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Lloyds Banking Group
Annual Report and Accounts 2018
About us
We are the largest UK retail fi nancial services
provider with around 26 million customers
and a presence in nearly every community.
The Group’s 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
fi nancial 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
fi nancial condition, performance, results,
strategic initiatives and objectives. For
further details, reference should be made to
the forward looking statements on page 287.
This icon appears throughout
this report highlighting
how we are Helping Britain
Prosper. Read more online at
lloydsbankinggroup.com
View our Annual Report and
Accounts and other information
about Lloyds Banking Group at
lloydsbankinggroup.com
The 2018 Annual Report and Accounts
incorporates the strategic report and the
consolidated fi nancial statements, both of which
have been approved by the Board of Directors.
On behalf of the Board
Lord Blackwell
Chairman
Lloyds Banking Group
19 February 2019
Our purpose is to Help Britain Prosper.
We are transforming the business into
a digitised, simple, low risk, fi nancial
services provider whilst creating a
responsible business that focuses on
customers’ needs. This is key to our
long-term success and to fulfi lling
our aim to become the best bank for
customers, colleagues and shareholders.
Business model on
pages 10 to 11
Inside this year’s Annual Report
Strategic report
Group highlights
Chairman’s statement
Group Chief Executive’s review
Key performance indicators
Our external environment
Our business model
Our strategic priorities
Refl ecting the needs of our stakeholders
Responsible Business
Helping Britain Prosper Plan
Divisional overview
Risk overview
Financial results
Summary of Group results
Divisional results
Other fi nancial information
Governance
A letter from our Chairman
Board of Directors
Group Executive Committee
Corporate governance report
Directors’ report
Directors’ remuneration report
Other remuneration disclosures
01
02
04
06
08
10
12
16
19
20
27
30
37
44
48
51
52
54
56
79
82
100
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 fi nancial statements
Parent company fi nancial statements
Other information
Shareholder information
Five year fi nancial summary
Forward looking statements
Abbreviations
Alternative performance measures
Subsidiaries and related undertakings
106
108
110
110
112
114
161
170
275
284
286
287
288
288
289
Lloyds Banking Group Annual Report and Accounts 2018 01
Group highlights
Strong financial and strategic performance
2018 has been a successful year for the Group in which we have continued to
Help Britain Prosper, economically, socially and environmentally. In February
2018, we launched the next phase of our strategic plan and have made strong
strategic progress with significantly improved financial performance.
£6.0bn
+13%
Statutory profit before tax
increased significantly, further
closing the gap between
statutory and underlying profit
3.21p
+5%
Ordinary dividend per share
including interim and final
dividend. In addition the Group
intends to implement a share
buyback of up to £1.75bn
Key performance
indicators on pages 06 to 07
£8.1bn
+6%
Underlying profit increased,
driven by higher income, and
lower costs
5.5p
+27%
Earnings per share increased
in the year, largely due to
the significant increase in
statutory profit
>£3bn
Strategic investment spend over
the three year plan period
(2018 to 2020), significant increase
on prior plan
11.7%
+2.8pp
Group delivering a market
leading return on tangible equity
49.3%
(2.5)pp
Cost:income ratio including
remediation further improved
15.7m
Digitally active customers, the
largest digital bank in the UK
Strategic priorities on
pages 12 to 15
HOW WE’VE HELPED
BRITAIN PROSPER IN 2018
get a home
£12.4bn
in lending to first
time buyers
>3,000
charities supported, one of
the largest corporate donors
in the UK
Find out more about our Helping
Britain Prosper Plan on page 20
visit lloydsbankinggroup.com/
prosperplan
Championing Britain's
>700,000
of individuals, SMEs and
charities trained in digital skills
35.3%
of senior roles held
by women
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationHelping BritainBuilding capabilityand digital skillsTackling socialdisadvantage across Britaindiversity
02 Lloyds Banking Group Annual Report and Accounts 2018
Chairman’s statement
Transforming the Group for success
in a digital world
At the heart of our
success is our purpose
to Help Britain Prosper
and we are playing a
vital role in supporting
people, businesses and
communities across
the UK.
Lord Blackwell
Chairman
Overview and strategy
The Group once again delivered strong
financial performance in 2018 while making
major strides in executing our strategic
transformation. Nevertheless I am conscious
it was a frustrating year for shareholders,
with a disappointing share price performance
despite this progress. While external factors
affecting UK investments are outside of
our control, the Board are determined to
continue building value for shareholders
by maintaining our focus on delivering
continued improvement in our results whilst
simultaneously investing in the transformation
required to serve our customers and
operate effectively in a digital world. We
are committed to building a successful and
sustainable Group we can all be proud of.
The Board has been actively involved in the
development and ongoing review of the
strategy and last year we announced the
next phase of our strategic plan. We outlined
our four transformation 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. This programme of change and
renewal is all embracing, and our strong
capital build is enabling us to invest more than
£3 billion in these strategic initiatives over the
current three year plan period (2018 to 2020),
a significant increase over the prior period.
During 2018, the Board were excited to see
the excellent progress that had been made
within the first year of this plan. We are now
operating in an industry which is experiencing
more change through digitisation than in its
entire history. Our aim is not just to maintain
our position as Britain’s biggest digital bank by
competing more effectively, but also to seize
opportunities to create more value from the
wider and deeper relationships we can build
with our customers through digital channels
and service capabilities.
One important component of this
opportunity is the potential to provide a
deeper range of financial planning, wealth
management and retirement solutions to our
bank customers, drawing on the capabilities
and expertise within Scottish Widows. During
2018, as well as completing the acquisition
of the UK workplace pensions and savings
business from Zurich Financial Services,
we were delighted to announce a strategic
partnership with Schroders in October with
the aim of creating a market leading wealth
management proposition.
Capital return
At each year end the Board makes an
assessment of the strength of the Group’s
balance sheet and future prospects relative
to uncertainties in the external environment.
In addition to the increased investment of
more than £3 billion over the plan period,
I am pleased to announce that, as a result
of the financial progress in the year, the
Board has recommended an increased final
ordinary dividend of 2.14 pence per share,
bringing the total ordinary dividend for
2018 to 3.21 pence per share, an increase of
5 per cent on last year. In line with the Group’s
policy to deliver a progressive and sustainable
ordinary dividend, whilst distributing surplus
capital, the Board also intends to implement
a share buyback of up to £1.75 billion. More
information on the intended share buyback is
provided on page 40.
Our purpose
At the heart of our success is our continued
focus on Helping Britain Prosper. The Group
plays a vital role in supporting the prosperity
of people, businesses and communities
across the UK, and in doing so builds deep,
long-term customer relationships. It is also
important to the Board that our strategy is
fully consistent with our commitments as a
responsible business and during the year
we have committed to becoming a leader in
supporting the UK to transition successfully
to a more sustainable low carbon economy.
We recognise that the success of the Group is
inextricably linked to the health of the UK and
in this uncertain economic environment we are
working hard to support the whole economy;
and to help businesses take advantages of
the continuing opportunities we have to build
a prosperous future for the nation. Given
the UK’s ongoing competitive advantages
as an open, innovative economy we remain
optimistic about the long-term prospects.
In line with these objectives I am delighted
that we have been named as a Top Ten
Employer for Working Families, Responsible
Business of the Year, and also The Times’ Top
50 Employer for Women – showing that we’re
leading the way on gender equality too.
Customers and communities
Over the course of the year I have travelled
across Britain to meet with colleagues,
customers and communities. These visits
enable me to see first-hand the work we do
to support our customers and respond to
their changing needs. Being truly customer
focused is a prerequisite for success and I am
always impressed by the fact it is an aspiration
and commitment shared by everyone I meet
in the Group.
Our focus on customers also continues to be
recognised through various awards which
this year included being awarded Bank of the
Year for the sixth year running at The Banker
awards; and for the third year in a row Scottish
Widows won five stars at the Financial Adviser
Service Awards, a reflection on how financial
advisers rate our products and services.
During the year our colleagues raised close
to £4 million for Mental Health UK, our charity
partner, bringing our total to over £8 million
since the partnership began in 2017. Seeing
first-hand how our Foundations and colleague
fund raising is helping charities all over the
UK really brings perspective to the positive
impact we are having in keeping with our
purpose to Helping Britain Prosper.
Lloyds Banking Group Annual Report and Accounts 2018 03
HELPING BRITAIN PROSPER
OUR CONTRIBUTION
TO THE UK
As the UK’s leading financial
services provider we are
making a significant positive
impact on the UK economy
Colleagues
One of the largest
employers in the UK
Communities
£56 million to help
communities in 2018
More than 200,000
hours volunteered
Payments
£15 trillion of payments
processed in 2018 =
7 x UK GDP
Tax
£2.6 billion paid in 2018
The UK’s largest corporate
tax payer
Investment
More than £3 billion
strategic investment spend
over the plan period
Lending
£64 billion SME and Mid
Markets lending portfolio
Biggest mortgage lender
in UK with c.£290 billion
portfolio
Dividends
£2.3 billion paid in dividends
to 2.4 million shareholders
Outlook
As we look ahead to 2019, the UK continues to
face uncertainty around the near-term outlook
for the economy reflecting both EU exit
negotiations and wider global economic
risks. However we have a strong and resilient
business and, as we accelerate into the
second year of our strategic transformation,
we believe that our customer focus and simple
business model with its multi-brand, multi-
channel proposition will continue to provide
the best opportunities for competitive
advantage and future success.
I would like to thank all of our colleagues
for their contribution to making 2018 such a
successful year. It is the commitment, support
and dedication from all of them that enables
us to succeed.
Lord Blackwell
Chairman
There is of course much more to do, but
I know we will do even greater good in the
year ahead.
Directors
We review the Board composition and
diversity regularly and are committed to
ensuring we have the right balance of skills
and experience within the Board. During the
year we have announced a number of Board
changes, as outlined below.
In October, Amanda Mackenzie joined the
Board as a Non-Executive Director, and
will serve as a member of the Board Risk
Committee, Remuneration Committee
and Responsible Business Committee.
Further biography details can be found on
page 53. At the end of December 2018,
Deborah McWhinney stepped down as
a Non-Executive Director of the Group
for personal reasons and Stuart Sinclair
succeeded Anita Frew as Chairman of the
Board Remuneration Committee. Anita will
continue to be a member of the Committee,
alongside her roles as the Group’s Deputy
Chairman and Senior Independent Director.
In addition, we’re also pleased to announce
that Nigel Hinshelwood, Sarah Bentley and
Brendan Gilligan joined as independent
Non-Executive Directors of the Group’s Ring-
Fenced Banks on 1 January 2019 where they
serve alongside the Group Board Directors.
More information on the ring-fencing
restructure is provided on page 58.
In October George Culmer announced that
he would be retiring in the third quarter
of 2019, having served the Group so well
since joining in 2012. I want to pay tribute
to George’s tremendous contribution and
to thank him on behalf of the Board, our
colleagues and our shareholders.
In February 2019, the Group was pleased to
announce that William Chalmers will succeed
George Culmer as Executive Director and
Chief Financial Officer. I look forward to
welcoming him to the executive team and
the Board.
Remuneration
During the year we were disappointed
to receive a 20.78 per cent advisory vote
against our remuneration report, having
previously had 98 per cent of votes support
the Directors' remuneration policy in 2017.
We have listened carefully to our shareholders
and other key stakeholders and have made
a number of changes to simplify our process
for determining bonus awards for Executive
Directors and to enhance our disclosures.
We continue to align our remuneration
principles to the Group’s strategic objectives
to ensure we reward performance and ensure
our approach to remuneration is aligned to
the interests of our shareholders.
Despite the Group’s strong financial
performance, the annual Group Performance
Share (GPS) award for Executive Directors
has decreased relative to last year. As set
out in the Remuneration Report, this reflects
the assessed performance against other
stretching operational and strategic goals,
which, while strong in 2018, was a step down
from the higher rating achieved in 2017.
Total GPS outcome remains a small
proportion of underlying profit at 5.1 per cent
and an even smaller proportion of overall
revenues. Cash GPS awards are capped at
£2,000 with additional amounts paid in shares
and subject to deferral and performance
adjustment to ensure their ultimate value
reflects sustained performance. More
information on how we ensure our approach
to remuneration supports our strategy can be
found in the Directors’ remuneration report on
pages 84 to 104.
We believe that our customer
focus and simple business
model will continue to provide
the best opportunities for
competitive advantage and
future success.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
04 Lloyds Banking Group Annual Report and Accounts 2018
Group Chief Executive’s review
Another year of strong strategic
and financial performance
Our continued
strong performance
positions us well
to succeed in a
digital world.
António Horta-Osório
Group Chief Executive
In 2018 the Group has again delivered
significant benefits for our customers
and a strong financial performance, with
increased profits and returns. As a result
of this performance, we have been able
to recommend an increased dividend and
share buyback. Our differentiated, customer
focused, UK business model continues to
position us well for sustainable success and
continuing to deliver our purpose of Helping
Britain Prosper.
I am clearly proud of our customer focus
and financial performance. To deliver this
sustainable success in the long-term we need
to ensure we remain focused on enhancing
customer experience. With this in mind, in
February 2018 we announced our ambitious
strategy to transform the Group for success
in a digital world, with a significant increase in
strategic investment. We have already made
a great start in implementing the strategic
initiatives which will further digitise the Group,
enhance customer experience, maximise our
capabilities as an integrated financial services
provider and transform the way we work.
In addition, towards the end of the year we
also announced a strategic partnership with
Schroders to create a market leading wealth
proposition. Continued delivery against our
strategic priorities positions us well for future
success and our confidence is reflected in
our guidance.
Given our UK focus, our performance is
inextricably linked to the health of the UK
economy. Over 2018, economic performance
has remained resilient with record
employment and continued GDP growth and,
whilst the near-term outlook remains unclear,
particularly given the ongoing EU withdrawal
negotiations, our strategy will continue to
deliver for our customers. Our strategy is
framed by our purpose of Helping Britain
Prosper, being the bank with the largest retail
and commercial presence throughout the
country. Our unique business model and
market leading efficiency will ensure we can
continue to invest in customer propositions
and grow our leading digital bank whilst
delivering strong financial performance and
market leading returns.
Financial performance
Statutory profit after tax of £4.4 billion
was 24 per cent higher than 2017 and
earnings per share at 5.5 pence per share
was 27 per cent higher. This was driven by
improved underlying profit including lower
remediation charges and we continue to
narrow the gap between underlying and
statutory profit, a trend we expect to continue
as statutory profits increase further. As a
result of this performance the Group has
delivered a further increase to our return
on tangible equity, which is now a market
leading 11.7 per cent. Underlying profit of
£8.1 billion increased 6 per cent, reflecting
growth in income and lower costs, partly
offset by the expected increase in the
impairment charge. Our relentless focus on
cost efficiency led to a reduction in operating
costs despite increased strategic investment,
and our cost:income ratio improved further
to 49.3 per cent. Asset quality remains strong
with the Group’s gross asset quality ratio
remaining flat at 28 basis points, while the net
asset quality ratio increased to 21 basis points,
from 18 basis points, driven by expected lower
releases and write-backs.
The Group’s loans and advances were
stable at £444 billion with growth in targeted
segments including SME, Mid Markets and
consumer lending offset by the sale of the
£4 billion Irish mortgage portfolio in the first
half of 2018. The Group’s capital position
remains strong with a pro forma CET1 ratio of
13.9 after allowing for ordinary dividends and
the share buyback.
Given the Group’s capital build of
210 basis points in the year, the Board has
recommended a final ordinary dividend
of 2.14 pence per share, bringing the total
ordinary dividend for the year to 3.21 pence
per share. This represents an increase of
5 per cent on 2017 and is in line with our
progressive and sustainable ordinary dividend
policy. In addition, the Board has announced
its intention to implement a share buyback
programme of up to £1.75 billion, equivalent
to 2.46 pence per share, up 76 per cent from
last year.
Strategic progress
In February 2018, we launched the third
stage of our strategic plan with an increased
strategic investment of more than £3 billion
over the three year plan period, building
on our unique competitive advantages,
to transform the Group to succeed in a
digital world.
Over the first year of the plan we have
delivered significant progress against our
strategic priorities of Leading customer
experience, Digitising the Group, Maximising
the Group's capabilities and Transforming
ways of working as outlined on the next page.
Helping Britain Prosper Plan
The Group’s success is intertwined with the
UK’s prosperity and we acknowledge we have
a responsibility to help address the economic,
social and environmental challenges the
country faces. We do this through our Helping
Britain Prosper Plan, which was simplified
and updated in 2018 to support our three
year strategy and focus on metrics that have
the most impact on people, businesses
and communities.
During 2018 we lent over £12 billion to first
time buyers and increased lending to SME
and Mid Market businesses by £3 billion to
Help Britain Prosper and have committed to
lending up to £18 billion in 2019 to businesses
as part of our continued support for the UK
economy. We have also provided digital skills
training for more than 700,000 individuals,
SMEs and charities, and supported over
3,000 charities through our independent
charitable Foundations.
Lloyds Banking Group Annual Report and Accounts 2018 05
STRATEGIC
PROGRESS
Significant progress has been made against our strategic priorities
since the launch of our strategic plan in February 2018
15.7m
Digitally active customers
24%
Year-on-year increase in
technology spend
>3m
customers with access to
Single Customer View
>1m
of future skills training
hours delivered
Leading customer
experience
Digitising
the Group
We are building a market leading
digital experience, and in 2018
launched API-enabled Open
Banking aggregation functionality
as well as enhanced security and
anti-fraud features. As part of
our multi-channel model we also
remain committed to maintaining
the UK’s largest branch network,
with one out of five branches in the
country, whilst tailoring it to meet
customers’ complex needs more
effectively. In the year we opened
our flagship Halifax branch,
increased our mobile branch fleet
to 44 and extended our remote
advice coverage to 270 branches.
We are also delivering increasingly
targeted customer propositions.
The success of our multi-channel,
multi-brand approach is reflected
in our net promoter score which
increased to 62 in the year and is
up c.50 per cent from 2011.
Strategic priorities and focus for
2019 on pages 12 to 15
We have increased investment in
technology which now represents
16 per cent of operating costs,
with over two-thirds relating to
enhancing existing capabilities
and creating new ones. This has
driven operational efficiencies
and improved the experience of
customers and colleagues.
We are adopting new
technologies, introducing
machine learning and creating
approximately 780,000 hours of
additional colleague capacity
through the use of robotics for
simple repetitive tasks. We have
also made targeted investments in
public and private cloud solutions,
which will deliver more efficient
and scalable infrastructure going
forward, whilst collaborating
with fintechs to accelerate the
digital transformation of the
business, as part of our broader
innovation strategy.
Maximising the
Group’s capabilities
In 2018 we launched Single
Customer View; a unique
capability already enabling over
3 million customers to view in one
place the pension and insurance
products they hold with the Group
alongside their banking products.
We have expanded our workplace
pensions and savings offering
to over 2 million customers and
have seen net inflows of £13 billion
into our financial planning and
retirement propositions.
We have also strengthened our
client relationship model and
improved online functionality for
Commercial Banking clients. Our
Schroders partnership announced
in October is a key part of our
strategy to accelerate growth in
Wealth by leveraging our multi-
channel customer reach and
Schroders’ investment expertise,
with the aim of becoming a
top three UK financial planning
business within five years.
Transforming
ways of working
We recognise that our colleagues
are critical to the success of
our transformation and are
therefore making our biggest ever
investment in our people.
In 2018 we have increased
training hours by over
50 per cent, including more than
1 million hours dedicated to
developing skills of the future.
We have also introduced more
modern collaborative working
environments, simplified people
processes by replacing several HR
systems with a single platform and
developed a new performance
management system ‘Your Best’
which launched in January 2019.
We are also transforming the way
in which change is delivered with
15 per cent of teams now using
Agile methodologies.
In 2018, the Group became the first FTSE 100
company to set a public target to increase
representation of Black, Asian and Minority
Ethnic (BAME) colleagues, committing
to 8 per cent of senior management and
to 10 per cent of the total workforce by
2020. At the end of the year 6.4 per cent of
senior management and 9.5 per cent of all
colleagues were from BAME backgrounds.
In recognition of the importance the Group
places on helping the UK transition to a low
carbon economy, in 2019 we have included a
specific sustainability metric in our Plan. This
signals our commitment and is supported
by a detailed sustainability strategy. More
information on the sustainability strategy is
provided on pages 24 and 25.
Outlook
Over 2018 the UK economy has proven itself
to be resilient with record employment and
continued GDP growth. Whilst the near term
outlook for the UK economy remains unclear,
we continue to believe that our simple, low
risk business model will deliver strong financial
performance and market leading returns with
a resilient net interest margin, lower operating
costs enabling increased investment, strong
asset quality and lower remediation costs. Our
guidance demonstrates our confidence in the
business model and the future prospects of
the Group:
We are already delivering a market leading
return on tangible equity and expect further
improvement in 2019 to 14 to 15 per cent
Capital build is expected to remain
strong at 170 to 200 basis points per
year with the Board's view of our CET1
capital requirement remaining at around
13 per cent plus a management buffer of
around 1 per cent. As a result we continue
to expect to deliver progressive and
sustainable ordinary dividends whilst
maintaining the flexibility to return surplus
capital to shareholders
Our net interest margin is expected to be
c.2.90 per cent in 2019 and, as previously
guided, remain resilient through the
plan period
Our market leading efficiency continues
to be a competitive advantage and we
now expect operating costs to be less
than £8 billion in 2019, a year ahead of the
original target. We also continue to expect
a cost:income ratio, including remediation
costs, in the low 40s as we exit 2020, with
improvements in this ratio every year
Credit quality remains strong and, given our
low risk business model and the significant
portfolio improvements in recent years, we
expect an asset quality ratio of less than
30 basis points in 2019 and the rest of the
plan period
Summary
Framed by our purpose to Help Britain
Prosper, the Group has again delivered a
strong customer experience and financial
performance in 2018 whilst making significant
progress in building new capabilities to
transform the Group to succeed in a digital
world. While the year ahead will bring its own
challenges, given the ongoing economic and
political uncertainty, I continue to believe that
our simple, low risk business model is the
right one. Our current strategic plan for 2018
to 2020, with continued strong investment,
will further improve customer propositions
and grow our leading digital bank as part of
our multi-channel strategy, while continuing
to provide leading and sustainable returns to
our shareholders.
António Horta-Osório
Group Chief Executive
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
06 Lloyds Banking Group Annual Report and Accounts 2018
Key performance indicators
Our strategy has delivered strong performance
Delivering for all
our stakeholders
The Board has been actively involved in
the development and ongoing review of
strategy with regular reviews of progress
and priorities. Following the launch of the
next phase of our strategic plan in early 2018,
and in addition to the regular management
progress updates, a comprehensive Board
review process has been implemented
which includes formal quarterly updates and
selective deep dives on topical issues. In
addition strategy days were held in June and
November to consider market dynamics and
the strategic challenges and opportunities the
Group is likely to face going forward. Board
members have also made a number of site
visits to understand how the strategy is being
implemented and perceived at a local level.
Key performance indicators are regularly
reviewed by the Board with the measures
outlined on this page identifying the most
effective output measures for assessing
financial performance and progress towards
becoming the best bank for customers,
colleagues and shareholders.
As a result of significant strategic progress in
2018, 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
Key performance indicators that are directly
linked to remuneration are marked with
this symbol.
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.
The remuneration awarded to Executive
Directors is heavily weighted towards
the delivery of long-term, sustainable
performance that aligns with shareholder
experience. For the variable awards made
under the Group Performance Share and
Group Ownership Share plans in respect
of performance in 2018, over 95 per cent is
awarded in shares, and 70 per cent is subject
to performance conditions applying over
three years.
Financial
Underlying profit before tax
£m
Statutory profit before tax
£m
2018
1
2017
1
2016
1
2015
1
2014
8,066
7,628
6,782
7,275
6,831
2018
2017
2016
2015
2014
5,960
5,275
4,238
1,644
1,762
Underlying profit increased in 2018, largely due to
higher income, and lower costs whilst asset quality
remains strong.
Statutory profit before tax increased significantly,
largely driven by strong underlying performance
and lower charges below the line.
1 Restated to include remediation.
Ordinary dividend
p per share
Statutory return on tangible equity
%
2018
2017
2016
2015
2014
3.21
3.05
2.55
2.25
0.75
2018
2017
2016
2015
2014
11.7
8.9
6.6
2.6
4.4
An increased ordinary dividend of 3.21 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 £1.75 billion.
The statutory return on tangible equity increased
reflecting the increase in statutory profit after tax,
and slightly lower average tangible equity.
2019 TARGET
Statutory return on tangible equity
14-15%
Cost:income ratio %
Including remediation
Excluding remediation
Common equity tier 1 ratio (CET1)
%
2018
2017
2016
1
2015
1
2014
49.3
51.8
55.3
54.2
55.3
46.0
46.8
48.7
49.3
49.8
1
2018
1
2017
1
2016
1
2015
2014
13.9
13.9
13.0
13.0
12.8
Our cost:income ratio, including remediation,
further improved to 49.3 per cent and remains the
lowest of our major UK banking peers.
2020 TARGET
Cost income ratio
including remediation
Low 40s
1 Excluding TSB.
2019 TARGET (NEW)
Operating costs
<£8bn
Performance at a divisional level
on pages 27 to 29
Our common equity tier 1 ratio remains strong. The
Board's view of the level of capital required to grow
the business, meet regulatory requirements and
cover uncertainties remains around 13 per cent plus
a management buffer of around 1 per cent. In the
last two years we have reduced this to 13.9 per cent
through dividend payments and buybacks.
CURRENT TARGET
Capital build
170-200bps per annum
with a regulatory capital requirement of around 13%
and a management buffer of around 1%
1 Pro forma, reflecting Insurance dividend. Also includes
ordinary dividend and share buyback. 2016 reflects MBNA.
Lloyds Banking Group Annual Report and Accounts 2018 07
Non-Financial
Earnings per share
p
Customer satisfaction
(net promoter score)
Digitally active customers
m
2018
2017
2016
2015
2014
5.5
4.4
2.9
0.8
1.7
2018
1
2017
1
2016
1
2015
1
2014
61.8
61.2
61.8
58.5
58.3
2018
1
2017
1
2016
1
2015
1
2014
15.7
13.4
12.5
11.5
10.4
Earnings per share increased in the year, largely due
to the significant increase in statutory profit.
Our net promoter score is the measure of customer
service at key touch points and the likelihood of
customers recommending us. Customer satisfaction
slightly increased in 2018.
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 11.4 million, many of whom use our
award winning Lloyds Bank app.
Link to strategic priorities
Leading customer experience
1 Restated to reflect changes in measurement approach.
Link to strategic priorities
Digitising the Group
1 Excludes MBNA.
Economic profit
£m
Our values and behaviours
% favourable
1
Customer complaints
FCA reportable complaints per 1,000 accounts
2018
2017
2016
2015
2014
3,291
3,987
3,377
2,233
2,094
2018
2017
1
2016
2015
2014
H1 2018
H2 2017
H1 2017
H2 2016
79
80
78
78
72
3.9
4.2
4.1
4.3
Economic profit, a measure of profit taking into
account expected losses, tax and a charge for
equity utilisation. In 2018, the equity charge and tax
charge increased.
Our values and behaviours index comprises metrics
related to continuous improvement, collaboration,
innovation, inclusiveness with a strong focus on
customers. We continue to see high numbers of
colleagues believing we are demonstrating these
values. The survey in 2018 was completed by
more than 57,000 colleagues (83 per cent of the
Group headcount).
Link to strategic priorities
Leading customer experience
1 New baseline score introduced to tie in with new
Group behaviours.
Overall FCA reportable complaints excluding PPI
and claims management companies have continued
to reduce in 2018.
The FCA changed the approach to complaint
reporting in June 2016 and historic data is presented
since this date.
Link to strategic priorities
Leading customer experience
1 Excluding PPI.
Total shareholder return
%
Colleague engagement index
% favourable
Helping Britain Prosper Plan
targets achieved
2018
2017
2016
2015
2014
(20)
14
(10)
(2)
(4)
2018
2017
2016
2015
2014
73
76
71
71
60
2018
2017
2016
2015
2014
20/22
21/22
20/24
27/28
20/25
Despite the strong financial performance our
share price fell by 24 per cent in 2018 in line
with many other financial services companies.
After including dividends paid in the year, total
shareholder return was (20) per cent.
Colleague engagement remains strong despite
a slight decline since 2017 (our highest ever
score). Both the engagement and performance
excellence indices are above UK high performing
norms with colleagues scoring pride, advocacy and
teamwork favourably.
Since we launched the Plan in 2014 we have made
strong progress. In 2018, we achieved 20 out of
22 targets, helping to address some of the social,
economic and environmental challenges the UK
faces. Find out more on page 20.
Link to strategic priorities
Transforming ways of working
Link to strategic priorities
Maximising the Group's capabilities
Leading customer experience
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
08 Lloyds Banking Group Annual Report and Accounts 2018
Our external environment
We operate in an increasingly dynamic market
Economy
Highlights
Given our UK focus, the Group’s prospects
are closely linked to the fortunes of the UK
economy
The economy faces significant uncertainty
around the UK’s departure from the EU.
With the expectation that the UK leaves in
an orderly fashion, the economy should be
able to grow in 2019 at a similar pace to 2018
Our low risk business model and focus on
efficiency positions us well irrespective of
macro conditions, but if the UK economy
sees significant sustained deterioration this
is likely to impact Group performance
Overview
As the largest provider of UK banking
services, our prospects are closely aligned
to the outlook for the UK economy. In the
period following the decision to leave the
EU, the economy has been resilient. Growth
has slowed only slightly below its trend rate,
the unemployment rate has continued to fall
to a 43 year low, and property prices have
continued to rise slowly. This resilience is
expected to continue in 2019 and the next
few years, barring any sudden shocks to
business or consumer confidence particularly
in connection with the UK’s exit from the EU
during 2019.
Market dynamics
Households’ spending power has been
improving in recent months as pay growth has
begun to pick up and outpace inflation, which
is falling back towards the medium term target
of 2 per cent. Inflation adjusted pay is now
slightly above its previous peak in early 2016.
This improvement is expected to continue
through 2019, supported by a reduction in
planned fiscal tightening announced in the
2018 Budget in November and the end of
the cap to public sector pay growth. The
improvement in spending power should help
support growth in consumer spending and
borrowing, whilst also increasing growth in
households’ savings.
The UK housing market has been broadly
flat in 2018 in aggregate, although weakness
has been centred around London and the
South East where high prices are constraining
affordability. Improved households’ spending
power should support the housing market
in 2019, as would resolution of uncertainty
about the immediate political and
economic concerns.
Operational impacts of the UK’s exit
from the EU present risks for some of our
customers’ businesses. With the future trading
arrangements between the UK and EU
unlikely to become finalised for a few years,
businesses’ investment decisions are more
difficult and postponement of investment
may weigh on future growth capacity of the
economy. Uncertainty is also challenging
the UK’s attractiveness to foreign investors,
although many qualities that have attracted
investors in the past remain.
More widely, the global economy is
transitioning away from the exceptionally
low interest rates in place in most advanced
economies since the financial crisis. This
process will not always be constant, with
different countries at different stages of
their economic cycle, and unwinding of
‘quantitative easing’ may increase volatility in
financial markets. The widespread trend to
increasingly populist politics, of which the
US-China trade war is a prime example, poses
a challenge to appropriate economic policy.
Barring sudden shocks stemming from these
challenges, the UK economy is expected
to grow through 2019 to 2021 at a pace
similar to that of the past three years, around
1.5 per cent. The unemployment rate is
expected to rise only a little from its current
43 year low, and further mild increases
in house prices are expected. The Bank
Rate is expected to rise only slowly, as the
uncertainty drag on the economy fades.
Growth in many of our markets is expected
to pick up, although the consumer credit
market should continue to slow after its strong
growth through 2014 to 2017. Impairments are
expected to increase in 2019 as we continue
to see lower write-backs and recoveries but
remain at relatively low levels.
Our response
Given our UK focus, the Group’s prospects are
closely linked to the performance of the UK
economy. Our low risk, stable business model
and focus on efficiency positions us well to
continue to support customers irrespective of
macro conditions.
Link to principal risks
Credit
Capital
Funding and liquidity
Market
Link to strategic priorities
Maximising the Group’s capabilities
Regulation
Highlights
The UK financial services sector is expected
to remain highly regulated
There is increasing clarity on impending
regulation although new regulation and
market reviews continue to be issued
Market dynamics
A number of key regulatory changes have
been implemented in the last 12 months
including ring-fencing and GDPR. The key
areas of focus for 2019 are as below:
Open banking
Open Banking regulation was implemented
in January 2018 with the aim of increasing
competition by enabling customers to
view personal financial data from different
providers in one place. Although currently just
relating to current accounts it will be extended
to other products in 2019 and beyond.
Customer data protection is integral to this
with new EU wide technical standards (PSD2)
due to be implemented by September 2019.
Customer treatment
A number of specific product reviews are
currently being undertaken by the regulators
to ensure product clarity and pricing
transparency. These include reviews of the
mortgage market, overdraft charging and
savings accounts.
Capital regulation
The Group continues to prepare for a
number of regulatory capital developments
with uncertainty remaining around the
implementation and impact of the final
Basel III reforms.
Other
A number of other regulatory initiatives
are currently in the pipeline, which seek to
address, among other things, vulnerability,
access to services, customer treatment and
choice, and competition.
Our response
As a Group we always seek to comply with all
related regulation.
Given the Group’s simple, low risk business
model, it is well placed to meet these
requirements and welcomes the positive
effect that they will have on the industry, its
customers and other stakeholders.
Link to principal risks
Conduct
Governance
Operational
Regulatory and Legal
Capital
Link to strategic priorities
Delivering a leading customer experience
Lloyds Banking Group Annual Report and Accounts 2018 09
Customer
Key messages
Technology
Key messages
Competition
Key messages
Customer behaviours continue to change,
with an increasing focus on personalised
customer experiences and convenient,
instantly accessible services, with these
developments enabling customers to exert
greater control over their finances than
ever before
Evolving demographics and life patterns
are changing the financial needs of our
customers, in particular increasing focus on
financial planning for retirement
Market dynamics
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
provided more brand choice for the customer
across a number of sectors, with technology
developments also raising customer
expectations for control of their finances, both
in terms of seeing their accounts in one place
and monitoring transactions.
As we continue to see in a number of other
industries, incumbents who do not respond
to changing customer preferences and
behaviours are at the greatest risk.
Our response
We have a proven track record of providing
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 we are now
using to facilitate greater personalisation,
while ensuring we meet all of our customers
evolving banking and insurance needs.
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.
Link to principal risks
Regulatory and legal
Conduct
Operational
Link to strategic priorities
Delivering a leading customer experience
The pace of digital adoption continues to
surpass expectations and is likely to increase
further in the coming years
Harnessing new technology is enabling
us to respond to customers' needs more
rapidly and efficiently
Cyber security and the protection of
customer data are increasingly important
factors in retaining customer trust
Market dynamics
The pace of digital adoption continues
to surpass expectations and this trend is
likely to accelerate further, transforming
the way 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. These new entrants have also been
increasingly collaborating with incumbent
banks, while established peers have more
recently launched their own standalone
propositions designed to increase disruption.
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, particularly given the introduction
of Open Banking and API-enabled propositions
which are changing the manner in which
customers are able to share their data.
Our response
As the UK's largest digital bank, we are
embracing technological developments to
enhance customer experience. The increasing
use of intelligent systems provides an
opportunity to respond to customers growing
expectations for personalisation, relevance
and control, 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 quickly to an evolving
operating environment, as well as aiding risk
taking decisions and mitigating fraud.
We remain focused on further enhancing the
customer experience and building on our
market leading efficiency position through the
use of technology, supported by a significant
increase in investment over this strategic plan.
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.
Link to principal risks
Conduct
Operational
Regulation and legal
Link to strategic priorities
Delivering a leading customer experience
Digitising the Group
Competition within UK financial services
remains high
The competitive landscape is changing
with new entrants such as fintechs and tech
giants continuing to increase disruption
through innovation, while incumbent banks
continue to re-focus
Market dynamics
Our competitive landscape continues to
evolve. A number of domestic incumbents
are intensifying their focus on the UK market,
as a result of restructuring post-financial
crisis and ongoing regulatory changes.
In addition we are seeing increasing
competition from smaller non traditional
and technology focused companies,
some of whom are partnering with large,
traditional banks to build scale and drive
efficiency. Tech giants also remain a future
threat to the financial services sector, given
strong brand loyalty, access to significant
customer data and a focus on delivering great
customer experiences.
Looking ahead, competition is likely to remain
high, increasing focus on innovation and
placing pressure on earnings across the sector.
Our response
With customers becoming more empowered
as a result of greater choice than ever before,
we must continue to 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 raise the bar for innovation.
Our leading cost position, combined with
our simple business model, provides us
with the operational flexibility to compete
effectively. However, we are going further
to respond to these threats and our current
strategic plan should equip us well to combat
these challenges.
While greater competition increases choice
for consumers and reinforces the need to
further improve the customer experience, the
breadth of our multi-brand and multi-channel
offering along with our market leading
efficiency and customer focused business
model means we continue to compete from a
position of strength.
Link to principal risks
Regulatory and legal
Conduct
Operational
People
Link to strategic priorities
Delivering a leading customer experience
Maximising the Group’s capabilities
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
10 Lloyds Banking Group Annual Report and Accounts 2018
Our business model
How we create value, and what sets us apart
We are a simple, low-risk,
customer focused UK financial
services provider...
...with several evolving,
distinctive competitive
strengths...
OUR PURPOSE
Helping Britain Prosper
Our success is interwoven with the UK’s prosperity and we aim
to Help Britain Prosper through creating a responsible business
that focuses on customers’ needs, and delivering long-term
sustainable success.
OUR AIM
Best bank for customers, colleagues
and shareholders
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.
OUR PRODUCTS
Our product range is driven by our customers’ needs and is
informed through comprehensive customer analysis and insight.
Lending Mortgages, credit cards, motor finance, 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
OUR BUSINESS AREAS
Our business areas are structured according to the products
and the services we provide to best serve our customers'
financial needs. We currently have three business areas:
Retail
Commercial Banking
Insurance and Wealth
pages 27 to 29
UK’s largest digital bank, branch reach and
customer franchise with leading integrated
propositions
Our scale and reach across the UK means that our customer
franchise extends to around 26 million customers, with 15.7 million
digitally active customers. We are uniquely positioned to deal with
customers' banking and investment needs.
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 relative credit default swap spread.
Our financial strength has been transformed in recent years with our
capital position amongst the strongest in the sector worldwide.
Market leading efficiency through tech-enabled
productivity improvements
Our simpler operating model and focus on operational
efficiency provide a cost advantage, which benefits both
customers and shareholders.
Rigorous execution and management discipline
focusing on key skills of the future
Experience of delivering change and transformation in recent
years provides benefit as we further transform the business.
Multi-brand, multi-channel customer proposition
with data driven customer experience
Operating in an integrated way through a range of distribution
channels ensures our customers can interact with us when and
how they want.
Offering our services through a number of recognised brands
enables us to address the needs of different customer segments
more effectively.
As a large, UK focused financial
services provider we face several
external and internal challenges
EXTERNAL
As previously discussed on pages 08 to 09, the main external challenges we face are:
Evolving and uncertain economic environment, including EU exit uncertainty
High levels of regulation
Evolving customer needs
Responding to technology innovations
Managing pressure from increased competition
Lloyds Banking Group Annual Report and Accounts 2018 11
...that underpin our clear strategy
to transform the Group for success
in a digital world...
In February 2018, we launched our new three year strategy to transform the Group for success in a digital world. We identified four strategic
priorities focused on the financial needs and behaviours of the customer of the future and are investing more than £3 billion in these
strategic initiatives over the plan period.
OUR STRATEGIC PRIORITIES
pages 12 to 15
IGITIS E
D
M
A
X
I
M
I
S
E
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
UK's sole integrated financial services
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.
...enabling us to Help Britain Prosper
and deliver for all our stakeholders.
Successful implementation of our strategy will ensure we Help Britain Prosper and deliver sustainable success for all stakeholders including
customers, colleagues and shareholders.
KEY STAKEHOLDER OUTCOMES
Customers
Shareholders
Colleagues
Market leading digital proposition with
UK’s largest branch network
Single home for our customers’ banking
and insurance needs
Personalised customer propositions
Better experience across channels
pages 16 to 18
Sustainable and low risk growth
Enhanced customer focus culture
Market leading efficiency
Transformed ways of working
Superior returns and lower cost of equity
Enhanced colleague skills and capabilities
Strong capital generation and attractive
distribution policy
Compelling colleague proposition
INTERNAL
We also face a number of internal challenges:
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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
12 Lloyds Banking Group Annual Report and Accounts 2018
Our strategic priorities
Leading customer experience
Progress in 2018
In 2018 we have made significant progress
in enhancing our digital propositions
and branch network to reflect changing
customer preferences, while also
increasing personalisation.
Building a market leading digital experience
In a year in which we met more of our
customers’ simple needs via mobile than any
other channel for the first time, we have made
a number of functionality enhancements
designed to put customers more in control of
their finances digitally.
We were the first large UK bank to meet the
regulatory deadline for Open Banking. We
have built on this success, launching our
API-enabled aggregation functionality in the
fourth quarter. Through this customers are
now able to view their current accounts with us
alongside those held outside of the Group.
We have also launched enhanced security
and anti-fraud features including location
based transaction searches and the ability
to freeze and unfreeze cards via mobile, with
other functionality enhancements including
improved statement searches, smart alerts
and upcoming payment notifications.
#1 branch network, serving complex needs
Customers continue to prefer face-to-face
contact for more complex needs. We
therefore remain committed to maintaining
the UK’s largest branch network as part of
our multi-channel proposition, while tailoring
it to continue meeting these complex needs
effectively. Highlights include the opening
of our flagship Halifax branch in London’s
Oxford Street, 16 additional routes for our
mobile branch fleet, which now serves over
210 locations, the roll-out of remote advice
functionality, with 270 branches now linking
directly to dedicated mortgage advisers, and
enhancements that have enabled branch
colleagues to spend more time meeting
customers’ complex needs.
Personalising our customer proposition
Given our extensive insight, we are well
positioned to meet the growing demand
for personalised customer propositions. As
part of our overall response to this significant
opportunity, we recently launched our Lend
a Hand mortgage proposition that meets
the needs of borrowers without a deposit
to get onto the housing ladder, while also
offering market leading savings rates to
family members or other supporters who
are willing to provide this deposit on their
behalf. In addition, the strength of our Club
Lloyds proposition has enabled strong
deposit growth. These and other initiatives
have enabled us to increase personalisation
and to achieve growth of over £4 billion in
underrepresented segments.
Focus for 2019
We will build on these strong foundations by
continuing to enhance our digital functionality
to meet customers’ simple needs, while also
ensuring that our branch network continues
to meet complex needs effectively. In 2019,
we have already made our Open Banking
capability available to all our Lloyds, Halifax
and Bank of Scotland mobile app customers,
with the significant broadening of the range
of products they are able to aggregate later
in the year putting them more in control of
their finances . In addition we will retain our
focus on using our significant data insight to
develop products that are more tailored to
our customers’ specific needs.
270
branches now live with
Remote Advice
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 2018 TO 2020
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
MEASURING PERFORMANCE
15.7 million
Digitally active customers
>£4 billion
Balance growth in underrepresented segments
Our Remote Advice Video Interviewing
service is an important element of
how we are improving the customer
experience, providing our customers
with greater flexibility and convenience
in how they can discuss and meet their
complex needs. In 2018, this service has
gone from strength to strength, with an
initial focus on our customers’ mortgage
needs. Approximately 38,000 customers
have already taken the opportunity to
discuss their mortgage needs in one of our
270 branch locations that currently offer
this service or from the comfort of their own
home through our home to hub offering.
Lloyds Banking Group Annual Report and Accounts 2018 13
Our strategic priorities
Digitising the Group
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 2018 TO 2020
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
MEASURING PERFORMANCE
24%
Year-on-year increase in technology spend
c.100
Applications migrated to private cloud
Progress in 2018
We have made a strong start against our
strategic objectives of driving additional
operational efficiencies that will make banking
simpler and easier for customers. We have
embraced technology developments, with
increasing levels of investment underpinning
the progress made in modernising our IT and
data architecture and improving processes for
the benefit of both customers and colleagues.
Increasing investment in technology
To position the Group for success in a
digital world, we have embarked on one
of the largest transformation programmes
in financial services. Consistent with this,
we have increased our investment in
technology by 24 per cent, placing us in the
top quartile amongst peers. Over two-thirds
of this spend related to enhancing existing
capabilities and creating new ones, in line
with our chosen approach of simplifying and
modernising our IT and data architecture in a
progressive manner.
Adopting new technologies
In order to improve processes and deliver
better outcomes for customers, we are
increasingly adopting new technologies. Key
highlights in the year include the introduction
of robotics for simple, repetitive tasks such as
performing customer rectifications, with the
resultant release of approximately 780,000
colleague hours creating additional capacity
to improve processes and propositions for
customers. In addition, we have introduced
machine learning capabilities in a number
of areas, which has also led to significant
improvements to back office processes and
further operational efficiencies.
In 2018, the Group also made targeted
investments in both public and private cloud
solutions, with around 100 applications
migrated to private cloud. These investments
will deliver a more efficient, scalable and
flexible infrastructure going forward and act
as enablers for further investment in 2019
and beyond. This leaves us well positioned to
deliver further enhancements for the benefit
of customers, colleagues and shareholders.
Delivering for our customers
The launch of our Open Banking aggregation
capability and multiple functionality
developments throughout the year were
made possible by the replatforming of our
mobile app during 2018. This replatforming
placed our Lloyds, Halifax and Bank of
Scotland banking brands on the same
platform and has enabled us to react faster
to change, doubling the frequency of new
releases to the market. This supported the roll
out of a number of new features for customers
including push notifications and virtual
assistants, both of which have been positively
received by customers to date, with strong
satisfaction and adoption rates.
Focus for 2019
We will further embrace technology while
continuing to build our innovation pipeline
and collaborate with fintechs to accelerate
our transformation. We will also make better
use of our extensive customer data, creating
a single record for each of our customers
that allow us to deliver better insight driven
propositions. As a result, we will make
ongoing improvements to our customer
offering, leveraging our mobile app to deliver
new functionality to customers in a timely
manner and providing greater control and
insight to customers than ever before.
Digital Champions are colleagues who
pledge to improve the digital skills
and financial capability of at least two
individuals or organisations each year.
Thousands of colleagues have already
signed up. Digital Champions are one way
we are committed to Help Britain Prosper.
Numman Miah volunteered at his local
community centre at a session supporting
those with limited IT skills. Many of the
attendees were unemployed – improving
their digital capabilities helps them in
their job searches.
Working as a Group Digital Champion
is a source of joy for Numman,
providing him with the opportunity to
give something valuable back to his
own community.
When you first hear
of being a Digital
Champion, you
assume that you have
to be a computer
whizz but, in reality, it’s
just doing the things
we all do every day,
without realising.
Numman Miah
Digital champion
>23,000
Digital Champions
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
14 Lloyds Banking Group Annual Report and Accounts 2018
Our strategic priorities
Maximising the Group’s capabilities
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 strengths and unique
business model.
KEY OBJECTIVES FOR 2018 TO 2020
+£50 billion growth in financial planning and
retirement open book assets under administration
>1 million new pensions customers
+£6 billion of additional net lending to start-ups,
SMEs and Mid Market customers
MEASURING PERFORMANCE
£3 billion
Net lending to starts ups, SME and Mid Market
customers
>3 million
Customers with access to Single Customer View
>£13 billion
Open book assets under administration net
customer inflows
The Group is uniquely placed in the
UK to help customers throughout their
whole life. Single Customer View helps our
customers see everything that is important
to them, including their bank account,
pension and other insurance products, in
one place, whether that is online, in branch
or over the phone. 2018 saw us help over
3 million customers engage with their
insurance and pension products more
simply, alongside their banking. In 2019 we
want to reach many more customers and
help them to do more with us, like make
a top up to their pension or start a home
insurance claim.
Progress in 2018
In 2018 we have continued to enhance and
leverage the Group’s capabilities to meet
our customers’ banking and insurance needs
more effectively.
Meeting our customers’ growing financial
planning and retirement needs
As the UK’s sole integrated financial services
provider we are unique in being able to show
and serve all of our customers’ financial needs
in one place. In the year we have begun the
roll out of a Single Customer View capability,
with over 3 million customers now able to
view in one place the insurance and pension
products they hold with the Group alongside
their more traditional banking products. This
single home for banking and insurance needs
builds on our Open Banking aggregation
capability and is supported by levels of digital
engagement that significantly surpass those
of standalone insurers.
We have also made a number of
improvements to our customer propositions,
including the expansion of our workplace
pensions and savings offering following the
Zurich acquisition in 2017. These and other
developments have enabled us to achieve net
inflows of £13 billion open book assets under
administration in the year.
We embrace innovation and are working with
external parties to develop potential solutions
that will enable customers to consolidate their
pension pots from multiple providers digitally,
making it quicker and easier for them to review
their retirement savings in one place.
Leveraging our partnership with Schroders
to accelerate our Wealth strategy
In October, we announced a strategic
partnership with Schroders to create a market
leading wealth proposition that will better
serve customer needs and accelerate the
development of our financial planning and
retirement business.
We are excited by the potential that the
combination of our significant customer
base, multi-channel distribution and digital
capabilities with Schroders’ investment
and wealth management expertise and
technology brings and have consequently
set an ambitious target of becoming a top
three UK financial planning business within
five years.
Improving the experience of our
Commercial Banking clients
In Commercial Banking we have increased
net lending by £3 billion and have exceeded
start-ups, SMEs and Mid Market clients
our sustainability target through support
for renewable energy projects capable
of powering over 2.6 million homes. We
have also delivered improvements to the
client experience by simplifying our client
relationship model and enhancing our online
functionality, with SME clients now able to
check instantly whether they will be approved
for loans or overdrafts of up to £25,000 before
they apply.
Focus for 2019
In 2019 we will extend the roll out of Single
Customer View, with the expectation of
reaching over 9 million customers by the end
of the plan period, with other areas of focus
including the further development and formal
launch of our wealth partnership, Schroders
Personal Wealth. We will also improve the
digital banking experience of our Commercial
Banking clients, including significantly
reducing the time to cash for unsecured
lending to less than two hours.
I had to stop making
contributions to my
pension, so seeing this
online alongside my
bank account now has
reminded me I need to
take some action and
start saving again.
Lloyds Banking Group
customer
Lloyds Banking Group Annual Report and Accounts 2018 15
Our strategic priorities
Transforming ways of working
Our colleagues are crucial to the success
of our business. In order to deliver our
transformation during the current strategic
plan 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 are making our biggest ever investment
in colleagues to ensure that we 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 2018 TO 2020
50 per cent increase in training and development to
4.4 million hours per year
Up to 30 per cent change efficiency improvement
MEASURING PERFORMANCE
>1 million
Future skills training hours delivered
15%
Change delivered using Agile
Progress in 2018
We recognise that our colleagues play a
critical role in our transformation and have
made significant progress in providing them
with the skills they will need in the future as
well as an improved working environment and
tools to deliver change more effectively. At the
same time, we are simplifying and improving
our colleague proposition, responding to
changing expectations towards employers.
Investing in our people
We are making the biggest ever investment in
our people. As part of this, we have increased
training hours by over 50 per cent to 4.3 million
hours, with over 1 million of these relating to
developing key skills for the future. We are
on course to deliver our target of cumulative
4.4 million training hours relating to skills for
the future by 2020.
In addition, we have brought our teams closer
together, improving productivity and bringing
further benefits to our colleagues’ working
experience. Over 32 per cent of colleagues
are now located in modern, collaborative
working environments, as we continue to
move to six strategic hubs across the UK.
We are also reducing complexity to allow our
colleagues to spend more time focusing on
decisions that really matter. Consistent with
this focus, we have started the migration of
60 people processes and systems onto a
single HR platform, leveraging cloud based
technology, and completely redesigned
our performance management process,
one of our key colleague journeys, reducing
management time, bureaucracy and process,
and focusing on meaningful colleague
feedback and development.
Embracing new ways of working
We are embracing new ways of working
and transforming the way in which change
is delivered. In particular, 15 per cent of
change is now delivered using Agile,
with 6,600 colleagues trained in these
methodologies. This allows us to build cross
functional teams and increase collaboration,
efficiency and expertise in our decisions and,
through this, deliver products and services
that our customers really want, at a pace that
ensures these remain relevant and timely.
The ongoing improvement in the capabilities
of our people and the methods in which
we work will drive a continued cultural shift
across the organisation and will help us deliver
our significant strategic transformation. In
addition, this will improve satisfaction and
make it easier to do business, while also
delivering a leading customer experience.
Focus for 2019
We will continue to roll out Agile as we
move towards our target of more than
50 per cent of change delivered through
these methodologies by the end of this
strategic plan. This combined with changes
that will bring our colleagues closer together,
boosting innovation and increasing simplicity,
will make it easier for our people to focus on
delivering greater value for customers. We will
also further up-skill our colleagues alongside
targeted recruitment to ensure our colleagues
have the required capabilities to deliver our
transformation. The attraction, retention and
development of talent will be supported
by further improvements to our colleague
proposition, ensuring that this remains
compelling and aligns to our culture.
32%
of colleagues are now
in co-located teams,
moving from 39 locations
to 6 strategic hubs
I genuinely feel much
more valued as a
colleague than before
the move. It’s great to
see Lloyds Banking
Group making such
an investment in
colleagues and it’s just
a much more pleasant
experience coming
into the office.
Lloyds Banking Group
colleague
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
16 Lloyds Banking Group Annual Report and Accounts 2018
Reflecting the needs of our stakeholders
Our Board actively engages with our stakeholders
Our aim is to be the best bank for customers,
colleagues and shareholders. As the UK’s
leading financial services provider we
operate in, and support, communities
across the country and help British people
and businesses prosper. We have around
26 million customers, 2.4 million shareholders
and around 65,000 colleagues. Engaging
and responding to all our stakeholders
is fundamental to the way we operate
and maintaining the highest standards of
business conduct is vital to our corporate
culture and the long-term success of the
Group. This therefore remains a major focus
for senior management and the Board.
One of the primary tasks of the Board is to
develop a strategy which can achieve
long-term success and generate sustainable
returns and this is only possible if we engage,
consult and act on the needs of stakeholders.
To enable this and ensure stakeholder
considerations are at the heart of all corporate
decision making, various papers relating to
different stakeholder groups are presented
regularly at Board. In addition all Board papers
submitted are required to consider the impact
of proposals on key stakeholder groups.
On occasion, some decisions may not provide
a positive outcome for all stakeholders
however we aim to act in the best interests of
the Group and all stakeholders and be fair and
balanced in our approach.
We engage with stakeholders in many
different ways and this section outlines the key
stakeholder Groups, how we are interacting
with them and how they inform strategic
decision making.
In January 2019 we launched Lend a Hand,
specifically designed to help address the
biggest challenges that first time buyers face
whilst getting onto the property ladder. Lend
a Hand mortgage removes the need for a first
time buyer deposit - with this instead coming
from savings from family or other supporters.
Owning a home remains the number one life
goal for 18 to 35 year olds, but half say saving
for a deposit is the biggest barrier.
£30bn
lending to first time buyers by 2020
Customers
Shareholders
We aim to treat our customers fairly, making
it easy for them to find, understand and
access products that are right for them,
whatever their circumstances.
The Group has the largest shareholder
base in the UK and we undertake a
comprehensive shareholder engagement
programme with regular feedback to
management and the Board.
The Group is focused on doing the
right thing for customers and the Board
receives regular updates and reports on
progress. In particular the Board reviews
the Customer Dashboard results on a
quarterly basis, and approves the annual
customer plans
The Group also looks to benchmark
performance among customers and uses
this insight from a range of internal and
external research, including net promoter
scores (NPS) and the GFK customer index,
to improve services
Our new strategy launched in February 2018
with the aim of meeting customers’
needs more effectively in a digital world.
The Board was heavily engaged in its
development and ensuring the customer
was at the heart of strategic investment
The real focus on customers is not just
evidenced by the regularity of presentations
but also by the existence of the Group
Customer First Committee. This is a
sub-committee of the Group Executive
Committee which focuses on Group
customer experience, customer targets and
plans and best practice externally
To ensure Board members truly understand
the needs of customers, a series of branch
visits and customer events were undertaken
during 2018 enabling direct feedback
We aim to treat all customers fairly and have
specifically looked to ensure vulnerable
customers are not disadvantaged.
Our websites and mobile banking apps
are being accessibility accredited by
AbilityNet and we have provided more
than 90,000 hours of vulnerable customer
training this year. We are the UK’s largest
provider of basic bank accounts, opening
around 33 per cent of all basic bank
accounts in 2018. We also work with many
support organisations to remove the
barriers to accessing banking services
We recognise the importance to customers
of both their data and their money being
safe, and we use advanced technology
to protect them, including systems that
prevent fraud and detect fraudulent
payments in real time. We are continuously
improving our cyber defences and also
educate customers to improve their own
security by championing public awareness
campaigns, including Take Five. Colleagues
also receive appropriate, ongoing training
and support, such as anti-bribery training to
help them protect our customers
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
more than 400 meetings in 2018, covering
approximately 800 institutions in various
locations including the UK, North America,
Europe and Asia
The meetings were primarily aligned to
results and included discussions on strategic
progress and financial and operational
performance. Feedback from meetings is
passed directly to senior management
During 2018 senior management increased
their investor engagement with over
300 investors seen during the year.
In addition to the Group Chief Executive
and Chief Financial Officer, an increasing
number of other executive committee
members undertook investor meetings in
the year
Various members of the Board have engaged
with shareholders through the year, including
the Chairman, the Senior Independent
Director and the Remuneration Committee
Chair. The Remuneration Committee Chair,
in particular, held numerous meetings with
investors to gain feedback following the
remuneration resolution outcome at the
2018 Annual General Meeting (AGM)
– More information on the 2018 AGM
advisory vote can be found on page 03
In October, the Chairman and a number
of Non-Executive Directors hosted a
governance lunch with various major
institutional investors covering key topics
such as responsible business, remuneration
and risk enabling us to provide an update
on progress whilst enabling investors to
provide feedback on these subjects
In addition to these meetings the Group
communicates with its shareholders
through regular results and strategy
announcements and has a comprehensive
website on which detailed company
information is available. To ensure effective
communication with all shareholders, the
Group Chief Executive specifically writes
to all shareholders, updating them on
progress every six months
Investor Relations also provides regular
reports and feedback to the executive
team and the Board on key market issues
and shareholder concerns. This includes
a six monthly update on reputation and
an annual presentation by our corporate
brokers on market dynamics and
corporate perception
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.
In 2018
– over 200 shareholders attended
– over 70 per cent of total voting
rights voted
All institutional shareholder letters are
discussed at the Board Nomination and
Governance Committee to ensure Board
members are aware of investor sentiment
and concerns
The Group has a significant retail
shareholder base and 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. Further work is progressing
to enhance engagement with retail
shareholders in 2019. Group Secretariat
provide feedback to the Board and
appropriate Committees to ensure the
views of retail shareholders are received
and considered
Lloyds Banking Group Annual Report and Accounts 2018 17
Colleagues
Our colleagues take pride in working for an
inclusive and diverse bank and with their
support we are building a culture in which
everyone feels included, empowered and
inspired to do the right thing for customers.
We are committed to making the Group
a great place to work and believe that our
colleagues are crucial to the long-term
success of our business. We believe it is
important that the Board engages actively
with colleagues and understands the views
of the Group’s diverse workforce and does
this in a variety of ways, as outlined below
Ensuring all colleagues act in the right way is
key to embedding a customer focus culture.
Our Code of Responsibility outlines the
values and behaviours which colleagues
should follow. Colleagues review the
code annually during mandatory training,
alongside Anti-Bribery training based on
our Anti-Bribery Policy. We have a zero
tolerance approach to bribery, and expect
the same from all colleagues and third
parties providing services for, and on behalf
of the Group. Any non-compliance with
codes, policies or standards will result in
colleagues facing disciplinary action
During the year we communicated directly
with colleagues detailing the Group's
performance, changes in the economic
and regulatory environment and updates
on our key strategic initiatives. We also
hosted regular Ask Me Anything sessions
providing the opportunity for colleagues
and contingent workers to ask questions
and receive real time responses directly
from members of the Board and senior
colleagues across all departments
Members of the Board visited several
Group offices, including our new Halifax
flagship branch in London, and the
MBNA offices in Chester, providing
the opportunity to meet key functions
in our supply chain supporting our IT
and transformation labs and customer
call handling
Helping Britain Prosper LIVE
was a fantastic experience,
which I felt lucky and grateful to
be involved with. I left the day
feeling inspired and excited to
see how the Group will evolve
in the next three years.
Lloyds Banking Group colleague
We hosted regular breakfasts and informal
dinners with the Chairman and Group Chief
Executive. These took place in various hub
locations and invitations were extended to
contingent workers and suppliers working
within these locations
The Group held its biggest ever live
communication event, Helping Britain
Prosper LIVE, which was attended by
4,000 colleagues. This event, hosted by
the Group Chief Executive, Chairman and
key members of the executive leadership
team, provided the opportunity for our
colleagues to see first-hand how we are
Helping Britain Prosper every day. Speeches
were broadcast live on our intranet and
sessions were run in five key hub locations
to provide opportunities for members
of our colleagues in those locations to
experience the event
We held meetings throughout the year
with our recognised unions, attended by
the Chair of the Remuneration Committee
and the Group Chief Executive. Key topics
included the Living Wage, which applies
to our whole workforce
The Board participated in the transforming
ways of working labs, providing them
with the opportunity to see first hand the
activity underway in support of changing
the way we work and improving the
colleague experience
The Board reviewed the results from annual
surveys; Banking Standards Board (BSB)
survey and cultural assessment colleague
engagement survery, and agreed specific
actions as a result
We are committed to improving the
transparency of workforce disclosure and
for the first time in 2018 participated in the
Workforce Disclosure Initiative
During 2018, the Board discussed how
best to engage with the wider workforce;
permanent employees, contingent workers
and third party suppliers that work on the
Group’s premises. From the second quarter
of 2019, the Board will receive quarterly
insight into workforce related activity and
support key decision making
We offer a competitive and fair reward
package. Colleagues are eligible to
participate in HMRC approved share plans
which promote share ownership by giving
employees an opportunity to invest in
Group shares. Further information can
be found on page 98 in the Directors’
Remuneration Report.
4,000
colleagues attended Helping Britain
Prosper LIVE with around 14,000
watching remotely
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
18 Lloyds Banking Group Annual Report and Accounts 2018
Reflecting the needs of our stakeholders continued
Communities and environment
Regulators and government
Suppliers
As the largest retail and commercial bank
in the UK, we have representation across
the country. We specifically invest in local
communities across Britain to help them
prosper economically and build social
cohesion by tackling disadvantage.
Board members are directly involved with
our considerable community engagement
and environmental focus. Our Responsible
Business Committee, a committee of the
Board, provides oversight and support for
the Group’s Helping Britain Prosper Plan, and
the plans for delivering the aspirations to be
seen as a trusted and responsible business
The Group’s Helping Britain Prosper Plan
is reviewed and approved annually by
the Board to ensure it focuses on what
matters most to people, businesses and
communities in the UK
The Responsible Business Committee is
also responsible for overseeing the Group’s
approach to responding to global issues
of environmental sustainability, including
measurement and reporting. Following
a 2018 Board review of our sustainability
approach we have developed a new
sustainability strategy, read more on
page 24 and 25
Our four independent charitable
Foundations are key to our vision of
tackling social disadvantage. Sara Weller,
Non-Executive Director and Chair of the
Responsible Business Committee joined
the Lloyds Bank Foundation for England
and Wales as trustee during 2018 for an
initial term of three years
We recognise the importance of supporting
communities beyond our own banking
services, and over five years we have
invested £5 million to support the Credit
Unions sector. We signpost to local credit
unions when we cannot support customers’
borrowing needs
In partnership with Macmillan, our Cancer
Support Team has helped support 3,100
customers and identified £411,000 in
benefits from a range of products and
services, to help them reduce the financial
impact of a cancer diagnosis. We are also
raising awareness of financial and domestic
abuse through our ‘Acknowledge, Respond,
Refer’ campaign, developed with support
from the Lloyds Bank Foundation for
England & Wales, and working closely with
Business in the Community and UK Finance
Read more on Responsible Business, our
Helping Britain Prosper Plan targets and
how we have supported the UK on page 20
We have a good relationship with our
regulators and other government authorities
and liaise regularly.
Given the size of our organisation we are
reliant on external suppliers for a number of
key services. Dealing with suppliers in the
right way is important for future success.
