maturity. These movements in CET 1 capital were partially offset by dividends paid out during the year, movements in the
defined benefit pension schemes largely driven by the impact of credit spreads, an increase in the excess of expected losses over impairment
provisions and value adjustments primarily as a result of the implementation of recently published EBA guidance restricting prudent valuation
adjustments eligible for offset against expected losses, and the accrual of the full year ordinary and special dividends, representing returns to
ordinary shareholders following strong capital generation.
AT1 capital resources have reduced by £703 million in the year, primarily reflecting the annual reduction in the transitional limit applied to
grandfathered AT1 capital instruments and an increase in the significant investments deduction.
Tier 2 capital resources have reduced by £1,910 million in the year largely reflecting calls and redemptions, including the redemption of all remaining
series of Enhanced Capital Notes (ECNs) under the Regulatory Call Right, and the amortisation of dated tier 2 instruments, partly offset by the issuance
of a new dated tier 2 instrument, foreign exchange movements on subordinated debt, the transitioning of grandfathered AT1 instruments to tier 2 and
a reduction in the significant investments deduction.
The redemption of the remaining series of ECNs followed the decision of the Court of Appeal in December 2015 that a Capital Disqualification Event
(CDE) in relation to the ECNs had occurred. The Group subsequently exercised its option to redeem them in the first quarter of 2016. In June 2016 the
Supreme Court confirmed the decision of the Court of Appeal.
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Risk management
Risk management continued
Table 1.51: Risk-weighted assets
Foundation Internal Ratings Based (IRB) Approach
Retail IRB Approach
Other IRB Approach
IRB Approach
Standardised (STA) Approach
Credit risk
Counterparty credit risk
Contributions to the default fund of a central counterparty
Credit valuation adjustment risk
Operational risk
Market risk
Underlying risk-weighted assets
Threshold risk-weighted assets1
Total risk-weighted assets
Movement to fully loaded risk-weighted assets2
Fully loaded risk-weighted assets
At 31 Dec
2016
£m
64,907
64,970
17,788
147,665
18,956
166,621
8,419
340
864
25,292
3,147
204,683
10,851
215,534
At 31 Dec
2015
£m
68,990
63,912
18,661
151,563
20,443
172,006
7,981
488
1,684
26,123
3,775
212,057
10,788
222,845
–
(98)
215,534
222,747
1 Threshold risk-weighted assets reflect the element of the significant investments and deferred tax assets that are permitted to be risk-weighted instead of deducted from CET1 capital.
Significant investments primarily arise from the investment in the Group’s Insurance business.
2 Differences may arise between transitional and fully loaded threshold risk-weighted assets where deferred tax assets reliant on future profitability and arising from temporary timing
differences and significant investments exceed the fully loaded threshold limit, resulting in an increase in amounts deducted from CET1 capital rather than being risk-weighted.
Table 1.52: Risk-weighted assets movement by key driver
Fully loaded risk-weighted assets
as at 31 December 2015
Less total threshold risk-weighted assets3
Risk-weighted assets
at 31 December 2015
Asset size
Acquisitions and disposals
Model updates
Methodology and policy
Asset quality
Movements in risk levels (Market risk only)
Foreign exchange
Other
Risk-weighted assets
as at 31 December 2016
Threshold risk-weighted assets3
Total risk-weighted assets
as at 31 December 2016
1 Credit risk includes securitisation risk-weighted assets.
Credit risk
IRB
£m
Credit risk
STA
£m
Credit risk1
£m
Counterparty
Credit risk2
£m
Market risk
£m
Operational
risk
£m
Total
£m
222,747
(10,690)
151,563
20,443
172,006
(4,453)
(3,406)
4,363
(1,215)
(2,989)
–
3,802
–
(440)
(435)
–
(1,184)
(75)
–
647
–
(4,893)
(3,841)
4,363
(2,399)
(3,064)
–
4,449
–
10,153
(1,542)
(183)
99
–
729
–
367
–
3,775
(139)
–
(951)
–
(200)
662
–
–
26,123
212,057
–
–
–
–
–
–
–
(831)
(6,574)
(4,024)
3,511
(2,399)
(2,535)
662
4,816
(831)
147,665
18,956
166,621
9,623
3,147
25,292
204,683
10,851
215,534
2 Counterparty credit risk includes movements in contributions to the default fund of central counterparties and movements in credit valuation adjustment risk.
3 Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital.
Significant investments primarily arise from investment in the Group’s Insurance business.
The risk-weighted assets movement tables provide analyses of the reduction in risk-weighted assets in the period by risk type and an insight into the
key drivers of the movements. The key driver analysis is compiled on a monthly basis through the identification and categorisation of risk-weighted
asset movements and is subject to management judgment.
Credit risk-weighted assets reductions of £5.4 billion were driven by the following key movements:
– Asset size movements. Credit risk-weighted assets decreased by £4.9 billion, primarily due to active portfolio management, partially offset by
continued growth in targeted customer segments.
– Disposals of the Group’s interest in strategic equity investments and other targeted disposals reduced credit risk-weighted assets by £3.8 billion.
– Model update increases of £4.4 billion were mainly related to the Mainstream and buy-to-let UK mortgage portfolios.
– Methodology and policy reductions of £2.4 billion are principally due to securitisation activity.
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– Asset quality movements capture movements due to changes in borrower risk, including changes in the economic environment. Net reductions
in credit risk-weighted assets of £3.1 billion primarily relate to model calibrations and a net change in credit quality, reflecting improvements in the
economic climate, partly offset by increases in the valuation of centrally held strategic equity investments.
– Foreign exchange movements reflect the depreciation of Sterling which has contributed to a £4.4 billion increase in credit risk-weighted assets.
Counterparty credit risk assets decreased by £0.5 billion mainly driven by increased capital relief from CVA related hedges partially offset by increased
trading activity, foreign exchange and yield curve movements.
Market risk-weighted assets reduced by £0.6 billion due to a reduction in the Value-at-Risk multiplier, improvements to the VaR model and active
portfolio management.
Operational risk-weighted assets reduced by £0.8 billion due to the annual update of the income based TSA operational risk calculation.
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Stress testing
The Group undertakes a wide ranging programme of stress testing providing a comprehensive view of the potential impacts arising from the risks to
which the Group is exposed. One of the most important uses of stress testing is to assess the resilience of the operational and strategic plans of the
Group to adverse economic conditions and other key vulnerabilities. As part of that the Group participates in the UK-wide concurrent stress test run
by the Bank of England.
During 2016, the Group was subject to the European Banking Authority’s Europe-wide stress test with the Group‘s results significantly above our
minimum capital requirements. The concurrent UK stress test run by the Bank of England was also undertaken in 2016. As announced in November,
the Group comfortably exceeded the capital thresholds set by the PRA and was not required to take any action as a result of this test.
Leverage ratio
The table on the next page summarises the component parts of the Group’s leverage ratio. Further analysis will be provided in the Group’s Pillar 3 Report.
Table 1.53: Leverage ratio
Total tier 1 capital for leverage ratio
Common equity tier 1 capital
Additional tier 1 capital
Total tier 1 capital
Exposure measure
Statutory balance sheet assets
Derivative financial instruments
Securities financing transactions (SFTs)
Loans and advances and other assets
Total assets
Deconsolidation adjustments1
Derivative financial instruments
Securities financing transactions (SFTs)
Loans and advances and other assets
Total deconsolidation adjustments
Derivatives adjustments
Adjustments for regulatory netting
Adjustments for cash collateral
Net written credit protection
Regulatory potential future exposure
Total derivatives adjustments
SFT adjustments
Off-balance sheet items
Regulatory deductions and other adjustments
Total exposure
Leverage ratio2
Average leverage ratio3
Average leverage ratio exposure measure4
Fully loaded
At 31 Dec
2016
£m
At 31 Dec
2015
£m
29,284
5,320
34,604
28,505
5,355
33,860
36,138
42,285
739,370
817,793
29,467
34,136
743,085
806,688
(2,403)
112
(1,510)
(441)
(142,955)
(133,975)
(145,246)
(135,926)
(20,490)
(8,432)
699
13,188
(15,035)
39
58,685
(9,128)
(16,419)
(6,464)
682
12,966
(9,235)
3,361
56,424
(9,112)
707,108
712,200
4.8%
4.9%
4.9%
718,926
1 Deconsolidation adjustments predominantly reflect the deconsolidation of assets related to Group subsidiaries that fall outside the scope of the Group’s regulatory capital consolidation
(primarily the Group’s Insurance entities).
2 The countercyclical leverage ratio buffer is currently nil.
3 The average leverage ratio is based on the average of the month end tier 1 capital and exposure measures over the quarter (30 September 2016 to 31 December 2016). The average
of 4.9 per cent compares to 4.8 per cent at the start and 4.9 per cent at the end of the quarter.
4 The average leverage ratio exposure measure is based on the average of the month end exposure measures over the quarter (30 September 2016 to 31 December 2016).
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Risk management
Risk management continued
Key movements
The Group’s fully loaded leverage ratio increased by 0.1 per cent to 4.9 per cent reflecting the impact of both the increase in tier 1 capital and the
£5.1 billion reduction in the exposure measure, the latter largely reflecting the reduction in liquid asset holdings.
The derivatives exposure measure, representing derivative financial instruments per the balance sheet net of deconsolidation and derivatives
adjustments, reduced marginally with market movements and trading activity broadly offset through netting and cash collateral inflows.
The increase in SFT assets over the period, reflecting increased customer volumes, was offset by the reduction in SFT adjustments reflecting both
the recognition of additional eligible netting adjustments and a reduction in the counterparty credit risk add-on.
Off-balance sheet items increased by £2.3 billion, primarily reflecting a change in the profile and subsequent classification of commercial off-balance
sheet items and a net increase in securitisation financing facilities, partially offset by a planned drawdown on certain liquidity facilities supporting the
Group’s conduit programme to provide funding alongside the proceeds of the ABCP issurance.
The average leverage ratio of 4.9 per cent over the quarter reflected a strengthening tier 1 capital position prior to the accrual for the announced
full year special dividend and the reduction in balance sheet assets during the quarter, largely reflecting the reduction in liquid asset holdings.
Modified UK leverage ratio
The Group’s leverage ratio on a modified basis, excluding qualifying central bank claims from the leverage exposure measure, is 5.2 per cent.
This follows the rule modification applied to the UK Leverage Ratio Framework by the PRA in August 2016 as a result of recommendations made
by the Financial Policy Committee.
The Financial Policy Committee has indicated that it intends to recalibrate the UK framework in 2017 in order to adjust for the impact of the rule
modification, thereby ensuring that levels of capital currently required to meet leverage ratio minimums are maintained. The modified UK leverage
ratio should therefore be considered in the context of the proposed recalibration.
G-SIB indicators
Although the Group is not currently classified as a Global Systemically Important Bank (G-SIB), by virtue of the Group’s leverage exposure measure
exceeding €200 billion the Group is required to report G-SIB indicator metrics to the PRA. The Group’s indicator metrics used within the 2016 Basel
G-SIBs annual exercise will be disclosed from April 2017, and the results are expected to be made available by the Basel Committee later this year.
Insurance businesses
The business transacted by the insurance companies within the Group comprises both life insurance business and general insurance business.
Life insurance business comprises unit-linked business, non-profit business and with-profits business.
Scottish Widows Limited (SW Ltd) holds the only with-profit funds managed by the Group. Each insurance company within the Group is regulated
by the PRA.
The Solvency II regime for insurers and insurance groups came into force from 1 January 2016. The insurance businesses are required to calculate
solvency capital requirements and available capital on a risk-based approach. The insurance business of the Group calculates regulatory capital
on the basis of an internal model, which was approved by the PRA on 5 December 2015.
The minimum required capital must be maintained at all times throughout the year. These capital requirements and the capital available to meet
them are regularly estimated in order to ensure that capital maintenance requirements are being met.
All minimum regulatory requirements of the insurance companies have been met during the year.
REGULATORY AND LEGAL RISK
Definition
Regulatory and legal risk is defined as the risk that the Group is exposed to fines, censure, or legal or enforcement action; or to civil or criminal
proceedings in the courts (or equivalent) and/or the Group is unable to enforce its rights due to failing to comply with applicable laws (including
Codes of Practice which could have legal implications), regulations, codes of conduct or legal obligations.
Exposures
Whilst the Group has a zero risk appetite for material regulatory breaches or material legal incidents, the Group remains exposed to material
regulatory breaches and material legal incidents outside of its risk appetite. Exposure is driven by significant ongoing and new legislation, regulation
and court proceedings in the UK and overseas which in each case needs to be interpreted, implemented and embedded into day-to-day operational
and business practices across the Group.
Measurement
Regulatory and legal risks are measured against a set of risk appetite metrics, with appropriate thresholds, which are approved annually by the Board
and which are regularly reviewed and monitored. Metrics include assessments of control and material regulatory rule breaches.
Mitigation
We have taken a number of steps and have outlined below the following key components:
– The Board establishes a Group-wide risk appetite and metrics for Regulatory and Legal Risk;
– Group policies and procedures set out the principles and key controls that should apply across the business which are aligned to the group risk
appetite. Mandated policies and processes require appropriate control frameworks, management information, standards and colleague training
to be implemented to identify and manage regulatory and legal risk;
– Business units assess and implement policy and regulatory requirements and establish local control, processes and procedures to ensure governance
and compliance;
– Material risks and issues are escalated to divisional and then Group-level bodies which challenge and support the business on its management
of them;
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– Business units regularly produce management information to assist in the identification of issues and test management controls
are working effectively;
– Risk Division and Legal provide oversight and proactive support and constructive challenge to the business in identifying and managing regulatory
and legal issues;
– Risk Division will conduct thematic reviews of regulatory compliance across businesses and divisions where appropriate;
– Business units with the support of divisional and Group-Level bodies conduct ongoing horizon scanning to identify and address changes
in regulatory and legal requirements.
Monitoring
Business unit risk exposure is reported to Risk Division where it is aggregated at Group level and a report prepared. The report forms the basis of
challenge to the business at the monthly Group Conduct, Compliance and Operational Risk Committee. This committee may escalate matters to the
Chief Risk Officer, or higher committees. The report also forms the basis of the regulatory and legal sections in the Group’s consolidated risk reporting.
State aid commitments
In 2015 we satisfied all material structural and behavioural commitments following the successful carve-out and disposal of TSB with respect to the
State Aid commitments agreed with the European Commission under the State Aid regime in 2009. We are therefore no longer subject to restrictive
behavioural commitments including the constraint on acquisitions, but continue to be bound by two remaining limited ancillary commitments which
means that we remain subject to supervision by the European Commission with respect to these commitments until they cease to have effect on or
before June 2017.
INSURANCE RISK
Definition
Insurance risk is defined as the risk of adverse developments in the timing, frequency and severity of claims for insured/underwritten events and
in customer behaviour, leading to reductions in earnings and/or value.
Exposures
The major sources of insurance risk within the Group are the Insurance business and the Group’s defined benefit pension schemes.
Longevity and persistency are key risks within the life and pensions business. Longevity risk arises from the annuity portfolios where policyholders’
future cashflows are guaranteed at retirement and increases in life expectancy, beyond current assumptions, will increase the cost of annuities.
Longevity risk exposures are expected to increase with the Insurance business growth in the bulk annuity market. Persistency assumptions are
set to give a best estimate however, customer behaviour may result in increased cancellations or cessation of contributions.
Property insurance risk is a key risk within the general insurance business, through Home Insurance, and exposures can arise, for example, in extreme
weather conditions, such as flooding, when property damage claims are higher than expected.
The prime insurance risk of the Group’s defined benefit pension schemes is longevity.
Measurement
Insurance risks are measured using a variety of techniques including stress, reverse stress and scenario testing, as well as stochastic modelling. Current
and potential future insurance risk exposures are assessed and aggregated on a range of stresses including risk measures based on 1-in-200 year
stresses for Insurance’s regulatory capital assessments and other supporting measures where appropriate, including those set out in note 33 to the
financial statements. For measuring the longevity risk in the Group’s defined benefit pension schemes both 1-in-20 year stresses (risk appetite) and 1-in-
200 year stresses (regulatory capital) are utilised. For further information on defined benefit schemes please refer to note 36 to the financial statements.
Mitigation
Insurance risk in the Insurance business is mitigated in a number of ways:
– General insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements broadly spread over
different reinsurers. Detailed modelling, including that of the potential losses under various catastrophe scenarios, supports the choice of reinsurance
arrangements.
– Insurance processes on underwriting, claims management, pricing and product design.
– Longevity risk transfer and hedging solutions are considered on a regular basis. A team of longevity and bulk pricing experts has been built
to support the new bulk annuity proposition.
– Exposure limits by risk type are assessed through the business planning process and used as a control mechanism to ensure risks are taken within
risk appetite.
The most significant insurance risk in the defined benefit pension schemes is longevity risk. The merits of longevity risk transfer and hedging solutions
are regularly reviewed.
Monitoring
Insurance risks in the Insurance business are monitored by Insurance senior executive Committees and ultimately the Insurance Board. Governance
of the Group’s defined benefit pension schemes includes two specialist pension committees. Significant risks from the Insurance business and the
defined benefit pension schemes are reviewed by the Group Executive and Group Risk Committees and/or Board.
Insurance risk exposures within the Insurance business are monitored against risk appetite. The Insurance business monitors experiences against
expectations, for example business volumes and mix, claims and persistency experience. The effectiveness of controls put in place to manage
insurance risk is evaluated and significant divergences from experience or movements in risk exposures are investigated and remedial action taken.
Progress against risk appetite metrics in respect of longevity risk in the Group’s defined benefit pension schemes is regularly reported and reviewed
by the relevant committees.
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Risk management
Risk management continued
PEOPLE RISK
Definition
People risk is defined as the risk that the Group fails to lead, manage and enable colleagues to deliver the Group’s strategy for customers,
shareholders and regulators.
Exposures
The Group’s management of material people risks is critical to its capacity to deliver against its strategic objectives and to be the best bank
for customers. Over the coming year the Group anticipates the following key people risk exposures:
– Maintaining organisational skills, capability, resilience and capacity levels in response to increasing volumes of organisational, political
and external market change;
– Senior Managers and Certification Regime (SM&CR) and additional regulatory constraints on remuneration structures may impact the
Group’s ability to attract and retain talent;
– The increasing digitisation of the business is changing the capability mix required and may impact our ability to attract and retain talent; and
– Colleague engagement may continue to be challenged by ongoing media attention on banking sector culture, sales practices and ethical conduct.
Measurement
People risk is measured through a series of quantitative and qualitative indicators, aligned to key sources of people risk for the Group such as
succession, retention, colleague engagement and performance management. In addition to risk appetite measures and limits, people risks and
controls are monitored on a monthly basis via the Group’s risk governance framework and reporting structures.
Mitigation
The Group takes many mitigating actions with respect to people risk. Key areas of focus include:
– Focusing on leadership and colleague engagement, through delivery of strategies to attract, retain and develop high calibre people together
with implementation of rigorous succession planning;
– Continued focus on the Group’s culture by developing and delivering initiatives that reinforce the appropriate behaviours which generate
the best possible long-term outcomes for customers and colleagues;
– Managing organisational capability and capacity through divisional people strategies to ensure there are the right skills and resources to meet
our customers’ needs and deliver our strategic plan;
– Maintain effective remuneration arrangements to ensure they promote an appropriate culture and colleague behaviours that meet customer
needs and regulatory expectations;
– Ensuring compliance with legal and regulatory requirements related to SM&CR, embedding compliant and appropriate colleague behaviours
in line with Group policies, values and its people risk priorities; and
– Ongoing consultation with the Group’s recognised unions on changes which impact their members.
Monitoring
People risks from across the Group are monitored and reported through Board and Group Governance Committees in accordance with the Group’s
Risk Management Framework and People Risk sub-framework. Risk exposures are discussed monthly via the Group People Risk Committee with
upwards reporting to Group Risk and Executive Committees. In addition oversight, challenge and reporting is completed at Risk Division level and
combined with Risk Assurance reviews, assesses the effectiveness of controls, recommending follow up remedial action if relevant. All material People
Risk events are escalated in accordance with the formal Group Operational Risk Policy and People Policies to the respective Divisional Managing
Directors and the Group Director, Conduct, Compliance and Operational Risk.
FINANCIAL REPORTING RISK
Definition
Financial reporting risk is defined as the risk that the Group suffers reputational damage, loss of investor confidence and/or financial loss arising from
the adoption of inappropriate accounting policies, ineffective controls over business or finance processes impacting financial, prudential regulatory,
and tax reporting, failure to manage the associated risks of changes in taxation rates, law, corporate ownership or structure and the failure to disclose
timely and appropriate information in accordance with regulatory requirements.
Exposures
Exposure represents the sufficiency of the Group’s policies and procedures to maintain adequate systems, processes and controls to support
statutory, prudential regulatory and tax reporting, to prevent and detect financial reporting fraud, to manage the Group’s tax position and to
support regulatory disclosures.
Measurement
Financial reporting risk is measured by the adequacy of, and compliance with, a number of key controls. Identification of potential financial reporting
risk also forms a part of the Group’s Operational Risk management framework.
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Mitigation
The Group maintains a system of internal controls, which is designed to:
– ensure that accounting policies are consistently applied, transactions are recorded and undertaken in accordance with delegated authorities,
that assets are safeguarded and liabilities are properly recorded;
– enable the calculation, preparation and reporting of financial, prudential regulatory and tax outcomes in accordance with applicable International
Financial Reporting Standards, statutory and regulatory requirements; and
– ensure that disclosures are made on a timely basis in accordance with statutory and regulatory requirements and as far as possible are consistent
with best practice and in compliance with the British Bankers’ Association Code for Financial Reporting Disclosure.
Monitoring
Financial reporting risk is actively monitored at business unit and Group levels. There are specific programmes of work undertaken across the Group
to support:
– annual assessments of: (i) the effectiveness of internal controls over financial reporting; and (ii) the effectiveness of the Group’s disclosure controls
and procedures, both in accordance with the requirements of the US Sarbanes Oxley Act; and
– annual certifications by the Senior Accounting Officer with respect to the maintenance of appropriate tax accounting arrangements, in accordance
with the requirements of the 2009 Finance Act.
The Group also has in place an assurance process to support its prudential regulatory reporting and monitoring activities designed to identify and
review tax exposures on a regular basis. There is ongoing monitoring to assess the impact of emerging regulation and legislation on financial,
prudential regulatory and tax reporting.
The Group has a Disclosure Committee which assists the Group Chief Executive and Chief Financial Officer in fulfilling their disclosure responsibilities
under relevant listing and other regulatory and legal requirements. In addition, the Audit Committee reviews the quality and acceptability of the
Group’s financial disclosures. For further information on the Audit Committee’s responsibilities relating to financial reporting see pages 72 to 75.
GOVERNANCE RISK
Definition
Governance risk is defined as the risk that the Group’s organisational infrastructure fails to provide robust oversight of decision making and the control
mechanisms to ensure strategies and management instructions are implemented effectively.
Exposures
The internal and corporate governance arrangements of major financial institutions continue to be subject to a high level of regulatory and public
scrutiny. The Group’s exposure to governance risk is also reflective of the significant volume of existing and proposed legislation and regulation within
the UK and overseas with which it must comply. Risk governance and risk culture are mutually reinforcing.
Measurement
The Group’s governance arrangements are assessed against new or proposed legislation and regulation and best practice among peer organisations
in order to identify any areas of enhancement required.
Model Risk appetite considers the performance of the Group’s most material models.
Mitigation
The Group’s Risk Management Framework (RMF) establishes robust arrangements for risk governance, in particular by:
– Defining individual and collective accountabilities for risk management, risk oversight and risk assurance through a Three Lines of Defence model
which supports the discharge of responsibilities to customers, shareholders and regulators;
– Outlining governance arrangements which articulate the enterprise-wide approach to risk management; and
– Supporting a consistent approach to Group-wide behaviour and risk decision making through a Group Policy Framework which helps everyone
understand their responsibilities by clearly articulating and communicating rules, standards, boundaries and risk appetite measures which can be
controlled, enforced and monitored.
Under the banner of the RMF, training modules are in place to support all colleagues in understanding and fulfilling their risk responsibilities.
The Ethics and Responsible Business Policy and supporting Codes of Personal Responsibility and Business Responsibility embody the Group’s values
and reflect its commitment to operating responsibly and ethically both at a business and an individual level. All colleagues are required to adhere to
the Codes in all aspects of their roles.
Driving adherence to the Group’s RMF goes ‘hand in glove’ with its approach to risk culture which is embedded in the Group’s approach
to recruitment, selection, training, performance management and reward.
Monitoring
A review of the Group’s RMF, which includes the status of the Group’s Principles and Policy Framework, and the design and operational effectiveness
of key governance committees, is undertaken on an annual basis and the findings are reported to the Group Risk Committee, Board Risk Committee
and the Board.
This includes a review of the Group’s current approach to governance and ongoing initiatives in light of the latest regulatory guidance, including
in 2016 the further enhancement of frameworks to address Senior Managers and Certification Regime (SM&CR) requirements and prepare for the
requirement to ring-fence retail banking activities with effect from January 2019.
As part of the RMF, the performance of models is regularly monitored to ensure they remain fit-for-purpose.
For further information on Corporate Governance see pages 60 to 80.
For further information on Model Risk see page 78.
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FINANCIAL STATEMENTS
Independent auditors’ report
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated statement of changes
in equity
Consolidated cash flow statement
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181
183
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36. Retirement benefit obligations
37. Deferred tax
38. Other provisions
39. Subordinated liabilities
40. Share capital
41. Share premium account
42. Other reserves
43. Retained profits
Notes to the consolidated
financial statements
1. Basis of preparation
2. Accounting policies
3. Critical accounting estimates
4. Segmental analysis
5. Net interest income
6. Net fee and commission income
7. Net trading income
8. Insurance premium income
9. Other operating income
10. Insurance claims
11. Operating expenses
12. Impairment
13. Taxation
14. Earnings per share
15. Trading and other financial assets
at fair value through profit or loss
16. Derivative financial instruments
17. Loans and advances to banks
18. Loans and advances to customers
19. Securitisations and covered bonds
20. Structured entities
21. Allowance for impairment losses
on loans and receivables
22. Available-for-sale financial assets
23. Goodwill
24. Value of in-force business
25. Other intangible assets
26. Property, plant and equipment
27. Other assets
28. Deposits from banks
29 Customer deposits
44. Other equity instruments
45. Dividends on ordinary shares
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46. Share-based payments
47. Related party transactions
48. Contingent liabilities and commitments
49. Financial instruments
50. Transfers of financial assets
51. Offsetting of financial assets and liabilities
52. Financial risk management
53. Consolidated cash flow statement
54. Acquisition of MBNA Limited
55. Future accounting developments
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Parent company balance sheet
Parent company statement
of changes in equity
Parent company cash flow statement
Notes to the parent company
financial statements
1. Accounting policies
2. Amounts due from subsidiaries
3. Share capital, share premium
and other equity instruments
4. Other reserves
5. Retained profits
6. Debt securities in issue
7. Subordinated liabilities
8. Related party transactions
9. Financial instruments
10. Other information
30. Trading and other financial liabilities
at fair value through profit or loss
31. Debt securities in issue
32. Liabilities arising from insurance contracts
and participating investment contracts
33. Life insurance sensitivity analysis
34. Liabilities arising from non-participating
investment contracts
35. Other liabilities
REPORT ON THE FINANCIAL STATEMENTS
Our opinion
In our opinion:
– Lloyds Banking Group plc’s consolidated financial statements and parent company financial statements (the ‘financial statements’) give a true and fair
view of the state of the Group’s and of the parent company’s affairs as at 31 December 2016 and of the Group’s profit and the Group’s and the parent
company’s cash flows for the year then ended;
as adopted by the European Union;
– the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’)
– the parent company financial statements 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
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the consolidated
financial statements, Article 4 of the IAS Regulation.
What we have audited
The financial statements, included within the Annual Report and Accounts (the ‘Annual Report’), comprise:
– the consolidated and parent company balance sheets as at 31 December 2016;
– the consolidated income statement and the consolidated statement of comprehensive income for the year then ended;
– the consolidated and parent company cash flow statements for the year then ended;
– the consolidated and parent company statements of changes in equity for the year then ended; and
– the notes to the financial statements, which include a summary of accounting policies and other explanatory information.
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements.
These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union and,
as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006, and applicable law.
Our audit approach
Overview
– Overall Group materiality: £325 million which represents 5 per cent of the 3 year average of adjusted profit before tax. Statutory profits were adjusted
to remove the effects of certain items which are exceptional and/or one-off in nature.
– The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment, the financial
significance of reporting units and other qualitative factors (including history of misstatement through fraud or error).
– We performed audit procedures over reporting units we considered financially significant in the context of the Group (full scope audit) or in the
context of individual primary statement account balances (audit of specific account balances). We also performed other procedures including testing
entity level controls and analytical review procedures to mitigate the risk of material misstatement in the residual reporting units.
The areas of focus for our audit which involved the greatest allocation of our resources and effort were:
– Loan loss impairment provisions
– Conduct risk and provisions
– Insurance actuarial assumptions
– Defined benefit obligations
– Hedge accounting
– Deferred tax asset
– Uncertain tax positions
– Significant transactions
– Privileged access to IT systems
These items were initially discussed with the Audit Committee as part of our audit plan. There were no modifications to this initial assessment
and these were the key matters for discussion at the conclusion of our audit.
Change of Senior Statutory Auditor
Following the mandatory rotation of the previous Engagement Partner, this is my first year as Senior Statutory Auditor to the Group. In order to
better understand the Group, its operations, its financial reporting processes and the judgements exercised by the directors I observed a number
of Audit Committee meetings, auditor meetings with executive management and auditor process meetings from April 2015 to February 2016.
I commenced planning the 2016 audit in March 2016 and presented the audit plan to the Audit Committee in April 2016. This included an assessment
of materiality, an identification of the areas of focus of the audit, an overview of planned audit testing strategies, audit team structure and proposed
communications with the Audit Committee throughout the audit.
What an audit of financial statements involves
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 and the parent company’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.
We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements,
and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis
for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial
statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by
Lloyds Banking Group
Annual Report and Accounts 2016
Independent auditors’ report to the members
of Lloyds Banking Group plc
REPORT ON THE FINANCIAL STATEMENTS
Our opinion
In our opinion:
– Lloyds Banking Group plc’s consolidated financial statements and parent company financial statements (the ‘financial statements’) give a true and fair
view of the state of the Group’s and of the parent company’s affairs as at 31 December 2016 and of the Group’s profit and the Group’s and the parent
company’s cash flows for the year then ended;
– the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’)
as adopted by the European Union;
– the parent company financial statements 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
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the consolidated
financial statements, Article 4 of the IAS Regulation.
What we have audited
The financial statements, included within the Annual Report and Accounts (the ‘Annual Report’), comprise:
– the consolidated and parent company balance sheets as at 31 December 2016;
– the consolidated income statement and the consolidated statement of comprehensive income for the year then ended;
– the consolidated and parent company cash flow statements for the year then ended;
– the consolidated and parent company statements of changes in equity for the year then ended; and
– the notes to the financial statements, which include a summary of accounting policies and other explanatory information.
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements.
These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union and,
as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006, and applicable law.
Our audit approach
Overview
– Overall Group materiality: £325 million which represents 5 per cent of the 3 year average of adjusted profit before tax. Statutory profits were adjusted
to remove the effects of certain items which are exceptional and/or one-off in nature.
– The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment, the financial
significance of reporting units and other qualitative factors (including history of misstatement through fraud or error).
– We performed audit procedures over reporting units we considered financially significant in the context of the Group (full scope audit) or in the
context of individual primary statement account balances (audit of specific account balances). We also performed other procedures including testing
entity level controls and analytical review procedures to mitigate the risk of material misstatement in the residual reporting units.
The areas of focus for our audit which involved the greatest allocation of our resources and effort were:
– Loan loss impairment provisions
– Conduct risk and provisions
– Insurance actuarial assumptions
– Defined benefit obligations
– Hedge accounting
– Deferred tax asset
– Uncertain tax positions
– Significant transactions
– Privileged access to IT systems
These items were initially discussed with the Audit Committee as part of our audit plan. There were no modifications to this initial assessment
and these were the key matters for discussion at the conclusion of our audit.
Change of Senior Statutory Auditor
Following the mandatory rotation of the previous Engagement Partner, this is my first year as Senior Statutory Auditor to the Group. In order to
better understand the Group, its operations, its financial reporting processes and the judgements exercised by the directors I observed a number
of Audit Committee meetings, auditor meetings with executive management and auditor process meetings from April 2015 to February 2016.
I commenced planning the 2016 audit in March 2016 and presented the audit plan to the Audit Committee in April 2016. This included an assessment
of materiality, an identification of the areas of focus of the audit, an overview of planned audit testing strategies, audit team structure and proposed
communications with the Audit Committee throughout the audit.
What an audit of financial statements involves
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 and the parent company’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.
We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements,
and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis
for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial
statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by
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Financial statements
Independent auditors’ report to the members
of Lloyds Banking Group plc continued
us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications
for our report. With respect to the Strategic Report and Directors’ Report, we consider whether those reports include the disclosures required by
applicable legal requirements.
Materiality
We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit
and the nature, timing and extent of our audit procedures on the individual financial statement account balances and disclosures and in evaluating
the effect of misstatements, both individually and on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall Group materiality
£325 million (2015: £300 million).
How we determined it
5 per cent of the 3 year average of adjusted statutory profit before tax.
Rationale for benchmark applied We have used a 3 year average of adjusted profit before tax in order to reduce the potential for volatility and
large changes in materiality year-on-year. This is a generally accepted auditing practice. Statutory profits before
tax for 2014, 2015 and 2016 were adjusted to remove the disproportionate impact of several items which are
considered exceptional and/or one-off in nature. These adjustments included charges related to PPI and other
conduct provisions, charges relating to redemption of Enhanced Capital Notes (ECNs) and Additional Tier 1
securities (AT1s), the credit in relation to the disposal of the stake in Visa Europe Ltd., and the credit in relation
to pension scheme curtailment.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £20 million (2015: £20 million)
as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
The Group is structured into four divisions being Retail, Commercial Banking, Insurance and Consumer Finance. Within the Group’s main consolidation
and financial reporting system, each of the divisions comprises a number of reporting units. The consolidated financial statements are an aggregation
of the reporting units.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed over the reporting units by us,
as the Group engagement team, or auditors within PwC UK and from other PwC network firms operating under our instruction (‘component auditors’).
Almost all of our audit work is undertaken by PwC UK component auditors.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in their audit work to be able
to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as
a whole. This included regular communication with the component auditors throughout the audit, the issuance of instructions, a review of the results
of their work on the areas of focus and formal clearance meetings.
Any reporting units which were considered individually financially significant in the context of the Group’s consolidated financial statements were
considered full scope components. We then considered the individual financial significance of other reporting units in relation to primary statement
account balances. In doing this we also considered the presence of any significant audit risks and other qualitative factors (including history of
misstatements through fraud or error). Any reporting unit which was not already included as a full scope audit component but was identified as
being individually financially significant in respect of one of more primary statement account balances was subject to specific audit procedures over
those account balances. Inconsequential components (defined as reporting units which did not represent a reasonable possibility of a risk of material
misstatement either individually or in aggregate) were eliminated from further consideration for specific audit procedures although they were subject
to Group level analytical review procedures. All remaining reporting units which were neither inconsequential nor individually financially significant were
within our audit scope, with the risk of material misstatement mitigated through audit procedures including testing of entity level controls and Group
and component level analytical review procedures.
Certain account balances (e.g. cash and balances at central banks) were audited by the Group engagement team.
Reporting units within the scope of our audit contributed 99 per cent of Group total assets. Audit coverage on account balances in the consolidated
income statement ranged between 56 per cent and 99 per cent.
Areas of focus
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’).
We designed our audit by applying materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at
where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and
considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including evaluating
whether there was evidence of bias by the directors or management that represented a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as
‘areas of focus’ in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on
the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete
list of all risks identified by our audit.
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Area of focus
How our audit addressed the area of focus
Loan loss impairment provisions
We understood and tested key controls and focused on:
Refer to page 72 (Audit Committee Report), page 186
(Accounting Policies) and page 210 (Note 21 and
Critical Accounting Estimates and Judgements).
The determination of impairment provisions
remains a highly subjective and judgemental
area. Furthermore, the Group is subject to
significant regulatory scrutiny with respect to
provisioning levels.
Our work covered impairment of loans and advances
to customers within Retail, Consumer Finance and
Commercial Banking.
We assessed the use of historic experience to
estimate impairment events which have been
incurred but not reported and to derive estimates
of future cashflows.
We also focused on the calculation of required
impairment provisions, including the use of models,
and in particular the critical assumptions used in
those models and calculations.
The models rely upon the accuracy of underlying
data including the delinquency status of the
borrower. Our work therefore focused on agreed
customer treatments such as forbearance, including
the presentation of such information in the financial
statements, in order to validate the accuracy of such
delinquency status markers.
Management also applies adjustments, or overlays,
where they believe the data driven parameters
and calculations are not appropriate, either due to
emerging trends or models not capturing the risks
in the loan portfolio. An example of this is an overlay
for the current low interest rates which management
apply on top of the impairment model output in
Retail. These overlays require significant judgement
and are therefore a main area of focus.
– the identification of impairment events and classification of forborne loans;
– the governance over the impairment processes, including controls over unauthorised modifications to the
models and the re-assessment by management that impairment models are still calibrated in a way which
is appropriate for the impairment risks in the Group’s loan portfolios;
– the transfer of data between underlying source systems and the impairment models that the Group operates; and
– the review and approval process that management have in place for the outputs of the Group’s impairment
models, and the adjustments and overlays that are applied to modelled outputs.
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We found these key controls were designed, implemented and operated effectively, and therefore we determined
that we could place reliance on these key controls for the purposes of our audit.
In addition we have performed the following substantive procedures:
Retail and Consumer Finance
We understood management’s basis for determining whether a loan is impaired and assessed the reasonableness
using our understanding of the Group’s lending portfolios and our broader industry knowledge.
We tested the completeness and accuracy of relevant data from underlying systems and data warehouses that
is used in those models.
We understood and critically assessed the models used. Modelling assumptions and parameters, such as
probability of default, are based on historic data. We challenged whether historic experience was representative
of current circumstances and of the recent losses incurred in the portfolios. Where changes had been made in
model parameters and assumptions, we understood the reasons why changes had taken place and used our
industry knowledge and experience to evaluate the appropriateness of such changes. We performed sensitivity
analysis, and for certain portfolios, re-performed the provision calculation using our own independent models.
We understood and corroborated any material differences identified. We also performed testing to obtain
evidence over the existence and valuation of collateral.
In considering the appropriateness of provisions, we have assessed whether higher risk concentrations (e.g. past
term interest only loans, forborne loans) have been appropriately considered and captured in the modelled
provision, and where not, whether overlays to modelled calculations appropriately reflected those risks. We
challenged management over the completeness of overlays and to provide objective evidence to support the
adjustments made to the modelled provision and performed substantive testing over certain overlays.
Based on the evidence obtained we found that the impairment model assumptions, data used within the models
and overlays to modelled outputs are reasonable and therefore concluded that provisions are appropriate.
Commercial Banking
We understood and evaluated the processes for identifying impairment events within the loan portfolios, as
well as the impairment assessment processes for loans within the Business Support Unit and run-off portfolio.
We critically assessed the criteria for determining whether an impairment event had occurred and therefore
whether there was a requirement to calculate an impairment provision. We tested a sample of performing loans
with characteristics that might imply an impairment indicator existed (e.g. a customer experiencing financial
difficulty or in breach of covenant) as well as an additional sample of haphazardly selected performing loans
to assess whether these loans had any impairment indicators that management had not identified.
For a sample of individually impaired loans we understood the latest developments at the borrower and the
basis of measuring the impairment provisions and considered whether key judgements were appropriate
given the borrowers’ circumstances. We also re-performed management’s impairment calculation, testing key
inputs including the expected future cash flows, discount rates and the valuation of collateral held. Our testing
of collateral valuation specifically considered whether valuations were up to date, consistent with the strategy
being followed in respect of the particular borrower and assessed the appropriateness and sensitivities of key
assumptions. We back-tested previous provisions by comparing the gains or losses crystallised when impaired
loans were sold or exited.
For the collective unidentified impaired provision, which reflects losses incurred but not yet identified, we tested
the completeness and accuracy of the underlying loan information used in the impairment models by agreeing
details to the Group’s source systems as well as re-performing the calculation of the modelled provision. For
the key inputs and assumptions in the model, we obtained and tested objective evidence that supported their
appropriateness. For overlays to the modelled output, we challenged management to provide objective evidence
that the overlays were appropriate.
We also considered whether certain recent events and macro-economic factors (e.g. continued volatility and
uncertainty around commodity prices, sterling exchange rate movements and further reduction in interest rates)
had been appropriately considered and captured.
Based on the procedures performed and evidence obtained, we found management’s assumptions to be
reasonable and therefore consider provisions to be appropriate.
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Financial statements
Independent auditors’ report to the members
of Lloyds Banking Group plc continued
Area of focus
How our audit addressed the area of focus
Conduct risk and provisions
We understood and tested the key controls and management’s processes for:
– identifying emerging conduct risk exposures and assessing whether provisions or disclosures were necessary; and
– the calculation and review of conduct provisions including governance processes and approvals of model
assumptions and outputs.
We found these key controls were designed, implemented and operated effectively and therefore we
determined that we could place reliance on these key controls for the purposes of our audit.
In addition we have performed the following substantive procedures:
We met with Divisional and Group management to understand the emerging and potential issues that they had
identified. We independently assessed emerging and potential areas where exposures might have arisen based
upon our knowledge and experience of emerging industry issues and the regulatory environment. We used this
to challenge the completeness of the issues identified by management and whether a provision was required.
We understood customer complaints received, and assessed the trends. We used this analysis to understand
whether there were indicators of more systemic issues being present for which provisions or disclosures may have
needed to be made in the financial statements.
We read the Group’s correspondence with the Financial Conduct Authority and Prudential Regulation Authority
and discussed the output of any meetings held. We met on a trilateral basis with the Financial Conduct Authority,
Prudential Regulation Authority and the Chair of the Audit Committee. We also met on a bilateral basis with
each regulator.
We read the minutes of key governance meetings including those of the Board, and of various management
committees, as well as attending Audit Committee and Board Risk Committee meetings. We also understood
the key activities of the Conduct and Compliance function.
The majority of our detailed audit work was on the significant conduct provisions in relation to past sales of
payment protection insurance policies, arrears handling activities, packaged bank accounts and insurance
products in the German branch of Clerical Medical Investment Group Ltd (now Scottish Widows Ltd). We also
examined other areas of compensation payments made to customers.
For significant provisions made, we understood and challenged the provisioning methodologies and underlying
assumptions used by management. For example, we challenged the basis that management used for forecasting
the number of PPI complaints that will be received in the future. We also considered regulatory developments
and management’s interactions with regulators.
For those assumptions based on historic information, we challenged whether this was appropriate
for future experience and challenged the appropriateness of any adjustments made by management.
We also independently performed sensitivity analysis on the key assumptions.
Given the inherent uncertainty in the calculation of conduct provisions and their judgemental nature, we
evaluated the disclosures made in the financial statements. In particular, we focused on challenging management
that the disclosures were sufficiently clear in highlighting the exposures that remain, significant uncertainties that
exist in respect of the provisions and the sensitivity of the provisions to changes in the underlying assumptions.
No additional material conduct issues that would require either provision or disclosure in the financial statements
were identified as a result of the audit work performed.
We understood and tested key controls and governance around the processes for analysing economic and
noneconomic assumptions. We found the key controls for the setting of assumptions, including the experience
analysis data, were designed, implemented and operated effectively, and therefore we determined that we could
place reliance on these controls for the purposes of our audit.
We engaged our actuarial specialists to assess the actuarial assumptions, including the consideration and
challenge of management’s rationale for the judgements applied and any reliance placed on industry information.
The assessment included reference to our independent benchmarking data which considers each of
these principal areas. For persistency, longevity and expenses we considered recent experience and the
appropriateness of the judgements applied by management on how future experience will evolve. For
persistency, we also considered the appropriateness of assumptions set by management in light of regulatory
changes. In particular, we considered how the assumptions reflect expected persistency improvements from the
removal of commission for qualifying pension schemes and greater outflows of funds expected as a result of
increased options available to pension policyholders (Finance Act 2014). For longevity and expenses we assessed
the appropriateness of the assumptions by comparing them to experience and latest industry data.
For credit risk and illiquidity premium we assessed the appropriateness of the methodology, including
modifications made, against our knowledge and experience of the regulatory requirements and of the industry.
We assessed the assumptions with reference to wider market practice and prevailing economic conditions.
We challenged whether the actual asset mix remained an appropriate proxy to a market consistent portfolio by
comparing the proportion of illiquid assets held to those held by other similar companies; this comparison was
based on our understanding of the market and the most recent public information for other similar companies.
We performed testing to confirm that the assumptions approved were those applied.
Based on the results of our audit work we concluded that the data and assumptions used by management
were reasonable.
Refer to page 72 (Audit Committee Report), page 186
(Accounting Policies) and page 230 (Note 38 and
Critical Accounting Estimates and Judgements).
Significant provisions have been made in respect
of conduct matters in recent years, reflecting
customer redress payments, operational costs and
regulatory fines.
The most significant provisions have related to past
sales of payment protection insurance policies,
arrears handling activities, packaged bank accounts
and insurance products of the German branch of
Clerical Medical Investment Group Ltd (now Scottish
Widows Ltd).
Given the number and volume of products sold by
the Group historically, and the continued regulatory
and public focus on the banking industry, there is a
continuing risk that new conduct issues will emerge.
Therefore, there is a financial reporting risk that such
emerging risks and exposures are not appropriately
identified and provided for.
In relation to known issues, the measurement
of provisions is highly judgemental and involves
the use of several management assumptions
including volume of future complaints and related
redress costs.
Furthermore, there is a risk that these known and
emerging issues are not appropriately disclosed
in the financial statements.
Insurance actuarial assumptions
Refer to page 72 (Audit Committee Report), page 186
(Accounting Policies) and pages 213, 217 and 221
(Notes 24, 32, 33 and Critical Accounting Estimates
and Judgements).
The valuation of the Group’s insurance contracts is
dependent on a number of subjective assumptions
about future experience.
Some of the economic and non-economic actuarial
assumptions used in valuing insurance contracts
are highly judgemental, in particular persistency
(the retention of policies over time), longevity (the
expectation of how long an annuity policyholder
will live and how that might change over time),
expenses (future expenses incurred to maintain
existing policies to maturity), credit risk and illiquidity
premium (adjustments made to the discount rate).
The Group’s accounting policy is that the discount
rate applied to cash flows is consistent with that
applied to such cash flows in the capital markets.
Management currently use the actual asset mix as
a proxy for deriving a market consistent view of the
illiquidity adjustment to the discount rate.
Small changes in each of these assumptions
can result in material impacts to the valuation of
insurance contract liabilities, the value of in-
force assets and the related movements in the
income statement.
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Annual Report and Accounts 2016
Area of focus
How our audit addressed the area of focus
Defined benefit obligations
Refer to page 72 (Audit Committee Report), page 186
(Accounting Policies) and page 226 (Note 36 and
Critical Accounting Estimates and Judgements).
The valuations of the retirement benefit schemes are
calculated with reference to a number of actuarial
assumptions including discount rate, rate of inflation
and mortality rates.
Because of the size of the schemes, small changes
in these assumptions can have a significant impact
on the financial statements.
Hedge accounting
Refer to page 72 (Audit Committee Report), page 186
(Accounting Policies), and page 261 (Note 52).
The Group enters into derivative contracts in order
to manage and hedge risks such as interest rate and
foreign exchange rate risk. These arrangements create
accounting mismatches which are addressed through
hedge accounting, predominantly fair value hedges
or cash flow hedges.
The application of hedge accounting and ensuring
hedge effectiveness can be highly judgemental
and operationally cumbersome, and requires close
monitoring from management.
.
Deferred tax asset
Refer to page 72 (Audit Committee Report), page 186
(Accounting Policies), and page 228 (Note 37 and
Critical Accounting Estimates and Judgements).
The recognition of a deferred tax asset in respect
of tax losses is permitted only to the extent that it is
probable that future taxable profits will be available
to utilise the tax losses carried forward.
When considering the availability of future taxable
profits, judgement is required when assessing
projections of future taxable income which are based
on approved business plans/forecasts.
The allocation of forecast profits is also judgemental
when considering the utilisation of the deferred tax
assets in the separate legal entities where the assets
reside. Furthermore, there have recently been
changes to legislation in relation to the level of profits
which banking entities may offset with brought
forward tax losses.
Uncertain tax positions
Refer to page 72 (Audit Committee Report), and
page 242 (Note 48).
The Group has a number of open tax matters, for which
management is required to make certain judgements
as to the likely outturn for the purposes of calculating
the Group’s tax liabilities.
The most significant uncertainties at present relate to
a claim for group relief of group losses incurred in its
former Irish banking subsidiary and the tax treatment
of certain costs arising from the divestment of TSB
Banking Group plc.
We understood and tested key controls over the completeness and accuracy of data extracted and supplied to
the Group’s actuary, which is used in the valuation of the Group’s defined benefit obligations. We also tested the
controls for determining the actuarial assumptions and the approval of those assumptions by senior management.
We found the key controls were designed, implemented and operated effectively, and therefore we determined
that we could place reliance on these controls for the purposes of our audit.
We engaged our actuarial specialists and met with management and their actuary to understand the judgements
made in determining key economic assumptions used in the calculation of the liability. We assessed the
reasonableness of those assumptions by comparing to our own independently determined benchmarks and
concluded that the assumptions used by management were appropriate.
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We tested the consensus and employee data used in calculating the obligation. Where material, we also
considered the treatment of curtailments, settlements, past service costs and measurements, and any other
amendments made to obligations during the year.
Based on the evidence obtained, we found that the data and assumptions used by management in the actuarial
valuations for pension obligations are within a range we consider to be reasonable.
We also read and assessed the disclosures made in the financial statements, including disclosures of the
assumptions, and found them to be appropriate.
We understood and tested key controls over the designation and ongoing management of hedge accounting
relationships, including testing of hedge effectiveness as well as the controls around the preparation and review
of hedging strategy and related documentation prior to the implementation of new hedges. We found the key
controls were designed, implemented and operated effectively, and therefore we determined that we could place
reliance on these controls for the purposes of our audit.
We examined hedge documentation to assess whether the documentation complied with all IAS 39
requirements. We tested key year-end reconciliations between underlying source systems and spreadsheets
used to manage hedging models, including testing of hedging capacity after considering the impact of structural
reform, designation of hedges and the measurement and recording of hedge effectiveness adjustments. In
monitoring hedging effectiveness against stresses, we noted that despite significant market uncertainty and
volatility during the year, all significant hedge accounting relationships continued to be effective. We also
tested a sample of manual adjustments posted to hedge reserves relating to hedge ineffectiveness arising in
cash flow hedging models. We specifically considered the re-designations that were required as a result of the
reclassification of gilts from held-to-maturity to available-for-sale. We found that hedge accounting methodology
was appropriately applied.
We understood and tested key controls over the production and approval of the forecast taxable profits used to
support the recognition of various deferred tax assets. We found the key controls were designed, implemented
and operated effectively, and therefore we were able to place reliance on these controls for the purposes of
our audit.
We assessed whether the forecast profits were appropriate by challenging both the underlying and economic
assumptions, focusing on those directly impacting the adjusted profit figures, for example interest rates and
gross domestic product. We used our independent benchmarking data to benchmark a number of the economic
assumptions to external data sources where possible, and also assessed previous forecasts for evidence of bias.
We also reviewed management’s basis for allocating forecast profits between legal entities, challenging significant
assumptions and using our experience of the Group’s activities.
We have evaluated the impact of recent tax law changes on the calculation of the Group's deferred tax balances,
including confirming that the loss restriction rules, the banking surcharge and the restriction of deductions
for certain customer compensation payments have been correctly applied. In addition, we ensured that
management’s forecasts considered the impacts of structural reform.
We found that the both the utilisation period and the carrying value of the deferred tax asset together with the
related disclosures are reasonable.
We understood and tested key controls surrounding the governance procedures in evaluating such uncertain
exposures as well as performed an assessment over the experience of management in evaluating these
exposures. We found the key controls were designed, implemented and operated effectively, and therefore
we were able to place reliance on these controls for the purposes of our audit.
We examined and challenged the analyses performed by management which set out the basis for their
judgements in respect of the material tax exposures identified, together with relevant supporting evidence such
as correspondence with tax authorities and legal opinions obtained. We used our understanding of the business
and also read correspondence with tax authorities to challenge the completeness of identified exposures and the
need for provisions.
We made our own assessment of the likelihood of the tax exposures occurring based on our knowledge of tax
legislation and applicable precedent. In making our assessment we considered the range of interpretation of
the applicable tax legislation in the relevant jurisdictions. We also evaluated the calculation of the exposures
and agreed these to the financial statements.
We assessed whether the extent of the disclosures made, in particular, in relation to contingent liabilities and
judgements was appropriate.
We found management’s judgements in respect of the Group’s positions on uncertain tax items to be reasonable.
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Independent auditors’ report to the members
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Area of focus
How our audit addressed the area of focus
Significant transactions
Refer to page 72 (Audit Committee Report).
We understood and tested key controls which require that one-off transactions are referred to Group Financial
Reporting and an accounting paper prepared. We found the key controls were designed, implemented and
operated effectively.
We reviewed the accounting papers produced for each significant transaction in the year including any
transaction documents or contracts to evaluate and assess the impact of the transaction on the Group.
We made our own assessment as to the most appropriate accounting treatment for each individual significant
transaction, using this as a basis to challenge the key judgements made by management, including the
assessment of any potential management bias.
We assessed whether the extent of the disclosures made, in relation to significant transactions was appropriate.
Based on the results of our audit work we concluded that the accounting treatment applied to significant
transactions entered into in the year is reasonable.
We understood and tested key controls surrounding Group IT's central process for the periodic recertification
of user access entitlements across in-scope systems as well as reviewed the processes for managing privileged
access to IT systems.
We have observed significant progress in terms of remediating the control matters, however several of the
controls did not operate effectively for the full financial reporting period.
Where these control matters affected applications and supporting IT systems within the scope of our audit,
we performed a combination of additional controls testing, including compensating controls where relevant
and substantive audit procedures.
On the basis of our additional audit testing we were able to place reliance on the data and reports from
in-scope applications.
The Group has entered into a number of significant
one-off transactions where a high level of complexity
and/or judgement is involved in determining the
accounting treatment resulting in an increased risk of
management bias. (e.g. the redemption of ECN’s and
the reclassification of gilts from held-to-maturity to
available-for-sale).
Due to the nature of these transactions, the
accounting falls outside of the business as usual
process level controls and requires manual
calculations to be performed.
The design of the initial accounting treatment may
form the basis for subsequent periods for long dated
transactions.
Privileged access to IT systems
The Group’s financial reporting processes are
heavily reliant on automated processes and controls
performed by IT systems. As part of the audit, we
validate the design and operating effectiveness of
in-scope automated and IT dependent controls at
a point in time as well as review the supporting IT
General Computer Controls (ITGCs) that provide
assurance over the continued integrity of these
controls for the full financial reporting period.
In our 2015 audit, we identified control matters in
relation to the management of IT privileged access
to IT systems and therefore relied on compensating
controls and performed additional procedures.
