HELPING
BRITAIN
PROSPER
Lloyds Banking Group
Annual Report and Accounts 2017
About us
We are a UK financial services provider with
around 27 million customers and a presence
in nearly every community.
Our main business activities are retail and
commercial banking, general insurance
and long-term savings, provided under
well recognised brands including Lloyds
Bank, Halifax, Bank of Scotland and
Scottish Widows.
Our shares are quoted on the London and
New York stock exchanges and we are one of
the largest companies in the FTSE 100 index.
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.
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 265.
This icon appears throughout this
report highlighting how we are Helping
Britain Prosper. Read more online at
www.lloydsbankinggroup.com
View our Annual Report and
Accounts and other information
about Lloyds Banking Group at
www.lloydsbankinggroup.com
The 2017 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
20 February 2018
Our purpose is to help Britain prosper.
We are creating a responsible business that
better meets our customers’ needs and a
culture where our colleagues put customers
first. This is key to our long-term success and to
fulfilling our aim to become the best bank for
customers, colleagues and shareholders.
See more about how we create value for
all our stakeholders on pages 18–27
Inside this year’s Annual Report
Strategic report
Group highlights
Chairman’s statement
Group Chief Executive’s review
Key performance indicators
The external environment
Our business model
What we have achieved over the last
three years
Our strategic planning process
Our next chapter
Doing business responsibly
Running a responsible business for all
our stakeholders
Environment
Divisional overview
Risk overview
Financial results
Summary of Group results
Divisional results
Other financial information
01
02
04
06
08
10
12
13
14
18
21
26
28
32
39
45
49
Governance
A letter from our Chairman
Board of Directors
Group Executive Committee
Corporate governance report
Directors’ report
Directors’ remuneration report
Other remuneration disclosures
Risk management
The Group’s approach to risk
Emerging risks
Capital stress testing
How risk is managed
Risk governance
Full analysis of risk categories
Financial statements
Independent auditors’ report
Consolidated financial statements
Parent company financial statements
Other information
Shareholder information
Five year financial summary
Forward looking statements
Abbreviations
Alternative performance measures
Subsidiaries and related undertakings
52
54
56
58
81
84
103
108
110
111
111
113
115
158
166
255
263
265
266
267
267
268
Lloyds Banking Group Annual Report and Accounts 2017 01
Group highlights
Significant strategic progress and a strong financial performance
13.9%
£5.3bn
245bps
£8.5bn
+24%
Statutory profit before tax
increased significantly
+8%
Underlying profit increased
+55bps
Strong CET1 capital generation
pre ordinary dividend and
share buyback
+0.9pp
Pro forma CET1 ratio after
ordinary dividend and
share buyback
3.05p
+20%
Ordinary dividend per share
See our key performance
indicators on pages 6–7
18bps
+3bps
Asset quality ratio remains
strong, reflecting effective risk
management and the continued
benign credit environment
46.8%
-1.9pp
Our market leading cost:income
ratio further improved
62.0pts
-0.7pts
Our net promoter score, a
respected measure of customer
satisfaction, remains strong
How we’ve helped Britain prosper in 2017
>708,000
individuals, charities
and businesses trained
in digital skills.
This includes around 300 local people in
Wolverhampton who have been helped
by our Digital Champions to learn new
skills and stay safe online.
>124,000
businesses of all
kinds and sizes
helped to start up.
This includes Karen in Lowestoft who
has opened her own hairdressing salon
with support from Lloyds Bank.
>£20m
given to the Group’s
independent charitable
Foundations.
The Foundations have helped more
than 2,800 charities across the country,
including Newry Muay Thai in Northern
Ireland, which received a grant from the
Halifax Foundation.
Find out more about our Helping Britain
Prosper Plan on page 20
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
02 Lloyds Banking Group Annual Report and Accounts 2017
Chairman’s statement
Transforming the Group for success in a digital world
The transformation now being
undertaken will ensure we
maintain the core values of
the past while equipping us
to succeed in the future.
Lord Blackwell
Chairman
Overview and strategy
I am pleased to report that 2017 has been
another successful year with significant
progress both financially and strategically.
We have continued to transform the Group
to become a safer, more agile and customer
focused organisation whilst increasing
profitability. As a result of this progress, the
UK government was able to conclude its
share sale in May, more than recovering its
initial investment and allowing the Group
to return to full private ownership. This
landmark event is a tribute to the hard work
of all our colleagues in recent years.
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,
customer focused, simple and low risk
business model is the right approach. It has
helped us deliver over the last few years and
will, I believe continue to do so going forward.
However, the rapid pace of technological
change also brings new opportunities to
improve our service to customers with
faster, more convenient and more extensive
propositions tailored to meet their needs.
To meet our customer needs effectively in
this new world we will need to transform our
business operations while building on our
traditional strengths. As a Board we have
spent considerable time over the past two
years discussing the path we need to follow
to succeed as a ‘Bank of the Future’. This
provided a solid base for us to develop the
next phase of our strategy with the senior
management team. The transformation we
have now embarked on will ensure we maintain
the core values of the past while equipping
us to succeed in the future. It will also ensure
we use all our capabilities across the Group
to serve our customer needs seamlessly as
an integrated financial service provider. The
pace and scale of this transformation will be
challenging to every bank, but we have a
very strong foundation from which to move
forward. I am confident that our new strategy
will provide the capabilities to continue
to deliver for customers, colleagues and
shareholders and support the communities
in which we operate.
Capital return
As a result of the financial progress in the
year, I am pleased to announce that the Board
has recommended a final ordinary dividend
of 2.05 pence per share, bringing the total
ordinary dividend for 2017 to 3.05 pence per
share, an increase of 20 per cent on last year.
In addition the Board intends to implement a
share buyback of up to £1 billion. 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
The strong motivation for all of us in Lloyds is
the central role we play in Britain’s economy
as the UK’s leading financial services provider.
We are clear our purpose as a Group 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 which we believe we are best placed
to address.
We are enormously proud of this role.
Through our products and services, we have
been helping the people, businesses and
communities of Britain for more than 250 years.
But we want to do even more; we want to
Lloyds Banking Group Annual Report and Accounts 2017 03
Helping Britain Prosper and our contribution to the UK
As the UK’s leading financial services provider we are making a significant impact on the UK economy
Colleagues
Communities
Payments
Tax
Lending
Dividends
One of the largest
employers in
the UK
£58m given to
help communities
in 2017
260,000 hours
volunteered
£14 trillion
of payments
processed in 2017
= 7 x UK GDP
£2.5bn taxes paid
in 2017
The UK’s largest
corporate tax
payer
£65bn SME and
Mid Markets
lending portfolio
Biggest mortgage
lender in UK with
c.£290bn portfolio
£2.2bn paid
in dividends
to 2.4 million
shareholders
be a bank for Britain. Our Helping Britain
Prosper Plan takes us beyond our business as
usual activities by using our scale and reach,
and unites our Group to meet some bold
commitments. When Britain prospers we
prosper, so the Plan is an important investment
in our long-term success.
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 focus in 2017. Trust is the foundation
for our customer franchise and I believe that
our performance in the year has helped to
rebuild trust not just in the Group but in
the future stability and sustainability of the
banking sector.
Our responsible, inclusive and diverse culture
ensures our colleagues consistently do the
right thing for customers. Over the last year
we have taken steps to become even more
transparent in the way we communicate
with all our stakeholders. Of course, there is
always more to do and getting this culture
right is critical to our success in an increasingly
competitive environment.
Customers
We aim to treat all our customers fairly and
inclusively, making it easy for them to find,
understand and access products that are right
for them, whatever their circumstances. During
the year I have seen first-hand how the way we
serve our customers has continued to improve,
with colleagues embracing new technology
and ways of working to meet changing
customer needs.
Communities
I am extremely proud of the way we support
communities across the country and help
British people and businesses prosper and
am pleased that so many of our colleagues
have once again taken the time to volunteer
and raise funds for charities and community
groups. Over the course of 2017 our
colleagues donated 260,000 hours of their
time by sharing their skills and experience to
help make sustainable differences to local
charities, schools, colleges and businesses.
I have also had the opportunity to travel
around the country to see some of this work,
speaking with teams who work directly with
vulnerable customers and visiting charities
who receive support from our independent
Foundations.
I am delighted that we have raised more than
£4 million for our 2017-2018 charity partner
Mental Health UK in the past 12 months.
There is a growing recognition that mental
health and financial health are closely linked
and together we are creating the perfect
partnership to start developing this support
for people across the UK.
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 previously, two of our
Non-Executive Directors, Anthony Watson
and Nick Luff, stepped down following the
AGM in May. Anthony was succeeded as
Senior Independent Director by Anita Frew
and Nick as Audit Committee Chairman by
Simon Henry.
In June Lord Lupton joined the Board as an
independent Non-Executive Director and
Chairman of the non ring-fenced bank. James
brings not just his experience of UK banking
and capital markets, but also extensive
corporate advisory experience which will be
of particular value to our overall Commercial
Banking activities.
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 has reported increased statutory and
underlying profits, strong capital generation,
has announced an increased ordinary dividend
and intends to implement a share buyback.
As a result, the Group’s total Group
Performance Share (GPS) outcome has
increased to £414.7 million (an increase of
approximately 5.5 per cent on 2016). This is
after a 21 per cent collective performance
adjustment, and reflects both strong
performance against stretching Group
strategic objectives and issues impacting
negatively on profitability and shareholder
returns, customers, conduct and the
Group’s reputation.
Total GPS outcome remains a small proportion
of underlying profit at 4.7 per cent. Cash GPS
awards 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 new strategy can
be found in the Directors’ remuneration report
on page 97.
Outlook
There is of course much more to do as we
face into a rapidly changing and challenging
world. However, given our clear strategy and
approach to transforming the business, our
strong track record of delivery, our customer
focused values and the dedication and
commitment of our colleagues, we have all
the components to succeed - building a great
British institution we can all be proud of.
Lord Blackwell
Chairman
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
04 Lloyds Banking Group Annual Report and Accounts 2017
Group Chief Executive’s review
A landmark year with strong strategic
and financial performance
Our continued strong performance
positions us well to succeed in a
digital world.
António Horta-Osório
Group Chief Executive
2017 has been a landmark year for the
Group. In May the UK government
completed the sell-down of its shares
and the Group returned to full private
ownership. This was enabled by the
significant strategic progress and strong
financial performance in recent years and
was down to the hard work of all our people
and I thank them for it.
During the year we successfully completed
the second phase of our strategy with
significant improvement in customer service,
development of our market leading digital
proposition including an open banking
platform, targeted growth and delivery of
Simplification savings ahead of target. We now
have the largest and top rated digital bank in
the UK alongside the largest branch network.
We also completed the acquisition of MBNA’s
prime credit card business, the Group’s first
major acquisition since the financial crisis and
announced the acquisition of Zurich’s UK
workplace pensions and savings business later
in the year, giving us a strong platform on which
to develop the next stage of our strategy in the
financial planning and retirement business.
2017 has also been a pivotal year for the UK.
The Bank of England increased the bank rate
for the first time in more than 10 years and the
government triggered Article 50 and launched
EU exit negotiations. Although the precise
nature of the UK’s future relationship with
Europe remains unclear and the economic
outlook is therefore uncertain, the economy
has been resilient with low unemployment,
stable house prices, record employment and
GDP growth of 1.8 per cent.
Financial performance
We have delivered another year of strong
financial performance in 2017 with increased
profits and returns on both a statutory and
underlying basis, strong capital generation
and increased capital returns.
Statutory profit before tax increased 24 per cent
to £5.3 billion, reflecting higher underlying profit
and lower below the line charges. Underlying
profit was £8.5 billion, an increase of 8 per cent,
with improved income and positive operating
jaws resulting in an improved cost:income ratio
of 46.8 per cent. Asset quality remains strong
and the Group’s gross asset quality ratio remains
unchanged at 28 basis points, while the net
asset quality ratio increased to 18 basis points
as a result of expected lower releases and write-
backs. Additional PPI provisions of £1.7 billion
and conduct costs of £865 million were taken
in the year. The increased PPI provision reflects
increased complaint levels including the impact
of the first FCA advertising campaign for the
August 2019 industry deadline.
During the year, loans and advances
increased to £456 billion with open mortgage
book growth, increased SME balances and
continued growth in consumer lending
whilst also consolidating the MBNA book. Our
balance sheet remains strong with a pro forma
CET1 ratio of 13.9 per cent (after ordinary
dividends and allowing for the share buyback),
a total capital ratio of 21.2 per cent and a pro
forma UK leverage ratio of 5.4 per cent.
In line with our progressive and sustainable
ordinary dividend policy, the Board has
recommended a final ordinary dividend
of 2.05 pence per share, taking the total
ordinary dividend for 2017 to 3.05 pence
per share, up 20 per cent on 2016. Given our
strong capital generation the Board has also
announced its intention to implement a share
buyback of up to £1 billion, equivalent to up to
1.4 pence per share.
Strategic progress
In 2017 we successfully completed the
second phase of our strategic plan,
achieving our strategic priorities of creating
the best customer experience, becoming
simpler and more efficient and delivering
sustainable growth.
Creating the best customer experience
We have been committed to meeting
customers’ evolving needs through our
multi-brand and multi-channel approach and
as a result customer satisfaction, as measured
by net promoter score (NPS), has increased to
62.0 from 58.6 in 2014 and from 42.5 in 2011.
We operate the UK’s largest branch network
and the largest digital bank with 13.4 million
active online users, of which 9.3 million are on
mobile. We have focused on transforming key
customer journeys and have made significant
improvements, including faster processing
of new mortgage applications and simpler
processes for account opening. In addition we
have developed an open banking platform in
line with regulatory timescales.
We remain committed to delivering the best
service for our customers and addressing
historic conduct issues. We have continued
to pay compensation to victims of the legacy
fraud at HBOS Reading, and have now made
offers to 57 customers, which represents more
than 80 per cent of the customers in the review.
Becoming simpler and more efficient
Cost management has been a strategic priority
and we remain focused on maintaining our
competitive advantage in cost leadership.
Our Simplification programme has delivered
£1.4 billion of run-rate cost savings, ahead of
our original £1 billion target, and costs have
fallen every year (excluding the impact of
MBNA). Our market leading cost:income ratio
improved to 46.8 per cent in 2017, with further
improvements targeted.
Lloyds Banking Group Annual Report and Accounts 2017 05
Strategy overview
As we look to the future, we see the external
environment evolving rapidly. Changing
customer behaviours, the pace of technological
evolution and changes in regulation all present
opportunities. Given our strong capabilities
and the significant progress made in recent
years we believe we are in a unique position
to compete and win in this environment by
developing additional competitive advantages.
We will continue to transform ourselves to
succeed in this digital world and the next
phase of our strategy will ensure we have the
capabilities to deliver future success.
Strategic priorities
We have identified four strategic priorities
focused on the financial needs and behaviours
of the customer of the future: further enhancing
our leading customer experience; further
digitising the Group; maximising Group
capabilities; and transforming ways of working.
We will invest more than £3 billion in these
strategic initiatives through the plan period that
will drive our transformation into a digitised,
simple, low risk, customer focused UK financial
services provider.
Delivering a leading customer experience
We will drive stronger customer relationships
through best in class propositions while
continuing to provide our customers with
brilliant servicing and a seamless experience
across all channels. This will include:
remaining the number 1 digital bank in the
UK with open banking functionality;
unrivalled reach with UK’s largest branch
network serving complex needs; and
data-driven and personalised
customer propositions.
Digitising the Group
We will deploy new technology to drive
additional operational efficiencies that will
make banking simple and easier for customers
whilst reducing operating costs, pursuing the
following initiatives:
deeper end-to-end transformation targeting
over 70 per cent of cost base;
simplification and progressive modernisation
of our data and IT infrastructure; and
technology enabled productivity
improvements across the business.
Maximising the Group’s capabilities
We will deepen customer relationships, grow
in targeted segments and better address our
customers’ banking and insurance needs as
an integrated financial services provider. This
will include:
increasing Financial Planning and Retirement
(FP&R) open book assets by more than
£50 billion by 2020 with more than 1 million
new pension customers;
implementing an integrated FP&R
proposition with single customer view; and
start-up, SME and Mid Market net lending
growth (more than £6 billion in the
plan period).
Transforming ways of working
We are making our biggest ever investment
in people, increasing colleague training and
development by 50 per cent to 4.4 million hours
per annum and embracing new technology
to drive better customer outcomes. The
hard work, commitment and expertise of our
colleagues has enabled us to deliver to date
and we will further invest in capabilities and
agile working practices. We have already
restructured the business and reorganised
the leadership team to ensure effective
implementation of the new strategy.
Financial returns
The UK economy has proven resilient and
going forward our plans and projections
assume this performance continues with a
steady increase in base rate to 1.25 per cent
by the end of 2020.
The strategy outlined will enable the Group
to deliver strong statutory profit growth
supported by targeted asset growth in key
segments, a resilient net interest margin,
lower operating costs, strong asset quality
and lower remediation costs, whilst delivering
strong capital generation and sustainable and
superior shareholder returns.
Costs will continue to be a competitive
advantage as we deliver market leading
efficiency. We expect operating costs to be
less than £8 billion in 2020. We also expect to
achieve a cost:income ratio in the low 40s as we
exit 2020, including future remediation costs.
We continue to expect improvements in the
cost:income ratio every year.
Asset quality remains strong and, given our
low risk business model and the significant
portfolio improvements in recent years, we now
expect an asset quality ratio of around 35 basis
points through the cycle and less than 30 basis
points through the plan period.
We expect to deliver an improved return on
tangible equity (RoTE) of 14.0–15.0 per cent
from 2019 onwards on a higher CET1 capital
base of c.13 per cent plus a management buffer
of around 1 per cent.
Capital generation is expected to remain
strong with 170-200 basis points of capital
generation per year pre dividend and as
a result we expect to deliver progressive
and sustainable ordinary dividends whilst
maintaining the flexibility to return surplus
capital to shareholders.
Summary
Our strong foundations, differentiated business
model and strategic capabilities combined with
the new strategic plan and a highly engaged
team positions us well to succeed in a digital
world and continue to help Britain prosper.
António Horta-Osório
Group Chief Executive
Our achievements in 2017
UK government share sale completed,
allowing the Group to be returned to full
private ownership
Statutory profit of £5.3 billion, an increase
of 24 per cent on 2016
Underlying profit of £8.5 billion, an
increase of 8 per cent on 2016
Completed the acquisition of prime
credit card business MBNA and
announced the acquisition of Zurich’s UK
workplace pensions and savings business
Increased ordinary dividend of
3.05 pence per share with an additional
share buyback of up to £1 billion
Delivering sustainable growth
When we outlined our strategic vision in
October 2014, we targeted sustainable
growth in line with our low risk appetite,
committing to grow in areas where we were
under-represented. We have increased net
lending to SME clients by £3 billion since
2014, significantly ahead of the market, while
also increasing UK consumer assets by over
£6 billion and acquiring the £8 billion MBNA
credit card portfolio. In the competitive low
growth mortgage market we have focused
on protecting margin rather than achieving
volume growth over the last couple of years
though the open mortgage book returned to
growth in 2017. The Group also announced the
acquisition of Zurich’s workplace pensions and
savings business in late 2017.
We remain committed to building the best
team, creating an inclusive and diverse
workforce that represents a changing Britain.
Colleague engagement is at an all-time high,
and in line with top performing corporates. In
2017 we were awarded number one employer
for lesbian, gay, bisexual and transgender
people at the Stonewall Awards and named the
world’s best bank for diversity and inclusion by
Euromoney magazine.
Helping Britain Prosper Plan
In 2014 we launched our Helping Britain
Prosper Plan to support the people,
businesses and communities in the UK. The
financial success of the Group is inextricably
linked to the health of the UK and we are
working hard to support the whole economy.
Since the launch of the plan four years ago,
we have lent more than £47 billion to first-
time buyers, supported more than 440,000
start-ups, been the largest UK corporate tax
payer and donated £72 million to the Group’s
independent Foundations. Also, in 2017
we have trained over 700,000 individuals,
businesses and charities in digital skills. In
2014 we were the first FTSE 100 company to
make a commitment on the number of senior
positions held by women. At that time women
made up 29 per cent of senior management.
In 2017 we met our 34 per cent target and
we are on track to achieve 40 per cent by
2020. We also recently became the first FTSE
100 company to set a target to increase the
proportion of senior roles held by Black, Asian
and Minority Ethnic colleagues. Our target is
8 per cent by 2020 for senior managers and
10 per cent for the overall Group.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
06 Lloyds Banking Group Annual Report and Accounts 2017
Key performance indicators
Our strategy has delivered strong performance
Delivering for all
our stakeholders
Our key performance indicators have been
considered by the Board and identify the
most effective output measures for assessing
financial and non-financial performance and
progress towards becoming the best bank for
customers, colleagues and shareholders.
As a result of significant strategic progress in
2017, we have reported increased statutory and
underlying profits, strong capital generation
and have announced an increased ordinary
dividend and our intention to implement a
share buyback.
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 20.
Pay for performance
across the Group
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 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 (the Group
Ownership Share 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, colleagues and shareholders
and helping Britain prosper. KPIs that are
directly linked to remuneration are marked
with this symbol.
Underlying profit before tax
£m
Statutory profit before tax
£m
2017
2016
2015
2014
8,493
7,867
8,112
7,756
2017
2016
2015
2014
5,275
4,238
1,644
1,762
Underlying profit increased in 2017, largely due
to higher income, positive operating jaws and
strong asset quality.
Pre-tax statutory profit increased significantly,
largely driven by strong underlying
performance and lower charges below the line.
Ordinary dividend
p
Statutory return on tangible equity
%
2017
2016
2015
2014
3.05
2.55
2.25
0.75
2017
2016
2015
2014
8.9
6.6
2.6
4.4
An increased ordinary dividend of 3.05 pence
per share, in line with our progressive and
sustainable dividend policy. In addition, the
Board intends to implement a share buyback
of up to £1 billion.
The statutory return on tangible equity
increased in 2017 as the gap between
underlying and statutory profit continues
to reduce.
We previously reported underlying return
on required equity but changed to statutory
return on tangible equity at full year 2016 to aid
comparability with our peers.
Earnings per share
p
Common equity tier 1 ratio
%
2017
2016
2015
2014
4.4
2.9
0.8
1.7
2017
1
2016
1
2015
1
2014
13.9
13.0
13.0
12.8
Earnings per share increased in the year,
largely due to the significant increase in
statutory profit.
Our common equity tier 1 ratio remains one of
the strongest of the major UK banks.
1 Pro forma, reflecting insurance dividend and ordinary
dividend. Also reflecting MBNA in 2016 and intended share
buyback in 2017.
Read about performance at a divisional level
on pages 28–31
Financial Lloyds Banking Group Annual Report and Accounts 2017 07
Cost:income ratio
%
Customer satisfaction
Digital active customer base
m
2017
2016
2015
2014
46.8
48.7
49.3
49.8
2017
2016
2015
2014
62.0
62.7
58.9
58.6
2017
2016
2015
2014
13.4
12.5
11.5
10.4
Our cost:income ratio further improved to
46.8 per cent and remains the lowest of our
major UK banking peers.
Our net promoter score is the measure of
customer service at key touch points and the
likelihood of customers recommending us.
Despite being slightly down in the year it
remains nearly 50 per cent higher than at the
end of 2011.
Reflecting the pace of digital adoption, the
number of active digital customers increased
in the year. The number of mobile banking
users also increased in the year, to 9.3 million,
many of whom use our award winning Lloyds
Bank app.
Asset quality ratio
bp
Best bank for customers
% favourable
Customer complaints
*
FCA reportable complaints per 1,000 accounts
2017
2016
2015
2014
18
15
14
23
2017
20161
2015
2014
80
77
78
72
Our asset quality ratio remains strong,
reflecting our effective risk management and
the continued benign credit environment.
The increase reflects lower write-backs and
recoveries rather than any deterioration in
the underlying portfolio.
The index is the outcome of a survey of more
than 62,000 colleagues which shows an
increasing number of colleagues believe we
are committed to becoming the best bank
for customers.
H1 2017
H2 2016
*Excluding PPI
4.1
4.3
The FCA changed the approach to
complaint reporting from 30 June 2016 so our
complaint reporting is now presented on this
basis. Overall incoming complaints excluding
PPI and claims management companies have
fallen by nearly 70 per cent since 2011 and by
around 18 per cent since 2016.
Total shareholder return
%
2017
2016
2015
2014
1 New baseline score introduced to tie in with new
Group behaviours.
Employee engagement index
% favourable
Helping Britain Prosper Plan
targets achieved
14
(10)
(2)
(4)
2017
2016
2015
2014
76
71
71
60
2017
2016
2015
2014
21/22
20/24
27/28
20/25
Our share price increased by 9 per cent in 2017,
and when dividends are included, our total
shareholder return was 14 per cent.
Colleague engagement remains at its highest
ever level with our employee engagement
index 5 points higher than 2016. Our
performance excellence index also improved,
indicating our colleagues strongly believe we
are committed to delivering great products and
services for customers.
Since we launched the Plan in 2014 we have
made strong progress. In 2017, we achieved
21 out of 22 targets to help people, businesses
and communities. Find out more about our
Plan on page 20.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationFinancialNon-Financial
08 Lloyds Banking Group Annual Report and Accounts 2017
Our
strategic
journey
1
The external
environment
2
Intrinsic
strengths and
challenges
3
Creating
value for our
stakeholders
See page 10
See page 11
4
What we have
achieved
over the last
three years
See page 12
5
Our strategic
planning
process
See page 13
1
2
3
4
5
The external environment
See how risks associated with these factors
impact upon our principal risks and strategy
on page 33
Challenges
Households’ spending power has been
squeezed over the past year as the rise in
inflation to 3 per cent by the end of 2017 has
outpaced growth in pay that has remained
subdued in a broadly 2-2.5 per cent range over
the year, partly reflecting weak productivity
growth. While inflation is expected to slow,
it is likely to trend towards 2 per cent only
gradually through the next three year chapter
of our strategy, and whilst we expect wage
growth to improve and end the spending
power squeeze, it is uncertain how quickly this
will happen. Meanwhile, the economy is more
reliant than normal on business investment
and exports to drive growth.
Business investment is likely to have been
impacted by the uncertainty around the UK’s
future trading relationship with the EU but as
negotiations progress and that relationship
becomes clearer, investment spending should
be supported. Operational impacts of the
UK’s exit from the EU present risks for some
of our customers’ businesses, although the
UK’s continued competitive advantages in
innovation and high value services, and the
flexible labour market should enable the
economy to prosper longer term in growing
world markets.
Outlook
Barring unexpected sudden shocks
to consumer or business confidence,
the near-term outlook for both the UK
economy and the Group remains relatively
benign. A tight labour market and gradual
productivity improvements should over time
underpin quickening wage growth, whilst
inflation is expected to start falling through
2018, the combination gradually ending the
squeeze on households’ spending power.
With unemployment remaining close to its
current 40-year lows, Bank Rate is expected
to continue to rise, but only slowly. House
prices are expected to rise marginally, with the
affordability impact of slightly higher interest
rates offset by improving disposable incomes.
The Group is not immune to the challenges
facing the near-term and medium-term
economic outlook, but our UK focus
means that the current benign conditions
and resilience of the UK economy will be
supportive to the Group’s performance
through the delivery of the next chapter our
strategy. Direct operational impacts from
EU exit are also limited.
Key messages
Given our UK focus, our prospects are closely
linked to the strength of the UK economy
Despite near-term uncertainties about
the future relationship with the EU, the
UK economy is expected to remain resilient
in 2018, growing at a similar pace to 2017.
Longer term growth potential is still
expected to be faster than the Eurozone
and similar to the US
Interest rates are expected to remain low,
with gradual rises beneficial to our savings
customers and the Group
Overview
As a UK focused financial services provider, our
prospects are closely aligned to the strength
of and outlook for the UK economy. In the
period following the decision to leave the
EU, the UK economy has remained resilient.
Growth has slowed only a little below its trend
rate, unemployment has continued to fall
to a 40-year low, and property prices have
continued to rise slowly. In the absence of
any sudden shocks to business or consumer
confidence, this recent resilience is expected
to continue in 2018 and the next few years.
In common with many other countries, the
biggest uncertainty for longer term growth
is the degree to which productivity growth
improves from its weak rate of the past decade.
Opportunities
The economy’s resilience bodes well for us
and our customers. While interest rates are
expected to increase only gradually, the Bank
of England’s first increase in Bank Rate in over
10 years has benefited savers, many of whom
will have dealt with low rates for a prolonged
period, and will support banking margins.
In recent years, low interest rates and our
low risk approach have been reflected in low
and falling levels of impairments against our
lending balances.
Looking ahead, impairments are expected to
remain at benign levels at an industry level,
with contributing factors including the slow
pace of expected interest rate increases,
unemployment remaining close to its current
40-year low, and the benefit of both continuing
to support property prices. Meanwhile,
business confidence has to date held up well in
the face of global and domestic uncertainties.
Manufacturers and exporters have been aided
by sterling’s depreciation since late 2015, and
businesses generally are benefiting from low
debt service costs.
Key messages
The UK financial services sector is
expected to remain highly regulated
There is increasing clarity on impending
regulation with a number of key regulatory
programmes now agreed or to be finalised
in the near future
Open banking and
customer data
In January 2018 open banking regulation
was implemented in the UK, with the aim of
enabling customers to view their personal
financial data in one place. Customer
protection is at the heart of this and other
upcoming regulations regarding personal
data, with robust data systems and processes
having been developed to ensure that
customer data can be transferred securely,
and only once consent has been given.
Capital regulation
The Group continues to monitor and
prepare for a number of regulatory capital
developments taking effect over the next
few years. Uncertainty remains around
the implementation and impact of some
regulatory developments, including the
finalisation of Basel III, which will be subject
to EU and UK implementation. The highly
capital generative nature of the Group means
that it remains relatively well-positioned
to meet any changes arising.
Ring-fencing
From January 2019, the Group and its peers will
have to comply with the ring-fencing regulations
introduced by the Financial Services (Banking
Reform) Act 2013. This legislation has been
developed in response to the global financial
crisis, with the aim of ensuring that ordinary
depositors and other stakeholders, such as
shareholders, would be protected in the event
of a similar crisis occurring in the future. While
this will result in some structural and operational
changes for the Group, our simple business
model and UK focus mean they are likely to be
less onerous than for our major peers.
Other
Over the next three years a number of other
regulations will be introduced or take effect
including the effectiveness of competition and
customer choice and the deadline for customers
to claim compensation for mis-sold PPI.
Given our simple, low risk business model, we
are well placed to meet these requirements
and welcome the positive effect that they
will have on the industry, its customers, and
other stakeholders.
EconomyRegulation Lloyds Banking Group Annual Report and Accounts 2017 09
Key messages
Key messages
Key messages
Customer behaviours are changing, with
a greater focus on personalised customer
experiences and instantly accessible services
Evolving demographics and life patterns
are changing the financial needs of our
customers, in particular increasing focus on
the ability to plan for retirement
Market challenge
The needs and expectations of our customers
continue to evolve, driven by changing
demographics and life patterns along with
increased choice, both in terms of provider
and channel. The increasing use of digital has
also reduced brand affinity and loyalty across
a number of sectors.
As we have seen in a number of other
industries, incumbents who do not respond
to changing customer preferences and
behaviours are at the greatest risk.
Opportunities
Strong customer satisfaction scores
demonstrate our ability to provide products
and services that our customers value but it
is imperative that we keep pace with market
developments in order to maintain relevance
with our customer base.
Our multi-channel offering, including the
largest branch network and digital bank in
the UK, enables customers to interact with
us in whichever way they prefer. In addition,
our customer data provides the Group with
a wealth of information that can be utilised
to facilitate greater personalisation, while
ensuring we meet all of our customers’
evolving banking and insurance needs.
Outlook
Changes to customer expectations and
behaviour, demographics and life patterns
mean that we cannot be complacent. While
we have a number of competitive advantages
in the current environment, including our
differentiated multi-channel and multi-brand
propositions, securing and enhancing the
relationships with our customers will be
paramount to our future success.
The pace of digital adoption continues to
surpass expectations and is likely to increase
further in the coming years. Addressing
customer expectations in this area is key to
future success
Cyber security and the protection of
customer data are increasingly important
factors in retaining customer trust
Market challenge
The pace of digital adoption has surpassed
expectations in recent years and this trend is
likely to accelerate further. The increasing role of
digital has heightened customer expectations
for personalisation while transforming the
manner in which customers interact with
banks. New entrants to the financial services
market are increasing disruption through the
innovative use of technology and data, often
specifically targeting small, profitable niches.
Security and resilience remain important factors,
with the ability to respond to heightened cyber
and fraud risks key to retaining customer trust in
a digital environment.
Opportunities
As the UK’s largest digital bank, further
technological improvements are an
important enabler of enhancing the customer
experience. The increasing use of intelligent
systems provides an opportunity to respond
to customers’ growing expectations for
personalisation and relevance, while the
automation of simple transactions increases
our capacity to focus on complex, value adding
transactions. In addition, the use of technology
provides organisational benefits in terms of
efficiency, our ability to respond to an evolving
operating environment, as well as aiding risk
taking decisions and mitigating fraud.
Outlook
Building upon our strong starting position, we
have a unique opportunity to further enhance
the customer experience and improve
operational efficiency through the use of
technology. In doing this, we must ensure that
we continue to respond to innovation and
meet the needs of our diverse customer base
whilst ensuring system resilience and security.
Competition within the UK markets
continues to increase
The competitive landscape is changing
with new entrants such as FinTechs and
tech giants increasing disruption through
innovation, while incumbent banks continue
to re-focus on the UK
Market challenge
Our competitive landscape continues to
evolve. A number of domestic incumbents
are intensifying their focus on the UK market,
with restructuring phases largely complete. In
addition, collaboration among non-traditional
competitors is increasing in order to build
scale and drive efficiency. Tech giants such
as Apple and Google are also posing an
increasing threat to the financial services
sector, underpinned by large customer bases,
strong brand loyalty, access to significant
customer data and a focus on delivering great
customer experiences.
While the extent to which non-traditional
lenders and tech giants will attempt to
disintermediate our markets is unclear,
intensified competition within our markets
is likely. This will place pressure on income and
margins across the sector and place
an increasing focus on innovation.
Opportunities
With customers becoming more empowered
as a result of greater choice than ever before,
we must be responsive to their changing
expectations and ensure that we continue to
offer products and services they value. These
expectations are likely to be increasingly
influenced by non traditional competitors in
other industries as they continue to the raise
bar for innovation.
Our leading cost position, combined with our
simple business model, provides us with the
operational flexibility to compete effectively.
However, we must go further to respond to
these threats.
Outlook
While greater competition increases choice for
consumers and reinforces the need to further
improve the customer experience, the breadth
of our multi-brand offering along with our
efficiency and customer satisfaction means we
start from a position of strength.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationCustomerTechnologyCompetition
10 Lloyds Banking Group Annual Report and Accounts 2017
1
2
3
4
5
Our business model
Intrinsic strengths and challenges
We have several distinctive competitive strengths, which enable us
to create sustainable value for our stakeholders.
UK’s largest digital
bank, branch reach
and customer
franchise
Our scale and reach across the UK
means that our customer franchise
extends to around 27 million
customers with more than
13 million active online users.
Multi-channel
approach
Operating in an integrated way
through a range of distribution
channels ensures our customers
can interact with us when and how
they want.
Prudent, low
risk participation
choices with
strong capital
position
Being low risk is fundamental to
our business model. Our low risk
appetite is reflected through the
low level of non-performing loans
and run-off assets, as well as our
credit default swap spread, which
is amongst the best in the banking
sector worldwide. Our financial
strength has been transformed
in recent years with our capital
position amongst the strongest in
the sector worldwide.
Market leading
efficiency position
Our simpler operating model
and focus on operational
efficiency provide a cost
advantage which benefits both
customers and shareholders.
Rigorous
execution and
management
discipline
Experience of delivering change
and transformation in recent years
provides benefit as we further
transform the business.
Multi-brand
proposition
Offering our services through
a number of recognised brands
enables us to address the needs
of different customer segments
more effectively.
We will look to build upon these
strong foundations in the next
phase of our strategy, thereby
creating new competitive
strengths. Implementation will
ensure we can compete effectively
and create value in a digital world.
Further detail is available on
page 14.
Due to the nature of our business as a large, UK focused financial services provider,
we face a number of external and internal challenges.
EXTERNAL
INTERNAL
As previously discussed on pages 8–9, the main external
challenges we face are:
We also face a number of internal challenges, which are being
addressed as part of the next phase of our strategy:
Evolving and uncertain economic environment
Ever increasing levels of regulation
Evolving customer needs
Responding to technology innovations
Managing pressure from increased competition
Operating as efficiently as possible while remaining the best
bank for customers
Ensuring we have the right people and culture to meet
evolving customer needs
Ensuring IT systems are effective and resilient and that we
are prepared for the threat of cyber risk
1
2
3
4
5
Lloyds Banking Group Annual Report and Accounts 2017 11
Creating value for our stakeholders
Our simple, low risk, customer focused business model is driven
by our competitive positioning. As we enter the next phase of
our strategy we will enhance our competitive strengths to further
transform the business, help Britain prosper and continue delivering
for customers, colleagues and shareholders.
B U S INESS AREAS
P R ODUCTS
Le
n
din
g
OUR PURPOSE
Helping Britain
Prosper
e n t
k manage m
Ris
I
n
s
u
r
a
s
n
n
I
c
e
OUR AIM
Best bank for customers,
colleagues and
shareholders
Co m m e r c ial fi nancing
In
v
estment
alth
e
W
d
n
a
e
c
n
a
r
u
D
e
p
o
s
i
t
t
a
k
in
g
R
e
t
a
i
l
Running a
responsible
business
for all our
stakeholders
See pages 21–27
Commercial Ba n k i n g
OUR PURPOSE
Helping Britain Prosper
OUR AIM
Best bank for customers,
colleagues and shareholders
PRODUCTS
BUSINESS AREAS
Doing the right thing for our
customers, colleagues and
shareholders 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.
We are a responsible business,
focused on succeeding over the
longer-term, and we believe that
helping to make Britain a more
inclusive and prosperous country
is fundamental to that aim.
We are proud to take a leading
role in helping the UK economy,
whether through supporting
housing, trade and business
growth or by tackling disadvantage.
Our Helping Britain Prosper
Plan, launched in 2014, takes us
well beyond business as usual
by setting measurable targets in
the areas where we can make the
biggest difference.
For more about our approach to
responsible business and the Plan
see pages 18–20
Our product range is driven by our
customers’ needs and is informed
through comprehensive customer
analysis and insight.
Our business areas are structured
according to the products and
services we provide to best serve
our customers’ financial needs.
We currently have three
business areas:
Retail
Commercial Banking
Insurance and Wealth
Read more:
Retail see pages 28–29
Commercial Banking
see page 30
Insurance and Wealth
see page 31
Lending
Mortgages, credit cards,
personal and business loans
Deposit taking
Current accounts and
savings accounts
Insurance
Home insurance, motor insurance
and protection
Investment
Pensions and investment products
Commercial financing
Term lending, debt capital markets
and private equity
Risk management
Interest rate hedging, currency
and liquidity
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
12 Lloyds Banking Group Annual Report and Accounts 2017
1
2
3
4
5
What we have achieved
over the last three years
We have made significant progress against our
strategic priorities over the last three years and are
well positioned as we head into the next chapter of
our strategy.
STRATEGIC PRIORITIES 2015 – 2017
We are now the UK’s largest
digital bank, with 13.4 million
online customers and a mobile
customer base of 9.3 million
We have continued to invest in
the UK’s largest branch network,
reformatting branches to reflect
changing customer needs
We have improved customer
satisfaction with our seamless,
multi-brand, multi-channel
offering, reflected in increasing
Net Promoter Scores (NPS),
while customer complaints
continued to trend downwards
We have demonstrated our
ability to actively respond
to changes in the operating
environment, accelerating
cost delivery and achieving
significant efficiency savings
The transformation of customer
journeys has made it simpler,
faster and more convenient
for us to meet customers’
evolving needs
We have maintained our cost
leadership position amongst
UK high street banks
Despite the uncertain
macroeconomic environment,
we have continued to support
the UK economy while
operating within our prudent
risk appetite
We have maintained market
leadership across our key retail
business lines, while growing
in a number of targeted
areas where we were under-
represented including SME,
Mid Markets, credit cards and
motor finance
We have helped Britain prosper
through a number of strategic
commitments, including
supporting more first-time
buyers than anybody else
We have made progress
towards building a business
our colleagues are proud to
work for by creating the best
environment for our colleagues
to succeed
We are creating an honest
and open environment where
colleagues feel valued, reflected
in all-time high colleague
engagement scores that are
also above the norm for high
performing organisations
We continue to encourage
diversity, believing that
everybody should have the
opportunity to reach their
full potential
Performance highlights
Performance highlights
Performance highlights
Performance highlights
68 per cent of customer needs
met via digital (versus forecast
range of 50-70 per cent set out
in 2014)
NPS score of 62.0, up from 58.6
55 per cent of customers
receiving mortgage offer
within less than 14 days, up 18pp
Cost:income ratio of 46.8 per
cent, down from 49.8 per cent
Net lending to SMEs up by
£3 billion, ahead of market
76pts – employee engagement
at an all-time high
£1.4 billion of Simplification
savings achieved, ahead of
our original target
Operating costs reduced every
year during the course of the last
six years (excluding the impact
of MBNA in 2017)
£8 billion of MBNA credit
card assets acquired in
June 2017
More than £35 billion lent to
first-time buyers
34 per cent of senior roles held
by women, up 5 per cent
Named world’s best bank
for diversity and inclusion by
Euromoney magazine
Creating the best customer experienceBecoming simpler and more efficientDelivering sustainable growthBuilding the best team Lloyds Banking Group Annual Report and Accounts 2017 13
Lloyds Banking Group Annual Report and Accounts 2017 13
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
1
2
3
4
5
Our strategic
planning process
Over the past two years we have developed a new
strategy to further transform the Group and deliver
sustainable value to our stakeholders.
Why the change?
Since 2011, we have significantly transformed our
business for the benefit of our customers and other
stakeholders. However we are not complacent and
recognise that unprecedented change in customer
expectations, technology, the competitive environment
and regulation require a bold response for the next
chapter of our strategy.
Stages in the process
up to June 2016
up to June 2017
up to February 2018
2018–2020
Our next chapter
Over the page, we outline
the strategic priorities for the
business to 2020.
Bank of the
Future discussion
Development of high
level strategic options
We regularly review our strategy
in the light of the changing
external environment to ensure
that our focus remains the right
one for our customers and other
stakeholders. As part of this
process, the Board specifically
discusses strategic issues at
a strategy offsite meeting
every year.
In June 2016, the Board and the
executive management team
took part in an intensive two-day
strategy meeting to discuss
the strategic challenges and
opportunities the Group could
face in the future, based on four
scenarios for how banking could
evolve over the next 10 years.
The Board debated the
transformation required to
become ‘Bank of the Future’
and underpin our continued
competitiveness in each of these
scenarios. This provided a solid
foundation for us to develop the
next phase of our strategy.
Using this foundation, coupled
with the ongoing monitoring
of both internal and external
stakeholder trends and best
practice, our main focus in 2017
was the development of the
Group’s strategy for the three
year period from 2018 to 2020.
At the start of the year we
identified four major strategic
themes, each of which was
developed further by dedicated
teams, with support and
challenge provided centrally
and by executive management.
During the course of the year, the
Board discussed and reviewed
the proposed change initiatives in
a number of deep dive sessions
and at mid-year the Board
debated at length the preliminary
findings and broad strategic
options for each of these priority
themes over the course of two
days. This resulted in a set of clear
strategic priorities for further
development.
Finalisation of
strategy and
communication
A number of changes to the
Group’s operating structure and
executive management were
announced in July to put in place
the right team and structure
to lead the development and
delivery of the strategy.
The priorities identified by
the Board were subsequently
developed into detailed strategic
plans with measurable operating
and financial metrics and targets
which support our strategic
aspirations for the next three
years and beyond.
The Board reviewed the more
detailed plan and immediate
priorities in an extended session
in November 2017, placing
particular emphasis on the
effective management of the
programme and the mitigation
of potential execution risks.
At the same time, executive
management and the
Board have been engaged
in the development of the
communication plan, to ensure
that all our stakeholders clearly
understand the strategy and what
it means for them.
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
14 Lloyds Banking Group Annual Report and Accounts 2017
Our next chapter
Transforming the Group for success in a digital world
Our new strategy will enable us to seize new opportunities
by building on our existing competitive advantages. The
transformation planned will ensure we become a digitised,
simple, low risk, customer focused, UK financial services provider.
OUR PURPOSE Helping Britain Prosper
OUR AIM Best bank for customers, colleagues and shareholders
OUR BUSINESS MODEL Digitised, simple, low risk, customer focused, UK financial services provider
Our strategic priorities
M
A
X
I
M
I
S
E
IGITIS E
D
LEADING
CUSTOMER
EXPERIENCE
TRANSF O R M
Leading customer experience
Driving stronger customer relationships through
best-in-class propositions while continuing to
provide our customers with brilliant servicing and a
seamless experience across all channels.
Digitising the Group
Deploying new technology to improve our efficiency
and make banking simpler and easier for customers.
Maximising the Group’s capabilities
Aligning the Group’s capabilities as the sole UK
banking and insurance provider to deepen customer
relationships and grow in targeted segments.
Transforming ways of working
Enhancing colleague skills and processes, investing
in agile working practices and embracing new
technology to drive better outcomes for customers.
Enhancing our competitive strengths
Differentiated
multi-brand,
multi-channel
propositions
with data-driven
customer experience
Market leading
efficiency through
tech-enabled
productivity
improvements
Largest digital
bank, branch reach
and customer
franchise with
leading integrated
propositions
Prudent, low risk
participation
choices with strong
capital position
Rigorous execution
and management
discipline focusing
on key skills of
the future
Aiming to deliver for our stakeholders
Customers
Market leading digital proposition with UK’s
largest branch network
Single home for our customers’ banking
and insurance needs
Colleagues
Evolved culture
Shareholders
Sustainable and low risk growth
Transformed ways of working
Market leading efficiency
Enhanced colleague skills and capabilities
Superior returns and lower cost of equity
Personalised customer propositions
Compelling colleague proposition
Strong capital generation and attractive
distribution policy
Better experience across channels
For more about our 2018 – 2020
strategic priorities see pages 15–17
For more about our purpose
see pages 20–21
Lloyds Banking Group Annual Report and Accounts 2017 15
Leading
customer
experience
Why this is important
In order to be the best bank for customers,
we recognise that we must continue to
adapt to changes in customer behaviour,
technology-driven competition and
regulation. Our propositions must be
reflective of heightened customer
expectations for ease of access,
personalisation and relevance, as well as the
needs created by changing life patterns.
Key objectives for 2020
To achieve our aim of being best bank for
customers, we will deliver best-in-class
propositions while continuing to provide
our customers with brilliant servicing and a
seamless experience across all our channels.
Remain number 1 UK digital bank with open
banking functionality
Unrivalled reach with UK’s largest branch
network, serving complex needs
Data-driven and personalised
customer propositions
Building a market leading digital experience
The recent introduction of open banking
regulation has provided an opportunity to
enhance our propositions and engage our
customers in new ways, whilst keeping them
safe. We are the largest digital bank in the UK
and aim to build on this position by creating
a market leading digital financial services
experience with open banking functionality.
In doing this, we recognise that customers want
to be in control of their finances in a secure and
trusted way.
Personalising our customer propositions
As the UK’s largest banking franchise, we
will invest in developing our data capabilities,
with the aim of delivering more personalised
and data-driven propositions and services for
our customers.
Tailoring our multi-channel approach
We will build on the strength of our multi-
channel model by responding to the evolving
ways in which our customers are choosing to
interact with us, ensuring that they continue to
benefit from seamless multi-channel services
in a way that best fits their needs.
Our customers are increasingly choosing
digital channels to meet their simple banking
needs. We will therefore continue to invest in
the development of new digital technologies,
to enable the delivery of best-in-class self-
serve functionality for these simpler needs.
We will also provide new customer tools to
increase confidence and trust in using our
digital channels.
While basic transaction volumes within
branches continue to decline, there remains
strong demand for face-to-face interaction
for more complex needs and advice. We
will therefore maintain our leading branch
market share.
As part of this approach, we will tailor the
format of our branches to the needs of the
customers and communities they serve.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
16 Lloyds Banking Group Annual Report and Accounts 2017
Digitising
the Group
Maximising
the Group’s
capabilities
Why this is important
Our market leading cost position and
customer franchise are sources of
competitive advantage. However, we must
not be complacent and must further digitise
the Group to drive additional operational
efficiencies, improve the experience of our
customers and colleagues and allow us to
invest more for the future. In addition, we
must continue to simplify and progressively
transform our IT architecture in order to
use data more efficiently, enhance our
multi-channel customer engagement and
create a scalable and resilient infrastructure.
Key objectives for 2020
By digitising the Group, we are expecting
to transform our cost base as well as the
experience of our customers and colleagues.
Deeper end-to-end transformation
targeting 70 per cent of our cost base
Simplification and progressive
modernisation of our data and
IT infrastructure
Technology enabled productivity
improvements across the business
Why this is important
To better address our customers’ banking
and insurance needs as an integrated
financial services provider and improve their
overall experience, we will make better use of
our competitive Group strengths and unique
business model.
Leveraging new technologies
To support our transformation and deliver
further efficiency savings, we will simplify and
modernise our IT architecture while deploying
new technologies such as cloud computing to
enhance our capabilities and increase resilience.
To generate additional efficiencies and
improve customer experiences we will also
increase our use of machine learning and
cognitive engines, such as chatbots to help
both colleagues and customers. To enable us
to tailor our propositions to our customers’
specific needs, we will need to be able to
access customer data more effectively. We will
therefore invest to create a single, scalable and
modern data platform through which this data
can be accessed more easily. This will enable
us to provide personalised experiences based
on deeper insight and analysis, greater security
and resilience as well as enabling further
innovation to our platforms.
Broadening the digital transformation
of our processes
Over the past three years we have transformed
a number of key customer journeys on an
end-to-end basis. This has led to significant
improvements in the experience of our
customers, as well as delivering significant
operational efficiencies. Looking ahead, we will
materially scale-up our transformation, going
deeper in the transformation of the customer
journeys we have already addressed to cover
additional brands and segments, as well as
more activities along the value chain.
Over the next three years we will also bring a
number of new customer journeys into scope
for transformation as well as a number of our
internal processes, or enterprise journeys,
within our central functions.
Overall, we expect this next phase of our
digital transformation to lead to a better
experience for our customers and colleagues
as well as improvements to risk management
and the resilience of our business. In addition,
we expect to achieve further structural
efficiency gains, which will enable us to
maintain our competitive advantage and
compete with emerging new competitors,
including digital disruptors.
Opportunities exist across the Group with
those in financial planning and retirement
and Commercial Banking described in further
detail below.
Meeting our customers’ growing
financial planning and retirement needs
The ageing population and recent regulatory
changes are leading to greater customer
demand for long-term savings and investment
products as well as for high quality, low cost
advice and personalised solutions.
Given our business model, comprising banking
and insurance operations and leading digital
capabilities, we are uniquely positioned to
respond to this demand. We are therefore
aiming to capture the significant opportunity
arising from the growing financial planning
and retirement market. We recognise that
customer needs vary and will offer a range
of solutions from an execution only level of
service to full specialist advice, ensuring that
our customers enjoy a seamless experience
regardless of the channels they use. Given our
wealth of customer data and the investment
we are making in technology, we will be able to
offer a single customer view capability across
our customers’ financial holdings, including
insurance and banking products. In addition,
we will seek to capture the significant
opportunities arising from auto-enrolment and
the increased demand for digitised service.
We will therefore strengthen our corporate
pensions proposition, leveraging our existing
commercial banking relationships and the
enhanced capabilities that we will gain through
Lloyds Banking Group Annual Report and Accounts 2017 17
Transforming
ways of
working
Key objectives for 2020
By maximising the Group’s capabilities and
sources of competitive advantage more
effectively, we expect to deepen customer
relationships and grow in targeted segments.
+£50 billion financial planning and
retirement open book assets under
administration growth
>1 million new pensions customers
+£6 billion of additional net lending to
start-ups, SMEs and Mid Markets
Why this is important
Our colleagues are crucial to the success
of our business. In order to deliver our
transformation over the next three years, and
beyond, our colleagues will require new skills
and capabilities to reflect the changing needs
of the business as it adapts to the evolving
operating environment. At the same time,
colleague expectations of their employers
are changing. As a result, we must devise
solutions to continue to attract, develop
and retain these skills and capabilities, while
fostering a culture that supports a way
of working that is agile, trust-based and
reinforces the Group’s values.
Key objectives for 2020
We are making our biggest ever investment
in people and by transforming our ways of
working, we are aiming to achieve a culture
of inclusiveness and collaboration, while also
upskilling our colleagues for future needs and
new career paths.
50 per cent increase in training and
development to 4.4 million hours per annum
Up to 30 per cent change efficiency
improvement
Developing a compelling
colleague proposition
In order to attract, develop and retain the
skills we need in the future as well as embed
our desired culture, we will also make a
number of positive changes to the processes,
systems and the physical environment
that directly affect our colleagues. This will
include the simplification of the organisation
to make it less hierarchical, providing our
colleagues with clearer career paths, more
flexibility and greater mobility across the
Group. Other initiatives to support this aim
include improvements to our performance
management process to create a better
balance between past performance
evaluation and future development.
the acquisition of Zurich’s UK workplace
pensions business. To access faster growing
segments and improve customer experience,
we will enhance our distribution model across
both intermediary and direct channels.
Transforming our Commercial
Banking proposition
We will strengthen our simple, low risk and
relationship-led Commercial Banking offering
to reflect our clients’ evolving expectations
as a result of the continued innovation in
our business.
We will enhance our digital capabilities to
enable our clients to self-serve their simpler
banking needs while ensuring that they
continue to have relationship manager
support for their more complex needs.
We will develop these enhancements to
our client offering according to the specific
needs of our different client segments, with
the expectation of achieving growth in our
SME and Mid Markets client segments and
deepening our relationships with our Global
Corporate and Financial Institutions clients.
Through this approach, we will improve the
customer experience by shortening the
time clients have to wait for simple banking
decisions and broadening our product range.
At the same time, the role of our relationship
managers will evolve, with better access to
data, new digital tools and analytics. These will
enable them to create more value in strategic
conversations with their clients.
Transforming our approach to people
To develop the new set of skills and capabilities
we will need our colleagues to have in the
future, we will launch a significant upskilling
programme, using new technologies and
tailored content to deliver appropriate training
in the most efficient way. For certain skills, we
will need to recruit externally, with a number
of these future requirements relating to very
specific technical capabilities that are in short
supply in the market, and for which there will be
intense competition. We will therefore transform
our recruitment and onboarding processes,
while also developing a compelling colleague
proposition and building on the strength of the
Group’s brands to attract future employees.
In addition to meeting our future skills
requirements, we will seek to achieve a shift in
the Group’s culture to ensure our values and
behaviours around simplicity, collaboration,
agility and trust are fully embedded. As
part of this, we will change the way that we
communicate with our colleagues to increase
engagement and will develop our leaders as
role models for the required change.
Adopting new ways of working and
an agile approach to change
In order to deliver the digital transformation
of the Group more effectively and efficiently,
we will embrace new ways of working,
including automated software engineering
processes and agile change methodologies
that will improve our responsiveness to
innovation and customer feedback. To
foster greater collaboration and innovation,
we will also co-locate our change teams
where appropriate.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
18 Lloyds Banking Group Annual Report and Accounts 2017
Doing business responsibly
Supporting our strategic priorities and
our purpose to help Britain prosper
A sustainable and responsible approach is integral
to what we do and how we operate. Doing business
responsibly underpins our purpose and is supported
by our Group values and Code of Responsibility.
We can only achieve our strategic
priorities and help Britain prosper if
we continue to operate responsibly.
We know that if Britain prospers
we can too, so we must continue to
use our scale and reach to make a
difference to people, businesses and
communities across the UK.
How the Group is run
Our Group Policies and standards, including our
values and Code of Responsibility, guide our
behaviour and are embedded and tracked as
part of our risk appetite and policy framework.
You can read more about the Group Policy
framework and how these Policies are
monitored and embedded on page 111
We actively support major national and
international codes and conventions related
to responsible business, including the
UN Global Compact.
Governance
Good governance requires an effective
structure and the combined effort of engaged
and well-informed colleagues. It is essential
that it is embedded into the processes,
planning and delivery of the Group’s
objectives and strategy.
Our governance structure extends from our
Group Board and Board level Responsible
Business Committee, through the executive
level Responsible Business Management
Committee, which implements our
responsible business strategy. At the end of
2017, this executive level committee became
our Sustainability Committee. The Committee
will increase its focus on the implementation
of our Group-wide sustainability strategy
as well as overseeing material responsible
business issues. Our responsible approach
then extends onwards through the efforts of
managers and colleagues at all levels.
Stakeholder engagement
We know that engaging with different
stakeholder groups is extremely important.
It enables us to understand the issues they
face, and their expectations from the Group.
Their contributions influence our strategic
thinking and also help us to shape our
corporate reporting.
We engage with stakeholders in many
different ways: during our business activities;
in face-to-face meetings on specific issues,
such as regulation; and also through new
media such as digital broadcasts.
Read more on
pages 62–63
Our Responsible Business
Committee
In 2017 our Board-level committee focused
on developing the Helping Britain Prosper
Plan and how the Group’s approach to doing
business responsibly should evolve. The
Group’s sustainability strategy was discussed
with colleagues from relevant business areas
and external advisors.
Read more on
page 80
Our businesses have roots going
back 250 years and have stood the
test of time. Our purpose, to help
Britain prosper, is more important
than ever to the UK’s successful
transformation into a digitally
enabled low carbon economy.
Sara Weller
Independent Director and Chairman,
Responsible Business Committee
Responsible business
highlights
We are doing business responsibly and
making a significant impact
One of Britain’s largest
corporate tax payers
Lending £13 billion to
first-time homebuyers
Supporting more than
124,000 start-up businesses
Transforming our business
to meet customers’ needs,
including the 13.4m banking
digitally
Given 260,000 hours of
colleague volunteering
to help good causes
£58 million given to help
communities, including
more than £20 million
given to our independent
charitable Foundations
Our fundraising enabled
Mental Health UK to launch
the UK’s first Mental Health
and Money Advice Service
Building Britain’s most
inclusive and diverse bank
More than 5 million sq. ft.
of real estate helped to
become energy efficient
Lloyds Banking Group Annual Report and Accounts 2017 19
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Helping Britain
Prosper
Through our products and services
we have been serving Britain for
more than 250 years, but our Helping
Britain Prosper Plan takes us beyond
business as usual and is an important
investment in our long-term success.
We launched the Plan in 2014, drawing on
advice from our senior leaders and many
external partners, including our independent
stakeholder panel and charitable
Foundations. Since its launch we have
achieved a lot for Britain, meeting 20 of our
25 targets in 2014, 27 of our 28 targets in 2015
and 20 of our of 24 targets in 2016.
Our performance in 2017
This year we have made good progress in
helping people, businesses and communities,
meeting 21 of our 22 targets for the year.
Helping people
We’re helping people with the issues
that really matter to them, whether that
is buying a home, saving for later life, or
finding a rewarding job.
This year, we delivered £13 billion of lending
to help first-time homebuyers, created more
than 1,200 new apprenticeship positions in the
Group and provided support and guidance
to help almost 89,000 customers plan for
retirement. Through our support for the
School for Social Entrepreneurs we helped
a further 260 social entrepreneurs start or
grow their businesses. We also made good
progress against our target to train 1.8 million
individuals, businesses and charities in digital
skills by 2020, having trained more than
708,000 in 2017.
Helping businesses
Helping communities
We’re helping businesses of all types
and sizes to start-up, grow, improve
productivity, build their skills base and
become successful exporters.
We provide support to businesses of all types
and sizes. In 2017, we delivered £1 billion
of financial support to the manufacturing
sector, exceeding our target, and extended
our support for the Lloyds Bank Advanced
Manufacturing Centre, helping to train 500
apprentices, graduates and engineers.
We also met our target to support UK
infrastructure projects collectively worth
more than £31 billion. We have now retired
this target from our Plan.
We increased net lending to SME and
Mid Markets companies by £0.9 billion, but
fell short of our £2 billion target. The shortfall
reflects similar challenges across the market.
Since the beginning of 2011, our net lending
to SMEs has increased by 31 per cent whilst
the market has contracted by 11 per cent.
Since 2012, our lending to Mid Markets
companies has increased by 17 per cent
compared to a market that has remained
flat. Our 2018 target is to deliver £2 billion
of net lending across start-up, SME and
Mid Markets businesses.
Read more on
page 23
We’re helping communities to become
more cohesive by providing vital support
for some of the most disadvantaged
people living in Britain today. We also
champion diversity.
Through our four independent charitable
Foundations we helped more than 2,800
charities and supported colleagues to
volunteer their expertise, including their
mentoring skills, to help these charities
become more effective and financially
sustainable. This year, colleagues gave
almost 260,000 volunteering hours to
support local communities.
Through our partnership with Mental
Health UK, we’re promoting awareness of
the link between mental health and money
problems. This year we exceeded our target
and raised £4.8 million thanks to the efforts
of our colleagues and customers. This
fundraising enabled Mental Health UK to
launch Mental Health and Money Advice –
the UK’s first service dedicated to helping
people understand, manage and improve
their financial and mental health.
We made further progress towards our
target of women holding 40 per cent of our
senior roles by 2020, with 34 per cent
of
these roles now held by women. You can
read more about inclusion and diversity on
page 21. We also met our 2020 colleague
engagement targets, three years ahead
of schedule, and reached engagement
levels of 70 per cent amongst Black, Asian
and Minority Ethnic (BAME) and Lesbian,
Gay, Bisexual (LGB) colleagues as well as
colleagues with disabilities. We will continue
to promote inclusion with our business but
have now retired these targets from our Plan.
Read more on
page 25
Indicator is subject to Limited ISAE3000
(revised) assurance by Deloitte LLP for the
2017 Annual Responsible Business Reporting.
Deloitte’s 2017 assurance statement and the
2017 Reporting Criteria are available online at
lloydsbankinggroup.com/RBdownloads
20 Lloyds Banking Group Annual Report and Accounts 2017
Doing business responsibly continued
2018 Helping
Britain Prosper
Plan
We have developed the Plan for 2018
and beyond, to ensure it supports
the next phase of our strategy and
focuses on the areas where we
believe we can make the biggest
difference: addressing Britain’s
housing needs, saving for the
future, building digital skills, helping
businesses start up and grow,
championing Britain’s diversity and
tackling disadvantage.
Evolving the Plan
To show our continuing support for the low
carbon economy, we have added a new
target: to help provide power for 5 million
homes in the UK by 2020 through our support
for renewable energy projects. We are still
focused on supporting business growth and
building an inclusive and diverse business.
We have set two new targets to increase the
percentage of roles held by BAME colleagues
to 10 per cent and to increase the percentage
of senior roles held by BAME colleagues to
8 per cent by 2020.
You can read more about all of our Helping
Britain Prosper Plan targets online
Our areas of focus
Through our full Plan, we are tracking our
performance against 22 stretching targets
in total. We have prioritised six of these
to focus on in 2018, as shown in the table
below. These support the UN Sustainable
Development Goals, which aim to tackle
the world’s most pressing challenges by
promoting sustainable development.
As a UK focused retail and
commercial bank, we are
inextricably linked to the British
economy. Our success is the
British economy’s success
and we are fully committed to
help people, businesses and
communities in Britain prosper.
António Horta-Osório
Group Chief Executive
How we are supporting the UN
Sustainable Development Goals
Our areas of focus
Target
Helping Britain get a home
Amount of lending committed to help people buy their first home
Helping save for the future
Growth in assets that we hold on behalf of customers in retirement and
investment products2
2018
20201
£10bn
£30bn
£8bn
£50bn
Building digital skills
Number of individuals, SMEs and charities trained in digital skills including
internet banking
700,000
1.8m
Supporting businesses to start up and grow
Increased amount of net lending to start-up, SME and Mid Markets businesses
£2bn
£6bn
Championing Britain’s diversity
Percentage of senior roles held by women
Percentage of roles held by Black, Asian and Minority Ethnic colleagues
36%
8.9%
40%
10%
Tackling disadvantage across Britain
Number of charities we will support as a result of our £100 million3 commitment to
the Group’s independent charitable Foundations
2,500
7,500
1 2020 targets are cumulative from 2018–2020 and are in line with the next phase of the Group’s strategic plan.
2 Growth in assets under administration in our front books.
3 Between 2014–2020.
Lloyds Banking Group Annual Report and Accounts 2017 21
Running a responsible business
for all our stakeholders
We seek to run our business responsibly, sustainably
and successfully, delivering value for all our stakeholders.
Addressing the issues
that matter most
This year we asked our stakeholders –
including colleagues, customers, investors,
community groups, special interest groups
and opinion formers – to participate in
our materiality survey, to help us shape
our reporting.
They were particularly interested in issues
related to how the Group is run; building
trust; supporting communities and society;
economic performance and contribution;
responsible and accessible products; human
rights, diversity and equality; and people
management and development.
We have structured our responsible business
reporting around our key stakeholder groups.
The issues they prioritised are listed at relevant
points to help you find those of most interest
to you.
Colleagues
Our colleagues take pride in working
for an inclusive and diverse bank and
with their support we’re building
a culture in which everyone feels
included, empowered and inspired to
do the right thing for customers.
Key issues for our stakeholders
Equality, inclusion and diversity
Human rights
Health, safety and wellbeing
Learning and development
Equality, inclusion
and diversity
We continued to make good progress
against our inclusion and diversity (I&D)
strategy. The proportion of colleagues who
agree that the Group is an inclusive place to
work increased to 89 per cent, 3 per cent more
than in 2016, and almost half of our colleagues
are members or supporters of one of our
five diversity networks. We met our target to
increase the engagement levels of Black, Asian
and Minority Ethnic colleagues, colleagues
with disabilities and Lesbian, Gay and Bisexual
colleagues above 70 per cent, three years
earlier than our target date of 2020.
We continue to promote I&D through our
Group Executive Committee. Several of our
senior executives are I&D sponsors, and an
Operational Committee overseas how our
I&D plans are implemented.
by Euromoney; and once again, a Top 10
Employer for Working Families and Times Top
50 Employer for Women. We also won awards
for our approach to agile hiring. You can read
more about agility on page 22.
We have committed to ensure that women
hold 40 per cent of our senior roles by 2020,
and to help reach this target we monitor
gender diversity on candidate lists for senior
appointments. Over 400 women have
now completed our Women in Leadership
programme, with 100 achieving promotion.
We’ve continued to develop and promote our
Authentic Leadership Programme for Black,
Asian and Minority Ethnic leaders. We foster
cultural awareness through promoting role
models and communication campaigns.
Other achievements include being rated
number 1 in the Stonewall Top 100 2017
LGBT employers and included in the Stonewall
inaugural list of Transgender Inclusive
Employers 2018; being named the best
bank in the world for diversity and inclusion
Our inclusion and diversity data
Gender pay gap
We recognise that supporting gender equality
and diversity more broadly supports the
success of the UK as a whole. We regularly
review our pay levels to ensure that men
and women are paid equally for doing
equivalent roles across the Group. We
support the government’s requirement for
all large companies to publish their gender
pay gap information. We remain committed
to increasing the proportion of women in
senior roles and building a diverse senior
management team.
Supporting colleagues with disabilities
This year, the Department for Work and
Pensions designated the Group as a Disability
Confident Leader for our inclusive
Gender
Board members
Senior managers2
Colleagues2
Ethnic background
Percentage of colleagues from a BAME background
BAME managers
BAME 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
2017
20161
Male
Female
Male
Female
9
3
4,939
2,544
Male
31,216
Female
42,956
8.3%
8.3%
5.6%
10
3
5,138
2,457
33,149
45,769
7.9%
6.4%
4.8%
2.6%
2.2%
1.7%
1.5%
1 Restated to include International and parental leave colleagues comparable with other gender reporting. Includes
subsidiary Non-Executive Directors.
2 Reporting scope: payroll headcount includes established and fixed term contract colleagues, parental leavers and
Internationals. Excludes leavers, Group Non-Executive Directors, contractors, temps and agency staff. Also excludes MBNA
colleagues, who became part of Lloyds Banking Group plc in June 2017, as they are currently on a separate grading structure.
Diversity scope: Payroll headcount including parental leavers. Excludes MBNA colleagues, who became part of Lloyds
Banking Group plc in June 2017, as they are currently on a separate grading structure. Also excludes contractors. Gender
information includes International colleagues. All other diversity information is UK Payroll only.
Senior 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 per cent representative; our systems do not record diversity data for the
proportion of colleagues who have not declared this information.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
22 Lloyds Banking Group Annual Report and Accounts 2017
Running a responsible business
for all our stakeholders continued
28,000
colleagues received
mental health awareness
training in 2017.
recruitment process and in November, we
won a ‘Nothing about us without us’ Disability
Smart Award, recognising the way we gather
insights about disability from colleagues,
customers and charities, then use them to
inform our decisions. As a member of the
Business Disability Forum, we are proud to
have retained our Gold accreditation in the
Disability Standard. Our colleague disability
network, Access, ran a successful national
event, while more than 2,300 colleagues
completed our industry leading workplace
adjustment process.
We offer bespoke development programmes
and recruitment processes for colleagues
and job applicants with disabilities. We aim
to appoint the best candidate into any role
and give full and fair consideration to job
applications from those with disabilities,
and we 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 Disability Work
Experience Programme in partnership
with Remploy. This is one of the largest
disability-focused work experience initiatives
in the financial services sector; we’ve increased
our number of candidates from 96 in 2016 to
392 in 2017.
Human rights
We aspire to conduct business in a way that
values and respects the human rights of all
the stakeholders we work with. We respect
and support the United Nations Universal
Declaration of Human Rights, together with
the International Labour Organisation (ILO)
Fundamental Conventions, covering freedom
of association, the abolition of forced labour,
equality and the elimination of child labour.
We comply with all relevant legislation,
including the UK Modern Slavery Act. We also
support relevant voluntary standards, such as
the UN Guiding Principles on Business and
Human Rights and take steps to make sure
colleagues understand our position on these
issues and can help us live up to the standards
they demand. You can read our Anti-Slavery
and Trafficking statement online.
Health, safety and wellbeing
We care about the physical and mental
health, safety and wellbeing of our colleagues.
We provide them with a growing range of
health and wellbeing resources, including
company paid private medical cover,
occupational health services and an employee
assistance programme. We publish advice
about health topics on our intranet and
actively encourage colleagues to support
external health and wellbeing campaigns.
We have policies, standards and relevant
mandatory training in place to help
colleagues work safely at all times. We also
work closely with external health and safety
agencies through our participation in the
Health and Safety Primary Authority Scheme
and Fire Primary Authority partnership. In 2017,
we achieved a 7 per cent decrease in our total
recorded accidents compared to 2016. You can
read more about health and safety in our 2017
Responsible Business update.
Supporting colleagues’ mental health
We worked with Mental Health UK to develop
and deliver mental health awareness training
to over 28,000 colleagues and we estimate that
more than 25 per cent of colleagues discussed
mental health this year. This included our
Group Chief Executive António Horta-Osório,
who shared his story about executive stress.
We have improved the mental health support
colleagues receive through our third-party
healthcare suppliers and are supporting our top
120 leaders to develop their mental resilience.
Agile working
To respond to the changing business
environment and in recognition of the
changing ways colleagues live and work, we
encourage our colleagues to embrace agile
working. Approximately 41 per cent of them
are now working in a flexible way compared to
33 per cent two years ago. In 2017 we launched
a workforce agility Line Manager toolkit to help
teams implement new ways of working.
Learning and development
Investing in learning and development
equips colleagues to do their best for
customers. During 2017, colleagues spent
more than 410,000 days on learning, an
average of 5.6 days each. We made it easier
for them to access learning by creating
new business learning catalogues and
Group-wide Learning Resource Centres.
We also ran ‘Values in Action’ sessions for all
colleagues, supporting the introduction of
our new Group and Leadership Behaviours,
and unified our learning for line managers
and leaders in a new Leadership Academy.
This offers a new curriculum for senior
colleagues, ‘pathways’ to guide those
preparing for a new line management role,
and leadership apprenticeships.
Our Strategic Leaders Programme, which
175 colleagues completed, concluded this
year. From 2018, colleagues in our Strategic
Leadership Group will undertake a new
‘Horizon’ development programme that
supports our ‘Bank of the Future’ objectives.
80 per cent of colleagues who completed our
‘Building the Best Team’ survey confirmed that
they get the support they need to improve
their skills and meet customer demands, an
annual increase of 3 per cent and 18 per cent
above the UK norm.
CREATING MORE
APPRENTICESHIPS
WITHIN OUR GROUP
During 2017, we created more than 1,200
apprenticeship positions within the Group,
bringing the total to more than 5,500
since 2012. Around 44 per cent of the new
apprenticeships were taken up by external
candidates from some of the UK’s most
disadvantaged areas. We are proud of the
fact that many of our apprentices flourish
with us after qualification including Vickie
McRae, a mother of two who joined the
Group in 2015.
We improved our digital offer, enhancing
our Skillsoft resource, which won a Gold
International Brandon Hall Excellence Award,
and adding a video library, Lynda. com,
to resources.
Engaging colleagues
We want colleagues to be engaged and
enthusiastic about our strategy, responsible
approach and culture. We regularly and
systematically update them on the Group’s
performance and changes in the economic
and regulatory environment including matters
that concern their role. We also want them
to share their ideas and views to help us
shape our future. One of the most effective
ways they do this is through the ‘Best Bank
for Customers’ and ‘Building the Best Team’
surveys that are run by an independent third-
party every year. They give colleagues the
opportunity to share their thoughts in order to
inform decisions and support improvements
in team performance. This year, 86 per cent of
colleagues participated in the two surveys –
2 per cent more than in 2016 and 5 per cent
Lloyds Banking Group Annual Report and Accounts 2017 23
89%
of colleagues believe
the Group is committed
to being a responsible
business (2016: 86%).
above the external best practice response rate.
We believe the surveys confirm that colleagues
are engaged and believe the Group is moving
forward in key areas.
Rewarding colleagues
We offer a competitive and fair reward
package that supports our aims as a
responsible business – with customer-facing
colleagues in Retail incentivised on the basis
of actions and behaviours that put customers
first. We offer colleague share schemes to
encourage shared ownership of our Group.
Read more on
pages 84
Customers
We aim to treat our customers fairly
and inclusively, making it easy for
them to find, understand and access
responsible products that are right for
them, whatever their circumstances.
Key issues for our stakeholders
Customer privacy and data security
Support for Britain’s businesses and entrepreneurs
Widening financial inclusion and supporting
vulnerable customers
Responsible and accessible products
Responsible and ethical lending
Customer privacy
and data security
We use advanced technology to protect
customers’ money and data, including secure
log on and log off features and systems
that prevent fraud or that detect fraudulent
payments in real time. In 2017, as part of the
multi-stakeholder Joint Fraud Task Force,
we helped to set the strategic direction for
fraud prevention. We also championed the
national rollout of the Banking Protocol, which
now includes 38 police forces. This enables
colleagues to request immediate police support
when customers are at risk. An estimated
£9 million of fraud was prevented through the
Protocol this year and 100 arrests were made.
We help and educate customers to improve
their own banking and data security and
champion industry-wide public information
campaigns, including Take 5, a national
education and awareness campaign. We
offer support to colleagues to protect our
customers and they can access our Anti-
Money Laundering and Counter Terrorist
Policies and specialist training if required.
Looking ahead, our key priorities are to further
strengthen our cyber defences and to meet
the requirements of the upcoming EU General
Data Protection Regulation which will apply
from May 2018.
Support for Britain’s
businesses and entrepreneurs
We helped 6,800 clients to export for the first
time in 2017, as part of a wider commitment to
help 25,000 businesses trade overseas for the
first time by 2020. We also supported more
than 124,000 start-up businesses. In 2017, we
handled over 54 million payments totalling in
excess of £1.4 trillion in digital transactions for
our commercial clients.
We met our 2017 target to provide £1 billion
in funding support for the manufacturing
sector and launched a £500 million fund
to help manufacturers access asset
finance to invest in new capital to improve
productivity. We’ve also supported more than
500 apprentices, graduates and engineers
at the Lloyds Bank Advanced Manufacturing
Training Centre in Coventry.
Through our partnership with the School for
Social Entrepreneurs, we’ve helped more
than 1,500 social entrepreneurs to start-up
or grow their businesses since 2012. Our
colleagues have worked with more than 250
social entrepreneurs as mentors to help them
build sustainable social businesses. In 2017
the Group became the first financial services
company to partner the pioneering Match
Trading™ initiative; a new funding model
which incentivises social entrepreneurs to
grow their business through trading.
Widening financial inclusion
and supporting customers
in vulnerable circumstances
Through our financial inclusion strategy and
financial education programmes we focus
on improving access to financial services
and building skills. Read more about financial
education on page 25. This year we opened
almost 271,000 new basic bank accounts
and helped 99,700 customers upgrade from
basic to mainstream products. We also
simplified our unplanned overdraft approach.
More than 9 in 10 personal current account
customers of Lloyds Bank, Bank of Scotland
and Halifax are now better off or unaffected
financially by the changes.
We want all customers to have easy access
to our products and services. We’ve worked
hard to track vulnerable customers’ needs,
particularly in our Community Bank, and
developed a Group-wide dashboard to
identify emerging vulnerability trends. In
2017, our specialist support team helped
1,900 customers with cancer, through
financial advice and with medical and
emotional support from our partners
Macmillan. To help colleagues do more
for vulnerable customers, we provided
90,000 hours of vulnerability training.
MEETING
CHANGING
CUSTOMER NEEDS
We are investing significantly in a major
branch transformation programme to better
serve our customers now and for many years
to come. We have expanded our mobile
branch service this year and we now have
28 mobile branches, which visit 169 different
locations to support rural communities
across Scotland, England and Wales.
Supporting customers with disabilities
Digital access can transform banking for
vulnerable customers, particularly for those
with health conditions and disabilities that
make it difficult to get to a branch. Following
a review in 2016, the charity Abilitynet
accredited our Halifax and Lloyds Bank
digital platforms based on their accessibility
for disabled customers.
We are piloting a new ‘Easy Read’ format,
endorsed by the RNIB, to make bank
statements accessible and understandable for
customers with a range of learning difficulties
and disabilities. This year we agreed our
Autism Friendly plans for customers and
colleagues, which we have developed in
partnership with the National Autistic Society.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
24 Lloyds Banking Group Annual Report and Accounts 2017
Running a responsible business
for all our stakeholders continued
Responsible and
accessible products
We have made significant progress over the
last three years to improve the customer
experience across many of our key products
and services as part of our far-reaching
Customer Journey Transformation initiative.
In 2017, we launched the last two of our
10 journeys, each of which is intended to
put customers at the heart of any changes
we make. This year, we issued colleagues in
branches with more than 4,000 iPad Pros so
they can open accounts faster and introduced
new digital services to help colleagues advise
customers about corporate pensions or loan
eligibility and to process mortgage offers and
accounts and small loans for SMEs in less time
than ever before.
Responsible and
ethical lending
As a lender and pension provider we play
an important role in promoting responsible
lending and investment decisions that take
into account a broad range of environmental,
social and governance factors. The Group
remains a signatory to the Equator Principles,
the Stewardship Code and the UN Principles
of Responsible Investment. As an active
and responsible asset owner, we consider
our obligations during the selection,
appointment, monitoring and retention of
our fund managers. The management of risk
for investment funds offered to customers
by Scottish Widows is effected through a
robust and comprehensive process, including
our Responsible Investment Governance
Framework. In 2017 we completed an initial
assessment of the responsible investment
capabilities of our lead asset managers and the
majority of external fund managers, and we
launched a social bond fund in addition to the
ethical and environmental funds in our range.
Partners
As a direct and indirect economic
contributor to the UK economy,
we value our relationships with
external stakeholders and partners,
including suppliers, government
bodies and legislators.
Key issues for our stakeholders
Responsible conduct and culture
Direct and indirect economic contribution
Working with suppliers
Responsible conduct
and culture
We are building a responsible, inclusive and
diverse culture based on our values, which
help colleagues consistently do the right
thing for customers. The 2017 launch of our
Group and leadership behaviours has given
colleagues clear guidance about how to live
our values at work. Throughout the year we
reinforced our values and behaviours through
numerous initiatives and embedded the
behaviours in our processes and policies.
We equip and encourage colleagues to
work in line with our values, our Code of
Responsibility and all other standards relevant
to their role. We also encourage them to speak
up, challenge and act if they witness or suspect
wrongdoing by contacting our Colleague
Conduct Management Team or using our
independent whistleblowing service ‘Speak
Up’, which is accessible by phone, online or
mobile app. During 2017, colleagues reported
372 concerns of which 181 were progressed
to investigation. 57 per cent of the concerns
investigated were upheld and remedial action
taken where appropriate.
We aim to comply with all laws and
regulations wherever we operate and have
a comprehensive anti-bribery policy that
applies to all colleagues, including directors,
contractors and others acting on our behalf.
All colleagues and contractors complete
annual anti-bribery training and we encourage
them to report 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.
Building trust
Our performance as a responsible business
during the past year has helped to rebuild
trust in our Group and in the future stability
and sustainability of the banking sector. In
May we returned to full private ownership and
the sale marked the successful delivery of our
strategy to transform into a simple, low risk, UK
focused retail and commercial bank. In 2017
we continued to build trust by taking steps to
become even more transparent in the way we
communicate with our stakeholders, providing
them with greater detail about where we stand
on environmental, social, governance and
ethical issues.
Customer satisfaction
We measure customer satisfaction using the
industry standard Net Promoter Score. In 2017,
this was 62.0, down slightly from 62.7 in 2016
but remains nearly 50 per cent higher than at
the end of 2011. When customers do complain,
we act as quickly as possible, focusing on
achieving fair outcomes. We continue to
target understanding and eradicating the
MOBILISING
COLLEAGUES
TO SUPPORT
MENTAL HEALTH
In September, a group of 62 colleagues
completed the Fourtitude Challenge and
raised over £317,000 for our charity partner
Mental Health UK. Our ‘Fourtituders’ tackled
a mental agility challenge, hiked up the
highest peak in their home nation, cycled
100 miles through the Peak District and
completed a half marathon. An additional
250 colleagues took part as day participants
and Mental Health UK’s Chief Executive,
Brian Dow, also participated, running the
half marathon.
root causes of customer complaints reducing
incoming complaints by 18 per cent from 2016
to 2017 (excluding PPI and claims management
companies). Read more on page 7.