During 2018 we had regular meetings
with our various regulators at different
levels of the organisation from Board to
senior management
Individual meetings took place between the
PRA and members of the Board during the
year to discuss subjects such as the Audit
and Risk Committees, IT Resilience and
Cyber and ring-fencing
FCA contact during the year with members
of the Board focused on governance,
culture and strategy
The newly appointed ring-fenced bank
Directors went through a rigorous approval
process including interviews with the PRA
ahead of appointment to ensure they met
regulatory requirements
From a tax perspective in 2018, we paid
£2.6 billion in tax, one of the largest
contributors to UK tax revenues. We are also
a major tax collector, gathering £2 billion
in 2018. We have a clear Tax Policy which
is part of our Board-approved Group Risk
Management Framework. We comply
with HMRC Code of Practice on Taxation
for Banks and the Confederation of British
Industry’s Statement of Tax Principles. You
can read more about our Tax Strategy
online www.lloydsbankinggroup.com/
our-group/responsible-business/reporting-
centre/
Our supply chain is crucial to the way
we serve our customers, and through
it our reach is considerable. We use a
multi brand approach to deliver specific
products and services. We work with
around 3,500 suppliers of varying sizes,
most in professional services sectors such
as IT, cyber, operations, management
consultancy, legal, HR, marketing and
communication. In 2018 our supplier
expenditure was £5.8 billion with 95 per cent
of our direct suppliers located in the UK
All material contracts are subject to rigorous
cost management governance and updates
on key supplier risks are provided to
the Board
We assess how significant each supplier
is to our operations across the various
components of our extended supply chain
and we conduct an annual programme
of assurance reviews based on the risk
criticality the supplier represents. We
require suppliers to adhere to relevant
Group policies and comply with our Code
of Supplier Responsibility. This defines our
expectations of responsible business and
behaviour, underpinning our efforts to share
and extend best practice
The Group supports the UN Declaration
of Human Rights, and the International
Labour Organisation (ILO) Fundamental
Conventions, whilst complying with all
relevant laws. We also support several
voluntary standards, including the UN
Guiding Principles on Business and
Human Rights
This year we made further enhancements
to address the risk of Modern Slavery in
our supply chain and provided training on
human trafficking and modern slavery for
specialist colleagues
In 2019, we will lend up to
£18 billion to businesses
across the UK. During
these uncertain times, it is
important that our customers
have financial support and
expert guidance to navigate
the challenges they may face.
Whatever the future brings,
we will continue to support
UK businesses as part of
our commitment to Help
Britain Prosper.
António Horta-Osório,
Group Chief Executive
£18bn
lending to UK businesses in 2019
Lloyds Banking Group Annual Report and Accounts 2018 19
Responsible Business
We have served Britain through our products and services for more than
250 years, across every community, and millions of households. Our success
is interwoven with the UK’s prosperity and we aim to Help Britain Prosper by
operating as a responsible, sustainable and inclusive Group. This underpins
our purpose and the way we deliver our strategy.
We recognise that we have a responsibility
to help address the economic, social and
environmental challenges that the UK faces.
Our approach to responsible business ensures
that colleagues are equipped to make the
right decisions supported by our values-based
culture, and the way we embed responsible
business in our policies, processes and training.
Our areas of focus
Each year we gather stakeholder views
through a dedicated materiality study. In 2018,
they identified demonstrating responsibility
at our core as a key priority, including how we
keep customers’ data safe, support vulnerable
customers, lend responsibly, support
businesses and work with suppliers. Read
more on our stakeholders on pages 16 to 18.
Stakeholders also identified building
capability and digital skills as a key issue,
alongside tackling social disadvantage,
inclusion and diversity and sustainability.
We believe that the way we are addressing
these issues places us in a unique position to
Help Britain Prosper:
We are using our own capabilities in digital
banking to help develop the skills of people,
businesses and charities
We are one of the UK’s largest corporate
donors and use our scale and reach to
tackle some of society’s more complex
challenges through our independent
charitable Foundations
We have taken a leading role in
championing diversity and mental health,
setting public goals for increasing
Black, Asian & Minority Ethnic (BAME)
representation at all levels
Our ambition is to take a leading role
in supporting the UK’s transition to a
sustainable low carbon economy
Responsible business
of the year
Lloyds Banking Group has been voted
Responsible Business of the Year 2018
by Business in The Community, which
highlighted our Helping Britain Prosper
Plan, commitment to delivering social
benefits through digital transformation
and support for the lower carbon
economy. Euromoney magazine has also
ranked us Best Bank in Western Europe for
Corporate Responsibility 2018.
The Lloyds Banking
Group Centre for
Responsible Business
We are working with thought leaders to build
our understanding of operating responsibly,
and to help drive change across industry,
in how responsible business is considered.
The Centre for Responsible Business
(CFRB) is a unique joint venture between
Lloyds Banking Group and the University of
Birmingham’s Business School. This initiative
combines research with business, exploring
how all businesses can work in an ever
more responsible and ethical manner. The
outputs of this approach will have impacts
across a range of industries, benefitting the
entire economy.
The CFRB’s work aligns with our purpose to
Help Britain Prosper, and our support for the
UN’s Sustainable Development Goals. The
Centre was established to help learn lessons
from the past and to help us and others
work in a different way going forward. It will
play a pivotal role in ensuring the worlds of
academia, business and policy-making work
together more effectively to drive change.
One area of focus will be exploring the
regulatory, operational and ethical barriers to
the implementation of artificial intelligence.
We can only help with the unprecedented
levels of change in Britain today by staying
true to our purpose of Helping Britain Prosper.
Operating responsibly is fundamental to
everything we do, from lending to first time
buyers to tackling disadvantage in areas such
as mental health. Every colleague has a part
to play, and every part of the Group has its
own action plan for supporting customers,
while involving colleagues in our work
in communities.
We believe we can make a substantial
contribution to Britain’s social and economic
prosperity. We’re developing a Skills
Academy, initially focusing on Digital Skills,
in pilot in the North West of England. Through
our charitable Foundations we support
thousands of charities working with groups
on issues such as domestic abuse and
homelessness. As sustainability becomes
more of a priority for us all, we have a role to
play in supporting a lower carbon economy,
the UN's Sustainable Development Goals and
the UK Government's Clean Growth strategy.
Sara Weller
Non-Executive Director and Chair,
Responsible Business Committee
We are in the early stages of this
exciting collaboration between Lloyds
Banking Group and the University
of Birmingham. Moving from an
initial idea, to challenge-centred
research and engagement, exploring
how businesses can be ‘rewired
responsibly’ to inform, shape and
energise Responsible Business. It’s a
unique opportunity to explore best
practice, and inform the evolution
of responsible business decision
making, underpinning Lloyds Banking
Group’s pioneering initiative, ‘Helping
Britain Prosper’. It has been some
journey so far, laying down the
foundations for future success.
Professor Ian Thomson, Director
Lloyds Banking Group Centre
for Responsible Business
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
20 Lloyds Banking Group Annual Report and Accounts 2018
Responsible Business
Helping Britain Prosper Plan
As part of Helping Britain Prosper, we believe we have a responsibility to help
address some of the social, economic and environmental challenges that the
UK faces. We manage this through our Helping Britain Prosper Plan.
Launched in 2014 and revised annually, the
Plan focuses on the areas in which we can
make the biggest difference.
In 2018 we set specific targets aligned to our
3 year strategy. It continues to unite and
inspire our colleagues and for 2019, we have
included a specific sustainability metric,
alongside the six existing priority metrics,
highlighted in bold below.
As a UK focused retail and
commercial financial services
company, we recognise our
responsibility to help address the
economic, social and environmental
challenges that the UK faces. We
remain fully committed to Helping
Britain Prosper.
visit lloydsbankinggroup.com/
prosperplan
António Horta-Osório
Group Chief Executive
HELPING BRITAIN PROSPER PLAN 2019
Area of focus
Helping Britain get a home
Amount of lending committed to help people buy their first home
2018
achieved
2019
targets
£12.4bn
£10bn
Helping people save for the future
Growth in assets that we hold on behalf of customers in retirement
and investment products
£7.4bn
£32bn2
Supporting businesses to start up and grow
Increased amount of net lending to start-up, SME and
Mid Market businesses
£3bn
£5bn2
ICONS
ICONS
17 ICONS: BLACK/WHITE VERSION
ICONS
17 ICONS: BLACK/WHITE VERSION
ICONS
49
NO
POVERTY
ICONS
20201
targets
ZERO
HUNGER
GOOD HEALTH
AND WELL-BEING
QUALITY
EDUCATION
GENDER
EQUALITY
CLEAN WATER
AND SANITATION
ICONS
49
UN Sustainable
Development Goals
17 ICONS: BLACK/WHITE VERSION
£30bn
AFFORDABLE AND
CLEAN ENERGY
ICONS
ICONS
NO
POVERTY
DECENT WORK AND
ECONOMIC GROWTH
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
page 21
REDUCED
INEQUALITIES
SUSTAINABLE CITIES
AND COMMUNITIES
ZERO
HUNGER
GOOD HEALTH
AND WELL-BEING
QUALITY
EDUCATION
GENDER
EQUALITY
RESPONSIBLE
CONSUMPTION
AND PRODUCTION
CLEAN WATER
AND SANITATION
ICONS
ICONS
CLIMATE
ACTION
LIFE BELOW
WATER
LIFE
ON LAND
17 ICONS: BLACK/WHITE VERSION
17 ICONS: BLACK/WHITE VERSION
£50bn
AFFORDABLE AND
CLEAN ENERGY
DECENT WORK AND
ECONOMIC GROWTH
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
FOR THE GOALS
page 21
REDUCED
INEQUALITIES
SUSTAINABLE CITIES
AND COMMUNITIES
NO
NO
POVERTY
POVERTY
ZERO
ZERO
HUNGER
HUNGER
GOOD HEALTH
GOOD HEALTH
AND WELL-BEING
AND WELL-BEING
QUALITY
QUALITY
EDUCATION
EDUCATION
GENDER
GENDER
EQUALITY
EQUALITY
When an icon is on a square, that square must be proportional 1 x 1.
RESPONSIBLE
CONSUMPTION
AND PRODUCTION
THE GLOBAL GOALS
CLEAN WATER
CLEAN WATER
For Sustainable Development
AND SANITATION
AND SANITATION
The white icon should be contained by its defined colour, or black
background.
LIFE BELOW
WATER
CLIMATE
ACTION
LIFE
ON LAND
£6bn
AFFORDABLE AND
AFFORDABLE AND
CLEAN ENERGY
CLEAN ENERGY
DECENT WORK AND
DECENT WORK AND
ECONOMIC GROWTH
ECONOMIC GROWTH
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
When an icon is on a square, that square must be proportional 1 x 1.
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
FOR THE GOALS
page 21
REDUCED
REDUCED
INEQUALITIES
INEQUALITIES
ICONS
SUSTAINABLE CITIES
SUSTAINABLE CITIES
49
AND COMMUNITIES
AND COMMUNITIES
ICONS
49
RESPONSIBLE
RESPONSIBLE
CONSUMPTION
CONSUMPTION
AND PRODUCTION
AND PRODUCTION
THE GLOBAL GOALS
For Sustainable Development
The white icon should be contained by its defined colour, or black
background.
LIFE BELOW
LIFE BELOW
WATER
WATER
CLIMATE
CLIMATE
ACTION
ACTION
Building capability and digital skills
Number of individuals, SMEs and charities trained in digital skills,
including internet banking
700,232
17 ICONS: BLACK/WHITE VERSION
NO
POVERTY
600,000
1.8m
ZERO
HUNGER
NO
POVERTY
ZERO
HUNGER
GOOD HEALTH
AND WELL-BEING
GOOD HEALTH
AND WELL-BEING
QUALITY
EDUCATION
QUALITY
EDUCATION
When an icon is on a square, that square must be proportional 1 x 1.
When an icon is on a square, that square must be proportional 1 x 1.
Tackling social disadvantage across Britain
Number of charities we support as a result of our £100m
commitment to the Group’s independent charitable Foundations
3,113
ICONS
Championing Britain’s diversity
Percentage of senior roles held by women
Percentage of roles held by Black, Asian and Minority
Ethnic colleagues
AFFORDABLE AND
CLEAN ENERGY
DECENT WORK AND
ECONOMIC GROWTH
The white icon should be contained by its defined colour, or black
background.
The white icon should be contained by its defined colour, or black
background.
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
REDUCED
INEQUALITIES
2,500
AFFORDABLE AND
CLEAN ENERGY
DECENT WORK AND
ECONOMIC GROWTH
2,500
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
REDUCED
INEQUALITIES
17 ICONS: BLACK/WHITE VERSION
CLIMATE
ACTION
CLIMATE
ACTION
LIFE BELOW
WATER
LIFE BELOW
WATER
35.3%
NO
POVERTY
36.7%
ZERO
HUNGER
40%
GOOD HEALTH
AND WELL-BEING
LIFE
ON LAND
LIFE
ON LAND
QUALITY
EDUCATION
PEACE AND JUSTICE
STRONG INSTITUTIONS
PEACE AND JUSTICE
STRONG INSTITUTIONS
GENDER
EQUALITY
ICONS
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The white icon should be contained by its defined colour, or black
background.
When an icon is on a square, that square must be proportional 1 x 1.
ICONS
9.5%
AFFORDABLE AND
CLEAN ENERGY
The white icon should be contained by its defined colour, or black
background.
DECENT WORK AND
ECONOMIC GROWTH
10%
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
9.7%
REDUCED
INEQUALITIES
SUSTAINABLE CITIES
AND COMMUNITIES
RESPONSIBLE
CONSUMPTION
AND PRODUCTION
17 ICONS: BLACK/WHITE VERSION
17 ICONS: BLACK/WHITE VERSION
LIFE
LIFE
ON LAND
ON LAND
GENDER
EQUALITY
GENDER
EQUALITY
PEACE AND JUSTICE
STRONG INSTITUTIONS
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
PARTNERSHIPS
FOR THE GOALS
FOR THE GOALS
page 21
CLEAN WATER
AND SANITATION
CLEAN WATER
AND SANITATION
THE GLOBAL GOALS
THE GLOBAL GOALS
For Sustainable Development
For Sustainable Development
SUSTAINABLE CITIES
AND COMMUNITIES
SUSTAINABLE CITIES
AND COMMUNITIES
ICONS
RESPONSIBLE
CONSUMPTION
AND PRODUCTION
page 22
RESPONSIBLE
49
CONSUMPTION
AND PRODUCTION
PARTNERSHIPS
FOR THE GOALS
PARTNERSHIPS
FOR THE GOALS
CLEAN WATER
AND SANITATION
ICONS
For Sustainable Development
THE GLOBAL GOALS
pages
22–23
THE GLOBAL GOALS
For Sustainable Development
49
Percentage of senior roles held by Black, Asian and Minority
Ethnic colleagues
6.4%
NO
POVERTY
CLIMATE
ACTION
ZERO
HUNGER
7.2%
LIFE BELOW
WATER
GOOD HEALTH
AND WELL-BEING
8%
LIFE
ON LAND
QUALITY
EDUCATION
GENDER
NO
EQUALITY
POVERTY
CLEAN WATER
ZERO
HUNGER
AND SANITATION
GOOD HEALTH
AND WELL-BEING
QUALITY
EDUCATION
GENDER
EQUALITY
CLEAN WATER
AND SANITATION
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
FOR THE GOALS
Helping the transition to a sustainable low carbon
economy
Average number of homes that could be powered as a result
of our support of UK renewable energy projects
2.6m
AFFORDABLE AND
CLEAN ENERGY
3.5m2
DECENT WORK AND
ECONOMIC GROWTH
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
5m
REDUCED
INEQUALITIES
AFFORDABLE AND
SUSTAINABLE CITIES
AND COMMUNITIES
CLEAN ENERGY
THE GLOBAL GOALS
DECENT WORK AND
RESPONSIBLE
For Sustainable Development
CONSUMPTION
ECONOMIC GROWTH
AND PRODUCTION
pages
INDUSTRY, INNOVATION
AND INFRASTRUCTURE
24–25
REDUCED
INEQUALITIES
SUSTAINABLE CITIES
AND COMMUNITIES
RESPONSIBLE
CONSUMPTION
AND PRODUCTION
When an icon is on a square, that square must be proportional 1 x 1.
The white icon should be contained by its defined colour, or black
background.
CLIMATE
ACTION
LIFE BELOW
WATER
LIFE
ON LAND
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
CLIMATE
FOR THE GOALS
ACTION
LIFE BELOW
WATER
LIFE
ON LAND
PEACE AND JUSTICE
STRONG INSTITUTIONS
PARTNERSHIPS
FOR THE GOALS
1 Figures are all cumulative excluding tackling social disadvantage across Britain and championing Britain's diversity.
2 Figures are cumulative from 2018.
When an icon is on a square, that square must be proportional 1 x 1.
When an icon is on a square, that square must be proportional 1 x 1.
The white icon should be contained by its defined colour, or black
background.
The white icon should be contained by its defined colour, or black
background.
THE GLOBAL GOALS
For Sustainable Development
THE GLOBAL GOALS
For Sustainable Development
49
49
ICONS
49
Lloyds Banking Group Annual Report and Accounts 2018 21
Helping Britain get a home
As the largest lender to the UK housing sector, we
are committed to supporting home ownership
across the UK and are working to make it an
affordable reality for millions of people, lending
£12.4 billion to first time buyers in 2018.
Helping people
save for the future
We recognise the importance of savings
to build financial resilience and help to
tackle disadvantage, so we’re making
saving for the future as easy as possible by
improving choice, flexibility and control. In
2018 we grew the assets we hold on behalf
of customers in retirement and investment
products by £7.4 billion.
Supporting business
to start up and grow
Supporting UK businesses of all types is
key to Helping Britain Prosper. In 2018, we
helped more than 124,000 businesses start
up, increased the amount of net lending to
start up, SME and Mid Market businesses
by £3 billion and doubled our financial
investment at the Lloyds Bank Advanced
Manufacturing Training Centre (AMTC).
Building capability
and digital skills
Our ambition is to enhance capability and
digital skills, helping 1.8 million people with
skills training by 2020 alongside investing
in apprenticeship schemes. Working with
over 50 partners, in 2018 we provided digital
skills training to over 700,000 individuals
and organisations.
Digital skills
Using a blend of transactional and attitudinal
data we provide the UK's largest study of the
digital capability of individuals, SMEs and
charities. The Lloyds Bank Consumer Digital
Index 2018 shows that 21 per cent of the UK
lack basic digital skills, including 10 per cent of
the working population. A further 8 per cent
are entirely offline. 42 per cent of SMEs and
48 per cent of charities lack the skills to benefit
from the time and costs savings associated with
digital capability. The Lloyds Bank Business and
Charity Digital Index 2018 revealed that the UK
loses £84.5 billion in annual revenue due to a
lack of SME digital capability.
To combat these challenges we have several
key initiatives:
23,000 colleagues volunteered to become
Digital Champions supporting local
communities; we delivered Digital Knowhow
workshops to over 3,000 organisations
covering fraud and digital marketing with an
online toolkit signposting key resources; we
co-created a digital curriculum and delivered
events in schools to inspire over 800 students
and teachers with our ReDiscover programme;
and colleague volunteers hosted over
1,000 code clubs in schools.
Partnering for progress
In 2018 we led a consultation on the new
Essential Digital Skills Framework for the
Department for Education as their sole
evaluation provider. This work provided the
business case for the Government’s Digital
Skills Entitlement; free digital skills training for
all adults from 2020.
We are a leading member of the UK
Government’s Digital Skills Partnership,
advisors to the Secretary of State for Digital,
and chair the Department for Digital, Culture,
Media and Sport’s Digital Enterprise Delivery
Group. We have played a central role in
implementing a Charity Digital Code of
Practice, with local authorities now adopting
our Digital Champions model. We have
also worked closely with national and local
governments like Greater Manchester
Combined Authority and Welsh Assembly
to drive change.
Lloyds Bank Academy
In November we launched the Lloyds Bank
Academy. Initially piloted in Manchester, the
Academy provides basic and workplace skills
through online and face-to-face courses.
Developed with our charitable Foundations,
academia, industry and Government, the
Academy will scale nationally in 2019 and our
existing initiatives will be closely aligned to
extend our reach and impact.
Inspiring the next
digital generation
We are building digital talent through our
#ReDiscover initiative. Launched in July
2018 #ReDiscover brings a new digital
edge to learning, helping children aged 11
to 14 to think and explore, meet digital
professionals, undertake work placements,
and build future digital needs into their
studies. By holding school events and co-
creating lesson plans we have inspired over
800 students to date.
Developing Britain’s
manufacturing talent
Britain is renowned for its manufacturing
expertise. The sector accounts for
10 per cent of UK GDP, for 44 per cent of all
UK exports and directly creates 2.7 million
jobs. Yet there is a lack of qualified workers.
The shortfall could reach 220,000 by 2020
so it is vital to train new talent.
We are helping to address this. In 2018,
we doubled our financial investment at
the Lloyds Bank Advanced Manufacturing
Training Centre in Coventry to £10 million
over 10 years and committed to train
3,500 apprentices, graduates and
engineers by 2024. We have already
created 178 apprenticeships and trained
80 graduates and 295 engineers, including
many women and individuals from a Black,
Asian and Minority Ethnic background.
More than 250 Lloyds Bank customers
have been supported through our
partnership with the Manufacturing
Technology Centre (MTC), with around
70 of them undertaking a bespoke
programme to improve efficiency and
productivity or adopt new technology.
Having a 5 minute chat with a
student today has changed her
outlook on the future. That’s what
makes #ReDiscover so worthwhile.
Rachel
Colleague volunteer
A career at the MTC has allowed
me to work on high profile and
challenging manufacturing
projects, applying all the skills I’ve
learnt, and also learn new ones.
Rishi Chohan
MTC Graduate 2018
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
22 Lloyds Banking Group Annual Report and Accounts 2018
Responsible business continued
Tackling social
disadvantage across Britain
As one of the UK’s largest corporate
donors, we use our scale to reach millions of
people and help tackle social disadvantage
in communities across the UK. Our four
independent charitable Foundations are
fundamental to our vision of tackling social
disadvantage. They cover the UK and the
Channel Islands, partnering with small and
local charities to help people overcome
complex social issues and rebuild their lives.
Our total community investment in 2018 was
£56 million . This includes our colleagues’
time, direct donations, and the money we
give to our Foundations, which receive a
share of the Group’s profits annually. The
Foundations supported over 3,000 charities
in 2018, providing help for some of the
most disadvantaged and vulnerable
people in Britain.
In addition to funding, we support the
Foundations through volunteering, and
more than 370 colleagues are also active as
mentors to charities supported by each of
the Foundations. This year, we ran a pilot with
the Lloyds Bank Foundation for England and
Wales to recruit some of our senior leaders as
charity trustees and launched a Community
Forum through which colleagues support
charities. Through these initiatives, our
Foundations help us better understand some
of the social issues people may be facing
and we use these insights to help shape
effective responses.
Championing Britain’s
diversity
We champion inclusion and diversity (I&D)
to reflect the diverse communities we serve.
We were the first FTSE100 company to set
a public goal on gender diversity and this
year became the first FTSE100 company to
set public goals to increase Black, Asian and
Minority Ethnic (BAME) representation at all
levels. Additionally, this year we enhanced
our focus on mental health, as this is key to
economic prosperity and social inclusion,
and therefore to Helping Britain Prosper.
We know that the most inclusive organisations
are the most successful, so we welcome and
value the unique difference of every colleague.
2018 has been a year of significant progress
against our I&D objectives, which we know is
a source of pride for our colleagues; this year
88 per cent of them agreed in our annual survey
that the Group is an inclusive place to work.
Around 50 per cent of colleagues also belong
to or support one of our five diversity networks.
Indicator is subject to Limited ISAE3000 (revised)
assurance by Deloitte LLP for the 2018 Annual
Responsible Business Reporting. Deloitte’s 2018
assurance statement and the 2018 Reporting Criteria
are available online at
www.lloydsbankinggroup.com/our-group/responsible-
business/
Ethnicity
We have a comprehensive Ethnicity Strategy
to help us meet our goals, which focus on
attracting and retaining talented BAME
colleagues; building cultural awareness
at all levels; and increasing visibility of
authentic role models from a wide range of
ethnic backgrounds. By the end of the year
6.4 per cent of senior managers were BAME
colleagues, compared with 5.6 per cent
in 2017, while BAME colleagues made up
9.5 per cent of our total workforce, compared
with 8.3 per cent in 2017.
To achieve this, activities in 2018 included:
developing our Authentic Leadership
Programme for BAME senior managers
and our Career Development Programme
for BAME middle managers; actively
promoting our Race, Ethnicity and Cultural
Heritage Network, which now has around
4,000 members; and promoting our Ethnicity
Role Models List. In October, we signed
the UK Government’s Race at Work Charter
and already meet and exceed its principle
requirements. In 2018 we won the overall
Outstanding Employer Award at the inaugural
Investing in Ethnicity Awards.
Gender diversity
We remain committed to having women
fill 40 per cent of our senior management
roles by 2020 and have been included in
The Times ‘Top 50 employers for women’ in
2018, for the seventh year running. This year
we continued sponsoring Women of the
Future Ambassadors, connecting successful
women with female students, and launched
our Sponsoring Leaders programme,
enabling women in senior roles to champion
the potential of women in more junior roles.
The promotion rate for the 100 colleagues
who completed the programme in 2018 was
around five times that of non-participants.
From January 2019, the Group will be included
in the Bloomberg Gender-Equality Index for
the first time.
For more information about Gender Pay
see pages 82 to 104
We were a top ten Trans-Inclusive employer
and fifth employer overall in the Stonewall Top
100 2018, the highest ranked financial services
company in the UK. Through our Rainbow
network colleagues raised almost £100,000 to
support key charities and we continued our
sponsorship for Stonewall Young Campaigners,
empowering young people aged 16 to 21
to become campaigners for Lesbian, Gay,
Bisexual and Transgender equality.
Supporting people with disabilities
Traditionally, employment of people with
disabilities has focused on making changes
to physical infrastructure or working
practices. We are moving the debate from
accommodating disabilities to developing
talent and careers. We offer bespoke
training, career development programmes
Taking a joined up
approach to tackling
domestic abuse
In partnership with our independent
charitable Foundations, we’re providing
more than just traditional funding. Our
Foundations are helping us work with
charities they support to develop a deeper
understanding of the challenges faced
by customers affected by complex and
sensitive issues.
The charity Behind Closed Doors (BCD)
helps people in Leeds exit harmful
situations relating to domestic abuse.
Lloyds Bank Foundation for England
and Wales provides financial support to
help them deliver their vital services to
vulnerable people. To deepen the support
they can provide, the Foundation matched
BCD with a senior Group colleague, Dave
Moore, who has joined them as a charity
mentor and valued Board member, helping
them become sustainable, develop their
offering and reach more people in need.
Dave is dynamic and energetic,
and he’s motivated the Board to
become more proactive. He’s
encouraged a business-like
approach, where we can more
easily consider the long-term
future, setting clear goals and
a strategy for achieving them,
and he’s supported the Board to
become more strategic in their
governance role. It’s been great
having his support.
Louise Tyne
Operational Director, BCD
Lloyds Banking Group Annual Report and Accounts 2018 23
and recruitment process adjustments for
colleagues and applicants with disabilities,
including those who have become disabled
while employed. Training includes courses
run with external disability consultants, which
have been described as life changing by
attendees. We give full and fair consideration
to applications from all candidates, offering
guaranteed interviews for candidates
declaring a disability, and meeting minimum
role requirements. We are unbiased in our
assessment, selection, appointment, training
and promotion of people. In 2018 we retained
our Business Disability Forum (BDF) Gold
Standard, and hold Disability Confident Leader
status with the Department for Work and
Pensions. The BDF considers our workplace
adjustment process for disabled colleagues to
be ground breaking, creating a best practice
case study that they have shared with around
400 other BDF member organisations. We
are set to achieve Autism Friendly Bank and
Employer accreditation from the National
Autistic Society in mid-2019.
Mental health & wellbeing
As a Group we believe that a shift in mindset is
needed amongst UK employers when it comes
to mental health. We all have mental health
as well as physical health and our approach
focuses on removing the stigma attached to
mental ill health, addressing it in the same way
as we would any physical condition; through a
culture of conversation and support.
Our mental health strategy supports colleagues
and leaders through a mental health resource
centre and this year we stepped up mental
health training for colleagues at all levels.
To date more than 40,000 colleagues have
completed training on mental health and
we are training 2,500 colleagues to become
mental health advocates by 2020. We enrolled
200 leaders in our new Optimal Resilience
Leadership Programme, which covers personal,
mental and physical wellbeing and are now
working on extending this to the next level of
2,000 senior managers.
Through a targeted communication campaign
and personal stories shared at all levels, we
have encouraged colleagues to freely discuss
mental health, with the number of those who
tell us they have mental health issues up by
22 per cent over the past three years.
We also extended the focus on mental
health to our colleague wellbeing resources,
increasing private medical benefit cover for
mental health to match that of physical health.
Our employee assistance programme now
provides colleagues with access to counselling
and cognitive behavioural therapy, and
our workplace adjustments programme
increasingly offers support for mental as well
as physical types of disability.
Recognition that mental health is an issue for
our customers and the communities we serve,
inspired us to create our ‘Get the Inside Out’
advertising campaign to challenge mental
health stereotypes.
The Mental Health and Money Advice Service
More than £8 million raised since 2017 has helped our
charity partner, Mental Health UK, open the Mental Health
and Money Advice Service – the UK’s first dedicated
advice service for people with mental health and money
problems. These two issues are often inter-related, so the
new service is urgently needed.
It comprises a public website providing information across
a number of issues including benefits, debt problems and
managing mental health. It also operates a referral only
telephone advice service.
Since its launch in November 2017, the website
has received around 180,000 views and more than
1,000 people have been referred for confidential advice.
More than 2,400 cases have been handled, with each
client on average about £1,000 better off as a result. By
November 2018 a total annual saving of over £1.3 million
had been delivered.
Our Inclusion and Diversity data
Gender
Board Members
Senior Managers3
Colleagues3
Ethnic Background
Percentage of colleagues from a BAME background
BAME managers
BAME senior managers
Disability
Percentage of colleagues who disclose they have a disability4
Sexual Orientation
Percentage of colleagues who disclose they are lesbian, gay,
bisexual or transgender
I know I still have a way to
go, but thanks to Mental
Health and Money
Advice I have improved
my confidence and built
up some skills to better
manage my situation.
Stephen
Mental Health and Money
Advice Service user
Male
Female2
Male
Female
Male
Female
2018
20171
9
4
4,701
2,573
30,458
42,372
9.5%
9.0%
6.4%
9
3
4,939
2,544
31,216
42,956
8.3%
8.3%
5.6%
1.7%
2.6%
2.0%
1.7%
1 2017 reporting scope excludes MBNA colleagues, who became part of Lloyds Banking Group plc in June 2017, as their
separate grading structure could not be aligned to LBG grades at that point.
2. Data as at 31 December 2018. Amanda Mackenzie joined the Board on 1 October 2018, and Deborah McWhinney retired
from the Board on 31 December 2018.
3 Reporting scope: payroll headcount includes established and fixed term contract colleagues, parental leavers, MBNA
colleagues and Internationals. Excludes Leavers, Group Non-Executive Directors, contractors, temps, and agency staff.
4 Percentage disclosure for disability has reduced due to the implementation of a new HR system in Nov 2018, with differing
categories. Not all disability data could be directly mapped across into the new system.
Diversity scope: Payroll headcount including parental leavers. Excludes contractors, temps and agency staff. Gender
information includes International colleagues and MBNA. All other diversity information is UK Payroll only. Senior
Managers: Grades F+. Managers: Grade D-E. Data source: HR system (Workday). Apart from gender data, all diversity
information is based on colleagues’ voluntary self-declaration. As a result this data is not 100 percent representative; our
systems do not record diversity data for the proportion of colleagues who have not declared this information.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
24 Lloyds Banking Group Annual Report and Accounts 2018
Responsible business continued
Responsible business continued
Helping the transition to
a sustainable low carbon
economy
Following a Board level review of our
approach to environmental sustainability, we
have developed a new sustainability strategy
which focuses on the opportunities and
threats related to climate change and the
need for the UK to transition to a sustainable
low carbon economy.
This strategy supports the Task Force on
Climate Related Financial Disclosures (TCFD)
recommendations and incorporates an
implementation plan to address them and
achieve full disclosure within five years. The
strategy maps to the key headings used
in the TCFD framework.
Strategy
Our commitment
The UK is committed to the vision of a
sustainable, low carbon economy, and
has placed clean growth at the heart of its
industrial strategy. This will require a radical
reinvention of the way people, work, live and
do business.
We have a unique position within the UK
economy with our purpose of Helping
Britain Prosper. The successful transition
to a sustainable, low carbon economy that
is resilient to climate change impacts and
sustainably uses resources is of strategic
importance to us. We support the aims
of the 2015 Paris Agreement on Climate
Change, and the UK Government’s Clean
Growth Strategy.
Our approach
To meet our commitment, we will:
Take a strategic approach to identifying new
opportunities to support our customers
and clients and to finance the UK transition
to a sustainable low carbon economy,
embedding sustainability into Group
strategy across all activities
Identify and manage material sustainability
and climate related risks across the Group,
disclosing these and their impacts on the
Group and its financial planning processes
in line with the TCFD recommendations
Use our scale and reach to help drive
progress towards a sustainable and
resilient UK economy, environment and
society through our engagement with
industry, Government, investors, suppliers
and customers
Embed sustainability into the way we do
business and manage our own operations
in a more sustainable way
Our ambition
Our goal is to be a leader in supporting
the UK to successfully transition to a more
sustainable, low carbon economy. We have
set ourselves seven ambitions anchored to the
goals laid out in the UK Government’s Clean
Growth Strategy, as these align closely to our
business priorities:
Business: become a leading UK commercial
bank for sustainable growth, supporting our
clients to transition to sustainable business
models and operations, and to pursue new
clean growth opportunities
Homes: be a leading UK provider of
customer support on energy efficient,
sustainable homes
Vehicles: be a leading UK provider of low
emission/green vehicle fleets
Pensions & investments: be a leading UK
pension provider that offers our customers
and colleagues sustainable investment
choices, and challenges companies we
invest in to behave more sustainably
and responsibly
Insurance: be a leading UK insurer in
improving the resilience of customers’
lives against extreme weather caused
by climate change
Green bonds: be a leading UK bank in the
green/sustainable bonds market
Our own footprint: be a leading UK bank
in reducing our own carbon footprint and
challenging our suppliers to ensure our
own consumption of resources, goods and
services is sustainable
For each ambition we will consider the
Government’s targets and current plans.
We will use forward looking scenarios to
identify risks and opportunities over short,
medium and long term time horizons and
assess how they impact the resilience of
our strategy. We are developing a series
of propositions against each ambition and
have defined an implementation plan to
achieve a leadership position within three
years. We will work with Government and
other stakeholders on thought leadership to
help inform the creation of the policies and
market conditions required for large scale
investment in the transition to a sustainable,
low carbon economy. To support these
propositions, we are equipping our business
relationship managers and other colleagues
with training and tools to have more informed
conversations on climate related issues. As
part of our TCFD implementation plan, we will
also develop a forward looking approach to
systematically reporting material financial risk
and opportunity aggregated across the Group.
Improving our own environmental footprint
is an important foundation for our activity.
We’ve consistently reduced our environmental
impacts, thanks to the ambitious
Environmental Action Plan we launched in
2010. To ensure this plan supports the UK’s
climate change priorities and our long term
strategy, we have a set of market leading
targets to improve the sustainability of our own
operations and supply chain. These include
reducing our operational waste by 70 per cent
by 2020 and 80 per cent by 2025 (compared to
2014/15), and reducing our CO2e emissions by
60 per cent by 2030 and 80 per cent by 2050
(compared to 2009) www.lloydsbankinggroup.
com/our-group/responsible-business/
sustainability-in-lloyds-banking-group. We
anticipate achievement of the 2050 target well
before this date, driven by both our energy
efficiency improvements, direct investment
in renewable energy on our sites and through
purchasing Renewable Energy Guarantees
of Origin (REGOs) to cover our UK electricity
consumption. We are now able to state that
100 per cent of our UK electricity comes
from renewable sources and to show our
commitment to supporting the transition
to the low carbon economy, we have joined
the RE100 campaign, a collaborative, global
initiative uniting businesses committed to
100 per cent renewable energy.
Environmental section within Directors’
Report see page 81
Governance
We have established a dedicated governance
process to provide oversight and ownership
of the sustainability strategy. This includes
the Responsible Business Committee
(RBC), a sub-committee of the Board, which
meets quarterly and provides Board level
oversight. This committee is chaired by
Sara Weller, Group Non-Executive Director
and includes the Chairman, Lord Blackwell
as a member. At Executive level, we have
established a Group Executive Sustainability
Committee (GESC), which is a sub-committee
of our Group Executive Committee (GEC)
and provides oversight and recommends
decisions to the GEC. The RBC, GEC and
GESC have all been informed on key climate
related issues by external industry experts.
We have created a Group sustainability
team, supported by divisional Governance
Forums and working groups led by divisional
Managing Directors. This enables us to have
a coordinated approach to oversight, delivery
and reporting of the Group sustainability
strategy to the GESC, along with a mechanism
for keeping management and the Board
updated on climate related issues impacting
the Group.
For the implementation of the TCFD
recommendations across the Group, we have
established a senior executive group TCFD
forum. We aim to expand the consideration of
sustainability and climate related issues into
relevant Board and governance committees
including processes to monitor and oversee
progress against goals and targets related
to climate issues. We will also consider how
sustainability might be incorporated into our
remuneration policies.
Lloyds Banking Group Annual Report and Accounts 2018 25
Risk management
Each division within the Group is responsible
for identifying and prioritising relevant climate
related risks and opportunities and integrating
them into their risk management processes,
which determine materiality and classify risks
into traditional risk categories. This includes
identifying potential risks through horizon
scanning of changes in regulation, technology
and consumer demand. Risks are classified
in terms of whether they impact the Group
in the short, medium or long term. Examples
include possible changes in the sustainability
of homes, how vehicles are powered, changes
in UK energy mix, through to changes in the
frequency and severity of extreme weather
events. The Group sustainability team
facilitates collaboration across divisions to
increase understanding of consistent issues,
as well as our risk, opportunities and financial
impact on an aggregated basis.
During 2018, we reviewed our external sector
statements to confirm that they align to our
sustainability strategy and consider appropriate
climate related risk. We introduced a position
statement for coal and revised statements
for defence, mining, oil and gas, power, and
forestry. For more information on our sector
statements www.lloydsbankinggroup.com/
our-group/responsible-business/sustainability-
in-lloyds-banking-group. In 2019, we will
review these statements again, and consider
developing statements for other sectors
and topics. We will review ways to embed
sustainability in the Group’s key policies.
Forward looking scenario analysis
incorporating physical and transition risk will
be utilised across the Group to systematically
identify risks and opportunities. During 2018,
Commercial Banking undertook forward
looking scenario analyses including business
as usual and low carbon transition scenarios,
identifying sectors with a higher level of
climate related risk and opportunity. Detailed
assessments are now being undertaken
on higher risk sectors to understand the
potential financial impact to our customers
and to the Group. We will be completing
further reviews of higher risk sectors in 2019
to inform portfolio analytics, counterparty
risk and financial product development,
while increasing the scope to also include
other divisions.
Metrics and targets
As part of our TCFD implementation plan we
are developing our approach to reporting
metrics and targets. This will include a
long term reporting framework, enabling
us to track our performance against our
sustainability strategy, and disclose the
financial impact of climate change related
risks and opportunities. We will define metrics
linked to our green finance propositions and
the carbon exposure of our activities. Our
targets will have specific time horizons against
defined baseline years and will consider
the level of historical and forward looking
projections that can be made available. We
aim to develop this new reporting framework
in the first half of 2019 and will start to
include key quantified metrics in our next
annual report.
We have made sustainability a focus area in
our Helping Britain Prosper Plan and have
defined metrics for it. We disclose our in-
house greenhouse gas emissions, as shown
below, with supporting commentary detailed
in the directors report Environmental section
within Directors’ Report see page 81 and our
set of in house environmental targets on our
website www.lloydsbankinggroup.com/our-
group/responsible-business/sustainability-in-
lloyds-banking-group.
Environmental section within Directors’
Report see page 81
Find out more about our set of in-house
environmental targets at www.lloydsbanking.
com/our-group/responsible-business/
sustainabilityinlloyds-banking-group
Clean Growth
Finance Initiative
In 2018 we launched a £2 billion Clean
Growth Finance Initiative (CGFI) to
help British businesses reduce their
environmental impacts and benefit from
the transition to a low carbon economy.
The CGFI aims to be the most inclusive
UK green funding proposition available,
incentivising all types of businesses
to invest in low carbon projects by
providing discounted financing for
capital expenditure or investment with
a green purpose.
CO2e emissions (tonnes)
Total CO2e (market-based)
Total CO2e (location-based)
Total Scope 1
Total Scope 2 (market-based)
Total Scope 2 (location-based)
Total Scope 3
Oct 17-Sept 18
Oct 16-Sept 17
Oct 15-Sept 161
115,467
244,407
48,461
1,976
130,916
65,030
303,065
286,892
51,419
178,771
162,598
72,876
340,2612
340,261
53,023
202,3192
202,319
84,918
1 Restated 2017/2016 and 2016/2015 emissions data to improve the accuracy of reporting, using actual data to
replace estimates.
2 Note our market based emissions are equal to location based for 2016/15. This is in accordance with GHG protocol
guidelines in absence of appropriate residual factors.
Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard (2004). We are now reporting to the revised
Scope 2 guidance, disclosing a market-based figure in addition to the location-based figure. The measure and reporting
criteria for Scope 1, 2, 3 emissions is provided in the Lloyds Banking Group Reporting Criteria statement available online at
www.lloydsbankinggroup.com/ResponsibleBusiness
Scope 1 emissions include mobile and stationary combustion of fuel and operation of facilities.
Scope 2 emissions have been calculated in accordance with GHG Protocol guidelines, in both location and market
based methodologies.
Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2018 Annual Responsible Business
Reporting. Deloitte’s 2018 assurance statement and the 2018 Reporting Criteria are available online at
www.lloydsbankinggroup.com/our-group/responsible-business
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
26 Lloyds Banking Group Annual Report and Accounts 2018
Responsible business continued
This section of the strategic report constitutes Lloyds Banking Group's Non-Financial Information Statement, produced to comply with sections 414CA
and 414CB of the Companies Act. The information listed is incorporated by cross-reference.
Reporting requirement
Policies and standards which govern our approach
Information necessary to understand our business and its impact, policy due diligence and
outcomes
Environmental matters
Environmental statement
Reflecting the needs of our stakeholders:
Communities and environment, page 18
Helping the transition to a sustainable low carbon economy,
pages 24 to 25
Employees
Ethics and Responsible Business Policy1
Reflecting the needs of our stakeholders: Colleagues, page 17
Ethical Policy Statement
Colleague Policy1
Code of Responsibility
Health and Safety Policy1
Championing Britain’s diversity, pages 22 to 23
Respect for Human rights
Human Rights Policy statement
Reflecting the needs of our stakeholders:
Colleague Policy1
Suppliers, page 18
Pre-Employment vetting standards1
Championing Britain’s diversity, pages 22 to 23
Data Privacy Policy1
Anti-Slavery and Trafficking Statement
Information and Cyber Security Policy
Social matters
Volunteering standards1
Reflecting the needs of our stakeholders: Customers, page 16
Matched giving guidelines1
Reflecting the needs of our stakeholders:
Communities and environment, page 18
Helping Britain Prosper Plan, page 20
Helping Britain get a home, Helping people save for the future,
Supporting business to start up and grow, Building capability
and digital skills, page 21
Tackling social disadvantage across Britain, page 22
Anti-corruption
and anti-bribery
Anti-bribery Policy1
Reflecting the needs of our stakeholders:
Anti-bribery policy statement
Customers, page 16
Anti-money laundering and counter terrorist
Reflecting the needs of our stakeholders:
financing Policy1
Colleagues, page 17
Fraud Risk Management Policy1
Description of principal risks and impact of business activity
Helping the transition to a sustainable low carbon economy:
Description of the business model
Non-financial key performance indicators
Risk management, page 25
Risk overview 2018 themes, page 31
Our principal risks, pages 32 to 35
Our Business Model, Page 10
Key performance indicators, pages 6 to 7
Our strategic priorities, pages 12 to 15
Helping Britain Prosper Plan, page 20
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 2018.
Non-financial information statement Lloyds Banking Group Annual Report and Accounts 2018 27
Divisional overview
Retail
Retail offers a broad range of financial
service products to personal and business
banking customers, including current
accounts, savings, mortgages, credit cards,
unsecured loans, motor finance and leasing
solutions. Its aim is to be the best bank for
customers in the UK, by building deep and
enduring relationships that deliver value, and
by providing them with choice and flexibility,
with propositions increasingly personalised
to their needs. Retail operates a multi-brand
and multi-channel strategy and continues
to simplify its business and provide more
transparent products, helping to improve
service levels and reduce conduct risks,
whilst working within a prudent risk appetite.
£4,272m
Underlying profit increased by 13%
>£12bn
Lending to first time
buyers
1m
Halifax was the first UK
bank to reach 1 million
switchers since the
current account switching
service began in 2013
UK’s largest digital bank
Active online users (m)
2018
2017
1
2016
1
2015
1
2014
1
1 Excludes MBNA.
15.7
13.4
12.5
11.5
10.4
Creating warm
informal spaces to meet,
work and learn
Progress in 2018
Leading customer experience
Launched API-enabled Open Banking
aggregation capability, providing
customers with more control and the ability
to view in one place the current accounts
they hold with us alongside those held
outside the Group
Maintained position as UK’s largest
digital bank with 15.7 million digitally
active customers
Maintained the UK’s largest branch
network, while tailoring it to meet
customers’ complex needs more effectively.
Opened a new flagship Halifax branch and
41 micro branches, while also introducing
16 new mobile branches, with the enlarged
fleet helping serve customers in more
remote and rural communities across more
than 210 locations
Expanded Remote Advice video service,
with approximately 38,000 customers
having already discussed their mortgage
needs with remote advisers in one of the
270 branches that offer this service or from
their own homes
Increased personalisation, with the
recent launch of Lend a Hand mortgage
expanding support to first time buyers
Reduced complaints (excluding PPI) by
10 per cent in 2018
Digitising the Group
Rolled out Voice ID technology to make
banking quicker and easier for customers,
whilst providing added protection. Since
launch, over 770,000 registered customers
have used this functionality, completing
4 million verifications
Continued to improve mobile banking
experience, giving customers greater
control and choice:
– First UK bank to use location based
payment tracking, enabling customers to
identify fraudulent transactions
– Launched card controls increasing
customer security with functionality to
cancel or temporarily freeze card use
– Introduced cheque image clearing,
providing customers with the ability to pay
in cheques remotely
Taking a prime position on London’s busy Oxford
Street, and with 13,500 square feet of floor space,
the Halifax Flagship branch is one of the largest in
the UK. It offers a relaxed, comfortable space open
to everyone. Customers and non-customers alike are
encouraged to explore at their leisure.
At the heart of the branch, the Halifax Home Hub will
help customers with all aspects of the home buying
and moving process, with colleagues available
without appointment. In the travel zone, customers
will be able to order and exchange over 50 currencies
and get advice on saving for their next trip, or how to
pay for things while they are away. In the kids’ savings
zone, children can learn about good savings habits,
using the coin counting machine to see how much
they have saved up. On the lower ground floor, a
state-of-the-art safe deposit facility using biometric
fingerprint technology will store customers’
possessions securely.
Maximising the Group’s capabilities
Helping Britain Prosper with over
£12 billion of gross mortgage lending to
first time buyers and over 120,000 start-up
businesses supported
Halifax was the first UK bank to reach
1 million switchers since the Current
Account Switching Service began in 2013
Transforming ways of working
Delivered around 25,000 training hours
to Group Customer Services colleagues,
enabling them to better support
vulnerable customers
Financial performance
Underlying profit at £4,272 million increased
13 per cent
Net interest income increased 4 per cent
reflecting an 8 basis point improvement in
net interest margin with the benefits of a
full year of MBNA and lower funding costs
more than offsetting ongoing mortgage
pricing pressure
Other income was 2 per cent lower
following implementation of a simpler
overdraft fee structure
Operating lease depreciation reduced
3 per cent reflecting improved used car
market prices
Operating costs of £4,915 million increased
1 per cent, as increased investment in the
business was partly offset by efficiency
savings. Remediation reduced to £267 million,
driven by lower provision charges
Impairment increased 21 per cent reflecting
full year inclusion of MBNA and non-repeat
of UK mortgages write-backs
Loans and advances include the increase
in Business Banking balances and growth
in Black Horse offset by reductions in the
closed mortgage book. Open mortgage
book balances were broadly flat at
£267 billion reflecting continued focus on
the trade-off between volume and margin
in a highly competitive market
Customer deposits included average
current account growth of 6 per cent and
continued reduction in tactical savings
Risk-weighted assets increased to £94 billion
reflecting changing asset mix, along with
model refinements
Banking is often quick and
transactional but we know
that some financial decisions
need more thought and
that’s why branches remain
vitally important.
Lloyds Banking Group colleague
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
28 Lloyds Banking Group Annual Report and Accounts 2018
Divisional overview continued
Commercial Banking
Transforming ways of working
Restructured our Commercial Banking
operations teams to align processing
activity with the changing ways that
customers consume our services
Over 94,000 colleague training hours
completed, helping us to develop the skills
and capabilities of the future
Financial performance
Return on risk-weighted assets of
2.50 per cent, up 6 basis points with lower
risk-weighted assets driven by continued
balance sheet optimisation more than
offsetting a reduction in underlying profit
Net interest income was slightly lower
at £3,004 million, with the net interest
margin slightly lower at 3.27 per cent,
and marginally higher average interest
earning assets
Other income of £1,653 million was
8 per cent lower reflecting challenging
market conditions leading to lower levels
of client markets activity. 2017 included a
number of significant one-off refinancing
and hedging transactions
Operating lease depreciation significantly
lower given accelerated depreciation of
legacy assets in 2017
Operating costs 3 per cent lower, with
efficiency savings more than offsetting
increased investment
Improved asset quality ratio of 9 basis
points reflecting good credit quality
across the portfolio
Continued lending growth in SME of
3 per cent including loans and advances
now transferred to Business Banking as part
of the client re-segmentation
Increased customer deposits of £149 billion,
reflecting continued success in attracting
high quality transactional deposits with
improved current account mix
Progress in 2018
Leading customer experience
Successful launch of Lloyds Bank Corporate
Markets, the Group’s non ring-fenced bank,
enabling us to continue meeting our clients’
broad range of needs while helping to create
a safer, more secure financial services industry
Further simplified the client coverage model
to better reflect the changing needs of our
clients. Coverage model now based on
three segments – SME and Mid Corporates,
Large Corporates and Financial Institutions
Awarded Business Bank of the Year at
the FDs’ Excellence Awards for the 14th
consecutive year, with an overall satisfaction
rating of nine out of ten
Digitising the Group
Launched a digital eligibility and pricing
tool, enabling SME clients to understand
instantly how likely they are to be approved
for a loan or overdraft of up to £25,000
before they apply
Expanded the online servicing functionality
available to SME customers, including the
ability for sole traders to digitally add or
remove a party onto their business account
in less than 24 hours
Maximising the Group’s capabilities
Increased net lending to start-ups, SMEs
and Mid Market clients by £3 billion,
having provided over £18 billion of gross
new lending to businesses in the year and
committed to the same level in 2019
Exceeded the commitment to provide
£750 million of funding to support social
housing projects in the UK
Provided £1.5 billion of funding to the UK
manufacturing sector, supporting increased
production capacity, investment in plant and
machinery and research and development,
allowing clients to remain innovative
and competitive
Exceeded sustainability targets through
support for renewable energy projects
capable of powering over 2.6 million homes
and the financing of energy efficiency
improvements across 1.4 million square feet
of real estate
Green Loans
In 2016 Commercial Banking announced the first
green loans designed to help global corporate
commercial real estate clients improve the energy
efficiency of their estates. By the end of 2017, more
than £500m had been lent under the initiative,
improving over five million square feet of real estate.
We have committed to a further one million square
feet in 2018, and five million square feet by 2020.
>5m
We have committed to a
further one million square
feet in 2018, and five million
square feet by 2020.
Commercial Banking has a client-led,
low risk, capital efficient strategy, and
is committed to supporting UK-based
clients and international clients with a link
to the UK. Through its segmented client
coverage model, it provides clients with
a range of products and services such
as lending, transaction banking, working
capital management, risk management and
debt capital markets services. Continued
investment in capabilities and digital
propositions enables the delivery of a
leading customer experience, supported
by increasingly productive relationship
managers, with more time spent on value-
adding activity.
£2,160m
Underlying profit decreased by 3%
£3bn
growth in net lending to
start-ups, SMEs and
Mid Market clients
2.50%
Return on risk weighted
assets, up 6bps
Funding for UK manufacturers
£bn
2018
2017
2016
2015
2014
1.5
1.1
1.2
1.4
1.0
Helping clients improve
the energy efficiency
of their estates
Lloyds Banking Group Annual Report and Accounts 2018 29
Insurance and Wealth
Insurance and Wealth offers insurance,
investment and wealth management
products and services. It supports
around 10 million customers with assets
under administration of £141 billion and
annualised annuity payments in retirement
of over £1 billion. The Group continues to
invest significantly in the development of
the business, with the aims of capturing
considerable opportunities in pensions
and financial planning, offering customers
a single home for their banking and
insurance needs, and driving growth across
intermediary and relationship channels
through a strong distribution model.
£927m
Underlying profit increased by 3%
>0.6m
new pension customers
87%
increased new business
income
Strong open book AUA customer net inflows
£bn
20181
2017
2016
2015
2014
8
5
13
2
1
2
3
1 Underlying customer net inflows £5 billion and Zurich
transfer £8 billion.
Helping people
plan for their future
Ongoing collaboration with Commercial
Banking to provide long duration loans
primarily to finance housing, infrastructure
and education while backing the growing
annuity portfolio, with £1.1 billion new loans
written in 2018
Transforming ways of working
Involved customers and colleagues in
developing and launching a new simple to
understand protection product
Financial performance
Strong growth in life and pensions sales,
up 45 per cent, driven by increases in new
members in existing workplace schemes,
increased auto enrolment workplace
contributions and bulk annuities
New underwritten household premiums
increased 27 per cent, reflecting progress
of Direct and Corporate Partnership
propositions; total underwritten premiums
decreased 6 per cent driven by a
competitive renewal market
Significant growth in life and pensions
new business income, up 87 per cent to
£526 million partly offset by £26 million
decrease in total general insurance income
net of claims, including around £60 million
impact from higher weather related claims.
Lower experience and other items primarily
due to non recurrence of £170 million income
from the addition of death benefits in 2017
Underlying profit increased by 3 per cent
to £927 million. Net income increased by
£9 million to £1,988 million whilst operating
costs decreased by £19 million, with
cost savings more than offsetting higher
investment in the business
7,000
people helped across
37 locations
Progress in 2018
Leading customer experience
Successfully completed first stage of Zurich
transfer and on track to conclude transfers
in the second half of 2019
Commenced roll out of a new suite of annual
benefit statements to over 50 per cent of
longstanding customers, making it simpler
for them to understand their products, as
well as the options available to them
Simplifying systems and processes through
our long-term partnership with Diligenta.
Good progress towards initial systems
migration in first half of 2019, enabling
customers to better manage their policies
with Scottish Widows
Scottish Widows won 5 star service awards
at the Financial Adviser Service Awards for
the third consecutive year
Digitising the Group
Successful pilot allowing customers to
register and manage home insurance
claims online now being followed up with
introduction of new technology, enabling
customers to upload digital media to
accelerate settlement
Maximising the Group’s capabilities
Launched Single Customer View; a unique
capability, already enabling over 3 million
customers to view in one place the pension
and insurance products they hold with the
Group alongside their banking products.
Announced strategic partnership with
Schroders to create a market leading wealth
management proposition. Target for the
partnership, Schroders Personal Wealth,
to become a top 3 UK financial planning
business within five years
Good progress towards the target
of growing open book assets under
administration by £50 billion by the end
of 2020, with strong customer net inflows
of £13 billion achieved in the year, partly
offset by £5.5 billion of negative market
movements, mainly in the fourth quarter
Strong progress towards one million new
pension customers by end 2020, with over
630,000 new customers in 2018
The Scottish Widows pensions bus travelled
around the country in 2018, helping members of
the public with their retirement plans and visiting
25 employers that have their workplace pensions
with Scottish Widows.
Starting in Edinburgh, the bus finished the first week
on National Pensions Awareness Day at London
Kings Cross Station before travelling the length of the
country once more helping people understand their
Scottish Widows workplace pension. The Group left
a trail of happy customers behind them.
Our pensions experts provided free guidance,
whether they were just thinking about starting a
pension or perhaps coming to the end of their working
career and are about to retire, all questions were
welcomed, big or small – ensuring people feel happy
and confident when thinking about their future.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
30 Lloyds Banking Group Annual Report and Accounts 2018
Risk overview
Effective risk management and control
Our approach to risk
As a Group, managing risk effectively is
fundamental to our strategy and future
success. We are a simple, low risk, UK-focused
financial services provider with a culture
founded on strong risk management and
a prudent through the cycle risk appetite.
These are at the heart of everything we do,
and ensure constructive challenge takes
place across the business and underpins
sustainable growth.
Our approach to risk is founded on an effective
control framework, which guides how our
colleagues work, behave and the decisions
they make. As part of this framework, risk
appetite – the amount and type of risk that
the Group is prepared to seek, accept or
tolerate in delivering our Group Strategy – is
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 decision-making
and has enabled us to continue to deliver
against our strategic priorities in 2018.
Our approach to risk plays a key role in the
Group’s strategy of becoming the best bank
for customers, colleagues and shareholders.
Risk as a strategic differentiator
Risks are identified, managed and mitigated
using our comprehensive Risk Management
Framework, and our well-articulated risk
appetite provides a clear framework for
decision-making. The principal risks we face,
which could significantly impact the delivery
of our strategy, are discussed on pages 32
to 35.
We believe effective risk management can
be a strategic differentiator, in particular:
Prudent approach to risk
Being low risk is fundamental to our business
model and drives our participation choices.
Strategy and risk appetite are developed in
tandem and together outline the parameters
within which the Group operates.
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 controlled.
The Board is responsible for approving
the Group’s risk appetite statement at
least annually. Group Board-level metrics
are cascaded into more detailed business
appetite metrics and limits.
Business focus and accountability
Risk management is an integral feature of
how we measure and manage performance
– for individuals, businesses and the Group.
In the first line of defence, business units are
accountable for managing risk with oversight
from a strong and independent second line
of defence Risk division.
Effective risk analysis, management
and reporting
Regular close monitoring and
comprehensive 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, as appropriate.
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 within 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 2018 31
2018 themes
Our priorities for risk management have
continued to evolve, alongside progression
of the Group’s strategy and development of
external factors.
Our principal risks are outlined over the next
few pages but a number of themes have
been particularly prevalent in 2018.
EU exit
Given the vast majority of our business is in
the UK, the direct impact on the Group from
leaving the EU is relatively small and we are
well prepared to ensure continuity of our
limited EU business activities.
Given our UK focus, our performance is
inextricably linked to the health of the UK
economy. Economic performance has
remained resilient in recent years and
whilst the near term outlook for the UK
economy remains unclear given the ongoing
EU withdrawal negotiations, we have
contingency plans in place.
We have also taken a prudent approach to
our balance sheet, increasing the amount of
liquidity held and pre funding some issuance.
Irrespective of the outcome, our customer
focused strategy remains the right one.
We will continue to support our personal
and business customers and have already
announced that we will lend up to £18 billion
to UK businesses in 2019, reaffirming our
support for the UK economy.
Guided by the overriding principle of Helping
Britain Prosper, we will seek to minimise the
impact on our customers. We have also been
working hard to ensure we are well prepared
to provide customers with effective and
timely support.
Data
Our Group is trusted with large volumes
of data, which must be protected, whilst
providing customers with ease of access
through our multi-channel model. Data is our
most valuable asset and so we must ensure
that the information we hold is accurate,
secure and managed appropriately. We meet
the requirements of the General Data
Protection Regulation (GDPR) that came into
force in May 2018. The Group has taken this
opportunity to implement new governance
structures and demonstrate increased
levels of accountability and transparency,
as establishing trust is critical to our vision
of being the best bank for customers.
We have created a Group Data Protection
Office (GDPO) to independently oversee
compliance, reporting on this to Group
and Board Risk Committees.
The Group drives a culture of compliance
through its Data Privacy policy and control
framework and has implemented robust
governance to oversee compliance with
GDPR, as well as enhanced staff training.
During 2019 the Group will continue to drive
enhancements to the maturity of our data
control environment.
Cyber
Cyber threats are increasingly complex and
like all financial services providers, attempts
are made on a regular basis to attack our
systems and services, and to steal customer
and bank data. Given the significant threat
we continue to strengthen the resilience
of our IT systems and invest in our cyber
control framework.
We are simplifying and modernising
our IT architecture, alongside deploying
technologies such as cloud computing which
offer greater levels of resilience, capacity
management and speed of processing.
We are a member of the UK’s Cyber Defence
Alliance, where a number of UK-based banks
and law enforcement agencies collaborate
in the fight against cyber-attacks, sharing
expertise, intelligence and knowledge.
Within Lloyds Banking Group, our Chief
Security Office engenders a culture whereby
colleagues are considered to be our first line
of defence. Vigilance and training are key to
preventing cyber-attacks.
Sustainability
The Group has been developing its
sustainability strategy, to address more
broadly the opportunities and threats
related to climate change, and the need for
the UK to transition to a sustainable, lower
carbon economy. This is in line with our
commitment to implement the Task Force
for Climate-related Financial Disclosures’
recommendations. For risk management,
addressing the potential impacts of climate
change plays a key role in our approach to
sustainability, and this year we have identified
climate change as a top emerging risk.
Emerging risks page 108
Operational risk page 136
Sustainability strategy page 24
Environmental risk management page 135
Risk management – enhancing the customer experience
We recognise that the primary role of risk management is to protect our customers, colleagues and the Group, whilst enabling sustainable growth. We
are able to fulfil this purpose whilst also supporting the Group’s strategic priorities and delivering better outcomes for customers. Here are some of
the ways we have contributed to the Group’s strategic priorities and enhancing the customer experience this year.
Credit risk
Operational risk
Leading customer experience
We are committed to adapting to
changing customer expectations.
With increasing competition and
digital propositions in the market,
customers expect great service
and a frictionless experience.
This year Risk division increased
the use of automated property
valuations for the mortgage
application process through
Halifax, reducing the time it
takes for us to offer customers
a mortgage to buy a property
by an average of one week. By
speeding up this part of the
process and removing an extra
step, our customers have more
time to focus on what matters
most during life-changing events
such as buying a home.
Strategic priorities pages 12 to 15
Maximising the Group’s
capabilities
We remain committed to
supporting our customers and
their businesses across the
country.
Within Commercial Banking we
look specifically at how industry
risks impact success, and tailor
advice and lending based on
the dynamics of a segment or
sector. One such example is in
our SME dairy sector which has
experienced significant pressures
due to falling milk prices.
Our relationship managers and
risk teams have been working
together to understand each
client’s farm and its changing
needs so we can provide the
best support possible. This may
be through extending working
capital or restructuring facilities,
in order to drive better outcomes
for the businesses we serve.
Digitising the Group
Deploying new technology to
make banking simpler and safer
for customers is a key priority for
the Group.
We have already implemented
a number of significant
enhancements across various
products and services. For
example, from a risk perspective
we have changed how we
authenticate suspicious
transactions across personal
debit and credit cards. Rather
than decline the payment and
request that the customer
contact us, we send a text with
a unique code which enables
our customer to quickly and
easily verify that the transaction
is genuine. This has helped
to protect our customers and
made the experience simpler
by communicating in a method
convenient to them.
Transforming ways of working
Our nationwide Fraud analytics
and insight team looks after the
systems which detect fraud for
the Group.
The team has embraced agile
working due to the nature of its
role: at short notice they might
be called upon to respond to
a new fraud attack, which can
require working long hours or
into the night. The team also
supports a large number of the
Group’s change programmes,
often working outside regular
hours. To meet the needs of
the colleague, the team and the
Group, working patterns are
agreed on an individual basis.
There has been a strong
reduction in fraud losses over the
last five years; while some of this
is due to investment in systems,
we place great reliance on having
well trained, engaged and
motivated teams.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
32 Lloyds Banking Group Annual Report and Accounts 2018
Risk overview continued
Our 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.
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.
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.