While there is an ongoing programme of activities to
address such control matters, their exercise during
2016 meant there was an increased risk that the data
and reports from the affected systems were not
reliable.
Going concern
Under the Listing Rules we are required to review the directors’ statement, set out on page 82, in relation to going concern. We have nothing to report
having performed our review.
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the directors’
statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing
material to add or to draw attention to.
As noted in the directors’ statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial
statements. The going concern basis presumes that the Group and parent company have adequate resources to remain in operation, and that the
directors intend them to do so, for at least one year from the date the financial statements were signed. In drawing this conclusion the directors
have considered:
– the regulatory capital position of the Group which is critical to the market maintaining confidence in the Group’s ability to absorb losses that it may
incur in a market stress; and
– the funding and liquidity position of the Group to be able to meet its liabilities as they fall due, including in a market stress.
As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or
conditions can be predicted, these statements are not a guarantee as to the Group’s and parent company’s ability to continue as a going concern.
In drawing our conclusion, we critically assessed the going concern assessment undertaken by management and approved by the Board or directors.
As part of our assessment we have:
– assessed and challenged the appropriateness of the stress scenarios used and their impact on the Group’s and parent company's capital and
liquidity positions;
– understood and challenged key economic and other assumptions used in both the capital and liquidity plan and the Group’s operating plan; and
– substantiated the Group’s and parent company's unencumbered collateral position and potential to access central bank liquidity facilities.
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Lloyds Banking Group
Annual Report and Accounts 2016
OTHER REQUIRED REPORTING
Consistency of other information and compliance with applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the audit:
– the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
– the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In addition, in light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we are required to
report if we have identified any material misstatements in the Strategic Report and the Directors’ Report. We have nothing to report in this respect.
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ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
– information in the Annual Report is:
– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge
of the Group and parent company acquired in the course of performing our audit; or
– otherwise misleading.
– the statement given by the directors on page 83, in accordance with provision C.1.1 of the UK
Corporate Governance Code (the ‘Code’), that they consider the Annual Report taken as a whole
to be fair, balanced and understandable and provides the information necessary for members to
assess the Group’s and parent company’s position and performance, business model and strategy
is materially inconsistent with our knowledge of the Group and parent company acquired in the
course of performing our audit.
We have no exceptions to report arising from
this responsibility.
We have no exceptions to report arising from
this responsibility.
– the section of the Annual Report on page 72, as required by provision C.3.8 of the Code,
describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We have no exceptions to report arising from
this responsibility.
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten
the solvency or liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:
– the directors’ confirmation on page 83 of the Annual Report, in accordance with provision C.2.1 of
the Code, that they have carried out a robust assessment of the principal risks facing the Group,
including those that would threaten its business model, future performance, solvency or liquidity.
We have nothing material to add or draw
attention to.
– the disclosures in the Annual Report that describe those risks and explain how they are being
managed or mitigated.
– the directors’ explanation on page 82 of the Annual Report, in accordance with provision C.2.2 of
the Code, as to how they have assessed the prospects of the Group, over what period they have
done so and why they consider that period to be appropriate, and their statement as to whether
they have a reasonable expectation that the Group will be able to continue in operation and meet
its liabilities as they fall due over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.
We have nothing material to add or draw
attention to.
We have nothing material to add or draw
attention to.
Under the Listing Rules we are required to review the directors’ statement that they have carried out a robust assessment of the principal risks
facing the Group and the directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an
audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are
in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us
in the course of performing our audit. We have nothing to report having performed our review.
Adequacy of accounting records and information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion:
– we have not received all the information and explanations we require for our audit; or
– 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 financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting
records and returns.
We have no exceptions to report arising from this responsibility.
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Financial statements
Independent auditors’ report to the members
of Lloyds Banking Group plc continued
Directors’ remuneration
Directors’ remuneration report - Companies Act 2006 opinion
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
Other Companies Act 2006 reporting
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. We have no exceptions to report arising from this responsibility.
Corporate governance statement
Under the Companies Act 2006 we are required to report to you if, in our opinion, a corporate governance statement has not been prepared by the
parent company. We have no exceptions to report arising from this responsibility.
Under the Listing Rules we are required to review the part of the corporate governance statement relating to ten further provisions of the Code.
We have nothing to report having performed our review.
RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT
Our responsibilities and those of the directors
As explained more fully in the Statement of directors' responsibilities set out on page 83, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & 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 parent 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.
Mark Hannam (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
21 February 2017
(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.
178
Lloyds Banking Group
Annual Report and Accounts 2016
Consolidated income statement
for the year ended 31 December
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
Regulatory provisions
Other operating expenses
Total operating expenses
Trading surplus
Impairment
Profit before tax
Taxation
Profit for the year
Profit attributable to ordinary shareholders
Profit attributable to other equity holders1
Profit attributable to equity holders
Profit attributable to non-controlling interests
Profit for the year
Basic earnings per share
Diluted earnings per share
Note
5
6
7
8
9
2016
£ million
16,620
(7,346)
9,274
3,045
(1,356)
1,689
18,545
8,068
2,035
30,337
39,611
10
(22,344)
17,267
(2,024)
(10,253)
(12,277)
4,990
(752)
4,238
(1,724)
2,514
2,001
412
2,413
101
2,514
2.9p
2.9p
11
12
13
14
14
2015
£ million
17,615
(6,297)
11,318
3,252
(1,442)
1,810
3,714
4,792
1,516
11,832
23,150
(5,729)
17,421
(4,837)
(10,550)
(15,387)
2,034
(390)
1,644
(688)
956
466
394
860
96
956
0.8p
0.8p
2014
£ million
19,211
(8,551)
10,660
3,659
(1,402)
2,257
10,159
7,125
(309)
19,232
29,892
(13,493)
16,399
(3,125)
(10,760)
(13,885)
2,514
(752)
1,762
(263)
1,499
1,125
287
1,412
87
1,499
1.7p
1.6p
1 The profit after tax attributable to other equity holders of £412 million (2015: £394 million; 2014: £287 million) is partly offset in reserves by a tax credit attributable to ordinary shareholders
of £91 million (2015: £80 million; 2014: £62 million).
The accompanying notes are an integral part of the consolidated financial statements.
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Financial statements
Consolidated statement of comprehensive income
for the year ended 31 December
Profit for the year
Other comprehensive income
Items that will not subsequently be reclassified to profit or loss:
Post-retirement defined benefit scheme remeasurements:
Remeasurements before taxation
Taxation
Items that may subsequently be reclassified to profit or loss:
Movements in revaluation reserve in respect of available-for-sale financial assets:
Adjustment on transfer from held-to-maturity portfolio
Change in fair value
Income statement transfers in respect of disposals
Income statement transfers in respect of impairment
Taxation
Movement in cash flow hedging reserve:
Effective portion of changes in fair value taken to other comprehensive income
Net income statement transfers
Taxation
Currency translation differences (tax: nil)
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Total comprehensive income attributable to ordinary shareholders
Total comprehensive income attributable to other equity holders
Total comprehensive income attributable to equity holders
Total comprehensive income attributable to non-controlling interests
Total comprehensive income for the year
The accompanying notes are an integral part of the consolidated financial statements.
2016
£ million
2,514
2015
£ million
956
2014
£ million
1,499
(1,348)
320
(1,028)
1,544
356
(575)
173
(301)
1,197
2,432
(557)
(466)
1,409
(4)
1,574
4,088
3,575
412
3,987
101
4,088
(274)
59
(215)
–
(318)
(51)
4
(6)
(371)
537
(956)
7
(412)
(42)
(1,040)
(84)
(574)
394
(180)
96
(84)
674
(135)
539
–
690
(131)
2
(13)
548
3,896
(1,153)
(549)
2,194
(3)
3,278
4,777
4,403
287
4,690
87
4,777
180
Lloyds Banking Group
Annual Report and Accounts 2016
Consolidated balance sheet
at 31 December
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
Held-to-maturity investments
Goodwill
Value of in-force business
Other intangible assets
Property, plant and equipment
Current tax recoverable
Deferred tax assets
Retirement benefit assets
Other assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
Note
2016
£ million
2015
£ million
47,452
706
151,174
36,138
26,902
457,958
3,397
488,257
56,524
–
2,016
5,042
1,681
12,972
28
2,706
342
58,417
697
140,536
29,467
25,117
455,175
4,191
484,483
33,032
19,808
2,016
4,596
1,838
12,979
44
4,010
901
12,755
817,793
13,864
806,688
15
16
17
18
22
23
24
25
26
37
36
27
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181
Financial statements
Consolidated balance sheet continued
at 31 December
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
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
Other equity instruments
Total equity excluding non-controlling interests
Non-controlling interests
Total equity
Total equity and liabilities
The accompanying notes are an integral part of the consolidated financial statements.
The directors approved the consolidated financial statements on 21 February 2017.
Lord Blackwell
Chairman
António Horta-Osório
Group Chief Executive
George Culmer
Chief Financial Officer
Note
2016
£ million
2015
£ million
28
29
30
16
31
32
34
35
36
37
38
39
40
41
42
43
44
16,384
415,460
16,925
418,326
548
54,504
34,924
1,402
76,314
94,390
20,112
29,193
822
226
–
4,868
19,831
717
51,863
26,301
1,112
82,056
80,294
22,777
29,661
365
279
33
5,687
23,312
768,978
759,708
7,146
17,622
14,652
3,600
43,020
5,355
48,375
440
48,815
817,793
7,146
17,412
12,260
4,416
41,234
5,355
46,589
391
46,980
806,688
182
Lloyds Banking Group
Annual Report and Accounts 2016
Consolidated statement of changes in equity
for the year ended 31 December
Attributable to equity shareholders
Balance at 1 January 2016
Comprehensive income
Profit for the year
Other comprehensive income
Post-retirement defined benefit scheme
remeasurements, net of tax
Movements in revaluation reserve
in respect of available-for-sale
financial assets, net of tax
Movements in cash flow hedging
reserve, net of tax
Currency translation differences (tax: £nil)
Total other comprehensive income
Total comprehensive income
Transactions with owners
Dividends
Distributions on other equity
instruments, net of tax
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Changes in non-controlling interests
Total transactions with owners
Balance at 31 December 2016
Share capital
and premium
£ million
Other
reserves
£ million
Retained
profits
£ million
Total
£ million
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
Total
£ million
24,558
12,260
4,416
41,234
5,355
391
46,980
–
–
–
–
–
–
–
–
–
–
–
1,197
1,409
(4)
2,602
2,602
–
–
–
–
–
–
–
–
–
–
2,413
2,413
(1,028)
(1,028)
–
–
–
(1,028)
1,385
1,197
1,409
(4)
1,574
3,987
(2,014)
(2,014)
(321)
–
(175)
141
168
–
(321)
–
(175)
141
168
–
210
(210)
24,768
14,652
(2,201)
3,600
(2,201)
43,020
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,355
101
2,514
–
–
–
–
–
101
(1,028)
1,197
1,409
(4)
1,574
4,088
(29)
(2,043)
–
–
–
–
–
(23)
(52)
440
(321)
–
(175)
141
168
(23)
(2,253)
48,815
Redemption of preference shares
210
(210)
Further details of movements in the Group’s share capital, reserves and other equity instruments are provided in notes 40, 41, 42, 43 and 44.
The accompanying notes are an integral part of the consolidated financial statements.
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e
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e
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i
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183
Other equity
instruments
£ million
Non-
controlling
interests
£ million
Financial statements
Consolidated statement of changes in equity continued
for the year ended 31 December
Balance at 1 January 2014
Comprehensive income
Profit for the year
Other comprehensive income
Post-retirement defined benefit scheme
remeasurements, net of tax
Movements in revaluation reserve in respect of
available-for-sale financial assets, net of tax
Movements in cash flow hedging reserve,
net of tax
Currency translation differences (tax: £nil)
Total other comprehensive income
Total comprehensive income
Transactions with owners
Dividends
Distributions on other equity instruments,
net of tax
Issue of ordinary shares
Issue of other equity instruments
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Adjustment on sale of non-controlling
interest in TSB Banking Group plc
Other changes in non-controlling interests
Total transactions with owners
Balance at 31 December 2014
Comprehensive income
Profit for the year
Other comprehensive income
Post-retirement defined benefit scheme
remeasurements, net of tax
Movements in revaluation reserve in respect of
available-for-sale financial assets, net of tax
Movements in cash flow hedging reserve,
net of tax
Attributable to equity shareholders
Share capital
and premium
£ million
24,424
Other
reserves
£ million
10,477
Retained
profits
£ million
4,088
Total
£ million
38,989
–
–
–
–
–
–
–
–
–
3
–
–
–
–
–
–
3
–
–
548
2,194
(3)
2,739
2,739
–
–
–
–
–
–
–
–
–
–
24,427
13,216
1,412
1,412
539
–
–
–
539
1,951
–
(225)
–
(21)
(286)
123
233
(171)
–
(347)
5,692
539
548
2,194
(3)
3,278
4,690
–
(225)
3
(21)
(286)
123
233
(171)
–
(344)
43,335
–
–
–
–
–
–
(371)
(412)
860
860
(215)
–
–
(215)
(371)
(412)
–
–
–
–
–
–
–
–
–
–
–
5,355
–
–
–
–
–
5,355
5,355
–
–
–
–
Total
£ million
39,336
1,499
539
548
2,194
(3)
3,278
4,777
(27)
(225)
3
5,334
(286)
123
233
634
1
5,790
49,903
347
87
–
–
–
–
–
87
(27)
–
–
–
–
–
–
805
1
779
1,213
96
956
–
–
–
(215)
(371)
(412)
Currency translation differences (tax: £nil)
–
(42)
–
(42)
–
–
(42)
(825)
(825)
(215)
645
(1,040)
(180)
Total other comprehensive income
Total comprehensive income
Transactions with owners
Dividends
Distributions on other equity instruments,
net of tax
–
–
–
–
–
–
Redemption of preference shares
131
(131)
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Adjustment on sale of interest in
TSB Banking Group plc
Other changes in non-controlling interests
Total transactions with owners
Balance at 31 December 2015
–
–
–
–
–
–
–
–
–
–
131
24,558
(131)
12,260
The accompanying notes are an integral part of the consolidated financial statements.
184
(1,070)
(1,070)
(314)
–
(816)
107
172
–
–
(1,921)
4,416
(314)
–
(816)
107
172
–
–
(1,921)
41,234
–
–
–
–
–
–
–
–
–
–
–
5,355
–
96
(1,040)
(84)
(52)
(1,122)
–
–
–
–
–
(825)
(41)
(918)
391
(314)
–
(816)
107
172
(825)
(41)
(2,839)
46,980
Lloyds Banking Group
Annual Report and Accounts 2016
Consolidated cash flow statement
for the year ended 31 December
Profit before tax
Adjustments for:
Change in operating assets
Change in operating liabilities
Non-cash and other items
Tax paid
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchase of financial assets
Proceeds from sale and maturity of 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 used in investing activities
Cash flows from financing activities
Dividends paid to ordinary shareholders
Distributions on other equity instruments
Dividends paid to non-controlling interests
Interest paid on subordinated liabilities
Proceeds from issue of subordinated liabilities
Proceeds from issue of ordinary shares
Repayment of subordinated liabilities
Changes in non-controlling interests
Net cash used in 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.
Note
53(A)
53(B)
53(C)
53(E)
53(D)
2016
£ million
4,238
(12,218)
(2,659)
13,535
(822)
2,074
(4,930)
6,335
(3,760)
1,684
(20)
5
(686)
(2,014)
(412)
(29)
(1,687)
1,061
–
(7,885)
(8)
(10,974)
21
(9,565)
71,953
62,388
2015
£ million
1,644
34,700
(11,985)
(7,808)
(179)
16,372
(19,354)
22,000
(3,417)
1,537
(5)
(4,071)
(3,310)
(1,070)
(394)
(52)
2014
£ million
1,762
(872)
11,992
(2,496)
(33)
10,353
(11,533)
4,668
(3,442)
2,043
(1)
543
(7,722)
–
(287)
(27)
(1,840)
(2,205)
338
–
(3,199)
(41)
(6,258)
2
6,806
65,147
71,953
629
3
(3,023)
635
(4,275)
(6)
(1,650)
66,797
65,147
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185
Financial statements
Notes to the consolidated financial statements
NOTE 1: BASIS OF PREPARATION
The consolidated financial statements of Lloyds Banking Group plc have been prepared in accordance with International Financial Reporting
Standards (IFRS) 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 IFRS Interpretations
Committee (IFRS IC) 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 82, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing
the financial statements.
During the year the Group has reviewed its holding of government securities classified as held‑to‑maturity in light of the current low interest rate
environment and they have been reclassified as available‑for‑sale; this has resulted in a credit of £1,544 million to the available‑for‑sale revaluation
reserve (£1,127 million after tax).
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2016 and which have
not been applied in preparing these financial statements are given in note 55.
NOTE 2: ACCOUNTING POLICIES
The Group’s accounting policies are set out below. These accounting policies have been applied consistently.
(A) Consolidation
The assets, liabilities and results of Group undertakings (including structured 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. Details of the Group’s subsidiaries and related
undertakings are given on pages 293 to 300.
(1) Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it has power over the entity, is exposed to, or has rights to,
variable returns from its involvement with the entity, and has the ability to affect those returns through the exercise of its power. This generally
accompanies a shareholding of more than one half of the voting rights although in certain circumstances a holding of less than one half of the voting
rights may still result in the ability of the Group to exercise control. The existence and effect of potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Group controls another entity. The Group reassesses whether or not it controls an entity if facts
and circumstances indicate that there are changes to any of the above elements. 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.
The Group consolidates collective investment vehicles if its beneficial ownership interests give it substantive rights to remove the external fund
manager over the investment activities of the fund. Where a subsidiary of the Group is the fund manager of a collective investment vehicle, the
Group considers a number of factors in determining whether it acts as principal, and therefore controls the collective investment vehicle, including: an
assessment of the scope of the Group’s decision making authority over the investment vehicle; the rights held by other parties including substantive
removal rights without cause over the Group acting as fund manager; the remuneration to which the Group is entitled in its capacity as decision
maker; and the Group’s exposure to variable returns from the beneficial interest it holds in the investment vehicle. Consolidation may be appropriate
in circumstances where the Group has less than a majority beneficial interest. Where a collective investment vehicle is consolidated the interests of
parties other than the Group are reported in other liabilities and the movement in these interests in interest expense.
Structured entities are entities that are designed so that their activities are not governed by way of voting rights. In assessing whether the Group
has power over such entities in which it has an interest, the Group considers factors such as the purpose and design of the entity; its practical ability
to direct the relevant activities of the entity; the nature of the relationship with the entity; and the size of its exposure to the variability of returns of
the entity.
The treatment of transactions with non‑controlling interests depends on whether, as a result of the transaction, the Group loses control of the
subsidiary. Changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions;
any difference between the amount by which the non‑controlling interests are adjusted and the fair value of the consideration paid or received is
recognised directly in equity and attributed to the owners of the parent entity. Where the Group loses control of the subsidiary, at the date when
control is lost the amount of any non‑controlling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary
is remeasured to its fair value; the gain or loss that is recognised in profit or loss on the partial disposal of the subsidiary includes the gain or loss on the
remeasurement of the retained interest.
Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration for the acquisition of a subsidiary
is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value
of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred except those relating
to the issuance of debt instruments (see (E)(5) below) or share capital (see (P) below). Identifiable assets acquired and liabilities assumed in a business
combination are measured initially at their fair value at the acquisition date.
(2) Joint ventures and associates
Joint ventures are joint arrangements over which the Group has joint control with other parties and has rights to the net assets of the arrangements.
Associates are entities over which the Group has significant influence. Significant influence is the power to participate in the financial and operating
policy decisions of the entity, but is not control or joint control of those policies, and is generally 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.
186
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 2: ACCOUNTING POLICIES continued
(B) Goodwill
Goodwill arises on business combinations and 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. 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.
(C) Other intangible assets
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:
up to 7 years for capitalised software; 10 to 15 years for brands and other intangibles.
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 using the effective interest method,
except for those classified at fair value through profit or loss. 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, including 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.
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.
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 (M) below); those relating to leases
are set out in (J)(2) below.
(E) Financial assets and liabilities
On initial recognition, financial assets are classified into fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments
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. The Group initially recognises loans and receivables, deposits, debt
securities in issue and subordinated liabilities when the Group becomes a party to the contractual provisions of the instrument. Regular way purchases
and sales of securities and other financial assets and trading liabilities are recognised on trade date, being the date that the Group is committed to
purchase or sell an asset.
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 of 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.
(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 (F) below).
Held for trading: 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.
Classified at fair value through profit and loss: 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.
– 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.
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Notes to the consolidated financial statements continued
NOTE 2: ACCOUNTING POLICIES continued
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. Refer to note 49(3) (Financial instruments: Financial assets and liabilities carried at fair
value) for details of valuation techniques and significant inputs to valuation models.
(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, held-to-maturity investments 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. Such assets are 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 a financial asset from the available-for-sale category to the loans and receivables category where that asset would
otherwise have met the definition of loans and receivables at the time of reclassification and where there is both the intention and ability to hold
that financial asset for the foreseeable future. Reclassification of a financial asset from the available-for-sale category to the held-to-maturity category
is permitted when the Group has the ability and intent to hold that financial asset to maturity. Reclassifications are made at fair value as of the
reclassification date. Fair value becomes the new cost or amortised cost as applicable. Effective interest rates for financial assets reclassified to the loans
and receivables and held-to-maturity categories are determined at the reclassification date. Any previous gain or loss on a transferred asset that has
been recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest method or until the asset
becomes impaired. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset
using the effective interest method.
When an impairment loss is recognised in respect of available-for-sale assets transferred, the unamortised balance of any available-for-sale reserve
that remains in equity is transferred to the income statement and recorded as part of the impairment loss.
(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 (D) above) less provision
for impairment (see (H) below).
The Group has entered into securitisation and similar transactions to finance certain loans and advances to customers. In cases where the securitisation
vehicles are funded by the issue of debt, on terms whereby the majority of the risks and rewards of the portfolio of securitised lending are retained by
the Group, these loans and advances continue to be recognised by the Group, together with a corresponding liability for the funding.
(4) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s
management has the positive intention and ability to hold to maturity other than: those that the Group designates upon initial recognition as at fair
value through profit or loss; those that the Group designates as available-for-sale; and those that meet the definition of loans and receivables.
These are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost,
using the effective interest method, less any provision for impairment.
A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-maturity
investments to available-for-sale financial assets.
(5) 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. Securities which carry a discretionary coupon and have
no fixed maturity or redemption date are classified as other equity instruments. Interest payments on these securities are recognised, net of tax, as
distributions from equity in the period in which they are paid. 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.
(6) Sale and repurchase agreements (including securities lending and borrowing)
Securities sold subject to repurchase agreements (repos) continue to be recognised on the balance sheet where substantially all of the risks and
rewards are retained. Funds received under these arrangements are included in deposits from banks, customer deposits, or trading liabilities.
Conversely, securities purchased under agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards
of ownership, are recorded as loans and receivables or trading securities. The difference between sale and repurchase price is treated as interest and
accrued over the life of the agreements using the effective interest method.
Securities borrowing and lending transactions are typically secured; collateral takes the form of securities or cash advanced or received. Securities
lent to counterparties are retained on the balance sheet. Securities borrowed are not recognised on the balance sheet, unless these are sold to third
parties, in which case the obligation to return them is recorded at fair value as a trading liability. Cash collateral given or received is treated as a loan
and receivable or customer deposit.
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NOTE 2: ACCOUNTING POLICIES continued
(F) Derivative financial instruments and hedge accounting
Derivatives are classified as trading except those designated as effective hedging instruments which meet the criteria under IAS 39. All derivatives
are recognised at their fair value. 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 49(3) (Financial instruments: Financial assets and liabilities carried at fair value) 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 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 such instruments. At the inception of the hedge relationship,
formal documentation is drawn up specifying the hedging strategy, the hedged item, 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.
(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 used in net investment 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. Cash collateral on exchange traded derivative
transactions is presented gross unless the collateral cash flows are always settled net with the derivative cash flows. 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 of the financial asset
and prior to the balance sheet date, there is objective evidence that a financial asset or group of financial assets has become impaired.
Where such an event, including the identification of fraud, has had an impact on the estimated future cash flows of the financial asset or group of
financial assets, an impairment allowance is recognised. The amount of impairment allowance is the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. If the asset has a variable rate of interest,
the discount rate used for measuring the impairment allowance is the current effective interest rate.
Subsequent to the recognition of an impairment loss on a financial asset or a group of financial assets, interest income continues to be recognised on
an effective interest rate basis, on the asset’s carrying value net of impairment provisions. 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, the allowance is adjusted and the
amount of the reversal is recognised in the income statement.
Impairment allowances are assessed individually for financial assets that are individually significant. Impairment allowances for portfolios of smaller
balance homogenous loans such as most 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.
In certain circumstances, the Group will renegotiate the original terms of a customer’s loan, either as part of an ongoing customer relationship or in
response to adverse changes in the circumstances of the borrower. Where the renegotiated payments of interest and principal will not recover the
original carrying value of the asset, the asset continues to be reported as past due and is considered impaired. Where the renegotiated payments
of interest and principal will recover the original carrying value of the asset, the loan is no longer reported as past due or impaired provided that
payments are made in accordance with the revised terms. Renegotiation may lead to the loan and associated provision being derecognised and
a new loan being recognised initially at fair value.
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Notes to the consolidated financial statements continued
NOTE 2: ACCOUNTING POLICIES continued
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 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. For both secured and unsecured retail balances,
the write-off takes place only once an extensive set of collections processes has been completed, or the status of the account reaches a point where
policy dictates that forbearance is no longer appropriate. For commercial lending, a write-off occurs if the loan facility with the customer is restructured,
the asset is under administration and the only monies that can be received are the amounts estimated by the administrator, the underlying assets
are disposed and a decision is made that no further settlement monies will be received, or external evidence (for example, third party valuations)
is available that there has been an irreversible decline in expected cash flows.
(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) Property, plant and equipment
Property, plant and equipment (other than investment property) is 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: the shorter of 50 years and the remaining period of the lease for freehold/long and
short leasehold premises; the shorter of 10 years and, if lease renewal is not likely, the remaining period of the lease for leasehold improvements;
10 to 20 years for fixtures and furnishings; and 2 to 8 years for other equipment and motor vehicles.
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.
Investment property comprises freehold and long leasehold land and buildings that are held either to earn rental income or for capital accretion or
both, primarily within the life insurance funds. In accordance with the guidance published by the Royal Institution of Chartered Surveyors, investment
property is carried at fair value based on current prices for similar properties, adjusted for the specific characteristics of the property (such as location
or condition). If this information is not available, the Group uses alternative valuation methods such as discounted cash flow projections or recent prices
in less active markets. These valuations are reviewed at least annually by independent professionally qualified valuers. Investment property being
redeveloped for continuing use as investment property, or for which the market has become less active, continues to be valued at fair value.
(J) 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.
(K) Employee benefits
Short-term employee benefits, such as salaries, paid absences, performance-based cash awards and social security costs are recognised over the
period in which the employees provide the related services.
(1) Pension schemes
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.
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NOTE 2: ACCOUNTING POLICIES continued
Scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method. 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, past service costs, net interest
expense (income), and plan administration costs that are not deducted from the return on plan assets. Past service costs, which represents the change
in the present value of the defined benefit obligation resulting from a plan amendment or curtailment, are recognised when the plan amendment or
curtailment occurs. Net interest expense (income) is calculated by applying the discount rate at the beginning of the period to the net defined benefit
liability or asset.
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Remeasurements, comprising actuarial gains and losses, the return on plan assets (excluding amounts included in net interest expense (income) and
net of the cost of managing the plan assets), and the effect of changes to the asset ceiling (if applicable) are reflected immediately in the balance
sheet with a charge or credit recognised in other comprehensive income in the period in which they occur. Remeasurements recognised in other
comprehensive income are reflected immediately in retained profits and will not subsequently be reclassified to profit or loss.
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. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in
the future or through refunds from the schemes. In assessing whether a surplus is recoverable, the Group considers its current right to obtain a refund
or a reduction in future contributions and does not anticipate any future acts by other parties that could change the amount of the surplus that may
ultimately be recovered.
The costs of the Group’s defined contribution plans are charged to the income statement in the period in which they fall due.
(2) 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 or a Monte Carlo simulation. 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, 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 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.
(L) Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities including open
matters where Her Majesty’s Revenue and Customs (HMRC) adopt a different interpretation and application of tax law. Dependent on their complexity,
provisions are based on management’s interpretation of the relevant tax legislation, precedents and guidance as well as external tax advice. The
provision is the best estimate of the consideration expected to be required to settle the particular obligation taking into account management’s
judgement of the relevant risks and uncertainties.
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 shareholders’ 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 substantively 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
and current 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 tax is subsequently transferred to
the income statement together with the 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.
(M) Insurance
The Group undertakes both life insurance and general insurance business. Insurance and participating investment contracts are accounted for under
IFRS 4 Insurance Contracts, which permits (with certain exceptions) the continuation of accounting practices for measuring insurance and participating
investment contracts that applied prior to the adoption of IFRS. The Group, therefore, continues to account for these products using UK GAAP and UK
established practice.
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 gives the holder the right to receive, in addition to the guaranteed benefits, further additional
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Notes to the consolidated financial statements continued
NOTE 2: ACCOUNTING POLICIES continued
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, within the constraints of the terms and conditions of the instrument 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.
Liabilities
Changes in the value of liabilities are recognised in the income statement through insurance claims.
– Insurance and participating investment contracts in the Group’s with-profit 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 Prudential Regulation Authority’s realistic capital regime, except that projected transfers out of the funds into
other Group funds are recorded in the unallocated surplus (see below).
– Insurance and participating investment contracts which are not unit-linked or in the Group’s with-profit 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.
– 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. 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 returns (including movements in
fair value and investment income) allocated to those contracts are recognised in the income statement through 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 its recoverability is reviewed 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 are 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.
192
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Annual Report and Accounts 2016
NOTE 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 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 the contract 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.
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(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 benefits payable on one or more contracts issued
by the Group are recognised as assets arising from reinsurance contracts held. Where the underlying contracts issued by the Group are classified
as insurance contracts and the reinsurance contract transfers significant insurance risk on those contracts to the reinsurer, the assets arising from
reinsurance contracts held are classified as insurance contracts. Where the underlying contracts issued by the Group are classified as non-participating
investment contracts and the reinsurance contract transfers financial risk on those contracts to the reinsurer, the assets arising from reinsurance
contracts held are classified as non-participating investment contracts.
Assets arising from reinsurance contracts held – Classified as insurance 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.
Assets arising from reinsurance contracts held – Classified as non-participating investment contracts
These contracts are accounted for as financial assets whose value is contractually linked to the fair values of financial assets within the reinsurers’
investment funds. Investment returns (including movements in fair value and investment income) allocated to these contracts are recognised 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 assets arising from reinsurance contracts held.
(N) 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). 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; and 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 (F)(3) above). On disposal or liquidation 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 or liquidation.
(O) Provisions and contingent liabilities
Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will be required
to settle the obligations and they can be reliably estimated.
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.
Provision is made for irrevocable undrawn loan commitments if it is probable that the facility will be drawn and result in the recognition of an asset
at an amount less than the amount advanced.
193
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Financial statements
Notes to the consolidated financial statements continued
NOTE 2: ACCOUNTING POLICIES continued
(P) Share capital
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. Dividends paid on the Group’s ordinary shares are recognised as a reduction in equity in the period in which they are paid.
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; if these shares are subsequently sold or reissued, any consideration received is included in
shareholders’ equity.
(Q) 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.
NOTE 3: CRITICAL ACCOUNTING ESTIMATES
The preparation of the Group’s financial statements in accordance with IFRS 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 as follows:
– Allowance for impairment losses on loans and receivables (note 21);
– Valuation of assets and liabilities arising from insurance business (notes 24 and 32);
– Defined benefit pension scheme obligations (note 36);
– Recoverability of deferred tax assets (note 37);
– Payment protection insurance and other regulatory provisions (note 38); and
– Fair value of financial instruments (note 49).
NOTE 4: SEGMENTAL ANALYSIS
Lloyds Banking Group provides 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. GEC considers interest income and expense on a net basis and consequently the
total interest income and expense for all reportable segments is presented net. The segments are differentiated by the type of products provided,
by whether the customers are individuals or corporate entities.
The segmental results and comparatives are presented on an underlying basis, the basis reviewed by the chief operating decision maker. The effects
of the following are excluded in arriving at underlying profit:
– losses on redemption of the Enhanced Capital Notes and the volatility in the value of the embedded equity conversion feature;
– market volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group’s own debt and hedging
arrangements as well as that arising in the insurance businesses, insurance gross up, the unwind of acquisition-related fair value adjustments and the
amortisation of purchased intangible assets;
– restructuring costs, (which in 2015 and 2016 comprised severance related costs relating to the Simplification programme announced in October 2014
and in 2014 included severance, IT and business costs relating to the programme started in 2011) and the costs of implementing regulatory reform
and ring-fencing;
– TSB build and dual running costs and the loss relating to the TSB sale in 2015;
– payment protection insurance and other conduct provisions; and
– certain past service pension credits or charges.
The Group’s activities are organised into four financial reporting segments: Retail; Commercial Banking; Consumer Finance and Insurance. The Group’s
unsecured personal lending portfolio, previously part of Retail, is now managed by Consumer Finance and elements of the Group’s business in the
Channel Islands and Isle of Man were transferred from Retail to Commercial Banking; comparatives have been restated accordingly.
Retail offers a broad range of financial service products, including current accounts, savings and mortgages, to UK personal customers, including
wealth and small business customers. It is also a distributor of insurance and a range of long-term savings and investment products.
Commercial Banking is client-led, helping UK-based clients and international clients with a link to the UK. Through its four client facing divisions
– SME, Mid Markets, Global Corporates and Financial Institutions – it provides clients with a range of products and services such as lending,
transactional banking, working capital management, risk management, debt capital markets services, as well as access to private equity through Lloyds
Development Capital.
Consumer Finance comprises all the Group’s consumer lending products including motor finance, credit cards, and unsecured personal loans along
with its European business.
Insurance provides a range of protection, pension and investment products to meet the needs of its customers.
Other includes certain assets previously reported as outside of the Group’s risk appetite and the results of businesses disposed. Other also includes
income and expenditure not recharged to divisions, including the costs of certain central and head office functions and the costs of managing the
Group’s technology platforms, branch and head office property estate, operations (including payments, banking operations and collections) and
sourcing, the costs of which are predominantly recharged to the other divisions. It also reflects other items not recharged to the divisions.
194
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 4: SEGMENTAL ANALYSIS continued
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 the majority of those derivative contracts entered into by business units for risk management purposes, the business unit recognises the net
interest income or expense on an accrual accounting basis and transfers the remainder of the movement in the fair value of the derivative to the central
group segment where the resulting accounting volatility is managed where possible through 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 derivative and change in fair value of the hedged instrument attributable to the hedged risk avoids accounting asymmetry in
segmental results and leads to accounting volatility, which is managed centrally and reported within Other.
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Retail
£m
Commercial
Banking
£m
Consumer
Finance
£m
Insurance
£m
Other
£m
Underlying
basis total
£m
Year ended 31 December 2016
Net interest income
Other income, net of insurance claims
Total underlying income, net of insurance claims
Operating lease depreciation1
Net income
Operating costs
Impairment
Underlying profit (loss)
External income
Inter-segment income
Segment underlying income, net of insurance claims
Segment external assets
Segment customer deposits
Segment external liabilities
Other segment items reflected in
income statement above:
Depreciation and amortisation
Increase in value of in-force business
Defined benefit scheme charges
Other segment items:
Additions to fixed assets
Investments in joint ventures and associates
at end of year
1 Net of profits on disposal of operating lease assets of £58 million.
6,497
1,053
7,550
–
7,550
(4,174)
(373)
3,003
8,460
(910)
7,550
2,735
1,987
4,722
(105)
4,617
(2,133)
(16)
2,468
3,668
1,054
4,722
300,085
271,005
275,006
188,296
132,628
221,395
1,941
1,338
3,279
(775)
2,504
(939)
(282)
1,283
3,885
(606)
3,279
40,992
7,920
12,494
888
–
10
459
–
134
278
1
286
–
45
126
2,086
–
5
(146)
1,755
1,609
–
1,609
(772)
–
837
1,311
298
1,609
408
(68)
340
(15)
325
(75)
26
276
176
164
340
153,936
134,484
–
3,907
146,836
113,247
168
472
13
481
–
579
–
85
789
53
11,435
6,065
17,500
(895)
16,605
(8,093)
(645)
7,867
17,500
–
17,500
817,793
415,460
768,978
2,380
472
287
3,760
59
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195
Financial statements
Notes to the consolidated financial statements continued
NOTE 4: SEGMENTAL ANALYSIS continued
Year ended 31 December 2015
Net interest income
Other income, net of insurance claims
Total underlying income, net of insurance claims
Operating lease depreciation2
Net income
Operating costs
Impairment
TSB
Underlying profit
External income
Inter-segment income
Segment underlying income, net of insurance claims
Segment external assets
Segment customer deposits
Segment external liabilities
Other segment items reflected in
income statement above:
Depreciation and amortisation
Decrease in value of in-force business
Defined benefit scheme charges
Other segment items:
Additions to fixed assets
Investments in joint ventures and associates at end of year
1 Restated – see page 194.
2 Net of profits on disposal of operating lease assets of £66 million.
Year ended 31 December 2014
Net interest income
Other income, net of insurance claims
Total underlying income, net of insurance claims
Operating lease depreciation2
Net income
Operating costs
Impairment
TSB
Underlying profit
External income
Inter-segment income
Segment underlying income, net of insurance claims
Segment external assets
Segment customer deposits
Segment external liabilities
Other segment items reflected in
income statement above:
Depreciation and amortisation
Decrease in value of in-force business
Defined benefit scheme charges
Other segment items:
Additions to fixed assets
Investments in joint ventures and associates at end of year
1 Restated – see page 194.
2 Net of profits on disposal of operating lease assets of £67 million.
196
Retail1
£m
Commercial
Banking1
£m
Consumer
Finance1
£m
Insurance
£m
Other
£m
Underlying
basis total
£m
6,664
1,115
7,779
–
7,779
(4,339)
(349)
–
3,091
8,545
(766)
7,779
2,576
2,072
4,648
(30)
4,618
(2,162)
22
–
2,478
3,636
1,012
4,648
1,954
1,359
3,313
(720)
2,593
(977)
(235)
–
1,381
3,772
(459)
3,313
(163)
1,827
1,664
–
1,664
(702)
–
–
962
2,065
(401)
1,664
451
(218)
233
(14)
219
(131)
(6)
118
200
(381)
614
233
307,887
273,719
278,933
178,838
131,998
226,106
36,501
11,082
15,462
143,217
–
137,233
140,245
1,527
101,974
408
–
123
383
1
204
–
30
153
–
839
–
9
1,752
4
124
(162)
11
343
–
537
–
142
786
42
11,482
6,155
17,637
(764)
16,873
(8,311)
(568)
118
8,112
17,637
–
17,637
806,688
418,326
759,708
2,112
(162)
315
3,417
47
Retail1
£m
Commercial
Banking1
£m
Consumer
Finance1
£m
Insurance
£m
Other
£m
Underlying
basis total
£m
6,270
1,202
7,472
–
7,472
(4,239)
(494)
–
2,739
8,083
(611)
7,472
2,542
1,962
4,504
(24)
4,480
(2,139)
(85)
–
2,256
3,810
694
4,504
308,414
279,148
289,442
242,452
126,273
237,764
335
–
121
368
1
158
–
37
245
–
2,037
1,368
3,405
(667)
2,738
(971)
(318)
–
1,449
3,744
(339)
3,405
33,781
14,955
18,629
778
–
9
1,642
9
(131)
1,725
1,594
–
1,594
(672)
–
–
922
1,206
388
1,594
257
210
467
(29)
438
(301)
(205)
458
390
599
(132)
467
150,615
–
144,921
119,634
26,691
114,237
130
(428)
9
449
–
194
–
168
738
64
10,975
6,467
17,442
(720)
16,722
(8,322)
(1,102)
458
7,756
17,442
–
17,442
854,896
447,067
804,993
1,595
(428)
344
3,442
74
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 4: SEGMENTAL ANALYSIS continued
Reconciliation of underlying basis to statutory results
The underlying 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 underlying basis.
Year ended 31 December 2016
Net interest income
Other income, net of insurance claims
Total income, net of insurance claims
Operating lease depreciation3
Net income
Operating expenses
Impairment
Profit before tax
Year ended 31 December 2015
Net interest income
Other income, net of insurance claims
Total income, net of insurance claims
Operating lease depreciation3
Net income
Operating expenses
Impairment
TSB
Profit
Year ended 31 December 2014
Net interest income
Other income, net of insurance claims
Total income, net of insurance claims
Operating lease depreciation3
Net income
Operating expenses
Impairment
TSB
Profit
Lloyds
Banking
Group
statutory
£m
9,274
7,993
17,267
17,267
(12,277)
(752)
4,238
Volatility
and other
items4
£m
318
209
527
(764)
(237)
2,065
(197)
–
1,631
Volatility
and other
items6
£m
619
1,482
2,101
(720)
1,381
1,936
(448)
–
2,869
Removal of:
Volatility
and other
items1
£m
Insurance
gross up2
£m
263
121
384
(895)
(511)
1,948
107
1,544
TSB5
£m
(192)
(31)
(223)
–
(223)
86
19
118
–
TSB4
£m
(786)
(140)
(926)
–
(926)
370
98
458
–
1,898
(2,110)
(212)
–
(212)
212
–
–
Removal of:
Insurance
gross up2
£m
38
(126)
(88)
–
(88)
88
–
–
–
Removal of:
Insurance
gross up2
£m
482
(614)
(132)
–
(132)
132
–
–
–
Other
conduct
provisions
£m
Underlying
basis
£m
–
61
61
–
61
1,024
–
1,085
11,435
6,065
17,500
(895)
16,605
(8,093)
(645)
7,867
Other
conduct
provisions
£m
Underlying
basis
£m
–
–
–
–
–
837
–
–
837
11,482
6,155
17,637
(764)
16,873
(8,311)
(568)
118
8,112
Other
conduct
provisions
£m
Underlying
basis
£m
–
–
–
–
–
925
–
–
925
10,975
6,467
17,442
(720)
16,722
(8,322)
(1,102)
458
7,756
PPI
£m
–
–
–
–
–
1,000
–
1,000
PPI
£m
–
–
–
–
–
4,000
–
–
4,000
PPI
£m
–
–
–
–
–
2,200
–
–
2,200
Lloyds
Banking
Group
statutory
£m
11,318
6,103
17,421
17,421
(15,387)
(390)
–
1,644
Lloyds
Banking
Group
statutory
£m
10,660
5,739
16,399
16,399
(13,885)
(752)
–
1,762
1 Comprises the write-off of the ECN embedded derivative and premium paid on redemption of the remaining notes in the first quarter (loss of £790 million); the effects of asset sales (gain
of £217 million); volatile items (gain of £99 million); liability management (gain of £123 million); the amortisation of purchased intangibles (£340 million); restructuring costs (£622 million, principally
comprising the severance related costs related to phase II of the Simplification programme); and the fair value unwind and other items (loss of £231 million).
2 The Group’s insurance businesses’ income statements include income and expenditure which are attributable to the policyholders of the Group’s long-term assurance funds. These items
have no impact in total upon the profit attributable to equity shareholders and, in order to provide a clearer representation of the underlying trends within the business, these items are shown
net within the underlying results.
3 Net of profits on disposal of operating lease assets of £58 million (2015: £66 million; 2014: £67 million).
4 Comprises market movements on the ECN embedded derivative (loss of £101 million); the effects of asset sales (gain of £54 million); volatile items (loss of £107 million ); liability management
(loss of £28 million); the amortisation of purchased intangibles (£342 million); restructuring costs (£170 million); TSB costs (£745 million); and the fair value unwind and other items (loss of
£192 million).
5 Comprises the underlying results of TSB.
6 Comprises the loss arising on the Group’s exchange and tender offers in respect of its ECNs in April 2014 (£1,362 million); market movements on the ECN embedded derivative (gain of
£401 million); the effects of asset sales (gain of £138 million); volatile items (loss of £343 million); liability management (loss of £24 million); the past service pension credit of £710 million (which
represented the curtailment credit of £843 million following the group’s decision to reduce the cap on pensionable pay partly offset by the cost of other changes to the pay, benefits and
reward offered to employees); the amortisation of purchased intangibles (£336 million ); restructuring costs (£966 million); and TSB costs (£558 million); and the fair value unwind and other
items (loss of £529 million).
197
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Financial statements
Notes to the consolidated financial statements continued
Geographical areas
Following the reduction in the Group’s non-UK activities, an analysis between UK and non-UK activities is no longer provided.
NOTE 5: NET INTEREST INCOME
Weighted average
effective interest rate
Interest and similar income:
Loans and advances to customers
Loans and advances to banks
Debt securities held as loans and receivables
Interest receivable on loans and receivables
Available-for-sale financial assets
Held-to-maturity investments
Total interest and similar income
Interest and similar expense:
Deposits from banks, excluding liabilities under sale and
repurchase transactions1
Customer deposits, excluding liabilities under sale and
repurchase transactions
Debt securities in issue2
Subordinated liabilities
Liabilities under sale and repurchase agreements
Interest payable on liabilities held at amortised cost
Amounts payable to unitholders in consolidated
open-ended investment vehicles
Total interest and similar expense
Net interest income
2016
%
3.32
0.46
1.47
2.87
1.88
1.44
2.77
0.65
0.69
0.94
8.35
0.46
1.07
10.85
1.44
2015
%
3.50
0.42
1.87
2.98
1.77
1.49
2.86
0.41
0.87
0.69
8.37
0.57
1.19
1.16
1.19
2014
%
3.53
0.52
2.57
3.12
1.90
–
3.03
0.74
1.15
0.63
8.44
2.61
1.45
3.23
1.51
2016
£m
2015
£m
2014
£m
15,190
16,256
17,806
381
56
397
40
406
42
15,627
16,693
18,254
762
231
725
197
957
–
16,620
17,615
19,211
(68)
(43)
(86)
(2,520)
(799)
(1,864)
(38)
(5,289)
(2,057)
(7,346)
9,274
(3,299)
(586)
(2,091)
(34)
(6,053)
(244)
(6,297)
11,318
(4,781)
(552)
(2,475)
(55)
(7,949)
(602)
(8,551)
10,660
1 Includes £51 million (2015: £nil; 2014: £nil) of interest expense on assets with negative interest rates.
2 The impact of the Group’s hedging arrangements is included on this line; excluding this impact the weighted average effective interest rate in respect of debt securities in issue would be
2.70 per cent (2015: 2.76 per cent; 2014: 3.06 per cent).
Included within interest and similar income is £205 million (2015: £248 million; 2014: £407 million) in respect of impaired financial assets. Net interest
income also includes a credit of £557 million (2015: credit of £956 million; 2014: credit of £1,153 million) transferred from the cash flow hedging reserve
(see note 42).
NOTE 6: NET FEE AND COMMISSION INCOME
Fee and commission income:
Current accounts
Credit and debit card fees
Other
Total fee and commission income
Fee and commission expense
Net fee and commission income
2016
£m
2015
£m
2014
£m
752
875
1,418
3,045
(1,356)
1,689
804
918
1,530
3,252
(1,442)
1,810
918
1,050
1,691
3,659
(1,402)
2,257
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.
198
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 7: NET TRADING INCOME
Foreign exchange translation (losses) gains
Gains on foreign exchange trading transactions
Total foreign exchange
Investment property (losses) gains (note 26)
Securities and other gains (see below)
Net trading income
2016
£m
1,363
542
1,905
(83)
16,723
18,545
2015
£m
(80)
335
255
416
3,043
3,714
2014
£m
(95)
344
249
513
9,397
10,159
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Securities and other gains comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss and for trading as follows:
Net income arising on assets held at fair value through profit or loss:
Debt securities, loans and advances
Equity shares
Total net income arising on assets held at fair value through profit or loss
Net income (expense) arising on liabilities held at fair value through profit or loss
– debt securities in issue
Total net gains arising on assets and liabilities held at fair value through profit or loss
Net (losses) gains on financial instruments held for trading
Securities and other gains
NOTE 8: INSURANCE PREMIUM INCOME
Life insurance
Gross premiums:
Life and pensions
Annuities
Ceded reinsurance premiums
Net earned premiums
Non-life insurance
Net earned premiums
Total net earned premiums
2016
£m
2015
£m
2014
£m
4,771
12,534
17,305
(154)
17,151
(428)
16,723
451
2,384
2,835
14
2,849
194
3,043
4,805
3,816
8,621
(75)
8,546
851
9,397
2016
£m
2015
£m
2014
£m
5,613
1,685
7,298
(88)
7,210
858
8,068
3,613
430
4,043
(122)
3,921
871
4,792
6,070
327
6,397
(142)
6,255
870
7,125
Premium income in 2015 was reduced by a charge of £1,959 million relating to the recapture by a third party insurer of a portfolio of policies previously
reassured with the Group.
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199
Financial statements
Notes to the consolidated financial statements continued
NOTE 9: OTHER OPERATING INCOME
Operating lease rental income
Rental income from investment properties (note 26)
Gains less losses on disposal of available-for-sale financial assets (note 42)
Movement in value of in-force business (note 24)
Liability management
Share of results of joint ventures and associates
Other
Total other operating income
2016
£m
1,225
229
575
472
(598)
(1)
133
2,035
2015
£m
1,165
268
51
(162)
(28)
(3)
225
1,516
2014
£m
1,126
269
131
(428)
(1,386)
32
(53)
(309)
Liability management
In April 2014, the Group completed exchange offers with holders of certain series of its Enhanced Capital Notes (ECNs) and a tender offer to eligible
retail holders outside the United States. A loss of £1,362 million was recognised in relation to these exchange and tender transactions in the year
ended 31 December 2014. The Group completed tender offers and redemptions in respect of the remaining ECNs in March 2016, resulting in a net
loss to the Group of £721 million, principally comprising the write-off of the embedded equity conversion feature and premiums paid under the terms
of the transaction.
Profits of £123 million arose in the year ended 31 December 2016 (2015: losses of £28 million; 2014: losses of £24 million) on other transactions
undertaken as part of the Group’s management of its wholesale funding and subordinated debt.
NOTE 10: INSURANCE CLAIMS
Insurance claims comprise:
Life insurance and participating investment contracts
Claims and surrenders
Change in insurance and participating investment contracts (note 32)
Change in non-participating investment contracts
Reinsurers’ share
Change in unallocated surplus
2016
£m
2015
£m
2014
£m
(8,617)
(14,160)
679
(22,098)
106
(21,992)
14
(7,983)
2,898
(438)
(5,523)
101
(5,422)
63
(7,506)
(4,392)
(1,448)
(13,346)
109
(13,237)
74
Total life insurance and participating investment contracts
(21,978)
(5,359)
(13,163)
Non-life insurance
Total non-life insurance claims, net of reinsurance
Total insurance claims
(366)
(22,344)
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows:
Deaths
Maturities
Surrenders
Annuities
Other
Total life insurance gross claims and surrenders
(635)
(1,347)
(5,444)
(949)
(242)
(8,617)
(370)
(5,729)
(631)
(1,348)
(4,811)
(902)
(291)
(7,983)
(330)
(13,493)
(549)
(1,656)
(4,102)
(884)
(315)
(7,506)
200
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 11: OPERATING EXPENSES
Staff costs:
Salaries
Performance-based compensation
Social security costs
Pensions and other post-retirement benefit schemes (note 36):
Past service (credits) charges1
Other
Restructuring costs
Other staff costs
Premises and equipment:
Rent and rates
Repairs and maintenance
Other
Other expenses:
Communications and data processing
Advertising and promotion
Professional fees
UK bank levy
TSB disposal
Other
Depreciation and amortisation:
Depreciation of property, plant and equipment (note 26)
Amortisation of acquired value of in-force non-participating investment contracts (note 24)
Amortisation of other intangible assets (note 25)
Total operating expenses, excluding regulatory provisions
Regulatory provisions:
Payment protection insurance provision (note 38)
Other regulatory provisions2 (note 38)
Total operating expenses
2016
£m
2015
£m
2014
£m
2,750
475
363
–
555
555
241
433
2,808
409
349
–
548
548
104
459
3,178
390
398
(822)
596
(226)
264
741
4,817
4,677
4,745
365
187
120
672
848
198
265
200
–
873
368
173
174
715
893
253
262
270
665
703
2,384
3,046
1,761
37
582
2,380
10,253
1,000
1,024
2,024
12,277
1,534
41
537
2,112
10,550
4,000
837
4,837
15,387
424
221
246
891
1,118
336
481
237
–
1,017
3,189
1,391
43
501
1,935
10,760
2,200
925
3,125
13,885
1 On 11 March 2014 the Group announced a change to its defined benefit pension schemes, revising the existing cap on the increases in pensionable pay used in calculating the pension
benefit, from 2 per cent to nil with effect from 2 April 2014. The effect of this change was to reduce the Group’s retirement benefit obligations recognised on the balance sheet by £843 million
with a corresponding curtailment gain recognised in the income statement. This has been partly offset by a charge of £21 million following changes to pension arrangements for staff within
the TSB business.
2 In addition, regulatory provisions of £61 million (2015: £nil; 2014: £nil) have been charged against income.
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201
Financial statements
Notes to the consolidated financial statements continued
NOTE 11: OPERATING EXPENSES continued
Performance-based compensation
The table below analyses the Group’s performance-based compensation costs between those relating to the current performance year and those
relating to earlier years.
Performance-based compensation expense comprises:
Awards made in respect of the year ended 31 December
Awards made in respect of earlier years
Performance-based compensation expense deferred until later years comprises:
Awards made in respect of the year ended 31 December
Awards made in respect of earlier years
2016
£m
312
163
475
123
41
164
2015
£m
280
129
409
114
56
170
2014
£m
324
66
390
152
32
184
Performance-based awards expensed in 2016 include cash awards amounting to £116 million (2015: £96 million; 2014: £104 million).
Average headcount
The average number of persons on a headcount basis employed by the Group during the year was as follows:
UK
Overseas
Total
Fees payable to the auditors
Fees payable to the Company’s auditors by the Group are as follows:
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:
Taxation compliance services
All other taxation advisory services
Other non-audit fees:
Services relating to corporate finance transactions
Other services
Total other non-audit fees
2016
79,606
812
80,418
2015
84,922
781
85,703
2014
94,241
847
95,088
2016
£m
1.5
14.7
3.1
19.3
3.1
22.4
0.2
0.1
0.3
0.1
1.5
1.6
2015
£m
1.2
14.9
2.2
18.3
3.2
21.5
0.2
0.1
0.3
0.2
2.3
2.5
2014
£m
1.4
15.5
2.1
19.0
9.1
28.1
0.2
0.3
0.5
0.3
3.2
3.5
32.1
Total fees payable to the Company’s auditors by the Group
24.3
24.3
202
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 11: OPERATING EXPENSES continued
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.
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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 and reviews a report detailing all pre-approved
services and amounts paid to the auditors for such pre-approved services.