Direct and indirect
economic contribution
We make significant direct and indirect
contributions to the economy. We employ
approximately 68,000 colleagues (full
time equivalent) and are helping to create
additional jobs and bring talented people
into our business through our Graduate and
Apprenticeship schemes. We’ve created more
than 5,500 apprenticeships since 2012. In 2017,
38 per cent of our new apprenticeships were
offered to external candidates.
Lloyds Banking Group Annual Report and Accounts 2017 25
£2.5bn
of taxes paid in 2017
We are helping the housing sector as a whole.
In 2017 we lent more than £42 billion to home
buyers and exceeded our target to build
1,500 homes through our Housing Growth
Partnership. We also helped the construction
sector acquire skills through the London-
based Construction Skills Centre, where 166
people obtained an industry recognised
qualification. We also provided a further
£2 billion of new funding support to the social
housing sector.
Our tax contribution
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 FTSE 100 and some large UK private
companies. In 2017, we paid £2.5 billion in tax
(2016: £2.3 billion). We are also a major tax
collector, gathering £1.7 billion on behalf of
HMRC in 2017 (2016: £2 billion).
Our approach to tax is governed by our Tax
Policy which is part of our Board-approved
Group Risk Management Framework. We
have discussed this Policy with HMRC and we
comply with their 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. You can read more about our Tax
Strategy online.
Shareholders
Engaging with our shareholders helps us
understand their issues, shape our strategic
thinking and improve our corporate
reporting. We held more than 800 meetings
with investors in 2017, including a number
with SRI investors. We also ran a number of
webinars, roadshows and meetings to update
shareholders, investment analysts and ratings
agencies about our performance.
Government
We engage with government bodies,
including central and local government and
the devolved governments in Scotland, Wales
and Northern Ireland. We keep them informed
about our activity as a responsible business,
which in 2017 included party conference fringe
meetings held with Mental Health UK, the
launch of a report on the challenges facing
the private rental sector, and briefings on
economic development. To support the UK’s
nations and regions, our 10 Ambassadors,
who are all senior colleagues, have a mandate
from the Group Chief Executive to support
economic and social progress in their local
area. In 2017, our Ambassadors focused
on issues connected to housing, skills
development and business growth.
Working with suppliers
We aim to source responsibly and sustainably,
requiring our suppliers to comply with our
Code of Supplier Responsibility. We source
a range of products and services from an
active supply base of around 4,000 suppliers.
In 2017, our supplier expenditure was
£5.0 billion (£5.3 billion in 2016) with 94 per cent
of this spent with UK-based suppliers.
Our responsible business objectives are
embedded into our sourcing and supplier
activities. For example, we further enhanced
the questions we ask prospective and existing
suppliers in our Financial Supplier Qualification
System in relation to issues such as human
trafficking and slavery, and have implemented
new contractual requirements. We have also
worked with key suppliers to build partnerships
with social enterprises and embed social
responsibility practices.
Communities
We invest in local communities
across Britain to help them prosper
economically and build social
cohesion by tackling disadvantage.
Key issues for our stakeholders
Financial education and inclusion
Community investment
Financial education
and inclusion
Our award winning Money for Life programme
is specifically designed to help vulnerable
16-25 year olds to improve their financial
competencies. Since the programme was
relaunched in October 2016 we have engaged
more than 450,000 young people and over
11,300 money masterclasses have been
delivered face-to-face in youth centres across
England, Wales, Scotland and Northern
Ireland. In addition to this colleagues have
delivered financial literacy sessions in primary
and secondary schools in local communities.
Thanks to our ‘StandingOut’ programme we
remain one of the largest providers of school
and academy governors in Britain, with 577
colleagues currently involved.
Community investment
Our support for local communities focuses
on education, employability and enterprise.
Our total community investment in 2017
was around £58 million
. This includes our
colleagues’ time, direct donations, and the
money we give to our independent charitable
Foundations, which receive a share of the
TACKLING SOCIAL
DISADVANTAGE
ACROSS BRITAIN
Through the Lloyds Bank Foundation for the
Channel Islands, we are supporting Autism
Jersey, a charity that provides much-needed
advice and respite for people on the autism
spectrum, their families and carers. The
charity, which is using a grant of £50,000 over
three years to help pay salaries, has grown
significantly in the past five years and has
helped many individuals obtain care for the
first time without travelling to the mainland.
Group’s profits annually. Through the Group’s
Foundations, we reach and help some of the
most disadvantaged communities in Britain,
giving more than £20 million in 2017.
Our charity partner
In 2017 we raised £4.8 million for Mental Health
UK. This money will have a significant impact
across the UK and has funded the first helpline
dedicated to supporting people experiencing
mental health and money management issues,
which was launched in November 2017. We
also aim to increase awareness and reduce the
stigma associated with mental health so that
our colleagues can support themselves, each
other and our customers.
Read more on
page 22
Indicator is subject to Limited ISAE3000 (revised)
assurance by Deloitte LLP for the 2017 Annual
Responsible Business Reporting. Deloitte’s 2017
assurance statement and the 2017 Reporting
Criteria are available online at lloydsbankinggroup.com/
RBdownloads
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
26 Lloyds Banking Group Annual Report and Accounts 2017
Environment
A sustainable and responsible approach
is integral to how we operate
We need to use scarce natural
resources more sustainably,
manage our environmental
impacts and support our
customers by financing
opportunities created by the
transition to a low carbon
economy.
Key issues for our stakeholders
The impact of climate risks
Managing environmental impacts
Delivering the science-based carbon
reduction and climate resilience targets set
out in the Paris Agreement will have significant
structural implications for the economy and
the businesses and communities we serve.
That is why we are evolving our Group-wide
sustainability strategy.
This year, our overall carbon emissions were
292,848 of CO2e, a decrease of 14 per cent
year-on-year and of 48 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, as a result of our
extensive energy management programme. In
2017, we also reduced the CO2e related to our
business travel by promoting our ‘No Travel
Week’, encouraging travel alternatives and the
successful roll out of ‘WebEx’, Group-wide.
Read more about our emissions in
the Directors’ report on page 83
Supporting the low carbon economy
We are helping more of our commercial clients
to understand and manage their sustainability
risks and we complete an environmental risk
assessment at the start of every new client
relationship. We are currently exploring ways
to build sustainability considerations into our
policies and risk management processes. We
offer customers products and services that
help them embrace sustainability. In 2016, we
launched an innovative £1 billion Green Loan
Initiative to incentivise commercial real estate
to become more energy efficient and this year
exceeded our target to help 2 million square
feet of real estate.
At the end of 2017, our UK team had financed
renewable projects with a combined
capacity of over 2.75GW (2016: 1.78GW) and
internationally our existing investments in
renewables exceed 8.9GW (2016: 7.4GW).
In 2017 Lloyds Bank played an important
part in Macquarie’s acquisition of the Green
Investment Bank (now Green Investment
Group), providing financing for a significant
portfolio of operational offshore wind farms
including Sheringham Shoal, Gwynt y Mor,
Rhyl Flats and projects in construction,
including Galloper and Rampion offshore
wind farms. Together the projects have a total
capacity of approximately 2.4GW, which is
enough to power over 1.7 million homes and
they will support a significant number of jobs
across the UK through the supply chain and
maintenance of the wind farms.
The impact of climate risk
We welcome the recommendations of
the Financial Stability Board Taskforce on
Climate-related Financial Disclosures (TCFD)
and have mapped our approach to them. We
are developing a strategy and implementing
processes to:
Assess the materiality of climate risk across
our business
Identify and define a range of scenarios,
including relevant physical and transition risk
Evaluate the business impacts
Identify potential responses to manage the
risks and opportunities
We will address a number of these and will
disclose further information on our work in this
important area.
CO2e emissions
Total CO2 e
Total Scope 1
Total Scope 2
Total Scope 3
Oct 16 - Sept 17
Oct 15 - Sept 161,2
Oct 14 - Sept 151,2
292,848
52,160
166,617
74,071
340,382
53,026
202,414
84,943
395,543
58,851
239,709
96,983
1 Restated 2014/2015 and 2015/2016 emissions data to improve the accuracy of reporting, using actual data to replace estimates.
2 Restated all historic years to reflect improved methodology in assigning road travel between reporting scopes.
Emissions in tonnes CO2 e 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.
Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2017 Annual Responsible Business
Reporting. Deloitte’s 2017 assurance statement and the 2017 Reporting Criteria are available online at
www.lloydsbankinggroup.com/rbdownloads
HELPING
INCENTIVISE
GREEN REAL
ESTATE
We’re incentivising Unibail-Rodamco,
Europe’s largest commercial real estate
business, to become more environmentally
sustainable – by linking the margin on their
five year €650 million revolving credit facility
to green key performance indicators. The
interest margins set through this innovative
refinancing deal, will take into account the
Unibail-Rodamco’s performance against KPIs
based on its own ‘Sustainability Vision’ and
‘Better Places 2030’ strategies.
Lloyds Banking Group Annual Report and Accounts 2017 27
Our climate related financial disclosures
Our strategy
In 2017, we reviewed how we integrate
environmental sustainability into our strategy
and risk management processes, taking
advice from external advisors and working
with all parts of the business to understand
work already in plan and where we need to do
more. We are committed to supporting the
transition to a low carbon economy through
our financial products and services, including
renewable energy services.
Governance of climate change
The Responsible Business Committee, a
sub-committee of the Board, will take overall
responsibility for the Group’s climate-related
impacts and risks from 2018. It is chaired by
an Independent Director, Sara Weller, and
meets regularly throughout the year. We have
refocused our executive-level Responsible
Business Management Committee to
become our Sustainability Committee and
will ensure that colleagues with operational
responsibilities across the Group’s key
divisions are actively involved in
the development and implementation of a
comprehensive environmental sustainability
strategy. Discussions involving these
Committees and the Commercial Banking
leadership team were held in 2017 to start
to examine the strategic implications
of environmental challenges, including
climate change.
Risk management
The Sustainability Committee will oversee
the assessment of our climate-related risks,
escalating to the Responsible Business
Committee and the Board Risk Committee as
appropriate. Our divisions are each exposed
to different levels of climate risk. For example,
as a large home insurer, we are aware that
global warming is projected to increase
the risk of flooding and consequently
weather-related insurance claims. It is
important that we continue to work with our
customers, industry peers and government
to ensure this risk is minimised and mitigated
to keep flood insurance affordable.
You can read more about environmental
risk management on page 133
Metrics and targets
We are working to develop strategic
commitments and targets in response to
climate-related risks and opportunities, with
different parts of the business feeding into
this target setting process. This builds on our
work to reduce the environmental impact of
our own operations.
Our target is to reduce our overall CO2e
by 60 per cent by 2030 and 80 per cent by
2050, in line with the UK’s emission reduction
targets. This follows a science-based target
setting methodology. As part of our Green
Loan Initiative, our target is to fund 5 million
square feet of commercial real estate to
become more energy efficient by 2020, the
equivalent of five London Shards. We have
set a new target to help provide power for
5 million homes through our investment in
renewable energy by 2020.
We will also consider the supplementary
industry specific recommendations for the
financial sector.
Non-financial information statement
We aim to comply with the new Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006.
The below table, and information it refers to, is intended to help stakeholders understand our position on key non-financial matters. This builds
on existing reporting that we already do under the following frameworks: CDP, Global Reporting Initiative, Guidance on the Strategic Report
(UK Financial Reporting Council), UN Global Compact, UN Sustainable Development Goals and UN Guiding Principles.
Reporting requirement Policies and standards which govern our approach
Risk management and additional information
Environmental
matters
Employees
Human rights
Environmental statement
Environment, pages 26–27
Ethics and Responsible Business Policy1
Ethical Policy Statement
Colleague Policy1
Code of Responsibility
Health and Safety Policy1
Equality, inclusion and diversity, page 21
Health, safety and wellbeing, page 22
Learning and development, page 22
Responsible conduct and culture, page 24
Diversity, skills and composition, page 58
Human Rights Policy statement
Colleague Policy1
Pre-Employment vetting standards1
Data Privacy Policy1
Anti-Slavery and Trafficking Statement
Information and Cyber Security Policy
Human rights, page 22
Responsible and ethical lending, page 24
Working with suppliers, page 25
Environmental risk management,
page 133
Board Diversity Policy, page 72
People risk, page 136
Governance risk, page 150
Social matters
Volunteering standards1
Matched giving guidelines1
Anti-corruption
and anti-bribery
Anti-bribery Policy1
Anti-bribery policy statement
Anti-money laundering and counter
terrorist financing Policy1
Fraud Risk Management Policy1
Helping communities, page 19
Communities, page 25
Customer privacy and data security, page 23
Responsible conduct and culture, page 24
Operational risk, pages 135–136
Policy embedding2, due diligence and outcomes
Risk overview, pages 32–33
Risk management, pages 107–156
Description of principal risks and impact of
business activity
External environment, pages 8–9
Creating value for our stakeholders, page 11
Addressing the issues that matter most, page 21
Direct and indirect economic
contribution, page 24
Risk overview, pages 32–33
Principal risks, pages 34–37
Description of the business model
Our business model, pages 10–11
Our next chapter, page 14
Non-financial key performance indicators
Key performance indicators, page 7
What we have achieved over the past
three years, page 12
Doing business responsibly, page 18
Helping Britain Prosper, pages 19–20
Running a responsible business,
pages 21–25
Environment, pages 26–27
1 Certain Group Policies and internal standards and guidelines are not published externally.
2 The policies mentioned above form part of the Group’s Policy Framework which is founded on key risk management principles. The policies which underpin the principles define mandatory
requirements for risk management. Robust processes and controls to identify and report policy outcomes are in place and were followed in 2017.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
28 Lloyds Banking Group Annual Report and Accounts 2017
Divisional overview
Retail
Retail offers a broad range of financial service products,
including current accounts, savings, mortgages, credit
cards, motor finance and unsecured loans to personal
and business banking customers.
£4,403m
Underlying profit
56%1
1 Proportion of Group underlying profit
excluding run-off and central items.
£13bn
Lending to first-time buyers
£1.0bn
Open mortgage book growth
>124,000
business start-ups supported
>100,000
Lex Autolease fleet growth within 5 year ambition
UK’s largest digital bank
Active online users (m)
Mobile users (m)
2017
2016
2015
2014
13.4
12.5
11.5
10.4
9.3
8.0
6.6
5.2
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. Retail operates a multi-brand
and multi-channel strategy and continues
to simplify the business and provide more
transparent products, helping to improve
service levels and reduce conduct risks,
whilst working within a prudent risk appetite.
Progress against strategic
priorities
Creating the best customer experience
Delivered a new approach to current
account overdrafts that is simple, clear
and puts customers in control as well as
redesigning the account opening journey
to reduce account opening times.
Largest UK digital bank with 13.4 million
active online users including 9.3 million
mobile users.
Now able to provide bespoke financial
support to customers suffering from cancer,
following training from Macmillan.
Retail complaint volumes (excluding PPI)
down 17 per cent compared to 2016.
Becoming simpler and more efficient
Maintained the UK’s largest branch
network, with 21 per cent market share.
Responding to changing customer usage
and preferences resulted in an overall net
reduction in branches, the introduction of
new branch formats in selected locations
and an increase in mobile branches to 28,
supporting 169 communities.
Improved digital capability simplifying
processes for customers:
– Rolled out over 4,440 iPad Pros across our
branches, integrating the multi-channel
customer experience
– Simplified online processes for mortgage
intermediaries to offer a faster service
– Customers now able to check both loan
and credit card eligibility up front
Delivering sustainable growth
Successfully completed the acquisition of
MBNA from Bank of America, consolidating
the Group’s position as Britain’s largest
prime credit card issuer, with 25 per cent
market share of balances.
Continued to support first-time home
buyers, lending £13 billion compared to
the £10 billion target.
Supported over 124,000 start-up
businesses, exceeding the commitment
to support 100,000.
Lex Autolease exceeded its five year
ambition to grow its fleet by 100,000
vehicles, cementing its position as the
UK’s leading vehicle leasing company.
Lloyds Banking Group Annual Report and Accounts 2017 29
Strengthening
our retail offer
In June 2017 we completed our acquisition of MBNA, a specialist
credit card provider which serves around 2.5 million UK customers
and provides around £8 billion of UK prime credit card lending.
MBNA facilitates 480,000 transactions per day and is accepted and
used all around the world.
MBNA is a strong, profitable and prime credit card business, with
an experienced management team and an advanced data analytics
capability, which will benefit the wider Group. This is the largest
integration of a credit card business ever undertaken in Europe.
The integration is progressing well and will be completed by the
end of the first quarter of 2019.
Following the acquisition the combined business is now the largest
prime credit card issuer in the UK.
Financial performance
2017 results include completion of the
acquisition of MBNA on 1 June. MBNA
has performed ahead of expectations
and generated incremental income of
£448 million, operating costs of £135 million
and impairments of £118 million.
Underlying profit increased 9 per cent
to £4,403 million.
Net interest income increased 8 per cent
(3 per cent excluding MBNA) reflecting
a 14 basis points improvement in net
interest margin, driven by deposit repricing
offsetting mortgage margin pressures.
Other income was 3 per cent higher, driven
by fleet growth in Lex Autolease. Operating
lease depreciation increased reflecting
fleet growth and increased conservatism
in residual value management.
Operating costs increased 2 per cent to
£4,857 million. Excluding MBNA, costs
decreased by 1 per cent driven by efficiency
savings partly offset by increased investment
spend and pay related growth.
Impairment charges increased 10 per cent
to £717 million. Excluding MBNA,
impairments were £55 million lower than
in 2016, reflecting the resilient economic
environment. Asset quality ratio excluding
MBNA was down 2 basis points.
Loans and advances to customers were up
3 per cent to £339.7 billion (including MBNA
£8 billion) driven by the Black Horse business
and growth in the open mortgage book, up
£1.0 billion to £267.1 billion.
Customer deposits were down 1 per cent
to £253.1 billion, with a continued reduction
in tactical balances.
Risk-weighted assets increased by
£6.2 billion to £90.8 billion following the
acquisition of MBNA.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information25%market share of credit card balances
30 Lloyds Banking Group Annual Report and Accounts 2017
Divisional overview continued
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.
£2,489m
Underlying profit
Through its four client facing segments –
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 and
debt capital markets services.
Financial performance
Underlying profit increased 5 per cent to
£2,489 million, driven by income growth
and active cost management, delivering
improvement in cost:income ratio to
45.8 per cent.
32%1
1 Proportion of Group underlying profit
excluding run-off and central items.
2%
growth in SME lending
2%
growth in Mid Corporate lending
37bps
increase in return on risk-weighted
assets to 2.82%
Funding for UK manufacturers £bn
2017
2016
2015
2014
1.1
1.2
1.4
1.0
Return on risk-weighted assets of 2.82 per cent,
reflecting proactive portfolio optimisation
and increased profit.
Income increased by 3 per cent to
£4,847 million with broad based franchise
growth.
Net interest margin increased 18 basis
points to 3.54 per cent as a result of lower
funding costs.
Other income resilient at £1,761 million
(2016: £1,756 million), with fewer significant
transactions in the second half and reduced
client activity compared to 2016.
Operating lease depreciation reduced due
to lower accelerated charges compared
with 2016.
Continued investment in the business offset
by efficiencies, leading to flat operating costs.
The increase in impairment charge to
£115 million and asset quality ratio to
12 basis points is due to a lower level
of write-backs and provision releases
and also includes a single large
corporate impairment.
Loans and advances decreased 2 per cent
to £100.0 billion, with year-on-year lending
growth of 2 per cent in SME remaining
at above market growth levels, offset by
reductions in Global Corporates.
Deposits increased by 4 per cent to
£147.6 billion, with continued momentum
in attracting high quality transactional
banking deposits.
Continued portfolio optimisation, including
capital efficient securitisation activity,
to achieve an 8 per cent reduction in
risk-weighted assets to £85.6 billion.
Progress against strategic
priorities
Commercial Banking delivered a return on
risk-weighted assets of 2.82 per cent in 2017,
exceeding the commitment of a return of
2.40 per cent, while continuing to focus on
improving the client experience grow lending
in key client segments.
Creating the best customer experience
Awarded Business Bank of the Year at the FDs’
Excellence Awards for the 13th consecutive
year; scoring highest against peers across all
three assessment criteria; service, relationship
managers and value for money.
Supported c.6,800 clients in 2017 to export for
the first time and helped clients break into new
markets through the International Trade Portal.
Becoming simpler and more efficient
Over 16,000 SME business accounts opened
using the transformed end-to-end process.
The transformed process includes additional
digital functionality, such as the option to
review and approve banking agreements
online and upload signatures.
Delivering sustainable growth
Following the launch of the Green Loan
Initiative in 2016, the Group has provided
in excess of £0.5 billion of green lending,
improving the energy efficiency of over
5 million square feet of real estate.
Exceeded the £4 billion Helping Britain
Prosper funding commitment for
manufacturing businesses, for the four years
to 2017. In addition, continued to support
the Lloyds Bank Advanced Manufacturing
Training Centre, investing £1 million a year
since 2014; and to date have trained over
500 manufacturing graduates, engineers
and apprentices, building towards the target
of 1,000 by 2020.
SME lending up 2 per cent, outperforming
the market and providing valuable support
to the economy.
Lloyds Banking Group Annual Report and Accounts 2017 31
Insurance and Wealth
Insurance and Wealth offers insurance,
investment and wealth management
products and services.
£939m
Underlying profit
12%1
1 Proportion of Group underlying profit
excluding run-off and central items.
>9m
Life, pensions and
investments customers
£670m
of long duration loans funded
Workplace, planning and
retirement customer assets
under administration £bn
2017
2016
2015
2014
42.7
37.1
30.0
27.4
Annualised annuity payments to
customers in retirement £m
It supports over 9 million customers with
total customer assets under administration of
£145 billion and annualised annuity payments
to customers in retirement of c.£1 billion.
The division’s strategic aim is to be the best
insurer and wealth management business in
the UK. It is committed to providing trusted,
value for money products and services to
meet the needs of its customers.
Progress against strategic
priorities
The Group continues to direct significant
investment towards developing Insurance
and Wealth, seeking to grow in areas
where it has competitive advantage and is
under-represented, for the benefit of both
customers and shareholders.
Creating the best customer experience
Scottish Widows won ‘Company of the
Year’ and 5 star service awards in individual
categories of Life and Pensions and
Investments at the Financial Adviser Service
Awards 2017.
Home insurance net promoter scores
increased by 10 per cent and life, pensions
and investments by 13 per cent.
Improved the Wealth customer experience
through reduction in time taken to provide
customer advice by up to 40 per cent, which
allows the Group to help more customers.
2017
2016
2015
2014
968
932
798
787
Becoming simpler and more efficient
Simplifying insurance systems and processes
through long-term partnerships with
Diligenta and Jardine Lloyd Thomson,
enabling customers to better manage their
policies with Scottish Widows.
Following its launch in 2016, the employer
digital service now reaches all eligible
workplace schemes, significantly reducing
processing time for monthly pension
scheme management.
Delivering sustainable growth
Announced the acquisition of Zurich’s UK
workplace pensions and savings business,
which has customer funds of £21 billion and
c.595,000 customers. The acquisition will
enhance Scottish Widows’ current offering,
giving a strong platform on which to develop
the next stage of its strategy in financial
planning and retirement.
Helping Britain prosper by funding
£670 million of long duration loans in the year
to finance affordable housing, infrastructure
and commercial real estate projects whilst
supporting a growing annuitant portfolio.
Since market entry in 2015, we have written
£2.5 billion of bulk annuity business (of
which £0.6 billion in 2017) and continue to see
significant demand from UK defined benefit
pension schemes using bulk annuities to
manage risk.
Workplace, planning and retirement
customer assets under administration
increased by 15 per cent to £43 billion
reflecting net inflows and positive
market movements.
Wealth customer assets increased by
7 per cent to £25 billion, reflecting positive
market movements.
Financial performance
Income in insurance and overall costs
remained flat, with higher investment
costs offset by lower business as usual
costs. Underlying profit has decreased by
3 per cent to £939 million as a result of lower
Wealth income.
Total life and pensions sales increased by
12 per cent, driven by 29 per cent increase
across workplace, planning and retirement
and protection, partly offset by lower bulk
annuity sales where we have maintained
a strong pricing discipline whilst actively
quoting in a very competitive market.
The total underwritten household premiums
decreased by 12 per cent reflecting the
highly competitive marketplace, despite
achieving an increase in underwritten new
business premiums of 12 per cent supported
by the new flexible Direct proposition
launched during 2016.
Insurance capital
Estimated pre final dividend Solvency II ratio
is unchanged at 160 per cent (31 December
2016: 160 per cent) and represents the
shareholder view of Solvency II surplus.
The ratio reflects in-year earnings, capital
management actions and favourable market
movements offset by capital invested in new
business and dividends paid in the year.
Capital management actions include
successful conclusion of a £1.3 billion
annuitant longevity reinsurance
transaction with Prudential Insurance
Company of America.
Estimated excess capital of £890 million was
generated in 2017 from which dividends
totalling £575 million were paid in the year
with a further dividend of £600 million paid
to the Group in February 2018.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
32 Lloyds Banking Group Annual Report and Accounts 2017
Risk overview
Effective risk management 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 bank with a culture founded on a
prudent through the cycle risk appetite.
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 work, behave and the decisions
they make. Risk appetite – the amount and
type of risk we are prepared to seek, accept
or tolerate – is approved by the Board and
embedded in policies, authorities and limits
across the Group.
Our prudent risk culture and appetite, along
with close collaboration between Risk division
and the business, supports effective decision
making and has enabled us to continue to
deliver against our strategic priorities in 2017,
simplifying and strengthening the business
whilst growing in targeted areas. We have
created a strong foundation to enable this
progress, ensuring we react appropriately
to the ever changing macroeconomic and
regulatory environment.
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, colleagues
and shareholders.
Risks are identified, managed and mitigated
using our comprehensive Risk Management
Framework (see below), and our well
articulated risk appetite provides a clear
framework for effective decision making.
The principal risks we face, which could
significantly impact the delivery of our
strategy, are discussed on pages 34 –37.
We believe effective risk management can
be a strategic differentiator, in particular:
Prudent approach to risk
Implementing a prudent approach to
risk across the Group and embedding a
strong risk culture ensures alignment to
our strategy.
Strong control framework
The Group’s Risk Management Framework
is 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 business units are assessed.
Business units in the first line of defence
are accountable for risk with oversight from
a strong and independent, second line of
defence Risk division.
Effective risk analysis, management
and reporting
Continuing to deliver regular close
monitoring and stringent reporting to
all levels of management and the Board
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.
Our risk management framework
The diagram below outlines the framework in place for risk management across the Group.
Accountability for ensuring risk is managed
consistently with the Risk Management
Framework approved by the Board
Confirmation of the effectiveness of
the Risk Management Framework
and underlying risk and control
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 ensure
effective risk management across the Group
Board
role
Senior
management role
Risk appetite
Governance framework
Three lines of defence
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
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
Risk and control cycle
from identification to reporting
Carried out by all three lines of defence and is an
integral part of our control effectiveness assessment
In line with our code of responsibility. Culture ensures
performance, risk and reward are aligned
Risk
culture
Risk resources
and capabilities
Processes and infrastructure are being invested in to
further improve our risk management capabilities
Risk-specific needs defined in detail for
implementation by each business
Primary risk categories
Risk-type specific sub-frameworks e.g. credit risk
Lloyds Banking Group Annual Report and Accounts 2017 33
Risk considerations
The potential risks and impacts arising from the external environment are outlined below. They are grouped using the same classification as on
pages 8–9, with links to our principal risks and strategic priorities. For information on how we manage our emerging risks, see page 110.
Risk and potential impact
Economic headwinds such as rising inflation
could impact households’ disposable income
and businesses’ profitability, impairing
customers’ ability to repay their borrowing,
and potentially hindering sustainable growth.
The impact of EU exit on our portfolios
remains uncertain. Operational changes are
likely to be limited given our UK focus but
the impact on the UK economy may affect
business performance.
We consider an array of scenarios as part of
our operating plan and stress testing exercises,
to identify and implement appropriate
mitigating actions.
Risk and potential impact
The financial services industry continues
to experience significant legislative and
regulatory change and interpretation
giving rise to uncertainty surrounding
the nature, scale and complexity of
implementation requirements.
This has the potential to impact, for example,
the resource and investment available to
allocate to the Group’s strategic priorities.
The Group has a proven track record in
implementing complex legal and regulatory
programmes and will continue to manage
any potential impact by remaining actively
engaged with governmental bodies, regulatory
authorities and industry associations.
Link to principal risks
Credit
Operational
Insurance underwriting
Capital
Funding and liquidity
Market
Link to principal risks
Credit
Regulatory and legal
Capital
Funding and liquidity
Market
Link to strategic priorities
Link to strategic priorities
Maximising the Group’s capabilities
Delivering a leading customer experience
Risk and potential impact
The availability and delivery of services through
digital channels is becoming increasingly
important for customer satisfaction.
Accelerated change in customer behaviour
and expectations may require increased agility
to accommodate the pace and scale of change
and could lead to customer detriment if this
change is poorly executed.
The Group will continue to focus on change
execution whilst keeping pace with
developments to meet new and evolving
customer needs.
Link to principal risks
Regulatory and legal
Conduct
Operational
Link to strategic priorities
Delivering a leading customer experience
Risk and potential impact
New technologies such as public cloud and
artificial intelligence along with growing
interconnectivity between the Group,
customers, and third parties create new risks.
Increasing capabilities of cyber-attackers
and higher volumes of connected devices
increases the potential for cyber-enabled fraud
and other crime, including attacks that could
disrupt service for customers.
We continue to optimise our approach to
operational resilience by enhancing systems
that support the Group’s critical business
processes, evolving controls within new
technologies and channels, and making
significant investment to improve data privacy,
including the security of data.
Link to principal risks
Conduct
Operational
Risk and potential impact
Technological change is driving an increase
in the number, and changing the nature of
competitors in the UK financial services industry,
opening up opportunities for consumers even
as levels of regulatory focus rise.
We must ensure that an unexpectedly fast pace
of change, which may accelerate customer
disintermediation, does not lead to our
involvement in anti-competitive practices, or
prevent certain customer groups from having
equal access to our products and services.
We will continue to address this through
innovation and developing new products
that respond to market trends and meet
customer changing needs.
Link to principal risks
Regulatory and legal
Conduct
Operational
People
Link to strategic priorities
Link to strategic priorities
Delivering a leading customer experience
Digitising the Group
Delivering a leading customer experience
Maximising the Group’s capabilities
The links shown here between these five factors and our
principal risks and strategic priorities are not an exhaustive list.
Find further discussion on the impact of
these factors on our business on pages 8–9
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationTechnologyCompetitionEconomyRegulation and legalCustomer
34 Lloyds Banking Group Annual Report and Accounts 2017
Risk overview continued
Principal risks
The most significant risks which could impact the
delivery of our long-term strategic objectives and
our approach to each risk, are detailed below.
As part of the Group’s ongoing assessment
of the potential implications of the UK
leaving the European Union, the Group
continues to consider the impact to its
customers, colleagues and products –
as well as legal, regulatory, tax, financial
and capital implications.
There remains continued uncertainty
around both the UK and global political and
macroeconomic environment. The potential
impacts of external factors have been
considered in all principal risks to ensure
any material uncertainties continue to be
monitored and are appropriately mitigated.
Principal risks and uncertainties are reviewed
and reported regularly. This year we have
added a new principal risk, model risk, to
reflect the Group’s increasing use of analytics
and models to make decisions.
The risk that parties with whom we have
contracted, fail to meet their financial
obligations (both on and off balance sheet).
Example
Adverse impact on profitability due to
an increase in impairment losses, write
downs and/or decrease in asset valuations
which can occur for a number of reasons,
including adverse changes in the economic,
geopolitical and market environment. For
example, low interest rates have helped
customer affordability, but there is a risk of
increased defaults as interest rates rise.
Key mitigating actions
The risks of changing legislation, regulation,
policies, voluntary codes of practice and
their interpretation in the markets in which
we operate may 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, Payment Services
Directive 2 (PSD2), Open Banking and
General Data Protection Regulation (GDPR).
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.
Key mitigating actions
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.
Extensive and thorough credit processes
and controls to ensure effective risk
identification, management and oversight.
Continued investment in people, processes,
training and IT to assess impact and help
meet our legal and regulatory commitments.
Effective, well-established governance
process supported by independent
credit risk assurance.
Engage with regulatory authorities and
industry bodies on forthcoming regulatory
changes, market reviews and investigations.
Early identification of signs of stress leading
to prompt action in engaging the customer.
Alignment to strategic priorities
and future focus
Delivering a leading customer experience
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, regulation and associated
consultations and participate in industry
bodies. We continue to be subject to
significant ongoing and new legislation,
regulation and court proceedings.
Alignment to strategic priorities
and future focus
Maximising the Group’s capabilities
We seek to support sustainable growth in our
targeted segments. We have a conservative
and well balanced credit portfolio, managed
through the economic cycle and supported by
strong credit portfolio management.
We are committed to better addressing our
customers’ banking needs through consistent,
fair and responsible credit risk decisions,
aligned to customers’ circumstances, whilst
staying within prudent risk appetite.
Impairments remain below long-term levels
and are expected to increase as the level
of write-backs and releases reduces and
impairments normalise.
Read more
on pages 116–133
Read more
on page 133
Regulatory and legalCreditKey risk indicatorsImpairment charge Impaired assets£795m £7,841m2016: £645m 2016: £8,495mKey risk indicatorsMandatory, legal and regulatory investment spend£886m2016: £555m Lloyds Banking Group Annual Report and Accounts 2017 35
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; failing to
promote effective competition in the interest
of customers; and exhibiting behaviours which
could impact on the integrity of the market or
undermine wider regulatory standards.
We face significant operational risks which
may disrupt services to customers, cause
reputational damage, and result in financial
loss. These include the availability, resilience
and security of our core IT systems, unlawful
or inappropriate use of customer data, theft
of sensitive data, fraud and financial crime
threats, and the potential for failings in our
customer processes.
Example
Example
The most significant conduct cost in recent
years has been PPI mis-selling.
The dynamic threat posed by cyber risk to
the confidentiality and integrity of electronic
data or the availability of systems.
Key mitigating actions
Conduct risk appetite metrics provide a
granular view of how our products and
services are performing for customers.
Product approval, continuous product
review processes and customer
outcome testing (across products
and services) 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.
Further enhancements and embedding
of our framework to support customers
in vulnerable circumstances.
Key mitigating actions
Investing in enhanced cyber controls to
protect against external threats to the
confidentiality or integrity of electronic data,
or the availability of systems, and to ensure
effective third party assurance.
Enhancing the resilience of systems that
support critical business processes with
independent verification of progress on an
annual basis.
Significant investment in compliance with
GDPR and Basel Committee on Banking
Supervision standards.
Working with industry bodies and law
enforcement agencies to identify and
combat fraud and money laundering.
Key people risks include the risk that we fail
to maintain organisational skills, capability,
resilience and capacity levels in response to
organisational, political and external market
change and evolving business needs.
Example
Inability to attract or retain colleagues with
key skills could impact the achievement of
business objectives.
Key mitigating actions
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.
Alignment to strategic priorities
and future focus
Transforming ways of working
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
will continue to invest in the development
of colleague capabilities and agile working
practices in order to deliver a leading customer
experience, and to respond quickly to the
rapidly evolving change in customers’ decision
making in an increasingly digital marketplace.
Alignment to strategic priorities
and future focus
Delivering a leading customer experience
As we transform our business, minimising
conduct risk is critical to achieving our strategic
goals and meeting regulatory standards.
Our focus on embedding a customer-centric
culture and delivering good outcomes through
good conduct is subject to robust review
by the Group Customer First Committee.
This supports our vision of being the best
bank for customers, enabling the delivery
of a leading customer experience through
effective root cause analysis and learning
from customer feedback.
Alignment to strategic priorities
and future focus
Delivering a leading customer experience
We recognise that resilient and secure
technology, and appropriate use of data,
is critical to delivering a leading 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. Internal programmes
ensure that data is used correctly, and the
control environment is regularly assessed
through both internal and third party testing.
Read more
on page 134
Read more
on pages 135–136
Read more
on page 136
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationConductOperationalPeopleKey risk indicatorsConduct risk appetite metric performance-Group92.3%2016: 92.1%Key risk indicatorsAvailability of core systems99.98%2016: 99.97%Key risk indicatorsBest bank for customers index80%2016: 77%
36 Lloyds Banking Group Annual Report and Accounts 2017
Risk overview continued
Key insurance underwriting 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.
Example
Uncertain property insurance claims impact
Insurance earnings and capital, e.g. extreme
weather conditions, such as flooding, can
result in high property damage claims.
Key mitigating actions
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 the Insurance business.
Property insurance exposures are mitigated
by a broad reinsurance programme.
The risk that we have a sub-optimal quantity
or quality of capital or that capital is
inefficiently deployed across the Group.
The risk that we have insufficient financial
resources to meet our commitments as
they fall due.
Example
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 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.
Key mitigating actions
Key mitigating actions
A comprehensive capital management
framework that includes setting of capital
risk appetite and dividend policy.
Close monitoring of capital and leverage
ratios to ensure we meet regulatory
requirements and risk appetite.
Comprehensive stress testing analyses to
evidence capital adequacy under various
adverse scenarios.
Holding liquid assets to cover potential cash
and collateral outflows and to meet regulatory
requirements. In addition, maintaining a
further pool of 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.
Alignment to strategic priorities
and future focus
Delivering a leading customer experience
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 delivering a leading
customer experience by helping customers
protect themselves today whilst preparing
for a secure financial future.
Strategic growth initiatives within Insurance
are developed and managed in line with
a defined risk appetite, aligned to the
Group risk appetite and strategy.
Alignment to strategic priorities
and future focus
Maximising the Group’s capabilities
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 growth in targeted segments.
1 Pro forma.
2 CET1 ratio after ordinary dividends and share buyback.
2016 adjusted for MBNA.
3 Calculated in accordance with the UK Leverage Ratio
Framework which requires qualifying central bank claims
to be excluded from the leverage exposure measure.
Alignment to strategic priorities
and future focus
Maximising the Group’s capabilities
We maintain a strong funding position in
line with our low risk strategy and the loan to
deposit ratio remains within our target range.
Our funding position allows the Group to
grow targeted business segments and better
address our customers’ needs.
Read more
on page 137
Read more
on pages 137–144
Read more
on pages 144–149
Insurance underwritingCapitalFunding and liquidityKey risk indicatorsInsurance (Life and Pensions) present value of new business premiums£9,951m2016: £8,919mGeneral Insurance underwritten total gross written premiums £733m2016: £831mKey risk indicatorsCommon equity tier 1 ratio1,213.9%2016: 13.0%UK leverage ratio1,3 5.4%2016: 5.3%Key risk indicatorsLCR eligible assets£121bn2016: £121bn Loan to deposit ratio110%2016: 109% Lloyds Banking Group Annual Report and Accounts 2017 37
Against a background of increased regulatory
focus on governance and risk management,
the most significant challenges arise from
meeting the requirements to ring-fence core
UK financial services and activities from January
2019 and further requirements under the Senior
Manager & Certification Regime (SM&CR).
Examples
Inadequate or complex governance
arrangements to address ring-fencing
requirements could result in a weaker control
environment, delays in decision making and
lack of clear accountability.
Non-compliance with or breaches of SM&CR
requirements could result in lack of clear
accountability and legal and regulatory
consequences.
Key mitigating actions
Leveraging our considerable change
experience to meet ring-fencing
requirements before the regulatory
deadlines, and the continuing evolution
of SM&CR.
Programme in place to address ring-fencing.
In close and regular contact with regulators
to develop and deploy our planned
operating and legal structure.
Evolving risk and governance arrangements
to continue to be appropriate to comply with
regulatory objectives.
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 (DB) pension schemes.
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 risk 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.
Narrowing credit spreads will increase the cost
of pension scheme benefits.
Key mitigating actions
Structural hedge programmes implemented
to manage liability margins and margin
compression.
Equity and credit spread risks are closely
monitored and, where appropriate,
asset and liability matching is undertaken.
The Group’s DB pension schemes
have increased their credit allocation
and hedged against nominal rate and
inflation movements.
Alignment to strategic priorities
and future focus
Delivering a leading customer experience
Ring-fencing will ensure we become safer
and continue to deliver a leading customer
experience by providing further protection
to core retail and SME deposits, increasing
transparency of our operations and facilitating
the options available in resolution.
Our governance framework and strong culture
of ownership and accountability enabled
effective, on time, compliance with the
SM&CR requirements and enable us to
demonstrate clear accountability for decisions.
Alignment to strategic priorities
and future focus
Maximising the Group’s capabilities
We actively manage our exposure to
movements in market rates, to drive lower
volatility earnings and offer a comprehensive
customer proposition with hedging strategies
to support strategic aims. Mitigating actions
are implemented to reduce the impact of
market movements, resulting in a more stable
capital position. Effective interest rate and
inflation hedging has kept volatility in the
Group’s DB pension schemes low and helped
to return the schemes to IAS19 surplus in
2017. This allows us to more efficiently utilise
available capital resources to better enable the
Group to maximise its capabilities.
NEW
The risk of financial loss, regulatory censure,
reputational damage or customer detriment,
as a result of deficiencies in the development,
application and ongoing operation of financial
models and rating systems.
Examples
Examples of the consequences of inadequate
models include:
Inappropriate levels of capital or
impairments.
Inappropriate credit or pricing decisions.
Adverse impacts on funding or liquidity,
or the Group’s earnings and profits.
Key mitigating actions
A comprehensive model risk management
framework including:
Defined roles and responsibilities, with clear
ownership and accountability.
Principles regarding the requirements of
data integrity, development, validation,
implementation and ongoing maintenance.
Regular model monitoring.
Independent review of models.
Periodic validation and re-approval
of models.
Alignment to strategic priorities
and future focus
Digitising the Group
The Group’s models play a vital role in
supporting Group strategy to ensure
profitable growth in targeted segments
and the Group’s drive toward automation
and digital solutions to enhance customer
outcomes. Model risk management helps
ensure these models are implemented in
a controlled and safe manner for both the
Group and customers.
Read more
on page 150
Read more
on pages 151–156
Read more
on page 156
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationKey risk indicatorsIAS19 Pension surplus£509m2016: £(244)mModelGovernanceMarketKey risk indicatorsN/AKey risk indicatorsN/A
38 Lloyds Banking Group Annual Report and Accounts 2017
FINANCIAL
RESULTS
Summary of Group results
Divisional results
Other financial information
39
45
49
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Summary of Group results
Strong financial performance with improved profit and returns on both statutory and
underlying bases
The Group’s statutory profit before tax was £5,275 million, 24 per cent higher than in 2016 driven by increased underlying profit and lower volatility and other
items which more than offset the increased PPI charge. Statutory profit after tax increased by 41 per cent to £3,547 million (2016: £2,514 million) and the
return on tangible equity was 8.9 per cent.
Underlying profit was £8,493 million, 8 per cent higher than 2016 with higher income and positive operating jaws. The underlying return on tangible equity
increased to 15.6 per cent. Underlying profit in the fourth quarter was £1,926 million, 7 per cent higher than the same period in 2016 with a 5 per cent
increase in net income.
The balance sheet remains strong and the Group generated 245 basis points of CET1 capital in the year. The pro forma CET1 ratio at 31 December 2017
after accruing for ordinary dividends and allowing for the share buyback was 13.9 per cent compared to 13.0 per cent (pro forma after dividends and
adjusting for MBNA) at 31 December 2016. The pro forma leverage ratio increased to 5.4 per cent (31 December 2016: 5.3 per cent) and tangible net assets
per share were 53.3 pence.
Given the strong capital generation in the year, the Board has recommended a final ordinary dividend of 2.05 pence per share, making a total ordinary
dividend of 3.05 pence per share, an increase of 20 per cent on 2016 and in line with our progressive and sustainable ordinary dividend policy. In addition,
the Board intends to implement a share buyback of up to £1 billion, equivalent to up to 1.4 pence per share.
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 profits on disposal of operating lease assets of £32 million (2016: £58 million).
2017
£ million
12,320
6,205
18,525
(1,053)
17,472
2.86%
2016
£ million
11,435
6,065
17,500
(895)
16,605
2.71%
£434.9bn
£435.9bn
Change
%
8
2
6
(18)
5
15bp
–
Net income of £17,472 million was 5 per cent higher than in 2016 with an 8 per cent increase in net interest income, which included £430 million from
MBNA, and a 2 per cent increase in other income, while operating lease depreciation increased 18 per cent reflecting fleet growth in Lex Autolease.
Net interest income increased by £885 million to £12,320 million. The net interest margin increased by 15 basis points to 2.86 per cent reflecting lower
deposit and wholesale funding costs, which more than offset continued pressure on asset margins and also included a 7 basis points benefit from MBNA.
Average interest-earning assets were broadly unchanged with reductions in run-off, global corporates and the closed mortgage book offset by MBNA.
The Group expects the net interest margin for 2018 to be around 2.90 per cent, in line with the margin of 2.90 per cent in the fourth quarter of 2017.
The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less
sensitive to movements in rates. These liabilities include certain current account and savings balances, together with the Group’s equity. As at 31 December
2017 the Group’s hedge had a nominal balance of £165 billion (31 December 2016: £111 billion), broadly in line with the underlying hedgeable balances.
The hedge had an average duration of around 3 years and a fixed earnings rate of approximately 1.1 per cent over LIBOR (2016: 1.6 per cent). The benefit
from the hedge in the year was £1.9 billion over LIBOR (2016: £1.7 billion).
Other income was £6,205 million, an increase of 2 per cent in the year. The increase reflected continued growth in the Lex Autolease business, the
£146 million gain on sale of the Group’s interest in Vocalink and £274 million (2016: £112 million) of gains from the sale of £14 billion of gilts and other
available-for-sale assets (2016: c.£5 billion). The increase was partly offset by lower income from the run-off portfolio and reduced income from bulk
annuities reflecting the timing of transactions.
Operating costs
Operating costs
Cost:income ratio
Operating jaws
Simplification savings annual run-rate
2017
£ million
8,184
46.8%
4%
1,422
2016
£ million
8,093
48.7%
947
Change
%
(1)
(1.9) pp
Operating costs at £8,184 million increased slightly during the year, but excluding MBNA costs of £135 million fell 1 per cent. Savings from Simplification
more than offset increased investment in the business and inflation.
In 2017 the Group continued to focus on tight cost control while investing significant amounts in developing its digital capability, improving the branch
network and simplifying processes. The Simplification programme has achieved the annual run-rate savings target of £1.4 billion since 2014, ahead of the
original £1 billion target.
Our market leading cost:income ratio continues to provide competitive advantage and improved further to 46.8 per cent with positive operating jaws of
4 per cent.
The Group expects operating costs of less than £8 billion in 2020; the Group also expects the cost:income ratio to improve every year and reach the low
40s exiting 2020, including future remediation costs.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
40 Lloyds Banking Group Annual Report and Accounts 2017
Summary of Group results continued
Impairment
Impairment charge
Asset quality ratio
Gross asset quality ratio
Impaired loans as a % of closing advances
Provisions as a % of impaired loans
2017
£ million
2016
£ million
Change
%
795
0.18%
0.28%
645
0.15%
0.28%
At 31 Dec
2017
At 31 Dec
2016
1.6%
45.6%
1.8%
43.4%
(23)
3bp
–
Change
(0.2) pp
2.2pp
Asset quality remains strong with portfolios continuing to benefit from the Group’s proactive approach to risk management, continued low interest rates
and a resilient UK economy.
The impairment charge increased to £795 million from £645 million in 2016, reflecting lower releases and write-backs and the consolidation of MBNA.
The asset quality ratio increased from 15 basis points to 18 basis points reflecting the expected lower provision write-backs and releases while the gross
asset quality ratio was stable year-on-year at 28 basis points including the 2 basis points impact of MBNA in 2017.
The Group expects an asset quality ratio of around 35 basis points through the cycle and less than 30 basis points through the plan period and in
2018. The Group continues to expect the asset quality to remain strong but with further reductions in releases and write-backs, however, following the
implementation of IFRS 9, the Group anticipates some additional volatility in impairment.
Total impaired loans fell by £0.7 billion to £7.8 billion (31 December 2016: £8.5 billion) and represent 1.6 per cent of closing advances to customers
(31 December 2016: 1.8 per cent). Provisions as a percentage of impaired loans increased to 45.6 per cent (31 December 2016: 43.4 per cent).
Overall credit performance in the UK Retail mortgage book remains stable. The average indexed loan to value (LTV) improved to 43.6 per cent
(31 December 2016: 44.0 per cent) and the value of lending with an indexed LTV of greater than 80 per cent fell to £30.7 billion (31 December 2016:
£32.4 billion). Impaired loans as a percentage of closing advances were 1.3 per cent (31 December 2016: 1.4 per cent).
The UK Motor Finance book continues to benefit from conservative residual values and prudent provisioning and impaired loans as a percentage of closing
advances were stable at 1.0 per cent. The credit card book also continued to perform strongly with the MBNA portfolio performing in line with the Group’s
expectations. Impaired credit card balances as a percentage of closing advances improved to 2.3 per cent (31 December 2016: 3.1 per cent).
The Commercial Banking portfolio continues to benefit from effective risk management, a resilient economic environment and continued low interest
rates. Impaired loans as a percentage of closing advances reduced to 1.9 per cent (31 December 2016: 2.1 per cent).
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
PPI provision
Other conduct provisions
Statutory profit before tax
Tax expense
Profit for the year
2017
£ million
8,493
2016
£ million
7,867
Change
%
8
–
279
(91)
(621)
(270)
(703)
(1,650)
(865)
5,275
(1,728)
3,547
(790)
439
(340)
(622)
(231)
(1,544)
(1,000)
(1,085)
4,238
(1,724)
2,514
24
–
41
Statutory profit before tax increased 24 per cent to £5,275 million (2016: £4,238 million) driven by higher underlying profit and lower volatility and other
items. Statutory profit after tax increased by 41 per cent to £3,547 million (2016: £2,514 million).
The charge of £790 million for Enhanced Capital Notes in 2016 represented the write-off of the embedded derivative and premium paid on redemption of
the remaining notes.
Market volatility and asset sales of £279 million included positive insurance volatility of £286 million. The credit of £439 million in 2016 included the
£484 million gain on sale of the Group’s interest in Visa Europe.
Amortisation of purchased intangibles was lower at £91 million (2016: £340 million) as certain intangible assets are now fully amortised.
Restructuring costs were £621 million (2016: £622 million) and included costs relating to the Simplification programme, the rationalisation of the non-branch
property portfolio, implementation of the ring-fencing requirements and MBNA integration costs.
The PPI charge of £1,650 million included an additional £600 million in the fourth quarter reflecting an increase in expected weekly complaints from 9,000
to 11,000, which is the average level of complaints for the last nine months. The outstanding balance sheet provision at 31 December 2017 was £2.4 billion.
The other conduct provisions of £865 million included an additional £325 million charged in the fourth quarter which covers a number of items including
packaged bank accounts, arrears handling and smaller legacy issues.
Lloyds Banking Group Annual Report and Accounts 2017 41
Taxation
The tax expense was £1,728 million (2016: £1,724 million) representing an effective tax rate of 33 per cent (2016: 41 per cent). The high effective tax rate
largely reflects the restrictions on deductibility of conduct provisions and the banking surcharge. The effective tax rate of 41 per cent in 2016 was higher as
it also included 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 expects the effective tax rate to reduce to around 25 per cent by 2020.
Return on tangible equity
The underlying return on tangible equity increased to 15.6 per cent (2016: 14.1 per cent) primarily reflecting increased underlying profit. The return on
tangible equity was 8.9 per cent up from 6.6 per cent in 2016, reflecting the increase in statutory profit after tax.
Going forward the Group remains confident in its future prospects and expects the return on tangible equity to trend towards the underlying level and
expects to generate a statutory return on tangible equity of between 14.0 and 15.0 per cent in 2019, on a higher capital base.
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 £16.8 billion (31 December 2016: £8.3 billion).
2 Excludes repos of £2.6 billion (31 December 2016: £2.5 billion).
At 31 Dec
2017
£456bn
£416bn
110%
At 31 Dec
2016
£450bn
£413bn
109%
£101bn
£111bn
£29bn
£15bn
£35bn
£14bn
£121bn
£121bn
Change
%
1
1
1pp
(9)
(19)
6
–
3 Excludes balances relating to margins of £2.1 billion (31 December 2016: £3.2 billion) and settlement accounts of £1.5 billion (31 December 2016: £1.8 billion).
Loans and advances to customers increased by 1 per cent to £456 billion compared with £450 billion at 31 December 2016 mainly due to the acquisition
of the MBNA prime credit card portfolio (£8 billion), growth in the open mortgage book, UK Motor Finance and SME, partly offset by reductions in run-off
and the closed mortgage book.
The loan to deposit ratio was broadly stable at 110 per cent. Wholesale funding reduced by 9 per cent to £101 billion compared with £111 billion at
31 December 2016. In addition, the Group made use of central bank funding schemes and by the end of 2017 the Group had fully utilised its £20 billion
capacity from the Bank of England’s Term Funding Scheme.
The Group’s liquidity surplus exceeds the regulatory minimum and internal risk appetite with a Liquidity Coverage Ratio of 127 per cent based on the
EU Delegated Act at 31 December 2017.
Capital ratios and risk-weighted assets
Pro forma CET1 ratio pre dividend and share buyback1
Pro forma CET1 ratio post dividend1,2
Pro forma CET1 ratio post dividend and share buyback1
Transitional tier 1 capital ratio2
Transitional total capital ratio2
Pro forma UK leverage ratio1,2,3
Risk-weighted assets
Shareholders’ equity
Tangible net assets per share pre dividend4,5
Tangible net assets per share5
At 31 Dec
2017
At 31 Dec
2016
15.5%
14.4%
13.9%
17.2%
21.2%
5.4%
£211bn
£44bn
56.5p
53.3p
14.1%
13.0%
13.0%
17.0%
21.4%
5.3%
£216bn
£43bn
54.8p
54.8p
Change
%
1.4pp
1.4pp
0.9pp
0.2pp
(0.2)pp
0.1pp
(2)
1
1.7p
(1.5)p
1 The CET1 and leverage ratios at 31 December 2017 and 2016 are reported on a pro forma basis, reflecting the dividends paid by the Insurance business in February 2018 and
February 2017, respectively, in relation to prior year earnings. In addition the CET1 ratios at 31 December 2016 have been adjusted for the acquisition of MBNA.
2 The 2017 capital and leverage ratios do not, unless otherwise indicated, recognise the share buyback as this will be reflected in 2018.
3 Calculated in accordance with the UK Leverage Ratio Framework. Excludes qualifying central bank claims.
4 Pre final 2016 and interim 2017 dividends.
5 Tangible net assets per share at 31 December 2016 equivalent to 53.4 pence after adjusting for the impact of MBNA.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
42 Lloyds Banking Group Annual Report and Accounts 2017
Summary of Group results continued
The Group’s CET1 ratio has strengthened to 15.5 per cent on a pro forma basis before ordinary dividends and the share buyback. After ordinary dividends
and allowing for the share buyback, the CET1 ratio remains strong at 13.9 per cent.
The Group generated 245 basis points of CET1 capital (pre ordinary dividends and share buyback) in the year. This included c.250 basis points from
underlying capital generation; the Group also had a benefit of c.80 basis points from the reduction in risk-weighted assets and c.40 basis points from
market and other movements, which were offset by the c.120 basis point impact of conduct provisions.
The Group remains highly capital generative and continues to expect ongoing capital generation of 170 to 200 basis points per annum.
As reported in the Q3 IMS, the Group’s Pillar 2A CET1 requirement has increased by 0.5 per cent to 3 per cent. In addition, the Countercyclical Capital
Buffer on UK exposures will be introduced during 2018 and the Systemic Risk Buffer will come into effect in early 2019. The Group is also pleased to
announce that the PRA has now completed its annual review of the Group’s PRA Buffer requirement. As a consequence, the Board’s view of the level of
CET1 capital required is c.13 per cent plus a management buffer of around 1 per cent. The Group’s CET1 ratio as at 31 December 2017, including the
Insurance dividend and after the ordinary dividend and allowing for the share buyback, was 13.9 per cent.
The Group’s total capital ratio remains strong at 21.2 per cent which, when combined with eligible senior unsecured securities issued by Lloyds Banking
Group plc, has left the Group well positioned to meet its Minimum Requirement for Own Funds and Eligible Liabilities (MREL) from 2020.
The leverage ratio on a pro forma basis increased to 5.4 per cent (31 December 2016: 5.3 per cent), largely reflecting both the increase in fully loaded tier 1
capital and reductions in balance sheet assets.
Tangible net assets per share at 31 December 2016 was 54.8 pence, or 53.4 pence after adjusting for the acquisition of MBNA. The movement from
the adjusted 2016 tangible net assets per share to 53.3 pence at 31 December 2017 comprises an increase of 3.1 pence due to the strong financial
performance offset by a reduction of 3.2 pence for dividends paid during the year.
Dividend
The Board has recommended a final ordinary dividend of 2.05 pence per share. This is in addition to the interim ordinary dividend of 1.0 pence per share
that was announced at the 2017 half year results. The total ordinary dividend per share for 2017 of 3.05 pence per share has increased by 20 per cent from
2.55 pence per share in 2016.
The Board continues to give due consideration at each year end to the return of any surplus capital and for 2017, the Board intends to implement a share
buyback of up to £1 billion, equivalent to up to 1.4 pence per share. This represents the return 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. The share buyback programme will commence in
March 2018 and is expected to be completed during the next 12 months.
Given the total ordinary dividend of 3.05 pence per share and the intended share buyback, equivalent to up to 1.4 pence per ordinary share, the total
capital return for 2017 will be up to 4.45 pence per share, an increase of up to 46 per cent on the prior year, equivalent to up to £3.2 billion.
In prior years, the Board has distributed surplus capital by means of a special dividend. The Board’s current preference is to return surplus capital by way
of a buyback programme given the amount of surplus capital (£1 billion in 2017 versus £350 million in 2016), the normalisation of ordinary dividends, our
return to full private ownership and the flexibility that a buyback programme offers.
The Group intends to maintain a progressive and sustainable ordinary dividend policy. The rate of growth of the ordinary dividend will be decided by the
Board in light of circumstances at the time and, having grown very significantly in the last three years, going forward the ordinary dividend is likely to grow
at a more normalised rate, whilst being supplemented by buybacks or special dividends.
Pensions
The Group's defined benefit schemes have been significantly derisked over recent years including being materially hedged for both interest rates
and inflation.
Terms have now been agreed in principle with the Trustee in respect of the valuations of the Group’s three main defined benefit pension schemes.
The valuations showed an aggregate ongoing funding deficit of £7.3 billion as at 31 December 2016 (£5.2 billion deficit at 30 June 2014). The increase
in the ongoing deficit over the period was mainly driven by lower gilt yields, offset primarily by hedging and asset returns.
Under the previous recovery plans, deficit contributions were committed of £0.3 billion in 2018 and 2019 and c.£0.9 billion per annum thereafter. Under the
new recovery plans, deficit contributions of £0.4 billion are payable in 2018, £0.6 billion in 2019, £0.8 billion in 2020 and £1.3 billion per annum from 2021
to 2024. The Group also continues to provide security to these pension schemes, with corporate guarantees and collateral pledged, while also making
additional annual contributions for future service. All of the Group’s defined benefit pension schemes will be located within the ring-fenced bank and these
revised contributions are included in the Group’s latest capital guidance.
Ring-fencing
The Group is making good progress with the implementation of its ring-fencing programme, including the establishment of the non ring-fenced bank,
Lloyds Bank Corporate Markets plc (LBCM), and remains on track to meet the legal and regulatory requirements by 1 January 2019. As a predominantly UK
retail and commercial bank, the impact on the Group is relatively limited, with minimal impact for the majority of the Group’s retail and commercial customers.
Over the course of 2018, in order to comply with the ring-fencing legislation, certain businesses will be transferred out of Lloyds Bank plc and its subsidiaries
to other parts of the Group, by means of statutory or contractual transfers. This will include the transfer of certain wholesale and international businesses to
Lloyds Bank Corporate Markets and the transfer of Scottish Widows Group and other insurance subsidiaries to Lloyds Banking Group plc.
Due to the Group’s UK retail and commercial focus, the vast majority of the Group’s business will continue to be held by Lloyds Bank plc and its subsidiaries
(together the ring-fenced bank) and as a result these transfers will not have a material impact on the financial strength of Lloyds Bank plc.
IFRS 9
The Group implemented IFRS 9 (Financial Instruments) on 1 January 2018. The adoption of the new Standard resulted in a reduction in shareholders’
equity of £1.2 billion largely reflecting an increase in impairment provisions of £1.3 billion. The impact on the Group’s CET1 capital ratio before transitional
relief at 1 January 2018 was a reduction of c.30 basis points after taking account of the offset against regulatory expected losses. After transitional relief the
impact was c.1 basis point.
Other matters
In 2014 the FCA removed the requirement to publish quarterly interim management statements, however the Group has continued to publish detailed
statements. Going forward, given the simple and more stable nature of the Group’s business, we will review the length and content of the Q1 and Q3
interim management statements.
Underlying basis – segmental analysis
2017
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
Return on risk-weighted assets
Loans and advances to customers1
Customer deposits2
Risk-weighted assets
20163
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
Return on risk-weighted assets
Loans and advances to customers2
Customer deposits2
Risk-weighted assets
Lloyds Banking Group Annual Report and Accounts 2017 43
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Run-off and
Central
items
£m
8,706
2,217
10,923
(946)
9,977
3,086
1,761
4,847
(44)
133
1,846
1,979
–
4,803
1,979
(4,857)
(2,199)
(1,040)
(717)
4,403
(115)
2,489
–
939
2.61%
3.54%
395
381
776
(63)
713
(88)
37
662
Group
£m
12,320
6,205
18,525
(1,053)
17,472
(8,184)
(795)
8,493
2.86%
£337.4bn
£86.0bn
£0.8bn
£10.7bn £434.9bn
0.21%
4.92%
0.12%
2.82%
0.18%
3.95%
£339.7bn £100.0bn
£0.8bn
£15.2bn £455.7bn
£253.1bn £147.6bn
£13.8bn
£1.0bn £415.5bn
£90.8bn
£85.6bn
£1.3bn
£33.2bn £210.9bn
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Run-off and
Central
items
£m
8,073
2,162
10,235
(775)
9,460
(4,748)
(654)
4,058
2,934
1,756
4,690
(105)
4,585
(2,189)
(17)
2,379
80
1,939
2,019
–
2,019
(1,046)
–
973
2.47%
3.36%
348
208
556
(15)
541
(110)
26
457
Group
£m
11,435
6,065
17,500
(895)
16,605
(8,093)
(645)
7,867
2.71%
£334.5bn
£89.9bn
£0.8bn
£10.7bn
£435.9bn
0.20%
4.85%
0.02%
2.45%
0.15%
3.55%
£330.8bn
£101.6bn
£0.8bn
£16.5bn
£449.7bn
£256.5bn
£141.3bn
£13.8bn
£1.4bn
£413.0bn
£84.6bn
£92.6bn
£1.7bn
£36.6bn
£215.5bn
1 Excludes reverse repos of £16.8 billion (31 December 2016: £8.3 billion) .
2 Excludes repos of £2.6 billion (31 December 2016: £2.5 billion) .
3 Restated. See page 181.
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 267.
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 unwind of acquisition-related fair value adjustments and 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, the
rationalisation of the non-branch property portfolio and the integration of MBNA; and payment protection insurance and other conduct provisions.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
44 Lloyds Banking Group Annual Report and Accounts 2017
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
Underlying profit
Volatility and other items
PPI provision
Other conduct provisions
Statutory profit before tax
Tax expense
Profit for the year
Earnings per share
Dividends per share – ordinary
Dividends per share – special
Share buyback up to £1 billion
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
Asset quality ratio
Return on risk-weighted assets
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 CET1 ratio pre dividend and share buyback3
Pro forma CET1 ratio post dividend3,4
Pro forma CET1 ratio post dividend and share buyback3
Transitional total capital ratio4
Pro forma UK leverage ratio3,4,5
Risk-weighted assets
Tangible net assets per share pre dividend6
Tangible net assets per share
1 Excludes reverse repos of £16.8 billion (31 December 2016: £8.3 billion).
2 Excludes repos of £2.6 billion (31 December 2016: £2.5 billion).
2017
£ million
12,320
6,205
18,525
2016
£ million
11,435
6,065
17,500
(1,053)
(895)
17,472
16,605
(8,184)
(795)
8,493
(703)
(1,650)
(865)
5,275
(1,728)
3,547
4.4p
3.05p
–
1.40p
2.86%
(8,093)
(645)
7,867
(1,544)
(1,000)
(1,085)
4,238
(1,724)
2,514
2.9p
2.55p
0.50p
–
2.71%
£435bn
£436bn
46.8%
0.18%
3.95%
15.6%
8.9%
48.7%
0.15%
3.55%
14.1%
6.6%
At 31 Dec
2017
£456bn
£416bn
110%
At 31 Dec
2016
£450bn
£413bn
109%
£812bn
£818bn
15.5%
14.4%
13.9%
21.2%
5.4%
14.1%
13.0%
13.0%
21.4%
5.3%
£211bn
£216bn
56.5p
53.3p
54.8p
54.8p
Change
%
8
2
6
(18)
5
(1)
(23)
8
24
–
41
52
20
15bp
–
(1.9)pp
3bp
40bp
1.5pp
2.3pp
Change
%
1
1
1pp
(1)
1.4pp
1.4pp
0.9pp
(0.2)pp
0.1pp
(2)
1.7p
(1.5) p
3 The CET1 and leverage ratios at 31 December 2017 and 2016 are reported on a pro forma basis, reflecting the dividends paid by the Insurance business in February 2018 and
February 2017, respectively, in relation to prior year earnings. In addition the CET1 ratios at 31 December 2016 have been adjusted for the acquisition of MBNA.
4 The 2017 capital and leverage ratios do not, unless otherwise indicated, recognise the share buyback as this will be reflected in 2018.
5 Calculated in accordance with the UK Leverage Ratio Framework. Excludes qualifying central bank claims.
6 Pre final 2016 and interim 2017 dividend.
Divisional results
Retail
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 a ssets
Asset quality ratio
Impaired loans as % of closing advances
Return on risk-weighted assets
Open mortgage book
Closed mortgage book
Credit cards
Loans
UK Motor Finance
Europe2
Other
Loans and advances to customers
Operating lease assets
Total customer assets
Relationship balances
Tactical balances
Customer deposits
Risk-weighted assets
1 Restated. See page 181.
2 Includes the Netherlands mortgage lending business.
Lloyds Banking Group Annual Report and Accounts 2017 45
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
2017
£m
8,706
2,217
20161
£m
8,073
2,162
10,923
10,235
(946)
9,977
(4,857)
(717)
4,403
(775)
9,460
(4,748)
(654)
4,058
2.61%
2.47%
£337.4bn
£334.5bn
0.21%
1.4%
4.92%
0.20%
1.5%
4.85%
At 31 Dec
2017
£bn
267.1
23.6
18.1
7.9
13.6
7.1
2.3
339.7
4.7
344.4
240.0
13.1
253.1
90.8
At 31 Dec
20161
£bn
266.1
26.7
9.7
7.7
11.4
6.3
2.9
330.8
4.1
334.9
239.3
17.2
256.5
84.6
Change
%
8
3
7
(22)
5
(2)
(10)
9
14bp
1
1bp
(0.1)pp
7bp
Change
%
–
(12)
87
3
19
13
(21)
3
15
3
–
(24)
(1)
7
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
46 Lloyds Banking Group Annual Report and Accounts 2017
Divisional results continued
Commercial Banking
Performance summary
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment charge
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
SME
Mid Corporates
Other Mid Markets
Mid Markets
Other2
Loans sold to Insurance business3
Loans and advances to customers
Customer deposits
Risk-weighted assets
1 Restated. See page 181.
2017
£m
3,086
1,761
4,847
(44)
4,803
(2,199)
(115)
2,489
20161
£m
2,934
1,756
4,690
(105)
4,585
(2,189)
(17)
2,379
Change
%
5
–
3
58
5
–
5
3.54%
3.36%
£86.0bn
£89.9bn
0.12%
1.9%
2.82%
0.02%
2.1%
2.45%
18bp
(4)
10bp
(0.2) pp
37bp
At 31 Dec
2017
£bn
At 31 Dec
20161
£bn
Change
%
30.7
19.9
14.3
34.2
41.8
(6.7)
100.0
147.6
85.6
30.2
19.5
15.0
34.5
43.4
(6.5)
101.6
141.3
92.6
2
2
(5)
(1)
(4)
(2)
4
(8)
2 Mainly lending to Global Corporates and Financial Institutions clients.
3 The customer segment balances include lower risk loans that were originated by Commercial Banking and subsequently sold to the Insurance business to back annuitant liabilities. These
loans are reported in Central items but have been included in this table to aid comparison with prior periods.
Lloyds Banking Group Annual Report and Accounts 2017 47
2017
£m
133
1,846
1,979
20161
£m
80
1,939
2,019
(1,040)
(1,046)
939
973
9,951
8,919
84
733
87%
75
831
85%
At 31 Dec
2017
£bn
160%
0.8
13.8
1.3
145.4
At 31 Dec
20161
£bn
160%
0.8
13.8
1.7
137.8
New
business
£m
20161
Existing
business
£m
123
109
121
19
9
381
103
95
16
17
441
672
Change
%
66
(5)
(2)
1
(3)
12
12
(12)
2pp
Change
%
–
–
–
(24)
6
Total
£m
226
204
137
36
450
1,053
202
354
1,609
410
2,019
New
business
£m
107
95
54
13
12
281
2017
Existing
business
£m
96
91
26
20
440
673
Total
£m
203
186
80
33
452
954
358
298
1,610
369
1,979
Insurance and Wealth
Performance summary
Net interest income
Other income
Total income
Operating costs
Underlying profit
Life and pensions sales (PVNBP) 2
General insurance underwritten new GWP3
General insurance underwritten total GWP3
General insurance combined ratio
Insurance Solvency II ratio4
Wealth loans and advances to customers
Wealth customer deposits
Wealth risk-weighted assets
Total customer assets under administration
Income by product group
Workplace
Planning and retirement
Bulk annuities
Protection
Longstanding LP&I
Life and pensions experience
General insurance
Wealth
Total income
1 Restated. See page 181.
2 Present value of new business premiums.
3 Gross written premiums.
4 Equivalent regulatory view of ratio (including With Profits funds) is 154 per cent at 31 December 2017 (31 December 2016: 154 per cent).
Excluding bulk annuities and 2016 with profits fund annuity transfer within planning and retirement, new business income remains stable, reflecting lower
margins as a result of the competitive environment and strengthening of underlying assumptions. Existing business income is flat with positive impact of
economics offset by legacy products run-off.
Experience and other items contributed a net benefit of £358 million (2016: £202 million), including benefits as a result of changes to longevity
assumptions. These include both experience in the annuity portfolio and the adoption of a new industry model reflecting an updated view of future
life expectancy.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
48 Lloyds Banking Group Annual Report and Accounts 2017
Divisional results continued
Run-off and Central Items
Run-off
Net interest income
Other income
Total income
Operating lease depreciation
Net income
Operating costs
Impairment release
Underlying loss
Loans and advances to customers
Total assets
Risk-weighted assets
2017
£m
(91)
42
(49)
(63)
(112)
(54)
41
(125)
2016
£m
(110)
120
10
(15)
(5)
(77)
26
(56)
At 31 Dec
2017
£bn
At 31 Dec
2016
£bn
8.1
9.1
7.3
9.6
11.3
8.5
Change
%
17
(65)
30
58
Change
%
(16)
(19)
(14)
The lower income and costs reflect further reductions in the run-off portfolios. The run-off portfolio largely comprises the Group’s Irish mortgage book
and a number of other corporate and specialist finance portfolios.
Central items
Total income
Costs
Impairment
Underlying profit
1 Restated. See page 181.
2017
£m
825
(34)
(4)
787
20161
£m
546
(33)
–
513
Central items includes income and expenditure not attributed to divisions, including the costs of certain central and head office functions and the Group’s
private equity business, Lloyds Development Capital.
Total income increased to £825 million (2016: £546 million) largely as a result of the gains on sales of liquid assets including gilts of £274 million
(2016: £112 million) and the gain of £146 million on the sale of the Group’s interest in Vocalink.
Lloyds Banking Group Annual Report and Accounts 2017 49
Other financial information
Banking net interest margin
The net interest margin is calculated by dividing underlying banking net interest income by average interest-earning banking assets.
Non-banking net interest income largely comprises subordinated debt costs incurred by the Insurance business. Non-banking assets largely comprise fee
based loans and advances within Commercial Banking and loans sold by Commercial Banking and Retail to Insurance and Wealth to back annuitant liabilities.
The table below shows the reconciliation between statutory net interest income and the underlying net interest income.
Group net interest income – statutory basis
Insurance gross up
Volatility and other items
Group net interest income – underlying basis
Non-banking net interest expense
Banking net interest income – underlying basis
Average interest-earning banking assets
Banking net interest margin
2017
£m
10,912
1,180
228
2016
£m
9,274
1,898
263
12,320
11,435
111
391
12,431
11,826
£434.9bn
£435.9bn
2.86%
2.71%
The table below shows the reconciliation between the statutory net interest income and the underlying net interest income.
Net loans and advances to customers1
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)
1 Excludes reverse repos of £16.8 billion (31 December 2016: £8.3 billion).
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
2017
£bn
455.7
3.2
(8.1)
(6.9)
(4.0)
Quarter
ended
30 Sept
2017
£bn
Quarter
ended
30 June
2017
£bn
Quarter
ended
31 Mar
2017
£bn
454.6
453.2
444.7
3.4
3.3
3.6
(7.4)
(6.8)
(4.7)
(7.4)
(6.8)
(4.2)
(8.5)
(6.6)
(3.4)
439.9
439.1
438.1
429.8
(0.7)
(0.8)
(7.1)
439.2
434.9
438.3
433.4
431.0
430.9
1.1
430.9
430.9
2017
£m
196
190
386
(100)
286
Quarter
ended
31 Dec
2016
£bn
449.7
3.7
(9.4)
(6.7)
(5.0)
432.3
1.7
434.0
435.9
2016
£m
(152)
241
89
(180)
(91)
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 Insurance and Wealth 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
50 Lloyds Banking Group Annual Report and Accounts 2017
Other financial information continued
Tangible net assets per share
The table below sets out a reconciliation of the Group’s shareholders’ equity to its tangible net assets.
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
Tangible net assets per share pre dividend1
1 Pre final 2016 and interim 2017 dividends.
2017
£m
2016
£m
43,551
43,020
(2,310)
(2,835)
(306)
254
(2,016)
(1,681)
(340)
170
38,354
39,153
71,944m
71,413m
53.3p
56.5p
54.8p
54.8p
Tangible net assets per share at 31 December 2016 was 54.8 pence, or 53.4 pence after adjusting for the acquisition of MBNA. The movement from
the adjusted 2016 tangible net assets per share to 53.3 pence at 31 December 2017 comprises an increase of 3.1 pence due to the strong financial
performance offset by a reduction of 3.2 pence for dividends paid during the year.
Return on tangible equity
The Group’s underlying return on tangible equity was 15.6 per cent (2016: 14.1 per cent) and statutory return on tangible equity was 8.9 per cent,
2.3 percentage points higher year-on-year as a result of higher underlying profit and lower volatility and other items.
Underlying return on tangible equity
Average shareholders’ equity (£bn)
Average intangible assets (£bn)
Average tangible equity (£bn)
Underlying profit after tax (£m)
Add back amortisation of intangible assets (post tax) (£m)
Less profit attributable to other equity holders (£m)
Less profit attributable to non-controlling interests (£m)
Adjusted underlying profit after tax (£m)
Underlying return on tangible equity
Statutory return on tangible equity
Group statutory profit after tax (£m)
Add back amortisation of intangible assets (post tax) (£m)
Add back amortisation of purchased intangible assets (post tax) (£m)
Less profit attributable to other equity holders (£m)
Less profit attributable to non-controlling interests (£m)
Adjusted statutory profit after tax (£m)
Statutory return on tangible equity
Number of employees (full-time equivalent)
Retail2
Commercial Banking
Insurance and Wealth
Group functions and services
Agency staff
Total number of employees
1 Restated. See page 181.
2 Includes 1,703 MBNA employees in 2017.
2017
2016
43.4
(4.6)
38.8
42.7
(3.8)
38.9
6,244
5,731
219
(313)
(90)
174
(321)
(101)
6,060
5,483
15.6%
14.1%
3,547
2,514
219
101
(313)
(90)
174
299
(321)
(101)
3,464
2,565
8.9%
6.6%
At 31 Dec
2017
32,760
6,735
6,445
23,786
69,726
(1,821)
67,905
At 31 Dec
20161
33,246
6,838
6,882
24,922
71,888
(1,455)
70,433
Lloyds Banking Group Annual Report and Accounts 2017 51
GOVERNANCE
A letter from our Chairman
Board of Directors
Group Executive Committee
Corporate governance report
Directors’ report
Directors’ remuneration report
Other remuneration disclosures
52
54
56
58
81
84
103
SUPPORTING
BRITAIN’S
SOCIAL
ENTREPRENEURS
In 2017 we helped a further 260 social
entrepreneurs through our School for
Social Entrepreneurs programme.
They include Nikki Markham of Battling On,
who trains armed forces veterans across
Cornwall to become mentors and
instructors for vulnerable young people
from disadvantaged backgrounds and
adults with disabilities. Battling On offers
nationally recognised vocational training,
numeracy and literacy support and work
experience on community projects. Nikki
was a finalist in the 2017 Social
Entrepreneur of the Year Awards.
Visit www.lloydsbankinggroup.com/
prosperplan
1,500social entrepreneurs helped to start-up and grow their social businesses since 2012
52 Lloyds Banking Group Annual Report and Accounts 2017
A letter from our Chairman
Building robust stakeholder relationships
Good governance is vitally important
as it underpins the delivery of our
strategy to help Britain prosper and
become the best bank for customers,
colleagues and shareholders.
Lord Blackwell
Chairman
Dear Shareholders
I am pleased to present our corporate
governance report for 2017. This report sets
out our approach to governance in practice,
how the Board works, how it has spent its
time during the year, how it has evaluated its
performance, and includes reports from each
of the Board’s Committees.
Good governance is vitally important as it
underpins the delivery of our strategy to help
Britain prosper and become the best bank for
customers, colleagues and shareholders. It is
essential to ensure good corporate governance
and the associated values are embedded into
the thinking and processes of the business, and
driven by the Board.
Board changes
The Nomination and Governance Committee
is responsible for reviewing the composition of
the Board and its Committees and assessing
whether the balance of skills, experience,
knowledge and independence is appropriate
to enable them to operate effectively.
It went through a rigorous process leading
to the appointment of Lord Lupton as a new
independent Non-Executive Director with
the additional role of chairing our new non
ring-fenced bank. Lord Lupton joined the
Board on 1 June 2017, bringing with him
extensive international corporate experience
(see page 55 for further details). Both Nick Luff
and Anthony Watson stepped down from the
Board in May 2017, having made significant
contributions to the Group. As a result of
the two retirements, our Deputy Chairman
Anita Frew was appointed as the new Senior
Independent Director, and Simon Henry
succeeded Nick Luff as the Audit Committee
Chairman. The names and biographies of
current Directors are set out on pages 54–55.
The roles and responsibilities of the Board
members are set out on page 68.
The Group’s strategic
transformation
On 16 May 2017, the Group returned to full
private ownership after the government sold
its remaining stake. The sale demonstrated
the successful delivery of the Group’s strategy
to transform itself into a simple, low risk, UK
focused retail and commercial bank. Since
the government first acquired shares in 2009,
the Group has repaired its balance sheet,
reduced its cost base, cut complexity and
international exposure, built and sold TSB, and
addressed legacy issues. The Group returned
to profitability in 2013 and resumed paying
dividends in 2014.
The sale marked the final step in the rescue
and rejuvenation of Lloyds Banking Group.
The combination of our strong financial
performance and the progress we have made
towards our strategic priorities has enabled
over £21.2 billion to be returned to the
government, more than repaying the amount
that taxpayers invested.
However, we are not complacent. While we
are proud of the progress we have made
over the last few years, we recognise we now
have an equally challenging task to transform
Lloyds Banking Group into a bank that can
deliver outstanding service for customers in
the future technology environment and play
our full role in helping Britain prosper. The
Board has spent considerable time over the
past two years working with the executive team
to understand the requirements to compete
successfully as the ‘Bank of the Future’, and
to translate that into the new strategic plan
announced with our results. The oversight of
this new transformation programme, including
the associated cultural changes that will be
required, will be a major focus of our ongoing
governance activities.
Non ring-fenced bank
One of the largest change initiatives for the
Group this year is the implementation of
the ring-fencing regulatory requirements
which come into effect on 1 January 2019.
The Group’s approach aims to minimise the
impact on both colleagues and customers
and for the vast majority there will be no
changes. There has been significant progress
during the year towards the establishment of
the new non ring-fenced bank, Lloyds Bank
Corporate Markets plc (‘LBCM’). The Board
has played an active role in identifying and
appointing members of the LBCM board, as
well as helping to establish the governance
framework to ensure that the framework is
both fit for purpose for the new bank and
complements that of the Group. An overview
by the Chairman of LBCM, Lord Lupton, of the
establishment and governance structures of
LBCM can be found on page 60.
Board effectiveness
The Board carried out an annual evaluation
of its effectiveness during the year. This
was an internal evaluation overseen by the
Nomination and Governance Committee.
The process which was undertaken and
the findings of the review are set out on
pages 66–67, together with information about
our progress against the 2016 review actions.
Diversity
Being able to attract, develop, fully utilise
and retain top talent is highly important to
us, ensuring everyone has the opportunity to
progress and realise their potential. For this
reason, the Group has made a commitment to
be a leader in diversity, removing the barriers
that stand in the way of equal opportunity.