Principal risks and uncertainties are reviewed
and reported regularly. As part of a review of
the Group’s risk categories, the secondary risk
categories of Change, Data management and
Operational resilience have been elevated
to primary risk categories, and Strategic
risk has been included as a new primary risk
category, in the Group’s Risk Management
Framework. These changes will be embedded
during 2019 and reflected within the Group’s
principal risks.
Full analysis of risk categories page 114
Credit
The risk that parties with whom we have
contracted, fail to meet their financial
obligations (both on and off balance sheet).
Example
Observed or anticipated changes in the
economic environment could impact
profitability due to an increase in delinquency,
defaults, write-downs and/or expected
credit losses
Regulatory and legal
The risk that the Group is exposed to financial
loss, 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, or a failure to adequately
manage actual or threatened litigation,
including criminal proceedings.
Key mitigating actions
Example
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
Extensive and thorough credit processes and
controls to ensure effective risk identification,
management and oversight
During the year we strengthened affordability
buffers and improved controls to restrict
lending to consumers with higher risk of
over-indebtedness
Effective, well-established governance
process supported by independent credit risk
oversight and assurance
Early identification of signs of stress leading to
prompt engagement with the customer
Key risk indicators
£937m
Impairment charge
2017: £795m
£9,215m
Stage 3 assets1
1 Jan 2018: £9,055m
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.
1 Underlying total gross lending.
Failure to deliver key regulatory changes or to
comply with ongoing requirements
Key mitigating actions
Implementation of compliance and legal risk
management policies and procedures to
ensure appropriate controls and processes
are in place to comply with legislation, rules
and regulation
Embedding Group-wide processes to monitor
ongoing compliance with new legislation,
rules and regulation
Continued investment in people, processes,
training and IT to help meet our legal and
regulatory commitments
Ongoing engagement with regulatory
authorities and industry bodies on
forthcoming regulatory changes, market
reviews and investigations, ensuring
programmes are established to deliver new
regulation and legislation
Ongoing horizon scanning to identify changes
in regulatory and legal requirements
Key risk indicators
£993m
Mandatory, legal and regulatory investment spend
2017: £886m
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 proactive in
responding to significant ongoing and new
legislation, regulation and court proceedings.
Read more pages 115 to 135
Read more page 135
Lloyds Banking Group Annual Report and Accounts 2018 33
Conduct
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.
Example
Operational
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.
The most significant conduct cost in recent
years has been PPI mis-selling
Example
The dynamic threat posed by cyber risk to the
confidentiality and integrity of electronic data
or the availability of systems
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
General Data Protection Regulation and Basel
Committee on Banking Supervision standards
Working with industry bodies and law
enforcement agencies to identify and combat
fraud and money laundering
Key risk indicators
99.97%
Availability of core systems
2017: 99.98%
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.
Key mitigating actions
Conduct policies and procedures are in place
to ensure appropriate controls and processes
that deliver fair customer outcomes
Conduct risk appetite metrics provide a
granular view of how our products and
services are performing for customers through
the customer lifecycle
Product approval, continuous product review
processes and customer outcome testing in
place (across products and services)
Learning from past mistakes through root
cause analysis
Clear customer accountabilities for
colleagues, with rewards driven by customer-
centric metrics
Further enhancements and embedding of our
framework to support all customers, including
those in vulnerable circumstances
Key risk indicators
92.5%
Conduct risk appetite metric performance-Group
2017: 92.3%
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.
We have senior committees that ensure our
focus on embedding a customer-centric
culture and delivering fair outcomes across
the Group. Further enhancements to
our conduct risk framework continue to
support this through robust and effective
management of conduct risk. Together
these support 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.
Read more page 136
People
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 to
reinforce behaviours which 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
During 2018 we enhanced our colleague
wellbeing strategies to ensure support is
in place to meet colleague needs, and to
help achieve the skills and capability growth
required to build a workforce for the
‘Bank of the Future’
Key risk indicators
79%
Values and behaviours index1
2017: 80%
Alignment to strategic priorities
and future focus
Transforming ways of working
Regulatory requirements relating to personal
accountability and remuneration rules could
affect the Group’s ability to attract and retain
the calibre of colleagues required to meet
changing customer needs. We recognise the
challenges in delivering the Group’s strategic
priorities and we will continue to invest in
the development of colleague capabilities
and agile working practices. This investment
will deliver a leading customer experience
and allow the Group to respond quickly to
customers’ rapidly changing decision-making
in a digital era.
1 Formerly known as Best bank for customers index.
Read more pages 136 to 138
Read more page 138
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
34 Lloyds Banking Group Annual Report and Accounts 2018
Risk overview continued
Capital
The risk that we have a sub-optimal quantity or
quality of capital or that capital is inefficiently
deployed across the Group.
Example
A worsening macroeconomic environment
could lead to adverse financial performance,
which could deplete capital resources
and/or increase capital requirements due to a
deterioration in customers’ creditworthiness
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
Key risk indicators
13.9%
Common equity tier 1
ratio1,2
2017: 13.9%
5.6%
UK leverage ratio1
2017: 5.4%
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
through the cycle.
1 Pro forma.
2 CET1 ratio after ordinary dividends and share buyback.
Read more pages 139 to 147
Funding and liquidity
Funding risk is the risk that we do not have
sufficiently stable and diverse sources of
funding. Liquidity risk is the risk that we have
insufficient financial resources to meet our
commitments as they fall due.
Example
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
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
Key risk indicators
£129bn
LCR eligible assets
2017: £121bn
107%
Loan to deposit ratio
1 Jan 2018: 107%
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 pages 147 to 152
Insurance underwriting
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
Strategic decisions made consider the
maintenance of the current well-diversified
portfolio of insurance risks
Processes for underwriting, claims
management, pricing and product design
seek to control exposure. Experts in
demographic risk (for example longevity)
support the propositions
Reinsurance and other risk transfer
arrangements are actively reviewed for their
efficacy, including monitoring the strength of
third-parties with whom the risk is shared
Key risk indicators
£14,384m
Insurance (Life and Pensions
present value of new
business premiums)
2017: £9,951m
£690m
General Insurance
underwritten
total gross written
premiums
2017: £733m
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.
Read more pages 138 to 139
Lloyds Banking Group Annual Report and Accounts 2018 35
Model
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 models
and rating systems.
Example
The consequences of inadequate models
could include: inappropriate levels of capital
or impairments; inappropriate credit or pricing
decisions; and adverse impacts on funding or
liquidity, or the Group’s earnings and profits
Key mitigating actions
A comprehensive model risk
management framework
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
Key risk indicators
N/A
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 page 159
Governance
Against a background of increased
regulatory focus on governance and
risk management, the most significant
challenges arise from ensuring that the Group
continues to demonstrate compliance with
the requirements to ring-fence core UK
financial services and activities, the potential
impact of EU exit and further requirements
under the Senior Manager & Certification
Regime (SM&CR).
Examples
Inadequate or complex governance
arrangements to address ring-fencing
requirements and the potential impact
of EU exit 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
To meet ring-fencing requirements, core UK
financial services and activities have been
ring-fenced from other activities of the Group
and an appropriate control environment
and governance structures are in place to
ensure compliance
A dedicated change programme is in place and
addressing the additional SM&CR requirements
which will come into force during 2019
A dedicated programme is in place to assess
and address the potential impacts of EU exit
on the Group’s operations in Europe. The
Group is in close and regular contact with
regulators to develop and deploy our planned
operating and legal structure to mitigate the
potential impacts of EU exit
Evolving risk and governance arrangements
to ensure they continue to be appropriate to
comply with regulatory objectives
Key risk indicators
N/A
Alignment to strategic priorities
and future focus
Delivering a leading customer experience
Ring-fencing ensures that we are 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.
Read more page 153
Market
The risk that our capital or earnings profile is
affected by adverse market rates, in particular
interest rates and credit spreads in the
banking business, equity and credit spreads in
the Insurance business, and credit spreads in
the Group’s defined benefit pension schemes.
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 defined benefit pension schemes
continue to monitor their credit allocation as
well as the hedges in place against nominal
rate and inflation movements
Key risk indicators
£1,146m
IAS 19 Pension surplus
2017: £509m
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 defined benefit pension schemes
low. This combined with improved market
conditions has helped keep the schemes in
IAS 19 surplus in 2018. This allows us to more
efficiently utilise available capital resources
to better enable the Group to maximise its
capabilities.
Read more pages 154 to 159
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
36 Lloyds Banking Group Annual Report and Accounts 2018
Financial results
Summary of Group results
Divisional results
Other financial information
37
44
48
Helping students
from low income backgrounds
to aim high
Since its inception in 2011, nearly 900 students have benefited
from our Lloyds Scholars programme, which provides the financial
support they need to study at university along with a package of
support, including mentoring and internships. Oxford University has
welcomed 94 Lloyds Scholars so far, and those who have taken the
programme are very positive about the experience. To encourage
school pupils to consider applying to top universities, whatever their
background and financial circumstances, Lloyds Banking Group has
also supported the IntoOxford project. This gives Year 10 students
the chance to spend a day at an Oxford college, develop their
study skills for GCSEs in a workshop and get help with university
background information. Our Lloyds Scholars programme has
recently been awarded ‘Highest Impact Employer Initiative’ in the
2018 upReach Student Social Mobility Awards.
c.900
young people
have benefited
from our Lloyds
Scholars programme
visit lloydsbankinggroup.com/
prosperplan
The bursary support is
extremely valuable to me. It
means that I do not have to feel
anxious about making financial
decisions such as joining new
clubs and societies, and I feel
like it puts me on a level playing
field with everyone else. I also
appreciate that a firm genuinely
wants to help my development
and it is not simply about taking
up a job with them at the end,
as it allows me to be more
open with my mentor about my
personal development.
Suzanne Norman,
Law, Jesus College
Lloyds Banking Group Annual Report and Accounts 2018 37
Summary of Group results
Strong and sustainable financial performance with continued growth in profits and returns
The Group’s statutory profit after tax of £4,400 million was 24 per cent higher than in 2017, driven by increased underlying profit, a reduction in the payment
protection insurance charge and a lower effective tax rate. Statutory return on tangible equity increased by 2.8 percentage points to 11.7 per cent.
Underlying profit was £8,066 million, 6 per cent higher than 2017, with higher net income and lower total costs partly offset by the expected increase in the
impairment charge. The underlying return on tangible equity increased to 15.5 per cent (2017: 14.0 per cent).
Given the strong capital build of 210 basis points this year, the Board has recommended a final ordinary dividend of 2.14 pence per share, making a total
ordinary dividend of 3.21 pence per share, an increase of 5 per cent on 2017 and in line with our progressive and sustainable ordinary dividend policy. In
addition, the Board intends to implement a share buyback of up to £1.75 billion, equivalent to 2.46 pence per share. The Group’s pro forma CET1 ratio was
13.9 per cent post dividend and allowing for the proposed share buyback (31 December 2017: 13.9 per cent).
Net income
Net interest income
Other income
Vocalink gain on sale
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 £60 million (2017: £32 million).
2018
£m
2017
£m
Change
%
12,714
6,010
–
(956)
17,768
2.93%
12,320
6,059
146
(1,053)
17,472
2.86%
£436.0bn
£434.9bn
3
(1)
9
2
7bp
–
Net income of £17,768 million was 2 per cent higher than in 2017, with an increase in net interest income partly offset by slightly lower other income, while
operating lease depreciation reduced by 9 per cent.
Net interest income of £12,714 million increased by 3 per cent compared to 2017, reflecting an improved net interest margin and slightly higher average
interest-earning banking assets of £436 billion. The net interest margin increased to 2.93 per cent with lower deposit costs and an increased contribution
from the structural hedge, again more than offsetting continued pressure on asset margins. In line with previous guidance, the Group expects a net interest
margin of c.2.90 per cent in 2019 and for the margin to be resilient through the plan period.
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. As at 31 December 2018 the Group’s hedge had a nominal balance of £180 billion (31 December 2017: £165 billion) and
an average duration of around four years (31 December 2017: around three years). The Group generated £2.7 billion of income from the structural hedge
balances in the year (2017: £2.5 billion). The benefit from the hedge in the year was £1.4 billion over LIBOR (2017: £1.9 billion) with a fixed earnings rate of
approximately 0.7 per cent over LIBOR (2017: 1.1 per cent).
Other income of £6,010 million was slightly lower excluding the £146 million gain on sale of Vocalink in 2017. Strong growth in new business within
Insurance and Wealth, largely driven by increased workplace pensions income, was offset by slightly lower clients market activity in Commercial Banking
while Retail remained stable, due in part to the launch of a simpler overdraft fee structure, which has now been fully implemented. Other income includes
a gain of £270 million on the sale of £18 billion of gilts and other liquid assets, compared with a £274 million gain on sale of such assets in 2017.
Operating lease depreciation reduced by 9 per cent to £956 million reflecting improved used car prices and the non-recurrence of accelerated
depreciation charges within Commercial Banking in 2017.
Total costs
Operating costs
Remediation
Total costs
Cost:income ratio
Cost:income ratio excluding remediation
2018
£m
2017
£m
Change
%
8,165
600
8,765
49.3%
46.0%
8,184
865
9,049
51.8%
46.8%
–
31
3
(2.5)pp
(0.8)pp
Total costs of £8,765 million were 3 per cent lower than in 2017, driven by the reduction in operating costs and remediation charges.
Operating costs of £8,165 million were slightly lower than 2017, with business as usual costs down 4 per cent offset by expected higher investment
expensed and depreciation which together increased by 10 per cent. During 2018 the Group capitalised £1.5 billion of investment spend, equivalent to
c.60 per cent of above the line investment, in line with 2017. Capitalised investment spend of £1.0 billion, or 67 per cent, related to intangible assets, a
similar proportion to 2017.
The Group’s market leading cost:income ratio continues to provide competitive advantage and improved by 2.5 percentage points to 49.3 per cent
(or 0.8 percentage points to 46.0 per cent, excluding remediation) with positive jaws of 5 per cent.
Remediation charges were 31 per cent lower at £600 million and included additional charges of £234 million in the fourth quarter relating to a number of
small items across existing programmes. The Group expects remediation charges to reduce significantly in 2019.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
38 Lloyds Banking Group Annual Report and Accounts 2018
Summary of Group results continued
The Group continues to target a cost:income ratio including remediation in the low 40s exiting 2020, with reductions every year, and now expects
operating costs to be less than £8 billion in 2019, a year ahead of the original target.
Impairment
Impairment charge
Asset quality ratio
Gross asset quality ratio
Stage 2 gross loans and advances to customers as a % of total
Stage 2 ECL2 allowances as a % of Stage 2 drawn balances
Stage 3 gross loans and advances to customers as a % of total
Stage 3 ECL2 allowances as a % of Stage 3 drawn balances
Total ECL2 allowances as a % of drawn balances
1 Underlying basis (including purchased and originated credit impaired assets in Stage 2 and 3).
2 Expected credit losses.
2018
£m
937
0.21%
0.28%
At 31 Dec
20181
%
7.8
4.1
1.9
24.3
0.9
2017
£m
795
0.18%
0.28%
At 1 Jan
20181
%
11.3
3.5
1.9
24.0
1.0
Change
%
(18)
3bp
–
Change
%
(3.5)pp
0.6pp
–
0.3pp
(0.1)pp
Credit quality remains strong with no deterioration in credit risk. The Group’s loan portfolios continue to be well positioned, reflecting the Group’s
continued prudent, through the cycle approach to credit risk, and benefiting from continued low interest rates and a resilient UK economy.
The gross asset quality ratio remains stable at 28 basis points, in line with full year 2017 and 2016. On a net basis the asset quality ratio increased to 21 basis
points and the impairment charge increased by 18 per cent to £937 million, both reflecting expected lower releases and write-backs.
Overall credit performance in the UK mortgage book remains strong with average mortgage loan to value ratios broadly stable at 44.1 per cent and new
to arrears as a proportion of the total book remaining low. New business average loan to value was 62.5 per cent and around 88 per cent of the portfolio
continues to have loan to value ratios of less than 80 per cent. The consumer finance portfolios continue to perform well with credit card business new to
arrears as a proportion of the total book remaining low whilst the UK motor finance book continues to benefit from the Group’s conservative approach
to residual values and resilient used car prices. In Commercial Banking, the book continues to benefit from effective risk management, including reduced
single name and key sector exposures. Together with a resilient economic environment, this has resulted in impairment charges remaining at a low level.
There have been no significant changes to the Group’s economic assumptions included in its IFRS 9 models. IFRS 9 is procyclical and introduces additional
volatility but through the cycle expectations remain unchanged. The Group’s expected credit loss (ECL) allowance reflects a probability weighted view of
future economic scenarios including a 30 per cent weighting of downside and a 10 per cent weighting of severe downside. The weighted impact of these
negative scenarios is already included within the Group’s ECL allowance, which includes £0.6 billion in respect of the severe downside scenario.
Stage 2 loans and advances to customers as a percentage of total lending reduced by 3.5 percentage points to 7.8 per cent reflecting the sale of the
Irish portfolio, model refinements and portfolio improvements whilst Stage 3 loans and advances were stable at 1.9 per cent. At the same time coverage
of Stage 2 assets has increased to 4.1 per cent of drawn balances and Stage 3 assets to 24.3 per cent. At the end of 2018, the Group held a total
ECL allowance of £4.4 billion, equivalent to over four years of net underlying cash write-offs (and five years for the mortgage portfolio).
The Group expects an asset quality ratio of less than 30 basis points in 2019 and through the plan period reflecting continued strong asset quality
and further reductions in releases and write-backs.
Statutory profit
Underlying profit
Restructuring
Volatility and other items
Market volatility and asset sales
Amortisation of purchased intangibles
Fair value unwind and other
Payment protection insurance provision
Statutory profit before tax
Tax expense
Statutory profit after tax
Earnings per share
2018
£m
8,066
(879)
(50)
(108)
(319)
(477)
(750)
5,960
(1,560)
4,400
5.5p
2017
£m
7,628
(621)
279
(91)
(270)
(82)
(1,650)
5,275
(1,728)
3,547
4.4p
Change
%
6
(42)
(19)
(18)
55
13
10
24
27
Further information on the reconciliation of underlying to statutory results is included on page 193.
The Group’s statutory profit after tax of £4,400 million was 24 per cent higher than in 2017, driven by increased underlying profit, a reduction in the payment
protection insurance charge and a lower effective tax rate. Earnings per share was 5.5p, 27 per cent higher than 2017 driven by increased statutory profit
and lower share count.
Restructuring costs were £879 million, with £267 million incurred in the fourth quarter, and included severance costs relating to the Group’s strategic
investment plans as well as the expected costs of the integration of MBNA and Zurich’s UK workplace pensions and savings business, ring-fencing and the
rationalisation of the non-branch property portfolio. The fourth quarter charge included £57 million of severance costs, making £247 million for the year.
Restructuring costs are expected to reduce significantly in 2019 with ring-fencing and the integration of MBNA now substantially complete.
Market volatility and asset sales of £50 million included negative insurance volatility of £103 million, with £236 million of negative insurance volatility in the
fourth quarter reflecting weaker equity markets and wider credit spreads, compared to positive insurance volatility of £286 million in 2017. Market volatility
Lloyds Banking Group Annual Report and Accounts 2018 39
also included a £105 million loss on sale of the Irish mortgage portfolio and an adjustment to past service pension liabilities, both of which were recognised
in the first half of 2018.
The increase in amortisation of purchased intangibles to £108 million (2017: £91 million) and fair value unwind and other items to £319 million
(2017: £270 million) were both largely driven by the inclusion of MBNA.
The payment protection insurance charge of £750 million included an additional £200 million charged in the fourth quarter. The additional charge
was largely driven by an increase in average redress per case, additional operational costs to deal with potential complaint volatility and continued
improvements in data interrogation and the Group’s ability to identify valid claims, partly offset by lower reactive complaints which have been 12,000 per
week in the second half of 2018, compared with the Group’s assumption of 13,000 per week. The outstanding balance sheet provision at 31 December
2018 was £1.3 billion and continues to assume around 13,000 complaints per week until the timebar in August 2019.
Taxation
The tax expense was £1,560 million (2017: £1,728 million) representing an effective tax rate of 26 per cent (2017: 33 per cent). The lower effective tax rate
was driven by the reduction in non-deductible conduct provisions, including remediation. The Group continues to expect the effective tax rate to reduce
to around 25 per cent in 2020.
Return on tangible equity
The return on tangible equity was 11.7 per cent up from 8.9 per cent in 2017, reflecting the increase in statutory profit after tax, and slightly lower average
tangible equity. The underlying return on tangible equity increased to 15.5 per cent (2017: 14.0 per cent) reflecting increased underlying profit.
The Group continues to expect a return on tangible equity of 14 to15 per cent in 2019.
Balance sheet
Loans and advances to customers2
Customer deposits3
Loan to deposit ratio
Wholesale funding
Wholesale funding <1 year maturity
Of which money-market funding <1 year maturity4
Liquidity coverage ratio – eligible assets
Liquidity coverage ratio
At 1 Jan
2018
(adjusted)1
£444bn
£416bn
107%
£101bn
£29bn
£15bn
At 31 Dec
2018
£444bn
£416bn
107%
£123bn
£33bn
£21bn
£129bn
130%
Change
%
–
–
–
22
16
44
At 31 Dec
2017
(reported)
£456bn
£416bn
110%
£101bn
£29bn
£15bn
£121bn
127%
Change
%
(2)
–
(3) pp
22
16
44
7
3pp
1 Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018.
2 Excludes reverse repos of £40.5 billion (1 January 2018: £16.8 billion; 31 December 2017: £16.8 billion).
3 Excludes repos of £1.8 billion (1 January 2018: £2.6 billion; 31 December 2017: £2.6 billion).
4 Excludes balances relating to margins of £3.8 billion (1 January 2018: £2.1 billion; 31 December 2017: £2.1 billion) and settlement accounts of £1.2 billion (1 January 2018: £1.5 billion;
31 December 2017: £1.5 billion).
Loans and advances to customers were stable at £444 billion with growth in targeted segments offset by the £4 billion sale of the Irish mortgage portfolio
and a reduction of £2 billion in the closed mortgage book. The growth in targeted segments included £3 billion from start-ups, SME and Mid Markets and
£1 billion from UK Motor Finance whilst the open mortgage book remained broadly flat at £267 billion.
The Group continues to optimise funding and target current account balance growth, with Retail current accounts up 5 per cent to £74 billion
(31 December 2017: £70 billion) and Commercial current account balances at £35 billion (31 December 2017: £30 billion).
The loan to deposit ratio was stable at 107 per cent. Wholesale funding increased by 22 per cent to £123 billion, compared to £101 billion at 31 December
2017, as the Group refinanced Bank of England Funding for Lending Scheme maturities and increased liquidity buffers.
The Group’s liquidity surplus continues to exceed the regulatory minimum and internal risk appetite with a liquidity coverage ratio (LCR) of 130 per cent
(31 December 2017: 127 per cent) and LCR eligible assets of £129 billion (31 December 2017: £121 billion).
Capital
Capital build2
Pro forma CET1 ratio3
Pro forma transitional total capital ratio3
Pro forma transitional MREL ratio3
Pro forma UK leverage ratio3
Risk-weighted assets
Shareholders' equity
Tangible net assets per share
At 31 Dec
2018
210bp
13.9%
23.1%
32.6%
5.6%
At 1 Jan
2018
(adjusted)1
244bp
13.9%
21.5%
26.0%
5.4%
£206bn
£211bn
£43bn
53.0p
£42bn
51.7p
Change
%
(34)bp
–
1.6pp
6.6pp
0.2pp
(2)
2
1.3p
At 31 Dec
2017
(reported)
245bp
13.9%
21.5%
26.0%
5.4%
£211bn
£44bn
53.3p
Change
%
(35)bp
–
1.6pp
6.6pp
0.2pp
(2)
–
(0.3)p
1 Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018, with transitional arrangements applied for capital.
2 Capital build is reported on a pro forma basis before ordinary dividends and share buyback.
3 The CET1, total, leverage and MREL ratios at 31 December 2018, 1 January 2018 and 31 December 2017 are reported on a pro forma basis, reflecting the dividends paid up by the
Insurance business in February 2019 and February 2018 respectively in relation to prior year earnings. The CET1 ratio is also reported post dividends and share buyback.
The Group’s balance sheet remains strong with capital build of 210 basis points, pre 2018 dividends, and a pro forma CET1 ratio of 13.9 per cent post
proposed buyback and Insurance dividend.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
40 Lloyds Banking Group Annual Report and Accounts 2018
Summary of Group results continued
The capital build included 195 basis points from underlying performance, 25 basis points from earnings related dividends received from the Insurance
business and 25 basis points in relation to the sale of the Irish mortgage portfolio. Other movements, resulting in a net increase of 3 basis points, included
the impact of structural changes arising from transfers between Insurance and the ring-fenced bank, risk-weighted asset reductions, market movements
and expected pension deficit contributions. This was partly offset by 38 basis points for PPI charges.
The Group continues to expect ongoing capital build of 170 to 200 basis points per year, after allowing for the impact of estimated RWA inflation and
increased pension contributions.
In July 2018, the Prudential Regulation Authority (PRA) reduced the Group’s Pillar 2A CET1 requirement from 3.0 per cent to 2.6 per cent, increasing to
2.7 per cent with effect from 1 January 2019 to reflect commencement of the UK’s ring-fencing regime. In addition the countercyclical capital buffer rate
on UK credit exposures increased to 1.0 per cent in November 2018 resulting in a countercyclical capital buffer for the Group of 0.9 per cent.
The Board’s view of the level of CET1 capital required for the Group remains around 13 per cent, plus a management buffer of around 1 per cent.
The transitional total capital ratio increased to 23.1 per cent on a pro forma basis (31 December 2017: 21.5 per cent) and the Group remains well positioned
to meet its MREL requirement from 2020 with a pro forma transitional MREL ratio of 32.6 per cent (31 December 2017: 26.0 per cent). The leverage ratio
on a pro forma basis increased to 5.6 per cent (31 December 2017: 5.4 per cent).
Tangible net assets per share of 53.0 pence (1 January 2018: 51.7 pence) was up 1.3 pence with an increase of 4.4 pence before dividends of 3.1 pence paid
in 2018, driven by increased statutory profit after tax partly offset by the effects of the share buyback and other reserve movements.
Dividend and share buyback
The Group has a progressive and sustainable ordinary dividend policy whilst maintaining the flexibility to return surplus capital through buybacks or special
dividends. The Board’s view of the current level of capital required to grow the business, meet regulatory requirements and cover uncertainties remains
around 13 per cent plus a management buffer of around 1 per cent.
Given the strong business performance in 2018 the Board has recommended a final ordinary dividend of 2.14 pence per share. This is in addition to
the interim ordinary dividend of 1.07 pence per share that was announced in the 2018 half year results. The total ordinary dividend per share for 2018
of 3.21 pence per share has increased by 5 per cent from 3.05 pence per share in 2017.
The Group is planning on the basis of an orderly EU withdrawal and, given the resilience of the UK economy, intends to implement a share buyback of up
to £1.75 billion (2017: £1 billion) which will commence in March 2019 and is expected to be completed by 31 December 2019.
The Board’s current preference is to return surplus capital by way of a buyback programme given the amount of surplus capital, the normalisation of
ordinary dividends, and the flexibility that a buyback programme offers.
Given the total ordinary dividend of 3.21 pence per share and the intended share buyback, equivalent to up to 2.46 pence per ordinary share, the total
capital return for 2018 will be up to 5.67 pence per share, an increase of 27 per cent on the prior year, equivalent to £4.0 billion.
Ring-fencing
The Group successfully launched its new non ring-fenced bank, Lloyds Bank Corporate Markets plc in 2018, transferring in non ring-fenced business from
the rest of the Group, thereby meeting its legal requirements under ring-fencing legislation.
As a predominantly UK retail and commercial bank, the effect on the Group has been relatively limited, with minimal impact on the majority of the Group’s
retail and commercial customers. As the vast majority of the Group’s business has continued to be held by Lloyds Bank plc and its subsidiaries there has
not been a material impact on the financial strength of Lloyds Bank plc.
Income statement – underlying basis
Lloyds Banking Group Annual Report and Accounts 2018 41
Net interest income
Other income
Vocalink gain on sale
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Impairment
Underlying profit
Restructuring
Volatility and other items
Payment protection insurance provision
Statutory profit before tax
Tax expense
Statutory profit after tax
Earnings per share
Dividends per share – ordinary
Share buyback
Share buyback value
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
Cost:income ratio excluding remediation
Asset quality ratio
Underlying return on tangible equity
Return on tangible equity
Key balance sheet metrics
Loans and advances to customers2
Customer deposits3
Loan to deposit ratio
Capital build4
Pro forma CET1 ratio5
Pro forma transitional MREL ratio5
Pro forma UK leverage ratio5
Risk-weighted assets
Tangible net assets per share
2018
£m
12,714
6,010
–
2017
£m
12,320
6,059
146
(956)
(1,053)
17,768
17,472
(8,165)
(8,184)
(600)
(865)
(8,765)
(9,049)
(937)
8,066
(879)
(477)
(750)
5,960
(795)
7,628
(621)
(82)
(1,650)
5,275
(1,560)
(1,728)
4,400
5.5p
3.21p
2.46p
£1.75bn
2.93%
3,547
4.4p
3.05p
1.40p
£1bn
2.86%
£436bn
£435bn
49.3%
46.0%
0.21%
15.5%
11.7%
51.8%
46.8%
0.18%
14.0%
8.9%
At 31 Dec
2018
£444bn
£416bn
107%
210bp
13.9%
32.6%
5.6%
At 1 Jan
2018
(adjusted)1
£444bn
£416bn
107%
244bp
13.9%
26.0%
5.4%
£206bn
£211bn
53.0p
51.7p
Change
%
3
(1)
9
2
–
31
3
(18)
6
(42)
55
13
10
24
27
5
76
75
7bp
–
(2.5)pp
(0.8)pp
3bp
1.5pp
2.8pp
Change
%
–
–
–
(34)bp
–
6.6pp
0.2pp
(2)
1.3p
1 Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018, with transitional arrangements applied for capital.
2 Excludes reverse repos of £40.5 billion (1 January 2018: £16.8 billion).
3 Excludes repos of £1.8 billion (1 January 2018: £2.6 billion).
4 Capital build is reported on a pro forma basis before ordinary dividends and share buyback.
5 The CET1, MREL and leverage ratios at 31 December 2018 and 1 January 2018 are reported on a pro forma basis, reflecting the dividends paid up by the Insurance business in
February 2019 and February 2018 respectively in relation to prior year earnings. The CET1 ratio is also reported post dividends and share buyback.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
42 Lloyds Banking Group Annual Report and Accounts 2018
Summary of Group results continued
Balance sheet analysis
Loans and advances to customers
Open mortgage book
Closed mortgage book
Credit cards
UK Retail unsecured loans
UK Motor Finance
Overdrafts
Retail other2
SME3
Mid Markets
Global Corporates and Financial Institutions
Commercial Banking other
Irish mortgage portfolio
Wealth and other
Loans and advances to customers4
Customer deposits
Retail current accounts
Commercial current accounts3
Retail relationship savings accounts
Retail tactical savings accounts
Commercial deposits3
Wealth and central items
Total customer deposits5
Total assets
Total liabilities
Shareholders’ equity
Other equity instruments
Non-controlling interests
Total equity
Ordinary shares in issue, excluding own shares
Average Retail current accounts
1 Adjusted to reflect the implementation of IFRS 9 and IFRS15.
2 Retail other primarily includes Europe.
3 Includes Retail Business Banking and other reclassifications.
4 Excludes reverse repos of £40.5 billion (1 January 2018: £16.8 billion).
5 Excludes repos of £1.8 billion (1 January 2018: £2.6 billion).
At 31 Dec
2018
£bn
At 1 Jan
2018
(adjusted)1
£bn
Change
%
266.6
267.0
21.2
18.1
7.9
14.6
1.3
8.6
31.8
31.7
34.4
4.3
–
3.9
23.6
17.9
7.8
13.5
1.4
8.0
31.0
29.4
32.6
7.2
4.2
0.6
444.4
444.2
73.7
34.9
145.9
16.8
130.1
14.9
416.3
797.6
747.4
43.4
6.5
0.3
50.2
70.3
30.0
150.4
18.9
131.7
14.2
415.5
811.2
763.2
42.4
5.4
0.2
48.0
71,149m
71,944m
£71.6bn
£67.5bn
–
(10)
1
1
8
(7)
8
3
8
6
(40)
–
5
16
(3)
(11)
(1)
5
–
(2)
(2)
2
20
50
5
(1)
6
Underlying basis – segmental analysis
Lloyds Banking Group Annual Report and Accounts 2018 43
2018
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total 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
2017
Net interest income
Other income
Vocalink gain on sale
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Impairment
Underlying profit4
Banking net interest margin
Average interest-earning banking assets
Asset quality ratio
Return on risk-weighted assets4
Loans and advances to customers1
Customer deposits2
Risk-weighted assets
1 Excludes reverse repos of £40.5 billion (31 December 2017: £16.8 billion).
2 Excludes repos of £1.8 billion (31 December 2017: £2.6 billion).
3 Restated to include run-off.
4 Prior period restated to include remediation.
Commercial
Banking
£m
Insurance
and Wealth
£m
Retail
£m
9,066
2,171
3,004
1,653
123
1,865
–
(921)
(35)
Central
items
£m
521
321
–
Group
£m
12,714
6,010
(956)
10,316
4,622
1,988
842
17,768
(4,915)
(2,167)
(1,021)
(267)
(203)
(39)
(62)
(91)
(8,165)
(600)
(5,182)
(2,370)
(1,060)
(153)
(8,765)
(862)
(92)
4,272
2,160
(1)
927
18
707
(937)
8,066
2.68%
3.27%
2.93%
£342.3bn
£91.2bn
£0.8bn
£1.7bn £436.0bn
0.25%
4.59%
0.09%
2.50%
0.21%
3.86%
£340.1bn £100.4bn
£0.9bn
£3.0bn £444.4bn
£252.8bn £148.6bn
£14.1bn
£0.8bn £416.3bn
£94.3bn
£86.0bn
£1.2bn
£24.9bn £206.4bn
Retail3
£m
8,706
2,221
–
(947)
9,980
Commercial
Banking3
£m
Insurance
and Wealth
£m
3,030
1,798
–
(105)
4,723
133
1,846
–
–
Central
items3
£m
451
194
146
Group
£m
12,320
6,059
146
(1)
(1,053)
1,979
790
17,472
(4,866)
(2,230)
(1,040)
(633)
(173)
(40)
(5,499)
(2,403)
(1,080)
(711)
3,770
(89)
2,231
–
899
(48)
(19)
(67)
5
728
2.60%
3.28%
(8,184)
(865)
(9,049)
(795)
7,628
2.86%
£338.5bn
£91.1bn
£0.8bn
£4.5bn
£434.9bn
0.21%
4.18%
0.10%
2.44%
0.18%
3.55%
£340.7bn
£102.8bn
£0.8bn
£11.4bn
£455.7bn
£253.1bn
£148.3bn
£13.8bn
£0.3bn
£415.5bn
£91.4bn
£88.1bn
£1.3bn
£30.1bn
£210.9bn
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 288.
Underlying basis
In order to allow a comparison of the Group’s underlying performance, the results are adjusted for certain items including restructuring, severance
related costs, the costs of implementing regulatory reform including ring-fencing, the rationalisation of the non-branch property portfolio, the integration
of MBNA and Zurich’s UK workplace pensions and savings business, volatility and other items, 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, insurance gross up, the unwind
of acquisition-related fair value adjustments and the amortisation of purchased intangible assets and payment protection insurance (PPI) provisions.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
44 Lloyds Banking Group Annual Report and Accounts 2018
Divisional results
Retail
Performance summary
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Impairment
Underlying profit2
Banking net interest margin
Average interest-earning banking assets
Asset quality ratio
Return on risk-weighted assets2
Open mortgage book
Closed mortgage book
Credit cards
UK unsecured loans
UK Motor Finance
Business Banking
Overdrafts
Other4
Loans and advances to customers
Operating lease assets
Total customer assets
Relationship balances5
Tactical balances5
Customer deposits6
Risk-weighted assets
Average Retail current accounts
1 Prior period restated to include run-off.
2 Prior period restated to include remediation.
3 Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018.
4 Includes Europe and run-off, previously reported separately.
5 Prior period restated to show European deposits as tactical balances.
2018
£m
9,066
2,171
(921)
10,316
(4,915)
(267)
(5,182)
(862)
4,272
20171
£m
8,706
2,221
(947)
9,980
(4,866)
(633)
(5,499)
(711)
3,770
Change
%
4
(2)
3
3
(1)
58
6
(21)
13
2.68%
2.60%
£342.3bn
£338.5bn
0.25%
4.59%
0.21%
4.18%
8bp
1
4bp
41bp
At 31 Dec
2018
£bn
At 1 Jan
2018
(adjusted)1,3
£bn
266.6
267.0
21.2
18.1
7.9
14.6
1.8
1.3
8.6
340.1
4.7
344.8
235.3
17.5
252.8
94.3
71.6
23.6
17.9
7.8
13.5
0.9
1.4
8.0
340.1
4.7
344.8
233.2
19.9
253.1
91.4
67.5
At 31 Dec
2017
(reported)1
£bn
267.1
23.6
18.1
7.9
13.6
0.9
1.5
8.0
340.7
4.7
345.4
233.2
19.9
253.1
91.4
67.5
Change
%
–
(10)
1
1
8
(7)
8
–
–
–
1
(12)
–
3
6
Change
%
–
(10)
–
–
7
(13)
8
–
–
–
1
(12)
–
3
6
6 SME portfolio re-segmented in the first half of 2018 moving £1.0 billion of loans and advances to customers and £2.0 billion of customer deposits to Business Banking. Comparatives
not restated.
Commercial Banking
Performance summary
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Impairment
Underlying profit2
Banking net interest margin
Average interest-earning banking assets
Asset quality ratio
Return on risk-weighted assets2
SME4
Mid Markets
Global Corporates and Financial Institutions
Other5
Loans sold to Insurance business6
Loans and advances to customers
SME including Retail Business Banking
Customer deposits1, 4
Risk-weighted assets
1 Prior period restated to include run-off.
2 Prior period restated to include remediation.
3 Adjusted to reflect the impact of applying IFRS 9 from 1 January 2018.
Lloyds Banking Group Annual Report and Accounts 2018 45
2018
£m
3,004
1,653
(35)
4,622
(2,167)
(203)
20171
£m
3,030
1,798
(105)
4,723
(2,230)
(173)
(2,370)
(2,403)
(92)
2,160
(89)
2,231
Change
%
(1)
(8)
67
(2)
3
(17)
1
(3)
(3)
3.27%
3.28%
£91.2bn
£91.1bn
0.09%
2.50%
0.10%
2.44%
(1) bp
–
(1) bp
6bp
At 31 Dec
2018
£bn
At 1 Jan
2018
(adjusted)1,3
£bn
At 31 Dec
2017
(reported)1
£bn
Change
%
Change
%
30.0
31.7
34.4
4.3
100.4
31.8
148.6
86.0
30.1
29.4
32.6
7.2
99.3
31.0
148.3
88.1
–
8
6
(40)
1
3
–
(2)
30.7
34.2
36.9
7.7
(6.7)
102.8
31.6
148.3
88.1
(2)
(7)
(7)
(44)
(2)
1
–
(2)
4 SME portfolio re-segmented in the first half of 2018 moving £1.0 billion of loans and advances to customers and £2.0 billion of customer deposits to Business Banking in Retail.
Comparatives not restated.
5 As part of the Lloyds Bank Corporate Markets launch c.£2 billion of loans and advances to customers moved to Group Corporate Treasury.
6 At 31 December 2017 the customer segment balances included lower risk loans that were originated by Commercial Banking and subsequently sold to the Insurance business to back
annuitant liabilities. These loans were reported in Central items but included in the table to aid comparison with prior periods. Since the implementation of IFRS 9 these loans are no
longer classified as loans and advances to customers.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
46 Lloyds Banking Group Annual Report and Accounts 2018
Divisional results continued
Insurance and Wealth
Performance summary
Net interest income
Other income
Net income
Operating costs
Remediation
Total costs
Impairment
Underlying profit1
Life and pensions sales (PVNBP)2
General insurance underwritten new GWP3
General insurance underwritten total GWP3
General insurance combined ratio
Insurance Solvency II ratio5
UK Wealth Loans and advances to customers
UK Wealth Customer deposits
UK Wealth Risk-weighted assets
Total customer assets under administration
Income by product group
Workplace, planning and retirement
Individual and bulk annuities
Protection
Longstanding LP&I
Life and pensions experience and other items
General insurance
UK Wealth
Net income
2018
£m
123
1,865
1,988
2017
£m
133
1,846
1,979
(1,021)
(1,040)
(39)
(40)
(1,060)
(1,080)
(1)
927
–
899
14,384
9,951
107
690
89%
84
733
87%
At 31 Dec
2018
£bn
165%
0.9
14.1
1.2
141.3
At 31 Dec
2017
(reported)4
£bn
160%
0.8
13.8
1.3
145.4
New
business
£m
2017
Existing
business
£m
131
125
13
12
281
125
88
20
440
673
Change
%
(8)
1
–
2
3
2
3
45
27
(6)
2pp
Change
%
5pp
13
2
(8)
(3)
Total
£m
256
213
33
452
954
358
298
1,610
369
1,979
New
business
£m
333
160
20
13
526
2018
Existing
business
£m
153
84
22
414
673
Total
£m
486
244
42
427
1,199
143
272
1,614
374
1,988
1 Prior period restated to include remediation.
2 Present value of new business premiums. Further information on page 288.
3 Gross written premiums.
4 No material impact from application of IFRS 9 – adjusted assets are unchanged from those reported at 31 December 2017.
5 Equivalent regulatory view of ratio (including With Profits funds) at 31 December 2018 was 156 per cent (31 December 2017: 154 per cent).
Central items
Performance summary
Net income
Operating costs
Remediation
Total costs
Impairment
Underlying profit2
1 Prior period restated to include run-off.
2 Prior period restated to include remediation.
Lloyds Banking Group Annual Report and Accounts 2018 47
2018
£m
842
(62)
(91)
(153)
18
707
20171
£m
790
(48)
(19)
(67)
5
728
Change
%
7
(29)
(3)
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
48 Lloyds Banking Group Annual Report and Accounts 2018
Other financial information
Banking net interest margin and average interest-earning assets
Group net interest income – statutory basis (£m)
Insurance gross up (£m)
Volatility and other items (£m)
Group net interest income – underlying basis (£m)
Non-banking net interest expense (£m)
Banking net interest income – underlying basis (£m)
Net loans and advances to customers (£bn)1
Impairment provision and fair value adjustments (£bn)
Non-banking items:
Fee based loans and advances (£bn)
Assets held by Insurance (£bn)
Other non-banking (£bn)
Gross banking loans and advances (£bn)
Averaging (£bn)
Average interest-earning banking assets (£bn)
Banking net interest margin (%)
1 Excludes reverse repos of £40.5 billion (31 December 2017: £16.8 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
2018
£m
13,396
(834)
152
12,714
54
12,768
444.4
4.0
(7.2)
–
(4.7)
436.5
(0.5)
436.0
2.93
2018
£m
(506)
46
(460)
357
(103)
2017
£m
10,912
1,180
228
12,320
111
12,431
455.7
3.2
(8.1)
(6.9)
(4.0)
439.9
(5.0)
434.9
2.86
2017
£m
196
190
386
(100)
286
The Group’s insurance business has policyholder liabilities that are supported by substantial holdings of investments. IFRS requires that the changes in
both the value of the liabilities and investments are reflected within the income statement. The value of the liabilities does not move exactly in line with
changes in the value of the investments. As the investments are substantial, movements in their value can have a significant impact on the profitability of
the Group. Management believes that it is appropriate to disclose the division’s results on the basis of an expected return in addition to results based on
the actual return. The impact of the actual return on these investments differing from the expected return is included within insurance volatility.
The Group actively manages its exposures to interest rate, foreign currency exchange rate, inflation and market movements within the banking book
through a comprehensive hedging strategy. This helps to mitigate earnings, volatility and reduces the impact of market movements on the capital position.
The volatility movements in the period were largely driven by insurance volatility arising from equity market movements and credit spreads. The capital
impact of equity market movements is hedged within Insurance and this also reduces the IFRS earnings exposure.
Lloyds Banking Group Annual Report and Accounts 2018 49
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
1 Adjusted to reflect the implementation of IFRS 9 and IFRS 15.
Return on tangible equity
Average shareholders' equity (£bn)
Average intangible assets (£bn)
Average tangible equity (£bn)
Underlying profit after tax (£m)1
Add back amortisation of intangible assets (post tax) (£m)
Less profit attributable to non-controlling interests and other equity holders (£m)
Adjusted underlying profit after tax (£m)
Underlying return on tangible equity (%)1
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 non-controlling interests and other equity holders (£m)
Adjusted statutory profit after tax (£m)
Statutory return on tangible equity (%)
1 Prior period restated to include remediation.
At 31 Dec
2018
£m
43,434
(2,310)
(3,347)
(271)
228
At 1 Jan
2018
(adjusted)1
£m
42,360
(2,310)
(2,835)
(306)
254
37,734
37,163
71,149m
71,944m
53.0p
51.7p
2018
43.0
(5.4)
37.6
5,951
296
(425)
5,822
2017
43.4
(4.6)
38.8
5,612
219
(403)
5,428
15.5
14.0
4,400
296
111
(425)
4,382
3,547
219
101
(403)
3,464
11.7
8.9
Share buyback
During 2018, the Group completed a £1 billion share buyback programme with an average price paid of 63.4 pence per share. Through a reduction in the
weighted average number of ordinary shares in issue, share buybacks have the effect of increasing earnings per share and, depending on the average
price paid per share, can either increase or decrease the tangible net assets per share. The 2018 share buyback had the effect of increasing the earnings
per share by 0.1 pence and decreasing the tangible net assets per share by 0.2 pence.
Number of employees (full-time equivalent)
Retail
Commercial Banking
Insurance and Wealth
Group functions and services
Agency staff
Total number of employees
1 2017 figures restated to reflect the Group’s current structure.
At 31 Dec
2018
At 31 Dec
20171
35,090
6,888
5,610
19,025
66,613
(1,685)
64,928
36,514
7,343
6,445
19,424
69,726
(1,821)
67,905
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
50 Lloyds Banking Group Annual Report and Accounts 2018
Governance
A letter from our Chairman
Board of Directors
Group Executive Committee
Corporate governance report
Directors’ report
Directors’ remuneration report
Other remuneration disclosures
51
52
54
56
79
82
100
Making banking easier for people
affected by homelessness
Homelessness is a very real challenge facing all cities across the
UK. The Lloyds Bank Flagship Branch on Manchester’s Market
Street, in conjunction with Barnabus, the Booth Centre and other
local charities, help individuals affected by homelessness to access
banking products and services to support them in their journey to
regaining financial independence.
Working with the charities and the Manchester Homelessness
Partnership to understand the social, economic, and health issues
associated with homelessness, Market Street Branch were able to
respond in a way that met the needs of their clients. The success of
this partnership has given way to developing further relationships
between branches and local charities in Glasgow, Cardiff and
London as we move into 2019.
100+
people opened bank
accounts that they have
been refused before
Working in partnership with
frontline charities across
Manchester has opened my
eyes to the size and scale of
the challenge. Overcoming
barriers associated with
identification and opening
a bank account allows
clients to claim benefits, get
accommodation, start work
and live a normal life and I’m
delighted that our efforts
across Greater Manchester
have helped over 100 people
open bank accounts.
James Hargreaves
Local Director for Lloyds Bank Manchester
visit lloydsbankinggroup.com/
prosperplan
Lloyds Banking Group Annual Report and Accounts 2018 51
A letter from our Chairman
Building robust stakeholder relationships
During the year, the
Board continued to
ensure corporate
governance was
embedded into the
thinking and processes
of the business.
Lord Blackwell
Chairman
Chairman’s letter
This Corporate Governance Report details
our approach to governance in practice, how
the Board operates and the key activities
of the Board during the year, together with
information on the annual Board evaluation
process. It also includes the reports from each
of the Board’s principal Committees.
Strong Board oversight is vitally important
alongside the executive governance
framework. A major focus over the last
year has been the implementation of our
strategic transformation programme,
following extensive Board engagement in
the conception and design of the strategy to
deliver the ‘Bank of the Future’.
This transformation programme is managed
through multiple workstreams and initiatives,
and the scale and pace of change is highly
demanding. It has involved a significant shift in
organisational decision-making and controls
from business and functional lines to cross
divisional workstreams. It has also required
a substantial investment in colleague skills
and culture to support the re-shaping of roles
around the new ways of working. The Board
has devoted considerable time to reviewing
the way this is being implemented, with
particular attention to the management of the
risks arising from the implementation of new
technologies, the new ways of working and
the overall pace of change.
Board and Committee changes
There have been a number of changes
to the Board and Committees during the
year. Amanda Mackenzie was appointed
to the Board in October, and became a
member of the Board Risk Committee and
the Responsible Business Committee. She
is also joining the Remuneration Committee
with effect from 1 March 2019. Also,
Nick Prettejohn is joining the Nomination
and Governance Committee with effect
from 1 March 2019. After three years on the
Board, Deborah McWhinney decided to
leave the Group, for personal reasons, with
effect from 31 December 2018. Deborah
provided valuable insight to the Board
during her tenure, especially in respect of
IT infrastructure and cyber security. She left
with our thanks and best wishes for the future.
Anita Frew stepped down as Chairman of
the Remuneration Committee in September
and was replaced by Stuart Sinclair. Anita will
continue to be a member of the Committee,
and remains as the Group’s Deputy Chairman
and Senior Independent Director. Further
to the announcement in October that
George Culmer would be retiring from the
Group in the third quarter of 2019, the Group
announced, in February 2019 that, subject to
regulatory approvals, William Chalmers will
succeed George as Executive Director and
Chief Financial Officer.
Governance and the ring-fenced
bank structure
Building on the work carried out last year to
create our non-ring fenced bank, Lloyds Bank
Corporate Markets plc, the Group has now
completed the new regulatory requirements
by establishing new governance around its
ring-fenced banking activities – Lloyds Bank plc
and Bank of Scotland plc (together the ‘Ring-
Fenced Banks’). These companies serve the
Group’s personal and business clients in the
UK and contain the vast majority of the Group’s
UK banking activities. Further information on
the governance structure for the Ring-Fenced
Banks can be found on page 58.
Group Directors are also Directors of the
Ring-Fenced Banks and, in addition, we have
appointed three Non-Executive Directors to
the Ring-Fenced Banks, who are independent
of the Group (the ‘Ring-Fenced Bank only
Directors’). These three Ring-Fenced Bank only
Directors were recruited during 2018 and took
up their formal roles on 1 January 2019. They
are Nigel Hinshelwood and Brendan Gilligan,
who both have extensive experience of the
financial sector, and Sarah Bentley, who has
significant experience in consumer-focused
industries as well as in digital technology. More
information is provided in the Nomination and
Governance Committee report on pages 67 to
69. Nigel Hinshelwood has been appointed as
the Senior Independent Director of the
Ring-Fenced Bank Boards.
Board evaluation
In accordance with the UK Corporate
Governance Code the Board engaged
Egon Zehnder to facilitate the annual review
of the Board and its Committees, following
two years in which we had undertaken internal
reviews of board effectiveness. This process
ran between August 2018 and January 2019,
and was overseen by the Nomination and
Governance Committee. The process which
was undertaken and the findings of the review
can be found on pages 62 to 63, together with
information about our progress against the
2017 review actions.
Corporate Governance Code
During the year under review, the Group
applied and was fully compliant with
the UK Corporate Governance Code
2016. Additionally, in preparation for our
adoption of the UK Corporate Governance
Code 2018 from 1 January this year, the
Group undertook a review of its Corporate
Governance Framework. We also considered
our approach to workforce engagement.
Further information on workforce
engagement can be found on page 17 and 64.
We will report on our application of the UK
Corporate Governance Code 2018 in next
year’s annual report.
The Board has engaged with the Group’s
stakeholders during the year, and further
details on this can be found on pages 16 to 18.
Lord Blackwell
Chairman
Strategy
The Board has been engaged with the
Group’s strategy through multiple touchpoints
throughout the year. These have included:
the annual cycle of two offsite meetings
to debate priorities and agree
implementation plans;
a suite of formal Board metrics and
qualitative reporting to monitor
progress and risks;
‘Deep dive’ sessions on key areas (see
page 56 for more information);
‘Gallery Walk’ sessions with workstream
teams in the Lab environment (more
information can be found on page 17); and
a wide range of informal interactions to
‘feel the pulse’.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
52 Lloyds Banking Group Annual Report and Accounts 2018
Board of Directors1
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
62
73
A
Ri
8
A
Ri
9
NG
Re RB Ri
13
Re
RB
Ri
A
NG
Ri
Re
RB Ri
10
11
12
A Member of Audit Committee
NG Member of Nomination and
Governance Committee
RB Member of Responsible
Business Committee
Re Member of Remuneration
Ri Member of Board Risk
Committee Chairman
Committee
Committee
1 Deborah McWhinney served as a Director throughout the year and retired from the Board on 31 December 2018.
2 Amanda Mackenzie is to be appointed to the Remuneration Committee with effect from 1 March 2019.
3 Nick Prettejohn is to be appointed to the Nomination and Governance Committee with effect from 1 March 2019.
1. Lord Blackwell Chairman
Appointed: June 2012 (Board), April 2014
(Chairman)
Skills and experience:
Deep financial services knowledge including
insurance and banking
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 is an experienced Chairman
and Non-Executive Director within the
financial services sector having previously
been 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
also 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.
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
Experience across a range of sectors,
including banking, asset and investment
management, manufacturing and utilities
Extensive experience as chairman in a range
of industries
Strong board governance experience,
including investor relations and remuneration
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.
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, a Non-Executive Director
of Nationwide Building Society where he
was Chairman of its Risk Committee and a
Governor of Motability.
External appointments: Chairman of
Urban&Civic plc.
4. Simon Henry Independent Director
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
Simon was formerly Chief Financial Officer
and Executive Director of Royal Dutch Shell
plc. He was also previously Chair of the
European Round Table CFO Taskforce and
a Member of the Main Committee of the
100 Group of UK FTSE CFOs.
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.
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
Lloyds Banking Group Annual Report and Accounts 2018 53
Lord Lupton was Deputy Chairman of
Baring Brothers, co-founded the London
office of Greenhill & Co., and was Chairman
of Greenhill Europe. He was previously
Chairman of Trustees of Dulwich Picture
Gallery, 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.
External appointments: Senior Advisor to
Greenhill Europe and Chairman of the
Trustees of the Lovington Foundation.
6. Amanda Mackenzie OBE Independent
Director
Appointed: October 2018
Skills and experience:
Extensive experience in responsible business
Considerable customer
engagement experience
Strong digital technology experience
Significant marketing and brand background
Amanda was a member of Aviva’s Group
Executive for seven years and Chief Marketing
and Communications Officer. Prior to her
current role, Amanda was seconded from Aviva
as Executive Adviser to Project Everyone, to
help launch the United Nations Sustainable
Development Goals. She has over 25 years’ of
commercial business practice, including director
roles at British Airways AirMiles, BT, Hewlett
Packard Inc, British Gas and Mothercare plc.
External appointments: Chief Executive of
Business in the Community – The Prince’s
Responsible Business Network, a Life Fellow
of the Royal Society of Arts and Fellow of the
Marketing Society.
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.
External appointments: Chairman of Reach
plc (formerly Trinity Mirror plc) and of their
Nomination Committee. He is also 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). Until recently he
was the Interim Chairman of Provident Financial
plc. He was also a former 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).
External appointments: Senior Independent
Director and Chair of the Risk & Capital
Committee at QBE UK Limited (formerly 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 Board member at the Higher
Education Funding Council, a Non-Executive
Director of Mitchells & Butlers as well as a
number of senior management roles for
Abbey National and Mars Confectionery.
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 and Trustee of Lloyds Bank
Foundation for England and Wales.
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.
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 Management/
Enable 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.
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 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. 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.
He was previously the Vice Chairman of the
International Financial Risk Institute.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
54 Lloyds Banking Group Annual Report and Accounts 2018
Group Executive Committee
Delivering our vision and managing a more agile organisation
Executive Director members
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.
António Horta-Osório Executive
Director and Group Chief Executive
George Culmer Executive Director
and Chief Financial Officer
Juan Colombás Executive Director
and Chief Operating Officer
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 53.
George joined the Board as an
Executive Director in May 2012.
Read his full biography on page 53.
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 53.
Other members and attendees
1
5
9
13
2
6
10
14
3
7
11
4
8
12
1. Carla Antunes Da Silva Group Strategy,
Corporate Ventures and Investor Relations
Director (GEC attendee)
Appointed: June 2018 (GEC)
Skills and experience: Since joining the
Group in October 2015, Carla led the 2018
to 2020 Group Strategic Review and, prior
to that, the work on the Bank of the Future.
Carla is responsible for supporting senior
management with strategic decision making
such as recommendations on mergers,
acquisitions/disposals, joint ventures and
partnerships and also manages the Group’s
relationships with shareholders, analysts
and the wider investment community. Carla
joined from Credit Suisse where she headed
the European Banks equity research team,
with lead coverage of UK banks. Carla has
over 18 years of financial analysis, strategy
and management experience from her
time with JPMorgan, Deutsche Bank and
Credit Suisse Group. Carla currently serves
as a Non-Executive Director of Lloyds Bank
Corporate Markets plc.
as part of global operating environments such
as Barclays, Capita and Indian headquartered
IT and business process outsourcing firms. His
experience spans systems integration, large
scale data analytics, enterprise application
platforms, software product development, IT
operations and infrastructure.
2. John Chambers Group Chief Information
Officer (GEC attendee)
3. Kate Cheetham Group General Counsel
(GEC attendee)
Appointed: June 2018 (GEC)
Skills and experience: John was appointed
as the Group’s Chief Information Officer
in September 2017. During the course of
his career, John has been responsible for
delivering large scale IT solutions, building
teams that can operate at scale and working
Appointed: July 2017 (GEC)
Skills and experience: Kate was appointed
Group General Counsel in January 2015. 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
Lloyds Banking Group Annual Report and Accounts 2018 55
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.
12. Jennifer Tippin Group People and
Productivity Director
Appointed: July 2017 (GEC)
Skills and experience: Jen was appointed
as Group People and Productivity Director
in July 2017 and is responsible for leading
the people function, property, sourcing,
divestment and development teams 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. Jen
has enjoyed a career spanning multiple
industries, including banking, engineering
and the airline sector. Jen is a Non-Executive
Director of Lloyds Bank Corporate Markets
plc and a Non-Executive Director of the Kent
Community NHS Foundation Trust.
13. Andrew Walton Group Corporate Affairs
Director
Appointed: December 2018 (GEC)
Skills and experience: Andrew joined the
Group as Group Corporate Affairs Director,
taking on responsibility for internal and
external communications, reputation
management and public affairs. Prior to
Lloyds, Andrew was Senior Managing Director
and Global Head of Financial Services for
the Strategic Communications segment of
FTI Consulting.
14. Malcolm Wood Company Secretary
(GEC attendee)
Appointed: November 2014 (GEC)
Skills and experience: Malcolm joined the
Group as Company Secretary in November
2014. Read his full biography on page 53.
including Deputy Group General Counsel
and General Counsel for Group Legal. Kate
is a trustee of the Lloyds Bank Foundation for
England and Wales and is a Non-Executive
Director of Scottish Widows.
4. Paul Day Chief Internal Auditor (GEC
attendee)
Appointed: September 2016 (GEC)
Skills and experience: Paul joined the Group
as a contractor in September 2016 and was
formally employed by the Group in June
2017. He joined 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
10 years in various leadership roles in Barclays
Internal Audit.
5. Antonio Lorenzo Chief Executive, Scottish
Widows and Group Director, Insurance
and Wealth
Appointed: March 2011 (GEC)
Skills and experience: Antonio joined the
Group 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.
6. Vim Maru Group Director, Retail
Appointed: September 2013 (GEC)
Skills and experience: Vim was appointed
Group Director, Retail in September 2017. He
joined the Group in June 2011 as Managing
Director, Customer Products. 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.
7. Zaka Mian Group Director, Transformation
Appointed: August 2016 (GEC)
Skills and experience: 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.
8. David Oldfield Group Director,
Commercial Banking
Appointed: May 2014 (GEC)
Skills and experience: David was appointed as
Group Director for the Commercial Banking
division in September 2017 responsible for
supporting corporate clients from SMEs and
mid corporates through to large corporates
and financial institutions. David started
his career with Lloyds Bank in 1986 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.
9. Jakob Pfaudler Group Director,
Community Banking (GEC attendee)
Appointed: September 2017 (GEC)
Skills and experience: 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 & Company, in their
London office. Prior to McKinsey, Jakob spent
time with Goldman Sachs and Oliver Wyman.
Jakob is also a Non-Executive Director of
Scottish Widows.
10. Janet Pope Chief of Staff and Group
Director, Responsible Business and Inclusion
Appointed: January 2015 (GEC)
Skills and experience: 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 Chair of the Charities Aid Foundation
Bank and a Non-Executive Director of
the Banking Standards Board. She is also
the Group’s Executive Sponsor for Sexual
Orientation and Gender Identity.
11. Stephen Shelley Chief Risk Officer
Appointed: September 2017 (GEC)
Skills and experience: 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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
56 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report
Our Board in 20181
Gender diversity
Skills and experience
(Non-Executive Directors only)
Board tenure
Age
A.
Retail/Commercial Banking
7 out of 10
E. A.
B.
A. Male: 9
B. Female: 4
Financial markets/wholesale banking/
corporate clients
8 out of 10
Insurance
5 out of 10
D.
B.
C.
Prudential and conduct risk in
financial institutions
Core technology operations
10 out of 10
5 out of 10
Government/regulatory
10 out of 10
Consumer/marketing/distribution
8 out of 10
Strategic thinking
10 out of 10
A. 0-2 years: 2
B. 2-4 years: 2
C. 4-6 years: 4
D. 6-8 years: 4
E. 8+ years: 1
A.
C.
B.
A. 46-55: 2
B. 56-65: 9
C. 66-75: 2
1 Data as at 31 December 2018. Amanda Mackenzie joined the Board on 1 October 2018, and Deborah McWhinney retired from the Board on 31 December 2018.
Board and Committee composition and attendance in 20184
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
Amanda Mackenzie1
Deborah McWhinney2
Nick Prettejohn
Stuart Sinclair
Sara Weller
8/8
8/8
8/8
8/8
8/8
8/8
7/8
8/8
1/1
8/8
8/8
7/8
8/8
7/7 C
–
–
–
7/7
6/7
–
–
–
–
–
–
7/7
–
–
–
–
7/7
7/7
7/7 C
6/7
–
6/7
7/7
–
–
8/8
–
–
–
8/8 C
8/8
8/8
8/8
2/2
8/8
8/8
7/8
8/8
6/6
–
–
–
6/6
6/6 C 3
–
–
–
–
–
6/6 C 3
6/6
4/4
–
–
–
–
4/4
–
–
1/1
–
–
4/4
4/4 C
1 Amanda Mackenzie joined the Board and respective Committees on 1 October 2018.
2 Deborah McWhinney retired from the Board on 31 December 2018.
3 Stuart Sinclair succeeded Anita Frew as the Chair of the Remuneration Committee on 1 September 2018.
4 Where a Director is unable to attend a meeting s/he receives papers in advance and has the opportunity to provide comments to the Chair of the Board, or to the relevant Committee Chair.
C Chairman
‘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 2018 deep dive sessions were held on the following topics:
IT Architecture Strategy
People and ways of working (initial deep dive in April, and update meeting in October)
Open Banking
Lloyds Bank Corporate Markets plc update
Scottish Widows strategy
Governance of GSR3 and value streams
Lloyds Banking Group Annual Report and Accounts 2018 57
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.
IGITIS E
D
M
A
X
I
M
I
S
E
LEADING
CUSTOMER
EXPERIENCE
TRANSF O R M
Discussions and decisions
Regular updates
Group Performance Report
Finance report, including budgets,
forecast and capital positions
Risk reports
2018 customer performance dashboard
Chairman’s report
Reports from Chairmen of Committees
and principal subsidiaries
Financial
2018 budget
Dividend approval
Update on structural hedging strategy
Pension scheme valuations
Group Corporate Treasury Management
information pack
GSR3 and four year operating plan
Draft results and presentations to analysts
Funding and liquidity plans
Capital plan
Basel Pillar 3 disclosures
Annual report and Form 20-F
Unconsolidated income statement
Group treasury plan 2019
Strategy
Governance and stakeholders1
Two strategy away days to review
the progress in implementing the
Group’s strategy
‘Deep dive’ on IT Architecture
Strategy
‘Deep dive’ on Open Banking
Consideration and approval of
large transactions
Cloud strategy, which supports
the transformation of the Group’s
IT architecture
Customers
Annual review of customer conduct
framework and risks
Performance reviews against customer
dashboard
Deep dives on customer propositions,
including mortgage offerings and
transforming customer journeys
Processes and outcomes for fair
treatment of customer complaints
and remediation
Progress in providing a ‘single
customer view’ of Group products and
supporting Open Banking developments
Supporting vulnerable customers and
customers in financial difficulty
Establishment of the operational,
organisational and governance structure
for the Ring-Fenced Banks.