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
NOTE 12: IMPAIRMENT
Impairment losses on loans and receivables:
Loans and advances to customers
Debt securities classified as loans and receivables
Total impairment losses on loans and receivables (note 21)
Impairment of available-for-sale financial assets
Other credit risk provisions
Total impairment charged to the income statement
2016
£m
0.3
0.4
1.2
1.0
2016
£m
592
–
592
173
(13)
752
2015
£m
0.3
0.4
3.1
1.2
2015
£m
443
(2)
441
4
(55)
390
2014
£m
0.3
0.4
5.0
1.0
2014
£m
735
2
737
5
10
752
203
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Financial statements
Notes to the consolidated financial statements continued
NOTE 13: TAXATION
(A) Analysis of tax charge for the year
UK corporation tax:
Current tax on profit for the year
Adjustments in respect of prior years
Foreign tax:
Current tax on profit for the year
Adjustments in respect of prior years
Current tax (charge) credit
Deferred tax (note 37):
Origination and reversal of temporary differences
Due to change in UK corporation tax rate
Adjustments in respect of prior years
Tax charge
2016
£m
2015
£m
(1,010)
156
(854)
(20)
2
(18)
(872)
(557)
(201)
(94)
(852)
(1,724)
(485)
(90)
(575)
(24)
27
3
(572)
(185)
(27)
96
(116)
(688)
The charge for tax on the profit for 2016 is based on a UK corporation tax rate of 20 per cent (2015: 20.25 per cent; 2014: 21.5 per cent).
The income tax charge is made up as follows:
Tax (charge) credit attributable to policyholders
Shareholder tax charge
Tax charge
2016
£m
(301)
(1,423)
(1,724)
2015
£m
3
(691)
(688)
2014
£m
(162)
213
51
(39)
3
(36)
15
(72)
(24)
(182)
(278)
(263)
2014
£m
(18)
(245)
(263)
(B) Factors affecting the tax charge for the year
A reconciliation of the charge that would result from applying the standard UK corporation tax rate to the profit before tax to the actual tax charge for
the year is given below:
2016
£m
2015
£m
2014
£m
Profit before tax
Tax charge thereon at UK corporation tax rate of 20 per cent
(2015: 20.25 per cent; 2014: 21.5 per cent)
Factors affecting charge:
Impact of bank surcharge
Impact of changes in UK corporation tax rates
Disallowed items1
Non-taxable items
Overseas tax rate differences
Gains exempted
Policyholder tax2
Tax losses not previously recognised
Adjustments in respect of previous years
Effect of results of joint ventures and associates
Other items
Tax charge on profit on ordinary activities
4,238
1,644
1,762
(848)
(333)
(379)
(266)
(201)
(394)
75
10
19
(241)
59
64
(1)
–
–
(27)
(630)
162
(4)
67
3
42
33
(1)
–
–
(24)
(195)
153
(24)
181
(14)
–
34
7
(2)
(1,724)
(688)
(263)
1 The Finance (No. 2) Act 2015 introduced restrictions on the tax deductibility of provisions for conduct charges arising on or after 8 July 2015. This has resulted in an additional income
statement tax charge of £219 million (2015: £459 million).
2 In 2016 this includes a £231 million write down of the deferred tax asset held within the life business, reflecting the Group’s utilisation estimate which has been restricted by the current
economic environment.
The Finance (No. 2) Act 2015 introduced an additional surcharge of 8 per cent on banking profits from 1 January 2016.
The Finance Act 2016 was enacted on 15 September 2016. The Act further reduced the corporation tax rate applicable from 1 April 2020 to 17 per cent
and further restricts the amount of banks’ profits that can be offset by carried forward losses for the purposes of calculating corporation tax liabilities
from 50 per cent to 25 per cent with effect from 1 April 2016.
The corporation tax changes enacted have resulted in a reduction in the Group’s net deferred tax asset at 31 December 2016 of £158 million,
comprising a £201 million charge included in the income statement and a £43 million credit included in equity.
204
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 14: EARNINGS PER SHARE
Profit attributable to equity shareholders – basic and diluted
Tax credit on distributions to other equity holders
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
2016
£m
2,001
91
2,092
2016
million
71,234
790
72,024
2.9p
2.9p
2015
£m
466
80
546
2015
million
71,272
1,068
72,340
0.8p
0.8p
2014
£m
1,125
62
1,187
2014
million
71,350
1,097
72,447
1.7p
1.6p
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 140 million (2015: 101 million; 2014: 22 million) ordinary shares representing
the Group’s holdings of own shares in respect of employee share schemes.
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 that arise 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.
The weighted-average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 0.3 million
at 31 December 2016 (2015: 1 million; 2014: 7 million).
NOTE 15: 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
Treasury and other bills
Total
2016
Other
financial
assets at fair
value
through
profit or loss
£m
–
–
Trading
assets
£m
30,473
2,606
Total
£m
30,473
2,606
Trading
assets
£m
30,109
3,065
11,828
14,904
26,732
8,269
–
–
47
69
224
12,168
6
–
1,325
244
660
1,469
19,608
38,210
67,691
20
1,325
244
707
1,538
19,832
50,378
67,697
20
–
–
516
85
612
9,482
5
–
2015
Other
financial
assets at fair
value through
profit or loss
£m
–
–
13,848
2,039
135
842
762
19,704
37,330
60,471
74
Total
£m
30,109
3,065
22,117
2,039
135
1,358
847
20,316
46,812
60,476
74
45,253
105,921
151,174
42,661
97,875
140,536
Other financial assets at fair value through profit or loss include the following assets designated into that category:
(i)
financial assets backing insurance contracts and investment contracts of £101,888 million (2015: £90,492 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. Included within these assets
are investments in unconsolidated structured entities of £15,611 million (2015: £13,282 million), see note 20; and
(ii)
private equity investments of £2,245 million (2015: £2,415 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.
For amounts included above which are subject to repurchase and reverse repurchase agreements see note 52.
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Notes to the consolidated financial statements continued
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS
The fair values and notional amounts of derivative instruments are set out in the following table:
31 December 2016
31 December 2015
Contract/
notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
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
38,072
288,441
15,192
18,342
360,047
2,160,535
628,962
39,509
39,847
114,284
1,149
6,903
808
–
8,860
19,780
13
3,251
–
6
Contract/
notional
amount
£m
39,817
293,536
20,352
22,708
376,413
1,383
6,382
–
1,016
8,781
18,862
2,316,071
87
–
3,400
1,159,099
55,962
52,202
3
105,475
Fair value
assets
£m
Fair value
liabilities
£m
852
5,585
751
–
7,188
14,442
6
3,003
–
7
774
4,323
–
984
6,081
13,050
57
–
3,116
8
2,983,137
23,050
22,352
3,688,809
17,458
16,231
Credit derivatives
Embedded equity conversion feature (note 9)
Equity and other contracts
8,098
–
43,218
Total derivative assets/liabilities – trading and other
3,394,500
Hedging
Derivatives designated as fair value hedges:
Currency swaps
Interest rate swaps
Options purchased
Derivatives designated as cash flow hedges:
Interest rate swaps
Futures
Currency swaps
Total derivative assets/liabilities – hedging
1,454
194,416
–
195,870
384,182
53,115
8,121
445,418
641,288
Total recognised derivative assets/liabilities
4,035,788
381
–
1,135
33,426
19
1,462
–
1,481
814
–
417
1,231
2,712
36,138
659
–
1,168
4,566
–
14,174
32,960
4,083,962
22
737
–
759
1,166
3
36
1,205
1,964
2,649
121,063
–
123,712
460,829
150,085
11,228
622,142
745,854
34,924
4,829,816
295
545
1,295
26,781
52
1,572
–
1,624
816
3
243
1,062
2,686
29,467
407
–
1,145
23,864
107
724
–
831
1,534
–
72
1,606
2,437
26,301
The notional 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 52 Credit risk.
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 and cash flow hedge approaches as described in note 52; and
– Derivatives held in policyholder funds as permitted by the investment strategies of those funds.
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.
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NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS continued
– 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 used credit default swaps to securitise, in combination with external funding,
£455 million of corporate and commercial banking loans at 31 December 2015; these arrangements were wound up during 2016.
– 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.
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Hedged cash flows
For designated cash flow hedges the following table shows when the Group’s hedged cash flows are expected to occur and when they will
affect income.
2016
Hedged forecast cash flows
expected to occur:
0-1 years
£m
1-2 years
£m
2-3 years
£m
3-4 years
£m
4-5 years
£m
5-10 years
£m
10-20 years
£m
Over 20
years
£m
Total
£m
Forecast receivable cash flows
Forecast payable cash flows
172
(565)
198
(722)
415
(692)
372
(599)
391
(429)
1,215
(1,541)
102
(806)
45
2,910
(262)
(5,616)
Hedged forecast cash flows affect
profit or loss:
Forecast receivable cash flows
Forecast payable cash flows
211
(777)
223
(713)
418
(671)
363
(521)
472
(415)
1,070
(1,477)
99
(787)
54
2,910
(255)
(5,616)
2015
Hedged forecast cash flows
expected to occur:
Forecast receivable cash flows
Forecast payable cash flows
Hedged forecast cash flows affect
profit or loss:
Forecast receivable cash flows
Forecast payable cash flows
0-1 years
£m
1-2 years
£m
2-3 years
£m
3-4 years
£m
4-5 years
£m
5-10 years
£m
10-20 years
£m
Over
20 years
£m
Total
£m
363
(1,235)
381
(1,261)
298
(758)
439
(741)
499
(714)
515
(715)
500
(667)
453
(671)
376
(440)
1,876
(1,116)
345
(440)
1,777
(1,115)
137
(532)
136
(523)
75
(145)
4,124
(5,607)
78
(141)
4,124
(5,607)
There were no transactions for which cash flow hedge accounting had to be ceased in 2015 or 2016 as a result of the highly probable cash flows no
longer being expected to occur.
NOTE 17: LOANS AND ADVANCES TO BANKS
Lending to banks
Money market placements with banks
Total loans and advances to banks
For amounts included above which are subject to reverse repurchase agreements see note 52.
2016
£m
2,903
23,999
26,902
2015
£m
2,273
22,844
25,117
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Notes to the consolidated financial statements continued
NOTE 18: 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
Total loans and advances to customers before allowance for impairment losses
Allowance for impairment losses (note 21)
Total loans and advances to customers
For amounts included above which are subject to reverse repurchase agreements see note 52.
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
Net investment in finance leases
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
Net investment in finance leases
2016
£m
7,269
2,320
7,285
4,535
13,320
2,564
32,192
49,197
306,682
20,761
2,628
11,617
2015
£m
6,924
3,247
5,953
4,952
13,526
2,563
32,228
43,072
312,877
20,579
2,751
9,536
460,370
458,208
(2,412)
457,958
(3,033)
455,175
2016
£m
2015
£m
551
1,618
1,561
3,730
(1,038)
(64)
2,628
2016
£m
361
1,282
985
2,628
497
1,225
2,407
4,129
(1,316)
(62)
2,751
2015
£m
319
859
1,573
2,751
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 2015 and 2016 no contingent rentals in respect of finance leases were recognised in the income statement.
There was no allowance for uncollectable finance lease receivables included in the allowance for impairment losses (2015: £nil).
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NOTE 19: SECURITISATIONS AND COVERED BONDS
Securitisation programmes
Loans and advances to customers and debt securities classified as loans and receivables include loans securitised under the Group’s securitisation
programmes, the majority of which have been sold by subsidiary companies to bankruptcy remote structured entities. As the structured entities are
funded by the issue of debt on terms whereby the majority of the risks and rewards of the portfolio are retained by the subsidiary, the structured
entities are consolidated fully and all of these loans are retained on the Group’s balance sheet, with the related notes in issue included within debt
securities in issue.
Covered bond programmes
Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of
covered bonds by the Group. The Group retains all of the risks and rewards associated with these loans and the partnerships are consolidated fully
with the loans retained on the Group’s balance sheet and the related covered bonds in issue included within debt securities in issue.
The Group’s principal securitisation and covered bond programmes, together with the balances of the advances subject to these arrangements
and the carrying value of the notes in issue at 31 December, are listed below. The notes in issue are reported in note 31.
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Securitisation programmes1
UK residential mortgages
Commercial loans
Credit card receivables
Dutch residential mortgages
PFI/PPP and project finance loans
Less held by the Group
Total securitisation programmes (note 31)
Covered bond programmes
Residential mortgage-backed
Social housing loan-backed
Less held by the Group
Total covered bond programmes (note 31)
Total securitisation and covered bond programmes
1 Includes securitisations utilising a combination of external funding and credit default swaps.
2016
2015
Loans and
advances
securitised
£m
Notes
in issue
£m
Loans and
advances
securitised
£m
Notes
in issue
£m
35,146
17,705
39,154
20,931
9,345
7,305
1,981
305
58,090
43,323
2,544
45,867
7,395
7,610
2,033
–
52,184
33,881
2,087
35,968
8,179
5,723
2,081
–
33,688
(26,435)
7,253
30,021
1,200
31,221
(700)
30,521
37,774
8,720
5,277
2,044
94
37,066
(29,303)
7,763
29,697
1,700
31,397
(4,197)
27,200
34,963
Cash deposits of £9,018 million (2015: £8,383 million) which support the debt securities issued by the structured entities, the term advances related to
covered bonds and other legal obligations are held by the Group. Additionally, the Group had certain contractual arrangements to provide liquidity
facilities to some of these structured entities. At 31 December 2016 these obligations had not been triggered; the maximum exposure under these
facilities was £373 million (2015: £381 million).
The Group has a number of covered bond programmes, for which Limited Liability Partnerships have been established to ring-fence asset pools and
guarantee the covered bonds issued by the Group. At the reporting date the Group had over-collateralised these programmes as set out in the table
above to meet the terms of the programmes, to secure the rating of the covered bonds and to provide operational flexibility. From time-to-time,
the obligations of the Group to provide collateral may increase due to the formal requirements of the programmes. The Group may also voluntarily
contribute collateral to support the ratings of the covered bonds.
The Group recognises the full liabilities associated with its securitisation and covered bond programmes within debt securities in issue, although
the obligations of the Group are limited to the cash flows generated from the underlying assets. The Group could be required to provide additional
support to a number of the securitisation programmes to support the credit ratings of the debt securities issued, in the form of increased cash reserves
and the holding of subordinated notes. Further, certain programmes contain contractual obligations that require the Group to repurchase assets
should they become credit impaired.
The Group has not voluntarily offered to repurchase assets from any of its public securitisation programmes during 2016 (2015: none). Such repurchases
are made in order to ensure that the expected maturity dates of the notes issued from these programmes are met.
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Financial statements
Notes to the consolidated financial statements continued
NOTE 20: STRUCTURED ENTITIES
The Group’s interests in structured entities are both consolidated and unconsolidated. Detail of the Group’s interests in consolidated structured entities
are set out in: note 19 for securitisations and covered bond vehicles, note 36 for structured entities associated with the Group’s pension schemes, and
below in part (A) and (B). Details of the Group’s interests in unconsolidated structured entities are included below in part (C).
(A) Asset-backed conduits
In addition to the structured entities discussed in note 19, which are used for securitisation and covered bond programmes, the Group sponsors
an active asset‑backed conduit, Cancara, which invests in client receivables and debt securities. The total consolidated exposure of Cancara at
31 December 2016 was £6,840 million (2015: £7,295 million), comprising £6,684 million of loans and advances (2015: £6,440 million) and £156 million
of debt securities (2015: £855 million).
All lending assets and debt securities held by the Group in Cancara are restricted in use, as they are held by the collateral agent for the benefit of the
commercial paper investors and the liquidity providers only. The Group provides liquidity facilities to Cancara under terms that are usual and customary
for standard lending activities in the normal course of the Group’s banking activities. During 2016 there has been a planned drawdown on certain
liquidity facilities for balance sheet management purposes, supporting the programme to provide funding alongside the proceeds of the asset‑backed
commercial paper issuance. The Group could be asked to provide further support under the contractual terms of these arrangements including, for
example, if Cancara experienced a shortfall in external funding, which may occur in the event of market disruption. As at 31 December 2015 there had
been no drawdowns on these liquidity facilities.
The external assets in Cancara are consolidated in the Group’s financial statements.
(B) Consolidated collective investment vehicles and limited partnerships
The assets and liabilities of the Insurance business held in consolidated collective investment vehicles, such as Open‑Ended Investment Companies
and limited partnerships, are not directly available for use by the Group. However, the Group’s investment in the majority of these collective investment
vehicles is readily realisable. As at 31 December 2016, the total carrying value of these consolidated collective investment vehicle assets and liabilities
held by the Group was £75,669 million (2015: £67,122 million).
The Group has no contractual arrangements (such as liquidity facilities) that would require it to provide financial or other support to the consolidated
collective investment vehicles; the Group has not previously provided such support and has no current intentions to provide such support.
(C) Unconsolidated collective investment vehicles and limited partnerships
The Group’s direct interests in unconsolidated structured entities comprise investments in collective investment vehicles, such as Open‑Ended
Investment Companies, and limited partnerships with a total carrying value of £15,611 million at 31 December 2016 (2015: £13,282 million), included
within financial assets designated at fair value through profit and loss (see note 15). These investments include both those entities managed by third
parties and those managed by the Group. At 31 December 2016, the total asset value of these unconsolidated structured entities, including the
portion in which the Group has no interest, was £1,849 billion (2015: £603 billion).
The Group’s maximum exposure to loss is equal to the carrying value of the investment. However, the Group’s investments in these entities are
primarily held to match policyholder liabilities in the Insurance division and the majority of the risk from a change in the value of the Group’s
investment is matched by a change in policyholder liabilities. The collective investment vehicles are primarily financed by investments from investors
in the vehicles.
During the year the Group has not provided any non‑contractual financial or other support to these entities and has no current intention of providing
any financial or other support. There were no transfers from/to these unconsolidated collective investment vehicles and limited partnerships.
The Group considers itself the sponsor of a structured entity where it is primarily involved in the design and establishment of the structured entity; and
further where the Group transfers assets to the structured entity; market products associated with the structured entity in its own name and/or provide
guarantees regarding the structured entity’s performance.
The Group sponsors a range of diverse investment funds and limited partnerships where it acts as the fund manager or equivalent decision maker
and markets the funds under one of the Group’s brands.
The Group earns fees from managing the investments of these funds. The investment management fees that the Group earned from these entities,
including those in which the Group held no ownership interest at 31 December 2016, are reported in note 6.
NOTE 21: ALLOWANCE FOR IMPAIRMENT LOSSES ON LOANS AND RECEIVABLES
Critical accounting estimates and judgements
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. In determining the required level of impairment provisions, the Group uses the output from various statistical models. Management judgement
is required to assess the robustness of the outputs from these models and, where necessary, make appropriate adjustments. Impairment allowances
are made up of two components, those determined individually and those determined collectively.
Individual impairment allowances are generally established against the Group’s commercial lending portfolios. Assets are reviewed on a regular basis
and those showing potential or actual vulnerability are placed on a watchlist where greater monitoring is undertaken and any adverse or potentially
adverse impact on ability to repay is used in assessing whether an asset should be transferred to a dedicated Business Support Unit. Specific examples
of trigger events that could lead to the initial recognition of impairment allowances against lending to corporate borrowers (or the recognition of
additional impairment allowances) include (i) trading losses, loss of business or major customer of a borrower; (ii) material breaches of the terms
and conditions of a loan facility, including non‑payment of interest or principal, or a fall in the value of security such that it is no longer considered
adequate; (iii) disappearance of an active market because of financial difficulties; or (iv) restructuring a facility with preferential terms to aid recovery
of the lending (such as a debt for equity swap).
For such individually identified financial assets, a review is undertaken of the expected future cash flows which requires significant management
judgement as to the amount and timing of such cash flows. Where the debt is secured, the assessment reflects the expected cash flows from the
realisation of the security, net of costs to realise, whether or not foreclosure or realisation of the collateral is probable. The determination of individual
impairment allowances 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. 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.
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NOTE 21: ALLOWANCE FOR IMPAIRMENT LOSSES ON LOANS AND RECEIVABLES continued
Collective impairment allowances are generally established for smaller balance homogenous portfolios such as the retail portfolios. For these
portfolios the asset is included in a group of financial assets with similar risk characteristics and collectively assessed for impairment. Segmentation
takes into account factors such as the type of asset, industry sector, 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.
Generally, the impairment trigger used within the impairment calculation for a loan, or group of loans, is when they reach a pre‑defined level of
delinquency or where the customer is bankrupt. Loans where the Group provides arrangements that forgive a portion of interest or principal are
also deemed to be impaired and loans that are originated to refinance currently impaired assets are also defined as impaired.
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In respect of the Group’s secured mortgage portfolios, the impairment allowance is calculated based on a definition of impaired loans which are those
six months or more in arrears (or certain cases where the borrower is bankrupt or is in possession). The estimated cash flows are calculated based on
historical experience and are dependent on estimates of the expected value of collateral which takes into account expected future movements in
house prices, less costs to sell.
For unsecured personal lending portfolios, the impairment trigger is generally when the balance is two or more instalments in arrears or where the
customer has exhibited one or more of the impairment characteristics set out above. While the trigger is based on the payment performance or
circumstances of each individual asset, the assessment of future cash flows uses historical experience of cohorts of similar portfolios such that the
assessment is considered to be collective. Future cash flows are estimated on the basis of the contractual cash flows of the assets in the cohort and
historical loss experience for similar assets. 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. The collective impairment allowance is also subject to estimation
uncertainty and in particular 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.
The value of collateral supporting the Group’s UK mortgage portfolio is estimated by applying changes in the house price indices to the original
assessed value of the property. Given the relative size of the portfolio, this is a key variable in determining the Group’s impairment charge for loans
and receivables. If average house prices were ten per cent lower than those estimated at 31 December 2016, the impairment charge would increase
by approximately £190 million in respect of UK mortgages.
In addition, the collective provision also includes provision for inherent losses, that is losses that have been incurred but have not been separately
identified at the balance sheet date. The loans that are not currently recognised as impaired are grouped into homogenous portfolios by key risk
drivers. Risk drivers for secured retail lending include the current indexed loan‑to‑value, previous mortgage arrears, internal cross‑product delinquency
data and external credit bureau data; for unsecured retail lending they include whether the account is up‑to‑date and, if not, the number of payments
that have been missed; and for commercial lending they include factors such as observed default rates and loss given default. An assessment is made
of the likelihood of assets being impaired at the balance sheet date and being identified subsequently; the length of time taken to identify that an
impairment event has occurred is known as the loss emergence period. The loss emergence period is determined by local management for each
portfolio and the Group has a range of loss emergence periods which are dependent upon the characteristics of the portfolios. Loss emergence
periods are reviewed regularly and updated when appropriate. In general the periods used across the Group vary between one month and 12 months
based on historical experience. Unsecured portfolios tend to have shorter loss emergence periods than secured portfolios. This provision is sensitive
to changes in the loss emergence period. Management use a significant level of judgement when determining the collective unidentified impairment
provision, including the assessment of the level of overall risk existing within particular sectors and the impact of the low interest rate environment
on loss emergence periods. In the Commercial Banking division, an increase of one month in the loss emergence period in respect of the loan
portfolio assessed for collective unidentified impairment provisions would result in an increase in the collective unidentified impairment provision of
approximately £33 million (2015: £36 million).
At 1 January
Exchange and other adjustments
Disposal of businesses
Advances written off
Loans and
advances
to customers
£m
3,033
69
–
2016
Debt
securities
£m
97
–
–
Total
£m
3,130
69
–
(2,111)
(22)
(2,133)
Recoveries of advances written off in previous years
Unwinding of discount
Charge (release) to the income statement (note 12)
At 31 December
861
(32)
592
2,412
1
–
–
76
862
(32)
592
2,488
3,033
Loans and
advances
to customers
£m
2015
Debt
securities
£m
6,414
(246)
(82)
(4,204)
764
(56)
443
Total
£m
6,540
(246)
(82)
(4,235)
768
(56)
441
3,130
126
–
–
(31)
4
–
(2)
97
Of the total allowance in respect of loans and advances to customers, £1,876 million (2015: £2,425 million) related to lending that had been determined
to be impaired (either individually or on a collective basis) at the reporting date.
Of the total allowance in respect of loans and advances to customers, £1,208 million (2015: £1,170 million) was assessed on a collective basis.
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Notes to the consolidated financial statements continued
NOTE 22: AVAILABLE-FOR-SALE FINANCIAL ASSETS
Debt securities:
Government 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
Total available-for-sale financial assets
2016
£m
2015
£m
48,714
142
108
317
6,030
55,311
1,213
56,524
25,329
186
197
319
5,808
31,839
1,193
33,032
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).
During 2016 government securities with a fair value at the point of transfer of £22,830 million were reclassified from held-to-maturity investments,
(see note 1).
NOTE 23: GOODWILL
At 1 January and 31 December
Cost1
Accumulated impairment losses
At 31 December
2016
£m
2,016
2,362
(346)
2,016
2015
£m
2,016
2,362
(346)
2,016
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 (2015: £2,016 million), £1,836 million, or 91 per cent of the total
(2015: £1,836 million, 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 (2015: £170 million, 8 per cent of the total) to Motor Finance in the Group’s Consumer Finance division.
The recoverable amount of the goodwill relating to Scottish Widows has been based on a value-in-use calculation. The calculation uses pre-tax
projections of future cash flows based upon budgets and plans approved by management covering a five-year period, the related run-off of
existing business in force and a discount rate of 10 per cent. 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. New business 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 above would not cause the recoverable amount of Scottish Widows
to fall below its balance sheet carrying value.
The recoverable amount of the goodwill relating to Motor Finance has also been based on a value-in-use calculation using pre-tax cash flow
projections based on financial budgets and plans approved by management covering a five-year period and a discount rate of 14 per cent. 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 Motor Finance participates. Management believes that any reasonably possible change in the key assumptions above would not
cause the recoverable amount of Motor Finance to fall below the balance sheet carrying value.
212
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Annual Report and Accounts 2016
NOTE 24: VALUE OF IN-FORCE BUSINESS
Critical accounting estimates and judgements
The value of in-force business asset (2016: £4,702 million; 2015: £4,219 million) represents the present value of future profits expected to arise from
the portfolio of in-force life insurance and participating investment contracts. The valuation of this asset requires assumptions to be made about
future economic and operating conditions which are inherently uncertain and changes could significantly affect the value attributed to this asset.
The methodology used to value this asset and the key assumptions that have been made in determining the carrying value of the value of in-force
business asset at 31 December 2016 are set out below.
Key assumptions
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. The certainty
equivalent approach covers all investment assets relating to insurance and participating investment contracts, other than the annuity business
(where an illiquidity premium is included, see below).
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. Further information on options and guarantees can be
found in note 32.
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 and illiquid loan assets. 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 corporate bond holdings and relevant illiquid loan assets. In determining the market
premium for illiquidity, we consider a range of inputs which reflect actual asset allocation and relevant observable market data. The illiquidity premium
is estimated to be 138 basis points at 31 December 2016 (2015: range of 85 to 144 basis points).
The risk-free rate is derived from the relevant swap curve with a deduction for credit risk.
The table below shows the resulting range of yields and other key assumptions at 31 December:
Risk-free rate (value of in-force non-annuity business)1
Risk-free rate (value of in-force annuity business)1
Risk-free rate (financial options and guarantees)1
Retail price inflation
Expense inflation
1 All risk-free rates are quoted as the range of rates implied by the relevant swap curve.
2016
%
2015
%
0.00 to 4.20
0.00 to 4.20
1.38 to 5.58
0.85 to 5.64
0.00 to 4.20
0.00 to 2.54
3.50
3.73
3.27
3.65
Non-market risk
An allowance for non-market risk is made through the choice of best estimate assumptions based upon experience, which generally will give the mean
expected financial outcome for shareholders and hence no further allowance for non-market risk is required. However, in the case of operational risk,
reinsurer default and the with-profit funds these can be asymmetric in the range of potential outcomes for which an explicit allowance is made.
Non-economic assumptions
Future mortality, morbidity, expenses, 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. Further information on these assumptions is given in note 32 and the effect of changes in key assumptions
is given in note 33.
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
Total value of in-force business
The movement in the acquired value of in-force non-participating investment contracts over the year is as follows:
At 1 January
Amortisation taken to income statement (note 11)
At 31 December
2016
£m
340
4,702
5,042
2016
£m
377
(37)
340
The acquired value of in-force non-participating investment contracts includes £206 million (2015: £228 million) in relation to OEIC business.
2015
£m
377
4,219
4,596
2015
£m
418
(41)
377
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Financial statements
Notes to the consolidated financial statements continued
NOTE 24: VALUE OF IN-FORCE BUSINESS continued
The movement in the value of in-force insurance and participating investment contracts over the year is as follows:
At 1 January
Exchange and other adjustments
Movements in the year:
New business
Existing business:
Expected return
Experience variances
Assumption changes
Economic variance
Movement in the value of in-force business taken to income statement (note 9)
Disposal of businesses
At 31 December
2016
£m
4,219
11
2015
£m
4,446
(5)
428
454
(210)
(137)
127
264
472
–
(365)
(130)
(209)
88
(162)
(60)
4,702
4,219
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. This will also contain changes in the other assets and liabilities, including the effects of changes in
assumptions used to value the liabilities, of the relevant businesses. 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.
NOTE 25: OTHER INTANGIBLE ASSETS
Brands
£m
Core deposit
intangible
£m
Purchased
credit card
relationships
£m
Customer-
related
intangibles
£m
Capitalised
software
enhancements
£m
Cost:
At 1 January 2015
Additions
Disposals
At 31 December 2015
Additions
Disposals
At 31 December 2016
Accumulated amortisation:
At 1 January 2015
Charge for the year
Disposals
At 31 December 2015
Charge for the year
Disposals
At 31 December 2016
Balance sheet amount at 31 December 2016
Balance sheet amount at 31 December 2015
596
–
–
596
–
–
596
128
21
–
149
22
–
171
425
447
2,770
–
–
2,770
–
–
2,770
2,160
300
–
2,460
297
–
2,757
13
310
315
–
–
315
–
–
315
305
4
–
309
2
–
311
4
6
538
–
–
538
–
–
538
456
16
–
472
27
–
499
39
66
Total
£m
5,728
306
(1)
6,033
463
(110)
1,509
306
(1)
1,814
463
(110)
2,167
6,386
609
196
–
805
234
(72)
967
1,200
1,009
3,658
537
–
4,195
582
(72)
4,705
1,681
1,838
Included within brands above are assets of £380 million (31 December 2015: £380 million) 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 have an indefinite useful life.
The core deposit intangible is the benefit derived from a large stable deposit base that has low interest rates, and the balance sheet amount
at 31 December 2016 shown above will become fully amortised during 2017.
The purchased credit card relationships represent the benefit of recurring income generated from the portfolio of credit cards purchased.
The customer-related intangibles include customer lists and the benefits of customer relationships that generate recurring income.
Capitalised software enhancements principally comprise identifiable and directly associated internal staff and other costs.
214
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Annual Report and Accounts 2016
NOTE 26: PROPERTY, PLANT AND EQUIPMENT
Investment
properties
£m
Premises
£m
Equipment
£m
Operating
lease assets
£m
Cost or valuation:
At 1 January 2015
Exchange and other adjustments
Additions
Expenditure on investment properties (see below)
Change in fair value of investment properties (note 7)
Disposals
Disposal of businesses
At 31 December 2015
Exchange and other adjustments
Additions
Expenditure on investment properties (see below)
Change in fair value of investment properties (note 7)
Disposals
At 31 December 2016
Accumulated depreciation and impairment:
At 1 January 2015
Exchange and other adjustments
Depreciation charge for the year
Disposals
Disposal of businesses
At 31 December 2015
Exchange and other adjustments
Depreciation charge for the year
Disposals
At 31 December 2016
Balance sheet amount at 31 December 2016
Balance sheet amount at 31 December 2015
Expenditure on investment properties is comprised as follows:
Acquisitions of new properties
Additional expenditure on existing properties
4,492
2,893
(5)
–
272
416
(814)
–
4,361
13
–
344
(83)
(871)
3,764
–
–
–
–
–
–
–
–
–
–
3,764
4,361
–
141
–
–
(172)
(273)
2,589
2
59
–
–
(100)
2,550
4,643
–
1,071
–
–
(281)
(167)
5,266
6
806
–
–
(113)
5,965
1,374
1,883
9
116
(90)
(162)
1,247
(1)
136
(49)
1,333
1,217
1,342
(2)
588
(245)
(128)
2,096
(8)
672
(89)
2,671
3,294
3,170
Total
£m
16,633
18
2,914
272
416
(2,574)
(440)
17,239
133
2,953
344
(83)
4,605
23
1,702
–
–
(1,307)
–
5,023
112
2,088
–
–
(1,017)
6,206
(2,101)
18,485
832
7
830
(752)
–
917
49
953
(410)
1,509
4,697
4,106
2016
£m
251
93
344
4,089
14
1,534
(1,087)
(290)
4,260
40
1,761
(548)
5,513
12,972
12,979
2015
£m
165
107
272
Rental income of £229 million (2015: £268 million) and direct operating expenses arising from properties that generate rental income of £26 million
(2015: £27 million) have been recognised in the income statement.
Capital expenditure in respect of investment properties which had been contracted for but not recognised in the financial statements was £65 million
(2015: £37 million).
The table above analyses movements in investment properties, all of which are categorised as level 3. See note 49 for details of levels in the fair
value hierarchy.
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
Total future minimum rentals receivable
2016
£m
1,120
1,373
347
2,840
2015
£m
1,003
1,163
172
2,338
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2015 and 2016 no contingent
rentals in respect of operating leases were recognised in the income statement.
In addition, total future minimum sub-lease income of £109 million at 31 December 2016 (£72 million at 31 December 2015) is expected to be received
under non-cancellable sub-leases of the Group’s premises.
215
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Financial statements
Notes to the consolidated financial statements continued
NOTE 27: OTHER ASSETS
Assets arising from reinsurance contracts held (notes 32 and 34)
Deferred acquisition and origination costs
Settlement balances
Corporate pension asset
Investments in joint ventures and associates
Other assets and prepayments
Total other assets
NOTE 28: DEPOSITS FROM BANKS
Liabilities in respect of securities sold under repurchase agreements
Other deposits from banks
Deposits from banks
For amounts included above which are subject to repurchase agreements see note 52.
NOTE 29: 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
2016
£m
714
81
700
6,645
59
4,556
12,755
2016
£m
7,279
9,105
16,384
2015
£m
675
106
264
7,725
47
5,047
13,864
2015
£m
7,061
9,864
16,925
2016
£m
61,804
90,978
208,227
2,462
51,989
415,460
2015
£m
48,518
85,491
224,137
–
60,180
418,326
For amounts included above which are subject to repurchase agreements, see note 52.
Included in the amounts reported above are deposits of £219,106 million (2015: £230,110 million) which are protected under the UK Financial Services
Compensation Scheme.
NOTE 30: TRADING AND OTHER FINANCIAL LIABILITIES AT FAIR VALUE
THROUGH PROFIT OR LOSS
Liabilities held at fair value through profit or loss
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Other deposits
Short positions in securities
Trading and other financial liabilities at fair value through profit or loss
2016
£m
9,425
42,067
530
2,482
45,079
54,504
2015
£m
7,879
38,431
1,113
4,440
43,984
51,863
Liabilities designated at fair value through profit or loss primarily 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.
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2016 was £16,079 million,
which was £6,656 million higher than the balance sheet carrying value (2015: £12,034 million, which was £4,156 million higher than the balance sheet
carrying value). At 31 December 2016 there was a cumulative £95 million increase 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 Bank plc, the issuing entity within the Group. Of the cumulative
amount an increase of £28 million arose in 2016 and a decrease of £114 million arose in 2015.
For the fair value of collateral pledged in respect of repurchase agreements see note 52.
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Annual Report and Accounts 2016
NOTE 31: DEBT SECURITIES IN ISSUE
Medium-term notes issued
Covered bonds (note 19)
Certificates of deposit issued
Securitisation notes (note 19)
Commercial paper
Total debt securities in issue
2016
£m
27,182
30,521
8,077
7,253
3,281
76,314
2015
£m
29,329
27,200
11,101
7,763
6,663
82,056
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NOTE 32: LIABILITIES ARISING FROM INSURANCE CONTRACTS
AND PARTICIPATING INVESTMENT CONTRACTS
Insurance contract and participating investment contract liabilities are comprised as follows:
2016
2015
Gross
£m
Reinsurance1
£m
Net
£m
Gross
£m
Reinsurance1
£m
Net
£m
Life insurance (see (1) below):
Insurance contracts
Participating investment contracts
Non-life insurance contracts (see (2) below):
Unearned premiums
Claims outstanding
Total
1 Reinsurance balances are reported within other assets (note 27).
79,793
13,984
93,777
404
209
613
94,390
(671)
–
(671)
(14)
–
(14)
(685)
79,122
13,984
93,106
390
209
599
66,122
13,460
79,582
461
251
712
93,705
80,294
(629)
–
(629)
(12)
–
(12)
(641)
(1) Life insurance
The movement in life insurance contract and participating investment contract liabilities over the year can be analysed as follows:
65,493
13,460
78,953
449
251
700
79,653
Net
£m
85,634
2,446
(5,337)
(2,891)
38
(3,828)
78,953
4,445
9,673
14,118
35
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n
t
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a
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o
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Insurance
contracts
£m
72,168
2,422
(4,681)
(2,259)
39
(3,826)
66,122
4,422
9,214
13,636
35
Participating
investment
contracts
£m
14,102
28
(667)
(639)
(1)
(2)
13,460
28
496
524
–
Gross
£m
86,270
2,450
(5,348)
(2,898)
38
(3,828)
79,582
4,450
9,710
14,160
35
Reinsurance
£m
(636)
(4)
11
7
–
–
(629)
(5)
(37)
(42)
–
79,793
13,984
93,777
(671)
93,106
217
At 1 January 2015
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
Disposal of businesses
At 31 December 2015
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2016
Financial statements
Notes to the consolidated financial statements continued
NOTE 32: LIABILITIES ARISING FROM INSURANCE CONTRACTS
AND PARTICIPATING INVESTMENT CONTRACTS continued
Liabilities for insurance contracts and participating investment contracts can be split into with-profit fund liabilities, accounted for using the PRA’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
Total
2016
With-profit
fund
£m
Non-profit
fund
£m
9,147
8,860
18,007
70,646
5,124
75,770
Total
£m
79,793
13,984
93,777
With-profit
fund
£m
9,023
9,341
18,364
2015
Non-profit
fund
£m
57,099
4,119
61,218
Total
£m
66,122
13,460
79,582
With-profit fund realistic liabilities
(i) Business description
Scottish Widows Limited has the only with-profit funds within the Group. The primary purpose of the conventional and unitised business written in the
with-profit funds is to provide a smoothed investment vehicle to policyholders, protecting them against short-term market fluctuations. Payouts may
be subject to a guaranteed minimum payout if certain policy conditions are met. With-profit policyholders are entitled to at least 90 per cent of the
distributed profits, with the shareholders receiving the balance. The policyholders are also usually insured against death and the policy may carry a
guaranteed annuity option at retirement.
(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 (including guaranteed annuity options);
– Deductions levied against asset shares;
– Planned enhancements to with-profits benefits reserve; and
– Impact of the smoothing policy.
(iii) Assumptions
Key assumptions used in the calculation of with-profit liabilities, and the processes for determining these, are:
Investment returns and discount rates
With-profit fund liabilities are valued on a market-consistent basis, 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 swap curve, adjusted for credit risk. Further information on significant
options and guarantees is given below.
Guaranteed annuity option take-up rates
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.
218
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 32: LIABILITIES ARISING FROM INSURANCE CONTRACTS
AND PARTICIPATING INVESTMENT CONTRACTS continued
(iv) 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 the With-Profit Fund originally held in Scottish Widows plc and subsequently transferred
into Scottish Widows Limited, 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 2016 of £2.7 billion (2015: £2.5 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.
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As noted above, the liabilities of the With-Profit Funds are valued using a market-consistent stochastic simulation model which places 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 and investment volatility.
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.
(ii) Method of calculation of liabilities
The non-profit fund liabilities are determined on the basis of recognised actuarial methods and 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 of interest used are determined 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.
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.
Key changes in assumptions
A detailed review of the Group’s assumptions in 2016 resulted in the following key impacts on profit before tax:
– Change in persistency assumptions (£48 million decrease).
– Change in the assumption in respect of current and future mortality and morbidity rates (£194 million increase).
– Change in expenses assumptions (£109 million decrease).
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.
(iv) Options and guarantees outside the With-Profit Funds
A number of typical guarantees are provided outside the With-Profit Funds such as guaranteed payments on death (e.g. term assurance) or
guaranteed income for life (e.g. annuities). In addition, 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 £82 million (2015: £68 million) in respect of those guarantees.
219
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Notes to the consolidated financial statements continued
NOTE 32: LIABILITIES ARISING FROM INSURANCE CONTRACTS
AND PARTICIPATING INVESTMENT CONTRACTS continued
(2) Non-life insurance
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 movements in non-life insurance contract liabilities and reinsurance assets over the year have been as follows:
Provisions for unearned premiums
Gross provision at 1 January
Increase in the year
Release in the year
Change in provision for unearned premiums charged to income statement
Gross provision at 31 December
Reinsurers’ share
Net provision at 31 December
2016
£m
461
827
(884)
(57)
404
(14)
390
These provisions represent the liability for short-term insurance contracts for which the Group’s obligations are not expired at the year end.
Claims outstanding
Gross claims outstanding at 1 January
Cash paid for claims settled in the year
Increase/(decrease) in liabilities1
Change in liabilities charged to the income statement
Gross claims outstanding at 31 December
Reinsurers’ share
Net claims outstanding at 31 December
Notified claims
Incurred but not reported
Net claims outstanding at 31 December
2016
£m
251
(408)
366
(42)
209
–
209
122
87
209
2015
£m
424
934
(897)
37
461
(12)
449
2015
£m
224
(343)
370
27
251
–
251
117
134
251
1 Of which an increase of £363 million (2015: £393 million) was in respect of current year claims and an increase of £3 million (2015: decrease of £23 million) was in respect of prior year claims.
220
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 33: LIFE INSURANCE SENSITIVITY ANALYSIS
Critical accounting estimates and judgements
Elements of the valuations of liabilities arising from insurance contracts and participating investment contracts require assumptions to be made
about future investment returns, future mortality rates and future policyholder behaviour and are subject to significant management judgement and
estimation uncertainty. The methodology used to value these liabilities and the key assumptions that have been made in determining their carrying
value are set out in note 32.
The following table demonstrates the effect of reasonably possible 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.
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Non-annuitant mortality and morbidity1
Annuitant mortality2
Lapse rates3
Future maintenance and investment expenses4
Risk-free rate5
Guaranteed annuity option take up6
Equity investment volatility7
Widening of credit default spreads on corporate bonds8
Increase in illiquidity premia9
2016
2015
Increase
(reduction)
in profit
before tax
Increase
(reduction)
in equity
£m
25
(287)
48
318
(74)
(12)
(10)
(200)
152
£m
21
(238)
40
264
(62)
(10)
(8)
(166)
126
Increase
(reduction)
in profit
before tax
£m
Increase
(reduction)
in equity
£m
32
(190)
85
231
(44)
2
(7)
(183)
120
26
(156)
70
190
(37)
2
(5)
(151)
98
Change in
variable
5% reduction
5% reduction
10% reduction
10% reduction
0.25% reduction
5% addition
1% addition
0.25% addition
0.10% addition
Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases.
1 This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate.
2 This sensitivity shows the impact on the annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate.
3 This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate.
4 This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate.
5 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.
6 This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.
7 This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.
8 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. Swap curves, the risk-free
rate and illiquidity premia are all assumed to be unchanged.
9 This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity premia. It assumes the overall spreads on assets are unchanged and hence market values
are unchanged. Swap curves and the non-annuity risk-free rate are both assumed to be unchanged. The increased illiquidity premium increases the annuity risk-free rate.
NOTE 34: 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
New business
Changes in existing business
Disposal of businesses
At 31 December
2016
£m
22,777
560
(3,225)
–
20,112
2015
£m
27,248
539
(4,461)
(549)
22,777
The balances above are shown gross of reinsurance. As at 31 December 2016, related reinsurance balances were £29 million (2015: £34 million);
reinsurance balances are reported within other assets (note 27). Liabilities arising from non-participating investment contracts are categorised as
level 2. See note 49 for details of levels in the fair value hierarchy.
221
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Financial statements
Notes to the consolidated financial statements continued
NOTE 35: OTHER LIABILITIES
Settlement balances
Unitholders’ interest in Open Ended Investment Companies
Unallocated surplus within insurance businesses
Other creditors and accruals
Total other liabilities
NOTE 36: RETIREMENT BENEFIT OBLIGATIONS
Charge to the income statement
Past service (credits) charges 1
Other
Defined benefit pension schemes
Other post-retirement benefit schemes
Total defined benefit schemes
Defined contribution pension schemes
Total charge (credit) to the income statement (note 11)
2016
£m
706
22,947
243
5,297
29,193
2016
£m
2015
£m
–
279
279
8
287
268
555
–
307
307
8
315
233
548
2015
£m
467
22,621
257
6,316
29,661
2014
£m
(822)
334
(488)
10
(478)
252
(226)
1 On 11 March 2014 the Group announced a change to its defined benefit pension schemes, revising the existing cap on the increases in pensionable pay used in calculating the pension
benefit, from 2 per cent to nil with effect from 2 April 2014. The effect of this change was to reduce the Group’s retirement benefit obligations recognised on the balance sheet by £843 million
with a corresponding curtailment gain recognised in the income statement. This was partly offset by a charge of £21 million following changes to pension arrangements for staff within the
TSB business.
Amounts recognised in the balance sheet
Retirement benefit assets
Retirement benefit obligations
Total amounts recognised in the balance sheet
The total amount recognised in the balance sheet relates to:
Defined benefit pension schemes
Other post-retirement benefit schemes
Total amounts recognised in the balance sheet
2016
£m
342
(822)
(480)
2016
£m
(244)
(236)
(480)
2015
£m
901
(365)
536
2015
£m
736
(200)
536
222
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 36: RETIREMENT BENEFIT OBLIGATIONS continued
Pension schemes
Defined benefit schemes
Critical accounting estimates and judgements
The value of the Group’s defined benefit pension schemes’ liabilities requires management to make a number of assumptions. The key areas of
estimation uncertainty are the discount rate applied to future cash flows and the expected lifetime of the schemes’ members. The discount rate is
required to be set with reference to market yields at the end of the reporting period on high quality corporate bonds in the currency and with a term
consistent with the defined benefit pension schemes’ obligations. The average duration of the schemes’ obligations is approximately 20 years. The
market for bonds with a similar duration is illiquid and, as a result, significant management judgement is required to determine an appropriate yield
curve on which to base the discount rate. The cost of the benefits payable by the schemes will also depend upon the life expectancy of the members.
The Group considers latest market practice and actual experience in determining the appropriate assumptions for both current mortality expectations
and the rate of future mortality improvement. Given the advances in medical science in recent years, it is uncertain whether this rate of improvement
will be sustained going forward and, as a result, actual experience may differ from current expectations. The effect on the net accounting surplus or
deficit and on the pension charge in the Group’s income statement of changes to the principal actuarial assumptions is set out in (iii) below.
(i) Characteristics of and risks associated with the Group’s schemes
The Group has established a number of defined benefit pension schemes in the UK and overseas. All significant schemes are based in the UK, with
the three most significant being the defined benefit sections of the Lloyds Bank Pension Schemes No’s 1 and 2 and the HBOS Final Salary Pension
Scheme. These schemes provide retirement benefits calculated as a percentage of final pensionable salary depending upon the length of service; the
minimum retirement age under the rules of the schemes at 31 December 2016 is generally 55 although certain categories of member are deemed to
have a contractual right to retire at 50.
The Group operates a number of funded and unfunded pension arrangements, the majority, including the three most significant schemes, are funded
schemes in the UK. All these schemes are operated as separate legal entities under trust law by the trustees and are in compliance with the Pensions
Act 2004. A valuation exercise is carried out for each scheme at least every three years, whereby scheme assets are measured at market value and
liabilities (technical provisions) are measured using prudent assumptions. If a deficit is identified a recovery plan is agreed between the Group and
the scheme Trustee and sent to the Pensions Regulator for review. The Group has not provided for these deficit contributions as the future economic
benefits arising from these contributions are expected to be available to the Group. The Group’s overseas defined benefit pension schemes are
subject to local regulatory arrangements.
The latest full valuations of the three main schemes were carried out as at 30 June 2014; the results have been updated to 31 December 2016 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 2016 by qualified independent actuaries.
During 2009, the Group made one-off contributions to the Lloyds Bank Pension Scheme No 1 and Lloyds Bank Pension Scheme No 2 in the form
of interests in limited liability partnerships for each of the two schemes which hold assets to provide security for the Group’s obligations to the two
schemes. At 31 December 2016, the limited liability partnerships held assets of approximately £5.4 billion. The limited liability partnerships are
consolidated fully in the Group’s balance sheet.
The Group has also established three private limited companies which hold assets to provide security for the Group’s obligations to the HBOS Final
Salary Pension Scheme, a section of the Lloyds Bank Pension Scheme No 1 and the Lloyds Bank Offshore Pension Scheme. At 31 December 2016
these held assets of approximately £4.8 billion in aggregate. The private limited companies are consolidated fully in the Group’s balance sheet. The
terms of these arrangements require the Group to maintain assets in these vehicles to agreed minimum values in order to secure obligations owed
to the relevant Group pension schemes. The Group has satisfied this requirement during 2016.
The Group currently expects to pay contributions of approximately £575 million to its defined benefit schemes in 2017.
The responsibility for the governance of the Group’s funded defined benefit pension schemes lies with the Pension Trustees. Each of the Group’s
funded UK defined benefit pension schemes are managed by a Trustee Board (the Trustee) whose role is to ensure that their Scheme is administered
in accordance with the Scheme rules and relevant legislation, and to safeguard the assets in the best interests of all members and beneficiaries.
The Trustee is solely responsible for setting investment policy and for agreeing funding requirements with the employer through the triennial
valuation process. The Board of Trustees must be composed of representatives of the Company and plan participants in accordance with the
Scheme’s regulations.
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Financial statements
Notes to the consolidated financial statements continued
NOTE 36: RETIREMENT BENEFIT OBLIGATIONS continued
(ii) Amounts in the financial statements
Amount included in the balance sheet
Present value of funded obligations
Fair value of scheme assets
Net amount recognised in the balance sheet
Net amount recognised in the balance sheet
At 1 January
Net defined benefit pension charge
Actuarial (losses) gains on defined benefit obligation
Return on plan assets
Employer contributions
Exchange and other adjustments
At 31 December
Movements in the defined benefit obligation
At 1 January
Current service cost
Interest expense
Remeasurements:
Actuarial gains – experience
Actuarial gains (losses) – demographic assumptions
Actuarial (losses) gains – financial assumptions
Benefits paid
Past service cost
Employee contributions
Settlements
Exchange and other adjustments
At 31 December
Analysis of the defined benefit obligation:
Active members
Deferred members
Pensioners
Dependants
Changes in the fair value of scheme assets
At 1 January
Return on plan assets excluding amounts included in interest income
Interest income
Employer contributions
Employee contributions
Benefits paid
Settlements
Administrative costs paid
Exchange and other adjustments
At 31 December
224
2016
£m
2015
£m
(45,822)
45,578
(244)
2016
£m
736
(279)
(8,770)
7,455
623
(9)
(244)
2016
£m
(36,903)
37,639
736
2015
£m
890
(307)
607
(879)
427
(2)
736
2015
£m
(36,903)
(257)
(1,401)
(37,243)
(302)
(1,340)
535
195
(9,500)
1,580
(20)
–
12
(63)
195
(747)
1,159
1,371
(12)
(1)
8
9
(45,822)
(36,903)
2016
£m
2015
£m
(9,903)
(16,934)
(17,476)
(1,509)
(45,822)
2016
£m
37,639
7,455
1,441
623
–
(7,530)
(12,723)
(15,312)
(1,338)
(36,903)
2015
£m
38,133
(879)
1,383
427
1
(1,580)
(1,371)
(18)
(36)
54
(14)
(30)
(11)
45,578
37,639
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 36: RETIREMENT BENEFIT OBLIGATIONS continued
Composition of scheme assets:
Equity instruments
Debt instruments1:
Fixed interest government bonds
Index-linked government bonds
Corporate and other debt securities
Asset-backed securities
Property
Pooled investment vehicles
2016
Unquoted
£m
–
–
–
–
–
–
497
Quoted
£m
1,114
5,797
14,359
7,464
99
27,719
–
3,577
12,845
Total
£m
1,114
5,797
14,359
7,464
99
27,719
497
16,422
Money market instruments, cash, derivatives and other
assets and liabilities
At 31 December
1,462
33,872
(1,636)
11,706
(174)
45,578
Quoted
£m
947
4,841
9,944
7,243
74
22,102
–
3,464
525
27,038
1 Of the total debt instruments, £25,219 million (31 December 2015: £18,428 million) were investment grade (credit ratings equal to or better than ‘BBB’).
The assets of all the funded plans are held independently of the Group’s assets in separate trustee administered funds.
The pension schemes’ pooled investment vehicles comprise:
Equity funds
Hedge and mutual funds
Liquidity funds
Bond and debt funds
Other
At 31 December
The expense (credit) recognised in the income statement for the year ended 31 December comprises:
Current service cost
Net interest amount
Past service credits and curtailments (see page 222)
Settlements
Past service cost – plan amendments
Plan administration costs incurred during the year
Total defined benefit pension expense (credit)
2015
Unquoted
£m
–
–
–
–
–
–
440
10,619
(458)
10,601
2016
£m
2,883
2,350
484
3,383
7,322
Total
£m
947
4,841
9,944
7,243
74
22,102
440
14,083
67
37,639
2015
£m
2,412
2,078
918
2,807
5,868
16,422
14,083
2015
£m
302
(43)
–
6
12
30
307
2014
£m
277
(6)
(822)
7
20
36
(488)
2016
£m
257
(40)
–
6
20
36
279
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Financial statements
Notes to the consolidated financial statements continued
NOTE 36: 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:
Retail Prices Index
Consumer Price Index
Rate of salary increases
Weighted-average 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
2016
%
2.76
3.23
2.18
0.00
2.74
2016
Years
28.1
30.3
29.3
31.7
2015
%
3.87
2.99
1.99
0.00
2.58
2015
Years
28.1
30.4
29.5
31.9
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 at 31 December 2016 is assumed
to live for, on average, 28.1 years for a male and 30.3 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.
(iii) Amount timing and uncertainty of future cash flows
Risk exposure of the defined benefit schemes
Whilst the Group is not exposed to any unusual, entity specific or scheme specific risks in its defined benefit pension schemes, it is exposed
to a number of significant risks, detailed below:
Inflation rate risk: the majority of the plans’ benefit obligations are linked to inflation both in deferment and once in payment. Higher inflation will
lead to higher liabilities although this will be partially offset by holdings of inflation-linked gilts and, in most cases, caps on the level of inflationary
increases are in place to protect against extreme inflation.
Interest rate risk: The defined benefit obligation is determined using a discount rate derived from yields on AA-rated corporate bonds. A decrease
in corporate bond yields will increase plan liabilities although this will be partially offset by an increase in the value of bond holdings.
Longevity risk: The majority of the schemes obligations are to provide benefits for the life of the members so increases in life expectancy will result
in an increase in the plans’ liabilities.
Investment risk: Scheme assets are invested in a diversified portfolio of debt securities, equities and other return-seeking assets. If the assets
underperform the discount rate used to calculate the defined benefit obligation, it will reduce the surplus or increase the deficit. Volatility in asset
values and the discount rate will lead to volatility in the net pension liability on the Group’s balance sheet and in other comprehensive income.