Lloyds Banking Group Annual Report and Accounts 2017 53
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The Board sees it as an important objective
for its membership to reflect diversity in its
broadest sense. A mix of different backgrounds
and experience on the Board, as in the
executive team, is important in providing a
range of perspectives, insights and challenge
needed to support good decision making.
As a Group, we have committed to maintaining
at least three female Board members, and
recognise the Davies/Hampton-Alexander
target for FTSE companies to move towards
33 per cent female representation. We are
looking to take opportunities to increase the
number of female Board members over time
where that is consistent with other skills and
diversity requirements. The Group has also
made the public commitment to increase the
proportion of senior roles held by women to
40 per cent by 2020. For more information on
current levels of diversity and inclusion see
page 21.
In addition to this, the Group recognises the
importance of the diversity of colleagues,
reflecting the diversity of our customers, to
allow us to better understand customers’
needs and create deeper relationships.
The Group’s aim is to increase ethnic diversity
in our workforce and unlock the potential of
our ethnic minority colleagues. The Group has
publicly committed to increase the proportion
of senior roles held by Black, Asian and
Minority Ethnic colleagues to eight per cent
by 2020. This is being achieved through career
development programmes, a programme of
visible role models, and a focus on increasing
cultural awareness to help all colleagues
interact more effectively, regardless of ethnic
background. Our commitment to diversity is
led from the top, with Executive Committee
sponsorship of the initiatives. More information
on both diversity and the importance of
succession planning is provided on page 72.
Lord Blackwell
Chairman
Development of our
transformation strategy
In early 2016, following discussions with the Chairman
and Board, the Group Chief Executive initiated a
major exercise to explore the characteristics required
to succeed as the ’Bank of the Future’. Working
groups across the Group were engaged in looking
forward to the likely impact of changing technology,
customer needs and competition, and developing
scenarios for different economic backdrops.
The emerging analysis was debated at a two day
offsite session involving both the Board and Group
Executive Committee in June 2016, and led to the
conclusion that a major transformation would be
required in evolving our customer propositions,
re-engineering our core business processes to
incorporate new technology, changing our ways of
working and developing new skills and capabilities.
These conclusions were then developed into
a programme of change initiatives which were
discussed and reviewed in subsequent Board deep
dive sessions and, as a whole, in the joint Board and
Executive offsite meeting in June 2017.
Having agreed the key initiatives and the overall scale
and pace of the transformation, the Board reviewed
the more detailed plan and immediate priorities
in an extended session in November 2017, placing
particular emphasis on the effective management
of the programme and the mitigation of potential
execution risks. The final proposals were reviewed
again in January and confirmed with the 2018 budget
in February.
54 Lloyds Banking Group Annual Report and Accounts 2017
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.
1
2
3
4
NG Re RB
Ri
A
NG
Re RB Ri
A
NG Re
Ri
5
6
7
A
Ri
9
A
Ri
10
A
Ri
11
A
Ri
8
Re
RB
Ri
12
NG
Re RB Ri
13
A Member of Audit Committee
Re
Member of Remuneration
Committee
RB
Member of Responsible
Business Committee
NG
Member of Nomination and
Governance Committee
Ri Member of Board Risk
Committee Chairman
Committee
1. Lord Blackwell Chairman
Appointed: June 2012 (Board),
April 2014 (Chairman)
Skills and experience:
Experience across a range of sectors, including
banking, asset and investment management,
manufacturing and utilities
Statistical Society and has an MBA from the
Manchester Business School and a BSc from the
University of Birmingham.
Extensive experience as chairman in a range
of industries
External appointments: Chairman of
Urban&Civic plc and a Governor of Motability.
Deep financial services knowledge including in
insurance and banking
Strong board governance experience, including
investor relations and remuneration
4. Simon Henry Independent Director
Significant experience with strategic planning
and implementation
Regulatory and public policy experience gained from
senior positions in Downing Street, Regulators and a
wide range of industries
Credibility with key stakeholders
Strong leadership qualities
Lord Blackwell initially joined the Board as Chairman
of Scottish Widows Group. He was previously
Senior Independent Director and Chairman of the
UK Board for Standard Life and Director of Group
Development at NatWest Group. His past Board
roles have included Chairman of Interserve plc,
and Non-Executive Director of 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 and a member of the Governing
Body of the Royal Academy of Music.
2. Anita Frew Deputy Chairman and
Senior Independent Director
Appointed: December 2010 (Board),
May 2014 (Deputy Chairman), May 2017
(Senior Independent Director)
Skills and experience:
Significant board, financial and general
management experience
Anita 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. She has a BA (Hons)
in International Business from the University of
Strathclyde, a MRes in Humanities and Philosophy
from the University of London, an Honorary
DSc for contribution to industry and finance from
the University of Cranfield and an Honorary
Doctorate in Management and Finance from the
University of Aberdeen.
External appointments: Chairman of Croda
International Plc and a Non-Executive Director
of BHP Billiton.
3. Alan Dickinson Independent Director
Appointed: September 2014
Skills and experience:
Highly regarded retail and commercial banker
Strong strategic, risk and core banking experience
Regulatory and public policy experience
Alan has 37 years’ experience with the Royal Bank
of Scotland, most notably as Chief Executive of
RBS UK. More recently, Alan 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. He is a Fellow of
the Chartered Institute of Bankers and the Royal
Appointed: June 2014
Skills and experience:
Deep international experience in board level strategy
and execution
Extensive knowledge of financial markets,
treasury and risk management
Qualification as an Audit Committee Financial Expert
Strong board governance experience, including
investor relations and remuneration
Until recently Simon was Chief Financial Officer and
Executive Director of Royal Dutch Shell plc. He was
previously Chair of the European Round Table CFO
Taskforce and a Member of the Main Committee
of the 100 Group of UK FTSE CFOs. He has a BA
in Mathematics, an MA from the University of
Cambridge and is a fellow of the Chartered Institute
of Management Accountants (CIMA).
External appointments: Non-Executive Director
of Rio Tinto plc and Rio Tinto Limited, Independent
Director of PetroChina Company Limited, Member
of the Defence Board and Chair of the Defence
Audit Committee, UK Government, Member of the
Advisory Panel of CIMA and of the Advisory Board of
the Centre for European Reform.
Lloyds Banking Group Annual Report and Accounts 2017 55
5. Lord Lupton CBE Independent
Director and Chairman of Lloyds Bank
Corporate Markets plc
Appointed: June 2017
Skills and experience:
Extensive international corporate experience,
especially in financial markets
Strong board governance experience, including
investor relations and remuneration
Regulatory and public policy experience
Significant experience in strategic planning
and implementation
Lord Lupton was Deputy Chairman of Baring Brothers,
co-founded the London office of Greenhill & Co., and
was Chairman of Greenhill Europe until May 2017.
He was previously a Trustee of the British Museum,
Governor of Downe House School and a member of
the International Advisory Board of Global Leadership
Foundation. He became a Life Peer in October 2015
and is a former Treasurer of the Conservative Party. He
served on the House of Lords Select Committee on
Charities. He read Jurisprudence at Lincoln College,
Oxford and is a qualified solicitor.
External appointments: Senior Advisor to
Greenhill Europe and Chairman of the Trustees
of the Lovington Foundation.
6. Deborah McWhinney
Independent Director
Appointed: December 2015
Skills and experience:
Extensive executive background in managing
technology, operations and new digital
innovations across banking, payments and
institutional investment
International business and management experience
Experience in consumer analysis, marketing
and distribution
Deborah is Chair of the Board Risk Committee’s
IT Resilience and Cyber Sub-Committee. She is a
former Chief Executive Officer, Global Enterprise
Payments and President, Personal Banking and
Wealth Management at Citibank. Deborah 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.
7. Nick Prettejohn Independent Director
and Chairman of Scottish Widows Group
Appointed: June 2014
Skills and experience:
Deep financial services experience,
particularly in insurance
In-depth regulatory knowledge and experience
Governance experience and strong
leadership qualities
Significant experience in strategic planning
and implementation
Nick has served as Chief Executive of Lloyd’s of
London, Prudential UK and Europe and 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 and the Financial
Conduct Authority’s Financial Advice Working
Group. He was previously a Member of the BBC Trust
and Chairman of the Britten-Pears Foundation. Nick
has a First Class Degree in Philosophy, Politics and
Economics from Balliol College, University of Oxford.
External appointments: Chairman of the Royal
Northern College of Music and a member of the
Board of Opera Ventures.
8. Stuart Sinclair Independent Director
Appointed: January 2016
Skills and experience:
Extensive experience in retail banking, insurance
and consumer finance
Governance and regulatory experience
Significant experience in strategic planning
and implementation
Experience in consumer analysis, marketing
and distribution
Stuart is a former Non-Executive Director of TSB
Banking Group plc, TSB Bank plc, LV Group, Virgin
Direct and Vitality Health (formerly Prudential
Health). He was also a Senior Independent Director
of Swinton Group Limited. 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: Interim Chairman of
Provident Financial Plc with effect from 2 February
2018 (previously Senior Independent Director) and
Chair of their Risk Advisory Committee, Senior
Independent Director and Chair of Risk at QBE
Insurance (Europe) Limited.
9. Sara Weller CBE Independent Director
Appointed: February 2012
Skills and experience:
Background in retail and associated sectors,
including financial services
Strong board governance experience, including
investor relations and remuneration
Passionate advocate of customers, the community,
financial inclusion and the development of
digital skills
Considerable experience of boards at both executive
and non-executive level
Sara’s previous appointments include Managing
Director of Argos, various senior positions at
J Sainsbury including Deputy Managing Director,
Chairman of the Planning Inspectorate, 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 and a member of their
Nomination Committee, Lead Non-Executive
Director at the Department for Work and Pensions,
a Governing Council Member of Cambridge
University, Board member at the Higher Education
Funding Council and Trustee of Lloyds Bank
Foundation for England and Wales, with effect from
1 February 2018.
10. António Horta-Osório Executive Director
and Group Chief Executive
Appointed: January 2011 (Board), March 2011
(Group Chief Executive)
Skills and experience:
Extensive experience in, and understanding of, both
retail and commercial banking built over a period of
more than 30 years, working both internationally and
in the UK
Drive, enthusiasm and commitment to customers
Proven ability to build and lead strong
management teams
António previously worked for Citibank, Goldman
Sachs and held various senior management
positions at Grupo Santander before becoming
its Executive Vice President and member of the
Group’s Management Committee. 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. 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.
11. George Culmer Executive Director
and Chief Financial Officer
Appointed: May 2012 (Board)
Skills and experience:
Extensive operational and financial expertise
including strategic and financial planning and control
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.
12. Juan Colombás Executive Director
and Chief Operating Officer
Appointed: November 2013 (Board), January 2011-
September 2017 (Chief Risk Officer), September 2017
(Chief Operating Officer)
Skills and experience:
Significant banking and risk management experience
International business and management experience
Juan was appointed to the role of Chief Operating
Officer in September 2017 and is responsible for
leading a number of critical Group functions and
driving the transformation activities across the
Group in order to build the Bank of the Future. Prior
to this he served as the Group’s Chief Risk Officer
and was responsible for developing the Group’s
risk framework, recommending the Group’s risk
appetite and ensuring that all risks generated by the
business were 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, he held a number of senior
risk, control and business management roles across
the Corporate, Investment, Retail and Risk Divisions
of the Santander Group. Until September 2017 he
was the Vice Chairman of the International Financial
Risk Institute. 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: None.
13. 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 Corporate
Governance Council and the GC100. Malcolm is an
attendee of the Group Executive Committee.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 56 Lloyds Banking Group Annual Report and Accounts 2017
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, colleagues and shareholders.
Executive Director members
António Horta-Osório
Executive Director and
Group Chief Executive
António joined the Board as an
Executive Director in January 2011
and became Group Chief Executive
in March 2011. Read his full biography
on page 55.
George Culmer
Executive Director and
Chief Financial Officer
George joined the Board as an
Executive Director in May 2012.
Read his full biography on page 55.
Juan Colombás
Executive Director and
Chief Operating Officer
Juan joined the Group as Chief Risk
Officer in January 2011 and joined
the Board as an Executive Director in
November 2013. He became Chief
Operating Officer in September 2017.
Read his full biography on page 55.
Other members and attendees
1
5
9
2
6
10
3
7
11
4
8
12
Lloyds Banking Group Annual Report and Accounts 2017 57
9. Janet Pope
Chief of Staff and Group Director, Corporate
Affairs, Responsible Business and Inclusion
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 is Chairman of the Charities Aid
Foundation Bank and a Non-Executive Director of
the Banking Standards Board. Janet studied at the
London School of Economics. She has a Master’s
degree in Economics and holds an MBA from
Cass Business School. She is also the Group’s
Executive Sponsor for Inclusion and Diversity.
10. Stephen Shelley
Chief Risk Officer
Stephen was appointed Chief Risk Officer in
September 2017. He joined the Group in May 2011
as Chief Credit Officer for Wholesale, Commercial
and International. In October 2012 he became Risk
Director, Commercial Banking Risk and was also a
member of the Commercial Banking Management
Group. Prior to joining the Group Stephen was
Chief Risk Officer at Barclays Corporate and prior to
that was Chief Credit Officer for the UK Retail and
Corporate business in Barclays. In a 21-year career
at Barclays, Stephen undertook a variety of roles in
the front office and risk. He was also a member of
the Group Risk Executive team and a Chair of Group
Credit Committees. Stephen is also the Group’s
Executive Sponsor for Gender Diversity and Equality.
11. Jennifer Tippin
Group People and Productivity Director
(GEC attendee)
Jen was appointed as Group People and Productivity
Director in July 2017 and is responsible for leading
the people function and managing the Group’s cost
base. Prior to her current role, Jen held the roles of
Group Customer Services Director and Managing
Director, Retail Business Banking. Graduating from
Oxford University, Jen has enjoyed a career spanning
multiple industries, including banking, engineering
and the airline sector. Jen is a Non-Executive Director
(Designate) on the Board of Lloyds Bank Corporate
Markets and a Non-Executive Director of the Kent
Community NHS Foundation Trust.
12. Malcolm Wood
Company Secretary
(GEC attendee)
Malcolm joined the Group as Company Secretary in
November 2014. Read his full biography on page 55.
1. Kate Cheetham
Group General Counsel (GEC attendee)
5. Vim Maru
Group Director, Retail
Kate was appointed Group General Counsel in
January 2015. In this role she advises the Board and
Senior Executives on legal matters, leads the Group’s
legal team and oversees management of the Group’s
external legal suppliers. Kate joined the Group in
2005 from Linklaters, where she was a corporate
lawyer specialising in M&A transactions. Before her
current role, Kate held a number of senior positions
including Deputy Group General Counsel and
General Counsel for Group Legal. Kate is co-chair of
Breakthrough, LBG’s women’s network, a trustee of
the Lloyds Bank Foundation for England and Wales
and sponsor of ‘Legal in the Community’, the legal
function’s Responsible Business programme.
2. Karin Cook
Group Services Director
Karin is Group Services Director and is responsible
for Global Payments, Customer Services, Property,
Divestment and Development, the Chief Security
Office, Credit Operations and Sourcing. Having
worked in financial services for 27 years, prior to
joining the Group as COO Commercial Banking
in 2013, Karin led global operational, finance, and
technology functions at HSBC, Morgan Stanley and
Goldman Sachs. She is a Non-Executive Director of
Scottish Widows and the Group’s Executive Sponsor
for Sexual Orientation and Gender Identity. She was
named in the prestigious 2017 OUTstanding FT list
as one of the Top 50 Allies globally, and is proud that
the Group was also recognised as the 2017 Stonewall
employer of the year. Karin holds a degree in Modern
and Medieval Languages from Cambridge University.
3. Paul Day
Chief Internal Auditor (GEC attendee)
Paul joined the Group in June 2017 from Deloitte,
where he was a partner in the UK Financial Services
practice and led the UK Financial Services Internal
Audit business. Paul has specialised in internal and
external audit roles across financial services for
over 20 years, including holding various leadership
roles across Barclays Internal Audit. Paul studied
at Cambridge University, holds an MBA from
Manchester Business School and is a member of
the Institute of Chartered Accountants and the UK
Chartered Institute of Internal Auditors.
Vim was appointed Group Director, Retail in
September 2017. He joined the Group in June 2011
as Managing Director, Customer Products and was
appointed to the Group Executive Committee in
August 2013. Vim is also a UK Finance Board member,
leading on Retail Banking. 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.
6. Zaka Mian
Group Director, Transformation
Zak joined the Group in 1989 as a Business Analyst in
IT and has carried out multiple roles involving Retail
CIO, Head of IT Architecture and leading the Digital
Transformation programme. He was appointed
Group Director, Digital and Transformation in 2016
and his responsibilities increased in September
2017 as the Group Director, Transformation. He
is responsible for the digital transformation of
the Group, including all IT and business change,
and ensuring we are ready to meet the future
expectations of our customers. Zak has a
Computer Science degree from York University.
7. David Oldfield
Group Director, Commercial Banking
David was appointed as Group Director for the
Commercial Banking division in September 2017
responsible for supporting corporate clients from
SMEs through Mid Markets to Global Corporates
and Financial Institutions. David started his career
with Lloyds Bank 31 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 his current role
he was Group Director Retail and Consumer Finance,
responsible for the Lloyds, Halifax, Bank of Scotland,
Lex Autolease and Black Horse Brands including
the retail branch networks, customer products and
telephone banking, in addition to Retail Business
Banking and UK Wealth businesses. David is a Fellow
of the Chartered Institute of Bankers. He is also Group
Executive Sponsor for Disability.
4. Antonio Lorenzo
Chief Executive, Scottish Widows and Group
Director, Insurance and Wealth
8. Jakob Pfaudler
Group Director, Community Banking
(GEC attendee)
Jakob was appointed Group Director, Community
Banking in September 2017. From 2015 to 2017 he was
Chief Operating Officer for the Retail Bank and prior
to this he was Managing Director of Asset Finance.
Other previous roles include Chief Operating Officer
for Wealth & International, Managing Director
International Retail and International Banking and
Wholesale Banking Operations Director. Jakob
joined the Group in 2004 having spent six years
with McKinsey & Co, in their London office. Prior to
McKinsey, Jakob spent time with Goldman Sachs and
Oliver Wyman. He has a PhD in Theoretical Physics
from Oxford University.
Antonio joined the Group in 2011 as head of the
Wealth and International division and Group
Corporate Development, leading the Group’s
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. At the end of
2015 he was appointed Chief Executive, Scottish
Widows and Group Director, Insurance and during
2017 he also assumed responsibility for the Wealth
Division. 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-over of Alliance & Leicester and
Bradford & Bingley; and was Chief Financial Officer of
Santander UK. Before Santander, Antonio spent over
nine years at Arthur Andersen.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 58 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report
Our Board in 2017
Diversity, skills and composition
Gender diversity
Skills and experience
(Non-Executive Directors only)
Board tenure
Age
A.
Retail/Commercial Banking
6 out of 9
D. A.
C. A.
B.
Financial markets/wholesale banking/
corporate clients
Insurance
3 out of 9
A. Male: 9
B. Female: 3
Prudential and conduct risk in
financial institutions
Core technology operations
Government/regulatory
4 out of 9
8 out of 9
8 out of 9
8 out of 9
C.
A. 0-2 years: 3
B. 3-4 years: 4
C. 5-6 years: 4
D. 7-8 years: 1
B.
B.
A. 46-55: 3
B. 56-65: 8
C. 66-75: 1
Consumer/marketing/distribution
7 out of 9
Strategic thinking
9 out of 9
Data as at 31 December 2017.
Board and Committee composition and attendance in 2017
Board member
Board meetings
Nomination and
Governance Committee
Audit
Committee
Board Risk
Committee
Remuneration
Committee
Responsible
Business Committee
Lord Blackwell (C)
António Horta-Osório
Juan Colombás
George Culmer
Alan Dickinson
Anita Frew
Simon Henry
Lord Lupton 1
Nick Luff 2
Deborah McWhinney
Nick Prettejohn
Stuart Sinclair
Anthony Watson 2
Sara Weller
10/10
10/10
10/10
10/10
10/10
10/10
10/10
5/5
4/5
9/10
8/10
10/10
5/5
10/10
8/8 C
–
–
–
8/8
8/8
–
–
4/4
–
–
–
3/4
4/4 5
–
–
–
–
8/8
8/8
8/8 C 3
4/4
4/4 C 3
8/8
7/8
–
3/4
–
8/8
–
–
–
8/8 C
8/8
8/8
4/4
3/4
8/8
8/8
8/8
4/4
8/8
7/7
–
–
–
7/7
7/7 C
–
–
–
–
–
7/7
4/4
7/7
5/5
–
–
–
–
3/5
–
–
–
–
–
4/4 4
–
5/5 C
1 Lord Lupton joined the Board and respective Committees on 1 June 2017.
2 Nick Luff and Anthony Watson retired from the Company on 10 May and 11 May respectively.
3 Simon Henry succeeded Nick Luff as Audit Committee Chairman with effect from 1 May 2017.
4 Stuart Sinclair was appointed to the Responsible Business Committee with effect from 1 April 2017.
5 Sara Weller joined the Nomination and Governance Committee on 11 May 2017.
C Chairman
Lloyds Banking Group Annual Report and Accounts 2017 59
Key focus areas
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.
Below are details of the main topics discussed by the Board during the year.
Discussions and decisions
Regular
updates
Group performance report
Finance report, including budgets, forecasts
and capital position
Governance
and
stakeholders
Risk report
Customer performance dashboard
Chairman’s report
Reports from Committee Chairmen
Financial
2017 budget
Dividend approval
5 year operating plan
Draft results and presentations to analysts
Funding and liquidity plans
Regulatory
Capital plan
Basel Pillar 3 disclosures
Annual Report and Form 20-F
Board effectiveness and Chairman’s
performance reviews
AGM documentation approval and subsequent
voting results briefing
Review and approval of the Corporate
Governance Framework
Review and approval of various Group policies
including the Code of Responsibilities, Signing
Authorities, Group Statement on Modern Slavery,
and Board and GEC Members’ Dealing Policy
Investor relations updates
Committee and meeting simplification review
Ring-fencing progress updates
Whistleblowing updates
Regulatory updates
Senior Manager and Certification Regime
FCA strategic review of retail banking
business models
Strategy
Two strategy away days to review progress in
implementing the Group’s strategy (see
page 13 for further details)
‘Deep Dives’ on various elements of market
development and business strategy (see below)
MBNA integration
Consideration and approval of large transactions
Cloud strategy, which supports the
transformation of the Group’s IT architecture
Risk
management
Approval of Group risk appetite
Review of Group non-traded market risk plan
Cyber security briefings
Review of conduct risk
Review and approval of PRA and EBA stress
testing results
Review and approval of the Risk
Management Framework
Culture and
values
Helping Britain Prosper Plan
Conduct, culture and values – Culture Dashboard
Responsible business report
‘Deep dive’ sessions
The Board regularly takes the opportunity to hold ‘deep dive’ sessions
with senior management outside formal Board meetings. The purpose
of the sessions is to provide the Board with deeper insight into key
areas of strategic focus, whilst providing Directors with a greater
understanding and appreciation for the subject matter to help drive
better quality of debate and enhance knowledge. The sessions are
structured to allow plenty of opportunity for discussion and include
presentations and videos.
In 2017 ‘deep dive’ sessions were held on the following topics:
IT architecture strategy
Customer journeys
Interest only mortgages
Consumer credit
Open banking
IFRS9 implementation
Cloud strategy
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results
60 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Governance in action
Overseeing strategy
development
The Board held two strategy offsite meetings
during the year, giving the Directors the
opportunity to focus solely on strategic
issues. The first of these was held in June, and
concentrated on the priorities of the business
and the four strategic pillars which will help
the Group progress towards the ‘Bank of the
Future’. During the second half of the year,
the priorities agreed at the first meeting were
developed and the second meeting held in
November provided an opportunity to discuss
these further, along with financial plans.
António Horta-Osório reflected on the
offsite meetings:
The Board offsite meetings are especially
important in providing an opportunity to
focus on strategic issues, taking a view of
the longer-term outlook for the Group.
In June we debated the priorities of the
business and the four strategic pillars which will
help the Group progress towards the ‘Bank of
the Future’. It was extremely helpful to gain the
input of our Board members, leveraging the
broad range of experience and perspectives
the Board has, resulting in a set of clear
strategic priorities we will focus on.
In November the Board debated the detailed
strategic priorities, associated delivery plans
and financial projections. The collective
experience and expertise of the Board was
brought to life in challenging and scrutinising
our plans ensuring we can further transform
the Group and deliver sustainable value
to our stakeholders over the course of the
plan. The Board’s focus on continuing to put
the customer at the heart of everything we
do, whilst recognising the increasing and
critical role of technology, aligned well with
the team’s proposals and reinforced our aim
to become the best bank for customers,
colleagues and shareholders.
Integrating MBNA
In the immediate period following the Group’s
announcement of its milestone acquisition of
MBNA in December 2016, work commenced
to achieve regulatory approval from both
the Competition & Markets Authority
(CMA) and the Financial Conduct Authority
(FCA), and also to prepare for the first day
of legal ownership, known as ‘Completion’.
Unconditional CMA approval was achieved on
5 May 2017 and FCA approval of the Group’s
Change in Control application was received on
19 May 2017.
In readiness for Completion on 1 June 2017,
many activities were completed to support
a smooth transition of ownership from Bank
of America, such as a review of some 470 IT
applications to ensure services could continue,
critical policy changes in MBNA to align to the
Group and the introduction of a management
structure and governance approach which was
aligned to the Group’s organisational design
and risk management framework.
The ‘Legal Day 1’ Event completed seamlessly
on 1 June 2017 with no operational issues.
Since then, we have completed a detailed
operating model review to identify how best
we integrate the MBNA and existing Lloyds
Banking Group Cards businesses to ensure
we preserve and enhance areas of value
creation and opportunities to improve the
customer experience for all of our 8 million
credit card customers.
The integration programme has moved
into the delivery phase and has developed
plans with Bank of America to complete the
customer, systems and process integration
by early 2019.
There is a rigorous governance process to
oversee design decision and integration
execution, which ensures appropriate
and timely updates and escalations up to
Board level.
Lloyds Bank Corporate
Markets
On 1 June, 2017, I was appointed a
Non-Executive Director of Lloyds Banking
Group and also as Chairman designate of
the newly created ‘non ring-fenced bank
subsidiary’, which is called Lloyds Bank
Corporate Markets plc (‘LBCM’), subject to
regulatory consent. Since then, we have been
engaged in a complex, intense and detailed
programme to meet all the conditions which
the PRA and FCA have set in order to enable
them to give us full authorisation to conduct
the non ring-fenced activities of the Group,
which are required as part of the ring-fencing
regulations for UK banks.
Our first, and surely the most important
task, was to appoint a Board and senior
management team to LBCM. The Board
comprises eight Directors, three of whom
are independent Non-Executive Directors
recruited from outside the Group and all of
whom have wide experience of banking, two
Directors Designate (Group executives serving
in a non-executive capacity and subject to
regulatory approval), the Chief Executive, Chief
Financial Officer, and myself as Chairman.
This composition supports LBCM’s legal and
regulatory requirements for independent
decision making within the overall framework
of Group policies and controls. At the
same time we have made good progress in
appointing the rest of the senior management
team of LBCM, such as the Chief Risk Officer,
Chief Operating Officer, Chief Internal
Auditor and Treasurer from both within
and outside the Group. The bank received
authorisation from the PRA and FCA in July
2017, subject to conditions. Our current plans
are to operationalise the bank, and receive
full authorisation for it to commence trading
during 2018, leaving us good time to complete
the process before the ring-fencing regulations
come into force on 1 January 2019.
Since receiving the bank’s conditional
authorisation in July 2017, the Board has
concentrated on creating a bespoke
Governance Framework, including the vital
Risk Management Framework, which is fit for
purpose for LBCM, but also which is consistent
and fits within the Group Governance
Framework. In essence, LBCM must comply
with each and every governance and risk
requirement of the Group, but has the right
and duty to manage the non ring-fenced bank
within any narrower parameters set by the
LBCM Board.
Lord Lupton
Chairman
Lloyds Bank Corporate Markets
Lloyds Banking Group Annual Report and Accounts 2017 61
Lord Lupton’s induction
Induction pack prepared
and sent to Lord Lupton
prior to and on appointment
This contained key corporate
documents, such as:
Role of Director
Group policies such as anti-
bribery, expenses, gifts and
hospitality, and share dealing
The role of a director and
statutory duties, including
Companies Act liabilities,
Listing Rules, Disclosure
Guidance and Transparency
Rules and SEC Rules
Directors’ and officers’
liability insurance
Board and its Committees
Directors’, Executive
Management and Company
Secretary biographies and
contact details
Schedule of Board Committee
membership
Schedule of Board and
Committee meetings and
Board calendar
Meetings were held during May
and June with all the GEC to
discuss aspects such as:
Customer products
and marketing
Insurance risk
Retail and consumer credit risk
People, Legal and Strategy
Retail and Consumer Finance
Meetings with senior
management
Ongoing programme of
meetings, deep dives
and training sessions
developed in respect of
the non ring-fenced bank,
including:
Commercial Banking
Risk
Markets
Establishing the Board and
governance procedures
Last Board effectiveness review
Risk management
Minutes of the last 12 months’
Board meetings
Last three Board packs
Risk profile, appetite, risk
management and internal
control procedures
Financial and strategic
Latest Annual Report
Corporate history, with a
summary of significant events
Group management structure
chart and business unit details
Key performance indicators,
including KPIs on which
incentive plans are measured
Latest Strategic plan
Guide to ring-fencing
Governance
Corporate Governance
Framework
Articles of Association
Digital and transformation
Group operations
Commercial Banking
Corporate affairs
Treasury
Scottish Widows and the
Insurance Board
Financials (including
meeting the internal and
external auditors)
Regulators
Capital management
and liquidity
Culture
Shareholders
Shareholder analysis/analyst
reports
Voting and shareholder
feedback from the last AGM
Notices of any general
meetings held in the last
three years
General
Recent press cuttings, reports
and articles concerning
the Company
Glossary of Company-specific
jargon/acronyms
Training aspects
The use of the electronic
board portal
The Senior Managers and
Certification Regime
Meetings were also held
specifically to deal with
regulatory aspects, including:
Ring-fencing
Corporate governance and the
Companies Act
Whistleblowing
Wholesale Banking conduct
risk and remuneration rules
Site visits to the New York,
Jersey and Singapore offices
Branch visits to Jersey
Floor walks and informal
engagement with colleagues
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 62 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Engaging with our stakeholders
Shareholders
Customers
Colleagues
The Group’s aim is to become the best bank
for customers, colleagues and shareholders.
As part of this, the Board constantly
reviews the strategy, receives updates on
implementation and reviews progress as
part of the governance process.
One of the deep dives held by the Board
during the year focused on the Customer
Journey. This provided the Board with
an update on the progress made on the
Customer Journey transformation and
gave the Board the opportunity to enhance
their understanding and to consider and
feedback on future plans.
Further to the launch of mobile branches
which serve local communities, an example
was displayed at the 2017 AGM. More
information regarding mobile branches can
be found on page 23.
The Board receives regular updates and
reports detailing the findings of the ongoing
customer surveys and feedback programme.
Members of the Board have visited branches
in various locations including Nottingham,
Liverpool and Jersey during the year to help
build understanding of the business and
meet with colleagues.
The Group intranet is used by the Directors
to communicate with colleagues. During the
year, this has included:
– podcasts and videos detailing full year
and half year results and details of the
transformation within the Group and
future plans;
– Q&A sessions with the Group Chief
Executive, where selected colleagues were
given the opportunity to put questions
directly to him; and
– annual end of year message to all
colleagues from the Chairman.
Colleague feedback sessions are arranged
on a regular basis where colleagues join the
Chairman for informal discussion over lunch
or dinner. These took place during the year
in various locations, including Dunfermline,
London, Bristol, Liverpool and Jersey.
The Chairman hosts regular colleague
breakfast meetings which are also attended
by Non-Executive Directors.
Helping Britain Prosper LIVE event was
attended by 4,000 colleagues at the ExCel
centre in London in March. This event
provided everyone with more details about
the future of the Group and the opportunity
to see first-hand how we are helping Britain
prosper every day. Speeches were given
by the Group Chief Executive and Chief
Financial Officer, which were broadcast live.
The Chairman of the Remuneration
Committee held a meeting during the year
with the unions.
Members of the Board have visited several
Group offices and service centres during the
year including Chester, Reading, Swindon
and Edinburgh.
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 800 meetings
and various presentations in 2017. 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.
The Company Secretary has a team
dedicated to engaging 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 provide 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 2018 AGM, can be
found on pages 263–264.
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.
– over 200 shareholders represented
– over 65 per cent of total voting rights voted
– all resolutions voted on by way of a poll.
The Board receives regular investor
feedback and engages with shareholders,
this includes:
– meetings between the Chairman, Senior
Independent Director and Chairman
of the Remuneration Committee and
institutional shareholders;
– regular communications from the
Group Chief Executive including
correspondence with both retail and
institutional shareholders;
– investor meetings, roadshows and the AGM.
Lloyds Banking Group Annual Report and Accounts 2017 63
Lord Blackwell visits
Liverpool
In July Lord Blackwell visited Liverpool,
splitting his time between meeting
colleagues and charities supported by the
England and Wales Foundation.
Colleagues took the opportunity to present
details of how they are implementing
strategic priorities; an update on the
apprenticeship training programme;
how fraud is managed; and the impact
on customers. Lord Blackwell also met
representatives from the local PPI team, who
discussed the end-to-end PPI complaint
handling process, focusing on the key parts
undertaken in Speke and Chester.
A networking lunch was held, with Lord
Blackwell presenting a keynote speech to
50 colleagues. This was followed by a Q&A
session at the Group’s Speke office, after
which he visited the Rotunda charity, an
accredited training centre and community
hub. The England and Wales Foundation
has been supporting the charity since
2011. In 2017, Rotunda was awarded a
further grant to support a pilot project
which aims to demonstrate how a local
community organisation can produce
better services and outcomes for those
with offender records and who are long
term unemployed.
As part of our Helping Britain
Prosper Plan, we have committed to
supporting the communities in which
we serve and it is a matter of great
personal pride that the Lloyds Bank
Foundation is able to support this
worthy cause.
Lord Blackwell
Chairman
Regulators and
government
Members of the Board regularly meet
with various organisations and institutions,
including the Bank of England, the FCA,
the PRA, CBI and accounting bodies.
Members of the Board also participate in
the Bank Governance Leadership Network,
which addresses key issues facing global
banks and provides opportunities for
discussions between leading global banks,
and other stakeholders across a range of
activities throughout the year. Core themes
include regulation and supervision of banks
risk governance and oversight, the future of
the banking industry, rebuilding trust and
culture and changing business models and
strategic challenges.
Representatives of the regulator (both PRA
and FCA) observed Board and Committee
meetings in 2017.
Communities
Members of the Board met with some of the
organisations which are beneficiaries of the
Group’s independent charitable Lloyds Bank
Foundation for England and Wales and Bank
of Scotland Foundation.
The Chairman also attended Lloyds Bank
Foundation for England and Wales
Westminster Parliamentary Reception
in November, where more than
100 representatives of small and local
charities were joined by MPs, government
ministers and representatives from the
Group. The reception highlighted the
work of small and local charities tackling
disadvantage across England.
The Board engages with the work of the
Foundations through the Responsible
Business Committee. See page 80 for
more information.
Almost 260,000 hours of volunteering by
colleagues were delivered in 2017, of which
44 per cent were skills-based volunteering.
More than 5,000 colleagues took part in
volunteering over the period of a week in the
Group’s Give & Gain volunteering campaign.
Whistleblowing
We encourage colleagues to speak up if they suspect wrongdoing or witness behaviours
that do not meet the standards set out in our Codes of Responsibility or Group policies
and procedures. This whistleblowing service is known internally as ‘Speak Up’ and it gives
colleagues a way to raise concerns confidentially and without fear of reprisal.
The Group has an established Speak Up Champion (Anita Frew, Deputy Chairman and Senior
Independent Director), a dedicated team to handle disclosures (the Colleague Conduct
Management Team (CCMT)) and a third party supplier (Expolink) which colleagues can contact
anonymously. There is a clear Speak Up Policy that sets out its commitment to listening to
colleague concerns and protecting those who raise concerns from any detriment. The Policy
provides information on how concerns can be raised and to whom. It also confirms that the
Group has zero tolerance of retaliation and provides assurance around confidentiality and
anonymity where required.
Whistleblowing continues to be a topic of public and regulatory concern; it is essential that
colleagues feel confident reporting wrongdoing and are able to trust the process. A healthy
culture encourages asking questions, raising concerns and admitting mistakes. This type of
culture influences employee actions, decision-making and behaviour. In the reporting period,
Speak Up has been embedded into Group culture through communication and awareness
campaigns, training to all colleagues and the leadership team regularly considering speak up
arrangements as part of its annual review of the system of internal control.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 64 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
How our Board works
Meetings, activities and processes
Board meetings
Start of the year
Agenda set
Papers compiled
and distributed
A yearly planner is prepared by the Company Secretary to map out the flow of key items of business to
the Board.
Board venues are agreed and colleagues in the areas that the Board will visit are engaged at both senior
management and operational level.
The Chairman holds monthly meetings to review the draft agenda and planner with the Company
Secretary and Chief of Staff, as well as quarterly meetings with a wider group of central functions, to
identify emerging issues.
The draft Board agenda is 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,
regulatory initiatives and the quarterly Board topic review meetings.
Templates and guidelines are included within targeted training for authors of papers to ensure
consistency and high quality of information.
Meeting packs are uploaded and communicated to all Directors via a secure electronic board portal
typically a week in advance of the meeting to ensure sufficient time to review the matters which are to
be discussed and seek clarification or any additional information.
Before the meeting
Executive meetings are held ahead of all Board and Committee meetings to ensure all matters being
presented to the Board have been through a thorough discussion and escalation process.
Board meeting
Committee meetings are held prior to Board meetings, with the Chairman of each Committee then
reporting matters discussed to the Board.
Non-Executive discussions and informal dinners are held prior to most Board meetings, some of which
also include the Group Chief Executive.
Board meetings have certain standing items, such as a report from the Group Chief Executive and
Chief Financial Officer on Group performance, reports from Committee Chairmen and updates from
GEC members.
Topics for deep dives or additional items are discussed when required and include business, governance
and regulatory updates.
The Board makes full use of technology such as video conferencing, teleconferencing, a Board portal
and tablets/devices in its meeting arrangements. This leads to greater flexibility, security and efficiency
in Board paper distribution and meeting arrangements.
After the meeting
The Board meetings offer the Board the chance to meet colleagues within the business, and if any
additional meetings are required to provide more details, these are arranged.
Minutes and matters arising from the meeting are produced and circulated to the Directors for review
and feedback.
Those responsible for matters arising are asked to provide updates to the next meeting by way of an
update paper.
Beyond Board meetings
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 and engagement
each year, as set out on page 62–63.
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. These informal meetings allow
Directors greater time to discuss business in an informal setting,
ensuring that there is sufficient time for the Board to discuss matters
of a material nature at Board meetings.
Where further training or awareness is identified, such as new
technology, regulations or sector advances, deep dives are held with the
relevant field expert to provide overviews, chances to raise questions,
and debate the impacts on business in an informal setting.
In April, the Board held a joint discussion with the Board of Scottish
Widows Group Limited allowing in-depth focus on insurance matters.
The Executive Directors make decisions within clearly defined
parameters which are documented within the Corporate Governance
Framework, although where appropriate, any activities outside the
ordinary course of business are brought to the full Board for their
consideration, even if the matters fall within the agreed parameters. The
Corporate Governance Framework helps to ensure that decisions are
made by the management with the correct authority.
Lloyds Banking Group Annual Report and Accounts 2017 65
The right processes in place to deliver
on our strategy
During the year, there were 10 scheduled Board meetings, with details
of attendance shown on page 58. In addition to formal meetings, the
Board meets as necessary to consider matters of a time-sensitive nature.
The Chairman and the Chairmen of each Committee ensure Board
and Committee meetings are structured to facilitate open discussion,
debate and challenge. Through their opening remarks, the Chairmen set
the focus of each meeting.
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 issues.
The management of all Committees is in keeping with the basis on which
meetings of the Board are managed. Each of the Committee’s structures
facilitates open discussion and debate, with steps taken to ensure
adequate time for members of the Committees to consider proposals
which are put forward.
In the rare event of a Director being unable to attend a meeting, the
Chairmen of the respective meetings discusses the matters proposed
with the Director concerned, seeking their support and feedback
accordingly. The Chairman subsequently represents those views at
the meeting.
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 to ensure that 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.
Details of the meeting process are provided on page 64.
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 designated area on the Board portal.
A full schedule of matters reserved for the Board and Terms of
Reference for each of the Committees can be found at
www.lloydsbankinggroup.com
IT Resilience and cyber security
At the Board meeting in May 2017, the Board took part in an
advanced scenario testing exercise to simulate real life cyber-attack
scenarios. The purpose of this was to enhance the Board’s
understanding of the processes and controls in place, and to
rehearse the actions required from the Board at the different stages
of an incident if such an event should occur in reality.
IT resilience and the dynamic threat posed by cyber risk are
recognised as key risks and are a central area of focus for the Board
Risk Committee.
Important and/or material issues continue to be brought to the full
Board Risk Committee for information, consideration and discussion
as appropriate.
During the year, the sub-committee of the Board Risk Committee
dedicated to IT resilience and cyber security considered a wide
range of issues including:
cyber and IT controls;
technology resilience;
cyber security; and
roles and responsibilities of the Chief Security Officer.
See page 78 for more information.
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
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 66 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Assessing our effectiveness
How the Board performs and is evaluated
The Board is in the third year of its three year evaluation cycle. An
external evaluation was conducted in 2015, facilitated by JCA Group1,
with an internal evaluation having been carried out in 2016 and this
year. The annual evaluation is facilitated externally at least once every
three years and an externally facilitated evaluation will be conducted in
2018. 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. Performance evaluation of the Chairman is carried out by the
Non-Executive Directors, led by the Senior Independent Director, taking
into account the views of the Executive Directors.
2017 evaluation of the Board’s performance
The 2017 evaluation was conducted internally between October 2017
and December 2017 by the Company Secretary, and was overseen by
the Nomination and Governance Committee.
The 2017 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.
Highlights from the 2017 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.
Having been Board members for more than six years, a particularly
rigorous review of Anita Frew’s and Sara Weller’s independence was
undertaken. The Nomination and Governance Committee concluded
they were both still sufficiently independent.
Many Directors commented favourably on the performance of the
Board as a whole, describing it as hardworking, conscientious, expert,
questioning and highly engaged. Highlights mentioned by several
Directors were the continued value of deep dives, the offsite strategy
session (described by one Director as a ‘model of open discussion’);
the openness of Executives to interacting with the Board members
and sharing issues, the discussion on executive succession; the process
for keeping the Board aware of important issues which arise between
meetings; the further development of Group Internal Audit; the
usefulness of the Risk Sub-Committees and the Cyber Security Advisory
Panel and the Non-Executive Director only discussions. Directors also
spoke highly of the work done by the Chairman and the Chairmen of the
Committees in structuring agendas and ensuring that business is covered
at the meetings.
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 2017 and up to the date of this report.
The actions from the 2016 Board Effectiveness Review have been
recognised by Directors as helpful, particularly, the requirement that
‘links to strategy’ are identified in Board papers. Many think that more
needs to be done to make Board papers more concise and focused
and that less meeting time should be used for presentations.
Internal evaluation process
OCTOBER 2017
Questionnaires issued to all Directors by the Company Secretary
for completion.
OCTOBER – DECEMBER 2017
Individual meetings held between each Director and the Company
Secretary to discuss responses and opportunity for Directors to
raise any other matters concerning the Board or its Committees.
DECEMBER 2017 – JANUARY 2018
Report prepared by the Company Secretary based on the
questionnaire results and matters raised in individual meetings.
JANUARY 2018
Draft report discussed by the Company Secretary with
the Chairman.
Final report discussed at a meeting of the Board. The Board
discussion was subsequently considered by the Nomination and
Governance Committee.
APRIL 2018
Actions to be recommended to the Board by the Nomination and
Governance Committee to reflect the Board discussion in January.
Subsequently the Board will consider the recommendations and
agree an action plan.
JULY 2018
Update to be provided to both the Nomination and Governance
Committee and the Board detailing progress against the
agreed actions.
Points raised in the
2017 Board effectiveness review
The review identified a number of areas for improvement in the
Board’s effectiveness.
Board papers and presentations to the Board
The most common observation by Directors concerned the volume and
content of information contained within Board papers, which was also
linked to observations in favour of reducing the amount of time spent
on presentations in Board meetings. Directors would like to receive
more concise reports, highlighting important points and avoiding
unnecessary volume and repetition, along with having fewer and
shorter presentations.
Stakeholder feedback
Directors believe that they receive good information on regulatory
and customer feedback. Several Directors would like to receive
more feedback from stakeholders other than regulators and
customers, including shareholders and bond holders. The views of
shareholders on remuneration matters are well represented at the
Remuneration Committee.
Responsible Business Committee Terms of Reference
A number of Directors suggested that the Terms of Reference of the
Responsible Business Committee be reconsidered, now that it has been
in operation for a full year, in order to avoid duplication of effort in areas
covered by other Committees.
Non-Executive Director recruitment
While there was general agreement that the balance of skills within
the Board was good, a number of Directors asked that the following
experience be borne in mind for future recruitment of Directors (to
supplement the experience of the current Directors in these areas):
major change management; finance; accounting and data.
Some Directors mentioned the importance of maintaining, and
enhancing, gender diversity in the Board.
1 Aside from assisting with senior recruitment, benchmarking and succession planning, JCA Group has no other connection to the Company.
Lloyds Banking Group Annual Report and Accounts 2017 67
Progress against the 2016 internal Board effectiveness review
During the year, work focused particularly on the quality and quantity of papers and to the linkage of agenda items to the ‘Bank of the Future’
strategy. A summary of the Board’s progress against the actions arising from the 2016 effectiveness review are set out below.
Recommendations from the 2016 evaluation
Actions taken in 2017
Links to
strategy
More frequent linkage to strategy in the
regular business of the Board.
Two in-depth strategy away days held during the year;
The programme of regular deep dives and discussion topics
established in 2016 continues;
All papers submitted to Board meetings include clear links
to strategy.
Executive summaries have been shortened and a brief section on
debate and challenge has been included;
Revised Board template and clear guidance in place in respect
of both papers submitted to meetings and presentations given
during meetings.
Request from Directors to receive more
concise reports with clearer signposting of
the key issues.
Volume
of Board/
Committee
papers
Conduct
of Board/
Committees
Review and continue to evolve the quality and
content of Board papers to ensure effective
use of meetings and improve discussions.
Continued progress on focusing material and presentations on key
issues for the Board.
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 107–156. 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 approve the CER findings which are reviewed and
independently challenged by the Risk Division and Group Internal 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 Internal 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.
Continuous improvement
The Group’s 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
Conduct. The 2017 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.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 68 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Complying with the UK Corporate Governance
Code 2016
The UK Corporate Governance Code 2016 (the ‘Code’) applied to the 2017 financial year. The Group confirms that it applied the main principles and
complied with all the provisions of the Code throughout the year. The Code is publicly available at www.frc.org.uk.
The statement by the Chairman of the Remuneration Committee and the Annual report on remuneration are set out on pages 84 and 88.
The Group has adopted the UK Finance Code for Financial Reporting Disclosure and its 2017 financial statements have been prepared in compliance
with its principles.
A. Leadership
A1. The Board’s Role The Group is led by an effective, committed unitary Board, which is collectively responsible for the long-term success of the
Company. The Group’s 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. Further details can be found online at www.lloydsbankinggroup.com and on page 64.
Chairman
Lord Blackwell
Executive Directors
Group Chief Executive
António Horta-Osório
Chief Financial Officer
George Culmer
Chief Operating Officer
Juan Colombás
Non-Executive Directors
Deputy Chairman and
Senior Independent
Director
Anita Frew
Alan Dickinson
Simon Henry
Nick Luff 1
Lord Lupton2
Deborah McWhinney
Nick Prettejohn
Stuart Sinclair
Anthony Watson1
Sara Weller
Company Secretary
Malcolm Wood
Independent Responsibilities
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.
António Horta-Osório manages and leads 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 other members of the Group Executive Committee. 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.
Under the leadership of the Group Chief Executive, George Culmer and Juan Colombás make and implement decisions
in all matters affecting operations, performance and strategy. They provide specialist knowledge and experience to
the Board. Together with António Horta-Osório, George Culmer and Juan Colombás design, develop and implement
strategic plans and deal with day-to-day operations of the Group. During the year Juan Colombás was appointed to the
role of Chief Operating Officer in September 2017. Prior to this he served as the Group’s Chief Risk Officer.
As Deputy Chairman, Anita Frew would ensure 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.
As Senior Independent Director, Anita Frew is also a sounding board for the Chairman and Chief Executive. She acts as a
conduit for the views of other Non-Executive Directors and conducts the Chairman’s annual performance appraisal. She
is available to help resolve shareholders’ concerns and attend meetings with major shareholders and financial analysts to
understand issues and concerns.
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.
The Company Secretary advises the Board on matters such as governance 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.
1 Nick Luff and Anthony Watson resigned from the board with effect from 10 May and 11 May 2017, respectively.
2 Lord Lupton joined the Board with effect from 1 June 2017.
Lloyds Banking Group Annual Report and Accounts 2017 69
A2. Division of responsibilities There is clear division of responsibility
at the head of the Company, which is documented in the Group’s
Corporate Governance Framework.
A3. Role of the Chairman The Chairman has overall responsibility for
the leadership of the Board and for ensuring its effectiveness.
Lord Blackwell was independent on appointment.
A4. Role of the Non-Executive Directors The Board has a Senior
Independent Director (‘SID’), Anita Frew, who acts as a sounding board
to the Chairman and Group Chief Executive. She can be contacted by
shareholders and other Directors as required. Anthony Watson served
as SID until 11 May 2017.
The Non-Executive Directors challenge constructively and help develop
and set the Group’s strategy.
Meetings are held between the Non-Executive Directors in the absence
of the Executive Directors, and at least once a year in the absence of
the Chairman.
Further information on meeting arrangements and the responsibilities
of the Directors are given on pages 64–65 and 68 respectively.
B. Effectiveness
B1. The Board’s composition The balance of skills, experience,
independence, and knowledge on the Board is the responsibility of the
Nomination and Governance Committee, and is reviewed annually, or
whenever appointments are considered.
The majority of the Board are independent Non-Executive Directors as
shown on page 68.
B2. Board appointments The process for Board appointments is led
by the Nomination and Governance Committee, which then makes a
recommendation to the Board.
More details about succession planning can be found on page 72.
More information about the work of the Nomination and Governance
Committee can be found on pages 70–72.
B3. Time commitments The time commitments of the Directors are
considered by the Board on appointment and annually.
The Chairman considers any new external appointments which may
impact existing 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 SID, this increases to a minimum of 45 to 50 days. In
reality, the time devoted on the Group’s business by the Non-Executive
Directors is considerably more than the minimum requirements.
Executive Directors are allowed to hold 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.
There are no Directors whose time commitments are considered to be
a matter for concern.
Directors who take on or change roles during the year attend induction
meetings in respect of those new roles.
The Company Secretary maintains a training and development log for
each Director.
B5. Provision of information and support The Chairman, supported
by the Company Secretary, ensures that Board members receive
appropriate and timely information.
The Group provides access, at its expense, to the services of
independent professional advisers in order to assist Directors in the role.
Board Committees are also provided with sufficient resources to
undertake their duties.
All Directors have access to the services of the Company Secretary in
relation to the discharge of their duties.
B6. Board and Committee performance and evaluation An externally
facilitated performance evaluation was completed in 2015, with internally
facilitated evaluations having taken place in 2016 and 2017. More
information can be found on pages 66–67, along with the findings,
actions, and progress made during the year.
B7. Re-election of Directors At the 2017 AGM, all Directors were
subject to re-election with the exception of Anthony Watson, who
stepped down after the AGM and Nick Luff, who stepped down prior
to the AGM. All Directors will be standing for re-election, and in the
case of Lord Lupton, election by shareholders at the 2018 AGM.
C. Accountability
C1. Financial and business reporting The Directors’ and Auditors’
Statements of Responsibility can be found on pages 83 and
158 respectively.
Information on the Company’s business model and strategy can be
found on pages 1–37.
C2. Risk management and internal control systems See page 67 for
more detail regarding internal control.
The Audit Committee is responsible for the effectiveness of internal
controls and the Risk Management Framework. Further information can
be found on pages 73–76.
The Board Risk Committee is responsible for the review of the risk
culture of the Group, setting the tone from the top in respect of risk
management. Further information can be found on pages 77–79.
The Directors’ viability statement and confirmation that the business is
a going concern can be found on page 82.
C3. Role and responsibilities of the Audit Committee The Audit
Committee reports to the Board on how it discharges its responsibilities
and makes recommendations to the Board. Full information on the Audit
Committee can be found on pages 73–76.
D. Remuneration
D1. Level and elements of remuneration The Directors’ Remuneration
Report on pages 84–102 explains the work of the Remuneration
Committee and provides full details regarding the remuneration of
Directors. The Remuneration Policy can be found in the 2016 Annual
Report and Accounts.
B4. Training and development The Chairman leads the learning and
development of Directors and the Board generally and regularly reviews
and agrees with each Director their individual and combined training
and development needs.
E. Relations with Shareholders
E1. Shareholder engagement Details of engagements with
shareholders during the year can be found on page 62.
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 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. An
outline of the induction programme for Lord Lupton can be found on
page 61.
E2. Use of General Meetings The 2018 AGM will be held on 24 May
2018. The whole Board is expected to attend and will be available to
answer shareholders’ questions.
To facilitate shareholder participation, electronic proxy voting and voting
through the CREST proxy appointment service are available. All votes
are taken by way of a poll to include all shareholder votes cast.
A webcast of the AGM is carried out to allow shareholders who cannot
attend in person to view the meeting live.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 70 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Nomination and Governance
Committee report
The Group aspires to the highest
standards of corporate and internal
governance in accordance with the
expectations of the Board.
Dear Shareholder
The Nomination and Governance Committee
(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 me of the collective Board’s technical
and governance skill set. These assessments
provide an essential analysis of the skills and
experience of the Non-Executive Directors
relative to the required and desirable Board
competencies to help ensure that the Board
continues to have an appropriate range and
depth of Non-Executive skills.
As detailed in last year’s annual report and
following our announcement in February 2017,
Nick Luff and Anthony Watson left the Board
in May 2017. These departures resulted in the
positions of Senior Independent Director and
Audit Committee Chairman becoming vacant.
The Committee reviewed both internal and
external candidates for the position of Senior
Independent Director. It was subsequently
agreed that Anita Frew would become the
Senior Independent Director and Simon Henry
would become the Chairman of the Audit
Committee. Further details in respect of both
of these appointments are provided below.
In addition to these changes, a thorough
recruitment process was initiated and
overseen by the Committee to select suitable
candidates for the roles of Non-Executive
Director of the Company and Chairman of
Lloyds Bank Corporate Markets plc, who would
provide the required skill set, experience and
knowledge whilst complementing the existing
Board of Lloyds Banking Group plc. As a result
of this Lord Lupton was appointed to the
Board in June 2017. Lord Lupton was chosen
for this role as he brings not just his experience
of UK banking and capital markets, but also
his extensive corporate advisory experience
which will be of particular value to our overall
Commercial Banking activities.
During the year, the Committee dedicated
a substantial part of its time to Executive
succession planning, building on the progress
made over the previous years. The work
undertaken included additional analysis and
benchmarking, which led to the establishment
of development plans for identified candidates
(further details can be found opposite). These
were important considerations in the executive
reorganisation announced in the summer.
The Group aspires to the highest standards
of corporate and internal governance in
accordance with the expectations of the
Board, ensuring that governance is in
compliance with the latest regulation.
As part of this, the Board’s Diversity Policy
was reviewed by the Committee during the
year. The review included the consideration of
aspects of new and emerging best practice
and regulatory developments in the area of
senior management and Board diversity.
This led to amendments to the existing policy
explicitly to broaden the range of diversity
criteria which will be taken into consideration
in future appointments. Specifically, the policy
now includes race, age, gender, educational
and professional background as attributes.
Lord Blackwell
Chairman, Nomination and
Governance Committee
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
and the Senior Independent Director, the
Chairman of the Board Risk Committee, and
the Chairman of the Responsible Business
Committee. The Group Chief Executive
attends meetings as appropriate.
Details of Committee membership and
meeting attendance can be found on page 58.
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 it leads the
search process for nominations to the Board.
These issues are summarised on the next page.
Lloyds Banking Group Annual Report and Accounts 2017 71
Activities during the year
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
Board changes
and Board
composition
Change in Senior
Independent Director and
Audit Committee Chairman
Anita Frew as Senior Independent Director – The Committee considered a range
of external and internal candidates for this position (the external candidates were
sourced by JCA Group1), and agreed that Anita’s significant board, financial and
investment management experience, including as a Senior Independent Director,
made her ideally suited to take on the role.
Simon Henry as Audit Committee Chairman – Simon had been a member of the Audit
Committee since June 2014, and the Committee agreed that 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 external search firm JCA Group provided an extensive list of candidates. The
Committee selected and shortlisted candidates, interviews were carried out with various
members of the Board, and the process resulted in the appointment of Lord Lupton to the
Board in June. Details of Lord Lupton’s induction are provided on page 61.
From the ongoing assessment of the Board members, the Chairman creates a 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.
During the year, the Committee, led by the Chairman, reviewed the succession plans for
key senior management roles. Full details of the process are provided on the next page.
In addition to the appointment of Lord Lupton as Chairman of the new bank, the
Committee also oversaw the selection of the Board members. This involved shortlisting
external candidates for the position of independent non-executive directors with the
help of an external recruitment provider, Russell Reynolds1, meeting with the candidates
on a one-to-one basis and reviewing both the individuals and overall composition of
the new board before making recommendations to the Group Board. In addition to the
composition of the board, the Committee has also reviewed the governance framework,
including the Terms of Reference of the preparatory board. The preparatory board
preceded the formation of the operating board, and was established by the Group
board to oversee the establishment of the company, board and structure.
New Non-Executive Director
Structure and composition
of the Board
Developing the succession
plans for senior management,
and establishing and agreeing
development plans.
Formation of Lloyds Bank
Corporate Markets plc,
including the establishment
of the Board and its
governance structures.
Performance of the annual
effectiveness review of the
Board and its Committees.
During the year, the Committee met its key objectives and carried out its responsibilities
effectively, as confirmed by the annual effectiveness review. Full details of the review
can be found on pages 66–67.
The Committee oversees
various aspects of corporate
governance, and during the
year, the key activities included
the following:
Annual review of the Corporate Governance Framework
Helping to establish governance for the non ring-fenced bank, including agreeing
the Terms of Reference to the non ring-fenced bank preparatory board
Annual review of the share dealing policy for Directors and GEC
Received reports from the Chairman on communications with shareholders
Approved the appointment of Trustees to the Bank’s Foundations
Reviewed and proposed a training schedule for Non-Executive Directors
Received governance reports from the Company Secretary detailing updates
and changes to regulation and best practice
The Board Diversity Policy was
reviewed by the Committee
during the year.
In addition to the changes noted in the Chairman’s letter on page 52, Board
appointments must also take into account independence and knowledge in addition to
specific skills and experience to ensure a diverse Board composition. The full Diversity
Policy can be found at www.lloydsbankinggroup.com.
Succession
planning
Lloyds Bank
Corporate
Markets plc
Annual
effectiveness
review
Governance
Diversity
Independence
and time
commitments
A review as to whether
Non-Executive Directors were
demonstrably independent and
free of relationships and other
circumstances that could affect
their judgement.
Training
A review of the Group’s
approach to the training of
Non-Executive Directors.
The Committee conducted a review of the role, including capabilities and time
commitment of all the Directors of the Company. This review was undertaken with
reference to the individual performance and conduct in reaching decisions. It also took
account of any relationships that had been disclosed. Details of conflicts of interest can
be found on page 81. Based on its assessment for 2017, the Committee is satisfied that,
throughout the year, all Non-Executive Directors remained independent as to both
character and judgement. All Directors were considered to have appropriate roles,
including capabilities and time commitments.
In addition to the existing methods of training for the Directors, the Board accepted
a recommendation from the Committee that Non-Executive Directors should be
provided with a mandatory training programme, ideally available online, based on
relevant core modules which are part of the mandatory training programme undertaken
by all colleagues. Members of the Committee are currently testing training modules
and will feedback comments to the Committee in spring 2018 before it is considered for
roll-out to the rest of the Board.
1 Aside from assisting with senior recruitment, benchmarking and succession planning, JCA Group, Russell Reynolds, Egon Zehnder and YSC Consulting have no other connection to the Company.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 72 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Succession planning in detail
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 under-represented groups within the
business in order to build a diverse talent pipeline.
The Company continues to review and identify potential future executive
talent and during the year the following activities were undertaken to
develop the talent pipeline further:
Assessment of potential candidates for senior management positions
undertaken by the Group Chief Executive with the Chairman, using
a range of criteria and benchmarking (facilitated by executive search
and board consulting firm Egon Zehnder1). Details of assessment
criteria are provided below. External candidates were identified by
executive search firm, JCA Group to provide a reference benchmark
and identify where recruitment might be required.
Assessments were discussed by the Committee, also taking into
consideration discussions with the Non-Executive Directors.
Individual development plans established for each internal candidate,
and validated with individuals.
Development actions commenced.
Evidenced progress against the development plans reported to the
Committee and PRA in the third quarter.
Assessment of candidates
Each of the potential candidates for senior management positions
was assessed by the Group Chief Executive and Chairman using the
following criteria with input from Egon Zehnder by way of competency,
psychometric and potential assessments and market benchmarking,
and in the case of non-GEC members, also with further input from
YSC Consulting1 (a premier leadership consultancy), who use a
biographical assessment methodology. The results were then discussed
and reviewed by the Nomination and Governance Committee and
subsequently in a meeting with all Non-Executive Directors.
Assessment criteria
Leadership:
Breadth of banking experience:
Strategy
People
Delivery
Judgement/values
Retail
Commercial
Treasury/Capital
Insurance
Technology
Governance experience:
Personal:
Board
Investor
Drive
Resilience
Candidates were scored from 1 to 5 for each of the above categories,
being 5 (very strong versus requirements), 3 (average – not a distinctive
strength) and 1 (weakness/development needed).
Board Diversity Policy
The Board Diversity Policy sets out the Board of Lloyds Banking Group’s
approach to diversity and provides a high level indication of the
Board’s approach to diversity in senior management roles which is
governed in greater detail through the Group’s policies.
The Board places great emphasis on ensuring that its membership
reflects diversity in its broadest sense. A combination of demographics,
skills, experience, race, age, gender, educational and professional
background and other relevant personal attributes on the Board is
important in providing the 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, independence and knowledge needed to ensure
a rounded Board and the diversity benefits each candidate can bring to
the overall Board composition.
Objectives for achieving Board diversity may be set on a regular basis. 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 under-represented 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 on page 21 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 58.
Female representation on the Board is currently 25 per cent (based on
three female directors and nine male directors).
Lloyds Banking Group Annual Report and Accounts 2017 73
Audit Committee report
The Committee continues
to deliver on its key
responsibilities, ensuring focus
is maintained on the Group’s
control environment.
and also provided important recommendations
on the application of best practice. These have
been incorporated in the future audit plan and in
providing a fit for purpose approach for audit in
the rapidly changing environment.
This report covers in more detail how the
Committee operates and the issues on which
we focused. Noting the environment in which
we operate I am pleased to be able to report
that in the opinion of the Audit Committee,
your Company has met its obligations for
financial reporting and disclosure and that the
internal control framework is both effectively
designed and operated.
Simon Henry
Chairman, Audit Committee
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 (including over
financial reporting) and the risk management
framework, whistleblowing arrangements
and each of the internal and external audit
processes, including the statutory audit of
the consolidated financial statements and the
independence of the statutory auditor.
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.
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. In satisfying
its purpose, the Committee undertakes the
functions detailed within Disclosure and
Transparency Rule 7.1.3R.
During the year the Committee considered
a number of issues relating to the Group’s
financial reporting, these issues are
summarised on the next page, 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.
Dear Shareholder
It was both an honour and a pleasure to take on
the role as Chairman of the Audit Committee
(the ‘Committee’) in May 2017, and I would like
to record my thanks and recognition to Nick
Luff for his excellent performance in this role
in the preceding four years, on behalf of the
Board and the Company.
2017 was a year of significant change and
challenge for the Committee. In addition to
welcoming Lord Lupton to the Committee we
saw the establishment and embedding of new
leadership in the internal audit function, and
the first full calendar year of the new senior
partner for external audit. The Committee
oversaw the preparation for various new
accounting standards and regulatory
requirements, including IFRS 9 ‘Accounting
for financial instruments’, and the structural
ring-fencing of relevant activities within
the Bank.
Over half of the Committee’s time is typically
spent on financial reporting and integrity of
information provided to external parties. In
2017 we focused on assessing judgements and
outcomes relating to conduct issues, credit
performance and various material accounting
issues and changes. The latter included the
completion and integration of the acquisition
of the MBNA credit card business.
In particular we reviewed provisions for
payment protection insurance (PPI), costs and
provisions which had exceeded £18 billion
by the end of the year. While PPI itself will
be finalised as an issue by mid-2019, the
Committee will continue to focus on both
legacy and emerging conduct issues as a
matter of priority.
The external environment for the Bank remains
challenging from both a regulation and
competition perspective. As a result the Bank
is in the process of transforming its business
model and ways of working, primarily through
increasing digitisation of all its activities. This
creates both risk and opportunity for financial
reporting and internal controls, and the
Committee has already spent significant time
considering the implications of this significant
level of change.
I am pleased to be able to report a successful
conclusion to the planned transformation of the
Group Internal Audit function, and during the
year we carried out a thorough independent
external quality assessment of the function. This
review noted the scale and pace of improvement
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.
All members of the Committee are
independent Non-Executive Directors with
competence in the financial sector and their
biographies can be found on pages 54–55.
With effect from 1 July 2017 the Committee
welcomed Lord Lupton, who brings extensive
financial experience. Simon Henry is a
Chartered Global Management Accountant
and has extensive knowledge of financial
markets, treasury, risk management and
international accounting standards. He is a
member having recent and relevant financial
experience for the purposes of the UK
Corporate Governance Code and is the Audit
Committee financial expert for SEC purposes.
The members of the Committee keep their
skills up to date with Board deep dives and
scheduled Audit Committee training. The
focus of specific Audit Committee training this
year has been on IFRS 9.
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. For details of
how the Committee was run, see page 64.
Annually the Committee undertakes an
effectiveness review. The review forms
part of the Board evaluation process with
Directors being asked to complete parts of
the questionnaire relating to the Committees
of which they were members. The findings of
the review were considered by the Committee
at its January meeting followed up with
telephone calls from the Audit Committee
chairman with each of the Committee
members. On the basis of the evaluation the
feedback was that the performance of the
Committee continues to be effective.
Whilst the Committee’s membership
comprises the Non-Executive Directors noted
on page 58, all Non-Executive Directors may
attend meetings as agreed with the Chairman
of the Committee. The Group Financial
Controller, Chief Internal Auditor, the external
auditor, the Group Chief Executive, the Chief
Financial Officer, the Chief Risk Officer and the
Chief Operating Officer also attend meetings
of the Committee as appropriate. Details
of Committee membership and meeting
attendance can be found on page 58.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 74 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Financial reporting
During the year, the Committee considered the following issues in relation to the Group’s financial statements and disclosures, with input from
management, Group Internal Audit and the external auditor:
Activities for the year
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
Payment
Protection
Insurance
(PPI)
Other
conduct
provisions
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 £1,650 million to cover
further operating costs and
redress, including the impact of the
August 2019 industry deadline. To
31 December 2017, the Group has
provided a total of £18,675 million
in respect of PPI mis-selling redress
and administration costs.
The Group has also made provisions
totalling £865 million in respect of
other conduct matters, including
£245 million for packaged bank
accounts; £245 million for secured
and unsecured arrears handling
activities; and £100 million in
respect of HBOS Reading, all largely
reflecting issues caused prior to
the implementation of the Group’s
Conduct Strategy in 2013.
Ring-fencing
The Committee discussed the
accounting and control implications
of the Government’s structural
reform programme (‘ring-fencing’).
Allowance for
impairment
losses on
loans and
advances
Recoverability
of the
deferred
tax asset
Determining the appropriateness
of impairment losses requires the
Group to make assumptions based
on management judgement.
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.
One-off
transactions
Determining the appropriate
accounting for certain one-off
transactions requires management
to assess the facts and circumstances
specific to each transaction.
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 reviewed management’s assessment of the potential impact of
the Financial Conduct Authority’s (‘FCA’) Policy Statement which confirmed a two
month extension to the industry deadline (now August 2019) for consumers to
make their PPI complaints, and on the potential impact of the Plevin case. In the
second half of the year, consideration was given to the application for a Judicial
Review in relation to the FCA’s policy statement that introduced both the August
2019 industry deadline and the concept that an undisclosed commission in excess
of 50 per cent of the premium would give rise to an unfair relationship under the
Consumer Credit Act. The Committee also reviewed management’s assessment
of the start of the related FCA media campaign.
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 37: ‘Other provisions’ on page 213 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.
The Committee has reviewed management’s assessment of the compensation
expected to be paid to a number of customers of the HBOS Impaired Assets
Office based in Reading for economic losses, ex-gratia payments and distress and
inconvenience following the conviction of two former HBOS employees.
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 37: ‘Other provisions’ on page 213 of the financial statements.
The Committee discussed the accounting considerations for the planned transfer
of assets and liabilities from Lloyds Bank plc and its subsidiaries to the Group’s non
ring-fenced bank. The issues considered included the effect of transactions between
entities under common control, hedge accounting and the impact of applying the
‘hold to collect’ business model under IFRS 9. The Committee also considered
specific financial control risks associated with the implementation of ring-fencing and
the risk management framework being implemented to mitigate these risks.
The Committee challenged the level of provisions made and the assumptions
used to calculate the impairment provisions held by the Group.
The Committee was satisfied that the impairment provisions were appropriate.
The disclosures relating to impairment provisions are set out in note 51: ‘Financial
risk management’ on page 240 of the financial statements. The allowance for
impairment losses on loans and advances to customers at 31 December 2017 was
£2,201 million (31 December 2016: £2,412 million).
The Committee considered the recognition of deferred tax assets, in particular
the forecast 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 assessment also included the impact of the changes in Group structure that
will be made to comply with ring-fencing requirements.
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 36: ‘Deferred tax’ on page 211 of the
financial statements. The Group’s deferred tax asset at 31 December 2017 was
£2,284 million (31 December 2016: £2,706 million).
The sale of Vocalink was considered by the Committee during the year. The
Committee reviewed the accounting proposed by management and was satisfied
that it was appropriate.
Lloyds Banking Group Annual Report and Accounts 2017 75
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
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.
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.
MBNA
acquisition
The Group completed its acquisition
of MBNA on 1 June 2017.
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.
Viability
statement
IFRS 9
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 the Directors’
conclusions and explain why the
period chosen is appropriate.
The Committee has devoted a
substantial amount of time to
understanding and challenging
management on its IFRS 9
implementation programme.
The Group adopted IFRS 9 on
1 January 2018.
Other
accounting
standards
The Committee has discussed the
requirements of IFRS 15 (Revenue),
which the Group adopted on
1 January 2018, and IFRS
16 (Leases), which the Group
expects to adopt
on 1 January 2019.
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 47:
‘Contingent liabilities and commitments’ on page 224 of the financial statements.
The Committee considered the assumptions underlying the calculation of the
defined benefit liabilities. The most critical assumptions reviewed were in respect
of the mortality assumptions, inflation and the discount rate, which have been
updated to reflect the Group’s recent experience, the latest CMI mortality tables
and the results of the latest full actuarial review of the Group’s main schemes.
The Committee was 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 35: ‘Retirement benefit obligations’
on page 206 of the financial statements. The defined benefit obligation at
31 December 2017 was £44,384 million (31 December 2016: £45,822 million).
The Committee reviewed a summary of the key assumptions underlying the fair
value adjustments made by management to the acquired MBNA assets and
liabilities. The Committee was satisfied with the key assumptions made. The
disclosures relating to the acquisition are set out in note 22: ‘Acquisition of MBNA
Limited’ on page 197 of the financial statements.
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 most significant assumptions were in respect of annuitant
mortality, workplace pension persistency and expenses. The annuitant mortality
assumptions were updated to recognise recent experience and for the latest
industry improvement model; the assumptions for workplace pension persistency
were updated to reflect the introduction of new pension freedom; and the Group’s
expense assumption was updated to reflect new outsourcing arrangements.
The Committee was satisfied that the value of the VIF asset and insurance liabilities
were appropriate. The VIF asset at 31 December 2017 was £4,839 million (31
December 2016: £5,042 million). The disclosures are set out in note 24: ‘Value of
in-force business’ on page 198 and note 31: ‘Liabilities arising from insurance contracts
and participating investment contracts’ on page 202 of the financial statements. The
liability arising from insurance contracts and participating investment contracts at
31 December 2017 was £103,413 million (2017: £94,390 million).
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.
The Committee has been briefed on the Group’s IFRS 9 implementation
programme throughout 2017 and in prior years and held a session dedicated
to IFRS 9 in October 2017. IFRS 9 has three critical elements: classification
and measurement, impairment, and hedging. The Group has not adopted
the hedging rules within IFRS 9 at 1 January 2018 (a permitted option) and,
accordingly, the Committee’s focus has been on classification and measurement,
and impairment.
The Committee has received regular updates facilitating detailed discussion and
challenge, including a dedicated extended session to review the key decisions
taken by management to implement IFRS 9. During these updates, the Committee
has discussed the Group’s processes to assess the classification and impairment of
its financial assets; the proxies and simplifications used in the data for the models,
noting the Model Governance Committee’s approval of the integrity, adequacy
and methodology of the Group’s critical models; the estimated financial and
capital impact (including the Group’s approach to the transitional arrangements);
the industry-wide concerns raised by the PRA and the Group’s response to
these concerns; the key methodology decisions made by management; and the
changes to the Group’s key controls and governance.
The Committee discussed the Group’s approach to the new revenue standard
(IFRS 15). The standard does not apply to transactions that are accounted for in
accordance with IFRS 9 and, as a result, the impact on the Group is not significant.
IFRS 16, the new leasing standard, is not effective until 1 January 2019. The main
impact on the Group will be on its property leases which will move ‘on-balance
sheet’. The Group will recognise a right of use asset and a corresponding liability.
The Committee has discussed the Group’s progress on its implementation plans
for the standard during 2017 and will continue to discuss the Group’s plans and the
impact of the standard on the Group during 2018.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 76 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Other significant issues
The following matters were also considered by the Committee during
the year:
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 107–156. Specific matters that the
Committee considered for 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 Internal Audit
In monitoring the activity, role and effectiveness of the internal audit
function and their audit programme the Committee:
monitored the effectiveness of Group Internal Audit and their audit
programme through quarterly reports on the activities undertaken
and a report from the Quality Assurance function within Group
Internal Audit;
approved the annual audit plan and budget, including resource and
reviewed progress against the plan through the year;
oversaw the performance of an External Quality Assessment in line
with CIIA standards and reviewed the findings and recommendations;
oversaw the process for the appointment of the Chief Internal
Auditor; 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 reports 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. The
Committee continues to operate a policy approved during 2016, and
amended in 2017 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 considers to be prohibited.
The total amount of fees paid to the auditor for both audit and non-audit
related services in 2017 is disclosed in note 11 to the financial statements
on page 187.
External auditor
The Committee oversees the relationship with the external auditor.
During the year, the Committee considered the auditor’s terms
of engagement (including remuneration), its independence and
objectivity and approved the audit plan (including methodology and risk
identification processes). Mark Hannam has been PwC’s senior statutory
audit partner for the Group and the Company since the beginning of
2016, and attends all meetings of the Committee.
The Committee also considered the effectiveness and performance of
the auditor and the audit process.
The process was largely based on an assessment of responses received
to a questionnaire from the Chairman of the Audit Committee and
business areas as well as Finance, Risk, Legal and Group Internal Audit.
The Committee considered also the FRC’s Audit Quality Inspection
Report published in June 2017. Following review of the feedback from the
process the Committee concluded that it was satisfied with the auditor’s
performance and recommended to the Board a proposal for the re-
appointment 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 2017.
PwC has been auditor to the Company and the Group since 1995, having
previously been auditor to certain of the Group’s constituent companies.
PwC was re-appointed as auditor with effect from 1 January 2016
following a tender process conducted in 2014 in respect of the audit
contract for the 2016 financial year. There will be a mandatory rotation for
the 2021 audit, and a competitive tender process will be conducted in
advance of this time, if not earlier.
Lloyds Banking Group Annual Report and Accounts 2017 77
Board Risk Committee report
The Group’s effective
management of risk helps
underpin its low risk and
customer focused business
model.
Committee purpose
and responsibilities
The purpose of the 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 policies, 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 107–156. 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, experience and
operation
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.
All Non-Executive Directors are members
of the Board Risk Committee. The Chief Risk
Officer has full access to the Committee
and attends all meetings. The Chief Internal
Auditor and members of the Executive also
attend meetings, as appropriate.
Dear Shareholder
I am pleased to report on how the Board Risk
Committee (the ‘Committee‘) has discharged
its responsibilities throughout 2017.
The Committee has continued to give detailed
consideration to existing and emerging risks,
through a balanced agenda which ensures
sufficient focus on standing areas of risk
management, together with specific attention
being given to those emerging risks which
are considered to be of ongoing importance
to the Group and its customers. During the
year, the Committee continued to make use
of dedicated sub-committees to focus on
particular areas, such as IT resilience and
cyber security, where the dynamic nature and
significance of related risks and challenges
continues to evolve.
Focus has also been given to the successful
execution of a number of significant regulatory
change programmes, proactive identification
and resolution of conduct issues, and the
challenges and opportunities arising from
the introduction of open banking and the
second Payment Services Directive. Increasing
levels of UK consumer indebtedness were
also reviewed, and whilst overall controls
were found to be robust, with management
actions being taken to increase risk mitigation
and to minimise customer detriment; close
monitoring will continue into 2018. Progress
across each of these areas will be a key
ongoing focus for the Committee during 2018.
The environment within which the Group
operates continues to be subject to
considerable change. Uncertainties,
including the EU Exit and wider geo-political
risks continue to provide challenges, and
the Committee will continue to monitor
developments and any associated impact on
the Group’s risk profile.
The Committee has concluded 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
During the year the Committee met its key
objectives and carried out its responsibilities
effectively. Details of Committee membership
and meeting attendance can be found on
page 58.
As the most senior risk committee in the
Group, the Committee interacts with other
related risk committees, including the 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 on the following pages
is a summary of these risks, with an outline
of the material factors considered by the
Committee, and the conclusions which were
ultimately reached.
During 2017, the Committee continued to
utilise established sub-committees to provide
additional focus on Financial Markets, IT
Resilience & Cyber, and Stress Testing &
Recovery Planning. These sub-committees
enable members of the Committee to
dedicate additional time and resource to
achieving a more in-depth understanding of
the topics covered, and enable further review
and challenge of the associated risks.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 78 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Activities during the year
IT and cyber
risk
Strategy
execution
risk
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
A resilient IT environment is
critical to providing reliable
services to our customers
and enabling sustainable
growth. The dynamic cyber
risk and the potential for
external attacks threatens the
confidentiality and integrity
of electronic data or the
availability of systems. These
are key risks for the Group
and a central area of focus for
the Committee.
Given the dynamic nature and significance of IT and cyber risks, the Board Risk Committee
sub-committee on IT resilience and cyber continues to enable more in depth consideration
of these risks to the Group. During the year, the sub-committee gave consideration to a wide
range of issues including enhanced assurance for cyber critical third parties, cyber and IT
controls, Technology Resilience and Cyber Programme updates, Cyber Strategy, and roles
and responsibilities of the Chief Security Officer. Alongside this an advisory panel comprised
of external industry experts provides the sub-committee with an external view of current and
evolving industry wide cyber security threats, challenges and developments.
Conclusion: Whilst there have been significant improvements in cyber capability and the
Group is within Board risk appetite in relation to its industry benchmark, the Committee will
continue to challenge the Group to further improve its ability to mitigate and respond to cyber
risk. Technology resilience will also remain a key focus for 2018 as the Group continues to invest
in its infrastructure.
The Committee recognises
the risks associated with an
extensive discretionary and
regulatory change agenda.
Assessments have been
performed to establish
achievability of its plans whilst
new metrics will be introduced
for ongoing risk monitoring
and management.
In order to maintain and enhance the Group’s strategic position, it continues to invest in new
initiatives and programmes. The Group acknowledges the challenges faced with delivering
this strategy alongside the extensive regulatory and legal change agenda whilst additionally
enhancing systems and controls. In the development of the strategy, the Group considers
these demands against the capacity of the organisation to ensure successful delivery for both
customers and shareholders.
Conclusion: Whilst initial planning has been undertaken to satisfy the Board that the Group
can deliver against its planned change objectives, new metrics are being introduced to
enable effective performance monitoring, risk management and the assessment of delivery
challenges including subject matter capacity and capability. These risk metrics will be
managed across the Group but reported to Board on a regular basis.
Regulatory
and legal risk
Managing regulatory risk
continues to be a key focus
within the Group due to the
significant amount of highly
complex and interdependent
regulatory reform that we
have had to manage.
The Committee continues to focus on ensuring we have effective controls and oversight
to comply with existing regulatory obligations. The Committee has also been focused
on overseeing the successful execution of a number of significant, complex and
interdependent regulatory change programmes including ring-fencing, EU General Data
Protection Regulation, Payment Services Directive II (PSD2), Markets in Financial Instruments
Directive II, and the Basel Committee on Banking Supervision (BCBS 239). Given the
significance of ring-fencing, monthly programme reporting has been presented to Board
and due consideration given to governance and compliance within the ring-fenced bank.
Conclusion: The Group has placed significant focus on ensuring compliance with these
complex regulatory changes. Regulatory risk will remain a key area of focus for the
Committee in 2018 given the importance of complying with our regulatory obligations.
Operational
risk
Managing operational
risk continues to be a key
focus within the Group
due to the complexity and
volume of change, the
Group’s IT infrastructure,
cyber risk, and reliance on
third party suppliers.