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 Signing Authorities,
Group Statement on Modern Slavery,
and Board and GEC Members’
Dealing Policy
Investor Relations updates
Revised principal Committee responsibilities
Chairman’s fee review
(without Chairman present)
Non-Executive Directors’ fees review
(with Non-Executive Directors’ abstaining)
Going concern and viability statement
Banking Standards Board update
Board appointments and Executive
succession plans
1 Further details regarding stakeholder engagement can be
found on pages 16 to 18.
Regulatory
Updates on our support for financial inclusion
Ring-Fenced Banking updates
Culture and values
‘Deep dive’ on people and ways
of working in April, and an additional
deep dive in October
Helping Britain Prosper Plan
Conduct, culture and values –
Culture dashboard
Responsible business report
Whistleblowing updates
Regulatory updates
Senior Manager and Certification
Regime updates
Risk management
Approval of Group risk appetite
Cyber security briefings
Review and approval of conduct risk
Review and approval of PRA and
EBA stress testing results
Review and approval of the
Risk Management Framework
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
58 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
Governance in action
Schroders joint venture
On 23 October 2018, the Group announced a strategic partnership
with Schroders plc to create a market-leading wealth management
proposition. The three key components of the partnership are:
(i) the establishment of a new financial planning joint venture (the ‘JV’);
(ii) the Group taking a 19.9 per cent stake in Schroders high net worth
UK wealth management business; and
(iii) the appointment of Schroders as the active investment manager of
approximately £80 billion of the Scottish Widows and Lloyds Banking
Group insurance and wealth related assets.
This strategic partnership will combine the Group’s significant
client base, multi-channel distribution and digital capabilities with
Schroders’ investment and wealth management expertise and
technology capabilities.
As part of the structure of the partnership, the Board considered two
primary elements:
The management of the insurance and wealth related assets; and
The establishment of the JV
Management of the assets was largely the responsibility of the
Insurance Business. In July 2018, a recommendation was made to the
Insurance Board (and the Boards of all the other entities that were to be
parties to the arrangements) proposing that Schroders be appointed
as core investment management and investment advisory partner
Revised Group governance arrangements and
Group restructure to comply with ring-fencing
Following the financial crisis, UK legislation was passed to better protect
customers and the day-to-day banking services they rely on. The new
rules mean large UK banks must separate personal banking services
such as current and savings accounts from risks in other parts of the
business, like investment banking. This is called ring-fencing. Banks have
taken different approaches on how they implement these rules with
effect from 1 January 2019.
The Group, led by the Nomination and Governance Committee, has
worked closely with the Regulators to ensure that there is in place a
Group structure and governance arrangements which are appropriate
for the Group, and meet regulatory requirements. Lloyds Bank plc and
Bank of Scotland plc have been identified as the banks which have been
included within the ring-fence (together, the ‘Ring-Fenced Banks’).
Broadly, there are three key PRA principles that underpin the governance
structure for the Ring-Fenced Banks.
Independent decision making by the Ring-Fenced Bank Boards – on
any matters where there might be a conflict between the interests of
the Ring-Fenced Banks and the interests of another part of the Group,
ensuring that the Ring-Fenced Bank Boards act in the interests of the
Ring-Fenced Banks.
Risks considered and managed from the Ring-Fenced Banks’
perspective – this includes maintenance of the capital adequacy and
liquidity of the Ring-Fenced Banks.
Clear and effective governance at both Ring-Fenced Bank and
Lloyds Banking Group plc level – including second and third lines of
defence in respect of risk management.
In order to meet ring-fencing requirements a major governance and
legal entity programme has been implemented across the Group, which
has included the following aspects:
Reorganisation
The reorganisation of the subsidiaries of the Group, which have now
been restructured into four sub-groups under Lloyds Banking Group plc:
the ‘Ring-Fenced Bank sub-group’ containing Lloyds Bank plc and
Bank of Scotland plc (which includes the Halifax business and MBNA);
the ‘LBCM sub-group’ under Lloyds Bank Corporate Markets plc,
which now holds the Group’s subsidiaries and branches in the Crown
Dependencies, Singapore and the US. A number of client agreements
were also transferred from Lloyds Bank plc and Bank of Scotland plc to
Lloyds Bank Corporate Markets plc in order to comply with the ring-
fencing regulatory requirements which took effect on 1 January 2019;
the ‘Insurance sub-group’ under Scottish Widows Group Limited
(including Scottish Widows Limited); and
following a structured Request for Proposal process, involving two
rounds of bidding, due diligence, site visits, client references and joint
implementation workshops. An evaluation process indicated that
Schroders would be the preferred bidder, with Schroders standing
out on strategic alignment as well as investment performance, which
was seen as key to building a successful long-term relationship. The
recommendation included the proposed strategic partnership with
the Wealth business, which would benefit the Insurance business.
The recommendation to appoint Schroders to manage the funds was
accepted in principle by the Insurance Board, subject to approval of the
proposed JV arrangements by the Group Board. Group Board approval
of the JV proposals was obtained on 2 October 2018.
The JV element of the partnership was considered by the main Group
Board. Initially papers were presented at scheduled Board meetings,
but as the proposal progressed, a Committee of the Board considered
and approved the project to provide flexibility, to better respond to the
needs of the business and engage in governance of the project, which
was important for the implementation of the Group’s strategy in the
area of insurance and wealth, and for the Group as a whole. The Board
scrutinised the proposal to satisfy itself that the establishment of the
JV was in the best interests of the Group’s customers. The Board
considered, amongst other things, the process for referring Group
customers to the JV and that the standards of customer service would
meet the Group’s values and standards, ensuring that customers were at
the heart of the decision being made.
the ‘Equity sub-group’ under a new equity holding company, LBG
Equity Investments Limited, under which the principal subsidiary is
Lloyds Development Capital Limited.
Lloyds Banking Group plc
Aligned Boards
Lloyds Bank plc1
HBOS plc
Bank of Scotland plc1
Lloyds Bank
Corporate
Markets plc
Scottish
Widows
Group
Limited
LBG Equity
Investments
Limited
Ring-Fenced Banks1
Non Ring-Fenced Bank
Insurance
Equity Investments
The board structure
To facilitate effective governance, the boards of Lloyds Banking Group
plc, Lloyds Bank plc, Bank of Scotland plc and HBOS plc are run on an
aligned basis as the business of the Ring-Fenced Banks accounts for
the majority of the Group’s operations. This involves the Directors of
Lloyds Banking Group plc also sitting on the Boards of the other three
companies. To provide further support to the fulfilment of the three
key principles of governance of the Ring-Fenced Banks outlined above,
three additional independent Non-Executive Directors have been
appointed to the Ring-Fenced Bank Boards.
Consistent with the existing independent Scottish Widows Limited
Board, Lloyds Bank Corporate Markets plc also has an independent
Board. Further detail on the risk management framework of the Group
and of each sub-group is set out on page 106.
New directors of the Ring-Fenced Banks
During the first quarter of the year the Nomination and Governance
Committee oversaw the selection process and recommendation for
appointment of three new Non-Executive Directors to the Boards
of Lloyds Bank plc and Bank of Scotland plc. As described in the
Chairman’s introduction on page 51, Sarah Bentley, Brendan Gilligan and
Nigel Hinshelwood were recruited during the year, and took office with
effect from 1 January 2019. All the Ring-Fenced Bank only Directors sit
on the Board Risk Committees of each of the Ring-Fenced Banks and
two are members of the relevant Audit and Remuneration Committees.
Nigel Hinshelwood, who is the Senior Independent Director of each of
the Ring-Fenced Banks with effect from 1 January 2019, is also a member
of the Nomination Committee of each of the Ring-Fenced Banks.
Lloyds Banking Group Annual Report and Accounts 2018 59
Q&A with Alan Dickinson, Chair of the Board Risk Committee
Q: How do we remain focused on resolving
legacy conduct, litigation and regulatory
matters?
A: The Committee pays a great deal of
attention to these issues. Whilst PPI mis-selling
is by far the most costly and well known issue,
there remain many smaller issues which
have been identified over the years since the
financial crisis. The Group has established
very considerable resources to address
these potential redress requirements and
has made material progress over the last
12 months in resolving these matters. In very
many cases our customers may have been
unaware of their potential claim. The Board
Risk Committee has placed great emphasis
on clearing up these issues and achieving
resolution as rapidly as possible and reviews
progress at each and every meeting.
Q: What are the biggest risk factors to our
industry and what steps are we taking to
address them?
A: Even in the best of times, it is essential
for banks to be aware of both inherent and
emerging risks of which there are many.
The inherent risks receive regular scrutiny,
but emerging risks require special attention
particularly with a banking group the size of
Lloyds Banking Group.
The sheer scale of our balance sheet and
the nature of banking in taking deposits and
lending those deposits on to other customers
means that we are mindful of the risks in
the UK economy at any time and indeed in
the global economy given that, as a trading
nation, what goes on in the world will very
rapidly impact the UK. The geopolitical
situation and, closer to home, EU exit are very
important risk factors to be considered when
assessing the Group’s Risk Appetite.
As economic cycles mature, it is important to
be mindful of the impact of the money supply
upon asset prices and to gauge the impact
of a sudden reversal of asset price growth
on investor sentiment, markets and the real
economy. We are always wary of asset price
bubbles and the potential impact upon an
ever more closely linked global economy of a
sudden reversal.
Aside from the balance sheet impacts of such
events, operational resilience has become
ever more important as the processes and
systems by which banks provide their services
become ever more technologically reliant
and dependent upon continued smooth
running of services provided in-house and
through expert third parties. The demand for
change and more sophisticated services in
itself brings operational risk as platforms are
changed. Add on the increasing risk of cyber
attacks and operational resilience is receiving
a very considerable amount of attention from
the Board Risk Committee.
Change also brings other risks. It is important
to provide the ever more user friendly and
sophisticated services that the banking
customers of tomorrow increasingly require,
and will obtain from other suppliers if we do
not. Changing processes and systems that
have been established over decades if not
more and making the organisation agile and
able to respond to demand, is a very material
risk and will take up a great deal of the Board
Risk Committee’s time for many years ahead.
Q: What keeps you awake at night?
A: Fortunately, I sleep pretty well. The
comprehensive work programme undertaken
by the Board Risk Committee means
that most issues have been reviewed in
detail and actions taken or accelerated
where appropriate.
The greater concerns lie where it is simply
impossible to be in control of events be
they geopolitical or, say, operational such as
cyber-security. It is much easier to predict with
accuracy potential losses from lending on
mortgage or credit card than the reputational
and financial losses that might arise from a
successful cyber-attack.
Ensuring that the Group is as prepared as it
possibly can be with the strongest defences
and tools at its disposal is the only prudent
course to take and is one we have pursued
vigorously in recent years to protect the
Group and all of its customers from whatever
might happen in the future.
Q: What is the Group’s risk appetite and risk
tolerance?
A: Taking risk is a critical part of what
any bank must do. How well it does that
determines how well it meets the needs of
its customers and how successful it will be as
an organisation.
The Board Risk Committee has three
key responsibilities.
The first is to review the environment in
which the Group is operating – factors such
as the economic and geopolitical climate
for example – and recommend for Board
approval how much risk the Group should
take – the ‘Risk Appetite’. This will usually be a
maximum level of risk in any one area – such
as how large a proportion of new mortgage
loans should be represented by high loan to
value loans, typically to first time buyers.
The second is to ensure that the ways in
which the risk that is taken are effective and
efficient, for example setting out policies
and procedures to be followed and checks
and balances to make sure that the right
actions happen. This is the Risk Management
Framework which is reviewed regularly by
the Board Risk Committee to give comfort
that it is still guiding the Group to do those
things right.
The third responsibility is to continually assess
the ways in which Group colleagues have risk
in mind when doing their jobs – what I would
call the ‘Risk Culture’. The role of the Board
and its Risk Committee is to set the ‘tone from
the top’ – to set an example as to what risks to
take and how to manage those risks.
Beyond Board meetings
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.
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 engagements
each year, please see pages 16 to 18 for more information.
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.
Details of the new mandatory training that has been rolled out to the
Non-Executive Directors this year can be seen on page 63.
The Board held joint discussions with Scottish Widows Group Limited
in April, and Lloyds Bank Corporate Markets plc in September. These
meetings are important in respect of both governance and the sharing
of best practice. They also provide the opportunity for in-depth focus
on both insurance and corporate markets matters. Performance and
business updates are also provided, and, in the case of Lloyds Bank
Corporate Markets plc, updates on key milestones in respect of the
development of this new bank.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
60 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
How our Board works
Meetings, activities and processes
The right processes in place to deliver on our
strategy
During the year, there were eight scheduled Board meetings, with details
of attendance shown on page 56. 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.
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 Board
appointments 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 Committees’ 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.
The Executive Directors make decisions within clearly defined
parameters which are documented within the Corporate Governance
Framework. However, 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 management with the correct authority.
In the rare event of a Director being unable to attend a meeting, the
Chairmen of the respective meetings discuss the matters proposed with
the Director concerned wherever possible, 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 the next page.
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 secure electronic Board portal.
A full schedule of matters reserved for the Board and Terms of
Reference for each of the principal Committees can be found at
www.lloydsbankinggroup.com
Q&A with Anita Frew, Deputy Chairman and Senior Independent Director
Q: What is your role as Senior Independent
Director?
A: I have a number of different stakeholders to
whom I am accountable, being shareholders,
the Chairman, the other Directors and the
Group as a whole. I make myself available to
shareholders when there are concerns that
have not or cannot be dealt with through the
usual channels of the Chairman or Executive
Directors. I also attend regular meetings with
major shareholders to ensure that there is a
balanced understanding of the issues and
concerns that this group of shareholders have.
I act as a sounding board for the Chairman
and Group Chief Executive on Board and
shareholder matters, and have regular
meetings with both. In matters relating to
the Chairman such as his performance and
conduct evaluation, agreeing his objectives
and succession planning, I will Chair the
Nomination and Governance Committee in
his place to ensure independence. I will also
conduct his annual appraisal, and deal with
any concerns regarding the Chairman that
other members of the Board have.
Regarding the Board as a whole, I act as
a trusted intermediary for the other Non-
Executive Directors where this is required
to help them to challenge and contribute
effectively; and take the initiative in discussion
with the Chairman or other Board members
if it should seem that the Board is not
functioning effectively.
For the Group, as the Ring-Fenced Bank
structure is now in place, I also liaise and
collaborate with the Ring-Fenced Bank Senior
Independent Director where appropriate.
Q: Where does the Senior Independent
Director add value?
A: The role of the Senior Independent
Director has grown enormously in the past
few years, and I believe stakeholders really
value this alternative contact within the Board,
providing a highly versatile intermediary with
the Board and senior management. This is
supported by me having a close relationship
with the stakeholders to reinforce the trust
and confidence needed to perform the
role effectively. The majority of my role
is undertaken during normal business
circumstances, but recognising that I will
need to step in when any issues arise. The
relationships fostered during times of normal
business provide a strong basis to deal with
any such issues effectively and independently.
Q: As Whistleblowing Champion for the
Group, what are the reporting lines to you, and
how do matters get escalated to the Board?
A: My role as the Group’s whistleblowing
Champion is to oversee the integrity,
independence and effectiveness of the
Group’s procedures for whistleblowing. There
is a dedicated team within the Group that
is responsible for managing whistleblowing
concerns and as such I delegate much of
the day-to-day activity to these trusted
colleagues. I retain oversight over the team
through regular catch up meetings and
have a direct reporting line for matters that
require escalation to me. On an annual
basis, I am responsible for presenting to the
Board on the effectiveness of the Group’s
arrangements and this includes relevant case
updates, industry perspective and whether
the internal processes are effective to handle
disclosures properly.
Q: Are you satisfied the Company has
a robust process in place in respect of
whistleblowing?
A: The Group’s whistleblowing arrangements
are subject to annual review by Group
Internal Audit. This provides an opportunity
for an independent party to review the
whistleblowing processes and test whether
they are effective. The results to date from
these reviews have been positive compared
to our peers. The Audit Committee and
Board also receive regular reports regarding
whistleblowing.
In addition, the Group has recently
participated in a benchmarking exercise
led by Protect. Protect (formerly known as
Public Concern at Work) provide external
confidential advice. Colleagues can contact
the independent UK Whistleblowing charity,
Protect who can talk you through your options
and help you raise a concern about risk,
malpractice or suspected wrongdoing at
work. This exercise reviewed the governance,
engagement and operational arrangements
and compared these to other financial
and non-financial companies. The Group
scored positively with the results showing a
favourable position.
Lloyds Banking Group Annual Report and Accounts 2018 61
Board meetings
Start of
the year
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.
Agenda set
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.
Papers
compiled and
distributed
Before the
meeting
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.
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.
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
meeting
Board meetings have certain standing items, such as a report from the Group Chief Executive and Chief Financial
Officer on Group performance, reports from the Chairmen of Committees and principal subsidiaries 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 a subsequent meeting.
Lord Blackwell’s visit to Cardiff
As one of his regular site visits, Lord Blackwell
was in Cardiff in September meeting
colleagues from St. William House, local
branches and Lloyds Bank Foundation charity,
Women Connect First.
The Chairman met with a number of teams,
including the Group Customer Services
Customer Solutions Centre, which is
designing and developing a new customer
management system which utilises artificial
intelligence, and colleagues from Black
Horse, including the Complaints team. Lord
Blackwell sat with colleagues and went
through some live cases with them, discussing
the challenges they face in ensuring fair and
reasonable outcomes.
This was followed by a networking lunch
with the Commercial Banking SME and the
Mid Markets Team, who deliver local face-to-
face relationships across five geographical
areas of Wales.
Lord Blackwell’s visit continued with a Town
Hall session, with over 200 colleagues,
followed by a visit to two local branches where
he discussed the evolution of technology
with mortgage advisors, and how their
role has changed. Lord Blackwell then met
with Women Connect First, which aims to
empower black and minority ethnic women in
Cardiff, helping them realise their full potential
and make an impact on Welsh society.
To end his visit in Cardiff, Lord Blackwell
hosted a colleague recognition dinner. The
evening recognised the achievements of
colleagues who demonstrate the Group
values of making a difference together,
keeping things simple and putting
customers first.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
62 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
How our Board works
Assessing our effectiveness
Board evaluation
How the Board performs and is evaluated
In accordance with the three-year cycle, the 2018 effectiveness
review was facilitated externally by Egon Zehnder1, an external
board evaluation specialist, between August 2018 and January 2019.
The annual effectiveness review, which is facilitated externally at
least once every three years, provides an opportunity to consider
ways of identifying greater efficiencies, maximising strengths and
highlighting areas of further development. The effectiveness review was
commissioned by the Board, assisted by the Company Secretary and
overseen by the Nomination and Governance Committee. Details of this
effectiveness review are provided below.
The Board conducted internal effectiveness reviews in 2016 and 2017.
These were led by the Chairman of the Board, and included a review
of effectiveness of the Board, its Committees and individual Directors
with the support of the Nomination and Governance Committee.
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.
2018 evaluation of the Board’s performance
The 2018 effectiveness 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.
The effectiveness review findings focus on both evaluation of
effectiveness of the Board as a whole, and of the individual Directors.
This is a well functioning Board underpinned by
a shared purpose, strong team dynamics and
robust processes.2
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 2018 and up to the date of
this report.
External evaluation process
Stage 1 – August 2018
Initial meetings with the Chairman took place to build on the
existing questionnaire and establish a discussion guide. Analysis
of the existing skills matrix was undertaken. This enabled Egon
Zehnder to understand the Board’s purpose and scope out the
effectiveness review.
Stage 2 – September to November 2018
Questionnaires were sent to the Directors ahead of the one-to-one
interviews with each Director. Egon Zehnder also attended the
November Board meeting. This enabled Egon Zehnder to witness
and evaluate the Board’s processes and behaviours.
Stage 3 – January 2019
Findings were reviewed with the Company Secretary. The summary
findings were then shared and discussed with the Chairman and
feedback on each of the Committees was shared with the relevant
principal Committees. The final summary was presented to the Board
in January at a meeting facilitated by Egon Zehnder. Feedback on
individual Directors is shared with the Chairman.
Highlights from the 2018 review
The evaluation 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.
The key findings and areas for consideration include the following:
Findings
Areas for consideration
Despite strong engagement in strategy the Board agenda is
perceived to be still overly rooted in regulatory compliance and risk
mitigation. Looking ahead, there is an opportunity for the Board to
become more outwardly-focused.
Further streamlining of meeting papers and agendas to enable
more expansive discussion;
The increase in the number of Directors attending aligned
Board meetings may require different disciplines in the conduct
of meetings;
Large attendance of Committee meetings could inhibit debate.
Consideration as to whether there is scope for bringing further
technology know-how to the Board in due course;
Non-Executive Directors would like to offer greater support to the
Chairman by leveraging their unique skills and experience more
fully.
Purpose and
Strategy
Processes
People
Purpose of creating the conditions for sound
governance and renewed stakeholder
confidence has been well executed
through tight controls and disciplined
risk management;
The strategy is clear and the Directors are
aligned on strategic priorities.
Controls and governance are very strong;
Committees are broadly well chaired;
The 2018 strategy review process was hailed
as a great success in allowing for wide-
ranging and free-flowing debate.
The Chairman:
– has focused on building an independently-
minded, diverse Board, and has laid the
foundations for an open Board culture;
– invests considerable one-on-one time with
Non-Executive Directors, which provides
a platform for timely, two-way feedback,
and helps the new Non-Executive Directors
build confidence and a sense of belonging.
Board Directors are committed and suitably
inquisitive. They come well-prepared to
meetings and show a healthy balance
of supporting management and asking
pertinent questions.
1 At the time of the 2018 review Egon Zehnder provided certain Board and senior management level services from time to time, including in respect of succession planning as detailed on page 67,
otherwise Egon Zehnder has no other connection with the Group.
2 2018 Board Effectiveness Review.
Lloyds Banking Group Annual Report and Accounts 2018 63
Progress against the 2017 internal Board effectiveness evaluation
During the year, work focused particularly on Board papers and presentations. A summary of the Board’s progress against the actions arising from
the 2017 evaluation are set out below.
Recommendations from the 2017 evaluation
Actions taken during 2018
Board
papers and
presentations
to the Board
Reduction in volume of Board papers.
More concise reports, highlighting important
points and avoiding unnecessary volume
and repetition.
Fewer and shorter presentations.
Stakeholder
feedback
Increased feedback from stakeholders other
than regulators and customers, including
shareholders and bondholders.
A review of the schedule of Board and Committee meetings took
place, and a number of meetings have been removed after being
considered unnecessary.
Instructions have been given to all those who produce Board papers
to avoid repetition between presentations and briefing papers.
Bespoke training has also been provided by the Company Secretary.
In order to allow more time for discussion, challenge and debate,
certain items of the agenda at Board meetings had no presentations
although the responsible executives were available at the meeting
to respond to queries from the Board.
Enhanced video conferencing facilities have been installed in various
Group locations to improve the quality of remote participation in
meetings when attendance in person is not possible.
The Group’s brokers attended the Board meeting in April to provide
investor feedback on the results and strategy announcements.
The bi-annual presentation to the Board on reputation contained
information on shareholder sentiment and was attended by the
Group Director of Investor Relations.
A governance lunch was held in November with key institutional
shareholders. This was hosted by the Chairman and the Chairmen of
the Board Committees, and feedback was reported to the Board.
As part of the monthly report to the Board, the CFO now reports
on the Bank of England’s ‘minimum requirements for own funds
and eligible liabilities’ and will continue to highlight significant
developments related to the Group’s debt funding.
Responsible
Business
Committee
Terms of
Reference
Non-
Executive
Director
Recruitment
Terms of Reference to be reviewed and
updated to avoid duplication of effort in
areas covered by other Committees.
The Terms of Reference were reviewed, and considered by the
Nomination and Governance Committee in April, and approved by
the Board in November.
Major change management; finance;
accounting and data experience to be
considered for future recruitment of
Directors.
These areas of experience will continue to be considered.
Amanda Mackenzie, appointed in October 2018 has a substantial
amount of experience in respect of change management.
Professional development and training programme at a glance
In addition to the existing methods of training for the Directors, the Board agreed in 2017 that the Non-Executive Directors should be provided with
a mandatory training programme. This was trialled by members of the Nomination and Governance Committee and has since been rolled out to the
rest of the Directors.
Training modules were identified from a list of the topics used by Group colleagues, and following discussions between Group Secretariat, Risk and
Group Learning, the following themes were identified as being the most relevant for Non-Executive Directors:
Anti-Bribery
Competition Law
Information Security
Whistleblowing
Senior Manager and Certification Regime (SMCR) has also been included as an additional theme for all Non-Executive Directors.
Delivery of training
The training is delivered via an online training platform on the Group’s intranet. The Directors can access this at any time, and once the training is
completed, it is recorded on the system to provide a full audit trail. The Directors have completed the modules for 2018.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
64 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
How our Board works
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 executive 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 105 to 159. 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.
Workforce engagement
During the year, the Nomination and
Governance Committee made a
recommendation to the Board as to how
the Board would engage with the ‘wider
workforce’ as a key stakeholder following
the Financial Reporting Council’s recent
guidelines. The Board has discussed and
agreed the approach to engagement
during 2019, methods of gathering and
documenting workforce views, and
considering how feedback provided by
the workforce would be presented to and
considered by the Board on a timely basis.
The definition of the Group’s ‘workforce’ was
considered and agreed as ‘our permanent
employees, contingent workers and third-
party suppliers that work on the Group’s
premises delivering services to our customers
and supporting key business operations.
Engagement activity and developing
dialogue
Board members already participate in a
number of key engagement activities such
as site visits, Q&A sessions, colleague
feedback sessions, Chairman’s breakfasts,
and the Helping Britain Prosper Live events.
Enhancements to current engagement
activities have been agreed to provide the
opportunity for feedback, themes and
viewpoints of the wider workforce to be
brought to the attention of the Board for
discussion and debate to encourage a
meaningful dialogue between the Board and
the workforce.
From the second quarter of 2019, the Board
will receive a report on a quarterly basis to
provide further oversight and insight into
workforce related activity and support with
key decision making.
For details of Board engagement with
colleagues during 2018, please see page 17.
Raising concerns in confidence
The Group’s existing whistleblowing channel
provides an opportunity for both colleagues
and the wider workforce to raise concerns in
confidence.
Lloyds Banking Group Annual Report and Accounts 2018 65
Complying with the UK Corporate Governance
Code 2016
The UK Corporate Governance Code 2016 (the ‘Code’) applied to the Lloyds Banking Group 2018 financial year. The Group confirms that it
applied the main principles and complied with all the provisions of the Code throughout the year. The Group has been subject to the provisions
of the UK Corporate Governance Code 2018 since January 2019, and will report on this next year. The Code is publicly available at www.frc.org.uk.
The following two pages explain how we have applied the Main Principles and the provisions of the Code during the year.
The Group has adopted the UK Finance Code for Financial Reporting Disclosure and its 2018 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
Group. 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 60.
Independent Responsibilities
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
Lord Lupton
Amanda Mackenzie¹
Deborah McWhinney2
Nick Prettejohn
Stuart Sinclair
Sara Weller
Company Secretary
Malcolm Wood
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.
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.
As Deputy Chairman, Anita Frew would ensure continuity of chairmanship during any change of
chairmanship. She supports the Chairman in representing the Board and acts as a spokesperson.
She deputises for the Chairman and is available to the Board for consultation and advice.
The Deputy Chairman may represent 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 management 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 various matters including governance and ensures good
information flows and comprehensive practical support is 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 Amanda Mackenzie joined the Board with effect from 1 October 2018.
2 Deborah McWhinney left the Board with effect from 31 December 2018.
A2. Division of responsibilities There is clear division of responsibility at the head of the Company, as noted above. As documented in the Group’s
Corporate Governance Framework there is clear separation between the role of the Chairman, who is responsible for the leadership and effectiveness
of the Board, and the Chief Executive, who is responsible for the running of the Company’s business.
A3. Role of the Chairman The Chairman has overall responsibility for the leadership of the Board and for ensuring its effectiveness. The responsibilities
of the Chairman and his fellow Directors are set out above.
Lord Blackwell was independent on appointment.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
66 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
A4. Role of the Non-Executive Directors The Senior Independent
Director (‘SID’), Anita Frew, acts as a sounding board for the Chairman
and Group Chief Executive. She can be contacted by shareholders and
other Directors as required.
The Non-Executive Directors challenge management 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 59 to 61 and 65 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. Having the right balance
on the Board and its Committees helps to ensure that those bodies
discharge their respective duties and responsibilities effectively.
In particular, the Nomination and Governance Committee monitors
whether there are any relationships or circumstances which may
affect a Director’s independence. Following the most recent review
of independence the Committee concluded that all Non-Executive
Directors are independent in character and judgement as shown on
page 65.
More information on the annual Board effectiveness review can be
found on pages 62 to 63 and information on the Board Diversity Policy
can be found on page 69.
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 67.
More information about the work and focus of the Nomination and
Governance Committee can be found on pages 67 to 69.
B3. Time commitments Non-Executive Directors are advised of time
commitments prior to their appointment and they are required to
devote such time as necessary to discharge their duties effectively.
The time commitments of the Directors are considered by the Board on
appointment and annually, and following the most recent review, the
Board is satisfied that there are no Directors whose time commitments
are considered to be a matter for concern. External appointments,
which may affect existing time commitments for the Board’s business,
must be agreed with the Chairman, and prior Board approval must be
obtained before taking on any new external appointments.
No Executive Director has either taken up more than one
Non-Executive Director role at a FTSE100 company or taken up
the Chairmanship of such a company.
More information on Directors’ attendance at Board and Committee
meetings can be found on page 56.
B4. Training and development The Chairman leads the training and
development of Directors and the Board generally and regularly reviews
and agrees with each Director their individual and combined training
and development needs.
Ample opportunities, support and resources for learning are provided
through a comprehensive programme, which is in place throughout
the year and comprises 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.
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 their role.
Board Committees are also provided with sufficient resources to
discharge 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 2018,
with internally facilitated evaluations having taken place in 2016 and
2017. More information can be found on pages 62 to 63, along with the
findings, actions, and progress made during the year.
B7. Re-election of Directors At the 2019 AGM all Directors will seek
re-election or election. Being the first AGM following her appointment,
Amanda Mackenzie will stand for election, with all other Directors
standing for re-election. The Board believes that all Directors continue
to be effective and committed to their roles.
C. Accountability
C1. Financial and business reporting The Code requirement
that the Annual Report is fair, balanced and understandable is
considered throughout the drafting and reviewing process and the
Board has concluded that the 2018 Annual Report is fair balanced
and understandable. The Directors’ and Auditors’ Statements
of Responsibility can be found on pages 81 and 161 respectively.
Information on the Company’s business model and strategy can be
found on pages 1 to 35.
C2. Risk management and internal control systems The Board is
responsible for the Group’s risk management and internal controls
systems; see page 64 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 70 to 73.
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 74 to 77.
The Directors’ viability statement and confirmation that the business is a
going concern can be found on page 80.
C3. Role and responsibilities of the Audit Committee The Board
has delegated a number of responsibilities to the Audit Committee,
including oversight of financial reporting processes, the effectiveness
of the internal controls and the risk management framework,
whistleblowing arrangements and the work undertaken by the external
and internal auditors. The Audit Committee Report which can be found
on pages 70 to 73, sets out how the Committee has discharged its
duties and areas of focus during the year.
D. Remuneration
D1. Level and elements of remuneration The Group is committed
to offering all colleagues a reward package that is competitive,
performance-driven and fair and its Remuneration Policy is designed
to promote the long term success of the Company. The Directors’
Remuneration Report on pages 82 to 99 provides full details regarding
the remuneration of Directors. The Remuneration Policy can be found in
the 2016 Annual Report and Accounts and remains unchanged since last
approved by shareholders at the 2017 AGM.
D2. Procedure The work of the Remuneration Committee and its focus
during the year can be found on page 96.
E. Relations with Shareholders
E1. Shareholder engagement The Board actively engages with all
stakeholders including shareholders and more information on our
approach to relations with shareholders can be found on pages 16 to 17.
E2. Use of General Meetings The Board values the AGM as a key
opportunity to meet shareholders. The 2019 AGM will be held on
16 May 2019. 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.
Key
Fully Compliant
Lloyds Banking Group Annual Report and Accounts 2018 67
Nomination and Governance Committee report
The Committee has overseen
further development of the
Group’s senior management
succession planning
programme.
capability, aspiration and adequacy of
current development plans. The identified
characteristics are designed to represent
the particular leadership requirements of
those undertaking GEC-level roles within the
Group as we build the Bank of the Future.
Our ambition is to ensure an Executive
team that embraces the diverse strengths of
individual leaders and collectively exhibits
the characteristics expected of a team
leading the Group to succeed in a digital
world. The GEC characteristics align to the
leadership behaviours: inspire delivery;
encourage simplicity; develop confidence;
and build trust. Additional emphasis is placed
upon key capabilities required to lead cultural
transformation, including innovative strategic
thinking; agile change management; digital
technology; collaborative team working and
insightful customer perspectives.
The GEC characteristics will become the
benchmark for the assessment of, and
development planning for, GEC members
and attendees as well as successors into those
roles. The characteristics will be considered
in addition to knowledge and experience
criteria around breadth of banking/financial
services and governance experience. Work
was undertaken in September 2018 to
support identified successors in reviewing and
refreshing their development plans to ensure
that these directly support their succession
readiness in line with the characteristics.
During the year GEC members and
attendees have been assessed against the
GEC characteristics, with both a desktop
assessment and self-assessments by GEC
members and attendees. These have been
reviewed by the Group Chief Executive and
me, and formed the basis for discussion
with the Committee and other Board
members about executive capabilities and
succession plans.
Individual assessment scores against the GEC
characteristics have been shared with each
GEC member and attendee for discussion
with their line manager. Additional personal
development interventions have been agreed
as appropriate, with individual development
plans continuing to be owned and driven
by each Executive.
Overall, the results of the assessment evidence
that the GEC collectively exhibit strong
capabilities in the leadership characteristics
required to deliver the Bank of the Future.
As a team, their breadth of banking and
governance experience provides the
Dear Shareholder
Board and GEC changes
As reported in my introduction to the
Governance Report on page 51, there have
been a number of changes to the Board
during the year, all of which have been
overseen by the Nomination and Governance
Committee (the ‘Committee’). The Committee
conducted a rigorous process for identifying
and assessing candidates to recruit both
the Ring-Fenced Bank only Non-Executive
Directors and an additional Group Non-
Executive Director. Details of this selection
process can be found on page 69. The
Committee has also overseen the transition
from Anita Frew to Stuart Sinclair as the Chair
of the Remuneration Committee Chairman,
and as part of the succession plan which is in
place for senior management, have approved
the appointment of Kate Cheetham as
Company Secretary to replace Malcolm Wood
when he retires from the Group in June 2019.
Following the announcement in October
that George Culmer would be retiring from
the Group in the third quarter of 2019, the
Nomination and Governance Committee
conducted a rigorous search process for his
successor. This led to the announcement
in February 2019 that, subject to customary
regulatory approvals, William Chalmers would
join the Group in June 2019, becoming an
Executive Director and Chief Finance Officer
when George steps down.
Board effectiveness review
As highlighted in my letter on page 51, an
externally facilitated Board effectiveness
review was conducted during the year.
This was overseen by the Committee, and full
details are provided on pages 62 to 63.
Succession planning
The Committee continued its work on
succession planning during the year, focusing
on the level below the Group Executive
Committee (GEC). This has included working
with Egon Zehnder to review the changing
role requirements and characteristics for
bank leadership in the context of the
Bank of the Future.
The outcome of this review provided
a comprehensive view of the GEC role
characteristics against which the current
senior management layer below GEC
can be assessed to ensure alignment of
knowledge base required to enable robust
decision-making. Personal characteristics
around values, judgement and drive are
aligned with the Group’s target culture.
UK Corporate Governance
Code
The Financial Reporting Council published in
July an amended UK Corporate Governance
Code (the ‘New Code’), which is applicable
from 1 January 2019, with requirements
relating to the annual report applicable
to the report and accounts for the year
ending 31 December 2019. The Group will
be reporting against this New Code in next
year’s annual report, but the requirements
have been considered by the Committee and
the Board during the year under review and
work has been done to implement changes to
procedures, governance, culture and practice
in line with the New Code.
The Group’s Corporate
Governance Framework
The Corporate Governance Framework was
updated in 2017 to anticipate the governance
requirements of ring-fencing on the basis
of discussions at that time. During 2018,
the Corporate Governance Framework
was further updated to include additional
amendments to reflect commitments made to
the Regulator. These amendments included
wording to reflect the role of Risk Officer
for the Ring-Fenced Banks, particularly in
relation to the Risk Committees, additional
detail on the conduct of aligned Board and
Committee meetings, and clarification of
the management of conflict issues. More
information on the aligned meetings can
be found on page 58.
The Committee has also overseen
amendments to the Corporate Governance
Framework to reflect the requirements of the
New Code ahead of implementation in 2019.
Lord Blackwell
Chairman, Nomination and
Governance Committee
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
68 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
Activities during the year
Key issues
Committee review and conclusion
Board
composition
Recruitment of a new Non-
Executive Director
Change in Chairman of the
Remuneration Committee
Structure and composition of
the Board
Executive
succession
planning
Establishing the GEC
characteristics and identifying
and supporting potential
successors into GEC-level roles
Ring-Fenced
Bank
Recruitment of the Ring-Fenced
Bank only Directors
Annual effectiveness review of
the Board and its Committees
Annual Board
effectiveness
review
Governance
The external search firm Russell Reynolds Associates1 provided a shortlist of candidates
for consideration. Interviews with various members of the Board were held, and the
process resulted in the appointment of Amanda Mackenzie in October.
Following Anita Frew’s decision to step down as the Remuneration Committee Chair,
the Committee recommended to the Board that Stuart Sinclair replace her in this role.
This recommendation was based on Board succession planning and the fact that Stuart
is an experienced Non-Executive Director, has been a member of the Remuneration
Committee since he joined the Company in January 2016, and has external experience
of chairing Board committees.
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 the Board, giving due weight to diversity in its broadest
sense. Recommendations are made to the Board as appropriate. The skills matrix was
considered in the appointment of Amanda Mackenzie, and the appointment of the
Ring-Fenced Bank only Directors.
During the year, the Committee, led by the Chairman, reviewed the succession plans
and development plans for key senior management roles, and established the GEC
characteristics as described on page 67.
This included updating the ongoing development plans for potential successors into
Executive Director roles, including Group Chief Executive.
Russell Reynolds Associates was engaged to shortlist candidates for the positions of
three Ring-Fenced Bank only Non-Executive Directors. The recruitment process, led by
the Chairman, included interviews with various members of the Board and resulted in
the appointment of Nigel Hinshelwood, Sarah Bentley and Brendan Gilligan with effect
from 1 January 2019.
During the year the Committee selected Egon Zehnder to facilitate the review by the
Board and its Committees of their effectiveness and provided oversight for the process.
The Committee also reviewed its own effectiveness and found that it met its key
objectives and carried out its responsibilities effectively. Full details of the review can be
found on pages 62 to 63.
The Committee provides
oversight for various aspects
of corporate governance, and
during the year key activities
included the following:
Annual review of the Corporate Governance Framework, amendments which took
into account the Group’s approach to compliance with the PRA’s Ring Fenced Banks
Governance Principles, and the requirements of recent regulatory developments
including the terms of the revised UK Corporate Governance Code. Our application
of the New Code will be reported upon next year;
Diversity
A review of the Diversity Policy
was undertaken
Continuing oversight of the governance structure for the Ring-Fenced Banks;
A review of the Board/Committee responsibilities and the matters reserved for the
Board to assess any instances of overlap or gaps in coverage or escalation;
In the light of the increasing importance of IT in the Group’s GSR3 strategy, a review of
the governance and oversight of the IT Programme;
Considering correspondence with shareholders;
Approval of the appointment of Trustees to the Bank’s Foundations.
The Board considered and approved the adoption of a public goal to increase ethnic
diversity in the senior management population, a first for a FTSE-100 company. This has
now been incorporated into the Board Diversity Policy which was approved by the Board
in January 2019. The Board Diversity Policy is available at www.lloydsbankinggroup.com.
Please see pages 22 to 23 and 69 for further information regarding diversity.
The Diversity Policy was a
consideration in recruitment
during the year
Diversity, in its broadest sense as detailed in the Policy, was taken into consideration as
part of the recruitment of Amanda Mackenzie and the Ring-Fenced Bank only Directors
during the year.
Independence
and time
commitments
Reviewing whether Non-
Executive Directors were
demonstrably independent and
free from relationships and other
circumstances that could affect
their judgement
Training
Overseeing the roll out of
training to all Non-Executive
Directors
In recommending Directors for re-election the Committee reviews the performance of
each Non-Executive Director and their ability to continue meeting the time commitments
required. It also takes account of any relationships that had been disclosed. Details
of conflicts of interest can be found on page 79. A particularly rigorous review of
Lord Blackwell, Anita Frew and Sara Weller was undertaken as a result of having held the
position of Non-Executive Director for longer than six years. Based on its assessment for
2018, the Committee is satisfied that, throughout the year, all Non-Executive Directors
remained independent2 as to both character and judgement. All Directors were
considered to have appropriate roles, including capabilities and time commitments.
In addition to existing methods of training for the Non-Executive Directors, at the end
of 2017, members of the Committee trialled an online mandatory training programme.
This was subsequently rolled out to the rest of the Board. Full details can be found
on page 63.
1 Aside from assisting with senior recruitment and benchmarking, Russell Reynolds Associates have no other connection to the Company.
2 The Chairman was independent on appointment. Under the Code, thereafter the test of independence is not appropriate in relation to the Chairman.
Lloyds Banking Group Annual Report and Accounts 2018 69
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 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 memberships and meeting attendance can be
found on page 56.
The Board diversity policy
The Board Diversity Policy (the 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, a summary of which is provided below.
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 cognitive and
personal strengths on the Board is important in providing a range of perspectives,
insights and challenge needed to support good decision making.
New appointments are made on merit, taking account of the specific skills
and experience, independence and knowledge needed to ensure a rounded
Board and the diversity benefits each candidate can bring to the overall Board
composition. Amanda Mackenzie was the only Director to be appointed to
Lloyds Banking Group plc during the year, and as part of her appointment
diversity was considered in its broadest sense. Amanda brings experience of
customer focus and leadership of Business in the Community, which will be a
major asset in supporting our mission of Helping Britain Prosper.
Objectives for achieving Board diversity may be set on a regular basis.
On gender diversity the Board has a specific objective to maintain at least
three female Board members and, recognising the target referred to in the
Hampton-Alexander Review for FTSE companies to move towards 33 per cent
female representation by 2020, to take opportunities to increase the number
of female Board Members over time where that is consistent with other skills
and diversity requirements. Female representation on the Board is currently
25 per cent (based on three female Directors and nine male Directors).
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 objectives of achieving 40 per cent of senior roles held by female
executives by 2020, and of 8 per cent of senior roles being held by Black, Asian
and Minority Ethnic (BAME) executives by 2020. This is underpinned by a range
of policies within the Group to help provide mentoring and development
opportunities for female and BAME 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. A copy of the Policy is
available on our website at www.lloydsbankinggroup.com/responsible-business
and information on Board diversity can be found on pages 22, 23 and 56.
Q&A with Amanda Mackenzie OBE,
Independent Director
Q: What did you think of the appointment and induction process?
A: Exceedingly thorough! It gave ample opportunity for Lloyds
Banking Group to learn about me and vice versa. A Non-Executive
Director role today comes with a much greater amount of obligation
and scrutiny, rightly so, but it does mean you have to be assured
of the company you are joining and of course they of you. I have to
say the Group’s very clear purpose of ‘Helping Britain Prosper’ and
the determination of everyone I met to make that a reality was very
appealing. The Group is prepared to make some tough decisions to
Process for new Group and Ring-Fenced Bank
Non-Executive Director appointments
Step 1
Russell Reynolds Associates was appointed by the Committee and
provided with a remit of what skills and experience the candidates
should have, based on the existing skills matrix of the Board, and
taking into account diversity in its broadest sense.
Step 2
Interviews were held between the Chairman and a shortlist of
candidates.
Step 3
The Committee considered the shortlisted candidates, having been
provided with an extensive report from Russell Reynolds Associates
which was based on interviews with the candidates and included
details of their background, skills, experience and a full evaluation.
Interviews took place with various members of the Committee. The
Committee recommended the appointments to the Board, which
subsequently approved them, subject to regulatory approval where
required.
Step 4
Formal offer letters were sent.
Step 5
Regulatory applications were made to the PRA and the FCA in
respect of the relevant Directors, and approval was obtained.
Step 6
Formal appointment of the Directors took place.
deliver on its purpose. The induction process has been wholehearted,
open, thorough and interesting. Given my background there are clearly
some areas in which I am not an expert and never will be, but I do need
to know enough and the induction process has not made me feel
foolish for the need to ask basic questions and by contrast has been
very welcoming of my knowledge where it is greatest and can help.
Q: What are your first impressions of how the Board functions and the
Group’s governance framework?
A: I left the first Board strategy away day I attended with one
overarching thought: the combined Board and Group Executive
are an incredible group of people and Lloyds Banking Group is an
amazing company. Of course there’s much to be done, but, with the
right approach, it will be. And no I wouldn’t say that if I didn’t believe it
or if I hadn’t seen some comparisons. So far I feel the Board functions
extremely well and the governance framework is clear, as simple as it
can be and the various lines of defence operate the way one should
expect they do.
Q: What are you looking to bring to the Board / What excites you
about your role with Lloyds?
A: I certainly hope I can bring my expertise to the Board. I am very
thrilled to be part of it and play my part in Helping Britain Prosper.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
70 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
Audit Committee report
The Committee has delivered
on its responsibilities of
ensuring the integrity of the
financial statements and
effectiveness of internal and
external audit services.
Committee will continue to pay close attention
to how the underlying models perform in
potentially volatile economic scenarios.
The wider external environment as we head
into 2019 continues to be challenging, with an
ongoing focus on regulation in the financial
sector, and recent proposals for change in
respect of audit practice. I am nonetheless
pleased to report that in the opinion of the
Committee, the Company continues to meet
its obligations in respect of financial reporting
and disclosure, and continues to operate an
effective internal control framework.
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 Guidance
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
The past year has been another busy one
for the Audit Committee (the ‘Committee’).
In addition to continuing focus on issues
relevant to the Company’s financial
reporting and its internal control framework,
considerable time has been spent on other
key areas, including implementation of IFRS 9
and oversight of the process for the selection
of a new external auditor.
A number of firms were invited by the
Committee to tender for the external audit
mandate. Our current auditor, PwC, did
not participate. The process, overseen in
the first instance by a Selection Committee
comprised of members of the Committee,
involved representatives meeting with senior
management from across the Group. After
careful consideration by the Committee, a
recommendation was made to the Board for
the appointment of Deloitte LLP, which the
Board accepted. Subject to shareholders’
approval at the 2021 AGM, Deloitte LLP will
therefore be appointed as external auditor in
place of PwC, with effect from the year ending
December 2021. Ensuring in the interim
the continued effectiveness of the external
auditor has also been a focus, with the
Committee reviewing the plan for the external
audit, and considering reports from the
auditor on accounting and control matters.
Whilst the regulator has confirmed a 2019
deadline for claims relating to payment
protection insurance (PPI), provisioning for
other conduct matters in addition to PPI has
continued to form part of the Committee’s
focus. Preparations for the implementation
of the ring-fencing regime have also been
an important area of consideration, with
the Committee reviewing the control and
accounting aspects of the establishment of
the Group’s non ring-fenced bank, which
was successfully made operational during
the second half of 2018. The Committee
has in addition considered other key areas
of judgement and complexity relevant
to the financial statements, including
review of significant one-off transactions,
assisting in determining the appropriate
accounting treatment in the sale of the
Company’s c.3 per cent stake in Standard Life
Aberdeen, and the sale of c.£4 billion of Irish
mortgage assets.
The Committee considered the style and format
of external disclosure for quarters one and three
of 2018, and agreed a significant simplification
of information provided. IFRS 9 was successfully
implemented during the year, although the
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 52 to 53.
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.
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 60.
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 2019 meeting. 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 56, 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 56.
Lloyds Banking Group Annual Report and Accounts 2018 71
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, Risk Division, Group Internal Audit and the external auditor:
Activities for the year
Key issues
Committee review and conclusion
Payment
Protection
Insurance
(PPI)
Other
conduct
provisions
Allowance for
impairment
losses on
loans and
advances
Ring-fencing
Management judgement is used to
determine the assumptions used to
calculate the Group’s PPI provision.
The principal assumptions
used in the calculation are the
number of future complaints,
the extent to which they will be
upheld, the average redress to
be paid and expected future
administration costs.
During the year the Group
provided a further £750 million
for further operating costs and
redress as claims volumes were
higher than previously expected.
In 2018, the Group made
provisions totalling £600 million
in respect of other conduct
matters, including £151 million
for secured and unsecured
arrears handling activities; and
£45 million in respect of packaged
bank accounts.
There were relatively few new
conduct matters in 2018 and the
majority of the provisions raised
in 2018 related to issues caused
prior to the implementation of the
Group’s Conduct Strategy in 2013.
The Group adopted IFRS 9 on
1 January 2018 and issued a
transition document setting out
the impact on the Group. IFRS 9
differs significantly from the
previous impairment standard
(IAS 39) as it requires impairment
losses to be recognised on
an expected loss (rather than
incurred loss) basis. As a result,
the Group’s impairment provision
is dependent on management’s
forward looking judgements on
matters such as interest rates,
house prices and unemployment
rates, as well as its assessment
of a customer’s current financial
position and whether it has
suffered a significant increase in
credit risk.
In readiness for the ring-fencing
regime, which came into force
on 1 January 2019, the Group has
transferred certain businesses, and
assets and liabilities out of Lloyds
Bank plc and Bank of Scotland plc
(together, the ring-fenced bank)
and their subsidiaries to other parts
of the Group, including the Group’s
non ring-fenced bank, Lloyds Bank
Corporate Markets plc (LBCM).
For each transfer, the principal
accounting judgement considered
by management was whether it
involved the transfer of a business
or a transfer of assets and liabilities.
The Committee continued to challenge management’s assumptions used to calculate
the Group’s provision for PPI redress and associated administration costs. The overall
cost remains uncertain and the Committee reviewed management’s use of sensitivities
used to evaluate this uncertainty.
The Committee reviewed management’s assessment of future customer claims
volumes considering, inter alia, the potential impact of regulatory changes; the
FCA media campaign; claims management company and customer activity; and
the additional remediation arising from the continual improvement of the Group’s
operational practices.
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’ of the financial statements.
The Committee has monitored developments on the Group’s secured and unsecured
arrears handling activities, including the impact of the Group’s enhanced data
capabilities and the risks emerging around operational costs.
The Committee has also reviewed management’s assessment of the provision
required for packaged bank accounts, including estimates made in respect of future
complaint volumes and uphold rates.
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’ of the financial statements.
The Committee reviewed the Group’s transition document and was satisfied that it
was appropriate.
Throughout 2018, the Committee challenged both the level of provision held by the
Group, and the judgements and estimates used to calculate the provision. It reviewed
on a regular basis the Group’s analysis by stage of its drawn and undrawn balances and
its coverage ratios for the Group’s lending portfolios. The Committee was satisfied that
the impairment provisions, and associated disclosures, were appropriate.
Management has designed its disclosures so that they comply with the requirements
of the accounting standard, provide relevant information to users to gain an
understanding of the new concepts and include sensitivities of assumptions
where appropriate.
The disclosures relating to impairment provisions are set out in note 20: ‘Allowance
for impairment losses’ and note 52: ‘Financial risk management’ of the financial
statements. The allowance for impairment losses on loans and advances to customers
at 31 December 2018 was £3,150 million (1 January 2018: £3,223 million).
The Committee discussed the controls and accounting aspects of the Group’s
activities to establish its non ring-fenced bank, including the intra-group transfers
made to ensure that the Group’s activities were appropriately separated.
Two examples of these transfers included the transfer of Scottish Widows from Lloyds
Bank plc to Lloyds Banking Group plc and the migration of a number of businesses and
customer assets from Lloyds Bank plc to LBCM.
The Committee was satisfied that the control framework established by management
to mitigate the financial control risks associated with the transfers was adequate
and that the judgements used to determine the accounting for the transfers were
appropriate.
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72 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
Key issues
Committee review and conclusion
Retirement
benefit
obligations
The value of the Group’s defined
benefit pension plan obligations
is determined by making financial
and demographic assumptions,
both of which are significant
estimates made by management.
The Committee considered the most critical assumptions underlying the calculation of
the defined benefit liabilities, including those in respect of the discount rate, inflation
and mortality.
The Committee was satisfied that management had used appropriate assumptions
that reflected the Group’s most recent experience and were consistent with market
data and other information.
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’ of the financial
statements. The defined benefit obligation at 31 December 2018 was £41,092 million
(31 December 2017: £44,384 million).
Recoverability
of the
deferred
tax asset
A deferred tax asset can be
recognised only to the extent
that it is more likely than not to be
recoverable. The recoverability of
the deferred tax asset in respect
of carry forward losses requires
consideration of the future levels
of the Group’s taxable profit and
the legal entities in which the profit
will arise.
The Committee has reviewed management’s assessment of 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. Management’s forecasts included
estimates of the impact of the changes in the Group’s structure 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’ of the financial statements. The Group’s net deferred
tax asset at 31 December 2018 was £2,453 million (31 December 2017: £2,284 million).
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.
Value-In-
Force (VIF)
asset and
insurance
liabilities
Determining the value of the VIF
asset and insurance liabilities
requires management to make
significant estimates for both
economic and non-economic
actuarial assumptions.
One-off
transactions
Determining the appropriate
accounting for certain one-
off transactions requires
management to assess the facts
and circumstances specific to each
transaction.
Future
accounting
standards
The Committee has discussed
the requirements of IFRS 16
(Leases), which the Group
adopted on 1 January 2019; and
IFRS 17 (Insurance Contracts),
which is expected to come
into force for the year ending
31 December 2022.
Viability
statement
The Directors are required to
confirm whether they have a
reasonable expectation that the
Company and the Group will be
able to continue to operate and
meet their liabilities as they fall due
for a specified period. The viability
statement must also disclose the
basis for the Directors’ conclusions
and explain why the period chosen
is appropriate.
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’ of the financial statements.
The Committee received a paper from the Group’s Insurance Audit Committee
summarising its activities, which included a review of the economic and non-economic
assumptions made by management to determine the Group’s VIF asset and insurance
liabilities. The Committee reviewed this paper and discussed the assumptions made
by management.
The Committee was satisfied that the value and associated disclosures of the VIF asset
(2018: £4,762 million; 2017: £4,839 million) and liabilities arising from insurance contracts
and participating investment contracts (2018: £98,874 million; 2017: £103,413 million)
were appropriate.
During the first half of 2018, the Group sold its Irish residential mortgage portfolio
for approximately £4 billion of cash consideration. The Committee reviewed the
accounting proposed by management, including the recognition of a £105 million loss
on disposal and the derecognition of the assets from the Group’s balance sheet, and
was satisfied that it was appropriate.
During June 2018, the Group sold its 3.3 per cent stake in Standard Life Aberdeen for
£344 million. The Committee reviewed management’s proposed accounting, which
had no impact on the Group’s income statement as the investment was classified as ‘at
fair value through other comprehensive income’. The Committee was satisfied that the
accounting was appropriate.
The Committee discussed the Group’s approach to the new leasing standard (IFRS 16)
noting that the principal impact of the standard on the Group was to bring its property
leases ‘on-balance sheet’. The impact on the Group’s balance sheet at 1 January 2019
was to recognise a right of use asset and a corresponding liability of approximately
£1.8 billion.
It also discussed the Group’s approach to the changes required by IFRS 17 noting
that this standard will fundamentally change the accounting for insurance products,
requiring that the profit be recognised over the life of the contract rather than
permitting immediate up-front profit recognition.
The Committee was satisfied with the Group’s disclosure included in its ‘Future
accounting developments’ note to the financial statements setting out the impact of
accounting standards that were not effective for the Group at 31 December 2018.
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 within the Directors’ report on page 80.
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 105 to 159. 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 to ensure that the control environment continued to
operate effectively
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
assessed Group Internal Audit’s resources and skills (supplemented
by externally sourced subject matter experts as required) as adequate
to fulfil its mandate
oversaw Group Internal Audit’s progress against the 2017 External
Quality Assessment
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. The Committee reviewed
the reports to ensure there are arrangements in place which colleagues
can use in confidence to report concerns about possible improprieties
in financial reporting or other matters, and that there is proportionate
and independent investigation of such matters or appropriate follow up.
Of the reports submitted, the Committee was satisfied with the actions
which had been taken.
Lloyds Banking Group Annual Report and Accounts 2018 73
Auditor independence and remuneration
Both the Board and the external auditor have policies and procedures
designed to protect the independence and objectivity of the external
auditor. In 2018, the Committee amended its policy on business
recovery services provided by the auditor in respect of the Group’s
customers to reflect revisions made by the Financial Reporting Council
(FRC) to its rules. To ensure that there is an appropriate level of oversight
by the Committee, 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; the policy permits senior management
to approve certain engagements with fees for amounts below the
threshold. The policy also details those services that the Committee
prohibits the external auditor from providing to the Group; these are
consistent with the non-audit services 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 2018 is disclosed in note 12 to the
financial statements.
External auditor
The Committee oversees the relationship with the external auditor
(PwC) including its terms of engagement and remuneration, and
monitors its independence and objectivity. 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.
During 2018, the Committee reviewed PwC’s audit plan, including the
underlying methodology, and PwC’s risk identification processes. In its
assessment of PwC’s performance and effectiveness, the Committee
has considered: PwC’s interactions with the Committee; the responses
to a questionnaire issued to the Group’s businesses, Finance, Risk and
Internal Audit; and the FRC’s Audit Quality Inspection Report published
in June 2018. In addition, the FRC’s Audit Quality Review team reviewed
PwC’s audit of the Group’s 2017 financial statements as part of its latest
annual inspection of audit firms. The Chairman and the Committee
received a copy of the findings and discussed them with PwC. Whilst
there were no significant findings, some areas of PwC’s audit procedures
were identified as needing limited improvements only. 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 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 (the ‘Order’) for the
year to 31 December 2018. 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, and subsequent, financial years.
During 2018 the Group carried out a formal review to choose its
auditor for the year ended 31 December 2021. In accordance with the
Order, PwC was excluded from this review. In October 2018, the Board
(following the recommendation of the Audit Committee) approved the
proposed appointment of Deloitte LLP. A recommendation for approval
of this appointment will be made to the shareholders at the 2021 Annual
General Meeting and subject to shareholder approval, Deloitte LLP will
undertake the Group audit for the year ending 31 December 2021.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
74 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
Board Risk Committee report
The environment within
which the Group operates
is increasingly subject to
considerable change.
Dear Shareholder
I am pleased to report on how the Board Risk
Committee (the ‘Committee‘) has discharged
its responsibilities throughout 2018.
During the year, the Committee gave detailed
consideration to a wide range of existing
and emerging risks, recognising that the
environment within which the Group operates
is increasingly subject to considerable change.
This is achieved through effective planning of
the agenda which ensures specific attention
is given to those emerging risks which are
considered to be of ongoing importance to the
Group and its customers, alongside standing
areas of risk management. The Committee
continues to make use of dedicated
sub-committees to provide additional focus
on particular areas of significance.
The Committee considered delivery of key
regulatory change programmes such as
ring-fenced banking, together with other
areas of regulatory attention such as data
governance and operational resilience,
where the Group continues to strengthen its
control environment. Focus was also given
to management of customer rectifications,
where good progress continued to be made
with reduction of the volume of rectification
programmes and customers impacted.
Stress testing undertaken by the Group,
which included the impacts of IFRS 9 for
the first time and considered the potential
impacts of severe economic scenarios on the
Group’s business model, also continued to be
reviewed and challenged by the Committee.
Each of these areas will be subject to ongoing
focus in 2019.
Looking ahead, other areas of focus will
include continued improvements in the
Group’s treatment of customers in financial
difficulty, and consumer indebtedness more
generally, operational resilience and ever
evolving cyber risks, together with risks
associated with delivery of the Group’s overall
strategy and change portfolio. Uncertainties,
particularly around the EU Exit, inevitably
continue to provide challenges and potential
impacts for the Group’s risk profile; the
Committee continues to closely monitor
developments in these areas.
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 digitised, simple, low risk
financial services provider.
Alan Dickinson
Chairman, Board Risk Committee
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 Group.
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 105 to 159.
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 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 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.
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 2019 meeting. On the basis of
the evaluation, the feedback was that the
performance of the Committee continues
to be effective. Details of Committee
membership and meeting attendance can be
found on page 56.
As the most senior risk committee in the
Group, the Committee interacts with other
related risk committees, including the
executive Group Risk Committee. Such
interaction assists with the agenda planning
process, where in addition to annual
agenda planning, matters considered by
the Group Risk Committee are reviewed to
ensure escalation of all relevant matters to
the 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 2018, the Committee continued to
utilise established sub-committees to provide
additional focus on areas such as IT resilience
and cyber, and stress testing and 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.
Lloyds Banking Group Annual Report and Accounts 2018 75
Activities during the year
Key issues
Committee review and conclusion
Conduct risk
Rectifications
The Committee continues
to focus closely on the
Group’s management of
customer rectifications.
Throughout 2018 the Committee has considered reports on the Group’s rectifications portfolio
performance, particularly the initiatives to reduce the number of customers with outstanding
remediation. The Committee has noted substantial progress in the pace and quality of
remediation in delivering a reduction in the number of customers awaiting redress and expect
improvements in the time taken to deliver the right customer outcomes. The Committee has
remained close to progress on material rectifications, including HBOS Reading.
Conclusion: Root cause analysis and read-across activities continue to improve and embed
across the Group with good progress in reducing the volume of rectification programmes and
customers impacted. This will remain a key focus for the Committee.
CiFD
The Committee continues
to focus closely on the
Group’s management of
conduct risks and issues
associated with customers
in financial difficulty.
In 2018 the Committee considered reports on the progress of resolution of conduct issues
affecting customers in financial difficulty. Key focus areas included pace and quality of
remediation and analysis of lessons learned to prevent similar issues from arising in the future.
The Committee also considered the progress made in transforming our approach to helping
customers in financial difficulty and improving customer outcomes.
Conclusion: Whilst good progress had been made, ongoing improvement in the Group’s
treatment of customers in financial difficulty will continue to be an area of focus.
Financial risk – covering Credit and Market risk
Commercial
credit quality
Reviews were undertaken
of the Commercial Banking
credit portfolio with a
focus on sectors that have
been impacted by slower
economic growth.
Customer
indebtedness
The Committee reviewed
the risks relating to
consumer lending
indebtedness, PRA
guidance on managing
affordability risk, new FCA
rules on Persistent Debt for
credit cards, and residual
value risk in Motor Finance.
Retail
secured
The Committee reviewed
risks associated with the
Group’s UK mortgage
portfolio including interest
only and buy-to-let lending.
Economic
update
The Committee continues
to consider key economic
risks, particularly
given the increasingly
uncertain outlook.
A detailed review of the portfolio was conducted, which considered the quality of the overall
portfolio as well as newly originated business. The Committee reviewed sectors that have been
impacted by slower economic growth or structural change, notably those that are linked to
discretionary consumer spending, for example, retail, as well as areas such as commercial real
estate, agriculture and leveraged finance.
Credit exposure and risk levels were monitored with reference to management information and
risk appetite limits which included overall portfolio information as well as material individual
exposures. The Committee also considered the Group’s approach to credit policies and
individual transaction limits, and reviewed summary details of transactions and portfolio reviews
that were assessed at the Group’s most senior credit committee.
Conclusion: Overall Commercial Banking credit quality remained stable. Origination
quality has been maintained, supported by a consistent through-the-cycle approach to risk
appetite. The portfolio continues to be monitored closely with consideration given to the
macroeconomic outlook and emerging trends.
Consideration was given to regulatory feedback, the Group’s lending controls and risk appetite
monitoring, new consumer lending indebtedness risk and the residual value risk profile in the
Motor Finance portfolio.