To a lesser extent this will also lead to volatility in the pension expense in the Group’s income statement.
The ultimate cost of the defined benefit obligations to the Group will depend upon actual future events rather than the assumptions made.
The assumptions made are unlikely to be borne out in practice and as such the cost may be higher or lower than expected.
Sensitivity analysis
The effect of reasonably possible changes in key assumptions on the value of scheme liabilities and the resulting pension charge in the Group’s income
statement and on the net defined benefit pension scheme liability, for the Group’s three most significant schemes, is set out below. The sensitivities
provided assume that all other assumptions and the value of the schemes’ assets remain unchanged, and are not intended to represent changes that
are at the extremes of possibility. The calculations are approximate in nature and full detailed calculations could lead to a different result. It is unlikely
that isolated changes to individual assumptions will be experienced in practice. Due to the correlation of assumptions, aggregating the effects of these
isolated changes may not be a reasonable estimate of the actual effect of simultaneous changes in multiple assumptions.
226
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 36: RETIREMENT BENEFIT OBLIGATIONS continued
Inflation (including pension increases):1
Increase of 0.1 per cent
Decrease of 0.1 per cent
Discount rate:2
Increase of 0.1 per cent
Decrease of 0.1 per cent
Expected life expectancy of members:
Increase of one year
Decrease of one year
Effect of reasonably possible alternative assumptions
Increase (decrease)
in the income
statement charge
Increase (decrease) in the
net defined benefit pension
scheme liability
2016
£m
19
(14)
(30)
30
42
(37)
2015
£m
17
(16)
(29)
30
43
(41)
2016
£m
491
(458)
(821)
847
1,213
(1,178)
2015
£m
363
(346)
(605)
621
952
(927)
1 At 31 December 2016, the assumed rate of RPI inflation is 3.23 per cent and CPI inflation 2.18 per cent (2015: RPI 2.99 per cent and CPI 1.99 per cent).
2 At 31 December 2016, the assumed discount rate is 2.76 per cent (2015: 3.87 per cent).
Sensitivity analysis method and assumptions
The sensitivity analysis above reflects the impact on the Group’s three most significant schemes which account for over 90 per cent of the Group’s defined
benefit obligations. Whilst differences in the underlying liability profiles for the remainder of the Group’s pension arrangements mean they may exhibit
slightly different sensitivities to variations in these assumptions, the sensitivities provided above are indicative of the impact across the Group as a whole.
The inflation assumption sensitivity applies to both the assumed rate of increase in the Consumer Prices Index (CPI) and the Retail Prices Index (RPI),
and include the impact on the rate of increases to pensions, both before and after retirement. These pension increases are linked to inflation (either
CPI or RPI) subject to certain minimum and maximum limits.
The sensitivity analysis (including the inflation sensitivity) does not include the impact of any change in the rate of salary increases as pensionable
salaries have been frozen since 2 April 2014.
The life expectancy assumption has been applied by allowing for an increase/decrease in life expectation from age 60 of one year, based upon the
approximate weighted average age for each scheme. Whilst this is an approximate approach and will not give the same result as a one year increase
in life expectancy at every age, it provides an appropriate indication of the potential impact on the schemes from changes in life expectancy.
There was no change in the methods and assumptions used in preparing the sensitivity analysis from the prior year.
Asset-liability matching strategies
The main schemes’ assets are invested in a diversified portfolio, consisting primarily of debt securities. The investment strategy is not static and will
evolve to reflect the structure of liabilities within the schemes. Specific asset-liability matching strategies for each pension plan are independently
determined by the responsible governance body for each scheme and in consultation with the employer.
A significant goal of the asset-liability matching strategies adopted by Group schemes is to reduce volatility caused by changes in market expectations
of interest rates and inflation. In the main schemes, this is achieved by investing scheme assets in bonds, primarily fixed interest gilts and index linked
gilts, and by entering into interest rate and inflation swap arrangements. These investments are structured to take into account the profile of scheme
liabilities, and actively managed to reflect both changing market conditions and changes to the liability profile.
At 31 December 2016 the asset-liability matching strategy mitigated 89 per cent of the liability sensitivity to interest rate movements and 102 per cent
of the liability sensitivity to inflation movements. Much of the residual interest rate sensitivity is mitigated through holdings of corporate and other
debt securities.
Maturity profile of defined benefit obligation
The following table provides information on the weighted average duration of the defined benefit pension obligations and the distribution and timing
of benefit payments:
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
i
F
n
a
n
c
a
i
l
r
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
e
R
i
s
k
m
a
n
a
g
e
m
e
n
t
i
F
n
a
n
c
a
i
l
Duration of the defined benefit obligation
Maturity analysis of benefits expected to be paid
Benefits expected to be paid within 12 months
Benefits expected to be paid between 1 and 2 years
Benefits expected to be paid between 2 and 5 years
Benefits expected to be paid between 5 and 10 years
Benefits expected to be paid between 10 and 15 years
Benefits expected to be paid between 15 and 25 years
Benefits expected to be paid between 25 and 35 years
Benefits expected to be paid between 35 and 45 years
Benefits expected to be paid in more than 45 years
2016
Years
20
2016
£m
1,639
1,180
3,971
8,030
9,453
20,268
18,831
13,589
7,809
s
t
a
t
e
m
e
n
t
s
O
t
h
e
r
i
n
f
o
r
m
a
t
i
o
n
2015
Years
19
2015
£m
1,370
1,121
3,759
7,710
9,102
19,882
18,631
13,878
8,857
227
Financial statements
Notes to the consolidated financial statements continued
NOTE 36: RETIREMENT BENEFIT OBLIGATIONS continued
Maturity analysis method and assumptions
The projected benefit payments are based on the assumptions underlying the assessment of the obligations, including allowance for expected
future inflation. They are shown in their undiscounted form and therefore appear large relative to the discounted assessment of the defined benefit
obligations recognised in the Group’s balance sheet. They are in respect of benefits that have been accrued prior to the respective year-end date only
and make no allowance for any benefits that may have been accrued subsequently.
Defined contribution schemes
The Group operates a number of defined contribution pension schemes in the UK and overseas, principally Your Tomorrow and the defined
contribution sections of the Lloyds Bank Pension Scheme No. 1.
During the year ended 31 December 2016 the charge to the income statement in respect of defined contribution schemes was £268 million
(2015: £233 million; 2014: £252 million), representing the contributions payable by the employer in accordance with each scheme’s rules.
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 31 December 2014 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 6.84 per cent (2015: 6.59 per cent).
Movements in the other post-retirement benefits obligation:
At 1 January
Actuarial (loss) gain
Insurance premiums paid
Charge for the year
Exchange and other adjustments
At 31 December
2016
£m
(200)
(33)
7
(8)
(2)
2015
£m
(196)
(2)
6
(8)
–
(236)
(200)
NOTE 37: DEFERRED TAX
Critical accounting estimates and judgements
The largest category of deferred tax asset relates to tax losses carried forward. The recoverability of the Group’s deferred tax assets in respect of
carry forward losses is based on an assessment of future levels of taxable profit expected to arise that can be offset against these losses. The Group’s
expectations as to the level of future taxable profits take into account the Group’s long-term financial and strategic plans, and anticipated future tax
adjusting items.
In making this assessment account is taken of business plans, the board approved operating plan and the expected future economic outlook as set
out in the Group Chief Executive’s Review and Market Overview, as well as the risks associated with future regulatory change.
The Group’s total deferred tax asset includes £4,298 million (2015: £4,890 million) in respect of trading losses carried forward. The tax losses have arisen
in individual legal entities and will be used as future taxable profits arise in those legal entities, though substantially all of the unused tax losses for
which a deferred tax asset has been recognised arise in Bank of Scotland plc and Lloyds Bank plc.
The deferred tax asset is expected to be utilised over different time periods in each of the entities in which the losses arise. Under current UK tax law
there is no expiry date for unused tax losses. Following the enactment of the Finance Acts in 2015 and 2016, there is a restriction imposed on the
amount of banks’ profits that can be offset by certain carried forward tax losses for the purposes of calculating corporation tax liabilities. The additional
restriction in 2016 has increased the period over which the Group expects to fully utilise its tax losses from 2025 to 2031.
228
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 37: DEFERRED TAX continued
The movement in the net deferred tax balance is as follows:
Asset at 1 January
Exchange and other adjustments
Disposals
Income statement charge (note 13):
Due to change in UK corporation tax rate and related impacts
Origination and reversal of temporary differences
Amount credited (charged) to equity:
Post-retirement defined benefit scheme remeasurements
Available-for-sale financial assets (note 42)
Cash flow hedges (note 42)
Share-based compensation
Asset at 31 December
2016
£m
3,977
(14)
–
(201)
(651)
(852)
320
(246)
(466)
(13)
(405)
2015
£m
4,091
5
(59)
(27)
(89)
(116)
59
(7)
7
(3)
56
2,706
3,977
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
Asset at 31 December
2016
£m
2,706
–
2,706
2015
£m
4,010
(33)
3,977
Tax disclosure
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
The deferred tax charge 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
Tax losses carried forward
Tax on fair value of acquired assets
Other temporary differences
Deferred tax charge in the income statement
Deferred tax assets and liabilities are comprised as follows:
Deferred tax assets:
Accelerated capital allowances
Pensions and other post-retirement benefits
Other provisions
Tax losses carried forward
Other temporary differences
Total deferred tax assets
Deferred tax liabilities:
Pensions and other post-retirement benefits
Long-term assurance business
Available-for-sale asset revaluation
Tax on fair value of acquired assets
Derivatives
Other temporary differences
Total deferred tax liabilities
2016
£m
(120)
(105)
(273)
–
(625)
93
178
(852)
2016
£m
5,549
(2,843)
2,706
2015
£m
377
(40)
303
(5)
(855)
178
(74)
(116)
2016
£m
969
143
40
4,298
99
5,549
2016
£m
–
(914)
(233)
(798)
(643)
(255)
2015
£m
6,400
(2,423)
3,977
2014
£m
34
(243)
312
(24)
(565)
159
49
(278)
2015
£m
1,089
–
28
4,890
393
6,400
2015
£m
(72)
(641)
(11)
(891)
(395)
(413)
(2,843)
(2,423)
229
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
i
F
n
a
n
c
a
i
l
r
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
e
R
i
s
k
m
a
n
a
g
e
m
e
n
t
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
O
t
h
e
r
i
n
f
o
r
m
a
t
i
o
n
Financial statements
Notes to the consolidated financial statements continued
NOTE 37: DEFERRED TAX continued
The Finance (No. 2) Act 2015 introduced an additional surcharge of 8 per cent on banking profits from 1 January 2016.
The Finance Act 2016 was enacted on 15 September 2016. The Act further reduced the corporation tax rate applicable from 1 April 2020 to 17 per cent
and further restricts the amount of banks’ profits that can be offset by carried forward losses for the purposes of calculating corporation tax liabilities
from 50 per cent to 25 per cent with effect from 1 April 2016.
The corporation tax changes enacted have resulted in a reduction in the Group’s net deferred tax asset at 31 December 2016 of £158 million,
comprising a £201 million charge included in the income statement and a £43 million credit included in equity.
Deferred tax assets not recognised
Deferred tax assets of £92 million (2015: £140 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 £723 million (2015: £893 million) have not been recognised in respect of trading losses carried forward, mainly in respect of
temporary differences in the insurance businesses and in certain overseas companies. Trading losses can be carried forward indefinitely, except for
losses in the USA which expire after 20 years.
In addition, deferred tax assets have not been recognised in respect of unrelieved foreign tax carried forward at 31 December 2016 of £46 million
(2015: £76 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.
NOTE 38: OTHER PROVISIONS
Critical accounting estimates and judgements
At 31 December 2016, the Group carried provisions of £3,597 million (2015: £4,463 million) against the cost of making redress payments to customers
and the related administration costs in connection with historical regulatory breaches, principally the mis-selling of payment protection insurance
(2016: £2,258 million; 2015: £3,458 million).
Determining the amount of the provisions, which represent management’s best estimate of the cost of settling these issues, requires the exercise of
significant judgement. It will often be necessary to form a view on matters which are inherently uncertain, such as the scope of reviews required by
regulators, the number of future complaints, the extent to which they will be upheld, the average cost of redress and the impact of legal decisions that
may be relevant to claims received. Consequently the continued appropriateness of the underlying assumptions is reviewed on a regular basis against
actual experience and other relevant evidence and adjustments made to the provisions where appropriate.
More detail on the nature of the assumptions that have been made and key sensitivities is set out below.
At 1 January 2016
Exchange and other adjustments
Provisions applied
Charge for the year
At 31 December 2016
Provisions for
commitments
£m
50
19
–
(13)
56
Payment
protection
insurance
Other
regulatory
provisions
Vacant
leasehold
property
£m
3,458
–
(2,200)
1,000
2,258
£m
1,005
10
(761)
1,085
1,339
£m
37
4
(14)
24
51
Other
£m
1,137
64
(282)
245
1,164
Total
£m
5,687
97
(3,257)
2,341
4,868
Provisions for 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.
Payment protection insurance
The Group increased the provision for PPI costs by a further £1,000 million in 2016, bringing the total amount provided to £17,025 million.
The charge to the provision in 2016 was largely driven by a higher total volume of complaints expected as a result of the Financial Conduct Authority’s
(FCA) proposed industry deadline being extended to the end of June 2019 in its consultation paper published on 2 August 2016 (CP16/20: Rules and
guidance on payment protection insurance complaints: feedback on CP15/39 and further consultation). The paper also consulted on some changes
to the proposed rules and guidance that should apply when firms handle PPI complaints in light of the Supreme Court’s decision in Plevin v Paragon
Personal Finance Limited [2014] UKSC 61 (Plevin). In December 2016, the FCA stated that a further announcement in relation to the consultation would
follow in 2017.
As at 31 December 2016, a provision of £2,258 million remained unutilised relating to reactive complaints and associated administration costs. Total
cash payments were £2,200 million during the year to 31 December 2016. Spend continues to reduce following the completion of the re-review of
previously handled cases (remediation).
The provision is consistent with total expected reactive complaint volumes of 4.9 million (including complaints falling under the Plevin rules and
guidance) in light of the FCA proposals reflected in the provision increase, which was equivalent to approximately 7,700 net complaints per week on
average through to the proposed industry deadline of June 2019. Weekly complaint levels in the second half of 2016 have been approximately 8,300
versus approximately 8,600 in the first half, and are expected to vary significantly through to the proposed industry deadline.
Sensitivities
The Group estimates that it has sold approximately 16 million PPI policies since 2000. These include policies that were not mis-sold and those that have
been successfully claimed upon. Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or
provided for approximately 50 per cent of the policies sold since 2000.
230
The Finance (No. 2) Act 2015 introduced an additional surcharge of 8 per cent on banking profits from 1 January 2016.
The Finance Act 2016 was enacted on 15 September 2016. The Act further reduced the corporation tax rate applicable from 1 April 2020 to 17 per cent
and further restricts the amount of banks’ profits that can be offset by carried forward losses for the purposes of calculating corporation tax liabilities
from 50 per cent to 25 per cent with effect from 1 April 2016.
The corporation tax changes enacted have resulted in a reduction in the Group’s net deferred tax asset at 31 December 2016 of £158 million,
comprising a £201 million charge included in the income statement and a £43 million credit included in equity.
Deferred tax assets not recognised
Deferred tax assets of £92 million (2015: £140 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 £723 million (2015: £893 million) have not been recognised in respect of trading losses carried forward, mainly in respect of
temporary differences in the insurance businesses and in certain overseas companies. Trading losses can be carried forward indefinitely, except for
losses in the USA which expire after 20 years.
In addition, deferred tax assets have not been recognised in respect of unrelieved foreign tax carried forward at 31 December 2016 of £46 million
(2015: £76 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.
NOTE 38: OTHER PROVISIONS
Critical accounting estimates and judgements
At 31 December 2016, the Group carried provisions of £3,597 million (2015: £4,463 million) against the cost of making redress payments to customers
and the related administration costs in connection with historical regulatory breaches, principally the mis-selling of payment protection insurance
(2016: £2,258 million; 2015: £3,458 million).
Determining the amount of the provisions, which represent management’s best estimate of the cost of settling these issues, requires the exercise of
significant judgement. It will often be necessary to form a view on matters which are inherently uncertain, such as the scope of reviews required by
regulators, the number of future complaints, the extent to which they will be upheld, the average cost of redress and the impact of legal decisions that
may be relevant to claims received. Consequently the continued appropriateness of the underlying assumptions is reviewed on a regular basis against
actual experience and other relevant evidence and adjustments made to the provisions where appropriate.
More detail on the nature of the assumptions that have been made and key sensitivities is set out below.
Provisions for
commitments
Payment
protection
insurance
Other
regulatory
provisions
Vacant
leasehold
property
£m
50
19
–
(13)
56
£m
3,458
–
(2,200)
1,000
2,258
£m
1,005
10
(761)
1,085
1,339
£m
37
4
(14)
24
51
Other
£m
1,137
64
(282)
245
1,164
Total
£m
5,687
97
(3,257)
2,341
4,868
At 1 January 2016
Exchange and other adjustments
Provisions applied
Charge for the year
At 31 December 2016
Provisions for commitments
ability to meet its repayment obligations.
Payment protection insurance
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
The Group increased the provision for PPI costs by a further £1,000 million in 2016, bringing the total amount provided to £17,025 million.
The charge to the provision in 2016 was largely driven by a higher total volume of complaints expected as a result of the Financial Conduct Authority’s
(FCA) proposed industry deadline being extended to the end of June 2019 in its consultation paper published on 2 August 2016 (CP16/20: Rules and
guidance on payment protection insurance complaints: feedback on CP15/39 and further consultation). The paper also consulted on some changes
to the proposed rules and guidance that should apply when firms handle PPI complaints in light of the Supreme Court’s decision in Plevin v Paragon
Personal Finance Limited [2014] UKSC 61 (Plevin). In December 2016, the FCA stated that a further announcement in relation to the consultation would
follow in 2017.
As at 31 December 2016, a provision of £2,258 million remained unutilised relating to reactive complaints and associated administration costs. Total
cash payments were £2,200 million during the year to 31 December 2016. Spend continues to reduce following the completion of the re-review of
previously handled cases (remediation).
The provision is consistent with total expected reactive complaint volumes of 4.9 million (including complaints falling under the Plevin rules and
guidance) in light of the FCA proposals reflected in the provision increase, which was equivalent to approximately 7,700 net complaints per week on
average through to the proposed industry deadline of June 2019. Weekly complaint levels in the second half of 2016 have been approximately 8,300
versus approximately 8,600 in the first half, and are expected to vary significantly through to the proposed industry deadline.
Sensitivities
The Group estimates that it has sold approximately 16 million PPI policies since 2000. These include policies that were not mis-sold and those that have
been successfully claimed upon. Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or
provided for approximately 50 per cent of the policies sold since 2000.
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 38: OTHER PROVISIONS continued
The total amount provided for PPI represents the Group’s best estimate of the likely future cost. However a number of risks and uncertainties remain in
particular with respect to future volumes. The cost could differ from the Group’s estimates and the assumptions underpinning them, and could result in
a further provision being required. There is significant uncertainty around the impact of the proposed regulatory changes, FCA media campaign and
Claims Management Companies and customer activity.
Key metrics and sensitivities are highlighted in the table below:
Sensitivities
(exclude claims where no PPI policy was held)
Customer initiated complaints since origination (m)1
Average uphold rate per policy2
Average redress per upheld policy2
Administrative expenses (£m)
1 Sensitivity includes complaint handling costs.
Actuals
to date
Anticipated
future
3.9
74%
£1,700
3,190
1.0
87%
Sensitivity
0.1 = £210m
1% = £30m
£1,470
£100 = £125m
460
1 case = £450
2 Actuals to date are based on the last six months to 31 December 2016. Anticipated future and sensitivities are impacted by a proportion of complaints falling under the Plevin rules and
guidance.
Other regulatory provisions
Packaged bank accounts
In the year ended 31 December 2016 the Group has provided an additional £280 million in respect of complaints relating to alleged mis-selling of
packaged bank accounts raising the total amount provided to £505 million. As at 31 December 2016, £215 million of the provision remained unutilised.
The total amount provided represents the Group’s best estimate of the likely future cost, however a number of risks and uncertainties remain in
particular with respect to future volumes.
Arrears handling related activities
Following a review of the Group’s secured and unsecured arrears handling activities, the Group has put in place a number of actions to further improve
its handling of customers in these areas. As a result, the Group has provided an additional £261 million in the year ended 31 December 2016 (bringing
the total provision to £397 million), for the costs of identifying and rectifying certain arrears management fees and activities. As at 31 December 2016,
the unutilised provision was £383 million (31 December 2015: £136 million).
Customer claims in relation to insurance branch business in Germany
The Group continues to receive claims in Germany from customers relating to policies issued by Clerical Medical Investment Group Limited
(subsequently renamed Scottish Widows Limited). The German industry-wide issue regarding notification of contractual ‘cooling off’ periods has
continued to lead to an increasing number of claims in 2016. Accordingly a provision increase of £94 million was recognised in the year ended
31 December 2016 giving a total provision of £639 million; the remaining unutilised provision as at 31 December 2016 is £168 million (31 December
2015: £124 million). The validity of the claims facing the Group depends upon the facts and circumstances in respect of each claim. As a result the
ultimate financial effect, which could be significantly different from the current provision, will be known only once all relevant claims have been
resolved.
Other legal actions and regulatory matters
In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators and other governmental
authorities on a range of matters. The Group also receives complaints and claims from customers in connection with its past conduct and, where
significant, provisions are held against the costs expected to be incurred as a result of the conclusions reached. In the year ended 31 December 2016,
the Group charged an additional £450 million in respect of matters across all divisions. At 31 December 2016, the Group held unutilised provisions
totalling £573 million for these other legal actions and regulatory matters.
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 biannual basis and will normally run off over the period of under-recovery of the leases concerned, currently averaging 3 years; where a property is
disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.
Other
Following the sale of TSB Banking Group plc in 2015, the Group raised a provision of £665 million in relation to the Transitional Service Agreement
entered into between Lloyds Bank plc and TSB and the contribution to be provided to TSB in moving to alternative IT provision; £611 million of this
provision remained unutilised at 31 December 2016.
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. At 31 December 2016 provisions of £239 million (31 December 2015: £201 million) were held.
Other provisions also include those arising out of the insolvency of a third party insurer, which remains exposed to asbestos and pollution claims in
the US. The ultimate cost and timing of payments are uncertain. The provision held of £35 million at 31 December 2016 represents management’s
current best estimate of the cost after having regard to actuarial estimates of future losses.
231
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Financial statements
Notes to the consolidated financial statements continued
NOTE 39: SUBORDINATED LIABILITIES
The movement in subordinated liabilities during the year was as follows:
Preference
shares
£m
980
Preferred
securities
£m
3,748
Undated
subordinated
liabilities
£m
Enhanced
capital notes
£m
Dated
subordinated
liabilities
£m
Total
£m
965
3,610
14,009
23,312
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(32)
(150)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5)
–
–
(7)
(108)
(101)
(142)
(110)
–
(2)
–
–
–
–
–
–
–
–
–
1,061
1,061
(3,568)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(42)
–
–
–
–
–
–
–
–
–
–
–
–
(3,568)
(5)
(32)
(150)
(7)
(108)
(101)
(142)
(110)
(319)
(2)
(244)
(244)
(233)
(233)
(960)
(960)
(466)
(466)
(456)
(186)
(143)
(382)
(3,070)
2,234
14,234
(456)
(186)
(143)
(382)
(4,046)
3,072
19,831
(319)
203
864
(182)
568
4,134
(475)
109
599
6.267% Non-Cumulative Callable Fixed to Floating Rate
Preference Shares callable 2016
(319)
At 1 January 2016
Issued during the year:
4.65% Subordinated Fixed Rate Notes 2026
(US$1,500 million)
Tender offers and redemptions in respect of
Enhanced Capital Notes
Other repurchases and redemptions during the year:
7.5% Undated Subordinated Step-up Notes
4.939% Non-voting Non-cumulative Perpetual Preferred
Securities
7.286% Perpetual Regulatory Tier One Securities (Series A)
4.25% Subordinated Undated Instruments
Floating Rate Primary Capital Notes
Primary Capital Undated Floating Rate Notes:
Series 1
Series 2
Series 3
5.125% Undated Subordinated Step-up Notes
callable 2016
13% Subordinated Fixed to Fixed Rate Notes 2021
callable 2016
10.125% Subordinated Fixed to Fixed Rate Notes 2021
callable 2016
11.875% Subordinated Fixed to Fixed Rate Notes 2021
callable 2016
10.75% Subordinated Fixed to Fixed Rate Notes 2021
callable 2016
9.875% Subordinated Fixed to Fixed Rate Notes 2021
callable 2016
Callable Floating Rate Subordinated Notes 2016
Callable Floating Rate Subordinated Notes 2016
Subordinated Callable Notes 2016
Foreign exchange and other movements
At 31 December 2016
232
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 39: SUBORDINATED LIABILITIES continued
At 1 January 2015
Issued during the year:
5.3% Subordinated Fixed Rate Notes 2045 (US$824 million)
4.582% Subordinated Fixed Rate Notes 2025
(US$1,353 million)
Repurchases and redemptions during the year:
6.625% Subordinated Notes 2015
4.875% Subordinated Notes 2015
7.834% Sterling Step-up Non-Voting Non-Cumulative
Preferred Securities callable 2015
8.117% Non-cumulative Perpetual Preferred
Securities (Class A)
6.0884% Non-Cumulative Fixed to
Floating Rate Preference Shares callable 2015
6.625% Undated Subordinated Step-Up Notes
callable 2010
6.9625% Callable Subordinated Fixed to
Floating Rate Notes 2020 callable 2015
5.125% Step-up Perpetual Subordinated Notes
callable 2015 (Scottish Widows plc)
5.92% Non-cumulative Fixed to Floating
Rate Preference shares callable 2015
Floating Rate Undated Subordinated Step-up Notes
6.05% Fixed to Floating Rate Undated
Subordinated Notes
5.125% Undated Subordinated Fixed to
Floating Rate Notes
5.109% Callable Fixed to Floating Rate Notes 2017
6.305% Subordinated Callable Fixed to
Floating Notes 2017
6.50% Subordinated Fixed Rate Notes 2020
6% Subordinated Notes 2033
4.25% Perpetual Fixed to Floating Rate Reset
Subordinated Guaranteed Notes
Foreign exchange and other movements
At 31 December 2015
Preference
shares
£m
1,091
Preferred
securities
£m
3,819
Undated
subordinated
liabilities
£m
Enhanced
capital notes
£m
Dated
subordinated
liabilities
£m
Total
£m
1,852
3,683
15,597
26,042
–
–
–
–
–
–
–
(10)
–
–
–
(140)
–
–
–
–
–
–
–
–
–
–
–
–
–
(5)
(250)
–
–
–
–
–
–
–
–
–
–
–
–
–
(150)
39
980
(255)
184
3,748
–
–
–
–
–
–
–
–
(5)
–
(560)
–
(29)
(18)
(50)
–
–
–
–
(276)
(938)
51
965
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(73)
3,610
543
543
893
1,436
(350)
(723)
–
–
–
–
(737)
–
–
–
–
–
(14)
(35)
(764)
(191)
–
(2,814)
(210)
14,009
893
1,436
(350)
(723)
(5)
(250)
(10)
(5)
(737)
(560)
(140)
(29)
(18)
(50)
(14)
(35)
(764)
(191)
(276)
(4,157)
(9)
23,312
These securities 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 preference shares and
preferred 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 dated Enhanced Capital Notes (ECNs) ranked 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 2016 (2015: none).
233
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Financial statements
Notes to the consolidated financial statements continued
NOTE 40: 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
2016
Number of shares
2015
Number of shares
2014
Number of shares
2016
£m
2015
£m
2014
£m
Ordinary shares of 10p
(formerly 25p) each
At 1 January
71,373,735,357
71,373,735,357
71,368,435,941
Issued under employee share schemes
–
–
5,299,416
At 31 December
71,373,735,357
71,373,735,357
71,373,735,357
Limited voting ordinary shares
of 10p (formerly 25p) each
At 1 January and 31 December
80,921,051
80,921,051
80,921,051
Total issued share capital
7,138
–
7,138
8
7,146
7,138
–
7,138
8
7,146
7,137
1
7,138
8
7,146
Share issuances
No shares were issued in 2016 or 2015; in 2014, 5 million shares were issued in respect of employee share schemes.
(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);
– 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 beneficial 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 significant direct or indirect holdings of shares in the Company can be found on page 82.
The directors have authority to allot and issue ordinary and preference shares and to make market purchases of ordinary and preference shares as
granted at the annual general meeting on 12 May 2016. The authority to issue shares and the authority to make market purchases of shares will expire
at the next 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 99.9 per cent of the total ordinary share capital at 31 December
2016, 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 on a winding up may share in the assets of the Company.
Limited voting ordinary shares
The limited voting ordinary shares are held by the Lloyds Bank Foundations (the Foundations). The holders of the limited voting ordinary shares,
who held 0.1 per cent of the total ordinary share capital at 31 December 2016, 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 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.
The Company has entered into deeds of covenant with the Foundations under the terms of which the Company makes annual donations. The deeds
of covenant in effect as at 31 December 2016 provide that such annual donations will cease in certain circumstances, including the Company providing
nine years’ notice. Such notice has been given to the Lloyds TSB Foundation for Scotland.
Preference shares
The Company has in issue various classes of preference shares which are all classified as liabilities under IFRS which are included in note 39.
234
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 41: SHARE PREMIUM ACCOUNT
At 1 January
Issued under employee share schemes
Redemption of preference shares1
At 31 December
2016
£m
2015
£m
2014
£m
17,412
17,281
17,279
–
210
–
131
2
–
17,622
17,412
17,281
1 During the year ended 31 December 2016, the Company redeemed all of its outstanding 6.267% Non-cumulative Fixed to Floating Rate Callable US Dollar Preference Shares at their
combined sterling equivalent par value of £210 million. These preference shares had been accounted for as subordinated liabilities. On redemption an amount of £210 million was transferred
from the distributable merger reserve to the share premium account (2015: £131 million in respect of the redemption of the outstanding 6.0884% Non-cumulative Fixed to Floating Rate
Preference Shares and 5.92% Non-cumulative Fixed to Floating Rate Preference Shares).
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NOTE 42: OTHER RESERVES
Other reserves comprise:
Merger reserve
Capital redemption reserve1
Revaluation reserve in respect of available-for-sale financial assets
Cash flow hedging reserve
Foreign currency translation reserve
At 31 December
1 There were no movements in this reserve during 2014, 2015 or 2016.
2016
£m
7,766
4,115
759
2,136
(124)
14,652
2015
£m
7,976
4,115
(438)
727
(120)
2014
£m
8,107
4,115
(67)
1,139
(78)
12,260
13,216
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 and amounts transferred
from share capital following the cancellation of the deferred shares.
The revaluation reserve in respect of available-for-sale financial assets represents the cumulative after tax unrealised change in the fair value of financial
assets classified as available-for-sale since initial recognition; in the case of available-for-sale financial assets obtained on acquisitions of businesses,
since the date of acquisition; and in the case of transferred assets that were previously held at amortised cost, by reference to that amortised cost.
The cash flow hedging reserve represents the cumulative after tax gains and losses on effective cash flow hedging instruments that will be reclassified
to the income statement in the periods in which the hedged item affects profit 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 financial instruments designated as hedges of the Group’s net investment in foreign operations.
Merger reserve
At 1 January
Redemption of preference shares (note 41)
At 31 December
2016
£m
7,976
(210)
7,766
2015
£m
8,107
(131)
7,976
2014
£m
8,107
–
8,107
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235
Financial statements
Notes to the consolidated financial statements continued
2016
£m
2015
£m
2014
£m
(438)
1,544
(417)
1,127
356
(25)
(3)
328
(575)
196
(52)
(431)
173
–
173
759
2016
£m
727
2,432
(610)
1,822
(557)
144
(413)
2,136
2016
£m
(120)
(110)
106
(124)
(67)
(615)
–
–
–
(318)
(18)
2
(334)
(51)
3
(1)
(49)
4
8
12
(438)
2015
£m
1,139
537
(186)
351
(956)
193
(763)
727
2015
£m
(78)
(59)
17
(120)
–
–
–
690
(65)
–
625
(131)
52
–
(79)
2
–
2
(67)
2014
£m
(1,055)
3,896
(765)
3,131
(1,153)
216
(937)
1,139
2014
£m
(75)
(25)
22
(78)
NOTE 42: OTHER RESERVES continued
Movements in other reserves were as follows:
Revaluation reserve in respect of available-for-sale financial assets
At 1 January
Adjustment on transfer from held-to-maturity portfolio
Deferred tax
Change in fair value of available-for-sale financial assets
Deferred tax
Current tax
Income statement transfers:
Disposals (note 9)
Deferred tax
Current tax
Impairment
Deferred tax
At 31 December
Cash flow hedging reserve
At 1 January
Change in fair value of hedging derivatives
Deferred tax
Income statement transfers (note 5)
Deferred tax
At 31 December
Foreign currency translation reserve
At 1 January
Currency translation differences arising in the year
Foreign currency gains on net investment hedges (tax: £nil)
At 31 December
236
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 43: RETAINED PROFITS
At 1 January
Profit for the year
Dividends paid1
Issue costs of other equity instruments (net of tax)
Distributions on other equity instruments (net of tax)
Post-retirement defined benefit scheme remeasurements
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Adjustment on sale of non-controlling interest in TSB
At 31 December
2016
£m
4,416
2,413
(2,014)
–
(321)
(1,028)
(175)
141
168
–
2015
£m
5,692
860
(1,070)
–
(314)
(215)
(816)
107
172
–
2014
£m
4,088
1,412
–
(21)
(225)
539
(286)
123
233
(171)
3,600
4,416
5,692
1 Net of a credit in respect of unclaimed dividends written-back in accordance with the Company’s Articles of Association.
Retained profits are stated after deducting £495 million (2015: £740 million; 2014: £565 million) representing 730 million (2015: 943 million;
2014: 648 million) treasury shares held.
The payment of dividends by subsidiaries and the ability of members of the Group to lend money to other members of the Group may be subject to
regulatory or legal restrictions, the availability of reserves and the financial and operating performance of the entity. Details of such restrictions and the
methods adopted by the Group to manage the capital of its subsidiaries are provided under Capital Risk on page 161.
NOTE 44: OTHER EQUITY INSTRUMENTS
At 1 January
Additional Tier 1 securities issued in the year:
Sterling notes (£3,725 million nominal)
Euro notes (€750 million nominal)
US dollar notes ($1,675 million nominal)
At 31 December
2016
£m
5,355
2015
£m
5,355
–
–
–
–
–
–
5,355
5,355
2014
£m
−
3,725
622
1,008
5,355
The AT1 securities are Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities with no fixed maturity or redemption date.
The principal terms of the AT1 securities are described below:
– The securities rank behind the claims against Lloyds Banking Group plc of (a) unsubordinated creditors, (b) claims which are, or are expressed to
be, subordinated to the claims of unsubordinated creditors of Lloyds Banking Group plc but not further or otherwise or (c) whose claims are, or are
expressed to be, junior to the claims of other creditors of Lloyds Banking Group, whether subordinated or unsubordinated, other than those whose
claims rank, or are expressed to rank, pari passu with, or junior to, the claims of the holders of the AT1 Securities in a winding-up occurring prior to
the Conversion Trigger.
– The securities bear a fixed rate of interest until the first call date. After the initial call date, in the event that they are not redeemed, the AT1 securities
will bear interest at rates fixed periodically in advance for five year periods based on market rates.
– Interest on the securities will be due and payable only at the sole discretion of Lloyds Banking Group plc, and Lloyds Banking Group plc may at
any time elect to cancel any Interest Payment (or any part thereof) which would otherwise be payable on any Interest Payment Date. There are also
certain restrictions on the payment of interest as specified in the terms.
– The securities are undated and are repayable, at the option of Lloyds Banking Group plc, in whole at the first call date, or on any fifth anniversary
after the first call date. In addition, the AT1 securities are repayable, at the option of Lloyds Banking Group plc, in whole for certain regulatory or tax
reasons. Any repayments require the prior consent of the PRA.
– The securities convert into ordinary shares of Lloyds Banking Group plc, at a pre-determined price, should the fully loaded Common Equity Tier 1
ratio of the Group fall below 7.0 per cent.
237
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Financial statements
Notes to the consolidated financial statements continued
NOTE 45: DIVIDENDS ON ORDINARY SHARES
The directors have recommended a final dividend, which is subject to approval by the shareholders at the Annual General Meeting, of
1.7 pence per share (2015: 1.5 pence per share; 2014: 0.75 pence per share) representing a total dividend of £1,212 million (2015: £1,070 million;
2014: £535 million), which will be paid on 16 May 2017. The directors have also recommended a special dividend of 0.5 pence per share (2015:
0.5 pence per share; 2014: nil) representing a total dividend of £356 million (2015: £357 million; 2014: nil). These financial statements do not reflect
these recommended dividends.
Dividends paid during the year were as follows:
Recommended by directors at previous year end:
Final dividend
Special dividend
Interim dividend paid in the year
2016
pence
per share
2015
pence
per share
2014
pence
per share
2016
£m
2015
£m
2014
£m
1.50
0.50
0.85
2.85
0.75
–
0.75
1.50
–
–
–
–
1,070
357
607
2,034
535
–
535
1,070
–
–
–
–
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 have chosen to waive their entitlement to the dividends on those shares as indicated: the Lloyds Banking Group Share Incentive Plan (holding
at 31 December 2016: 27,898,019 shares, 31 December 2015: 24,275,824 shares, waived rights to all dividends), the HBOS Share Incentive Plan
Trust (holding at 31 December 2016: 445,625 shares, 31 December 2015: 446,169 shares, waived rights to all dividends), the Lloyds Banking Group
Employee Share Ownership Trust (holding at 31 December 2016: 10,699,978 shares, 31 December 2015: 164,141,179 shares, on which it waived rights
to all dividends), Lloyds Group Holdings (Jersey) Limited (holding at 31 December 2016: 42,846 shares, 31 December 2015: 42,846 shares, waived
rights to all but a nominal amount of one penny in total) and the Lloyds Banking Group Qualifying Employee Share Ownership Trust (holding at
31 December 2016: nil shares, 31 December 2015: 1,398 shares, waived rights to all but a nominal amount of one penny in total).
NOTE 46: SHARE-BASED PAYMENTS
Charge to the income statement
The charge to the income statement is set out below:
Deferred bonus plan
Executive and SAYE plans:
Options granted in the year
Options granted in prior years
Share plans:
Shares granted in the year
Shares granted in prior years
Total charge to the income statement
2016
£m
266
16
138
154
15
7
22
442
2015
£m
255
12
99
111
15
6
21
387
2014
£m
213
29
78
107
14
6
20
340
During the year ended 31 December 2016 the Group operated the following share-based payment schemes, all of which are equity settled.
Deferred bonus plans
The Group operates a number of deferred bonus plans that are equity settled. Bonuses in respect of employee performance in 2016 have been
recognised in the charge in line with the proportion of the deferral period completed.
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Annual Report and Accounts 2016
NOTE 46: SHARE-BASED PAYMENTS continued
Save-As-You-Earn schemes
Eligible employees may enter into contracts through the Save-As-You-Earn schemes to save up to £500 per month and, at the expiry of a fixed term of
three or five 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:
2016
2015
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
Outstanding at 1 January
Granted
Exercised
Forfeited
Cancelled
Expired
Outstanding at 31 December
Exercisable at 31 December
Number of
options
850,146,220
454,667,560
Weighted
average
exercise price
(pence)
Weighted
average
exercise price
(pence)
Number of
options
50.99
783,626,383
47.49
156,797,949
(401,286,043)
40.74
(32,683,177)
(10,590,490)
(204,238,535)
(10,005,816)
56.02
60.23
57.08
(27,740,207)
(24,943,674)
(4,911,054)
678,692,896
51.76
850,146,220
48.73
60.70
41.83
48.69
56.04
48.34
50.99
–
–
533,654
180.66
The weighted average share price at the time that the options were exercised during 2016 was £0.67 (2015: £0.77). The weighted average remaining
contractual life of options outstanding at the end of the year was 2.9 years (2015: 1.9 years).
The weighted average fair value of SAYE options granted during 2016 was £0.13 (2015: £0.17). The fair values of the SAYE options have been
determined using a standard Black-Scholes model.
For the HBOS sharesave plan, no options were exercised during 2015 or 2016 and the outstanding options lapsed on 31 December 2016.
The options outstanding at 31 December 2015 had an exercise price of £1.8066 and a weighted average remaining contractual life of 0.4 years.
Other share option plans
Lloyds Banking 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 under this plan have been
granted specifically to facilitate recruitment and as such were not subject to any performance conditions. The Plan is used not only to 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.
For options granted on 27 March 2014 under the Commercial Banking Transformation Plan (CBTP), the number of options that may be delivered in
March 2017 may vary by a factor of 0-4 from the original ‘on-target’ award, depending on the degree to which the performance conditions have been
met. An ‘on-target’ vesting is contingent upon Commercial Banking achieving £2.5 billion underlying profit and 2 per cent Return on Risk-weighted
Assets (‘RoRWA’) on 31 December 2016. The Plan will pay out at between £1.9 billion and £3 billion underlying profit, and between 1.6 per cent and
2.5 per cent RoRWA.
Participants are not entitled to any dividends paid during the vesting period.
Outstanding at 1 January
Granted
Exercised
Forfeited
Lapsed
Outstanding at 31 December
Exercisable at 31 December
2016
2015
Number of
options
221,397,597
4,298,701
(2,700,679)
(3,863,477)
(169,861)
218,962,281
4,504,392
Weighted
average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Number of
options
233,389,084
9,813,363
(13,313,421)
(8,374,250)
(117,179)
221,397,597
3,972,911
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 (2015: £0.75). The fair values of options granted have been determined using
a standard Black-Scholes model. The weighted average share price at the time that the options were exercised during 2016 was £0.64 (2015: £0.83).
The weighted average remaining contractual life of options outstanding at the end of the year was 5.1 years (2015: 6.1 years).
239
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Financial statements
Notes to the consolidated financial statements continued
NOTE 46: SHARE-BASED PAYMENTS continued
Other share plans
Lloyds Banking Group 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.
Participants may be entitled to any dividends paid during the vesting period if the performance conditions are met. An amount equal in value to
any dividends paid between the award date and the date the Remuneration Committee determine that the performance conditions were met may
be paid, based on the number of shares that vest. The Remuneration Committee will determine if any dividends are to be paid in cash or in shares.
Details of the performance conditions for the plan are provided in the Directors’ remuneration report.
At the end of the performance period for the 2013 grant, the targets had not been fully met and therefore these awards vested in 2016 at a rate
of 94.18 per cent.
Outstanding at 1 January
Granted
Vested
Forfeited
Dividend award
Outstanding at 31 December
2016
Number of
shares
2015
Number of
shares
398,066,746
522,836,111
132,194,032
121,676,131
(140,879,465)
(196,193,904)
(33,713,900)
(50,251,592)
2,560,615
–
358,228,028
398,066,746
Awards in respect of the 2014 grant will vest in 2017 at a rate of 55 per cent.
The weighted average fair value of awards granted in the year was £0.64 (2015: £0.78).
The fair value calculations at 31 December 2016 for grants made in the year, using Black-Scholes models and Monte Carlo simulation, are based on the
following assumptions:
Weighted average risk-free interest rate
Weighted average expected life
Weighted average expected volatility
Weighted average expected dividend yield
Weighted average share price
Weighted average exercise price
Save-As-You-
Earn
Executive
Share Plan
2003
0.25%
0.36%
Commercial
Banking
Transformation
Plan
0.43%
LTIP
0.39%
3.2 years
1.9 years
3.0 years
0.8 years
30%
4.5%
£0.59
£0.47
26%
3.1%
£0.69
nil
24%
0.0%
£0.73
nil
33%
4.5%
£0.78
nil
Expected volatility is a measure of the amount by which the Group’s shares are expected to fluctuate 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.
Matching shares
The Group undertakes to match shares purchased by employees up to the value of £45 per month; these matching shares are held in trust for a
mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. 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 2016 was 35,956,224 (2015: 18,001,413), with an average fair value of £0.61 (2015: £0.78),
based on market prices at the date of award.
Fixed share awards
Fixed share awards were introduced in 2014 in order to ensure that total fixed remuneration is commensurate with role and to provide a competitive
reward package for certain Lloyds Banking Group employees, with an appropriate balance of fixed and variable remuneration, in line with regulatory
requirements. The fixed share awards are delivered in Lloyds Banking Group shares, released over five years with 20 per cent being released each year
following the year of award. The number of shares purchased in 2016 was 10,031,272 (2015: 8,237,469).
The fixed share award is not subject to any performance conditions, performance adjustment or clawback. On an employee leaving the Group,
there is no change to the timeline for which shares will become unrestricted.
240
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 47: 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 the 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 benefits
Post‑employment benefits
Share‑based payments
Total compensation
2016
£m
2015
£m
2014
£m
17
–
23
40
14
–
18
32
15
1
17
33
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £0.1 million (2015: £0.1 million;
2014: £0.1 million).
Share option plans
At 1 January
Granted, including certain adjustments (includes entitlements of appointed key management
personnel)
Exercised/lapsed (includes entitlements of former key management personnel)
At 31 December
Share plans
At 1 January
Granted, including certain adjustments (includes entitlements of appointed key management
personnel)
Exercised/lapsed (includes entitlements of former key management personnel)
At 31 December
2016
million
2015
million
2014
million
9
3
(9)
3
13
3
(7)
9
14
–
(1)
13
2016
million
2015
million
2014
million
82
29
(46)
65
102
37
(57)
82
105
19
(22)
102
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:
2016
£m
2015
£m
2014
£m
Loans
At 1 January
Advanced (includes loans of appointed key management personnel)
Repayments (includes loans of former key management personnel)
At 31 December
5
3
(4)
4
3
4
(2)
5
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
2.49 per cent and 23.95 per cent in 2016 (2015: 3.99 per cent and 23.95 per cent; 2014: 0.5 per cent and 23.95 per cent).
No provisions have been recognised in respect of loans given to key management personnel (2016 and 2015: £nil).
Deposits
At 1 January
Placed (includes deposits of appointed key management personnel)
Withdrawn (includes deposits of former key management personnel)
At 31 December
2016
£m
13
41
(42)
12
2015
£m
16
58
(61)
13
2
2
(1)
3
2014
£m
13
32
(29)
16
Deposits placed by key management personnel attracted interest rates of up to 4.0 per cent (2015: 4.7 per cent; 2014: 4.7 per cent).
At 31 December 2016, the Group did not provide any guarantees in respect of key management personnel (2015 and 2014: none).
At 31 December 2016, 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 £0.4 million with five directors and two connected persons
(2015: £1 million with four directors and six connected persons; 2014: £1 million with six directors and six connected persons).
241
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Financial statements
Notes to the consolidated financial statements continued
NOTE 47: RELATED PARTY TRANSACTIONS continued
Subsidiaries
Details of the Group’s subsidiaries and related undertakings are provided on pages 293 to 300. In accordance with IFRS 10 Consolidated financial
statements, transactions and balances with subsidiaries have been eliminated on consolidation.
Pension funds
The Group provides banking and some investment management services to certain of its pension funds. At 31 December 2016, customer deposits
of £171 million (2015: £145 million) and investment and insurance contract liabilities of £406 million (2015: £694 million) related to the Group’s
pension funds.
Collective investment vehicles
The Group manages 139 (2015: 168) collective investment vehicles, such as Open Ended Investment Companies (OEICs) and of these 83 (2015: 95)
are consolidated. The Group invested £265 million (2015: £818 million) and redeemed £826 million (2015: £616 million) in the unconsolidated collective
investment vehicles during the year and had investments, at fair value, of £2,405 million (2015: £2,129 million) at 31 December. The Group earned fees
of £192 million from the unconsolidated collective investment vehicles during 2016 (2015: £187 million).
Joint ventures and associates
At 31 December 2016 there were loans and advances to customers of £173 million (2015: £225 million) outstanding and balances within customer
deposits of £15 million (2015: £8 million) relating to 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 profit or loss. At 31 December 2016, these companies had total assets of approximately £4,712 million (2015: £3,911 million), total liabilities
of approximately £5,033 million (2015: £4,104 million) and for the year ended 31 December 2016 had turnover of approximately £4,401 million
(2015: £4,660 million) and made a loss of approximately £27 million (2015: net loss of £181 million). In addition, the Group has provided £1,550 million
(2015: £1,710 million) of financing to these companies on which it received £127 million (2015: £125 million) of interest income in the year.
NOTE 48: CONTINGENT LIABILITIES AND COMMITMENTS
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group is not directly involved in the ongoing investigations and litigation (as described below)
which involve card schemes such as Visa and MasterCard. However, the Group is a member of Visa and MasterCard and other card schemes.
– The European Commission continues to pursue certain competition investigations into MasterCard and Visa probing, amongst other things, MIFs
paid in respect of cards issued outside the EEA;
– Litigation continues in the English Courts against both Visa and MasterCard. This litigation has been brought by several retailers who are seeking
damages for allegedly ‘overpaid’ MIFs. From publicly available information, it is understood these damages claims are running to different timescales
with respect to the litigation process. It is also possible that new claims may be issued;
– Any ultimate impact on the Group of the above investigations and the litigation against Visa and MasterCard remains uncertain at this time.
Visa Inc completed its acquisition of Visa Europe on 21 June 2016. The Group’s share of the sale proceeds comprised cash consideration of
approximately £330 million (of which approximately £300 million was received on completion of the sale and £30 million is deferred for three years)
and preferred stock, which the Group measures at fair value. The preferred stock is convertible into Class A Common Stock of Visa Inc or its equivalent
upon the occurrence of certain events. As part of this transaction, the Group and certain other UK banks also entered into a Loss Sharing Agreement
(LSA) with Visa Inc, which clarifies the allocation of liabilities between the parties should the litigation referred to above result in Visa Inc being liable
for damages payable by Visa Europe. The maximum amount of liability to which the Group may be subject under the LSA is capped at the cash
consideration which was received by the Group at completion. Visa Inc may also have recourse to a general indemnity, currently in place under Visa
Europe’s Operating Regulations, for damages claims concerning inter or intra-regional MIF setting activities.
LIBOR and other trading rates
In July 2014, the Group announced that it had reached settlements totalling £217 million (at 30 June 2014 exchange rates) to resolve with UK
and US federal authorities legacy issues regarding the manipulation several years ago of Group companies’ submissions to the British Bankers’
Association (BBA) London Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The Group continues to cooperate with various other government
and regulatory authorities, including the Serious Fraud Office, the Swiss Competition Commission, and a number of US State Attorneys General, in
conjunction with their investigations into submissions made by panel members to the bodies that set LIBOR and various other interbank offered rates.
Certain Group companies, together with other panel banks, have also been named as defendants in private lawsuits, including purported class
action suits, in the US in connection with their roles as panel banks contributing to the setting of US Dollar, Japanese Yen and Sterling LIBOR and the
Australian BBSW Reference Rate. The lawsuits, which contain broadly similar allegations, allege violations of the Sherman Antitrust Act, the Racketeer
Influenced and Corrupt Organizations Act and the Commodity Exchange Act, as well as various state statutes and common law doctrines. Certain of
the plaintiffs’ claims, including those asserted under US anti-trust laws, were dismissed by the US Federal Court for Southern District of New York (the
District Court). In November 2015 OTC and exchange-based plaintiffs’ claims against the Group were dismissed for lack of personal jurisdiction. On
20 December 2016, the Federal Court for Southern District of New York dismissed all antitrust class action claims against LBG and its affiliates in the
Multi District Litigation arising from the alleged manipulation of USD LIBOR. Further appeals in relation to the anti-trust claims remain possible.
Certain Group companies are also named as defendants in UK based claims raising LIBOR manipulation allegations in connection with interest rate
hedging products.
It is currently not possible to predict the scope and ultimate outcome on the Group of the various outstanding regulatory investigations not
encompassed by the settlements, any private lawsuits or any related challenges to the interpretation or validity of any of the Group’s contractual
arrangements, including their timing and scale.
242
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 48: CONTINGENT LIABILITIES AND COMMITMENTS continued
UK shareholder litigation
In August 2014, the Group and a number of former directors were named as defendants in a claim filed in the English High Court by a number of
claimants who held shares in Lloyds TSB Group plc (LTSB) prior to the acquisition of HBOS plc, alleging breaches of duties in relation to information
provided to shareholders in connection with the acquisition and the recapitalisation of LTSB. It is currently not possible to determine the ultimate
impact on the Group (if any), but the Group intends to defend the claim vigorously.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) is the UK’s independent statutory compensation fund of last resort for customers of authorised
financial services firms and pays compensation if a firm is unable or likely to be unable to pay claims against it. The FSCS is funded by levies on the
authorised financial services industry. Each deposit-taking institution contributes towards the FSCS levies in proportion to their share of total protected
deposits on 31 December of the year preceding the scheme year, which runs from 1 April to 31 March.
Following the default of a number of deposit takers in 2008, the FSCS borrowed funds from HM Treasury to meet the compensation costs for
customers of those firms. At 31 March 2016, the end of the latest FSCS scheme year for which it has published accounts, the principal balance
outstanding on these loans was £15,655 million (31 March 2015: £15,797 million). Although it is anticipated that the substantial majority of this loan will
be repaid from funds the FSCS receives from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted, any
shortfall will be funded by deposit-taking participants of the FSCS. The amount of future levies payable by the Group depends on a number of factors
including the amounts recovered by the FSCS from asset sales, the Group’s participation in the deposit-taking market at 31 December, the level of
protected deposits and the population of deposit-taking participants.
Tax authorities
The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities including open
matters where Her Majesty’s Revenue and Customs (HMRC) adopt a different interpretation and application of tax law. The Group has an open matter
in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In 2013 HMRC
informed the Group that their interpretation of the UK rules, permitting the offset of such losses, denies the claim; if HMRC’s position is found to be
correct management estimate that this would result in an increase in current tax liabilities of approximately £600 million and a reduction in the Group’s
deferred tax asset of approximately £400 million. The Group does not agree with HMRC’s position and, having taken appropriate advice, does not
consider that this is a case where additional tax will ultimately fall due. There are a number of other open matters on which the Group is in discussion
with HMRC (including the tax treatment of certain costs arising from the divestment of TSB Banking Group plc); none of these is expected to have
a material impact on the financial position of the Group.
Residential mortgage repossessions
In August 2014, the Northern Ireland High Court handed down judgment in favour of the borrowers in relation to three residential mortgage test cases
concerning certain aspects of the Group’s practice with respect to the recalculation of contractual monthly instalments of customers in arrears. The
FCA is actively engaged with the industry in relation to these considerations. The Group will respond as appropriate to this and any investigations,
proceedings, or regulatory action that may in due course be instigated as a result of these issues. The FCA has issued a consultation on new guidance
on the treatment of customers with mortgage payment shortfalls. The guidance covers remediation for mortgage customers who may have been
affected by the way firms calculate these customers’ monthly mortgage instalments. The output from this consultation is expected in the first quarter
of 2017.