The Committee continues to focus on ensuring the Group has an effective framework for
managing operational risk, including enhancing the use of key risk and control indicators and
scenarios. The Committee has considered a number of reports in relation to the operational
risk framework, cyber, IT resiliency, user access management and Cloud computing.
Conclusion: The Group has made progress in enhancing its management of operational
risk. The Group will continue to focus on enhancing the maturity of its operational risk
framework to ensure it is proactive, forward looking and effective in managing the 21st
century risks in a digital world, including execution, model, cyber/IT and third party risk.
Conduct risk
The Committee continues to
focus closely on the Group’s
management of conduct risk.
Consumer
lending
indebtedness
The Committee reviewed
key metrics for the motor
finance, credit cards,
personal loan and personal
current account overdraft
portfolios to understand
the risks associated with
persistent indebtedness.
Throughout 2017, the Committee has considered reports on the proactive identification and
resolution of conduct issues which directly impact customers (customer conduct risks) and
those which can undermine market integrity (market conduct risks). The pace and quality of
remediation remained a focus, including root cause analysis to establish lessons learned and
help prevent similar issues in the future. Consideration was also given to the conduct risks
associated with the treatment of customers in vulnerable circumstances, with a particular
focus on those in financial difficulties. In addition the Committee continues to consider
developments in the Group’s conduct culture as well as reports on rectification programmes,
complaints and conduct risk appetite metric performance.
Conclusion: Whilst good progress has been made in 2017, to continue embedding the
Group’s conduct strategy initiatives into business as usual, ongoing improvement in the
Group’s conduct risk profile will remain a priority for the Group in 2018 and will continue
to be a subject of focus for the Committee.
The macroeconomic and market context was reviewed to ensure understanding of the key
drivers of increased consumer lending; this included an examination of the overall market
growth in consumer lending, changes in indebtedness, a comparison to pre-crisis levels
and a review of the growth rate of each consumer credit product within the portfolio. The
key macroeconomic drivers of credit losses including the specific impact of debt to income
were also reviewed. Underwriting standards, credit quality and the programme of ongoing
improvements to strengthen indebtedness and affordability controls were assessed to
ensure that risk appetite for the consumer lending portfolios remains appropriate.
Conclusion: Regular monitoring continues to assist the Committee in its assessment of
indebtedness of the consumer lending portfolios, with management continuing to take
action to mitigate potential risks associated with increased indebtedness and to continue
to review the appropriate treatment of vulnerable customers.
Lloyds Banking Group Annual Report and Accounts 2017 79
KEY ISSUES
COMMITTEE REVIEW AND CONCLUSION
Data risk
The Committee
continues to focus on the
Group’s risks associated
with data management,
including governance,
control and privacy.
UK Secured
and buy-to-let
Reviews were undertaken of
the risks associated with the
UK residential interest only
portfolio and the Group’s
participation in the buy-to-
let segment.
Open banking
and payments
Open banking and PSD2
present strategic and
operational challenges as
well as opportunities and
is a central area of focus for
the Group.
EU exit
Negotiations are on-going
to determine the terms of
the UK’s exit from the EU.
The uncertainty regarding
the timing and the process
itself could affect the
outlook for both the UK and
global economy.
Given the increase in data regulation, data remains a key risk for the Group and remains
a critical area of focus for the Group’s regulators. The Committee has monitored and
reviewed the risks associated with the introduction of PSD2, including the need to ensure
there is appropriate control and ownership of data as the use of Third Party Providers
(TPPs) becomes more prevalent. With the introduction of GDPR, the Committee has
overseen actions within the Group to ensure clear control and management of customer
data, including assessing its accuracy and how it’s used. It is increasingly important for the
Committee to ensure the Group has effective controls in place to manage any potential
data breaches, including a defined escalation route to the FCA and the ICO.
Conclusion: The Group continues to enhance the controls required to manage the data
environment effectively, whilst the Committee ensures the necessary risk oversight of the
delivery of required regulatory changes relating to data.
In reviewing the UK Secured portfolio, specific consideration was given to the risks
associated with maturing residential interest only mortgages. The Committee reviewed
repayment rates, in-life and past-term customer engagement and treatment strategies,
credit risk performance including debt-to-value ratios, and the Group’s risk appetite for
future originations.
The Group’s participation in the buy-to-let segment was also reviewed, including the design
and implementation of underwriting changes in response to taxation changes and new
supervisory standards for portfolio landlords.
Conclusion: The Committee continues to monitor closely trends in the residential interest
only portfolio and the progress of management’s initiatives to further enhance customer
treatment. The Committee was satisfied that additional underwriting controls within
buy-to-let provided adequate safeguards to support continued participation in line with
the Group’s risk appetite limits.
The UK payments landscape is experiencing a period of unprecedented change. Open
banking, mandated by the Competition Markets Authority, will allow TPPs to offer new
services through Application Process Interface technology, providing customers with
alternative means of access to their bank accounts (governed by explicit customer consent).
PSD2 classifies these TPPs as Account Information Service Providers and Payment Initiation
Service Providers. The aim of these changes is to promote competition and enhance
customer choice. The changes create a number of key risks including (but not limited to)
security risk, data risk and fraud risk as sensitive and confidential customer information is
shared more widely than current practice. The Group is alert to the potential new vectors
for fraud and risks to consumers flowing from these channels, particularly in relation to
data security. Additional controls and mitigations have been developed. The Committee
received updates throughout 2017 through the consolidated risk report regarding the
requirements of the legislation and how the Group is planning to achieve compliance.
Conclusion: Initial legislative changes required compliance in January 2018 and
further regulatory requirements will come into force by the third quarter of 2019 (when
strong customer authentication becomes mandatory). The Committee will continue to
review progress throughout 2018 as further developments are delivered by the
Group-wide programme.
The key risks for the Group include adverse movements and volatility in Financial Markets,
impact on our customer credit profiles and the ability to operate cross border. When
reviewing the possible impacts of the EU exit, the Committee has given consideration
to the Group’s strong UK focus and UK-centric strategy. The Committee continues to
review the effectiveness of risk management across the Group and the actions taken to
better understand the impact on our customers, as well as close monitoring of positions in
Financial Markets. These actions not only include continued support to all our customers,
but in addition the Group has ensured our Commercial Banking customers consider their
relevant trading and financial impacts.
Conclusion: The EU exit plans continue to be closely monitored by the Committee via a suite
of early warning indicators and risk mitigation plans, including the possible loss of passporting
arrangements into Europe.
Residual value
risk in Motor
Finance
portfolio
Model risk
Residual value risk of motor
finance businesses was
monitored over the year.
Consideration was given to new car registrations, used vehicle prices and provision adequacy
in the context of Group exposure to residual value risk in the growing motor finance
businesses. The Committee also monitored exposure to residual value risk via risk appetite.
Conclusion: Residual value risk exposure continues to perform in line with appetite and the
Committee will continue to closely monitor trends in the used car market and automotive
sector as a whole.
The Committee recognises
the importance of the
Group Executive and
the Board holding a
strong understanding
of the Group’s models,
their associated risks and
performance.
The Committee discussed, during the year, the current model landscape, trends in
performance and actions being taken to resolve material model issues. The Committee
considered regulatory impacts and the action being taken by the Group as well as
benchmarking the Group’s approach to the industry.
Conclusion: Whilst good progress was made in 2017, the demand for models and model
related activity is expected to increase, with key drivers being the Group strategy and the
need for increased automation and analytics as well as increasing regulatory demands.
There will be an increased focus by the Committee in 2018 on model risk management to
address these challenges.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 80 Lloyds Banking Group Annual Report and Accounts 2017
Corporate governance report continued
Responsible Business
Committee report
Dear Shareholders
I am pleased to report on the Responsible
Business Committee’s (RBC) second full year
of operation in 2017.
Doing business responsibly is central to our
purpose to Help Britain Prosper, and supports
our strategy to be a low risk, customer
focused bank.
At its meetings, the RBC oversaw a wide
range of responsible business activities, which
included our substantial investments to provide
opportunities for those starting out, whether
as first time home buyers, small business
start-ups, social entrepreneurs or apprentices.
We also reviewed work being done to tackle
disadvantage in communities across the UK,
through our four Charitable Foundations, our
partnership with Mental Health UK, and our
support for vulnerable customers, including
those struggling with low financial skills or illness.
To respond to a rapidly changing external
environment, the RBC also reviewed emerging
areas such as the impact of climate change on
UK businesses, individuals and communities,
and ways in which we can support enhanced
UK productivity through the strengthening of
digital skills, particularly for individuals, small
businesses and charities.
Many of these activities are described in our
2018 Helping Britain Prosper Plan, which is
developed annually with the RBC to reflect
the ways in which Lloyds Banking Group, both
directly (as the largest corporate tax payer and
a substantial UK-wide employer) and indirectly,
contributes to the wider economic and social
health of Britain.
I would like to thank the many thousands of
colleagues who have dedicated their time and
energy to supporting these activities and I very
much hope you enjoy and find it interesting to
read about the Committee’s work.
Sara Weller
Chairman, Responsible Business Committee
Doing business responsibly is at
the heart of strengthening trust
in our Group and the industry.
How the Committee spent
its time in 2017
The Chairman of the Committee reviews
the forward agenda regularly to ensure that
the appropriate topics are considered and
adequate time is allocated for members to
provide input to proposals at meetings.
During the year, the Committee considered
in detail the development of the Group’s
responsible business approach, including a
sustainability strategy. Detailed discussions
took place with colleagues from relevant
business areas and external advisers at which
proposals were considered and challenged
leading to a change of focus on some areas
of the approach. The Committee contributed
to the plans for strengthening the Group’s
ongoing commitment to supporting basic,
workplace and specialist digital skills in the
UK during 2018 and provided perspectives on
how this could best be achieved.
The Committee also considered the
following topics:
a regular progress report from the Chairman
of the executive level Group Customer First
Committee (see page 114) on the approach
to customers, conduct and culture;
a report from Group Sourcing on working in
a responsible way with the Group’s suppliers;
an oversight of the processes which provide
reassurance that customer rectifications are
managed responsibly;
the benchmarking of trust amongst
stakeholders and customers against financial
services companies and acknowledged
leaders in other industries;
the outputs from colleague surveys in
relation to the Group’s role as a responsible
business; and
the draft Modern Slavery Statement, before
recommending to the Board for approval.
Committee purpose
The purpose of the Committee is to oversee
the Group’s strategy and plans for becoming
a leader in responsible business as part of the
objective to help Britain prosper; the activities
which have an impact on the Group’s behaviour
and reputation as a trusted, responsible
business; and the development of the Group’s
responsible business report and Helping
Britain Prosper Plan, which the Committee
recommends to the Board for approval.
Committee composition,
attendance at meetings
and effectiveness review
Alan Dickinson, Chairman of the Board
Risk Committee, attended all meetings.
Representatives from Group Internal Audit
and the Chief Operating Office are invited to
meetings as appropriate.
Representatives of the regulators attended
meetings as observers in January (FCA) and
July 2017 (PRA).
During the year, the Committee met its key
objectives and carried out its responsibilities
effectively, as confirmed by the annual
effectiveness review. The Committee
will consider the output from the 2017
effectiveness review and whether any changes
need to be made to the way it works.
Details of the committee membership and
meeting attendance can be found on page 58.
RBC Chairman’s visit to
Elizabeth Fry charity
In August 2017, Sara Weller visited the
Elizabeth Fry Charity in Reading, which has
received a grant of around £70,000 from
the Lloyds Bank Foundation for England
and Wales. The charity runs one of only six
approved premises for women released
from prison on bail, on license or as part of
a community order. The charity supports
residents to deal with some challenging
issues, such as substance abuse or mental
health problems and equips them with
the skills to live (and hopefully work)
more independently within 3-6 months.
After the visit Sara Weller commented:
‘my visit reinforced the message that the
Foundations actively seek out and make
a difference for the most disadvantaged
people in our society. Supporting them is
something in which we, as a Group, take
great pride.’
Lloyds Banking Group Annual Report and Accounts 2017 81
Directors’ report
Corporate governance statement
The Corporate Governance report found on pages 51–80 together with
this Directors’ 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 2017 of £5,275 million (2016:
£4,238 million). The Directors have recommended a final dividend, which
is subject to approval by the shareholders at the AGM, of 2.05 pence per
share (2016: 1.7 pence per share) totalling £1,475 million (2016:
£1,212 million). The final dividend will be paid on 29 May 2018.
The final dividend in respect of 2016 of 1.7 pence per ordinary share was
paid to shareholders on 16 May 2017, a special dividend in respect of 2016
of 0.5 pence per ordinary share was paid to shareholders on 16 May 2017
and an interim dividend for 2017 of 1 pence per ordinary share was paid
on 27 September 2017; these dividends totalled £2,284 million, net of a
credit in respect of unclaimed dividends written-back in accordance with
the Company’s Articles of Association. Further information on dividends
is shown in note 44 on page 220 and is incorporated by reference.
The Board continues to give due consideration at each year end to
the return of any surplus capital and for 2017, the Board intends to
implement a share buyback of up to £1 billion, equivalent to up to
1.4 pence per share. This represents the return 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.
The share buyback programme will commence in March 2018 and is
expected to be completed during the next 12 months. Given the total
ordinary dividend of 3.05 pence per share and the intended share
buyback, equivalent to up to 1.4 pence per ordinary share, the total
capital return for 2017 will be up to 4.45 pence per share, an increase of
up to 46 per cent on the prior year, equivalent to up to £3.2 billion.
The Company intends to use the authority for the repurchase of ordinary
shares granted to it at the 2017 AGM to implement the proposed share
buyback. Details of this existing authority are set out under ‘Power of
Directors in relation to shares’.
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.
Lord Lupton has been appointed to the Board since the 2017 AGM and
will therefore stand for election at the forthcoming AGM. In the interests
of good governance and in accordance with the provisions of the UK
Corporate Governance Code, all other Directors will retire, and those
wishing to serve again will submit themselves for re-election at the
forthcoming AGM.
Biographies of current Directors are set out on pages 54–55. Details of
the Directors seeking election or 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 2017 up to the
date of this report are shown in the table below:
Nicholas Luff
Anthony Watson
Lord Lupton
Joined the Board
Left the Board
10 May 2017
11 May 2017
1 June 2017
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.
Directors’ indemnities
The Directors of the Company, including the former Directors 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. 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 2017. In addition, the Group had appropriate Directors’ and
Officers’ liability insurance cover in place throughout 2017.
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 2017 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, which 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 2017 AGM. Shareholders
will be asked to renew these authorities at the 2018 AGM. The authority
in respect of purchase of the Company’s ordinary shares is limited to
7,154,088,636 ordinary shares, equivalent to 10 per cent of the issued
ordinary share capital of the Company as at the latest practicable date
prior to publication of the 2017 AGM circular.
The Company did not repurchase any of its shares during the year.
(2016: none).
Conflicts of interest
The Board has a comprehensive procedure for reviewing, and as
permitted by the Companies Act 2006 and the Company’s articles of
association, approving actual and potential conflicts of interest. Directors
have a duty to notify the Chairman and Company Secretary as soon as
they become aware of actual or potential conflict situations. Changes
to 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 Directors at QBE Insurance (Europe)
Limited, a general insurance and reinsurance company. Lord Lupton
is a senior advisor to Greenhill Europe, an investment bank focused
on providing financial advice on significant mergers, acquisitions,
restructurings, financings and capital raising to corporations,
partnerships, institutions and governments. The Board has recognised
that potential conflicts may arise as a result of these positions. The Board
has authorised the potential conflicts and requires Mr. Sinclair and Lord
Lupton to recuse themselves from discussions, should the need arise.
Directors’ and Officers’ liability insurance
Throughout 2017 the Group had appropriate insurance cover in place
to protect Directors, including the Directors who retired or resigned
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 in the Directors’ indemnities section.
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.
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 82 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ report continued
Information incorporated by reference
The following additional information forms part of the Directors’ report,
and is incorporated by reference.
Content
Group results
Summary of Group results
Ordinary dividends Dividends on ordinary shares
Directors’
biographies
Board of Directors
Directors in 20171
Board of Directors
Pages
39–42
220
54–55
54–55
Directors’
emoluments
Directors’ remuneration report
84–106
Internal control
and financial risk
management
Financial reporting risk
Risk management and
Financial instruments
Information
included in the
strategic report
Disclosures required
under Listing
Rule 9.8.4R
Principal risks
and uncertainties
Share capital
and control
Future developments
Greenhouse gas emissions
(additional information)
Inclusion and diversity
Engaging colleagues
Significant contracts
Dividend waivers
Funding and liquidity
Capital position
109
108–156
and
226–237
2–37
27
21–22
22
223–224
220
36 and
144–150
137–144
Share capital and restrictions on the
transfer of shares or voting rights
Special rights with regard to the
control of the Company
Employee share schemes –
exercise of voting rights
216
216
216
1 Nick Luff and Anthony Watson also served as directors during the year, retiring from the
Company on 10 May 2017 and 11 May 2017 respectively.
Substantial shareholders
Information provided to the Company by substantial shareholders
pursuant to the DTR is published via a Regulatory Information Service.
As at 31 December 2017, the Company had been notified by its
substantial shareholders under Rule 5 of the DTR of the following
interests in the Company’s shares:
BlackRock Inc.
Interest in shares
3,668,756,7652
Harris Associates L.P.
3,607,058,7583
1 Percentage provided was correct at the date of notification.
% of issued share capital with
rights to vote in all circumstances at
general meetings1
5.14%
5.01%
2 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 7 February 2018, which identifies beneficial
ownership of 4,843,291,732 shares in the Company representing 6.7 per cent of the issued
share capital in the Company. This variance is attributable to different notification and
disclosure requirements between these regulatory regimes.
3 An indirect holding.
No further notifications have been received under Rule 5 of the DTR as at
the date of this report.
Post balance sheet events
The Board has announced its intention to implement a share buyback
programme, details of which are from a post balance sheet events
perspective provided in note 53, ‘Events since the balance sheet date’,
on page 252.
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 36
and pages 144–149 and capital position on pages 137–144. Additionally,
the Directors have considered the capital and funding projections of
the Company and Group. Accordingly, the Directors conclude that
the Company and the Group have adequate resources to continue in
operational existence for a period of at least 12 months from the date of
the approval of the financial statements and therefore it is appropriate to
continue to adopt the going concern basis in preparing the accounts.
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; the 2017 Group Strategic Review,
which sets out the Group’s customer and business strategy for the three
year period from 2018 to 2020; 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 2017, the assessment included consideration of the impact of
Structural Reform (ring-fencing), the effects of the continuing low interest
rate environment, the ongoing impact of the implementation of IFRS 9
‘Financial Instruments’ and the continuing uncertainty over the transitional
arrangements to be agreed as part of the UK’s exit from the EU.
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 annual planning process comprises the following key stages:
The Board reviews and revises the Group’s strategy, risk appetite and
objectives in the context of the operating environment and external
market commitments.
The divisional teams develop their operating plans based on the
Board’s objectives ensuring that they are in line with the Group’s
strategy and risk appetite.
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.
In addition, the Board obtains independent assurance from Risk
Division over the alignment of the plan with Group strategy and the
Board’s risk appetite. This assessment performed by Risk Division also
identifies the key risks to delivery of the Group’s operating plan.
The planning process is also underpinned by a robust capital and
funding stress testing framework. This framework allows the Group
to assess compliance of the operating plan with the Group’s risk
appetite. The scenarios used for stress testing are designed to
be severe but plausible, and take account of the availability and
likely effectiveness of mitigating actions that could be taken by
management 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. Further information on stress testing and reverse stress
testing is provided on page 111.
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.
Lloyds Banking Group Annual Report and Accounts 2017 83
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 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:
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.
The Group’s principal activities, business and operating models
and strategic direction are described in the strategic report on
pages 1–37;
Emerging risks are disclosed on page 110;
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 116–156; and
The Group’s approach to stress testing and reverse stress testing,
including both regulatory and internal stresses, is described on
page 111.
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 2020.
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 26.
Deloitte LLP has provided limited level ISAE 3000 (Revised) assurance
over selected non-financial indicators as noted by
independent assurance statement is available online
at www.lloydsbankinggroup.com/rbdownloads
. Their full,
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 2016 to 30 September 2017, which
is different to that of our Directors’ report (January 2017 – December
2017). 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 2017
Reporting Criteria online at www.lloydsbankinggroup.com/rbdownloads
Intensity ratio
GHG emissions (CO2e) per £m of underlying income
Oct 2016-Sept 2017
15.8
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.
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 54–55 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
20 February 2018
Lloyds Banking Group plc
Registered in Scotland
Company number SC95000
Risk managementFinancial statementsOther informationStrategic reportGovernanceFinancial results 84 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report
Remuneration Committee
Chairman’s statement
Our remuneration policy ensures fair reward for
all colleagues, with a focus on building a culture
where colleagues have a long-term interest in the
success of the Group, in line with shareholders.
Anita Frew
Chairman, Remuneration Committee
1 Simplifying the Group’s
remuneration policy and principles,
with a focus on long-term share
ownership
2 Ensuring remuneration outcomes
are fair for all colleagues
3 Rewarding individual performance
and collective success
4 Providing alignment to the Group’s
future strategic priorities
5 Enhancing levels of disclosure
and corporate governance
Dear Shareholder
On behalf of the Board and the Remuneration
Committee (the ‘Committee’), I have the
pleasure of presenting the Directors’
remuneration report for the year ended
31 December 2017. The Committee strongly
believes that the Group’s remuneration
approach, guided by four key reward
principles, contributes significantly to the
delivery of the Group’s strategic priorities.
I am very grateful for the continued support
and engagement we have had with
shareholders, their representative bodies and
our wider stakeholder group. I believe this
is reflected in the positive voting outcome
we received at the AGM in 2017 for our
new remuneration policy. No changes are
proposed to that policy.
Simplification
We made changes in 2017 in a drive towards
further simplification of remuneration
structures, removing complexity, and ensuring
a focus on rewarding longer-term, sustainable
performance. The Group Performance Share
plan was introduced in 2017. The plan outcome
is determined on a ‘top down’ basis, as a
percentage of the Group’s underlying profit,
replacing the previous complex bonus pool
methodology driven by aggregated divisional
and functional bonus outcomes. There are
enhancements to the levels of disclosure
within this report, with the aim to provide
additional clarity and transparency, particularly
relating to the performance assessments
that underpin the Group Performance
Share outcome both at Group level, and for
individual Executive Directors.
From 2018, the Group no longer operates
specific incentive arrangements for customer-
facing colleagues. Instead, colleagues now
participate only in the Group Performance
Share plan. Approximately 28,000 customer-
facing colleagues have transitioned plans
during 2017.
In my last report, I announced that all
colleagues in the Group had received an
award of Colleague Group Ownership Shares,
with the aim of achieving 100 per cent share
ownership among colleagues and building a
colleague-wide long-term ownership culture.
I am pleased to confirm that this award will be
repeated in 2018.
Taking into consideration
stakeholders’ views
The Committee remains acutely aware that the
topic of remuneration, alongside corporate
culture and working practices, continues to
generate a high level of focus and that the role
of the Committee is to ensure that the interests
of colleagues, shareholders and other key
stakeholders are considered fairly, and in the
context of wider societal expectations.
I have set a broad agenda for the Committee
in 2017, further details of which can be
found on page 99. The Committee remit
is dynamic and extends beyond executive
remuneration, believing that all colleagues
should be represented in its consideration.
It is our aim to ensure that the remuneration
policy framework and guiding principles can
be applied consistently to all colleagues. This
recognises the importance of colleagues
working together, sharing collectively in the
Group’s success and building a culture of
acting as stewards of the long-term interests of
the Group.
The Committee remains mindful of the
relationship between pay for Executive
Directors and all other colleagues. To ensure
that the Committee understands wider
stakeholder views, I have engaged directly
with the Group’s recognised unions (Accord
Our key priorities Lloyds Banking Group Annual Report and Accounts 2017 85
Contents
Remuneration Committee
Chairman’s statement
Remuneration at a glance
Annual report on remuneration
Directors’ remuneration policy
84
86
88
100
Rewarding all colleagues fairly
Group
Ownership
Share awards
Direct
engagement
with unions
We aim to
achieve
100 per cent
share ownership
among our
colleagues.
Feedback is
sought from
Accord and
Unite on specific
matters.
Our balanced
scorecard
Pay linked to
performance
on the basis
of both ‘what’
was achieved
and ‘how’ it was
delivered.
A single pay
budget with
higher awards
for more junior
colleagues
Increases to
base salary for
Directors below
the Group pay
budget.
The Long-Term Incentive Plan (LTIP) awards
made in 2015 are vesting at 66.3 per cent,
reflecting the Group’s strong performance
since 2015, balanced against uncertainty in
the economic and political environment.
In particular, this has impacted negatively on
absolute share price performance, resulting
in no vesting for the Total Shareholder Return
component.
In line with shareholder views, changes to
the measures in the 2018 Group Ownership
Share awards have been minimised to
provide consistency with the 2017 plan, while
aligning to the key strategic priorities as
set out in the third Group Strategic Review.
Further detail is provided on page 97.
2018 Annual General Meeting
I look forward to welcoming you to the 2018
AGM and hope you will support the resolution
relating to remuneration.
Anita Frew
Chairman, Remuneration Committee
and Unite) who represent the interests of
around 30,000 colleagues. Feedback from
the unions is provided to the Committee
on specific matters under consultation, for
example, in setting the annual pay budget
for colleagues and any changes to benefits
arrangements. I have also actively engaged
with the Group’s customers, regulators and
my other Board members (including directly
with the Responsible Business Committee).
In addition, our independent advisers have
provided regular updates on market context
and emerging topics in remuneration.
Rewarding all colleagues fairly
The Group is committed to offering
all colleagues a reward package that is
competitive, performance-driven and fair.
In discussions with the Group’s recognised
unions, a 2018 pay budget of 2.7 per cent
was agreed, including additional funding
to ensure a minimum pay award of £600 for
eligible colleagues. Colleagues in lower pay
ranges receive higher awards to support
pay progression, together with colleagues
who receive stronger performance ratings in
recognition of their contribution to the Group.
The majority of colleagues’ pay is determined
consistently using fixed pay matrices aligned
to the external market and designed to
help recruit and retain colleagues with the
skills, behaviours and motivation to deliver
the Group’s strategic aims. This approach
supports the Group’s commitment to the
Living Wage Foundation.
The Committee proposes salary increases
for the Group Chief Executive and the Chief
Financial Officer set below the budget for the
wider colleague population, at 2 per cent.
Juan Colombás took on a new role of Chief
Operating Officer (COO) in September 2017
and accordingly it is proposed he receive a
salary increase of 3.4 per cent to reflect the fact
that the COO role is larger than his previous role
as the Chief Risk Officer.
The Committee considers that pay ratios
provide a useful reference point. However,
there remains uncertainty and potential
confusion how these should be calculated
and disclosed. The Committee has therefore
chosen not to publish the CEO to colleague
pay ratio data alongside this report and
will instead comply with the government
proposals when these are finalised.
Summary of 2017
remuneration outcomes
The ‘Remuneration at a glance’ section on
the following pages provides a summary of
the remuneration outcomes for Executive
Directors and the key measures against which
the Committee determined these outcomes.
I should like to draw attention to the following
key messages:
Underlying profit increased to £8,493 million
in 2017, exceeding budget by 8.2 per cent.
Taking into consideration this financial
performance, the Committee agreed
an overall Group Performance Share of
5.1 per cent of underlying profit. This was
adjusted both positively and negatively
to reflect strong performance against
stretching Group strategic objectives and
conduct provisions impacting negatively
on profitability and shareholder returns.
In reaching its decision, the Committee
considered the impact on customers,
conduct and the Group’s reputation.
The overall outcome determined by the
Committee was £414.7 million, approximately
5.5 per cent higher than the equivalent bonus
outcome for 2016. The total overall outcome,
following the adjustments applied above, is
4.7 per cent of underlying profit before tax
which remains significantly lower than the
funding limit of 10 per cent. Further detail is
provided on page 89, including the detailed
metrics in the Group’s balanced scorecard.
The approach to determining individual
Group Performance Share awards for
Executive Directors is consistent with other
colleagues. The Committee determined
that awards of between 77 per cent and
80 per cent of maximum should be made to
the Executive Directors. These awards reflect
individual performance assessed on the
basis of whole job contribution, both what
was achieved and how it was delivered. The
average annual Group Performance Share
award for colleagues increased by 9.3 per cent
relative to 2016, which compares favourably to
the average increase in individual awards for
Executive Directors of 4 per cent, excluding
the Group Chief Executive. The award for the
Group Chief Executive increased by 8.4 per
cent relative to 2016, reflecting the increase in
the base salary against which the award level
is determined. The 2017 award is the same
percentage of salary as 2016.
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
86 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
Remuneration at a glance
How we performed, and our policy
How Executive Directors’ remuneration works
Fixed
remuneration
Base salary
Fixed share award
Pension
Benefits
See page 100
See page 100
See page 100
See page 100
Group Performance Share (GPS) plan
The Committee determined that the GPS outcome would be
£414.7 million, based on the following performance outcomes.
Underlying profit £m
2017
1
Budget
Actual2
2016
Budget
Actual3
£7,846
£8,567
£7,572
£7,741
Variable
remuneration
Short-term plan
Long-term plan
See page 101
See page 101
£436.9m
x
1.20
x
0.79
(£109.6m)
=
£414.7m
5.1% of
underlying profit
Group BSC
modifier based
on Strong Plus
performance
Collective
performance
adjustment
4.7% of
underlying profit
GPS award versus shareholder returns
(% of underlying profit)
1 Excludes MBNA.
2 The underlying profit of £8,493 million has been adjusted by the £74 million incremental
difference between the Prudential Value Adjustment (PVA) at year-end 2016 to year-end
2017, in line with regulatory requirements.
3 The underlying profit of £7,867 million has been adjusted (reduced) by the £126 million
incremental difference between the PVA at year-end 2015 to year-end 2016.
2017
2016
Group Balanced Scorecard (BSC) performance
BSC category
Customer
People
Control environment
Building the business
Finance
Rating
Strong+
Strong+
Strong+
Strong
Strong
Collective performance adjustment
The Committee considered the conduct-related provisions, including
an additional PPI provision. This led to a downward adjustment of
£109.6 million, or 21 per cent.
Long-term incentive plan
36%
4.7%
26.3%
4.8%
0
500
1000
1500
2000
2500
3000
3500
Dividend £m
Dividend includes ordinary and special
dividend (2016) and intended share buyback (2017)
GPS £m
The total GPS award as a percentage of underlying profit before tax
and GPS allocation decreased from 4.8 per cent in 2016 to 4.7 per cent
in 2017. This compares favourably to shareholder return from dividend
payments and share buyback over the same period which increased
to 36 per cent of underlying profit. The GPS allocation for 2017 remains
significantly lower than the Group’s funding limit of 10 per cent of
underlying profit.
LTIP awards made in 2015 are vesting at 66.3 per cent, as detailed in the
table below. This reflects the Group’s strong performance over the three
financial years ended 31 December 2017, balanced against uncertainty in
the economic and political environment. In particular, this has impacted
negatively on absolute share price performance, resulting in no vesting
for the Total Shareholder Return component. Executive Directors are
required to retain any vested shares for a further two years after vesting.
Weighting
Measure
30%
25%
10%
10%
10%
7.5%
7.5%
Absolute total shareholder return (TSR)
Economic profit
Cost:income ratio1
Customer complaint handling2
(FCA reportable complaints / FOS uphold rate)
Net promoter score
Digital active customer base
Colleague engagement score
Threshold
8% p.a.
£2,870m
45.6%
0.79
=<32%
3rd
12.7m
62
Maximum
16% p.a.
£3,587m
44.5%
0.73
=<28%
1st
13.3m
70
Actual
(1.7%)
£3,987m
44.9%
0.53
15%
1st
13.4m
76
Vesting
0%
25%
6.3%
10%
10%
7.5%
7.5%
LTIP (% maximum) vesting 66.3%
1 Adjusted total costs.
2 The FCA changed the approach to complaint classification and reporting from 30 June 2016. The Committee determined that the original target should be translated on a like-for-like basis into
the new reporting requirement. The Committee was satisfied that the revised targets, set on a mechanical basis, were no less stretching.
Lloyds Banking Group Annual Report and Accounts 2017 87
Single total figure of remuneration
2018 policy implementation overview
The charts below summarise the Executive Directors’ remuneration
for the 2016 and 2017 performance years.
The detailed policy implementation table containing all elements of
remuneration can be found on page 96.
Base
salary
The Group has applied a total pay budget of
2.7 per cent for the wider colleague population. Salary
increases for the Group Chief Executive (GCE) and
the Chief Financial Officer (CFO) are set below this
budget, at 2 per cent. Juan Colombás took on a new
role of Chief Operating Officer (COO) in September
2017 and accordingly it is proposed he receive a salary
increase of 3.4 per cent to reflect the fact that the
COO role is larger than his previous role as the Chief
Risk Officer. Salaries will be as follows, effective dates
shown below:
GCE: £1,244,400 (1 January 2018)
CFO: £779,351 (1 April 2018)
COO: £779,351 (1 January 2018)
Fixed share
award
The levels of award set for 2018 remain unchanged
and are as follows:
GCE: £900,000
CFO: £504,000
COO: £497,000
Group
Performance
Share plan
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 (no change).
Malus/clawback provisions and holding period
apply in line with regulatory requirements.
Group
Ownership
Share plan
The maximum annual Group Ownership Share
award for Executive Directors is 300 per cent of
salary (no change).
Awards in 2018, based on individual performance
in 2017, are made as follows:
GCE: 300 per cent of base salary
CFO: 275 per cent of base salary
COO: 275 per cent of base salary
Malus/clawback provisions and holding period
apply in line with regulatory requirements and
market practice.
António Horta-Osório Group Chief Executive
2017
2016
44%
21%
35%
2,842
1,3231
77%
of max
2,2572
66.3%
of max
47%
21%
32%
2,737
1,220
77%
of max
1,834
55%
of max
George Culmer Chief Financial Officer
£000
6,422
5,791
£000
3,321
2017
2016
45%
18%
37%
1,501
599 1
78%
of max
1,2212
66.3%
of max
48%
19%
33%
1,478
574
77%
of max
992
55%
of max
3,044
Juan Colombás Chief Operating Officer (formerly Chief Risk Officer)3
2017
2016
46%
18%
1,510
5991
80%
of max
£000
3,313
36%
1,2042
66.3%
of max
50%
20%
30%
1,492
578
78%
of max
883
55%
of max
2,953
1 2017 Group Performance Share, awarded in March 2018.
2 The LTIP vesting and dividend equivalents awarded in shares were confirmed by the
Remuneration Committee at its meeting on 19 February 2018. The average share price
between 1 October 2017 and 31 December 2017 (66.75 pence) has been used to indicate the
value. The shares were awarded in 2015 based on a share price of 79.93 pence.
3 Juan Colombás took up the role of Chief Operating Officer on 4 September 2017.
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
88 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
Annual report on remuneration
Single total figure of remuneration (audited)
The following table summarises the total remuneration delivered during 2017 in relation to service as an Executive Director.
£000
Base salary
Fixed share award
Benefits
Group Performance Share
Long-term incentive (LTIP)1
Pension allowance
Other remuneration2
Total remuneration
António Horta-Osório
George Culmer
Juan Colombás
Totals
2017
1,220
900
156
1,323
2,257
565
1
6,422
2016
1,125
900
143
1,220
1,834
568
1
5,791
2017
760
504
46
599
1,221
190
1
2016
745
504
42
574
992
186
1
2017
753
497
71
599
1,204
188
1
2016
739
497
70
578
883
185
1
2017
2,733
1,901
273
2,521
4,682
943
3
2016
2,609
1,901
255
2,372
3,709
939
3
3,321
3,044
3,313
2,953
13,056
11,788
1 The LTIP vesting at 66.3 per cent and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 19 February 2018. The total number of shares
vesting were 3,035,880 and 346,087 shares delivered in respect of dividend equivalents for António Horta-Osório, 1,642,361 shares vesting and 187,227 shares delivered in respect of dividend
equivalents for George Culmer and 1,619,551 shares vesting and 184,627 shares delivered in respect of dividend equivalents for Juan Colombás. The average share price between 1 October 2017
and 31 December 2017 (66.75 pence) has been used to indicate the value. The shares were awarded in 2015 based on a share price of 79.93 pence. LTIP and dividend equivalent figures for 2016
have been adjusted to reflect the share price on the date of vesting (67.51 pence) instead of the average price (58.30 pence) reported in the 2016 report.
2 Other remuneration payments comprise income from all employee share plans, which arises through employer matching or discounting of employee purchases.
Pension and benefits (audited)
Pension/Benefits £
Cash allowance in lieu of pension contribution
Car or car allowance
Flexible benefits payments
Private medical insurance
Tax preparation
Transportation
António
Horta-Osório
565,000
12,000
45,000
35,167
24,000
39,389
George
Culmer
190,081
15,313
29,964
760
–
–
Juan
Colombás
188,364
12,000
29,547
15,985
10,680
2,649
Defined benefit pension arrangements (audited)
António Horta-Osório 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 benefit in the EFRBS accrued during the six years following commencement of
employment, therefore ceasing to accrue as of 31 December 2016.
The EFRBS was subject to performance conditions. It provides a percentage of the GCE’s base salary or reference salary in the 12 months before
retirement or leaving. No additional benefit is due in the event of early retirement. The rate of pension accrued in each year depended on share price
conditions being met and the total pension due is 6 per cent of the reference salary of £1,220,000 or £73,200.
There are no other Executive Directors with defined benefit pension entitlements.
Under terms agreed when joining the Group, Juan Colombás is entitled to a conditional lump sum benefit of £718,996 either (i) on reaching normal
retirement age of 65 unless he voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death.
Lloyds Banking Group Annual Report and Accounts 2017 89
Executive Directors’ Group Performance Share outcome for 2017 (audited)
The annual Group Performance Share (GPS) outcome is based on a
percentage of the Group’s underlying profit, adjusted by a strategic
modifier based on the Group’s Balanced Scorecard (BSC) metrics and
collective and discretionary adjustments to reflect risk matters and
other factors.
£436.9m
x
1.20
x
0.79
(£109.6m)
=
£414.7m
5.1% of
underlying profit
Group BSC
modifier
Collective
performance
adjustment
4.7% of
underlying profit
The Committee determined that the GPS outcome would be £414.7 million, based on the following performance outcomes.
Underlying profit £m
2017
Budget
1
Actual2
2016
Budget
Actual3
£7,846
£8,567
£7,572
£7,741
1 Excludes MBNA.
2 The underlying profit of £8,493 million has been adjusted by the £74 million incremental
difference between the Prudential Value Adjustment (PVA) at year-end 2016 to year-end 2017,
in line with regulatory requirements.
3 The underlying profit of £7,867 million has been adjusted (reduced) by the £126 million
incremental difference between the PVA at year-end 2015 to year-end 2016.
Group Balanced Scorecard modifier
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.
The Balanced Scorecard (BSC) is not intended to be a purely mechanical
approach to performance assessment, but designed to support the
Committee in exercising judgement. It was noted that while there
were a diverse range of outcomes, on balance despite challenging
economic and external market conditions, the Group had delivered
outperformance against 10 of the 20 BSC metrics, with only two falling
below the target level; the progress on the creation of the non ring-
fenced bank and return on required equity. The Committee discussed
a number of key performance factors, noting in particular the Group’s
outperformance in customer complaints management, colleague
engagement despite the significant structural changes during 2017, and
strong balance sheet management and capital generation.
Collective performance adjustment
Consideration was given to items not factored into the Group underlying
profit or the Group BSC. The Committee considered adjustments
reflecting 2017 conduct-related provisions, including the additional PPI
provision of £1.65 billion and other non-PPI provisions of £865 million. In
arriving at the adjustment, the Committee considered factors such as
customer impact and reputation.
The Committee determined that the share of underlying profit should be
5.1 per cent. In reaching this decision, the Committee took into account
the Group’s actual performance against budget where outperformance
was 8.2 per cent and distributions to shareholders which have increased
by 46.9 per cent. Due consideration was also given to market levels of
variable remuneration on both an individual basis and for the total GPS
outcome overall.
The Committee approved the final Group BSC performance outcome
at Strong Plus (as detailed in table ‘Group Balanced Scorecard
performance’ on page 90), with the view that while the mechanical BSC
assessment was marginal in some areas, on balance there were other
qualitative factors that provided the Committee with assurance that the
recommendation was fair and justified. A full summary of the Group’s
performance is provided in the Group Chief Executive’s statement on
page 4, however the key factors were: the Group’s return to full private
ownership; significant additional cost reductions; the completion of the
successful acquisition of MBNA; and continued focus on commitments
to the UK economy through the Helping Britain Prosper strategy.
Under
0
Developing
0.55
Good
1.00
Strong
1.15
Strong Plus
1.20
Top
1.30
As a result of these items, the Committee approved an overall collective
adjustment of £109.6 million (or approximately 21 per cent of the
modified GPS outcome) which reduced the total GPS outcome.
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
90 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
Group Balanced Scorecard performance
Objective
Measure
Under
Top
Performance range/outcome2
Customer
Creating
the best
customer
experience
Customer dashboard
Best customer experience:
end-to-end customer journeys
Reportable
complaints
Total FCA
complaints
per ‘000
Formally closed
FCA complaints
per ‘000
FOS uphold rate (ex PPI)
Culture – Best Bank for
Customers Index scores
People colleague
engagement – EEI
People colleague
engagement – PEI
Inclusion & Diversity –
F+ Females
Board risk appetite
Regulatory management
People
Best team:
engaged
and
customer
focused
colleagues
Control
environment
Maintain
a strong
control,
governance
and
compliance
structure
in line with
the Risk
Management
Framework
The Group has performed below expectations
in terms of customer perception of brand,
service, products and complaints.
The Group has exceeded expectations in terms of
customer perception of brand, service, products and
complaints.
The Group has not improved the operation
and/or service of its key customer journeys.
The Group has significantly improved the operation or
service of its key customer journeys.
> 4.95
> 0.71
> 30%
≤ 68
≤ 57
≤ 60
< 32.4%
3.24
0.52
80
34
≤ 3.09
≤ 0.50
15%
≤ 25%
≥ 84
76
≥ 73
83
≥ 81
> 34.3%
The Group has not managed its key risk
measures to ensure the safe guarding of
the Group.
The Group has strongly managed its key risk measures to
ensure the safe guarding of the Group.
The regulatory bodies (FCA and PRA) are
concerned about the Group’s approach to
regulatory matters.
The regulatory bodies (FCA and PRA) are comfortable
with the Group’s approach to regulatory matters and
recognise this as an area of strength.
Building the
business
Actively
manage key
stakeholders
Simpler and more efficient:
Simplification savings
The Group has not managed to improve its
operational and strategic processes through
simplification initiatives and delivered below
target savings.
The Group has successfully managed to improve
its operations and strategic processes through
simplification initiatives and delivered above target
savings.
Best customer experience:
Digital active customer growth
< 13.26m
13.44m
≥ 13.38m
Reputation with external
stakeholders – composite
(excluding regulators)
Deliver Helping Britain
Prosper Plan targets (Group)
Establishment of the
non ring-fenced bank
Poor relationships with key external
stakeholders.
Strong relationships with key external stakeholders.
< 50% of Helping Britain Prosper Plan metrics
are Green
90%+ of Helping Britain Prosper Plan metrics are Green
and none of the Helping Britain Prosper metrics are Red.
Key mobilisation milestones are not on track for
the separation of the commercial and personal
banking customers in line with the regulatory non
ring-fenced Bank requirements.
Key mobilisation milestones are ahead of schedule
and comfortably on track for the separation of the
commercial and personal banking customers in line with
the regulatory non ring-fenced Bank requirements.
+
g
n
o
r
t
S
+
g
n
o
r
t
S
+
g
n
o
r
t
S
g
n
o
r
t
S
Finance
Maintain
prudent
reserves to
withstand
unexpected
shocks
Cost:income ratio (Group)1
Underlying profit before
tax (Group)1
Total return on required
equity (Group)
Underlying Common Equity Tier
1 generation (Group)
PRA stress test (Group)
> 49.8%
< 7,061m
< 7.0%
< 140bps
47.3%
8.1%
< 47.3%
8,298m
> 8,238m
> 10.5%
245bps
> 200bps
g
n
o
r
t
S
Failed the annual Prudential Regulation
Authority (PRA) stress test due to the Group’s
capital position and negative feedback on
quality of submissions and ranked significantly
below peers.
Passed the annual Prudential Regulation Authority (PRA)
stress test with a strong capital position and very positive
feedback on quality of submissions and ranked highly
against peers.
1 Excludes MBNA.
2 Where the performance assessment is qualitative the position against threshold and maximum (Under and Top) is shown. Where internal dashboards are used in reaching the assessment of
performance, the Committee is provided with underlying data points and additional commentary to inform its judgement.
Lloyds Banking Group Annual Report and Accounts 2017 91
The individual GPS awards for Executive Directors are determined in the same way as for colleagues across the Group, based on individual
performance and the level of GPS outcome determined by the Committee following consideration of the factors set out on pages 89–90. Individual
performance is assessed on the basis of ‘whole job’ contribution, both ‘what’ has been achieved against BSC objectives, role requirements and
personal objectives and ‘how’ it has been delivered. Judgement is applied in reaching the overall assessment. Awards are approved by the
Committee, which has discretion to adjust outcomes for any reason.
In reaching their decision on individual awards for Executive Directors, the Committee considered formulaic payout ranges set around the expected
outcome for each performance rating, based on a percentage of base salary (see graphs below for each Executive Director). The percentage of base
salary applied within the relevant range was determined by reference to the individual performance rating for each Executive Director.
António Horta-Osório Group Chief Executive (GCE)
The GCE’s individual performance
assessment for 2017 reflected the Group’s
objectives, assessed as Strong Plus as
outlined on page 90 and a number of other
considerations, including:
Successful delivery of the second Group
Strategic Review, with improved customer
service, market leading digital proposition,
targeted lending growth and simplification
savings ahead of target. Completed acquisition
of MBNA’s prime credit card business.
Next phase of strategy defined to further
transform the business for success in a
digital world and deliver additional sources
of competitive advantage, positioning
the Group well to meet changing
customer needs.
Restructured the business and reorganised
the team ready for the next stage of the
Group’s strategic journey.
Continued strong underlying financial
performance with continued improvement in
profit (£8.5 billion, up 8 per cent) and returns
(RoTE of 15.6 per cent). Market leading
cost:income ratio improving to 46.8 per cent.
Credit and asset quality remain strong.
CET1 ratio of 15.5 per cent pre capital return
comfortably above requirements. Moody’s
upgraded Lloyds Bank’s credit rating to Aa3
and S&P improved outlook to ‘positive’.
George Culmer Chief Financial Officer (CFO)
The CFO’s individual performance
assessment for 2017 reflected the Finance
division’s objectives. During 2017, the Group
undertook a significant structural change
with the responsibility for Legal and Strategy
transferring to the CFO from September 2017.
The individual performance assessment of
the CFO was Strong Plus for full year 2017,
informed by the rating for the Finance, Legal
and Strategy division at Q4 2017 and a number
of other considerations, including:
Strong financial performance delivered in
challenging environment with low interest
rates and Brexit uncertainty creating
downward pressure on the UK economy.
Improvements in profit and returns.
Continued improvement in the Group’s
market leading cost:income ratio to
46.8 per cent (2016: 48.7 per cent).
Increase in ordinary dividend to 3.05 pence
per share (2016: 2.55 pence plus special
dividend 0.5 pence per share), in line with
the Group’s progressive and sustainable
dividend policy, with a share buyback of
up to £1 billion.
Employee engagement survey results
further strengthened, exceeding UK
high-performing benchmarks.
Expansion of enhancement to key customer
journeys leading to improved customer
feedback and trust scores. Total complaints
reduced by 18 per cent.
Largest digital bank in the UK, with over
13.4 million digitally active customers,
providing best-in-class customer experience
(number 1 rated mobile app since 2015).
Significant progress made against Helping
Britain Prosper targets with more than
£47 billion of lending to first-time buyers
since 2014, and 15 per cent increase
in lending to SMEs since 2014 (versus
market increasing by only 1 per cent). Over
700,000 individuals, businesses and charities
trained in digital skills.
Successful return of the Group to full private
ownership, repaying the taxpayer £20.3 billion
plus an additional £900 million.
CET1 capital generation of 245 basis
points, with CET1 ratio of 15.5 per cent pre
capital return, 14.4 per cent pre-buyback,
comfortably above requirements.
Continued to build strong relationships with
key external stakeholders, including debt
and equity investors, regulators, and credit
rating agencies.
Effectively managed development of the
next phase of the Group’s strategy whilst
successfully completing delivery of the
second Group Strategic Review.
Established the new Finance, Legal and
Strategy division effectively, with excellent
employee engagement scores and retention
of talent.
BSC category
Customer
People
Control environment
Building the business
Finance
Rating
Strong+
Strong+
Strong+
Strong
Strong
The individual rating of Strong Plus results
in a GPS award of £1,322,520 (108 per cent
of salary and 77 per cent of maximum).
Top
Strong Plus
Strong
l
y
r
a
a
s
f
o
%
s
a
e
m
o
c
t
u
o
d
e
t
c
e
p
x
E
140
91
42
0
Good
Developing
Rating
BSC category
Customer
People
Control environment
Building the business
Finance
Rating
Strong+
Strong
Strong+
Strong–
Strong–
The individual rating of Strong Plus results
in a GPS award of £599,000 (78 per cent of
maximum).
Top
Strong Plus
Strong
l
y
r
a
a
s
f
o
%
s
a
e
m
o
c
t
u
o
d
e
t
c
e
p
x
E
100
65
30
0
Good
Developing
Rating
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
92 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
Juan Colombás Chief Operating Officer (COO) (formerly Chief Risk Officer)
The COO’s individual performance
assessment for 2017 reflected the Risk
division’s objectives and the newly created
Chief Operating Office from September
2017. The individual performance assessment
of the COO was Strong Plus for full year
2017, informed by the rating for the Risk
division at Q3 2017 and a number of other
considerations, including:
The Group continues to remain comfortably
within the risk appetite set by the Board.
Continued to drive a prudent risk culture and
control framework to ensure low risk model
maintained, positioning the Group well for
market developments and uncertainties.
Moody’s upgraded Lloyds Bank’s credit
rating to Aa3 and S&P improved outlook
to ‘positive’.
Further strengthening of operational risk
management through enhanced reporting
framework. Material reductions in operational
losses and events.
Support to the business in development
of frameworks and controls to mitigate
emerging and evolving risks, such as
cyber risks.
Development and maintenance of a high
cadre of risk professionals, with employee
engagement scores above the high
performing norms and strong retention
of talent.
Fully supported successful transition to
revised Group organisation structure and
mobilisation of the new Chief Operating
Office function.
Effective implementation of the supporting
infrastructure required to drive the
transformation activities across the Group
to build Bank of the Future.
BSC category
Customer
People
Control environment
Building the business
Finance
Rating
Good
Strong-
Strong+
Good+
Top
The individual rating of Strong Plus results
in a GPS award of £599,000 (80 per cent of
maximum).
Top
Strong Plus
Strong
l
y
r
a
a
s
f
o
%
s
a
e
m
o
c
t
u
o
d
e
t
c
e
p
x
E
100
65
30
0
Good
Developing
Rating
Deferral
The 2017 GPS for all Executive Directors is awarded in a combination of
cash and shares. 40 per cent of the GPS will be released in 2018 (£2,000
cash in March, the remainder in shares), 40 per cent will be released in
2019 and the remaining 20 per cent will be released in 2020, subject to
remaining in the Group’s employment. Any shares released are subject
to a further holding period in line with regulatory requirements.
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 to be made,
if it deems appropriate as a result of a risk matter coming to light
before vesting.
20%
(10% held for 12 months)
40%
(20% held for
12 months)
Performance
period
40%
(20% held for
12 months)
2017
2018
2019
2020
2021
2015 LTIP vesting (audited)
Awards in the form of conditional rights to free shares in 2015 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 (now COO). These LTIP awards are vesting at 66.3 per cent, as detailed in the table below. This reflects
the Group’s strong performance over the three financial years ended 31 December 2017, balanced against uncertainty in the economic and political
environment. In particular, this has impacted negatively on absolute share price performance, resulting in no vesting for the Total Shareholder Return
component. Executive Directors are required to retain any vested shares for a further two years after vesting.
Weighting
Measure
30%
25%
10%
10%
10%
7.5%
7.5%
Absolute total shareholder return (TSR)
Economic profit
Cost:income ratio1
Customer complaint handling2
(FCA reportable complaints/FOS uphold rate)
Net promoter score
Digital active customer base
Colleague engagement score
Threshold
8% p.a.
£2,870m
45.6%
0.79
=<32%
3rd
12.7m
62
Maximum
16% p.a.
£3,587m
44.5%
0.73
=<28%
1st
13.3m
70
Actual
(1.7%)
£3,987m
44.9%
0.53
15%
1st
13.4m
76
Vesting
0%
25%
6.3%
10%
10%
7.5%
7.5%
LTIP (% maximum) vesting 66.3%
1 Adjusted total costs.
2 The FCA changed the approach to complaint classification and reporting from 30 June 2016. The Committee determined that the original target should be translated on a like-for-like basis into
the new reporting requirement. The Committee was satisfied that the revised targets, set on a mechanical basis, were no less stretching.
Lloyds Banking Group Annual Report and Accounts 2017 93
Percentage change in remuneration levels
Figures for ‘All employees’ are calculated using figures for UK-based colleagues subject to the GPS 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 2017, 45,696 colleagues
were included in this category.
GCE (salary increase effective 1 January 2018)
All employees
% change in base salary
(2016 – 2017)
% change in GPS
(2016 – 2017)
% change in benefits
(2016 – 2017)
2
2.72
8.41
22,3
8.7
2.72
1 Reflects the increase in base salary from 1 January 2017 against which the award is determined.
2 Adjusted for movements in staff numbers and other impacts to ensure a like-for-like comparison. Salary increases effective 1 April 2018.
3 Average awards for colleagues participating in the Group annual GPS increased by 9.3 per cent.
Relative importance of spend
on pay (£m)
The graphs illustrate the total remuneration
of all Group employees compared with
distributions to shareholders in the form of
dividends and share buyback.
Dividend and share buyback1 £m
2017
2016
+46.9%
3,195
2,175
Salaries and performance-based
compensation2 £m
2017
-2.9%
3,152
2016
3,245
1 2017: Ordinary dividend in respect of the financial year
2 In addition to the annual bonus of £414.7 million
ended 31 December 2017, partly paid in 2017 and partly
to be paid in 2018 and intended share buyback. 2016:
Ordinary and special dividend in respect of the financial
year ended 31 December 2016, partly paid in 2016 and
partly paid in 2017.
awarded in respect of 2017 performance, the Group
made Group Ownership Share awards of £46.7 million
and paid approximately £64.1 million under variable
pay arrangements used to incentivise customer-facing
colleagues, primarily in the Community Banking and
Commercial Banking divisions.
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 2017.
External appointments
António Horta-Osório – During the year ended 31 December 2017, the GCE served as a Non-Executive Director of Exor, Fundação Champalimaud,
Stichting INPAR and Sociedade Francisco Manuel dos Santos for which he received fees of £323,688 in total.
Chairman and Non-Executive Directors (audited)
Chairman and current Non-Executive Directors
Lord Blackwell 1
Alan Dickinson
Anita Frew
Simon Henry
Lord Lupton
Deborah McWhinney
Nick Prettejohn
Stuart Sinclair
Sara Weller
Former Non-Executive Directors
Dyfrig John (retired May 2016)
Anthony Watson (retired May 2017)
Nick Luff (retired May 2017)
Total
1 Benefits: car allowance (£12,000).
Fees £000
Total £000
2017
2016
2017
2016
728
248
364
166
161
142
441
152
190
–
91
69
714
195
295
135
–
135
412
135
171
49
230
165
740
248
364
166
161
142
441
152
190
–
91
69
726
195
295
135
–
135
412
135
171
49
230
165
2,752
2,636
2,764
2,648
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
94 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
Comparison of returns to shareholders and GCE total remuneration
The chart below shows the historical total shareholder return (TSR) of Lloyds Banking Group plc compared with the FTSE 100 as required by the
regulations. 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.
TSR indices – Lloyds Banking Group and FTSE 100
Rebased to 100 on 31 December 2008.
Source: Mercer Kepler
Lloyds return index
FTSE 100 return index
250
225
200
175
150
125
100
75
50
25
0
GCE
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
GCE single figure of remuneration £000
J E Daniels
1,121
António Horta-Osório
–
2,572
–
855
1,765
Annual bonus/GPS payout (% of maximum opportunity)
J E Daniels
Waived
António Horta-Osório
–
62%
–
0%
Waived
Long-term incentive vesting (% of maximum opportunity)
J E Daniels
António Horta-Osório
0%
–
0%
–
0%
0%
–
3,398
–
62%
–
0%
–
7,475
–
71%
–
54%
–
11,540
–
54%
–
97%
–
8,704
–
57%
–
94.18%
–
5,791
–
77%
–
55%
–
6,422
–
77%
–
66.3%
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.
Directors’ share interests and share awards
Directors’ interests (audited)
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
2017
Totals at
20 February
2018
Expected
value at
31 December
2017
(£000s)2
21,611,593 3,228,463 14,912,901
12,620,524 1,133,621 8,238,141
7,937,630 1,127,750 8,123,722
51,277
29,549
29,109
100,000
200,000
450,000
200,000
400,000
550,000
250,000
69,280
–
576,357
340,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
39,804,234 39,804,8086
22,021,835 22,022,3366
17,218,211 17,218,7116
22,015
12,184
8,954
100,000
200,000
450,000
200,000
400,000
550,000
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
Executive Directors
António Horta-Osório
George Culmer
Juan Colombás
Non-Executive Directors
Lord Blackwell
Alan Dickinson
Anita Frew
Simon Henry
Nick Luff 4
Lord Lupton
Deborah McWhinney3
Nick Prettejohn5
Stuart Sinclair
Anthony Watson4
Sara Weller
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
2017 closing price of 68.06 pence. Full face value of awards are £27,090,761 for António Horta-Osório, £14,988,060 for George Culmer and £11,718,714 for Juan Colombás.
3 Shareholdings held by Deborah McWhinney are either wholly or partially in the form of ADRs.
4 Shares held as at date of resignation/retirement.
5 In addition, Nick Prettejohn held 400 6.475% preference shares at 1 January 2017 and 31 December 2017.
6 The changes in beneficial interests for António Horta-Osório (574 shares), George Culmer (501 shares) and Juan Colombás (500 shares) relate to ‘partnership’ and ‘matching’ shares
acquired under the Lloyds Banking Group Share Incentive Plan between 31 December 2017 and 20 February 2018. There have been no other changes up to 20 February 2018.
Lloyds Banking Group Annual Report and Accounts 2017 95
Shareholding requirement (audited)
From 1 January 2017 the shareholding requirement has been focused on base salary only (previously: base salary plus fixed share award) to provide
greater transparency in the measurement of the shareholding requirements. This resulted in an increase in the percentage required as a multiple of
salary. 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.
In addition to the Group’s shareholding requirements, shares vesting are subject to holding periods, in line with regulatory requirements.
António Horta-Osório
Shareholding requirement
Actual shareholding1
George Culmer
Shareholding requirement
Actual shareholding1
Juan Colombás
Shareholding requirement
Actual shareholding1
0
0
0
130
260
390
520
650
780
910
1040
1170
1300
350%
1184%
130
260
390
520
650
780
910
1040
1170
1300
130
260
390
520
650
780
910
1040
1170
1300
250%
704%
250%
1104%
1 Calculated using the average share price for the period 1 January 2017 to 31 December 2017 (66.85 pence). 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.
Outstanding share plan interests (audited)
At 1 January
2017
Granted/
awarded
Dividends
awarded
Vested /
released /
exercised
At
31 December
2017
Lapsed
Exercise
price
From
To
Notes
Exercise periods
António Horta-Osório
LTIP 2014-2016
4,640,077
LTIP 2015-2017
LTIP 2016-2018
4,579,006
5,015,210
GOS 2017-2019
Deferred GPS
awarded in 2017
2014 Sharesave
2016 Sharesave
2017 Sharesave
George Culmer
14,995
14,554
LTIP 2014-2016
2,510,205
LTIP 2015-2017
LTIP 2016-2018
GOS 2017-2019
Deferred GPS
awarded in 2017
2014 Sharesave
2016 Sharesave
Juan Colombás
2,477,167
2,767,409
14,995
14,554
LTIP 2014-2016
2,234,780
2,442,762
2,728,973
LTIP 2015-2017
LTIP 2016-2018
GOS 2017-2019
Deferred GPS
awarded in 2017
2016 Sharesave
–
–
–
5,318,685
1,417,778
–
–
21,728
–
–
–
2,993,565
667,685
–
–
–
–
–
2,951,987
671,579
164,563
2,552,042
2,088,035
–
–
–
–
–
–
–
–
354,443
–
–
–
–
–
–
– 4,579,006
– 5,015,210
– 5,318,685
– 1,063,335
–
–
–
14,995
14,554
21,728
89,026
1,380,612
1,129,593
–
1, 2, 3
3
3
3, 4
5
60.02p 01/01/2018 30/06/2018
47.49p 01/01/2020 30/06/2020
51.03p 01/01/2021 30/06/2021
6
–
–
–
–
–
–
–
–
–
166,920
– 2,477,167
– 2,767,409
– 2,993,565
–
500,765
–
–
–
–
14,995
60.02p 01/01/2018 30/06/2018
14,554
47.49p 01/01/2020 30/06/2020
79,257
1,229,129
1,005,651
–
–
–
–
–
–
–
–
167,894
– 2,442,762
– 2,728,973
– 2,951,987
–
503,685
1, 2, 3
3
3
3, 4
5
1, 2, 3
3
3
3, 4
5
29,109
–
–
–
–
29,109
47.49p 01/01/2020 30/06/2020
1 The shares awarded in March 2014 vested on 6 March 2017. The closing market price of the Group’s ordinary shares on that date was 67.51 pence. Shares vested are subject to a further
two-year holding period.
2 2014 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 6 March 2017. The closing market price of the Group’s ordinary shares on that date was
67.51 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 2017 were made over shares with a value of 300 per cent of reference salary for António Horta-Osório (5,318,685 shares with
a face value of £3,660,000); 275 per cent for George Culmer (2,993,565 shares with a face value of £2,059,992); and 275 per cent for Juan Colombás (2,951,987 shares with a face value of
£2,031,381). The share price used to calculate face value is the average price over the five days prior to grant (27 February to 3 March 2017), which was 68.814 pence. This was the average
share price used to determine the number of shares awarded. Performance conditions for this award are set out in the table below.
5 GPS is deferred into shares. The face value of the share awards in respect of GPS granted in March 2017 was £975,630 (1,417,778 shares) for António Horta-Osório; £459,461 (667,685 shares)
for George Culmer; and £462,141 (671,579 shares) for Juan Colombás. The share price used to calculate the face value is the average price over the five days prior to grant (27 February to
3 March 2017), which was 68.814 pence.
6 Sharesave options granted on 29 September 2017.
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
96 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
2017 GOS performance measures
Strategic priorities
Creating the best
customer experience
10%
10%
7.5%
25%
10%
30%
7.5%
Measure
Basis of payout range
Metric
Weighting
FCA total reportable complaints
and Financial Ombudsman Service
(FOS) uphold rate (excluding PPI)
Set relative to 2019 targets
Average rate over 2019
Threshold: 3.52 complaints per
1,000 accounts
Maximum: 3.18 complaints per
1,000 accounts
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 profit1
Set relative to 2019 targets
Cost:income ratio
Set relative to 2019 targets
Delivering sustainable growth
Absolute total shareholder
return (TSR)
Growth in share price
including dividends over
3-year period
Building the best team
Employee engagement index
Set relative to 2019 targets
Threshold: 14.3m
Maximum: 14.9m
Threshold: £3,074m
Maximum: £3,769m
Threshold: 47.2%
Maximum: 45.7%
Threshold: 8% p.a.
Maximum: 16% p.a.
Threshold: 67
Maximum: 73
1 A measure of profit taking into account Expected Losses, tax and a charge for equity utilisation.
None of the other Directors at 31 December 2017 had options to acquire shares in Lloyds Banking Group plc or its subsidiaries.
Implementation of the policy in 2018
It is proposed to operate the policy in the following way in 2018:
Base salary
Group Performance Share plan
The Group has applied a total pay budget of 2.7 per cent including
additional funding to ensure a minimum pay award of £600 for eligible
colleagues. Salary increases for the Group Chief Executive (GCE) and
the Chief Financial Officer (CFO) are set below the budget for the
wider colleague population, at 2 per cent. Juan Colombás took on a
new role of Chief Operating Officer (COO) in September 2017 and
accordingly it is proposed he receive a salary increase of 3.4 per cent to
reflect the fact that the COO role is larger than his previous role as the
Chief Risk Officer.
Salaries will therefore be as follows:
GCE: £1,244,400 (1 January 2018)
CFO: £779,351 (1 April 2018)
COO: £779,351 (1 January 2018)
Fixed share award
The levels of the 2018 award are unchanged from 2017:
GCE: £900,000
CFO: £504,000
COO: £497,000
Shares will be released in equal tranches over a five year period.
Pension
The level of pension allowances is unchanged from 2017:
GCE: 50 per cent of base salary less flexible benefits allowance
CFO: 25 per cent of base salary
COO: 25 per cent of base salary
Benefits
For 2018, 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 2017).
The maximum Group Performance Share opportunity will be unchanged
from 2017 at 140 per cent of base salary for the GCE and 100 per cent
of base salary for other Executive Directors. The threshold is set at
20 per cent below the Group’s underlying profit target.
For 2018, the Group Performance Share will be based on a percentage
of the Group’s underlying profit, adjusted by a strategic modifier of up
to 130 per cent based on the Group’s Balanced Scorecard (BSC) metrics
and collective and discretionary adjustments to reflect risk matters and
other factors. At least 75 per cent of performance is weighted towards a
financial measure.
Individual awards will be adjusted to reflect a balanced scorecard
approach with clearly identified performance metrics used to assess
Group performance in key areas. Stretching objectives for the Group
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 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’. Each of these ratings may be further differentiated by the
addition of ‘minus’ or ‘plus’.
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.
For the 2018 performance year, the Group Performance Share
opportunity will be awarded in March 2019 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 12-month holding period in line with
regulatory requirements.
The Committee may consider the application of malus and clawback as
outlined in the performance adjustment section below.
Lloyds Banking Group Annual Report and Accounts 2017 97
Group Ownership Share plan
The maximum Group Ownership Share award for Executive Directors is
300 per cent of salary (unchanged from 2017).
Awards in 2018 are being made as follows:
GCE: 300 per cent of base salary
CFO: 275 per cent of base salary
COO: 275 per cent of base salary
As regulations prohibit the payment of dividend equivalents on awards
in 2018 and subsequent years, the number of shares subject to the award
has been determined by applying a discount factor to the share price on
grant, as previously disclosed. The Committee approved an adjustment
of 25 per cent for colleagues who are senior managers, including the
Executive Directors.
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.
Awards made in 2018 will vest based on the Group’s performance
against the financial and strategic measures, set out in the table below.
In line with the Directors’ remuneration policy, the Committee has full
discretion to amend payout levels should the award not reflect business
and/or individual performance. Business performance includes, but is
not limited to, consideration of returns to shareholders.
In line with shareholder views, changes to strategic measures have been
minimised to provide consistency with the 2017 plan, while aligning to
the key strategic priorities as set out in the third Group Strategic Review.
A new measure is proposed for the 2018 plan. The new measure will be
Digital Net Promoter Score, to ensure that there is focus on maintaining
customer satisfaction and quality of service. To provide alignment to
the 2016 and 2017 plans, the Committee will also take into account other
factors, for example the number of digitally active customers, when
making its overall assessment of performance. Economic profit has been
based on statutory profit after tax, not underlying profit, to align more
closely with shareholder experience, while maintaining focus on capital
efficiency. The targets for this revised measure are considered stretching.
For reference, the equivalent outcome in 2017 would be £798 million
(including PPI), compared to the 2020 threshold of £2.3 billion. The
cost: income ratio measure is inclusive of conduct-related provisions
(excluding PPI). The Committee believes that these measures
appropriately capture risk management and long-term sustainable
growth, aligning management and shareholder interests.
The Committee may consider the application of malus and clawback as
outlined in the performance adjustment section below.
Strategic priorities
Creating the best
customer experience
Measure
Customer satisfaction
Basis of payout range
Metric
Weighting
Major Group average ranking
over 2020
Threshold: 3rd
Maximum: 1st
Digital net promoter score
Set relative to 2020 targets
FCA total reportable complaints
and Financial Ombudsman Service
(FOS) uphold rate
Set relative to 2020 targets
Average rates over 2020
Becoming simpler and
more efficient
Statutory economic profit
Set relative to 2020 targets
Cost:income ratio
Set relative to 2020 targets
Threshold: 64
Maximum: 67
Threshold: 2.97
Maximum: 2.69
Threshold: =<29%
Maximum: =<25%
Threshold: £2,300m
Maximum: £3,451m
Threshold: 46.4%
Maximum: 43.9%
Delivering sustainable growth
Absolute total shareholder
return (TSR)
Growth in share price including
dividends over 3-year period
Threshold: 8% p.a.
Maximum: 16% p.a.
Building the best team
Employee engagement index
Set relative to 2020 markets
norms
Threshold: +5% vs UK Norm
Maximum: +2% vs UK High
Performing Norm
10%
7.5%
10%
25%
10%
30%
7.5%
Performance adjustment
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 GPS and/or GOS 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 GPS and/or GOS 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 GPS and/or GOS 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.
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
98 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
Chairman and Non-Executive Director fees in 2018
The annual fee for the Chairman was increased by 2 per cent to £742,845, in line with the overall salary budget for the executive population.
The annual Non-Executive Director fees were increased by 2 per cent, in line with the base salary increase awarded to the senior management of the
Group. These changes took effect from 1 January 2018.
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 membership1
Nomination and Governance Committee membership2
1 New members only.
2 Including payments to Chairmen of other Committees who are members.
Non-Executive Directors may receive more than one of the above fees.
Additional disclosures
Total remuneration of the eight highest paid senior executives1
2018
2017
£78,000
£76,500
£102,000
£100,000
£61,200
£71,400
£71,400
£71,400
£40,800
£32,650
£32,650
£32,650
£15,300
£15,300
£60,000
£70,000
£70,000
£70,000
£40,000
£32,000
£32,000
£32,000
£15,000
£15,000
The following table sets out the total remuneration of the eight highest paid senior executives (excluding Executive Directors) in respect of the 2017
performance year.
Fixed
Cash-based
Share-based
Total fixed
Variable
Upfront cash
Deferred cash
Upfront shares
Deferred shares
Long-term incentive plan
Total variable pay
Pension cost2
Total remuneration
8
£000
7
£000
6
£000
5
£000
4
£000
3
£000
2
£000
1
£000
Executive
601
406
1,007
2
0
128
195
185
510
160
1,677
498
100
598
2
0
604
172
247
1,025
100
1,723
569
162
731
2
0
204
309
401
916
125
617
422
1,039
2
0
275
416
157
850
154
635
422
1,057
2
0
200
303
404
909
167
1,772
2,043
2,133
490
810
1,300
2
0
642
276
524
1,444
98
2,842
709
466
1,175
2
0
221
335
984
1,542
177
2,894
815
500
1,315
2
0
202
305
1,113
1,622
196
3,133
1 Includes members of the Group Executive Committee and Senior Executive level colleagues, employed by the Group as at 31 December 2017 (excluding colleagues on garden leave or
subject to notice of termination).
2 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
68,299
4,762
102
24
1 Total remuneration of UK-based colleagues. Includes base salary, bonus awards for the 2017 performance year, the estimated values of LTIP, pension and benefits.
Lloyds Banking Group Annual Report and Accounts 2017 99
Remuneration Committee
Committee composition and purpose
The Committee comprises Non-Executive Directors from a wide
background to provide a balanced and independent view on
remuneration matters. Anthony Watson retired as an independent Non-
Executive Director and as a member of the Committee on 11 May 2017.
For details of full membership and attendance at meetings, please see
page 58.
The purpose of the Committee is to set the remuneration for all
Executive Directors and the Chairman, including pension rights and
any compensation payments. It recommends and monitors the level
and structure of remuneration for senior management and material risk
takers. It also considers, agrees and recommends 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.
Annual effectiveness review
During 2017, the Committee met its key objectives and carried
out its responsibilities effectively, as confirmed by the annual
effectiveness review.
How the Remuneration Committee spent its time in 2017
The Committee had eight scheduled meetings during 2017 to consider
the following principal matters.
Committee:
– Review of committee composition
– Approval of terms of reference
– Results of the effectiveness review and suggestions for improvement
Remuneration approach and awards:
– Determination of 2016 bonus outcome
– Approval of the 2014 LTIP vesting
– Approval of the 2017 Group Performance Share plan design,
methodology and performance measures
– Colleague 2017 Group Ownership Share
– Approval of the 2017 and 2018 Group Ownership Shares plan
performance measures
– Incentive Plan review
Senior Executives:
– Review of performance and remuneration arrangements for Executive
Directors and key senior managers
– Review and approval of material risk taker identification
– Approval of LBCM Non-Executive Fees
– Review of shareholding policy
Stakeholders:
– Feedback from the Chairman on her meeting with the PRA
and shareholders
– Consideration of the BEIS Corporate Governance Report and PRA
Policy and supervisory statements
Other remuneration matters:
– Approval of the 2016 Directors’ Remuneration Report for publication
within the annual report and Form 20-F
– Approval of the 2016 Remuneration Policy Statement
– Review of the Reward Governance Framework
– Gender pay reporting review
– Approval of the annual procedural review
– MBNA integration impacts and awards
Mercer (part of the MMC group of companies) is the appointed advisor
to the Remuneration Committee. Mercer is a founding member and
signatory of the Code of Conduct for Remuneration Consultants.
For more detail, please refer to the website
www.remunerationconsultantsgroup.com. Mercer was appointed
by the Committee in 2016 following a competitive tender process
and was retained during the year. The Committee is of the view that
Mercer provides independent remuneration advice to the Committee
and does not have any connections with the Group that may impair
its independence, and, other than advice on remuneration, no other
services were provided to the Company. The broader Mercer company
provides unrelated advice on accounting.
During the year, Mercer attended Committee meetings upon
invitation and provided advice and support in areas such as market
and best practice, regulatory and governance developments, drafting
the remuneration report, and relevant comparator groups for pay
and performance.
Fees payable for the provision of Remuneration Committee services in
2017 were £98,020, based on time and materials.
António Horta-Osório (Group Chief Executive), Simon Davies (Chief
People, Legal and Strategy Officer) until July 2017 and Jen Tippin (Group
People and Productivity Director) thereafter, Paul Hucknall (People
Director, Centres of Excellence), Matt Sinnott (Group Reward Director),
Chris Evans (Director, Reward Policy and Partnering), Stuart Woodward
(Head of Reward Regulation and Governance) and Letitia Smith (Group
Director, Conduct, Compliance & Operational Risk) provided guidance
to the Committee (other than for their own remuneration).
Juan Colombás (Chief Operating Officer from September 2017 and
formerly the Chief Risk Officer) and George Culmer (Chief Financial
Officer) also attended the Committee to advise as and when necessary
on risk, financial and operational matters.
Statement of voting at Annual General Meeting
The table below sets out the voting outcome at the Annual General Meeting in May 2017.
Directors’ remuneration policy (binding vote)
2016 annual report on remuneration (advisory vote)
Votes cast in favour
Votes cast against
Votes
withheld
Number of
shares
(millions)
Percentage of
votes cast
Number of
shares
(millions)
Percentage of
votes cast
Number of
shares
(millions)
47,673
48,113
98.03%
97.92%
959
1,023
1.97%
2.08%
535
31
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
100 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
Directors’ remuneration policy
The Group’s remuneration policy was approved at the AGM on 11 May 2017 and took 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; no changes are proposed for 2018. The full policy is set out in the 2016 annual report and accounts (pages 90–98)
which is available at: www.lloydsbankinggroup.com/globalassets/documents/investors/2016/2016_lbg_annual_report_v2.pdf
The tables in this section provide a summary of the Directors’ remuneration policy. There is no significant difference between the policy for
Executive Directors and that for other colleagues. Further information about the remuneration policy for other colleagues is set out in section ‘Other
remuneration disclosures’.
Remuneration policy table for Executive Directors
Base salary
Pension
Purpose and link to strategy
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.
Operation
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.
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.
Salary may be paid in sterling or other currency and at an exchange rate
determined by the Committee.
All future appointments as Executive Directors will attract a maximum
allowance of 25 per cent of base salary.
Maximum potential
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
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.
Performance measures
N/A
Performance measures
N/A
Benefits
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
Lloyds Banking Group Annual Report and Accounts 2017 101
All-employee plans
Purpose and link to strategy
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.
Operation
Executive Directors may participate in these plans in line with HMRC
guidelines currently prevailing (where relevant), on the same basis as
other eligible employees.
Maximum potential
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
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 a risk matter
coming to light 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 2018
financial year are set out on page 96. 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.
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 a risk matter
coming to light 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.
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
102 Lloyds Banking Group Annual Report and Accounts 2017
Directors’ remuneration report continued
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.
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.
Deferral of variable remuneration and holding
periods
Performance metrics
N/A
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.
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.
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.
Further information on which performance measures were chosen and
how performance targets are set are disclosed in the relevant sections
throughout the report.
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.
On behalf of the Board
Anita Frew
Chairman, Remuneration Committee
Remuneration policy table for Chairman
and Non-Executive Directors
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.
Lloyds Banking Group Annual Report and Accounts 2017 103
Other remuneration disclosures
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This section discloses the remuneration awards made by the Group
to Material Risk Takers (MRTs) in respect of the 2017 performance year.
Additional information summarising the Group’s remuneration policies,
structure and governance is also provided. These disclosures should
be read in conjunction with the disclosures for Executive Directors
contained in the Directors’ Remuneration Report (DRR) on pages 84–102,
and together comply with the requirements of Article 450 of the Capital
Requirements Regulation (EU) No. 575/2013 (CRR). The remuneration
principles and practices detailed in the DRR apply to MRTs and non-
MRTs in the same way as to Executive Directors (other than where stated
in this disclosure).
The Group has applied the EBA Delegated Regulation (EU) No 604/2014
to determine which colleagues should be identified as MRTs. MRTs are
colleagues who are considered to have a material impact on the Group’s
risk profile, and include, but are not limited to:
Senior management, Executive Directors, members and attendees of
the Group Executive Committee (GEC) and their respective executive
level direct reports;
Non-Executive Directors;
Approved persons performing significant influence functions (SIFs)
and/or all colleagues performing a senior management function; and
Other highly remunerated individuals whose activities could have a
material impact on the Group’s risk profile.
Decision making process for remuneration policy
The Group has a strong belief in aligning the remuneration delivered
to the Group’s executives with the successful performance of the
business and, through this, the delivery of long-term, superior and
sustainable returns to shareholders. It has continued to seek the views
of shareholders and other key stakeholders with regard to remuneration
policy and seeks to motivate, incentivise and retain talent while being
mindful of the economic outlook. An essential component of the
Group’s approach to remuneration is the governance process that
underpins it. This ensures that the policy is robustly applied and risk is
managed appropriately.
The overarching purpose of the Remuneration Committee is to
consider, agree and recommend to the Board an overall remuneration
policy and philosophy for the Group that is defined by, supports
and is closely aligned to its long-term business strategy, business
objectives, risk appetite and values and recognises the interests of
relevant stakeholders. The remuneration policy governs all aspects
of remuneration and applies in its entirety to all divisions, business
units and companies in the Group, including wholly-owned overseas
businesses and all colleagues, contractors and temporary staff. The
Committee reviews the policy annually. In 2017, it was updated to reflect
changes to the Reward Principles and new reward supporting policies.
The Committee pays particular attention to the top management
population, including the highest paid colleagues in each division,
those colleagues who perform senior management functions for the
Group and MRTs. Further details on the operation of the Remuneration
Committee can be found on page 99 of the DRR.
The Group has a robust governance framework, with the Remuneration
Committee reviewing all compensation decisions for Executive
Directors, senior management, senior risk and compliance officers, high
earners and any other MRTs. This approach to governance is cascaded
through the Group with the Executive Compensation Committee
having oversight for all other colleagues and divisional Remuneration
Committees providing oversight for specific business areas.
Governance and risk management
An essential component of the approach to remuneration is the
governance process that underpins it. This ensures that the policy is
robustly applied and risk is managed appropriately.
In addition to setting the overall remuneration policy and philosophy for
the Group, the Remuneration Committee ensures that colleagues who
could have a material impact on the Group’s risk profile are provided
with appropriate incentives and reward to encourage them to enhance
the performance of the Group and that they are recognised for their
individual contribution to the success of the organisation, whilst ensuring
that there is no reward for excessive risk taking. The Remuneration
Committee works closely with the Risk Committee in ensuring the
Group Performance Share (GPS) plan outcome is moderated. The
two Committees determine whether the proposed GPS outcome and
performance assessments adequately reflect the risk appetite and
framework of the Group; whether it took account of current and future
risks; and whether any further adjustment is required or merited. The
Group and the Remuneration Committee are determined to ensure
that the aggregate of the variable remuneration for all colleagues is
appropriate and balanced with the interests of shareholders and all
other stakeholders.
The Remuneration Committee’s terms of reference are available from
the Company Secretary and are displayed on the Group’s website,
www.lloydsbankinggroup.com. These terms are reviewed each year
to ensure compliance with the remuneration regulations and were last
updated in November 2017.
Link between pay and performance
The Group’s approach to reward is intended to provide a clear link
between remuneration and delivery of its key strategic objectives,
supporting the aim of becoming the best bank for customers,
and through that, for shareholders. To this end, the performance
management process has been developed, with the close participation
of the Group’s Risk team, to embed performance measures across the
Group’s reward structure which are challenging and reflect Group and
divisional achievement in addition to personal contribution.
The use of a balanced scorecard approach to measure performance
enables the Remuneration Committee to assess the performance of the
Group and its senior executives in a consistent and performance-driven
way. The Group’s remuneration policy supports the business values
and strategy, based on building long-term relationships with customers
and colleagues and managing the financial consequences of business
decisions across the entire economic cycle.