The Committee noted that lending controls and risk appetite metrics for both indebtedness
and affordability assessment are in place, and acknowledged the Group’s actions to closely
monitor and control higher risk and marginal indebtedness segments and reduce exposure
over time. The Committee reviewed progress against implementation of new FCA rules on
Persistent Debt in the cards portfolio. Persistent Debt has decreased and further treatments are
being tested to encourage higher levels of repayment. The Committee reviewed the progress
being made to strengthen risk appetite limits and controls on residual value risk in the Motor
Finance portfolio.
Conclusion: The Committee was satisfied that appropriate lending controls and monitoring are
in place for affordability and indebtedness and noted progress made to strengthen these and
improve visibility of customers’ debt positions, as well as ensure resilience in Motor Finance.
Consideration was given to the appropriateness of the Group’s credit risk appetite for new
mortgage lending, risks inherent in the portfolio and comparative benchmarks of business mix
and performance.
The Committee noted the credit quality of new business and reductions in the level of arrears
across the portfolio. In line with our ‘Helping Britain Prosper Plan’, the Group participates
more fully in lending to first time buyers and the buy-to-let market than our peer group. The
Committee reviewed the additional credit controls that have been introduced to further reduce
exposure to more marginal customers in these segments. The Committee also reviewed
plans to address the risks associated with maturing interest only mortgages and noted
progress made.
Conclusion: The Committee was satisfied that appropriate credit controls were in place to
support continued market participation in line with the Group’s risk appetite limits, and that
progress has been made on controls to address the risk of interest only lending.
During the year the Committee has increased consideration of macroeconomic risks impacting
the Group’s central economics forecast incorporated into the Group’s Four-Year Operating
Plan. The Committee has focused on economic and geo-political risks such as EU Exit and
wider global economic risks, including US monetary policy, the impact of the US currency on
emerging markets, trade wars, UK property markets and UK productivity.
Conclusion: The Committee will continue to closely monitor economic uncertainties, particularly
arising from EU Exit. The Committee will also focus on risks emerging from the EU due to slower
growth and political challenges, as well as risks from wider global events.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
76 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
Stress testing
Operational risk
Operational
resilience
Data risk
Key issues
Committee review and conclusion
The Committee
continues to review the
key vulnerabilities of
the Group to adverse
changes in the economic
environment, ensuring
that there are adequate
financial resources in
the event of a severe yet
plausible downturn.
The Committee has reviewed the stress testing outputs from both the internal and regulatory
exercises. This year, PRA stress testing included the impact of IFRS 9 for the first time, which
requires us to recognise expected lifetime losses rather than reflecting incurred losses and
accelerates loss recognition. This was a key area of focus and challenge at the Committee,
which reviewed the evolution of balances through IFRS 9 stages under stress, and associated
impairment impact. In addition the Committee assessed the usage and governance of models
in the stress testing process to ensure the results were satisfactorily produced.
Conclusion: The Group continues to review the impact of severe economic scenarios on our
business model, whilst the Committee ensures the necessary risk oversight via review and
challenge of the internal and regulatory stress tests.
Operational resilience is
one of the Group’s most
important non-financial
risks. Key focus in 2018
has been to enhance
the existing approach to
operational resilience and
strengthen the control
environment, to improve
the Group’s ability to
respond to incidents and
continue delivering key
services to our customers.
Key areas of focus for the Committee have included updates on the Group’s cloud strategy, review
of the updated operational resilience strategy and response to the Bank of England’s discussion
paper. In addition, the Committee has reviewed papers relating to key risk reduction programmes
including Identity and Access Management, insider risk and updates to the Group’s approach to
managing its third-party suppliers.
Given the significance of the risk to the Group, the Committee has a sub-committee specifically
focused on IT and cyber risks.
Conclusion: The Committee takes the operational resilience of its services very seriously and has
taken valuable insight from having independent advice and guidance. It has agreed risk appetite
statements for critical services and has strengthened these over the last period to reflect the
increased focus on resilience. The Committee considers that governance of operational resilience
risk is robust and that activities in plan will ensure the ongoing resilience of key services to the
Group’s customers.
The Committee continues
to focus on data
governance and privacy
risks including oversight of
the Group’s compliance
with the General Data
Protection Regulation
(GDPR), and the associated
risks and controls.
Data risk continues to be an area of significant regulatory and media attention and the
Committee has overseen the implementation of robust governance, to ensure compliance
with GDPR. Clear accountabilities have been established by the creation of Divisional Data
Privacy Accountable Persons, driving a culture of compliance. A Group Data Protection Office
(GDPO) has been established to independently oversee compliance. The Group continues
to drive enhancements to the control environment to ensure value is harnessed from the data
that we hold, enabling delivery against key strategic priorities, whilst ensuring transparency and
trustworthiness to our customers and colleagues.
Conclusion: The Group continues to heighten the controls required to manage data risk. In 2019
data risk has been classified as a primary risk type.
People risk
The Committee recognises
the importance of People
risk management to ensure
the Group has the right
capabilities and culture
as we build the Bank of
the Future.
Change and
execution risk
EU Exit
planning
The Committee
continues to recognise
risks associated with an
extensive strategic change
agenda, incorporating
both discretionary and
regulatory change.
Focus areas include new
execution risk metrics,
effective change oversight
and governance.
Negotiations continue to
determine the final terms of
the UK’s exit from the EU.
The ongoing uncertainty
regarding the options,
timing and the process
itself could affect the
outlook for the UK and
global economy.
The Committee continued to focus on the People risk profile, recognising the challenges
faced in successfully delivering the Group strategic and extensive regulatory change agenda.
The Group recognises the increasing demands on colleagues and is monitoring colleague
wellbeing and engagement as well as developing colleague skills to achieve capability
enhancement for a digital era. Particular consideration is given to critical and high performing
individuals. The Group has made significant progress in evolving and refining the compliance
control environment for the Senior Manager and Certification Regime (SMCR). The delivery of
the SMCR extension will remain a focus for 2019.
Conclusion: The Committee provides oversight of People risk, which will remain a key focus as
the Group delivers simplified colleague processes and maximises colleague skills and capability
to achieve the workforce of the future.
Recognising the extent of our transformation agenda, the Committee has received regular
monitoring of key change and execution risk indicators. Metrics have been developed and
refined throughout the year, alongside regular reporting.
The effectiveness and model for change oversight has been reviewed and refreshed to ensure
that there is risk-based assessment of strategic change activity. Similarly, the risk governance with
respect to strategic change has been reviewed.
Conclusion: There is significant work needed to transform how change is delivered, impacting
both capacity and required change capability. This reorganisation is happening concurrently
with change delivery. Further focus is required to manage dependencies and associated risks
alongside refinement of execution risk metrics, and change/execution risk reporting.
The key risks for the Group include volatility and possible discontinuities in financial markets,
impact on our customers’ trading performance, financial position and credit profile, and ability
to operate cross-border. When reviewing the possible impacts of the EU Exit, the Committee
has given particular consideration to the Group’s strong UK focus and UK-centric strategy.
The Committee continues to closely monitor developments, with specific focus on the trading,
financial and operational impacts for the Group, and the continued support of our customers.
Conclusion: The EU exit plans continue to be closely monitored by the Committee via specific
regular updates, a suite of early warning indicators and corresponding risk mitigation plans.
Lloyds Banking Group Annual Report and Accounts 2018 77
Money
laundering
Fraud
Key issues
Committee review and conclusion
Financial crime is a
priority for the UK
Government, law
enforcement and
regulators. The
Committee continues
to monitor the Group’s
management of
financial crime risk
in light of significant
regulatory change.
The Committee
continues to closely
monitor the Group’s
management of
fraud risk, whilst
minimising the impact
of controls on genuine
customer journeys.
The Committee considered the unprecedented volume of regulatory and legislative change,
noting the Group’s response to the updated Money Laundering Regulations and UK Criminal
Finances Act. Accordingly, the Committee reviewed the Annual Group Money Laundering
Officer’s Report (MLRO report) and was satisfied with the standard of compliance detailed
within. Additionally, the Committee acknowledged the strategic plans in place to continually
improve the Group’s Financial Crime control framework.
The Committee noted the positive outcome of the FCA Systematic Anti-Money Laundering
Programme review, recognising the Group’s ‘largely effective Financial Crime control framework’
and ‘strong tone from the top’. Additionally, the Committee noted the progress in the Group’s
money mules strategy which has resulted in a significant improvement in the identification and
prevention of illicit funds being laundered through Group accounts.
Conclusion: The Committee noted satisfaction with the standard of compliance documented
in the MLRO report, and acknowledged the action plans in place across the Group to further
enhance the Group’s position.
The Committee considered the challenging and evolving nature of the fraud risk environment
influenced by factors such as an increasing sophistication of fraud typologies, third-party data
breaches, and an uplift in social engineering fraud. The Group continues to invest in new and
innovative controls, as well as working in collaboration with the public sector to prevent, detect,
and respond to fraud risks. As such, the Committee was updated on strategic plans which will
deliver enhanced controls enabling the Group to continue to manage fraud risk within appetite.
Additionally, the Committee acknowledged the leading role the Group has played in the
development of an industry code for authorised push payment fraud. The code will be agreed
in early 2019 and the Group is well positioned to manage the impact.
Conclusion: The Committee noted the positive work undertaken in the detection and
prevention of fraud; acknowledged the need to maintain momentum, and therefore parity,
with our peers; and, recognised the continuing efforts of the Group to protect the integrity of
genuine customer journeys.
Regular reporting categories
Regulatory
and legal risk
Model risk
Complaints
Vulnerability
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 managed in
2018, and will continue to
manage in 2019.
The Committee
continues to recognise
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
continues to focus on
ensuring the Group
is resolving customer
complaints in a timely
manner and eradicating
the causes for complaints.
Vulnerable customers
represent a significant
proportion of the
Group’s customer base
and continue to be an
area of close focus.
The Committee has continued focus on ensuring effective controls and oversight to comply with
existing regulatory obligations, as well as receiving regular updates on emerging legal trends.
There have been ongoing significant regulatory change programmes in which the Board has placed
increased focus in order to ensure successful execution, including the Basel Committee on Banking
Supervision (BCBS 239) and Markets in Financial Instruments Directive II. Due consideration to the
governance and compliance of the ring-fenced bank has also been considered by the Committee,
including monthly programme reporting until the ring-fencing legislation took effect.
Conclusion: The Group continues to place significant focus on complex regulatory changes, as well
as ensuring effective horizon scanning of upcoming trends. Regulatory risk will remain a priority
area of focus for the Committee in 2019.
During the year the Committee discussed the current model risk profile, with specific focus on
the new IFRS 9 Impairment models, trends in performance and actions being taken to resolve
material model issues. The Committee considered wider model issues such as the increase in
automation and analytics required to support the Bank’s strategic aims, regulatory issues and
the action being taken by the Group to address these, as well as benchmarking the Group’s
approach to model risk management compared to the industry.
Conclusion: Whilst good progress was made in 2018, the demand for models and model related
activity is expected to continue to increase, with key drivers being the Group strategy, and the
need to meet new regulatory requirements in the longer-term.
The Committee continues to focus on ensuring the Group has an effective framework for
managing complaints including root cause analysis to establish lessons learned and help prevent
similar issues in the future. Consideration has been given to complaint metric performance and
quality as measured by the Financial Ombudsman Service.
Conclusion: The Group continues to make good progress however focus needs to remain on
reducing the reasons for customers to complain in 2019 and to learn from root cause analysis.
The Committee considered progress on implementing the Group’s strategy for vulnerable
customers which is aligned to UK Finance Vulnerability Taskforce Principles.
The Committee noted the actions in train, including enhanced guidance, more detailed
evidencing of embedding, enhancement of the control framework and developing
improved management information.
The Group’s signature actions for 2019 will focus on Mental Health, Critical Illness, Financial Abuse,
Age Vulnerability and Access to Service.
Conclusion: The Committee recognise the ongoing activity and the progress made, coupled
with the significant focus required to deliver effectively on both the Group’s aspirations and
external expectations.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
78 Lloyds Banking Group Annual Report and Accounts 2018
Corporate governance report continued
Responsible Business Committee report
Doing business in a responsible
way is key to the successful
delivery of our purpose to Help
Britain Prosper
How the Committee
spent its time in 2018
During the year, the Committee undertook a
detailed exercise to consider how its role and
remit would develop to ensure it remained
best placed to assist with the delivery of the
Company’s strategy by concentrating on
overseeing the key initiatives to deliver the
responsible business strategy.
The Committee agreed that its approach
should focus on three material areas aligned
to the Bank of the Future with the aim of
enabling people, businesses and communities
to be ready for the future.
Digital Skills has been a significant area
for review and debate during the year, with
regular updates provided on the direction of
and progress with the establishment of the
Lloyds Bank Academy. The Committee has
provided input and challenge to the team
working on the Academy programme and
supported the pilot programmes undertaken
in Manchester.
The development of the Company’s
Sustainability strategy was considered with
input from external advisers. The Committee
engaged with the leaders of business
areas on the application of the approach
to helping customers in a sustainable way.
These included the assistance provided for
customers who are victims of flooding, work
to support the transition to a low carbon
economy and the development of green
loans. The Company’s sustainability strategy
was recommended to the Board for approval
in September 2018 and published on the
Company’s website www.lloydsbankinggroup.
com/our-group/responsible-business/
sustainability-in-Lloyds-banking-group.
The alignment of the working relationship
between the Company and the charitable
Foundations was a key area of focus.
The Committee considered and supported
the development of plans to work in
partnership with the Foundations to support
the Charitable Sector through strengthening
skills-based volunteering across Foundations-
supported charities.
In other activities, the Committee
considered reports on: an outline for an
assurance process on responsible business
activities within business areas; colleague
engagement in responsible business
activities; the partnership with the University
of Birmingham’s Centre for Responsible
Dear Shareholder
I am pleased to report on the activity of
the Responsible Business Committee
(the Committee) in 2018.
During the year, as well as overseeing
progress against the Helping Britain Prosper
Plan as a whole, the Committee focused
on some major and emerging Responsible
Business themes.
The four Lloyds Banking Group charitable
Foundations do critical work to tackle
disadvantage across the UK. The Committee
met with Baroness Fritchie, chair of the Lloyds
Bank Foundation for England and Wales,
to discuss how we could jointly do more to
support activity in key areas such as domestic
abuse or homelessness.
The Committee took a comprehensive
deep dive to review the Company’s emerging
sustainability strategy. The Group committed
to supporting the country’s transition to a lower
carbon economy, in line with the Government’s
Clean Growth Plan, and directors from all
business areas described how their activity
contributed to the overall plan.
I had great pleasure in attending the regional
launch of our Digital Academy in Manchester
in December. Improving digital skills, is a key
plank of Britain’s plan to increase productivity,
and the Academy works with local
organisations and national partners to deliver
a range of training, including basic skills
(like preparing a CV) as well as more advanced
activity, and is accessible to all members of
the community.
Further information on the activities which the
Committee keeps under review are set out
in the 2019 Helping Britain Prosper Plan on
page 19. The Plan sets out how the Company
seeks to help people, communities and
businesses prosper.
In conclusion, I would like to thank the many
colleagues across the Group for their hard
work and extraordinary commitment to
supporting Responsible Business activity
in their ‘day jobs’, as well as by volunteering
over 235,000 hours of their time and helping
to raise £3.8 million for our charity of the year,
Mental Health UK.
The report that follows gives more examples
of our activity to Help Britain Prosper in
2018, and I hope you find it both interesting
and informative.
Sara Weller
Chairman, Responsible Business Committee
Business; the approach to communicating
the Company’s role as a responsible business;
the Company’s policies relating to responsible
business including the Code of Responsibility
and the Statement on compliance with the
Modern Slavery Act.
At each meeting, updates have been
provided on the performance against the
metrics of the Helping Britain Prosper Plan
on which a report is provided on page 20.
Committee purpose
and operation
The Committee’s role is to support the Board
in overseeing the Group’s performance as a
responsible business by providing oversight
of, and support for, the Group’s strategy
and plans for delivering the aspiration, to
be seen as a trusted, responsible business,
as part of the Company’s purpose to Help
Britain Prosper. This role is fulfilled by
providing oversight and challenge on those
activities which impact on the Company’s
behaviour and reputation as a trusted,
responsible business and by considering and
recommending to the Board for approval the
Responsible Business Report and Helping
Britain Prosper Plan.
The Chairman of the Committee reviews
the forward agenda regularly to ensure that
the focus of the Committee’s work is on its
key priorities and members have sufficient
time at meetings to raise issues of concern
and to engage in constructive dialogue
with colleagues.
Committee composition,
attendance at meetings
and effectiveness review
Representatives from Group Internal Audit
and the Chief Operating Office are invited to
meetings as appropriate.
During the year, the Committee met
its key objectives and carried out its
responsibilities effectively, as confirmed
by the annual effectiveness review.
The Committee will consider the output from
the 2018 effectiveness review and whether
amendments could be made to its current
working arrangements.
Details of committee membership
and meeting attendance can be found
on page 56.
Directors’ report
Corporate governance statement
The Corporate Governance report found on pages 50 to 78 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 2018 of £5,960 (2017: £5,275 million).
The Directors have recommended a final dividend for 2018, which is
subject to approval by the shareholders at the AGM, of 2.14 pence per
share (2017: 2.05 pence per share) totalling £2,288 for the year (2017:
£1,475 million). The final dividend will be paid on 21 May 2019.
The final dividend in respect of 2017 of 2.05 pence per ordinary share
was paid to shareholders on 29 May 2018, and an interim dividend for
2018 of 1.07 pence per ordinary share was paid on 26 September 2018;
these dividends totalled £2.24 billion. Further information on dividends
is shown in note 44 on page 234 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 2018, the Board intends to
implement a share buyback of up to £1.75 billion, equivalent to up to
2.46 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 is intended to commence in March 2019
and is expected to be completed during 2019. Given the total ordinary
dividend of 3.21 pence per share and the intended share buyback,
the total capital return for 2018 will be up to 5.67 pence per share, an
increase of 27 per cent on the prior year, equivalent to up to £4.0 billion.
The Company intends to use the authority for the repurchase of ordinary
shares granted to it at the 2018 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.
Amanda Mackenzie has been appointed to the Board since the 2018
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 52 to 53. 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 2018 up to the
date of this report are shown in the table below:
Amanda Mackenzie
Deborah McWhinney
Joined the Board
Left the Board
1 October 2018
31 December 2018
Directors’ and Officers’ liability insurance
Throughout 2018 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.
Lloyds Banking Group Annual Report and Accounts 2018 79
Change of control
The Company is not party to any significant agreements which take
effect, alter or terminate upon a change of control of the Company
following 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 Director who retired
during the year, have entered into individual deeds of indemnity with the
Company which constituted ‘qualifying third-party indemnity provisions’
for the purposes of the Companies Act 2006. The deeds indemnify
the Directors to the maximum extent permitted by law and remain in
force. 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 2018. 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, and to Group colleagues subject
to the provisions of the Senior Managers and Certification Regime.
Such deeds were in force during the financial year ended 31 December
2018 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 buyback shares. The Directors were granted authorities to issue
and allot shares and to buyback shares at the 2018 AGM. Shareholders
will be asked to renew these authorities at the 2019 AGM. The authority
in respect of purchase of the Company’s ordinary shares is limited to
7,219,629,615 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 2018 AGM circular.
The Company undertook a share buyback programme, between
8 March 2018 and 24 August 2018, repurchasing in aggregate
1,577,908,423 ordinary shares for an aggregate consideration of
£1 billion (aggregate nominal value of the shares £157,790,842.30) as a
means by which to return capital to shareholders, given the amount of
surplus capital. The 2018 buyback also assisted in the normalisation of
ordinary dividends, and gave the flexibility that a buyback programme
offers. All of the repurchased shares were cancelled, and together
represented 2.22 per cent of the called up share capital of the Company
at completion of the programme. Further information in relation to the
2018 share buyback programme is provided on page 49.
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 a Senior Independent Director at QBE UK 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
80 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ report continued
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.
Information incorporated by reference
The following additional information forms part of the Directors’ report,
and is incorporated by reference.
Content
Board of Directors
Summary of Group results
Group results
Ordinary dividends Dividends on ordinary shares
Directors’
biographies
Directors in 20181
Directors’
emoluments
Internal control
and financial risk
management
Financial reporting risk
Risk management and
Financial instruments
Board of Directors
Directors’ remuneration report
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)
Supporting people with
disabilities
Engaging colleagues
Significant contracts
Dividend waivers
Funding and liquidity
Capital position
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
Pages
37 to 43
234
52 to 53
52 to 53
82 to 104
107
105 to 159,
241 to 252 and
255 to 268
2 to 35
24 to 25
22 to 23
17
237 to 238
234
34 and
147 to 152
139 to 147
229
229
229
1 Deborah McWhinney also served as a director during the year, retiring from the Company on
31 December 2018.
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 2018, 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.
Harris Associates L.P.
Interest in shares
3,668,756,7652
3,551,514,5713
% of issued share capital with
rights to vote in all circumstances at
general meetings1
5.14%
4.99%
1 Percentage provided was correct at the date of notification.
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 5 February 2019, which identifies beneficial
ownership of 4,598,344,792 shares in the Company representing 6.5 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.
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 34 and
pages 147 to 152 and capital position on pages 139 to 147. 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
inclusive; and
the Group’s four year operating plan which comprises detailed customer,
financial, capital and funding projections together with an assessment of
relevant risk factors for the period from 2019 to 2022 inclusive.
In particular, the Board considered a range of possible impacts arising from
the uncertain economic and geopolitical outlook, notably the implications
of the possible outcomes of the EU exit negotiations. The Group’s four
year operating plan also incorporated the impact of the IFRS 9 ‘Financial
Instruments’ and the continuing low interest rate environment.
Group, divisional and business unit operating plans covering a period
of four 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 64, is taken into
account. Further information on stress testing and reverse stress
testing is provided on page 110.
The final four year operating plan, Risk Division assessment and the
results of the stress testing are presented to the Board for approval.
Once approved, the operating plan drives detailed divisional and
Group targets for the following year.
The Directors have specifically assessed the prospects of the Company
and the Group over the first three years of the current plan. The
uncertain global economic and political environment, including the
longer-term impact of the UK’s plans to leave the EU, together with
the pace of regulatory change mean that the assumptions supporting
the fourth year 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:
The Group’s principal activities, business and operating models
and strategic direction are described in the strategic report
on pages 1 to 35;
Emerging risks are disclosed on pages 108 to 109;
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 115 to 159; and
The Group’s approach to stress testing and reverse stress testing,
including both regulatory and internal stresses, is described on page 110.
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 2021.
Greenhouse gas emissions
The Group has voluntarily reported greenhouse gas emissions and
environmental performance since 2009, and since 2013 this has been
reported in line with the requirements of the Companies Act 2006.
Our total emissions, in tonnes of CO2 equivalent, are reported in the
strategic report on page 25.
Deloitte LLP has provided limited level ISAE 3000 (Revised) assurance
over selected non-financial indicators as noted by
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 2017 to 30 September 2018, which is different to that of
our Directors’ report (January 2018 – December 2018). 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 both the location and market-
based methodologies. 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 2018
Reporting Criteria online at www.lloydsbankinggroup.com/rbdownloads.
Intensity ratio
GHG emissions (CO2e) per £m of
underlying income (Location Based)1
GHG emissions (CO2e) per £m of
underlying income (Market Based)
Oct 2017 –
Sept 2018
Oct 2016 –
Sept 2017
Oct 2015 –
Sept 2016
13.1
6.2
15.5
16.4
19.4
19.4
1 Location based intensity levels have been restated for 2015-2016 and 2016-2017 to reflect
changes to emissions data only, replacing estimated data with actuals; underlying income
figures for those years have not changed.
This year, our overall location based carbon emissions were 244,407
tCO2e; a 15 per cent decrease since 2017, and 57 per cent against our
2009 baseline. Reductions achieved are attributable to our Environmental
Action Plan (EAP), launched in 2010, which has delivered a reduction in gas
and electricity consumption through an extensive energy management
programme, alongside decarbonisation of the UK electricity grid.
Additionally, we are now disclosing market based emissions figures.
For 2018, this is equal to 115,467 tCO2e – a comparative decrease
of 62 per cent year on year and 79% against 2009 baseline. Further
reductions in market emissions are attributable to the purchase of solar,
wind, hydro and biomass Renewable Energy Guarantees of Origin
(REGOs) equivalent to total UK electricity consumption in 2018.
Lloyds Banking Group Annual Report and Accounts 2018 81
Omissions
Emissions associated with joint ventures and investments are not
included in this disclosure as they fall outside the scope of our
operational boundary. The Group does not have any emissions
associated with heat, steam or cooling and is not aware of any other
material sources of omissions from our reporting.
Independent auditor and audit information
Each person who is a Director at the date of approval of this report
confirms that, so far as the Director is aware, there is no relevant audit
information of which the Company’s auditor is unaware and each
Director has taken all the steps that he or she ought to have taken
as a Director to make himself or herself aware of any relevant audit
information and to establish that the Company’s auditor is aware of that
information. This confirmation is given and should be interpreted in
accordance with the provisions of the Companies Act 2006.
Resolutions concerning the re-appointment of PricewaterhouseCoopers
LLP as auditor and authorising the Audit Committee to set its
remuneration will be proposed at the AGM.
Statement of directors’ responsibilities
The Directors are responsible for preparing the annual report, the
Directors’ remuneration report and the financial statements in
accordance with applicable law and regulations. Company law requires
the Directors to prepare financial statements for each financial year. Under
that law, the Directors have prepared the Group and parent Company
financial statements in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union. Under company
law, the Directors must not approve the financial statements unless they
are satisfied that they give a true and fair view of the state of affairs of
the Group and the Company and of the profit or loss of the Company
and Group for that period. In preparing these financial statements, the
Directors are required to: select suitable accounting policies and then
apply them consistently; make judgements and accounting estimates
that are reasonable and prudent; and state whether applicable IFRSs as
adopted by the European Union have been followed.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of the
Company and the Group and enable them to ensure that the financial
statements and the Directors’ remuneration report comply with the
Companies Act 2006 and, as regards the Group financial statements,
Article 4 of the IAS Regulation. They are also responsible for safeguarding
the assets of the Company and the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
A copy of the financial statements is placed on our website at
www.lloydsbankinggroup.com. The Directors are responsible for the
maintenance and integrity of the Company’s website. Legislation in the
UK governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Each of the current Directors who are in office as at the date of this
report, and whose names and functions are listed on pages 52 to 53 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
19 February 2019
Lloyds Banking Group plc
Registered in Scotland
Company number SC95000
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
82 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report
Remuneration Committee Chairman’s statement
The Committee is particularly mindful
of its obligation to ensure that reward
for Executive Directors is clear and
transparent, is encouraging strong
and sustainable performance, and
that the variable components of
remuneration are truly variable.
KEY MESSAGES
Underlying profit increased 6 per cent
to £8,066 million
Executive Director single figure
remuneration outcomes are approximately
2 per cent lower than prior year
Gender pay gap reduced 1.3 per cent to
31.5 per cent – better than the average
for Financial Services
Pay budget increase of 2.6 per cent for
all colleagues – increases for Executive
Directors and other senior colleagues set
lower at 2 per cent
Minimum full time salary for all colleagues
now exceeds National Living Wage by
7 per cent
Financial and strategic performance in 2018
delivered a Group Balanced Scorecard
outcome of 83 per cent of maximum
Group Performance Share outcome is down
3 per cent year-on-year when adjusted for
changes to eligible population. The total
pool for 2018 is £464.5 million.
2016 Long Term Incentive Plan is vesting
at 68.7 per cent
Composition of Executive Director Remuneration
30%
Fixed
Salary, Fixed Share
Award, Pension,
Benefits
70%
Variable
Group Performance
Share, Group
Ownership Share
Variable Reward Components
c.70%
Long-term
3+ years
95%
Shares
c.30%
Short-term
1 year
5%
Cash
Dear Shareholder
On behalf of the Board, I am pleased to
present our Directors’ remuneration report
for the year ended 31 December 2018. This
is my first report to you, and on behalf of
the Board I would like to thank Anita Frew
for her chairmanship of the Committee in
the period to September 2018, when I took
over. I hope to continue the excellent work
Anita did in ensuring that remuneration
is actively debated and transparent to all
relevant stakeholders.
This report covers the information required
to meet the Group’s regulatory disclosures,
but also provides additional context and
detail on the Group’s broader remuneration
framework, its alignment with our strategy
and other factors considered relevant by
the Committee.
Responding to feedback
We were disappointed that our report
for 2017 did not receive the high level of
support from shareholders at the 2018 AGM
that we had previously experienced. We
place great importance on the opinions of
our shareholders and other stakeholders
when considering our remuneration policy
and its implementation.
During 2018, I took the opportunity to
meet a broad selection of shareholders
and other key stakeholders, to obtain
feedback on our approach. This included
shareholders who opposed the 2017
remuneration report. It became clear in
these discussions that, while disclosure
levels were generally considered good,
the way we determined bonus awards for
Executive Directors was perceived to be too
complex, and we could make clearer both
how the annual awards were calculated and
where judgement or discretion had been
applied by the Committee. This report has
been designed in part to respond to that
feedback and I believe we have listened to,
and addressed, the concerns raised. I have
summarised the key changes below.
We are not seeking to make any changes
to the Directors’ Remuneration Policy for
2019, however we will consult widely on
policy changes ahead of the Annual General
Meeting in 2020.
Our performance and
remuneration philosophy
We continue to operate four core
reward principles:
Customer alignment
Simple, affordable and motivating
Shareholder alignment
Competitive, performance-driven and fair
These principles underpin all our decisions
and ensure that our remuneration approach
and outcomes are aligned to the Group’s
purpose and priorities.
What we have changed in response to your feedback
To provide greater clarity on the process for
determining variable remuneration for
Executive Directors, on page 87 we have
provided a step-by-step walk-through of
the approach to bonus awards. This shows
how we determine the proportion of profit
allocated to variable pay for on target
performance, which remained at 5.1 per cent
for 2018, and the mechanical approach to
determining individual awards.
The Committee is also mindful of the
changes to corporate governance and
reporting regulations which take effect from
next year and has begun to prepare for their
formal introduction and reporting.
In this report we have published details of
our CEO pay ratio, which can be found on
page 95. We have also provided an overview
of activity that the Board will undertake with
regard to understanding the views of the
wider workforce on page 64. We anticipate
that the role of the Committee will evolve
and develop during 2019 and intend to
provide full details in 2020. Other aspects
the Committee intends to focus on in 2019
include post employment shareholding and
pension contributions of Executive Directors
relative to the majority of the workforce.
Lloyds Banking Group Annual Report and Accounts 2018 83
As in previous years, we believe any
remuneration awarded to Executive Directors
must be supported by strong performance
achieved with the interests of all our
stakeholders in mind.
The remuneration awarded to Executive
Directors is heavily weighted towards the
delivery of long-term, sustainable performance
that aligns with shareholder experience.
For the variable awards made under the Group
Performance Share and Group Ownership
Share plans in respect of performance in
2018, over 95 per cent is awarded in shares,
and 70 per cent is subject to performance
conditions applying over three years.
Delivery through collective
success
We believe it is important that all our
colleagues share in the collective success
of the Group when we deliver at our best.
Therefore for 2019, significant changes are
being made to the Group’s performance
management framework. Our new approach,
which we are calling Your Best, is a simpler
approach to performance management,
with a stronger emphasis on teamwork and a
greater focus on personal growth, skills and
development. This is highly relevant to all
colleagues in this fast changing economy.
Our colleagues are the stewards of the
Group’s future. We are therefore investing
significantly in transforming ways of working to
enhance our colleagues’ skills and capabilities.
All eligible colleagues in the Group will receive
a Colleague Group Ownership Share award
in 2019, continuing our practice of promoting
long-term ownership and alignment
to shareholder interests. 99 per cent of
colleagues hold shares in the Group.
To ensure that the Committee understands
the views of a broad range of stakeholders,
I have consulted with the Group’s recognised
unions who represent the interests of around
30,000 colleagues. I am pleased to confirm
that the unions have agreed our pay approach
for 2019 receiving overwhelming support
from their members. The total pay budget
of 2.6 per cent for 2018 for all colleagues
has been allocated such that higher pay
increases are made to colleagues who are
positioned lower in the pay range for their
role, supporting a policy of real wage growth
and pay progression. Increases range from
0.25 per cent to 9.9 per cent. The proposed
salary increases for Executive Directors for
2019 have been set at 2 per cent, in line with
other senior colleagues but lower than the
overall colleague population.
From April 2019, all full-time colleagues in the
Group will be paid a minimum salary of £17,510,
7 per cent above the National Living Wage,
and where eligible will receive a minimum
pay increase of £600 in 2019. This reflects the
Group’s commitment to offering colleagues
a competitive reward package, which
aims to reward all colleagues fairly for their
contribution. The Group has been recognised
as a Living Wage employer since 2015.
The Group has also made progress in
reducing the Gender Pay Gap by 1.3 per cent,
with the median gap reducing from
32.8 per cent to 31.5 per cent, lower than
the average for Financial Services, through
a combination of targeting our salary
increases and our efforts to increase female
representation at senior levels in the Group.
2018 remuneration in
the context of business
performance and the
perspective of our wider
stakeholders
We have taken on board feedback received
in 2018 that suggests our approach to
measurement of Group performance was overly
complex. For 2018, we operated a scorecard
with 20 measures across five blocks (as set out
in full on page 86), but have reduced this to
15 measures and four blocks for 2019. We have
weighted the scorecard measures to provide
a balance of performance expectations across
financial, customer and colleague related
outcomes. We will disclose details of the 2019
targets in 2020, but the revised balance of
measures is summarised as follows:
33%
Financial
33%
Customer
33%
Colleague
and
Conduct
The ‘Remuneration Overview’ section on the
following pages provides a summary of the
2018 remuneration outcomes and policy for
Executive Directors.
The Committee places great importance
on ensuring there are clear links between
remuneration and delivery of both financial
and strategic objectives aligned to the
long-term sustainable success of the Group.
In 2018, the Group made significant
business progress, providing a strong
platform for the Group’s strategic
development and delivery of key priorities.
The Group delivered strong financial
performance in a period of political and
economic uncertainty. This uncertainty
weighed heavily on the Group’s share price
during 2018; however, the Group’s resilient
and low risk business model enabled strong
underlying performance. Underlying Profit
increased by 6 per cent and the Group’s
capital position strengthened. The Group’s
cost:income ratio remains market leading
at 49.3 per cent.
Reflecting the Group’s performance in 2018,
the Committee determined that the total
Group Performance Share funding should
be 3 per cent down year-on-year (adjusted
for changes in eligible population). Individual
awards for Executive Directors reduced on
average by 12 per cent year-on-year. Awards
for Executive Directors were determined
at 67.6 per cent of maximum.
The value of the 2016 Long Term Incentive
Plan awards has vested at 68.7 per cent in
respect of the three-year performance period
ending 31 December 2018. This reflects the
significant progress made by the Group
towards its strategic and financial goals,
while reflecting the fall in share price over
the performance period.
How we determine
remuneration for Executive
Directors and our wider
colleague population
The Committee seeks to be transparent
in its approach to setting and delivering
remuneration. Our policy for 2019 and the
implementation report for 2019 can be found
on pages 97 and 93.
As a result of taking on the role of Chief
Executive of the Ring-Fenced Bank from
1 January 2019 in addition to his existing
responsibility as Group Chief Executive, it has
been determined that the Fixed Share Award
for António Horta-Osório should be increased
to £1.05 million. At the same time, the Group
Chief Executive has agreed to reduce his
Pension Allowance to bring this closer to
that of the majority of the colleagues. His
Pension Allowance will reduce from its current
contractual level of 46 per cent of base salary
to 33 per cent of base salary. This results in a
decrease in total remuneration and greater
value delivered in shares subject to a longer-
term release schedule. Details are provided
on page 93.
Variable remuneration for Executive Directors
and other senior colleagues is weighted heavily
toward long-term performance, ensuring our
colleagues build an ownership interest in the
Group and are motivated by delivering superior
and sustainable returns for shareholders.
All colleagues, including Executive Directors,
participate in the Group Performance Share
plan. This single approach to bonus awards
ensures there is a fair and transparent link
between individual remuneration outcomes
and Group performance.
The approach to determining awards for
Executive Directors is as follows:
Evaluation of performance: The
Committee reviews financial and
non-financial performance against the
Balanced Scorecard objectives. Judgement
may then be used to ensure that mechanical
scorecard outcomes are aligned to
individual contribution, including how
Executive Directors have performed.
Full details are provided on page 86.
Determination of Group Performance
Share award: The performance assessment
determines the maximum opportunity
and the range that judgement can be
applied within.
Full details are provided on page 87.
Final awards: To ensure fairness with all
other colleagues, awards are adjusted to
reflect the final pool funding.
Full details are provided on page 87.
In 2018, the Committee did not exercise any
discretion over remuneration outcomes.
Further details on how the use of discretion
was considered can be found on page 89
in respect of the 2016 LTIP vesting outcome
and page 87 in respect of the 2018 Group
Performance Share awards.
I hope you find the additional explanation in
this report helpful in clarifying our approach.
2019 Annual General Meeting
Together with my Committee members,
I look forward to hearing your views on the
remuneration arrangements outlined in this
report, and to welcoming you to the 2019
AGM where I hope you will support the
resolution relating to remuneration.
Stuart Sinclair
Chairman, Remuneration Committee
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
84 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report continued
Remuneration overview
How we pay in line with performance and our strategic goals
Total Remuneration for Executive Directors 2017 vs 2018
The charts below summarise the Executive Directors’ remuneration for the 2017 and 2018 performance years. Full details are provided on page 88.
Fixed pay
Group Performance Share
Long term incentive/Group Ownership Share
António Horta-Osório
Group Chief Executive (GCE)
George Culmer
Chief Financial Officer (CFO)
Juan Colombás
Chief Operating Officer (COO)
2018
2017
46% 19%
35% £000
6,270
2018
47% 16%
37% £000
3,274
2018
47% 16%
37% £000
3,273
1
2,876 1,178
67.6%
of max
2
2,216
68.7%
of max
1,524
1
527
67.6%
of max
2
1,223
68.7%
of max
1,540
1
527
67.6%
of max
2
1,206
68.7%
of max
44%
21%
35% £000
6,434
2017
45% 18%
37% £000
3,328
2017
46% 18%
36% £000
3,320
2,842 1,323
77%
of max
2,269
66.3%
of max
1,501
599
78%
of max
1,228
66.3%
of max
1,510
599
80%
of max
1,211
66.3%
of max
1 2018 Group Performance Share, awarded in March 2019.
2 The 2016 LTIP vesting and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 14 February 2019. The average share price between
1 October 2018 and 31 December 2018 (56.04 pence) has been used to indicate the value. The shares were awarded in 2016 based on a share price of 72.978 pence.
How Executive Director remuneration is composed1
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Implementation
Base
Salary
Fixed share
award
Pension
Benefits
2018 Group
Performance
Share
D
E
X
F
I
E
L
B
A
R
A
V
I
2019 Group
Ownership Share
d
r
a
w
A
d
r
a
w
A
d
r
a
w
A
d
r
a
w
A
e
c
n
a
m
r
o
f
r
e
P
e
c
n
a
m
r
o
f
r
e
p
l
a
u
d
i
v
i
d
n
I
20%
20%
20%
20%
20%
40%
1 yr hold
40%
1 yr hold
20%
1 yr hold
20%
2 yr hold
20%
1 yr hold
20%
1 yr hold
20%
1 yr hold
20%
1 yr hold
d
o
i
r
e
p
d
r
a
w
a
9
1
0
2
s
e
n
m
r
e
t
e
d
i
e
c
n
a
m
r
o
f
r
e
P
d
o
i
r
e
p
For 2019:
The Group has applied a total pay budget of 2.6 per cent for the
wider colleague population.
GCE: £1,269,288 (1 January 2019) (2 per cent)
CFO: £779,351
COO: £794,938 (1 January 2019) (2 per cent).
For 2019:
GCE: £1,050,000
CFO: £504,000
COO: £497,000
Awards are released in shares in equal tranches over
a five year period.
For 2019:
GCE: 33 per cent of base salary
CFO: 25 per cent of base salary
COO: 25 per cent of base salary
Benefits remain unchanged from 2018. Executive Directors
receive a flexible benefits allowance in line with colleagues,
(4 per cent of salary). This can be used to select benefits
including life assurance and critical illness cover. Other benefits
include car allowance, transportation and private medical cover.
For 2018, the following awards were made:
GCE: £1,177,700
CFO: £526,841
COO: £526,841
£2,000 is paid in cash in March 2019, with the balance of the
upfront 40 per cent delivered in shares. Half of this is delivered in
June 2019 and the remainder subject to holding until March 2020.
The remaining 60 per cent is deferred into shares with 40 per cent
vesting in 2020 and 20 per cent in 2021. Half of each deferral is
also subject to holding for one year.2 See page 93.
For 2019 the following awards are being made:
GCE: 300 per cent of base salary.
CFO: No award
COO: 275 per cent of base salary. Awards will be subject to a
three year performance period with vesting between the third and
seventh anniversary of award. Any shares released are subject to
a further holding period in line with regulatory requirements and
market practices.2
See page 94.
1 All references to CFO refer to George Culmer in role on 1 January 2019.
2 Variable remuneration is subject to malus and clawback. See page 94.
Lloyds Banking Group Annual Report and Accounts 2018 85
How our reward emphasises long term performance and is aligned to our strategic priorities
Financial targets that form the basis of the outcomes for both short term and long term awards are directly linked to the Group’s
Four Year Operating Plan.
Variable remuneration awards are subject to a balance of financial and strategic measures as summarised below.
Short Term Variable Remuneration
Year 1
Year 2
Year 3
Performance Assessment
%
0
3
.
c
Group Performance
Share
Financial Performance
measures
Underlying Profit
Strategic Performance
measures
Group Balanced
Scorecard
Long Term Variable Remuneration
%
0
7
.
c
Group Ownership
Share
Financial Performance
measures
Cost: income ratio / Total Shareholder return / Economic profit
Strategic Performance
measures
Customer satisfaction / Digital active customer growth / Customer complaints
Colleague engagement
Shareholding requirements are in line with FTSE 100 practice and actual Executive Director shareholdings are significantly above the required levels
as can be seen on page 91.
How we performed against the key performance indicators which directly
impact remuneration outcomes and support the delivery of our reward principles
For details of all Group KPIs,
see pages 6 to 7
How we have performed over one year
Financial performance
£8,066m
+6%
Underlying profit
How we have performed over three years (2016 LTIP measures) – see page 89.
Cost:income ratio1
(10% weighting)
Total shareholder return
(2016–2018) (30% weighting)
Economic profit
(25% weighting)
Actual: 44.7%
100%
Actual: (4.8%)
0%
Actual: £3,291m
94.8%
47.3% or less
25% payout
46.1% or less
100% payout
8% p.a. or more
25% payout
16% p.a. or more
100% payout
£2,507m
25% payout
£3,308m or more
100% payout
Customer satisfaction
(10% weighting)
Digital active customer growth2
(7.5% weighting)
Customer complaints per 1,000
(5% weighting)
Actual: 1st
100%
Actual: 14.1m
100%
Actual: 3.04
100%
3rd place
25% payout
1st place
100% payout
13.4m
25% payout
14.0m
100% payout
4.18
25% payout
3.78
100% payout
Colleague engagement
(7.5% weighting)
Actual: 73
100%
66
25% payout
72
100% payout
1 Adjusted total costs, excluding remediation.
2 Excludes MBNA.
Customer complaints FOS change
rate
(5% weighting)
Actual: 18%
100%
=<29%
25% payout
=<25%
100% payout
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
86 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report continued
Annual report on remuneration
2018 Group Balanced Scorecard
A balanced scorecard approach is used to assess Group performance and divisional performance. The Group Balanced Scorecard is made up of
20 measures with clearly defined performance targets agreed by the Committee in Q1 2018. Each receives a mechanical score of 1 to 5 depending on
performance against those targets, resulting in an overall score and performance rating, see table on page 87. The Group Chief Executive’s individual
performance is measured through the Group Balanced Scorecard.
The 2018 Group Balanced Scorecard is as follows:
Performance Range/Outcome
Customer
Objective
Satisfying our
customers
Retaining
and growing
customers
Making
business with
us easier
Measure
Customer Dashboard
(score relating to c. 120
customer specific
measures)
Minimum: 1
0-29
Customer Index
(Reviewing customer
experience and customer
value)
<4
Improvement of
customer journeys
The Group has standardised the
majority of its customer journeys
with little progress to optimise.
Fewer
complaints,
better handled,
driving better
outcomes
Total FCA Complaints
per ‘000
FOS Change Rate
>3.25
>30%
People
More
engaged
colleagues
Banking
Standards1
Board
Colleague
Survey
results
Score
movement
(absolute)
>-6
Change vs
BSB median
(relative)
>-2
Building a
better culture
Colleague and cultural
engagement scores
<63
Building skills
for the future
Colleague upskilling/
retraining completion
<3,000 training interventions
Control
environment
Maintaining a
low risk Bank
Board Risk Appetite
>10% red metrics
Maximum: 5
Score
4
85-100
73
8
≥9
50% standardised / 50% optimised
The Group has optimised the majority
of its customer journeys with the
remainder being standardised.
3.04
-2
-1
70.1
<3.00
18%
≤25%
≥1
≥1
≥73
13,548
≥4,200 training interventions
0.0%
≤4% red metrics
Change
delivered
safely
Major
programmes
delivered as
planned
Building great
relationships
with regulators
Change Execution Risk
Successful delivery
of Major Group Core
Programmes (based on
time, cost and quality
approach)
Regulatory Management
and Engagement
Less than 75% of change indicators rated Green,
over 15% rated Red
Over 92.5% of change indicators rated Green,
less than 5% rated Red
92.9% Green / 4.7% Red
<5
11
≥14
Under performance of ≥3 metrics
Top performance in ≥4 metrics.
No metrics at Good, Developing or Under.
All metrics rated Good
Building the
business
Faster and
simpler
change
Change delivered
through Agile
methodology
<10% of portfolio
Building great
relationships
with external
stakeholders
Managing
investments
and delivering
benefits
Making the
most of our
data
Reputation with external
stakeholders – excluding
regulators
<0.55
Investment Performance
(based on time, cost and
quality approach)
<5
Data Maturity Level
<2.6
Helping Britain
Prosper
Deliver Helping Britain
Prosper targets
52.9%
Delivering
a capital
efficient, low
cost, profitable
Bank
Statutory Profit after tax
Common Equity Tier 1
generation
<3,180m
<140bps
1 Banking Standards Board measure combines the absolute and relative
movement in one metric.
15.5%
≥17.5% of portfolio
2.90
11
2.86
≥3.55
≥14
>2.9
90.9% rated Green
≥90% metrics rated Green, none Red
49.3%
<48.9%
4,400m
≥4,373m
210bps
>200bps
Overall
4.15
4
4
4
5
3
4
5
5
4
4
3
4
3
4
4
5
4
5
5
l
i
i
a
c
n
a
n
F
-
n
o
N
l
i
a
c
n
a
n
F
i
Lloyds Banking Group Annual Report and Accounts 2018 87
Calculating the 2018 Group Performance Share outcome
The Annual Group Performance Share outcome is calculated using the following steps.
Timeline
Process
Q1. 2018
Group underlying profit target determined. Threshold set 20 per cent below target,
below which no bonus payable.
The Committee set a funding level to award at target which is 30 per cent
of max opportunity for EDs, as per policy, and 50 per cent for all other colleagues.
Calculation step
£8,616m1
£447.5m2
Percentage of underlying profit used to fund Group Performance Share determined.
£447.5m / £8,616m = 5.1%
Q4. 2018
Group underlying profit reported (adjusted).
Application of funding percentage.
£9,154m3
£9,154m x 5.1% = £466.9m
Balanced Scorecard
Outcome
1.00 – 1.59
Group Scorecard Rating
Under
Group Balanced Scorecard
Modifier
1.60 – 2.59
2.60 – 2.79 2.80 – 3.19 3.20 – 3.59 3.60 – 3.79 3.80 – 4.19 4.20 – 4.59 4.60 – 4.79 4.80 – 5.00
Developing
Good
Minus
Good
Good Plus
Strong
Minus
Strong
Strong Plus Top Minus
Top
l
d
o
h
s
e
r
h
T
m
u
m
x
a
M
i
0
0.55 – 0.80
0.90
1.00
1.05
1.10
1.15
1.20
1.25
1.30
Assessment of performance against Group Balanced Scorecard objectives agreed in Q1 2018.
s
t
u
p
n
i
i
g
n
d
n
u
F
l
n
o
i
t
a
u
c
l
a
c
g
n
d
n
u
F
i
Group Balanced Scorecard Modifier.
Reduction for conduct, and other factors.
Final approved GPS funding for the Group was 4 per cent greater than the original target.
Balanced Scorecard
Outcome 4.15/5
£466.9m x 1.15 = £536.9m
£536.9m – £72.4m = £464.5m
Overall pool
£464.5m
£464.5m / £447.5m = 104%
(Group Funding Modifier)
Underlying profit
£m
Pool Funding
%
Funding
(mechanical)
£m
Performance
Adjustment
£m
Conduct, risk and
other factors
£m
Overall Pool
£m
Final % of
Underlying Profit
%
GPS Funding
2017
Target 7,846
Actual
8,567
2018
Target 8,6161
Actual 9,1543
%
1
.
5
400.0
436.9
447.52
466.9
87.4
70
–
(109.6)
–
(72.4)
–
414.7
–
464.5
–
4.8
–
5.1
1 Target full year underlying profit agreed by Board, adjusted for conduct and target GPS expense.
2 On target increased year-on-year due to population change, including colleagues moving from incentives to Group Performance Share in 2018.
3 Underlying profit of £8,066m adjusted by £600m for conduct provision, £27m for year-on-year Prudential Value Adjustment in line with regulatory requirement and £461m for Group performance
share expense in 2018.
Executive Directors’ Group Performance Share outcome for 2018 (audited)
Individual awards for Executive Directors are determined through the assessment of individual performance using the Group or their divisional
balanced scorecard. Personal contribution may be considered where it diverges from scorecard outcomes. Awards will not be made if the Group
does not meet threshold financial performance or if an individual is rated Developing or below.
Awards are based on pre-determined formulaic pay out ranges commensurate with performance as follows:
Individual
Performance
Opportunity
(% of maximum)
Under –
Developing
No award
l
d
o
h
s
e
r
h
T
Good
Minus
12.5% –
24.15%
Good
24.16% –
35.83%
Good
Plus
35.84% –
47.49%
Strong
Minus
47.5% –
59.15%
Strong
59.16% –
70.82%
Strong
Plus
70.83% –
82.49%
Top
Minus
82.5% –
94.15%
Top
94.16% –
100%
m
u
m
x
a
M
i
Based on the mechanical outturn of individual scorecards, a recommendation is made on the award level within the pre-determined pay out range.
This was the mid point of the range and no discretion was applied.
The Group modifier is applied to all colleague awards to take into account Group Performance against target. For 2018 an adjustment
of 4 per cent.
Executive
Director
António Horta-Osório
George Culmer
Juan Colombás
Balanced
Scorecard
Group
Finance
Chief Operating Office
Award
(% of max)
65%
65%
65%
Group
Funding
Modifier
104%
Final
Award
(% of max)
GPS Maximum
Opportunity
(% of salary)
Final Award
(% of salary)
67.6%
67.6%
67.6%
140%
100%
100%
94.60%
67.60%
67.60%
Final
Individual
rating
Strong
Strong
Strong
Read more
page 88
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
88 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report continued
Individual performance ratings are determined on the basis of whole job contribution taking account of both (i) what has been achieved against the
balanced scorecard objectives for the area for which they have responsibility and (ii) personal performance that considers how performance has been
achieved through their leadership approach. For the Group Chief Executive the relevant Balanced Scorecard is the Group Balanced Scorecard, for
the Chief Financial Officer the Finance Division Scorecard, and for the Chief Operating Officer the Chief Operating Office Scorecard. Discretion may
be applied in deciding whether personal performance rating should vary from the mechanical outcome provided by the Balanced Scorecard metrics.
No discretion has been exercised for 2018.
António Horta-Osório
Group Chief Executive
George Culmer
Chief Financial Officer
Juan Colombás
Chief Operating Officer
The Group Chief Executive’s performance
assessment for 2018 reflected the Group’s
objectives, assessed as Strong.
For Group Balanced scorecard
please see page 86
Finance Balanced Scorecard rating
COO Balanced Scorecard rating
BSC category
Customer
People
Control
environment
Building the
business
Finance
4.00
3.75
4.00
3.67
4.60
Assessment Rating
Strong
BSC category
Customer
Strong minus
People
Strong
Strong minus
Control
environment
Building the
business
Top minus
Finance
Assessment Rating
4.20
3.50
4.25
4.00
4.50
Strong Plus
Good Plus
Strong Plus
Strong
Strong Plus
The Chief Financial Officer’s individual
performance assessment for 2018
reflected the Finance division’s
objectives, assessed as Strong. The
individual block ratings and assessment
are shown above.
The Chief Operating Officer’s individual
performance assessment for 2018
reflected the Chief Operating Office
objectives, assessed as Strong. The
individual block ratings and assessment
are shown above.
Key considerations factored into assessing performance and overall rating include, but are not limited to, the following:
Other performance considerations
Other performance considerations
Other performance considerations
Launched the third stage of the Group’s
strategic plan with strategic investment
of more than £3 billion over three years.
Increased customer ‘net promoter’ score,
with reduction in compliants, set against
continuing legacy conduct issues and
remediation.
Further progress in building market
leading savings and wealth proposition
with agreed Schroders JV.
Maintained colleague engagement
above UK high-performing norm, with
significant increase in skills training.
Continued progress against Helping
Britain Prosper targets.
Financial performance above plan,
allowing for increased return of capital
to shareholders.
Strong financial performance delivered
in a continuing challenging low interest
rate environment.
Continued improvement in the Group’s
cost:income ratio to 46 per cent (49.3 per
cent including remediation).
CET1 capital generation of 210 bps,
comfortably exceeding market
guidance of 200 bps.
Effective management of the
establishment of the non-ring fenced
bank, Lloyds Bank Corporate Markets plc.
Very strong leadership of the Finance,
Legal and Strategy division with
excellent colleague engagement.
Maintained a strong operational
environment including developing and
implementation of Change, Information
and Cyber Security risk control,
reporting and insight.
Delivered customer complaint
reductions which saw an 8.2 per cent
year-on-year reduction to a close of 3.04
FCA complaints per thousand.
Exemplary leadership of delivery of the
latest strategic plan, transforming the
Group for success in a digital world.
Fully supported the People
transformation activities across the Group,
delivering in excess of 1 million training
and development hours for colleagues.
Maintained colleague engagement
at levels in excess of the UK high
performing norm.
Overall rating
Strong
Overall rating
Strong
Overall rating
Strong
Single total figure of remuneration (audited)
£000
Base salary
Fixed share award
Benefits
Group Performance Share
2016 Long-term incentive (LTIP)1
Pension allowance
Other remuneration2
Total remuneration
António Horta-Osório
George Culmer
Juan Colombás
Total
2018
1,244
900
157
1,178
2,216
573
2
6,270
2017
1,220
900
156
1,323
2,269
565
1
6,434
2018
776
504
49
527
1,223
194
1
3,274
2017
2018
2017
2018
2017
760
504
46
599
1,228
190
1
3,328
779
497
68
527
1,206
195
1
3,273
753
497
71
599
1,211
188
1
3,320
2,799
1,901
274
2,232
4,645
962
4
12,817
2,733
1,901
273
2,521
4,708
943
3
13,082
1 The 2016 LTIP vesting (see page 89) at 68.7 per cent and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 14 February 2019. The total
number of shares vesting were 3,445,449 and 509,271 shares delivered in respect of dividend equivalents for António Horta-Osório, 1,901,209 shares vesting and 281,017 shares delivered in
respect of dividend equivalents for George Culmer and 1,874,804 shares vesting and 277,114 shares delivered in respect of dividend equivalents for Juan Colombás. The average share price
between 1 October 2018 and 31 December 2018 (56.04 pence) has been used to indicate the value. The shares were awarded in 2016 based on a share price of 72.978 pence and as such no part
of the reported value is attributable to share price appreciation. LTIP and dividend equivalent figures for 2017 have been adjusted to reflect the share price on the date of vesting (67.1043 pence)
instead of the average price (66.75 pence) reported in the 2017 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
Lloyds Banking Group Annual Report and Accounts 2018 89
António Horta-Osório
George Culmer
Juan Colombás
573,400
12,000
48,800
38,151
24,000
34,265
193,883
17,943
30,563
760
–
–
194,838
12,000
30,138
17,342
5,881
2,542
Defined benefit pension arrangements (audited)
António Horta-Osório has a conditional unfunded pension commitment. 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 his base salary of £1,244,400 or £74,664.
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.
2016 LTIP vesting (audited)
Awards in the form of conditional rights to free shares in 2016 were made over shares with a value of 300 per cent of reference salary for the GCE
and 275 per cent of salary for the CFO and COO. These LTIP awards are vesting at 68.7 per cent, as detailed in the table below. This reflects the
Group’s strong financial and strategic performance over the three financial years ended 31 December 2018, balanced against significant uncertainty
in the economic and political environment impacting negatively on share price performance, resulting in no vesting for the Total Shareholder
Return component.
The Committee has an overarching discretion to reduce the level of award that will vest, regardless of whether the performance condition for
partial or full vesting has been met. This qualitative judgement ensures that vesting is not simply driven by a formula that may give an unexpected
or unintended remuneration outcome compared to Group performance. The Committee considers this discretion carefully, taking into account
circumstances that are relevant to the performance measures and the period under consideration. No discretion has been applied in respect of the
vesting outcome for the 2016 LTIP. This was discussed, but it was agreed that the formulaic outcomes were fair and reflective against the original
targets set in 2016. Executive Directors are required to retain any vested shares for a further two years after vesting.
Weighting
Measure
Threshold
Maximum
Actual
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 change rate)
Customer Satisfaction
Digital active customer growth
Colleague engagement score
8% p.a.
(4.8%)
16% p.a.
£2,507m £3,308m £3,291m
44.7%
3.04
18%
47.3%
4.18
=<29%
46.1%
3.78
=<25%
Vesting
0%
23.7%
10%
5%
5%
3rd
13.4m
66
1st
14.0m
72
10%
7.5%
7.5%
LTIP (% maximum) vesting 68.7%
1st
14.1m
73
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.
Chairman and Non-Executive Directors (audited)
Chairman and current Non-Executive Directors
Lord Blackwell1
Alan Dickinson
Anita Frew
Simon Henry
Lord Lupton
Amanda Mackenzie2
Deborah McWhinney
Nick Prettejohn
Stuart Sinclair
Sara Weller
Former Non-Executive Directors
Anthony Watson (retired May 2017)
Nick Luff (retired May 2017)
Total
1 Benefits: car allowance (£12,000).
2 Appointed 1 October 2018.
Fees £000
Total £000
2018
2017
2018
2017
743
230
380
182
318
31
174
449
172
199
728
248
364
166
161
–
142
441
152
190
755
230
380
182
318
31
174
449
172
199
740
248
364
166
161
–
142
441
152
190
–
–
2,878
91
69
2,752
–
–
2,890
91
69
2,764
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
90 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report continued
Loss of office payments and payments within the reporting year to past Directors (audited)
There were no payments for the loss of office during 2018. In April 2018, following a Court judgment in relation to Integration Awards granted under
the Group’s Long-Term Incentive Plan (the LTIP) in 2009, 2,063,640 shares were released and £271,169 paid to John Eric Daniels, former Group Chief
Executive and 1,424,778 shares were released and £386,167 paid to Truett Tate, former Executive Director.
External appointments
António Horta-Osório – During the year ended 31 December 2018, the GCE served as a Non-Executive Director of Exor, Fundação Champalimaud,
Stichting INPAR Management/Enable and Sociedade Francisco Manuel dos Santos. The Group Chief Executive is entitled to retain the fees, which
were £380,569 in total.
Relative importance of spend
on pay
The graphs illustrate the total remuneration of
all Group employees compared with returns
of capital to shareholders in the form of
dividends and share buyback.
2018
2017
Dividend and share buyback £m
1
Salaries and performance-based
compensation £m
2018
-5.2%
2,991
3,195
2017
3,152
+26%
4,039
1 2018: Ordinary dividend in respect of the financial year
ended 31 December 2018, partly paid in 2018 and partly to
be paid in 2019 and intended share buyback.
2017: Ordinary dividend in respect of the financial year
ended 31 December 2017, partly paid in 2017 and partly to
be paid in 2018 and intended share buyback.
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
Growth in the value of a hypothetical £100 holding since 31st December 2008 (to 31st December 2018)
Source: Mercer Kepler
Lloyds return index
FTSE 100 return index
8
0
0
2
r
e
b
m
e
c
e
D
1
3
n
o
d
e
t
s
e
v
n
i
0
0
1
£
f
o
e
u
a
V
l
250
225
200
175
150
125
100
75
50
25
0
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
CEO
GCE single figure
of remuneration
£000
J E Daniels
António
Horta-Osório
2009
1,121
2010
2,572
2011
855
2012
–
2013
–
2014
–
2015
–
2016
–
2017
–
2018
–
–
–
1,765
3,398
7,475
11,540
8,704
5,791
6,434
6,270
J E Daniels
Waived
62%
0%
–
–
–
–
–
–
–
Annual bonus/
GPS payout (%
of maximum
opportunity)
António
Horta-Osório
Long-term
incentive vesting
(% of maximum
opportunity)
J E Daniels
António
Horta-Osório
TSR component
vesting (% of
maximum)
J E Daniels
António
Horta-Osório
–
0%
–
0%
–
– Waived
62%
71%
54%
57%
77%
77%
67.6%
0%
–
0%
–
0%
0%
–
0%
–
–
–
–
–
–
–
0%
54%
97%
94.18%
55%
66.3%
68.7%
–
–
–
–
0%
25.3%
30%
30%
–
0%
–
0%
–
0%
Notes: J E Daniels served as GCE until 28 February 2011; António Horta-Osório was appointed GCE from 1 March 2011. António Horta-Osório declined to take a bonus in 2011.
Lloyds Banking Group Annual Report and Accounts 2018 91
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
Total at
31 December
2018
Total at
20 February
2019
Expected value
at 31 December
2018 (£000s)2
25,751,860
14,754,666
9,679,888
1,520,915 17,059,116
9,621,899
9,488,262
695,245
696,217
36,282
14,554
29,109
150,000
200,000
450,000
250,000
1,000,000
–
250,000
69,280
–
340,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
44,368,173 44,368,8787
25,086,364 25,086,9787
19,893,476 19,894,0917
18,582
10,512
7,854
150,000
200,000
450,000
250,000
1,000,000
–
250,000
69,280
–
340,000
n/a7
n/a7
n/a7
n/a7
n/a7
n/a7
n/a7
n/a7
n/a7
n/a7
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 Directors3
Lord Blackwell
Alan Dickinson
Anita Frew
Simon Henry
Lord Lupton
Amanda Mackenzie OBE4
Deborah McWhinney5
Nick Prettejohn6
Stuart Sinclair
Sara Weller CBE
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 2018 closing
price of 51.85 pence. Full face value of awards are £23,004,897 for António Horta-Osório, £13,007,279 for George Culmer and £10,314,767 for Juan Colombás.
3 Deborah McWhinney resigned 31 December 2018. Shares held as at date of resignation.
4 Appointed 1 October 2018.
5 Shareholdings held by Deborah McWhinney are either wholly or partially in the form of ADRs.
6 In addition, Nick Prettejohn held 400 6.475 per cent preference shares at 1 January 2018 and 31 December 2018.
7 The changes in beneficial interests for António Horta-Osório (705 shares), George Culmer (614 shares) and Juan Colombás (615 shares) relate to ‘partnership’ and ‘matching’ shares acquired under
the Lloyds Banking Group Share Incentive Plan between 31 December 2018 and 20 February 2019. There have been no other changes up to 20 February 2019.
Shareholding requirement (audited)
Executives are expected to build and maintain a company shareholding in direct proportion to their remuneration in order to align their interests to
those of shareholders. The minimum shareholding requirements Executive Directors are expected to meet are as follow: 350 per cent of base salary
for the GCE and 250 per cent of base salary for other Executive Directors. Newly appointed individuals will have three years from appointment to
achieve the shareholding requirement.
There is no appetite for non-compliance with the Shareholding Policy. In the event that exceptional individual circumstances exist resulting in an
Executive not being able to comply with the Policy, the Remuneration Committee will consider whether an exception should apply.
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%
1,294%
130
260
390
520
650
780
910
1040
1170
1300
250%
1,184%
130
260
390
520
650
780
910
1040
1170
1300
250%
777%
1 Calculated using the average share price for the period 1 January 2018 to 31 December 2018 (62.554 pence). Includes ordinary shares acquired through the vesting of the deferred Group
Performance Share plan, Fixed Share Awards as the shares have no performance conditions; American Deposit Receipts (ADRs) with each one ADR equating to four shares, Executive Share
Awards which have vested but have not been exercised; shares held in the Share Incentive Plan (SIP) Trust, i.e. Free, Partnership, Matching and Dividend shares which are no longer subject to
forfeiture, as defined in the SIP Rules. Shares held by Connected Persons, as defined by the Companies Act, but broadly meaning spouse or partner and children, may also be included.