Update to the Financial Conduct Authority’s announcement in November 2015 on a deadline for PPI
complaints and Plevin v Paragon Personal Finance Limited
On 2 August 2016, the Financial Conduct Authority (FCA) published a further consultation paper (CP16/20: Rules and guidance on payment protection
insurance complaints: feedback on CP15/39 and further consultation), following on from the original consultation published in November 2015.
The FCA continues to propose the introduction of a two year deadline by which consumers would need to make their PPI complaints and indicates the
deadline period will start in June 2017 and end in June 2019, later than originally indicated by the FCA. The FCA has also consulted further on changes
to the proposed rules and guidance that should apply when firms handle PPI complaints in light of the Supreme Court’s decision in Plevin v Paragon
Personal Finance Limited [2014] UKSC 61. The Group awaits the FCA’s final decision. A further announcement by the FCA is expected in 2017.
Mortgage arrears handling activities
On 26 May 2016, the Group was informed that an enforcement team at the FCA had commenced an investigation in connection with the Group’s
mortgage arrears handling activities. This investigation is ongoing and it is currently not possible to make a reliable assessment of the liability, if any,
that may result from the investigation.
HBOS Reading – customer review
The Group is commencing a review into a number of customer cases from the former HBOS Impaired Assets Office based in Reading. This review
follows the conclusion of a criminal trial in which a number of individuals, including two former HBOS employees, were convicted of conspiracy to
corrupt, fraudulent trading and associated money laundering offences which occurred prior to the acquisition of HBOS by the Group in 2009. The
review is at an early stage and it is currently not possible to determine the ultimate financial impact on the Group.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is subject to other complaints and threatened or actual legal proceedings (including
class or group action claims) brought by or on behalf of current or former employees, customers, investors or other third parties, as well as legal
and regulatory reviews, challenges, investigations and enforcement actions, both in the UK and overseas. All such material matters are periodically
reassessed, with the assistance of external professional advisers 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 at the relevant balance sheet date. In some cases it will not be possible to form a view, for example because the
facts are unclear or because further time is needed properly to assess the merits of the case, and no provisions are held in relation to such matters.
However the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position, operations
or cash flows.
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Financial statements
Notes to the consolidated financial statements continued
NOTE 48: 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
Total contingent liabilities
2016
£m
21
779
2,237
3,016
3,037
2015
£m
52
458
2,123
2,581
2,633
The contingent liabilities of the Group arise in the normal course of its banking business and it is not practicable to quantify their future financial effect.
Commitments
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
Total commitments
2016
£m
648
2015
£m
421
10,749
62,697
73,446
40,074
9,995
57,809
67,804
44,691
114,168
112,916
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £63,203 million
(2015: £63,086 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
Total operating lease commitments
2016
£m
264
855
944
2,063
2015
£m
267
885
1,049
2,201
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 2016
amounted to £543 million (2015: £388 million). Of this amount, £541 million (2015: £380 million) related to assets to be leased to customers under
operating leases. The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.
244
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 49: FINANCIAL INSTRUMENTS
(1) Measurement basis of financial assets and liabilities
The accounting policies in note 2 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.
At fair value
through profit or loss
Derivatives
designated
as hedging
instruments
£m
Held for
trading
£m
Designated
upon initial
recognition
Available-
for-sale
Loans and
receivables
£m
£m
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
–
–
–
–
–
–
–
–
–
–
–
–
26,902
457,958
3,397
488,257
56,524
–
47,452
706
–
–
–
–
–
–
–
–
–
–
–
–
–
2,712
78,679
105,921
56,524
488,257
48,158
At 31 December 2016
Financial 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
–
–
–
–
–
–
–
45,253
105,921
Derivative financial instruments
2,712
33,426
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale financial assets
Total financial assets
Financial 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
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
Subordinated liabilities
Total financial liabilities
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
45,079
32,960
–
–
–
–
–
–
–
–
–
9,425
–
–
–
–
–
–
–
1,964
78,039
9,425
Derivative financial instruments
1,964
16,384
415,460
548
–
–
1,402
76,314
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
94,390
94,390
20,112
20,112
243
243
19,831
–
19,831
529,939
114,745
734,112
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
47,452
706
151,174
36,138
26,902
457,958
3,397
488,257
56,524
780,251
16,384
415,460
548
54,504
34,924
1,402
76,314
i
F
n
a
n
c
a
i
l
r
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
e
R
i
s
k
m
a
n
a
g
e
m
e
n
t
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
O
t
h
e
r
i
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o
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245
Financial statements
Notes to the consolidated financial statements continued
NOTE 49: FINANCIAL INSTRUMENTS continued
Derivatives
designated
as hedging
instruments
£m
At fair value
through profit 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
–
–
42,661
26,781
–
–
–
–
–
–
–
–
97,875
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
33,032
–
–
–
–
–
25,117
455,175
4,191
484,483
–
–
2,686
69,442
97,875
33,032
484,483
–
–
–
43,984
23,864
–
–
–
–
–
–
–
–
–
7,879
–
–
–
–
–
–
–
2,437
67,848
7,879
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
58,417
697
–
–
–
–
–
–
–
19,808
78,922
16,925
418,326
717
–
–
1,112
82,056
–
–
–
23,312
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
58,417
697
140,536
29,467
25,117
455,175
4,191
484,483
33,032
19,808
766,440
16,925
418,326
717
51,863
26,301
1,112
82,056
80,294
80,294
22,777
22,777
257
–
257
23,312
542,448
103,328
723,940
At 31 December 2015
Financial 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
2,686
Derivative financial instruments
2,437
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale financial assets
Held-to-maturity investments
Total financial assets
Financial 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
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
Subordinated liabilities
Total financial liabilities
246
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 49: FINANCIAL INSTRUMENTS continued
(2) Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. It is a measure as at a specific date and may be significantly different from the amount which will actually be paid or received on
maturity or settlement date.
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 flow analysis and pricing models and, where appropriate, comparison to instruments with characteristics similar to those
of the instruments held by the Group.
The Group manages valuation adjustments for its derivative exposures on a net basis; the Group determines their fair values on the basis of their net
exposures. In all other cases, fair values of financial assets and liabilities measured at fair value are determined on the basis of their gross exposures.
The carrying amount of the following financial instruments is a reasonable approximation of fair value: cash and balances at central banks, items
in the course of collection from banks, items in course of transmission to banks, notes in circulation and liabilities arising from non‑participating
investment contracts.
Because a variety of estimation techniques are employed and significant estimates made, comparisons of fair values between financial institutions may not
be meaningful. Readers of these financial statements are thus advised to use caution when using this data to evaluate the Group’s financial position.
Fair value information is not provided for items that are not financial instruments or for other assets and liabilities which are not carried at fair value
in the Group’s consolidated balance sheet. 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.
Valuation control framework
The key elements of the control framework for the valuation of financial instruments include model validation, product implementation review and
independent price verification. These functions are carried out by appropriately skilled risk and finance teams, independent of the business area
responsible for the products.
Model validation covers both qualitative and quantitative elements relating to new models. In respect of new products, a product implementation
review is conducted pre‑ and post‑trading. Pre‑trade testing ensures that the new model is integrated into the Group’s systems and that the profit and
loss and risk reporting are consistent throughout the trade life cycle. Post‑trade testing examines the explanatory power of the implemented model,
actively monitoring model parameters and comparing in‑house pricing to external sources. Independent price verification procedures cover financial
instruments carried at fair value. The frequency of the review is matched to the availability of independent data, monthly being the minimum. Valuation
differences in breach of established thresholds are escalated to senior management. The results from independent pricing and valuation reserves are
reviewed monthly by senior management.
Formal committees, consisting of senior risk, finance and business management, meet at least quarterly to discuss and approve valuations in more
judgemental areas, in particular for unquoted equities, structured credit, over‑the‑counter options and the Credit Valuation Adjustment (CVA) reserve.
Valuation of financial assets and liabilities
Assets and liabilities carried at fair value or for which fair values are disclosed have been classified into three levels according to the quality and
reliability of information used to determine the fair values.
Level 1
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified
as level 1 predominantly comprise equity shares, treasury bills and other government securities.
Level 2
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 significantly
on observable market data. Examples of such financial instruments include most over‑the‑counter derivatives, financial institution issued securities,
certificates of deposit and certain asset‑backed securities.
Level 3
Level 3 portfolios are those where at least one input which could have a significant 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 significant management judgement in determining appropriate assumptions, including earnings multiples 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.
Transfers out of the level 3 portfolio arise when inputs that could have a significant 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.
247
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Financial statements
Notes to the consolidated financial statements continued
NOTE 49: FINANCIAL INSTRUMENTS continued
(3) Financial assets and liabilities carried at fair value
Critical accounting estimates and judgements
The valuation techniques for level 2 and, particularly, level 3 financial instruments involve management judgement and estimates the extent of which
depends on the complexity of the instrument and the availability of market observable information. In addition, in line with market practice, the Group
applies credit, debit and funding valuation adjustments in determining the fair value of its uncollateralised derivative positions. A description of these
adjustments is set out in this note on page 253. Further details of the Group’s level 3 financial instruments and the sensitivity of their valuation including
the effect of applying reasonably possible alternative assumptions in determining their fair value are set out below. Details about sensitivities to market
risk arising from trading assets and other treasury positions can be found in the risk management section on page 146.
(A) Financial assets, excluding derivatives
Valuation hierarchy
At 31 December 2016, the Group’s financial assets carried at fair value, excluding derivatives, totalled £207,698 million (31 December 2015:
£173,568 million). The table below analyses these financial assets by balance sheet classification, asset type and valuation methodology (level 1, 2 or
3, as described on page 247). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2
during the year.
Valuation hierarchy
At 31 December 2016
Trading and other financial assets at fair value through profit or loss
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
Treasury and other bills
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
–
30,473
2,606
24,959
–
–
–
4
112
25,075
66,147
20
1,773
1,279
244
654
1,092
17,968
23,010
37
–
–
–
–
46
–
53
442
1,752
2,293
1,513
–
30,473
2,606
26,732
1,325
244
707
1,538
19,832
50,378
67,697
20
Total trading and other financial assets at fair value through profit or loss
91,242
56,126
3,806
151,174
Available-for-sale financial assets
Debt securities:
Government 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
Total available-for-sale financial assets
Total financial assets carried at fair value, excluding derivatives
48,542
–
–
–
107
48,649
435
49,084
140,326
172
142
108
184
5,923
6,529
17
6,546
62,672
–
–
–
133
–
133
761
894
48,714
142
108
317
6,030
55,311
1,213
56,524
4,700
207,698
248
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 49: FINANCIAL INSTRUMENTS continued
At 31 December 2015
Trading and other financial assets at fair value through profit or loss
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
Treasury and other bills
Total trading and other financial assets at fair value through profit or loss
Available-for-sale financial assets
Debt securities:
Government 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
Total available-for-sale financial assets
Total financial assets carried at fair value, excluding derivatives
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
–
20,881
–
–
–
–
38
20,919
58,457
74
79,450
25,259
–
–
–
7
25,266
43
25,309
104,759
30,109
3,065
1,235
759
135
1,295
839
18,241
22,504
292
–
55,970
70
186
197
264
5,801
6,518
521
7,039
–
–
1
1,280
–
63
8
2,037
3,389
1,727
–
5,116
–
–
–
55
–
55
629
684
30,109
3,065
22,117
2,039
135
1,358
847
20,316
46,812
60,476
74
140,536
25,329
186
197
319
5,808
31,839
1,193
33,032
63,009
5,800
173,568
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249
Financial statements
Notes to the consolidated financial statements continued
NOTE 49: FINANCIAL INSTRUMENTS continued
Movements in Level 3 portfolio
The table below analyses movements in level 3 financial assets, excluding derivatives, carried at fair value (recurring measurement).
2016
2015
At 1 January
Exchange and other adjustments
Gains recognised in the income statement
within other income
Gains recognised in other comprehensive income within
the revaluation reserve in respect of available-for-sale
financial assets
Purchases
Sales
Transfers into the level 3 portfolio
Transfers out of the level 3 portfolio
At 31 December
Gains recognised in the income statement, within other
income, relating to the change in fair value of those assets
held at 31 December
Trading and
other financial
assets at fair
value through
profit or loss
£m
5,116
8
437
–
833
(2,597)
186
(177)
3,806
Total level 3
assets carried
at fair value,
excluding
derivatives
(recurring basis)
£m
Trading and
other financial
assets at fair
value through
profit or loss
£m
5,800
20
437
312
1,091
(3,124)
341
(177)
4,700
5,104
–
192
–
965
(1,070)
71
(146)
5,116
Available-
for-sale
£m
684
12
–
312
258
(527)
155
–
894
Total level 3
assets carried
at fair value,
excluding
derivatives
(recurring basis)
£m
5,374
–
192
302
1,033
(1,081)
126
(146)
5,800
Available-
for-sale
£m
270
–
–
302
68
(11)
55
–
684
642
–
642
34
–
34
Valuation methodology for financial assets, excluding derivatives
Loans and advances to customers and banks
These assets are principally reverse repurchase agreements. The fair value of these assets is determined using discounted cash flow techniques.
The discount rates are derived from observable repo curves specific to the type of security purchased under the reverse repurchase agreement.
Debt securities
Debt securities measured at fair value and classified as level 2 are valued by discounting expected cash flows using an observable credit spread
applicable to the particular instrument.
Where there is limited trading activity in debt securities, the Group uses valuation models, consensus pricing information from third party pricing
services and broker or lead manager quotes to determine an appropriate valuation. Debt securities are classified as level 3 if there is a significant
valuation input that cannot be corroborated through market sources or where there are materially inconsistent values for an input. Asset classes
classified as level 3 mainly comprise certain collateralised loan obligations and collateralised debt obligations.
Equity investments
Unlisted equity and fund investments are valued using different techniques in accordance with the Group’s valuation policy and International Private
Equity and Venture Capital Guidelines.
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 flows.
– 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 financial gearing
of comparable businesses when selecting an appropriate multiple.
– Discounted cash flow valuations use estimated future cash flows, usually based on management forecasts, with the application of appropriate exit
yields or terminal multiples and discounted using rates appropriate to the specific investment, business sector or recent economic rates of return.
Recent transactions involving the sale of similar businesses may sometimes be used as a frame of reference in deriving an appropriate multiple.
– 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.
Unlisted equity investments and investments in property partnerships held in the life assurance funds are valued using third party valuations.
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.
250
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 49: FINANCIAL INSTRUMENTS continued
(B) Financial liabilities, excluding derivatives
Valuation hierarchy
At 31 December 2016, the Group’s financial liabilities carried at fair value, excluding derivatives, comprised its trading and other financial liabilities at
fair value through profit or loss and totalled £54,504 million (31 December 2015: £51,863 million). (Financial guarantees are also recognised at fair value,
on initial recognition, and are classified as level 3; but the balance is not material). The table below analyses these financial liabilities by balance sheet
classification and valuation methodology (level 1, 2 or 3, as described on page 247). The fair value measurement approach is recurring in nature. There
were no significant transfers between level 1 and 2 during the year.
i
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o
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At 31 December 2016
Trading and other financial liabilities at fair value through profit or loss
Liabilities held at fair value through profit or loss
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Short positions in securities
Other
Total financial liabilities carried at fair value, excluding derivatives
At 31 December 2015
Trading and other financial liabilities at fair value through profit or loss
Liabilities held at fair value through profit or loss
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Short positions in securities
Other
Total financial liabilities carried at fair value, excluding derivatives
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
–
2,417
–
2,417
2,417
–
–
4,153
–
4,153
4,153
9,423
42,067
65
530
42,662
52,085
7,878
38,431
287
1,113
39,831
47,709
2
–
–
–
–
2
1
–
–
–
–
1
9,425
42,067
2,482
530
45,079
54,504
7,879
38,431
4,440
1,113
43,984
51,863
The table below analyses movements in the level 3 financial liabilities portfolio, excluding derivatives. There were no transfers into or out of level 3
during 2015 or 2016.
At 1 January
Losses (gains) recognised in the income statement within other income
Redemptions
At 31 December
Gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities
held at 31 December
2016
£m
2015
£m
1
1
–
2
1
5
–
(4)
1
–
Valuation methodology for financial liabilities, excluding derivatives
Liabilities held at fair value through profit or loss
These principally comprise debt securities in issue which are classified as level 2 and their fair value is determined using techniques whose inputs are
based on observable market data. The carrying amount of the securities is adjusted to reflect the effect of changes in own credit spreads. The resulting
gain or loss is recognised in the income statement.
At 31 December 2016, the own credit adjustment arising from the fair valuation of £9,423 million (2015: £7,878 million) of the Group’s debt securities
in issue designated at fair value through profit or loss resulted in a loss of £28 million (2015: gain of £114 million).
251
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Financial statements
Notes to the consolidated financial statements continued
NOTE 49: FINANCIAL INSTRUMENTS continued
Trading liabilities in respect of securities sold under repurchase agreements
The fair value of these liabilities is determined using discounted cash flow techniques. The discount rates are derived from observable repo curves
specific to the type of security sold under the repurchase agreement.
(C) Derivatives
All of the Group’s derivative assets and liabilities are carried at fair value. At 31 December 2016, such assets totalled £36,138 million (31 December
2015: £29,467 million) and liabilities totalled £34,924 million (31 December 2015: £26,301 million). The table below analyses these derivative balances
by valuation methodology (level 1, 2 or 3, as described on page 247). The fair value measurement approach is recurring in nature. There were no
significant transfers between level 1 and level 2 during the year.
Derivative assets
Derivative liabilities
2016
Level 1
£m
270
Level 2
£m
34,469
(358)
(33,606)
Level 3
£m
1,399
(960)
Total
£m
36,138
(34,924)
Level 1
£m
43
(41)
2015
Level 2
£m
27,955
(25,537)
Level 3
£m
1,469
(723)
Total
£m
29,467
(26,301)
Where the Group’s derivative assets and liabilities are not traded on an exchange, they are valued using valuation techniques, including discounted
cash flow and options pricing models, as appropriate. The types of derivatives classified as level 2 and the valuation techniques used include:
– Interest rate swaps which are valued using discounted cash flow models; the most significant inputs into those models are interest rate yield curves
which are developed from publicly quoted rates.
– Foreign exchange derivatives that do not contain options which are priced using rates available from publicly quoted sources.
– Credit derivatives which are valued using standard models with observable inputs, except for the items classified as level 3, which are valued using
publicly available yield and credit default swap (CDS) curves.
– Less complex interest rate and foreign exchange option products which 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.
Complex interest rate and foreign exchange products where there is significant dispersion of consensus pricing or where implied funding costs are
material and unobservable are classified as level 3.
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 asset-backed security and the resulting derivative assets or liabilities have been classified as either level 2 or level 3 according
to the classification of the underlying asset-backed security.
The table below analyses movements in level 3 derivative assets and liabilities carried at fair value.
At 1 January
Exchange and other adjustments
Gains (losses) recognised in the income statement within other income
Purchases (additions)
(Sales) redemptions
Derecognised pursuant to tender offers and redemptions in respect of
Enhanced Capital Notes
Transfers into the level 3 portfolio
Transfers out of the level 3 portfolio
At 31 December
Gains (losses) recognised in the income statement, within other income, relating to the
change in fair value of those assets or liabilities held at 31 December
2016
2015
Derivative
assets
£m
1,469
74
220
24
(91)
(476)
216
(37)
1,399
284
Derivative
liabilities
£m
(723)
(53)
(299)
(13)
128
–
–
–
(960)
(262)
Derivative
assets
£m
2,771
Derivative
liabilities
£m
(1,456)
(25)
(87)
72
(125)
–
126
(1,263)
1,469
(95)
18
(36)
(74)
120
–
(114)
819
(723)
(12)
252
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 49: FINANCIAL INSTRUMENTS continued
Derivative valuation adjustments
Derivative financial instruments which are carried in the balance sheet at fair value are adjusted where appropriate to reflect credit risk, market liquidity
and other risks.
(i) Uncollateralised derivative valuation adjustments, excluding monoline counterparties
The following table summarises the movement on this valuation adjustment account during 2015 and 2016:
At 1 January
Income statement charge (credit)
Transfers
At 31 December
Represented by:
Credit Valuation Adjustment
Debit Valuation Adjustment
Funding Valuation Adjustment
2016
£m
598
163
(17)
744
2016
£m
685
(123)
182
744
2015
£m
608
(38)
28
598
2015
£m
511
(78)
165
598
Credit and Debit Valuation Adjustments (CVA and DVA) are applied to the Group’s over-the-counter derivative exposures with counterparties that are
not subject to standard interbank collateral arrangements. These exposures largely relate to the provision of risk management solutions for corporate
customers within the Commercial Banking division.
A CVA is taken where the Group has a positive future uncollateralised exposure (asset). A DVA is taken where the Group has a negative future
uncollateralised exposure (liability). These adjustments reflect interest rates and expectations of counterparty creditworthiness and the Group’s
own credit spread respectively.
The CVA is sensitive to:
– the current size of the mark-to-market position on the uncollateralised asset;
– expectations of future market volatility of the underlying asset; and
– expectations of counterparty creditworthiness.
In circumstances where exposures to a counterparty become impaired, any associated derivative valuation adjustment is transferred and assessed
for specific loss alongside other non-derivative assets and liabilities that the counterparty may have with the Group.
Market Credit Default Swap (CDS) spreads are used to develop the probability of default for quoted counterparties. For unquoted counterparties,
internal credit ratings and market sector CDS curves and recovery rates are used. The Loss Given Default (LGD) is based on market recovery rates and
internal credit assessments.
The combination of a one notch deterioration in the credit rating of derivative counterparties and a ten per cent increase in LGD increases the CVA by
£64 million. Current market value is used to estimate the projected exposure for products not supported by the model, which are principally complex
interest rate options that are traded in very low volumes. For these, the CVA is calculated on an add-on basis (in total contributing £1 million of the
overall CVA balance at 31 December 2016).
The DVA is sensitive to:
– the current size of the mark-to-market position on the uncollateralised liability;
– expectations of future market volatility of the underlying liability; and
– the Group’s own CDS spread.
A one per cent rise in the CDS spread would lead to an increase in the DVA of £152 million to £275 million.
The risk exposures that are used for the CVA and DVA calculations are strongly influenced by interest rates. Due to the nature of the Group’s business
the CVA/DVA exposures tend to be on average the same way around such that the valuation adjustments fall when interest rates rise. A one per cent
rise in interest rates would lead to a £221 million fall in the overall valuation adjustment to £341 million. The CVA model used by the Group does not
assume any correlation between the level of interest rates and default rates.
The Group has also recognised a Funding Valuation Adjustment to adjust for the net cost of funding uncollateralised derivative positions. This
adjustment is calculated on the expected future exposure discounted at a suitable cost of funds. A ten basis points increase in the cost of funds
will increase the funding valuation adjustment by approximately £32 million.
(ii) Market liquidity
The Group includes mid to bid-offer valuation adjustments against the expected cost of closing out the net market risk in the Group’s trading positions
within a timeframe that is consistent with historical trading activity and spreads that the trading desks have accessed historically during the ordinary
course of business in normal market conditions.
At 31 December 2016, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £96 million (2015: £76 million).
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Financial statements
Notes to the consolidated financial statements continued
NOTE 49: FINANCIAL INSTRUMENTS continued
(D) Sensitivity of level 3 valuations
At 31 December 2016
At 31 December 2015
Effect of reasonably
possible
alternative assumptions2
Effect of reasonably
possible
alternative assumptions2
Valuation techniques
Significant unobservable
inputs1
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Trading and other financial assets at fair value
through profit or loss
Credit spreads (bps)
(1ps/2ps)
n/a
29
59
5
–
(5)
–
92
62
Earnings multiple
(0.9/10.0)
2,163
63
(68)
2,279
7
–
72
8
–
–
25
–
14
20
–
–
(7)
–
(72)
(14)
(48)
–
(27)
–
(14)
(19)
–
–
54
1,501
3,806
133
2
–
–
(3)
145
(32)
2,538
5,116
–
55
761
48
(53)
339
–
894
–
–
–
–
–
1,399
(3)
(19)
1,399
6,099
2
960
960
962
–
–
–
–
290
684
545
924
1,469
7,269
1
723
723
724
Debt securities
Asset-backed
securities
Equity and venture
capital investments
Discounted
cash flows
Lead manager
or broker quote
Market approach
Underlying asset/
net asset value (incl.
property prices)3
Underlying asset/
net asset value (incl.
property prices)3
Unlisted equities
and debt securities,
property partnerships
in the life funds
Available-for-sale financial assets
Asset-backed
securities
Equity and venture
capital investments
Lead manager or broker
quote/consensus
pricing
Underlying asset/net
asset value (incl.
property prices)3
Other
Various
n/a
n/a
n/a
n/a
n/a
Derivative financial assets
Embedded equity
conversion feature
Interest rate
derivatives
Lead manager
or broker quote
Option pricing
model
Equity conversion
feature spread
Interest rate volatility
(0%/115%)
Level 3 financial assets carried at fair value
Trading and other financial liabilities at fair
value through profit or loss
Derivative financial liabilities
Interest rate
derivatives
Option pricing
model
Interest rate volatility
(0%/115%)
Level 3 financial liabilities carried at fair value
1 Ranges are shown where appropriate and represent the highest and lowest inputs used in the level 3 valuations.
2 Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
3 Underlying asset/net asset values represent fair value.
254
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Annual Report and Accounts 2016
NOTE 49: FINANCIAL INSTRUMENTS continued
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows:
– Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives depends
on the behaviour of those underlying references through time.
– Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality;
higher spreads lead to a lower fair value.
– Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of possible outcomes.
– Earnings multiples are used to value certain unlisted equity investments; a higher earnings multiple will result in a higher fair value.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group’s level 3 instruments often involve the use of two or more inputs whose relationship is
interdependent. The calculation of the effect of reasonably possible alternative assumptions included in the table above reflects such relationships.
Debt securities
Reasonably possible alternative assumptions have been determined in respect of the Group’s structured credit investment by flexing credit spreads.
Derivatives
Reasonably possible alternative assumptions have been determined in respect of swaptions in the Group’s derivative portfolios which are
priced using industry standard option pricing models. Such models require interest rate volatilities which may be unobservable at longer
maturities. To derive reasonably possible alternative valuations these volatilities have been flexed within a range of nil per cent to 115 per cent
(2015: 1 per cent and 63 per cent).
Unlisted equity, venture capital investments and investments in property partnerships
The valuation techniques used for unlisted equity and venture capital investments vary depending on the nature of the investment. Reasonably
possible alternative valuations for these investments have been calculated by reference to the approach taken, as appropriate to the business
sector and investment circumstances and as such the following inputs have been considered:
– for valuations derived from earnings multiples, consideration is given to the risk attributes, growth prospects and financial gearing of comparable
businesses when selecting an appropriate multiple;
– the discount rates used in discounted cash flow valuations; and
– in line with International Private Equity and Venture Capital Guidelines, the values of underlying investments in fund investments portfolios.
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Financial statements
Notes to the consolidated financial statements continued
NOTE 49: FINANCIAL INSTRUMENTS continued
(4) Financial assets and liabilities carried at amortised cost
(A) Financial assets
Valuation hierarchy
The table below analyses the fair values of the financial assets of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3,
as described on page 247). Loans and receivables are mainly classified as level 3 due to significant unobservable inputs used in the valuation models.
Where inputs are observable, debt securities are classified as level 1 or 2.
Valuation hierarchy
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
At 31 December 2016
Loans and receivables:
Loans and advances to customers: unimpaired
Loans and advances to customers: impaired
Loans and advances to customers
Loans and advances to banks
Debt securities
Reverse repos included in above amounts:
Loans and advances to customers
Loans and advances to banks
At 31 December 2015
Loans and receivables:
Loans and advances to customers: unimpaired
Loans and advances to customers: impaired
Loans and advances to customers
Loans and advances to banks
Debt securities
Held-to-maturity investments
Reverse repos included in above amounts:
Loans and advances to customers
Loans and advances to banks
Valuation methodology
451,339
450,986
6,619
6,475
457,958
457,461
26,902
3,397
8,304
902
26,812
3,303
8,304
902
448,010
447,808
7,165
6,989
455,175
454,797
25,117
4,191
19,808
–
963
25,130
4,107
19,851
–
963
–
–
–
–
–
–
–
–
–
–
–
7
19,851
–
–
–
–
–
–
3,288
–
–
–
–
–
–
4,090
–
–
–
450,986
6,475
457,461
26,812
15
8,304
902
447,808
6,989
454,797
25,130
10
–
–
963
Loans and advances to customers
The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates due to their short
term nature. The carrying value of the variable rate loans and those relating to lease financing is assumed to be their fair value.
To determine the fair value of loans and advances to customers, loans are segregated into portfolios of similar characteristics. A number of techniques
are used to estimate the fair value of fixed rate lending; these take account of expected credit losses based on historic trends, prevailing market
interest rates and expected future cash flows. For retail exposures, fair value is usually estimated by discounting anticipated cash flows (including
interest at contractual rates) at market rates for similar loans offered by the Group and other financial institutions. Certain loans secured on residential
properties are made at a fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair
value of such loans is estimated by reference to the market rates for similar loans of maturity equal to the remaining fixed interest rate period. The fair
value of commercial loans is estimated by discounting anticipated cash flows at a rate which reflects the effects of interest rate changes, adjusted for
changes in credit risk. No adjustment is made to put it in place by the Group to manage its interest rate exposure.
Loans and advances to banks
The carrying value of short dated loans and advances to banks is assumed to be their fair value. The fair value of loans and advances to banks is
estimated by discounting the anticipated cash flows at a market discount rate adjusted for the credit spread of the obligor or, where not observable,
the credit spread of borrowers of similar credit quality.
Debt securities
The fair values of debt securities, which were previously within assets held for trading and were reclassified to loans and receivables, are determined
predominantly from lead manager quotes and, where these are not available, by alternative techniques including reference to credit spreads on similar
assets with the same obligor, market standard consensus pricing services, broker quotes and other research data.
Reverse repurchase agreements
The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments.
256
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 49: FINANCIAL INSTRUMENTS continued
(B) Financial liabilities
Valuation hierarchy
The table below analyses the fair values of the financial liabilities of the Group which are carried at amortised cost by valuation methodology
(level 1, 2 or 3, as described on page 247).
Valuation hierarchy
At 31 December 2016
Deposits from banks
Customer deposits
Debt securities in issue
Subordinated liabilities
Repos included in above amounts:
Deposits from banks
Customer deposits
At 31 December 2015
Deposits from banks
Customer deposits
Debt securities in issue
Subordinated liabilities
Repos included in above amounts:
Deposits from banks
Customer deposits
Valuation methodology
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
16,384
16,395
415,460
416,490
76,314
19,831
7,279
2,462
16,925
418,326
82,056
23,312
7,061
–
79,650
22,395
7,279
2,462
16,934
418,512
85,093
26,818
7,061
–
–
–
–
–
–
–
–
–
–
–
–
–
16,395
408,571
79,434
22,395
7,279
2,462
16,934
407,417
81,132
26,818
7,061
–
–
7,919
216
–
–
–
–
11,095
3,961
–
–
–
Deposits from banks and customer deposits
The fair value of bank and customer deposits repayable on demand is assumed to be equal to their carrying value.
The fair value for all other deposits is estimated using discounted cash flows applying either market rates, where applicable, or current rates
for deposits of similar remaining maturities.
Debt securities in issue
The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities is calculated based
on quoted market prices where available. Where quoted market prices are not available, fair value is estimated using discounted cash flow techniques
at a rate which reflects market rates of interest and the Group’s own credit spread.
Subordinated liabilities
The fair value of subordinated liabilities is determined by reference to quoted market prices where available or by reference to quoted market prices
of similar instruments. Subordinated liabilities are classified as level 2, since the inputs used to determine their fair value are largely observable.
Repurchase agreements
The carrying amount is deemed a reasonable approximation of fair value given the short term nature of these instruments.
(5) Reclassifications of financial assets
In 2015 the Group had reviewed its approach to managing a portfolio of government securities held as a separately identifiable component of the
Group’s liquidity portfolio. Given the long-term nature of this portfolio, and reflecting the Group’s positive intent and ability to hold them until maturity
in the economic environment at the time, the Group concluded that certain of these securities would be able to be held until they reached maturity
and consequently, on 1 May 2015, government securities with a fair value of £19,938 million were reclassified from available-for-sale financial assets to
held-to-maturity investments. During 2016, the Group has reassessed this holding of government securities classified as held-to-maturity in light of the
current low interest rate environment and they have been reclassified as available-for-sale; this resulted in a credit of £1,544 million to the available-for-
sale revaluation reserve (£1,127 million after tax).
257
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Financial statements
Notes to the consolidated financial statements continued
NOTE 50: TRANSFERS OF FINANCIAL ASSETS
There were no significant transferred financial assets which were derecognised in their entirety, but with ongoing exposure. Details of transferred
financial assets that continue to be recognised in full are as follows.
The Group enters into repurchase and securities lending transactions in the normal course of business that do not result in derecognition of the
financial assets covered as substantially all of the risks and rewards, including credit, interest rate, prepayment and other price risks are retained
by the Group. In all cases, the transferee has the right to sell or repledge the assets concerned.
As set out in note 19, included within loans and receivables are loans transferred under the Group’s securitisation and covered bond programmes. As
the Group retains all of a majority of the risks and rewards associated with these loans, including credit, interest rate, prepayment and liquidity risk, they
remain on the Group’s balance sheet. Assets transferred into the Group’s securitisation and covered bond programmes are not available to be used
by the Group whilst the assets are within the programmes. However, the Group retains the right to remove loans from the covered bond programmes
where they are in excess of the programme’s requirements. In addition, where the Group has retained some of the notes issued by securitisation and
covered bond programmes, the Group has the ability to sell or pledge these retained notes.
The table below sets out the carrying values of the transferred assets and the associated liabilities. For repurchase and securities lending transactions,
the associated liabilities represent the Group’s obligation to repurchase the transferred assets. For securitisation programmes, the associated liabilities
represent the external notes in issue (note 31). Except as otherwise noted below, none of the liabilities shown in the table below have recourse only to
the transferred assets.
Repurchase and securities lending transactions
Trading and other financial assets at fair value through profit or loss
Available-for-sale financial assets
Loans and receivables:
Loans and advances to customers
Securitisation programmes
Loans and receivables:
Loans and advances to customers1
2016
2015
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
10,256
24,681
3,380
21,809
13,711
18,141
7,460
14,295
583
–
1,491
–
52,184
7,253
58,090
7,763
1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £26,435 million (31 December 2015: £29,303 million).
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Annual Report and Accounts 2016
NOTE 51: OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
The following information relates to financial assets and liabilities which have been offset in the balance sheet and those which have not been offset
but for which the Group has enforceable master netting agreements or collateral arrangements in place with counterparties.
At 31 December 2016
Financial assets
Trading and other financial assets at fair value
through profit or loss:
Excluding reverse repos
Reverse repos
Derivative financial instruments
Loans and advances to banks:
Excluding reverse repos
Reverse repos
Loans and advances to customers:
Excluding reverse repos
Reverse repos
Debt securities
Available-for-sale financial assets
Financial liabilities
Deposits from banks:
Excluding repos
Repos
Customer deposits:
Excluding repos
Repos
Trading and other financial liabilities at fair value
through profit or loss:
Excluding repos
Repos
Derivative financial instruments
Related amounts where set
off in the balance sheet not
permitted3
Gross amounts
of assets and
liabilities1
£m
Amounts
offset in the
balance
sheet2
£m
Net amounts
presented in
the balance
sheet
£m
Cash
collateral
received/
pledged
£m
Non-cash
collateral
received/
pledged
£m
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p
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Potential
net amounts
if offset
of related
amounts
permitted
£m
118,095
35,298
153,393
92,390
26,000
902
26,902
451,290
8,304
459,594
3,397
56,524
9,105
7,279
16,384
415,153
2,462
417,615
12,437
44,286
56,723
90,657
–
118,095
(2,219)
(2,219)
(56,252)
–
–
–
33,079
151,174
36,138
26,000
902
26,902
–
–
–
(3,265)
114,830
(33,079)
–
(36,344)
114,830
(6,472)
(19,906)
9,760
(2,826)
–
(2,826)
–
(902)
(902)
23,174
–
23,174
(1,636)
449,654
(1,793)
–
8,304
–
(6,331)
(8,304)
441,530
–
(1,636)
457,958
(1,793)
(14,635)
441,530
3,397
56,524
–
–
–
(21,475)
3,397
35,049
9,105
7,279
(5,080)
–
16,384
(5,080)
(2,155)
412,998
(1,391)
–
2,462
–
(2,155)
415,460
(1,391)
(695)
(7,279)
(7,974)
(6,331)
(2,462)
(8,793)
3,330
–
3,330
405,276
–
405,276
–
(2,219)
(2,219)
(55,733)
12,437
42,067
54,504
34,924
–
–
–
(4,620)
–
12,437
(42,067)
(42,067)
(24,820)
–
12,437
5,484
–
–
–
–
–
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259
Financial statements
Notes to the consolidated financial statements continued
NOTE 51: OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES continued
At 31 December 2015
Financial assets
Trading and other financial assets at fair value
through profit or loss:
Excluding reverse repos
Reverse repos
Derivative financial instruments
Loans and advances to banks:
Excluding reverse repos
Reverse repos
Loans and advances to customers:
Excluding reverse repos
Reverse repos
Debt securities
Available-for-sale financial assets
Held-to-maturity investments
Financial liabilities
Deposits from banks:
Excluding repos
Repos
Customer deposits:
Excluding repos
Repos
Trading and other financial liabilities at fair value
through profit or loss:
Excluding repos
Repos
Derivative financial instruments
1 After impairment allowance.
Related amounts where set off in
the balance sheet not permitted3
Gross
amounts
of assets and
liabilities1
£m
Amounts
offset in the
balance
sheet2
£m
Net amounts
presented in
the balance
sheet
£m
Cash
collateral
received/
pledged
£m
Non-cash
collateral
received/
pledged
£m
Potential
net amounts
if offset
of related
amounts
permitted
£m
107,362
39,083
146,445
62,937
24,154
963
25,117
–
(5,909)
(5,909)
(33,470)
–
–
–
107,362
33,174
140,536
29,467
24,154
963
25,117
–
–
–
(3,228)
(1,810)
–
(1,810)
(7,175)
100,187
(33,174)
(40,349)
(20,091)
–
(963)
(963)
–
100,187
6,148
22,344
–
22,344
457,546
(2,371)
455,175
(1,001)
(7,250)
446,924
–
–
–
–
–
–
457,546
(2,371)
455,175
(1,001)
(7,250)
446,924
4,191
33,032
19,808
9,864
7,061
16,925
–
–
–
–
–
–
4,191
33,032
19,808
9,864
7,061
16,925
420,330
(2,004)
418,326
–
–
–
420,330
(2,004)
418,326
13,432
44,340
57,772
60,138
–
(5,909)
(5,909)
(33,837)
13,432
38,431
51,863
26,301
–
–
–
–
(13,895)
–
(1,387)
(7,061)
(8,448)
4,191
19,137
19,808
5,707
–
5,707
(7,250)
410,618
–
–
(7,250)
410,618
–
13,432
(38,431)
(38,431)
(22,586)
–
13,432
904
(2,770)
–
(2,770)
(458)
–
(458)
–
–
–
(2,811)
2 The amounts set off in the balance sheet as shown above represent derivatives and repurchase agreements with central clearing houses which meet the criteria for offsetting under IAS 32.
3 The Group enters into derivatives and repurchase and reverse repurchase agreements with various counterparties which are governed by industry standard master netting agreements.
The Group holds and provides cash and securities collateral in respective of derivative transactions covered by these agreements. The right to set off balances under these master netting
agreements or to set off cash and securities collateral only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32.
The effects of over collateralisation have not been taken into account in the above table.
260
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Annual Report and Accounts 2016
NOTE 52: FINANCIAL RISK MANAGEMENT
As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments
represent a significant component of the risks faced by the Group.
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign
exchange risk; liquidity risk; capital risk; and insurance risk. Information about the Group’s exposure to each of the above risks and capital can be found
on pages 115 to 169. The following additional disclosures, which provide quantitative information about the risks within financial instruments held or
issued by the Group, should be read in conjunction with that earlier information.
Market risk
Interest rate risk
Interest rate risk arises from the different repricing characteristics of the assets and liabilities. Liabilities are either insensitive to interest rate movements,
for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be varied at the
Group’s discretion and that for competitive reasons generally reflect changes in the Bank of England’s base rate. The rates on the remaining deposits
are contractually fixed 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 significant proportion of the Group’s
lending assets, for example many personal loans and mortgages, bear interest rates which are contractually fixed.
The Group establishes two types of hedge accounting relationships for interest rate risk: fair value hedges and cash flow hedges. The Group is
exposed to fair value interest rate risk on its fixed rate customer loans, its fixed rate customer deposits and the majority of its subordinated debt,
and to cash flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt.
At 31 December 2016 the aggregate notional principal of interest rate swaps designated as fair value hedges was £194,416 million
(2015: £121,063 million) with a net fair value asset of £725 million (2015: asset of £848 million) (note 16). The losses on the hedging instruments were
£1,946 million (2015: losses of £618 million). The gains on the hedged items attributable to the hedged risk were £2,017 million (2015: gains of
£511 million).
In addition the Group has cash flow hedges which are primarily used to hedge the variability in the cost of funding within the commercial business.
Note 16 shows when the hedged cash flows are expected to occur and when they will affect income for designated cash flow hedges. The notional
principal of the interest rate swaps designated as cash flow hedges at 31 December 2016 was £384,182 million (2015: £460,829 million) with a net fair
value liability of £352 million (2015: liability of £718 million) (note 16). In 2016, ineffectiveness recognised in the income statement that arises from cash
flow hedges was a gain of £24 million (2015: gain of £3 million).
Currency risk
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 are disclosed on page 151.
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 currency borrowings. At
31 December 2016 the aggregate principal of these currency borrowings was £695 million (2015: £670 million). In 2016, an ineffectiveness loss of
£2 million before tax and £1 million after tax (2015: ineffectiveness gain of £5 million before tax and £4 million after tax) was recognised in the income
statement arising from net investment hedges.
The Group’s main overseas operations are in the Americas and Europe. Details of the Group’s structural foreign currency exposures, after net
investment hedges, are as follows:
Functional currency of Group operations
Gross exposure
Net investment hedges
Total structural foreign currency exposures, after net
investment hedges
2016
US Dollar
£m
479
(479)
–
Other non-
sterling
£m
36
–
36
Euro
£m
247
(216)
31
2015
US Dollar
£m
447
(415)
32
Other non-
sterling
£m
32
(1)
31
Euro
£m
246
(254)
(8)
261
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Financial statements
Notes to the consolidated financial statements continued
NOTE 52: FINANCIAL RISK MANAGEMENT continued
Credit risk
The Group’s credit risk exposure arises in respect of the instruments below and predominantly in the United Kingdom. Information about the Group’s
exposure to credit risk, credit risk management, measurement and mitigation can be found on pages 124 to 144.
A. Maximum credit exposure
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, which includes amounts held to cover unit-linked and With Profits funds liabilities,
is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions and financial guarantees, their contractual
nominal amounts.
At 31 December 2016
At 31 December 2015
Loans and receivables:
Loans and advances to banks, net1
Loans and advances to customers, net1
Debt securities, net1
Available-for-sale financial assets3
Held-to-maturity investments
Trading and other financial assets at fair value through
profit or loss:3,4
Loans and advances
Debt securities, treasury and other bills
Derivative assets
Assets arising from reinsurance contracts held
Financial guarantees
Off-balance sheet items:
Acceptances and endorsements
Other items serving as direct credit substitutes
Performance bonds and other transaction-related
contingencies
Irrevocable commitments
Maximum
exposure
£m
26,902
457,958
3,397
488,257
55,311
–
33,079
50,398
83,477
36,138
714
6,883
21
779
2,237
63,203
66,240
Offset2
£m
Net exposure
£m
–
26,902
(6,331)
451,627
–
3,397
Maximum
exposure
£m
25,117
455,175
4,191
Offset2
£m
Net exposure
£m
–
(7,250)
–
25,117
447,925
4,191
(6,331)
481,926
484,483
(7,250)
477,233
55,311
–
31,839
19,808
–
–
–
–
–
(18,539)
–
–
–
–
–
–
–
33,079
50,398
83,477
17,599
714
6,883
21
779
2,237
63,203
66,240
33,174
46,886
80,060
29,467
675
7,165
52
458
2,123
63,086
65,719
719,216
–
–
–
–
–
(19,466)
–
–
–
–
–
–
–
31,839
19,808
33,174
46,886
80,060
10,001
675
7,165
52
458
2,123
63,086
65,719
(26,716)
692,500
737,020
(24,870)
712,150
1 Amounts shown net of related impairment allowances.
2 Offset items comprise deposit amounts available for offset, and amounts available for offset under master netting arrangements, that 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 financial statements.
3 Excluding equity shares.
4 Includes assets within the Group’s unit-linked funds for which credit risk is borne by the policyholders and assets within the Group’s With-Profits funds for which credit risk is largely borne
by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back related contract liabilities.
B. Concentrations of exposure
The Group’s management of concentration risk includes single name, industry sector and country limits as well as controls over the Group’s overall
exposure to certain products. Further information on the Group’s management of this risk is included within Credit risk mitigation, Risk management
on page 124.
At 31 December 2016 the most significant concentrations of exposure were in mortgages (comprising 67 per cent of total loans and advances to
customers) and to financial, business and other services (comprising 11 per cent of the total). For further information on concentrations of the Group’s
loans, refer to note 18.
Following the continuing reduction in the Group’s non-UK activities, an analysis of credit risk exposures by geographical region has not been provided.
262
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 52: FINANCIAL RISK MANAGEMENT continued
C. Credit quality of assets
Loans and receivables
The disclosures in the table below and those on page 264 are produced under the underlying basis used for the Group’s segmental reporting. The
Group believes that, for reporting periods following a significant acquisition such as the acquisition of HBOS in 2009, this underlying basis, which
includes the allowance for loan losses at the acquisition date on a gross basis, more fairly reflects the underlying provisioning status of the loans. The
remaining acquisition-related fair value adjustments in respect of this lending are therefore identified separately in this table.
The analysis of lending between retail and commercial 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 commercial are
exposures to corporate customers and other large institutions.
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Loans and advances
Loans and advances to customers
Loans and
advances
to banks
£m
Retail –
mortgages
£m
Retail –
other
£m
Commercial
£m
Total
£m
Loans and
advances
designated
at fair value
through
profit or loss
£m
At 31 December 2016
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 balance sheet carrying value
At 31 December 2015
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 balance sheet carrying value
26,888
296,303
39,478
109,364
445,145
33,079
14
–
–
26,902
–
–
26,902
7,340
784
3,536
307,963
(1,696)
386
392
1,038
41,294
305
689
2,056
112,414
(458)
(1,378)
8,031
1,865
6,630
461,671
(3,532)
(181)
–
–
–
33,079
–
–
457,958
33,079
25,006
302,063
38,886
100,001
440,950
33,174
111
–
–
25,117
–
–
25,117
8,233
732
3,269
314,297
(1,617)
393
690
911
40,880
(448)
463
1,092
2,896
104,452
(2,107)
9,089
2,514
7,076
–
–
–
459,629
33,174
(4,172)
(282)
–
–
455,175
33,174
The criteria that the Group uses to determine that there is objective evidence of an impairment loss are disclosed in note 2(H). Included in loans
and receivables are advances which are individually determined to be impaired with a gross amount before impairment allowances of £2,870 million
(31 December 2015: £4,406 million).
The table below sets out the reconciliation of the allowance for impairment losses of £2,412 million (2015: £3,033 million) shown in note 21 to the
allowance for impairment losses on an underlying basis of £3,532 million (2015: £4,172 million) shown above:
Allowance for impairment losses on loans and advances to customers
HBOS allowance at 16 January 20091
HBOS charge covered by fair value adjustments2
Amounts subsequently written off
Foreign exchange and other movements
Allowance for impairment losses on loans and advances to customers on an underlying basis
2016
£m
2,412
11,147
12,236
2015
£m
3,033
11,147
12,166
(22,699)
(22,623)
684
436
3,532
690
449
4,172
1 Comprises an allowance held at 31 December 2008 of £10,693 million and a charge for the period from 1 January 2009 to 16 January 2009 of £454 million.
2 This represents the element of the charge on loans and advances to customers in HBOS’s results that was included within the Group’s fair value adjustments in respect of the acquisition
of HBOS on 16 January 2009.
263
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Financial statements
Notes to the consolidated financial statements continued
NOTE 52: FINANCIAL RISK MANAGEMENT continued
Loans and advances which are neither past due nor impaired
At 31 December 2016
Good quality
Satisfactory quality
Lower quality
Below standard, but not impaired
Total loans and advances which are neither past due
nor impaired
At 31 December 2015
Good quality
Satisfactory quality
Lower quality
Below standard, but not impaired
Total loans and advances which are neither past due
nor impaired
Loans and advances to customers
Loans and
advances
to banks
£m
Retail –
mortgages
£m
Retail –
other
£m
Commercial
£m
Total
£m
26,745
295,286
87
3
53
814
39
164
34,195
4,479
387
417
72,083
30,433
6,433
415
Loans and
advances
designated
at fair value
through
profit or loss
£m
33,049
30
–
–
26,888
296,303
39,478
109,364
445,145
33,079
24,670
301,403
311
4
21
527
27
106
33,589
4,448
476
373
63,453
28,899
7,210
439
33,156
15
3
–
25,006
302,063
38,886
100,001
440,950
33,174
The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and commercial are not the
same, reflecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided.
Commercial lending has 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 incorporate expected recovery levels for mortgages, as well as probabilities of default assessed using internal rating
models. Further information about the Group’s internal probabilities of default rating models can be found on page 124.
Loans and advances which are past due but not impaired
Loans and advances to customers
Retail –
mortgages
£m
Retail –
other
£m
Commercial
£m
Total
£m
Loans and
advances
designated
at fair value
through
profit or loss
£m
–
–
–
–
–
–
–
–
–
–
–
–
285
75
2
6
18
386
276
81
9
8
19
393
157
37
74
14
23
3,989
1,685
1,061
1,255
41
305
8,031
248
100
52
19
44
463
4,590
1,913
1,126
1,397
63
9,089
At 31 December 2016
0-30 days
30-60 days
60-90 days
90-180 days
Over 180 days
Total loans and advances which are past due
but not impaired
At 31 December 2015
0-30 days
30-60 days
60-90 days
90-180 days
Over 180 days
Loans and
advances
to banks
£m
14
–
–
–
–
14
111
–
–
–
–
3,547
1,573
985
1,235
–
7,340
4,066
1,732
1,065
1,370
–
Total loans and advances which are past due
but not impaired
111
8,233
A financial asset is ‘past due’ if a counterparty has failed to make a payment when contractually due.
264
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 52: FINANCIAL RISK MANAGEMENT continued
Debt securities classified as loans and receivables
An analysis by credit rating of the Group’s debt securities classified as loans and receivables is provided below:
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Gross exposure
Allowance for impairment losses
Total debt securities classified as loans and receivables
1 Credit ratings equal to or better than ‘BBB’.
2016
2015
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
2,089
1,192
3,281
29
3,310
–
98
98
65
2,089
1,290
3,379
94
163
3,473
(76)
3,397
2,528
1,140
3,668
417
4,085
–
94
94
109
203
2,528
1,234
3,762
526
4,288
(97)
4,191
2 Other comprises sub-investment grade (2016: £91 million; 2015: £87 million) and not rated (2016: £72 million; 2015: £116 million).
Available-for-sale financial assets (excluding equity shares)
An analysis of the Group’s available-for-sale financial assets is included in note 22. The credit quality of the Group’s available-for-sale financial assets
(excluding equity shares) is set out below:
Debt securities:
Government securities
Bank and building society certificates of deposit
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Total held as available-for-sale financial assets
1 Credit ratings equal to or better than ‘BBB’.
2016
2015
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
48,714
142
108
312
420
6,030
55,306
–
–
–
5
5
–
5
48,714
142
108
317
425
6,030
55,311
25,329
186
197
315
512
5,808
31,835
–
–
–
4
4
–
4
25,329
186
197
319
516
5,808
31,839
2 Other comprises sub-investment grade (2016: £5 million; 2015: £4 million) and not rated (2016: £nil; 2015: £nil).
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265
Financial statements
Notes to the consolidated financial statements continued
NOTE 52: FINANCIAL RISK MANAGEMENT continued
Debt securities, treasury and other bills held at fair value through profit or loss
An analysis of the Group’s trading and other financial assets at fair value through profit or loss is included in note 15. The credit quality of the Group’s
debt securities, treasury and other bills held at fair value through profit or loss is set out below:
2016
2015
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
–
–
–
–
30
30
–
16
–
41
–
41
2,333
2,390
–
2,390
2,420
8,269
516
85
601
612
9,482
13,848
2,039
135
842
762
1,604
19,704
37,330
74
37,404
46,886
Debt securities, treasury and other bills held at fair value
through profit or loss
Trading assets:
Government securities
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Total held as trading assets
Other assets held at fair value through profit or loss:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
11,828
47
69
116
221
12,165
14,904
1,318
244
633
1,178
1,811
–
–
–
–
3
3
–
7
–
27
291
318
11,828
8,269
47
69
116
224
516
85
601
582
12,168
9,452
14,904
1,325
244
660
1,469
2,129
13,848
2,023
135
801
762
1,563
17,371
Corporate and other debt securities
17,445
2,163
19,608
Total debt securities held at fair value through profit or
loss
Treasury bills and other bills
Total other assets held at fair value through profit or loss
Total held at fair value through profit or loss
1 Credit ratings equal to or better than ‘BBB’.
35,722
2,488
38,210
34,940
20
35,742
47,907
–
2,488
2,491
20
38,230
50,398
74
35,014
44,466
2 Other comprises sub-investment grade (2016: £485 million; 2015: £544 million) and not rated (2016: £2,006 million; 2015: £1,876 million).
Credit risk in respect of trading and other financial assets at fair value through profit or loss held within the Group’s unit-linked funds is borne by the
policyholders and credit risk in respect of with-profits funds is largely borne by the policyholders. Consequently, the Group has no significant exposure
to credit risk for such assets which back those contract liabilities.
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NOTE 52: FINANCIAL RISK MANAGEMENT continued
Derivative assets
An analysis of derivative assets is given in note 16. The Group reduces exposure to credit risk by using master netting agreements and by
obtaining collateral in the form of cash or highly liquid securities. In respect of the Group’s net credit risk relating to derivative assets of
£17,599 million (2015: £10,001 million), cash collateral of £6,472 million (2015: £3,228 million) was held and a further £613 million was due from
OECD banks (2015: £94 million).
Trading and other
Hedging
Total derivative financial instruments
1 Credit ratings equal to or better than ‘BBB’.
2016
2015
Investment
grade1
£m
31,373
2,664
34,037
Other2
£m
2,053
48
2,101
Total
£m
33,426
2,712
36,138
Investment
grade1
£m
24,764
2,653
27,417
Other2
£m
2,017
33
2,050
Total
£m
26,781
2,686
29,467
2 Other comprises sub-investment grade (2016: £1,830 million; 2015: £1,418 million) and not rated (2016: £271 million; 2015: £632 million).
Financial guarantees and irrevocable loan commitments
Financial guarantees 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 significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards.
D. Collateral held as security for financial assets
A general description of collateral held as security in respect of financial instruments is provided on page 126. The Group holds collateral against loans
and receivables and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral
below. Collateral held as security for trading and other financial assets at fair value through profit or loss and for derivative assets is also shown below.