Further detail can be found in the DRR. In particular, see pages 89–90,
92, 96–97 and 101–102 of the DRR.
Design and structure of remuneration
When establishing the remuneration policy and associated frameworks,
the Group is required to take into account its size, organisation
and the nature, scope and complexity of its activities. For the
purpose of remuneration regulation, Lloyds Bank plc is treated as a
proportionality level I firm and therefore subject to the more onerous
remuneration rules.
Remuneration is delivered via a combination of fixed and variable
remuneration. Fixed remuneration reflects the role, responsibility
and experience of a colleague. Variable remuneration is based on
an assessment of individual, business area and Group performance.
The mix of variable and fixed remuneration is driven by seniority,
grade and role. Taking into account the expected value of awards,
the performance-related elements of pay make up a considerable
proportion of the total remuneration package for MRTs, whilst
maintaining an appropriate balance between the fixed and variable
elements. The maximum ratio of fixed to variable remuneration for MRTs
is 200 per cent, which has been approved by shareholders (98.77 per
cent of votes cast) at the AGM on 15 May 2014.
Remuneration for control functions is set in relation to benchmark market
data to ensure that it is possible to attract and retain staff with the
appropriate knowledge, experience and skills. An appropriate balance
between fixed and variable compensation supports this approach.
Generally, control function staff receive a higher proportion of fixed
remuneration than other colleagues and the aggregate ratio of fixed
to variable remuneration for all control function staff does not exceed
100 per cent. Particular attention is paid to ensure remuneration for
control function staff is linked to the performance of their function and
independent from the business areas they control.
i
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104 Lloyds Banking Group Annual Report and Accounts 2017
Other remuneration disclosures continued
The table below summarises the different remuneration elements for
MRTs (this includes control function staff) and non-MRTs.
Short-term variable remuneration arrangements
Base salary
Base salaries are reviewed annually, taking into account individual
performance and market information. Further information on base
salaries can be found on page 100 of the DRR.
Applies to:
Senior Management, Executive Directors, members/attendees of the
GEC and their respective direct reports
Approved Persons performing SIFs and/or all colleagues performing a
Senior Management Function
Other MRTs
Non-MRTs
Fees
Non-Executive Director fees are reviewed periodically by the Board.
Further information on fees can be found on page 102 of the DRR.
Applies to:
Non-Executive Directors (NEDs)
Fixed share award
The fixed share award, made annually, delivers Lloyds Banking Group
shares over a period of five years. Its purpose is to ensure that total
fixed remuneration is commensurate with the role, responsibilities and
experience of the individual; provides a competitive reward package;
and is appropriately balanced with variable remuneration, in line with
regulatory requirements. The fixed share award can be amended or
withdrawn in the following circumstances:
– to reflect a change in role;
– to reflect a Group leave policy (e.g. parental leave or sickness absence);
– termination of employment with the Group;
– if the award would be inconsistent with any applicable legal, regulatory
or tax requirements or market practice.
Further information on fixed share awards can be found on page 100 of
the DRR.
Applies to:
Senior Management, Executive Directors, members/attendees of the
GEC and their respective direct reports
Approved Persons performing SIFs and/or all colleagues performing a
Senior Management Function*
Other MRTs*
Non-MRTs*
Benefits and all-employee share plans
Core benefits for UK-based colleagues include pension, private medical
insurance, life insurance, car or car allowance (eligibility dependent on
grade) and other benefits that may be selected through the Group’s
flexible benefits plan. Further information on benefits and all-employee
share plans can be found on pages 100–101 of the DRR. Benefits can be
amended or withdrawn in the following circumstances:
– to reflect a change to colleague contractual terms;
– to reflect a change of grade;
– termination of employment with the Group;
– to reflect a change of Reward Strategy/benefit provision;
– if the award would be inconsistent with any statutory or
tax requirements.
Details of NEDs’ benefits are set out on page 102 of the DRR.
Applies to:
Non-Executive Directors (NEDs)
Senior Management, Executive Directors, members/attendees of the
GEC and their respective direct reports
Approved Persons performing SIFs and/or all colleagues performing a
Senior Management Function
Other MRTs
Non-MRTs
The Group Performance Share (GPS) plan is an annual discretionary
bonus plan. The plan is designed to reflect specific goals linked to the
performance of the Group. The majority of colleagues and all MRTs
participate in the GPS plan.
Individual GPS awards are based upon individual contribution, overall
Group financial results and Balanced Scorecard ratings over the
past financial year. The Group’s total risk-adjusted GPS outcome is
determined by the Remuneration Committee annually as a percentage
of the Group’s underlying profit, modified for:
– Group Balanced Scorecard performance
– Collective and discretionary adjustments to reflect risk matters and/or
other factors.
For the 2017 performance year, approximately one third of colleagues
are eligible to participate in variable pay arrangements other than GPS.
These are used to incentivise customer-facing colleagues, primarily in
the Community Banking division. In structure these are substantively
similar to GPS and the majority of colleagues will move across to GPS for
the 2018 performance year.
The Group applies deferral arrangements to GPS and variable pay
awards made to colleagues. GPS awards for MRTs are subject to
deferral and a holding period in line with regulatory requirements and
market practice.
Further information on the GPS plan can be found on pages 96–97 and
101–102 of the DRR.
Applies to:
Senior Management, Executive Directors, members/attendees of the
GEC and their respective direct reports
Approved Persons performing SIFs and/or all colleagues performing a
Senior Management Function
Other MRTs
Non-MRTs
Group Ownership Share plan
The Group Ownership Share (GOS) plan is a core part of the reward
strategy and an important tool for aligning the Group’s reward strategy
to the long-term performance of the business. Through the application
of carefully considered, stretching target measures, the Group can
ensure that awards are forfeited or restricted where performance does
not meet the desired level.
The GOS pays out in shares based on performance against Group
financial and other non-financial strategic targets measured over a
three-year period. Shares are released over a minimum three to five-year
period and are then subject to a holding period (MRTs only) in line with
regulatory requirements and market practice.
Further information on the GOS plan can be found on pages 97 and
101–102 of the DRR.
Applies to:
Senior Management, Executive Directors, members/attendees of the
GEC and their respective direct reports
Approved Persons performing SIFs and/or all colleagues performing a
Senior Management Function*
Other MRTs*
Non-MRTs*
Deferral, vesting and performance adjustment
At least 40 per cent of MRTs’ variable remuneration above certain
thresholds is deferred into Lloyds Banking Group Shares. For all MRTs,
GPS is deferred in line with the regulatory requirements for three, five or
seven years, (depending on MRT category) and subject to a six-month or
12-month retention period.
For all colleagues, any deferred variable remuneration amount is subject
to performance adjustment (malus) in accordance with the Group’s
Deferral and Performance Adjustment Policy.
Lloyds Banking Group Annual Report and Accounts 2017 105
Table 1 Analysis of high earners by band
Number of Material Risk Takers
paid €1 million1,2 or more
2017
Material Risk Takers3
2016
Material Risk Takers
€1.0m - €1.5m
€1.5m - €2.0m
€2.0m - €2.5m
€2.5m - €3.0m
€3.0m - €3.5m
€3.5m - €4.0m
€4.0m - €4.5m
€4.5m - €5.0m
€5.0m - €6.0m
€6.0m - €7.0m
36
10
2
1
5
2
–
–
–
1
31
8
4
3
3
3
–
–
–
1
1 Converted to Euros using the exchange rate €1 = £0.88293 (average exchange rate
1 December 2017 – 31 December 2017 based on the European Commission Budget
exchange rates). The exchange rate used for 2016 was €1 = £0.84815.
2 Values for LTIP awards based on an expected value of 50 per cent of maximum value.
3 Total number of Material Risk Takers earning more than €1m has increased from 53 in 2016 to
57 in 2017.
Table 2 Aggregate remuneration expenditure
(Material Risk Takers)
Analysis of aggregate remuneration expenditure by division1
Commercial
Banking
£m
Retail2
£m
Insurance
& Wealth
£m
Group
Functions
& Services3
£m
Total
£m
19.3
54.5
8.2
90.5
172.5
Aggregate
remuneration
expenditure
1 The Group undertook a reorganisation during 2017. As a result, a number of reporting lines
have changed.
2 Comprises previous Customer Products & Marketing and Consumer Finance divisions, and
includes the ‘Community Banking’ division
3 Comprises Global Payments, Group Services, Group Sourcing, Group Property, Group &
Cyber Security, Group Transformation and all supporting functions (Risk, Finance, People,
Legal, Group Corporate Affairs, Group Internal Audit, Company Secretariat)
MRTs’ vested variable remuneration (including variable remuneration
subject to a holding period) can be recovered from colleagues up to
seven years after the date of award in the case of a material or severe
risk event (clawback). This period may be extended to ten years where
there is an ongoing internal or regulatory investigation. Clawback is used
alongside other performance adjustment processes.
Further information on deferral, vesting and performance adjustment
can be found in the DRR on pages 92, 97 and 102.
Guaranteed variable remuneration
Guarantees, such as sign-on awards, may only be offered in exceptional
circumstances to new hires for the first year of service and in accordance
with regulatory requirements.
Any awards made to new hires to compensate them for unvested
variable remuneration they forfeit on leaving their previous employment
(‘buy-out awards’) will be subject to appropriate retention, deferral,
performance and clawback arrangements in accordance with applicable
regulatory requirements.
Retention awards may be made to existing colleagues in limited
circumstances and are subject to prior regulatory approval in line with
applicable regulatory requirements.
Applies to:
Senior Management, Executive Directors, members/attendees of the
GEC and their respective direct reports
Approved Persons performing SIFs and/or all colleagues performing a
Senior Management Function
Other MRTs
Non-MRTs
Shareholding requirement
Executive Directors: see DRR page 95.
All other MRTs and non-MRTs: 25 per cent - 100 per cent of the
aggregate of base salary and fixed share award depending on grade.
Applies to:
Senior Management, Executive Directors, members/attendees of the
GEC and their respective direct reports
Approved Persons performing SIFs and/or all colleagues performing a
Senior Management Function**
Other MRTs**
Non-MRTs**
Termination payments
Executive Directors and GEC members: see page 96 of the 2016 DRR.
All other termination payments comply with the Group’s contractual,
legal and regulatory requirements and are made in such a way as to
ensure they do not reward failure or misconduct and reflect performance
over time.
Applies to:
Senior Management, Executive Directors, members/attendees of the
GEC and their respective direct reports
Approved Persons performing SIFs and/or all colleagues performing a
Senior Management Function
Other MRTs
Non-MRTs
* Eligibility based on seniority, grade and role
** Requirement based on seniority and grade
GovernanceOther informationStrategic reportFinancial resultsFinancial statementsRisk management
106 Lloyds Banking Group Annual Report and Accounts 2017
Other remuneration disclosures continued
Table 3 Fixed and variable remuneration (Material Risk Takers)
Analysis of remuneration between fixed and variable amounts
Remuneration £m
Awarded in relation to the 2017
performance year
Fixed
Remuneration
£m
Variable
Remuneration
£m
Number of employees
Total fixed remuneration
Of which: Cash based
Of which: Shares1
Total variable remuneration
Of which: Upfront cash based
Of which: Share based3
Of which: Deferred
Vested
Unvested
Total remuneration
Management body
Executive
Directors
Non-Executive
Directors
Senior
Management2
Other MRTs
2017 Total
3
4.6
2.7
1.9
6.5
–
6.5
1.0
5.5
11.1
11
–
–
–
–
–
–
–
–
–
139
49.1
41.0
8.1
48.8
0.3
48.5
19.2
29.3
97.9
131
32.7
30.1
2.6
30.7
0.2
30.5
16.8
13.7
63.4
284
86.4
73.8
12.6
86.0
0.5
85.5
37.0
48.5
172.4
1 Released over a five-year period.
2 Senior Management are defined as Group Executive Committee (GEC) members/attendees (excluding Group Executive Directors and Non-Executive Directors) and their direct reports
(excluding those direct reports who do not materially influence the risk profile of any in-scope group firm).
3 Based on fair value at grant.
Table 4 Total outstanding deferred variable remuneration
Remuneration £m
Total outstanding deferred variable
remuneration at 31 December 2017
Variable
Remuneration
£m
Number of employees
Total outstanding deferred variable
remuneration
Of which: Vested
Of which: Unvested
Management body
Executive
Directors
Non-Executive
Directors
Senior
Management
Other MRTs
2017 Total
3.0
27.8
2.7
25.1
11.0
–
–
–
139
115.9
10.6
105.3
131
46.7
0.8
45.9
284
190.4
14.1
176.3
Table 5 Other payments awarded in relation to the 2017 performance year
Management body
Senior management
Other Material Risk Takers
Guaranteed bonuses
Sign-on awards
Severance payments
Number of
awards made
–
3
1
Total £m
–
0.2
0.2
Number of
awards made
Total £m
Number of
awards made
Total £m
–
–
–
–
–
–
–
–
–
–
–
–
Table 6 Deferred remuneration
Analysis of deferred remuneration at 31 December 2017
Remuneration
£m
Management body3
Senior management
Other Material Risk Takers
Total amount of outstanding
deferred1 and retained2
remuneration
Of which: Total amount of
outstanding remuneration
exposed to ex-post explicit
and/or implicit adjustment
Total amount of amendment
during the year due to ex-post
explicit adjustments
Total amount of deferred
remuneration paid out in the
performance year
27.8
115.9
46.7
27.8
115.9
46.7
–4
–
–
3.7
31.6
36.0
1 Deferred in this context refers only to any unvested remuneration.
2 Retained refers to any variable remuneration for which the deferral period has ended but which is still subject to a holding period before release.
3 Reference to the ‘Management Body’ relates to Executive Directors only. Non-Executive Directors are not eligible to receive variable remuneration.
4 Actual amount £12,500.
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
Risk governance
Full analysis of risk categories
108
110
111
111
113
115
Further information on risk management can
be found:
Risk overview
Note 51: Financial risk management
Pillar 3 report: www.lloydsbankinggroup.com
32
240
The Group supports the recommendations
made in the report ‘Enhancing the Risk
Disclosures of Banks’ issued by the Enhanced
Disclosure Task Force of the Financial Stability
Board in October 2012.
Lloyds Banking Group Annual Report and Accounts 2017 107
BUILDING
BRITAIN'S
DIGITAL SKILLS
We’ve committed to help 1.8 million
individuals improve their digital skills by
2020. Those we’ve already helped include
Betty from Airdrie who is now banking
online for the first time, thanks to free
training provided at one of our Bank of
Scotland branch Digizones.
Visit www.lloydsbankinggroup.com/
prosperplan
>708,000individuals, small businesses and charities helped to improve their digital skills in 2017
108 Lloyds Banking Group Annual Report and Accounts 2017
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 in targeted
segments. 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 32–37) provides a summary of risk management
within the Group. It highlights the important role of risk as a strategic
differentiator, along with a brief overview of the Group’s Risk Management
Framework, the potential risks and impacts arising from the external
environment, 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 108–115) and a full analysis of the primary risk categories
(pages 115–156) – the framework by which risks are identified, managed,
mitigated and monitored.
Each risk category 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
Group risk appetite and through good risk reward decision making.
Risk culture
The Board ensures that senior management implements risk policies and
risk appetite 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 code of responsibility in 2017, reinforcing its approach under which
colleagues are accountable for the risks they take and for prioritising their
customers’ needs.
The focus remains on building and sustaining long-term relationships with
customers cognisant of the economic climate.
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 Group risk appetite statement which
is reviewed by the Board Risk Committee and approved annually by the
Board. The Group level metrics are supported by more detailed sub Board
functional and divisional risk appetite metrics.
As a key component of the Risk Management Framework, Group 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 Group risk appetite and
business planning is undertaken with a view to meeting the requirements
of the Group 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 including its risk appetite, to ensure these are in line with
emerging regulatory, corporate governance and industry best practice.
Group risk appetite includes the following areas:
Credit – the Group has a conservative and well balanced credit portfolio
through the economic cycle, generating an appropriate return on equity, in
line with the Group’s target return on equity in aggregate.
Conduct – the Group’s product design and sales practices ensure that
products are transparent and meet customer needs.
Market – the Group has robust controls in place to manage the Group’s
inherent market risk and does not engage in any proprietary trading,
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.
Funding and liquidity – the Group maintains a prudent liquidity profile
and a balance sheet structure that limits its reliance on potentially volatile
sources of funding.
Capital – the Group maintains capital levels commensurate with a prudent
level of solvency, and aims to deliver consistent and high quality earnings.
Regulatory and legal – the Group complies with all relevant regulation
and all applicable laws (including codes of practice which 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.
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.
Model – the Group has embedded a framework for the management
of model risk to ensure effective control and oversight, compliance
with all regulatory rules and standards, and to facilitate appropriate
customer outcomes.
Financial reporting – the Group meets regulatory reporting and tax
requirements in jurisdictions where it operates.
As separate regulated entities with their own Boards, the Insurance
business and Lloyds Bank Corporate Markets each maintain their
own risk appetite and framework, which are aligned to the Group risk
appetite framework.
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 managers are directly accountable for identifying and managing risks
in their individual businesses, ensuring that business decisions strike an
appropriate balance between risk and reward and are consistent with the
Group’s risk appetite.
Lloyds Banking Group Annual Report and Accounts 2017 109
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.
Financial reporting risk management
systems and internal controls
The Group maintains risk management systems and internal controls
relating to the financial reporting process, which are 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;
– 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 UK Finance
Code for Financial Reporting Disclosure.
The financial reporting process 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 73–76.
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 of the
aggregate risk profile and has direct access to the Chairman and members
of Board Risk Committee.
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 through its risk-weighted assets. Details of the business
activities for each division are provided in the Divisional overview on pages 28–31.
Risk-weighted assets (RWAs)
– Credit risk
– Counterparty credit risk3
– Market risk
– Operational risk
Total (excluding threshold)
– Threshold4
Total
Retail
£bn
Commercial
Banking
£bn
Insurance
& Wealth1
£bn
Run-off
£bn
Central
items2
£bn
Group
£bn
71.1
–
–
19.7
90.8
71.2
7.1
3.0
4.3
85.6
90.8
85.6
0.6
–
–
0.7
1.3
1.3
7.1
–
–
0.2
7.3
7.3
14.5
164.5
0.8
0.1
0.4
15.8
10.1
25.9
7.9
3.1
25.3
200.8
10.1
210.9
1 As a separate regulated business, Insurance (excluding Wealth) 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, in accordance with Capital
Requirements Directive and Regulation (CRD IV) rules, part of the Group's investment in Insurance is included in the calculation of threshold RWAs, while the remainder is taken as a
capital deduction.
2 Central items include assets held outside the main operating divisions, including assets relating to Group Corporate Treasury which holds the Group's liquidity portfolio, and Group
Operations.
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 proportion of significant investments and deferred tax assets that are permitted to be
risk-weighted instead of deducted from common equity tier 1 (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 34–37). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s risk
categories is on pages 115–156.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
110 Lloyds Banking Group Annual Report and Accounts 2017
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.
There remains uncertainty as to the impact of EU exit on the regulatory and
legal landscape; for example, the ability that the UK can continue to share
data under the new data protection regime (both with other European
countries and internationally) after EU exit.
– We continue to embed the regulatory and legal agenda across all
areas of the Group ensuring that the customer is at the heart of our
business planning.
– We work closely with regulatory authorities and industry bodies to ensure
that the Group can identify and respond to the evolving regulatory and
legal landscape.
– We actively implement programmes to deliver regulatory and legal
change requirements.
Macroeconomic headwinds and political uncertainties: Uncertainty
over the UK’s eventual relationship with the EU, and the implications of
a minority UK government, create a more uncertain outlook for the UK
economy. A rise in global protectionism led by the US, fuelled by growing
income inequality and an accompanying rise in political populism, and the
recent indecisive German election, generate heightened risks to the global
political and macroeconomic environment.
Further, high levels of credit market liquidity have reduced spreads and
weakened terms in some sectors, creating a potential under-pricing of risk.
– Internal contingency plans recalibrated and regularly reviewed for
potential strategic, operational and reputational impacts, with a plan
specifically for working through the potential impacts of the EU exit on
the Group.
– 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 and regulatory requirements.
IT resilience and cyber: Increasing digitisation places greater reliance
on the provision of resilient and secure services to customers. Continued
increase in the volume and sophistication of cyber-attacks could disrupt
service for customers, causing financial loss/reputational damage.
– Continued investment in IT and to improve the effectiveness of the
Group’s IT resilience.
– Continued investment in the Group’s Cyber Programme to ensure
confidentiality and integrity of data and availability of key systems.
– Collaboration with regulators and law enforcement agencies.
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.
– The Group is transforming the business to improve customer experience
by digitising customer journeys and leveraging branches for complex
needs, in response to customers’ evolving needs and expectations.
Strategic use of customer data: The implementation of open banking
introduces data sharing with third parties, potentially increasing the risks of
fraud and data loss. There is a continued need to defend against dynamic
external challengers and meet consumer expectations. Failure to address
growth in data movement or understand the supply chain/third party
controls may increase exposure to cyber and fraud leading to conduct
and reputational issues.
Geopolitical shocks: Current uncertainties could further impede the global
economic recovery. Events in North Korea, Russia, the Middle-East, as well
as terrorist activity, have the potential to trigger changes in the economic
outlook, market risk pricing and funding conditions.
– The Group will deepen insight into customer segments, their perception
of brands and what they value.
– Agility will be increased by consolidating platforms and building new
architecture aligned with customer journeys.
– The Group has implemented open banking and is actively monitoring the
implications for our customers, including protecting them from fraud.
– The Group is making a significant investment to improve data privacy,
including the security of data and oversight of third parties.
– The Group’s strategy is to introduce advanced data management
practices, based on Group-wide standards, data-first culture and
modern enterprise data platforms, supported by a simplified modern
IT architecture.
– Risk appetite criteria limits single counterparty bank and non-bank
exposures complemented by a UK-focused strategy.
– The Chief Security Office develops and maintains the Stability Response
Plan with the Financial Stability Response Team acting as a rapid reaction
group, should an external crisis occur.
– The Chief Security Office also maintains the operational resilience
framework to embed resilience activities across the Group and limit the
impact of internal or external events.
Lloyds Banking Group Annual Report and Accounts 2017 111
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
Prudential Regulation Authority (PRA) and management buffers (see
capital risk on pages 137–144).
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
The concurrent UK stress test run by the Bank of England was also
undertaken in 2017. As announced in November, despite the severity of the
stress scenario, the Group exceeded the capital and leverage thresholds
set out for the purpose of the stress test and was not required to take any
capital action as a result.
Internal stress tests
On at least an annual basis, the Group conducts macroeconomic stress
tests of the operating plan, which are 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 primary risk categories on
pages 115–156 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 business, Risk and Finance areas is built
into the preparation process, so that the appropriate analysis of each risk
category’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 Directors’, appropriate Risk Directors’ and Managing Directors’
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 and non-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 32), is structured around the following 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 applies to every area of the business and covers all types of risk.
It 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. In 2017 the annual
update was also informed by the findings of an independent external
review. 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 of risk management consistent with 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’, pages 108–109).
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.
Regular policy framework assessments are undertaken in all business areas,
driving Board-level risk appetite metrics which monitor the operating
effectiveness of policy controls and overall policy implementation. Robust
processes and controls to identify and report policy breaches include clear
materiality criteria and escalation procedures which ensure an appropriate
level of visibility and prioritisation of remedial actions.
The risk committee governance framework is outlined on page 113.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
112 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
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 headed by the Chief Risk
Officer and consisting of eight Risk Directors and their specialist teams. The
role of Chief Risk Officer was held by Juan Colombás until 4 September
2017 when he was succeeded by Stephen Shelley, previously Commercial
Banking Risk Director. Within Risk division the Compliance function has
been headed throughout 2017 by Letitia Smith, Group Director, Conduct,
Compliance and Operational Risk.
Risk division provides 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.
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.
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
– 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
– recommend risk appetite and oversight of the associated risk profile
across the Group.
Group Internal Audit (third line) provides independent and objective
assurance designed to add value and improve the organisation’s
operations. Group Internal Audit has been headed throughout 2017
by Paul Day, Chief Internal Auditor, on an interim secondment basis
from 1 January to 31 May, and on a permanent basis thereafter. It
helps the Group accomplish its objectives by bringing a systematic,
disciplined approach to evaluating and improving the effectiveness of risk
management, control and governance processes. Group Internal 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 Internal 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.
Risk and control cycle from identification
to reporting
To allow senior management to make informed risk decisions, the business
follows a continuous risk management approach which includes producing
appropriate, accurate and focused risk reporting and risk management.
The risk and control cycle sets out how this should be approached and
produced with the appropriate controls and processes in place. This cycle,
from identification to reporting, ensures consistency and is intended to
manage and mitigate the risks impacting the Group.
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 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.
Identified risks are 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 Internal 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 2017 113
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 Group Executive Committee and Board. Conversely, strategic direction and guidance is cascaded down from the
Board and Group Executive Committee.
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
Reporting
Reporting
e
c
n
a
r
u
s
s
a
–
e
c
n
e
f
e
d
f
o
e
n
i
l
d
r
i
h
T
Aggregation,
escalation
Independent
challenge
t
i
d
u
A
l
a
n
r
e
t
n
I
p
u
o
r
G
Independent
challenge
Reporting
Primary escalation
Independent challenge of both
first and second lines of defence
Group Chief Executive Committees
Group Executive Committee (GEC)
Group Risk Committee (GRC)
Business area principal
Enterprise Risk Committees
Commercial Banking Risk Committee
Group Asset and Liability Committee (GALCO)
Retail Risk Committee
Group Customer First Committee
Group Cost Management Committee
Conduct Review Committee
Group People Committee
Responsible Business
Management Committee
Senior Independent Performance
Adjustment and Conduct Committee
Insurance and Wealth Risk Committee
Community Banking Risk Committee
Group Services Risk Committee
Transformation Risk Committee
Finance Risk Committee
People and Productivity Risk Committee
Group Corporate Affairs Risk Committee
Aggregation,
escalation
Independent
challenge
Independent
challenge
Reporting
Risk Division
Committees and
Governance
t
h
g
i
s
r
e
v
o
k
s
i
r
–
e
c
n
e
f
e
d
f
o
e
n
i
l
d
n
o
c
e
S
Risk Division Committees
and Governance
Credit risk
− Executive Credit Approval Committee
− Commercial Banking Credit Risk Committees
− Retail Credit Risk Committees
Market risk
− Group Market Risk Committee
Conduct, compliance and operational risk
− Group Conduct, Compliance and
Operational Risk Committee
Fraud and financial crime risk
− Group Fraud and Financial Crime
Prevention Committee
Financial risk
− Group Financial Risk Committee
Capital risk
− Group Capital Risk Committee
Model risk
− Group Model Governance Committee
Insurance underwriting 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)
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk managementBusiness area principal Enterprise Risk CommitteesFirst line of defence – risk managementAudit CommitteeBoardBoard Risk CommitteeGroup Chief ExecutiveGroup Chief Executive Committees
114 Lloyds Banking Group Annual Report and Accounts 2017
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 58–80, for further information on Board committees.
The divisional and functional risk committees review and recommend divisional and 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)
Group Risk Committee (GRC)
Group Asset and Liability Committee (GALCO)
Group Customer First Committee
Group Cost Management Committee
Conduct Review Committee
Group People Committee
Supports the Group Chief Executive in exercising his authority in relation to material matters
having strategic, cross-business area or Group-wide implications.
Reviews and recommends the Group’s risk appetite and governance, risk and control
frameworks, and material Group policies. The committee also regularly reviews risk
exposures and risk/reward returns and approves models that are material at Group level.
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.
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 sets and promotes 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.
Oversees the Group’s colleague policy, remuneration policy and Group-wide remuneration
matters, oversees compliance with Senior Manager and Certification Regime (SM&CR) and
other regulatory requirements, monitors colleague engagement surveys and ensures that
colleague-related issues are managed fairly, effectively and compliantly.
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.
Senior Independent Performance Adjustment and
Conduct Committee
Responsible for providing recommendations regarding performance adjustment, including
the individual risk adjustment process and risk adjusted performance assessment, and
making final decisions on behalf of the Group on the appropriate course of action relating to
conduct breaches, under the formal scope of the SM&CR.
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 second line of defence Risk committees which ensure effective oversight of
risk management:
Credit Risk Committees
Group Market Risk Committee
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.
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 Fraud and Financial Crime Prevention Committee
Reviews and challenges the management of fraud and financial crime risk including overall
strategy and performance, Group-level risk appetite and broader corporate responsibilities,
and engagement with relevant authorities and other external parties. The committee is
accountable for ensuring that, at Group level, current and emerging fraud and financial
crime risks are effectively identified and managed within appetite, and that strategies
and investments to improve fraud and financial crime prevention are co-ordinated and
implemented in relevant business areas.
Lloyds Banking Group Annual Report and Accounts 2017 115
Committees
Risk focus
Group Financial Risk Committee
Group Capital Risk Committee
Group Model Governance Committee
Responsible for reviewing, challenging and recommending to GEC, GRC and GALCO, the
Group Individual Liquidity Adequacy Assessment (ILAAP) and Internal Capital Adequacy
Assessment Process (ICAAP) submissions, Pillar 3 Disclosures, the Group recovery and
resolution plans, and the annual stress testing of the Group’s operating plan, Prudential
Regulation Authority (PRA) and European Banking Authority (EBA) stress tests, and any other
analysis as required.
Responsible for providing oversight of all relevant capital matters within the Group including
the Group’s capital position, Pillar 2 requirements, regulatory reform and accounting
developments specific to capital, as well as other areas such as stress testing and modelling
activity. It also reviews regulatory submissions including the ICAAP and recovery plan prior to
submission to Group Financial Risk Committee.
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 modelling framework, specifically regarding consistency of approach
across business units and risk types. It approves banking models other than those material
at Group level, which are approved by GRC, and meets the PRA requirements regarding
the governance and approval for Internal Ratings Based (IRB) methodologies. An equivalent
committee exists in the Insurance division for approval of insurance models.
Full analysis of risk categories
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 on pages 116–156.
Following a review of the Group’s risk categories in 2017, model risk is now a primary risk category, and is described in detail on page 156. Financial
reporting risk, previously a primary risk category, is now considered as a secondary risk category of operational risk (see pages 135–136; additionally
the main features of the Group’s internal control system in relation to the financial reporting process are described on page 109).
Primary risk categories
Secondary risk categories
Credit risk
Page 116
– Retail credit
– Commercial credit
Regulatory and legal risk
Page 133
– Regulatory compliance
– Legal
Conduct risk
Page 134
Operational risk
Page 135
People risk
Page 136
– Conduct
– Business process
– Change
– External service provision
– Internal service provision
– Financial crime
– IT systems
– Cyber and information security
– Financial reporting
– Operational resilience
– Data management
– Sourcing
– People
– Fraud
– Physical security/health and safety
Insurance underwriting risk
Page 137
– Insurance underwriting
Capital risk
Page 137
– Capital
Funding and liquidity risk
Page 144
– Funding and liquidity
Governance risk
Page 150
Market risk
Page 151
Model risk
Page 156
– Governance
– Trading book
– Banking book
– Model
– Pensions
– Insurance
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 category.
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116 Lloyds Banking Group Annual Report and Accounts 2017
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 and 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 51 on page 240. Credit
risk exposures are categorised as ‘retail’, arising primarily in the Retail 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 and Wealth 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 2017 is shown on
page 122. 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 51 on page 240.
Additionally, credit risk arises from leasing arrangements where the
Group is the lessor. Note 2(J) on page 177 provides details on the Group’s
approach to the treatment of leases.
Credit risk exposures in the Insurance and Wealth division largely result
from holding bond and loan assets, together with some related swaps, 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 35 on page 206 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, because the terms required to refinance are outside
acceptable appetite at the time or the customer is unable to refinance
externally, due to a lack of market liquidity. 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 identified as
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’ (PD) 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’).
Assessment of obligor quality for both retail and commercial
counterparties is largely based on the outcomes of credit risk PD
rating 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, 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 and 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 PD 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.
Use of internally modelled outputs in the regulatory capital process is
specific to the calculation approach being used. Under the Retail Internal
Ratings Based (IRB) approach the rating system PD assessment is used
alongside calculated exposure at default and loss given default values
in order to derive risk-weighted assets (RWAs) and regulatory Expected
Loss (EL). The Foundation IRB approach requires the use of the rating
system PD alongside regulatory prescribed exposure at default and loss
given default values. Slotting portfolios do not use loss given default whilst
Standardised requires the use of regulatory refined exposure at default in a
defined RWA calculation.
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
EL models. Note 2(H) on page 176 provides details of the Group’s
approach to the impairment of financial assets.
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,
credit risk policies and credit risk appetite statements. Principles and
policies are reviewed regularly, and any changes are subject to an 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 credit risk appetite
tolerances. Oversight and reviews are also undertaken by independent
credit risk oversight functions and Group Internal Audit.
Strong models and controls: The independent Risk division has
established a set of model risk management principles, designed to
ensure 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 fitness for purpose of the rating systems, supported and
challenged by the independent specialist Group function.
Limitations on concentration risk: There are 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 potentially vulnerable
sectors and asset classes. Note 17 on page 193 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
Lloyds Banking Group Annual Report and Accounts 2017 117
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 largest exposures are regularly reported to
the Board Risk Committee and reported in accordance with regulatory
reporting requirements.
Robust country risk management: The Board sets a broad maximum
country risk appetite. Within this, the Executive Credit Approval
Committee approves the Group country risk framework and sovereign
limits on an annual basis. Risk based country appetite for all countries is
set within the independent Risk division, taking into account economic,
financial, political and social factors as well as the approved business and
strategic plans of the Group.
Specialist expertise: Credit quality is managed and controlled by a
number of specialist units within the business and Risk division providing,
for example: intensive management and control (see overleaf for 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 stress testing process, methodology
and governance, see page 111.
Frequent and robust credit risk oversight and assurance: Undertaken
by independent credit risk oversight functions operating within Retail
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 Internal Audit provides assurance to the Board Audit Committee
on the effectiveness of credit risk management controls across the Group’s
activities. The team carries out independent risk based control audits
across the full credit lifecycle.
Additional mitigation for Retail 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 internal data and 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.
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. Since September 2017, Portfolio Landlords (customers with four
or more mortgaged buy-to-let properties) have been subject to additional
controls including evaluation of overall portfolio resilience.
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 credit 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 derivatives
and securities financing 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.
Collateral
The principal collateral types acceptable for loans and advances,
contingent liabilities and derivatives with commercial and bank
counterparties and customers are:
– residential and commercial properties;
– charges over business assets such as premises, inventory and accounts
receivable;
– 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, however 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 financial counterparties are typically collateralised under a Credit
Support Annex (CSA) in conjunction with the International Swaps and
Derivatives Association (ISDA) Master Agreement. Derivative transactions
with non-financial 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
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118 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
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 or 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 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 LTV 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, the Group adjusts open market 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 repurchase (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 51 on page 240 for further information on collateral.
Master netting agreements
It is credit policy that a Group approved master netting agreement must
be used for all derivative and traded property 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.
The performance of all rating models is monitored on a regular basis, in
order to ensure that they provide appropriate risk differentiation capability,
the generated ratings remain as accurate and robust as practical, and the
models assign appropriate risk estimates to grades and 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 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 owner
occupier 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 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 may classify 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 for
impairment are grouped with other assets of similar characteristics and
assessed collectively in accordance with the Group impairment policy
Lloyds Banking Group Annual Report and Accounts 2017 119
detailed in note 2(H) on page 176. 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.
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).
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, 80.7 per cent
of customers accepting reduced payment arrangements are performing.
For permanent treatments, 83.4 per cent of customers who have accepted
capitalisations of arrears and 84.3 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 (SMI) 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:
– Customers claiming Jobseeker's Allowance, Income Support, Universal
Credit or Employment and Support Allowance benefits: Qualifying
customers are able to claim for mortgage interest at 2.61 per cent
on up to £200,000 of the mortgage. There is a two year time limit on
Jobseeker's Allowance claims that started getting SMI benefit after
5 January 2009. There is no time limit for Income Support, Universal
Credit or Employment and Support Allowance customer claims.
– Pension Credit customers: Qualifying customers are able to claim for
mortgage interest at 2.61 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
£1.6 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.
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 BSU at an early stage. The decision
to transfer rests with the Credit teams and not the relationship team. On
transfer, the 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 (<£50,000) 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).
This 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 BSU gross loans and advances to
customers reduced from £3.4 billion to £2.6 billion between 31 December
2016 and 31 December 2017. 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 176 Income statement information set out in
the credit risk tables is on an underlying basis (see page 43).
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 the 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, but are not limited to, Lloyds Bank
Commercial Finance Ltd and The Agricultural Mortgage Corporation Plc.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
120 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Types of forbearance
The Group’s strategy and offer of forbearance is largely dependent on
each customer’s 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
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 2017
Overview
– Asset quality remains strong with portfolios continuing to benefit from
the Group’s proactive approach to risk management, continued low
interest rates and a resilient UK economic environment.
– Gross impairment charges remain broadly flat, including the acquisition
– Non-payment contractual terms (for example covenant amendments or
of MBNA.
waivers) where the concession enables default to be avoided.
– Gross asset quality ratio (excluding releases and write-backs) was stable
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 and 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).
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 to have been (or will be) granted some form of forbearance.
Most impaired loans and advances exist only in the BSU within Commercial
Banking and Run-off divisions.
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
Where forbearance has been granted a customer will remain treated and
recorded as forborne until the customer 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 the 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 to within a covenant). In
this case, the customer may exit forbearance once the permanent cure has
been made.
at 28 basis points.
– The net impairment charge increased to £795 million in 2017 compared
to £645 million in 2016, reflecting expected lower provision releases and
write-backs and the acquisition of MBNA (£118 million). The net asset
quality ratio for 2017 was 18 basis points (2016: 15 basis points).
– The Group expects an asset quality ratio of around 35 basis points through
the cycle and less than 30 basis points through the plan period and in 2018.
– Impaired loans as a percentage of closing loans and advances reduced
to 1.6 per cent (31 December 2016: 1.8 per cent) with impaired loans down
£0.7 billion to £7.8 billion (31 December 2016: £8.5 billion), with reductions
across Retail, Commercial Banking and Run-off divisions. As at 31 December
Retail impaired loans were £104 million lower at £4,951 million, despite
including £151 million relating to the acquisition of MBNA. Commercial
Banking impaired loans reduced by £270 million to £1,927 million, driven
by impaired loan repayments and reductions, partly offset by a large newly
impaired loan.
Low risk culture and prudent risk appetite
– The Group continues to take a prudent approach to credit risk, with
robust credit quality and affordability controls at origination and a
prudent through the cycle credit risk appetite. The Group’s portfolios are
well positioned against an uncertain economic outlook and potential
market volatility.
– The Group continues to grow lending to key segments while maintaining
prudent credit criteria.
– The Group’s effective risk management ensures early identification and
management of customers and counterparties who may be showing
signs of distress.
– 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 UK Retail mortgage portfolio
improved to 43.6 per cent (31 December 2016: 44.0 per cent) and
the percentage of Secured loans and advances with an indexed LTV
greater than 100 per cent was 0.6 per cent (31 December 2016: 0.7 per
cent). The average LTV for new UK Retail mortgages written in 2017 was
63.0 per cent (31 December 2016: 64.4 per cent).
– The value of UK Retail mortgage lending with an indexed LTV of
greater than 80 per cent fell to £30,680 million (31 December 2016:
£32,395 million).
– Total UK Direct Real Estate gross lending across the Group was
£17.9 billion at 31 December 2017 (31 December 2016: £19.9 billion)
and includes Commercial Banking lending of £17.3 billion, and
£0.2 billion within Retail Business Banking (within Retail). The Group’s
legacy run-off direct real estate portfolio has continued to fall and was
£0.4 billion at 31 December 2017.
– Run-off net external assets stood at £9.1 billion at 31 December
2017, down from £11.3 billion at 31 December 2016. The portfolio
represents only 1.8 per cent of the overall Group’s loans and advances
(31 December 2016: 2.1 per cent).
Lloyds Banking Group Annual Report and Accounts 2017 121
Table 1.4: Group impairment charge
2017
Retail
Commercial Banking
Insurance and Wealth
Run-off
Central items
Total impairment charge
Asset quality ratio
Gross asset quality ratio
1 Restated. See page 181.
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
Impact of acquisition of businesses
Exchange and other movements
At 31 December
1 Restated. See page 181.
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
717
117
–
(31)
1
804
–
–
–
(6)
–
(6)
–
3
–
–
3
6
–
(5)
–
(4)
–
(9)
Retail
£m
5,055
2,342
(783)
(711)
(1,073)
(8)
138
(9)
4,951
Commercial
Banking
£m
2,197
637
(132)
(601)
(136)
–
–
(38)
1,927
2017
Insurance
and Wealth
£m
26
9
(8)
(2)
2
–
–
1
28
Run-off
£m
1,217
101
(67)
(163)
(133)
(20)
–
–
935
Total
£m
717
115
–
(41)
4
795
0.18%
0.28%
Total
£m
8,495
3,089
(990)
(1,477)
(1,340)
(28)
138
(46)
2016¹
£m
654
17
–
(26)
–
645
0.15%
0.28%
2016
Total
£m
9,590
3,154
(1,047)
(1,327)
(1,472)
(492)
–
89
7,841
8,495
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
122 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Table 1.6: Group impaired loans and provisions
At 31 December 2017
Retail
Commercial Banking
Insurance and Wealth
Run-off
Reverse repos and other items3
Total gross lending
Impairment provisions
Fair value adjustments4
Total Group
At 31 December 20165
Retail
Commercial Banking
Insurance and Wealth
Run-off
Reverse repos and other items3
Total gross lending
Impairment provisions
Fair value adjustments4
Total Group
Impaired
loans as a %
of closing
advances
%
Impairment
provisions1
£m
Impairment
provisions
as a % of
impaired
loans2
%
1.4
1.9
3.4
11.0
2,147
830
9
456
46.1
43.1
32.1
48.8
Impaired
loans
£m
4,951
1,927
28
935
7,841
1.6
3,442
45.6
5,055
2,197
26
1,217
1.5
2.1
3.2
11.9
2,011
828
11
682
42.9
37.7
42.3
56.0
Loans and
advances to
customers
£m
341,705
100,812
818
8,533
23,886
475,754
(3,442)
186
472,498
332,953
102,398
812
10,259
15,249
461,671
8,495
1.8
3,532
43.4
(3,532)
(181)
457,958
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 2017: £291 million; 31 December 2016: £365 million).
3 Includes £6.9 billion (December 2016: £6.7 billion) of lower risk loans sold by Commercial Banking and Retail to Insurance and Wealth to back annuitant liabilities.
4 The Group made adjustments to reflect the HBOS and MBNA loans and advances at fair value on acquisition. At 31 December 2017, the remaining fair value adjustment was £186 million
comprising a positive adjustment of £270 million in respect of the MBNA assets and a negative adjustment of £84 million in respect of the HBOS assets. The fair value unwind in respect of
impairment losses incurred was £85 million for the year ended 31 December 2017 (31 December 2016: £70 million). The fair value adjustment in respect of loans and advances is expected
to continue to decrease in future years and will reduce to zero over time.
5 Restated. See page 181.
Table 1.7: Derivative credit risk exposures
2017
Traded over the counter
2016
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
–
19
278,833
278,852
109,492
2,903,481
324,834
3,337,807
15,455
–
–
–
9,695
4,568
25,150
4,568
–
167,399
32,172
–
254
3,023,742
–
–
369,368
423,709
11,046
8,098
369,622
3,614,850
43,218
8,098
124,947
2,903,500
617,930
3,646,377
199,571
3,023,996
812,221
4,035,788
280
(592)
(312)
25,155
(25,454)
(299)
262
(1)
261
35,563
(34,506)
1,057
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 2017
and 31 December 2016 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 51 on page 240.
Lloyds Banking Group Annual Report and Accounts 2017 123
Retail
– Asset quality remains strong across all portfolios, with stable new business quality and flow of loans entering arrears.
– The impairment charge increased by £63 million to £717 million. Excluding MBNA, impairments were £55 million lower driven by a net release on the
Secured portfolio, due to reduced impaired loans and rising house prices, which was offset by higher impairment charges on the Loans and UK Motor
Finance portfolios.
– Impairment provisions as a percentage of impaired loans increased to 46.1 per cent from 42.9 per cent at the end of 2016.
Table 1.8: Retail impairment charge
Secured
Credit cards
Loans
Overdrafts
UK Motor Finance
Retail Business Banking
Europe
Total impairment charge
Asset quality ratio
1 Restated. See page 181.
Table 1.9: Retail impaired loans and provisions
At 31 December 2017
Secured
Credit cards
Loans
Overdrafts
UK Motor Finance
Retail Business Banking
Europe
Total gross lending
Impairment provisions
Fair value adjustments
Total
At 31 December 20163
Secured
Credit cards
Loans
Overdrafts
UK Motor Finance
Retail Business Banking
Europe
Total gross lending
Impairment provisions
Fair value adjustments
Total
2017
£m
(15)
254
111
227
111
27
2
717
0.21%
2016¹
£m
104
136
70
241
75
27
1
654
0.20%
Change
%
(87)
(59)
6
(48)
–
(10)
1bp
Impaired
loans
as a %
of closing
advances
%
Impairment
provisions1
£m
Impairment
provisions
as a %
of impaired
loans2
%
1.3
2.3
3.2
12.4
1.0
2.6
0.6
1.4
1.4
3.1
3.6
9.2
1.0
2.7
0.6
1.5
1,443
267
107
113
171
23
23
2,147
1,503
157
92
90
127
22
20
2,011
37.1
82.9
79.9
86.3
127.6
230.0
53.5
46.1
36.6
81.8
81.4
82.6
105.8
200.0
48.8
42.9
Loans and
advances to
customers
£m
292,187
18,134
8,010
1,595
13,738
928
7,113
Impaired
loans
£m
3,886
413
254
197
134
24
43
341,705
4,951
(2,147)
186
339,744
294,503
4,104
9,843
7,767
1,952
11,555
1,004
6,329
307
277
179
120
27
41
332,953
5,055
(2,011)
(181)
330,761
1 Impairment provisions include collective unidentified impairment provisions.
2 Impairment provisions as a percentage of impaired loans are calculated excluding loans in recoveries for Credit cards (31 December 2017: £91 million; 31 December 2016: £115 million),
Loans (31 December 2017: £120 million; 31 December 2016: £164 million), Overdrafts (31 December 2017: £66 million; 31 December 2016: £70 million) and Retail Business Banking
(31 December 2017: £14 million; 31 December 2016: £16 million).
3 Restated. See page 181.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
124 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Secured
– Total loans and advances reduced by 0.8 per cent to £292,187 million (31 December 2016: £294,503 million). The closed Specialist portfolio has continued
to run-off, reducing by 10.9 per cent to £15,668 million.
– New business quality remained stable and early arrears have continued to reduce.
– The value of mortgages greater than three months in arrears (excluding repossessions) reduced to £5,437 million at 31 December 2017 (31 December
2016: £6,033 million).
– Impaired loans decreased by £218 million to £3,886 million (31 December 2016: £4,104 million), and impaired loans as a percentage of closing advances
reduced to 1.3 per cent (31 December 2016: 1.4 per cent).
– UK house prices increased by 2.7 per cent over 2017 (on a quarterly non-seasonally adjusted basis).
– The average indexed LTV of the portfolio improved to 43.6 per cent (31 December 2016: 44.0 per cent).
– The value of lending with an indexed LTV of greater than 80 per cent fell to £30,680 million (31 December 2016: £32,395 million).
– The percentage of loans and advances with an indexed LTV in excess of 100 per cent fell to 0.6 per cent (31 December 2016: 0.7 per cent).
– The average LTV for new mortgages written in 2017 was 63.0 per cent (31 December 2016: 64.4 per cent).
– Net impairment release of £15 million in 2017 (2016: £104 million charge) reflects an improvement in the level of impaired loans in the portfolio.
– Impairment provisions as a percentage of impaired loans increased to 37.1 per cent (31 December 2016: 36.6 per cent), reflecting the continued prudent
approach to provisioning.
Table 1.10: Retail secured loans and advances to customers
Mainstream
Buy-to-let
Specialist
Total secured
At 31 Dec
2017
£m
223,322
53,197
15,668
At 31 Dec
2016
£m
222,450
54,460
17,593
292,187
294,503
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 %
2017
Cases
32,383
4,710
8,313
45,406
2016
Cases
35,254
5,324
9,078
49,656
2017
%
1.6
1.0
7.3
1.7
2016
%
1.7
1.1
7.2
1.8
2017
£m
3,502
581
1,354
5,437
2016
£m
3,865
660
1,508
6,033
2017
%
1.6
1.1
8.7
1.9
2016
%
1.7
1.2
8.6
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 777 cases at 31 December 2017 compared to 678 cases at 31 December 2016.
Lloyds Banking Group Annual Report and Accounts 2017 125
Table 1.12: Period end and average LTVs across the Retail mortgage portfolios
At 31 December 2017
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 value1:
Stock of residential mortgages
New residential lending
Impaired mortgages
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 value1:
Stock of residential mortgages
New residential lending
Impaired mortgages
Mainstream
%
Buy-to-let
%
Specialist
%
Total
%
Unimpaired
%
Impaired
%
57.1
16.9
14.5
9.0
2.1
0.4
53.9
25.0
15.7
4.1
0.7
0.6
57.6
18.4
12.8
6.4
1.6
3.2
56.4
18.5
14.6
8.0
1.9
0.6
56.7
18.5
14.6
7.9
1.8
0.5
41.7
18.6
14.6
10.5
5.3
9.3
100.0
223,322
100.0
53,197
100.0
15,668
100.0
100.0
292,187
288,301
100.0
3,886
41.7
63.7
50.0
56.8
17.8
14.0
8.4
2.4
0.6
53.0
59.1
68.3
52.0
25.4
14.4
6.1
1.5
0.6
47.4
n/a
60.4
53.8
17.8
13.6
8.6
3.1
3.1
43.6
63.0
54.1
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
38.3
18.4
15.3
11.9
6.8
9.3
100.0
4,104
41.8
65.0
51.8
53.7
61.9
69.0
49.2
n/a
61.9
44.0
64.4
55.8
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 2017, owner occupier interest
only balances as a proportion of total owner occupier balances had reduced to 29.2 per cent (31 December 2016: 31.8 per cent). The average indexed loan
to value improved to 41.7 per cent (31 December 2016: 42.6 per cent).
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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
126 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Table 1.13: Analysis of owner occupier interest only mortgages
Interest only balances (£m)
Of which, impaired (%)
Average loan to value (%)
Maturity profile (£m):
Due
1 year
2-5 years
6-10 years
>11 years
Past term interest only balances (£m)2
Of which, impaired (%)
Average loan to value (%)
Negative equity (%)
2017
69,703
3.0
41.7
1,093
2,672
10,227
18,026
37,685
1,553
13.1
33.4
2.1
20161
76,229
3.0
42.6
1,028
2,499
10,287
17,368
45,047
1,365
11.7
31.5
1.6
1 2016 values have been restated to include Scottish Widows Bank Mortgages and certain other interest only balances of £3,578 million.
2 Balances where all interest only elements have moved past term. Some may subsequently have had a term extension, so are no longer classed as due.
Credit cards
– Loans and advances increased by 84.2 per cent to £18,134 million
(31 December 2016: £9,843 million), of which £8,003 million relates to
MBNA. The MBNA portfolio is performing broadly in line with both the
Group’s expectations and the existing credit card portfolio.
– Impaired loans increased by £106 million to £413 million (31 December
2016: £307 million), of which £151 million related to MBNA. Impaired
loans as a percentage of closing loans and advances improved to
2.3 per cent (31 December 2016: 3.1 per cent), reflecting good credit
performance and the continued sale of debt in recoveries.
– The impairment charge increased to £254 million (2016: £136 million),
driven by the acquisition of MBNA (£118 million).
Loans
– Loans and advances increased by 3.1 per cent to £8,010 million
(31 December 2016: £7,767 million).
– Impaired loans decreased by £23 million to £254 million (31 December
2016: £277 million), largely due to the sale of debt in recoveries. Impaired
loans as a percentage of closing loans and advances improved to
3.2 per cent (31 December 2016: 3.6 per cent).
– The impairment charge increased to £111 million (2016: £70 million),
reflecting a one-off change relating to policy alignment across brands for
franchised customers, and reducing cash flows due to previous sales of
debt in recoveries.
Overdrafts
– Loans and advances decreased to £1,595 million (31 December 2016:
£1,952 million).
– Impaired loans increased by £18 million to £197 million (31 December
2016: £179 million), and impaired loans as a percentage of closing
advances increased to 12.4 per cent (31 December 2016: 9.2 per cent),
reflecting a one-off impact relating to changes in overdraft fees
and charges.
– The impairment charge decreased by 5.8 per cent to £227 million
(2016: £241 million), largely due to increased sale of debt in recoveries
and improved underlying performance.
UK Motor Finance
– Loans and advances increased by £2,183 million to £13,738 million
(31 December 2016: £11,555 million), with 49.7 per cent of growth
from Jaguar Land Rover business. The book continues to benefit from
conservative residual values and prudent provisioning with stable credit
quality and flows into arrears.
– Impaired loans increased by £14 million to £134 million (31 December
2016: £120 million), reflecting growth in the portfolio. Impaired loans as
a percentage of closing loans and advances were stable at 1.0 per cent.
– The impairment charge increased by £36 million to £111 million
(2016: £75 million), driven by portfolio growth and increased provisions
for residual value risks reflecting a more conservative outlook on used
car prices.
Forborne loans
Forborne loans and advances on the principal Retail portfolios reduced
by £601 million in 2017 to £1,951 million, driven by improvements on the
Secured portfolio. As a percentage of loans and advances, forborne loans
and advances on these portfolios improved to 0.6 per cent (31 December
2016: 0.8 per cent).
Impairment provisions as a percentage of loans and advances that are
forborne increased to 13.0 per cent (31 December 2016: 9.6 per cent).
Secured forborne loans and advances reduced by £668 million in 2017
to £1,428 million, primarily due to a reduction in recapitalisations (with
historically higher levels of cases exiting the two year probation period)
and a reduction in the level of reduced payment arrangements.
Within the other portfolios, movements were seen in the level of forborne
loans and advances in relation to one off changes for 2017. This included
the acquisition of MBNA in the Credit cards portfolio (with forborne loans
and advances of £112 million and impaired forborne loans and advances
of £90 million), and improved customer views and the reclassification
of some treatments across the Loans and UK Motor Finance portfolios.
Lloyds Banking Group Annual Report and Accounts 2017 127
Table 1.14: UK Retail forborne loans and advances (audited)1
Temporary reduced payment arrangements
Permanent term extensions and repair
Secured
Credit cards
Loans2
Overdrafts
UK Motor Finance2
Total
Total loans
and advances
which are forborne
Total forborne loans
and advances
which are impaired
Impairment provisions as a %
of loans and advances
which are forborne
At Dec
2017
£m
249
1,179
1,428
295
86
108
34
1,951
At Dec
2016
£m
428
1,668
2,096
212
49
78
117
2,552
At Dec
2017
£m
76
61
137
190
45
94
19
485
At Dec
2016
£m
101
116
217
119
46
61
62
505
At Dec
2017
%
5.7
4.0
4.3
36.0
27.9
47.0
36.6
13.0
At Dec
2016
%
4.9
4.7
4.7
29.0
44.4
38.0
27.0
9.6
1 Includes temporary treatments where the customer is currently benefiting from the change or the treatment has ended within the last three months for Secured, and six months for other
portfolios. Permanent changes, such as refinancing or recapitalisation which commenced during the last 24 months, are also included.
2 Figures for 2017 include improved customer views and the reclassification of some treatments.
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 movements1
At 31 December
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
Secured
£m
2,096
744
(13)
(1,217)
(162)
(20)
1,428
Secured
£m
3,102
975
(12)
(1,741)
(200)
(28)
2,096
Credit
cards
£m
212
159
(100)
(41)
(15)
80
295
Credit
cards
£m
225
110
(46)
(43)
(9)
(25)
212
2017
Loans
£m
Overdrafts
£m
78
85
(32)
(19)
–
(4)
108
49
44
(18)
(3)
(6)
20
86
2016
Loans
£m
Overdrafts
£m
60
34
(24)
(4)
(6)
(11)
49
87
50
(31)
(24)
–
(4)
78
UK Motor
Finance
£m
117
24
(20)
(15)
(8)
(64)
34
UK Motor
Finance
£m
100
82
(16)
(22)
(16)
(11)
117
Total
£m
2,552
1,056
(183)
(1,295)
(191)
12
1,951
Total
£m
3,574
1,251
(129)
(1,834)
(231)
(79)
2,552
1 Exchange and other movements for 2017 reflects the acquisition of MBNA within Credit cards, and improved customer views and the reclassification of some treatments across the
Loans and UK Motor Finance portfolios.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
128 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Commercial Banking
– Net impairment charge was £115 million in 2017 (2016: £17 million) with
the increase due to a lower level of write-backs and provision releases
rather than a deterioration in the underlying portfolio.
– Both 2016 and 2017 included material charges against a single customer
(2016: oil & gas sector, 2017: construction sector), but otherwise gross
charges have remained relatively low.
– The portfolio continues to benefit from effective risk management, a
resilient economic environment and continued low interest rates.
– Credit quality of the portfolio and new business remains generally
good and the Group is not relaxing risk appetite despite a more
competitive market.
– Impaired loans reduced by 12 per cent to £1,927 million at 31 December
2017 compared with £2,197 million at 31 December 2016, driven by
impaired loan repayments and reductions, partly offset by a large newly
impaired loan. Impaired loans as a percentage of closing loans and
advances reduced to 1.9 per cent from 2.1 per cent at 31 December 2016.
– Impairment provisions were broadly flat at £830 million at 31 December
2017 (31 December 2016: £828 million) and includes collective unidentified
impairment provisions of £183 million (31 December 2016: £183 million).
Provisions as a percentage of impaired loans increased from 37.7 per cent
to 43.1 per cent during 2017, driven by a number of isolated cases.
– An uncertain UK and global economic outlook and uncertainty relating
to EU exit negotiations have the ability to impact the Commercial
Banking portfolios.
– Internal and external key performance indicators continue to be
monitored closely to help identify early signs of any deterioration
and portfolios remain subject to ongoing risk mitigation actions as
appropriate.
– Despite the uncertain economic outlook, the portfolios are well
positioned and the Group’s through the cycle risk appetite approach is
unchanged. Monitoring indicates no material deterioration in the credit
quality of our portfolios. Notwithstanding this, 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 ratio2
1 Restated. See page 181.
2 In respect of loans and advances to customers.
Table 1.17: Commercial Banking impaired loans and provisions
At 31 December 2017
SME
Other
Total gross lending
Impairment provisions
Total
At 31 December 20162
SME
Other
Total gross lending
Impairment provisions
Total
Change
%
2017
£m
7
108
115
20161
£m
(7)
24
17
0.12%
0.02%
10bp
Impaired
loans as
a % of
closing
advances
%
Impairment
provisions1
£m
Impairment
provisions
as a % of
impaired
loans
%
2.7
1.6
1.9
3.1
1.8
2.1
151
679
830
173
655
828
18.4
61.4
43.1
18.7
51.4
37.7
Impaired
loans
£m
821
1,106
1,927
923
1,274
2,197
Loans and
advances to
customers
£m
30,480
70,332
100,812
(830)
99,982
29,959
72,439
102,398
(828)
101,570
1 Impairment provisions include collective unidentified impairment provisions.
2 Restated. See page 181.
Portfolios
– The SME Banking portfolio continues to grow within prudent credit
risk appetite parameters. As a result of the Group’s customer driven
relationship management, net lending has increased 2 per cent in 2017.
Portfolio credit quality has remained stable or improved across the
majority of key risk metrics.
– The Mid Markets portfolio is domestically focused and reflects the
underlying performance of the UK economy and our prudent credit risk
appetite. Credit quality has been stable with levels of financial stress and
impairment remaining low.
– 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 uncertainty particularly
relating to the EU Exit and a softer outlook in a number of sectors,
including construction and retail.
– The commercial 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
market for UK real estate has continued to be resilient, with appetite from
a range of investors. UK real estate continues to offer attractive yields
compared to other asset classes and the fall in Sterling has boosted
the attractiveness to foreign investors. 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.
– Through clearly defined sector strategies Financial Institutions serves
predominantly investment grade counterparties with whom relationships
are either client focused or held to support the Group’s funding,
Lloyds Banking Group Annual Report and Accounts 2017 129
– Commercial Banking UK Direct Real Estate gross lending stood at
£17.3 billion at 31 December 2017.
– 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.
liquidity or general hedging requirements. The portfolio continues to be
prudently managed within the Group’s 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.
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 20171
At 31 December 20161
Unimpaired
£m
Impaired
£m
Total
£m
%
Unimpaired
£m
Impaired
£m
Total
£m
5,567
855
183
14
–
–
–
404
7,023
9,443
16,466
–
–
25
54
–
–
49
–
128
305
433
5,567
855
208
68
–
–
49
404
7,151
9,748
16,899
77.8
12.0
2.9
1.0
–
–
0.7
5.6
100.0
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
1 Excludes Islands Commercial UK Direct Real Estate of £0.4 billion (31 December 2016: £0.5 billion).
2 Predominantly investment grade corporate CRE lending where the Group is relying on the corporate covenant.
3 December 2017 <£5m exposures include £9.2 billion within SME which has an LTV profile broadly similar to the >£5m exposures.
Forborne loans
Commercial Banking forbearance
At 31 December 2017, £2,374 million (31 December 2016: £2,663 million) of total loans and advances were forborne of which £1,927 million (31 December
2016: £2,197 million) were impaired. Impairment provisions as a percentage of forborne loans and advances increased from 31.1 per cent at 31 December
2016 to 35.0 per cent at 31 December 2017.
Table 1.19: Commercial Banking forborne loans and advances (audited)
Impaired
Unimpaired
Total
1 Restated. See page 181.
All Commercial Banking impaired assets are considered forborne.
Total loans
and advances
which are forborne
Impairment provisions as a %
of loans and advances
which are forborne
2017
£m
1,927
447
2,374
20161
£m
2,197
466
2,663
2017
%
43.1
–
35.0
20161
%
37.7
–
31.1
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
130 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Impaired loans and advances
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 disposals/sales of impaired assets
Drawdowns/repayments
Exchange and other movements
At 31 December
1 Restated. See page 181.
2017
£m
2,197
20161
£m
2,543
518
119
637
–
(51)
(81)
(132)
(136)
–
(601)
(38)
547
124
671
–
(31)
(81)
(112)
(311)
(33)
(595)
34
1,927
2,197
Unimpaired loans and advances
Unimpaired forborne loans and advances were £447 million at 31 December 2017 (31 December 2016: £466 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 2017 by type of forbearance:
Table 1.21: Commercial Banking unimpaired forborne loans and advances1 (audited)
31 Dec
2017
£m
31 Dec
2016
£m
Type of unimpaired forbearance
Exposures >£5m
Covenants
Extensions/alterations
Multiple
Exposures <£5m
Total
1 Material portfolios only.
157
–
–
157
290
447
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 tear
Transferred from impaired but still reported as forborne
Asset disposal/sales
Net drawdowns/repayments
Exchange and other movements
At 31 December
1 Balances exclude intra-year movements.
2017
£m
181
(34)
(50)
90
–
–
(25)
(5)
157
153
7
21
181
285
466
2016
£m
669
(63)
(413)
88
–
–
(100)
–
181
Run-off
Table 1.23: Run-off impairment charge
Ireland
Corporate real estate and other corporate
Specialist finance
Other
Total
Asset quality ratio¹
1 In respect of loans and advances to customers.
Table 1.24: Run-off impaired loans and provisions
At 31 December 2017
Ireland
Corporate real estate and other corporate
Specialist finance
Other
Total gross lending
Impairment provisions
Total
At 31 December 2016
Ireland
Corporate real estate and other corporate
Specialist finance
Other
Total gross lending
Impairment provisions
Total
Lloyds Banking Group Annual Report and Accounts 2017 131
2017
£m
(9)
(13)
(15)
(4)
(41)
2016
£m
(14)
1
(2)
(11)
(26)
Change
%
36
64
(58)
(0.32%)
(0.15%)
(17)bp
Loans and
advances to
customers
£m
Impaired
loans
£m
Impaired
loans as
a % of
closing
advances
%
Impairment
provisions
as a % of
impaired
loans
%
Impairment
provisions
£m
136
692
23
84
935
139
896
99
83
1,217
3.1
84.9
1.0
8.4
11.0
3.1
75.3
2.9
6.9
11.9
115
287
29
25
456
133
399
111
39
682
84.6
41.5
126.1
29.8
48.8
95.7
44.5
112.1
47.0
56.0
4,391
815
2,327
1,000
8,533
(456)
8,077
4,498
1,190
3,374
1,197
10,259
(682)
9,577
Eurozone exposures
The following section summarises the Group’s direct exposure to Eurozone
countries at 31 December 2017. 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 Chief Security Office (formerly the Group Financial Stability Forum)
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 International Financial Reporting Standards (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. 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
132 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
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 1.25: Selected Eurozone exposures
Sovereign debt
Financial Institutions
Direct
Sovereign
Expenses
£m
Cash at
Central
Banks
£m
Banks
£m
Other1
£m
Asset
backed
securities
£m
Corporate
£m
Personal
£m
Insurance
Assets1
£m
At 31 December 2017
Ireland
Spain
Portugal
Italy
Greece
At 31 December 2016
Ireland
Spain
Portugal
Italy
Greece
–
–
–
–
–
–
–
23
–
–
–
23
–
–
–
–
–
–
–
–
–
–
–
–
177
103
5
33
–
318
215
76
7
38
–
336
Total
£m
5,602
817
21
210
–
300
100
749
591
9
78
–
4,276
51
7
–
–
–
68
–
99
–
–
–
–
–
100
1,427
4,334
167
6,650
91
–
–
–
–
929
630
22
59
–
4,363
41
7
–
–
638
91
1,640
4,411
–
19
–
67
–
86
6,110
915
36
164
–
7,225
4
–
–
–
304
512
126
–
–
–
1 Excludes reverse repurchase exposure to Institutional funds domiciled in Ireland secured by UK gilts of £16,323 million (2016: £14,506 million) on a gross basis.
In addition to the exposures detailed above, the Group has exposures in the following Eurozone countries:
Table 1.26: Other Eurozone exposures
At 31 December 2017
Netherlands
France
Germany
Luxembourg
Belgium
All other Eurozone countries
At 31 December 2016
Netherlands
France
Germany
Luxembourg
Belgium
All other Eurozone countries
Sovereign debt
Financial Institutions
Direct
Sovereign
Expenses
£m
38
205
2,008
22
22
80
Cash at
Central
Banks
£m
12,182
–
68
–
–
–
Banks
£m
Other1
£m
Asset
backed
securities
£m
Corporate
£m
Personal
£m
Insurance
Assets
£m
Total
£m
269
1,059
325
306
142
22
303
128
–
702
7
–
29
–
261
629
–
–
1,678
2,040
1,581
1,130
110
423
6,673
433
21,605
91
575
–
–
–
1,142
473
4
113
58
4,665
5,291
2,793
394
583
2,375
12,250
2,123
1,140
919
6,962
7,339
2,223
35,331
–
–
1,543
7
35
38
8,795
–
93
–
–
–
1,623
8,888
343
1,907
538
306
1,009
95
4,198
324
620
31
1,484
300
–
2,759
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
934
7,247
6,854
1,862
34,365
1 Excludes reverse repurchase exposure to Institutional funds secured by UK gilts of £2,644 million (2016: £2,679 million) on a gross basis.
Lloyds Banking Group Annual Report and Accounts 2017 133
Environmental risk management
The Group ensures appropriate management of the environmental
impact, including climate change, 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 responsibility.
The Group’s divisions are each exposed to different types and levels of
climate-related risk in their operations. For example, the general insurance
division regularly uses weather, climate and environmental models and
data to assess its insurance risk from covered perils such as windstorm and
flood. A team of specialist scientists are employed within underwriting to
do this work and they also regularly monitor the state of climate science to
assess the need to include its potential impacts within pricing and solvency.
In response to the Task Force on Climate-related Financial Disclosure
recommendations, in 2018 we will commence a systematic review of
climate-related risks and opportunities across the Group’s core divisions.
The Group has been a signatory to the Equator Principles since 2008
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,
Table 1.27: Environmental risk management approach
Project-Related Corporate loans and Bridge loans. The Group has also
been a signatory to the UN Principles for Responsible Investment (UNPRI)
since 2012, which incorporate ESG (environmental, social and governance
risk) considerations in asset management. Scottish Widows is responsible
for the annual UNPRI reporting process.
Within Commercial Banking, an electronic Environmental Risk Screening
Tool is the primary mechanism for assessing environmental risk for lending
transactions. This system provides screening of location specific and sector
based risks that may be present in a transaction. Where a risk is identified,
the transaction is 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.
We provide colleague training on environmental risk management as part
of the standard suite of Commercial Banking credit risk courses. To support
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.
Group credit principles
Environmental risk
Initial transaction
screening
Relationship teams
Detailed review
In-house team,
retained consultancy
Environmental
due diligence
Panel consultants
Environmental
risk approval
(including any
conditions)
Credit policies
Business unit
processes
Supporting tools
Sector briefings
Legislation briefings
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;
– 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; and
– 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
134 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Conduct risk
Definition
The risk of customer detriment due to poor design, distribution and
execution of products and services or other activities which could
undermine the integrity of the market or distort competition, leading
to unfair customer outcomes, regulatory censure and financial and
reputational loss.
Exposures
The Group faces significant conduct risks, which affect all aspects of the
Group’s operations and all types of customers.
Conduct risks can impact directly or indirectly on our customers and can
materialise from a number of areas across the Group, including: sales
processes resulting in poor customer outcomes; products and services not
meeting the customers’ needs; failing to deal with customers’ complaints
effectively; failing to promote effective competition in the interest of
customers and failing to identify and report behaviour which could
undermine the integrity of the market.
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. There is
also a significant regulatory focus on market misconduct, resulting from
previous issues which include London Interbank Offered Rate (LIBOR) and
Foreign Exchange (FX).
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.
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 supports a
consistent approach across products and services. These contain a range
of product design, sales and service metrics (such as sales volume, usage
and customer outcome testing) to provide a more holistic view of conduct
risks; each product also has additional bespoke metrics.
Each of the tolerances for the metrics are agreed for the individual product
or service and are tracked monthly. At a consolidated level these metrics
are part of the Board approved risk appetite. The Group is also evolving
its approach to measurements supporting customer vulnerability and
customer journeys.
Measurements in relation to market integrity continued to evolve in 2017,
including additional business unit level risk control metrics to enhance
the established suite of metrics (which already cover key topics such
as the management of conflicts of interest and the handling of market
sensitive information).
Mitigation
The Group takes a range of mitigating actions with respect to conduct risk.
The Group’s ongoing commitment to good customer outcomes sets the
tone from the top and supports the development of the right customer
centric culture – strengthening links between actions to support conduct,
culture and customer and enabling more effective control management.
Actions to enable good conduct include:
– Conduct risk appetite established at Group and business area level, with
metrics included in the Group risk appetite to ensure ongoing focus;
– Customer needs explicitly considered within business and product level
planning and strategy, through divisional customer and culture plans,
with integral conduct lens, reviewed and challenged by Group Customer
First Committee (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;
– Further embedding of the customer vulnerability framework. The
Customer Vulnerability Cross Divisional Committee operates at a senior
level to prioritise change, drive implementation and ensure consistency
across the Group. Significant partnership established with Macmillan to
support customers with cancer;
– Embedding and evolving 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.
The Group continues to prioritise activity designed to reinforce good
conduct in its engagement with the markets in which it operates, with
the Market Conduct Steering Committee leading read-across activity
of industry issues for LBG consideration. Further training has been
delivered for colleagues, and the focus on enhanced procedures, and the
enhancement of preventative and detective controls continues – including
the Group’s trade surveillance and continuous surveillance capability.
The Group’s leadership team, through GCFC, support the development of
the conduct agenda and priorities. 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 concerns related to
customer treatment, effective competition and market integrity, to ensure
that the Group’s strategic conduct focus 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.
GCFC has responsibility for monitoring and reviewing integrated
measurement of enhanced outcomes and customer views, 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.
Lloyds Banking Group Annual Report and Accounts 2017 135
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,
which can lead to adverse customer impact, reputational damage or
financial loss.
Exposures
The principal operational risks to the Group are:
– A cyber-attack could result in customer detriment, financial loss,
disruption and/or reputational damage;
– Failure in IT systems, due to volume of change, and/or aged
infrastructure, could result in unfair customer outcomes, financial loss
and/or reputational damage;
– Failure to protect and manage customers’ data could result in customer
detriment, financial loss, disruption and/or reputational damage;
– Internal and/or external fraud or financial crime could result in customer
detriment, financial loss, disruption and/or reputational damage;
– Failure to ensure compliance with increasingly complex and detailed
anti-money laundering, anti-terrorism, sanctions and prohibitions laws
and regulations, as such a failure would adversely impact the Group’s
reputation and potentially incur fines and other legal enforcements; and
– Terrorist acts, other acts of war or hostility, geopolitical, pandemic or
other such events.
A number of these risks could increase where there is a reliance on third
party suppliers to provide services to the Group or its customers.
Measurement
Operational risk is managed across the Group through an operational risk
framework and operational risk policies. The operational risk framework
includes a risk control self-assessment process, risk impact likelihood
matrix, key risk and control indicators, risk appetite, a robust operational
event management and escalation process, scenario analysis and
operational losses process.
Table 1.28 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 2017 the highest frequency of events occurred
in external fraud (64.37 per cent) and execution, delivery and process
management (22.69 per cent). Clients, products and business practices
accounted for 72.74 per cent of losses by value, driven by legacy issues
where impacts materialised in 2017 (excluding PPI).
Table 1.28: 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
2017
1.35
10.12
1.10
–
22.69
64.37
0.37
100.00
2016
1.01
11.31
1.05
0.04
24.80
61.58
0.21
2017
0.92
72.74
0.07
–
22.80
3.50
(0.03)
2016
0.55
77.62
0.27
–
19.23
2.31
0.02
100.00
100.00
100.00
Operational risk losses and scenario analysis is used to inform the Internal Capital Adequacy Assessment Process (ICAAP). The Group calculates its
minimum (Pillar I) operational risk capital requirements using The Standardised Approach (TSA). Pillar II is calculated using Internal and External loss data
and extreme but plausible scenarios that may occur in the next 12 months.
Mitigation
The Group’s strategic review considers the changing risk management
requirements, adapting the change delivery model to be more agile
and develop the people skills and capabilities needed to be the ‘Bank of
the Future’. 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 to ensure the correct
level of visibility and engagement. The Group employs a range of risk
management strategies, including: avoidance, mitigation, transfer
(including 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 process including due diligence,
risk evaluation and ongoing assurance.
Mitigating actions to the principal operational risks are:
– The threat landscape associated with cyber risk continues to evolve
and there is significant regulatory attention on this subject. The Board
has defined a cyber risk appetite and has completed a three year
programme to deliver capability to meet that risk appetite. Given the
nature of the threat, the Group continues to invest heavily in protecting
against malicious cyber-attacks and is commencing further investment
in enhancing the protection of its customers and their data, improving
capability to detect and respond to attacks and protecting its most
critical systems.
– The Group continues to optimise its approach to IT and operational
resilience by investing in technology improvements and enhancing
the resilience of systems that support the Group’s critical business
processes, primarily through the Technology 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 resilience.
– The Group is making a significant investment to improve data privacy,
including the security of data and oversight of third parties. The Group’s
strategy is to introduce advanced data management practices, based
on Group-wide standards, data-first culture and modern enterprise data
platforms, supported by a simplified modern IT architecture.
– 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 terms 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
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
136 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
colleagues. The Group also plays an active role with other financial
institutions, industry bodies, and enforcement agencies in identifying and
combatting fraud.
– The Group has adopted policies and procedures designed to detect
and prevent the use of its banking network for money laundering,
terrorist financing, bribery, tax evasion, human trafficking, and modern-
day slavery, and activities prohibited by legal and regulatory sanctions.
Against a background of increasingly complex and detailed laws and
regulations, and of increased criminal and terrorist activity, the Group
regularly reviews and assesses its policies, procedures and organisational
arrangements to keep them current, effective and consistent across
markets and jurisdictions. 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, reporting of suspicions of money laundering or
terrorist financing to the applicable regulatory authorities, and interaction
between the Group’s Financial Intelligence Unit and external agencies
and other financial institutions. 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.
– Operational resilience measures and recovery planning defined in the
Group’s Resilience and 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. The Group considers its
operational resilience across five key pillars; cyber, third parties, IT, people
and property.
Monitoring
Monitoring and reporting of operational risk is undertaken at Board, Group
and divisional risk committees. Each committee monitors key risks, control
effectiveness, key risk and control indicators, events, operational losses, risk
appetite metrics and the results of independent testing conducted by Risk
and/or Group Internal Audit.
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.
People risk
Definition
The risk that the Group fails to provide an appropriate colleague and
customer centric culture, supported by robust reward and wellbeing
policies and processes; effective leadership to manage colleague
resources; effective talent and succession management; and robust control
to ensure all colleague-related requirements are met.
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, Risk division reviews and 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.
Lloyds Banking Group Annual Report and Accounts 2017 137
Insurance underwriting risk
Capital risk
Definition
Insurance underwriting risk is defined as the risk of adverse developments
in longevity, mortality, persistency, General Insurance underwriting and
policyholder behaviour, leading to reductions in earnings and/or value.
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
The major source of insurance underwriting risk within the Group is the
Insurance business.
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. Exposures can arise, for example, in extreme
weather conditions, such as flooding, when property damage claims are
higher than expected.
The Group’s defined benefit pension schemes also expose the Group to
longevity risk. For further information please refer to the defined benefit
pension schemes component of the market risk section and note 35 to the
financial statements.
Measurement
Insurance underwriting 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 underwriting 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 32 to the financial statements.
Mitigation
Insurance underwriting 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 and in 2017 we reinsured £1.3 billion of annuitant longevity. A team
of longevity and bulk pricing experts has been built to support the new
bulk annuity proposition; and
– 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.
Monitoring
Insurance underwriting risks in the Insurance business are monitored by
Insurance senior executive committees and ultimately the Insurance Board.
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 underwriting 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 underwriting risk is evaluated and significant
divergences from experience or movements in risk exposures are
investigated and remedial action taken.
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 needs 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 requires and holds through
applying the regulatory framework defined by the Capital Requirements
Directive and Regulation (CRD IV) as implemented in the UK by the
Prudential Regulation Authority (PRA) and supplemented through
additional regulation under the PRA Rulebook. Full details of the Group’s
regulatory capital and leverage frameworks, including the means by which
its capital and leverage requirements and capital resources are calculated,
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 2A of the regulatory framework, the aggregate
of which is to be referred to as the Group’s Total Capital Requirement
(TCR) from 1 January 2018, and a number of regulatory capital buffers as
described below.
Additional minimum requirements under Pillar 2A are currently set by the
PRA through 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 to
cover 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). From 1 January
2018, Pillar 2A will be set as a firm specific capital requirement (Pillar 2R)
rather than as individual capital guidance.
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.
– Although the Group is not currently classified as a global systemically
important institution (G-SII) under the Capital Requirements Directive, it
has been classified as an ‘other’ systemically important institution (O-SII)
by the PRA. The O-SII buffer is set to zero in the UK.
– The Systemic Risk Buffer (SRB) will be applied to UK ring-fenced banks
from early 2019. 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 FPC anticipates applying a buffer of 2.5 per cent to
the largest ring-fenced institutions. 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 Group’s PRA Buffer 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 risk-weighted
assets 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 2017 it was 1.25 per cent and during 2018 it will increase
to 1.875 per cent.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
Monitoring
Capital is actively managed and monitoring capital ratios is 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 plan 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 both minimum regulatory requirements and the
Group’s risk appetite and is consistent with market expectations.
Target capital ratios
The Board’s view of the level of CET1 capital required is c.13 per cent plus
a management buffer of around 1 per cent.
This takes into account, amongst other things:
– the Pillar 2A 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 an increase from 4.5 per cent to 5.4 per
cent of risk-weighted assets at 31 December 2017, of which 3.0 per cent
has to be met 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 the Group’s
internal stress tests. The PRA requires the PRA Buffer itself to remain
confidential between the Group and the PRA.
– future regulatory developments, including the introduction of the
Systemic Risk Buffer in early 2019 and the CCyB on UK exposures during
the course of 2018.
138 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
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 CCyB rate for the UK is
currently set at zero but will increase to 0.5 per cent on 27 June 2018
and to 1.0 per cent on 28 November 2018. The FPC will reconsider the
adequacy of a 1.0 per cent UK CCyB rate during the first half of 2018
in light of the evolution of the overall risk environment. Non-zero buffer
rates currently apply for Norway, Sweden, Hong Kong, Iceland, Slovakia
and the Czech Republic. Given that the Group has minimal exposures
to these jurisdictions, the overall countercyclical capital buffer requirement
at 31 December 2017 is considered to be negligible.
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
the 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 and CCyB. 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 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.
The minimum leverage ratio requirement under the UK Leverage Ratio
Framework is 3.25 per cent. In addition the 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 3.25 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.
Lloyds Banking Group Annual Report and Accounts 2017 139
Overall the Group’s CET1 ratio has strengthened to 15.5 per cent on a
pro forma basis before ordinary dividends and the share buyback. After
ordinary dividends the Group’s CET1 ratio was 14.4 per cent on a pro
forma basis. In addition the Board intends to implement a share buyback
programme of up to £1 billion, equivalent to up to 1.4 pence per share.
The buyback will impact the Group’s capital position in 2018 and is
expected to reduce CET1 capital by c.50 basis points. Allowing for this
at 31 December 2017 the pro forma CET1 ratio would be 13.9 per cent
(31 December 2016: 13.0 per cent pro forma after dividends and adjusting
for MBNA).
The accrual for foreseeable dividends reflects the recommended final
ordinary dividend of 2.05 pence per share.
The transitional total capital ratio, after ordinary dividends reduced by
0.2 per cent to 21.2 per cent, largely reflecting amortisation on dated
tier 2 instruments and foreign exchange movements on tier 1 and tier 2
instruments, offset by the increase in CET1 capital and the reduction in
risk-weighted assets.