The current Shareholding Policy does not take into account post-employment requirements. Consideration of how post-employment shareholding
will be incorporated into the Policy will be undertaken in 2019, ahead of a revised policy being implemented in 2020.
As per the diagram on page 84 illustrating how share based remuneration is delivered to our Executive Directors, shares are deferred for up to seven
years and clawback provisions can be implemented for up to ten years. Deferred bonus awards and long term incentive awards that are yet to vest
are not currently included within the total shareholding for Executive Directors. Based on the number of outstanding bonus deferrals and number
of in-flight long term incentive awards granted to each Executive Director, a post-employment shareholding requirement could be achieved until a
formal policy is implemented.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
92 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report continued
Outstanding share plan interests (audited)
At 1 January
2018
Granted/
awarded
Dividends
awarded
Vested /
released /
exercised
At 31
December
Exercise periods
Lapsed
2018 Exercise price
From
To
Notes
António Horta-Osório
LTIP 2015-2017
LTIP 2016-2018
GOS 2017-2019
GOS 2018-2020
Deferred GPS
awarded in 2018
2014 Sharesave
2016 Sharesave
2017 Sharesave
George Culmer
LTIP 2015-2017
LTIP 2016-2018
GOS 2017-2019
GOS 2018-2020
Deferred GPS
awarded in 2018
2014 Sharesave
2016 Sharesave
Juan Colombás
LTIP 2015-2017
LTIP2016-2018
GOS 2017-2019
GOS 2018-2020
Deferred GPS
awarded in 2018
2016 Sharesave
4,579,006
5,015,210
5,318,685
14,995
14,554
21,728
2,477,167
2,767,409
2,993,565
14,995
14,554
2,442,762
2,728,973
2,951,987
29,109
–
–
–
6,725,221
1,555,288
–
–
–
–
–
3,860,925
704,426
–
–
–
–
3,807,302
704,426
–
346,087 3,035,880
–
–
–
–
–
–
1,543,126
–
– 5,015,210
– 5,318,685
– 6,725,221
–
–
–
–
388,822
14,995
–
–
– 1,166,466
–
–
–
14,554
21,728
60.02p
47.49p 01/01/2020 30/06/2020
51.03p 01/01/2021 30/06/2021
187,227
–
–
–
1,642,361
–
–
–
834,806
–
– 2,767,409
– 2,993,565
– 3,860,925
–
–
–
176,106
14,995
–
– 528,320
–
–
14,554
60.02p
47.49p 01/01/2020 30/06/2020
184,627
–
–
–
1,619,551
–
–
–
823,211
–
– 2,728,973
– 2,951,987
– 3,807,302
–
–
176,106
–
– 528,320
29,109
–
47.49p 01/01/2020 30/06/2020
1, 2, 3
3
3
3, 4
5
6
1, 2, 3
3
3
3, 4
5
6
1, 2, 3
3
3
3, 4
5
1 The shares awarded in March 2015 vested on 12 March 2018. The closing market price of the Group’s ordinary shares on that date was 67.50 pence. Shares vested are subject to a further two-year
holding period.
2 2015 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 12 March 2018. The closing market price of the Group’s ordinary shares on that date was 67.50 pence.
The dividend equivalent shares are not subject to any holding period.
3 All LTIPs /GOS 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 2018 were made over shares with a value of 300 per cent of reference salary for António Horta-Osório (6,725,221 shares with a face value
of £3,660,000); 275 per cent for George Culmer (3,860,925 shares with a face value of £2,101,193); and 275 per cent for Juan Colombás (3,807,302 shares with a face value of £2,072,010). The share
price used to calculate face value is the average price over the five days prior to grant (27 February to 5 March 2018), which was 68.027 pence. As regulations prohibit the payment of dividend
equivalents on awards in 2018 and subsequenet years, the number of shares awarded has been determined by applying a discount factor to the share price on award. An adjustment of 25 per cent
was applied. 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 2018 was £1,058,016 (1,555,288 shares) for António Horta-Osório; £479,200 (704,426 shares)
for George Culmer; and £479,200 (704,426 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
5 March 2018), which was 68.027 pence.
6 Options exercised on 14 June 2018. The closing market price of the Group’s ordinary shares on that date was 63.13 pence.
2018 Group Ownership Share performance measures (for awards made in March 2018)
As requested in the 2017 Directors’ Remuneration report, (see implementation of the policy in 2018), the following awards were granted in March 2018.
25 per cent of the proportion of the award attributable to each performance measure will vest at threshold performance.
Strategic priorities
Measure
Basis of payout range
Metric
Weighting
Creating the best
customer experience
Customer satisfaction
Digital net promoter score
Major Group average ranking
over 2020
Set relative to 2020 targets
FCA total reportable complaints and
Financial Ombudsman Service (FOS)
change rate
Set relative to 2020 targets
Average rates over 2020
Becoming simpler and
more efficient
Statutory economic profit1
Set relative to 2020 targets
Cost:income ratio
Set relative to 2020 targets
Delivering sustainable
growth
Building the best team Employee engagement index
Absolute total shareholder return (TSR)
Growth in share price including
dividends over 3-year period
Set relative to 2020 markets
norms
1 A measure of profit taking into account Expected Losses, tax and a charge for equity utilisation.
Threshold: 3rd
Maximum: 1st
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%
Threshold: 8% p.a.
Maximum: 16% p.a.
Threshold: +5% vs UK Norm
Maximum: +2% vs UK High
Performing Norm
10%
7.5%
10%
25%
10%
30%
7.5%
Lloyds Banking Group Annual Report and Accounts 2018 93
Salaries will therefore be as follows:
GCE: £1,269,288 (with effect from 1 January 2019)
CFO: £779,351
COO: £794,938 (with effect from 1 January 2019)
CFO Designate1: £794,938
Implementation of the policy in 2019
It is proposed to operate the policy in the following way in 2019:
Base Salary
The Group has applied a total pay budget of 2.6 per cent
including a minimum pay award of £600 for eligible colleagues.
This is considered an appropriate and competitive budget in
the current economic and business climate. Salary increases
for the Group Chief Executive (GCE) and Chief Operating
Officer (COO) are set below the budget for the wider colleague
population at 2 per cent. Following confirmation that the
Chief Financial Officer (CFO) is due to retire in 2019, his salary is
due to remain in line with 2018.
Fixed share
award
GCE: £1,050,000
CFO: £504,000
COO: £497,000
CFO Designate1: £504,000
Pension
Benefits
Group
Performance
Share
Group
Ownership
Share
Shares will be released in equal tranches over a five year period.
The level of pension allowances for 2019 are:
GCE: 33 per cent of base salary
CFO: 25 per cent of base salary
COO: 25 per cent of base salary
CFO Designate1: 25 per cent of base salary
Any new Executive Director appointments in 2019 will attract a
maximum allowance of 25 per cent of base salary.
Benefits remain unchanged from 2018. Executive Directors
receive a flexible benefit allowance in line with colleagues,
(4 per cent of salary). This can be used to select benefits
including life assurance and critical illness cover. Other benefits
include car allowance, transportation tax preparation and
private medical cover.
The approach to determining the Group Performance Share
outcome for 2019 will remain unchanged from 2018. It will
be based on a percentage of the Group’s underlying profit,
adjusted by a scorecard modifier commensurate with Group
Balanced Scorecard performance. Adjustments for conduct
and risk factors will also be considered.
A financial performance threshold will be set at 20 per cent
below the Group’s underlying profit target, at which no award
will be payable. The Group Balanced Scorecard must also
exceed a threshold score of 1.6, below which no award will
be payable.
Individual award maxima for Executive Directors will remain
unchanged from 2018 at 140 per cent of base salary for the
GCE and 100 per cent of base salary for other Executive
Directors. No award will be payable if an individual is rated
below an expected level from a performance, regulatory or
risk perspective.
Individual awards will be based on pre-determined formulaic
pay out ranges commensurate with performance and will be
determined by the Remuneration Committee through the
assessment of individual performance via a balanced scorecard
and personal performance considerations. The Group Chief
Executive’s individual performance will be measured through
the Group Balanced Scorecard, the Chief Financial Officer
will be measured through the Finance Division scorecard and
the Chief Operating Officer will be measured through the
Chief Operating Office scorecard.
The maximum Group Ownership Share award for Executive
Directors is 300 per cent of salary (unchanged from 2018).
Awards in 2019 are being made as follows:
GCE: 300 per cent of base salary
CFO: No award
COO: 275 per cent of base salary
As regulations prohibit the payment of dividend equivalents
on awards in 2019 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 29.8 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.
The 2019 scorecard will provide a balanced view across
financial, operational and strategic measures. This will be
equally weighted between financial, customer and conduct
measures. Each measure will be assigned a target assessed
against a rating scale of 1 to 5.
The Committee considers the specific measures and targets
that apply to 2019 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.
For the 2019 performance year, any Group Performance Share
opportunity will be awarded in March 2020 in a combination of
cash (up to 50 per cent) and shares. 40 per cent will be released
in the first year following the award with £2,000 paid in cash,
and the balance of the upfront 40 per cent delivered in shares;
50 per cent of which will be subject to holding until March
2020. The remaining 60 per cent is deferred into shares with
40 per cent vesting in 2020 and 20 per cent in 2021. 50 per cent
of each release will be subject to a further 12-month holding in
line with regulatory requirements.
The Committee may consider the application of malus and
clawback as outlined in the performance adjustment section.
Awards made in 2019 will vest based on the Group’s
performance against the financial and strategic measures,
set out in the table opposite. 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.
There are no changes to proposed financial and strategic
measures to provide consistency with the 2018 plan, while
aligning to the key strategic priorities as set out in the third
Group Strategic Review.
The Committee may consider the application of malus and
clawback as outlined in the performance adjustment section.
1 Remuneration for the CFO Designate will take effect from commencement of employment.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
94 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report continued
Group
Ownership
Share
continued
Strategic priorities
Measure
Basis of payout range
Metric
Weighting
Creating the best
customer experience
Customer satisfaction
Digital net promoter
score
FCA total reportable
complaints and Financial
Ombudsman Service
(FOS) change rate
Statutory economic
profit1
Cost:income ratio
Becoming simpler and
more efficient
Delivering sustainable
growth
Absolute total
shareholder return (TSR)
Building the best team Employee engagement
index
Major Group average
ranking over 2021
Set relative to 2021
targets
Set relative to 2021
targets
Average rates over 2021
Set relative to 2021
targets
Set relative to 2021
targets
Growth in share price
including dividends over
3-year period
Set relative to 2021
markets norms
Threshold: 3rd
Maximum: 1st
Threshold: 65.3
Maximum: 68.3
Threshold: 2.88
Maximum: 2.60
Threshold: =<29%
Maximum: =<25%
Threshold: £2,210m
Maximum: £3,315m
Threshold: 45.9%
Maximum: 43.4%
Threshold: 8% p.a.
Maximum: 16% p.a.
Threshold: +5% vs. UK norm
Maximum: +2% vs. UK high
Performing norm
10%
7.5%
10%
25%
10%
30%
7.5%
1 A measure of profit taking into account expected losses, tax and a charge for equity utilisation.
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 balanced scorecards 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 balanced scorecard 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.
Chairman and Non-Executive Director fees in 2019
The annual fee for the Chairman was increased by 2 per cent to £757,700, 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 2019.
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.
2019
2018
£79,600
£104,000
£62,400
£72,800
£72,800
£72,800
£41,600
£33,300
£33,300
£33,300
£15,600
£15,600
£78,000
£102,000
£61,200
£71,400
£71,400
£71,400
£40,800
£32,650
£32,650
£32,650
£15,300
£15,300
Lloyds Banking Group Annual Report and Accounts 2018 95
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 2018, 65,537 colleagues
were included in this category.
GCE (salary increase effective 1 January 2019)
All employees
% change in base salary
(2017 to 2018)
% change in GPS
(2017 to 2018)
% change in benefits
(2017 to 2018)
2
2.62
(11)1
1.42
2
2.62
1 Reflects the increase in base salary from 1 January 2018 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 2019.
Additional disclosures
CEO pay ratio
The Group is committed to ensuring remuneration is competitive, performance-driven and fair. The Group has decided to publish the CEO pay ratio
in advance of the formal disclosure requirement using the prescribed Methodology A, as shown in the table below together with an alternative view
based on fixed pay.
In assessing the pay ratio for 2018, the Committee has considered likely ratios at industry and sector peers, and companies with a similar employee
profile. The Remuneration Committee views pay ratios as a useful reference point to inform policy-setting, but also takes into consideration a number
of other factors when considering remuneration levels, including direct engagement on pay with the Group’s recognised unions and shareholders.
The Committee is confident that the Group’s policy on pay is fair and that improvements to pay progression will continue to ensure that lower paid
colleagues receive a greater share of pay awards.
Total remuneration (Methodology A)
P25
(Lower Quartile)
237:1
245:1
Year
2018
2017
Y-o-Y
P50
(Median)
169:1
177:1
(4%)
P75
(Upper Quartile)
P25
(Lower Quartile)
93:1
97:1
113:1
113:1
Fixed pay
P50
(Median)
81:1
82:1
(1%)
P75
(Upper Quartile)
48:1
48:1
The median ratio has decreased 4 per cent year-on-year. The median ratio provides a fair reflection of the Group’s approach to pay as colleagues
at this level make up approximately 70 per cent of the Group’s employee base, however, these colleagues do not receive long-term incentive plan
awards which are more volatile. For the majority of colleagues, year-on-year changes in remuneration are principally driven by pay awards, which the
Group directs to the lowest grades. For example, the P25 colleague in 2017 received a 5 per cent pay increase in 2018, meaning this colleague moved
up in the percentile ranking to P25.5. The colleague who is now at P25 for 2018 received a 3 per cent pay increase which brought them up from P24.5
to that level. For 2019, the pay budget has been set at 2.6 per cent, but only 2 per cent for senior colleagues, including the Group Chief Executive. To
support the Group’s policy of real wage growth and commitment to pay progression, there is a focus on ensuring higher pay awards for colleagues
who are lower paid, or paid lower within their pay range. From April 2019, all full-time colleagues will be paid a minimum salary of £17,510. For some
colleagues, this will result in an increase of up to 9.9 per cent. This salary level is 7 per cent above the National Living Wage.
Notes to the calculation:
The P25, P50 and P75 colleagues were determined based on calculating total remuneration for all UK employees as at 31 December 2018. This
methodology was selected on the basis that it provided the most accurate means of identifying the median, lower and upper quartile colleagues.
The 2018 total remuneration for the colleagues identified at P25, P50 and P75 are as follows: £26,490, £37,058, £67,225.
The 2018 base salary for the colleagues identified at P25, P50 and P75 are as follows: £21,560, £30,364, £45,230.
The colleague identified at P50 is not eligible to receive a car benefit unless required for role and does not participate in the long term incentive
plan, therefore the ratio does not provide a like-for-like comparison to the total remuneration of the Group Chief Executive. Each of the three
individuals identified was a full-time employee during the year.
The single total figure of remuneration calculated for each of the 65,537 UK colleagues includes full time equivalent base pay, Group Performance
Share awards for the 2018 performance year, long term incentive plan payments (for eligible colleagues), core benefits, pension, overtime and shift
payments, travel/relocation payments and private medical benefit.
Due to operational constraints, the calculation of the colleague Pension Input Figure excludes the adjustment to uprate the opening value for
defined benefit plans specified in section 229 of the Finance Act 2004. The omission of this factor does not materially affect the outcome of the ratio
and/or distort the validity of the valuation. All other data has been calculated in line with the methodology for the single total figure of remuneration
for the Group Chief Executive.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
96 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report continued
Gender pay
We reduced our gender pay gap by
1.3 per cent in 2018
The Group is committed to offering
all colleagues a reward package that is
competitive, performance-driven and fair.
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 and the Group is
committed to increasing the number of women
in senior roles. As a result of progress made in
hiring female talent into senior positions and
Remuneration Committee
The Committee comprises Non-Executive
Directors from a wide background to provide
a balanced and independent view on
remuneration matters. During the year Anita
Frew stepped down as Chair of the Committee
and was replaced by Stuart Sinclair with effect
from 1 September 2018. Stuart has been a
member of the Committee since January 2016
and Anita remains a member of the Committee.
For details of membership and attendance at
meetings, please see pages 52 to 53 and 56.
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, including
the wider workforce.
Annual effectiveness review
During 2018, 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 2018
The Committee held five scheduled meetings
during 2018 where the following key matters
were considered.
Committee:
Approval of terms of reference
Results of the effectiveness review and
suggestions for improvement
Group wide remuneration approach:
Determination of the overall 2017 Group
Performance Share outcome
Approval of the 2015 LTIP vesting
Approval of the 2018 Group Performance
targeting greater pay awards for lower graded
colleagues (where there is a majority of female
colleagues), we have reduced our gender pay
gap by 1.3 per cent. An increase in part time
working at lower grades and a reduction in the
number of female colleagues at the most senior
grades, offset the progress made in female
colleagues taking on more senior positions in
the Group. As a result the mean bonus gap
increased by 1.2 per cent from 2017 to 2018.
Further information is available at: https:///www.
lloydsbankinggroup.com/globalassets/our-
group/responsible-business/reporting-centre/
gender-pay-gap-report-2017-18-final.pdf.
Mean Pay Gap %
2018
2017
Mean Bonus Gap %
2018
2017
31.5%
32.8%
66.4%
65.2%
Share methodology including performance
measures included within the Group
Balanced Scorecard
2018 Colleague Group Ownership Share
2018 Sharesave offer
Approval of a simplified 2019 Balanced
Scorecard approach following
stakeholder feedback
Review of the Group’s new approach to
performance, ‘Your Best’
Senior Executives and Executive Directors:
Review of performance and remuneration
arrangements for Executive Directors and
key senior management
Key Stakeholders:
Shareholder feedback following the 2018
AGM in May
Feedback sessions following engagement
with the PRA/FCA
Consideration of the revised UK Corporate
Governance Code and how the Committee
intends to ensure compliance moving into
2019 and beyond
Consideration for ensuring a clear link
between pay and performance following
the launch of the Group’s new approach to
performance, ‘Your Best’
Review and approval of MBNA integration
remuneration approach
Review and approval of LDC bonus
award approach
Key Priorities for 2019
We are not seeking to make any changes to
our Directors Remuneration Policy for 2019
but the Committee will undertake a full review
of the Policy in 2019 ahead of the 2020 AGM.
During 2019, the Committee will increase its
level of oversight on remuneration matters
for the wider workforce to support with key
decision making when setting the policy.
This will include implementation of changes
supporting the Group’s new performance
management approach.
In light of the recent enhancements in
corporate governance, the Committee will
continue to focus on implementing the revised
principles of the UK Corporate Governance
Code. In addition to continuous engagement
with stakeholders, the Committee intends to
increase the level of engagement it has with
the wider workforce on remuneration matters.
Advice provided to the Committee:
Mercer is the appointed advisor to the
Committee, following a competitive tender
process in 2016 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. The broader Mercer company
provides unrelated advice on accounting and
investments. Mercer is a founding member
and signatory to the UK Remuneration
Consultants Code of Conduct which governs
standards in the areas of transparency,
integrity, objectivity, confidentiality,
competence and due care, details of
which can be found at
www.remunerationconsultantsgroup.com.
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 benchmarking pay
and performance.
Fees payable for the provision of
Remuneration Committee services in 2018
were £89,870, based on time and materials.
António Horta-Osório (Group Chief
Executive), Juan Colombás (Chief Operating
Officer), Jen Tippin (Group People and
Productivity Director), Matt Sinnott (Group
Reward Director), Stuart Woodward (Reward
Regulation, Governance and Variable Reward
Director) and Letitia Smith (Group Director,
Conduct, Compliance & Operational Risk)
provided guidance to the Committee (other
than for their own remuneration).
Stephen Shelley (Chief Risk Officer) and
George Culmer (Chief Financial Officer) also
attended the Committee to advise as and
when necessary on risk, financial and other
operational matters.
Statement of voting at Annual General Meeting
The table below sets out the voting outcome at the Annual General Meeting in May 2018.
Directors’ remuneration policy (binding vote in 2017)
2018 annual report on remuneration (advisory vote)
47,673
39,664
98.03%
79.22%
959
10,405
1.97%
20.78%
535
645
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)
Lloyds Banking Group Annual Report and Accounts 2018 97
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 2019. The full policy is set out in the 2016 annual report and accounts (pages 90–98) which is available at:
https://www.lloydsbankinggroup.com/investors/annual-reports/download-centre/.
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
Fixed share
award
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.
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.
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.
Pay for comparable roles in comparable publicly listed
financial services groups of a similar size.
Salary may be paid in sterling or other currency and at an
exchange rate determined by the Committee.
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
Maximum potential
The maximum award is 100 per cent of base salary.
Performance measures
N/A
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.
All future appointments as Executive Directors will attract a
maximum allowance of 25 per cent of base salary.
Performance measures
N/A
Benefits
Purpose and link to strategy
To provide flexible benefits as part of a competitive
remuneration package.
When determining and reviewing the level of benefits
provided, the Committee ensures that decisions are made
within the following two parameters:
Operation
Benefits may include those currently provided and disclosed in
the annual report on remuneration.
An objective assessment of the individual’s responsibilities
and the size and scope of their role, using objective job-
sizing methodologies.
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.
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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
98 Lloyds Banking Group Annual Report and Accounts 2018
Directors’ remuneration report continued
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
Group
Ownership
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.
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.
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.
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. 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 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.
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.
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.
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.
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.
Lloyds Banking Group Annual Report and Accounts 2018 99
Deferral
of variable
remuneration
and holding
periods
Operation
The Group Performance Share and Group Ownership Share
plans are both considered variable remuneration for the
purpose of regulatory payment and deferral requirements.
The payment of variable remuneration and deferral levels
are determined at the time of award and in compliance with
regulatory requirements (which currently require that at least
60 per cent of total variable remuneration is deferred for seven
years with pro-rata vesting between the third and seventh year,
and at least 50 per cent of total variable remuneration is paid in
shares or other equity linked instruments subject to a holding
period in line with current regulatory requirements).
A proportion of the aggregate variable remuneration may
vest immediately on award. The remaining proportion
of the variable remuneration is then deferred in line with
regulatory requirements.
Further information on which performance measures were
chosen and how performance targets are set are disclosed in
the relevant sections throughout the report.
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.
The Chairman receives an all-inclusive fee, which is reviewed
periodically plus benefits including life insurance, car
allowance, medical insurance and transportation. The
Committee retains the right to provide additional benefits
depending on individual circumstances. NEDs are paid a basic
fee plus additional fees for the chairmanship/membership of
committees and for membership of Group companies/boards/
non-board level committees.
Additional fees are also paid to the senior independent
director and to the deputy chairman to reflect additional
responsibilities.
Any increases normally take effect from 1 January of a
given year.
The Chairman and the NEDs are not entitled to receive
any payment for loss of office (other than in the case of the
Chairman’s fees for the six month notice period) and are not
entitled to participate in the Group’s bonus, share plan or
pension arrangements.
NEDs are reimbursed for expenses incurred in the course of
their duties, such as travel and accommodation expenses, on a
grossed-up basis (where applicable).
Maximum potential
The Committee will make no increase in fees or benefits
currently provided which it believes is inconsistent with the
parameters above.
Performance metrics
N/A
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.
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
Stuart Sinclair
Chairman, Remuneration Committee
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
100 Lloyds Banking Group Annual Report and Accounts 2018
Other remuneration disclosures
This section discloses the remuneration
awards made by the Group to Material
Risk Takers (MRTs) in respect of the 2018
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 82 to 99, 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
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 and 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 96 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 Group People Committee having
oversight for all other colleagues.
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/our-
group/corporate-governance. These terms
are reviewed each year to ensure compliance
with the remuneration regulations and were
last updated in November 2018.
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 86 to 87, 89, 92 to 94 and
97 to 99 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.
Lloyds Banking Group Annual Report and Accounts 2018 101
The table below summarises the different remuneration elements for MRTs (this includes control function staff) and non-MRTs.
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 97 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
Applies to:
Non-Executive Directors (NEDs)
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 Function1
Other MRTs1
Non-MRTs1
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
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
Fixed share
award
Benefits
Short-term
variable
remuneration
arrangements
Non-Executive Director fees are reviewed periodically by the
Board. Further information on fees can be found on page 94
of the DRR.
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 97 of the DRR.
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 97 to 98 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 99 of the DRR.
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.
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 93
and 98 of the DRR.
1 Eligibility based on seniority, grade and role
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
102 Lloyds Banking Group Annual Report and Accounts 2018
Other remuneration disclosures continued
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 98 and 99 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 Function1
Other MRTs1
Non-MRTs1
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, variable remuneration is deferred in line
with the regulatory requirements for three, five or seven years,
(depending on MRT category). At least 50 per cent of each
release is subject to a 12 month holding 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.
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 94 and 99.
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 91.
Applies to:
All other MRTs and non-MRTs: 25 per cent to 100 per cent
of the aggregate of base salary and fixed share award
depending on grade.
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 Function2
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.
1 Eligibility based on seniority, grade and role
2 Requirement based on seniority and grade
Other MRTs2
Non-MRTs2
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
Table 1 Analysis of high earners by band
Number of Material Risk Takers paid €1 million1,2 or more
€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
€7.0m – €8.0m
Lloyds Banking Group Annual Report and Accounts 2018 103
2018
Material Risk
Takers3,4
2017
Material Risk
Takers4
30
8
7
1
2
4
–
–
–
–
1
35
11
2
1
3
4
–
–
–
–
1
1 Converted to Euros using the exchange rate €1 = £0.89135 (average exchange rate 1 December 2018 – 31 December 2018 based on the European Commission Budget exchange rates). The
exchange rate used for 2017 was €1 = £0.88293.
2 Value of LTIP/Group Ownership Share awards based on expected value at grant pre the application of the EBA discount factor.
3 Total number of Material Risk Takers earning more than €1m has decreased from 57 in 2017 to 53 in 2018.
4 2018 and 2017 data has been calculated using methodology consistent with EBA guidelines.
Table 2 Aggregate remuneration expenditure (Material Risk Takers)
Analysis of aggregate remuneration expenditure by division1
Aggregate remuneration expenditure
Retail and
Community
Banking
£m
Commercial
Banking
£m
Insurance &
Wealth
£m
Group
Functions &
Services1
£m
Total
£m
22.7
62.1
10.8
95.6
191.2
1 Chief Operating Office comprises People and Productivity, Group Transformation, Chief Information Office and Chief Security Office. Group Functions comprises Risk, Finance, Legal, Strategy,
Group Corporate Affairs, Group Internal Audit, Company Secretariat and Responsible Business.
Table 3 Fixed and variable remuneration (Material Risk Takers)
Analysis of remuneration between fixed and variable amounts
Remuneration £m
Awarded in relation to the 2018 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
2018 Total
3
5.8
3.9
1.9
6.0
–
6.0
0.9
5.1
11.8
10
–
–
–
–
–
–
–
–
–
147
61.6
54.6
7.0
57.0
0.3
56.7
20.3
36.4
118.6
120
36.0
34.4
1.6
24.7
0.2
24.5
13.3
11.2
60.7
280
103.4
92.9
10.5
87.7
0.5
87.2
34.5
52.7
191.2
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 Values for LTIP/Group Ownership Share awards based on expected value at the date of grant pre the application of the EBA discount factor.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
104 Lloyds Banking Group Annual Report and Accounts 2018
Other remuneration disclosures continued
Table 4 Total outstanding deferred variable remuneration
Remuneration £m
Total outstanding deferred variable remuneration at 31 December 2018
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
2018 Total
3
26.2
5.9
20.3
10
–
–
–
147
116.1
16.7
99.4
120
40.4
7.4
33.0
280
182.7
30.0
152.7
Table 5 Other payments awarded in relation to the 2018 performance year
Guaranteed bonuses
Sign-on awards
Severance payments
Number of
awards made
Total
£m
Number of
awards made
Total
£m
Number of
awards made
Total
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Management body
Senior management
Other Material Risk Takers
Table 6 Deferred remuneration
Analysis of deferred remuneration at 31 December 2018
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
26.2
116.1
40.4
26.2
116.1
40.4
–
–
–
1.7
12.7
9.6
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.
Lloyds Banking Group Annual Report and Accounts 2018 105
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
106
108
110
110
112
114
Further information on risk management
can be found:
30
Risk overview
Note 52: Financial risk management
255
Pillar 3 report: www.lloydsbankinggroup.com
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.
Supporting
green transport
in London
A new fleet of hybrid and electric buses is arriving on the streets of
London, with funding provided through our Clean Growth Finance
Initiative (CGFI). Metroline, one of the capital’s largest bus providers,
has used a £50 million asset finance facility to fund its fleet renewal
programme, in line with London Mayor Sadiq Khan’s plans to
make London the world’s greenest global city. Targets have been
set by Transport for London to operate low-emission transport
across the city and reduce carbon dioxide emissions by 60 per cent
before 2025. Metroline is one of a number of businesses that have
accessed discounted funding to support low carbon projects
through the CGFI.
£50m
asset finance facility to
fund Metroline’s fleet
renewal programme
visit lloydsbankinggroup.com/
prosperplan
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106 Lloyds Banking Group Annual Report and Accounts 2018
Risk management
Risk management is at the heart of our strategy
to become the best bank for customers.
Our mission is to protect our customers,
colleagues and the Group, whilst enabling
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 30 to 35) provides a summary of risk management
within the Group. It highlights the important role of risk as a strategic
differentiator, key areas of focus for risk during 2018, and the role of risk
management in enhancing the customer experience, along with an
overview of the Group’s Risk Management Framework, 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 106 to 114) and a full analysis of the primary risk categories
(pages 114 to 159) – 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, support sustainable growth
within Group risk appetite, and to drive and inform good risk reward
decision-making.
To meet ring-fencing requirements from 1 January 2019, core UK retail
financial services and ancillary retail activities have been ring-fenced from
other activities of the Group. The Group Risk Management Framework and
Group Risk Appetite apply across the Group and are supplemented by risk
management frameworks and risk appetites for the sub-groups to meet
sub-group specific needs. In each case these are aligned to the Group
position. The Group’s Corporate Governance Framework applies across
Lloyds Banking Group plc, Lloyds Bank plc, Bank of Scotland plc and
HBOS plc. It is tailored where needed to meet the entity specific needs of
Lloyds Bank plc and Bank of Scotland plc, and supplementary Corporate
Governance Frameworks are in place to address sub-group specific
requirements of the other sub-groups (LBCM, Insurance and LBG Equity
Investments). See our revised Group governance arrangements and Group
restructure to comply with ring-fencing on page 58.
Risk culture
Based on the Group’s conservative business model, prudent approach
to risk management, and guided by the Board, the senior management
articulates the core risk values to which the Group aspires, and sets the
tone at the top, with a strong focus on building and sustaining long-term
relationships with customers through the economic cycle. The Group’s
code of responsibility reinforces colleague accountability for the risks they
take and their responsibility to prioritise their customers’ needs.
Risk appetite
We define our risk appetite as ‘the amount and type of risk that the Group
is prepared to seek, accept or tolerate’ in delivering our Group strategy.
Group strategy and risk appetite are developed in tandem. Business
planning aims to optimise value within our risk appetite parameters and
deliver on our promise to Help Britain Prosper.
The Group’s risk appetite statement details the risk parameters within
which the Group operates. The statement forms part of our control
framework and is embedded into our policies, authorities and limits, to
guide decision-making and risk management. The Board is responsible
for approving the Group’s risk appetite statement at least annually.
Group Board-level metrics are cascaded into more detailed business
appetite metrics and limits.
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.
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.
Conduct – the Group’s product design and sales practices ensure that
products are transparent and meet customer needs.
Operational – the Group has robust controls in place to manage
operational losses, reputational events and regulatory breaches.
It identifies and assesses emerging risks and acts to mitigate these.
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.
Capital – the Group maintains capital levels commensurate with a prudent
level of solvency, and aims to deliver consistent and high quality earnings.
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.
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.
Market – the Group has robust controls in place to manage its inherent
market risk and does not engage in any proprietary trading, reflecting the
customer focused nature of the Group’s activities.
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.
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.
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.
Lloyds Banking Group Annual Report and Accounts 2018 107
Risk decision-making and reporting
Risk analysis and reporting enables better understanding of risks and
returns, supporting the identification of opportunities as well as better
management of 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 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.
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 appropriately and consistently
applied, transactions are recorded accurately, and undertaken in
accordance with delegated authorities, that assets are safeguarded and
liabilities are properly stated;
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;
enable annual certifications relating to maintenance of appropriate tax
accounting by the Senior Accounting Officer in accordance with the
2009 Finance Act;
ensure that disclosures are made on a timely basis in accordance with
statutory and regulatory requirements (for example UK Finance Code
for Financial Reporting Disclosure; US Sarbanes Oxley Act) and, as far as
possible, consistent with best practice;
ensure ongoing monitoring to assess the impact of emerging regulation
and legislation on financial, prudential regulatory and tax reporting; and
ensure an accurate view of the Group’s performance to allow the Board
and senior management to appropriately manage the affairs and
strategy of the business as a whole and each of its sub-groups.
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 70 to 73.
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 Results on pages 27 to 29.
Risk-weighted assets (RWAs)
– Credit risk
– Counterparty credit risk3
– Market risk
– Operational risk
Total (excluding threshold)
– Threshold4
Total
Retail
£bn
Commercial
Banking
£bn
Insurance and
Wealth1
£bn
Central
items2
£bn
74.5
–
–
19.8
94.3
–
94.3
74.7
4.7
2.0
4.6
86.0
–
86.0
0.6
–
–
0.6
1.2
–
1.2
11.7
2.5
0.1
0.5
14.8
10.1
24.9
Group
£bn
161.5
7.2
2.1
25.5
196.3
10.1
206.4
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 other
supporting functions.
3 Exposures relating to the default fund of a central counterparty and credit valuation adjustment risk are included in counterparty credit risk.
4 Threshold RWAs 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 32 to 35). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s risk
categories is on pages 114 to 159.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
108 Lloyds Banking Group Annual Report and Accounts 2018
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 financial sector continues to witness an
increased pace, volume and complexity of oversight and regulation from
various bodies including government and regulators.
Increasing regulatory rules and laws from both the UK and overseas may
affect the Group’s operation, placing pressure on expert resource and
investment priorities.
There continues to be uncertainty as to the impact of EU exit or the impact
of a no deal outcome on the regulatory and legal landscape. One impact of
EU exit will be that the UK loses its ability to make use of the EU Passport for
provision of banking services into the EU.
– 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 legal, regulatory and
mandatory change requirements.
– We have implemented a programme to assess the legal impacts and risks
of an EU exit (including a no deal outcome) and to identify appropriate
mitigants, such as establishing EU entities to ensure continuity of certain
business activities.
Cyber: Increases in the volume and sophistication of cyber-attacks
alongside the growth in connected devices continues to heighten the
potential for cyber-enabled crime.
Increases in geopolitical tensions increase the indirect threat of a
sophisticated attack on the Group. The capability of organised crime
groups is growing rapidly, which along with the commoditisation of cyber-
crime increases the likelihood that the Group or one of its suppliers will
be the direct target of a sophisticated attack. This increases the risk of the
Group’s exposure through the supply chain.
Political uncertainties including EU exit: The continued lack of clarity over
the UK’s eventual relationship with the EU allied to ongoing challenges in
the Eurozone, including protests in France and changes in government in
Italy, raise additional uncertainty for the UK economic outlook. Growing
public concern over perceived income inequality has also led to a rise in
political populism. There also remains the possibility of a further referendum
on Scottish independence.
There is a risk of a no deal EU exit outcome or a delay to EU exit, which
could result in continuing business uncertainty across the whole UK
banking sector.
– Continued investment and priority focus on the Group’s Cyber
Programme to ensure confidentiality and integrity of data and availability
of systems. Key areas of focus relate to access controls, network security,
disruptive technology, and denial of service capability.
– Embedding of Group Cyber control framework aligned to industry
recognised cyber security framework (NIST: National Institute of Standards
and Technology).
– Three year cyber strategy to deliver an industry-leading approach across
the Group and to embed innovation in our approach to cyber.
– Increased business and colleague engagement through education and
awareness, phishing testing and security culture initiatives. Cyber risk is
governed through all key risk committees and there are quarterly reviews
of all cyber risks.
– Internal contingency plans recalibrated and regularly reviewed for
potential strategic, operational and reputational impacts.
– Engagement with politicians, officials, media, trade and other bodies to
reassure our commitment to Helping Britain Prosper.
Specifically for the potential impacts of EU exit:
– Executive forum considering and tracking developments and activity
– Committed investments to establish new Group entities in the EU to
ensure continuity of certain business activities, and contingency planning
in relation to wider areas of impact
– Group Corporate Treasury tracking market conditions closely and actively
managing the Group’s balance sheet
– Credit applications and sector reviews include assessment of EU exit risk.
Initiatives to help clients effectively identify and manage associated risks
– Review of the Group’s top EU suppliers to identify any impact on service
provision and drive appropriate mitigating action
– No deal EU exit outcome analysed to identify impacts and assess
robustness of the Group’s contingency plans.
Competition: Adoption of technological trends is accelerating with
customer preferences increasingly shaped by tech giants and other
challengers who are able to exploit their own infrastructure and are
impacted by different market dynamics. Regulation is focusing on
lowering barriers for new entrants, which could have an adverse impact
on our market position.
Operational complexity has the potential to restrict our speed of response
to market trends. Inability to leverage data and innovate could lead to loss
of market share as challengers capitalise on Open Banking. Timely delivery
of GSR3 objectives remains key to addressing the competitive challenges
facing the Group.
– 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.
– 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 is responsive to changing customer behaviour/business
models and adjusts its risk management approach as appropriate
– GSR3 is designed to support the Group to strengthen its competitive position.
Data: Advancements in new technologies and new services, an increasing
external threat landscape, and changing regulatory requirements increase
the need for the Group to effectively govern, manage, and protect its
data (or the data shared with third-party suppliers). Failure to manage data
risk will impact the accuracy, access to and availability of data, ultimately
leading to poor customer outcomes, loss of value to the bank and
reputational damage.
Macroeconomic headwinds: The UK economic outlook is uncertain.
Business investment is lower than historical averages with early signs of
pressure in Retail and high street sectors. High levels of credit market
liquidity have reduced spreads and weakened terms in some sectors,
creating a potential under-pricing of risk and heightened risk of a market
correction. These factors could lead to downward pressure on credit quality.
– 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 has implemented Open Banking and actively monitors
implications for our customers, including protection from fraud.
– We are making a significant investment to improve data privacy, including
the security of data and oversight of third-parties.
– Wide array of risks considered in setting strategic plans.
– Capital and liquidity are reviewed regularly through committees, ensuring
compliance with risk appetite and regulatory requirements.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 109
Risk
Key mitigating actions
Uncertainty remains over UK monetary policy, and tightening US monetary
policy is pressuring some emerging markets with potential spill over effects
on growth and asset prices in other markets.
Policy tightening in the US and China has weakened global growth
prospects; this is likely to bring a pause to US policy normalisation and
Chinese deleveraging of its high debt levels, in turn weakening crisis
management tools.
Geopolitical shocks: Current uncertainties could further impede the global
economic recovery. Global events, as well as terrorist activity including
cyber-attacks, have the potential to trigger changes in the economic
outlook, market risk pricing and funding conditions.
Financial services transformation impact on customers: The risk that
transformation of the financial services industry and the Group does not
adequately consider vulnerable customers. As technology and innovation
move at increasing pace, the more vulnerable could be at a disadvantage.
The increase in execution only propositions due to digitisation may lead to
increased conduct risk where customers (including vulnerable customers)
choose unsuitable products. Our approach to customer segmentation will
need to ensure conduct and reputational risks are well managed.
Further, there is an emerging risk of unintended consequences within
decision-making undertaken by machine learning which could occur on
a large scale in a short period of time, creating new operational risks that
affect financial and non-financial outcomes, for example credit portfolio
anomalies or conduct impacts. This is relevant for the Group at present as
the delivery of GSR3 utilises new technologies.
– The Group has a robust through the cycle credit risk appetite, including
appropriate product, sector and single name concentration parameters,
robust sector appetite statements and policies, as well as affordability
and indebtedness controls at origination. In addition to ongoing focused
monitoring, we conduct portfolio deep dives and quarterly larger
exposure reviews. We have enhanced our use of early warning indicators
including sector specific indicators.
– The Group is well positioned against an uncertain economic outlook and
is able to withstand potential market volatility and/or downturn due to its
selective and pre-emptive credit tightening, robust affordability controls
and close monitoring of internal and external trends.
– Risk appetite criteria limits single counterparty bank and non-bank
exposures complemented by a UK-focused strategy.
– The Chief Security Office develops and maintains an Emerald Response
Process to respond to external crisis events. This is a rapid reaction group,
incorporating Financial Stability Response where appropriate.
– 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.
– Hedging of market risk considers, inter alia, potential shocks as a result of
geopolitical events.
– Group vulnerability strategy and associated actions being developed
throughout the transformation programme.
– Digital principles are being agreed across the Group, primarily aimed
at preventing material conduct residual risk and giving customers an
optimal, informative and fair buying journey to mitigate the increased
risks.
– Technology risks, including those related to machine learning, are
escalated and discussed through governance to ensure ongoing
monitoring of any emerging unintended consequences.
– Emerging customer risks, including those pertaining to vulnerable
customers, are managed through customer segmentation strategy
governance throughout the change lifecycle.
Climate change: The key risks associated with climate change are physical
risks arising from climate and weather-related events, and transition risks,
which are the financial risks resulting from the process of adjustment
towards a lower carbon economy. Both of these risks may cause the
impairment of asset values and impact the creditworthiness of our clients,
which could result in currently profitable business deteriorating over the
term of agreed facilities. Conversely propositions currently outside of
appetite may constitute an acceptable opportunity in the future.
There is increased focus on these risks by key stakeholders including
businesses, clients and investors, and the regulatory landscape is evolving
to reflect these risks.
There is also a risk that campaign groups or other bodies could seek to take
legal action (including indirect action) against the Group and/or the financial
services industry for investing in or lending to organisations that they deem
to be responsible for, or contributing to, climate change.
– We have embedded Sustainability in our Helping Britain Prosper Plan and
Group Property Objectives.
– We are taking a strategic approach to align with the UK Government’s
Clean Growth Strategy and have committed to adopting the approach
set out by the Financial Stability Board’s Task Force on Climate-related
Financial Disclosures (TCFD).
– We are identifying new opportunities to support customers and clients
and to finance the UK’s transition to a lower carbon economy.
– We will embed sustainability into the way we do business and manage
our own operations in a more sustainable way, identifying and managing
material sustainability-related risks across the Group, and disclosing these
in line with the TCFD recommendations.
– We will ensure that appropriate training is provided to Relationship
managers and Risk colleagues to enable them to have effective
sustainability conversations with their clients.
Transition from IBORs to Alternative Risk Free Reference Rates:
Widely used benchmark rates, such as the London Interbank Offered
Rate (‘LIBOR’), have been subject to increasing regulatory scrutiny, with
regulators signalling the need to use alternative benchmark rates. As a
result, existing benchmark rates may be discontinued or the basis on which
they are calculated may change.
There is uncertainty across the whole UK Banking sector as to the impact
such discontinuation or changes may have and they may adversely affect
a broad array of financial products, including any LIBOR-based securities,
loans and derivatives.
Any discontinuation or changes could have important implications for both
the Group and our customers, for example: necessitating amendments to
existing documents and contracts; changes to systems and infrastructures;
and the possibility of disputes.
– The Group is working closely with the Bank of England initiated Working
Group on Sterling Risk-Free Reference Rates on the transition away from
LIBOR in the UK.
– Maintain close engagement with the FCA on potential impacts.
– Working closely with industry bodies to understand and manage the
impact of benchmark transition in other geographies.
– Transition project established and the appointment of an IBOR Transition
Director as accountable executive.
– Working with our customers to ensure they understand the risks or
outcomes they might face from transition.
– Establish a clear client communication strategy for all new IBOR linked
products. Consider appropriate client communications for legacy
contracts as the market end-state position evolves.
– Implement an internal communication strategy and ensure that all
relevant staff are aware and have the tools and training required.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
110 Lloyds Banking Group Annual Report and Accounts 2018
Capital stress testing
Overview
Stress testing is recognised as a key risk management tool by the Boards,
senior management, the businesses and the Risk and Finance functions
of all parts of the Group and its legal entities. It is fully embedded in the
planning process of the Group and its legal entities as a key activity in
medium-term planning, and senior management is actively involved in
stress testing activities via a strict governance process.
Scenario stress testing is used for:
Risk Identification:
Understand key vulnerabilities of the Group and its key legal entities
under adverse economic conditions.
Risk Appetite:
Assess the results of the stress test against the risk appetite of all parts of
the Group to ensure the Group and its legal entities are managed within
their 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 Boards of the Group and its
applicable legal entities 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
Prudential Regulation Authority (PRA) and management buffers
(see capital risk on pages 139 to 147) of the Group and its separately
regulated legal entities.
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 recovery planning process of the Group and its legal entities.
Regulatory stress tests
In 2018 the Group participated in both the concurrent UK stress test run by
the Bank of England (BoE) and in the European Banking Authority’s (EBA)
bi-annual EU-wide stress test. The EBA stress test did not contain a pass/
fail threshold and as announced in November, the Group demonstrated
its ability to meet applicable capital requirements under stress conditions.
In the case of the BoE stress test, despite the severity of the scenario, the
Group exceeded the capital and leverage hurdles after the application of
management actions and as a consequence was not required to take any
capital actions.
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 and its legal entities’ business plans 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
and its key legal entities’ strategies and plans to extreme adverse events
that would cause the businesses to fail, in order to facilitate contingency
planning. The scenarios used are those that would cause the businesses to
be unable to carry on their activities. Where reverse stress testing reveals
plausible scenarios with an unacceptably high risk when considered
against the Group’s or its entities’ risk appetite, they 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
assessments of liquidity scenarios, market risk sensitivities and scenarios,
and business specific scenarios (see the primary risk categories on pages
114 to 159 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 and its key legal entities. 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.
Lloyds Bank Corporate Markets (LBCM) Risk Committee performs a similar
function within the scope of LBCM.
The review and challenge of the Group’s 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 and Board
Risk Committee for review and challenge, before being approved by the
Board. There is a similar process within LBCM for the governance of the
LBCM-specific results.
How risk is managed in
Lloyds Banking Group
The Group’s Risk Management Framework (RMF) (see risk overview,
page 30) is structured around the following components which meet and
align with the industry-accepted internal control framework standards.
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. 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’ in delivering our
Group Strategy (see the Group’s approach to risk page 106).
Governance frameworks
The policy framework is founded on Board-approved key principles
for the overall management of risk in the organisation. These 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.
These are consistently implemented across the Group.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 111
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. The risk
and control cycle sets out how this should be approached, 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.
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.
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.
Robust processes and controls to identify and report policy breaches are
in place. These 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 112.
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, providing oversight and independent constructive challenge
to the effectiveness of risk decisions taken by business management,
providing proactive advice and guidance, reviewing, challenging and
reporting on the risk profile of the Group and ensuring that mitigating
actions are appropriate.
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:
oversighting embedding of 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 risk management 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 for both current and emerging key risks, and associated
management actions;
proposing Group risk appetite to the Board for approval (with input
from the business areas and Risk division), and overseeing performance
of the Group against risk appetite;
developing an effective RMF which meets regulatory requirements for
approval by the Board, and overseeing its 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 reporting to the Chief Risk Officer:
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 provide oversight of the associated risk
profile across the Group.
The primary role of Group Internal Audit (third line) is to help the
Board and executive management protect the assets, reputation and
sustainability of the Group. Group Internal Audit is led by the Group Chief
Internal Auditor. Group Internal Audit provides independent assurance
to the Audit Committee and the Board through performing reviews and
engaging with committees/executive management, providing opinion
and challenge on risk and the state of the control environment. Group
Internal Audit is a single independent internal audit function, reporting
to the Board Audit Committee of the Group and the Board Audit
Committee of the key subsidiaries.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
112 Lloyds Banking Group Annual Report and Accounts 2018
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 supports senior and Board-level committees, and supports the Chairs in agenda planning. This gives a further line of escalation
outside the three lines of defence.
Table 1.2: Risk governance structure
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escalation
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challenge
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Risk Division
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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
Risk Division Committees
and Governance
Commercial Banking Risk Committee
Credit risk
Group Asset and Liability Committee (GALCO)
Retail Risk Committee
Insurance and Wealth Risk Committee
Executive Credit Approval Committees
Commercial Banking Credit Risk Committees
Retail Credit Risk Committees
Group Customer First Committee
Group Cost Management Committee
Conduct Review Committee
Group People Committee
Sustainability Committee
Senior Independent Performance
Adjustment and Conduct Committee
Group Strategic Review 3 Committee
Community Banking Risk Committee
Market risk
Group Transformation Risk Committees
Finance Risk Committee
People and Productivity Risk Committee
Group Corporate Affairs Risk Committee
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)
Risk management continuedBusiness area principal Enterprise Risk CommitteesFirst line of defence – risk managementAudit CommitteeBoardBoard Risk CommitteeGroup Chief ExecutiveGroup Chief Executive Committees
Lloyds Banking Group Annual Report and Accounts 2018 113
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 56 to 78, for further information on Board committees.
The Group’s Corporate Governance Framework applies across Lloyds Banking Group plc, Lloyds Bank plc, Bank of Scotland plc and HBOS plc. It is
tailored where needed to meet the entity specific needs of Lloyds Bank plc and Bank of Scotland plc, and supplementary Corporate Governance
Frameworks are in place to address sub-group specific requirements of the other sub-groups (LBCM, Insurance and LBG Equity Investments).
The divisional and functional risk committees review and recommend divisional and functional risk appetite and monitor local risk profile and adherence
to appetite.
Table 1.3: Executive and Risk Committees
In relation to the operation of Lloyds Banking Group plc, the Group Chief Executive is supported by the following:
Committees
Risk focus
Group Executive Committee (GEC)
Assists the Group Chief Executive in exercising his authority in relation to material matters having
strategic, cross-business area or Group-wide implications.
Group Risk Committee (GRC)
Group Asset and Liability Committee (GALCO)
Group Customer First Committee
Group Cost Management Committee
Conduct Review Committee
Group People Committee
Responsible for the development, implementation and effectiveness of the Group’s Risk
Management Framework, the clear articulation of the Group’s risk appetite and monitoring and
reviewing of the Group’s aggregate risk exposures and concentrations of risk.
Responsible for the strategic direction of the Group’s assets and liabilities and the profit and loss
implications of balance sheet management actions. The committee reviews and determines
the appropriate allocation of capital, funding and liquidity, and market risk resources and makes
appropriate trade-offs between risk and reward.
Provides a Group-wide perspective on the progress of implementation of initiatives to 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.
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 senior management oversight, challenge and accountability 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.
Sustainability Committee
Recommends and implements the strategy and plans for delivering the Group’s aspiration to be
viewed as a trusted responsible business as part of the objective of Helping Britain Prosper.
Senior Independent Performance Adjustment
and Conduct Committee
Group Strategic Review 3 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.
Responsible for monitoring the progress of transformation across the Group, acting as a clearing
house to resolve issues and facilitate resolution of issues where necessary and to drive the execution
of the Group’s transformation agenda as agreed by the Group Chief Executive.
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
Group Conduct, Compliance and
Operational Risk Committee
Review material credit risk, both current and emerging, and adherence to agreed risk appetite;
approve, or note the delegated approval of divisional and business level credit risk policy and
credit risk appetite; identify portfolio trends and risk appetite breaches and escalate to Group Risk
Committee as appropriate; sanction new credit initiatives for automated and manual decisioning
and collection and recoveries; oversight new business and portfolio credit risk performance, risks,
opportunities, and concentrations; and oversight performance of collections and recoveries.
Reviews and recommends market risk appetites. Monitors and oversights market risk exposures
across the Group and adherence to Board Risk Appetite. Approves the framework and designation
of books between the Trading Book and the Banking Book for regulatory purposes.
Acts as a Risk community forum to independently challenge and oversee the Group-wide risk and
control environment, focusing on read-across of material events, key areas of regulatory focus and
emerging horizon risks. Uses lessons learned and undertakes read-across from the three lines of
defence to ensure that the Group-wide risk profile adapts to emerging risks, trends and themes, and
the control environment is sustainable to deliver the Bank of the Future.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
114 Lloyds Banking Group Annual Report and Accounts 2018
Committees
Risk focus
Group Fraud and Financial Crime
Prevention Committee
Group Financial Risk Committee
Group Capital Risk Committee
Group Model Governance Committee
Ensures development and application of fraud and financial crime risk management complies with
the Group’s strategic aims, Group Corporate Responsibility, Group Risk Appetite and Group Fraud
and Financial Crime Policies. Provides direction and appropriate focus on priorities to enhance the
Group’s fraud and financial crime risk management capabilities in line with business and customer
objectives whilst aligning to the Group’s target operating model.
Responsible for oversighting, reviewing, challenging and recommending to senior executives and
Board committees internal and Regulatory stress tests, Internal Capital Adequacy Assessment
Process, Pillar 3 Disclosures, Recovery and Resolution Plans, and other analysis as required.
Responsible for providing oversight of all relevant capital matters within the Group including the
Group’s latest capital position and plans, risk appetite proposals, Pillar 2 developments, and the
impact from regulatory reforms and accounting developments specific to capital.
Responsible for setting the model governance framework, the associated policy and related
principles and procedures; reviewing and approving models, model changes, model extensions
and capital post model adjustments; recommending approval to Group Risk Committee (GRC) of
those models which require GRC approval; monitoring summary of model performance, approving
any appropriate corrective actions; and monitoring performance against risk appetite and escalating
as required.
Ring-Fenced Bank Perimeter Oversight Committee The Committee escalates perimeter control breaches to the Ring-Fenced Banks’ Board Risk
Committee and Boards.
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 115 to 159.
Risk categories recognised by the Group are periodically reviewed to ensure that they reflect the Group risk profile in light of internal and external factors,
such as the Group Strategy and the regulatory environment in which it operates. As part of a review of the Group’s risk categories, the secondary risk
categories in the table below of Change, Data management and Operational resilience have been elevated to primary risk categories, and Strategic risk
has been included as a new primary risk category, in the Group’s Risk Management Framework. These changes will be embedded during 2019.
Primary risk categories
Secondary risk categories
Credit risk
Page 115
Regulatory and legal risk
Page 135
Conduct risk
Page 136
Operational risk
Page 136
– Retail credit
– Commercial credit
– Regulatory compliance
– Legal
– Conduct
– Business process
– Change
– External service provision
– Internal service provision
– Financial crime
– IT systems
– Cyber and information security
– Financial reporting
– Operational resilience
– Data management
– Fraud
– Physical security/health and safety
People risk
Page 138
– Sourcing
– People
Insurance underwriting risk
Page 138
– Insurance underwriting
Capital risk
Page 139
– Capital
Funding and liquidity risk
Page 147
– Funding and liquidity
Governance risk
Page 153
Market risk
Page 154
Model risk
Page 159
– 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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 115
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 52 on page 255.
In terms of loans and advances (for example mortgages, term loans and
overdrafts) and contingent liabilities (for example credit instruments such
as guarantees and documentary 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 a loss up to an amount equal to the total unutilised
commitments. However, the likely amount of loss may be less than the
total unutilised commitments, as most retail and certain commercial
lending commitments may be cancelled based on regular assessment
of the prevailing creditworthiness of customers. Most commercial term
commitments are also contingent upon customers maintaining specific
credit standards.
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 2018 is shown on
page 134. The notional principal amount does not, however, represent
the Group’s credit risk exposure, which is limited to the current cost of
replacing contracts with a positive value to the Group. Such amounts are
reflected in note 52 on page 255.
Additionally, credit risk arises from leasing arrangements where the
Group is the lessor. Note 2(J) on page 181 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,
shareholder funds (including the annuity portfolio) and 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 219 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 occur for a number of reasons which may include: 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 exposures are minimised through intensive
account management and, where appropriate, are impaired and/or classed
as forborne.
Measurement
The process for credit risk identification, measurement and control is
integrated into the Board-approved framework for credit risk appetite and
governance.
Credit risk is measured from different perspectives using a range of
appropriate modelling and scoring techniques at a number of levels of
granularity, including total balance sheet, individual portfolio, pertinent
concentrations and individual customer – for both new business and
existing lending. Key metrics such as total exposure, risk-weighted assets,
new business quality, concentration risk and portfolio performance, are
reported monthly to Risk Committees.
Measures such as expected credit loss (ECL), risk-weighted assets,
observed credit performance, predicted credit quality (usually from
predictive credit scoring models), collateral cover and quality and other
credit drivers (such as cash flow, affordability, leverage and indebtedness)
are used to enable effective risk measurement across the Group.
In addition, stress testing and scenario analysis are used to estimate
impairment losses and capital demand forecasts for both regulatory and
internal purposes and to assist in the formulation of credit risk appetite.
As part of the ‘three lines of defence’ model, Risk division is the second
line of defence providing oversight and independent challenge to key
risk decisions taken by business management. Risk division also tests the
effectiveness of credit risk management and internal credit risk controls.
This includes ensuring that the control and monitoring of higher risk
and vulnerable portfolios/sectors is appropriate and confirming that
appropriate loss allowances for impairment are in place. Output from these
reviews help to inform credit risk appetite and credit policy.
As the third line of defence, Group Internal Audit undertakes regular
risk-based reviews to assess the effectiveness of credit risk management
and controls. The Group’s external auditors also review adequacy at each
quarter-end.
Following the introduction of IFRS 9, underlying processes and key controls
have been updated with additional management information produced
to assist in monitoring portfolio quality and provision coverage. Group
governance and oversight of impairments remains largely unchanged.
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. These are subject
to regular review and governance, with any changes subject to an
approval process. Risk teams monitor credit performance trends, review
and challenge exceptions, and test the adequacy and adherence to
credit risk policies and processes throughout the Group. This includes
tracking portfolio performance against an agreed set of credit risk appetite
tolerances.
Robust models and controls: see Model risk on page 159.
Limitations on concentration risk: there are portfolio controls on
certain industries, sectors and products to reflect risk appetite as well as
individual, customer and bank limit risk tolerances. 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 18(A) on page 255 provides an analysis of loans
and advances to customers by industry (for commercial customers) and
product (for retail customers). Exposures are monitored to prevent both
an excessive concentration of risk and single name concentrations. These
concentration risk controls are not necessarily in the form of a maximum
limit on exposure, but may instead require new business in concentrated
sectors to fulfil additional minimum policy and/or guideline requirements.
The Group’s largest exposures are regularly monitored by the Board Risk
Committee and reported in accordance with regulatory requirements.
Defined country risk management framework: 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 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, which
provide for example: intensive management and control; security
perfection; maintenance of customer and facility records; expertise in
documentation for lending and associated products; sector specific
expertise; and legal services applicable to the particular market segments
and product ranges offered by the Group.
Stress testing: the Group’s credit portfolios are subject to regular stress
testing. In addition to the Group led, PRA, EBA and other regulatory stress
tests, exercises focused on individual divisions and portfolios are also
performed. For further information on stress testing process, methodology
and governance see page 110.
Frequent and robust credit risk oversight and assurance: oversight and
assurance of credit risk is 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 effectively managed and to ensure that appropriate controls
are in place and being adhered to. Group Internal Audit also provides
assurance to the Board Audit Committee on the effectiveness of credit risk
management controls across the Group’s activities.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
116 Lloyds Banking Group Annual Report and Accounts 2018
Collateral
The principal types of acceptable collateral include:
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 parameters on the acceptability of specific
classes of collateral.
For non-mortgage retail lending to small businesses, collateral may include
second charges over residential property and the assignment of life cover.
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.
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 if required, the Group will often seek that any collateral include
a first charge over land and buildings owned and occupied by the
business, a debenture over one or more of the assets of a company or
limited liability partnership, personal guarantees, limited in amount, from
the directors of a company or limited liability partnership and key man
insurance. The Group maintains policies setting out acceptable collateral
bases for valuation, maximum loan to value (LTV) ratios and other criteria
that are 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.
Where third-parties are used for collateral valuations, they are subject to
regular monitoring and review. Collateral values are subject to review,
which will vary according to the type of lending, collateral involved and
account performance. Such reviews are undertaken to confirm that the
value recorded 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 and/or other amendments to the terms of the facility. The Group
adjusts estimated 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 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 the Group’s 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. 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- or better may be considered to
have no adverse correlation between the counterparty domiciled in that
country and the country of risk (issuer of securities).
Refer to note 52 on page 255 for further information on collateral.
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 for all lending are
compliant with relevant regulatory and 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 maximum
limits for individual customer products, 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 typically reject borrowing applications. The Group also applies certain
criteria that are applicable to specific products for example applications for
buy-to-let mortgages.
For UK mortgages, the Group’s policy permits owner occupier applications
with a maximum LTV of 95 per cent. Applications with an LTV above
90 per cent are subject to enhanced underwriting criteria, including higher
scorecard cut-offs and loan size restrictions.
Buy-to-let mortgages within Retail 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. Portfolio Landlords (customers with four or
more mortgaged buy-to-let properties) are 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 typically 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 certain 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 and Divisional risk
appetite. Exposure to individual counterparties, groups of counterparties
or customer risk segments is controlled through a tiered hierarchy of
delegated sanctioning authorities and risk based recommended maximum
limit parameters. 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 by Risk division. 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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 117
Non-performing exposures can be reclassified as Performing Forborne
after a minimum 12 month cure period, providing there are no past due
amounts or concerns regarding the full repayment of the exposure. A
minimum of a further 24 months must pass from the date the forborne
exposure was reclassified as Performing Forborne before the account can
exit forbearance. If conditions to exit forbearance are not met at the end
of this probation period, the exposure shall continue to be identified as
forborne until all the conditions are met.
The Group’s treatment of loan renegotiations is included in the impairment
policy in note 2(H) on page 180.
Customers receiving support from UK government
sponsored programmes
To assist customers in financial distress, the Group participates in UK
government sponsored programmes for households, including the Income
Support for Mortgage Interest programme, under which the government
paid all or part of the interest on the mortgage on behalf of the customer.
The Income Support for Mortgage Interest programme changed from a
benefit to a government loan, with effect from 6 April 2018. The Group
estimates that customers representing approximately £0.4 billion (2017:
£1.6 billion) of its mortgage exposures are receiving such support.
The Group credit risk portfolio in 2018
Overview
Credit quality remains strong with no deterioration in credit risk. Flow to
arrears remains stable at low levels. The Group’s loan portfolios continue
to be well positioned, reflecting the Group’s continued prudent, through
the cycle approach to credit risk and benefiting from continued low
interest rates and a resilient UK economy
The gross asset quality ratio remains stable at 28 basis points, in line with
2017 and 2016
The net asset quality ratio increased to 21 basis points (2017: 18 basis
points) and the impairment charge increased to £937 million in 2018
(2017: £795 million), driven by expected lower releases and write-backs,
the inclusion of MBNA for a full year and a low impairment charge in
Secured compared to one-off write-backs in 2017
The closed mortgage book continued to run off, reducing by a further
£2.4 billion during 2018
Stage 2 loans as a proportion of total loans and advances to customers
have reduced to 7.8 per cent (1 January 2018: 11.3 per cent), with Stage 2
loans and advances down by £14.3 billion to £38.3 billion, driven by the
sale of the Irish mortgage portfolio, model refinements to the Stage 2
transfer approach for Secured and portfolio improvements. Coverage
of Stage 2 drawn balances increased to 4.1 per cent (1 January 2018:
3.5 per cent)
Stage 3 loans as a proportion of total loans and advances to customers
have remained stable at 1.9 per cent, with Stage 3 loans and advances
up £0.2 billion to £9.2 billion. Coverage of Stage 3 drawn balances
increased to 24.3 per cent (1 January 2018: 24.0 per cent).
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
Credit portfolios are well positioned against an uncertain economic
outlook and potential market volatility, including that related to the UK’s
exit from the EU
The Group continues to grow lending to targeted segments while
maintaining a prudent risk appetite
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 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.
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.
Master netting agreements
It is credit policy that a Group approved master netting agreement must
be used for all derivative and traded product transactions and must be
in place prior to trading. This requirement extends to trades with clients
and the counterparties used for the Bank’s own hedging activities, which
may also include clearing trades with Central Counterparties (CCPs). Any
exceptions must be approved by the appropriate credit sanctioner. 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. However, within relevant jurisdictions and for
appropriate counterparty types master netting agreements 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 behaviours and
characteristics by which those portfolios are managed and monitored.