Loans and receivables
The disclosures below are produced under the underlying basis used for the Group’s segmental reporting. The Group believes that, for reporting
periods following a significant acquisition, such as the acquisition of HBOS in 2009, this underlying basis, which includes the allowance for loan losses
at the acquisition on a gross basis, more fairly reflects the underlying provisioning status of the loans.
The Group holds collateral in respect of loans and advances to banks and customers as set out below. The Group does not hold collateral against
debt securities, comprising asset-backed securities and corporate and other debt securities, which are classified as loans and receivables.
Loans and advances to banks
There were reverse repurchase agreements which are accounted for as collateralised loans within loans and advances to banks with a carrying
value of £902 million (2015: £963 million), against which the Group held collateral with a fair value of £785 million (2015: £1,009 million).
These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Loans and advances to customers
Retail lending
Mortgages
An analysis by loan-to-value ratio of the Group’s residential mortgage lending is provided below. The value of collateral used in determining the
loan-to-value ratios 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.
2016
2015
Less than 70 per cent
70 per cent to 80 per cent
80 per cent to 90 per cent
90 per cent to 100 per cent
Greater than 100 per cent
Neither
past due
nor impaired
£m
220,497
39,789
23,589
7,983
4,445
Past due but
not impaired
£m
Impaired
£m
Gross
£m
Neither
past due
nor impaired
£m
Past due but
not impaired
£m
5,288
1,004
621
223
204
2,334
228,119
211,631
648
495
355
488
41,441
24,705
8,561
5,137
45,764
27,529
10,908
6,231
4,907
1,350
935
610
431
Impaired
£m
Gross
£m
1,965
218,503
671
528
247
590
47,785
28,992
11,765
7,252
Total
296,303
7,340
4,320
307,963
302,063
8,233
4,001
314,297
267
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Notes to the consolidated financial statements continued
NOTE 52: FINANCIAL RISK MANAGEMENT continued
Other
The majority of non-mortgage retail lending is unsecured. At 31 December 2016, impaired non-mortgage lending amounted to £972 million, net of
an impairment allowance of £458 million (2015: £1,153 million, net of an impairment allowance of £448 million). The fair value of the collateral held in
respect of this lending was £139 million (2015: £107 million). In determining the fair value of collateral, no specific amounts have been attributed to the
costs of realisation and the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate
the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
Unimpaired non-mortgage retail lending amounted to £39,864 million (2015: £39,279 million). Lending decisions are predominantly based on an
obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values are rigorously
assessed at the time of loan origination and are thereafter monitored in accordance with business unit credit policy.
The Group credit risk disclosures for unimpaired non-mortgage retail lending report assets gross of collateral and therefore disclose the maximum
loss exposure. The Group believes that this approach is appropriate. The value of collateral is reassessed if there is observable evidence of distress
of the borrower. Unimpaired non-mortgage retail lending, including any associated collateral, is managed on a customer-by-customer basis rather
than a portfolio basis. No aggregated collateral information for the entire unimpaired non-mortgage retail lending portfolio is provided to key
management personnel.
Commercial lending
Reverse repurchase transactions
At 31 December 2016 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of
£8,304 million (2015: £nil), against which the Group held collateral with a fair value of £7,490 million (2015: £nil), all of which the Group was able to
repledge. Included in these amounts were collateral balances in the form of cash provided in respect of reverse repurchase agreements of £8 million
(2015: £nil). These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Impaired secured lending
The value of collateral is re-evaluated and its legal soundness re-assessed if there is observable evidence of distress of the borrower; this evaluation
is used to determine potential loss allowances and management’s strategy to try to either repair the business or recover the debt.
At 31 December 2016, impaired secured commercial lending amounted to £204 million, net of an impairment allowance of £401 million
(2015: £1,245 million, net of an impairment allowance of £577 million). The fair value of the collateral held in respect of impaired secured commercial
lending was £1,160 million (2015: £1,367 million). In determining the fair value of collateral, no specific amounts have been attributed to the
costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured commercial lending,
the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any
over-collateralisation and to provide a clearer representation of the Group’s exposure.
Impaired secured commercial lending and associated collateral relates to lending to property companies and to customers in the financial, business
and other services; transport, distribution and hotels; and construction industries.
Unimpaired secured lending
Unimpaired secured commercial lending amounted to £36,275 million (2015: £51,298 million).
For unimpaired secured commercial lending, the Group reports assets gross of collateral and therefore discloses the maximum loss exposure.
The Group believes that this approach is appropriate as collateral values at origination and during a period of good performance may not be
representative of the value of collateral if the obligor enters a distressed state.
Unimpaired secured commercial lending is predominantly managed on a cash flow basis. On occasion, it may include an assessment of underlying
collateral, although, for impaired lending, this will not always involve assessing it on a fair value basis. No aggregated collateral information for the
entire unimpaired secured commercial lending portfolio is provided to key management personnel.
Trading and other financial assets at fair value through profit or loss (excluding equity shares)
Included in trading and other financial assets at fair value through profit or loss are reverse repurchase agreements treated as collateralised loans with
a carrying value of £33,079 million (2015: £33,174 million). Collateral is held with a fair value of £30,850 million (2015: £36,493 million), all of which the
Group is able to repledge. At 31 December 2016, £27,303 million had been repledged (2015: £15,438 million).
In addition, securities held as collateral in the form of stock borrowed amounted to £47,816 million (2015: £58,621 million). Of this amount,
£16,204 million (2015: £29,859 million) had been resold or repledged as collateral for the Group’s own transactions.
These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Derivative assets, after offsetting of amounts under master netting arrangements
The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly
liquid securities. In respect of the net derivative assets after offsetting of amounts under master netting arrangements of £17,599 million
(2015: £10,001 million), cash collateral of £6,472 million (2015: £3,228 million) was held.
Irrevocable loan commitments and other credit-related contingencies
At 31 December 2016, the Group held irrevocable loan commitments and other credit-related contingencies of £66,240 million (2015: £65,719 million).
Collateral is held as security, in the event that lending is drawn down, on £10,053 million (2015: £9,551 million) of these balances.
Collateral repossessed
During the year, £241 million of collateral was repossessed (2015: £203 million), consisting primarily of residential property.
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 commercial lending. In such cases, the assets are carried on the Group’s balance sheet and are classified according to the Group’s
accounting policies.
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Annual Report and Accounts 2016
NOTE 52: FINANCIAL RISK MANAGEMENT continued
E. Collateral pledged as security
The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted under terms that
are usual and customary for standard securitised borrowing contracts.
Repurchase transactions
Deposits from banks
Included in deposits from banks are deposits held as collateral for facilities granted, with a carrying value of £7,279 million (2015: £7,061 million)
and a fair value of £8,395 million (2015: £6,707 million).
Customer deposits
Customer deposits included deposits held as collateral for facilities granted with a carrying value of £2,462 million (2015: £nil) and a fair value
of £2,277 million (2015: £nil). No collateral balances in the form of cash were provided in respect of repurchase agreements (2015: £5 million).
Trading and other financial liabilities at fair value through profit or loss
The fair value of collateral pledged in respect of repurchase transactions, accounted for as secured borrowing, where the secured party is permitted
by contract or custom to repledge was £45,702 million (2015: £44,655 million).
Securities lending transactions
The following on balance sheet financial assets have been lent to counterparties under securities lending transactions:
Trading and other financial assets at fair value through profit or loss
Loans and advances to customers
Available-for-sale financial assets
2016
£m
6,991
583
3,206
10,780
2015
£m
6,478
1,491
4,247
12,216
Securitisations and covered bonds
In addition to the assets detailed above, the Group also holds assets that are encumbered through the Group’s asset-backed conduits and its
securitisation and covered bond programmes. Further details of these assets are provided in notes 19 and 20.
Liquidity risk
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. Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturity. The Group
carries out monthly stress testing of its liquidity position against a range of scenarios, including those prescribed by the PRA. The Group’s liquidity risk
appetite is also calibrated against a number of stressed liquidity metrics.
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269
Financial statements
Notes to the consolidated financial statements continued
NOTE 52: FINANCIAL RISK MANAGEMENT continued
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 fixed maturity are included in the over 5 years category. Certain balances, included in the table below on the basis of their
residual maturity, are repayable on demand upon payment of a penalty.
Maturities of assets and liabilities
At 31 December 2016
Assets
Up to
1 month
£m
1-3
months
£m
3-6
months
£m
6-9
months
£m
9-12
months
£m
1-2
years
£m
2-5
years
£m
Over 5
years
£m
Total
£m
Cash and balances at central banks
47,446
2
4
–
–
–
–
–
47,452
Trading and other financial assets at fair value
through profit or loss
Derivative financial instruments
Loans and advances to banks
20,168
14,903
956
9,801
1,700
6,049
7,387
1,393
3,894
2,914
786
1,201
817
651
867
1,680
2,230
1,281
6,011
4,165
3,692
97,294
151,174
24,257
36,138
117
26,902
Loans and advances to customers
20,179
10,651
14,235
12,400
10,773
26,007
69,300 294,413 457,958
Debt securities held as loans and receivables
Available-for-sale financial assets
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
Derivative financial instruments, trading and other
financial liabilities at fair value through profit or loss
Debt securities in issue
Liabilities arising from insurance and investment
contracts
Other liabilities
Subordinated liabilities
Total liabilities
At 31 December 2015
Assets
8
127
5,025
–
259
583
–
73
242
637
–
222
584
1,560
1,059
–
1,887
1,846
34
3,113
3,397
16,080
37,239
56,524
4,808
22,783
38,248
103,710
34,147
27,570
19,740
14,389
34,931 104,090 479,216 817,793
3,772
2,779
347,753
18,936
18,381
19,640
4,065
8,328
1,583
3,282
–
2,190
2,266
390
1,062
8,961
8,779
6,433
2,737
1,213
161
503
13
43
10,482
8,477
13,859
7,859
6,430
353
16,384
562 415,460
1,696
4,158
2,463
2,164
393
1,179
1,224
2,377
1,440
3,843
6,939
5,575
30,335
89,428
25,020
20,147
76,314
8,588
19,971
74,593 114,502
413
–
1,750
2,737
4,527
23,544
37,059
12,610
19,831
378,836
54,529
29,346
21,859
14,710
35,435
72,119 162,144 768,978
Cash and balances at central banks
58,411
2
4
–
Trading and other financial assets at fair value
through profit or loss
25,696
12,877
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Debt securities held as loans and receivables
Available-for-sale financial assets
Held-to-maturity investments
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
1,226
9,802
19,392
9
109
–
1,257
4,676
6,351
–
269
–
4,620
1,068
6,526
841
4,157
3,008
585
915
11,864
8,318
–
56
–
884
1
535
–
1,589
14,951
119,265
26,500
24,332
–
680
607
1,095
11,426
98
120
–
1,421
–
–
–
58,417
1,495
1,480
1,784
6,411
3,889
2,076
83,843
140,536
19,582
612
29,467
25,117
28,061
68,685
301,078
455,175
208
1,000
297
2,204
28
7,178
3,357
9,561
3,847
23,765
16,154
19,598
4,191
33,032
19,808
40,945
15,447
36,529
101,185
468,479
806,688
6,586
1,076
5,958
42
132
22
340,445
20,365
13,758
10,584
9,277
15,927
2,543
6,742
566
16,925
1,228
418,326
Derivative financial instruments, trading and other
financial liabilities at fair value through profit or loss
Debt securities in issue
Liabilities arising from insurance and investment
contracts
Other liabilities
Subordinated liabilities
Total liabilities
24,326
5,822
14,191
7,273
1,580
4,240
269
1,558
2,800
307
5,070
5,556
2,279
449
329
1,625
4,757
2,066
2,326
466
806
1,661
2,269
1,906
2,083
4,020
11,697
5,135
21,984
22,991
23,306
78,164
82,056
7,817
20,674
64,828
103,071
634
648
5,079
9,321
20,420
9,889
37,854
23,312
383,268
47,570
33,399
21,866
18,134
40,765
71,478
143,228
759,708
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 this data to evaluate the Group’s liquidity position.
In particular, amounts in respect of customer deposits are usually contractually payable on demand or at short notice. However, in practice, these
deposits are not usually withdrawn on their contractual maturity.
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Annual Report and Accounts 2016
NOTE 52: FINANCIAL RISK MANAGEMENT continued
The table below analyses financial instrument liabilities of the Group, excluding those arising from insurance and participating investment contracts,
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.
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
At 31 December 2016
Deposits from banks
Customer deposits
Trading and other financial liabilities at
fair value through profit or loss
Debt securities in issue
Liabilities arising from non-participating
investment contracts
Subordinated liabilities
3,686
347,573
14,390
7,590
20,112
41
4,154
19,151
19,718
8,721
–
674
Total non-derivative financial liabilities
393,392
52,418
1,541
28,248
11,845
12,533
–
1,289
55,456
5,883
20,789
1,938
36,386
–
9,279
74,275
Over 5
years
£m
1,203
1,294
13,513
17,635
–
18,542
52,187
Total
£m
16,467
417,055
61,404
82,865
20,112
29,825
627,728
Derivative financial liabilities:
Gross settled derivatives – outflows
Gross settled derivatives – inflows
Gross settled derivatives – net flows
Net settled derivatives liabilities
Total derivative financial liabilities
At 31 December 2015
Deposits from banks
Customer deposits
Trading and other financial liabilities at
fair value through profit or loss
Debt securities in issue
Liabilities arising from non-participating
investment contracts
Subordinated liabilities
Total non-derivative financial liabilities
Derivative financial liabilities:
Gross settled derivatives – outflows
Gross settled derivatives – inflows
Gross settled derivatives – net flows
Net settled derivatives liabilities
Total derivative financial liabilities
33,128
24,088
25,366
52,925
36,462
171,969
(31,359)
(22,401)
(23,510)
(49,239)
(32,382)
(158,891)
1,769
21,669
23,438
6,673
339,387
15,055
7,526
22,777
522
391,940
31,932
(30,432)
1,500
16,600
18,100
1,687
117
1,804
1,143
21,234
15,465
9,131
–
366
47,339
28,059
(26,967)
1,092
115
1,207
1,856
620
2,476
6,156
34,012
5,365
18,467
–
4,132
68,132
27,510
(26,337)
1,173
321
1,494
3,686
1,167
4,853
2,785
23,932
5,897
34,515
–
13,238
80,367
29,962
(27,883)
2,079
953
3,032
4,080
3,020
7,100
400
312
10,662
24,540
–
20,476
56,390
28,508
(26,521)
1,987
2,587
4,574
13,078
26,593
39,671
17,157
418,877
52,444
94,179
22,777
38,734
644,168
145,971
(138,140)
7,831
20,576
28,407
The Group’s financial guarantee contracts are accounted for as financial instruments and measured at fair value, upon initial recognition, on the
balance sheet. The majority of the Group’s financial guarantee contracts are callable on demand, were the guaranteed party to fail to meet its
obligations. It is, however, expected that most guarantees will expire unused. The contractual nominal amounts of these guarantees totalled
£6,883 million at 31 December 2016 (2015: £7,165 million) with £3,815 million expiring within one year; £667 million between one and three years;
£1,334 million between three and five years; and £1,067 million over five years (2015: £4,014 million expiring within one year; £942 million between
one and three years; £1,182 million between three and five years; and £1,027 million over five years).
The majority of the Group’s non-participating investment contract liabilities are unit-linked. These unit-linked products are invested in accordance
with unit fund mandates. Clauses are included in policyholder contracts to permit the deferral of sales, where necessary, so that linked assets can
be realised without being a forced seller.
The principal amount for undated subordinated liabilities with no redemption option is included within the over five years column; interest of
approximately £23 million (2015: £39 million) per annum which is payable in respect of those instruments for as long as they remain in issue is
not included beyond five years.
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271
Financial statements
Notes to the consolidated financial statements continued
NOTE 52: FINANCIAL RISK MANAGEMENT continued
Further information on the Group’s liquidity exposures is provided on pages 154 to 157.
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:
At 31 December 2016
At 31 December 2015
Up to
1 month
£m
1,283
1,477
1-3
months
£m
1,836
1,081
3-12
months
£m
6,266
4,745
1-5
years
£m
23,425
10,444
Over 5
years
£m
61,580
62,547
Total
£m
94,390
80,294
For insurance and participating investment contracts which are neither unit-linked nor in the Group’s with-profit funds, in particular annuity liabilities,
the aim is to invest in assets such that the cash flows on investments match those on the projected future liabilities.
The following tables set out the amounts and residual maturities of the Group’s off balance sheet contingent liabilities and commitments.
Up to
1 month
£m
1-3
months
£m
3-6
months
£m
6-9
months
£m
9-12
months
£m
1-3
years
£m
3-5
years
£m
Over 5
years
£m
At 31 December 2016
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
13
427
440
6
782
788
–
163
163
–
153
153
1
122
123
1
466
467
–
280
280
–
623
623
Total
£m
21
3,016
3,037
Lending commitments
48,210
3,546
5,276
4,783
11,628
17,212
18,775
4,090
113,520
Other commitments
Total commitments
–
48,210
Total contingents and commitments 48,650
At 31 December 2015
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
Lending commitments
Other commitments
Total commitments
Total contingents and commitments
Up to
1 month
£m
16
331
347
46,443
–
46,443
46,790
3
3,549
4,337
1-3
months
£m
34
441
475
1,989
–
1,989
2,464
–
5,276
5,439
3-6
months
£m
–
433
433
4,444
2
4,446
4,879
41
4,824
4,977
6-9
months
£m
–
116
116
3,276
31
3,307
3,423
1
11,629
11,752
9-12
months
£m
–
142
142
79
17,291
17,758
1-3
years
£m
1
365
366
11,575
18,803
5
11,580
11,722
4
18,807
19,173
122
18,897
19,177
402
648
4,492
114,168
5,115
117,205
3-5
years
£m
Over 5
years
£m
Total
£m
1
107
108
19,234
83
19,317
19,425
–
52
646
2,581
646
6,731
296
7,027
7,673
2,633
112,495
421
112,916
115,549
NOTE 53: CONSOLIDATED CASH FLOW STATEMENT
(A) Change in operating assets
Change in loans and receivables
Change in derivative financial instruments, trading and other financial assets
at fair value through profit or loss
Change in other operating assets
Change in operating assets
(B) Change in operating liabilities
Change in deposits from banks
Change in customer deposits
Change in debt securities in issue
Change in derivative financial instruments, trading and other liabilities
at fair value through profit or loss
Change in investment contract liabilities
Change in other operating liabilities
Change in operating liabilities
272
2016
£m
710
(13,889)
961
(12,218)
2016
£m
(654)
(3,690)
(6,552)
11,265
(2,665)
(363)
(2,659)
2015
£m
6,081
20,689
7,930
34,700
2015
£m
6,107
(4,252)
5,657
(16,924)
(3,922)
1,349
(11,985)
2014
£m
12,852
(11,767)
(1,957)
(872)
2014
£m
(3,029)
7,745
(11,089)
24,020
(342)
(5,313)
11,992
Lending commitments
48,210
3,546
5,276
4,783
11,628
17,212
18,775
4,090
113,520
Further information on the Group’s liquidity exposures is provided on pages 154 to 157.
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:
At 31 December 2016
At 31 December 2015
Up to
1 month
£m
1,283
1,477
months
1-3
£m
1,836
1,081
3-12
months
£m
6,266
4,745
1-5
years
£m
23,425
10,444
Over 5
years
£m
61,580
62,547
Total
£m
94,390
80,294
For insurance and participating investment contracts which are neither unit-linked nor in the Group’s with-profit funds, in particular annuity liabilities,
the aim is to invest in assets such that the cash flows on investments match those on the projected future liabilities.
The following tables set out the amounts and residual maturities of the Group’s off balance sheet contingent liabilities and commitments.
Up to
1 month
£m
months
1-3
£m
3-6
months
£m
6-9
months
£m
9-12
months
£m
1-3
years
£m
3-5
years
£m
Over 5
years
£m
At 31 December 2016
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
Other commitments
Total commitments
Total contingents and commitments 48,650
At 31 December 2015
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
Lending commitments
Other commitments
Total commitments
Total contingents and commitments
13
427
440
–
48,210
Up to
1 month
£m
16
331
347
46,443
–
46,443
46,790
6
782
788
3
3,549
4,337
months
1-3
£m
34
441
475
1,989
–
1,989
2,464
–
163
163
–
5,276
5,439
3-6
months
£m
–
433
433
4,444
2
4,446
4,879
–
153
153
41
4,824
4,977
months
6-9
£m
–
116
116
3,276
31
3,307
3,423
1
122
123
1
11,629
11,752
9-12
months
£m
–
142
142
5
11,580
11,722
1
466
467
79
17,291
17,758
1-3
years
£m
1
365
366
4
18,807
19,173
11,575
18,803
NOTE 53: CONSOLIDATED CASH FLOW STATEMENT
(A) Change in operating assets
Change in derivative financial instruments, trading and other financial assets
Change in loans and receivables
at fair value through profit or loss
Change in other operating assets
Change in operating assets
(B) Change in operating liabilities
Change in deposits from banks
Change in customer deposits
Change in debt securities in issue
at fair value through profit or loss
Change in investment contract liabilities
Change in other operating liabilities
Change in operating liabilities
Change in derivative financial instruments, trading and other liabilities
Total
£m
21
3,016
3,037
–
280
280
–
623
623
122
18,897
19,177
402
648
4,492
114,168
5,115
117,205
3-5
years
£m
Over 5
years
£m
Total
£m
1
107
108
19,234
83
19,317
19,425
–
52
646
2,581
646
6,731
296
7,027
7,673
2,633
112,495
421
112,916
115,549
2016
£m
710
(13,889)
961
(12,218)
2016
£m
(654)
(3,690)
(6,552)
11,265
(2,665)
(363)
(2,659)
2015
£m
6,081
20,689
7,930
34,700
2015
£m
6,107
(4,252)
5,657
(16,924)
(3,922)
1,349
(11,985)
2014
£m
12,852
(11,767)
(1,957)
(872)
2014
£m
(3,029)
7,745
(11,089)
24,020
(342)
(5,313)
11,992
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 53: CONSOLIDATED CASH FLOW STATEMENT continued
(C) Non-cash and other items
Depreciation and amortisation
Revaluation of investment properties
Allowance for loan losses
Write-off of allowance for loan losses, net of recoveries
Impairment of available-for-sale financial assets
Change in insurance contract liabilities
Payment protection insurance provision
Other regulatory provisions
Other provision movements
Net charge (credit) in respect of defined benefit schemes
Impact of consolidation and deconsolidation of OEICs1
Unwind of discount on impairment allowances
Foreign exchange impact on balance sheet2
Loss on ECN transactions
Interest expense on subordinated liabilities
Loss (profit) on disposal of businesses
Net gain on sale of available-for-sale financial assets
Hedging valuation adjustments on subordinated debt
Value of employee services
Transactions in own shares
Accretion of discounts and amortisation of premiums and issue costs
Share of post-tax results of associates and joint ventures
Transfers to income statement from reserves
Profit on disposal of tangible fixed assets
Other non-cash items
Total non-cash items
Contributions to defined benefit schemes
Payments in respect of payment protection insurance provision
Payments in respect of other regulatory provisions
Other
Total other items
Non-cash and other items
2016
£m
2,380
83
592
(1,272)
173
14,084
1,000
1,085
(40)
287
2015
£m
2,112
(416)
441
(3,467)
4
(2,856)
4,000
837
337
315
2014
£m
1,935
(513)
737
(5,761)
2
4,070
2,200
925
222
(478)
(3,157)
(5,978)
(5,277)
(32)
(155)
721
(56)
507
–
1,864
1,970
–
(575)
153
309
(175)
465
1
(557)
(93)
(17)
17,124
(630)
(2,200)
(761)
2
(3,589)
13,535
46
(51)
(162)
279
(816)
339
3
(956)
(51)
(11)
(3,630)
(433)
(3,091)
(661)
7
(4,178)
(7,808)
(126)
770
1,336
2,374
(208)
(131)
559
340
(286)
122
(32)
(1,153)
(44)
(8)
1,575
(538)
(2,458)
(1,104)
29
(4,071)
(2,496)
1 These OEICs (Open-ended investment companies) are mutual funds which are consolidated if the Group manages the funds and also has a sufficient beneficial interest. The population of
OEICs to be consolidated varies at each reporting date as external investors acquire and divest holdings in the various funds. The consolidation of these funds is effected by the inclusion
of the fund investments and a matching liability to the unitholders; and changes in funds consolidated represent a non-cash movement on the balance sheet.
2 When considering the movement on each line of the balance sheet, the impact of foreign exchange rate movements is removed in order to show the underlying cash impact.
3 A number of capital transactions entered into by the Group involved the exchange of existing securities for new issues and as a result there was no related cash flow.
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273
Financial statements
Notes to the consolidated financial statements continued
NOTE 53: CONSOLIDATED CASH FLOW STATEMENT continued
(D) Analysis of cash and cash equivalents as shown in the balance sheet
Cash and balances at central banks
Less: mandatory reserve deposits1
Loans and advances to banks
Less: amounts with a maturity of three months or more
Total cash and cash equivalents
2016
£m
2015
£m
2014
£m
47,452
(914)
46,538
26,902
58,417
(941)
57,476
25,117
50,492
(980)
49,512
26,155
(11,052)
(10,640)
(10,520)
15,850
62,388
14,477
71,953
15,635
65,147
1 Mandatory reserve deposits are held with local central banks in accordance with statutory requirements; these deposits are not available to finance the Group’s day-to-day operations.
Included within cash and cash equivalents at 31 December 2016 is £14,475 million (2015: £13,545 million; 2014: £12,855 million) held within the Group’s
long-term insurance and investments businesses, which is not immediately available for use in the business.
(E) Disposal and closure of group undertakings and businesses
Trading and other assets at fair value through profit or loss
Loans and advances to customers
Loans and advances to banks
Available-for-sale financial assets
Value of in-force business
Property, plant and equipment
Customer deposits
Debt securities in issue
Liabilities arising from insurance contracts and participating investment contracts
Liabilities arising from non-participating investment contracts
Non-controlling interests
Other net assets (liabilities)
Net assets
Non-cash consideration received
(Loss) profit on sale
Cash consideration received on losing control of group undertakings and businesses
Cash and cash equivalents disposed
Net cash inflow (outflow)
2016
£m
–
–
–
–
–
–
–
–
–
–
–
–
5
5
5
–
–
5
–
5
2015
£m
3,420
21,333
5,539
654
60
150
2014
£m
11
256
55
–
–
–
31,156
322
(24,613)
(9)
(3,828)
(549)
(825)
(314)
(30,138)
1,018
–
(46)
972
(5,043)
(4,071)
(266)
–
–
–
–
802
536
858
(518)
208
548
(5)
543
NOTE 54: ACQUISITION OF MBNA LIMITED
On 20 December 2016, the Group signed an agreement with Bank of America Merrill Lynch (BAML) to purchase 100 per cent of the share capital
of MBNA Limited, a UK consumer credit card business, for a cash consideration of £1.9 billion. The Group is expected to acquire control of MBNA
Limited during 2017, subject to the receipt of competition and regulatory approval.
274
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 55: FUTURE ACCOUNTING DEVELOPMENTS
The following pronouncements are not applicable for the year ending 31 December 2016 and have not been applied in preparing these financial
statements. Save as disclosed below, the impact of these accounting changes is still being assessed by the Group and reliable estimates cannot be
made at this stage.
With the exception of IFRS 9, which was endorsed in November 2016, as at 21 February 2017 these pronouncements are awaiting EU endorsement.
IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for annual periods beginning on or after 1 January 2018.
Classification and Measurement
IFRS 9 requires financial assets to be classified into one of three measurement categories, fair value through profit or loss, fair value through other
comprehensive income or amortised cost. Financial assets will be measured at amortised cost if they are held within a business model the objective
of which is to hold financial assets in order to collect contractual cash flows, and their contractual cash flows represent solely payments of principal and
interest. Financial assets will be measured at fair value through other comprehensive income if they are held within a business model the objective of
which is achieved by both collecting contractual cash flows and selling financial assets and their contractual cash flows represent solely payments of
principal and interest. Financial assets not meeting either of these two business models; and all equity instruments (unless designated at inception
to fair value through other comprehensive income); and all derivatives are measured at fair value through profit or loss. An entity may, at initial
recognition, designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces an accounting
mismatch.
The Group has undertaken an assessment to determine the potential impact of changes in classification and measurement of financial assets. The
adoption of IFRS 9 is unlikely to result in significant changes to existing asset measurement bases, however, the final impact will be dependent on
the facts and circumstances that exist on 1 January 2018.
IFRS 9 retains most of the existing requirements for financial liabilities. However, for financial liabilities designated at fair value through profit or loss,
gains or losses attributable to changes in own credit risk may be presented in other comprehensive income. It is expected that the Group will elect
to early adopt this presentation of gains and losses on financial liabilities from 1 January 2017. These gains and losses are currently recognised in
profit or loss and are disclosed in note 30 to the financial statements.
Impairment Overview
The IFRS 9 impairment model will be applicable to all financial assets at amortised cost, debt instruments measured at fair value through other
comprehensive income, lease receivables, loan commitments and financial guarantees not measured at fair value through profit or loss.
IFRS 9 replaces the existing ‘incurred loss’ impairment approach with an Expected Credit Loss (‘ECL’) model, resulting in earlier recognition of credit
losses compared with IAS 39. Expected credit losses are the unbiased probability weighted average credit losses determined by evaluating a range
of possible outcomes and future economic conditions.
The ECL model has three stages. Entities are required to recognise a 12 month expected loss allowance on initial recognition (stage 1) and a lifetime
expected loss allowance when there has been a significant increase in credit risk since initial recognition (stage 2). Stage 3 requires objective evidence
that an asset is credit-impaired, which is similar to the guidance on incurred losses in IAS 39.
Under IAS 39, provisions are recognised for losses that have been incurred but may not have been separately identified. An assessment is made
of the likelihood of assets being impaired at the balance sheet date and being identified subsequently; the length of time taken to identify that an
impairment event has occurred is known as the loss emergence period. The Group has a range of emergence periods which are dependent upon the
characteristics of the portfolios, but typically range between one month and 12 months based on historical experience. Unsecured portfolios tend to
have shorter emergence periods than secured portfolios. Under IFRS 9, all loans in stage 1 will require a loss allowance measured at an amount equal
to 12 months ECL and is therefore longer than current emergence periods for certain portfolios.
The requirement to recognise lifetime ECL for loans which have experienced a significant increase in credit risk since origination, but which are not
credit impaired, does not exist under IAS 39. The assessment of whether an asset is in stage 1 or 2 considers the relative change in the probability of
default occurring over the expected life of the instrument, not the change in the amount of expected credit losses. This will involve setting quantitative
tests combined with supplementary indicators such as credit risk classification. Reasonable and supportable forward looking information will also be
used in determining the stage allocation. In general, assets more than 30 days past due, but not credit impaired, will be classed as stage 2.
IFRS 9 requires the use of more forward looking information including reasonable and supportable forecasts of future economic conditions. The need
to consider a range of economic scenarios and how they could impact the loss allowance is a subjective feature of the IFRS 9 ECL model. The Group
is developing the capability to model a number of economic scenarios and capture the impact on credit losses to ensure the overall ECL represents
a reasonable distribution of economic outcomes. Appropriate governance and oversight will be established around the process.
IFRS 9 Impairment Models
For all material portfolios, IFRS 9 ECL calculation will leverage the systems, data and methodology used to calculate regulatory ‘expected losses’.
The Group anticipates the definition of default for IFRS 9 purposes will be aligned to the Basel definition of default to ensure consistency across the
Group. However, the IFRS 9 ECL models differ from the regulatory models in a number of ways, for example stage 2 assets under IFRS 9 carry a lifetime
expected loss amount whereas regulatory models generate 12 month expected losses for non-defaulted loans.
IFRS 9 models will use three key input parameters for the computation of expected loss, being probability of default (‘PD’), loss given default (‘LGD’)
and exposure at default (‘EAD’). However, given the conservatism inherent in the regulatory expected losses calculation, some adjustments to these
components must be made to ensure compliance with IFRS 9. Some of the key requirements are listed in the following table.
275
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Financial statements
Notes to the consolidated financial statements continued
NOTE 55: FUTURE ACCOUNTING DEVELOPMENTS continued
Component Regulatory capital
IFRS 9
EAD
– Anticipates additional drawings made by customers who are yet
– Maximum exposure is the contractual amount except for certain
to default
revolving facilities (as defined by the standard)
– Downturn EAD, appropriate to a severe but plausible economic
– Forward looking EAD
downturn
PD
– 12 month PD
– Through-the-cycle using long run average economic and risk data
– Forward-looking 12 month PD or lifetime PD, considering a range
of possible outcomes
to reduce sensitivity to changes in the economic cycle
– Point-in-time, sensitive to changes in the
– Default defined as 90 days past due, except 180 days past
economic cycle
due definition for certain mortgage portfolios secured by UK
residential real estate, plus unlikeliness to pay factors
– No explicit definition of default
– Rebuttable presumption that default does not occur later than
LGD
– Downturn LGD, appropriate to a severe by plausible economic
downturn
– Subject to floors, to mitigate the risk of underestimating credit
when a financial asset is 90 days past due
– Forward looking LGD
– No floors prescribed
– Discount rate is effective interest rate as defined by IFRS 9
losses due to a lack of
historical data
– Discount cash flows to take account of the uncertainties associated
with the receipt of recoveries with respect to a defaulted exposure
Impact of IFRS 9 on the Group
The adoption of IFRS 9 may result in an increase in the Group’s balance sheet provisions for credit losses and may therefore negatively impact the
Group’s regulatory capital position. The extent of any increase in provisions will depend upon on a number factors including the composition of
the Group’s lending portfolios and forecast economic conditions at the date of implementation. Whilst the Group is still refining its methodology
and completing the development of the models required to calculate the provision, it is not possible to provide a reliable estimate of the impact of
adopting IFRS 9. It is also too early to estimate the ongoing impact of the IFRS 9 impairment model on the financial results although the requirement
to transfer assets between stages and to incorporate forward looking data into the expected credit loss calculation, including multiple economic
scenarios, could result in impairment charges being more volatile when compared to the current IAS 39 impairment model.
The regulatory capital impact of IFRS 9 could be affected by changes to the regulatory rules. The Basel Committee on Banking Supervision has
issued two papers on the impacts of IFRS 9 on regulatory capital, a consultation paper on the ‘Regulatory treatment of accounting provisions – interim
approach and transitional arrangements’; and one discussing longer-term changes. It is not clear whether any transitional capital arrangements will be
in place for 1 January 2018.
Hedge Accounting
The hedge accounting requirements of IFRS 9 are more closely aligned with risk management practices and follow a more principle-based approach
than IAS 39. The standard does not address macro hedge accounting, which is being considered in a separate IASB project. There is an option to
maintain the existing IAS 39 hedge accounting rules until the IASB completes its project on macro hedging. The Group currently expects to continue
applying IAS 39 hedge accounting in accordance with this accounting policy choice.
IFRS 9 Implementation Programme
The Group has an established IFRS 9 programme to ensure a high quality implementation in compliance with the standard and additional regulatory
guidance that has been issued. The programme involves Finance and Risk functions across the Group with Divisional and Group steering committees
providing oversight. The key responsibilities of the programme include defining IFRS 9 methodology and accounting policy, development of ECL
models, identifying data and system requirements, and establishing an appropriate operating model and governance framework. The programme
is progressing in line with current delivery plans.
Credit risk methodologies have been defined and model build and approval is underway for core portfolios. The Retail secured model has been
approved by the Model Governance Committee. Models and credit risk processes will be tested during the parallel run period to embed the changes
and help improve the understanding of the new impairment models.
Finance systems and reporting requirements are being developed and tested. Existing controls and governance structures have been reviewed and
changes identified as a result of IFRS 9. The governance framework includes the review, challenge and sign-off of forward looking information for a
range of economic scenarios. Communication and training plans are in place and the impact on resources within Finance and Risk functions is being
assessed to ensure the business is ready to implement the new standard.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 replaces IAS 18 Revenue and IAS 11 Construction Contracts. Financial instruments, leases and insurance contracts are out of scope however,
fee recognition associated with credit cards and packaged products, for example, will need to be reviewed. The standard is not currently expected to
have a significant impact on the Group’s profitability. Limited, or no systems or process impacts are expected as a result of adopting IFRS 15. IFRS 15
is effective for annual periods beginning on or after 1 January 2018.
IFRS 16 Leases
IFRS 16 replaces IAS 17 Leases and requires lessees to recognise a right of use asset and a liability for future payments arising from a lease contract.
Lessees will recognise a finance charge on the liability and a depreciation charge on the asset which could affect the timing of the recognition of
expenses on leased assets. This change will mainly impact the properties that the Group currently accounts for as operating leases. Finance systems
will need to be changed to reflect the new accounting rules and disclosures. Lessor accounting requirements remain aligned to the current approach
under IAS 17. IFRS 16 is effective for annual periods beginning on or after 1 January 2019.
Minor amendments to other accounting standards
During 2016, the IASB has issued amendments to IAS 7 Statement of Cash Flows (which require additional disclosure about an entity’s financing
activities) and IAS 12 Income Taxes (which clarify when a deferred tax asset should be recognised for unrealised losses) together with a number
of other minor amendments to IFRSs, which will be effective for annual periods beginning on or after either 1 January 2017 or 1 January 2018. These
revised requirements are not expected to have a significant impact on the Group.
276
Lloyds Banking Group
Annual Report and Accounts 2016
Parent company balance sheet
at 31 December
Assets
Non-current assets:
Investment in subsidiaries
Loans to subsidiaries
Deferred tax asset
Current assets:
Derivative financial 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 profits2
Shareholders’ equity
Other equity instruments
Total equity
Non-current liabilities:
Debt securities in issue
Subordinated liabilities
Current liabilities:
Current tax liabilities
Other liabilities
Total liabilities
Total equity and liabilities
1 See note 1.
2 The parent company recorded a profit after tax for the year of £3,135 million (2015: £897 million).
The accompanying notes are an integral part of the parent company financial statements.
The directors approved the parent company financial statements on 21 February 2017.
Lord Blackwell
Chairman
António Horta-Osório
Group Chief Executive
George Culmer
Chief Financial Officer
Note
2016
£ million
20151
£ million
8
8
2
3
3
4
4
5
3
6
7
44,188
6,912
38
40,785
14,548
51
51,138
55,384
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c
r
e
p
o
r
t
461
959
67
42
465
1,994
53,132
7,146
17,622
7,423
4,115
1,584
37,890
5,355
43,245
2,455
4,329
6,784
–
3,103
3,103
9,887
53,132
590
909
67
24
32
1,622
57,006
7,146
17,412
7,633
4,115
785
37,091
5,355
42,446
–
3,065
3,065
–
11,495
11,495
14,560
57,006
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Financial statements
Parent company statement of changes in equity
for the year ended 31 December
Redemption of preference shares
131
(131)
Balance at 1 January 2014
Total comprehensive income1
Distributions on other equity instruments,
net of tax
Issue of ordinary shares
Issue of other equity instruments
Movement in treasury shares
Value of employee services:
Share option schemes, net of tax
Other employee award schemes
Balance at 31 December 2014
Total comprehensive income1
Dividends paid
Distributions on other equity instruments,
net of tax
Movement in treasury shares
Value of employee services:
Share option schemes, net of tax
Other employee award schemes
Balance at 31 December 2015
Total comprehensive income1
Dividends paid
Distributions on other equity instruments,
net of tax
Share capital
and premium
£ million
24,424
Merger
reserve
£ million
7,764
Capital
redemption
reserve
£ million
4,115
–
–
3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24,427
7,764
4,115
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24,558
7,633
4,115
Retained
profits1
£ million
1,414
379
(225)
–
(21)
(182)
122
233
1,720
897
(1,070)
(314)
–
(753)
133
172
785
3,135
(2,014)
(330)
–
(301)
141
168
Total
shareholders’
equity
£ million
Other equity
instruments
£ million
37,717
379
(225)
3
(21)
(182)
122
233
38,026
897
(1,070)
(314)
–
(753)
133
172
37,091
3,135
(2,014)
(330)
–
(301)
141
168
–
–
–
–
5,355
–
–
–
5,355
–
–
–
–
–
–
–
5,355
–
–
–
–
–
–
–
Total
equity
£ million
37,717
379
(225)
3
5,334
(182)
122
233
43,381
897
(1,070)
(314)
–
(753)
133
172
42,446
3,135
(2,014)
(330)
–
(301)
141
168
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Redemption of preference shares
210
(210)
Movement in treasury shares
Value of employee services:
Share option schemes, net of tax
Other employee award schemes
–
–
–
–
–
–
Balance at 31 December 2016
24,768
7,423
4,115
1,584
37,890
5,355
43,245
1 Total comprehensive income comprises only the profit (loss) for the year; no statement of comprehensive income has been shown for the parent company, as permitted by section 408 of the
Companies Act 2006.
The accompanying notes are an integral part of the parent company financial statements.
278
Lloyds Banking Group
Annual Report and Accounts 2016
Parent company cash flow statement
for the year ended 31 December
Profit before tax
Fair value and exchange adjustments and other non-cash items
Change in other assets
Change in other liabilities and other items
Dividends received
Distributions on other equity instruments received
Tax (paid) received
Net cash provided by (used in) operating activities
Cash flows from investing activities
Return of capital contribution
Dividends received
Distributions on other equity instruments received
Capital injection to Lloyds Bank plc
Amounts advanced to subsidiaries
Redemption of loans to subsidiaries
Net cash (used in) provided by investing activities
Cash flows from financing activities
Dividends paid to ordinary shareholders
Distributions on other equity instruments
Issue of other equity instruments
Issue of subordinated liabilities
Interest paid on subordinated liabilities
Repayment of subordinated liabilities
Proceeds from issue of ordinary shares
Net cash used in financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
1 See note 1.
The accompanying notes are an integral part of the parent company financial statements.
2016
£ million
20151
£ million
2014
£ million
3,463
2,482
(50)
(8,392)
(3,759)
(119)
(679)
(7,054)
441
3,759
119
(3,522)
(4,978)
13,166
8,985
(2,014)
(412)
–
1,061
(229)
(319)
–
(1,913)
18
24
42
969
(594)
(566)
458
(1,080)
–
(142)
(955)
600
1,080
–
–
(1,157)
570
1,093
(1,070)
(394)
–
1,436
(129)
(152)
–
(309)
(171)
195
24
273
1,118
558
(4,242)
(720)
–
301
(2,712)
198
720
–
–
(7,892)
4,420
(2,554)
–
(287)
5,329
629
(128)
(596)
3
4,950
(316)
511
195
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279
Financial statements
Notes to the parent company financial statements
for the year ended 31 December
NOTE 1: BASIS OF PREPARATION AND ACCOUNTING POLICIES
The Company has applied International Financial Reporting Standards as adopted by the European Union in its financial statements for the year ended
31 December 2016. IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board and those prefixed
IAS issued by the IASB’s predecessor body as well as interpretations issued by the IFRS 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 financial information has been prepared under the historical cost convention, as modified by the revaluation of all derivative contracts.
The accounting policies of the Company are the same as those of the Group which are set out in note 2 to the consolidated financial 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.
During 2016 the Company has reviewed the treatment of certain holdings of preference shares issued by its subsidiary, Lloyds Bank plc. As a result
loans to subsidiaries and other liabilities have been increased by £585 million; comparatives have been restated accordingly.
NOTE 2: AMOUNTS DUE FROM SUBSIDIARIES
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.
NOTE 3: SHARE CAPITAL, SHARE PREMIUM AND OTHER EQUITY INSTRUMENTS
Details of the Company’s share capital, share premium account and other equity instruments are as set out in notes 40, 41 and 44 to the consolidated
financial statements.
NOTE 4: 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, offset by adjustments on the redemption of preference shares. Substantially all of the Company’s merger reserve
is available for distribution.
Movements in the merger reserve were as follows:
At 1 January
Redemption of preference shares1
At 31 December
2016
£m
7,633
(210)
7,423
2015
£m
7,764
(131)
7,633
2014
£m
7,764
–
7,764
1 During the year ended 31 December 2016, the Company redeemed all of its outstanding 6.267% Non-cumulative Fixed to Floating Rate Callable US Dollar Preference Shares at their
combined sterling equivalent par value of £210 million. These preference shares had been accounted for as subordinated liabilities. On redemption an amount of £210 million was transferred
from the distributable merger reserve to the share premium account (2015: £131 million in respect of the redemption of the outstanding 6.0884% Non-cumulative Fixed to Floating Rate
Preference Shares and 5.92% Non-cumulative Fixed to Floating Rate Preference Shares).
The capital redemption reserve represents transfers from the merger reserve in accordance with companies’ legislation and amounts transferred
from share capital following the cancellation of the deferred shares.
There were no movements in the capital redemption reserve in 2014, 2015 or 2016.
NOTE 5: RETAINED PROFITS
At 1 January
Profit for the year
Issue costs of other equity instruments, net of tax
Dividends paid
Distributions on other equity instruments, net of tax
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
At 31 December
Details of the Company’s dividends are as set out in note 45 to the consolidated financial statements.
2016
£m
785
3,135
–
(2,014)
(330)
(301)
141
168
1,584
2015
£m
1,720
897
–
(1,070)
(314)
(753)
133
172
785
2014
£m
1,414
379
(21)
–
(225)
(182)
122
233
1,720
280
Lloyds Banking Group
Annual Report and Accounts 2016
NOTE 6: DEBT SECURITIES IN ISSUE
These comprise the following issues by the Company: US$1 billion 3.1% notes due 2021 (issued July 2016); €639 million 0.75% notes due 2021
and €772 million 1% notes due 2023 (issued November 2016); and ¥41.9 billion 0.615% notes due 2021 and ¥19.1 billion 1.047% notes due 2026
(issued December 2016).
NOTE 7: SUBORDINATED LIABILITIES
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 Prudential Regulation Authority.
At 1 January 2015
Issued during the year:
5.3% Subordinated Fixed Rate Notes 2045 (US$824 million)
4.582% Subordinated Fixed Rate Notes 2025 (US$1,353 million)
Repurchases and redemptions during the year:
6.0884% Non-cumulative Fixed to Floating Rate Preference Shares1
5.92% Non-cumulative Fixed to Floating Rate Preference Shares callable 20151
Foreign exchange and other movements
At 31 December 2015
Issued during the year:
4.65% Subordinated Fixed Rate Notes 2026 (US$1,500 million)
Repurchases and redemptions during the year:
6.267% Non-Cumulative Fixed to Floating Rate Preference Shares callable 2016
(US$1,000 million)1
Foreign exchange and other movements
At 31 December 2016
1 See note 4.
Preference
shares
£m
1,039
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
10
639
Total
£m
1,688
543
893
1,436
(10)
(140)
(150)
91
3,065
543
893
1,436
–
–
–
69
2,144
1,061
1,061
–
546
3,751
(319)
522
4,329
–
–
–
(10)
(140)
(150)
22
911
–
(319)
(24)
568
–
–
–
–
–
–
–
10
–
–
–
10
NOTE 8: RELATED PARTY TRANSACTIONS
Key management personnel
The key management personnel of the Group and the Company are the same. The relevant disclosures are given in note 47 to the consolidated
financial statements.
The Company has no employees (2015: nil).
As discussed in note 2 to the consolidated financial 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 benefits is recharged to the employing companies
in the Group.
Investment in subsidiaries
At 1 January
Additional capital injections
Capital contribution
Return of capital contribution
At 31 December
2016
£m
40,785
3,522
322
(441)
2015
£m
41,102
–
283
(600)
44,188
40,785
Details of the subsidiaries and related undertakings are given on pages 293 to 300 and are incorporated by reference.
Certain subsidiary companies currently have insufficient distributable reserves to make dividend payments, however, there were no further significant
restrictions on any of the 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.
281
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Financial statements
Notes to the parent company financial statements continued
NOTE 8: RELATED PARTY TRANSACTIONS continued
Loans to subsidiaries
At 1 January
Exchange and other adjustments
New issues
Redemptions
At 31 December
1 See note 1.
2016
£m
14,548
552
4,978
(13,166)
6,912
20151
£m
13,848
113
1,157
(570)
14,548
In addition the Company carries out banking activities through its subsidiary, Lloyds Bank plc. At 31 December 2016, the Company held deposits of
£42 million with Lloyds Bank plc (2015: £24 million). Given the volume of transactions flowing through the account, it is not meaningful to provide gross
inflow and outflow information. Included within other liabilities is £2,690 million (2015: £11,101 million) due to subsidiary undertakings. In addition, at
31 December 2016 the Company had interest rate and currency swaps with Lloyds Bank plc with an aggregate notional principal amount of £2,905 million
and a net positive fair value of £461 million (2015: notional principal amount of £734 million and a net positive fair value of £45 million). Of this amount an
aggregate notional principal amount of £1,529 million and a net positive fair value of £307 million (2015: notional principal amount of £325 million and a
net positive fair value of £26 million) were designated as fair value hedges to manage the Company’s issuance of subordinated liabilities.
Guarantees
The Company guarantees certain of its subsidiaries’ liabilities to the Bank of England.
Other related party transactions
Related party information in respect of other related party transactions is given in note 47 to the consolidated financial statements.
NOTE 9: 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
Company’s financial assets and liabilities by category and by balance sheet heading.
At 31 December 2016
Financial assets:
Cash and cash equivalents
Derivative financial instruments
Loans to subsidiaries
Amounts due from subsidiaries
Total financial assets
Financial liabilities:
Debt securities in issue
Subordinated liabilities
Total financial liabilities
At 31 December 20151
Financial assets:
Cash and cash equivalents
Derivative financial instruments
Loans to subsidiaries
Amounts due from subsidiaries
Total financial assets
Financial liabilities:
Subordinated liabilities
Total financial liabilities
1 See note 1.
Derivatives designated as
hedging instruments, held
at fair value through
profit or loss
£m
Held for
trading at fair
value through
profit or loss
£m
Loans and
receivables
£m
Held at
amortised
cost
£m
–
307
–
–
307
–
–
–
–
26
–
–
26
–
–
–
154
–
–
154
–
–
–
–
564
–
–
564
–
–
–
–
6,912
67
6,979
–
–
–
–
–
14,548
67
14,615
42
–
–
–
42
2,455
4,329
6,784
24
–
–
–
24
–
–
3,065
3,065
Total
£m
42
461
6,912
67
7,482
2,455
4,329
6,784
24
590
14,548
67
15,229
3,065
3,065
Note 49 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. The derivative assets classified as held for trading
(not being designated as hedging instruments) shown above at 31 December 2015 represented level 3 portfolios.
282
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Annual Report and Accounts 2016
NOTE 9: FINANCIAL INSTRUMENTS continued
The following reconciliation shows the movements in derivative financial instrument assets within level 3 portfolios:
At 1 January
Derecognised following completion of the Group’s ECN tender offers and redemptions
Losses recognised in the income statement
At 31 December
2016
£m
545
(476)
(69)
–
2015
£m
646
–
(101)
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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 8, the Company has entered into interest rate and currency swaps with its subsidiary, Lloyds Bank plc, to manage these risks.
Credit risk
The majority of the Company’s credit risk arises from amounts due from its wholly owned subsidiary, Lloyds Bank plc, and subsidiaries of that company.
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.
At 31 December 2016
Debt securities in issue
Subordinated liabilities
Total financial instrument liabilities
At 31 December 2015
Subordinated liabilities
Total financial instrument liabilities
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
Over 5
years
£m
13
–
13
2
2
–
30
30
–
–
27
229
256
191
191
1,809
1,043
2,852
770
770
820
7,893
8,713
6,487
6,487
Total
£m
2,669
9,195
11,864
7,450
7,450
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest
of approximately £1 million (2015: £1 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 49 to the consolidated financial statements.
Valuation hierarchy
The table below analyses the assets and liabilities of the Company. With the exception of derivatives all assets and liabilities are held at amortised cost.
They are categorised into levels 1 to 3 based on the degree to which their fair value is observable. No assets or liabilities were categorised as level 1
(2015: nil).
Fair value of financial assets and liabilities
2016
20151
Valuation hierarchy
Valuation hierarchy
Carrying
value
£m
Fair value
£m
461
6,912
67
7,440
2,455
4,329
6,784
461
6,912
67
7,440
2,452
5,111
7,563
Level 2
£m
461
6,912
67
7,440
2,452
5,111
7,563
Level 3
£m
–
–
–
–
–
–
–
Derivative financial
instruments
Loans to subsidiaries
Amounts due from
subsidiaries
Total financial assets
Debt securities in issue
Subordinated liabilities
Total financial liabilities
1 See note 1.
Carrying
value
£m
590
14,548
Fair value
£m
590
14,548
Level 2
£m
45
14,548
67
67
67
Level 3
£m
545
–
–
15,205
15,205
14,660
545
–
3,065
3,065
–
3,639
3,639
–
3,639
3,639
The carrying amount of cash and cash equivalents (2016: £42 million; 2015: £24 million) is a reasonable approximation of fair value.
–
–
–
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Financial statements
Notes to the parent company financial statements continued
NOTE 9: FINANCIAL INSTRUMENTS continued
Sensitivity of level 3 valuations at 31 December 2015
Financial assets carried at fair value at
December 2015
Derivative financial assets
Embedded equity conversion feature
Valuation
technique(s)
Significant
unobservable inputs1
Lead manager or
broker quote
Equity conversion
feature spread
(171 bps/386 bps)
1 Ranges represented the highest and lowest inputs used in the level 3 valuations.
Effect of reasonably possible
alternative assumptions
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
545
545
14
(14)
NOTE 10: OTHER INFORMATION
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 office is The Mound, Edinburgh EH1 1YZ, Scotland, and its principal
executive offices in the UK are located at 25 Gresham Street, London EC2V 7HN.
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OTHER INFORMATION
Shareholder information
Forward looking statements
Abbreviations
Alternative performance measures
Glossary
Subsidiaries and related undertakings
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ENCOURAGING BRITISH
BUSINESSES TO GO GREEN
We have launched an innovative £1 billion Green Loan
Initiative, incentivising green investment in the commercial
real estate sector through discounted interest rates. We
have completed the first deals and ultimately want to fund
10 million square feet of Britain’s real estate space to
become energy efficient by 2020.
10 million sq. ft.
of commercial real estate space to become energy efficient
by 2020
Other information
Shareholder information
Annual general meeting (AGM)
The AGM will be held at the Edinburgh International Conference Centre, The Exchange, Edinburgh EH3 8EE on Thursday 11 May 2017 at 11.00 am.
Further details about the meeting, including the proposed resolutions and where shareholders can stream the meeting live, can be found in our
Notice of AGM which will be available shortly on our website at www.lloydsbankinggroup.com
Reports and communications
The Group issues regulatory announcements through the Regulatory News Service (RNS); shareholders can subscribe for free via the ‘Investors &
Performance’ section of our website at www.lloydsbankinggroup.com, where our statutory reports and shareholder communications are available.
A summary of the reports and communications to be issued in 2017 are listed below:
Report/Communication
Preliminary results and publication of Annual Report and Accounts
Pillar 3 report
Group Chief Executive update to shareholders
Mailing of Annual Report and Accounts, Annual Review or
Performance Summary
Notice of AGM and voting materials
Q1 interim management statement1
Country analysis2
Interim results
Group Chief Executive update to shareholders
Q3 interim management statement1
Available format
Online
Email
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✔
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✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
RNS
✔
Paper
✔
✔
✔
✔
✔
✔
✔
Month
Feb
Mar/Aug
Mar
Mar
Mar
Apr
Jun/Jul
Jul
Aug
Oct
1 Despite changes to regulations which remove the requirement to issue interim management statements, Lloyds Banking Group still intends to issue these reports.