Applying the Bank of England’s Minimum Requirement for Own Funds
and Eligible Liabilities (MREL) policy to current capital requirements, the
Group’s indicative MREL requirement, excluding regulatory capital buffers,
is as follows:
– From 2020, 2 times Pillar 1 plus Pillar 2A, equivalent to 21.4 per cent of
risk-weighted assets
– From 2022, 2 times Pillar 1 plus 2 times Pillar 2A, equivalent to 26.8 per
cent of risk-weighted assets
The Bank of England will review the calibration of MREL in 2020 before
setting final end-state requirements to be met from 2022. This review will
take into consideration any changes to the capital framework, including
the finalisation of Basel III.
During 2017, the Group issued £8.5 billion (sterling equivalent as at
31 December 2017) of senior unsecured securities from Lloyds Banking
Group plc which, while not included in total capital, are eligible to meet
MREL. Combined with previous issuances made during 2016 the Group
remains comfortably positioned to meet MREL requirements from 2020
and, as at 31 December 2017, had a transitional MREL ratio of 25.7 per cent
of risk-weighted assets.
The UK leverage ratio, after ordinary dividends, increased from 5.3 per
cent on a pro forma basis to 5.4 per cent on a pro forma basis, largely
reflecting the increase in fully loaded tier 1 capital and the underlying
reduction in balance sheet assets, net of qualifying central bank claims and
deconsolidation adjustments.
An analysis of the Group’s capital position as at 31 December 2017
is presented in the following section on both a CRD IV transitional
arrangements basis and a CRD IV fully loaded basis.
Dividend policy
The Group intends to maintain an ordinary dividend policy that is both
progressive and sustainable. The rate of growth of the ordinary dividend
will be decided by the Board in light of the circumstances at the time.
The Board also gives due consideration to the distribution of surplus
capital through the use of special dividends or share buybacks. Surplus
capital represents the return 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. The amount of required capital
may vary from time to time depending on circumstances and by its nature
there can be no guarantee that 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 2017 Lloyds Banking Group plc (‘the Company’)
had accumulated distributable reserves of approximately £8.5 billion.
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.
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 2017, had a consolidated CET1
capital ratio of 15.8 per cent (31 December 2016: 15.1 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.
Analysis of capital position
Excluding the capital impact of the acquisition of MBNA on 1 June 2017,
the Group generated 2.45 per cent of CET1 capital on a pro forma basis
before ordinary dividends and allowing for the share buyback, primarily as
a result of:
– Strong underlying capital generation of 2.5 per cent, largely driven by
underlying profits (2.2 per cent) and the dividend paid by the Insurance
business in February 2018 in relation to 2017 earnings (0.3 per cent);
– A reduction in risk-weighted assets (prior to the impact of the acquisition
of MBNA) resulting in an increase of 0.8 per cent, primarily reflecting
updates made to both mortgage and unsecured retail IRB models,
continued active portfolio management, foreign exchange movements,
disposals and capital efficient securitisation activity, partly offset through
targeted growth in key customer segments;
– The impact of market and other movements, generating an increase of
0.4 per cent, partially reflecting positive movements in available-for-sale
assets and the defined benefit pension schemes;
– Offset by a reduction of (1.2) per cent for conduct provisions.
In addition, the Group utilised the 0.8 per cent of CET1 capital retained at
31 December 2016 to cover the acquisition of MBNA.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
140 Lloyds Banking Group Annual Report and Accounts 2017
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 1.29: Capital resources (audited)
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 adjustments
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
Risk-weighted assets
Common equity tier 1 capital ratio3
Tier 1 capital ratio
Total capital ratio
Transitional
Fully loaded
At 31 Dec
2017
£m
At 31 Dec
2016
£m
At 31 Dec
2017
£m
At 31 Dec
2016
£m
43,551
43,020
43,551
43,020
(1,475)
1,301
109
(1,405)
(177)
(1,568)
1,342
87
(2,136)
(276)
(1,475)
1,301
109
(1,405)
(177)
(1,568)
1,342
87
(2,136)
(276)
41,904
40,469
41,904
40,469
(2,966)
(1,623)
(2,966)
(1,623)
(556)
(498)
(541)
(191)
(4,250)
(3,255)
(630)
(602)
(267)
(217)
(4,282)
(3,564)
(556)
(498)
(541)
(191)
(4,250)
(3,255)
(630)
(602)
(267)
(217)
(4,282)
(3,564)
29,647
29,284
29,647
29,284
5,330
4,503
(1,748)
8,085
5,320
4,998
(1,692)
8,626
5,330
5,320
–
–
–
–
5,330
5,320
(1,403)
36,329
(1,329)
36,581
–
–
34,977
34,604
13,419
14,833
13,419
14,833
(1,786)
1,617
(3,524)
9,726
120
(1,810)
1,351
(3,447)
10,927
186
(1,786)
(1,252)
(3,565)
6,816
120
(1,810)
(1,694)
(3,597)
7,732
186
(1,516)
44,659
(1,571)
46,123
(2,919)
38,994
(2,900)
39,622
210,919
215,534
210,919
215,534
14.1%
17.2%
21.2%
13.6%
17.0%
21.4%
14.1%
16.6%
18.5%
13.6%
16.1%
18.4%
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.
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 14.4 per cent on a pro forma basis upon recognition of the dividend paid by the Insurance business in February 2018 in relation to its 2017 earnings
(31 December 2016: 13.8 per cent pro forma).
Lloyds Banking Group Annual Report and Accounts 2017 141
The key difference between the transitional capital calculation as at 31 December 2017 and the fully loaded equivalent is primarily related to capital
securities that previously qualified as tier 1 or tier 2 capital, but that do not fully qualify under CRD IV, which can be included in additional tier 1 (AT1)
or tier 2 capital (as applicable) up to specified limits which reduce by 10 per cent per annum until 2022.
The movements in the transitional CET1, AT1, tier 2 and total capital positions in the period are provided below.
Table 1.30: Movements in capital resources
At 31 December 2016
Profit attributable to ordinary shareholders1
Movement in foreseeable dividends2
Dividends paid out on ordinary shares during the year
Dividends in respect of 2016 earnings and 2017 interim 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
Other movements
At 31 December 2017
Common
Equity tier 1
£m
29,284
2,514
93
(2,284)
575
3
(274)
428
(74)
74
309
(1,343)
104
32
–
–
206
Additional
Tier 1
£m
7,297
Tier 2
£m
9,542
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(74)
–
55
(66)
Total
capital
£m
46,123
2,514
93
(2,284)
575
3
(274)
428
(74)
74
309
(1,343)
104
13
(66)
(541)
(1,201)
(1,742)
–
–
206
29,647
6,682
8,330
44,659
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 2017 full year ordinary dividend and the reversal of the accrual for the 2016 full year ordinary and special dividends which were paid during the year.
CET1 capital resources have increased by £363 million in the year, primarily reflecting a combination of profit generation, dividends received from the
Insurance business during the year, movements in the defined benefit pension schemes and a reduction in the deferred tax asset deducted from capital,
partially offset by the payment of the 2017 interim dividend, the accrual of the full year ordinary dividend and an increase in the deduction for goodwill and
other intangible assets, largely in relation to the acquisition of MBNA.
AT1 capital resources have reduced by £615 million in the year, primarily reflecting the annual reduction in the transitional limit applied to grandfathered
AT1 capital instruments and foreign exchange movements.
Tier 2 capital resources have reduced by £1,212 million in the year largely reflecting the amortisation of dated tier 2 instruments and foreign exchange
movements on subordinated debt, partly offset by the transitioning of grandfathered AT1 instruments to tier 2.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
142 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Table 1.31: 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
At 31 Dec
2017
£m
60,207
61,588
17,191
At 31 Dec
2016
£m
64,907
64,970
17,788
138,986
147,665
25,503
18,956
164,489
166,621
6,055
428
1,402
25,326
3,051
8,419
340
864
25,292
3,147
200,751
204,683
10,168
10,851
210,919
215,534
1 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.
Table 1.32: Risk-weighted assets movement by key driver
Total risk-weighted assets
as at 31 December 2016
Less total threshold risk-weighted assets3
Risk-weighted assets
as at 31 December 2016
Asset size
Asset quality
Model updates
Methodology and policy
Acquisitions and disposals
Movements in risk levels (market risk only)
Foreign exchange
Other
Risk-weighted assets
as at 31 December 2017
Threshold risk-weighted assets3
Total risk-weighted assets
as at 31 December 2017
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
147,665
(2,465)
322
(4,399)
(789)
(606)
–
18,956
100
(112)
166,621
(2,365)
210
–
(4,399)
434
6,237
–
(355)
5,631
–
3,147
25,292
9,623
(403)
(222)
–
(431)
(26)
–
–
349
–
–
–
–
–
–
930
–
–
(896)
(742)
(112)
(854)
(656)
–
–
–
–
–
–
–
(445)
Total
£m
215,534
(10,851)
204,683
(2,768)
(12)
(4,050)
(786)
6,535
(445)
(1,510)
(896)
138,986
25,503
164,489
7,885
3,051
25,326
200,751
10,168
210,919
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
movement 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 £2.1 billion were driven by the
following key movements:
– Asset size saw a reduction of £2.4 billion due to continued active portfolio
management, partly offset by targeted growth in key customer segments.
– Model update reductions of £4.4 billion were mainly due to PRA
approved model changes within the mortgage and unsecured
retail portfolios.
– Methodology and policy reductions of £0.4 billion were principally the
result of further capital efficient securitisation activity.
– Acquisitions and disposals increased by £5.6 billion and were primarily
driven by the acquisition of MBNA, partly offset by the disposal of the
Group’s interest in a strategic equity investment.
– Sterling foreign exchange movements, principally with the Euro and
US Dollar, contributed to an overall reduction in credit risk-weighted
assets of £0.9 billion.
Counterparty credit risk and CVA risk-weighted assets reductions of
£1.7 billion were mainly driven by foreign exchange movements, reductions
in position levels, updates to the calculation methodology following
clarification of the regulatory approach and other movements.
Market risk, risk-weighted assets reduced by £0.1 billion largely due to
a decrease in interest rate risk exposure, offset by an increase in the VaR
multiplier, an increase in exposure to corporate bonds and refinements to
internal models.
Lloyds Banking Group Annual Report and Accounts 2017 143
Operational risk, risk-weighted assets are broadly in line with the prior year,
with the increase following the acquisition of MBNA mostly offset by the
annual update of the income based Standardised Approach operational
risk calculation.
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 this programme, and in line with previous years,
the Group conducted macroeconomic stress tests of the operating plan.
The concurrent UK stress test run by the Bank of England was also
undertaken in 2017. As announced in November, despite the severity of the
stress scenario, the Group exceeded the capital and leverage thresholds
set out for the purpose of the stress test and was not required to take any
capital action as a result.
Leverage ratio
The table below summarises the component parts of the Group’s leverage
ratio. Further analysis will be provided in the Group’s Pillar 3 Report.
Table 1.33: Leverage ratio
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
Loans and advances and other assets
Total assets
Qualifying central bank claims
Deconsolidation adjustments1
Derivative financial instruments
Securities financing transactions
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
Securities financing transactions adjustments
Off-balance sheet items
Regulatory deductions and other adjustments
Total exposure measure2
Average exposure measure4
UK Leverage ratio2,3,6
Average UK leverage ratio4
CRD IV exposure measure5
CRD IV leverage ratio5
Fully loaded
At 31 Dec
2017
£m
29,647
5,330
34,977
25,834
49,193
737,082
812,109
(53,842)
(2,043)
(85)
(140,387)
(142,515)
(13,031)
(7,380)
881
12,335
(7,195)
(2,022)
58,357
(7,658)
657,234
660,557
5.3%
5.4%
At 31 Dec
2016
£m
29,284
5,320
34,604
36,138
42,285
739,370
817,793
(41,510)
(2,403)
112
(142,955)
(145,246)
(20,490)
(8,432)
699
13,188
(15,035)
39
58,685
(9,128)
665,598
5.2%
711,076
707,108
4.9%
4.9%
1 Deconsolidation adjustments relate to the deconsolidation of certain Group entities that fall outside the scope of the Group’s regulatory capital consolidation, being primarily the
Group’s Insurance business.
2 Calculated in accordance with the UK Leverage Ratio Framework which requires qualifying central bank claims to be excluded from the leverage exposure measure.
3 The countercyclical leverage ratio buffer is currently nil.
4 The average UK leverage ratio is based on the average of the month end tier 1 capital and exposure measures over the quarter (1 October 2017 to 31 December 2017).
The average of 5.4 per cent compares to 5.4 per cent at the start and 5.3 per cent at the end of the quarter.
5 Calculated in accordance with CRD IV rules which include central bank claims within the leverage exposure measure.
6 The UK leverage ratio is 5.4 per cent on a pro forma basis upon recognition of the dividend paid by the Insurance business in February 2018 in relation to its 2017 earnings (31 December
2016: 5.3 per cent pro forma).
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
144 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Key movements
The Group’s fully loaded UK leverage ratio increased by 0.1 per cent to
5.3 per cent reflecting the impact of both the increase in tier 1 capital
and the £8.4 billion reduction in the exposure measure, the latter largely
reflecting the underlying reduction in balance sheet assets (net of
qualifying central bank claims and deconsolidation adjustments) driven
by the reductions in both available-for-sale financial assets and derivatives
assets, partially offset by the increase in loans and advances following the
acquisition of MBNA and an increase in securities financing transactions
(SFT) activity.
The derivatives exposure measure, representing derivative financial
instruments per the balance sheet net of deconsolidation and derivatives
adjustments, reduced by £2.1 billion during the year, primarily driven by
market movements and a reduction in position levels.
The £4.7 billion increase in the SFT exposure measure during the year,
representing SFT assets per the balance sheet net of deconsolidation
and other SFT adjustments, reflected an increase in customer volumes,
partially offset by reduced trading volumes and an increase in eligible
netting adjustments.
Off-balance sheet items reduced by £0.3 billion during the year, primarily
reflecting a net reduction in securitisation financing facility commitments
together with corporate facility drawdowns, reductions and exits,
largely offset by an increase in unconditionally cancellable credit card
commitments following the acquisition of MBNA and new residential
mortgage offers placed.
The average UK leverage ratio of 5.4 per cent over the quarter reflected a
strengthening tier 1 capital position prior to the accrual for the announced
full year ordinary dividend and further conduct provisions, and the
reduction in underlying balance sheet assets during the quarter, net of
qualifying central bank claims.
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
2017 Basel G-SIBs annual exercise will be disclosed in April 2018 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.
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. Liquidity risk is defined as the risk
that the Group has insufficient financial resources to meet its commitments
as they fall due.
Exposure
Liquidity exposure represents the potential stressed outflows in any future
period less expected inflows. The Group considers liquidity 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 maturities with behavioural overlays
as appropriate. Note 51 on page 240 sets out an analysis of assets and
liabilities by relevant maturity grouping. Additionally the Group undertakes
quantitative and qualitative analysis of behavioural aspects of its assets and
liabilities in order to reflect their expected behaviour.
Mitigation
Group Corporate Treasury (GCT) is responsible for managing and
monitoring liquidity risks on behalf of the Group and ensuring that liquidity
risk management systems and arrangements are adequate with regard
to the internal risk appetite and Group strategy. Liquidity policies and
procedures are subject to independent internal oversight by Risk. Overseas
branches and subsidiaries of the Group may also be required to meet the
liquidity requirements of the entity’s domestic country. Management of
liquidity requirements is performed by the overseas branch or subsidiary
and overseen by GCT. Liquidity risk of the Insurance business is actively
managed and monitored within the Insurance business. The Group plans
funding requirements over the life of the funding plan, combining business
as usual and stressed conditions. The Group manages its risk appetite and
liquidity position with regard to its internal risk appetite and the Liquidity
Coverage Ratio (LCR) required by the PRA and Capital Requirements
Directive and Regulation (CRD IV) liquidity requirements.
The Group’s funding and liquidity position is underpinned by its significant
customer deposit base, and is supported by strong relationships across
customer segments. The Group has consistently observed that in
aggregate the retail deposit base provides a stable source of funding.
Funding concentration by counterparty, currency and tenor is monitored
on an ongoing basis and where concentrations do exist, these are
managed as part of the planning process and limited by internal risk
appetite, with analysis regularly provided to senior management.
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; helps drive the correct inputs to customer pricing;
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 historic data.
The Group can monetise liquid assets quickly, either through the
repurchase agreements (repo) market or through outright sale. In addition,
the Group has pre-positioned a substantial amount of assets at the Bank
of England’s Discount Window Facility which can be used to access
additional liquidity in a time of stress. The Group considers diversification
across geography, currency, markets and tenor when assessing appropriate
holdings of liquid assets. The liquid asset buffer is managed under the
control of Group Corporate Treasury and is available for deployment at
immediate notice, subject to complying with regulatory requirements.
Lloyds Banking Group Annual Report and Accounts 2017 145
Funding and liquidity management in 2017
The Group has maintained its strong funding and liquidity position with a
loan to deposit ratio of 110 per cent at 31 December 2017 (109 per cent as
at 31 December 2016).
During 2017, the Group drew down a further £15.4 billion under the
Bank of England’s Term Funding Scheme (TFS), now fully utilised at
£20 billion as at 31 December 2017. The amount outstanding under the
Bank of England’s Funding for Lending Scheme (FLS) is £25.1 billion as at
31 December 2017 (£30.1 billion as at 31 December 2016).
As a result, wholesale funding has decreased by £9.7 billion to
£101.1 billion as at 31 December 2017, with the amount maturing in less
than one year falling to £28.5 billion as at 31 December 2017 (£35.1 billion
as at 31 December 2016). In 2017, the Group issued term funding of
£10.2 billion and following the full utilisation of the TFS, would expect
term issuance volumes in 2018 to return to a steady-state requirement of
between £15 billion and £20 billion per annum.
The Group’s strong balance sheet and funding and liquidity position has
been reflected in positive movements in the Group’s credit ratings in 2017.
During the second half of the year, Moody’s upgraded Lloyds Bank plc’s
long-term rating by one notch to ‘Aa3’. In addition, S&P improved
Lloyds Bank plc’s outlook to ‘positive’ to reflect the Group’s improved
bail-in capital position following recent Lloyds Banking Group plc issuance.
The Group’s liquidity surplus continues to exceed the regulatory minimum
and internal risk appetite, with a Liquidity Coverage Ratio of 127 per cent
as at 31 December 2017 based on the EU Delegated Act.
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
Daily monitoring and control processes are in place to address internal and
regulatory liquidity requirements. The Group monitors a range of market
and internal early warning indicators on a daily basis for early signs of
liquidity risk in the market or specific to the Group. This captures regulatory
metrics as well as metrics the Group considers relevant for its liquidity
profile. These are a mixture of quantitative and qualitative measures,
including: daily variation of customer balances; changes in maturity profiles;
cash outflows; funding concentration; changes in LCR eligible liquidity
portfolio; credit default swap (CDS) spreads; and changing funding costs.
The Group carries out internal stress testing of its liquidity and potential
cash flow mismatch position over both short (up to one month) and longer
term horizons against a range of scenarios forming an important part of
the internal risk appetite. The scenarios and assumptions are reviewed at
least annually to ensure that they continue to be relevant to the nature of
the business including reflecting emerging horizon risks to the Group, such
as the UK exit from the EU. For further information on the Group’s 2017
liquidity stress testing results refer to page 148 .
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.
Table 1.34: Summary funding and liquidity metrics
LCR eligible assets
Loan to deposit ratio (%)
LCR eligible liquid assets/money market funding less than one year maturity (x)1
At 31 Dec
2017
£bn
120.9
109.7
8.3
At 31 Dec
2016
£bn
120.8
108.9
8.8
Change
(%)
–
1
(6)
1 Excludes balances relating to margins of £2.1 billion (31 December 2016: £3.2 billion) and settlement accounts of £1.5 billion (31 December 2016: £1.8 billion).
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
146 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Table 1.35: 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 liquid assets
Reverse repurchase agreements
Cash and balances at central banks4
Available-for-sale financial assets
Trading and fair value through profit and loss
Repurchase agreements
Total Group assets
Less: other liabilities5
Funding requirement
Funded by
Customer deposits
Wholesale funding6
Term funding scheme
Total equity
Total funding
At 31 Dec
2017
£bn
At 31 Dec
2016
£bn
Change
%
455.7
449.7
4.1
3.6
0.7
0.9
4.8
469.8
234.7
704.5
16.9
53.7
41.2
1.7
(5.9)
107.6
812.1
(226.5)
585.6
415.5
101.1
516.6
19.9
49.1
585.6
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
(240.7)
577.1
413.0
110.8
523.8
4.5
48.8
577.1
1
(20)
6
40
(53)
–
1
(6)
(2)
94
26
(25)
(6)
11
5
(1)
(6)
1
1
(9)
(1)
1
1
1 Excludes £16.8 billion (31 December 2016: £8.3 billion) of reverse repurchase agreements.
2 Excludes £1.7 billion (31 December 2016: £20.9 billion) of loans and advances to banks within the Insurance business and £0.8 billion (31 December 2016: £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’s definition of wholesale funding aligns with that used by other international market participants, including interbank deposits, debt securities in issue and subordinated
liabilities.
Table 1.36: Reconciliation of Group funding to the balance sheet (audited)
At 31 December 2017
At 31 December 2016
Repos
and cash
collateral
received by
Insurance
£bn
24.1
–
–
24.1
2.6
26.7
Included in
funding
analysis
£bn
5.1
78.1
17.9
101.1
415.5
516.6
Fair value
and other
accounting
methods
£bn
0.6
(5.6)
–
–
Balance
sheet
£bn
29.8
72.5
17.9
418.1
Repos
and cash
collateral
received by
Insurance
£bn
8.0
–
–
8.0
2.5
10.5
Included in
funding
analysis
£bn
8.1
83.0
19.7
110.8
413.0
523.8
Fair value
and other
accounting
methods
£bn
0.3
(6.7)
0.1
Balance
sheet
£bn
16.4
76.3
19.8
–
415.5
Deposits from banks
Debt securities in issue
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
Lloyds Banking Group Annual Report and Accounts 2017 147
Table 1.37: Analysis of 2017 total wholesale funding by residual maturity
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
Less
than one
month
£bn
One to
three
months
£bn
Three to
six months
£bn
Six to nine
months
£bn
Nine
months
to one year
£bn
3.7
1.0
0.3
0.1
–
1.3
0.4
0.7
1.5
–
3.9
–
7.6
2.1
2.8
0.6
–
0.4
5.9
0.2
7.1
3.2
–
0.5
0.7
–
4.4
1.5
6.2
2.5
–
0.9
0.1
0.1
3.6
–
3.7
0.9
–
2.3
–
0.1
3.3
0.6
3.9
One to
two years
£bn
Two to
five years
£bn
More than
five years
£bn
–
–
–
12.1
12.3
1.3
25.7
3.2
–
–
–
17.3
7.3
0.3
24.9
11.9
–
–
–
3.0
2.8
0.6
6.4
0.5
6.9
Total at
31 Dec
2017
£bn
5.1
10.0
3.2
37.4
24.7
2.8
78.1
17.9
Total at
31 Dec
2016
£bn
8.1
7.5
3.2
36.9
29.1
6.3
83.0
19.7
28.9
36.8
101.1
110.8
–
–
–
–
–
–
4.4
11.0
15.4
7.4
1 Medium-term notes include funding from the National Loan Guarantee Scheme (31 December 2016: £1.4 billion), which matured during 2017.
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 only.
Table 1.38: Total wholesale funding by currency (audited)
At 31 December 2017
At 31 December 2016
Table 1.39: Analysis of 2017 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 only.
Sterling
£bn
25.8
30.6
US Dollar
£bn
32.1
33.0
Euro
£bn
37.0
41.4
Other
currencies
£bn
6.2
5.8
Total
£bn
101.1
110.8
Sterling
£bn
US Dollar
£bn
–
1.0
1.0
0.1
–
2.1
1.0
–
5.2
–
0.3
–
5.5
5.2
Euro
£bn
–
1.6
–
–
–
1.6
1.6
Other
currencies
£bn
–
1.0
–
–
–
1.0
1.0
Total
£bn
–
8.8
1.0
0.4
–
10.2
8.8
The Group continues to maintain 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. For 2018, the Group will continue to maintain this diversified approach to funding, including capital and funding
from the holding company, Lloyds Banking Group plc, as needed to transition towards final UK Minimum Requirements for Own Funds and Eligible
Liabilities (MREL). The contractual maturities for the FLS and TFS are fully factored into the Group’s funding plan.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
148 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Liquidity portfolio
At 31 December 2017, the banking business had £120.9 billion of highly liquid unencumbered LCR eligible assets (31 December 2016: £120.8 billion), of
which £120.2 billion is LCR level 1 eligible (31 December 2016: £120.3 billion) and £0.7 billion is LCR level 2 eligible (31 December 2016: £0.5 billion). 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 eight times the Group’s money market funding less than one year
to maturity (excluding derivative collateral margins and settlement accounts) and exceed total wholesale funding, and thus provide a substantial buffer in
the event of market dislocation. As previously communicated, given the economic climate, the Group does not expect to hold gilts to maturity. The Group
has therefore continued to reduce the size of its gilts portfolio owned outright.
Table 1.40: LCR eligible assets
Level 1
Cash and central bank reserves
High quality government/MDB/agency bonds1
High quality covered bonds
Total
Level 22
Total LCR eligible assets
1 Designated multilateral development bank (MDB).
2 Includes Level 2A and Level 2B.
Table 1.41: LCR eligible assets by currency
At 31 December 2017
Level 1
Level 2
Total
At 31 December 2016
Level 1
Level 2
Total
At 31 Dec
2017
£bn
At 31 Dec
2016
£bn
Unweighted
average
2017
£bn
Unweighted
average
2016
£bn
Change
%
53.7
65.8
0.7
120.2
0.7
120.9
42.7
75.3
2.3
120.3
0.5
120.8
26
(13)
(70)
–
40
–
51.0
72.0
1.1
124.1
0.6
124.7
53.7
72.4
2.4
128.5
0.5
129.0
Sterling
£bn
US Dollar
£bn
Euro
£bn
Other
currencies
£bn
Total
£bn
90.8
0.2
91.0
96.0
0.2
96.2
16.3
0.5
16.8
12.5
0.3
12.8
13.1
–
13.1
11.8
–
11.8
–
–
–
–
–
–
120.2
0.7
120.9
120.3
0.5
120.8
The banking business also has a significant amount of non-LCR eligible assets which are eligible for use in a range of central bank or similar facilities. Future
use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions.
Stress testing results
Internal stress testing results at 31 December 2017 showed that the
banking business had liquidity resources representing 142 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 £1.1 billion of cash over a period of up to one year,
£2.0 billion of collateral posting related to customer financial contracts and
£5.9 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 Board and the Group Asset and Liability Committee (GALCO)
monitor and manage total balance sheet encumbrance via a number of
risk appetite metrics. At 31 December 2017, the Group had £64.6 billion
(31 December 2016: £83.5 billion) of externally encumbered on balance
sheet assets with counterparties other than central banks. The decrease in
encumbered assets was primarily driven by maturities of covered bond and
securitisation issuances. The Group also had £587.5 billion (31 December
2016: £580.9 billion) of unencumbered on balance sheet assets, and
£160.1 billion (31 December 2016: £153.5 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.
Lloyds Banking Group Annual Report and Accounts 2017 149
Table 1.42: 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
realisable1
£m
Other
realisable
assets2
£m
Cannot be
used3
£m
Total
£m
Total
£m
At 31 December 2017
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
Other4
Total assets
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
Debt securities
Available-for-sale financial
assets
Other4
Total assets
–
–
–
–
–
–
–
–
–
–
4,642
4,642
–
–
–
–
–
–
–
–
53,887
–
4,634
58,521 58,521
7,378
–
– 150,858 158,236 162,878
–
25,834
25,834
25,834
213
1,417
4,981
6,611
6,611
5,023
26,414
–
–
5,023
26,414
6,610
2,374
8,984
38,047
2,374
40,421
160,060
13,927 170,771
89,693 274,391 472,498
–
919
4
346
1,269
3,643
160,060
15,059 172,192
95,020 282,271 482,752
–
–
–
–
19,526
19,526
–
–
–
–
21,514
–
1,058
22,572
42,098
16
1,175
38,835
40,026
40,026
5,023
26,414
33,152
64,589
160,060
97,854 173,367 316,239 587,460 812,109
–
–
–
–
–
–
–
–
–
–
4,806
4,806
–
32
–
32
–
–
–
–
42,998
–
4,454
47,452
47,452
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
–
–
14,542
30,883
904
8,241
904
53,666
–
2,344
5
144
2,493
3,397
153,482
9,904
154,827
116,378
281,109
488,257
154
–
–
–
24,824
24,978
–
–
–
–
31,017
31
498
34
1,737
36,477
31,546
38,248
56,524
38,248
14,696
30,883
37,871
83,450
153,482
93,128
156,617
331,116
580,861
817,793
1 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.
2 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.
3 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.
4 Other comprises: items in the course of collection from banks; investment properties; goodwill; value in-force business; other intangible 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
150 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
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,
both within the UK and across the multiple jurisdictions within which it
operates, 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.
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 code of
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 code in all aspects of
their roles.
Effective implementation of the RMF mutually reinforces and is reinforced
by the Group’s risk culture, which is embedded in its 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 2017 the continued 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.
For further information on Corporate Governance see pages 58–80.
Lloyds Banking Group Annual Report and Accounts 2017 151
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 1.43 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 1.43: Market risk linkage to the balance sheet
2017
Assets
Banking
Total
£m
Trading
book only
£m
Non-trading
£m
Insurance
£m
Primary market risk factor
Cash and balances at central banks
58,521
–
58,521
–
Interest rate
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 customers1
Debt securities
Available-for-sale financial assets
Value of in-force business
Other assets
Total assets
Liabilities
Deposit from banks
Customer deposits
Trading and other financial liabilities at fair
value through profit or loss
Derivative financial instruments
Debt securities in issue
Liabilities arising from insurance and
investment contracts
Subordinated liabilities
Other liabilities
Total liabilities
162,878
25,834
42,230
21,605
3,325
1,881
117,323
Interest rate, foreign exchange, credit spread
2,348
Interest rate, foreign exchange, credit spread
6,611
472,498
3,643
482,752
42,098
4,839
35,187
–
–
–
–
–
–
–
4,274
472,498
3,643
480,415
42,098
2,337
Interest rate
Interest rate
Interest rate, credit spread
–
–
2,337
–
Interest rate, foreign exchange, credit spread
–
4,839
Equity
18,303
16,884
Interest rate
812,109
63,835
604,543
143,731
29,804
418,124
50,877
26,124
72,450
118,860
17,922
28,805
43,062
21,699
–
–
–
–
–
–
29,804
418,124
7,815
1,613
72,450
–
–
–
Interest rate
Interest rate
Interest rate, foreign exchange
2,812
Interest rate, foreign exchange, credit spread
–
Interest rate, credit spread
–
118,860
Credit spread
16,131
8,345
1,791
Interest rate, foreign exchange
20,460
Interest rate
762,966
64,761
554,282
143,923
1 Includes £6.9 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 35 on
page 206 provides further information.
The Group’s trading book assets and liabilities are originated by
Commercial Banking (CB) 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 155.
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 CB
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 198).
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 Funding and liquidity
risk on page 146. 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 152).
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
152 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
Table 1.44 below shows the key material market risks for the Group’s banking, defined benefit pension schemes, insurance and trading activities.
Table 1.44: Key material market risks for the Group by individual business activity (profit before tax impact
measured against Group single stress scenarios)
2017
Banking activities1
Defined benefit pension schemes1
Insurance portfolios1
Trading portfolios2
Profit before tax
> £500m
£250m – £500m
£50m – <£250m
Immaterial/zero
Interest rate
Basis risk
FX
Credit spread
Equity
Inflation
Risk Type
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Loss
Gain
–
–
1 Banking activities, Pensions and Insurance stresses; Interest rate -100 bps, Basis Risk 3 month London Interbank Offered Rate (LIBOR) +100bps/bank base rate -25bps, Foreign Exchange
(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 +50bps.
Measurement
In addition to measuring single factors, Group risk appetite is calibrated
primarily to five multi-risk Group economic 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.
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.
The Group 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 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.
Interest rate risk
Yield curve 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 1.43) and off
balance sheet positions.
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.
Optionality risk arises predominantly from embedded optionality within
assets, liabilities or off-balance sheet items where either the Group or the
customer can affect the size or timing of cash flows. One example of this
risk is pipeline mortgage risk where the customer owns an option on a
mortgage rate and changes in market rates can impact the take up of the
committed offer. Mortgage prepayment risk is another example where the
customer owns an option allowing them to prepay when it is economical
to do so. This can result in customer balances amortising more quickly
or slowly than anticipated due to economic conditions or customers’
response to changes in economic conditions.
Foreign exchange risk
Economic foreign exchange exposure arises from the Group’s investment in
its overseas operations (net investment exposures are disclosed in note 51
on page 240). 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.
Lloyds Banking Group Annual Report and Accounts 2017 153
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; (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). The market value
sensitivities are calculated on a static balance sheet using principal cash
flows excluding commercial margins and other spread components and
are therefore discounted at the risk free zero-coupon rate.
(ii) Interest income sensitivity: this measures the 12 month impact on future
net interest income arising from various economic scenarios. These include
instantaneous 25, 100 and 200 basis point parallel shifts in all yield curves
and the five Group economic scenarios (subject to an appropriate floor).
These scenarios are reviewed every year and are designed to replicate
severe but plausible economic events, capturing risks that would not
be evident through the use of parallel shocks alone such as basis risk
and steepening or flattening of the yield curve. An additional negative
rates scenario is also used for information purposes where all floors are
removed; however this is not measured against the limit framework.
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 changing rates. In
addition a dynamic balance sheet is used which includes the run-off of
current assets and liabilities and the addition of planned new business.
Table 1.45: Banking activities: market value sensitivity
Reported sensitivities are not necessarily predictive of future performance
as they do not capture additional management actions that would likely be
taken in response to an immediate, large, movement in interest rates. The
actions could reduce the net interest income sensitivity and help mitigate
any adverse impacts or they may result in changes to total income that are
not captured in the net interest income.
(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, or in response to changing market conditions, to
ensure the assumptions remain appropriate and the model itself is subject
to annual re-validation, as required under the Group Model Governance
Policy. The key behavioural assumptions are: (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) the re-pricing behaviour of
managed rate liabilities namely variable rate savings.
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 1.45 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.
Sterling
US Dollar
Euro
Other
Total
Up
25bps
£m
(9.9)
(3.6)
2.2
(0.1)
(11.4)
2017
Down
25bps
£m
10.1
3.7
(0.7)
0.2
13.3
Up
100bps
£m
(38.7)
(14.2)
8.9
(0.5)
(44.5)
Down
100bps
£m
22.1
15.3
0.9
0.6
38.9
Up
25bps
£m
(11.4)
3.2
(6.0)
(0.2)
(14.4)
2016
Down
25bps
£m
11.5
(3.2)
(3.7)
0.2
4.8
Up
100bps
£m
(45.1)
12.6
(23.2)
(0.9)
(56.6)
Down
100bps
£m
31.6
(13.7)
(12.1)
0.6
6.4
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.
Table 1.46 below shows supplementary value sensitivity to a steepening and flattening (c. 100 basis points around the 3 year point) in the yield curve. This
ensures there are no unintended consequences to managing risk to parallel shifts in rates.
Table 1.46: Banking activities: market value sensitivity to a steepening and flattening of the yield curve
Sterling
US Dollar
Euro
Other
Total
2017
2016
Steepener
£m
(1.1)
7.1
(3.8)
(0.2)
2.0
Flattener
£m
(16.5)
(8.9)
7.9
0.2
(17.3)
Steepener
£m
Flattener
£m
(5.8)
0.7
(15.3)
(0.2)
(20.6)
(13.2)
(1.3)
(12.8)
0.2
(27.1)
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
154 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
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 1.47: Banking activities: net interest income sensitivity
Client facing activity and associated hedges
Up
25bps
£m
86.1
2017
Down
25bps
£m
(54.0)
Up
100bps
£m
370.5
Down
100bps
£m
(186.9)
Up
25bps
£m
2016
Down
25bps
£m
176.8
(286.1)
Up
100bps
£m
724.9
Down
100bps
£m
(408.0)
Income sensitivity is measured over a rolling 12 month basis.
The reduction in the net interest income sensitivity reflects the growth in
the structural hedge throughout 2017 and the accompanying reduction in
income volatility in future years.
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 the 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 CB 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 structural
hedge consists of longer term fixed rate assets or interest rate swaps and
the amount and duration of the hedging activity is reviewed regularly
by GALCO.
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 Asset and Liability Committees (ALCOs).
Net investment foreign exchange exposures are managed centrally by
GCT, by hedging non-sterling asset values with currency borrowing. In the
first half of 2017, the Group unwound the economic hedges against these
positions in order to create additional offset to common equity tier 1 (CET1)
movements arising from revaluation of foreign currency risk-weighted
assets (see note 51 on page 240). 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.
Scheme membership provides exposure to longevity risk.
For further information on defined benefit pension scheme assets and
liabilities please refer to note 35 on page 206.
Measurement
Management of the schemes’ 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.
Longevity risk is measured using both 1-in-20 year stresses (risk appetite)
and 1-in-200 year stresses (regulatory capital).
Mitigation
The Group takes an active involvement in agreeing mitigation strategies with
the schemes’ Trustees. An interest rate and inflation hedging programme
is in place to reduce liability risk. The schemes have also reduced equity
allocation and invested the proceeds in credit assets as part of a programme
to de-risk the portfolio. The merits of longevity risk transfer and hedging
solutions are regularly reviewed.
Monitoring
In addition to the wider risk management framework, governance of the
schemes includes two specialist pensions committees.
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. Key metrics are monitored monthly including
the Group’s capital resources of the scheme, the performance against risk
appetite triggers, and the performance of the hedged asset and liability
matching positions.
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 198). 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 which the Insurance division has 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.
Lloyds Banking Group Annual Report and Accounts 2017 155
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 1.48 demonstrates the impact of the Group’s Eurozone Credit
Crunch scenario on Insurance's porfolio (with no diversification benefit,
but after the impact of Group consolidation on interest rate and spread
widening). 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 1.48: 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
1 Restated. The most onerous scenario has changed to Eurozone Credit Crunch from UK Recession.
Increase (reduction)
in profit before tax
2017
£m
(202)
24
140
(1,001)
(67)
20161
£m
(387)
(34)
369
(681)
(58)
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 32.
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 and 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.
Trading portfolios
Exposures
The Group’s trading activity is small relative to its peers and does not
engage in any 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 (Value at Risk: diversified across risk
factors) was £0.6 million for 31 December 2017 compared to £1.3 million
for 31 December 2016. The decrease in exposure was mainly due to high
VaR during the first half of 2016 caused by overstatement of the interest
rate risk by the VaR model. Improvements to more accurately reflect the
risk were implemented in June 2016 which reduced the VaR significantly
over the second half of 2016 and over 2017.
Trading market risk measures are applied to all of the Group’s regulatory
trading books and they include daily VaR (table 1.49), sensitivity based
measures, and stress testing calculations.
Measurement
The Group internally uses VaR as the primary risk measure for all trading
book positions.
Table 1.49 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 2017 and year end 2016.
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 1.49: Trading portfolios: VaR (1-day 95 per cent confidence level) (audited)
Interest rate risk
Foreign exchange risk
Equity risk
Credit spread risk
Inflation risk
All risk factors before diversification
Portfolio diversification
Total VaR
At 31 December 2017
At 31 December 2016
Close
£m
Average
£m
Maximum
£m
Minimum
£m
Close
£m
Average
£m
Maximum
£m
Minimum
£m
0.5
0.1
–
0.3
0.2
1.1
(0.4)
0.7
0.6
0.1
–
0.3
0.3
1.3
(0.7)
0.6
2.1
0.4
–
0.5
0.9
2.9
2.2
0.2
0.0
–
0.2
0.2
0.9
0.3
0.7
0.1
–
0.2
0.2
1.2
(0.5)
0.7
1.3
0.3
–
0.2
0.3
2.1
(0.8)
1.3
7.7
0.8
–
0.4
5.9
14.3
5.7
0.5
0.1
–
0.1
0.1
1.1
0.6
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
156 Lloyds Banking Group Annual Report and Accounts 2017
Risk management continued
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.
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.
Model risk
Definition
Model risk is defined as the risk of financial loss, regulatory censure,
reputational damage or customer detriment, as a result of deficiencies
in the development, application or ongoing operation of models and
rating systems.
Models are defined as quantitative methods that process input data
into quantitative outputs, or qualitative outputs (including ordinal
letter output) which have a quantitative measure associated with
them. Model Governance Policy is restricted to specific categories of
application of models, principally financial risk, treasury and valuation,
with certain exclusions, such as prescribed calculations and project
appraisal calculations.
Exposures
There are over 300 models in the Group performing a variety of functions
including:
– capital calculation;
– credit decisioning, including fraud;
– pricing models;
– impairment calculation;
– stress testing and forecasting; and
– market risk measurement.
As a result of the wide scope and breadth of coverage, there is exposure to
model risk across a number of the Group’s primary risk categories.
Measurement
The Group risk appetite framework is the key component for measuring
the Group’s model risk. Reported monthly to the Group Risk Committee
and Board, focus is placed on the performance of the Group’s most
material models.
Mitigation
The model risk management framework, established by and with
continued oversight from an independent team in the Risk division,
provides the foundation for managing and mitigating Model Risk
within the Group. Accountability is cascaded from the Board and
senior management via the Group Risk Management Framework.
This provides the basis for the Group Model Governance Policy,
which defines the mandatory requirements for models across the
Group, including:
– the scope of models covered by the policy;
– model materiality;
– roles and responsibilities, including ownership, independent oversight
and approval; and
– key principles and controls regarding data integrity, development,
validation, implementation, ongoing maintenance and validation,
monitoring, and the process for non-compliance.
The above ensures models, including those involved in regulatory capital
calculation, are developed consistently and are of sufficient quality to
support business decisions and meet regulatory requirements.
Monitoring
The Group Model Governance Committee is the primary body for
overseeing model risk. Policy requires that Key Performance Indicators
are monitored for every model and all issues are escalated appropriately.
Material model issues are reported to Group and Board Risk Committees
monthly with more detailed papers as necessary to focus on key issues.
Lloyds Banking Group Annual Report and Accounts 2017 157
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
158
166
167
168
170
172
36. Deferred tax
37. Other provisions
38. Subordinated liabilities
39. Share capital
40. Share premium account
41. Other reserves
42. Retained profits
43. Other equity instruments
44. Dividends on ordinary shares
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 customers
18. Securitisations and covered bonds
19. Structured entities
20. Allowance for impairment losses
on loans and receivables
21. Available-for-sale financial assets
22. Acquisition of MBNA Limited
23. Goodwill
24. Value of in-force business
25. Other intangible assets
26. Property, plant and equipment
27. Other assets
28 Customer deposits
45. Share-based payments
173
46. Related party transactions
47. Contingent liabilities and commitments
48. Financial instruments
49. Transfers of financial assets
50. Offsetting of financial assets and liabilities
51. Financial risk management
52. Consolidated cash flow statement
53. Events since the balance sheet date
54. Future accounting developments
255
256
257
258
Parent company balance sheet
Parent company statement
of changes in equity
Parent company cash flow statement
Notes to the parent company
financial statements
1. Basis of preparation and
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
29. Trading and other financial liabilities
at fair value through profit or loss
30. Debt securities in issue
31. Liabilities arising from insurance contracts
and participating investment contracts
32. Life insurance sensitivity analysis
33. Liabilities arising from non-participating
investment contracts
34. Other liabilities
35. Retirement benefit obligations
158 Lloyds Banking Group Annual Report and Accounts 2017
Independent auditors’ report to the members
of Lloyds Banking Group plc
Report on the financial statements
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 2017 and of the Group’s profit and the Group’s
and the parent company’s cash flows for the year then ended;
– have been properly prepared in accordance with IFRSs as adopted by the European Union and, as regards the parent company’s financial statements, as
applied in accordance with the provisions of the Companies Act 2006; and
– have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the consolidated financial statements, Article 4 of
the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts (the ‘Annual Report’), which comprise: the consolidated and
parent company balance sheets as at 31 December 2017; the consolidated income statement and the consolidated statement of comprehensive income
for the year then ended; the consolidated and parent company statements of changes in equity for the year then ended; and the consolidated and
parent company cash flow statements for the year then ended; and the notes to the financial statements, which include a description of the significant
accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities under ISAs (UK)
are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or
the parent company.
Other than those disclosed in note 11 to the financial statements, we have provided no non-audit services to the Group or the parent company in the
period from 1 January 2017 to 31 December 2017.
Our audit approach
Overview
– Overall Group materiality: £350 million (2016: £325 million), based on 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.
– Overall parent company materiality: £350 million (2016: £325 million), based on 1 per cent of total assets.
– 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 components and other qualitative factors (including history of misstatement through fraud or error).
– We performed audit procedures over components 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 performed other procedures including testing entity
level controls, information technology general controls and analytical review procedures to mitigate the risk of material misstatement in the
residual components.
The areas of focus for our audit which involved the greatest allocation of our resources and effort were:
– Loan loss impairment provisions (Group)
– Conduct risk and provisions (Group)
– Insurance actuarial assumptions (Group)
– Defined benefit obligation (Group)
– Hedge accounting (Group and parent)
– Significant transactions (Group and parent)
– Privileged access to IT systems (Group and parent)
– Disclosure of the impact of IFRS 9 (Group)
These items were discussed with the Audit Committee as part of our audit plan communicated in April 2017 and updated in October 2017. These were
the key audit matters for discussion at the conclusion of our audit.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis
of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.
Lloyds Banking Group Annual Report and Accounts 2017 159
The scope of our audit
As part of designing our audit, we determined materiality and assessed 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 gained an understanding of the legal and regulatory framework applicable to the Group and the industries in which it operates, and considered the
risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at Group and significant
component level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not
detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through
collusion. We focused on laws and regulations that could give rise to a material misstatement in the Group and parent financial statements, including but
not limited to, the Companies Act 2006, the Listing Rules, the Prudential Regulation Authority’s regulations, the Pensions Regulator legislation, the UK tax
legislation. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting documentation, review of
correspondence with and reports to the regulators, enquiries of management, review of significant components auditors’ work and review of internal audit
reports in so far as they related to the financial statements.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the
events and transactions reflected in the financial statements, the less likely we would become aware of it.
We found conduct risks and provisions to be a key audit matter, and this is discussed further below. As in all of our audits, we also addressed the risk of
management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a
risk of material misstatement due to fraud.
Materiality
The scope of our audit was influenced by our application of 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 line items 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 materiality
How we determined it
Rationale for benchmark applied
Group financial statements
£350 million (2016: £325 million).
5 per cent of the 3 year average of adjusted profit
before tax. Profit was adjusted to remove the effects
of certain items which are exceptional and/or one off
in nature.
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 2015, 2016 and 2017
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 redemptions of enhanced capital
notes and the credit in relation to the Group’s
disposal of its stake in Visa Europe Ltd.
Parent company financial statements
£350 million (2016: £325 million).
1 per cent of total assets.
We have selected total assets as an appropriate
benchmark for parent company materiality. Profit
based benchmarks are not considered appropriate
for parent company materiality as the Group is not
required to disclose a parent company income
statement. Parent company overall materiality
calculated based on the total assets benchmark
exceeds the Group overall materiality level. Therefore
parent company overall materiality is restricted to
equal the Group overall materiality level (£350m).
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality
allocated across components was between £60 million and £120 million.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £20 million for the Group and parent
company audits (2016: £20 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Audit scope
We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole,
taking into account the geographic structure of the Group and the parent company, the accounting processes and controls, and the industry in which the
Group operates.
The Group is structured into three segments being Retail, Commercial Banking, and Insurance and Wealth. Each of the segments comprises a number of
components. The consolidated financial statements are a consolidation of the components.
In establishing the overall approach to the Group audit, we determined the type of work that is required to be performed over the components 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 key audit matters and formal clearance meetings.
Any components which were considered individually financially significant in the context of the Group’s consolidated financial statements (defined as
components which that represent more than or equal to 10% of the total assets of the consolidated Group) were considered full scope components. We
considered the individual financial significance of other components in relation to primary statement account balances. We considered the presence of
any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). Any component 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 account balances was
subject to specific audit procedures over those account balances. Inconsequential components (defined as components 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 components which were neither inconsequential nor
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
160 Lloyds Banking Group Annual Report and Accounts 2017
Independent auditors’ report to the members
of Lloyds Banking Group plc continued
individually financially significant were within our audit scope, with the risk of material misstatement mitigated through audit procedures including testing
of entity level controls, information technology general controls and Group and component level analytical review procedures.
Certain account balances were audited centrally by the Group engagement team.
Components within the scope of our audit contributed 99 per cent of Group total assets and 94 per cent of profit after tax.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the
current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including
those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement
team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all
risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Loan loss impairment provisions
Group
Refer to page 73 (Audit Committee Report), page 173
(Accounting Policies) and page 195 (Note 20 and Critical
Accounting Estimates and Judgements).
The determination of impairment provisions is complex, and
significant judgements are required around both the timing of
recognition of impairment provisions and estimation of the
amount of provisions required in relation to loss events which
have occurred at the balance sheet date.
Impairment provisions relating to loans and advances in the Retail
division are determined on a collective basis, with the use of
impairment models. These models are used to calculate
impairment provisions based on key assumptions for example
loss emergence period, probability of default, loss given default
(including possession propensity and forced sale discounts for
mortgages) and valuation of recoveries. These are estimated
based on historical experience and other data as available at the
reporting date. Management also applies overlays where they
believe the calculated assumptions based on historical
experience are not appropriate, either due to emerging trends or
the models not capturing the risks in the loan portfolio. An
example of this is an overlay to the impairment model output for
the UK mortgage portfolio relating to the current low interest rate
environment. These overlays require significant judgement and
are therefore a main area of focus.
Impairment provisions relating to loans and advances in the
Commercial Banking division are primarily determined on an
individual basis. Judgement is required to determine when a loan
is considered impaired, and then to estimate the expected future
cash flows related to that loan. A collective provision is also
calculated to cover unidentified impairment (i.e. losses which
have been incurred but not yet identified). Management apply
overlays to the modelled output to address risks not captured by
the model.
We understood management’s process and tested key controls around the determination of
impairment provision, including:
– the identification of impairment events;
– 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, challenge and approval processes that are in place to assess the outputs of the Group’s
impairment models, and the overlays that are applied.
We found these key controls were designed, implemented and operated effectively, and therefore
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
We understood and critically assessed the appropriateness of models used. This included challenging
whether the portfolios were appropriately segmented and whether historical experience was
representative of current circumstances. We also performed testing over the completeness and
accuracy of data from underlying systems, assessed whether customer forbearance plans had been
appropriately reflected in the impairment models and performed testing to obtain evidence over the
existence and valuation of collateral.
We critically assessed the completeness of overlays proposed by management, including challenging
whether risk concentrations (e.g. past-term interest only loans, forborne loans, personal contract
purchase loans) have been appropriately provided for. We also performed testing over the
measurement of the overlays in place, including challenging the appropriateness of the calculation,
the reasonableness of the assumptions used and the reliability of the underlying data.
Based on the evidence obtained, we found that the methodologies, modelled assumptions, data
used within the models and overlays to modelled outputs to be appropriate.
Commercial Banking
We critically assessed the criteria for determining whether an impairment event had occurred and
therefore whether there was a requirement to calculate an individual 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
haphazardly selected sample of 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 in relation to
each case and the basis of measuring the impairment provisions and considered whether key
judgments were appropriate given the borrower’s 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 them to the gains or losses crystallised when impaired
loans were sold or exited.
For the collective unidentified impaired provision, 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 low
interest rates) had been appropriately considered and captured.
Based on the evidence obtained, we found that the methodologies, modelled assumptions, data
used within the models and overlays to modelled outputs are appropriate.
Key audit matter
Conduct risk and provisions
Group
Refer to page 73 (Audit Committee Report), page 173
(Accounting Policies) and page 213 (Note 37 and Critical
Accounting Estimates and Judgements).
Provisions reflecting the Group’s best estimate of present
obligations relating to anticipated customer redress payments,
operational costs and regulatory fines as a result of past events,
practices and conduct continue to be significant and therefore
represent a key audit matter.
The most significant provisions relate to past sales of payment
protection insurance (PPI) policies, arrears handling activities,
packaged bank accounts and insurance products of the German
branch of Clerical Medical Investment Group Ltd (now Scottish
Widows Ltd).
For the known issues that have been provided for, we focused on
the use of several management assumptions including volume of
future complaints and related redress costs that are key
judgmental inputs into the measurement of provisions.
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, for which financial statement disclosure and, or,
provision may be required.
Lloyds Banking Group Annual Report and Accounts 2017 161
How our audit addressed the key audit matter
We understood and tested the key controls and management’s processes around:
– identifying emerging conduct risk exposures and assessing whether provisions or disclosures were
necessary; and
– calculating and reviewing conduct provisions, including governance processes, challenge of key
assumptions and approval of provisions.
We found these 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 performed the following procedures around the measurement of provisions recognised:
The majority of our detailed audit work was on the significant conduct provisions in relation to past
sales of PPI 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 conduct provisions which are individually less material.
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 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 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 around whether 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.
Based on the procedures performed and evidence obtained, we found management’s assumptions
to be appropriate.
We performed the following procedures around the completeness of provisions recognised:
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 the nature of 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 reviewed the Group’s litigation reports, to identify potentially material cases which may require
provision. We also communicated with the Group’s external legal representatives to confirm our
understanding of significant cases.
We reviewed the Group’s correspondence with the Financial Conduct Authority and Prudential
Regulation Authority, discussing the content of any correspondence considered to be pertinent to
our audit with management. We met on a trilateral basis with the 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 all Audit Committee and Board Risk
Committee meetings.
No additional material conduct issues that would require financial statement disclosure or provision
were identified as a result of the audit work performed.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
162 Lloyds Banking Group Annual Report and Accounts 2017
Independent auditors’ report to the members
of Lloyds Banking Group plc continued
Key audit matter
How our audit addressed the key audit matter
Insurance actuarial assumptions
Group
Refer to page 73 (Audit Committee Report), page 173
(Accounting Policies) and pages 198, 202 and 205 (Notes 24, 31, 32
and Critical Accounting Estimates and Judgements).
A number of subjective assumptions about future experience
contribute as key inputs into the valuation of the Group’s
insurance contracts.
Some of the economic and non-economic actuarial assumptions
used in valuing insurance contracts are highly judgemental in
nature, 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),
maintenance expenses (future expenses incurred to maintain
existing policies to maturity), credit default and illiquidity
premium (adjustments made to the discount rate for the IFRS
value of in-force business asset.
In line with the Group’s accounting policy, the discount rate
applied to cash flows is consistent with that applied to such cash
flows in the capital markets. Management currently uses the
actual asset mix as a proxy for deriving a market consistent view
of the illiquidity adjustment to the discount rate.
Defined benefit obligation
Group
Refer to page 73 (Audit Committee Report), page 173
(Accounting Policies) and page 206 (Note 35 and Critical
Accounting Estimates and Judgements).
The retirement benefit schemes in the Group are calculated and
valued with reference to a number of actuarial assumptions
including discount rate, rate of inflation and mortality rates.
As a result of the size of these schemes, small changes in
these assumptions can have a significant impact on the
financial statements.
Hedge accounting
Group and parent
Refer to page 73 (Audit Committee Report), page 173
(Accounting Policies), and page 240 (Note 51).
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 hedge 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.
We understood and tested key controls and governance around the processes for setting economic
and non-economic assumptions. We found that the key controls for the setting of assumptions,
including those operating over the experience analysis data where applicable, were designed and
operated effectively. Therefore we are able to place reliance on these controls for the purposes of our
financial statement audit.
We engaged our actuarial specialists to assess the reasonableness of 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 includes reference to our benchmarking data which considers each of these principal
areas. For persistency, we 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, we have assessed the appropriateness of how own experience and industry data are
used in setting future assumptions around longevity experience and future longevity trends and
compared resulting life expectancies to benchmarking data.
For maintenance expenses, we assessed the appropriateness of the judgements around costs
deemed to be non-attributable to insurance business and the resulting per-policy costs assumptions.
We have reviewed the adjustments required reflecting the impact of the Group’s outsourcing
agreement in this area.
For credit default 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 methodology with reference to wider market practice and
prevailing economic conditions. We challenged whether the actual asset mix used in the illiquidity
premium calculation remained an appropriate proxy to a market consistent portfolio by comparing
the proportion of illiquid assets held to those held by other similar companies based on our
understanding of the market and the most recent public information for other similar companies.
Based on the evidence obtained, we found that the methodologies, modelled assumptions, data
used within the models and overlays to modelled outputs are appropriate.
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 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 experts 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.
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,
contributions and benefits paid, 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 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 tested a sample of manual adjustments
posted to hedge reserves relating to hedge ineffectiveness arising in cash flow hedging models. We
found that hedge accounting methodology was appropriately applied.
Lloyds Banking Group Annual Report and Accounts 2017 163
How our audit addressed the key audit matter
We understood and tested key controls which require that one-off transactions are referred to Group
Financial Reporting and that an accounting paper is produced outlining the treatment of the
transaction in the financial statements. Further to this, we ensured that the accounting paper is
appropriately reviewed and approved. We found the key controls were designed, implemented and
operated effectively.
We understood the nature of the significant transactions and reviewed the accounting papers
produced 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, 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 the evidence obtained, we found the accounting treatments applied to
significant transactions were supported by the evidence obtained.
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 obtained an understanding of management’s remediation programme and observed
progress in terms of their remediation of a number of the control matters. However, several of the
controls continued to be ineffective 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.
We understood and tested key controls supporting management’s estimate of the transition
adjustment focusing on:
– model development, validation and approval to ensure compliance with IFRS 9 requirements;
– review and approval of key assumptions, judgements and forward looking information prior to use
in the models;
– the integrity of data used as input to the models including the transfer of data between source
systems and the impairment models;
– review and approval of post model adjustments recorded by management; and
– review and approval of the output of IFRS 9 models and related transition impacts.
We noted the controls were designed and operated effectively, in all material respects.
We understood and critically assessed classification and measurement decisions and the ECL models
developed by the Group. This included using our credit modelling experts in our assessment of
judgements and assumptions supporting the ECL requirements of the standard. We re-performed
certain model calculations to confirm the risk parameter outputs and the results were appropriate.
We assessed the reasonableness of forward looking information incorporated into the impairment
calculations by using our experts and specialists to challenge the multiple economic scenarios chosen
and the weighting applied to capture non-linear losses.
We considered post-model adjustments in the context of key model and data limitations identified by
management, challenged their rationale and recalculated where necessary.
We tested the underlying disclosures related to the transition impact and reconciled the disclosed
impact to underlying accounting records.
Based on the evidence obtained, we found that the methodologies, modelled assumptions, data
used within the models, resulting outputs and overlays to modelled outputs are appropriate.
Key audit matter
Significant transactions
Group and parent
Refer to page 73 (Audit Committee Report).
During the year, the Group has entered into significant one-off
transactions that inherently have a high level of complexity and/or
judgment in its determination of accounting treatment
(e.g. acquisition of MBNA). This judgment increases the risk of
management bias being introduced into the transactions.
Due to the nature of significant one-off transactions, the
accounting often 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
Group and parent
Refer to page 73 (Audit Committee Report).
The Group’s financial reporting processes are reliant on
automated processes and controls performed by IT systems.
Further, the group-wide IT estate is complex in terms of the scale
and nature of IT systems relied upon. The risks associated with IT
are also impacted by the threat profile of IT within the banking
environment, which is subject to a number of internal and
external risks relating to cyber security and the resilience of
IT systems.
As part of the audit, we validate the design and operating
effectiveness of in-scope automated and IT dependent controls
over financial reporting 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.
As part of our audit work in prior periods, we identified recurring
control matters in relation to the management of IT privileged
access to IT systems and therefore have relied on compensating
controls and performed additional procedures.
While there is an ongoing programme of activities to address
such control matters, the fact that these were open control
matters during the period meant there was an increased risk that
the data and reports from the affected systems were not reliable.
Disclosure of the impact of IFRS 9
Group
Refer to page 73 (Audit Committee Report) and page 253
(Note 54).
On 1 January 2018, the Group transitioned to financial
instruments accounting standard IFRS 9 which replaced IAS 39.
The estimated transition impact is disclosed in Note 54 to the
Financial Statements in accordance with IAS 8. Disclosures in 2017
are intended to provide users with an understanding of the
estimated impact of the new standard, and as a result are more
limited than the disclosure to be included in the 2018 financial
statements.
We have deemed the disclosure of the impact of IFRS 9 for
impairment an area of focus because of the significant changes
introduced by the standard. Under the new impairment model,
losses are recognised on an expected credit loss basis. Expected
credit losses ('ECLs') are required to incorporate forward-looking
information, reflecting management’s view of potential future
economic environments. The complexity involved requires
management to develop new methodologies involving the use of
significant judgements.
Separately, the standard introduces new requirements around
the classification and measurement of financial instruments,
potentially resulting in fair value differences.
In order to meet the requirements of the new standard,
significant changes have also been made to systems, processes
and controls with effect from 1 January 2018.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
164 Lloyds Banking Group Annual Report and Accounts 2017
Independent auditors’ report to the members
of Lloyds Banking Group plc continued
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw
attention to in respect of the directors’ statement in the financial
statements about whether the directors considered it appropriate to
adopt the going concern basis of accounting in preparing the financial
statements and the directors’ identification of any material
uncertainties to the Group’s and the parent company’s ability to
continue as a going concern over a period of at least twelve months
from the date of approval of the financial statements.
We are required to report if the directors’ statement relating to Going
Concern in accordance with Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.
We have nothing material to add or to draw attention to. However,
because not all future events or conditions can be predicted, this
statement is not a guarantee as to the Group’s and parent company’s
ability to continue as a going concern.
We have nothing to report.
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. 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. In drawing our conclusion, we critically assessed
the going concern assessment undertaken by management and approved by the Board of Directors. As part of our assessment we have:
– evaluated the appropriateness of the stress scenarios used and their impact on the Group’s and parent company’s capital and liquidity positions;
– evaluated the key economic and other assumptions used in both the capital and liquidity plans and the Group’s operating plan; and
– substantiated the Group’s and parent company’s access to unencumbered collateral placed with, and liquidity facilities available from, the central bank.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The
directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do
not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material
misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ report, we considered whether the disclosures required by the UK Companies Act 2006 have
been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06), ISAs (UK) and the
Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK)
unless otherwise stated).
Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ report for the year
ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and parent company and their environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic Report and Directors’ report. (CA06)
The directors’ assessment of the prospects of the Group and of the principal risks that would
threaten the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
– The directors’ confirmation on page 83 of the Annual Report 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.
– 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 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 to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal risks
facing the Group and 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 UK Corporate Governance Code (the ‘Code’); and considering whether the statements are consistent with the knowledge and
understanding of the Group and parent company and their environment obtained in the course of the audit.
Lloyds Banking Group Annual Report and Accounts 2017 165
Other code provisions
We have nothing to report in respect of our responsibility to report when:
– The statement given by the directors, on page 83, that they consider the Annual Report taken as a whole to be fair, balanced and understandable,
and provides the information necessary for the 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 obtained in the course of performing our audit.
– The section of the Annual Report on page 73 describing the work of the Audit Committee does not appropriately address matters communicated by us
to the Audit Committee.
– The directors’ statement relating to the parent company’s compliance with the Code does not properly disclose a departure from a relevant provision of
the Code specified, under the Listing Rules, for review by the auditors.
Directors’ remuneration
In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06)
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
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 in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are responsible for such
internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to
liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
Use of this report
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.
Other required reporting
Companies Act 2006 exception reporting
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
– certain disclosures of directors’ remuneration specified by law are not made; 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.
Appointment
Following the recommendation of the audit committee, we were appointed by the directors on 21 December 1995 to audit the financial statements for
the year ended 31 December 1995 and subsequent financial periods. The period of total uninterrupted engagement is 23 years, covering the years ended
31 December 1995 to 31 December 2017. The audit was tendered in 2014 and we were re-appointed with effect from 1 January 2016. There will be a
mandatory rotation for the 2021 audit.
Mark Hannam (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
20 February 2018
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
166 Lloyds Banking Group Annual Report and Accounts 2017
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
Tax expense
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
2017
£ million
16,006
(5,094)
10,912
2,965
(1,382)
1,583
11,817
7,930
1,995
23,325
34,237
10
(15,578)
18,659
(2,515)
(10,181)
(12,696)
5,963
(688)
5,275
(1,728)
3,547
3,042
415
3,457
90
3,547
4.4p
4.3p
11
12
13
14
14
2016
£ million
16,620
(7,346)
9,274
3,045
(1,356)
1,689
18,545
8,068
2,035
30,337
39,611
(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
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
1 The profit after tax attributable to other equity holders of £415 million (2016: £412 million; 2015: £394 million) is partly offset in reserves by a tax credit attributable to ordinary shareholders
of £102 million (2016: £91 million; 2015: £80 million).
The accompanying notes are an integral part of the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2017 167
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 tax
Tax
Gains and losses attributable to own credit risk:
Gains (losses) before tax
Tax
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
Tax
Movement in cash flow hedging reserve:
Effective portion of changes in fair value taken to other comprehensive income
Net income statement transfers
Tax
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.
2017
£ million
3,547
2016
£ million
2,514
2015
£ million
956
628
(146)
482
(55)
15
(40)
–
303
(446)
6
63
(74)
(363)
(651)
283
(731)
(32)
(395)
3,152
2,647
415
3,062
90
3,152
(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)
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
168 Lloyds Banking Group Annual Report and Accounts 2017
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
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
2017
£ million
2016
£ million
47,452
706
151,174
36,138
26,902
457,958
3,397
488,257
56,524
2,016
5,042
1,681
58,521
755
162,878
25,834
15
16
6,611
17
472,498
3,643
482,752
42,098
2,310
4,839
2,835
21
23
24
25
26
36
35
27
12,727
12,972
16
2,284
723
13,537
812,109
28
2,706
342
12,755
817,793
Lloyds Banking Group Annual Report and Accounts 2017 169
Note
2017
£ million
2016
£ million
28
29
16
30
31
33
34
35
36
37
38
39
40
41
42
43
29,804
418,124
584
50,877
26,124
1,313
72,450
103,413
15,447
20,730
358
274
–
5,546
17,922
16,384
415,460
548
54,504
34,924
1,402
76,314
94,390
20,112
29,193
822
226
–
4,868
19,831
762,966
768,978
7,197
17,634
13,815
4,905
43,551
5,355
48,906
237
7,146
17,622
14,652
3,600
43,020
5,355
48,375
440
49,143
812,109
48,815
817,793
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 20 February 2018.
Lord Blackwell
Chairman
António Horta-Osório
Group Chief Executive
George Culmer
Chief Financial Officer
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
170 Lloyds Banking Group Annual Report and Accounts 2017
Consolidated statement of changes in equity
for the year ended 31 December
Balance at 1 January 2017
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
Gains and losses attributable to own credit
risk, 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
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Changes in non-controlling interests
Total transactions with owners
Attributable to equity shareholders
Share capital
and premium
£ million
24,768
Other
reserves
£ million
14,652
Retained
profits
£ million
3,600
Total
£ million
43,020
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
5,355
440
Total
£ million
48,815
–
–
–
–
–
–
–
–
–
63
–
–
–
–
63
–
–
(74)
–
(731)
(32)
(837)
(837)
–
–
–
–
–
–
–
–
3,457
3,457
482
482
–
(40)
–
–
442
3,899
(74)
(40)
(731)
(32)
(395)
3,062
(2,284)
(313)
(2,284)
(313)
–
(411)
82
332
–
63
(411)
82
332
–
(2,594)
4,905
(2,531)
43,551
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,355
90
3,547
–
–
–
–
–
–
90
(51)
–
–
–
–
–
(242)
(293)
237
482
(74)
(40)
(731)
(32)
(395)
3,152
(2,335)
(313)
63
(411)
82
332
(242)
(2,824)
49,143
At 31 December 2017
24,831
13,815
Further details of movements in the Group’s share capital, reserves and other equity instruments are provided in notes 39, 40, 41, 42 and 43.
The accompanying notes are an integral part of the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2017 171
Redemption of preference shares
131
(131)
Balance at 1 January 2015
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
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
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
Attributable to equity shareholders
Share capital
and premium
£ million
24,427
Other
reserves
£ million
13,216
Retained
profits
£ million
5,692
Total
£ million
43,335
Other equity
instruments
£ million
Non-controlling
interests
£ million
5,355
1,213
131
24,558
(131)
12,260
(1,921)
4,416
(1,921)
41,234
–
–
–
–
–
–
–
–
–
–
–
(371)
(412)
(42)
(825)
(825)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,197
1,409
(4)
2,602
2,602
–
–
860
(215)
–
–
–
(215)
645
(1,070)
(314)
–
(816)
107
172
–
–
860
(215)
(371)
(412)
(42)
(1,040)
(180)
(1,070)
(314)
–
(816)
107
172
–
–
2,413
2,413
(1,028)
(1,028)
–
–
–
(1,028)
1,385
(2,014)
(321)
–
(175)
141
168
–
(2,201)
3,600
1,197
1,409
(4)
1,574
3,987
(2,014)
(321)
–
(175)
141
168
–
(2,201)
43,020
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,355
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,355
Total
£ million
49,903
956
(215)
(371)
(412)
(42)
(1,040)
(84)
(1,122)
(314)
–
(816)
107
172
(825)
(41)
(2,839)
46,980
96
–
–
–
–
–
96
(52)
–
–
–
–
–
(825)
(41)
(918)
391
101
2,514
–
–
–
–
–
101
(29)
–
–
–
–
–
(23)
(52)
440
(1,028)
1,197
1,409
(4)
1,574
4,088
(2,043)
(321)
–
(175)
141
168
(23)
(2,253)
48,815
Redemption of preference shares
210
(210)
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
–
–
–
–
–
–
–
–
210
24,768
(210)
14,652
The accompanying notes are an integral part of the consolidated financial statements.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
172 Lloyds Banking Group Annual Report and Accounts 2017
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 (used in) provided by 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 provided by (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
52(A)
52(B)
52(C)
52(E)
52(F)
52(D)
2017
£ million
5,275
(15,492)
(4,282)
12,332
(1,028)
(3,195)
(7,862)
18,675
(3,655)
1,444
(1,923)
129
6,808
(2,284)
(415)
(51)
(1,275)
–
14
(1,008)
–
(5,019)
–
(1,406)
62,388
60,982
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)
(1,840)
338
–
(3,199)
(41)
(6,258)
2
6,806
65,147
71,953
Lloyds Banking Group Annual Report and Accounts 2017 173
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.
With effect from 1 January 2017 the Group has elected to early adopt the provision in IFRS 9 for gains and losses attributable to changes in own credit
risk on financial liabilities designated at fair value through profit or loss to be presented in other comprehensive income. The impact has been to increase
profit after tax and reduce other comprehensive income by £40 million in the year ended 31 December 2017; there is no impact on total liabilities or
shareholders’ equity. Comparatives have not been restated.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2017 and which have
not been applied in preparing these financial statements are given in note 54.
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 268–274.
(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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
174 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
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.
(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 (i.e. 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, except that gains and losses attributable to changes in own credit risk on financial liabilities held at fair value through profit or loss are
taken directly to other comprehensive income (see note 1). 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.
Lloyds Banking Group Annual Report and Accounts 2017 175
Note 2: Accounting policies continued
– where the assets and liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would
otherwise need to be separately accounted for.
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group
establishes a fair value by using valuation techniques. Refer to note 48(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) 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.
(5) 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.
(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 48(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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
176 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
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.
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
Lloyds Banking Group Annual Report and Accounts 2017 177
Note 2: Accounting policies continued
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.
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.
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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
178 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
(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
Tax expense comprises current and deferred tax. Current and deferred tax are charged or credited in the income statement except to the extent that the
tax arises from a transaction or event which is recognised, in the same or a different period, outside the income statement (either in other comprehensive
income, directly in equity, or through a business combination), in which case the tax appears in the same statement as the transaction that gave rise to it.
Current tax is the amount of corporate income taxes expected to be payable or recoverable based on the profit for the period as adjusted for items that
are not taxable or not deductible, and is calculated using tax rates and laws that were enacted or substantively enacted at the balance sheet date.
Current tax includes amounts provided in respect of uncertain tax positions when management expects that, upon examination of the uncertainty by
Her Majesty’s Revenue and Customs (HMRC) or other relevant tax authority, it is more likely than not that an economic outflow will occur. Provisions reflect
management’s best estimate of the ultimate liability based on their interpretation of tax law, precedent and guidance, informed by external tax advice as
necessary. Changes in facts and circumstances underlying these provisions are reassessed at each balance sheet date, and the provisions are re-measured
as required to reflect current information.
For the Group’s long-term insurance businesses, the tax expense is analysed between tax that is payable in respect of policyholders’ returns and tax that is
payable on the shareholders’ returns. This allocation is based on an assessment of the rates of tax which will be applied to the returns under the current UK
tax rules.
Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet.
Deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the balance sheet date, and which are expected to
apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax liabilities are generally recognised for all taxable temporary differences but not recognised for taxable temporary differences arising on
investments in subsidiaries where the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the
foreseeable future. Deferred tax liabilities are not recognised on temporary differences that arise from goodwill which is not deductible for tax purposes.
Deferred tax assets are recognised to the extent it is probable that taxable profits will be available against which the deductible temporary differences
can be utilised, and are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are not recognised in respect of temporary differences that arise on initial recognition of assets and liabilities acquired
other than in a business combination. Deferred tax is not discounted.
(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
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).
Lloyds Banking Group Annual Report and Accounts 2017 179
Note 2: Accounting policies continued
– 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.
(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.
(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
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
180 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
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.
(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 20);
– Valuation of assets and liabilities arising from insurance business (notes 24 and 31);
– Defined benefit pension scheme obligations (note 35);
– Recoverability of deferred tax assets (note 36);
– Payment protection insurance and other regulatory provisions (note 37); and
– Fair value of financial instruments (note 48).
Lloyds Banking Group Annual Report and Accounts 2017 181
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 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 unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets;
– restructuring costs, comprising costs relating to the Simplification programme and the costs of implementing regulatory reform and ring-fencing, the
rationalisation of the non-branch property portfolio and the integration of MBNA;
– TSB build and dual running costs and the loss relating to the TSB sale in 2015; and
– payment protection insurance and other conduct provisions.
For the purposes of the underlying income statement, operating lease depreciation (net of gains on disposal of operating lease assets) is shown as an
adjustment to total income.
As part of a Group restructuring during 2017:
– the Consumer Finance division has now become part of Retail;
– the Group’s UK wealth business, previously part of Retail, has been transferred to the Insurance division, now renamed Insurance and Wealth;
– the Group’s International wealth business, previously part of Retail, has been transferred to the Commercial Banking division; and
– the Group’s venture capital business, previously part of Commercial Banking, has been transferred to Other.
Comparatives have been restated accordingly. Following this restructuring, the Group’s activities are now organised into three financial reporting
segments: Retail; Commercial Banking; and Insurance and Wealth.
Retail offers a broad range of financial service products, including current accounts, savings, mortgages, motor finance and unsecured consumer lending
to personal and small business customers.
Commercial Banking provides a range of products and services such as lending, transactional banking, working capital management, risk management
and debt capital markets services to SMEs, corporates and financial institutions.
Insurance and Wealth offers insurance, investment and wealth management products and services.
Other includes certain assets previously reported as outside of the Group’s risk appetite and income and expenditure not attributed to divisions, including
the costs of certain central and head office functions and the Group’s private equity business, Lloyds Development Capital.
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.
Year ended 31 December 2017
Net interest income
Other income, net of insurance claims
Total underlying income, net of insurance claims
Operating lease depreciation1
Net income
Operating costs
Impairment (charge) credit
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
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 £32 million.
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying basis
total
£m
8,706
2,217
10,923
(946)
9,977
(4,857)
(717)
4,403
12,651
(1,728)
10,923
3,086
1,761
4,847
(44)
4,803
(2,199)
(115)
2,489
3,093
1,754
4,847
133
1,846
1,979
–
1,979
(1,040)
–
939
1,883
96
1,979
395
381
776
(63)
713
(88)
37
662
898
(122)
776
349,116
253,127
258,423
174,081
147,588
223,543
151,986
13,770
157,824
136,926
3,639
123,176
1,545
–
137
2,431
9
259
–
48
107
–
197
(165)
25
274
–
369
–
149
843
56
12,320
6,205
18,525
(1,053)
17,472
(8,184)
(795)
8,493
18,525
–
18,525
812,109
418,124
762,966
2,370
(165)
359
3,655
65
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
182 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 4: Segmental analysis continued
Year ended 31 December 20161
Net interest income
Other income, net of insurance claims
Total underlying income, net of insurance claims
Operating lease depreciation2
Net income
Operating costs
Impairment (charge) credit
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 181.
2 Net of profits on disposal of operating lease assets of £58 million.
Year ended 31 December 20151
Net interest income
Other income, net of insurance claims
Total underlying income, net of insurance claims
Operating lease depreciation2
Net income
Operating costs
Impairment (charge) credit
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 181.
2 Net of profits on disposal of operating lease assets of £66 million.
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying
basis total
£m
8,073
2,162
10,235
(775)
9,460
(4,748)
(654)
4,058
12,203
(1,968)
10,235
338,939
256,453
264,915
1,343
–
141
2,362
6
2,934
1,756
4,690
(105)
4,585
(2,189)
(17)
2,379
3,408
1,282
4,690
80
1,939
2,019
–
2,019
(1,046)
–
973
1,434
585
2,019
348
208
556
(15)
541
(110)
26
457
455
101
556
187,405
141,302
230,030
154,782
13,798
160,815
136,667
3,907
113,218
313
–
49
126
–
169
472
31
481
–
555
–
66
791
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
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying
basis total
£m
8,253
2,263
10,516
(720)
9,796
(4,958)
(583)
–
4,255
12,217
(1,701)
10,516
340,263
261,646
270,666
1,247
–
124
2,133
5
2,774
1,842
4,616
(30)
4,586
(2,225)
22
–
2,383
3,364
1,252
4,616
59
1,986
2,045
–
2,045
(954)
(1)
–
1,090
2,155
(110)
2,045
396
64
460
(14)
446
(174)
(6)
118
384
(99)
559
460
178,110
140,675
235,221
145,737
14,477
150,702
142,578
1,528
103,119
203
–
32
155
–
124
(162)
17
343
–
538
–
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
Lloyds Banking Group Annual Report and Accounts 2017 183
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 2017
Net interest income
Other income, net of insurance claims
Total income, net of insurance claims
Operating lease depreciation3
Net income
Operating expenses
Impairment
Profit
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
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
Lloyds
Banking
Group
statutory
£m
10,912
7,747
18,659
18,659
(12,696)
(688)
5,275
Lloyds
Banking
Group
statutory
£m
9,274
7,993
17,267
17,267
(12,277)
(752)
4,238
Volatility
and other
items5
£m
318
209
527
(764)
(237)
2,065
(197)
–
1,631
Removal of:
Volatility
and other
items1
£m
Insurance
gross up2
£m
228
(186)
42
(1,053)
(1,011)
1,821
(107)
703
1,180
(1,356)
(176)
–
(176)
176
–
–
Removal of:
Volatility
and other
items4
£m
Insurance
gross up2
£m
263
121
384
(895)
(511)
1,948
107
1,544
TSB6
£m
(192)
(31)
(223)
–
(223)
86
19
118
–
1,898
(2,110)
(212)
–
(212)
212
–
–
Removal of:
Insurance
gross up2
£m
38
(126)
(88)
–
(88)
88
–
–
–
PPI
£m
–
–
–
–
–
1,650
–
1,650
PPI
£m
–
–
–
–
–
1,000
–
1,000
PPI
£m
–
–
–
–
–
4,000
–
–
4,000
Other
conduct
provisions
£m
Underlying
basis
£m
–
–
–
–
–
865
–
865
12,320
6,205
18,525
(1,053)
17,472
(8,184)
(795)
8,493
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
Lloyds
Banking
Group
statutory
£m
11,318
6,103
17,421
17,421
(15,387)
(390)
–
1,644
1 In the year ended 31 December 2017 this comprises the effects of asset sales (gain of £30 million); volatile items (gain of £263 million); liability management (loss of £14 million); the
amortisation of purchased intangibles (£91 million); restructuring costs (£621 million, principally comprising costs relating to the Simplification programme; the rationalisation of the
non-branch property portfolio, the work on implementing the ring-fencing requirements and the integration of MBNA); and the fair value unwind and other items (loss of £270 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 £32 million (2016: £58 million; 2015: £66 million).
4 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).
5 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).
6 Comprises the underlying results of TSB.
Geographical areas
Following the reduction in the Group’s non-UK activities, an analysis between UK and non-UK activities is no longer provided.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
184 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
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 income1
Interest and similar expense:
Deposits from banks, excluding liabilities under sale and
repurchase transactions
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 expense3
Net interest income
2017
%
3.16
0.40
1.29
2.81
1.96
–
2.73
1.18
0.49
0.37
7.93
0.58
0.79
9.15
1.06
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
2017
£m
2016
£m
2015
£m
14,712
15,190
16,256
271
43
381
56
397
40
15,026
15,627
16,693
980
–
762
231
725
197
16,006
16,620
17,615
(80)
(68)
(43)
(1,722)
(266)
(1,481)
(110)
(3,659)
(1,435)
(5,094)
10,912
(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
1 Includes £12 million (2016: £nil; 2015: £nil) of interest income on liabilities 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
2.43 per cent (2016: 2.70 per cent; 2015: 2.76 per cent).
3 Includes £50 million (2016: £51 million; 2015: £nil) of interest expense on assets with negative interest rates.
Included within interest and similar income is £179 million (2016: £205 million; 2015: £248 million) in respect of impaired financial assets. Net interest income
also includes a credit of £651 million (2016: credit of £557 million; 2015: credit of £956 million) transferred from the cash flow hedging reserve (see note 41).
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
2017
£m
2016
£m
2015
£m
712
953
1,300
2,965
(1,382)
1,583
752
875
1,418
3,045
(1,356)
1,689
804
918
1,530
3,252
(1,442)
1,810
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.