This entails the production and analysis of regular portfolio monitoring
reports for review by senior management. Risk division in turn produces
an aggregated view of credit risk across the Group, including reports
on material credit exposures, concentrations, concerns and other
management information, which is presented to the divisional risk
committees, Group Risk Committee and the Board Risk Committee.
Models
The performance of all models used in credit risk is monitored in line with
the Group’s governance framework – see Model risk on page 159.
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.
Forbearance
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
supporting its customers and acting in their best interests by, where
possible, bringing customer facilities back into a sustainable position.
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 appropriate and
sustainable for both the customer and the Group.
The provision and review of such assistance is controlled through the
application of an appropriate policy framework and associated controls.
Regular review of the assistance offered to customers is undertaken to
confirm that it remains appropriate, alongside monitoring of customers’
performance and the level of payments received.
The Group classifies accounts as forborne at the time a customer in
financial difficulty is granted a concession. Accounts are classified as
forborne for a minimum of two or three years, dependent on whether the
exposure is performing or non-performing when the concession is applied.
Forbearance measures consist of concessions towards a debtor that is
experiencing or about to experience difficulties in meeting its financial
commitments. This can include modification of the previous terms and
conditions of a contract or a total or partial refinancing of a troubled debt
contract, either of which would not have been required had the debtor not
been experiencing financial difficulties.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
118 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.4: Group impairment charge
Retail2
Commercial Banking2
Insurance and Wealth
Central Items2
Total impairment charge
Asset quality ratio
Gross asset quality ratio
1 Prior period comparatives are on an IAS 39 basis.
2 Restated to include Run-off.
Loans
and
advances
to banks
and other assets
£m
Loans
and
advances
to customers
£m
Financial
assets at
fair value
through other
comprehensive
income
£m
–
1
–
1
2
889
150
1
(18)
1,022
–
(14)
–
–
(14)
Table 1.5: Group total expected credit loss allowance (statutory basis)
Undrawn
balances
£m
(27)
(45)
–
(1)
(73)
2018
Total
£m
862
92
1
(18)
937
0.21%
0.28%
2017¹
£m
711
89
–
(5)
795
0.18%
0.28%
At 31 Dec
2018
£m
3,150
193
3,343
19
3,362
At 1 Jan
2018
£m
3,223
273
3,496
37
3,533
At 31 Dec
20171
£m
2,201
30
2,231
26
2,257
Customer related balances
Drawn
Undrawn
Other assets
Total ECL allowance
1 Prior period comparatives are on an IAS 39 basis.
Group loans and advances to customers
The following pages contain analysis of the Group’s loans and advances
to customers by sub-portfolio. Loans and advances to customers are
categorised into the following stages:
Stage 1 assets comprise newly originated assets (unless purchased or
originated credit impaired), as well as those which have not experienced a
significant increase in credit risk. These assets carry an expected credit loss
(ECL) allowance equivalent to the ECL that result from those default events
that are possible within 12 months of the reporting date (12 month ECL).
Stage 2 assets are those which have experienced a significant increase in
credit risk since origination. These assets carry an ECL equivalent to the
ECL arising over the lifetime of the asset (lifetime ECL).
Stage 3 assets have either defaulted or are otherwise considered to be
credit impaired. These assets carry a lifetime ECL.
Purchased or originated credit impaired assets (POCI) are those that have
been originated or acquired in a credit impaired state. This includes within
the definition of credit impaired the purchase of a financial asset at a deep
discount that reflects impaired credit losses.
Basis of presentation
For the Group and Retail lending portfolios, the analyses which follow have
been presented on two bases; the ‘statutory basis’ which is consistent with
the presentation in the Group’s accounts and the ‘underlying basis’ which is
used for internal management purposes. Reconciliations between the two
bases have been provided. For Commercial Banking there is no difference
between the statutory and the underlying basis.
In the following statutory basis tables, POCI assets relate to a fixed pool
of mortgages that were purchased as part of the HBOS acquisition at
a deep discount to face value reflecting credit losses incurred from the
point of origination to the date of acquisition totalling £1,002 million at
31 December 2018. The residual ECL allowance and resulting low coverage
ratio reflects further deterioration in the creditworthiness from the date of
acquisition. Over time, the POCI assets will run off as the loans redeem, pay
down or losses are crystallised.
The Group uses the underlying basis to monitor the creditworthiness of the
lending portfolio and related ECL allowances because it provides a better
indication of the credit performance of the POCI assets. The underlying
basis assumes that the lending assets acquired as part of a business
combination was originated by the Group and is classified as either
Stage 1, 2 or 3 according to the change in credit risk over the period since
origination. Underlying ECL allowances have been calculated accordingly.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 119
Table 1.6: Group loans and advances to customers (statutory basis)
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Stage 3
as % of
total
%
At 31 December 20181
Retail
Commercial Banking
Insurance and Wealth
Central items
Total gross lending
ECL allowances on drawn balances
Net balance sheet carrying value
341,682
101,890
865
305,160
92,002
804
43,571
43,565
18,741
6,592
6
6
488,008
441,531
25,345
(3,150)
(525)
(994)
484,858
441,006
24,351
2,390
3,296
55
–
5,741
(1,553)
4,188
ECL allowance (drawn and undrawn) as a percentage of
gross lending (%)2
0.7
0.1
4.2
28.4
At 1 January 20181,3
Retail
Commercial Banking
Insurance and Wealth
Central items
Total gross lending
ECL allowances on drawn balances
Net balance sheet carrying value
341,661
100,820
819
20,939
464,239
296,264
90,341
724
16,552
403,881
(3,223)
(597)
461,016
403,284
25,319
7,765
67
4,094
37,245
(1,148)
36,097
2,105
2,714
28
293
5,140
(1,446)
3,694
0.7
3.2
6.4
–
1.2
0.6
2.7
3.4
1.4
1.1
15,391
–
–
–
15,391
(78)
15,313
17,973
–
–
–
17,973
(32)
17,941
ECL allowance (drawn and undrawn) as a percentage of gross
lending (%)2
0.8
0.2
3.4
29.8
1 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA acquisition related adjustments.
2 Total and Stage 3 expected credit loss allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Retail (31 December 2018: £250 million; 1 January
2018: £291 million).
3 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Table 1.6a: Group loans and advances to customers (underlying basis)
At 31 December 20181
Retail
Commercial Banking
Insurance and Wealth
Central items
Total gross lending
ECL allowances on drawn balances
Net balance sheet carrying value
ECL allowance (drawn and undrawn) as a percentage of
gross lending (%)2
At 1 January 20181,3
Retail
Commercial Banking
Insurance and Wealth
Central items
Total gross lending
ECL allowances on drawn balances
Net balance sheet carrying value
ECL allowance (drawn and undrawn) as a percentage of
gross lending (%)2
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
342,559
101,890
865
305,048
92,002
804
43,571
43,565
488,885
441,419
(4,236)
(556)
484,649
440,863
31,647
6,592
6
6
38,251
(1,506)
36,745
5,864
3,296
55
–
9,215
(2,174)
7,041
0.9
0.2
4.1
24.3
342,632
100,820
819
20,939
465,210
(4,464)
295,994
90,341
724
16,552
403,611
(626)
460,746
402,985
40,618
7,765
67
4,094
52,544
(1,731)
50,813
6,020
2,714
28
293
9,055
(2,107)
6,948
1.0
0.2
3.5
24.0
Stage 3
as % of
total
%
1.7
3.2
6.4
–
1.9
1.8
2.7
3.4
1.4
1.9
1 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
2 Total and Stage 3 expected credit loss allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Retail (31 December 2018: £250 million; 1 January
2018: £291 million).
3 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
120 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.6b: Reconciliation between statutory and underlying basis of Group gross loans and advances to customers
At 31 December 20181
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowances
Statutory basis
At 1 January 20181
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowances
Statutory basis
1 Gross lending and ECL allowances are stated on IFRS 9 basis.
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or originated
credit-impaired
£m
488,885
441,419
–
(877)
(877)
–
112
112
488,008
441,531
465,210
403,611
–
(971)
(971)
–
270
270
464,239
403,881
38,251
(12,917)
11
(12,906)
25,345
52,544
(15,290)
(9)
(15,299)
37,245
9,215
(3,476)
2
(3,474)
5,741
9,055
(3,802)
(113)
(3,915)
5,140
–
16,393
(1,002)
15,391
15,391
–
19,092
(1,119)
17,973
17,973
Table 1.6c: Group total expected credit loss allowances (underlying basis)
Customer related balances
Drawn
Undrawn
Other assets
Total ECL allowances
1 Prior period comparatives are on an IAS 39 basis.
At
31 Dec 2018
£m
At
1 Jan 2018
£m
At
31 Dec 20171
£m
4,236
193
4,429
19
4,448
4,464
273
4,737
37
4,774
3,442
30
3,472
26
3,498
Table 1.6d: Reconciliation between statutory and underlying basis of Group expected credit loss allowances on
drawn balances
At 31 December 20181
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowance
Statutory basis
At 1 January 20181
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowance
Statutory basis
1 ECL allowances are stated on an IFRS 9 basis.
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or originated
credit-impaired
£m
4,236
–
(1,086)
(1,086)
3,150
4,464
–
(1,241)
(1,241)
3,223
556
–
(31)
(31)
525
626
–
(29)
(29)
597
1,506
2,174
(481)
(31)
(512)
994
1,731
(553)
(30)
(583)
1,148
(599)
(22)
(621)
1,553
2,107
(598)
(63)
(661)
1,446
–
1,080
(1,002)
78
78
–
1,151
(1,119)
32
32
Risk management continued
Lloyds Banking Group Annual Report and Accounts 2018 121
Table 1.7: Group expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to
customers (statutory basis)
Total
Stage 1
Stage 2
Stage 3
As % of
drawn
balances
%
£m
1,768
1,513
18
44
3,343
1,685
1,521
17
273
3,496
0.5
1.5
2.1
0.1
0.7
0.5
1.5
2.1
1.3
0.8
As % of
drawn
balances
%
0.2
0.1
0.7
0.1
0.1
0.2
0.1
0.8
0.4
0.2
£m
493
111
6
38
648
538
132
6
67
743
As % of
drawn
balances
%
3.8
5.1
16.7
100.0
£m
713
338
1
6
As % of
drawn
balances1
%
£m
484
1,064
11
–
22.6
32.3
20.0
–
1,058
4.2
1,559
28.4
716
432
2
125
1,275
2.8
5.6
3.0
3.1
3.4
399
957
9
81
1,446
22.0
35.3
32.1
27.6
29.8
Purchased or
originated
credit-impaired
As % of
drawn
balances
%
0.5
–
–
–
0.5
0.2
–
–
–
0.2
£m
78
–
–
–
78
32
–
–
–
32
At 31 December 20182
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
At 1 January 20182
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
1 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Retail (31 December 2018: £250 million; 1 January 2018: £291 million).
2 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA related acquisition adjustments.
Table 1.7a: Group expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to
customers (underlying basis)
At 31 December 20182
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
At 1 January 20182
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
Total
Stage 1
Stage 2
Stage 3
As % of
drawn
balances
%
£m
2,854
1,513
18
44
4,429
2,926
1,521
17
273
4,737
0.8
1.5
2.1
0.1
0.9
0.9
1.5
2.1
1.3
1.0
£m
524
111
6
38
679
567
132
6
67
772
As % of
drawn
balances
%
As % of
drawn
balances
%
£m
As % of
drawn
balances1
%
£m
0.2
0.1
0.7
0.1
0.2
0.2
0.1
0.8
0.4
0.2
1,225
338
1
6
3.9
5.1
16.7
100.0
1,105
1,064
11
–
19.7
32.3
20.0
–
1,570
4.1
2,180
24.3
1,299
432
2
125
1,858
3.2
5.6
3.0
3.1
3.5
1,060
957
9
81
2,107
18.5
35.3
32.1
27.6
24.0
1 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Retail (31 December 2018: £250 million; 1 January 2018: £291 million).
2 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA related acquisition adjustments.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
122 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.8: Group Stage 2 loans and advances to customers (statutory basis)
Up to date
Expected
credit
loss
£m
498
287
–
6
Gross
lending
£m
14,505
6,020
4
6
20,535
791
21,773
7,420
61
4,014
33,268
535
401
2
111
1,049
As % of
gross
lending
%
3.4
4.8
–
100.0
3.9
2.5
5.4
3.3
2.8
3.2
At 31 December 20181
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
At 1 January 20181,2
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
Expected
credit
loss
£m
As % of
gross
lending
%
1-30 days past due
Over 30 days past due
Gross
lending
£m
2,441
455
–
–
Expected
credit
loss
£m
As % of
gross
lending
%
113
42
–
–
4.6
9.2
–
–
Gross
lending
£m
1,795
117
2
–
102
9
1
–
2,896
155
5.4
1,914
112
2,005
250
1
62
2,318
90
31
–
10
131
4.5
12.4
–
16.1
5.7
1,541
95
5
18
1,659
91
–
–
4
95
1 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA acquisition related adjustments.
2 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Table 1.8a: Group Stage 2 loans and advances to customers (underlying basis)
Up to date
Expected
credit
loss
£m
769
287
–
6
Gross
lending
£m
23,025
6,020
4
6
1-30 days past due
Over 30 days past due
As % of
gross
lending
%
3.3
4.8
–
–
Gross
lending
£m
4,472
455
–
–
Expected
credit
loss
£m
As % of
gross
lending
%
182
42
–
–
4.1
9.2
–
–
Gross
lending
£m
4,150
117
2
–
274
9
1
–
Expected
credit
loss
£m
As % of
gross
lending
%
29,055
1,062
3.7
4,927
224
4.5
4,269
284
32,113
7,420
61
4,014
43,608
831
401
2
111
1,345
2.6
5.4
3.3
2.8
3.1
4,269
250
1
62
4,582
174
31
–
10
215
4.1
12.4
–
16.1
4.7
4,236
294
95
5
18
–
–
4
4,354
298
At 31 December 20181
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
At 1 January 20181,2
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
1 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
2 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
The Group’s assessment of a significant increase in credit risk, and resulting categorisation of Stage 2, includes customers moving into early arrears as
well as a broader assessment that an up to date customer has experienced a level of deterioration in credit risk since origination. A more sophisticated
assessment is required for up to date customers, which varies across divisions and product type. This assessment incorporates specific triggers such
as a significant proportionate increase in probability of default relative to that at origination, recent arrears, forbearance activity, internal watch lists and
external bureau flags. Up to date exposures in Stage 2 are likely to show lower levels of expected credit loss (ECL) allowance relative to those that have
already moved into arrears given that an arrears status typically reflects a stronger indication of future default and greater likelihood of credit losses.
Additional information
The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by
selecting four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group’s base case assumptions used for medium
term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. The base case, upside
and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. The table below shows the decomposition
of the final probability-weighted ECL for each forward-looking economic scenario. The stage allocation for an asset is based on the overall scenario
probability-weighted PD and, hence, the Stage 2 allocation is constant across all the scenarios.
5.7
7.7
50.0
–
5.9
5.9
–
–
22.2
5.7
6.6
7.7
50.0
–
6.7
6.9
–
–
22.2
6.9
Risk management continued The table below shows the ECL calculated under each scenario on both an underlying and a statutory basis.
Lloyds Banking Group Annual Report and Accounts 2018 123
Underlying basis
Secured
Other Retail
Commercial
Other
At 31 December 2018
Statutory basis
Secured
Other Retail
Commercial
Other
At 31 December 2018
Probability-
weighted
£m
Upside
£m
Base Case
£m
Downside
£m
Severe
Downside
£m
1,462
1,392
1,513
81
4,448
317
397
424
23
376
413
442
25
471
418
468
25
1,161
1,256
1,382
298
164
179
8
649
Probability-
weighted
£m
Upside
£m
Base Case
£m
Downside
£m
Severe
Downside
£m
460
1,308
1,513
81
3,362
16
371
424
23
834
76
388
442
25
931
170
393
468
25
1,056
198
156
179
8
541
The table below shows the Group’s underlying ECL allowances for the upside and downside scenarios using a 100 per cent weighting, which means
that both stage allocation and the ECL are based on the single scenario only. All non-modelled provisions, including management judgement
remain unchanged.
ECL allowances
Retail
Upside
£m
3,861
Downside
£m
4,659
The credit quality of the Retail portfolios remains strong and continues to benefit from robust credit risk management, including affordability and
indebtedness controls at origination and a prudent approach to risk appetite. The economic environment remains resilient with record employment
rates, falling inflation, positive real wage growth and household indebtedness remaining below pre-crisis levels.
– New business quality remains strong;
– The flow of loans entering arrears remains at low levels;
– Stage 3 balances are broadly flat at 1.7 per cent; and
– Stage 2 balances have reduced to 9.2 per cent of the portfolio, largely due to model refinements to the Stage 2 transfer approach for Secured.
Loans and advances remained flat during the period at £343 billion as of 31 December 2018.
The impairment charge increased by £151 million (21.2 per cent) to £862 million for 2018 (2017: £711 million). The increase is attributable to the inclusion
of MBNA for a full year and a low impairment charge in Secured compared to one-off write-backs in 2017.
Expected credit loss (ECL) allowance as a percentage of drawn balances for Stage 3 increased to 19.7 per cent from 18.5 per cent relating to prudent
provisioning in Secured. Coverage for Stage 2 has increased to 3.9 per cent from 3.2 per cent, largely due to model refinements to the Stage 2 transfer
approach for Secured resulting in a reclassification of better quality Stage 2 assets into Stage 1.
Table 1.9: Retail impairment charge
Secured
Unsecured2
UK Motor Finance
Other3
Total impairment charge
Asset quality ratio
1 Prior period comparatives are on an IAS39 basis. Includes Run-off, previously reported as a separate segment.
2 Unsecured includes Credit cards, Loans and Overdrafts.
3 Other includes Business Banking, Europe and Retail run-off.
2018
£m
38
683
113
28
862
2017¹
£m
(15)
592
111
23
711
0.25%
0.21%
Change
%
(15)
(2)
(22)
(21)
4bp
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
124 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.10: Retail loans and advances to customers (statutory basis)
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or originated
credit-impaired
£m
Stage 3 as
% of
total
%
At 31 December 20181
Secured
Unsecured2
UK Motor Finance
Other3
Total gross lending
ECL allowances on drawn balances
Net balance sheet carrying value
288,235
257,797
13,654
1,393
15,391
28,115
14,933
10,399
24,705
13,224
9,434
2,707
1,580
800
341,682
305,160
18,741
(1,613)
(389)
(662)
340,069
304,771
18,079
703
129
165
2,390
(484)
1,906
–
–
–
15,391
(78)
15,313
ECL allowances (drawn and undrawn) as a percentage of
gross lending (%)4
0.5
0.2
3.8
22.6
At 1 January 20181,5
Secured
Unsecured2
UK Motor Finance
Other3
Total gross lending
ECL allowances on drawn balances
Net balance sheet carrying value
ECL allowances (drawn and undrawn) as a percentage of
gross lending (%)
291,021
251,707
20,109
1,232
17,973
27,886
13,738
9,016
24,197
12,176
8,184
341,661
296,264
(1,495)
(424)
340,166
295,840
3,052
1,456
702
25,319
(640)
24,679
637
106
130
2,105
(399)
1,706
–
–
–
17,973
(32)
17,941
0.5
0.2
2.8
22.0
0.5
2.5
0.9
1.6
0.7
0.4
2.3
0.8
1.4
0.6
1 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA acquisition related adjustments.
2 Unsecured includes Credit cards, Loans and Overdrafts.
3 Other includes Business Banking, Europe and Retail run-off.
4 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Unsecured (31 December 2018: £233 million; 1 January 2018:
£277 million) and Business Banking within Other (31 December 2018: £17 million; 1 January 2018: £14 million).
5 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Table 1.10a: Retail loans and advances to customers (underlying basis)
At 31 December 20181
Secured
Unsecured2
UK Motor Finance
Other3
Total gross lending
ECL allowances on drawn balances
Net balance sheet carrying value
ECL allowances (drawn and undrawn) as a percentage of
gross lending (%)4
At 1 January 20181,5
Secured
Unsecured2
UK Motor Finance
Other3
Total gross lending
ECL allowances on drawn balances
Net balance sheet carrying value
ECL allowances (drawn and undrawn) as a percentage of gross lending (%)
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Stage 3 as
% of
total
%
289,237
257,797
26,571
4,869
27,990
14,933
10,399
24,593
13,224
9,434
342,559
305,048
(2,699)
(420)
339,860
304,628
2,696
1,580
800
31,647
(1,174)
30,473
701
129
165
5,864
(1,105)
4,759
0.8
0.2
3.9
19.7
292,140
251,707
35,399
5,034
27,738
13,738
9,016
342,632
(2,736)
339,896
0.9
23,927
12,176
8,184
295,994
(453)
295,541
0.2
3,061
1,456
702
40,618
(1,223)
39,395
3.2
750
106
130
6,020
(1,060)
4,960
18.5
1.7
2.5
0.9
1.6
1.7
1.7
2.7
0.8
1.4
1.8
1 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
2 Unsecured includes Credit cards, Loans and Overdrafts.
3 Other includes Business Banking, Europe and Retail run-off.
4 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for Unsecured (31 December 2018: £233 million; 1 January 2018:
£277 million) and Business Banking within Other (31 December 2018: £17 million; 1 January 2018: £14 million).
5 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 125
Table 1.10b: Reconciliation between statutory and underlying basis of Retail gross loans and advances to customers
At 31 December 2018
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowances
Statutory basis
At 1 January 2018
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowances
Statutory basis
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
342,559
305,048
–
(877)
(877)
–
112
112
341,682
305,160
342,632
295,994
–
(971)
(971)
–
270
270
341,661
296,264
31,647
(12,917)
11
(12,906)
18,741
40,618
(15,290)
(9)
(15,299)
25,319
5,864
(3,476)
2
(3,474)
2,390
6,020
(3,802)
(113)
(3,915)
2,105
Purchased or
originated
credit-
impaired
£m
–
16,393
(1,002)
15,391
15,391
–
19,092
(1,119)
17,973
17,973
Table 1.10c: Reconciliation between statutory and underlying basis of Retail expected credit loss allowances on
drawn balances
At 31 December 2018
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowances
Statutory basis
At 1 January 2018
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowances
Statutory basis
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
2,699
–
(1,086)
(1,086)
1,613
2,736
–
(1,241)
(1,241)
1,495
420
–
(31)
(31)
389
453
–
(29)
(29)
424
1,174
1,105
(481)
(31)
(512)
662
(599)
(22)
(621)
484
1,223
1,060
(553)
(30)
(583)
640
(598)
(63)
(661)
399
Purchased or
originated
credit-impaired
£m
–
1,080
(1,002)
78
78
–
1,151
(1,119)
32
32
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
126 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.11: Retail expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to
customers (statutory basis)
Total
Stage 1
Stage 2
Stage 3
As % of
drawn
balances
%
0.2
3.2
1.9
1.2
0.5
0.1
3.3
1.9
1.2
0.5
£m
460
896
290
122
1,768
385
933
258
109
1,685
As % of
drawn
balances
%
–
1.2
1.0
0.4
0.2
–
1.4
0.9
0.5
0.2
£m
38
287
127
41
493
31
350
113
44
538
As % of
drawn
balances
%
1.7
14.0
4.9
3.8
3.8
1.2
12.5
5.0
3.6
2.8
£m
226
379
78
30
713
236
382
73
25
716
As % of
drawn
balances1
%
8.5
48.9
65.9
34.5
22.6
7.0
55.8
67.9
34.5
22.0
£m
118
230
85
51
484
86
201
72
40
399
Purchased
or originated
credit-impaired
As % of
drawn
balances
%
0.5
–
–
–
0.5
0.2
–
–
–
0.2
£m
78
–
–
–
78
32
–
–
–
32
At 31 December 20182
Secured
Unsecured3
UK Motor Finance4
Other5
Total
At 1 January 20182,6
Secured
Unsecured3
UK Motor Finance4
Other5
Total
1 Total and Stage 3 ECL allowance as a percentage of drawn balances are calculated excluding loans in recoveries for Unsecured (31 December 2018: £233 million; 1 January 2018:
£277 million), and Business Banking within Other (31 December 2018: £17 million; 1 January 2018: £14 million).
2 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA related acquisition adjustments.
3 Unsecured includes Credit cards, Loans and Overdrafts.
4 UK Motor Finance for Stages 1 and 2 include £99 million (1 January 2018: £84 million) relating to provisions against residual values of vehicles subject to finance leasing agreements.
These provisions are included within the calculation of coverage ratios.
5 Other includes Business Banking, Europe and Retail run-off.
6 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Table 1.11a: Retail expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to
customers (underlying basis)
At 31 December 20182
Secured
Unsecured3
UK Motor Finance4
Other5
Total
At 1 January 20182,6
Secured
Unsecured3
UK Motor Finance4
Other5
Total
Total
Stage 1
Stage 2
Stage 3
As % of
drawn
balances
%
£m
1,462
980
290
122
2,854
1,504
1,055
258
109
2,926
0.5
3.5
1.9
1.2
0.8
0.5
3.8
1.9
1.2
0.9
As % of
drawn
balances
%
–
1.3
1.0
0.4
0.2
–
1.6
0.9
0.5
0.2
£m
38
318
127
41
524
31
379
113
44
567
As % of
drawn
balances
%
2.7
15.2
4.9
3.8
3.9
2.2
13.5
5.0
3.6
3.2
£m
707
410
78
30
1,225
789
412
73
25
1,299
As % of
drawn
balances1
%
14.7
53.8
65.9
34.5
19.7
13.6
55.8
67.9
34.5
18.5
£m
717
252
85
51
1,105
684
264
72
40
1,060
1 Total and Stage 3 ECL allowance as a percentage of drawn balances are calculated excluding loans in recoveries for Unsecured (31 December 2018: £233 million; 1 January 2018:
£277 million), and Business Banking within Other (31 December 2018: £17 million; 1 January 2018: £14 million).
2 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA related acquisition adjustments.
3 Unsecured includes Credit cards, Loans and Overdrafts.
4 UK Motor Finance for Stages 1 and 2 include £99 million (1 January 2018: £84 million) relating to provisions against residual values of vehicles subject to finance leasing agreements.
These provisions are included within the calculation of coverage ratios.
5 Other includes Business Banking, Europe and Retail run-off.
6 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 127
Table 1.12: Retail Stage 2 loans and advances to customers (statutory basis)
Up to date
Expected
credit
loss
£m
Gross
lending
£m
10,118
2,355
1,403
629
14,505
17,264
2,678
1,279
552
21,773
139
293
47
19
498
172
303
45
15
535
At 31 December 20181
Secured
Unsecured2
UK Motor Finance
Other3
Total
At 1 January 20181,4
Secured5
Unsecured2
UK Motor Finance
Other3
Total
1-30 days past due
Over 30 days past due
As % of
gross
lending
%
Gross
lending
£m
Expected
credit
loss
£m
As % of
gross
lending
%
1.4
12.4
3.3
3.0
3.4
1.0
11.3
3.5
2.7
2.5
1,955
258
146
82
30
53
23
7
2,441
113
1,506
253
137
109
2,005
20
43
21
6
90
1.5
20.5
15.8
8.5
4.6
1.3
17.0
15.3
5.5
4.5
Gross
lending
£m
1,581
94
31
89
57
33
8
4
1,795
102
1,339
121
40
41
1,541
44
36
7
4
91
Expected
credit
loss
£m
As % of
gross
lending
%
1 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances include the impact of the HBOS and MBNA related acquisition adjustments.
2 Unsecured includes Credit cards, Loans and Overdrafts.
3 Other includes Business Banking, Europe and Retail run-off.
4 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
5 Secured days past due segmentation restated to align with IFRS 9 classifications.
Table 1.12a: Retail Stage 2 loans and advances to customers (underlying basis)
Up to date
Expected
credit
loss
£m
Gross
lending
£m
18,647
2,346
1,403
629
23,025
27,596
2,686
1,279
552
32,113
383
320
47
19
769
441
330
45
15
831
At 31 December 20181
Secured
Unsecured2
UK Motor Finance
Other3
Total
At 1 January 20181,4
Secured5
Unsecured2
UK Motor Finance
Other3
Total
1-30 days past due
Over 30 days past due
As % of
gross
lending
%
Gross
lending
£m
Expected
credit
loss
£m
As % of
gross
lending
%
2.1
13.6
3.3
3.0
3.3
1.6
12.3
3.5
2.7
2.6
3,987
257
146
82
97
55
23
7
4,472
182
3,769
254
137
109
4,269
102
45
21
6
174
2.4
21.4
15.8
8.5
4.1
2.7
17.7
15.3
5.5
4.1
Gross
lending
£m
3,937
93
31
89
227
35
8
4
4,150
274
4,034
121
40
41
4,236
246
37
7
4
294
Expected
credit
loss
£m
As % of
gross
lending
%
1 Gross lending and ECL allowances on drawn balances are stated on an IFRS 9 basis; the balances exclude the impact of the HBOS and MBNA related acquisition adjustments.
2 Unsecured includes Credit cards, Loans and Overdrafts.
3 Other includes Business Banking, Europe and Retail run-off.
4 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
5 Secured days past due segmentation restated to align with IFRS 9 classifications.
3.6
35.1
25.8
4.5
5.7
3.3
29.8
17.5
9.8
5.9
5.8
37.6
25.8
4.5
6.6
6.1
30.6
17.5
9.8
6.9
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
128 Lloyds Banking Group Annual Report and Accounts 2018
Portfolios
Secured credit quality remained strong, with flow to arrears stable at low levels. The average indexed loan to value (LTV) remained stable at 44.1 per cent
(1 January 2018: 43.6 per cent) and the proportion of balances with an LTV of greater than 90 per cent remained low at 2.9 per cent (1 January 2018:
2.5 per cent). The average LTV of new business improved to 62.5 per cent (31 December 2017: 63.0 per cent). The closed Specialist mortgage portfolio
continued to run off, reducing by a further £1.7 billion (11.0 per cent). Total Secured loans and advances decreased by £2.9 billion (1.0 per cent) to
£289 billion (1 January 2018: £292 billion), due to reductions in the Buy-to-let and closed Specialist portfolios. The impairment charge was £38 million
compared to a release of £15 million in 2017 arising from one-off write-backs. Total expected credit loss allowance as a percentage of loans and
advances (coverage) remained flat.
Unsecured loans and advances were broadly flat for the year ending 31 December 2018. The impairment charge increased by £91 million to £683 million
(2017: £592 million), mainly due to the inclusion of MBNA for a full year. Coverage decreased slightly to 3.5 per cent at 31 December 2018 (1 January
2018: 3.8 per cent), with model refinements in Stage 2 offset by those in Stage 3.
The UK Motor Finance portfolio continued to grow, with loans and advances increasing by 8.7 per cent to £14.9 billion at 31 December 2018
(1 January 2018: £13.7 billion). Increases in Stage 2 and Stage 3 balances reflect growth in the retail portfolio. The impairment charge in the period
was broadly flat at £113 million (2017: £111 million). The portfolio continues to benefit from a conservative approach to residual values at origination and
through the loan lifecycle, with prudent residual value provisions accounting for £99 million of Stage 1 and Stage 2 expected credit loss allowance at
31 December 2018. Coverage for the portfolio was flat at 1.9 per cent.
Other loans and advances increased by £1.4 billion to £10.4 billion driven by a transfer of largely Stage 1 assets from SME into Business Banking. The
impairment charge increased by £5 million to £28 million in the year due to the non-repeat of one-off write-backs in 2017 relating to a closed portfolio.
Coverage remained flat at 1.2 per cent.
Table 1.13: Retail secured loans and advances to customers (statutory basis)
Mainstream
Buy-to-let
Specialist
Total
At 31 Dec
20181
£m
At 1 Jan
20181
£m
223,230
222,814
51,322
13,683
52,834
15,373
288,235
291,021
1 The balances include the impact of HBOS related acquisition adjustments.
Table 1.14: Mortgages greater than three months in arrears (excluding repossessions) (underlying basis)
At 31 December
Mainstream
Buy-to-let
Specialist
Total
Number of cases
Total mortgage accounts
Value of loans1
Total mortgage balances
2018
Cases
30,106
4,544
7,966
42,616
2017
Cases
32,383
4,710
8,313
45,406
2018
%
1.5
1.0
7.8
1.7
2017
%
1.6
1.0
7.3
1.7
2018
£m
3,262
576
1,282
5,120
2017
£m
3,502
581
1,354
5,437
2018
%
1.5
1.1
9.3
1.8
2017
%
1.6
1.1
8.7
1.9
1 Value of loans represents total gross book value of mortgages more than three months in arrears; the balances exclude the impact of HBOS related acquisition adjustments.
The stock of repossessions decreased to 763 cases at 31 December 2018 compared to 777 cases at 31 December 2017.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 129
Table 1.15: Period end and average LTVs across the Retail mortgage portfolios (underlying basis)
At 31 December 2018
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Total
Average loan to value1:
Stock of residential mortgages
New residential lending
At 31 December 2017
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Total
Average loan to value1:
Stock of residential mortgages
New residential lending
Mainstream
%
Buy-to-let
%
Specialist
%
54.2
16.0
15.9
10.7
2.8
0.4
55.7
22.8
15.7
4.6
0.7
0.5
59.7
16.5
12.0
6.6
2.0
3.2
Total
%
54.7
17.3
15.7
9.4
2.4
0.5
100.0
100.0
100.0
100.0
42.5
63.1
52.1
58.6
45.8
n/a
Mainstream
%
Buy-to-let
%
Specialist
%
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
44.1
62.5
Total
%
56.4
18.5
14.6
8.0
1.9
0.6
100.0
100.0
100.0
100.0
41.7
63.7
53.0
59.1
47.4
n/a
43.6
63.0
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; the balances exclude the impact of HBOS
related acquisition adjustments.
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 2018, owner occupier interest
only balances as a proportion of total owner occupier balances had reduced to 26.7 per cent (31 December 2017: 29.0 per cent). The average indexed loan
to value improved to 41.3 per cent (31 December 2017: 41.7 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
130 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.16: Analysis of owner occupier interest only mortgages (statutory basis)
Interest only balances (£m)
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Purchased or originated credit impaired (%)
Average loan to value (%)
Maturity profile (£m)
Due
1 year
2-5 years
6-10 years
>11 years
At 31 Dec
20181
Total
63,138
At 1 Jan
20181
Total
69,129
79.1
6.6
1.0
13.3
41.3
1,144
2,405
10,229
18,562
30,798
75.4
9.5
0.8
14.3
41.7
1,043
2,612
10,158
17,913
37,403
Past term interest only balances (£m)2
1,635
1,474
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Purchased or originated credit impaired (%)
Average loan to value (%)
Negative equity (%)
2.8
16.8
17.9
62.5
35.2
2.8
2.9
15.3
15.6
66.2
33.4
2.1
1 Balances are stated on an IFRS 9 basis and include the impact of HBOS acquisition related adjustments.
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.
Retail forbearance
The basis of disclosure for forbearance has changed compared to previous years to be aligned to definitions used in the European Banking Authority’s
FINREP reporting. The change leads to an increase in disclosed forbearance of £5.6 billion, with the main drivers being longer probation periods before a
customer can return to order and the inclusion of Past Term Interest Only for Secured.
The main customer treatments included are: repair, where arrears are written on to the loan balance and the arrears position cancelled; instances where
there are suspensions of interest and/or capital repayments; Past Term Interest Only mortgages; and refinance personal loans.
Total forbearance for the major retail portfolios has improved by £578 million to £7.0 billion driven by customers exiting probation and returning to order on
the Secured portfolio. As a percentage of loans and advances, forbearance loans improved to 2.2 per cent at 31 December 2018 (1 January 2018: 2.4 per
cent). 98.1 per cent of forbearance loans are captured in Stage 2 or Stage 3 for IFRS 9 and hold provision on a lifetime basis. Total expected credit losses (ECL)
as a proportion of loans and advances which are forborne has increased to 9.4 per cent (1 January 2018: 8.6 per cent) due to prudent provisioning on the
Secured portfolio.
The Group measures the success of a forbearance scheme for Retail 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, 80.4 per cent of UK
Secured customers accepting reduced payment arrangements are performing. For permanent treatments, 83.2 per cent of UK Secured customers who
have accepted capitalisations of arrears and 84.4 per cent of customers who have accepted term extensions are performing.
Table 1.17: Retail forborne loans and advances (statutory basis) (audited)
At 31 December 20182
Secured
Unsecured3
UK Motor Finance (Retail)
Total
At 1 January 20182
Secured
Unsecured3
UK Motor Finance (Retail)
Total
Of which
Stage 2
£m
Of which
Stage 3
£m
Of which
purchased
or originated
credit-
impaired
£m
Expected credit
losses as a % of
total loans and
advances which
are forborne1
%
1,136
173
30
1,339
1,367
130
26
1,523
642
200
25
867
562
230
24
816
4,241
–
–
4,241
4,693
–
–
4,693
1.6
27.8
34.8
3.6
1.1
32.7
36.1
3.2
Total
£m
6,089
435
56
6,580
6,676
422
51
7,149
1 ECL as a percentage of total loans and advances which are forborne are calculated excluding loans in recoveries for Unsecured (31 December 2018: £107 million; 1 January 2018: £147 million).
2 The balances include the impact of HBOS related acquisition adjustments.
3 Excludes MBNA.
Risk management continued Table 1.17a: Retail forborne loans and advances (underlying basis)
At 31 December 20182
Secured
Unsecured3
UK Motor Finance (Retail)
Total
At 1 January 20182
Secured
Unsecured3
UK Motor Finance (Retail)
Total
Lloyds Banking Group Annual Report and Accounts 2018 131
Of which
Stage 2
£m
Of which
Stage 3
£m
Expected credit
losses as a % of
total loans and
advances which
are forborne1
%
3,838
173
30
4,041
4,379
130
26
4,535
2,598
200
25
2,823
2,667
230
24
2,921
8.0
27.8
34.8
9.4
7.0
32.7
36.1
8.6
Total
£m
6,506
435
56
6,997
7,102
422
51
7,575
1 ECL as a percentage of total loans and advances which are forborne are calculated excluding loans in recoveries for Unsecured (31 December 2018: £107 million; 1 January 2018: £147 million).
2 The balances exclude the impact of HBOS related acquisition adjustments.
3 Excludes MBNA.
Commercial Banking
The overall credit quality of the portfolio and new business remains good with the portfolio benefiting from effective risk management, a through the
cycle approach to risk appetite and continued low interest rates. Notwithstanding the current competitive market conditions, the Group is maintaining
its prudent risk appetite.
Uncertainty persists around the UK and global economic outlook, including the outcome of EU exit negotiations, the sustainability of global economic
growth, trade wars and geopolitical risks. Allied to this are headwinds in a number of sectors including construction, support services and consumer-
related sectors, such as retail. However, the portfolios remain well positioned and the Group’s through the cycle risk appetite approach is unchanged.
Monitoring indicates no material deterioration in the credit quality of the portfolio.
Internal and external key performance indicators are monitored closely to help identify early signs of any deterioration. Portfolios remain subject to
ongoing risk mitigation actions as appropriate.
Planning for any EU exit outcome is well advanced and continues to evolve in Commercial Banking to ensure portfolio quality is maintained whilst
supporting the Group’s Helping Britain Prosper strategy.
Net impairment charge for 2018 of £92 million compared with a net charge of £89 million in 2017.
Stage 3 gross charges included the impact of IFRS 9 model refinements and were broadly flat year on year. Stage 3 net charges increased, driven by
lower impairment releases and write-backs.
Net impairment releases in Stage 1 and 2 were weighted towards non-SME portfolios and reflect a number of factors including transfers between stages
(including to and from Stage 3), refinements to the IFRS 9 model methodology as well as adjustments to Multiple Economic Scenario impacts to reflect
any changes to the underlying economic outlook.
The size and nature of the commercial portfolio results in some volatility as cases move between stages. Stage 3 loans as a proportion of total loans
and advances to customers has increased to 3.2 per cent (1 January 2018: 2.7 per cent). Stage 3 expected credit loss (ECL) allowance as a percentage
of Stage 3 drawn balances has reduced to 32.3 per cent (1 January 2018: 35.3 per cent) largely as a result of a transfer in of assets to impaired status on
which lower ECL allowances are assessed.
Stage 2 loans as a proportion of total loans and advances to customers reduced to 6.5 per cent (1 January 2018: 7.7 per cent) as a result of transfers to
Stage 1 and Stage 3. The proportion of Stage 1 loans increased to 90.3 per cent (1 January 2018: 89.6 per cent). Stage 2 ECL allowances as a percentage
of Stage 2 drawn balances were lower at 5.1 per cent (1 January 2018: 5.6 per cent) due to changes in the mix of assets classified as Stage 2 and revisions
to model assumptions.
Notwithstanding the current stable performance of the portfolio, impairments are likely to increase from their current levels, driven mainly by lower levels
of releases and write-backs and an element of credit normalisation.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
132 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.18: Commercial Banking impairment charge
SME
Other
Total impairment charge
Asset quality ratio
1 Prior period comparatives are on an IAS 39 basis. Includes Run-off, previously reported as a separate segment.
Table 1.19: Commercial Banking loans and advances to customers
2018
£m
63
29
92
2017¹
£m
7
82
89
0.09%
0.10%
At 31 December 2018
SME
Other
Total gross lending
ECL allowance on drawn balances
Net balance sheet carrying value
ECL allowances (drawn and undrawn) as a percentage of gross lending (%)
At 1 January 20181
SME
Other
Total gross lending
ECL allowance on drawn balances
Net balance sheet carrying value
ECL allowances (drawn and undrawn) as a percentage of gross lending (%)
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
30,296
71,594
101,890
26,099
65,903
92,002
3,484
3,108
6,592
713
2,583
3,296
(1,476)
(93)
(325)
(1,058)
100,414
91,909
1.5
0.1
6,267
5.1
2,238
32.3
30,510
70,310
100,820
(1,440)
99,380
1.5
26,397
63,944
90,341
(101)
90,240
0.1
3,262
4,503
7,765
(382)
7,383
5.6
851
1,863
2,714
(957)
1,757
35.3
Change
%
(3)
(1)bp
Stage 3
as % of
total
%
2.4
3.6
3.2
–
–
2.8
2.6
2.7
1 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Table 1.20: Commercial Banking expected credit loss allowances (drawn and undrawn) as a percentage of loans and
advances to customers
At 31 December 2018
SME
Other
Total
At 1 January 20181
SME
Other
Total
Total
Stage 1
Stage 2
Stage 3
As % of
drawn
balances
%
1.3
1.6
1.5
1.2
1.6
1.5
£m
384
1,129
1,513
375
1,146
1,521
As % of
drawn
balances
%
0.2
0.1
0.1
0.2
0.1
0.1
£m
40
71
111
51
81
132
As % of
drawn
balances
%
6.6
3.4
5.1
6.3
5.0
5.6
£m
231
107
338
206
226
432
As % of
drawn
balances
%
15.8
36.8
32.3
13.9
45.0
35.3
£m
113
951
1,064
118
839
957
1 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 133
Table 1.21: Commercial Banking Stage 2 loans and advances to customers
At 31 December 2018
SME
Other
Total
At 1 January 20181
SME
Other
Total
Up to date
Expected
credit
loss
£m
181
106
287
180
221
401
Gross
lending
£m
3,037
2,983
6,020
2,969
4,451
7,420
1-30 days past due
Over 30 days past due
As % of
gross
lending
%
Gross
lending
£m
Expected
credit
loss
£m
As % of
gross
lending
%
Gross
lending
£m
Expected
credit
loss
£m
6.0
3.5
4.8
6.1
5.0
5.4
383
72
455
227
23
250
41
1
42
26
5
31
10.7
1.4
9.2
11.5
21.7
12.4
64
53
117
66
29
95
9
–
9
–
–
–
As % of
gross
lending
%
14.1
–
7.7
–
–
–
1 Certain balances have been reallocated between segments. This includes the incorporation of International Wealth into Commercial Banking and the allocation of Run-off across Retail
and Commercial Banking.
Portfolios
The SME and Mid Markets portfolios are domestically focused and reflect both our prudent credit risk appetite and the underlying performance of the
UK economy. Whilst certain sectors of the market are showing some emerging signs of stress, the overall credit quality of the portfolios has remained
broadly stable with levels of impairment remaining low.
The Global Corporates business continues to have a predominance of multi-national investment grade clients who are primarily UK-based. The portfolio
remains of good quality and is well positioned for the current economic outlook.
Through clearly defined sector strategies, Financial Institutions serves predominantly investment grade counterparties with whom relationships are either
client driven or held to support the Group’s funding, liquidity or general hedging requirements.
The commercial real estate business within the Group’s Mid Markets and Global Corporates 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. 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.
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). Exposures to social housing providers are also excluded.
Focus remains on the UK market, on good quality customers, with a proven track record in Real Estate and where cash flows are robust.
Commercial Banking UK Direct Real Estate gross lending stood at £17.2 billion at 31 December 2018 (excludes exposures subject to protection through
Significant Risk Transfer securitisations). The Group has a further £0.54 billion of UK Direct Real Estate exposure in Business Banking within Retail.
Approximately 70 per cent of loans and advances to UK Direct Real Estate relate to commercial real estate with the remainder related 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.
Development lending is subject to specific credit risk appetite criteria, including maximum loan to gross development value and maximum loan to cost,
with funding typically only released against completed works as confirmed by the Group's monitoring quantity surveyor.
Table 1.22: LTV – Commercial Banking UK Direct Real Estate
Investment Exposures > £1m
Less than 60%
60% to 70%
70% to 80%
80% to 100%
100% to 120%
120% to 140%
Greater than 140%
Unsecured4
Total Investment >£1m
Investment <£1m5
Total Investment
Development
Total
At 31 December 20181,2
At 31 December 20171,2,3
Stage 1/2
£m
Stage 3
£m
Total
£m
%
Unimpaired
£m
Impaired
£m
79.8
10.7
2.7
0.8
0.5
0.0
0.6
4.9
8,838
1,190
267
79
27
–
18
520
10,939
3,679
14,618
1,698
16,316
101
7
41
11
25
1
46
31
263
105
368
111
479
8,939
1,197
308
90
52
1
64
551
11,202
3,784
14,986
1,809
16,795
8,392
1,012
236
74
103
61
22
586
10,486
4,988
15,474
1,655
17,129
169
20
44
42
2
2
49
51
379
133
512
147
659
Total
£m
8,561
1,032
280
116
105
63
71
637
10,865
5,121
15,986
1,802
17,788
%
78.8
9.5
2.6
1.1
1.0
0.6
0.7
5.9
1 Excludes Commercial Banking UK Direct Real Estate exposures subject to protection through Significant Risk Transfer transactions.
2 Excludes Islands Commercial UK Direct Real Estate of £0.45 billion (31 December 2017: £0.45bn).
3 Prior period comparatives are on an IAS 39 basis. Includes run-off, previously excluded.
4 Predominantly Investment grade lending where the Group is relying on the corporate covenant.
5 December 2018 investment exposures <£1m have an LTV profile broadly similar to the investment exposures >£1m.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
134 Lloyds Banking Group Annual Report and Accounts 2018
Commercial Banking forbearance
Table 1.23: Commercial Banking forborne loans and advances (audited)
At 31 December 2018
Type of forbearance
Refinancing
Modification
Total
At 31 December 2017
Type of forbearance
Refinancing
Modification
Total
Total
£m
Of which
Stage 3
£m
38
29
3,834
2,949
3,872
2,978
27
3,644
3,671
Table 1.24: Derivative credit risk exposures
2018
Traded over the counter
2017
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
–
45
385,680
385,725
128,221
4,950,912
689,882
5,769,015
9,247
–
–
–
5,898
13,757
15,145
13,757
–
109,492
15,455
–
19
2,903,481
–
–
278,833
324,834
9,695
4,568
278,852
3,337,807
25,150
4,568
137,468
4,950,957
1,095,217
6,183,642
124,947
2,903,500
617,930
3,646,377
144
(150)
(6)
23,448
(21,222)
2,226
280
(592)
(312)
25,155
(25,454)
(299)
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
2018 and 31 December 2017 is shown in the table above. The notional
principal amount does not, however, represent the Group’s credit risk
exposure, which is limited to the current cost of replacing contracts with
a positive value to the Group. Such amounts are reflected in note 52
on page 255.
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.
Eurozone exposures
The Group manages its exposures to individual countries, both within and
without the Eurozone, 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 Eurozone countries Ireland,
Spain, Italy and Greece 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
The Chief Security Office 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.
Excluding reverse repurchase exposure to Institutional funds secured by
UK gilts, 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 Ireland, Spain, Portugal, Italy and Greece and following
the £4 billion sale of the Irish residential mortgage portfolio during the year,
exposures to the selected countries are significantly reduced.
Risk management continued
Lloyds Banking Group Annual Report and Accounts 2018 135
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 business areas and sub-groups are each exposed to different
types and levels of climate-related risk in their operations. For example,
the general insurance function 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 2018 we developed an implementation plan to address key
recommendations of the Task Force on Climate-related Financial
Disclosure (TCFD). Further detail on planned activities is provided in
the Sustainability Strategy and Task Force on Climate-related Financial
Disclosure Statement (see pages 24 to 25).
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, 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. 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.
Table 1.25: Environmental risk management approach
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 financial loss, 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, legal obligations, or a failure to adequately
manage actual or threatened litigation, including criminal proceedings.
Exposures
Whilst the Group has a zero risk appetite for material regulatory breaches
or material legal incidents, the Group remains exposed to them, 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 defined risk appetite
metric, which is an assessment of material regulatory breaches and material
legal incidents.
Mitigation
The Group undertakes a range of key mitigating actions to manage
regulatory and legal risk. These include the following:
The Board establishes a Group-wide risk appetite and metric 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 identify, assess and implement policy and regulatory
requirements and establish local controls, processes, procedures and
resources to ensure appropriate governance and compliance.
Business units regularly produce management information to assist in
the identification of issues and test management controls are working
effectively.
Risk and Legal provide oversight, proactive support and constructive
challenge to the business in identifying and managing regulatory and
legal issues.
Risk conducts thematic reviews of regulatory compliance and provides
oversight of regulatory compliance assessments across businesses and
divisions where appropriate.
Business units, with the support of divisional and Group-level bodies,
conduct ongoing horizon scanning to identify changes in regulatory and
legal requirements.
The Group engages with regulatory authorities and industry bodies on
forthcoming regulatory changes, market reviews and investigations,
ensuring programmes are established to deliver new regulation and
legislation.
Monitoring
Material risks are managed through the relevant divisional level
committees, with review and escalation through Group level committees
where appropriate, including the escalation of any material regulatory
breaches or material legal incidents.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
136 Lloyds Banking Group Annual Report and Accounts 2018
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: business
and strategic planning that does not sufficiently consider customer needs;
ineffective management and monitoring of products and their distribution
(including the sales process); unclear, unfair, misleading or untimely
customer communications; a culture that is not sufficiently customer-centric;
poor governance of colleagues’ incentives and rewards and approval of
schemes which drive unfair customer outcomes; ineffective management
and oversight of legacy conduct issues; ineffective management of
customers’ complaints or claims; and outsourcing of customer service and
product delivery via third-parties that do not have the same level of control,
oversight and culture as the Group. The Group is also exposed to the risk
of engaging in or failing to manage conduct which could constitute market
abuse, undermine the integrity of a market in which it is active, distort
competition or create conflicts of interest.
There is a 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 continues to be a significant focus on market misconduct, resulting
from previous issues relating to London Inter-bank Offered Rate (LIBOR)
and foreign exchange (FX).
Due to the level of enhanced focus relating to conduct, 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.
Measurement
To articulate its conduct risk appetite, the Group has sought more
granularity through the use of suitable Conduct Risk Appetite Metrics
(CRAMs) and tolerances that indicate where it may be operating outside
its conduct risk appetite. These include Board-level conduct risk metrics
covering an assessment of overall CRAMs performance, out of appetite
CRAMs, Financial Ombudsman Service (FoS) change rates and complaints.
CRAMs have been designed for services and product families offered
by the Group and are measured by a consistent set of common metrics.
These contain a range of product design, sales and process metrics to
provide a more holistic view of conduct risks; some products also have a
suite of additional bespoke metrics.
Each of the tolerances for the metrics are agreed for the individual product
or service and are regularly tracked. At a consolidated level these metrics
are part of the Board risk appetite. The Group continues to evolve its
approach to measurements supporting customer vulnerability, process
delivery and customer journeys.
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.
Cultural transformation, supported by strong direction and tone from
senior executives and the Board. This is underpinned by the Group’s
values, behaviours and code of responsibility, to deliver the best bank
for customers.
Continued embedding of the customer vulnerability framework.
The Customer Vulnerability Cross Divisional Committee continues to
operate at a senior level to prioritise change, drive implementation
and ensure consistency across the Group. Significant partnership with
Macmillan to support customers with cancer continues, alongside
ongoing activities to support all vulnerable customers, including those
experiencing financial and domestic abuse.
Continued embedding and evolving of the Group’s customer journey
strategy and framework to support our focus on conduct from an
end-to-end customer perspective.
Enhanced product governance framework to ensure products continue
to offer customers fair value, and consistently meet their needs
throughout their product life cycle; reviewed and challenged by Group
Product Governance Committee (GPGC).
Enhanced complaints management through effectively responding
to, and learning from, root causes of complaint volumes and FoS
change rates.
Review and oversight of thematic conduct agenda items at GPGC,
ensuring holistic consideration of key Group-wide conduct risks.
Enhanced recruitment and training, with a focus on how the
Group manages colleagues’ performance with clearer customer
accountabilities.
Ongoing engagement with third-parties involved in serving the Group’s
customers to ensure consistent delivery.
Monitoring and testing of customer outcomes to ensure the Group
delivers fair outcomes for customers whilst making continuous
improvements to products, services and processes.
Continued focus on market conduct through training and enhancements
of procedures and controls, governed by the Market Steering
Committee which also provides read-across for the Group on
industry issues.
Implementation of enhanced change delivery methodology to enable
prioritisation and delivery of initiatives to address conduct challenges.
Focus on proactive identification and mitigation of conduct risk in the
Group Strategic Review 3.
Active engagement with regulatory bodies and other stakeholders to
develop 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 is in place to determine whether the Group is delivering fair
outcomes for customers.
GCFC acts as the guardian of customer experience and has responsibility
for monitoring and reviewing plans and actions to improve it, 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.
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 which could result in customer
detriment, unfair customer outcomes, financial loss, disruption and/or
reputational damage are:
Conduct policies and procedures in place to ensure appropriate controls
and processes that deliver fair customer outcomes.
A cyber-attack;
Customer needs explicitly considered within business and product level
planning and strategy, through divisional customer plans, with integral
conduct lens, reviewed and challenged by Group Customer First
Committee (GCFC).
Change and execution risk in delivering the Group’s change agenda;
Failure in IT systems, due to volume of change, and/or aged
infrastructure;
Failure to protect and manage the Group’s and customers’ data;
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 137
Internal and/or external fraud or financial crime;
Failure to ensure compliance with increasingly complex and detailed
regulation including anti-money laundering, anti-bribery, counter-
terrorist financing, and financial sanctions and prohibitions laws and
regulations; and
Operational resilience and damage to physical assets including: 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 and 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 an
operational losses process.
Table 1.26 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 2018 the highest frequency of events occurred
in external fraud (59.83 per cent) and execution, delivery and process
management (25.52 per cent). Clients, products and business practices
accounted for 63.18 per cent of losses by value, driven by legacy issues
where impacts materialised in 2018 (excluding PPI).
Table 1.26: Operational risk events by risk category (losses greater than or equal to £10,000), excluding PPI1
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
2018
1.10
11.61
1.47
–
25.52
59.83
0.47
2017
1.43
10.84
1.78
0.05
24.26
61.29
0.35
2018
2.80
63.18
0.20
–
30.03
3.68
0.11
100.00
100.00
100.00
2017
1.31
86.23
0.17
0.06
8.91
3.38
(0.06)
100.00
1 2017 breakdowns have been restated to reflect a number of events that have been reclassified following an internal review.
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 a ‘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 continues to invest heavily to
protect the Group from malicious cyber-attacks. Most recent investment
has focused on improving the Group’s approach to identity and
access management, improving capability to detect and respond to
cyber-attacks and improved ability to manage vulnerabilities across
the estate.
The Group acknowledges the challenges faced with delivering new
strategic initiatives and programmes alongside the extensive agenda
of regulatory and legal changes whilst enhancing systems and controls.
To address this, impacts of change are assessed in terms of the ability
of the business to execute effectively and the potential impact on its
risk profile. Key elements are monitored, including identifying resources
and skills required to deliver change, critical dependencies and change
readiness, while controls are also put in place to manage change activity
and are monitored in line with the Group Change Policy. Execution and
change risks and controls are reported through Group Transformation
governance up to Board Risk Committee, and are recorded on key risk
systems to allow for consolidation and aggregation. To supplement this,
the Group takes a risk based approach to change oversight across the
three lines of defence, encompassing delivery assurance, risk oversight
and audit reviews focused on a combination of specific change activity
and broad overarching themes.
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, 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
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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
138 Lloyds Banking Group Annual Report and Accounts 2018
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 of suspected or actual bribery
activity. The Sanctions and the Related Prohibitions Policy sets out a
framework of controls for compliance with legal and regulatory sanctions.
The Group has increased its focus on operational resilience and has
updated its operational resilience strategy to reflect changing priorities
of both customers and regulators. At the core of its approach to
operational resilience are the Group’s Critical business processes which
drive all activity, including further mapping of the processes to identify
any additional resilience requirements such as impact tolerances in the
event of a service outage. The Group continues to develop playbooks
that address a range of interruptions from internal and external threats
and tests these through scenario based testing and exercising.
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 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. The Group is exposed to the following key people risks:
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;
The increasing demands on colleagues and consequential impact
colleague wellbeing may impact on the Group’s ability to enhance
colleague skills to achieve capability uplift for a digital era; and
Colleague engagement may continue to be challenged by
ongoing media attention on banking sector culture, conduct and
ethical considerations.
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, wellbeing 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 colleague wellbeing strategies and support are in place to
meet colleague needs, and that the skills and capability growth required
to build a workforce for the ‘Bank of the Future’ are achieved;
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. 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
are completed at Risk division level to assess the effectiveness of controls,
recommending follow up remedial action if required. 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.
Insurance underwriting 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.
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 cash flows 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 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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 139
Mitigation
Insurance underwriting risk in the Insurance business is mitigated in a
number of ways:
Strategic decisions made consider the maintenance of the current well-
diversified portfolio of insurance risks;
Processes for underwriting, claims management, pricing and product
design seek to control exposure. Experts in demographic risk (for
example longevity) support the propositions;
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;
Longevity risk transfer and hedging solutions are considered on a regular
basis and since 2017 Insurance has reinsured £2.7 billion of annuitant
longevity; 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.
Capital risk
Definition
Capital risk is defined as the risk that the Group has a sub-optimal
quantity or quality of capital or that capital is inefficiently deployed across
the Group.
Exposures
A capital risk exposure arises when the Group has insufficient capital
resources to support its strategic objectives and plans, and to meet
external stakeholder requirements and expectations. This could arise
due to a depletion of the Group’s capital resources as a result of the
crystallisation of any of the risks to which it is exposed. Alternatively a
shortage of capital could arise from an increase in the amount of capital
that needs to be held either at Group level or at regulated entity or
sub-group levels under the Group’s post ring-fence structure. 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. Further 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 set at 8 per cent of total 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
referred to as the Group’s Total Capital Requirement (TCR), and a number
of regulatory capital buffers as described below.
Additional minimum requirements under Pillar 2A are set by the PRA as a
firm-specific Individual Capital Requirement (ICR) reflecting a point in time
estimate, which may change over time, of the minimum amount of capital
that is needed by the Group 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).
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 come into force for UK ring-fenced
banks during 2019, with the PRA expected to announce both the SRB
rate and date of application for the Group’s Ring-Fenced Bank (RFB)
sub-group in the first half of 2019. The size of buffer applied to the RFB
sub-group will be dependent upon its total assets. Although the SRB will
apply to the RFB sub-group, the PRA has indicated that they will include
in the Group’s PRA Buffer an amount equivalent to the RFB sub-group’s
SRB. As a percentage of risk-weighted assets, the amount included in the
Group's PRA Buffer is expected to be lower reflecting the risk-weighted
assets of the Group that are not held in the RFB sub-group and for which
the SRB will not apply.
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.
The CCB has been phased in over a number of years – during 2018 it was
1.875 per cent and it increased to the full 2.5 per cent on 1 January 2019.
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 exposures. The CCYB rate for the UK is currently set at 1.0 per cent.
The FPC regularly considers the adequacy of the UK CCYB rate in light
of the evolution of the overall risk environment. As at 31 December 2018
non-zero buffer rates also currently apply for Norway, Sweden, Hong Kong,
Iceland, Slovakia, Czech Republic, and Lithuania. During 2019 France,
Bulgaria, Denmark and Ireland will implement non-zero buffer rates. The
Group’s overall countercyclical capital buffer at 31 December 2018 was
0.9 per cent of risk-weighted assets, having increased significantly during
the year (from 0.002 per cent at 31 December 2017) as a result of the
increase in the UK rate from nil to 1.0 per cent, the Group’s relevant credit
exposures being predominantly UK based.
As part of the capital planning process, forecast capital positions are
subjected to extensive internal stress testing to determine the adequacy of
the Group’s capital resources against the minimum requirements, including
the ICR. The PRA considers outputs from both the Group’s internal stress
tests and the annual Bank of England stress test, in conjunction with the
Group’s other regulatory capital buffers, as part of the process for informing
the setting of a bank-specific capital buffer for the Group, known as the
PRA Buffer. The PRA requires this 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 other regulatory buffers) would give rise to mandatory restrictions 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. This is supplemented by a time-varying
countercyclical leverage buffer (CCLB) which is determined by multiplying
the leverage exposure measure by 35 per cent of the countercyclical capital
buffer (CCYB) rate. As at 31 December 2018 the CCLB was 0.3 per cent
(31 December 2017: nil). An additional leverage ratio buffer (ALRB) will
apply from 2019 to the Group’s ring-fenced bank (RFB) sub-group, to
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
140 Lloyds Banking Group Annual Report and Accounts 2018
be determined by multiplying the RFB leverage exposure measure by
35 per cent of the SRB. An equivalent amount of capital, referred to as the
Leverage Ratio Group Add-on, will be required to be held at Group level
under the UK framework to cover the RFB’s ALRB.
At least 75 per cent of the 3.25 per cent minimum leverage ratio
requirement and all regulatory buffers 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 reducing or cancelling
dividend payments and share buybacks, by raising new equity via, for
example, a rights issue or debt exchange and by raising additional
tier 1 or tier 2 capital securities. 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.
Monitoring
Capital is actively managed and monitoring capital ratios is a key factor in
the Group’s planning processes and stress testing, which separately cover
the RFB sub-group and key individual banking entities. 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.
The capital plans also consider the impact of IFRS 9 which has the potential
to increase bank capital volatility. Under stress this is primarily a result of
provisioning for assets that are not in default at an earlier stage than would
have been the case under IAS 39. In addition it currently remains unclear
as to how the IFRS 9 requirement to reflect the outcome of multiple future
economic scenarios within the calculation of the expected credit losses
(ECL) allowance should be reflected in capital stress tests.
The Group notes that the UK regulatory authorities have previously
announced, via the Financial Policy Committee (FPC) of the Bank of
England, that the change in accounting standard will not change the
cumulative losses banks incur during any given stress period (the losses
will however be provided for at an earlier point in the stress) and that the
FPC will take steps to ensure that the interaction of IFRS 9 accounting
with its annual stress test does not result in de facto increases in capital
requirements. In the short term the IFRS 9 transitional arrangements for
capital, which the Group has adopted, will provide some stability in capital
requirements against the increased provisioning, measurement uncertainty
and volatility introduced by IFRS 9.
Regular reporting of actual and projected ratios for Group, the RFB
sub-group and key legal entities, 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 well
established and 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 current level of CET1 capital required remains
at around 13 per cent plus a management buffer of around 1 per cent
to provide capacity for growth, meet regulatory requirements and cover
uncertainties.
This takes into account, amongst other things:
the minimum Pillar 1 CET1 capital requirement of 4.5 per cent of
risk-weighted assets.
the Group’s Pillar 2A ICR set by the PRA. During the year the PRA
reduced the Group’s ICR from 5.4 per cent to 4.6 per cent of risk-
weighted assets at 31 December 2018, of which 2.6 per cent must be
met by CET1 capital. The requirement has increased to 4.7 per cent of
risk-weighted assets, of which 2.7 per cent must be met by CET1 capital,
from 1 January 2019 to reflect the commencement of the UK’s ring-
fencing regime.
the capital conservation buffer (CCB) requirement of 1.875 per cent of
risk-weighted assets, increasing to 2.5 per cent of risk-weighted assets
from 1 January 2019.
the Group’s current countercyclical capital buffer (CCYB) requirement
of 0.9 per cent of risk-weighted assets.
the introduction of the SRB during 2019 for the RFB sub-group, which will
require the Group to hold an equivalent monetary amount of capital.
the Group’s PRA stress buffer, which the PRA sets after taking account
of 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.