2 To be published on the Group’s website by 1 July 2017 in accordance with the Capital Requirements (country analysis) Regulations 2013.
Share dealing facilities
We offer a choice of three share dealing services for our UK shareholders and customers. To see the full range of services available for each,
please use the contact details below:
Service Provider
Bank of Scotland Share Dealing
Halifax Share Dealing
Lloyds Bank Direct Investments
Note:
Telephone Dealing
0345 606 1188
03457 22 55 25
0345 60 60 560
Internet Dealing
www.bankofscotland.co.uk/sharedealing
www.halifax.co.uk/sharedealing
www.lloydsbank.com/share-dealing.asp
All internet services are available 24/7. Telephone dealing services are available between 8.00 am and 9.15 pm, Monday to Friday and 9.00 am to 1.00 pm on Saturday. To open a share dealing
account with any of these services, you must be 18 years of age or over and be resident in the UK, Jersey, Guernsey or the Isle of Man.
Share dealing for the Lloyds Banking Group Shareholder Account
Share dealing services for the Lloyds Banking Group Shareholder Account are provided by Equiniti Shareview Dealing, operated by Equiniti
Financial Services Limited. Details of the services provided can be found either on the Shareholder Information page of our website at
www.lloydsbankinggroup.com or by contacting Equiniti using the contact details provided on the next page.
Share price information
Shareholders can access both the latest and historical share prices via our website at www.lloydsbankinggroup.com as well as listings in most
national newspapers. For a real time buying or selling price, you will need to contact a stockbroker, or you can contact the share dealing providers
detailed above.
Individual Savings Accounts (ISAs)
There are a number of options for investing in Lloyds Banking Group shares through an ISA. For details of services and products provided by the
Group please contact Bank of Scotland Share Dealing, Halifax Share Dealing or Lloyds Bank Direct Investments using the contact details above.
286
Lloyds Banking Group
Annual Report and Accounts 2016
American Depositary Receipts (ADRs)
Our shares are traded in the USA through a New York Stock Exchange-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: BNY Mellon Depositary Receipts, PO Box 30170, College Station, TX 77842-3170. Telephone: 1-866-259-0336 (US toll free),
international callers: +1 201-680-6825. Alternatively visit www.adrbnymellon.com or email shrrelations@cpushareownerservices.com
Analysis of shareholders
At 31 December 2016
Size of shareholding
1 – 999
1,000 – 9,999
10,000 – 99,999
100,000 – 999,999
1,000,000 – 4,999,999
5,000,000 – 9,999,999
10,000,000 – 49,999,999
50,000,000 – 99,999,999
100,000,000 – 499,999,999
500,000,000 – 999,999,999
1,000,000,000 and over
Shareholders
Number of ordinary shares
Number
%
Millions
2,042,405
402,830
60,751
2,386
483
198
278
65
84
15
10
81.39
16.05
2.42
0.10
0.02
0.01
0.01
0.00
0.00
0.00
0.00
2,509,505
100.00
616.5
1,066.4
1,486.4
554.2
1,154.3
1,439.2
6,399.1
4,639.7
18,591.5
11,359.5
24,066.9
71,373.7
%
0.86
1.49
2.08
0.77
1.62
2.02
8.97
6.50
26.05
15.92
33.72
100.00
Security – share fraud and scams
Shareholders should exercise caution when unsolicited callers offer the chance to buy or sell shares with promises of huge returns. If it sounds too
good to be true, it usually is and we would ask that shareholders take steps to protect themselves. We strongly recommend seeking advice from
an independent financial adviser authorised by the Financial Conduct Authority (FCA). Shareholders can verify whether a firm is authorised via the
Financial Services Register which is available at www.fca.org.uk
If a shareholder is concerned that they may have been targeted by such a scheme, please contact the FCA Consumer Helpline on 0800 111 6768
or use the online ‘Share Fraud Reporting Form’ available from their website (see above). We would also recommend contacting the Police through
Action Fraud on 0300 123 2040 or visiting www.actionfraud.org.uk for further information.
IMPORTANT SHAREHOLDER AND REGISTRAR INFORMATION
Register today to manage your
shareholding online
Get online in just three easy steps:
step 1
Register at www.shareview.co.uk/info/register
step 2
Receive activation code in post
step 3
Log on
Company website
www.lloydsbankinggroup.com
Shareholder information
help.shareview.co.uk
(from here you will be able to email your
query securely)
Registrar
Equiniti Limited
Aspect House, Spencer Road, Lancing
West Sussex BN99 6DA
Shareholder helpline
0371 384 2990* from within the UK
+44 121 415 7066 from outside the UK
*Lines are open from 8.30 am to 5.30 pm Monday to Friday,
excluding English and Welsh public holidays.
The company registrar is Equiniti Limited. They provide
a shareholder service, including a telephone helpline
and shareview which is a free secure portfolio service.
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Other information
Forward looking statements
This Annual Report contains certain forward looking statements 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 or may 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, portfolios, net interest margin, capital ratios,
liquidity, risk-weighted assets (RWAs), expenditures or any other financial
items or ratios; litigation, regulatory and governmental investigations;
the Group’s future financial performance; the level and extent of future
impairments and write-downs; statements of plans, objectives or goals
of Lloyds Banking Group or its management including in respect of
statements about the future business and economic environments in
the UK and elsewhere including, but not limited to, future trends in
interest rates, foreign exchange rates, credit and equity market levels and
demographic developments; statements about 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 business, strategy, plans and/or results
(including but not limited to the payment of dividends) to differ
materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward looking statements made by the
Group or on its behalf include, but are not limited to: general economic
and business conditions in the UK and internationally; market related
trends and developments; fluctuations in interest rates (including low
or negative rates), exchange rates, stock markets and currencies; the
ability to access sufficient sources of capital, liquidity and funding when
required; changes to the Group’s credit ratings; the ability to derive cost
savings and other benefits including, but without limitation as a result
of any acquisitions, disposals and other strategic transactions; changing
customer behaviour including consumer spending, saving and borrowing
habits; changes to borrower or counterparty credit quality; instability in
the global financial markets, including Eurozone instability, the exit by
the UK from the European Union (EU) and the potential for one or more
other countries to exit the EU or the Eurozone and the impact of any
Abbreviations
ADRs
BSU
CDS
CET1
American Depositary Receipts
Business Support Unit
Credit Default Swap
Common Equity Tier 1
CRD IV
Capital Requirements Directive IV
CUIP
CVA
DVA
EBA
ECNs
EP
EPS
FCA
FLS
FRC
Collective unidentified impairment provision
Credit Valuation Adjustment
Debit Valuation Adjustment
European Banking Authority
Enhanced Capital Notes
Economic Profit
Earnings Per Share
Financial Conduct Authority
Funding for Lending Scheme
Financial Reporting Council
HMRC
Her Majesty’s Revenue & Customs
288
sovereign credit rating downgrade or other sovereign financial issues;
technological changes and risks to cyber security; natural, pandemic and
other disasters, adverse weather and similar contingencies outside the
Group’s control; inadequate or failed internal or external processes or
systems; acts of war, other acts of hostility, terrorist acts and responses
to those acts, geopolitical, pandemic or other such events; changes in
laws, regulations, accounting standards or taxation, including as a result
of the exit by the UK from the EU, or a further possible referendum
on Scottish independence; changes to regulatory capital or liquidity
requirements and similar contingencies outside the Group’s control; the
policies, decisions and actions of governmental or regulatory authorities
or courts in the UK, the EU, the United States or elsewhere including the
implementation and interpretation of key legislation and regulation; the
ability to attract and retain senior management and other employees;
requirements or limitations on the Group as a result of HM Treasury’s
investment in the Group; actions or omissions by the Group’s directors,
management or employees including industrial action; changes to the
Group’s post-retirement defined benefit scheme obligations; the extent
of any future impairment charges or write-downs caused by, but not
limited to, depressed asset valuations, market disruptions and illiquid
markets; the value and effectiveness of any credit protection purchased
by the Group; the inability to hedge certain risks economically; the
adequacy of loss reserves; the actions of competitors, including non-
bank financial services, lending companies and digital innovators and
disruptive technologies; and exposure to regulatory or competition
scrutiny, legal, regulatory or competition proceedings, investigations or
complaints. Please refer to the latest Annual Report on Form 20-F filed
with the US Securities and Exchange Commission for a discussion of
certain factors together with examples of forward looking statements.
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.
The information, statements and opinions contained in this Annual
Report do not constitute a public offer under any applicable law or
an offer to sell any securities or financial instruments or any advice or
recommendation with respect to such securities or financial instruments.
IAS
IASB
ICG
IFRS
LCR
LIBOR
LTIP
OEICs
PFI
PPI
PPP
PRA
International Accounting Standard
International Accounting Standards Board
Individual Capital Guidance
International Financial Reporting Standards
Liquidity Coverage Ratio
London Inter-Bank Offered Rate
Long-Term Incentive Plan
Open Ended Investment Companies
Private Finance Initiative
Payment Protection Insurance
Public Private Partnership
Prudential Regulation Authority
PVNBP
Present Value of New Business Premiums
SEC
TSR
VaR
Securities and Exchange Commission
Total Shareholder Return
Value-at-Risk
Lloyds Banking Group
Annual Report and Accounts 2016
Alternative performance measures
As described on page 37, the Group analyses its performance on an underlying basis. The Group also calculates a number of metrics that are used
throughout the banking and insurance industries on an underlying basis as these provide management with a relevant and consistent view of these
measures from period to period. A description of the Group’s alternative performance measures and their calculation is set out below.
Asset quality ratio
Banking net interest margin
Cost:income ratio
Gross asset quality ratio
The underlying impairment charge for the period (on an annualised basis) in respect of loans and advances to customers
after releases and write-backs expressed as a percentage of average loans and advances to customers.
Banking net interest income on customer and product balances in the banking businesses as a percentage of average
banking gross interest-earning assets.
Operating costs as a percentage of total income net of insurance claims less operating lease depreciation calculated
on an underlying basis.
The underlying impairment charge for the period (on an annualised basis) in respect of loans and advances to customers
before releases and write-backs expressed as a percentage of average loans and advances to customers.
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Impaired loans as a percentage of
advances
Impaired loans and advances to customers adjusted to exclude Retail and Consumer Finance loans in recoveries expressed
as a percentage of closing gross loans and advances to customers.
Loan to deposit ratio
Operating jaws
The ratio of loans and advances to customers net of allowance for impairment losses and excluding reverse repurchase
agreements divided by customer deposits excluding repurchase agreements.
The difference between the period on period percentage change in total income net of insurance claims less operating
lease depreciation and the period on period change in operating costs calculated on an underlying basis.
Present value of new business premium
The total single premium sales received in the period (on an annualised basis) plus the discounted value
of premiums expected to be received over the term of the new regular premium contracts.
Required equity
The amount of shareholders’ equity and non-controlling interests required to achieve a common equity tier 1 ratio of 12.0
per cent after allowing for regulatory adjustments and deductions.
Return on assets
Underlying profit before tax divided by average total assets.
Return on required equity
Statutory profit after tax adjusted to reflect the notional earnings on any excess or shortfall in equity less the post-tax profit
attributable to other equity holders, divided by the average required equity for the period.
Return on risk-weighted assets
Underlying profit before tax divided by average risk-weighted assets.
Return on tangible equity
Tangible net assets per share
Statutory profit after tax adjusted to add back amortisation of intangible assets, after tax, profit attributable
to non-controlling interests and other equity holders divided by average tangible net assets.
Net assets excluding intangible assets such as goodwill and acquisition-related intangibles divided by the weighted average
number of ordinary shares in issue.
Underlying profit
Statutory profit adjusted for certain items as detailed in the Basis of Preparation.
Underlying return on required equity
Underlying profit after tax at the standard UK corporation tax rate adjusted to reflect the banking tax surcharge and the
notional earnings on any excess or shortfall in equity less the post-tax profit attributable to other equity holders divided
by the average required equity for the period.
Underlying return on tangible equity
Underlying profit after tax at the standard UK corporation tax rate adjusted to add back amortisation of intangible assets,
after tax, profit attributable to non-controlling interests and other equity holders, divided by average tangible net assets.
Glossary
Arrears
Asset quality ratio
Basel II
Basel III
Basis point
Central counterparty (CCP)
A customer is in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid
or overdue. Such a customer is also said to be in a state of delinquency and the entire outstanding balance is delinquent.
The impairment charge for the year in respect of loans and advances to customers expressed as a percentage of average
loans and advances to customers.
The capital adequacy framework issued by the Basel Committee on Banking Supervision in June 2006 in the form of the
‘International Convergence of Capital Measurement and Capital Standards’.
The capital reforms and introduction of a global liquidity standard proposed by the Basel Committee
on Banking Supervision in 2010 and due to be phased in, through CRD IV, from 1 January 2014 onward.
One hundredth of a per cent (0.01 per cent). 100 basis points is 1 per cent. Used in quoting movements in interest rates
or yields on securities.
An institution mediating between the buyer and seller in a financial transaction, such as a derivative contract or repurchase
agreement. Where a CCP is used, a single bilateral contract between the buyer and the seller is replaced with two contracts,
one between the buyer and the CCP and one between the CCP seller.
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Collectively assessed loan impairment
provision
A provision established following an impairment assessment on a collective basis for homogeneous groups of loans, such as
credit card receivables and personal loans, that are not considered individually significant and for loan losses that have been
incurred but not separately identified at the balance sheet date.
Collective unidentified
impairment provision
Commercial paper
A provision held for loan losses that have been incurred but not separately identified at the
balance sheet date.
Commercial paper is an unsecured promissory note issued to finance short-term credit needs. It specifies 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.
Commercial Real Estate
Includes office buildings, industrial property, medical centres, hotels, malls, retail stores, shopping centres, farm land,
multifamily housing buildings, warehouses, garages, and industrial properties.
Common equity tier 1 capital (CET1)
Conduits
The highest quality form of regulatory capital under CRD IV that comprises common shares issued and related share
premium, retained earnings and other reserves excluding the cash flow hedging reserve, less specified regulatory
adjustments.
A financial vehicle that holds asset-backed securities which are financed with short-term deposits (generally commercial
paper) that use the asset-backed securities as collateral. The conduit will often have a liquidity line provided by a bank that
it can draw down on in the event that it is unable to issue funding to the market.
Contractual maturities
Contractual maturity refers to the final payment date of a loan or other financial instrument, at which point all the remaining
outstanding principal will be repaid and interest is due to be paid.
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Other information
Glossary continued
Coverage ratio
CRD IV
Credit default swap
Credit derivatives
Impairment provisions as a percentage of impaired loans.
On 27 June 2013, the European Commission published, through the Official Journal of the European Union, its legislation for
a Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR), which together form the CRD IV package.
Amendments published on 30 November 2013 were made to the Regulation. The package implements the Basel III reforms in
addition to the inclusion of new proposals on sanctions for non-compliance with prudential rules, corporate governance and
remuneration. CRD IV rules apply from 1 January 2014 onwards, with certain requirements set to be phased in.
A credit default swap is a type of 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. The entity selling protection receives premium or interest-
related payments in return for contracting to make payments to the protection buyer upon a defined credit event. Credit
events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.
A credit derivative is a financial instrument that derives its value from the credit rating of an underlying instrument carrying
the credit risk of the issuing entity. The principal type of credit derivatives are credit default swaps, which are used by the
Group as part of its trading activity and to manage its own exposure to credit risk.
Credit valuation adjustments
These are adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. Further
details are given in note 49.
Debt restructuring
Debt securities
Delinquency
Embedded equity
conversion feature
Encumbered assets
This is when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve
cash flow 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.
Debt securities are assets held by the Group representing certificates of indebtedness of credit institutions, public bodies
or other undertakings, excluding those issued by Central Banks.
See Arrears.
An embedded equity conversion feature is a derivative contained within the terms and conditions of a debt instrument that
enables or requires the instrument to be converted into equity under a particular set of circumstances. The Group’s Enhanced
Capital Notes (ECNs) contain such a feature whereby these notes convert to ordinary shares in the event that the consolidated
core tier 1 ratio of the Group falls below 5 per cent.
Assets recognised on the Group’s balance sheet which have been pledged as collateral against an existing liability, and as a
result are assets which are unavailable to the Group to secure funding, satisfy collateral needs or be sold to reduce potential
future funding requirements.
Enhanced Capital Notes (ECNs)
The Group’s ECNs are subordinated notes issued by the Group that contained an embedded equity conversion feature.
Expected loss
Exposure at default
Fair value adjustment
Forbearance
Full time equivalent
This is the amount of loss that can be expected by the Group calculated in accordance with PRA rules. In broad terms
it is calculated by multiplying the Default Frequency by the Loss Given Default by the Exposure at Default.
An estimate of the amount expected to be owed by a customer at the time of the customer’s default.
Fair value adjustments arise on acquisition when assets and liabilities are acquired at fair values that are different from the
carrying values in the acquired company. In respect of the Group’s acquisition of HBOS the principal adjustments were
write-downs in respect of loans and advances to customers and debt issued.
Forbearance takes place when a concession is made on the contractual terms of a loan in response to an obligor’s
financial difficulties.
A full time employee works a standard five day week. The hours or days worked by part time employees are measured
against this standard and accumulated along with the number of full time employees and counted as full time equivalents.
This is a more consistent measure of the amount of time worked than employee numbers which will fluctuate as the mix of
part-time and full-time employees changes.
Funded/unfunded exposures
Exposures where the notional amount of the transaction is either funded or unfunded.
Funding risk
Impaired loans
Impairment allowances
Impairment losses
The risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient.
Impaired loans are loans where the Group does not expect to collect all the contractual cash flows 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 profit for the
incurred loss inherent in the lending book. An impairment allowance may either be individual or collective.
An impairment loss is the reduction in value that arises following an impairment review of an asset that determines that the
asset’s value is lower than it’s carrying value. For impaired financial assets measured at amortised cost, impairment losses
are the difference between the carrying value and the present value of estimated future cash flows, discounted at the
asset’s original effective interest rate. Impairment losses can be difficult to assess and the critical accounting estimates and
judgements in note 3 detail the key assessments made when determining impairment losses.
Individually/collectively assessed
Impairment is measured individually for assets that are individually significant, and collectively where a portfolio comprises
homogenous assets and where appropriate statistical techniques are available.
Individually assessed loan impairment
provisions
Impairment loss provisions for individually significant impaired loans are assessed on a case-by-case basis, taking into
account the financial condition of the counterparty, any guarantor and the realisable value of any collateral held.
Interest rate risk
Interest rate risk in arises from the different repricing characteristics of the Group’s non-trading assets, liabilities and
off-balance sheet positions of the Group. Interest rate risk arises predominantly from the mismatch between interest
rate sensitive assets and liabilities, but also to the investment term of capital and reserves, and the need to minimise
income volatility.
Internal Capital Adequacy Assessment
Process (ICAAP)
The Group’s own assessment, based on Basel II requirements, of the levels of capital that it needs to hold in respect of its
regulatory capital requirements (for credit, market and operational risks) and for other risks including stress events as they
apply on a solo level and on a consolidated level.
Internal Ratings-Based
approach (IRB)
Investment grade
ISDA (International Swaps
and Derivatives Association)
master agreement
Liquidity Coverage Ratio (LCR)
Liquidity risk
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290
A methodology of estimating the credit risk within a portfolio by utilising internal risk parameters to calculate credit risk
regulatory capital requirements. There are two approaches to IRB: Foundation IRB and Advanced IRB.
This refers to the highest range of credit ratings, from ‘AAA’ to ‘BBB’ as measured by external credit rating agencies.
A standardised contract developed by the ISDA which is used as an umbrella contract for bilateral derivative contracts.
The ratio of the stock of high quality liquid assets to expected net cash outflows over the following 30 days. High quality
liquid assets should be unencumbered, liquid in markets during a time of stress and ideally, be central bank eligible.
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.
Lloyds Banking Group
Annual Report and Accounts 2016
Loan-to-value ratio (LTV)
Loans past due
Loss emergence period
Loss Given Default
Master netting agreement
Medium Term Notes
Negative equity mortgages
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.
Loans are past due when a counterparty has failed to make a payment when contractually due.
The loss emergence period is the estimated period between impairment occurring and the loss being specifically identified
and evidenced by the establishment of an appropriate impairment allowance.
The estimated loss that will arise if a customer defaults. It is calculated after taking account of credit risk mitigation and
includes the cost of recovery.
An agreement between two counterparties that have multiple derivative contracts with each other that provides for the net
settlement of all contracts through a single payment, in a single currency, in the event of default on, or termination of, any
one contract.
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 31.
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.
i
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Net asset value per ordinary share
Shareholders‘ equity divided by the number of ordinary shares and limited voting ordinary shares in issue, adjusted to
exclude shares held under certain employee share ownership plans.
Net Stable Funding Ratio (NSFR)
Net interest income
Net interest margin
Over-the-counter derivatives
The ratio of available stable funding to required stable funding over a one year time horizon, assuming a stressed scenario.
The ratio is required to be over 100% with effect from 2018. Available stable funding would include such items as equity capital,
preferred stock with a maturity of over 1 year, or liabilities with a maturity of over 1 year.
The difference between interest received on assets and interest paid on liabilities.
Net interest margin is net interest income as a percentage of average interest-earning assets.
Over-the-counter derivatives are derivatives for which the terms and conditions can be freely negotiated
by the counterparties involved, unlike exchange traded derivatives which have standardised terms.
Pre-positioned and encumbered assets
held with central banks
Assets which have been delivered to central banks to facilitate future drawdowns under central bank funding schemes
and assets which are encumbered under such schemes.
Probability of default
Regulatory capital
Repurchase agreements
or ‘repos’
Risk appetite
Risk-weighted assets
Securitisation
Sovereign exposures
Specialist mortgages
Standardised Approach
Stress testing
Structured entities (SEs)
Sub-investment grade
Subordinated liabilities
Trading book
The likelihood that a customer will default on their obligation within the next year.
The amount of capital that the Group holds, determined in accordance with rules established by the PRA
for the consolidated Group and by local regulators for individual Group companies.
Short-term funding agreements which allow a borrower to sell a financial 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.
The amount and type of risk that the Group is prepared to seek, accept or tolerate.
A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance with the Basel
Capital Accord as implemented by the PRA.
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.
Exposures to central governments and central government departments, central banks and entities owned or guaranteed
by the aforementioned.
Specialist mortgages include those mortgage loans provided to customers who have self-certified their income (normally as
a consequence of being self-employed) or who are otherwise regarded as a sub-prime credit risk. New mortgage lending of
this type has not been offered by the Group since early 2009.
In relation to credit risk, a method for calculating credit risk capital requirements using External Credit Assessment
Institutions (ECAI) ratings of obligors (where available) and supervisory risk weights. In relation to operational risk, a method
of calculating the operational risk capital requirement by the application of a supervisory defined percentage charge to the
gross income of specified business lines.
Stress and scenario testing is the term used to describe techniques where plausible events are considered
as vulnerabilities to ascertain how this will impact the capital resources which are required to be held.
SEs are entities that have been designed so that voting or similar rights are not the dominant factor in determining who
controls the entity, such as when voting rights relate to administrative tasks only and the relevant activities are directed by
means of contractual arrangements. SEs often have specific restrictions around their ongoing activities and are created to
accomplish a narrow and well-defined objective.
This refers to credit ratings issued by external credit rating agencies that are below ‘BBB’ grade or its equivalent.
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 39.
Positions in financial instruments and commodities held for trading purposes or to hedge other elements
of the trading book.
Unencumbered assets – readily
realisable
Assets regarded by the Group to be readily realisable in the normal course of business, to secure funding, meet collateral
needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for
these purposes.
Unencumbered assets – other
realisable
Assets where there are no restrictions on their use to secure funding, meet collateral needs, or be sold to reduce potential
future funding requirements, but are not readily realisable in the normal course of business in their current form.
Unencumbered assets – cannot be used
Assets that have not been pledged but which the Group has assessed could not be pledged and therefore could not be
used to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements.
Value-at-Risk
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. It is measured to specified level of
confidence, often 95 per cent or 99 per cent.
Write downs
The depreciation or lowering of the value of an asset in the books to reflect a decline in their value, or expected cash flows.
291
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Other information
Glossary continued
Disclosures arising from Enhanced Disclosure Task Force (EDTF) recommendations
The 32 recommendations listed below are made in the report ‘Enhancing the Risk Disclosures of Banks’ issued by the Enhanced Disclosure Task Force
of the Financial Stability Board on 29 October 2012.
The Group’s Pillar 3 Report can be found at www.lloydsbankinggroup.com
EDTF Recommendations (summarised)
General commentary
1 Present all related risk information together or provide an index or an aid to navigation.
2 Define the bank’s risk terminology and risk measures and present key parameter values used.
3 Describe and discuss top and emerging risks.
4 Outline plans to meet each new key regulatory ratio.
Risk Governance and risk management strategies/business model
Page
115
116-169
28-31, 118
155, 160
5 Summarise prominently the bank’s risk management organisation, processes and key functions.
6 Describe risk culture and how procedures and strategies are applied to support the culture.
7 Describe the key risks that arise from the bank’s business models and activities, the bank’s risk appetite in the context
121-122
116
116-117, 123-169
of its business models and how the bank manages such risks.
8 Describe the use of stress testing within the bank’s risk governance and capital frameworks.
Capital adequacy and risk-weighted assets
9 Pillar 1 capital requirements and the application of counter-cyclical and capital conservation buffers or the minimum
internal ratio established by management.
119
159
10 Main components of capital and a reconciliation of the accounting balance sheet to the regulatory balance sheet.
11 Flow statement of movements since the prior reporting date in regulatory capital, including changes in common equity
162, Pillar 3
163
tier 1, tier 1 and tier 2 capital.
12 Discuss capital planning, including a description of management’s view of the required or targeted level of capital and
160-161
how this will be established.
13 Explain how risk-weighted assets (RWAs) relate to business activities and related risks.
14 Present a table showing the capital requirements for each method used for calculating RWAs for each Basel asset class.
15 Tabulate credit risk for Basel asset classes.
16 Present a flow statement that reconciles movements in RWAs for the period for each RWA risk type.
17 Provide narrative putting Basel Pillar 3 back-testing requirements into context.
117, 164-165, Pillar 3
Pillar 3
Pillar 3
164
Pillar 3
Liquidity
18 Describe how the bank manages its potential liquidity needs.
154-155, 157
Funding
19 Tabulate encumbered and unencumbered assets by balance sheet categories
20 Tabulate consolidated total assets, liabilities and off-balance sheet commitments by remaining contractual maturity
158
156, 270-272
at the balance sheet date.
21 Discuss the bank’s funding strategy, including key sources and any funding concentrations.
Market risk
22 Describe linkages between line items in the balance sheet with positions included in the traded
and non-traded market risk disclosures.
23 Provide breakdowns of significant trading and non trading market risk factors.
24 Describe significant market risk measurement model limitations, assumptions and validation procedures.
25 Describe the primary risk management techniques employed to measure and assess the risk of loss beyond
reported risk measures and parameters, such as VaR, earnings or economic value scenario results.
Credit risk
154-156
146
146-151
146-151, Pillar 3
146-151, Pillar 3
26 Describe the bank’s credit risk profile, including any significant credit risk concentrations. Detailing aggregate credit risk
124-144, Pillar 3
exposures that reconciles to the balance sheet, including detailed tables for both retail and corporate portfolios.
27 Describe the policies for identifying impaired or non-performing loans, defining impaired or non-performing,
restructured and returned-to-performing (cured) loans as well as explanations of loan forbearance policies.
28 A reconciliation of the opening and closing balances of non-performing or impaired loans in the period and the
allowance for loan losses.
29 Provide analysis of the bank’s counterparty credit risk that arises from its derivatives transactions.
30 Discuss credit risk mitigation, including collateral held for all sources of credit risk.
124-129, 189-190
130, 211
131, 267
124-126
Other
31 Describe ‘other risk’ types and discuss how each one is identified, governed, measured and managed.
32 Discuss publicly known risk events related to other risks.
145, 152-153, 166-169
145, 152-153, 166-169
292
292
Lloyds Banking Group
Annual Report and Accounts 2016
Subsidiaries and related undertakings
In compliance with Section 409 of the Companies Act 2006, the
following comprises a list of all related undertakings of the Group, as
at 31 December 2016. The list includes each undertaking’s registered
office and the percentage of the class(es) of shares held by the immediate
parent company. Where different, the ultimate percentage of the class of
shares held by the Group is given in brackets. All shares held are ordinary
shares unless indicated otherwise.
Subsidiary undertakings
The Group holds a majority of the voting rights of the following
undertakings.
Name of undertaking
25 Gresham Finance Ltd
A G Finance Ltd
A.C.L. Ltd
ACL Autolease Holdings Ltd
ADF No.1 Pty Ltd
Alex Lawrie Factors Ltd
Alex Lawrie Receivables Financing Ltd
Amberdate Ltd
AN Vehicle Finance Ltd
Anglo Scottish Utilities Partnership 1
Aquilus Ltd
Automobile Association Personal Finance Ltd
Bank of Scotland (B.G.S) London Nominees Ltd
Bank of Scotland (Stanlife) London Nominees Ltd
Bank of Scotland Branch Nominees Ltd
Bank of Scotland Capital Funding (Jersey) Ltd
Bank of Scotland Capital Funding L.P.
Bank of Scotland Central Nominees Ltd
Bank of Scotland Edinburgh Nominees Ltd
Bank of Scotland Equipment Finance Ltd
Bank of Scotland Hong Kong Nominees Ltd
Bank of Scotland Insurance Services Ltd
Bank of Scotland Leasing Ltd
Bank of Scotland LNG Leasing (No 1) Ltd
Bank of Scotland London Nominees Ltd
Bank of Scotland Nominees (Unit Trusts) Ltd
Bank of Scotland P.E.P. Nominees Ltd
Bank of Scotland plc
Bank of Scotland Structured Asset Finance Ltd
Bank of Scotland Transport Finance 1 Ltd
Bank of Wales Ltd
Barbirolli Square Limited Partnership
Barents Leasing Ltd
Barnwood Mortgages Ltd
Bavarian Mortgages No. 5 Ltd (in liquidation)
Birchcrown Finance Ltd
Birmingham Midshires Asset Management Ltd
Birmingham Midshires Financial Services Ltd
Birmingham Midshires Land Development Ltd
Birmingham Midshires Mortgage Services Ltd
Birmingham Midshires Mortgage Services
No.1 Ltd (in strike off)
Black Horse (TRF) Ltd
Black Horse Executive Mortgages Ltd
Black Horse Finance Holdings Ltd
Black Horse Finance Management Ltd
Black Horse Group Ltd
Black Horse Ltd
Black Horse Offshore Ltd
Black Horse Property Services Ltd
Boltro Nominees Ltd
BOS (Ireland) Nominees Ltd (in liquidation)
BOS (Ireland) Property Services 2 Ltd
BOS (Ireland) Property Services Ltd
BOS (PB) LLC
BOS (Shared Appreciation Mortgages
(Scotland) No. 2) Ltd
BOS (Shared Appreciation Mortgages
(Scotland) No. 3) Ltd
BOS (Shared Appreciation Mortgages
(Scotland)) Ltd
BOS (Shared Appreciation Mortgages) No. 1 plc
BOS (Shared Appreciation Mortgages) No. 2 plc
BOS (Shared Appreciation Mortgages) No. 3 plc
BOS (Shared Appreciation Mortgages) No. 4 plc
BOS (Shared Appreciation Mortgages) No. 5 plc
BOS (Shared Appreciation Mortgages) No. 6 plc
BOS (Southport) Holding LLC
BOS (USA) Fund Investments Inc.
% of share class
held by immediate
parent company
(or by the Group
where this varies) Notes
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
n/a
100%
100%
n/a
n/a
100%
100%
100%
n/a
n/a
100%
n/a
99.99%
100%
100%
n/a
n/a
n/a
99.99%
0%
100%
100%
100%
n/a
100%
100%
99.998%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
0%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.99%
99.99%
99.99%
99.99%
99.99%
99.99%
100%
100%
1
7 ii #
1
1
8
9
9
1
iv
*
*
*
1
+
1
4
5
5
5
10
10
5
5
2
11 *
5
2
1
5
5
5
5
*
*
*
*
*
iv
*
iv
vi
i
ii
iv
1
2
2
3
1
12
13
1
4
4
4
4
4
1
1
1
1
1
1
6
1
1
32
16
16
14
4
4
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
#
#
#
#
#
#
4
4
4
4
4
4
4
14
14 xiii
BOS (USA) Inc.
BOS Edinburgh No 1 Ltd
BOS Mistral Ltd
BOSIC Inc.
BOSSAF Rail Ltd
Britannia Personal Lending Ltd
British Linen Leasing (London) Ltd
British Linen Leasing Ltd
British Linen Shipping Ltd
Brooklyn Properties Ltd (in liquidation)
C&G Financial Services Ltd (in strike off)
C&G Homes Ltd
C&G Estate Agents Ltd
C.T.S.B. Leasing Ltd
Capital 1945 Ltd
Capital Bank Insurance Services Ltd
Capital Bank Leasing 1 Ltd
Capital Bank Leasing 2 Ltd
Capital Bank Leasing 3 Ltd
Capital Bank Leasing 4 Ltd
Capital Bank Leasing 5 Ltd
Capital Bank Leasing 6 Ltd
Capital Bank Leasing 7 Ltd
Capital Bank Leasing 8 Ltd
Capital Bank Leasing 9 Ltd
Capital Bank Leasing 10 Ltd
Capital Bank Leasing 11 Ltd
Capital Bank Leasing 12 Ltd
Capital Bank Property Investments (3) Ltd
Capital Bank Property Investments (6) Ltd
(in liquidation)
Capital Bank Vehicle Management Ltd
Capital Leasing (Edinburgh) Ltd
Capital Leasing Ltd
Capital Personal Finance Ltd
Car Ownership Finance Ltd
Cardnet Merchant Services Ltd
Carlease Ltd
Cartwright Finance Ltd
Cashfriday Ltd
Cashpoint Ltd
Castle Baynard Funding Ltd (in liquidation)
Caveminster Ltd
CBRail S.A.R.L.
Cedar Holdings Ltd
Central Mortgage Finance Ltd
CF Asset Finance Ltd
Chariot Finance Ltd
Chartered Trust (Nominees) Ltd
Charterhall (No. 1) Ltd (in liquidation)
Charterhall (No. 2) Ltd
Charterhall (No. 3) Ltd (in strike off)
Cheltenham & Gloucester plc
Cheshire Holdings Europe Ltd
Chiswell Stockbrokers Ltd
Clerical Medical (Dartford Number 2) Ltd
Clerical Medical (Dartford Number 3) Ltd
Clerical Medical Finance plc
Clerical Medical Financial Services Ltd
Clerical Medical Forestry Ltd
Clerical Medical International Holdings B.V.
Clerical Medical Investment Fund Managers Ltd
Clerical Medical Managed Funds Ltd
Clerical Medical Non Sterling Property Company
SARL
Clerical Medical Properties Ltd
Cloak Lane Funding Ltd
Cloak Lane Investments Ltd
CM Venture Investments Ltd
CMI Asset Management (Luxembourg) S.A
(in liquidation)
CMI Insurance (Luxembourg) S.A.
(in liquidation)
Conquest Securities Ltd
Corbiere Asset Investments Ltd
County Wide Property Investments Ltd
(in liquidation)
Create Services Ltd
Dalkeith Corporation
Delancey Rolls UK Ltd
Denham Funding Ltd (in liquidation)
Deva Lease 2 Ltd (in liquidation)
Deva Lease 3 Ltd (in liquidation)
Direct LB Ltd
Dunstan Investments (UK) Ltd
Enterprise Car Finance Ltd
Equipment Leasing (No. 3) Ltd (in liquidation)
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
97.85%
0%
100%
100%
0.08%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.99%
100%
100%
100%
100%
100%
99.99%
99.99%
99.99%
100%
100%
99.99%
100%
99.99%
100%
100%
100%
100%
100%
99.99%
99.99%
100%
100%
100%
0%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
i #
i #
ii
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p
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14
17
2
18
1
4
5
5
5
32
12
12
12
1
2
4
2
2
2
2
2
2
2
17
2
2
2
5
2
13
2
17
17
4
1
1
1
2
9
1
13
1
19
1
12
2
1
1
1
1
1
12
6
1
20
20
20
20
20
21
4
20
22
20
6
6
23
24
24
1
1
ii, #
iii ^
viii
vii #
xii
iv
iv
iv
vi
i
ii
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13
1
25
26
13
13
13
1
1
7 ii #
13
293
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Other information
Subsidiaries and related undertakings continued
Equipment Leasing (No. 6) Ltd (in liquidation)
Eurolead Services Holdings Ltd
Exclusive Finance No. 1 Ltd
Financial Consultants LB Ltd
First Retail Finance (Chester) Ltd
Flexifly Ltd
Fontview Ltd
Forthright Finance Ltd
France Industrial Premises Holding Company
Freeway Ltd
General Leasing (No. 2) Ltd (in liquidation)
General Leasing (No. 4) Ltd
General Leasing (No. 12) Ltd
General Leasing (No. 14) Ltd (in liquidation)
General Leasing (No. 15) Ltd (in liquidation)
General Reversionary and Investment
Company
GFP Holdings LLC
Glosstrips Ltd
Godfrey Davis (Contract Hire) Ltd
Gresham Nominee 1 Ltd
Gresham Nominee 2 Ltd
Halifax Credit Card Ltd
Halifax Equitable Ltd
Halifax Financial Brokers Ltd
Halifax Financial Services (Holdings) Ltd
Halifax Financial Services Ltd
Halifax General Insurance Services Ltd
Halifax Group Ltd
Halifax Investment Services Ltd
Halifax Leasing (June) Ltd
Halifax Leasing (March No.2) Ltd
Halifax Leasing (September) Ltd
Halifax Life Ltd
Halifax Ltd
Halifax Loans Ltd
Halifax Mortgage Services (Holdings) Ltd
Halifax Mortgage Services Ltd
Halifax Nominees Ltd
Halifax Pension Nominees Ltd
Halifax Premises Ltd
Halifax Share Dealing Ltd
Halifax Vehicle Leasing (1998) Ltd
HBOS Canada Inc.
HBOS Capital Funding (Jersey) Ltd
HBOS Covered Bonds LLP
HBOS Directors Ltd
HBOS Final Salary Trust Ltd
HBOS Financial Services Ltd
HBOS Insurance & Investment Group Ltd
HBOS International Financial Services Holdings Ltd
HBOS Investment Fund Managers Ltd
HBOS Management (Jersey) Ltd
HBOS plc
HBOS Social Housing Covered Bonds LLP
HBOS Treasury Services Ltd
HBOS UK Ltd
Heidi Finance Holdings (UK) Ltd
High Street Marketing Services S.A. (in liquidation)
Highway Vehicle Management Ltd (in liquidation)
Hill Samuel (USA), Inc.
Hill Samuel Bank Ltd
Hill Samuel Finance Ltd
Hill Samuel Leasing (No 2) Ltd (in liquidation)
Hill Samuel Leasing Co. Ltd
Hill Samuel Nominees Asia Private Ltd
HL Group (Holdings) Ltd (in liquidation)
Home Shopping Personal Finance Ltd
Horizon Capital 2000 Ltd
Horizon Capital Ltd
Horizon Hotel Investments Ltd (in liquidation)
Horizon Property Investments Ltd (in liquidation)
Horizon Resources Ltd
Horsham Investments Ltd
Housing Growth Partnership GP LLP
Housing Growth Partnership LP
Housing Growth Partnership Ltd
Housing Growth Partnership Manager Ltd
HSDL Nominees Ltd
HVF Ltd
Hyundai Car Finance Ltd
IAI International Ltd
IBOS Finance Ltd
IBOS Securities
ICC Enterprise Partners Ltd (in liquidation)
ICC Equity Partners Ltd (in liquidation)
ICC ESOP Trustee Ltd
294
294
(100%)
(100%)
(100%)
(100%)
(100%)
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.99%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
n/a
100%
100%
100%
100%
99.99%
100%
100%
99.99%
100%
100%
n/a
100%
99.99%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
n/a
n/a
100%
100%
100%
100%
100%
100%
100%
100%
100%
n/a
100%
100%
100%
i
13
9
1
1
4
17
20
2
28
2
13
1
1
13
13
20
14
17
2
1
1
4
i
ii
vii
4
4
4
4
4
4
4
1
1
1
4
4
4
4
4
4
29
1
4
4
18
10
4
1
5
20
20
20
4
10
5
2
20
5
1
30
13
14
1
1
1
1
1
31
4
4
17
17
78
78
17
6
1
1
1
1
4
2
7
1
2
+
32
32
33
*
iv
vi
*
xi
iv
*
* #
i
ii
i
ii
*
ICC Holdings Unlimited Company
ICC Software Partners Ltd (in liquidation)
IF Covered Bonds Limited Liability Partnership
Inchcape Financial Services Ltd
Industrial Real Estate (General Partner) Ltd
Industrial Real Estate (Nominee) Ltd
Intelligent Finance Financial Services Ltd
Intelligent Finance Software Ltd
International Motors Finance Ltd
IWEB (UK) Ltd (in liquidation)
Kanaalstraat Funding C.V.
Kanto Leasing Ltd
Katrine Leasing Ltd
Langbourn Holdings Ltd
LB Comhold Ltd
LB Healthcare Trustee Ltd
LB Leasing L.P
LB Mortgages Ltd
LB Motorent Ltd
LB Quest Ltd
LB Share Schemes Trustees Ltd
LBCF Ltd
LBG Capital Holdings Ltd
LBG Capital No. 2 plc
LBG Capital No. 1 plc
LBI Leasing Ltd
LDC (Asia) Ltd (in liquidation)
LDC (General Partner) Ltd
LDC (Managers) Ltd
LDC (Nominees) Ltd
LDC Carry VI LP
LDC Equity VI LP
LDC GP LLP
LDC I LP
LDC II LP
LDC III LP
LDC IV LP
LDC Parallel (Nominees) Ltd
LDC Parallel VI LP
LDC Ventures Carry Ltd
LDC Ventures Trustees Ltd
LDC V LP
LDC VI LP
Leasing (No. 2) Ltd
Legacy Renewal Company Ltd
Lex Autolease (CH) Ltd
Lex Autolease (FMS) Ltd (in liquidation)
Lex Autolease (Shrewsbury) Ltd
(in liquidation)
Lex Autolease (VC) Ltd
Lex Autolease (VL) Ltd (in liquidation)
Lex Autolease Carselect Ltd
Lex Autolease Ltd
Lex Vehicle Finance 2 Ltd
Lex Vehicle Finance 3 Ltd
Lex Vehicle Finance Ltd
Lex Vehicle Leasing (Holdings) Ltd
Lex Vehicle Leasing Ltd
Lex Vehicle Partners (1) Ltd
Lex Vehicle Partners (2) Ltd
Lex Vehicle Partners (3) Ltd
Lex Vehicle Partners (4) Ltd
Lex Vehicle Partners Ltd
Lime Street (Funding) Ltd
Lloyds (FDC) Company
Lloyds (General Partner) Ltd
Lloyds (Gresham) Ltd
Lloyds (Gresham) No. 1 Ltd
Lloyds (Nimrod) Leasing Industries Ltd
(in liquidation)
Lloyds (Nimrod) Specialist Finance Ltd
Lloyds America Securities Corporation
Lloyds Asset Leasing Ltd
Lloyds Bank (BLSA)
Lloyds Bank (Branches) Nominees Ltd
Lloyds Bank (Colonial & Foreign) Nominees Ltd
Lloyds Bank (Fountainbridge 1) Ltd
Lloyds Bank (Fountainbridge 2) Ltd
Lloyds Bank (Gibraltar) Ltd
Lloyds Bank (I.D.) Nominees Ltd
Lloyds Bank (PEP Nominees) Ltd
Lloyds Bank (Stock Exchange Branch)
Nominees Ltd
Lloyds Bank Asset Finance Ltd
Lloyds Bank Commercial Finance Ltd
Lloyds Bank Commercial Finance Scotland Ltd
Lloyds Bank Corporate Asset Finance (HP) Ltd
Lloyds Bank Corporate Asset Finance (No.1) Ltd
Lloyds Bank Corporate Asset Finance (No. 2) Ltd
Lloyds Bank Corporate Asset Finance (No.3) Ltd
(100%)
(100%)
(100%)
(100%)
(100%)
99.09%
100%
n/a
100%
100%
100%
100%
100%
100%
100%
n/a
100%
100%
99.99%
100%
100%
n/a
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
100%
n/a
100%
100%
n/a
n/a
100%
99.99%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
*
i #
i #
16
33
4
2
34
34
4
4
2
13
35 *
1
36
37
1
1
38 *
1
1
1
1
9
1
1
1
1
39
40
40
40
41 *
41 *
41 *
41 *
41 *
41 *
41 *
40
41 *
40
40
41 *
41 *
1
5
1
1
iv
v
i
ii
x
x
13
1
13
1
1
2
2
2
2
2
2
2
2
2
2
1
1
6
1
1
1
1
14
1
1
1
1
5
5
42
1
1
1
1
9
43
1
1
1
1
Lloyds Banking Group
Annual Report and Accounts 2016
Lloyds Bank Corporate Asset Finance (No.4) Ltd
Lloyds Bank Covered Bonds LLP
Lloyds Bank Equipment Leasing (No. 1) Ltd
Lloyds Bank Equipment Leasing (No. 2) Ltd
(in liquidation)
Lloyds Bank Equipment Leasing (No. 5) Ltd
Lloyds Bank Equipment Leasing (No. 7) Ltd
Lloyds Bank Equipment Leasing (No. 9) Ltd
Lloyds Bank Equipment Leasing (No. 10) Ltd
Lloyds Bank Equipment Leasing (No. 11) Ltd
Lloyds Bank Financial Advisers Ltd
Lloyds Bank Financial Services (Holdings) Ltd
Lloyds Bank General Insurance Holdings Ltd
Lloyds Bank General Insurance Ltd
Lloyds Bank General Leasing (No. 1) Ltd
(in liquidation)
Lloyds Bank General Leasing (No. 3) Ltd
Lloyds Bank General Leasing (No. 5) Ltd
Lloyds Bank General Leasing (No. 9) Ltd
(in liquidation)
Lloyds Bank General Leasing (No. 11) Ltd
Lloyds Bank General Leasing (No. 17) Ltd
Lloyds Bank General Leasing (No. 18) Ltd
Lloyds Bank General Leasing (No. 20) Ltd
Lloyds Bank GF (Holdings) Ltd (in liquidation)
Lloyds Bank Hill Samuel Holding Company Ltd
Lloyds Bank Insurance Services (Direct) Ltd
Lloyds Bank Insurance Services Ltd
Lloyds Bank International Ltd
Lloyds Bank Leasing (No. 3) Ltd
Lloyds Bank Leasing (No. 4) Ltd
Lloyds Bank Leasing (No. 6) Ltd
Lloyds Bank Leasing (No. 7) Ltd (in liquidation)
Lloyds Bank Leasing (No. 8) Ltd
Lloyds Bank Leasing Ltd
Lloyds Bank Maritime Leasing (No. 2) Ltd
(in liquidation)
Lloyds Bank Maritime Leasing (No. 3) Ltd
(in liquidation)
Lloyds Bank Maritime Leasing (No. 8) Ltd
Lloyds Bank Maritime Leasing (No. 10)Ltd
Lloyds Bank Maritime Leasing (No. 12)Ltd
Lloyds Bank Maritime Leasing (No. 13)Ltd
Lloyds Bank Maritime Leasing (No. 15)Ltd
Lloyds Bank Maritime Leasing (No.16) Ltd
Lloyds Bank Maritime Leasing (No. 17)Ltd
Lloyds Bank Maritime Leasing (No. 18)Ltd
Lloyds Bank Maritime Leasing Ltd
Lloyds Bank Mtch Ltd
Lloyds Bank Nominees Ltd
Lloyds Bank Offshore Pension Trust Ltd
Lloyds Bank Pension ABCS (No. 1) LLP
Lloyds Bank Pension ABCS (No. 2) LLP
Lloyds Bank Pension Trust (No. 1) Ltd
Lloyds Bank Pension Trust (No. 2) Ltd
Lloyds Bank Pensions Property
(Guernsey) Ltd
Lloyds Bank plc
Lloyds Bank Private Banking Ltd
Lloyds Bank Properties Ltd
Lloyds Bank Property Company Ltd
Lloyds Bank S.F. Nominees Ltd
Lloyds Bank Subsidiaries Ltd
Lloyds Bank Trust Company (International) Ltd
Lloyds Bank Trustee Services Ltd
Lloyds Banking Group Pensions Trustees Ltd
Lloyds Capital 2 L.P
Lloyds Commercial Leasing Ltd
Lloyds Commercial Properties Ltd
Lloyds Commercial Property Investments Ltd
Lloyds Corporate Services (Jersey) Ltd
Lloyds Development Capital (Holdings) Ltd
Lloyds Engine Capital (No.1) U.S LLC
Lloyds Far East Ltd
Lloyds Financial Leasing Ltd (in liquidation)
Lloyds General Leasing Ltd
Lloyds Group Holdings (Jersey) Ltd
Lloyds Holdings (Jersey) Ltd
Lloyds Industrial Leasing Ltd
Lloyds International Pty Ltd
Lloyds Investment Bonds Ltd
Lloyds Investment Fund Managers Ltd
Lloyds Investment Securities No.5 Ltd
Lloyds Leasing (North Sea Transport) Ltd
Lloyds Leasing Developments Ltd
Lloyds Merchant Bank Asia Ltd
100%
n/a
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.99%
0%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
91%
n/a
n/a
100%
100%
100%
100%
99.99%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
n/a
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.4%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
(100%)
(100%)
(100%)
(100%)
(100%)
1
44 *
1
13
1
1
1
1
1
1
1
45
1
1
1
1
13
1
1
1
1
13
1
1
1
6
1
1
1
1
1
1
1
13
1
1
1
1
1
1
1
1
1
1
1
6
1
1
1
1
i
ii
iv
*
*
37
i
ii
1 ^
^ x
^ x
1
1
1
1
1
iv
*
1
1
1
6
1
1
1
6
40
14
46
1
1
47
i #
ii
vii
6
1
8
1
6
1
1
1
31
iv
London Uberior (L.A.S. Group) Nominees Ltd
Lothian Road LLC
Lotus Finance Ltd
LTGP Limited Partnership Incorporated
Lovat Funding Holdings Ltd (in liquidation)
Maritime Leasing (No.7) Ltd (in liquidation)
Maritime Leasing (No.11) Ltd (in liquidation)
Maritime Leasing (No. 19) Ltd
Meadowfield Investments Ltd
Membership Services Finance Ltd
Mitre Street Funding Ltd
Moor Lane Holdings Ltd
Moray Investments Ltd
Morrison Street LLC
Murrayfield LLC
Nevis Leasing Ltd
Newfont Ltd
NFU Mutual Finance Ltd
98%
Lloyds Nominees (Guernsey) Ltd
99.99%
Lloyds Offshore Global Services Private Ltd
99.99%
Lloyds Participacoes Ltda
100%
Lloyds Plant Leasing Ltd
100%
Lloyds Portfolio Leasing Ltd
100%
Lloyds Premises Investments Ltd
Lloyds Project Leasing Ltd
100%
Lloyds Property Investment Company Ltd (in liquidation) 100%
100%
Lloyds Property Investment Company No. 3 Ltd
100%
Lloyds Property Investment Company No. 4 Ltd
100%
Lloyds Property Investment Company No.5 Ltd
100%
Lloyds Secretaries Ltd
100%
Lloyds Securities Inc.
100%
Lloyds Trade & Project Finance Ltd (in strike off)
100%
Lloyds Trust Company (Gibraltar) Ltd
100%
Lloyds TSB Fomento Comercial Ltda
99.99%
Lloyds TSB Pacific Ltd
100%
Lloyds TSB Rail Capital Inc.
100%
Lloyds UDT Asset Leasing Ltd
100%
Lloyds UDT Asset Rentals Ltd
100%
Lloyds UDT Business Development Ltd
100%
Lloyds UDT Business Equipment Ltd
100%
Lloyds UDT Hiring Ltd
100%
Lloyds UDT Leasing Ltd
100%
Lloyds UDT Ltd
100%
Lloyds UDT Rentals Ltd (in liquidation)
100%
Lloyds Your Tomorrow Trustee Ltd
100%
London Taxi Finance Ltd
100%
n/a
100%
100%
n/a
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
74%
100%
100%
100%
100%
100%
n/a
100%
100%
100%
100%
100%
100%
98%
n/a
100%
100%
100%
100%
100%
100%
100%
100%
100%
0%
100%
100%
100%
100%
100%
99.99%
100%
100%
100%
100%
100%
99%
100%
99%
100%
100%
100%
Portland Funding Ltd
Prestonfield Investments Ltd
Prestonfield P1 Ltd
Prestonfield P2 Ltd
Prestonfield P3 Ltd
Proton Finance Ltd
Quion 6 BV
R.F. Spencer And Company Ltd
Ranelagh Nominees Ltd
Retail Revival (Burgess Hill) Investments Ltd
Saint Michel Holding Company No1
Saint Michel Investment Property
Saint Witz 2 Holding Company No1
Saint Witz 2 Investment Property
Saleslease Purchase Ltd
Savban Leasing Ltd
Scotland International Finance B.V.
Scotland International Finance No. 2 B.V.
(in liquidation)
Scotmar Commercial Equipment Finance Ltd
Scottish Widows (Port Hamilton) Ltd
Scottish Widows Active Management Fund
Scottish Widows Administration Services Ltd
Scottish Widows Annuities Ltd
Scottish Widows Bank plc
Scottish Widows Financial Services Holdings
Oystercatcher LP
Oystercatcher Nominees Ltd
Oystercatcher Residential Ltd
Pacific Leasing Ltd
Pensions Management (S.W.F.) Ltd
Peony Eastern Leasing Ltd
Peony Leasing Ltd
Peony Western Leasing Ltd
Perry Nominees Ltd
PIPS Asset Investments Ltd
Nominees (Jersey) Ltd
Nordic Leasing Ltd
NWS 2
NWS Trust Ltd
Ocean Leasing (July) Ltd
Ocean Leasing (No 1) Ltd
Ocean Leasing (No 2) Ltd
Omnistone Ltd (in liquidation)
100%
100%
100%
n/a
100%
100%
100%
100%
(100%)
(100%)
(100%)
(100%)
37
48
49
1
1
1
1
13
1
1
1
1
50
1
42
49
51
14
1
1
1
1
1
1
1
52
1
1
i
ii
*
i #
5
25
81
37 *
13
13
13
1
5
4
6
6
20
25
25
36 #
20
2
i #
vii
*
i
ii
vii
i
ii
ii #
6
1
+
5
1
1
1
32
20*
20
20
1
54
1
1
1
1
1
1
5
5
5
5
7
55
2
1
1
28
28
28
28
17
1
21
(100%)
(100%)
(100%)
(100%)
(100%)
i #
*
21
2
54
3
1
3
3
54
295
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
i
F
n
a
n
c
a
i
l
r
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
e
R
i
s
k
m
a
n
a
g
e
m
e
n
t
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
O
t
h
e
r
i
n
f
o
r
m
a
t
i
o
n
Other information
Subsidiaries and related undertakings continued
Scottish Widows Fund and Life Assurance Society
Scottish Widows Fund Management Ltd
Scottish Widows Group Ltd
Scottish Widows Industrial Properties Europe B.V.