Note 7: Net trading income
Foreign exchange translation (losses) gains
Gains on foreign exchange trading transactions
Total foreign exchange
Investment property gains (losses) (note 26)
Securities and other gains (see below)
Net trading income
Lloyds Banking Group Annual Report and Accounts 2017 185
2017
£m
(174)
517
343
230
11,244
11,817
2016
£m
1,363
542
1,905
(83)
16,723
18,545
2015
£m
(80)
335
255
416
3,043
3,714
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 (expense) income 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 gains (losses) 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
2017
£m
2016
£m
2015
£m
1,122
9,862
10,984
(144)
10,840
404
11,244
4,771
12,534
17,305
(154)
17,151
(428)
16,723
451
2,384
2,835
14
2,849
194
3,043
2017
£m
2016
£m
2015
£m
6,273
1,082
7,355
(168)
7,187
743
7,930
5,613
1,685
7,298
(88)
7,210
858
8,068
3,613
430
4,043
(122)
3,921
871
4,792
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.
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 41)
Movement in value of in-force business (note 24)
Liability management
Share of results of joint ventures and associates
Other
Total other operating income
2017
£m
1,344
213
446
(165)
(14)
6
165
1,995
2016
£m
1,225
229
575
472
(598)
(1)
133
2,035
2015
£m
1,165
268
51
(162)
(28)
(3)
225
1,516
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows:
186 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 10: Insurance claims
Insurance claims comprise:
Life insurance and participating investment contracts
Claims and surrenders
Change in insurance and participating investment contracts (note 31)
Change in non-participating investment contracts
Reinsurers’ share
Change in unallocated surplus
Total life insurance and participating investment contracts
Non-life insurance
Total non-life insurance claims, net of reinsurance
Total insurance claims
Deaths
Maturities
Surrenders
Annuities
Other
Total life insurance gross claims and surrenders
Note 11: Operating expenses
Staff costs:
Salaries
Performance-based compensation
Social security costs
Pensions and other post-retirement benefit schemes (note 35)
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)
Goodwill impairment (note 23)
Total operating expenses, excluding regulatory provisions
Regulatory provisions:
Payment protection insurance provision (note 37)
Other regulatory provisions1 (note 37)
Total operating expenses
1 In 2016, regulatory provisions of £61 million were charged against income.
2017
£m
2016
£m
2015
£m
(8,898)
(9,067)
2,836
(8,617)
(14,160)
679
(15,129)
(22,098)
35
106
(15,094)
(21,992)
(147)
14
(15,241)
(21,978)
(337)
(15,578)
(366)
(22,344)
(675)
(1,280)
(5,674)
(985)
(284)
(8,898)
(635)
(1,347)
(5,444)
(949)
(242)
(8,617)
(7,983)
2,898
(438)
(5,523)
101
(5,422)
63
(5,359)
(370)
(5,729)
(631)
(1,348)
(4,811)
(902)
(291)
(7,983)
2017
£m
2016
£m
2015
£m
2,679
2,750
2,808
473
361
625
24
448
4,610
365
231
134
730
882
208
328
231
–
814
2,463
1,944
34
392
2,370
8
10,181
1,650
865
2,515
12,696
475
363
555
241
433
4,817
365
187
120
672
848
198
265
200
–
873
2,384
1,761
37
582
2,380
–
409
349
548
104
459
4,677
368
173
174
715
893
253
262
270
665
703
3,046
1,534
41
537
2,112
–
10,253
10,550
1,000
1,024
2,024
12,277
4,000
837
4,837
15,387
Lloyds Banking Group Annual Report and Accounts 2017 187
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
2017
£m
334
139
473
127
35
162
2016
£m
312
163
475
123
41
164
2015
£m
280
129
409
114
56
170
Performance-based awards expensed in 2017 include cash awards amounting to £102 million (2016: £116 million; 2015: £96 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
Total fees payable to the Company’s auditors by the Group
2017
75,150
794
75,944
2016
79,606
812
80,418
2015
84,922
781
85,703
2017
£m
1.5
18.6
3.0
23.1
1.2
24.3
–
–
–
1.2
2.4
3.6
27.9
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
24.3
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
24.3
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
188 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
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 debt prospectuses required by the listing rules.
Services relating to taxation: Following a change in policy, the Group’s auditors are not engaged to provide tax services except in exceptional
circumstances and where permitted by applicable guidance.
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 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 prohibiting certain non-audit services. All statutory audit
work as well as most non-audit assignments must be pre-approved by the audit committee on an individual engagement basis; for certain types of
non-audit engagements where the fee is ‘de minimis’ the audit committee has pre-approved all assignments subject to confirmation by management.
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 20)
Impairment of available-for-sale financial assets
Other credit risk provisions
Total impairment charged to the income statement
2017
£m
0.1
0.3
–
0.1
2017
£m
697
(6)
691
6
(9)
688
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
Note 13: Taxation
(A) Analysis of tax expense 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 expense
Deferred tax:
Current year
Adjustments in respect of prior years
Deferred tax expense
Tax expense
The income tax expense is made up as follows:
Tax (expense) credit attributable to policyholders
Shareholder tax expense
Tax charge
Lloyds Banking Group Annual Report and Accounts 2017 189
2017
£m
2016
£m
(1,342)
122
(1,220)
(40)
10
(30)
(1,250)
(430)
(48)
(478)
(1,010)
156
(854)
(20)
2
(18)
(872)
(758)
(94)
(852)
(1,728)
(1,724)
2017
£m
(82)
(1,646)
(1,728)
2016
£m
(301)
(1,423)
(1,724)
2015
£m
(485)
(90)
(575)
(24)
27
3
(572)
(212)
96
(116)
(688)
2015
£m
3
(691)
(688)
(B) Factors affecting the tax expense for the year
The UK corporation tax rate for the year was 19.25 per cent (2016: 20 per cent; 2015: 20.25 per cent). An explanation of the relationship between tax
expense and accounting profit is set out below:
Profit before tax
UK corporation tax thereon
Impact of surcharge on banking profits
Non-deductible costs: conduct charges
Non-deductible costs: bank levy
Other non-deductible costs
Non-taxable income
Tax-exempt gains on disposals
Recognition of losses that arose in prior years
Remeasurement of deferred tax due to rate changes
Differences in overseas tax rates
Policyholder tax1
Adjustments in respect of prior years
Tax effect of share of results of joint ventures
Tax expense
2017
£m
5,275
(1,015)
(452)
(352)
(44)
(59)
72
128
–
(9)
(15)
(66)
85
(1)
2016
£m
4,238
2015
£m
1,644
(848)
(266)
(219)
(40)
(135)
75
19
59
(201)
10
(241)
64
(1)
(333)
–
(459)
(55)
(116)
162
67
42
(27)
(4)
3
33
(1)
(1,728)
(1,724)
(688)
1 In 2016 this included 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
190 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
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
2017
£m
3,042
102
3,144
2017
million
71,710
683
72,393
4.4p
4.3p
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
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 57 million (2016: 140 million; 2015: 101 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.
There were no anti-dilutive share options and awards excluded from the calculation of diluted earnings per share at 31 December 2017
(2016: weighted-average of 0.3 million; 2015: weighted-average of 1 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
2017
Other financial
assets at fair
value through
profit or loss
£m
–
–
Trading
assets
£m
29,976
1,614
Total
£m
29,976
1,614
Trading
assets
£m
30,473
2,606
9,833
12,187
22,020
11,828
–
–
189
95
523
10,640
6
–
1,527
222
211
926
19,467
34,540
86,084
18
1,527
222
400
1,021
19,990
45,180
86,090
18
–
–
47
69
224
12,168
6
–
2016
Other financial
assets at
fair value
through
profit or loss
£m
–
–
14,904
1,325
244
660
1,469
Total
£m
30,473
2,606
26,732
1,325
244
707
1,538
19,608
19,832
38,210
67,691
20
50,378
67,697
20
42,236
120,642
162,878
45,253
105,921
151,174
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 £117,323 million (2016: £101,888 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 £28,759 million (2016: £15,611 million), see note 19; and
(ii)
private equity investments of £1,944 million (2016: £2,245 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 51.
Lloyds Banking Group Annual Report and Accounts 2017 191
Note 16: Derivative financial instruments
The fair values and notional amounts of derivative instruments are set out in the following table:
31 December 2017
31 December 2016
Trading and other
Exchange rate contracts:
Spot, forwards and futures
Currency swaps
Options purchased
Options written
Interest rate contracts:
Interest rate swaps
Forward rate agreements
Options purchased
Options written
Futures
Credit derivatives
Equity and other contracts
Contract/
notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
31,716
223,624
8,191
6,684
270,215
1,023
3,157
580
–
4,760
789
3,534
–
627
4,950
Contract/
notional
amount
£m
38,072
288,441
15,192
18,342
360,047
2,264,834
15,791
15,364
2,160,535
239,797
32,097
32,817
35,542
5
2,329
–
9
1
–
2,524
7
2,605,087
18,134
17,896
4,568
25,150
77
982
423
1,242
628,962
39,509
39,847
114,284
2,983,137
8,098
43,218
Total derivative assets/liabilities – trading and other
2,905,020
23,953
24,511
3,394,500
Hedging
Derivatives designated as fair value hedges:
Currency swaps
Interest rate swaps
Derivatives designated as cash flow hedges:
Interest rate swaps
Futures
Currency swaps
Total derivative assets/liabilities – hedging
Total recognised derivative assets/liabilities
1,327
109,670
110,997
549,099
73,951
7,310
630,360
741,357
3,646,377
19
1,145
1,164
597
–
120
717
1,881
25,834
38
407
445
1,053
1
114
1,168
1,613
1,454
194,416
195,870
384,182
53,115
8,121
445,418
641,288
26,124
4,035,788
Fair value
assets
£m
Fair value
liabilities
£m
1,149
6,903
808
–
8,860
19,780
13
3,251
–
6
23,050
381
1,135
33,426
19
1,462
1,481
814
–
417
1,231
2,712
36,138
1,383
6,382
–
1,016
8,781
18,862
87
–
3,400
3
22,352
659
1,168
32,960
22
737
759
1,166
3
36
1,205
1,964
34,924
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 51 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 51; and
– Derivatives held in policyholder funds as permitted by the investment strategies of those funds.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
192 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 16: Derivative financial instruments continued
The principal derivatives used by the Group are as follows:
– Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two
parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying
principal amounts. Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate,
applied to a notional principal amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but
not the obligation, to fix the rate of interest on a future loan or deposit, for a specified period and commencing on a specified future date.
– Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an
agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the
exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency option
gives the buyer, on payment of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of exchange on or
before a specified future date.
– Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk.
A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific
payment should a negative credit event take place.
– 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.
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.
2017
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
2016
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
346
(475)
307
(680)
515
(654)
562
(640)
682
(592)
648
(556)
492
(552)
448
(505)
395
(406)
701
(1,150)
466
(377)
684
(1,085)
55
(627)
63
(612)
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
46
(163)
3,232
(4,619)
54
(164)
Over
20 years
£m
3,232
(4,619)
Total
£m
172
(565)
211
(777)
198
(722)
223
(713)
415
(692)
418
(671)
372
(599)
363
(521)
391
(429)
472
(415)
1,215
(1,541)
1,070
(1,477)
102
(806)
99
(787)
45
(262)
54
(255)
2,910
(5,616)
2,910
(5,616)
There were no transactions for which cash flow hedge accounting had to be ceased in 2016 or 2017 as a result of the highly probable cash flows no longer
being expected to occur.
Lloyds Banking Group Annual Report and Accounts 2017 193
Note 17: 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 20)
Total loans and advances to customers
For amounts included above which are subject to reverse repurchase agreements see note 51.
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
2017
£m
7,461
1,609
7,886
4,428
14,074
2,148
30,980
57,006
2016
£m
7,269
2,320
7,285
4,535
13,320
2,564
32,192
49,197
304,665
306,682
28,757
2,094
13,591
474,699
(2,201)
472,498
20,761
2,628
11,617
460,370
(2,412)
457,958
2017
£m
2016
£m
680
1,106
1,053
2,839
(692)
(53)
2,094
2017
£m
546
887
661
2,094
551
1,618
1,561
3,730
(1,038)
(64)
2,628
2016
£m
361
1,282
985
2,628
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 2016 and 2017 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 (2016: £nil).
Note 18: 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 30.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
194 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 18: Securitisations and covered bonds continued
Securitisation programmes1
UK residential mortgages
Commercial loans
Credit card receivables
Dutch residential mortgages
Less held by the Group
Total securitisation programmes (note 30)
Covered bond programmes
Residential mortgage-backed
Social housing loan-backed
Less held by the Group
Total covered bond programmes (note 30)
Total securitisation and covered bond programmes
1 Includes securitisations utilising a combination of external funding and credit default swaps.
2017
2016
Loans and
advances
securitised
£m
Notes
in issue
£m
Loans and
advances
securitised
£m
Notes
in issue
£m
21,158
14,105
35,146
17,705
7,395
7,610
2,033
52,184
33,881
2,087
35,968
6,616
7,701
–
35,475
30,361
1,628
31,989
7,001
4,090
–
25,196
(21,536)
3,660
25,632
1,200
26,832
(700)
26,132
29,792
8,179
5,723
2,081
33,688
(26,435)
7,253
30,021
1,200
31,221
(700)
30,521
37,774
Cash deposits of £3,507 million (2016: £9,018 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 2017 these obligations had not been triggered; the maximum exposure under these
facilities was £95 million (2016: £373 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 2017 (2016: none).
Note 19: 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 18 for securitisations and covered bond vehicles, note 35 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 18, 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
2017 was £6,049 million (2016: £6,840 million), comprising £5,939 million of loans and advances (2016: £6,684 million) and £110 million of debt securities
(2016: £156 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 2017 there have continued to be planned drawdowns 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 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.
The external assets in Cancara are consolidated in the Group’s financial statements.
(B) Consolidated collective investment vehicles and limited partnerships
The assets 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 2017, the total carrying value of these consolidated collective investment vehicle assets and liabilities held by the
Group was £68,124 million (2016: £75,669 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.
Lloyds Banking Group Annual Report and Accounts 2017 195
Note 19: Structured entities continued
(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 £28,759 million at 31 December 2017 (2016: £15,611 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 2017, the total asset value of these unconsolidated structured entities, including the portion in which the Group
has no interest, was £2,338 billion (2016: £1,849 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 2017, are reported in note 6.
Note 20: 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.
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.
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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
196 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 20: Allowance for impairment losses on loans and receivables continued
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 2017, the impairment charge would increase by approximately
£200 million in respect of UK mortgages.
In addition, the collective provision also includes provision for 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 £25 million (2016: £33 million).
At 1 January
Exchange and other adjustments
Advances written off
Recoveries of advances written off in previous years
Unwinding of discount
Charge (release) to the income statement (note 12)
At 31 December
Loans and
advances
to customers
2017
Debt
securities
£m
2,412
132
(1,499)
482
(23)
697
2,201
£m
76
–
(44)
–
–
(6)
26
Loans and
advances
to customers
£m
3,033
69
(2,111)
861
(32)
592
Total
£m
2,488
132
(1,543)
482
(23)
691
2,227
2,412
2016
Debt
securities
£m
97
–
(22)
1
–
–
76
Total
£m
3,130
69
(2,133)
862
(32)
592
2,488
Of the total allowance in respect of loans and advances to customers, £1,772 million (2016: £1,876 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, £1,201 million (2016: £1,208 million) was assessed on a collective basis.
Note 21: 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
2017
£m
2016
£m
34,708
167
1,156
255
4,615
40,901
1,197
42,098
48,714
142
108
317
6,030
55,311
1,213
56,524
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).
Lloyds Banking Group Annual Report and Accounts 2017 197
Note 22: Acquisition of MBNA Limited
On 1 June 2017, following the receipt of competition and regulatory approval, the Group acquired 100 per cent of the ordinary share capital of
MBNA Limited (MBNA), which together with its subsidiaries undertakes a UK consumer credit card business, from FIA Jersey Holdings Limited,
a wholly-owned subsidiary of Bank of America. The acquisition will enable the Group to enhance its position and offering within the UK prime
credit card market. The total fair value of the purchase consideration was £2,016 million, settled in cash. The acquisition is expected to result in a
significant opportunity for cost synergies and goodwill of £302 million has been recognised on the transaction. None of the goodwill recognised is
deductible for tax purposes.
The table below sets out the fair value of the identifiable assets and liabilities acquired. The Group has finalised the acquisition accounting in the
second half of 2017 and this has resulted in a reduction in other assets of £23 million, an increase in deferred tax assets of £4 million and an increase
in goodwill of £19 million compared to the provisional amounts previously reported.
Assets
Loans and advances to customers
Available-for-sale financial assets
Purchased credit card relationships
Deferred tax assets
Other assets
Total assets
Liabilities
Deposits from banks1
Deferred tax liabilities
Other liabilities
Other provisions
Total liabilities
Fair value of net assets acquired
Goodwill arising on acquisition
Total consideration
Book value
as at 1 June
2017
£m
Fair value
adjustments
£m
Fair value
as at 1 June
2017
£m
7,466
16
–
27
190
7,699
6,431
3
112
233
6,779
920
345
–
702
4
322
1,373
–
184
–
395
579
794
7,811
16
702
31
512
9,072
6,431
187
112
628
7,358
1,714
302
2,016
1 Upon acquisition, the funding of MBNA was assumed by Lloyds Bank plc.
At acquisition date, the contractual amount of loans and advances receivable from customers was £7,628 million. The amount expected to be
collected is not materially different from the book value recognised by MBNA at 1 June 2017 (£7,466 million).
As a result of an indemnity guaranteed by Bank of America, N.A., the Group’s exposure to MBNA’s PPI liability is capped at £240 million.
Acquisition-related costs of £21 million have been included in operating expenses for the year ended 31 December 2017.
The post-acquisition total income of MBNA, which is included in the Group statutory consolidated income statement for the year ended
31 December 2017, is £436 million. MBNA also contributed profit before tax of £146 million for the same period.
Had the acquisition date of MBNA been 1 January 2017, the Group’s consolidated total income would have been £329 million higher at £34,566 million
and the Group’s consolidated profit before tax would have been £112 million higher at £5,387 million.
Note 23: Goodwill
At 1 January
Acquisition of businesses (note 22)
Impairment charged to the income statement (note 11)
At 31 December
Cost1
Accumulated impairment losses
At 31 December
2017
£m
2,016
302
(8)
2,310
2,664
(354)
2,310
2016
£m
2,016
–
–
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 £2,310 million (2016: £2,016 million), £1,836 million, or 79 per cent of the
total (2016: £1,836 million, 91 per cent of the total) has been allocated to Scottish Widows in the Group’s Insurance and Wealth division; £302 million,
or 13 per cent of the total (2016: £nil) relates to the acquisition of MBNA (note 22) and has been allocated to Cards in the Group’s Retail division; and
£170 million, or 7 per cent of the total (2016: £170 million, 8 per cent of the total) to Motor Finance in the Group’s Retail 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 9 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
2 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
198 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 23: Goodwill continued
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.
The goodwill relating to the acquisition of MBNA has been allocated to the Group’s Cards business as the Cards business is expected to benefit from
the synergies of the acquisition. The recoverable amount of this goodwill has 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
Cards participates. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of
the Cards business to fall below the balance sheet carrying value.
Note 24: Value of in-force business
Critical accounting estimates and judgements
The value of in-force business asset 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 2017 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 31.
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,
a range of inputs are considered which reflect actual asset allocation and relevant observable market data. The illiquidity premium is estimated to be
114 basis points at 31 December 2017 (2016: 138 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
2017
%
2016
%
0.00 to 4.20
0.00 to 4.20
1.14 to 5.34
1.38 to 5.58
0.00 to 4.20
0.00 to 4.20
3.43
3.67
3.50
3.73
1 All risk-free rates are quoted as the range of rates implied by the relevant forward swap curve.
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 31 and the effect of changes in key assumptions is
given in note 32.
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
2017
£m
306
4,533
4,839
2016
£m
340
4,702
5,042
Lloyds Banking Group Annual Report and Accounts 2017 199
Note 24: Value of in-force business continued
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
2017
£m
340
(34)
306
The acquired value of in-force non-participating investment contracts includes £185 million (2016: £206 million) in relation to OEIC business.
The movement in the value of in-force insurance and participating investment contracts over the year is as follows:
At 1 January
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)
At 31 December
2017
£m
4,702
(4)
348
(318)
(226)
(238)
269
(165)
4,533
2016
£m
377
(37)
340
2016
£m
4,219
11
428
(210)
(137)
127
264
472
4,702
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
makes 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
Cost:
At 1 January 2016
Additions
Disposals
At 31 December 2016
Acquisition of businesses (note 22)
Additions
Disposals
At 31 December 2017
Accumulated amortisation:
At 1 January 2016
Charge for the year
Disposals
At 31 December 2016
Charge for the year
Disposals
At 31 December 2017
Balance sheet amount at 31 December 2017
Balance sheet amount at 31 December 2016
Brands
£m
Core deposit
intangible
£m
Purchased
credit card
relationships
£m
Customer-
related
intangibles
£m
Capitalised
software
enhancements
£m
596
–
–
596
–
–
–
2,770
–
–
2,770
–
–
–
315
–
–
315
702
–
–
538
–
–
538
–
–
–
1,814
463
(110)
2,167
–
850
(77)
Total
£m
6,033
463
(110)
6,386
702
850
(77)
596
2,770
1,017
538
2,940
7,861
149
22
–
171
22
–
193
403
425
2,460
297
–
2,757
13
–
2,770
–
13
309
2
–
311
44
–
355
662
4
472
27
–
499
20
–
519
19
39
805
234
(72)
967
293
(71)
1,189
1,751
1,200
4,195
582
(72)
4,705
392
(71)
5,026
2,835
1,681
Included within brands above are assets of £380 million (31 December 2016: £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 additional £702 million of purchased credit card relationships in the year ended 31 December 2017 have arisen from the acquisition of MBNA (see
note 22) and represent the benefit of recurring income generated from the portfolio of credit cards purchased.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
200 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 26: Property, plant and equipment
Cost or valuation:
At 1 January 2016
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
Exchange and other adjustments
Acquisition of businesses (note 22)
Additions
Expenditure on investment properties (see below)
Change in fair value of investment properties (note 7)
Disposals
At 31 December 2017
Accumulated depreciation and impairment:
At 1 January 2016
Exchange and other adjustments
Depreciation charge for the year
Disposals
At 31 December 2016
Exchange and other adjustments
Depreciation charge for the year
Disposals
At 31 December 2017
Balance sheet amount at 31 December 2017
Balance sheet amount at 31 December 2016
Expenditure on investment properties is comprised as follows:
Acquisitions of new properties
Additional expenditure on existing properties
Investment
properties
£m
Premises
£m
Equipment
£m
Operating
lease assets
£m
4,361
2,589
13
–
344
(83)
(871)
3,764
–
–
–
209
230
(504)
3,699
–
–
–
–
–
–
–
–
–
3,699
3,764
5,266
6
806
–
–
(113)
5,965
–
3
5,023
112
2,088
–
–
(1,017)
6,206
(44)
–
382
2,262
–
–
–
–
Total
£m
17,239
133
2,953
344
(83)
(2,101)
18,485
(81)
6
2,714
209
230
2
59
–
–
(100)
2,550
(37)
3
70
–
–
(795)
1,791
(1,282)
5,068
(1,896)
6,528
(4,477)
17,086
1,247
2,096
(1)
136
(49)
1,333
(8)
125
(722)
728
1,063
1,217
(8)
672
(89)
2,671
(9)
734
(1,271)
2,125
2,943
3,294
917
49
953
(410)
1,509
(34)
1,085
(1,054)
1,506
5,022
4,697
2017
£m
82
127
209
4,260
40
1,761
(548)
5,513
(51)
1,944
(3,047)
4,359
12,727
12,972
2016
£m
251
93
344
Rental income of £213 million (2016: £229 million) and direct operating expenses arising from properties that generate rental income of £24 million
(2016: £26 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 £21 million
(2016: £65 million).
The table above analyses movements in investment properties, all of which are categorised as level 3. See note 48 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
2017
£m
1,301
1,419
128
2,848
2016
£m
1,120
1,373
347
2,840
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2016 and 2017 no contingent
rentals in respect of operating leases were recognised in the income statement.
Total future minimum sub-lease income of £71 million at 31 December 2017 (£109 million at 31 December 2016) is expected to be received under
non-cancellable sub-leases of the Group’s premises.
Note 27: Other assets
Assets arising from reinsurance contracts held (notes 31 and 33)
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: 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
Lloyds Banking Group Annual Report and Accounts 2017 201
2017
£m
602
104
720
7,786
65
4,260
13,537
2016
£m
714
81
700
6,645
59
4,556
12,755
2017
£m
70,444
95,889
2016
£m
61,804
90,978
196,966
208,227
2,638
52,187
2,462
51,989
418,124
415,460
For amounts included above which are subject to repurchase agreements, see note 51.
Included in the amounts reported above are deposits of £220,855 million (2016: £219,106 million) which are protected under the UK Financial Services
Compensation Scheme.
Note 29: 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
2017
£m
7,815
2016
£m
9,425
41,378
381
1,303
43,062
50,877
42,067
530
2,482
45,079
54,504
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 2017 was £14,224 million,
which was £6,412 million higher than the balance sheet carrying value (2016: £16,079 million, which was £6,656 million higher than the balance sheet
carrying value). At 31 December 2017 there was a cumulative £147 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 £52 million arose in 2017 and an increase of £28 million arose in 2016.
For the fair value of collateral pledged in respect of repurchase agreements see note 51.
Note 30: Debt securities in issue
Medium-term notes issued
Covered bonds (note 18)
Certificates of deposit issued
Securitisation notes (note 18)
Commercial paper
Total debt securities in issue
2017
£m
29,418
26,132
9,999
3,660
3,241
2016
£m
27,182
30,521
8,077
7,253
3,281
72,450
76,314
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
202 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 31: Liabilities arising from insurance contracts and participating investment contracts
Insurance contract and participating investment contract liabilities are comprised as follows:
2017
2016
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).
89,157
13,673
102,830
358
225
583
103,413
(563)
–
88,594
13,673
(563)
102,267
(13)
–
(13)
(576)
345
225
570
79,793
13,984
93,777
404
209
613
102,837
94,390
(671)
–
(671)
(14)
–
(14)
(685)
79,122
13,984
93,106
390
209
599
93,705
(1) Life insurance
The movement in life insurance contract and participating investment contract liabilities over the year can be analysed as follows:
At 1 January 2016
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2016
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2017
Insurance
contracts
£m
66,122
4,422
9,214
13,636
35
79,793
4,154
5,224
9,378
(14)
Participating
investment
contracts
£m
13,460
28
496
524
–
13,984
43
(354)
(311)
–
Gross
£m
79,582
4,450
9,710
14,160
35
93,777
4,197
4,870
9,067
(14)
Reinsurance
£m
(629)
(5)
(37)
(42)
–
(671)
(21)
129
108
–
Net
£m
78,953
4,445
9,673
14,118
35
93,106
4,176
4,999
9,175
(14)
89,157
13,673
102,830
(563)
102,267
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
With-profit
fund
£m
8,946
8,481
17,427
2017
Non-profit
fund
£m
80,211
5,192
85,403
Total
£m
89,157
13,673
102,830
With-profit
fund
£m
9,147
8,860
18,007
2016
Non-profit
fund
£m
70,646
5,124
75,770
Total
£m
79,793
13,984
93,777
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.
Lloyds Banking Group Annual Report and Accounts 2017 203
Note 31: Liabilities arising from insurance contracts and participating investment contracts continued
(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.
(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 2017 of £2.8 billion (2016: £2.7 billion). The eventual cost of providing benefits
on policies written both pre and post demutualisation is dependent upon a large number of variables, including future interest rates and equity values,
demographic factors, such as mortality, and the proportion of policyholders who seek to exercise their options. The ultimate cost will therefore not be
known for many years.
As noted above, 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:
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
204 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 31: Liabilities arising from insurance contracts and participating investment contracts continued
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 2017 resulted in the following key impacts on profit before tax:
– Change in persistency assumptions (£237 million decrease).
– Change in the assumption in respect of current and future mortality and morbidity rates (£289 million increase).
– Change in expenses assumptions (£142 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 £35 million (2016: £82 million) in respect of those guarantees.
(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
2017
£m
404
724
(770)
(46)
358
(13)
345
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 liabilities charged to the income statement 1
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
2017
£m
209
(321)
337
16
225
–
225
174
51
225
2016
£m
461
827
(884)
(57)
404
(14)
390
2016
£m
251
(408)
366
(42)
209
–
209
122
87
209
1 Of which an increase of £350 million (2016: £363 million) was in respect of current year claims and a decrease of £13 million (2016: an increase of £3 million) was in respect of prior year claims.
Lloyds Banking Group Annual Report and Accounts 2017 205
Note 32: 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 31.
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.
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
2017
2016
Increase
(reduction)
in profit
before tax
Increase
(reduction)
in equity
£m
23
(221)
75
289
(40)
(6)
(7)
(235)
145
£m
19
(184)
62
240
(33)
(5)
(6)
(195)
120
Increase
(reduction)
in profit
before tax
£m
Increase
(reduction)
in equity
£m
25
(287)
48
318
(74)
(12)
(10)
(200)
152
21
(238)
40
264
(62)
(10)
(8)
(166)
126
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 33: 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
At 31 December
2017
£m
20,112
608
(5,273)
15,447
2016
£m
22,777
560
(3,225)
20,112
The balances above are shown gross of reinsurance. As at 31 December 2017, related reinsurance balances were £26 million (2016: £29 million); reinsurance
balances are reported within other assets (note 27). Liabilities arising from non-participating investment contracts are categorised as level 2. See note 48 for
details of levels in the fair value hierarchy.
Note 34: Other liabilities
Settlement balances
Unitholders’ interest in Open Ended Investment Companies
Unallocated surplus within insurance businesses
Other creditors and accruals
Total other liabilities
2017
£m
501
14,480
390
5,359
20,730
2016
£m
706
22,947
243
5,297
29,193
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
206 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 35: Retirement benefit obligations
Charge to the income statement
Defined benefit pension schemes
Other post-retirement benefit schemes
Total defined benefit schemes
Defined contribution pension schemes
Total charge to the income statement (note 11)
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
2017
£m
362
7
369
256
625
2016
£m
279
8
287
268
555
2017
£m
723
(358)
365
2017
£m
509
(144)
365
2015
£m
307
8
315
233
548
2016
£m
342
(822)
(480)
2016
£m
(244)
(236)
(480)
Pension schemes
Defined benefit schemes
Critical accounting estimates and judgements
The accounting valuation 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 19 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. 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. At
31 December 2017, these schemes represented 95 per cent of the Group’s total gross defined benefit pension assets (2016: 94 per cent). 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 2017 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. The responsibility for the governance of the Group’s funded defined benefit pension schemes lies with the Pension Trustees. All 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 funding valuation process. The
Board of Trustees must be composed of representatives of the Company and plan participants in accordance with the Scheme’s regulations.
A valuation to determine the funding status of each scheme is carried out 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 most recent triennial funding valuation of the Group’s three main schemes, based on the position as at 31 December 2016, is substantially complete
and the terms have been agreed in principle with the trustees. The valuation shows an aggregate funding deficit of £7.3 billion (a funding level of 85.6 per
cent) compared to a £5.2 billion deficit (a funding level of 85.9 per cent) for the previous valuation as at 30 June 2014. In the light of this funding deficit,
and in contemplation of the changes the Group expects to make as a result of its Structural Reform Programme, the Group has agreed in principle a
recovery plan with the trustees. Under the plan, deficit contributions of £412 million are payable during 2018, rising to £618 million in 2019, £798 million in
2020, £1,287 million in 2021 and £1,305 million per annum from 2022 to 2024. Contributions in the later years will be subject to review and renegotiation at
subsequent funding valuations. The next funding valuation is due to be completed by March 2021 with an effective date of 31 December 2019. The deficit
contributions are in addition to the regular contributions to meet of benefits accruing over the year. The Group currently expects to pay contributions of
approximately £750 million to its defined benefit schemes in 2018.
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 2017, the limited liability partnerships held assets of approximately £5.5 billion. The limited liability partnerships are consolidated fully in
the Group’s balance sheet.
Lloyds Banking Group Annual Report and Accounts 2017 207
Note 35: Retirement benefit obligations continued
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 2017 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 2017.
The last funding valuations of other Group schemes were carried out on a number of different dates. In order to report the position under IAS 19 as
at 31 December 2017 the most recent valuation results for all schemes have been updated by qualified independent actuaries. The main differences
between the funding and IAS 19 valuations are different and more prudent approach to setting the discount rate and more conservative longevity
assumptions used in the funding valuations.
(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
Curtailments
Settlements
Exchange and other adjustments
At 31 December
Analysis of the defined benefit obligation:
Active members
Deferred members
Pensioners
Dependants
2017
£m
2016
£m
(44,384)
44,893
509
(45,822)
45,578
(244)
2017
£m
2016
£m
(244)
(362)
(731)
1,267
580
(1)
509
736
(279)
(8,770)
7,455
623
(9)
(244)
2017
£m
2016
£m
(45,822)
(36,903)
(295)
(1,241)
(347)
1,084
(1,468)
3,714
(14)
(10)
15
–
(257)
(1,401)
535
195
(9,500)
1,580
(20)
–
12
(63)
(44,384)
(45,822)
2017
£m
2016
£m
(7,947)
(15,823)
(19,014)
(1,600)
(44,384)
(9,903)
(16,934)
(17,476)
(1,509)
(45,822)
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
208 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 35: Retirement benefit obligations continued
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
Benefits paid
Settlements
Administrative costs paid
Exchange and other adjustments
At 31 December
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
Money market instruments, cash, derivatives and other
assets and liabilities
At 31 December
Quoted
£m
846
5,344
17,439
6,903
121
29,807
2017
Unquoted
£m
5
–
–
–
–
–
–
544
Total
£m
851
5,344
17,439
6,903
121
29,807
544
3,937
13,443
17,380
1,501
36,091
(5,190)
8,802
(3,689)
44,893
Quoted
£m
1,114
5,797
14,359
7,464
99
27,719
–
3,577
1,462
33,872
1 Of the total debt instruments, £27,732 million (31 December 2016: £25,219 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 recognised in the income statement for the year ended 31 December comprises:
Current service cost
Net interest amount
Past service credits and curtailments
Settlements
Past service cost – plan amendments
Plan administration costs incurred during the year
Total defined benefit pension expense
2017
£m
2016
£m
45,578
37,639
1,267
1,242
580
(3,714)
(18)
(41)
(1)
7,455
1,441
623
(1,580)
(18)
(36)
54
44,893
45,578
2016
Unquoted
£m
–
–
–
–
–
–
497
12,845
(1,636)
11,706
2017
£m
2,669
2,377
2,877
1,830
7,627
Total
£m
1,114
5,797
14,359
7,464
99
27,719
497
16,422
(174)
45,578
2016
£m
2,883
2,350
484
3,383
7,322
17,380
16,422
2017
£m
295
(1)
10
3
14
41
362
2016
£m
257
(40)
–
6
20
36
279
2015
£m
302
(43)
–
6
12
30
307
Lloyds Banking Group Annual Report and Accounts 2017 209
Note 35: 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
2017
%
2.59
3.20
2.15
0.00
2.73
2017
Years
27.9
29.5
28.9
30.7
2016
%
2.76
3.23
2.18
0.00
2.74
2016
Years
28.1
30.3
29.3
31.7
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 2017 is assumed
to live for, on average, 27.9 years for a male and 29.5 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
210 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 35: 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
2017
£m
16
(15)
(28)
26
44
(41)
2016
£m
19
(14)
(30)
30
42
(37)
2017
£m
472
(453)
(773)
794
2016
£m
491
(458)
(821)
847
1,404
(1,357)
1,213
(1,178)
1 At 31 December 2017, the assumed rate of RPI inflation is 3.20 per cent and CPI inflation 2.15 per cent (2016: RPI 3.23 per cent and CPI 2.18 per cent).
2 At 31 December 2017, the assumed discount rate is 2.59 per cent (2016: 2.76 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 2017 the asset-liability matching strategy mitigated 98 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:
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
2017
Years
19
2017
£m
1,174
1,235
4,089
8,082
9,360
19,044
16,735
11,156
5,219
2016
Years
20
2016
£m
1,639
1,180
3,971
8,030
9,453
20,268
18,831
13,589
7,809
Lloyds Banking Group Annual Report and Accounts 2017 211
Note 35: 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 2017 the charge to the income statement in respect of defined contribution schemes was £256 million
(2016: £268 million; 2015: £233 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 2017 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 6.81 per cent (2016: 6.84 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
Note 36: Deferred tax
The Group’s deferred tax assets and liabilities are as follows:
2017
£m
(236)
92
7
(7)
–
2016
£m
(200)
(33)
7
(8)
(2)
(144)
(236)
Statutory position
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
2017
£m
2,284
–
2,284
2016
£m
2,706
–
2,706
Tax disclosure
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
2017
£m
4,989
(2,705)
2,284
2016
£m
5,634
(2,928)
2,706
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 tables below which splits the deferred tax assets and liabilities by type.
The UK corporation tax rate will reduce from 19 per cent to 17 per cent on 1 April 2020. The Group measures its deferred tax assets and liabilities at the
value expected to be recoverable or payable in future periods, and re-measures them at each reporting date based on the most recent estimates of
utilisation or settlement, including the impact of bank surcharge where appropriate. The deferred tax impact of this re-measurement in 2017 is a charge of
£9 million in the income statement and a credit of £22 million in other comprehensive income.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
212 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 36: Deferred tax continued
Movements in deferred tax liabilities and assets (before taking into consideration the offsetting of balances within the same taxing jurisdiction) can be
summarised as follows:
Deferred tax assets
At 1 January 2016
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Other (charge) credit to equity
At 31 December 2016
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Other (charge) credit to equity
Impact of acquisitions and disposals
At 31 December 2017
Deferred tax liabilities
At 1 January 2016
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Exchange and other adjustments
At 31 December 2016
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Impact of acquisitions and disposals
At 31 December 2017
Property,
plant and
equipment
£m
Pension
liabilities
£m
Provisions
£m
Share-based
payments
£m
Other
temporary
differences
£m
Tax losses
£m
4,890
(592)
–
–
4,298
(264)
–
–
–
1,089
(120)
–
–
969
(226)
–
–
–
4,034
743
Long-term
assurance
business
£m
Acquisition
fair value
£m
(641)
(273)
–
–
(914)
115
–
–
(799)
(891)
93
–
–
(798)
76
–
(157)
(879)
102
(1,981)
2,107
–
228
(287)
149
–
–
90
Pension
assets
£m
(174)
1,876
(1,787)
–
(85)
199
(295)
–
(181)
28
12
–
–
40
(7)
25
–
–
58
91
(17)
–
(13)
61
7
–
(17)
–
51
395
(357)
–
–
38
(28)
–
–
3
13
4,989
Available-for-
sale asset
revaluation
£m
Other
temporary
differences
£m
Derivatives
£m
(395)
232
(466)
(14)
(643)
(139)
283
–
(499)
(11)
23
(246)
–
(234)
(40)
67
–
(506)
252
–
–
(254)
116
–
(2)
(207)
(140)
(2,705)
Total
£m
6,595
(3,055)
2,107
(13)
5,634
(805)
174
(17)
3
Total
£m
(2,618)
2,203
(2,499)
(14)
(2,928)
327
55
(159)
Critical accounting estimates and judgments
Estimation of income taxes includes the assessment of recoverability of deferred tax assets. Deferred tax assets are only recognised to the extent they
are considered more likely than not to be recoverable based on existing tax laws and forecasts of future taxable profits against which the underlying tax
deductions can be utilised.
The Group has recognised a deferred tax asset of £4,034 million (2016: £4,298 million) in respect of UK trading losses carried forward. Substantially
all of these losses have arisen in Bank of Scotland plc and Lloyds Bank plc, and they will be utilised as taxable profits arise in those legal entities in
future periods.
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 strategic report, as well as the risks associated with future regulatory change.
Under current law there is no expiry date for UK trading losses not yet utilised, although (since Finance Act 2016) banking losses that arose before 1 April
2015 can only be used against 25 per cent of taxable profits arising after 1 April 2016, and they cannot be used to reduce the surcharge on banking profits.
This restriction in utilisation means that the value of the deferred tax asset is only expected to be fully recovered by 2034.
Lloyds Banking Group Annual Report and Accounts 2017 213
Note 36: Deferred tax continued
Deferred tax not recognised
No deferred tax has been recognised in respect of the future tax benefit of expenses of the life assurance business carried forward. The deferred tax asset
not recognised in respect of these expenses is approximately £470 million (2016: £636 million). These expenses can be carried forward indefinitely.
Deferred tax assets of approximately £76 million (2016: £92 million) have not been recognised in respect of £404 million of UK tax losses and other
temporary differences which can only be used to offset future capital gains. UK capital losses can be carried forward indefinitely.
In addition, no deferred tax asset is recognised in respect of unrelieved foreign tax credits of £46 million (2016: £46 million), as there are no expected future
taxable profits against which the credits can be utilised. These credits can be carried forward indefinitely.
No deferred tax has been recognised in respect of foreign trade losses where it is not more likely than not that we will be able to utilise them in
future periods. Of the asset not recognised, £35 million (2016: £63 million) relates to losses that will expire if not used within 20 years, and £56 million
(2016: £56 million) relates to losses with no expiry date.
As a result of parent company exemptions on dividends from subsidiaries and on capital gains on disposal there are no significant taxable temporary
differences associated with investments in subsidiaries, branches, associates and joint arrangements.
Note 37: Other provisions
Critical accounting estimates and judgements
At 31 December 2017, the Group carried provisions of £4,070 million (2016: £3,597 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
(2017: £2,778 million; 2016: £2,258 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 2017
Exchange and other adjustments
Acquisition of businesses (note 22)
Provisions applied
Charge for the year
At 31 December 2017
Provisions for
commitments
£m
56
(26)
9
–
(9)
30
Payment
protection
insurance
£m
2,258
–
527
(1,657)
1,650
2,778
Other
regulatory
provisions
£m
1,339
16
–
(928)
865
1,292
Vacant
leasehold
property
£m
51
9
–
(23)
19
56
Other
£m
1,164
139
92
(252)
247
1,390
Total
£m
4,868
138
628
(2,860)
2,772
5,546
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 (excluding MBNA)
The Group increased the provision for PPI costs by a further £1,650 million in 2017, of which £600 million was in the fourth quarter, bringing the total
amount provided to £18,675 million. The remaining provision is consistent with an average of 11,000 complaints per week (previously 9,000) through to the
industry deadline of August 2019, in line with the average experience over the last nine months.
The higher volume of complaints received has been driven by increased claims management company (CMC) marketing activity and the Financial
Conduct Authority (FCA) advertising campaign.
At 31 December 2017, a provision of £2,438 million remained unutilised relating to complaints and associated administration costs. Total cash payments
were £1,470 million during the year to 31 December 2017.
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 53 per cent of the policies sold since 2000.
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 regulatory changes, FCA media campaign and Claims
Management Company and customer activity.
For every additional 1,000 reactive complaints per week above 11,000 on average through to the industry deadline of August 2019, the Group would
expect an additional charge of £200 million.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
214 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 37: Other provisions continued
Payment protection insurance (MBNA)
With regard to MBNA, as announced in December 2016, the Group’s exposure is capped at £240 million already provided for, through an indemnity
received from Bank of America.
Other provisions for 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 in connection with its past conduct and claims brought by or on behalf of current
and former employees, customers, investors and other third parties and is subject to legal proceedings and other legal actions. Where significant,
provisions are held against the costs expected to be incurred in relation to these matters and matters arising from related internal reviews. During the
year ended 31 December 2017 the Group charged a further £865 million in respect of legal actions and other regulatory matters, the unutilised balance at
31 December 2017 was £1,292 million (31 December 2016: £1,339 million). The most significant items are as follows.
Arrears handling related activities
The Group has provided an additional £245 million (bringing the total provided to date to £642 million), for the costs of identifying and rectifying
certain arrears management fees and activities. Following a review of the Group’s arrears handling activities, the Group has put in place a number of
actions to improve further its handling of customers in these areas and has made good progress in reimbursing mortgage arrears fees to the 590,000
impacted customers.
Packaged bank accounts
In 2017 the Group provided an additional £245 million in respect of complaints relating to alleged mis-selling of packaged bank accounts raising the total
amount provided to £750 million. A number of risks and uncertainties remain in particular with respect to future volumes.
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 continued to lead to an
increasing number of claims in 2016 and 2017. Up to 31 December 2016 the Group had provided a total of £639 million and no further amounts have been
provided to 31 December 2017. 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.
HBOS Reading – customer review
The Group is undertaking 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 Group has
provided £100 million in the year to 31 December 2017 and is in the process of paying compensation to the victims of the fraud for economic losses as
well as ex-gratia payments and awards for distress and inconvenience. The review is ongoing and at 12 February 2018, the Group had made offers to
57 customers, which represents more than 80 per cent of the customers in review.
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 5 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; £622 million of this provision
remained unutilised at 31 December 2017.
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 2017 provisions of £104 million (31 December 2016: £239 million) were held.
Other provisions also includes those arising in the normal course of business, whether from certain customer rectifications or provisions for dilapidation
and refurbishment of properties. Provisions also include a matter 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 £32 million at 31 December 2017 represents
management’s current best estimate of the cost after having regard to actuarial estimates of future losses.
Note 38: Subordinated liabilities
The movement in subordinated liabilities during the year was as follows:
At 1 January 2017
Issued during the year
Repurchases and redemptions during the year1
Foreign exchange movements
Other movements (all non-cash)
At 31 December 2017
1 The repurchases and redemptions resulted in cash outflows of £1,008 million.
Repurchases and redemptions during the year
Preferred securities
7.627% Fixed to Floating Rate Guaranteed Non-voting Non-cumulative
Preferred Securities
4.385% Step-up Perpetual Capital Securities callable 2017 (€750 million)
Dated subordinated liabilities
Subordinated Callable Notes 2017
There were no repurchases of preference shares or undated subordinated liabilities during the year.
At 1 January 2016
Issued during the year1
Tender offers and redemptions2
Other repurchases and redemptions during the year2
Foreign exchange movements
Other movements (all non-cash)
At 31 December 2016
Other repurchases and redemptions
Preference shares
Preference
shares
£m
980
–
–
(319)
127
76
864
Preferred
securities
£m
3,748
–
–
(182)
511
57
4,134
6.267% Non-Cumulative Callable Fixed to Floating Rate Preference shares callable 2016
Preferred securities
4.939% Non-voting Non-cumulative Perpetual Preferred Securities
7.286% Perpetual Regulatory Tier One Securities (Series A)
Undated subordinated liabilities
7.5% Undated Subordinated Step-up Notes
4.25% Subordinated Undated Instruments
Floating Rate Primary Capital Notes
Primary Capital Undated Floating Rate Notes3
5.125% Undated subordinated Step-up Notes callable 2016
Dated subordinated liabilities
Subordinated Fixed to Fixed Rate Notes 2021 callable 20164
Callable Floating Rate Subordinated Notes 2016
Subordinated Callable Notes 2016
Lloyds Banking Group Annual Report and Accounts 2017 215
Preference
shares
£m
864
–
–
(43)
(8)
813
Preferred
securities
£m
4,134
–
(237)
(221)
14
3,690
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
Total
£m
599
14,234
19,831
–
–
(34)
–
565
–
(771)
(487)
(122)
–
(1,008)
(785)
(116)
12,854
17,922
Undated
subordinated
liabilities
£m
Enhanced
capital notes
£m
Dated
subordinated
liabilities
£m
965
–
–
(475)
166
(57)
599
3,610
–
(3,568)
–
93
(135)
–
14,009
1,061
–
(3,070)
1,854
380
£m
163
74
237
£m
771
771
Total
£m
23,312
1,061
(3,568)
(4,046)
2,751
321
14,234
19,831
£m
319
£m
32
150
182
£m
5
7
108
353
2
475
£m
2,359
329
382
3,070
1 4.65% Subordinated Fixed Rate Notes 2026 (US$1,500 million).
2 In total, the tender offers, repurchases and redemptions resulted from cash outflows of £7,885 million.
3 Comprising Series 1 (£101 million), Series 2 (£142 million), Series 3 (£110 million).
4 Comprising notes with the following coupon rates: 13% (£244 million), 10.125% (£233 million), 11.875% (£960 million), 10.75% (£466 million), 9.875% (£456 million).
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
216 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 38: Subordinated liabilities continued
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 2017 (2016: none).
Note 39: 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
2017
Number of shares
2016
Number of shares
2015
Number of shares
2017
£m
2016
£m
2015
£m
Ordinary shares of 10p
(formerly 25p) each
At 1 January
71,373,735,357
71,373,735,357
71,373,735,357
7,138
7,138
7,138
Issued under employee share schemes
518,293,181
Redesignation of limited voting ordinary
shares (see below)
80,921,051
–
–
–
–
51
8
–
–
–
–
At 31 December
71,972,949,589
71,373,735,357
71,373,735,357
7,197
7,138
7,138
Limited voting ordinary shares
of 10p (formerly 25p) each
At 1 January
80,921,051
80,921,051
80,921,051
Redesignation to ordinary shares
(see below)
At 31 December
Total issued share capital
(80,921,051)
–
–
–
80,921,051
80,921,051
8
(8)
–
8
–
8
8
–
8
7,197
7,146
7,146
Share issuances
No shares were issued in 2015 or 2016; in 2017, 518 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 11 May 2017. 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, who held 100 per cent of the total ordinary share capital at 31 December 2017, 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 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
At the annual general meeting on 11 May 2017, the Company’s shareholders approved the redesignation of the 80,921,051 limited voting ordinary shares
held by the Lloyds Bank Foundations as ordinary shares of 10 pence each. The redesignation took effect on 1 July 2017 and the redesignated shares now rank
equally with the existing issued ordinary shares of the Company.
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 2017 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 38.
Note 40: Share premium account
At 1 January
Issued under employee share schemes
Redemption of preference shares1
At 31 December
Lloyds Banking Group Annual Report and Accounts 2017 217
2017
£m
2016
£m
2015
£m
17,622
17,412
17,281
12
–
–
210
–
131
17,634
17,622
17,412
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).
Note 41: Other reserves
Other reserves comprise:
Merger reserve
Capital redemption reserve
Revaluation reserve in respect of available-for-sale financial assets
Cash flow hedging reserve
Foreign currency translation reserve
At 31 December
2017
£m
2016
£m
2015
£m
7,766
4,115
685
1,405
(156)
13,815
7,766
4,115
759
2,136
(124)
14,652
7,976
4,115
(438)
727
(120)
12,260
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 distributable reserve in accordance with companies’ legislation upon the redemption of ordinary
and preference share capital.
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 40)
At 31 December
2017
£m
7,766
–
7,766
2016
£m
7,976
(210)
7,766
2015
£m
8,107
(131)
7,976
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
218 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 41: 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
2017
£m
759
–
–
–
303
(26)
(4)
273
(446)
93
–
(353)
6
–
6
685
2017
£m
2,136
(363)
121
(242)
(651)
162
(489)
1,405
2017
£m
(124)
(21)
(11)
(156)
2016
£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)
2015
£m
(67)
–
–
–
(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)
Note 42: Retained profits
At 1 January
Profit for the year
Dividends paid1
Distributions on other equity instruments (net of tax)
Post-retirement defined benefit scheme remeasurements
Gains and losses attributable to own credit risk (net of tax) 2
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
At 31 December
Lloyds Banking Group Annual Report and Accounts 2017 219
2017
£m
3,600
3,457
(2,284)
(313)
482
(40)
(411)
82
332
4,905
2016
£m
4,416
2,413
(2,014)
(321)
(1,028)
–
(175)
141
168
3,600
2015
£m
5,692
860
(1,070)
(314)
(215)
–
(816)
107
172
4,416
1 Net of a credit in respect of unclaimed dividends written-back in accordance with the Company’s Articles of Association.
2 During 2017 the Group derecognised, on redemption, financial liabilities on which cumulative fair value movements relating to own credit of £3 million (net of tax) had been recognised
directly in retained profits.
Retained profits are stated after deducting £611 million (2016: £495 million; 2015: £740 million) representing 861 million (2016: 730 million; 2015: 943 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 139.
Note 43: Other equity instruments
At 1 January and 31 December
2017
£m
5,355
2016
£m
5,355
2015
£m
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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
220 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 44: 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 2.05 pence
per share (2016: 1.7 pence per share; 2015: 1.5 pence per share) representing a total dividend of £1,475 million (2016: £1,212 million; 2015: £1,070 million),
which will be paid on 29 May 2018. At 31 December 2016 the directors also recommended a special dividend of 0.5 pence per share (2015: 0.5 pence per
share) representing a total dividend of £356 million (2015: £357 million). The financial statements do not reflect 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
2017
pence
per share
2016
pence
per share
2015
pence
per share
2017
£m
2016
£m
2015
£m
1.70
0.50
1.00
3.20
1.50
0.50
0.85
2.85
0.75
–
0.75
1.50
1,212
356
720
2,288
1,070
357
607
2,034
535
–
535
1,070
The cash cost of the dividends paid in the year was £2,284 million (2016: £2,014 million; 2015: £1,070 million), net of a credit in respect of unclaimed
dividends written-back in accordance with the Company's Articles of Association.
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 2017: 12,414,401 shares, 31 December 2016: 27,898,019 shares, waived rights to all dividends), the HBOS Share Incentive Plan Trust (holding
at 31 December 2017: 445,625 shares, 31 December 2016: 445,625 shares, waived rights to all dividends), the Lloyds Banking Group Employee Share
Ownership Trust (holding at 31 December 2017: 13,346,132 shares, 31 December 2016: 10,699,978 shares, on which it waived rights to all dividends) and
Lloyds Group Holdings (Jersey) Limited (holding at 31 December 2017: 42,846 shares, 31 December 2016: 42,846 shares, waived rights to all but a nominal
amount of one penny in total).
Note 45: 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
2017
£m
313
17
81
98
17
9
26
437
2016
£m
266
16
138
154
15
7
22
442
2015
£m
255
12
99
111
15
6
21
387
During the year ended 31 December 2017 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 2017 have been
recognised in the charge in line with the proportion of the deferral period completed.
Lloyds Banking Group Annual Report and Accounts 2017 221
Note 45: 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:
Outstanding at 1 January
Granted
Exercised
Forfeited
Cancelled
Expired
Outstanding at 31 December
Exercisable at 31 December
2017
2016
Number of
options
678,692,896
268,653,890
(13,119,229)
(18,545,569)
(41,211,075)
(13,603,825)
860,867,088
–
Weighted
average
exercise price
(pence)
51.76
51.03
55.58
51.70
52.77
56.98
51.34
–
Number of
options
850,146,220
454,667,560
(401,286,043)
(10,590,490)
(204,238,535)
(10,005,816)
678,692,896
–
Weighted
average
exercise price
(pence)
50.99
47.49
40.74
56.02
60.23
57.08
51.76
–
The weighted average share price at the time that the options were exercised during 2017 was £0.67 (2016: £0.67). The weighted average remaining
contractual life of options outstanding at the end of the year was 1.4 years (2016: 2.9 years).
The weighted average fair value of SAYE options granted during 2017 was £0.15 (2016: £0.13). The fair values of the SAYE options have been determined
using a standard Black-Scholes model.
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 in some instances, the grant may be subject to 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.
Options granted on 27 March 2014 under the Commercial Banking Transformation Plan (CBTP), became exercisable in March 2017 and vested at a
factor of 2.1 from the original ‘on-target’ award, due to the degree to which the performance conditions were exceeded. The award was based upon the
underlying profit and return on risk-weighted assets (‘RoRWA’) of Commercial Banking as at 31 December 2016.
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
2017
2016
Number of
options
218,962,281
5,466,405
(104,967,667)
(81,883)
(104,855,147)
14,523,989
7,729,919
Weighted
average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
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
The weighted average fair value of options granted in the year was £0.62 (2016: £0.68). 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 2017 was £0.69 (2016: £0.64). The
weighted average remaining contractual life of options outstanding at the end of the year was 4.9 years (2016: 5.1 years).
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
222 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 45: 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.
For the 2015 and 2016 LTIPs 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 2014 grant, the targets had not been fully met and therefore these awards vested in 2017 at a rate
of 55 per cent.
Outstanding at 1 January
Granted
Vested
Forfeited
Dividend award
Outstanding at 31 December
2017
Number of
shares
2016
Number of
shares
358,228,028
398,066,746
139,812,788
132,194,032
(57,406,864)
(140,879,465)
(73,268,966)
(33,713,900)
3,439,929
2,560,615
370,804,915
358,228,028
Awards in respect of the 2015 grant will vest in 2018 at a rate of 66.3 per cent.
The weighted average fair value of awards granted in the year was £0.57 (2016: £0.64).
The fair value calculations at 31 December 2017 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
0.59%
Executive
Share Plan
2003
0.18%
LTIP
0.22%
3.3 years
1.9 years
3.6 years
29%
4.0%
£0.68
£0.51
30%
4.0%
£0.67
nil
31%
0.0%
£0.68
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.
Share Incentive Plan
Free Shares
An award of shares may be made annually to employees up to a maximum of £3,000. The shares awarded 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 the Group within this three year period for other than a ‘good’ reason, all of the shares awarded will be forfeited.
On 10 May 2017, the Group made an award of £200 of shares to all eligible employees. The number of shares awarded was 21,566,047, with an average
fair value of 0.69 based on the market price at the date of award.
Matching shares
The Group undertakes to match shares purchased by employees up to the value of £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 2017 was 32,025,497 (2016: 35,956,224), with an average fair value of £0.67 (2016: £0.61),
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 2017 was 9,313,314 (2016: 10,031,272).
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.
Lloyds Banking Group Annual Report and Accounts 2017 223
Note 46: 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
2017
£m
2016
£m
2015
£m
13
–
22
35
17
–
23
40
14
–
18
32
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £0.05 million (2016: £0.1 million;
2015: £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
2017
million
2016
million
2015
million
3
–
(2)
1
9
3
(9)
3
13
3
(7)
9
2017
million
2016
million
2015
million
65
37
(20)
82
82
29
(46)
65
102
37
(57)
82
The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information
relating to other transactions between the Group and its key management personnel:
Loans
At 1 January
Advanced (includes loans of appointed key management personnel)
Repayments (includes loans of former key management personnel)
At 31 December
2017
£m
2016
£m
2015
£m
4
1
(3)
2
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 6.45 per cent
and 23.95 per cent in 2017 (2016: 2.49 per cent and 23.95 per cent; 2015: 3.99 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
2017
£m
12
41
(33)
20
2016
£m
13
41
(42)
12
2015
£m
16
58
(61)
13
Deposits placed by key management personnel attracted interest rates of up to 4.0 per cent (2016: 4.0 per cent; 2015: 4.7 per cent).
At 31 December 2017, the Group did not provide any guarantees in respect of key management personnel (2016 and 2015: none).
At 31 December 2017, 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 £0.01 million with three directors and two connected persons
(2016: £0.4 million with five directors and two connected persons; 2015: £1 million with four directors and six connected persons).
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
224 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 46: Related party transactions continued
Subsidiaries
Details of the Group’s subsidiaries and related undertakings are provided on pages 268–274. 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 2017, customer deposits of
£337 million (2016: £171 million) and investment and insurance contract liabilities of £307 million (2016: £406 million) related to the Group’s pension funds.
Collective investment vehicles
The Group manages 134 (2016: 139) collective investment vehicles, such as Open Ended Investment Companies (OEICs) and of these 83 (2016: 83)
are consolidated. The Group invested £418 million (2016: £265 million) and redeemed £616 million (2016: £826 million) in the unconsolidated collective
investment vehicles during the year and had investments, at fair value, of £2,328 million (2016: £2,405 million) at 31 December. The Group earned fees of
£133 million from the unconsolidated collective investment vehicles during 2017 (2016: £192 million).
Joint ventures and associates
At 31 December 2017 there were loans and advances to customers of £123 million (2016: £173 million) outstanding and balances within customer deposits
of £9 million (2016: £15 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 2017, these companies had total assets of approximately £4,661 million (2016: £4,712 million), total liabilities
of approximately £5,228 million (2016: £5,033 million) and for the year ended 31 December 2017 had turnover of approximately £4,601 million
(2016: £4,401 million) and made a loss of approximately £87 million (2016: net loss of £27 million). In addition, the Group has provided £1,226 million
(2016: £1,550 million) of financing to these companies on which it received £81 million (2016: £127 million) of interest income in the year.
Note 47: 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 competition investigations against MasterCard and Visa probing, amongst other things, MIFs paid in
respect of cards issued outside the EEA.
– Litigation brought by retailers continues in the English Courts against both Visa and MasterCard.
– Any ultimate impact on the Group of the above investigations and litigation against Visa and MasterCard remains uncertain at this time.
Visa Inc completed its acquisition of Visa Europe on 21 June 2016. 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, previously 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. Certain of the plaintiffs’ claims, including those in connection with USD and JPY LIBOR, have been dismissed by the US Federal
Court for Southern District of New York, and decisions are awaited on the Group’s motions to dismiss the Sterling LIBOR and BBSW claims. The decisions
leading to the Group’s dismissal from the USD LIBOR claims are subject to two appeals; the first took place on 25 September 2017 and a decision is
expected in the first quarter of 2018, and the second is expected to take place in the first half of 2018. The decisions leading to the Group’s dismissal from
the JPY LIBOR claims are not presently subject to appeal.
Certain Group companies are also named as defendants in: (i) UK based claims; and (ii) in a Dutch class action, each raising LIBOR manipulation
allegations. A number of the claims against the Group in relation to the alleged mis-sale of Interest Rate Hedging Products also include allegations of
LIBOR manipulation.
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.
UK shareholder litigation
In August 2014, the Group and a number of former directors were named as defendants in a claim 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. The defendants refute all claims made. A trial commenced in the English High Court on 18 October
2017 and is scheduled to conclude in the first quarter of 2018 with judgment to follow. It is currently not possible to determine the ultimate impact on the
Group (if any).
Lloyds Banking Group Annual Report and Accounts 2017 225
Note 47: Contingent liabilities and commitments continued
Financial Services Compensation Scheme
Following the default of a number of deposit takers in 2008, the Financial Services Compensation Scheme (FSCS) borrowed funds from HM Treasury
to meet the compensation costs for customers of those firms. In June 2017, the FSCS announced that following the sale of certain Bradford & Bingley
mortgage assets, the principal balance outstanding on the HM Treasury loan was £4,678 million (31 December 2016: £15,655 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, including the Group, of the FSCS. The amount
of future levies payable by the Group depends on a number of factors, principally, the amounts recovered by the FSCS from asset sales.
Tax authorities
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 which allow 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 £650 million
(including interest) and a reduction in the Group’s deferred tax asset of approximately £350 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 which 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 and has published 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 Group is now determining its detailed approach to implementation of the Guidance and will contact affected customers
during 2018.
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.
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. In these circumstances, specific disclosure in
relation to a contingent liability will be made where material. 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.
Contingent liabilities
Acceptances and endorsements
Other:
Other items serving as direct credit substitutes
Performance bonds and other transaction-related contingencies
Total contingent liabilities
2017
£m
71
740
2,300
3,040
3,111
2016
£m
21
779
2,237
3,016
3,037
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
2017
£m
384
2016
£m
648
11,156
81,883
93,039
36,386
10,749
62,697
73,446
40,074
129,809
114,168
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £60,126 million
(2016: £63,203 million) was irrevocable.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
226 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 47: Contingent liabilities and commitments continued
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
2017
£m
275
845
934
2016
£m
264
855
944
2,054
2,063
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 2017 amounted
to £444 million (2016: £543 million). Of this amount, £440 million (2016: £541 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.
Note 48: 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.
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
Loans and
receivables
£m
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
At 31 December 2017
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
1,881
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
Derivative financial instruments
1,613
1,881
66,189
120,642
–
–
42,236
23,953
–
–
–
–
–
–
–
120,642
–
–
–
–
–
–
–
–
–
43,062
24,511
–
–
–
–
–
–
–
–
–
7,815
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
42,098
42,098
–
–
–
–
6,611
472,498
3,643
482,752
–
58,521
755
–
–
–
–
–
–
–
482,752
59,276
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
29,804
418,124
584
–
–
1,313
72,450
–
–
–
17,922
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
58,521
755
162,878
25,834
6,611
472,498
3,643
482,752
42,098
772,838
29,804
418,124
584
50,877
26,124
1,313
72,450
103,413
103,413
15,447
15,447
390
–
390
17,922
1,613
67,573
7,815
540,197
119,250
736,448
Lloyds Banking Group Annual Report and Accounts 2017 227
Note 48: 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
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
–
–
–
Derivative financial instruments
2,712
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
–
–
45,253
33,426
–
–
–
–
–
–
–
105,921
–
–
–
–
–
–
–
–
–
–
–
2,712
78,679
105,921
–
–
–
–
–
–
–
–
–
–
45,079
9,425
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,964
78,039
9,425
–
–
–
–
–
–
–
–
56,524
56,524
–
–
–
–
26,902
457,958
3,397
488,257
–
47,452
706
–
–
–
–
–
–
–
488,257
48,158
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,384
415,460
548
–
–
1,402
76,314
–
–
–
19,831
529,939
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
94,390
94,390
20,112
20,112
243
–
114,745
243
19,831
734,112
Derivative financial instruments
1,964
32,960
(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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
228 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 48: Financial instruments continued
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.
Lloyds Banking Group Annual Report and Accounts 2017 229
Note 48: 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 233. 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 151.
(A) Financial assets, excluding derivatives
Valuation hierarchy
At 31 December 2017, the Group’s financial assets carried at fair value, excluding derivatives, totalled £204,976 million (31 December 2016: £207,698 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 228). 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 2017
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
–
–
29,976
1,614
20,268
–
–
3
5
–
20,276
84,694
18
1,729
1,526
222
348
229
18,542
22,596
18
–
–
–
23
1
–
49
787
1,448
2,308
1,378
–
29,976
1,614
22,020
1,527
222
400
1,021
19,990
45,180
86,090
18
Total trading and other financial assets at fair value through profit or loss
104,988
54,204
3,686
162,878
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
34,534
–
–
–
229
34,763
555
35,318
140,306
174
167
1,156
163
4,386
6,046
38
6,084
60,288
–
–
–
92
–
92
604
696
34,708
167
1,156
255
4,615
40,901
1,197
42,098
4,382
204,976
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
230 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 48: Financial instruments continued
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
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
–
–
24,959
–
–
–
4
112
25,075
66,147
20
91,242
48,542
–
–
–
107
48,649
435
49,084
140,326
30,473
2,606
1,773
1,279
244
654
1,092
17,968
23,010
37
–
56,126
172
142
108
184
5,923
6,529
17
6,546
62,672
–
–
–
46
–
53
442
1,752
2,293
1,513
–
3,806
–
–
–
133
–
133
761
894
30,473
2,606
26,732
1,325
244
707
1,538
19,832
50,378
67,697
20
151,174
48,714
142
108
317
6,030
55,311
1,213
56,524
4,700
207,698
Movements in Level 3 portfolio
The table below analyses movements in level 3 financial assets, excluding derivatives, carried at fair value (recurring measurement).
At 1 January
Exchange and other adjustments
Gains recognised in the income statement
within other income
(Losses) 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
2017
2016
Trading and
other
financial
assets at fair
value through
profit or loss
£m
3,806
(1)
202
–
774
(1,005)
152
(242)
3,686
Total level 3
assets carried
at fair value,
excluding
derivatives
(recurring basis)
£m
4,700
(25)
Available-
for-sale
£m
894
(24)
–
202
(117)
41
(61)
2
(39)
696
(117)
815
(1,066)
154
(281)
4,382
Trading and
other financial
assets at fair
value through
profit or loss
£m
Total level 3
assets carried at
fair value,
excluding
derivatives
(recurring basis)
£m
Available-
for-sale
£m
5,116
8
437
–
833
(2,597)
186
(177)
3,806
684
12
–
312
258
(527)
155
–
894
5,800
20
437
312
1,091
(3,124)
341
(177)
4,700
Gains recognised in the income statement, within other
income, relating to the change in fair value of those assets held
at 31 December
125
–
125
642
–
642
Lloyds Banking Group Annual Report and Accounts 2017 231
Note 48: Financial instruments continued
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.
(B) Financial liabilities, excluding derivatives
Valuation hierarchy
At 31 December 2017, 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 £50,877 million (31 December 2016: £54,504 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 228). The fair value measurement approach is recurring in nature. There
were no significant transfers between level 1 and 2 during the year.
At 31 December 2017
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
Total financial liabilities carried at fair value, excluding derivatives
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
Other deposits
Short positions in securities
Total financial liabilities carried at fair value, excluding derivatives
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
3
–
–
1,106
1,106
1,109
–
–
–
2,417
2,417
2,417
7,812
41,378
381
197
41,956
49,768
9,423
42,067
530
65
42,662
52,085
–
–
–
–
–
–
2
–
–
–
–
2
7,815
41,378
381
1,303
43,062
50,877
9,425
42,067
530
2,482
45,079
54,504
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
232 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 48: Financial instruments continued
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
2016 or 2017.
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
2017
£m
2
(2)
–
–
–
2016
£m
1
1
–
2
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. From 1 January 2017,
the resulting gain or loss is recognised in other comprehensive income (see note 1).
At 31 December 2017, the own credit adjustment arising from the fair valuation of £7,812 million (2016: £9,423 million) of the Group’s debt securities
in issue designated at fair value through profit or loss resulted in a loss of £55 million, recognised in other comprehensive income (2016: loss of £28 million,
recognised in the income statement).
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 2017, such assets totalled £25,834 million (31 December
2016: £36,138 million) and liabilities totalled £26,124 million (31 December 2016: £34,924 million). The table below analyses these derivative balances by
valuation methodology (level 1, 2 or 3, as described on page 228). 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
Level 1
£m
246
(587)
2017
Level 2
£m
24,532
(24,733)
Level 3
£m
1,056
(804)
Total
£m
25,834
(26,124)
Level 1
£m
270
(358)
2016
Level 2
£m
34,469
(33,606)
Level 3
£m
1,399
(960)
Total
£m
36,138
(34,924)
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.
Certain unobservable inputs are used to calculate CVA, FVA, and own credit adjustments, but are not considered significant in determining the
classification of the derivative and debt portfolios. Consequently, those inputs do not form part of the Level 3 sensitivities presented.
Lloyds Banking Group Annual Report and Accounts 2017 233
Note 48: Financial instruments continued
The table below analyses movements in level 3 derivative assets and liabilities carried at fair value.
At 1 January
Exchange and other adjustments
Losses (gains) 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
2017
2016
Derivative
assets
£m
1,399
24
(208)
103
(79)
–
33
(216)
1,056
Derivative
liabilities
£m
(960)
(20)
215
(18)
53
–
(74)
–
(804)
Derivative
assets
£m
1,469
74
220
24
(91)
(476)
216
(37)
1,399
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
(208)
213
284
Derivative
liabilities
£m
(723)
(53)
(299)
(13)
128
–
–
–
(960)
(262)
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 2016 and 2017:
At 1 January
Income statement charge (credit)
Transfers
At 31 December
Represented by:
Credit Valuation Adjustment
Debit Valuation Adjustment
Funding Valuation Adjustment
2017
£m
744
(260)
37
521
2017
£m
408
(37)
150
521
2016
£m
598
163
(17)
744
2016
£m
685
(123)
182
744
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
£82 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 (although no such adjustment was required
at 31 December 2017).
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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
234 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 48: Financial instruments continued
A one per cent rise in the CDS spread would lead to an increase in the DVA of £96 million to £133 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 £186 million fall in the overall valuation adjustment to £185 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 £26 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 2017, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £74 million (2016: £96 million).
(D) Sensitivity of level 3 valuations
At 31 December 2017
At 31 December 2016
Effect of reasonably possible
alternative assumptions2
Effect of reasonably possible
alternative assumptions2
Significant unobservable
inputs1
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Valuation techniques
Trading and other financial assets at fair value
through profit or loss
Debt securities
Asset-backed
securities
Equity and venture
capital investments
Discounted
cash flows
Lead manager
or broker quote
Market approach
Credit spreads (bps)
(1bps/2bps)
n/a
Earnings multiple
(0.9/14.4)
Underlying asset/net asset
value (incl. property
prices)3
Unlisted equities,
debt securities and
property partnerships
in the life funds
Underlying asset/net asset
value (incl. property
prices), broker quotes or
discounted cash flows3
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
Interest rate
derivatives
Option pricing
model
Interest rate volatility
(9%/94%)
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
(9%/94%)
Level 3 financial liabilities carried at fair value
11
–
1,879
50
1,746
3,686
–
–
65
5
–
–
29
59
(65)
2,163
(5)
54
26
(76)
1,501
3,806
92
–
(4)
133
604
696
1,056
1,056
5,438
–
804
804
804
83
(42)
11
(3)
–
–
–
–
761
–
894
1,399
1,399
6,099
2
960
960
962
5
–
63
2
–
–
48
–
(5)
–
(68)
(3)
(32)
–
(53)
–
(3)
(19)
–
–
–
–
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.
Lloyds Banking Group Annual Report and Accounts 2017 235
Note 48: 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 9 per cent to 94 per cent
(2016: nil per cent to 115 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.
(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 228). 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.
At 31 December 2017
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 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
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Valuation hierarchy
467,670
467,276
4,828
4,809
472,498
472,085
6,611
3,643
6,564
3,586
16,832
16,832
771
771
451,339
6,619
457,958
26,902
3,397
8,304
902
450,986
6,475
457,461
26,812
3,303
8,304
902
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,832
450,444
–
4,809
16,832
455,253
771
3,571
16,832
771
–
–
–
–
3,288
–
–
5,793
15
–
–
450,986
6,475
457,461
26,812
15
8,304
902
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
236 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 48: Financial instruments continued
Valuation methodology
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.
(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 228).
At 31 December 2017
Deposits from banks
Customer deposits
Debt securities in issue
Subordinated liabilities
Repos included in above amounts:
Deposits from banks
Customer deposits
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
Valuation methodology
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Valuation hierarchy
29,804
29,798
418,124
418,441
72,450
17,922
23,175
2,638
16,384
415,460
76,314
19,831
7,279
2,462
75,756
21,398
23,175
2,638
16,395
416,490
79,650
22,395
7,279
2,462
–
–
–
–
–
–
–
–
–
–
–
–
29,798
411,591
75,756
21,398
23,175
2,638
16,395
408,571
79,434
22,395
7,279
2,462
–
6,850
–
–
–
–
–
7,919
216
–
–
–
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.
Lloyds Banking Group Annual Report and Accounts 2017 237
Note 48: Financial instruments continued
(5) Reclassifications of financial assets
There have been no reclassifications of financial assets in 2017.
During 2016, the Group reassessed its holding of government securities classified as held-to-maturity in light of the low interest rate environment at that
time and they were 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).
Note 49: 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 18, 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 30). 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
2017
2016
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
9,946
19,359
3,257
16,753
10,256
24,681
3,380
21,809
–
–
583
–
35,475
3,660
52,184
7,253
1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £21,582 million (31 December 2016: £26,435 million).
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
238 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 50: 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 2017
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
Potential
net amounts
if offset
of related
amounts
permitted
£m
–
131,288
(7,292)
(7,292)
(47,035)
31,590
162,878
25,834
–
–
–
5,840
771
6,611
–
–
–
(5,419)
(2,293)
(646)
(2,939)
(3,322)
127,966
(31,590)
(34,912)
(13,807)
–
127,966
6,608
–
(125)
(125)
3,547
–
3,547
(1,716)
455,666
(1,656)
(7,030)
446,980
–
16,832
–
(1,716)
472,498
(1,656)
3,643
42,098
–
–
(16,832)
(23,862)
(16,751)
–
446,980
3,643
25,347
131,288
38,882
170,170
72,869
5,840
771
6,611
457,382
16,832
474,214
3,643
42,098
6,629
23,175
29,804
–
–
–
–
–
6,629
23,175
29,804
(4,860)
–
(4,860)
–
1,769
(23,175)
(23,175)
–
1,769
417,009
(1,523)
415,486
(1,205)
2,638
–
2,638
–
419,647
(1,523)
418,124
(1,205)
(7,030)
(2,638)
(9,668)
407,251
–
407,251
9,499
48,670
58,169
73,352
–
(7,292)
(7,292)
(47,228)
9,499
41,378
50,877
26,124
–
–
–
(3,949)
–
9,499
(41,378)
(41,378)
(17,459)
–
9,499
4,716
Lloyds Banking Group Annual Report and Accounts 2017 239
Note 50: Offsetting of financial assets and liabilities continued
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
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
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
–
(2,219)
(2,219)
(56,252)
–
–
–
(1,636)
–
(1,636)
–
–
–
–
–
(2,155)
–
(2,155)
–
(2,219)
(2,219)
(55,733)
118,095
33,079
151,174
36,138
26,000
902
26,902
449,654
8,304
457,958
3,397
56,524
9,105
7,279
16,384
412,998
2,462
415,460
12,437
42,067
54,504
34,924
–
–
–
(6,472)
(2,826)
–
(2,826)
(1,793)
–
(1,793)
–
–
(5,080)
–
(5,080)
(1,391)
–
(1,391)
–
–
–
(4,620)
(3,265)
114,830
(33,079)
(36,344)
(19,906)
–
(902)
(902)
(6,331)
(8,304)
(14,635)
–
(21,475)
(695)
(7,279)
(7,974)
(6,331)
(2,462)
(8,793)
–
(42,067)
(42,067)
(24,820)
–
114,830
9,760
23,174
–
23,174
441,530
–
441,530
3,397
35,049
3,330
–
3,330
405,276
–
405,276
12,437
–
12,437
5,484
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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
240 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 51: 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 107–156. 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 2017 the aggregate notional principal of interest rate swaps designated as fair value hedges was £109,670 million (2016: £194,416 million)
with a net fair value asset of £738 million (2016: asset of £725 million) (note 16). The losses on the hedging instruments were £420 million (2016: losses of
£1,946 million). The gains on the hedged items attributable to the hedged risk were £484 million (2016: gains of £2,017 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 2017 was £549,099 million (2016: £384,182 million) with a net fair value liability of
£456 million (2016: liability of £352 million) (note 16). In 2017, ineffectiveness recognised in the income statement that arises from cash flow hedges was a
loss of £21 million (2016: gain of £24 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 155.
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 2017
the aggregate principal of these currency borrowings was £41 million (2016: £695 million). In 2017, an ineffectiveness loss of £11 million before tax and
£8 million after tax (2016: ineffectiveness loss of £2 million before tax and £1 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
2017
2016
Euro
£m
73
(41)
32
US Dollar
£m
Other
non-sterling
£m
374
–
374
32
–
32
Euro
£m
247
(216)
31
US Dollar
£m
Other
non-sterling
£m
479
(479)
–
36
–
36
Lloyds Banking Group Annual Report and Accounts 2017 241
Note 51: 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 107–156.
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 2017
At 31 December 2016
Loans and receivables:
Loans and advances to banks, net1
Loans and advances to customers, net1
Debt securities, net1
Available-for-sale financial assets3
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
6,611
472,498
3,643
482,752
40,901
31,590
45,198
76,788
25,834
602
5,820
71
740
2,300
60,126
63,237
Offset2
£m
Net exposure
£m
–
6,611
(7,030)
465,468
–
3,643
(7,030)
475,722
–
–
–
–
(13,049)
–
–
–
–
–
–
–
40,901
31,590
45,198
76,788
12,785
602
5,820
71
740
2,300
60,126
63,237
695,934
(20,079)
675,855
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
737,020
Offset2
£m
Net exposure
£m
–
(6,331)
–
(6,331)
–
–
–
–
(18,539)
–
–
–
–
–
–
–
(24,870)
26,902
451,627
3,397
481,926
55,311
33,079
50,398
83,477
17,599
714
6,883
21
779
2,237
63,203
66,240
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 116.
At 31 December 2017 the most significant concentrations of exposure were in mortgages (comprising 64 per cent of total loans and advances to
customers) and to financial, business and other services (comprising 12 per cent of the total). For further information on concentrations of the Group’s
loans, refer to note 17.
Following the continuing reduction in the Group’s non-UK activities, an analysis of credit risk exposures by geographical region has not been provided.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
242 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 51: Financial risk management continued
C. Credit quality of assets
Loans and receivables
The disclosures in the table below and those on page 243 are produced under the underlying basis used for the Group’s segmental reporting. The Group
believes that, for reporting periods following a significant acquisition 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.
Loans and advances
At 31 December 2017
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 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
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
6,577
295,765
48,897
116,396
461,058
31,590
6
28
–
5,934
640
3,529
6,611
305,868
585
306
1,053
50,841
336
700
1,613
6,855
1,646
6,195
–
–
–
119,045
475,754
31,590
–
–
6,611
(1,604)
(655)
(1,183)
(3,442)
186
–
–
472,498
31,590
26,888
296,303
39,478
109,364
445,145
33,079
14
–
–
7,340
784
3,536
26,902
307,963
(1,696)
–
–
26,902
386
392
1,038
41,294
(458)
305
689
2,056
112,414
(1,378)
8,031
1,865
6,630
–
–
–
461,671
33,079
(3,532)
(181)
–
–
457,958
33,079
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 £2,465 million
(31 December 2016: £2,870 million).
The table below sets out the reconciliation of the allowance for impairment losses of £2,201 million (2016: £2,412 million) shown in note 20 to the allowance
for impairment losses on an underlying basis of £3,442 million (2016: £3,532 million) shown above:
Allowance for impairment losses on loans and advances to customers
Impairment allowance of HBOS and MBNA at acquisition1
Impairment charge covered by fair value adjustments
Amounts subsequently written off, net of foreign exchange and other movements
Allowance for impairment losses on loans and advances to customers on an underlying basis
2017
£m
2,201
11,309
12,321
(22,389)
3,442
2016
£m
2,412
11,147
12,236
(22,263)
3,532
1 Comprises an allowance in respect of HBOS (£11,147 million) and, in 2017, MBNA (£162 million). These amounts impact the impairment allowance on an underlying basis but not on a
statutory basis.
Lloyds Banking Group Annual Report and Accounts 2017 243
Note 51: Financial risk management continued
Loans and advances which are neither past due nor impaired
At 31 December 2017
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 2016
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
6,351
198
28
–
294,748
790
32
195
43,145
4,770
286
696
81,121
30,154
4,807
314
Loans and
advances
designated
at fair value
through
profit or loss
£m
31,548
42
–
–
6,577
295,765
48,897
116,396
461,058
31,590
26,745
295,286
87
3
53
814
39
164
34,195
4,479
387
417
72,083
30,433
6,433
415
33,049
30
–
–
26,888
296,303
39,478
109,364
445,145
33,079
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 116.