Scottish Widows Ltd
Scottish Widows Pension Trustees Ltd
Scottish Widows Property Management Ltd
Scottish Widows Services Ltd
Scottish Widows Trustees Ltd
Scottish Widows Unit Funds Ltd
Scottish Widows Unit Trust Managers Ltd
Seabreeze Leasing Ltd
Seadance Leasing Ltd (in liquidation)
Seaforth Maritime (Highlander) Ltd
Seaforth Maritime (Jarl) Ltd
Seaspirit Leasing Ltd
Seaspray Leasing Ltd
Services LB (No. 2) Ltd (in liquidation)
Services LB (No. 3) Ltd (in strike off)
Services LB (No. 4) Ltd (in strike off)
Share Dealing Nominees Ltd
Shibden Dale Ltd (in liquidation)
Shogun Finance Ltd
Silentdale Ltd
St Andrew’s Group Ltd
St Andrew’s Insurance plc
St Andrew’s Life Assurance plc
St. Mary’s Court Investments
Standard Property Investment (1987) Ltd
Standard Property Investment Ltd
Starfort Ltd
Sussex County Homes Ltd
Suzuki Financial Services Ltd
SW No.1 Ltd
SWAMF (GP) Ltd
SWAMF Nominee (1) Ltd
SWAMF Nominee (2) Ltd
SW Funding plc
SWUF Nominee 1 Ltd
SWUF Nominee 2 Ltd
SWUF Nominee 3 Ltd
SWUF Nominee 4 Ltd
Tantallon Investments, Inc.
Target Corporate Services Ltd
The Agricultural Mortgage Corporation plc
The British Linen Company Ltd
The Mortgage Business plc
Thistle Leasing
Three Copthall Avenue Ltd
Tower Hill Property Investments (7) Ltd
Tower Hill Property Investments (10) Ltd
Tranquility Leasing Ltd
Uberior (Moorfield) Limited
Uberior Canada LP Ltd
Uberior Co-Investments Ltd
Uberior ENA Ltd
Uberior Equity Ltd
Uberior Europe Ltd
Uberior Fund Investments Ltd
Uberior Infrastructure Investments Ltd
Uberior Infrastructure Investments (No.2) Ltd
Uberior Investments Ltd
Uberior ISAF CIP 2007 L.P
Uberior Nominees Ltd
Uberior Trading Ltd
Uberior Trustees Ltd
Uberior Ventures Australia Pty Ltd
Uberior Ventures Ltd
UDT Autolease Ltd
UDT Budget Leasing Ltd
UDT Ltd
UDT Sales Finance Ltd
United Dominions Leasing Ltd
United Dominions Trust Ltd
Upsaala Ltd
Vehicle Leasing (1) Ltd
Vehicle Leasing (2) Ltd
Vehicle Leasing (3) Ltd
Vehicle Leasing (4) Ltd
Ward Nominees (Abingdon) Ltd
Ward Nominees (Birmingham) Ltd
Ward Nominees (Bristol) Ltd
Ward Nominees Ltd
Warwick Leasing Ltd
Waverley – BOCA LLC
Waverley – Fund II Investor LLC
Waverley – Fund III Investor LLC
296
296
n/a
100%
100%
0%
100%
0%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.99%
99.99%
99.99%
100%
100%
100%
60.34%
100%
100%
100%
100%
100%
100%
100%
99.99%
100%
100%
100%
100%
100%
100%
99.99%
99.98%
99.99%
n/a
99%
90%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99%
n/a
n/a
99%
n/a
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
54 *
54
3
i
ii
iv
x
(100%)
(100%)
56
1
3
54
3
54
3
45
1
13
17
17
1
1
1
1
1
4
13
7
1
iv
iv
ii #
iv
vi
vi
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
(100%)
i #
#
20
20
20
1
17
*
#
#
i
ii
57 #
20
4
81
3
20
20
20
3
47
47
47
47
50
1
45
5
4
+
1
2
2
1
17
60
17
17
17
5
17
17
1
17
61 *
5
*
17
5
8
5
1
1
1
1
1
1
16
2
2
2
2
1
1
1
1
2
25
25
25
*
Waverley – Wilshire Rodeo LLC
Waymark Asset Investments Ltd
WCS Ltd
West Craigs Ltd
Western Trust & Savings Holdings Ltd
Western Trust Holdings Ltd
Whitestar Securities Ltd (in liquidation)
Wood Street Leasing Ltd
(100%)
100%
100%
0%
100%
100%
100%
100%
100%
100%
100%
25
1
62
17
4
4
1
1
i
ii
ii
xi
Subsidiary undertakings (continued)
The Group has determined that it has the power to exercise control over
the following entities without having the majority of the voting rights of
the undertakings. Unless otherwise stated, the undertakings do not have
share capital or the Group does not hold any shares.
Name of undertaking
Notes
Addison Social Housing Holdings Ltd
ARKLE Finance Trustee Ltd
ARKLE Funding (No. 1) Ltd
ARKLE Holdings Ltd
ARKLE Master Issuer plc
ARKLE PECOH Holdings Ltd
ARKLE PECOH Ltd
Cancara Asset Securitisation Ltd
Candide Financing 2006 BV
Candide Financing 2007 NHG BV
Candide Financing 2008-1 BV
Candide Financing 2008-2 BV
Candide Financing 2011-1 BV
Candide Financing 2012-1 BV
Celsius European Lux 2 SARL
Chepstow Blue Holdings Ltd
Chepstow Blue plc
Clerical Medical Non Sterling Arts FSA
Clerical Medical Non Sterling Arts LSA
Clerical Medical Non Sterling Guadalix Hold Co BV
Clerical Medical Non Sterling Guadalix Spanish Prop Co SL
Clerical Medical Non Sterling Megapark Hold Co BV
Clerical Medical Non Sterling Megapark Prop Co SA
Computershare Trustees (Jersey) Ltd
Coral Palm Ltd
Craig Financing Holdings Ltd
Deva Financing Holdings Ltd
Deva Financing plc
Dewcrown Ltd
Edgbaston RMBS 2010-1 plc
Edgbaston RMBS Holdings Ltd
Farnham Funding Ltd
Fontwell Securities 2016 Ltd
Gresham Receivables (No. 1) Ltd
Gresham Receivables (No. 3) Ltd
Gresham Receivables (No. 10) Ltd
Gresham Receivables (No.11) UK Ltd
Gresham Receivables (No. 12) Ltd
Gresham Receivables (No. 13) UK Ltd
Gresham Receivables (No. 14) UK Ltd
Gresham Receivables (No. 15) UK Ltd
Gresham Receivables (No. 16) UK Ltd
Gresham Receivables (No. 19) UK Ltd
Gresham Receivables (No. 20) Ltd
Gresham Receivables (No. 21) Ltd
Gresham Receivables (No. 22) Ltd
Gresham Receivables (No. 23) Ltd
Gresham Receivables (No. 24) Ltd
Gresham Receivables (No. 25) UK Ltd
Gresham Receivables (No. 26) UK Ltd
Gresham Receivables (No.27) UK Ltd
Gresham Receivables (No. 28) Ltd
Gresham Receivables (No. 29) Ltd
Gresham Receivables (No. 30) UK Ltd
Gresham Receivables (No. 31) UK Ltd
Gresham Receivables (No. 32) UK Ltd
Gresham Receivables (No. 33) UK Ltd
Gresham Receivables (No. 34) UK Ltd
Gresham Receivables (No. 35) Ltd
Gresham Receivables (No.36) UK Ltd
Gresham Receivables (No.37) UK Ltd
Gresham Receivables (No.38) UK Ltd
Gresham Receivables (No.39) UK Ltd
Gresham Receivables (No.40) UK Ltd
Gresham Receivables (No.41) UK Ltd
Gresham Receivables (No.42) Ltd
Gresham Receivables (No.44) UK Ltd
Gresham Receivables (No.45) UK Ltd
Gresham Receivables (No.46) UK Ltd
Guildhall Asset Purchasing Company (No 3) Ltd
Guildhall Asset Purchasing Company (No.11) UK Ltd
Hart 2014-1 Ltd
Headingley RMBS 2011-1 Holdings Ltd
Leicester Securities 2014 Ltd
63
10
64
64
64
64
64
65
66
66
66
66
66
66
24
44
44
67
67
68
69
68
69
47
83
44
44
44
83
44
44
82
63
65
65
65
71
65
71
71
71
71
71
65
65
65
65
65
71
71
71
65
65
71
71
71
71
71
65
71
71
71
71
71
71
65
71
71
71
65
71
63
44
73
Associated undertakings
The Group has a participating interest in the following undertakings.
% of share class
held by immediate
parent company
(or by the Group
Name of undertaking
where this varies) Registered office address (UK unless stated otherwise)
Notes
Sherwood House, Cartwright Way, Forest Business Park, Brandon Hill, Coalville, LE67 1UB
Aceso Healthcare Group Holdings Ltd
Addison Social Housing Holdings Ltd
Adler & Allan Group Ltd
A-Gas (Orb) Ltd
Agora Shopping Centres Ltd (in receivership)
Airline Services And Components Group Ltd
Angus International Safety Group Ltd
Antler Ltd
Applied Composites Group Ltd
Aqualisa Holdings (International) Ltd
Aspin Group Holdings Ltd
Aspire Oil Services Ltd
Atcore Technology Group Ltd
Australand Apartments No.6 Pty Ltd
Australand Residential Investments Pty Ltd
Australand Residential Trust
AVJBOS Nominees Proprietary Ltd
Bacchus Newco Ltd
Bergamot Ventures Ltd
Bluestone Consolidated Holdings Ltd
BoS Mezzanine Partners Fund LP
Brington North Holdco Ltd
Business Growth Fund plc
Bybox Group Holdings Ltd
Capital Economics Research Ltd
Cary Towne Parke Holdings LLC
Cary Towne Parke LLC
Caspian Media Holdings
CIPHR Group Ltd
City & General Securities Ltd
Citysprint (UK) Holdings Ltd
Clifford Thames (Topco) Ltd
CMS Acquisitions Company Ltd
Cobaco Holdings Ltd
Connect Managed Holdings Ltd
Connery Ltd
Continental Shelf 225 Ltd (in liquidation)
Continental Shelf 291 Ltd (in liquidation)
Craig Finance Ltd
CTI Holdings Ltd
Cuts Ice Holdings Ltd
D.U.K.E Real Estate Ltd
Dale Erskine Power Solutions Ltd
Delancey Arnold UK Ltd (in liquidation)
Devonshire Homes (Cullompton) Ltd
Devonshire Homes (Landkey) Limited
Dino Newco Ltd
Duchy Homes (Penistone) Ltd
Duchy Homes (Scawthorpe) Ltd
EDM Business Services Holdings Ltd
Eley Group Ltd
Ellis Whittam (Holdings) Ltd
EPI-V Equity LP
EPI-V Equity Investments LP
Equiom Holdings Ltd
27.5%
20%
43.6%
55.2%
50%
46.2%
48.1%
49.1%
49.5%
72.5%
35.6%
28.4%
71.2%
50%
50%
50%
50%
52.7%
45%
88.4%
n/a
50%
24.3%
47.3%
31.2%
98%
100%
88.4%
40.2%
100%
30.8%
50.3%
36.7%
50.3%
58.8%
20%
100%
100%
20%
53.6%
32.1%
100%
74.3%
50%
25%
25%
34.5%
21.5%
21.5%
65.3%
70.8%
40.2%
n/a
n/a
51.1%
Canberra House, Robeson Way, Sharston Green Business Park, Manchester, M22 4SX
35 Great St Helen's, London, EC3A 6AP
80 Station Parade, Harrogate, HG1 1HQ
Baynard Road, Portbury, Bristol, BS20 7XH
Hill House, 1 Little New Street, London, EC4A 3TR
Station Road, High Bentham, Near Lancaster, LA2 7NA
Northdown House, 11-21 Northdown Street, London, N1 9BN
Victoria Works, Thrumpton Lane, Retford, DN22 6HH
Westerham Trade Centre, The Flyers Way, Westerham, TN16 1DE
Nexus House Boundary Way, Hemel Hempstead Industrial Estate,
Hemel Hempstead, England, HP2 7SJ
Union Plaza, 6th Floor, 1 Union Wynd, Aberdeen, AB10 1DQ
353 Buckinghamshire Avenue, Slough, Berkshire, SL1 4PF
Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia
Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia
Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia
Ground Floor, 1 Lakeside Drive, Burwood East, VIC 3151, Australia
The Grange, Harnett Drive, Wolverton Mill, Milton Keynes, Buckinghamshire, MK12 5NE
6th Floor 25 Farringdon Street, London, EC4A 4AB
Newnham Mill, Newnham Road, Cambridge, CB3 9EY
7 Melville Crescent, Edinburgh, EH3 7JA
25 Gresham Street, London, EC2V 7HN
13-15 York Buildings, London, England, WC2N 6JU
1-2 Cherry Barn, High Street, Harwell, Oxford, OX11 0EY
100 Victoria Street, London, England, SW1E 5JL
Jeffrey Cohen, 1066 Woodward Avenue, Detroit, MI 48226, United States
National Registered Agents Inc., 150 Fayetteville Street, Raleigh, NC 2782, United States
Unit G4, Harbour Yard, Chelsea Harbour, London, SW10 0DX
Abbey House, Chapel Street, Marlow, SL7 1DD
10 Upper Berkeley Street, London, W1H 7PE
Ground Floor, Redcentral, 60 High Street, Redhill, RH1 1SH
Springfield Lyons House, Chelmsford Business Park, Chelmsford, CM2 5TH
Caisteal Road, Castlecary, Cumbernauld, Glasgow, G88 0FS
Cobaco House, North Florida Road, Haydock Industrial Estate, Merseyside, WA11 9TP
Abbey Place, 24-28 Easton Street., High Wycombe, HP11 1NT
44 Esplanade St Helier Jersey JE4 9WG
4 Mount Ephraim Road, Tunbridge Wells, Kent, TN1 1EE
4 Mount Ephraim Road, Tunbridge Wells, Kent, TN1 1EE
35 Great St. Helen’s, London, EC3A 6AP
47 Esplanade St Helier Jersey JE1 0BD
Level 1, Devonshire House, Mayfair Place, London, W1J 8AJ
1st Floor, Exchange Place, 3 Semple Street, Edinburgh, EH3 8BL
Eastfield Industrial Estate, Salter Road, Scarborough, North Yorkshire, YO11 3DU
105 St Peters Street, St Albans, AL1 3EJ
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA
Unit 2, Orchard Place, Nottingham Business Park, Nottingham, NG8 6PX
Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH
Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH
Queens House, 8-9 Queen Street, London, EC4N 1SP
Selco Way, Off First Avenue, Minworth Industrial Estate, Minworth, Sutton Coldfield, B76 1BA &
Woodhouse, Aldford, Chester, CH3 6JD
1st Floor 67 Leigh Road, Eastleigh, SO50 9DF
1st Floor 67 Leigh Road, Eastleigh, SO50 9DF
Jubilee Buildings, Victoria Street, Douglas, Isle of Man, IM 1 2SH
&
ii
&
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&
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&
&
ii
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&
&
i
i
&
i
&
i
&
*
*
&
Lloyds Banking Group
Annual Report and Accounts 2016
Lingfield 2014 I Holdings Ltd
Lingfield 2014 I plc
Lloyds Bank Covered Bonds (Holdings) Ltd
Lloyds Bank Covered Bonds (LM) Ltd
Molineux RMBS 2016-1 plc
Molineux RMBS Holdings Ltd
Penarth Asset Securitisation Holdings Ltd
Penarth Funding 1 Ltd
Penarth Funding 2 Ltd
Penarth Master Issuer plc
Penarth Receivables Trustee Ltd
Permanent Funding (No. 1) Ltd
Permanent Funding (No. 2) Ltd
Permanent Holdings Ltd
Permanent Master Issuer plc
Permanent Mortgages Trustee Ltd
Permanent PECOH Holdings Ltd
Permanent PECOH Ltd
Salisbury Securities 2015 Ltd
Salisbury II Securities 2016 Ltd
Sandown 2012-2 Holdings Ltd
Sandown 2012-2 plc
Sandown Gold 2011-1 Holdings Ltd
Sandown Gold 2011-1 plc
Sandown Gold 2012-1 Holdings Ltd
Sandown Gold 2012-1 plc
44
44
44
44
44
44
44
63
63
44
63
44
44
44
44
44
44
44
63
63
44
44
44
44
44
44
Sandown Gold plc
SARL Coliseum
SARL Fonciere De Rives
SARL Hiram
SAS Compagnie Fonciere De France,
SCI Astoria Invest
SCI De L’Horloge
SCI Equinoxe
SCI Mercury Invest
SCI Millenium AP1
SCI Norli
SCI Rambuteau CFF
Stichting Candide Financing Holdings
Swan Funding 2 Ltd
The Hual Carolita Limited Partnership
The SAFA 0494 Limited Partnership (to be placed into liquidation)
Thistle Investments (AMC) Ltd
Thistle Investments (ERM) Ltd
Trinity Financing Holdings Ltd
Trinity Financing plc
Lloyds Bank Foundation for England & Wales •
The Halifax Foundation for Northern Ireland •
Lloyds Bank Foundation for the Channel Islands •
Lloyds TSB Foundation for Scotland •
Bank of Scotland Foundation •
• A charitable foundation funded but not owned by Lloyds Banking Group
72
77
77
77
77
77
77
77
77
77
77
77
66
63
74
75
44
44
44
44
79
15
79
80
5
Associated undertakings
The Group has a participating interest in the following undertakings.
Name of undertaking
Aceso Healthcare Group Holdings Ltd
Addison Social Housing Holdings Ltd
Adler & Allan Group Ltd
A-Gas (Orb) Ltd
Agora Shopping Centres Ltd (in receivership)
Airline Services And Components Group Ltd
Angus International Safety Group Ltd
Antler Ltd
Applied Composites Group Ltd
Aqualisa Holdings (International) Ltd
Aspin Group Holdings Ltd
Aspire Oil Services Ltd
Atcore Technology Group Ltd
Australand Apartments No.6 Pty Ltd
Australand Residential Investments Pty Ltd
Australand Residential Trust
AVJBOS Nominees Proprietary Ltd
Bacchus Newco Ltd
Bergamot Ventures Ltd
Bluestone Consolidated Holdings Ltd
BoS Mezzanine Partners Fund LP
Brington North Holdco Ltd
Business Growth Fund plc
Bybox Group Holdings Ltd
Capital Economics Research Ltd
Cary Towne Parke Holdings LLC
Cary Towne Parke LLC
Caspian Media Holdings
CIPHR Group Ltd
City & General Securities Ltd
Citysprint (UK) Holdings Ltd
Clifford Thames (Topco) Ltd
CMS Acquisitions Company Ltd
Cobaco Holdings Ltd
Connect Managed Holdings Ltd
Connery Ltd
Continental Shelf 225 Ltd (in liquidation)
Continental Shelf 291 Ltd (in liquidation)
Craig Finance Ltd
CTI Holdings Ltd
Cuts Ice Holdings Ltd
D.U.K.E Real Estate Ltd
Dale Erskine Power Solutions Ltd
Delancey Arnold UK Ltd (in liquidation)
Devonshire Homes (Cullompton) Ltd
Devonshire Homes (Landkey) Limited
Dino Newco Ltd
Duchy Homes (Penistone) Ltd
Duchy Homes (Scawthorpe) Ltd
EDM Business Services Holdings Ltd
Eley Group Ltd
Ellis Whittam (Holdings) Ltd
EPI-V Equity LP
EPI-V Equity Investments LP
Equiom Holdings Ltd
% of share class
held by immediate
parent company
(or by the Group
where this varies) Registered office address (UK unless stated otherwise)
Notes
27.5%
20%
43.6%
55.2%
50%
46.2%
48.1%
49.1%
49.5%
72.5%
35.6%
28.4%
71.2%
50%
50%
50%
50%
52.7%
45%
88.4%
n/a
50%
24.3%
47.3%
31.2%
98%
100%
88.4%
40.2%
100%
30.8%
50.3%
36.7%
50.3%
58.8%
20%
100%
100%
20%
53.6%
32.1%
100%
74.3%
50%
25%
25%
34.5%
21.5%
21.5%
65.3%
70.8%
40.2%
n/a
n/a
51.1%
&
ii
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&
&
&
&
ii
Sherwood House, Cartwright Way, Forest Business Park, Brandon Hill, Coalville, LE67 1UB
35 Great St Helen's, London, EC3A 6AP
80 Station Parade, Harrogate, HG1 1HQ
Baynard Road, Portbury, Bristol, BS20 7XH
Hill House, 1 Little New Street, London, EC4A 3TR
Canberra House, Robeson Way, Sharston Green Business Park, Manchester, M22 4SX
Station Road, High Bentham, Near Lancaster, LA2 7NA
Northdown House, 11-21 Northdown Street, London, N1 9BN
Victoria Works, Thrumpton Lane, Retford, DN22 6HH
Westerham Trade Centre, The Flyers Way, Westerham, TN16 1DE
Nexus House Boundary Way, Hemel Hempstead Industrial Estate,
Hemel Hempstead, England, HP2 7SJ
Union Plaza, 6th Floor, 1 Union Wynd, Aberdeen, AB10 1DQ
353 Buckinghamshire Avenue, Slough, Berkshire, SL1 4PF
Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia
Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia
Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia
Ground Floor, 1 Lakeside Drive, Burwood East, VIC 3151, Australia
The Grange, Harnett Drive, Wolverton Mill, Milton Keynes, Buckinghamshire, MK12 5NE
6th Floor 25 Farringdon Street, London, EC4A 4AB
Newnham Mill, Newnham Road, Cambridge, CB3 9EY
7 Melville Crescent, Edinburgh, EH3 7JA
25 Gresham Street, London, EC2V 7HN
13-15 York Buildings, London, England, WC2N 6JU
1-2 Cherry Barn, High Street, Harwell, Oxford, OX11 0EY
100 Victoria Street, London, England, SW1E 5JL
Jeffrey Cohen, 1066 Woodward Avenue, Detroit, MI 48226, United States
National Registered Agents Inc., 150 Fayetteville Street, Raleigh, NC 2782, United States
Unit G4, Harbour Yard, Chelsea Harbour, London, SW10 0DX
Abbey House, Chapel Street, Marlow, SL7 1DD
10 Upper Berkeley Street, London, W1H 7PE
Ground Floor, Redcentral, 60 High Street, Redhill, RH1 1SH
Springfield Lyons House, Chelmsford Business Park, Chelmsford, CM2 5TH
Caisteal Road, Castlecary, Cumbernauld, Glasgow, G88 0FS
Cobaco House, North Florida Road, Haydock Industrial Estate, Merseyside, WA11 9TP
Abbey Place, 24-28 Easton Street., High Wycombe, HP11 1NT
44 Esplanade St Helier Jersey JE4 9WG
4 Mount Ephraim Road, Tunbridge Wells, Kent, TN1 1EE
4 Mount Ephraim Road, Tunbridge Wells, Kent, TN1 1EE
35 Great St. Helen’s, London, EC3A 6AP
47 Esplanade St Helier Jersey JE1 0BD
Level 1, Devonshire House, Mayfair Place, London, W1J 8AJ
1st Floor, Exchange Place, 3 Semple Street, Edinburgh, EH3 8BL
Eastfield Industrial Estate, Salter Road, Scarborough, North Yorkshire, YO11 3DU
105 St Peters Street, St Albans, AL1 3EJ
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA
Unit 2, Orchard Place, Nottingham Business Park, Nottingham, NG8 6PX
Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH
Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH
Queens House, 8-9 Queen Street, London, EC4N 1SP
&
Selco Way, Off First Avenue, Minworth Industrial Estate, Minworth, Sutton Coldfield, B76 1BA &
Woodhouse, Aldford, Chester, CH3 6JD
1st Floor 67 Leigh Road, Eastleigh, SO50 9DF
1st Floor 67 Leigh Road, Eastleigh, SO50 9DF
Jubilee Buildings, Victoria Street, Douglas, Isle of Man, IM 1 2SH
i
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&
i
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t
r
a
t
e
g
c
r
e
p
o
r
t
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a
i
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r
e
s
u
l
t
s
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o
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n
a
n
c
e
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i
s
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m
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a
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e
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f
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a
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i
o
n
297
Other information
Subsidiaries and related undertakings continued
Europa Property Company (Northern) Ltd
European Property Fund (Holdings) Ltd SARL
Express Engineering (Group) Ltd
FDL Salterns Ltd
Fern Bay Seaside Village Ltd (in liquidation)
FHR European Ventures LLP
Forest Holidays Group Ltd
Giacom Holdings Ltd
Golfview Apartment Holdings LLC
Golfview Apartments LLC
Great Wigmore Property Ltd
HBOS Capital Funding LP,
HBOS Capital Funding No. 1 LP
HBOS Capital Funding No. 3 LP
HBOS Capital Funding No. 4 LP
HBOS Euro Finance (Jersey) LP
HBOS Sterling Finance (Jersey) LP
Hedge End Place (Durkan) LLP
Hedge End Place Hold Co Ltd
Helsinki Topco Ltd
ICB Brands Holdings Ltd
Iglufastnet Ltd
Ingleby (1884) Ltd
Ingleby (2016) Ltd
Inprova Group Ltd
Kee Safety Group Ltd
Kenmore Capital 2 Ltd (in liquidation)
Kenmore Capital 3 Ltd (in receivership)
Kenmore Capital Ltd (in liquidation)
Keoghs Topco Ltd
Kimberly Holdings Ltd
LCP Baby Investors LP (in process of disposal)
Lesprit Ltd
Lighthouse Healthcare Group Ltd
London Topco Ltd
Lothian Fifty (150) Ltd (in liquidation)
Magicard Holdings Ltd
Marvel Newco Ltd
Mini-Cam Enterprise Ltd
Mitrefinch Holdings Ltd
Morston Assets Ltd (in administration)
Motability Operations Group plc
Nevada Topco Ltd
Nexinto Ltd
Northern Edge Ltd
Omnium Leasing Company
Onapp (Topco) II Ltd
Onapp (Topco) Ltd
Osprey Aviation Services (UK) Ltd
Pacific Shelf 1809 Ltd
Panther Partners Ltd
Paw Topco Ltd
PEI Group Topco Ltd
Personal Touch Holdings Ltd
Pertemps Network Group Ltd
PIHL Equity Administration Ltd
PIMCO (Holdings) Ltd
Power Topco Ltd
Prestbury 1 Limited Partnership
Prestbury Hotel Holdings Ltd (in liquidation)
Prestbury Wentworth Holdings Ltd (in liquidation)
Prism Medical Healthcare Ltd
Quantel Holdings Ltd
Ramco Acquisition Ltd
Rectory (Aston Clinton) Ltd
Rolls Development UK Ltd (in liquidation)
Sapphire Retail Fund Ltd (in liquidation)
SHOO 788AA Ltd
Southport Green Acquisition LLC
Specialist People Services Group Ltd
SSP Topco Ltd
Stewart Milne (Glasgow) Ltd
Stewart Milne (West) Ltd
Stratus (Holdings) Ltd
Stroma Group Ltd
Tantallon Acquisition LLC
Tantallon Austin Hotel LLC
Tantallon Austin LLC
Tantallon LLC
Team 17 Holdings Ltd
Test Equipment Asset Management Ltd
The Exceed Partnership LP
The Great Wigmore Partnership (G.P.) Ltd
The Great Wigmore Partnership
The Moment Content Group Ltd
The Pallet Network Group Limited
The Scottish Agricultural Securities Corporation plc
(in liquidation)
The Training Grp Holdings Ltd
Thistlerow Ltd
298
298
100%
24.9%
37.4%
25%
34.48%
n/a
59.3%
40.6%
43.758%
88%
100%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
50%
16.1%
58.5%
41.9%
76%
41.5%
21.1%
20.9%
100%
100%
100%
22.3%
59.1%
n/a
71%
71.96%
59.71%
77.07%
48.7%
100%
69.3%
44.1%
38.3%
51.9%
20%
20% (40%)
20% (40%)
73.2%
65.3%
39.4%
39%
70.1%
56.3%
65.5%
66.9%
61.4%
46.9%
34.9%
18.9%
27.2%
100%
61.9%
54.9%
n/a
100%
100%
65.1%
83.1%
60%
23.5%
50%
50%
73.2%
50%
51.6%
54.2%
100%
100%
66.6%
36.4%
100%
100%
100%
50%
29%
64%
n/a
50%
n/a
60.3%
35.7%
33.33%
40.9%
25%
Europa House, 20 Esplanade, Scarborough, North Yorkshire, YO11 2AQ
1 Allee Scheffer, Luxembourg, l-25250, Luxembourg
Kingsway North, Team Valley Trading Estate, Gateshead, NE11 0EG
2 Poole Road, Bournemouth, BH2 5QY
Septimus Roe Square, Level 8, 256 Adelaide Terrace, Perth, WA 6000, Australia
CMS Cameron Mckenna LLP, 78 Cannon Street, London, EC4N 6AF
Bath Yard, Bath Lane, Moira, Swadlincote, Derbyshire, DE12 6BA
1 Priory Court, Saxon Way, Hessle, East Yorkshire, HU13 9PB
Jeffrey Cohen, 1066 Woodward Avenue, Detroit, MI 48226, United States
300 South Orange Avenue, Suite 100, Orlando, FL 32801, United States
33 Cavendish Square, London, W1G 0PW
Sanne Group, 13 Castle Street, St. Helier, Jersey, JE4 5UT
Sanne Group, 13 Castle Street, St. Helier, Jersey, JE4 5UT
Sanne Group, 13 Castle Street, St. Helier, Jersey, JE4 5UT
Sanne Group, 13 Castle Street, St. Helier, Jersey, JE4 5UT
Sanne Group, 13 Castle Street, St. Helier, Jersey, JE4 5UT
Sanne Group, 13 Castle Street, St. Helier, Jersey, JE4 5UT
4 Elstree Gate, Elstree Way, Borehamwood, Hertfordshire, WD6 1JD
25 Gresham Street, London, EC2V 7HN
Granville House, Gatton Park Business Centre, Redhill, Surrey, RH1 3AS
4 Sceptre House, Hornbeam Square, Hornbeam Business Park,
Harrogate, North Yorkshire, HG2 2PB
2nd Floor, 165 The Broadway, Wimbledon, London, SW19 1NE
Fontana House, Works Road, Letchworth Garden City, SG6 1LD
Unit 22, Lodge Way, Lodge Farm Industrial Estate, Northampton, NN5 7US
Unit 2, Olympic Park, Woolston Grange Avenue, Warrington, Cheshire, WA2 0YL
Unit A2, Cradley Business Park, Overend Road, Cradley Heath, West Midlands, B64 7DW
Grant Thornton UK LLP, 95 Bothwell Street, Glasgow, G2 7JZ
Grant Thornton UK LLP, 95 Bothwell Street, Glasgow, G2 7JZ
Grant Thornton UK LLP, 95 Bothwell Street, Glasgow, G2 7JZ
2 The Parklands, Bolton, Lancashire, BL6 4SE
13 Hornbeam Square South, Harrogate, North Yorkshire, HG2 8NB
International Corporation Services Ltd, Harbour Place, 2nd Floor,
103 South Church Street, George Town, Grand Cayman, KY1106, Cayman Islands *
Apollo House 6 Bramley Road, Mount Farm, Milton Keynes, England, MK1 1PT
2nd Floor Bezant House, Bradgate Park View, Chellaston, Derbyshire, DE73 5UH
Gloucester Road, Cheltenham, Gloucester, GL51 8NR
55 Baker Street, London, W1U 7EU
Waverley House, Hampshire Road, Granby Industrial Estate, Weymouth, DT4 9XD
Paston House, Princess Street, Norwich, Norfolk, NR3 1AZ
Unit 4, Yew Tree Way, Golborne, Warrington, WA3 3FN
Mitrefinch House, Green Lane Trading Estate, Clifton, York, North Yorkshire, YO30 5YY
KPMG LLP, Arlington Business Park, Theale, Reading, Berkshire, RG7 4SD
City Gate House, 22 Southwark Bridge Road, London, SE1 9HB
National Exhibition Centre, Birmingham, B40 1NT
55 Baker Street, London, W1U 7EU
The Beacon, 176 St. Vincent Street, Glasgow, G2 5SG
N/A
The Old Truman Brewery, 91 Brick Lane, London, EC20 2AX
The Old Truman Brewery, 91 Brick Lane, London, EC20 2AX
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
Seabrook House, Duncombe Street, Bradford, West Yorkshire, BD8 9AJ
16 Kirby Street, London, EC1N 8TS
Birkbecks, Water Street, Skipton, North Yorkshire, BD23 1PB
140 London Wall, London, EC2Y 5DN
3 Trinity Park, Solihull, West Midlands, B37 7ES
Meriden Hall, Main Road, Meriden, Coventry
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
Dearing House, 1 Young Street, Sheffield, S1 4UP
Roundhouse Road, Faverdale Industrial Estate, Darlington, County Durham DL3 0UR
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
15 Canada Square, London, E14 5GL
KPMG LLP Arlington Business Park, Theale, Reading, RG7 4SD
Unit 4, Jubilee Business Park, Jubilee Way, Grange Moor, West Yorkshire, WF4 4TD
Turnpike Road, Newbury, Berkshire, RG14 2NX
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
Rectory House, Thame Road, Haddenham, Aylesbury, Buckinghamshire, HP17 8DA
105 St Peters Street, St Albans, AL1 3EJ
Grant Thornton UK LLP, 30 Finsbury Square, London, EC2P 2YU
21-22 Balena Close, Poole, Dorset, BH17 7DX
1095 Avenue of the Americas, New York, NY 10036, United States
7 Bradford Business Park, Kingsgate, Bradford, BD1 4SJ
2nd Floor, G Mill, Dean Clough, Halifax, HX3 5AX
Level 1, Citymark, 150 Fountainbridge, Edinburgh, EH3 9PE
Level 1, Citymark, 150 Fountainbridge, Edinburgh, EH3 9PE
Old Truman Brewery, 91 Brick Lane, London , EC20 2AX
Unit 4, Pioneer Way, Castleford, West Yorkshire, WF10 5QU
Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States
National Registered Agents Inc., 160 Greentree Drive, Suite 101, Dover, DE19904, United States
National Registered Agents Inc., 160 Greentree Drive, Suite 101, Dover, DE19904, United States
Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States
Castleview House, Calder Island Way, Wakefield, West Yorkshire, WF2 7AW
Unit 1 Waverley Industrial Estate, Hailsham Drive, Harrow, Middlesex, HA1 4TR
Cavendish House, 39-41 Waterloo Street, Birmingham, B2 5PP
33 Cavendish Square, London, W1G 0PW
33 Cavendish Square, London, W1G 0PW
3 Bush Park, Estover, Plymouth, PL6 7RG
Prologis Park, Midpoint Way, Minworth, Sutton Coldfield, West Midlands, B76 9EH
Titanium, 1 Kings Inch Place, Renfrew, PA4 8WF
2nd Floor, Waterloo House, Fleets Corner, Waterloo Road, Poole, Dorset, BH17 0HL
Radleigh House 1 Golf Road, Clarkston, Glasgow, G76 7HU
vii
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*
*
&
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ii
ii
ii
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&
v
i
ii
i
&
&
iv
&
&
ii
+
&
&
&
&
&
&
ii
&
&
*
vii
vii
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&
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ii
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&
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*
&
Lloyds Banking Group
Annual Report and Accounts 2016
&
*
&
i &
&
ii
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19
2
14
15
16
2
Thread Real Estate Cary Towne Park LLC
Thread Real Estate Golfview LLC
Travellers Cheque Associates Ltd
Tropical Marine Centre (2012) Ltd
United House Group Holdings Ltd
United Living Group Ltd
Valad Canadian Partners LP
Vocalink Holdings Ltd
Vulcan Topco Ltd
Whitefleet Ltd (in liquidation)
Willoughby (873) Ltd
Willoughby (880) Ltd
50%
50%
36%
35%
41.5%
70%
n/a
14.29% (25.11%)
55.2%
100%
47.4%
64.3%
WRG Worldwide Ltd
York & Becket Nominees Ltd (in liquidation)
York & Becket Nominees No.3 Ltd (in liquidation)
York & Becket Nominees No.4 Ltd (in liquidation)
Zog Brownfield Ventures Ltd (in administration)
48.3%
50%
50%
50%
50%
Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States
Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States
Belgrave House, 76 Buckingham Palace Road, London, SW1W 9AX
Tropical Marine Centre, Solesbridge Lane, Chorleywood, Herts, WD3 5SX
26 Kings Hill Avenue, Kings Hill, West Malling, Kent, ME19 4AE
Media House, Azalea Drive, Swanley, Kent, BR8 8HU
44 Chipman Hill, Suite 100, St. John, NB E2L 2A9, Canada
1 Angel Lane, London, EC4R 3AB
2 Mountview Court, 310 Friern Barnet Lane, Wheststone, London, N20 0YZ
1 More London Place, London, SE1 2AF
Parklands Industrial Estate, Forest Road, Denmead, PO7 6TJ
IMEX, 575-599 Maxted Road, Hemel Hempstead Industrial Estate,
Hemel Hempstead, Herts, HP2 7DX
36 Great Titchfield Street, London, W1W 8BQ
25-28 Bedford Row, London, WC1R 4HE
25-28 Bedford Row, London, WC1R 4HE
25-28 Bedford Row, London, WC1R 4HE
1 More London Place, London, SE1 2AF
Collective investment vehicles
The following comprises a list of the Group’s collective investment vehicles.
% of fund held by
immediate parent
(or by the Group
where this varies) Notes
Name of undertaking
ABERDEEN INVESTMENT ICVC
Aberdeen European Property Share Fund
Aberdeen World Government Bond Fund
Aberdeen Sterling Bond Fund
ABERDEEN INVESTMENTS ICVC II
Aberdeen Global Emerging Markets Quantitative
Equity Fund
ABERDEEN LIQUIDITY FUND (LUX)
Sterling Fund
Euro Fund
Ultra Short Duration Sterling Fund
53.21%
85.86%
70.16%
73.47%
50.93%
32.85%
61.62%
ABERDEEN PRIVATE EQUITY FUND OF FUNDS (2007) PLC 96.80%
ABERDEEN PROPERTY ICVC
Aberdeen UK Property Fund
31.39%
ACS POOLED PROPERTY
Scottish Widows Pooled Property ACS Fund
Scottish Widows Pooled Property ACS Fund2
BLACKROCK BALANCED GROWTH PORTFOLIO FUND
BLACKROCK UK SMALLER COMPANIES FUND
BNY MELLON INVESTMENT FUNDS I
99.88% (100%)
99.80% (100%)
33.74%
22.72%
Newton Managed Income Fund
31.53%
BNY MELLON INVESTMENT FUNDS
Boston Company US Opportunities Fund
Newton Oriental Fund
BNY MELLON INVESTMENTs FUNDS ICVC
Insight Global Multi-Strategy Fund
Insight Global Absolute Return Fund
Newton Multi-Asset Growth Fund (formerly
Newton Managed Fund)
Newton UK Opportunities Fund
Newton UK Equity Fund (formerly Newton
Income Fund)
DEVONSHIRE ASSETS MANAGED FUNDS PLC
Devonshire Conservative Real Return Fund
HBOS ACTIVELY MANAGED PORTFOLIO FUNDS ICVC
Diversified Return Fund
Absolute Return Fund
Dynamic Return Fund
HBOS INTERNATIONAL INVESTMENT FUNDS ICVC
North American Fund
Far Eastern Fund
European Fund
International Growth Fund
Japanese Fund
HBOS SPECIALISED INVESTMENT FUNDS ICVC
Cautious Managed Fund
Ethical Fund
Fund of Investment Trusts
Smaller Companies Fund
Special Situations Fund
HBOS UK INVESTMENT FUNDS ICVC
UK Equity Income Fund
UK Growth Fund
UK FTSE All-Share Index Tracking Fund
HBOS PROPERTY INVESTMENT FUNDS ICVC
UK Property Fund
HLE ACTIVE MANAGED PORTFOLIO KONSERVATIV
HLE ACTIVE MANAGED PORTFOLIO
DYNAMISCH
HLE ACTIVE MANAGED PORTFOLIO AUSGEWOGEN
INSIGHT INVESTMENT FUND OF FUNDS II ICVC
20.06%
42.29%
44.12%
79.08%
29.86%
38.66%
22.58%
41.37%
94.86%
94.08%
96.94%
96.86%
82.43%
94.39%
54.44%
96.61%
1
53.45%
83.78%
41.28%
66.75%
52.55%
63.13%
63.04%
59.39%
40.23%
31.06%
51.95%
56.45%
Absolute Insight Fund
INVESCO PERPETUAL FAR EASTERN INVESTMENT SERIES
Invesco Perpetual Asian Equity Income Fund
48.14%
25.95%
JP MORGAN FUND II ICVC
JP Morgan Balanced Managed Fund
68.99%
8
8
7
3
8
2
9
9
10
10
10
20
1
1
1
1
18
18
18
11
12
13
LDI SOLUTIONS PLUS PLC
IIFIG Government Liquidity Fund
MULTI MANAGER ICVC
Multi Manager UK Equity Growth Fund
Multi Manager UK Equity Income Fund
Multi Manager UK Equity Focus Fund
Multi Manager Global Real Estate Fund
NORDEA 1
29.19%
70.69%
24.87%
23.47%
21.32%
Nordea 1 SICAV-GBP Diversified Return Return Fund 45.68%
RUSSELL INVESTMENT COMPANY PLC
Russell Euro Fixed Income Fund
Russell Sterling Bond Fund
Russell U.S. Bond Fund
25.73%
27.52%
53.59%
24.15%
SCHRODER GILT AND FINXED INTEREST FUND
SCOTTISH WIDOWS INCOME AND GROWTH FUNDS ICVC
UK Index Linked Gilt Fund
Corporate Bond PPF Fund
SW Corporate Bond Tracker
Scottish Widows GTAA 1
Corporate Bond 1 Fund
Balanced Growth Fund
Adventurous Growth Fund
100%
100%
100%
82.92%
100%
27.47%
71.25%
SCOTTISH WIDOWS INVESTMENT SOLUTIONS FUNDS ICVC
2
Balanced Solution
Cautious Solution
Discovery Solution
Strategic Solution
Dynamic Solution
Defensive Solution
Adventurous Solution
European (ex UK) Equity Fund
Asia Pacific (ex Japan) Equity Fund
Japan Equities Fund
US Equities Fund
Fundamental Index UK Equity Fund
Fundamental Index Global Equity Fund
Fundamental Index Emerging Markets Equity Fund
Fundamental Low Volatility Index Global Equity
Fundamental Low Volatility Index Emerging
Markets Equity
Fundamental Low Volatility Index UK Equity
48.46%
40.82%
48.05%
56.95%
58.83%
73.86%
77.50%
95.90%
98.32%
94.44%
99.69%
85.40%
96.35%
95.52%
100.00%
95.57%
91.08%
SCOTTISH WIDOWS MANAGED INVESTMENT FUNDS ICVC
International Equity Tracker Fund
Balanced Portfolio Fund
Progressive Portfolio Fund
Cautious Portfolio Fund
Cash Fund
Opportunities Portfolio Fund
98.50%
82.10%
73.17%
60.14%
98.68%
92.61%
SCOTTISH WIDOWS OVERSEAS GROWTH INVESTMENT FUNDS ICVC
Global Growth Fund
European Growth Fund
American Growth Fund
Pacific Growth Fund
Japan Growth Fund
52.39%
89.24%
88.68%
36.36%
98.58%
2
2
SCOTTISH WIDOWS TRACKER AND SPECIALIST INVESTMENT FUNDS ICVC
2
UK All Share Tracker Fund
International Bond Fund
UK Smaller Companies Fund
UK Tracker Fund
UK Fixed Interest Tracker Fund
Emerging Markets Fund
UK Index-Linked Tracker Fund
Overseas Fixed Interest Tracker Fund
91.56%
65.88%
28.20%
47.43%
97.98%
90.34%
90.22%
98.99%
SCOTTISH WIDOWS UK AND INCOME INVESTMENT FUNDS ICVC
UK Corporate Bond Fund
UK Growth Fund
Gilt Fund
High Income Bond Fund
Safety Plus ® Fund
Strategic Income Fund
Environmental Investor Fund
Ethical Fund
SSGA ASIA PACIFIC TRACKER FUND
SSGA EUROPE (EX UK)
SSGA UK EQUITY TRACKER FUND
53.65%
63.32%
96.72%
25.32%
72.01%
61.80%
68.92%
71.41%
84.66%
96.00%
91.64%
2
4
4
4
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Other information
Subsidiaries and related undertakings continued
SSGA NORTH AMERICAN EQUITY FUND
SWIP EUROPEAN BALANED PROPERTY FUND
UNIVERSE, THE CMI GLOBAL NETWORK
CMIG GA 70 Flexible
CMIG GA 80 Flexible
CMIG GA 90 Flexible
European Enhanced Equity
CMIG Access 80%
Continental Euro Equity
UK Equity
US Enhanced Equity
Japan Enhanced Equity
Pacific Enhanced Basin
Euro Bond
US Bond
US Currency Reserve
Euro Currency Reserve
CMIG Focus Euro Bond
INVESTMENT PORTFOLIO ICVC
IPS Growth
THE TM LEVITAS FUNDS
TM Levitas A Fund
TM Levitas B Fund
UBS INVESTMENT FUNDS ICVC
UBS Global Optimal Fund
UBS UK Opportunities Fund
100%
83.988%
100%
100%
100%
100%
100%
97.54%
73.27%
86.78%
96.76%
78.73%
66.52%
93.81%
78.99%
98.57%
99.97%
20.42%
42.39%
32.86%
27.40%
49.87%
4
5
6
2
21
17
Principal place of business for collective investment vehicles
(1) Trinity Road, Halifax West Yorkshire, HX1 2RG
(2) 15 Dalkeith Road Edinburgh EH16 5WL
(3) 39/40 Upper Mount Street, Dublin, Ireland
(4) 20 Churchill Place, Canary Wharf, London E14 5HJ
(5) 80 route d’Esch, L-1470 Luxembourg
(6) Lemanik Asset Management S.A 106 route d’Arlon, L-8210 Mamer Luxembourg
(7) 35a avenue John F. Kennedy, L-1855, Luxembourg
(8) ABERDEEN ASSET MANAGERS LTD, 1 BREAD STREET, BOW BELLS HOUSE, LONDON
EC4M 9HH
(9) BlackRock Fund Managers Limited, 12 Throgmorton Avenue, London EC2N 2DL
(10) BNY MELLON INVESTMENT FUNDS, BNY MELLON CENTRE, 160 QUEEN VICTORIA
STREET, LONDON EC4V 4LA
(11) INSIGHT INVESTMENT MGMT GLOBAL, 160 QUEEN VICTORIA STREET, LONDON
EC4V 4LA
(12) Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH
(13) JP Morgan Funds Limited, 3 Lochside View, Edinburgh Park, Edinburgh, EH12 9DH
(14) Nordea Investment Funds S.A., 562 rue de Neudorf, L-2220 Luxembourg
(15) 78 SIR JOHN ROGERSON'S QUAY, DUBLIN 2, IRELAND
(16) SCHRODER UNIT TRUSTS LIMITED, 31 GRESHAM STREET, LONDON, EC2V 7QA
(17) UBS INVESTMENT FUNDS ICVC, 21 LOMBARD STREET, LONDON, EC3V 9AH
(18) Oppenheim Asset Management Services S.à r.l. , 2, Boulevard Konrad Adenauer, L-1115
Luxemburg
(19) LDI Solutions Plus plc, 2nd Floor, Beaux Lane House, Mercer Street Lower, Dublin 2,
Ireland
(20) GEORGE’S COURT, 54 -62 TOWNSEND STREET, DUBLIN 2, IRELAND
(21) Thesis Unit Trust Management Limited, Exchange Building, St. John’s Street, Chichester,
West Sussex PO19 1UP
* The undertaking does not have share capital
+ The undertaking does not have a registered office
# In relation to Subsidiary Undertakings, an undertaking external to the Group holds shares
^ Shares held directly by Lloyds Banking Group plc
& The Group holds voting rights of between 20% and 49.9%
(i) A Ordinary shares
(ii) B Ordinary shares
(iii) Deferred shares
(iv) Preference shares
(v) Preferred ordinary shares
(vi) Non-voting shares
(vii) C Ordinary shares
(viii) N Ordinary shares
(ix) Callable preference shares
(x) Redeemable preference shares
(xi) Ordinary limited voting shares
(xii) Redeemable ordinary shares
(xiii) Common stock
300
300
Registered office addresses
(1) 25 Gresham Street, London, EC2V 7HN
(2) Charterhall House, Charterhall Drive, Chester, CH88 3AN
(3) Port Hamilton, 69 Morrison Street, Edinburgh, EH3 8YF
(4) Trinity Road, Halifax, HX1 2RG
(5) The Mound, Edinburgh, EH1 1YZ
(6) 25 New Street, St. Helier, Jersey, JE4 8RG
(7) 116 Cockfosters Road, Barnet, Hertfordshire, EN4 0DY
(8) Minter Ellison, Governor Macquire Tower, Level 40, 1 Farrer Place, Sydney, NSW 2000,
Australia
(9) 1 Brookhill Way, Banbury, Oxon, OX16 3EL
(10) Sanne Group, 13 Castle Street, St. Helier, Jersey, JE4 5UT
(11) 26th Floor, Oxford House, Taikoo Place, Quarry Bay, Hong Kong
(12) Barnett Way, Gloucester, GL4 3RL
(13) 1 More London Place, London, SE1 2AF
(14) 1095 Avenue of the America’s, 34th Floor, New York, NY 10036, United States
(15) 2nd Floor, 14 Cromac Place, Gasworks, Belfast, BT7 2JB
(16) Rineanna House, Shannon Free Zone, Co. Clare, Ireland
(17) Level 1, Citymark, 150 Fountainbridge, Edinburgh, EH3 9PE
(18) Cox and Palmer, Suite 400, 371 Queen Street, Phoenix Square, Fredericton, NB E3B 4Y9,
Canada
(19) 4 Rue Alphonse Weicker, L-2721, Luxembourg
(20) 33 Old Broad Street, London, EC2N 1HZ
(21) Prins Bernhardplein 200, 1097 JB, Amsterdam, Netherlands
(22) Citco REIF Services, 20 Rue de Poste, L-2346, Luxembourg
(23) RL360 House, Cooil Road, Douglas, Isle of Man, IM2 2SP
(24) Centre Orchimont, 36 Rangwee, L-2412, Luxembourg
(25) Corporation Service Company, Suite 400, 2711 Centre Road, Wilmington, DE 19805,
United States
(26) 105 St Peters Street, St. Albans, AL1 3EJ
(27) 1 Allee Scheffer, Luxembourg, L-2520, Luxembourg
(28) SAB Formalities, 23 Rue de Roule, Paris, 75001, France
(29) Rockspring, 166 Sloane Street, London, SW1X 9QF
(30) Tronador 4890, 9th Floor, Buenos Aires, 1430, Argentina
(31) 138 Market Street, #27-01/02, Capita Green, 048946, Singapore
(32) McStay Luby, Dargan House, 21-23 Fenian Street, Dublin 2, Ireland
(33) 124-127 St. Stephen’s Green, Dublin 2, Ireland
(34) 21 St. Thomas Street, Bristol, BS1 6JS
(35) De Entrée 254, 1101 EE, Amsterdam, Netherlands
(36) 47 Esplanade, St. Helier, Jersey, JE1 0BD
(37) Sarnia House, Le Truchot, St. Peter Port, Guernsey, GY1 4EF
(38) 1 Rodney Square, 10th Floor, Tenth and King Street, Wilmington, DE 19801, United States
(39) Bank of China, Tower 1, Garden Road Central, Hong Kong
(40) 1 Vine Street, London, W1J 0AH
(41) 39 Queens Road, Aberdeen, AB15 4ZN
(42) Royal Ocean Plaza, Ocean Village, GX11 1AA, Gibraltar
(43) 110 St. Vincent Street, Glasgow, G2 4QR
(44) 35 Great St. Helen’s, London, EC3A 6AP
(45) Charlton Place, Charlton Road, Andover, SP10 1RE
(46) 22 Grenville Street, St. Helier ,Jersey, JE4 8PX
(47) Queensway House, Hilgrove Street, St. Helier, Jersey, JE4 1ES
(48) Unit 2, Level 2, Bagmane Tridib B-Wing, Bagmane Technology Park, Bangalore, 560093,
India
(49) Av. Jurubatuba 73, 8th Floor, Sao Paulo, Brazil
(50) Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States
(51) 18th Floor, United Centre, 95 Queensway, Hong Kong
(52) Finance House, Orchard Brae, Edinburgh
(53) 55 Baker Street, London, W1U 7EU
(54) 15 Dalkeith Road, Edinburgh, EH16 5BU
(55) Lichtenauerlann 170, 3062ME, Rotterdam, Netherlands
(56) Weena 340, 3012 NJ, Rotterdam, Netherlands
(57) Caledonian Exchange, 19A Canning Street, Edinburgh, EH3 8HE
(60) 44 Chipman Hill, Suite 100, St. John, NB E2L 2A9, Canada
(61) 155 Bishopsgate, London, EC2M 3YB
(62) 12 Peveril Buildings, Peveril Square, Douglas, Isle of Man, IM99 1JJ
(63) 44 Esplanade, St. Helier, Jersey, JE4 9WG
(64) Asticus Building 2nd Floor, 21 Palmer Street, London, SW1H 0AD
(65) 26 New Street St Helier Jersey JE2 3RA
(66) Fred. Roeskestraat 123, 1076 EE, Amsterdam, Netherlands
(67) Avenue Louise 331-333, 1050 Brussels, Belgium
(68) Naritaweg 165, 1043 BW, Amsterdam, Netherlands
(69) Calle Pinar 7, 50Izquierda, 28006, Madrid, Spain
(70) 2nd Floor Beaux Lane House, Mercer Street Lower, Dublin 2, Ireland
(71) Wilmington Trust Sp Services (London) Limited, Third Floor, 1 King’s Arms Yard, London,
EC2R 7AF
(72) 40a Station Road, Upminster, Essex, RM14 2TR
(73) 1st Floor, 1-2 Victoria Buildings, Haddington Road, Dublin 4, Ireland
(74) Black Horse House, Bentalls, Basildon, Essex, SS14 3BY
(75) Maples and Calder, P.O. Box 309, Ugland House, South Church Street, George Town,
Grand Cayman, KY1-1104, Cayman Islands
(76) 106 Goring Road, Goring By Sea, Worthing, West Sussex, BN12 4AA
(77) 8 Avenue Hoche, 75008, Paris, France
(78) 10 George Street, Edinburgh, EH2 2DZ
(79) Pentagon House, 52-54 Southwark Street, London, SE1 1UN
(80) Riverside House, 502 Gorgie Road, Edinburgh, EH11 3AF
(81) St William House, Tresillian Terrace, Cardiff, CF10 5BH
(82) Walker House, Mary Street, PO Box 908GT, South Church Street, George Town, Grand
Cayman, Cayman Islands
(83) Tower House, Charterhall Drive, Chester, CH88 3AN
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Head office
25 Gresham Street
London EC2V 7HN
Telephone +44 (0)20 7626 1500
Registered office
The Mound
Edinburgh EH1 1YZ
Registered in Scotland no SC95000
Internet
www.lloydsbankinggroup.com