Loans and advances which are past due but not impaired
At 31 December 2017
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 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
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
6
–
–
–
–
6
14
–
–
–
–
14
3,057
1,115
785
977
–
5,934
3,547
1,573
985
1,235
–
7,340
458
111
3
3
10
585
285
75
2
6
18
386
246
10
13
8
59
3,761
1,236
801
988
69
336
6,855
157
37
74
14
23
305
3,989
1,685
1,061
1,255
41
8,031
–
–
–
–
–
–
–
–
–
–
–
–
A financial asset is ‘past due’ if a counterparty has failed to make a payment when contractually due.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
244 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 51: 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’.
2017
2016
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
2,366
1,164
3,530
27
3,557
–
96
96
16
112
2,366
1,260
3,626
43
3,669
(26)
3,643
2,089
1,192
3,281
29
3,310
–
98
98
65
163
2,089
1,290
3,379
94
3,473
(76)
3,397
2 Other comprises sub-investment grade (2017: £89 million; 2016: £91 million) and not rated (2017: £23 million; 2016: £72 million).
Available-for-sale financial assets (excluding equity shares)
An analysis of the Group’s available-for-sale financial assets is included in note 21. 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’.
Investment
grade1
£m
2017
Other2
£m
2016
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
34,708
167
1,156
235
1,391
4,250
40,516
–
–
–
20
20
365
385
34,708
167
1,156
255
1,411
4,615
40,901
48,714
142
108
312
420
6,030
55,306
–
–
–
5
5
–
5
48,714
142
108
317
425
6,030
55,311
2 Other comprises sub-investment grade (2017: £9 million; 2016: £5 million) and not rated (2017: £376 million; 2016: £nil).
Lloyds Banking Group Annual Report and Accounts 2017 245
Note 51: 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:
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
Corporate and other debt securities
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’.
2017
2016
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
9,833
–
9,833
11,828
84
95
179
469
10,481
12,180
1,519
222
208
924
1,132
17,343
32,396
18
32,414
42,895
105
–
105
54
159
7
8
–
3
2
5
2,124
2,144
–
2,144
2,303
189
95
284
523
47
69
116
221
10,640
12,165
12,187
1,527
222
211
926
1,137
19,467
34,540
18
34,558
45,198
14,904
1,318
244
633
1,178
1,811
17,445
35,722
20
35,742
47,907
–
–
–
–
3
3
–
7
–
27
291
318
2,163
2,488
–
2,488
2,491
11,828
47
69
116
224
12,168
14,904
1,325
244
660
1,469
2,129
19,608
38,210
20
38,230
50,398
2 Other comprises sub-investment grade (2017: £331 million; 2016: £485 million) and not rated (2017: £1,972 million; 2016: £2,006 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.
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 £12,785 million
(2016: £17,599 million), cash collateral of £5,419 million (2016: £6,472 million) was held and a further £275 million was due from OECD banks
(2016: £613 million).
Trading and other
Hedging
Total derivative financial instruments
1 Credit ratings equal to or better than ‘BBB’.
Investment
grade1
£m
21,742
1,874
23,616
2017
Other2
£m
2,211
7
2,218
Total
£m
23,953
1,881
25,834
Investment
grade1
£m
31,373
2,664
34,037
2016
Other2
£m
2,053
48
2,101
Total
£m
33,426
2,712
36,138
2 Other comprises sub-investment grade (2017: £1,878 million; 2016: £1,830 million) and not rated (2017: £340 million; 2016: £271 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 117. 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
246 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 51: Financial risk management continued
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 £771 million (2016: £902 million), against which the Group held collateral with a fair value of £796 million (2016: £785 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.
2017
2016
Neither
past due
nor impaired
£m
Past due but
not impaired
£m
Impaired
£m
Gross
£m
Neither
past due
nor impaired
£m
Past due but
not impaired
£m
Less than 70 per cent
217,070
4,309
2,443
223,822
220,497
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
43,045
25,497
7,085
3,068
787
500
177
161
595
436
245
450
44,427
26,433
7,507
3,679
39,789
23,589
7,983
4,445
5,288
1,004
621
223
204
Impaired
£m
2,334
648
495
355
488
Gross
£m
228,119
41,441
24,705
8,561
5,137
Total
295,765
5,934
4,169
305,868
296,303
7,340
4,320
307,963
Other
The majority of non-mortgage retail lending is unsecured. At 31 December 2017, impaired non-mortgage lending amounted to £817 million, net of an
impairment allowance of £542 million (2016: £972 million, net of an impairment allowance of £458 million). The fair value of the collateral held in respect
of this lending was £154 million (2016: £139 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 £49,482 million (2016: £39,864 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 2017 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of £16,832 million
(2016: £8,304 million), against which the Group held collateral with a fair value of £17,122 million (2016: £7,490 million), 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 £nil
(2016: £8 million). 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 2017, impaired secured commercial lending amounted to £698 million, net of an impairment allowance of £242 million
(2016: £204 million, net of an impairment allowance of £401 million). The fair value of the collateral held in respect of impaired secured commercial lending
was £797 million (2016: £1,160 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 £48,120 million (2016: £36,275 million).
Lloyds Banking Group Annual Report and Accounts 2017 247
Note 51: Financial risk management continued
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 £31,590 million (2016: £33,079 million). Collateral is held with a fair value of £39,099 million (2016: £30,850 million), all of which the Group is
able to repledge. At 31 December 2017, £31,281 million had been repledged (2016: £27,303 million).
In addition, securities held as collateral in the form of stock borrowed amounted to £61,469 million (2016: £47,816 million). Of this amount, £44,432 million
(2016: £16,204 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 £12,785 million (2016: £17,599 million), cash collateral
of £5,419 million (2016: £6,472 million) was held.
Irrevocable loan commitments and other credit-related contingencies
At 31 December 2017, the Group held irrevocable loan commitments and other credit-related contingencies of £63,237 million (2016: £66,240 million).
Collateral is held as security, in the event that lending is drawn down, on £10,956 million (2016: £10,053 million) of these balances.
Collateral repossessed
During the year, £297 million of collateral was repossessed (2016: £241 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.
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 balances arising from repurchase transactions of £23,175 million (2016: £7,279 million); the fair value of the collateral
provided under these agreements at 31 December 2017 was £23,082 million (2016: £8,395 million).
Customer deposits
Included in customer deposits are balances arising from repurchase transactions of £2,638 million (2016: £2,462 million); the fair value of the collateral
provided under these agreements at 31 December 2017 was £2,640 million (2016: £2,277 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 £48,765 million (2016: £45,702 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
2017
£m
6,622
197
2,608
9,427
2016
£m
6,991
583
3,206
10,780
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 18 and 19.
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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
248 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 51: 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
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
At 31 December 2017
Assets
Cash and balances at central banks
58,519
2
–
–
–
–
–
–
58,521
Trading and other financial assets at fair value
through profit or loss
Derivative financial instruments
Loans and advances to banks
11,473
13,345
4,858
2,781
1,056
2,655
5,341 121,369 162,878
449
3,104
601
314
763
190
451
190
503
192
965
131
2,763
2,405
19,339
25,834
85
6,611
Loans and advances to customers
28,297
15,953
13,585
11,881
10,482
29,340
70,967 291,993 472,498
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 2016
Assets
10
59
3,807
29
365
897
–
286
414
–
1,025
1,170
7
265
854
350
2,775
472
3,643
3,040
15,366
21,692
42,098
725
5,618
26,541
40,026
105,718
31,506
20,096
17,498
13,359
37,206 105,235 481,491 812,109
2,810
2,318
1,885
87
28
–
22,378
298
29,804
366,778
18,821
10,615
5,524
5,074
7,823
2,986
503 418,124
19,215
16,932
3,248
6,014
1,898
4,229
2,003
2,805
4,933
4,431
2,484
239
–
202
1,588
3,419
3,506
2,466
2,216
–
948
2,902
2,425
1,894
570
1,961
6,333
8,532
1,498
574
4,298
25,295
77,001
25,669
20,347
72,450
21,842
77,210 118,860
1,933
3,983
13,991
28,805
11,005
17,922
398,178
49,095
26,175
17,218
13,841
26,721
83,089 148,649 762,966
Cash and balances at central banks
47,446
2
4
–
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
–
–
–
47,452
1,680
2,230
1,281
6,011
4,165
3,692
97,294
24,257
117
151,174
36,138
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
8
127
5,025
–
259
583
–
73
584
103,710
34,147
27,570
242
637
1,560
19,740
–
222
1,059
14,389
–
1,887
1,846
34
16,080
4,808
3,113
37,239
22,783
3,397
56,524
38,248
34,931
104,090
479,216
817,793
3,772
347,753
2,779
18,936
1,062
8,961
503
13
43
10,482
8,477
13,859
7,859
6,430
353
562
16,384
415,460
18,381
19,640
4,065
1,583
3,282
–
8,328
2,190
2,266
390
8,779
6,433
2,737
1,213
161
1,696
4,158
2,463
2,164
393
1,179
1,224
2,377
1,440
–
3,843
6,939
8,588
413
1,750
5,575
25,020
19,971
2,737
4,527
30,335
20,147
74,593
23,544
12,610
89,428
76,314
114,502
37,059
19,831
378,836
54,529
29,346
21,859
14,710
35,435
72,119
162,144
768,978
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.
Lloyds Banking Group Annual Report and Accounts 2017 249
Note 51: 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
Over 5
years
£m
Total
£m
At 31 December 2017
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
2,516
367,103
21,286
3,444
15,447
231
3,545
18,854
14,424
6,331
–
454
Total non-derivative financial liabilities
410,027
43,608
2,096
21,308
6,499
12,562
–
2,907
45,372
21,498
11,198
4,251
36,999
–
7,170
81,116
660
2,375
13,044
23,923
–
19,164
59,166
30,315
420,838
59,504
83,259
15,447
29,926
639,289
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 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
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
23,850
(23,028)
822
17,425
18,247
3,686
347,573
14,390
31,974
(30,972)
24,923
(23,886)
43,444
(43,523)
30,605
154,796
(32,065)
(153,474)
1,002
128
1,130
4,154
19,151
19,718
1,037
776
1,813
1,541
28,248
11,845
(79)
974
895
5,883
20,789
1,938
(1,460)
2,795
1,335
1,203
1,294
13,513
1,322
22,098
23,420
16,467
417,055
61,404
7,590
8,721
12,533
36,386
17,635
82,865
20,112
41
393,392
33,128
(31,359)
1,769
21,669
23,438
–
674
52,418
24,088
(22,401)
1,687
117
1,804
–
1,289
55,456
25,366
(23,510)
1,856
620
2,476
–
9,279
74,275
52,925
(49,239)
3,686
1,167
4,853
–
18,542
52,187
36,462
(32,382)
4,080
3,020
7,100
20,112
29,825
627,728
171,969
(158,891)
13,078
26,593
39,671
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 £5,820 million at 31 December
2017 (2016: £6,883 million) with £3,132 million expiring within one year; £627 million between one and three years; £1,471 million between three and five
years; and £590 million over five years (2016: £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).
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 £24 million (2016: £23 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
250 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 51: Financial risk management continued
Further information on the Group’s liquidity exposures is provided on pages 144–148.
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:
At 31 December 2017
At 31 December 2016
Up to
1 month
£m
1,708
1,283
1-3
months
£m
1,747
1,836
3-12
months
£m
6,467
6,266
1-5
years
£m
26,479
23,425
Over 5
years
£m
67,012
61,580
Total
£m
103,413
94,390
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.
At 31 December 2017
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
Lending commitments
Other commitments
Total commitments
Total contingents and commitments
At 31 December 2016
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
Lending commitments
Other commitments
Total commitments
Total contingents and commitments
Up to
1 month
£m
1-3
months
£m
3-6
months
£m
6-9
months
£m
9-12
months
£m
12
392
404
51
669
720
4
210
214
–
131
131
–
205
205
1-3
years
£m
4
506
510
3-5
years
£m
Over 5
years
£m
–
271
271
–
656
656
Total
£m
71
3,040
3,111
66,964
3,137
5,966
5,525
11,440
17,374
15,106
3,913
129,425
–
46
71
210
384
17,420
17,930
15,177
15,448
19
66,983
67,387
Up to
1 month
£m
13
427
440
48,210
–
48,210
48,650
–
3,137
3,857
1-3
months
£m
6
782
788
3,546
3
3,549
4,337
–
5,966
6,180
3-6
months
£m
–
163
163
5,276
–
5,276
5,439
38
5,563
5,694
6-9
months
£m
–
153
153
4,783
41
4,824
4,977
11,440
11,645
9-12
months
£m
1
122
123
1-3
years
£m
1
466
467
11,628
17,212
1
11,629
11,752
79
17,291
17,758
4,123
4,779
Over 5
years
£m
129,809
132,920
Total
£m
–
623
623
4,090
402
4,492
5,115
21
3,016
3,037
113,520
648
114,168
117,205
3-5
years
£m
–
280
280
18,775
122
18,897
19,177
Note 52: 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
2017
£m
(24,747)
9,916
2016
£m
710
(13,889)
(661)
961
(15,492)
(12,218)
2017
£m
13,415
2,913
(3,600)
(12,481)
(4,665)
136
(4,282)
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)
Note 52: 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
Lloyds Banking Group Annual Report and Accounts 2017 251
2017
£m
2,370
(230)
691
(1,061)
6
9,168
1,650
865
(17)
369
–
(23)
125
–
1,436
–
(446)
(327)
414
(411)
1,701
(6)
(650)
(120)
–
15,504
(587)
(1,657)
(928)
–
(3,172)
12,332
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
(3,157)
(5,978)
(32)
(155)
721
1,864
–
(575)
153
309
(175)
465
1
(557)
(93)
(17)
17,124
(630)
(2,200)
(761)
2
(3,589)
13,535
(56)
507
–
1,970
46
(51)
(162)
279
(816)
339
3
(956)
(51)
(11)
(3,630)
(433)
(3,091)
(661)
7
(4,178)
(7,808)
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.
(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
2017
£m
2016
£m
2015
£m
58,521
(957)
57,564
6,611
(3,193)
3,418
60,982
47,452
(914)
46,538
26,902
58,417
(941)
57,476
25,117
(11,052)
(10,640)
15,850
62,388
14,477
71,953
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 2017 is £2,322 million (2016: £14,475 million; 2015: £13,545 million) held within the Group’s
long-term insurance and investments businesses, which is not immediately available for use in the business.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
252 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 52: Consolidated cash flow statement continued
(E) Acquisition of group undertakings and businesses
Net assets acquired:
Cash and cash equivalents
Loans and receivables: Loans and advances to customers
Available-for-sale financial assets
Intangible assets
Property, plant and equipment
Other assets
Deposits from banks1
Other liabilities
Goodwill arising on acquisition
Cash consideration
Less: Cash and cash equivalents acquired
Net cash outflow arising from acquisition of MBNA
Acquisition of and additional investment in joint ventures
Net cash outflow from acquisitions in the year
1 Upon acquisition, the funding of MBNA was assumed by Lloyds Bank plc.
(F) 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)
2017
£m
2016
£m
2015
£m
123
7,811
16
702
6
414
(6,431)
(927)
302
2,016
(123)
1,893
30
1,923
2017
£m
–
342
–
–
–
–
342
–
–
–
–
(242)
29
(213)
129
–
–
129
–
129
–
–
–
–
–
–
–
–
–
–
–
–
20
20
2016
£m
–
–
–
–
–
–
–
–
–
–
–
–
5
5
5
–
–
5
–
5
–
–
–
–
–
–
–
–
–
–
–
–
5
5
2015
£m
3,420
21,333
5,539
654
60
150
31,156
(24,613)
(9)
(3,828)
(549)
(825)
(314)
(30,138)
1,018
–
(46)
972
(5,043)
(4,071)
Note 53: Events since the balance sheet date
The Group intends to implement a share buyback of up to £1 billion. This represents the return to shareholders of capital surplus to that required to
provide capacity for growth, meet regulatory requirements and cover uncertainties. The share buyback programme will commence in March 2018 and is
expected to be completed during the next 12 months.
Lloyds Banking Group Annual Report and Accounts 2017 253
Note 54: Future accounting developments
The following pronouncements are not applicable for the year ending 31 December 2017 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 17 ‘Insurance Contracts’, the amendment to IFRS 9 ‘Prepayment Features with Negative Compensation‘ and certain other
minor amendments as at 20 February 2018 these pronouncements have been endorsed by the EU.
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. The
Group has chosen 1 January 2018 as its initial application date of IFRS 9 and has not restated comparative periods.
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.
In October 2017 the IASB issued an Amendment to IFRS 9, ‘Prepayment Features with Negative Compensation’ which has an effective date of 1 January
2019. This Amendment changes the requirements of IFRS 9 so that certain prepayment features meet the solely payments of principal and interest test.
The Group has some loans in its Commercial Banking division that have these features and so the Group has decided to apply the Amendment in 2018 in
order to avoid further changes to accounting for financial assets in 2019. The Amendment is still subject to EU endorsement and the Group assumes this
will occur during 2018.
Impairment
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, and then a lifetime expected loss allowance is recognised.
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
has developed the capability to model a number of economic scenarios and capture the impact on credit losses to ensure the overall ECL reflects an
appropriate distribution of economic outcomes.
For all material portfolios, IFRS 9 ECL calculation will leverage the systems, data and methodology used to calculate regulatory ‘expected losses’. The
definition of default for IFRS 9 purposes will be aligned to the Basel definition of default to ensure consistency across the Group. 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 and some differences in the period over which risk
parameters are measured, some adjustments to these components have been made to ensure compliance with IFRS 9.
Impact on 31 December 2017 balance sheet
It is estimated that the new impairment methodology will result in higher impairment provisions of approximately £1.3 billion, predominantly for loans and
advances to customers, recognised on the Group’s balance sheet. The re-classification and measurement of assets under IFRS 9 also results in a reduction
to the carrying value of financial assets of approximately £0.2 billion gross of tax, mainly as a result of transferring assets managed by the Insurance division
to fair value through profit or loss. The total net of tax impact on shareholders’ equity is a reduction of approximately £1.2 billion.
The ongoing impact on the financial results will only become clearer after running the IFRS 9 credit risk models over a period of time and under different
economic environments, however, it could result in impairment charges being more volatile when compared to the current IAS 39 impairment model, due
to the forward looking nature of expected credit losses.
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 retain the
existing IAS 39 hedge accounting requirements until the IASB completes its project on macro hedging. The Group expects to continue applying IAS 39
hedge accounting in accordance with this accounting policy choice.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
254 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the consolidated financial statements continued
Note 54: Future accounting developments continued
IFRS 15 Revenue from Contracts with Customers
IFRS 15 replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction Contracts’ and is effective for annual periods beginning on or after 1 January 2018.
The core principle of IFRS 15 is that revenue reflects the transfer of goods or services to customers in an amount that reflects the consideration to which an
entity expects to be entitled. The recognition of such revenue is in accordance with five steps to: identify the contract; identify the performance obligations;
determine the transaction price; allocate the transaction price to the performance obligations; and recognise revenue when the performance obligations
are satisfied.
In nearly all cases the Group’s current accounting policy is consistent with the requirements of IFRS 15, however, certain income streams within the Group’s
car leasing business will be deferred with effect from 1 January 2018. This results in an additional £14 million being recognised as deferred income
at 1 January 2018 and a corresponding debit of £11 million, net of tax, to shareholders’ equity; as permitted by the transition options under IFRS 15
comparative figures for the prior year have not been restated.
IFRS 16 Leases
IFRS 16 replaces IAS 17 ‘Leases’ and is effective for annual periods beginning on or after 1 January 2019.
IFRS 16 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 17 Insurance Contracts
IFRS 17 replaces IFRS 4 ‘Insurance Contracts’ and is effective for annual periods beginning on or after 1 January 2021.
IFRS 17 requires insurance contracts and participating investment contracts to be measured on the balance sheet as the total of the fulfilment cash flows
and the contractual service margin. Changes to estimates of future cash flows from one reporting date to another are recognised either as an amount in
profit or loss or as an adjustment to the expected profit for providing insurance coverage, depending on the type of change and the reason for it. The
effects of some changes in discount rates can either be recognised in profit or loss or in other comprehensive income as an accounting policy choice. The
risk adjustment is released to profit and loss as an insurer’s risk reduces. Profits which are currently recognised through a Value in Force asset, will no longer
be recognised at inception of an insurance contract. Instead, the expected profit for providing insurance coverage is recognised in profit or loss over time
as the insurance coverage is provided.
The standard will have a significant impact on the accounting for the insurance and participating investment contracts issued by the Group.
Minor amendments to other accounting standards
The IASB has issued a number of minor amendments to IFRSs effective 1 January 2018 (including IFRS 2 Share-based Payment and IAS 40 Investment
Property) and effective 1 January 2019 (including IAS 19 Employee Benefits, IAS 12 Income Taxes and IFRIC 23 Uncertainty over Income Tax Treatments).
These revised requirements are not expected to have a significant impact on the Group.
Lloyds Banking Group Annual Report and Accounts 2017 255
Parent company balance sheet
at 31 December
Note
2017
£ million
20161
£ million
8
8
2
3
3
4
4
5
3
6
7
44,863
14,379
22
59,264
265
961
47
272
724
2,269
61,533
7,197
17,634
7,423
4,115
1,500
37,869
5,355
43,224
10,886
3,993
14,879
327
3,103
3,430
18,309
61,533
44,188
6,912
38
51,138
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
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 profits1
Shareholders’ equity
Other equity instruments
Total equity
Non-current liabilities:
Debt securities in issue
Subordinated liabilities
Current liabilities:
Derivative financial instruments
Other liabilities
Total liabilities
Total equity and liabilities
1 The parent company recorded a profit after tax for the year of £2,399 million (2016: £3,135 million).
The accompanying notes are an integral part of the parent company financial statements.
The directors approved the parent company financial statements on 20 February 2018.
Lord Blackwell
Chairman
António Horta-Osório
Group Chief Executive
George Culmer
Chief Financial Officer
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
256 Lloyds Banking Group Annual Report and Accounts 2017
Parent company statement of changes in equity
for the year ended 31 December
Redemption of preference shares
131
(131)
Balance at 1 January 2015
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
24,427
Merger
reserve
£ million
7,764
Capital
redemption
reserve
£ million
4,115
24,558
7,633
4,115
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Retained
profits1
£ million
1,720
897
(1,070)
(314)
–
(753)
133
172
785
3,135
(2,014)
(330)
–
(301)
141
168
1,584
2,399
(2,284)
(336)
–
(277)
82
332
Total
shareholders’
equity
£ million
38,026
897
(1,070)
(314)
–
(753)
133
172
37,091
3,135
(2,014)
(330)
–
(301)
141
168
37,890
2,399
(2,284)
(336)
63
(277)
82
332
Other equity
instruments
£ million
5,355
–
–
–
–
–
–
–
5,355
–
–
–
–
–
–
–
5,355
–
–
–
–
–
–
–
Total
equity
£ million
43,381
897
(1,070)
(314)
–
(753)
133
172
42,446
3,135
(2,014)
(330)
–
(301)
141
168
43,245
2,399
(2,284)
(336)
63
(277)
82
332
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
Total comprehensive income1
Dividends paid
Distributions on other equity instruments,
net of tax
Issue of ordinary shares
Movement in treasury shares
Value of employee services:
Share option schemes, net of tax
Other employee award schemes
–
–
–
24,768
–
–
63
–
–
–
7,423
4,115
–
–
–
–
–
–
–
–
–
–
–
–
Balance at 31 December 2017
24,831
7,423
4,115
1,500
37,869
5,355
43,224
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.
Lloyds Banking Group Annual Report and Accounts 2017 257
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
Acquisition of subsidiaries
Amounts advanced to subsidiaries
Redemption of loans to subsidiaries
Interest received on 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 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
The accompanying notes are an integral part of the parent company financial statements.
2017
£ million
2,416
495
18
8,431
(2,650)
(292)
(197)
8,221
77
2,650
292
–
(320)
(8,476)
475
244
(5,058)
(2,284)
(415)
–
(248)
–
14
2016
£ million
3,463
1,986
(50)
(8,392)
(3,759)
(119)
(679)
(7,550)
441
3,759
119
(3,522)
–
(4,978)
13,166
496
9,481
(2,014)
(412)
1,061
(229)
(319)
–
(2,933)
(1,913)
230
42
272
18
24
42
2015
£ million
969
(1,357)
(566)
458
(1,080)
–
(142)
(1,718)
600
1,080
–
–
–
(1,157)
570
763
1,856
(1,070)
(394)
1,436
(129)
(152)
–
(309)
(171)
195
24
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
258 Lloyds Banking Group Annual Report and Accounts 2017
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 2017. 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.
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 39, 40 and 43 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
2017
£m
7,423
–
7,423
2016
£m
7,633
(210)
7,423
2015
£m
7,764
(131)
7,633
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 2015, 2016 or 2017.
Note 5: Retained profits
At 1 January
Profit for the year
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
2017
£m
1,584
2,399
(2,284)
(336)
(277)
82
332
1,500
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
Details of the Company’s dividends are as set out in note 44 to the consolidated financial statements.
Note 6: Debt securities in issue
These comprise notes issued by the Company in a number of currencies, although predominantly Euros and US dollars, with maturity dates ranging
up to 2028.
Lloyds Banking Group Annual Report and Accounts 2017 259
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.
Preference
shares
£m
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
At 1 January 2016
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
Foreign exchange and other movements
At 31 December 2017
1 See note 4.
911
–
(319)
(24)
568
(2)
566
10
2,144
Total
£m
3,065
–
–
–
10
–
10
1,061
1,061
–
(319)
546
3,751
(334)
3,417
522
4,329
(336)
3,993
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 46 to the consolidated
financial statements.
The Company has no employees (2016: 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
Additions and capital injections
Capital contribution
Return of capital contribution
At 31 December
2017
£m
44,188
320
432
(77)
2016
£m
40,785
3,522
322
(441)
44,863
44,188
Details of the subsidiaries and related undertakings are given on pages 268 to 274 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.
Loans to subsidiaries
At 1 January
Exchange and other adjustments
New issues
Redemptions
At 31 December
2017
£m
6,912
(534)
8,476
(475)
14,379
2016
£m
14,548
552
4,978
(13,166)
6,912
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
260 Lloyds Banking Group Annual Report and Accounts 2017
Notes to the parent company financial statements continued
Note 8: Related party transactions continued
In addition the Company carries out banking activities through its subsidiary, Lloyds Bank plc. At 31 December 2017, the Company held deposits of
£272 million with Lloyds Bank plc (2016: £42 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 £2,168 million (2016: £2,690 million) due to subsidiary undertakings. In addition,
at 31 December 2017 the Company had interest rate and currency swaps with Lloyds Bank plc with an aggregate notional principal amount of
£8,068 million and a net negative fair value of £62 million (2016: notional principal amount of £2,905 million and a net positive fair value of £461 million).
Of this amount an aggregate notional principal amount of £4,455 million and a net positive fair value of £246 million (2016: notional principal
amount of £1,529 million and a net positive fair value of £307 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 46 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.
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
At 31 December 2017
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
Derivative financial instruments
Total financial liabilities
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
–
265
–
–
265
–
–
19
19
–
307
–
–
307
–
–
–
–
–
–
–
–
–
–
308
308
–
154
–
–
154
–
–
–
–
–
14,379
47
14,426
–
–
–
–
–
–
6,912
67
6,979
–
–
–
Total
£m
272
265
14,379
47
272
–
–
–
272
14,963
10,886
3,993
–
14,879
10,886
3,993
327
15,206
42
–
–
–
42
2,455
4,329
6,784
42
461
6,912
67
7,482
2,455
4,329
6,784
Note 48 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 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
2017
£m
–
–
–
–
2016
£m
545
(476)
(69)
–
Lloyds Banking Group Annual Report and Accounts 2017 261
Note 9: Financial instruments continued
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 2017
Debt securities in issue
Subordinated liabilities
Total financial instrument liabilities
At 31 December 2016
Debt securities in issue
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
46
–
46
13
–
13
6
28
34
–
30
30
218
213
431
27
229
256
5,437
962
6,399
1,809
1,043
2,852
7,133
7,062
14,195
820
7,893
8,713
Total
£m
12,840
8,265
21,105
2,669
9,195
11,864
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest
of approximately £1 million (2016: £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 48 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
(2016: nil).
Fair value of financial assets and liabilities
2017
2016
Valuation hierarchy
Valuation hierarchy
Derivative financial instruments
Carrying
value
£m
265
Fair value
£m
265
Level 2
£m
265
Loans to subsidiaries
14,379
14,379
14,379
Amounts due from subsidiaries
47
47
47
Total financial assets
14,691
14,691
14,691
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
327
10,886
3,993
15,206
327
10,966
5,160
16,453
327
10,966
5,160
16,453
Level 3
£m
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
–
–
–
–
–
–
–
–
The carrying amount of cash and cash equivalents (2017: £272 million; 2016: £42 million) is a reasonable approximation of fair value.
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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
OTHER
INFORMATION
Shareholder information
Five year financial summary
Forward looking statements
Abbreviations
Alternative performance measures
Subsidiaries and related undertakings
263
265
266
267
267
268
262 Lloyds Banking Group Annual Report and Accounts 2017
TACKLING
DISADVANTAGE
ACROSS
BRITAIN
We’re helping thousands of disadvantaged
people across Britain through our
independent charitable Foundations. In
Edinburgh, the Thistle Centre of Wellbeing
has received a £70,000 grant from the Bank
of Scotland Foundation to help them
support people with long term health
conditions. They will use the grant to
finance around 320 personal consultations
for the next two years. This face‑to‑face
support allows people to stay connected
and manage their health condition thanks
to a range of activities including tai chi
sessions led by local volunteers.
Visit www.lloydsbankinggroup.com/
prosperplan
>£20mgiven to our independent charitable Foundations in 2017 Lloyds Banking Group Annual Report and Accounts 2017 263
Shareholder information
Annual general meeting (AGM)
The AGM will be held at the Edinburgh International Conference Centre, The Exchange, Edinburgh EH3 8EE on Thursday 24 May 2018 at 11am.
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 scheduled reports and communications to be issued in 2018 is set out below:
Available format
Online
Email
RNS
Paper
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
Month
Feb
Mar/Aug
Mar
Mar
Mar
Apr
Jun/Jul
Jul
Aug
Oct
1 There is no longer a requirement to issue interim management statements and though we will continue to issue them going forward they will be much shorter.
2 To be published on the Group’s website by 1 July 2018 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.
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
264 Lloyds Banking Group Annual Report and Accounts 2017
Shareholder information continued
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 Shareowner Services, 462 South 4th Street, Suite 1600, Louisville KY 40202. 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 2017
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
%
1,994,288
390,857
60,662
2,745
598
182
293
66
78
10
13
81.41
15.95
2.48
0.11
0.02
0.01
0.01
–
–
–
–
2,449,792
100.00
599.8
1,041.9
1,502.2
670.3
1,386.5
1,301.4
6,592.1
4,722.0
18,240.3
6,889.5
29,026.9
71,972.9
0.83
1.45
2.09
0.93
1.93
1.81
9.16
6.56
25.34
9.57
40.33
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.
Lloyds Banking Group Annual Report and Accounts 2017 265
Five year financial summary
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r
t
The financial statements (statutory basis) for each of the years presented have been audited by PricewaterhouseCoopers LLP, independent auditors.
Income statement data for the year ended 31 December (£m)
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Profit before tax
Profit (loss) after tax for the year
Profit (loss) for the year attributable to ordinary shareholders
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 share1,2
Market price (year end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions) 3
Financial ratios (%) 4
Dividend payout ratio5
Post‑tax return on average shareholders’ equity
Post‑tax return on average assets
Cost:income ratio6
Capital ratios (%) 7, 8
Total capital
Tier 1 capital
Common equity tier 1 capital/Core tier 1 capital
2017
2016
2015
2014
2013
18,659
(12,696)
17,267
(12,277)
5,963
(688)
5,275
3,547
3,042
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)
31 December
2017
31 December
2016
31 December
2015
31 December
2014
31 December
2013
7,197
43,551
5,355
60.5p
418,124
17,922
472,498
812,109
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
2017
2016
2015
2014
2013
4.4p
4.3p
3.05p
68.1p
2,450
2.9p
2.9p
3.05p
62.5p
2,510
0.8p
0.8p
2.75p
73.1p
2,563
1.7p
1.6p
0.75p
75.8p
2,626
71,973
71,374
71,374
71,374
(1.2) p
(1.2) p
–
78.9p
2,681
71,368
2017
2016
2015
2014
2013
69.8
7.2
0.43
68.0
104.0
4.9
0.30
71.1
359.3
1.3
0.11
88.3
45.1
2.9
0.17
84.7
–
(2.0)
(0.09)
82.9
31 December
2017
31 December
2016
31 December
2015
31 December
2014
31 December
2013
21.2
17.2
14.1
21.4
17.0
13.6
21.5
16.4
12.8
22.0
16.5
12.8
20.8
14.5
14.0
1 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.
2 Dividends per ordinary share in 2016 include a recommended special dividend of 0.5 pence (2015: 0.5 pence).
3 For 2016 and previous years, this figure excluded the limited voting ordinary shares owned by the Lloyds Bank Foundations. The limited voting ordinary shares were redesignated as
ordinary shares on 1 July 2017
4 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
5 Total dividend for the year divided by earnings attributable to ordinary shareholders adjusted for tax relief on distributions to other equity holders.
6 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims) .
7 Capital ratios for 2013 are in accordance with the modified Basel II framework as implemented by the PRA.
8 Capital ratios for 2014 and later years are in accordance with the CRD IV rules implemented by the PRA on 1 January 2014.
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266 Lloyds Banking Group Annual Report and Accounts 2017
Forward looking statements
This Annual Report contains certain forward looking statements with
respect to the business, strategy, plans and/or results 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 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, inflation, 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,
instability as a result of the exit by the UK from the European Union (EU)
and the potential for other countries to exit the EU or the Eurozone and
the impact of any sovereign credit rating downgrade or other sovereign
financial issues; technological changes and risks to the security of IT
and operational infrastructure, systems, data and information resulting
from increased threat of cyber and other attacks; 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 US or elsewhere including the implementation and
interpretation of key legislation and regulation together with any resulting
impact on the future structure of the Group; the ability to attract and retain
senior management and other employees and meet its diversity objectives;
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.
Lloyds Banking Group Annual Report and Accounts 2017 267
Abbreviations
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
ADRs
BSU
CDS
CET1
American Depositary Receipts
Business Support Unit
Credit Default Swap
Common Equity Tier 1
CRD IV
Capital Requirements Directive IV
IAS
IASB
ICG
IFRS
LCR
International Accounting Standard
International Accounting Standards Board
Individual Capital Guidance
International Financial Reporting Standards
Liquidity Coverage Ratio
Collective unidentified impairment provision
LIBOR
London Inter‑Bank Offered Rate
CUIP
CVA
DVA
EBA
ECNs
EP
EPS
FCA
FLS
FRC
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
LTIP
OEICs
PFI
PPI
PPP
PRA
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
Alternative performance measures
As described on page 43, 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 gross loans and advances to customers for the period.
Banking net interest income on customer and product balances in the banking businesses as a percentage of average
banking gross interest‑earning assets for the period.
Operating costs as a percentage of net income 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 gross loans and advances to customers for the period.
Impaired loans as a percentage of
closing 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
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 net income 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.
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, and to deduct 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 on page 40.
Underlying return on tangible equity
Underlying profit after tax at the standard UK corporation tax rate adjusted to add back amortisation of intangible assets and
to deduct profit attributable to non‑controlling interests and other equity holders, divided by average tangible net assets.
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
268 Lloyds Banking Group Annual Report and Accounts 2017
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 2017. The list includes
each undertaking’s registered office and the
percentage of the class(es) of shares held by the
Group. All shares held are ordinary shares unless
indicated otherwise in the notes.
Subsidiary undertakings
The Group directly or indirectly holds 100% of
the share class and a majority of voting rights
(including where the undertaking does not
have share capital as indicated) in the following
undertakings.
Name of undertaking
Notes
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
Alexanderplatz 2017 GmbH
Amberdate Ltd
AN Vehicle Finance Ltd (In liquidation)
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 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
(In liquidation)
Bank of Scotland Leasing Ltd
Bank of Scotland LNG Leasing (No 1) Ltd
(In liquidation)
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
(In liquidation)
Bank of Wales Ltd
Barents Leasing Ltd
Barnwood Mortgages Ltd
Bedfont Lakes Business Park (No.2) LP
Birchcrown Finance Ltd
Birmingham Midshires Asset Management Ltd
(In liquidation)
Birmingham Midshires Financial Services Ltd
Birmingham Midshires Land Development Ltd
Birmingham Midshires Mortgage Services Ltd
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) Property Services 2 Ltd
BOS (Ireland) Property Services Ltd
BOS (Shared Appreciation Mortgages
(Scotland) No. 2) Ltd
BOS (Shared Appreciation Mortgages
(Scotland) No. 3) Ltd
BOS (Shared Appreciation Mortgages
(Scotland) Ltd
7 ii #
1
1
8
9
9
92
1
iv
13
+ *
1
4
5 *
5 *
5
10
5 *
5 *
2
11 *
88
2
13
5 *
5 *
5 *
5
iv
1
2
2
1
12
20
1 iv
vi
4
4
4
4
1
1
1 i
ii
1
1
iv
1
6
1
1
16
16
4
4
4
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 (USA) Fund Investments Inc.
BOS (USA) Inc.
BOS Edinburgh No 1 Ltd
4 #
4 #
4 #
4 #
4
4
14 xiii
14
5
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
C & G Homes Ltd (In liquidation)
C&G Estate Agents Ltd
C.T.S.B. Leasing Ltd (In liquidation)
Capital 1945 Ltd
Capital Bank Insurance Services Ltd (In liquidation)
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 Vehicle Management Ltd
Capital Leasing (Edinburgh) Ltd
Capital Leasing Ltd (In liquidation)
Capital Personal Finance Ltd
Car Ownership Finance Ltd (In liquidation)
Cardnet Merchant Services Ltd
Carlease Ltd
Cartwright Finance Ltd
Cashfriday Ltd
Cashpoint Ltd
Caveminster Ltd
CBRail S.A.R.L.
Cedar Holdings Ltd
Central Mortgage Finance Ltd
CF Asset Finance Ltd
Chariot Finance Ltd (In liquidation )
Chartered Trust (Nominees) Ltd
Charterhall (No. 1) Ltd (In liquidation)
Charterhall (No. 2) Ltd (In liquidation)
Cheltenham & Gloucester plc
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 Insurance (Luxembourg) S.A. (In liquidation)
Conquest Securities Ltd
Corbiere Asset Investments Ltd
Create Services Ltd
Dalkeith Corporation
Delancey Rolls UK Ltd (In liquidation)
Direct LB Ltd (In liquidation)
Dunstan Investments (UK) Ltd
Enterprise Car Finance Ltd
Eurolead Services Holdings Ltd
Exclusive Finance No. 1 Ltd (In liquidation)
Financial Consultants LB Ltd
First Retail Finance (Chester) Ltd
Flexifly Ltd (In liquidation)
Fontview Ltd
Forthright Finance Ltd
France Industrial Premises Holding Company
Freeway Ltd (In liquidation)
General Leasing (No. 4) Ltd
General Leasing (No. 12) Ltd
General Reversionary and Investment Company
Glosstrips Ltd (In liquidation)
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
2
18
1
4 i #
5
5
5
12
12
13
2
13
2
2
2
2
2
2
2
17
2
2
2
5
2
2
17
88
4
13
1 ii, #
iii ^
1
2 viii
vii #
9
1
1
19
1
12
2
13
1
13
13
12
1
20
20
20
20
20
21
4
20
22
20
6
iv
6
23
iv
24
1 iv
vi
1 i
ii
1
25
26 i
13
1
7 ii #
9
13 i
1
4
88
20
2
28
2
1
1
20
88
2
1
1
4 i
ii
vii
4
4
4
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 (In liquidation)
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 (In liquidation)
HBOS UK Ltd
Heidi Finance Holdings (UK) Ltd
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 (In liquidation)
Horizon Resources Ltd (In liquidation)
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 (In liquidation)
IBOS Finance Ltd
ICC Enterprise Partners Ltd (In liquidation)
ICC Equity Partners Ltd (In liquidation)
ICC ESOP Trustee Ltd (In liquidation)
ICC Holdings Unlimited Company
ICC Software Partners Ltd (In liquidation)
IF Covered Bonds Limited Liability Partnership
(In liquidation)
Inchcape Financial Services Ltd
Industrial Real Estate LP
Industrial Real Estate (General Partner) Ltd
Industrial Real Estate (Nominee) Ltd
Intelligent Finance Financial Services Ltd
Intelligent Finance Software Ltd
International Motors Finance Ltd
Kanaalstraat Funding C.V.
Kanto Leasing Ltd (In liquidation)
Katrine Leasing Ltd
LB Comhold Ltd (In liquidation)
LB Healthcare Trustee Ltd
LB Leasing L.P
LB Motorent Ltd
LB Quest Ltd
LB Share Schemes Trustees Ltd
LBCF Ltd
LBG Brasil Administração LTDA
LBG Capital Holdings Ltd
LBG Capital No. 2 Ltd (In liquidation)
LBG Capital No. 1 Ltd (In liquidation)
LBG Equity Investments Limited
LBI Leasing Ltd
LBPB (21 Hill Street) Limited (In liquidation)
LDC (Asia) Ltd (In liquidation)
LDC (General Partner) Ltd
LDC (Managers) Ltd
LDC (Nominees) Ltd
LDC Carry VII LP
LDC Equity VII LP
LDC GP LLP
4
4
4
4
1
1
1
4
4
4
4
4
4
29
1
4
4
18
10
4 *
13
5
20
20
20
4
10
5
iv
vi
2 *
13
5
1
14
1
1 iv
xi
13
1
31
13
4
5
88
88
6
1 *
1 * #
1 i
ii
1
4
2
7 i
ii
1
2
32
32
33
16
32
70 *
2 i #
34
34
34
4
4
2 i #
35 *
13
36
13
1
38 *
1
1
1
9
49
1 ^
13
13
1 ^
1
1
39
40
40
40
41*
41*
41 *
Lloyds Banking Group Annual Report and Accounts 2017 269
LDC I LP
LDC II LP
LDC III LP
LDC IV LP
LDC Parallel VII LP
LDC Parallel (Nominees) Ltd
LDC Ventures Carry Ltd (applied for strike off)
LDC Ventures Trustees Ltd (applied for strike off)
LDC V LP
LDC VI LP
LDC VII LP
Leasing (No. 2) Ltd (In liquidation)
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 Carselect Ltd
Lex Autolease Ltd
Lex Vehicle Finance 2 Ltd
Lex Vehicle Finance 3 Ltd
Lex Vehicle Finance Ltd (In liquidation)
Lex Vehicle Leasing (Holdings) Ltd
Lex Vehicle Leasing Ltd
Lex Vehicle Partners (1) Ltd (In liquidation)
Lex Vehicle Partners (2) Ltd (In liquidation)
Lex Vehicle Partners (3) Ltd (In liquidation)
Lex Vehicle Partners (4) Ltd (In liquidation)
Lex Vehicle Partners Ltd (In liquidation)
Lime Street (Funding) Ltd
Lloyds (FDC) Company (In liquidation)
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) (In liquidation)
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
Lloyds Bank Corporate Asset Finance (No.4) Ltd
Lloyds Bank Corporate Markets plc
Lloyds Bank Covered Bonds LLP
Lloyds Bank Equipment Leasing (No. 1) Ltd
Lloyds Bank Equipment Leasing (No. 5) Ltd
(In liquidation)
Lloyds Bank Equipment Leasing (No. 7) Ltd
Lloyds Bank Equipment Leasing (No. 9) Ltd
Lloyds Bank Equipment Leasing (No. 10) Ltd
(In liquidation)
Lloyds Bank Equipment Leasing (No. 11) Ltd
(In liquidation)
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
(In liquidation)
Lloyds Bank General Leasing (No. 20) 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 (In liquidation)
Lloyds Bank Leasing (No. 4) Ltd (In liquidation)
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)
41 *
41 *
41 *
41 *
41 *
40
40
40
41 *
41 *
41 *
13
5
1
13
13
iv
v
1
1
1
2
2
13
2 i
ii
x
2
13
13
13
13
13
1
13
6
1
x
1
13
1
14
1
13
1
1
5
5
42
1
1
1
1
9
43
1
1
1
1
1
1 ^
44 *
1
13
1
1
13
13
1 i
ii
1
iv
45
1
13
1
1
13
1
1
13
13
1
1
1
6
13
1
1
13
1
1
13
Lloyds Bank Maritime Leasing (No. 8) Ltd
(In liquidation)
Lloyds Bank Maritime Leasing (No. 10) Ltd
Lloyds Bank Maritime Leasing (No. 12) Ltd
(In liquidation)
Lloyds Bank Maritime Leasing (No. 13) Ltd
(In liquidation)
Lloyds Bank Maritime Leasing (No. 15) Ltd
Lloyds Bank Maritime Leasing (No.16) Ltd
(In liquidation)
Lloyds Bank Maritime Leasing (No. 17) Ltd
Lloyds Bank Maritime Leasing (No. 18) Ltd
(In liquidation)
Lloyds Bank Maritime Leasing Ltd (In liquidation)
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 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 Commercial Leasing Ltd (In liquidation)
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
Lloyds Nominees (Guernsey) Ltd
Lloyds Offshore Global Services Private Ltd
Lloyds Plant Leasing Ltd
Lloyds Portfolio Leasing Ltd
Lloyds Premises Investments Ltd
Lloyds Project Leasing Ltd
Lloyds Property Investment Company No. 3 Ltd
(In liquidation)
Lloyds Property Investment Company No. 4 Ltd
Lloyds Property Investment Company No.5 Ltd
Lloyds Secretaries Ltd
Lloyds Securities Inc.
Lloyds Trust Company (Gibraltar) Ltd
Lloyds TSB Pacific Ltd
Lloyds UDT Asset Leasing Ltd
Lloyds UDT Asset Rentals Ltd
Lloyds UDT Business Development Ltd
Lloyds UDT Business Equipment Ltd
Lloyds UDT Hiring Ltd
Lloyds UDT Leasing Ltd
Lloyds UDT Ltd
Lloyds UDT Rentals Ltd (In liquidation)
Lloyds Your Tomorrow Trustee Ltd
Loans.Co.UK Limited
London Taxi Finance Ltd
London Uberior (L.A.S. Group) Nominees Ltd
Lotus Finance Ltd
LTGP Limited Partnership Incorporated
Mainsearch Company Limited
Maritime Leasing (No. 19) Ltd
MBNA Direct Limited
MBNA Europe Finance Limited
MBNA Europe Holdings Limited
MBNA Global Services Limited
MBNA Indian Services Private Limited
MBNA Limited
MBNA R & L S.A.R.L.
MBNA Receivables Limited
Meadowfield Investments Ltd (In liquidation)
Membership Services Finance Ltd
Mitre Street Funding Ltd
Moor Lane Holdings Ltd
Moray Investments Ltd (In liquidation)
Newfont Ltd
NFU Mutual Finance Ltd
Nominees (Jersey) Ltd
Nordic Leasing Ltd
NWS Trust Ltd
13
1
1
13
1
13
1
13
13
1
1
6
1 *
1 *
1
1
37 i
ii
1 ^
^ x
1
1
1
1
1
1
1
13
1
1
6
40
14 *
46
13
1
47 i #
ii
vii
6
1
8
1
6
1
1
1
31
iv
37
48
1
1
1
1
13
1
1
1
14
42
51
1
1
1
1
1
1
1
52
1
82
1 i
ii
5 *
79 i #
37 *
82
1
82
83
82
82
84
82
85
63
88
4
6
6
13
20
2 i #
vii
6
1
5
Ocean Leasing (July) Ltd (In liquidation)
Ocean Leasing (No 1) Ltd (In liquidation)
Ocean Leasing (No 2) Ltd (In liquidation)
Oystercatcher LP
Oystercatcher Nominees Ltd
Oystercatcher Residential Ltd
Pacific Leasing Ltd
Paneldeluxe Company Limited (In liquidation)
Pensions Management (S.W.F.) Ltd
Peony Eastern Leasing Ltd
Peony Leasing Ltd
Peony Western Leasing Ltd
Perry Nominees Ltd
PIPS Asset Investments Ltd
Portland Funding Ltd (In liquidation)
Prestonfield Investments Ltd
Prestonfield P1 Ltd (In liquidation)
Prestonfield P2 Ltd (In liquidation)
Prestonfield P3 Ltd (In liquidation)
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 (In liquidation)
Sapphire Cards Limited (In liquidation)
Savban Leasing Ltd
Scotland International Finance B.V.
Scotmar Commercial Equipment Finance Ltd
(In liquidation)
Scottish Widows (Port Hamilton) Ltd
Scottish Widows Active Management Fund
Scottish Widows Administration Services Ltd
Scottish Widows Annuities Ltd
Scottish Widows Financial Services Holdings
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
Seaforth Maritime (Highlander) Ltd (In liquidation)
Seaforth Maritime (Jarl) Ltd (In liquidation)
Seaspirit Leasing Ltd
Seaspray Leasing Ltd (In liquidation)
Services LB (No. 2) Ltd (In liquidation)
Share Dealing Nominees Ltd
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
SWB (67 Morrison Street) PLC
SW No.1 Ltd
SWAMF (GP) Ltd
SWAMF Nominee (1) Ltd
SWAMF Nominee (2) Ltd
SW Funding plc
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
1
13
13
20
20
20
86
54 *
1
1
1
1
1 i
ii
13
5
88
88
88
7 ii #
55
2
1
1
28
28
28
28
88
86
1
21
13 i #
54
3 *
1
3
3
54 *
54
3 i
ii
iv
x
56
1
3
54
3
54
3
45
1
88
88
1
13
13
iv
4
7 ii #
1 iv
vi
vi
20
20
20
1
17 i
ii
57 #
20
4
79 i #
89
3
20
20
20
3 #
1
45
5
4
+ *
1
2 #
2 #
1
5
58
5
17
5
5
5
5
1
5
59 *
5 *
5
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
Permanent Mortgages Trustee Ltd
Permanent PECOH Holdings Ltd
Permanent PECOH Ltd
Salisbury Securities 2015 Ltd
Salisbury II Securities 2016 Ltd
Salisbury II‑A Securities 2017 Limited
Sandown 2012‑2 Holdings Ltd
Sandown 2012‑2 plc
Sandown Gold 2011‑1 Holdings Ltd
Sandown Gold 2011‑1 plc (in liquidation)
Sandown Gold 2012‑1 Holdings Ltd
Sandown Gold 2012‑1 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
Thistle Investments (AMC) Ltd
Thistle Investments (ERM) Ltd
Trinity Financing Holdings Ltd
Trinity Financing plc
Wetherby Securities 2017 Limited
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 •
MBNA General Foundation
• A charitable foundation funded but not owned by
Lloyds Banking Group
44
44
44
61
61
61
44
44
44
70
44
44
75
75
75
75
75
75
75
75
75
75
75
64
61
44
44
44
44
61
77
15
77
78
5
82
270 Lloyds Banking Group Annual Report and Accounts 2017
Subsidiaries and related undertakings continued
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
Universe, The CMI Global Network Fund
Upsaala Ltd
Vehicle Leasing (1) Ltd (In liquidation)
Vehicle Leasing (2) Ltd (In liquidation)
Vehicle Leasing (3) Ltd (In liquidation)
Vehicle Leasing (4) Ltd (In liquidation)
Ward Nominees (Abingdon) Ltd
Ward Nominees (Birmingham) Ltd
Ward Nominees (Bristol) Ltd
Ward Nominees Ltd
Warwick Leasing Ltd (In liquidation)
Waverley – Fund II Investor LLC
Waverley – Fund III Investor LLC
Waymark Asset Investments Ltd
WCS Ltd
West Craigs Ltd
Western Trust & Savings Holdings Ltd
(In liquidation)
Western Trust Holdings Ltd (In liquidation)
Whitestar Securities Ltd (In liquidation)
Wood Street Leasing Ltd
5 *
8
5
1
1
1
1
1
1
92 *
16
13
13
13
13
1
1
1
1
13
25
25
1 i
ii
60
5
13
13
13 ii
xi
1
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 2007 NHG BV
Candide Financing 2008‑1 BV
Candide Financing 2008‑2 BV
Candide Financing 2011‑1 BV
Candide Financing 2012‑1 BV
Cardiff Auto Receivables Securitisation 2018‑1 Plc
Cardiff Auto Receivables Securitisation Holdings
Limited
Celsius European Lux 2 SARL
Cheltenham Securities 2017 Limited
Chepstow Blue Holdings Ltd
Chepstow Blue plc
Chester Asset Options No.2 Limited
Chester Asset Options No.3 Limited
Chester Asset Receivables Dealings Issuer Limited
Chester Asset Securitisation Holdings Limited
61
10
62
62
62
62
62
63
64
64
64
64
64
44
44
91
61
44
44
69
87
63
69
Chester Asset Securitisation Holdings No.2 Limited
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
Credit Card Securitisation Europe Limited
Deva Financing Holdings Ltd
Deva Financing plc
Deva One Limited
Deva Three Limited
Deva Two Limited
Edgbaston RMBS 2010‑1 plc
Edgbaston RMBS Holdings 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
Gresham Receivables (No.47) UK Limited
Guildhall Asset Purchasing Company (No 3) Ltd
Guildhall Asset Purchasing Company (No.11) UK Ltd
Hart 2014‑1 Ltd
Leicester Securities 2014 Ltd
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
63
65
65
66
67
68
67
63
44
44
63
63
63
44
44
61
63
63
63
69
63
69
69
69
69
69
63
63
63
63
63
69
69
69
63
63
69
69
69
69
69
63
69
69
69
69
69
69
63
69
69
69
69
63
69
61
71
44
44
44
44
44
44
44
61
61
44
61
44
44
44
44
Associated undertakings
The Group has a participating interest in the following undertakings.
Name of undertaking
Aceso Healthcare Group Holdings Ltd
Addo Food Group (Holdings) Limited
Addison Social Housing Ltd
Adler & Allan Group Ltd
ADP Primary Care Services Limited
Aghoco 1472 Limited
Aghoco 1476 Limited
Agora Shopping Centres Ltd (In receivership)
Airline Services And Components Group Ltd
Allan Water Homes (Heartlands) Limited
AMA (Slateford) Limited
AMA (Fusion) Limited
Angus International Safety Group Ltd
Applied Composites Group Ltd
Aqualisa Holdings (International) Ltd
Aspin Group Holdings Ltd
Aspire Oil Services Ltd
% of share class
held by immediate
parent company
(or by the Group
where this varies)
89%
76.85%
20%
89%
54.54%
89.25%
89.25%
50%
94.45%
50%
50%
50%
88.9%
85.76%
89.25%
86.45%
99%
28.4%
Registered office address (UK unless stated otherwise)
Notes
Sherwood House, Cartwright Way, Forest Business Park, Brandon Hill, Coalville, LE67 1UB
Queens Drive, Nottingham, NG2 1LU
35 Great St Helen’s, London, EC3A 6AP
80 Station Parade, Harrogate, HG1 1HQ
1 Park Row, Leeds, LS1 5AB
58 Evans Road, Liverpool, L24 9PB
100‑102 King Street, Knutsford, Cheshire, WA16 6HQ
Hill House, 1 Little New Street, London, EC4A 3TR
Canberra House, Robeson Way, Sharston Green Business Park, Manchester, M22 4SX
24B Kenilworth Road, Bridge Of Allan, Stirling, Scotland, FK9 4DU
15 Coates Crescent, Edinburgh, EH3 7AF
15 Coates Crescent, Edinburgh, Midlothian, EH3 7AF
Station Road, High Bentham, Near Lancaster, LA2 7NA
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
Bishop’s Court, 29 Albyn Place, Aberdeen, AB10 1YL, United Kingdom
ii &
i &
i &
iii &
i &
i &
ii &
i &
i
i
i &
i &
i &
i
i &
&
Lloyds Banking Group Annual Report and Accounts 2017 271
Australand Apartments No.6 Pty Ltd
Australand Residential Investments Pty Ltd
Australand Residential Trust
Autograph Homes (Hambrook) Ltd
Bacchus Newco Ltd
Backhouse (Castle Cary) JV Limited
Bergamot Ventures Ltd
Big Society Capital Limited
Blue Bay Travel Group Limited
Bluestone Consolidated Holdings Ltd
BoS Mezzanine Partners Fund LP
Brington North Holdco Ltd
Bybox Group Holdings Ltd
Caedmon Homes (St Johns Mews) Limited
Canopy Holdco Limited
Cala Properties (Holdings) Limited
Capital Economics Research Ltd
Cardel Group Limited
Cary Towne Parke Holdings LLC
Cary Towne Parke LLC
Caedmon Homes Limited
Chester Business Park Management Company Ltd
Chiron Topco Limited
CIPHR Group Ltd
City & General Securities Ltd
City Living (Midlands) Limited
Citysprint (UK) Holdings Ltd
Cleanslate Ashford Limited
CMS Acquisitions Company Ltd
Cobaco Holdings Ltd
Coln Signature Homes Limited
Connect Managed Holdings Ltd
Connery Ltd
Continental Shelf 225 Ltd (In liquidation)
Continental Shelf 291 Ltd (In liquidation)
Cruden Homes (Aberlady) Limited
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
DHHG1 Limited
Dino Newco Ltd
Duchy Homes (Penistone) Ltd
Duchy Homes (Scawthorpe) Ltd
EDM Business Services Holdings Ltd
Eley Group Ltd
Ellis Whittam (Holdings) Ltd
Ensco 997 Limited
Ensek Holdings Limited
Equiom Holdings Ltd
Europa Property Company (Northern) Ltd
European Property Fund (Holdings) Ltd SARL
Everest Acquisition Company Limited
Express Engineering (Group) Ltd
FDL Salterns Ltd
Fern Bay Seaside Village Ltd (In liquidation)
FHR European Ventures LLP
Frontline Estates St Johns Walk Limited
Georgian House Developments (Investments) Ltd
Ginger Acquisition Company Limited
Guardian Holdings Limited
Great Wigmore Property Ltd
Hamsard 3468 Limited
Harrier Developments Limited
Heckfords Road Great Bentley Ltd
Hedge End Place (Durkan) LLP
Hedge End Place Hold Co Ltd
Helsinki Topco Ltd
Hillcrest Homes (Hurst Green) Limited
HTF Finco Limited
Iglufastnet Ltd
Ingleby (1884) Ltd
Ingleby (2016) Ltd
Inprova Group Ltd
IP Solutions Holdings Limited
Kenmore Capital 2 Ltd (In liquidation)
Kenmore Capital 3 Ltd (In receivership)
Kenmore Capital Ltd (In liquidation)
Keoghs Topco Ltd
KHL 2017 Limited
KHL Newco Limited
LCP Baby Investors LP (in process of disposal)
Lidcombe Unincorporated JV
LKR Holdings Limited
London Topco Ltd
Lothian Fifty (150) Ltd (In liquidation)
Magicard Holdings Ltd
Marvel Newco Ltd
Mitrefinch Holdings Ltd
50%
50%
50%
50%
89.25%
25%
50%
25%
99%
99%
99%
n/a
50%
89.25%
24.50%
89.25%
99.25%
100%
99%
89.25%
n/a
n/a
24%
24%
22%
74.84%
89.25%
100%
50%
82%
91.22%
25%
99%
90%
50%
89%
89%
27.75%
20%
100%
100%
50%
99%
99%
50%
99%
50%
50%
25%
89.25%
50%
50%
81.65%
85.85%
89.25%
32.74%
99%
99%
100%
24.9%
89.25%
26.98%
99%
50%
34.48%
n/a
25%
50%
89.25%
87.25%
50%
89.25%
50%
50%
n/a
50%
99%
50%
33.3%
89.25%
80.83%
99%
89.25%
89%
89.25%
50%
50%
50%
99%
84.4%
84.4%
89%
99%
89%
n/a
50%
89%
62.81%
100%
89.25%
89.25%
89%
89.25%
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
Meadows Causeway, Radipole, Weymouth, Dorset, United Kingdom, DT4 9RY
The Grange, Harnett Drive, Wolverton Mill, Milton Keynes, Buckinghamshire, MK12 5NE
DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS
6th Floor 25 Farringdon Street, London, EC4A 4AB
New Fetter Place, 8‑10 New Fetter Lane, London, EC4A 1AZ
A4 Bellringer Road, Trentham Business Quarter, Stoke‑On‑Trent, ST4 8GB
Newnham Mill, Newnham Road, Cambridge, CB3 9EY
7 Melville Crescent, Edinburgh, EH3 7JA
25 Gresham Street, London, EC2V 7HN
1‑2 Cherry Barn, High Street, Harwell, Oxford, OX11 0EY
Alderside Thirsk Road, Easingwold, York, YO61 3HJ
Bath Yard Bath Yard, Moira, Swadlincote, Derbyshire, England, DE12 6BA
Johnstone House, 52‑54 Rose Street, Aberdeen, AB10 1HA
100 Victoria Street, London, England, SW1E 5JL
5 The Marquis Centre, Royston Road, Baldock, Hertfordshire, England, SG7 6XL
Jeffrey Cohen, 1066 Woodward Avenue, Detroit, MI 48226, United States
100 Galleria Officentre, Suite 419, Southfield MI 48034, United States
Alderside Thirsk Road, Easingwold, York, YO61 3HJ
Drake House, Gadbrook Park, Rudheath, Northwich, CW9 7TW, United Kingdom
22 Grenville Street, St Helier, Jersey, Channel Islands, JE4 8PX
Abbey Place, 24‑28 Easton Street, High Wycombe, HP11 1NT, United Kingdom
10 Upper Berkeley Street, London, W1H 7PE
Old Banks Chambers, 582‑586 Kingsbury Road, Erdington, Birmingham, B24 9ND
Ground Floor, Redcentral, 60 High Street, Redhill, RH1 1SH
Chobham Farm, Sandpit Hall Road, Chobham, Surrey, GU24 8 HA
Caisteal Road, Castlecary, Cumbernauld, Glasgow, G88 0FS
Cobaco House, North Florida Road, Haydock Industrial Estate, Merseyside, WA11 9TP
2nd Floor 19 Apex Court Woodlands, Almondsbury Business Centre, Bristol, BS32 4JT
4th Floor, Chancellor House, 5 Thomas More Square, London, E1W 1YW, United Kingdom
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
Baberton House, Juniper Green, Edinburgh, EH14 3HN, United Kingdom
7th Floor, 111 Piccadilly, Manchester, M1 2HY, United Kingdom
Level 1, Devonshire House, Mayfair Place, London, England, W1J 8AJ
1st Floor, Exchange Place, 3 Semple Street, Edinburgh, EH3 8BL
Eastfield Industrial Estate, Salter Road, Scarborough, North Yorkshire, YO11 3DU
4th Floor, 4 Victoria Square, St Albans, AL1 3TF, United Kingdom
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA
220 West George Street, Glasgow, G2 2PG, United Kingdom
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
The Yard Dodd Lane, Westhoughton, Bolton, Bl5 3NU
The Watercourt, 116‑118 Canal Street, Nottingham, NG1 7HF
Jubilee Buildings, Victoria Street, Douglas, Isle of Man, IM 1 2SH
Europa House, 20 Esplanade, Scarborough, North Yorkshire, YO11 2AQ
1 Allee Scheffer, Luxembourg, l‑25250, Luxembourg
1 Park Row, Leeds, LS1 5AB
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
20‑22 Wenlock Road, London, N1 7GU
35 St Leonards Road, Northampton, Northamptonshire, United Kingdom, NN4 8DL
Tudno Mill, Smith Street, Aston‑Under‑Lyne, Ol7 0DB, United Kingdom
Merlin House, Brunel Court Village Farm Industrial Estate, Pyle, Bridgend, CF33 6BL
33 Cavendish Square, London, W1G 0PW
Squire Patton Boggs (UK) LLP (Ref:CSU), Rutland House, 148 Edmund Street, Birmingham, B3 2JR
4 Melbourne House Corbygate Business Park, Priors Haw Road, Corby, Northamptonshire, England, NN17 5JG i
Bonks Hill House, High Wych Road, Sawbridgeworth, United Kingdom, CM21 9HT
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
Mynshulls House, 14 Cateaton Street, Manchester, M3 1SQ
The Zenith Building, 26 Spring Gardens, Manchester, M2 1AB
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
Bury House, 31 Bury Street, London, EC3A 5AR
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
2 The Parklands, Bolton, Lancashire, BL6 4SE
One Eleven, Edmund Street, Birmingham, England, B3 2HJ
Barrington House, Heyes Lane, Alderley Edge, Cheshire, SK9 7LA
International Corporation Services Ltd, Harbour Place, 2nd Floor, 103 South Church Street, George Town,
Grand Cayman, KY1106, Cayman Islands
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
111‑113 Great Portland Street, 3rd Floor, London, W1W 6QQ
Gloucester Road, Cheltenham, Gloucester, GL51 8NR
55 Baker Street, London, W1U 7EU
Waverley House, Hampshire Road, Granby Industrial Estate, Weymouth, DT4 9XD
1 Prince Of Wales Road, Norwich, England, NR1 1BD
Mitrefinch House, Green Lane Trading Estate, Clifton, York, North Yorkshire, YO30 5YY
*
*
xiv
i &
i &
i &
i
i &
i &
i
i &
i
ii
ii
i &
i &
iv
*
&
i &
i &
iv
iv &
i &
i &
*
*
i
iv
i &
ii &
i &
i
i &
i &
i
i &
i
ii
&
i &
i &
i &
i &
ii
i &
i
i &
i &
i &
i &
iv &
i &
i &
vii &
ii &
i &
i &
iii
i
i &
* &
i
i &
i &
&
i &
*
&
i
i
&
i &
i &
i
i &
i &
i &
ii
ii
ii
ii &
i &
ii
i
ii
vii
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
272 Lloyds Banking Group Annual Report and Accounts 2017
Subsidiaries and related undertakings continued
Morston Assets Ltd (In administration)
Motability Operations Group plc
Mulberry Property Developments (HGP) Ltd
20.08%
20% (40%)
20% (40%)
50%
KPMG LLP, Arlington Business Park, Theale, Reading, Berkshire, RG7 4SD
City Gate House, 22 Southwark Bridge Road, London, SE1 9HB
Units 3‑4 Twigden Barns Grooms Lane, Creaton, Northampton, England, NN6 8NN
Strategic Business Centre, Blue Ridge Park, Thunderhead Ridge, Glasshoughton, West Yorkshire,
i
iv
i
My 360 Living Limited
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
Port Coogee Unincorporated JV
Potter Topco Limited
Prestbury 1 Limited Partnership
Prestbury Hotel Holdings Ltd (In liquidation)
Project Polka Bidco Limited
Prism Medical Healthcare Ltd
PW Growth Finance Limited
Quantel Holdings Ltd
Quantum (Flimwell) Limited
Ramco Acquisition Ltd
Rectory (Aston Clinton) Ltd
Rolls Development UK Ltd (In Liquidation)
Rush Hair Group Limited
Scenic Topco Limited
Seaspray Unincorporated JV
SHOO 788AA Ltd
SHOO 802AA Limited
Specialist People Services Group Ltd
SSP Topco Ltd
Stewart Milne (Glasgow) Ltd
Stewart Milne (West) Ltd
Stratus (Holdings) Ltd
Stroma Group Ltd
Sunshine Unincorporated JV
Tatton Hall Homes (Bradmore) Limited
Team 17 Holdings Ltd
Temple Topco Limited
The Exceed Partnership LP
The Great Wigmore Partnership (G.P.) Ltd
The Great Wigmore Partnership
The Pallet Network Group Limited
The Power Industrial Group Limited (In liquidation)
Thistlerow Ltd
Thread Real Estate Cary Towne Park LLC
Timec 1601 Limited
Travellers Cheque Associates Ltd
United House Group Holdings Ltd
United Living Group Ltd
Velocity Holdco Limited
Vulcan Topco Ltd
Whittington Facilities Limited
Willoughby (873) Ltd (In administration)
Willoughby (880) Ltd
Zog Brownfield Ventures Ltd (In administration)
50%
89.25%
89.25%
65.3%
39.4%
39%
82.5%
100%
82.5%
82.5%
89.25%
89.25%
89.25%
89.25%
89%
89%
89.25%
89.25%
89.25%
100%
100%
100%
100%
96.28%
100%
82.5%
42.8%
30.58%
50%
89.25%
n/a
100%
89.25%
89%
95.24%
100%
24.57%
89.45%
89.45%
89.45%
50%
50%
89.25%
89.25%
n/a
89.25%
89.25%
82.5%
82.5%
82.5%
88.8%
100%
100%
82.5%
82.5%
99%
n/a
50%
89.25%
89.25%
89.25%
n/a
50%
n/a
89.25%
82.5%
82.5%
25%
n/a
89.25%
36%
81.65%
100%
98.55%
99%
89.25%
89.25%
100%
95.95%
89.25%
50%
WF10 4AU, United Kingdom
16 Kirby Street, London, EC1N 8TS
National Exhibition Centre, Birmingham, B40 1NT
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
Birkbecks, Water Street, Skipton, North Yorkshire, BD23 1PB
Seabrook House, Duncombe Street, Bradford, West Yorkshire, BD8 9AJ
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ
140 London Wall, London, EC2Y 5DN
3 Trinity Park, Solihull, West Midlands, B37 7ES
55 Baker Street, London, W1U 7EU
The Beacon, 176 St. Vincent Street, Glasgow, G2 5SG
N/A
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ
i
i &
i
&
ii &
+
i &
iv
i &
i
i &
i
i &
i
i &
i
i
i &
i &
xvi &
xvii
xviii
xix
ii &
ii &
i &
ii
vii
*
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
i &
Lakelovers House, Victoria Street, Windermere, Cumbria, United Kingdom, LA23 1AB
* &
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
15 Canada Square, London, E14 5GL
vii &
Roundhouse Road, Faverdale Industrial Estate, Darlington, County Durham, DL3 0UR, United Kingdom ii &
i &
Unit 4, Jubilee Business Park, Jubilee Way, Grange Moor, West Yorkshire, WF4 4TD
vii
140 Aldersgate Street, London, England, EC1A 4HY
Turnpike Road, Newbury, Berkshire, RG14 2NX
i &
Kings Parade, Lower Coombe Street, Croydon, CR0 1AA
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
Meriden Hall, Main Road, Meriden, Coventry
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
Dearing House, 1 Young Street, Sheffield, S1 4UP
i &
xix
xix
i
ii
i &
i &
*
i &
i
i &
iii
iv
i &
i
i
i &
i
i &
*
i
i
xv &
i &
*
*
i
i &
i &
*
i &
Rectory House, Thame Road, Haddenham, Aylesbury, Buckinghamshire, HP17 8DA
4th Floor , 4 Victoria Square, St Ablans, Hertfordhsire, AL1 3TF, United Kingdom√
23 George Street, Croydon, Surrey, CR0 1LA
One Central Square, Cardiff, CF10 1FS
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
21‑22 Balena Close, Poole, Dorset, BH17 7DX
Burleighfield House, London Road, Loudwater, Buckinghamshire, HP10 9RF
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
3MC Middlemarch Business Park, Siskin Drive, Coventry, West Midlands, England, CV3 4FJ
Unit 4, Pioneer Way, Castleford, West Yorkshire, WF10 5QU
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
34 Waterloo Road, Wolverhampton, West Midlands, England, WV1 4DG
Castleview House, Calder Island Way, Wakefield, West Yorkshire, WF2 7AW
Market Place, Henley‑On‑Thames, Oxfordshire, RG9 2AD
Cavendish House, 39‑41 Waterloo Street, Birmingham, B2 5PP
33 Cavendish Square, London, W1G 0PW
33 Cavendish Square, London, W1G 0PW
Prologis Park, Midpoint Way, Minworth, Sutton Coldfield, West Midlands, B76 9EH
Deloitte LLP, 1 City Square, Leeds, LS1 2AL
Radleigh House 1 Golf Road, Clarkston, Glasgow, G76 7HU
Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States
Waterloo House, Thornton Street, Newcastle Upon Tyne, England, England, NE1 4AP
Belgrave House, 76 Buckingham Palace Road, London, SW1W 9AX
26 Kings Hill Avenue, Kings Hill, West Malling, Kent, ME19 4AE
Media House, Azalea Drive, Swanley, Kent, BR8 8HU
Unit 1 22 Aspen Way, Paignton, Devon, United Kingdom, TQ4 7QR
2 Mountview Court, 310 Friern Barnet Lane, Wheststone, London, N20 0YZ
i &
i &
xvii
i &
i &
i
v &
Cannon Place, 78 Cannon Street, London, EC4N 6AF
Four, Brindley Place, Birmingham, West Midlands, B1 2HZ
i &
IMEX, 575‑599 Maxted Road, Hemel Hempstead Industrial Estate, Hemel Hempstead, Herts, HP2 7DX i &
1 More London Place, London, SE1 2AF
Collective Investment Vehicles
The following comprises a list of the Group’s and other external collective
investment vehicles (CIV), where the shareholding is greater than or equal
to 20 per cent of the nominal value of any class of shares, or a book value
greater than 20 per cent of the CIV’s assets.
% of fund held by
immediate parent
(or by the Group
where this varies
Notes
Name of undertaking
ABERDEEN INVESTMENT ICVC
56.79%
Aberdeen European Property Share Fund
77.36%
Aberdeen Sterling Bond Fund
Aberdeen European Global High Yield Bond Fund
24.25%
Aberdeen Sterling Opportunistic Corporate Bond Fund 34.58%
ABERDEEN INVESTMENTS ICVC II
Aberdeen Global Corporate Bond Tracker Fund
97.86%
ABERDEEN INVESTMENT ICVC III
Aberdeen Global Emerging Markets Quantitative
70.62%
Equity Fund
ABERDEEN LIQUIDITY FUND (LUX)
Aberdeen Liquidity Fund (Lux) ‑ Sterling Fund
Aberdeen Liquidity Fund (Lux) ‑ Euro Fund
Aberdeen Liquidity Fund (Lux) ‑ Ultra Short Duration
52.49%
20.88%
61.20%
Sterling Fund
ABERDEEN PRIVATE EQUITY FUND OF FUNDS (2007)
96.08%
PLC
ACS POOLED PROPERTY
Scottish Widows Pooled Property ACS Fund
Scottish Widows Pooled Property ACS Fund2
100%
100%
BLACKROCK BALANCED GROWTH PORTFOLIO FUND 42.06%
BLACKROCK UK SMALLER COMPANIES FUND
23.09%
BNY MELLON INVESTMENTS FUNDS ICVC
Insight Global Multi‑Strategy Fund
Insight Global Absolute Return Fund
Newton Multi‑Asset Growth Fund
Newton UK Opportunities Fund
Newton UK Income 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
Absolute Insight Fund
43.84%
73.62%
29.15%
42.36%
27.38%
94.47%
92.49%
96.56%
96.49%
81.71%
94.19%
53.63%
95.80%
52.61%
83.59%
40.57%
66.86%
51.67%
62.43%
62.36%
58.47%
40.50%
32.65%
53.98%
58.43%
61.29%
INVESCO PERPETUAL FAR EASTERN INVESTMENT
SERIES
Invesco Perpetual Asian Equity Income Fund
24.38%
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
RUSSELL INVESTMENT COMPANY PLC
Russell Euro Fixed Income Fund
Russell Sterling Bond Fund
Russell U.S. Bond Fund
SCHRODER GILT AND FIXED INTEREST FUND
SCOTTISH WIDOWS INCOME AND GROWTH FUNDS
ICVC
UK Index Linked Gilt Fund
21.81%
82.23%
29.30%
21.50%
29.73%
38.48%
48.73%
23.75%
100%
Lloyds Banking Group Annual Report and Accounts 2017 273
Corporate Bond PPF Fund
SW Corporate Bond Tracker
Scottish Widows GTAA 1
Corporate Bond 1 Fund
Balanced Growth Fund
Adventurous Growth Fund
SCOTTISH WIDOWS INVESTMENT SOLUTIONS FUNDS
ICVC
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
SCOTTISH WIDOWS MANAGED INVESTMENT FUNDS
ICVC
International Equity Tracker Fund
Balanced Portfolio Fund
Progressive Portfolio Fund
Cautious Portfolio Fund
Cash Fund
Opportunities Portfolio Fund
SCOTTISH WIDOWS OVERSEAS GROWTH
INVESTMENT FUNDS ICVC
Global Growth Fund
European Growth Fund
American Growth Fund
Pacific Growth Fund
Japan Growth Fund
SCOTTISH WIDOWS TRACKER AND SPECIALIST
INVESTMENT FUNDS ICVC
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
SCOTTISH WIDOWS UK AND INCOME INVESTMENT
FUNDS ICVC
UK Corporate Bond Fund
UK Growth Fund
Gilt Fund
High Income Bond Fund
Strategic Income Fund
Environmental Investor Fund
Ethical Fund
SSGA ASIA PACIFIC TRACKER FUND
SSGA EUROPE (EX UK)
SSGA UK EQUITY TRACKER FUND
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
Euro Cautious
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%
100%
84.39%
100%
27.17%
71.69%
45.76%
37.40%
45.42%
55.13%
57.85%
68.08%
76.79%
96.77%
95.74%
94.71%
99.71%
85.30%
96.68%
95.50%
98.39%
96.17%
91.85%
77.65%
82.19%
72.76%
60.17%
99.06%
92.18%
54.22%
90.07%
87.81%
76.54%
98.62%
92.70%
32.96%
28.56 %
47.44%
96.28%
89.40%
50.89%
94.23%
62.79%
62.02%
95.99%
25.77%
63.23%
69.89%
73.65%
86.64%
96.10%
92.43%
100%
84.64%
100%
100%
100%
90.89%
100%
100%
97.56%
73.76%
87.67%
93.57%
78.82%
69.14%
93.52%
76.15%
98.70%
99.96%
22.01%
21.56%
26.39%
25.42%
44.79%
2
2
2
2
2
4
4
4
4
5
6
2
21
17
8
8
8
7
3
2
9
9
10
1
1
1
1
1
18
18
18
11
12
19
2
15
16
2
Other informationStrategic reportFinancial resultsGovernanceFinancial statementsRisk management
274 Lloyds Banking Group Annual Report and Accounts 2017
Subsidiaries and related undertakings continued
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
(48) 6/12, Primrose Road, , Bangalore , 560025, India
(49) Avenida Jurubatuba 73, 8˚ Andar, Vila Cordeiro, Såo Paulo, SP, CEP 04583‑100, 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, EH4 1PF
(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
(58) 44 Chipman Hill, Suite 1000, St. John, NB E2L 2A9, Canada
(59) 155 Bishopsgate, London, EC2M 3YB
(60) P O Box 12, Peveril Buildings, Peveril Square, Douglas, Isle of Man, IM99 1JJ
(61) 44 Esplanade, St. Helier, Jersey, JE4 9WG
(62) Asticus Building 2nd Floor, 21 Palmer Street, London, SW1H 0AD
(63) 26 New Street St Helier Jersey JE2 3RA
(64) Fred. Roeskestraat 123, 1076 EE, Amsterdam, Netherlands
(65) Avenue Louise 331‑333, 1050 Brussels, Belgium
(66) Naritaweg 165, 1043 BW, Amsterdam, Netherlands
(67) Calle Pinar 7, 50Izquierda, 28006, Madrid, Spain
(68) 2nd Floor Beaux Lane House, Mercer Street Lower, Dublin 2, Ireland
(69) Wilmington Trust SP Services (London) Limited, Third Floor, 1 King’s Arms Yard, London,
Luxemburg
EC2R 7AF
(70) 40a Station Road, Upminster, Essex, RM14 2TR
(71) 1 Grant’s Row, Lower Mount Street, Dublin 2, Ireland
(72) Black Horse House, Bentalls, Basildon, Essex, SS14 3BY
(73) Maples and Calder, P.O. Box 309, Ugland House, South Church Street, George Town,
Grand Cayman, KY1‑1104, Cayman Islands
(74) 106 Goring Road, Goring By Sea, Worthing, West Sussex, BN12 4AA
(75) 8 Avenue Hoche, 75008, Paris, France
(76) 10 George Street, Edinburgh, EH2 2DZ
(77) Pentagon House, 52‑54 Southwark Street, London, SE1 1UN
(78) Riverside House, 502 Gorgie Road, Edinburgh, EH11 3AF
(79) St William House, Tresillian Terrace, Cardiff, CF10 5BH
(80) Drake House, Gadbrook Park, Rudheath, Northwich, CW9 7TW, United Kingdom
(81) Tower House, Charterhall Drive, Chester, CH88 3AN
(82) Stansfield House, Chester Business Park, Chester, CH4 9QQ, United Kingdom
(83) Glategny Court, Glategny Esplanade, St Peter Port, GY1 3HQ, Guernsey
(84) The Residency, 7th Floor, 133/1 Residency Road, Bangalore, 560025, India
(85) 1A Heienhaff, Senningerberg, L‑1736, Luxembourg
(86) 30 Finsbury Square, London, EC2P 2YU, United Kingdom
(87) Fifth Floor, 100 Wood Street, London, EC2V 7EX, United Kingdom
(88) EY Atria One, 144 Morrison Street, Edinburgh, EH3 8EB
(89) PO BOX 12757, 67 Morrison Street, Edinburgh, Lothian, EH3 8YJ
(90) Sitz, Niederlassung, Inländische Geschäftsanschrift, Empfangsberechtigte Person,
Zweigniederlassungen, Berlin
(91) 20 Rue de la Poste, L‑2346 Luxembourg
(92) 106 Route d'Arlon, Mamer, L‑8210, Luxembourg
(19) LDI Solutions Plus plc, 32 Molesworth Street, 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
(xiv) D Ordinary Shares
(xv) E Ordinary Shares
(xvi) W Ordinary Shares
(xvii) X Ordinary Shares
(xviii) Y Ordinary Shares
(xix) Z Ordinary Shares
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) 6 Rue Jean Monnet, L‑2180 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) 4th Floor, 4 Victoria Square, St Albans, AL1 3TF, United Kingdom
(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
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Head office
25 Gresham Street
London EC2V 7HN
+44 (0)20 7626 1500
www.lloydsbankinggroup.com
Registered office
The Mound
Edinburgh EH1 1YZ
Registered in Scotland no. SC95000