Dividend policy
The Group has established an ordinary dividend policy that is both
progressive and sustainable, based on growing the ordinary dividend
per share over time. 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 return of surplus capital
through the use of special dividends or share buybacks. Surplus capital
represents capital over and above the amount management wish to
retain to grow the business, meet regulatory requirements and cover
uncertainties. The amount of required capital may vary from time to time
depending on circumstances and by its nature there can be no guarantee
that any return of surplus capital 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 Group's financial and operating performance.
Distributable reserves are determined as required by the Companies
Act 2006 by reference to a company’s individual financial statements.
At 31 December 2018 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 main operating subsidiaries,
including Lloyds Bank plc (the ring-fenced bank), Lloyds Bank Corporate
Markets plc (the non-ring-fenced bank), LBG Equity Investments Limited
(the non-ring-fenced investments business) and Scottish Widows Group
Limited (the insurance business). A number of Group subsidiaries,
principally those with banking and insurance activities, are subject to
regulatory capital requirements which require minimum amounts of
capital to be maintained relative to their size and risk. The principal
operating subsidiary is Lloyds Bank plc which, at 31 December 2018, had
a consolidated CET1 capital ratio of 14.9 per cent (31 December 2017:
15.8 per cent). The Group actively manages the capital of its subsidiaries,
which includes monitoring the regulatory capital ratios for its banking and
insurance subsidiaries and, on a consolidated basis, the RFB sub-group
against approved risk appetite. The Group operates a formal capital
management policy which requires all subsidiary entities to remit surplus
capital to their parent companies.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 141
Minimum requirement for own funds
and eligible liabilities (MREL)
The purpose of the minimum requirement for own funds and eligible
liabilities (MREL) is to require firms to maintain sufficient equity and liabilities
that are capable of credibly bearing losses in resolution. MREL can be
satisfied by a combination of regulatory capital and certain unsecured
liabilities (which must be subordinate to a firm’s operating liabilities).
In November 2016 the Bank of England published a statement of policy on
its approach for setting MREL in line with EU requirements.
The accrual for foreseeable dividends reflects the recommended final
ordinary dividend of 2.14 pence per share.
The transitional total capital ratio, after ordinary dividends, increased by
1.7 per cent to 22.9 per cent, largely reflecting the issuance of new AT1 and
dated subordinated debt instruments, foreign exchange movements on
subordinated debt instruments, the reduction in the significant investments
deduction from tier 2 capital, the increase in CET1 capital and the reduction
in risk-weighted assets, partially offset by the amortisation of dated tier 2
instruments and the annual reduction in the transitional limit applied to
grandfathered AT1 capital instruments.
Total capital requirement
The Group’s total capital requirement (TCR) as at 31 December 2018,
being the aggregate of the Group’s Pillar 1 and current Pillar 2A capital
requirements, was £26,124 million (31 December 2017: £28,180 million).
Capital resources
An analysis of the Group’s capital position as at 31 December 2018
is presented in the following section on both a CRD IV transitional
arrangements basis and a CRD IV fully loaded basis. In addition the
Group’s capital position reflects the application of the transitional
arrangements for IFRS 9.
Applying the Bank of England’s MREL policy to minimum capital
requirements from 1 January 2019, the Group’s indicative MREL
requirement, excluding regulatory capital buffers, is as follows:
From 2020, 2 times Pillar 1 plus Pillar 2A, equivalent to 20.7 per cent of
risk-weighted assets
From 2022, 2 times Pillar 1 plus 2 times Pillar 2A, equivalent to
25.4 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 2018, the Group issued £8.8 billion (sterling equivalent) 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 over the last two years the Group remains
comfortably positioned to meet MREL requirements from 2020 and, as at
31 December 2018, had a transitional MREL ratio of 32.4 per cent of risk-
weighted assets.
Analysis of capital position
The Group’s CET1 capital ratio increased by 2.10 per cent on a pro forma
basis before ordinary dividends and the share buyback, primarily as a
result of:
Strong underlying capital build, net of remediation costs, of
1.95 per cent, largely driven by underlying profits
Dividends paid by the Insurance business in July 2018 and in February
2019, in relation to 2018 earnings generating an increase of 0.25 per cent
The completion of the sale of the Irish mortgage portfolio in the second
half of the year which resulted in a 0.25 per cent increase
Other movements, resulting in a net increase of 0.03 per cent, included
the impact of structural changes arising from transfers between Insurance
and the ring-fenced bank, risk-weighted asset reductions, market
movements and additional pension contributions
Offset by a reduction of 0.38 per cent relating to PPI charges
The implementation of IFRS 9 on 1 January 2018 resulted in an initial
reduction in CET1 capital of 0.30 per cent which, following the application
of transitional relief, reduced to 0.01 per cent. No additional relief has
been recognised at 31 December 2018 as Stage 1 and Stage 2 expected
credit losses (ECLs), net of regulatory expected losses, have not increased
beyond the position at 1 January 2018.
Overall the Group’s CET1 ratio has strengthened to 16.0 per cent on a
pro forma basis before ordinary dividends and the share buyback. After
ordinary dividends the Group’s CET1 ratio reduces to 14.8 per cent on
a pro forma basis. In addition the Board intends to implement a share
buyback programme of up to £1.75 billion, equivalent to 2.46 pence per
share. The buyback will impact the Group’s capital position in 2019 and
is expected to reduce CET1 capital by c. 0.9 per cent. Allowing for this at
31 December 2018 the pro forma CET1 ratio would be 13.9 per cent after
ordinary dividends (31 December 2017: 13.9 per cent pro forma, after
ordinary dividends and the share buyback).
Excluding the Insurance dividend paid in February 2019 the Group’s CET1
ratio has strengthened to 15.8 per cent before ordinary dividends and the
share buyback and 14.6 per cent after ordinary dividends (31 December
2017: 14.1 per cent).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
142 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.27: Capital resources (audited)
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.
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
Transitional
Fully loaded
At 31 Dec
2018
£m
At 31 Dec
2017
£m
At 31 Dec
2018
£m
At 31 Dec
2017
£m
43,434
43,551
43,434
43,551
(1,523)
2,273
(280)
(1,051)
(19)
(1,475)
1,301
109
(1,405)
(177)
(1,523)
2,273
(280)
(1,051)
(19)
(1,475)
1,301
109
(1,405)
(177)
42,834
41,904
42,834
41,904
(3,667)
(2,966)
(3,667)
(2,966)
(529)
(27)
(994)
(191)
(4,222)
(3,037)
(556)
(498)
(541)
(191)
(4,250)
(3,255)
(529)
(27)
(994)
(191)
(4,222)
(3,037)
(556)
(498)
(541)
(191)
(4,250)
(3,255)
30,167
29,647
30,167
29,647
6,466
4,008
(1,804)
8,670
5,330
4,503
(1,748)
8,085
6,466
5,330
–
–
–
–
6,466
5,330
(1,298)
37,539
(1,403)
36,329
–
–
36,633
34,977
13,648
13,419
13,648
13,419
(1,767)
1,504
(2,717)
–
10,668
(1,786)
1,617
(3,524)
120
9,846
(1,767)
(1,266)
(2,717)
–
7,898
(1,786)
(1,252)
(3,565)
120
6,936
(973)
47,234
(1,516)
44,659
(2,271)
42,260
(2,919)
38,994
Risk-weighted assets (unaudited)
206,366
210,919
206,366
210,919
Common equity tier 1 capital ratio3
Tier 1 capital ratio
Total capital ratio
14.6%
18.2%
22.9%
14.1%
17.2%
21.2%
14.6%
17.8%
20.5%
14.1%
16.6%
18.5%
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 Group's common equity tier 1 ratio is 14.8 per cent reflecting the dividend paid by the Insurance business in February 2019 in relation to its 2018 earnings. The post share buyback
common equity tier 1 ratio is 13.9 per cent on a pro forma basis (31 December 2017: 13.9 per cent).
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 143
Movements in capital resources
The key difference between the transitional capital calculation as at 31 December 2018 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 key movements on a transitional basis are set out in
the table below.
Table 1.28: Movements in capital resources
At 31 December 2017
Banking profit attributable to ordinary shareholders1
Movement in foreseeable dividends2
Dividends paid out on ordinary shares during the year
Dividends received from the Insurance business1
Share buyback completed
Restatement of retained earnings on adoption of IFRS 9
IFRS 9 transitional adjustment to retained earnings
Movement in treasury shares and employee share schemes
Pension movements:
Removal of defined benefit pension surplus
Movement through other comprehensive income
Fair value through other comprehensive income 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 provisions3
Movements in subordinated debt:
Repurchases, redemptions and other
Issuances
Other movements
At 31 December 2018
Common
Equity tier 1
£m
29,647
3,759
(48)
(2,240)
750
(1,005)
(929)
478
300
(453)
90
(401)
27
218
(701)
471
28
–
–
–
176
Additional
Tier 1
£m
6,682
Tier 2
£m
8,330
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
105
–
543
(120)
Total
capital
£m
44,659
3,759
(48)
(2,240)
750
(1,005)
(929)
478
300
(453)
90
(401)
27
218
(701)
471
676
(120)
(551)
1,136
–
(824)
(1,375)
1,766
–
2,902
176
30,167
7,372
9,695
47,234
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. The £750 million of dividends received from Insurance during the year include £600 million in respect of their 2017 full year ordinary dividend and £150 million in respect of
their 2018 interim ordinary dividend.
2 Includes the accrual for the 2018 full year ordinary dividend and the reversal of the accrual for the 2017 full year ordinary dividend which was paid during the year.
3 The movement in eligible provisions reflects the adjustment made in respect of the application of the IFRS 9 transitional arrangements.
CET1 capital resources have increased by £520 million over the year, primarily reflecting:
– profit generation during the year
– receipt of the dividends paid by the Insurance business in February 2018 and July 2018
– movements in treasury shares and the employee share schemes
– a reduction in the deferred tax asset deduction
– a reduction in excess expected losses resulting from the partial absorption of the increase in impairment provisions following the adoption of IFRS 9 on 1
January 2018 (remaining expected losses deducted from capital relate specifically to equity exposures), offset by the impact on retained earnings (net of
transitional relief)
– largely offset by the interim dividend paid in September 2018, the accrual for the 2018 full year ordinary dividend, the completion of the share buyback
programme during the year, the increase in the defined benefit pension scheme surplus deduction, movements through the fair value through other
comprehensive income (FVOCI) reserve and an increase in intangible assets which are deducted from capital
AT1 capital resources have increased by £690 million in the period, primarily reflecting the issuance of a new AT1 capital instrument during the year,
partially offset by the annual reduction in the transitional limit applied to grandfathered AT1 capital instruments.
Tier 2 capital resources have increased by £1,365 million in the period largely reflecting the issuance of new dated subordinated debt instruments, foreign
exchange movements and a reduction in the significant investments deduction following the redemption by Scottish Widows of a subordinated debt
instrument issued to the Group, partially offset by the amortisation of dated instruments.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
144 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.29: Minimum requirement for own funds and eligible liabilities
An analysis of the Group’s current transitional MREL position is provided below.
Total capital resources (transitional basis)
Ineligible AT1 and tier 2 instruments1
Senior unsecured securities issued by Lloyds Banking Group plc
Total MREL2
Risk-weighted assets
MREL ratio3
Transitional
At 31 Dec
2018
£m
47,234
At 31 Dec
2017
£m
44,659
(613)
(1,350)
20,213
66,834
10,815
54,124
206,366
210,919
32.4%
25.7%
1 Instruments with less than one year to maturity or governed under non-EEA law without a contractual bail-in clause.
2 Until 2022, externally issued regulatory capital in operating entities can count towards the Group’s MREL to the extent that such capital would count towards the Group's consolidated
capital resources.
3 The MREL ratio is 32.6 per cent on a pro forma basis reflecting the dividend paid by the Insurance business in February 2019 in relation to its 2018 earnings (31 December 2017: 26.0 per
cent pro forma).
Table 1.30: 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 funds of central counterparties
Credit valuation adjustment risk
Operational risk
Market risk
Underlying risk-weighted assets
Threshold risk-weighted assets1
Total risk-weighted assets
At 31 Dec
2018
£m
60,555
59,522
15,666
At 31 Dec
2017
£m
60,207
61,588
17,191
135,743
138,986
25,757
25,503
161,500
164,489
5,718
830
702
25,505
2,085
6,055
428
1,402
25,326
3,051
196,340
200,751
10,026
10,168
206,366
210,919
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 1.31: Risk-weighted assets movement by key driver
Credit risk
IRB
£m
Credit risk
STA
£m
Credit risk
total2
£m
Counterparty
credit risk3
£m
Market risk
£m
Operational
risk
£m
Total risk-weighted assets as at 31 December 2017
Less threshold risk-weighted assets1
Risk-weighted assets as at 31 December 2017
138,986
25,503
164,489
Total
£m
210,919
10,168
Asset size
Asset quality
Model updates
Methodology and policy
Acquisitions and disposals
Movements in risk levels (market risk only)
Foreign exchange movements
Other
Risk-weighted assets as at 31 December 2018
Threshold risk-weighted assets1
Total risk-weighted assets as at 31 December 2018
(271)
759
1,472
(1,002)
(4,892)
–
639
52
591
354
–
182
(984)
–
(21)
132
320
1,113
1,472
(820)
(5,876)
–
618
184
7,885
75
(348)
–
(136)
–
–
(220)
(6)
3,051
25,326
200,751
–
–
(708)
–
–
(901)
–
643
–
–
–
–
–
–
–
395
765
764
(956)
(5,876)
(901)
398
179
1,000
135,743
25,757
161,500
7,250
2,085
25,505
196,340
10,026
206,366
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 investments in the Group’s Insurance business.
2 Credit risk includes securitisation risk-weighted assets.
3 Counterparty credit risk includes movements in contributions to the default funds of central counterparties and movements in credit valuation adjustment risk.
Risk management continued
The risk-weighted assets movement table provides analysis 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, risk-weighted assets:
Asset size net increase of £0.3 billion includes targeted growth in some
key customer segments
Asset quality increase of £1.1 billion captures movements due to changes
in borrower risk, including moves in and out of default, and changes in
the economic environment
Model update increases of £1.5 billion were driven by model
refinements, principally within Retail portfolios
Methodology and policy reductions of £0.8 billion were driven by further
capital efficient securitisation activity
Acquisitions and disposals reduction of £5.9 billion reflects the sale of the
Irish mortgage portfolio and certain strategic equity holdings
Sterling foreign exchange movements, principally with Euro and
US Dollar, contributed to an increase of £0.6 billion in credit
risk-weighted assets
Counterparty credit risk, risk-weighted assets reduction of £0.6 billion
was mainly driven by lower CVA risk-weighted assets, foreign exchange
movements and yield movement.
Market risk, risk-weighted assets reductions of £1.0 billion were largely due
to a reduction in underlying positions and refinements to internal models,
partly offset by migrations to Lloyds Bank Corporate Markets.
Operational risk, risk-weighted assets increased following the annual
update of the income based Standardised Approach operational
risk calculation.
Lloyds Banking Group Annual Report and Accounts 2018 145
Leverage ratio
Analysis of leverage movements
The Group’s fully loaded UK leverage ratio increased to 5.5 per cent
reflecting the increase in tier 1 capital, partially offset by the £6.0 billion
increase in the exposure measure. The latter largely reflects increases
in both the derivatives exposure measure and securities financing
transactions (SFT) exposure measure, offset in part by the reduction in
financial assets at fair value through other comprehensive income and the
reduction in off-balance sheet items.
On a pro forma basis the UK leverage ratio increased to 5.6 per cent from
5.4 per cent pro forma at 31 December 2017, reflecting the increase in the
pro forma fully loaded tier 1 capital position, partially offset by the increase
in the exposure measure.
The derivatives exposure measure, representing derivative financial
instruments per the balance sheet net of deconsolidation and derivatives
adjustment, increased by £5.0 billion during the period, predominantly
reflecting a reduction in the regulatory netting benefit and a higher
volume of trades through central counterparties, including longer dated
trades, which has contributed to the increase in the regulatory potential
future exposure. The movements in part reflect the impact of the
separation of derivative portfolios between the ring-fenced and non-ring-
fenced banks and the establishment of the latter through Lloyds Bank
Corporate Markets.
The SFT exposure measure, representing SFT assets per the balance
sheet net of deconsolidation and other SFT adjustments, increased by
£21.8 billion during the period, largely reflecting a continued increase in
customer volumes, partially offset by a small reduction in trading volumes.
Off-balance sheet items reduced by £2.0 billion during the period, primarily
reflecting a net reduction in securitisation financing facility commitments,
including drawdowns, and a small reduction in new residential mortgage
offers placed.
The average UK leverage ratio of 5.5 per cent over the quarter, compared
to 5.3 per cent at the start of the quarter, primarily reflected the issuance
of a new AT1 capital instrument in October 2018, partially offset by a
marginally higher average exposure measure over the quarter when
compared to the position at the end of the quarter.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
146 Lloyds Banking Group Annual Report and Accounts 2018
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 1.32: 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 measure3
UK Leverage ratio2,5
Average UK leverage ratio3
CRD IV exposure measure4
CRD IV leverage ratio4
Fully loaded
At 31 Dec
2018
£m
30,167
6,466
36,633
At 31 Dec
2017
£m
29,647
5,330
34,977
23,595
69,301
704,702
797,598
25,834
49,193
737,082
812,109
(50,105)
(53,842)
(1,376)
(487)
(130,048)
(131,911)
(8,828)
(10,536)
539
18,250
(575)
40
56,393
(8,163)
663,277
669,896
5.5%
5.5%
(2,043)
(85)
(140,387)
(142,515)
(13,031)
(7,380)
881
12,335
(7,195)
(2,022)
58,357
(7,658)
657,234
5.3%
713,382
711,076
5.1%
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 average UK leverage ratio is based on the average of the month end tier 1 capital position and average exposure measure over the quarter (1 October 2018 to 31 December 2018).
The average of 5.5 per cent compares to 5.3 per cent at the start and 5.5 per cent at the end of the quarter.
4 Calculated in accordance with CRD IV rules which include central bank claims within the leverage exposure measure.
5 The UK leverage ratio is 5.6 per cent on a pro forma basis reflecting the dividend paid by the Insurance business in February 2019 in relation to its 2018 earnings (31 December 2017: 5.4
per cent pro forma).
Table 1.33 : Application of IFRS 9 on a full impact basis for capital and leverage
Common equity tier 1 (£m)
Transitional tier 1 (£m)
Transitional total capital (£m)
Total risk-weighted assets (£m)
Common equity tier 1 ratio (%)
Transitional tier 1 ratio (%)
Transitional total capital ratio (%)
UK leverage ratio exposure measure (£m)
UK leverage ratio (%)
IFRS 9 full impact
At 31 Dec
2018
29,592
36,964
47,195
At 1 Jan
2018
29,060
35,742
44,636
At 31 Dec
2017
29,647
36,329
44,659
206,614
211,200
210,919
14.3%
17.9%
22.8%
13.8%
16.9%
21.1%
14.1%
17.2%
21.2%
663,182
656,886
657,234
5.4%
5.2%
5.3%
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 147
Further details on the Group’s adoption of the transitional arrangements
for IFRS 9 can be found in the Group publication entitled IFRS 9
Financial Instruments Transition, published in March 2018
and located on the Group’s website at
http://www.lloydsbankinggroup.com/investors/financial-performance/.
The Group has opted to apply paragraph 4 of CRR Article 473a (the
transitional rules) which allows for additional capital relief in respect of
any post 1 January 2018 increase in Stage 1 and Stage 2 IFRS 9 expected
credit loss provisions (net of regulatory expected losses) during the
transition period. As at 31 December 2018 no additional capital relief has
been recognised.
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 and its key legal entities are exposed. One
of the most important uses of stress testing is to assess the resilience of
the operational and strategic plans of the Group and its legal entities to
adverse economic conditions and other key vulnerabilities. As part of
this programme the Group conducts macroeconomic stress tests of the
operating plans.
In 2018 the Group participated in both the concurrent UK stress test run by
the Bank of England (BoE) and in the European Banking Authority’s (EBA)
bi-annual EU-wide stress test. The EBA stress test did not contain a pass/
fail threshold and as announced in November, the Group demonstrated its
ability to meet applicable capital requirements under stressed conditions.
In the case of the BoE stress test, despite the severity of the scenario, the
Group exceeded the capital and leverage hurdles after the application of
management actions, and as a consequence was not required to take any
capital actions.
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
2018 Basel G-SIBs annual exercise will be disclosed from April 2019 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, with the latest major change to the model approved
in November 2018.
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.
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 52 on page 255 sets out an analysis of assets and
liabilities by relevant maturity grouping. The Group undertakes quantitative
and qualitative analysis of the behavioural aspects of its assets and liabilities
in order to reflect their expected behaviour.
Mitigation
The Group manages and monitors liquidity risks and ensures that liquidity
risk management systems and arrangements are adequate with regard
to the internal risk appetite, Group strategy and regulatory requirements.
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 in line with Group Policy. 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 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 Group’s liquid asset buffer is available for
deployment at immediate notice, subject to complying with regulatory
requirements.
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. Liquidity risk
is actively managed and monitored within the Insurance business to ensure
that it remains within approved risk appetite, so that even under stress
conditions, there is sufficient liquidity to meet obligations.
Monitoring
Daily monitoring and control processes are in place to address internal
and regulatory liquidity requirements. In order to meet ring-fencing
requirements from 1 January 2019, the shape and scale of liquidity
reporting has increased with additional monitoring and reporting
requirements for the Ring-Fenced Bank (RFB) sub-group and non-ring-
fenced banking entities. 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; funding
concentrations; changes in LCR outflows; credit default swap (CDS)
spreads; and basis risks.
Exposure
Liquidity exposure represents the potential stressed outflows in any future
period less expected inflows. The Group considers liquidity exposure from
both an internal and a regulatory perspective.
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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
148 Lloyds Banking Group Annual Report and Accounts 2018
business including reflecting emerging horizon risks to the Group, such as a
further sovereign downgrade. For further information on the Group’s 2018
liquidity stress testing results refer to page 151.
The Group maintains a Contingency Funding Plan which is designed
to identify emerging liquidity concerns at an early stage, so that
mitigating actions can be taken to avoid a more serious crisis developing.
Contingency Funding Plan invocation and escalation processes are
based on analysis of five major quantitative and qualitative components,
comprising assessment of: early warning indicators; prudential and
regulatory liquidity risk limits and triggers; stress testing results; event and
systemic indicators; and market intelligence.
Funding and liquidity management in 2018
The Group has maintained its strong funding and liquidity position with a
stable loan to deposit ratio of 107 per cent.
During the year, the Group took advantage of favourable funding markets
to raise £21.4 billion of new term wholesale funding in order to refinance
maturities in the year including the Bank of England’s Funding for Lending
Scheme (FLS) and increase liquidity buffers. As a result wholesale funding
increased from £101.1 billion to £123.3 billion.
During 2018, the Group repaid £12 billion of its FLS drawings, which has
reduced the amount outstanding to £13.1 billion at 31 December 2018.
The balance of Term Funding Scheme drawings remains at £19.9 billion as
at 31 December 2018.
The Group’s liquidity position remains strong and in excess of the
regulatory minimum and internal risk appetite, with a LCR of 130 per cent
as at 31 December 2018 based on the EU Delegated Act. Total LCR eligible
liquid assets as at 31 December 2018 were £129.4 billion, up £8.5 billion in
the year.
The Group's strong ratings continue to reflect its robust balance sheet,
improved profitability and bail-in capital position. During 2018, S&P
upgraded Lloyds Bank plc’s long-term rating by one notch to ‘A+’ and S&P,
Moody’s and Fitch assigned definitive ratings to Lloyds Bank Corporate
Markets (LBCM) of A/A1/A respectively.
Risk management continued Table 1.34: Group funding position
Funding requirement
Loans and advances to customers2
Loans and advances to banks3
Debt securities at amortised cost
Reverse repurchase agreements
Financial assets at fair value through other comprehensive income – non-LCR
eligible4
Available-for-sale financial assets – non-LCR eligible4
Cash and balances at central bank – non-LCR eligible5
Funded assets
Other assets6
On balance sheet LCR eligible liquid assets
Reverse repurchase agreements
Cash and balances at central banks5
Debt securities at amortised cost
Financial assets at fair value through other comprehensive income
Available-for-sale financial assets
Trading and fair value through profit and loss
Repurchase agreements
Total Group assets
Less: other liabilities6
Funding requirement
Funded by
Customer deposits7
Wholesale funding8
Term funding scheme
Total equity
Total funding
Lloyds Banking Group Annual Report and Accounts 2018 149
At 31 Dec
2018
£bn
At 1 Jan
2018
(adjusted)1
£bn
At 31 Dec
2017
(reported)
£bn
Change
%
Change
%
444.4
444.2
–
455.7
5.9
4.0
–
0.8
5.8
460.9
212.9
673.8
40.9
48.9
1.2
24.0
11.9
(3.1)
123.8
797.6
(187.9)
609.7
416.3
123.3
539.6
19.9
50.2
609.7
1.7
3.3
0.7
1.7
4.8
456.4
247.2
703.6
16.9
53.7
–
41.2
1.7
(5.9)
107.6
811.2
(226.8)
584.4
415.5
101.1
516.6
19.9
47.9
584.4
21
(53)
21
1
(14)
(4)
(9)
(42)
(47)
15
(2)
(17)
4
–
22
4
–
5
4
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
(2)
44
11
21
(2)
(9)
(4)
(9)
(47)
15
(2)
(17)
4
–
22
4
–
2
4
1 Adjusted to reflect the implementation of IFRS 9 and IFRS 15.
2 Excludes reverse repos of £40.5 billion (1 January 2018: £16.8 billion; 31 December 2017: £16.8 billion).
3 Excludes nil (31 December 2017: £1.7 billion) of loans and advances to banks within the Insurance business and £0.4 billion (1 January 2018: £0.8 billion; 31 December 2017: £0.8 billion) of
reverse repurchase agreements.
4 Non-LCR eligible liquid assets comprise a diversified pool of highly rated unencumbered collateral (including retained issuance).
5 Cash and balances at central banks are combined in the Group’s balance sheet.
6 Other assets and other liabilities primarily include balances in the Group’s Insurance business and the fair value of derivative assets and liabilities.
7 Excludes repos of £1.8 billion (1 January 2018: £2.6 billion; 31 December 2017: £2.6 billion).
8 The Group’s definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated
liabilities.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
150 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.35: Reconciliation of Group funding to the balance sheet (audited)
At 31 December 2018
Deposits from banks
Debt securities in issue
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
At 31 December 2017
Deposits from banks
Debt securities in issue
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
Included in
funding
analysis
£bn
Repos
and cash
collateral
received by
Insurance
£bn
8.3
97.1
17.9
123.3
416.3
539.6
5.1
78.1
17.9
101.1
415.5
516.6
22.1
–
–
22.1
1.8
23.9
24.1
–
–
24.1
2.6
26.7
Fair value
and other
accounting
methods
£bn
(0.1)
(5.9)
(0.2)
Balance
sheet
£bn
30.3
91.2
17.7
–
418.1
0.6
(5.6)
–
–
29.8
72.5
17.9
418.1
Table 1.36: Analysis of 2018 total wholesale funding by residual maturity
Deposit from banks
Debt securities in issue:
Certificates of deposit
Commercial paper
Medium-term notes
Covered bonds
Securitisation
Subordinated liabilities
Total wholesale funding1
Of which issued by
Lloyds Banking Group plc2
Less
than one
month
£bn
5.3
1.7
1.1
0.5
0.7
–
4.0
0.1
9.4
–
One to
three
months
£bn
0.9
2.4
2.7
–
–
0.6
5.7
0.1
6.7
–
Three to
six months
£bn
Six to nine
months
£bn
Nine
months
to one year
£bn
One to
two years
£bn
Two to
five years
£bn
More than
five years
£bn
0.7
4.1
3.8
0.1
1.1
–
9.1
–
9.8
–
0.1
1.3
0.3
2.2
1.0
0.1
4.9
0.3
5.3
–
0.1
1.3
0.1
0.3
–
–
1.7
0.1
1.9
–
0.5
1.2
–
4.5
5.5
2.8
14.0
2.4
16.9
0.7
–
–
16.0
12.6
–
28.6
2.7
32.0
–
–
–
21.8
6.2
1.1
29.1
12.2
41.3
Total at
31 Dec
2018
£bn
8.3
Total at
31 Dec
2017
£bn
5.1
12.0
8.0
45.4
27.1
4.6
97.1
17.9
10.0
3.2
37.4
24.7
2.8
78.1
17.9
123.3
101.1
–
9.9
10.4
20.3
15.4
1 The Group’s definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities and subordinated liabilities.
2 Consists of medium-term notes only.
Table 1.37: Total wholesale funding by currency (audited)
At 31 December 2018
At 31 December 2017
Table 1.38: Analysis of 2018 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
25.8
US Dollar
£bn
45.2
32.1
Euro
£bn
42.8
37.0
Other
currencies
£bn
9.5
6.2
Total
£bn
123.3
101.1
Sterling
£bn
US Dollar
£bn
0.8
–
3.0
0.1
–
3.9
–
1.5
6.2
0.6
0.7
2.3
11.3
4.9
Euro
£bn
–
1.3
0.9
0.1
0.7
3.0
1.3
Other
currencies
£bn
–
3.0
–
0.2
–
3.2
2.6
Total
£bn
2.3
10.5
4.5
1.1
3.0
21.4
8.8
Risk management continued
Lloyds Banking Group Annual Report and Accounts 2018 151
The Group continues to access wholesale funding markets across a wide
range of products, currencies and investors to maintain a stable and diverse
source of funds. In 2019, the Group will continue with this 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 Group
will continue to issue funding trades from Lloyds Bank plc, operating
company, across senior unsecured, covered bonds, ABS and RMBS. Over
the course of 2019, the Group expects to launch an operating company
funding programme for LBCM. The maturity of the Funding for Lending
and Term Funding Schemes are fully factored into the Group’s funding
plans, and in the expected ‘steady state’ wholesale funding requirements
of £15-20 billion per annum.
Liquidity Portfolio
At 31 December 2018, the banking business had £129.4 billion of
highly liquid unencumbered LCR eligible assets (31 December 2017:
£120.9 billion), of which £128.6 billion is LCR level 1 eligible (31 December
2017: £120.2 billion) and £0.8 billion is LCR level 2 eligible (31 December
2017: £0.7 billion). These assets are available to meet cash and collateral
outflows and PRA regulatory requirements. The Insurance business
manages a separate liquidity portfolio to mitigate insurance liquidity
risk. Total LCR eligible liquid assets represent just under 6.2 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.
Table 1.39: 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 1.40: LCR eligible assets by currency
At 31 December 2018
Level 1
Level 2
Total
At 31 December 2017
Level 1
Level 2
Total
At 31 Dec
2018
£bn
At 31 Dec
2017
£bn
Change
%
Average
2018
£bn
Average
2017
£bn
48.9
78.7
1.0
128.6
0.8
129.4
53.7
65.8
0.7
120.2
0.7
120.9
(9)
20
43
7
14
7
58.1
66.2
0.8
125.1
0.8
125.9
51.0
72.0
1.1
124.1
0.6
124.7
Sterling
£bn
US Dollar
£bn
Euro
£bn
Other
currencies
£bn
98.2
0.4
98.6
90.8
0.2
91.0
19.8
0.4
20.2
16.3
0.5
16.8
10.6
–
10.6
13.1
–
13.1
–
–
–
–
–
–
Total
£bn
128.6
0.8
129.4
120.2
0.7
120.9
The banking business also has a significant amount of non-LCR eligible
liquid 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 liquidity stress testing results at 31 December 2018 showed that
the banking business had liquidity resources representing 167 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.
The above scenario considers a two notch downgrade of the Group’s
current long-term debt rating and accompanying one notch short-term
downgrade implemented instantaneously by all major rating agencies,
which could result in a contractual outflow of £1.3 billion of cash over
a period of up to one year, £2.2 billion of collateral posting related to
customer financial contracts and £6.1 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 using a number of risk
appetite metrics. At 31 December 2018, the Group had £53.4 billion
(31 December 2017: £64.6 billion) of externally encumbered on-balance
sheet assets with counterparties other than central banks. The decrease
in encumbered assets was primarily driven by a decrease in repo
encumbrance. The Group also had £584.3 billion (31 December 2017:
£587.5 billion) of unencumbered on-balance sheet assets, and £159.8 billion
(31 December 2017: £160.1 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
152 Lloyds Banking Group Annual Report and Accounts 2018
Table 1.41: 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
–
54
–
–
–
–
–
–
–
–
2,646
2,700
–
–
12
12
–
–
–
–
49,645
–
5,018
54,663
54,663
5,190
–
– 150,639 155,829 158,529
–
23,595
23,595
23,595
1,223
2,555
2,493
6,271
6,283
5,774
29,041
–
–
5,774
29,041
6,012
2,627
8,651
40,827
159,822
12,098 155,278 116,833 284,209 484,858
2,627
–
2,581
4
26
2,611
5,238
43,466
159,822
15,902 157,837 119,352 293,091 496,379
–
–
–
–
7,278
7,278
–
–
–
–
17,114
–
423
17,537
24,815
56
612
38,949
39,617
39,617
5,828
29,041
18,575
53,444
159,822
87,907 158,449 337,976 584,332 797,598
–
–
–
–
–
–
–
–
–
–
4,642
4,642
–
–
–
–
–
–
–
–
53,887
7,378
–
–
–
–
4,634
58,521
58,521
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
16
1,175
38,835
22,572
40,026
42,098
40,026
5,023
26,414
33,152
64,589
160,060
97,854
173,367
316,239
587,460
812,109
At 31 December 2018
Cash and balances at central
banks
Financial assets at fair value
through profit or loss
Derivative financial instruments
Financial assets at amortised
cost:
Loans and advances to banks
Loans and advances to
customers
Debt securities
Financial assets at fair value
through other comprehensive
income
Other4
Total assets
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
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 segregated in order to meet the Financial Resilience requirements of the PRA’s Supervisory Statement 9/16 ‘Operational Continuity in Resolution’; 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.
Risk management continued
Lloyds Banking Group Annual Report and Accounts 2018 153
Under the banner of the RMF, training modules are in place to support all
colleagues in understanding and fulfilling their risk responsibilities.
The Group’s code of responsibility embodies its 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.
For further information on Corporate Governance see pages 56 to 78.
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.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
154 Lloyds Banking Group Annual Report and Accounts 2018
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 1.42 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 1.42: Market risk linkage to the balance sheet
2018
Assets
Banking
Total
£m
Trading
book only
£m
Non-trading
£m
Insurance
£m
Primary market risk factor
Cash and balances at central banks
54,663
–
54,663
–
Interest rate
Financial assets at fair value through
profit or loss
Derivative financial instruments
Financial assets at amortised cost
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at fair value through
other comprehensive income
Value of in-force business
Other assets
Total assets
Liabilities
Deposit from banks
Customer deposits
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
158,529
23,595
6,283
484,858
5,238
496,379
24,815
4,762
34,855
35,246
14,734
6,380
6,898
Interest rate, foreign exchange, credit spread
116,903
1,963
Interest rate, foreign exchange, credit spread
–
–
–
–
–
–
–
6,242
484,818
5,238
496,298
Interest rate
Interest rate
Interest rate, credit spread
41
40
–
81
24,815
–
Interest rate, foreign exchange, credit spread
–
4,762
Equity
19,641
15,214
Interest rate
797,598
49,980
608,695
138,923
30,320
418,066
30,547
21,373
91,168
112,727
17,656
25,542
23,451
10,827
–
–
–
–
–
–
30,320
418,066
7,085
8,406
91,168
Interest rate
Interest rate
Interest rate, foreign exchange
–
–
11
2,140
Interest rate, foreign exchange, credit spread
–
Interest rate, credit spread
–
112,727
Credit spread
15,889
9,605
1,767
Interest rate, foreign exchange
15,937
Interest rate
747,399
34,278
580,539
132,582
The defined benefit pension schemes’ assets and liabilities are included
under Other assets and Other liabilities in this table and note 35 on
page 219 provides further information.
The Group’s trading book assets and liabilities are originated 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 meet the
requirements as set out in the Capital Requirements Regulation, article 104.
Further information on these activities can be found under the Trading
portfolios section on page 158.
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. 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 210).
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 financial assets at fair value through
other comprehensive income 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 149. 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 155).
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 155
Table 1.43 (below) shows the key material market risks for the Group’s banking, defined benefit pension schemes, insurance and trading activities.
Table 1.43: Key material market risks for the Group by individual business activity (profit before tax impact
measured against Group single stress scenarios)
2018
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 -70bps, 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.
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 un-
dertaken 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 Board 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.
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, liability or instrument.
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 1.42) 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 is
mortgage prepayment risk 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
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 52 on page 255). 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 e.g. Visa Europe, now held in the Equities sub-
group; (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 within the Equities sub-group.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
156 Lloyds Banking Group Annual Report and Accounts 2018
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
interest, 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.
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.
These actions could reduce the net interest income sensitivity, help
mitigate any adverse impacts or they may result in changes to total income
that are not captured in the net interest income.
(iii) Structural hedge limits: the structural hedging programme managing
interest rate risk in the banking book relies on a number of assumptions
made around customer behaviour. A material mismatch between
assumptions and reality could lead to a deterioration in earnings. In
order to monitor this risk a number of metrics are in place to enhance
understanding of risks within 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.
Table 1.44 below shows, split by material currency, the Group’s market value
sensitivities to an instantaneous parallel up and down 25 and 100 basis
points change to all interest rates.
Table 1.44: Group Banking activities: market value sensitivity
Sterling
US Dollar
Euro
Other
Total
Up
25bps
£m
29.1
(7.8)
(3.0)
(0.1)
18.2
2018
Down
25bps
£m
(29.5)
7.8
1.7
0.1
(19.9)
Up
100bps
£m
113.7
(30.6)
(11.2)
(0.4)
71.5
Down
100bps
£m
(122.4)
31.9
7.2
0.5
(82.8)
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
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 1.45 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 1.45: Group Banking activities: market value sensitivity to a steepening and flattening of the yield curve
Sterling
US Dollar
Euro
Other
Total
2018
2017
Steepener
£m
Flattener
£m
Steepener
£m
Flattener
£m
38.3
6.5
(6.8)
(0.1)
37.9
(36.5)
(5.7)
3.6
0.1
(38.5)
(1.1)
7.1
(3.8)
(0.2)
2.0
(16.5)
(8.9)
7.9
0.2
(17.3)
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 1.46: Group Banking activities: net interest income sensitivity
Client facing activity and associated hedges
Up
25bps
£m
76.2
2018
Down
25bps
£m
(125.4)
Up
100bps
£m
341.6
Down
100bps
£m
(538.6)
Up
25bps
£m
86.1
2017
Down
25bps
£m
(54.0)
Up
100bps
£m
370.5
Down
100bps
£m
(186.9)
Income sensitivity is measured over a rolling 12 month basis.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 157
The increase in the net interest income sensitivity to a down 100bps shock
reflects the additional margin compression risk within retail savings as bank
base rate has risen.
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.
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 219.
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. The
hedges are externalised to the market by derivative desks within GCT and
Commercial Banking Markets. 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 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 low rate environments, 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.
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.
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. The Group is liable for
meeting the funding deficit, 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 210). Equity risk also
arises in the with-profits funds but is less material.
Credit spread risk mainly arises from annuities where policyholders’
future cash flows 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.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
158 Lloyds Banking Group Annual Report and Accounts 2018
Measurement
Current and potential future market risk exposures within Insurance are
assessed using a range of techniques including stress, reverse stress and
scenario testing, as well as stochastic modelling.
Risk measures include 1-in-200 year stresses used for regulatory capital
assessments and single factor stresses for profit before tax.
Table 1.47 demonstrates the impact of the Group’s UK Recession scenario
on Insurance’s portfolio (with no diversification benefit, but after the impact
of Group consolidation on interest rate and credits spreads). For Insurance,
this impact of this scenario is identical to the Eurozone Credit Crunch so no
restatement of 2017 figures is required. The amounts include movements
in assets, liabilities and the value of in-force business in respect of Insurance
contracts and participating investment contracts. The impact of equity
movements at 2018 has been mitigated by hedging actions in the year.
The impact of interest rate and credit spread movements at 2018 has been
impacted by the adoption of IFRS9.
Table 1.47: 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
Total
Increase (reduction)
in profit before tax
2018
£m
297
93
(823)
(38)
(50)
(521)
2017
£m
(202)
24
140
(1,001)
(67)
(1,106)
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,
page 218.
One of the consequences of preparations for the formation of the
Ring-Fenced Bank was to reduce the impact of some stresses within the
Insurance business, though Group exposures may not have materially
changed. Examples of this include centralisation of defined benefit pension
schemes, and the transfer of specific hedging programmes from the
corporate centre to the business unit where the exposure emanated.
Mitigation
Equity and credit spread risks are closely monitored and, where
appropriate, asset liability matching is undertaken to mitigate risk. Hedging
strategies are in place to reduce exposure from unit-linked funds and 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 £0.8 million for 31 December 2018 compared to £0.6 million for
31 December 2017.
Trading market risk measures are applied to all of the Group’s regulatory
trading books and they include daily VaR (table 1.48), sensitivity based
measures, and stress testing calculations.
Measurement
The Group internally uses VaR as the primary risk measure for all trading
book positions.
Table 1.48 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 2018 and year end 2017.
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, but does not reflect
any diversification between Lloyds Bank Corporate Markets and any other
entities. 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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2018 159
Table 1.48: 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 2018
At 31 December 2017
Close
£m
Average
£m
Maximum
£m
Minimum
£m
Close
£m
Average
£m
Maximum
£m
Minimum
£m
0.6
0.1
–
0.2
0.3
1.2
(0.4)
0.8
0.7
0.1
–
0.2
0.3
1.3
(0.5)
0.8
1.8
2.1
–
0.7
0.7
3.0
2.1
0.4
–
–
0.1
0.2
0.9
0.4
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
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.
Exposures
There are over 300 models in the Group performing a variety of functions
including:
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 actual profit and loss. The 1-day 99 per cent VaR chart for
Lloyds Banking Group 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.
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 revalidation,
monitoring, and the process for non-compliance.
The model owner takes responsibility for ensuring the fitness for purpose
of the models and rating systems, supported and challenged by the
independent specialist Group function.
The above ensures all models in scope of policy, 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 to ensure they remain fit for purpose 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
160 Lloyds Banking Group Annual Report and Accounts 2018
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
161
170
171
172
174
176
34. Other liabilities
35. Retirement benefit obligations
36. Deferred tax
37. Other provisions
38. Subordinated liabilities
39. Share capital
40. Share premium account
41. Other reserves
42. Retained profits
Notes to the consolidated
financial statements
1. Basis of preparation
2. Accounting policies
3. Critical accounting judgements
and 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 Auditors’ remuneration
13. Impairment
14. Taxation
15. Earnings per share
16. Financial assets at fair value through
profit or loss
17. Derivative financial instruments
18. Financial assets at amortised cost
19. Finance lease receivables
20. Allowance for impairment losses
on loans and receivables
21. Financial assets at fair value through
other comprehensive income
22. Available-for-sale financial assets
23. Goodwill
24. Value of in-force business
25. Other intangible assets
26. Property, plant and equipment
27. Other assets
28. Financial liabilities at fair value
through profit or loss
29. Debt securities in issue
30. Securitisations and covered bonds
43. Other equity instruments
177
44. Dividends on ordinary shares
45. Share-based payments
46. Related party transactions
47. Contingent liabilities and commitments
48. Structured entities
49. Financial instruments
50. Transfers of financial assets
51. Offsetting of financial assets and liabilities
52. Financial risk management
53. Consolidated cash flow statement
54. Adoption of IFRS 9 and IFRS 15
55. Future accounting developments
275
276
277
278
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
31. Liabilities arising from insurance contracts
and participating investment contracts
32. Life insurance sensitivity analysis
33. Liabilities arising from non-participating
investment contracts
Lloyds Banking Group Annual Report and Accounts 2018 161
Independent auditors’ report to the members
of Lloyds Banking Group plc
Report on the audit of the financial statements
Opinion
In our opinion, the financial statements of Lloyds Banking Group plc (the Group) and the 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 2018 and of the Group’s profit and the Group’s
and parent company’s cash flows for the year then ended;
– have been properly prepared in accordance with International Financial Reporting Standards (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 Group 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 2018; the consolidated income statement and the consolidated statement of comprehensive
income for the year then ended; the consolidated and parent company cash flow statements for the year then ended; the consolidated and parent
company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant
accounting policies. We have also audited the consolidated and parent company balance sheets as at 1 January 2018.
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are
cross‑referenced from the financial statements and are identified as audited.
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 not provided non‑audit services to the Group or the parent company in the
period from 1 January 2018 to 31 December 2018.
Our audit approach
Overview
– Overall Group materiality: £360 million (2017: £350 million), based on 5 per cent of profit adjusted to remove the effects of certain items which were
considered to have a disproportionate impact.
– Overall parent company materiality: £360 million (2017: £350 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 key audit matters which were of most significance in the audit and involved the greatest allocation of our resources and effort were:
– Expected credit loss allowances (Group)
– Conduct risk and provisions (Group)
– Insurance actuarial assumptions (Group)
– Valuation of certain level 3 financial instruments (Group)
– Defined benefit obligation (Group)
– Hedge accounting (Group)
– Privileged access to IT systems (Group and parent company)
These items were discussed with the Audit Committee as part of our audit plan communicated in April 2018 and supplemented with updates in
January 2019. 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
162 Lloyds Banking Group Annual Report and Accounts 2018
162 Lloyds Banking Group Annual Report and Accounts 2018
Independent auditors’ report to the members of Lloyds Banking Group plc continued
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.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and industry, we identified that the principal risks of non‑compliance with laws and regulations related to
breaches of banking laws and regulations such as, but not limited to, regulations relating to consumer credit and unethical and prohibited business
practices, and we considered the extent to which non‑compliance might have a material effect on the financial statements. We also considered those
laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006, the Consumer Credit Act 1974 and the
Banking Reform Act. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the
risk of override of controls), and determined that the principal risks were related to posting manual journal entries to manipulate financial performance,
management bias through judgements and assumptions in significant accounting estimates and significant one‑off or unusual transactions. The Group
engagement team shared this risk assessment with the component auditors referred to in the scoping section of our report below, so that they could
include appropriate audit procedures in response to such risks in their work. Audit procedures performed by the Group engagement team and/or
component auditors included:
– Discussions with management and those charged with governance including consideration of known or suspected instances of non‑compliance with
laws and regulation and fraud;
– Evaluation and testing of the operating effectiveness of management’s entity level controls designed to prevent and detect irregularities, in particular
their code of conduct and whistleblowing helpline;
– Assessment of matters reported on the Group’s whistleblowing helpline and the results of management’s investigation of such matters;
– Performed testing over period end adjustments;
– Incorporated unpredictability into the nature, timing and/or extent of our testing;
– Reviewing key correspondence with the FCA and PRA;
– Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to expected credit
losses; conduct risk and provisions; insurance actuarial assumptions; valuation of certain level 3 financial instruments; and defined benefit obligation (see
related key audit matters below); and
– Identifying and testing journal entries, in particular any manual journal entries posted by infrequent users or senior management, posted on unusual
days, posted with descriptions indicating a higher level of risk, or posted late with a favourable impact on financial performance.
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. Also, 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.
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 in aggregate 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
£360 million (2017: £350 million).
5 per cent of adjusted profit, which removes the
effects of certain items which were considered to
have a disproportionate impact.
Our starting point was 5 per cent of profit before tax,
a generally accepted auditing practice. Profit before
tax was adjusted to remove the disproportionate
effect of regulatory provisions as they are considered
not to reflect the long term performance of the
Group.
Parent company financial statements
£360 million (2017: £350 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 profit & loss.
Where the calculated parent company materiality
from total assets exceeds the Group overall
materiality level, the parent company overall
materiality has been restricted to equal the Group
overall materiality level.
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 £50 million and £100 million.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £15 million (Group audit and parent
company audit) (2017: £20 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking
into account the structure of the Group and the parent company, the accounting processes and controls, and the industry in which they operate.
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.
Lloyds Banking Group Annual Report and Accounts 2018 163
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 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, in our judgement, 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 individually financially significant were subject to procedures which mitigated the risk of material misstatement 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 92 per cent of Group total assets and 87 per cent of Group total income.
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
Expected credit loss allowances
Group
Refer to page 70 (Audit Committee Report), page 177
(Accounting Policies) and page 208 (Note 20 and Critical
Accounting Estimates and Judgements).
The determination of expected credit loss allowances is
highly subjective and judgemental. With the introduction of
IFRS 9 in 2018, a number of additional judgements and
assumptions are introduced and reflected in the financial
statements, including the identification of significant
increases in credit risk and the application of forward
looking economic scenarios.
Group economics
The Group's economics team develops future economic
scenarios by using a statistical model and a number of
qualitative factors. Four scenarios are chosen from the
model output which represent distinct economic scenarios
and sensitivities of historical loss experience. These four
scenarios together with relative weightings are then
provided to the Retail and Commercial Banking divisions
for incorporation into the Stage allocation process and the
calculation of expected credit loss allowances.
Group economics
We understood management’s process and tested key controls relating to the
generation, selection and weighting applied to economic scenarios. We engaged our
internal economic experts as well as actuarial modelling specialists to assist us as we
considered:
– The identification and use of appropriate external economic data;
– The operation of the Group’s internally developed statistical model;
– The approach to selection of economic scenarios representing an upside, downside and
severe downside in addition to the Group’s base case scenario used for internal
planning; and
– The review, challenge and approval of the scenarios adopted through the Group’s
governance process.
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.
We critically assessed the assumptions adopted in the base case economic scenario and
compared this both to our independent view of the economic outlook as well as market
consensus, and investigated economic variables outside of our thresholds. We assessed
the risk of bias in the forecasts, as well as the existence of contrary evidence. We
considered the political uncertainties that existed at the year‑end and how these might
impact on the economic scenarios selected by the Group.
We also independently ran the Group’s model and performed testing to evaluate the
level of non‑linearity reflected in the expected credit loss allowances.
Based on the evidence obtained, we consider that the economic scenarios adopted
reflect an unbiased, probability weighted view, that appropriately captures the impact of
non‑linearity.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
164 Lloyds Banking Group Annual Report and Accounts 2018
Independent auditors’ report to the members of Lloyds Banking Group plc continued
Key audit matter
How our audit addressed the key audit matter
Retail
Expected credit loss allowances relating to loans and
advances in the Retail division are determined on a
collective basis, with the use of impairment models.
These models use a number of key assumptions including
probability of default, loss given default (including
propensity for possession and forced sale discounts for
mortgages) and valuation of recoveries. Management
also apply overlays where they believe the model
calculated assumptions and allowances are not
appropriate, either due to emerging trends or the model
limitations. An example of this is an overlay to the
impairment model output for the UK mortgages portfolio
relating to expected credit losses on past term interest‑
only exposures. Our work therefore focused on the
appropriateness of modelling methodologies adopted
and the significant judgements required to determine the
requirement for overlays and the measurement of those
overlays.
Commercial Banking
Expected credit loss allowances relating to credit impaired
loans and advances (referred to herein also as being in
Stage 3) in the Commercial Banking division are primarily
estimated on an individual basis. Judgement is required to
determine when a loan is considered to be credit impaired,
and then to estimate the expected future cash flows related
to that loan under multiple weighted scenario outcomes.
An expected credit loss allowance is determined on
Commercial Banking loans and advances which are not
classified as being credit impaired at the reporting date
(referred to as being in Stages 1 and 2) using impairment
models based on key assumptions including probability of
default and loss given default. Management apply overlays
to the modelled output to address risks not captured by
the model.
Retail and Commercial Banking
We understood management’s process and tested key controls around the determination
of expected credit loss allowances, including controls relating to:
– Appropriateness of modelling methodologies and monitoring of model performance;
– Periodic model review, validation and approval;
– The identification of credit impairment events; and
– The review, challenge and approval of the expected credit loss allowances, including the
impairment model outputs, key management judgements and overlays 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.
We understood and assessed the appropriateness of the impairment models developed
and used by management. This included assessing and challenging the appropriateness
of key modelling judgements (e.g. the transfer criteria used to determine significant
increase in credit risk) and quantifying the impact of the use of proxies and simplifications,
assessing whether these were appropriate. We also created our own independent models
covering certain parts of the model calculation and for selected portfolios this enabled us
to re‑perform management’s calculation and challenge their outputs.
We tested the formulae applied within the calculation files. We tested the completeness
and accuracy of key data inputs, sourced from underlying systems that are applied in the
calculation. We tested the reconciliation of loans and advances between underlying
source systems and the expected credit loss models.
We performed testing over the measurement of the overlays in place, focusing on the
larger overlays and those which we considered to represent the greatest level of audit risk
(e.g. overlays relating to past term interest‑only exposures and forbearance on the UK
mortgages portfolio). We assessed the appropriateness of methodologies used to
determine and quantify the overlays required and the reasonableness of key assumptions.
Based on our knowledge and understanding of the weaknesses and limitations in
management’s models and industry emerging risks, we critically assessed the
completeness of the overlays proposed by management.
We used credit risk modelling specialists to support the audit team in the performance of
these audit procedures.
Commercial Banking Stage 3 assets
We performed the following procedures to test the completeness of credit impaired
assets requiring a Stage 3 expected credit loss allowance:
– We critically assessed the criteria for determining whether a credit impairment event had
occurred;
– We tested a risk based sample of Stage 1 and 2 loans, utilising industry and insolvency
specialists to support the audit team in identifying sectors or borrowers with risk
characteristics which might imply an indicator of impairment. For each risk based
sample, as well as an additional haphazardly selected sample of Stage 1 and 2 loans, we
independently assessed whether they had indicators of a credit impairment event (e.g. a
customer experiencing financial difficulty or in breach of covenant) and therefore
whether they were appropriately categorised.
For a sample of stage 3 credit impaired loans, we:
– Evaluated the basis on which the allowance was determined, and the evidence
supporting the analysis performed by management;
– We independently challenged whether the key assumptions used, such as the recovery
strategies, collateral rights and ranges of potential outcomes, were appropriate, given
the borrower’s circumstances; and
– Re‑performed management’s allowance calculation, testing key inputs including
expected future cash flows, discount rates, valuations of collateral held and the
weightings applied to scenario outcomes.
Based on the evidence obtained, we found that the methodologies, modelled
assumptions, management judgements and data used within the allowance assessment
to be appropriate and in line with the requirements of IFRS 9.
Lloyds Banking Group Annual Report and Accounts 2018 165
Key audit matter
How our audit addressed the key audit matter
Conduct risk and provisions
Group
Refer to page 70 (Audit Committee Report), page 177
(Accounting Policies) and page 226 (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
customer claims in relation to insurance products sold by
the German branch of Clerical Medical Investment Group
Ltd (now Scottish Widows Ltd).
Determining the measurement of provisions requires a
number of assumptions which are made using a
significant degree of management judgement. Key
assumptions include the volume of future complaints and
related redress costs.
We understood and tested the key controls around the identification of matters which
require provision, the estimation and review of provisions, including governance
processes, challenge of key assumptions and approval of provisions.
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.
Our work focused on the more significant provisions in relation to past sales of payment
protection insurance (PPI) policies, arrears handling activities, packaged bank accounts
and customer claims in relation to insurance products sold by the German branch of
Clerical Medical Investment Group Ltd (now Scottish Widows Ltd). We also examined
other conduct provisions which are individually less significant.
For the provisions which are based on assumptions determined using management
judgement with reference to historic experience, we understood and challenged the
provisioning methodologies and underlying assumptions, including whether historic
information had been appropriately incorporated and whether this was an appropriate
indicator of future experience. For example, we challenged the basis that management
used for forecasting the volume of PPI complaints that will be received in the future.
For provisions which are dependent upon proactive identification and rectification of
affected customers (e.g. provisions for arrears handling activities), we understood the
planned management actions, understood the basis for estimating the provision and
challenged key assumptions, including those around the costs of identifying and rectifying
affected customers.
We independently performed sensitivity analysis on the key assumptions and considered
alternative scenarios which could be considered reasonably possible.
We considered regulatory developments and 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 also met with each regulator.
Given the inherent uncertainty in the estimation of conduct, litigation and other regulatory
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.
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166 Lloyds Banking Group Annual Report and Accounts 2018
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 70 (Audit Committee Report), page 177
(Accounting Policies) and pages 210, 215 and 218
(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, participating investment
contracts (‘insurance contract liabilities‘) and value of
in‑force business asset.
Some of the economic and non‑economic actuarial
assumptions used in valuing the insurance contract
liabilities and the value of in‑force business asset 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).
We understood and tested key controls and governance around the processes for setting
actuarial assumptions.
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.
Our actuarial specialists assessed the reasonableness of the actuarial assumptions,
including considering and challenging management’s rationale for judgements applied
and any reliance placed on industry information. Where appropriate, assumptions were
benchmarked by comparing to the Group’s peers in the insurance market whilst
overlaying an understanding of the specific policy features of the Group’s business.
For longevity, we assessed the appropriateness of how the Group’s own experience and
industry data were used in setting future assumptions and we compared resulting life
expectancies to benchmarking data.
For maintenance expenses, we assessed the appropriateness of the judgements in
respect of costs deemed to be non‑attributable to insurance business and the resulting
per‑policy costs assumptions. We reviewed the adjustments required reflecting the impact
of the Group’s outsourcing agreements, including any changes to the cost base that are
expected to be required due to Brexit.
For credit default and illiquidity premium, we assessed the appropriateness of the
methodology against our knowledge and experience of regulatory requirements and
industry practice. We challenged whether the 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.
For persistency, we considered the appropriateness of assumptions set by management
in light of actual experience and regulatory changes. For example, we considered how the
assumptions reflected expected persistency experience from the removal of commission
for qualifying pension schemes and the impact of increased options available to pension
policyholders (Finance Act 2014).
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.
Valuation of certain level 3 financial instruments
Group
Refer to page 70 (Audit Committee Report), page 177
(Accounting Policies) and pages 241 and 271 (Notes 49, 54
and Critical Accounting Estimates and Judgements).
As part of the Group’s transition to IFRS 9, £10.2bn of
financial assets have been transferred from amortised
cost to fair value. These comprise two portfolios, each of
which are concentrations of similar, non‑traded assets
which are classified as level 3 instruments as their
valuation is subjective and determined using bespoke
models which rely on a range of unobservable inputs.
We understood and tested the key controls around the valuation processes including the
independent price verification and valuation governance controls.
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.
With the support of our valuations specialists, we performed the following testing:
– evaluating the appropriateness of the valuation methodologies and testing their
application;
– evaluating key inputs and assumptions, with reference to matters including historic
performance, market information and perspectives, servicer and trustee reports and
investment prospectuses; and
– assessing the reasonableness of the valuations and performing sensitivity analyses over
them.
Based on the evidence obtained, we determined that the methodologies, inputs and
assumptions are appropriate.
Lloyds Banking Group Annual Report and Accounts 2018 167
Key audit matter
How our audit addressed the key audit matter
Defined benefit obligation
Group
Refer to page 70 (Audit Committee Report), page 177
(Accounting Policies) and page 219 (Note 35 and Critical
Accounting Estimates and Judgements).
The valuation of the retirement benefit schemes in the
Group are determined with reference to various actuarial
assumptions including discount rate, rate of inflation and
mortality rates. Due to the size of these schemes, small
changes in these assumptions can have a material impact
on the estimated defined benefit obligation.
Hedge accounting
Group
Refer to page 70 (Audit Committee Report), page 177
(Accounting Policies), and page 255 (Note 52).
The Group enters into derivative contracts in order to
manage and economically hedge risks such as interest
and foreign exchange rate risk. These arrangements
create accounting mismatches which are addressed
through designating instruments into fair value or cash
flow hedge accounting relationships.
The Group's application of hedge accounting, including
determining effectiveness, is manual in nature, which
increases the risk of errors and hence the risk that financial
reporting is not in line with IFRS requirements.
Privileged access to IT systems
Group and parent company
Refer to page 70 (Audit Committee Report).
The Group’s financial reporting processes are reliant on
automated processes, controls and data managed by IT
systems.
For the purposes of our audit, we validate the design and
operating effectiveness of those automated and IT
dependent controls that support the in‑scope financial
statement line items. We also review the supporting IT
General Computer Controls (ITGCs) that provide
assurance over the effective operation of these controls as
well as those controls that manage the integrity of relevant
data repositories for the full financial reporting period.
As part of our audit work in prior periods, we identified
control matters in relation to the management of IT
privileged access to IT platforms supporting applications
in‑scope for financial reporting. While there is an ongoing
programme of activities to address such control matters,
the fact that these were open during the period meant
there was a risk that automated functionality, reports and
data from the systems were not reliable.
We understood and tested key controls over the pensions process involving member
data, formulation of assumptions and the financial reporting process. We tested the
controls for determining the actuarial assumptions and the approval of those assumptions
by senior management.
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.
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.
Our actuarial experts have performed testing over the Guaranteed Minimum Pension
(‘GMP‘) equalisation impact calculated by management’s actuary, reviewed the approach
taken and understood the key assumptions used in the calculations. We used our own
independent GMP equalisation modelling tools to support this testing.
We performed testing over the consensus and employee data used in calculating the
obligation. Where material, we also considered the treatment of curtailments, settlements,
past service costs, remeasurements, benefits paid, and any other amendments made to
obligations during the year.
From the evidence obtained, we found the data and assumptions used by management
in the actuarial valuations for pension obligations to be appropriate.
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 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.
Our testing included the following:
– examining selected hedge documentation to assess whether it complies with the
requirements of IFRS;
– testing the key year‑end reconciliations between underlying source systems and the
spreadsheets used to manage hedging models;
– independently assessing whether management have captured and are monitoring all
material sources of ineffectiveness;
– re‑performing a sample of hedge effectiveness calculations; and
– testing a sample of manual adjustments posted to record ineffectiveness.
Based on the evidence obtained, we determined the application of hedge accounting to
be appropriate and compliant with the requirements of IFRS.
We tested the design and operating effectiveness of those key controls identified that
manage IT privileged access across the in‑scope IT platforms. Specifically we tested
controls over:
– The completeness and accuracy of the Access Controls Lists (ACLs) from IT platforms
that are used by downstream IT security processes;
– The onboarding and management of IT privileged accounts through the privileged
access restriction tool (including static IT privileged accounts);
– The monitoring of security events on IT platforms by the Security Operations Centre;
and
– Approval, recertification and timely removal of access from IT systems.
As part of our review, we identified a number of IT privileged accounts that had not been
onboarded to the privileged access restriction tool as at 31 December 2018.
Consequently, we performed an assessment of each of the areas within our audit
approach where we place reliance on automated functionality and data within IT systems.
In each case we identified a combination of mitigating controls, performed additional
audit procedures and assessed other mitigating factors in order to respond to the impact
on our overall audit approach.
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168 Lloyds Banking Group Annual Report and Accounts 2018
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.
In reviewing the directors’ statement, we have considered the Group and
parent company budgets, and the Group and parent company’s capital
and liquidity plans, resources and stress tests.
We have nothing to report in respect of the above matters. 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 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 to report.
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 also 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 2018 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 81 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 80 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. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
– The statement given by the directors, on page 81, 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 70 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.
Lloyds Banking Group Annual Report and Accounts 2018 169
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 81, 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 also 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 24 years, covering the years ended
31 December 1995 to 31 December 2018. 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
19 February 2019
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
170 Lloyds Banking Group Annual Report and Accounts 2018
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
10
11
13
14
15
15
2018
£ million
16,349
(2,953)
13,396
2,848
(1,386)
1,462
(3,876)
9,189
1,920
8,695
22,091
(3,465)
18,626
(1,350)
(10,379)
(11,729)
6,897
(937)
5,960
(1,560)
4,400
3,869
433
4,302
98
4,400
5.5p
5.5p
2017
£ million
16,006
(5,094)
10,912
2,965
(1,382)
1,583
11,817
7,930
1,995
23,325
34,237
(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
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
1 The profit after tax attributable to other equity holders of £433 million (2017: £415 million; 2016: £412 million) is partly offset in reserves by a tax credit attributable to ordinary shareholders
of £106 million (2017: £102 million; 2016: £91 million) .
The accompanying notes are an integral part of the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2018 171
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
Movements in revaluation reserve in respect of equity shares held
at fair value through other comprehensive income:
Change in fair value
Tax
Gains and losses attributable to own credit risk:
Gains (losses) before tax
Tax
Share of other comprehensive income of associates and joint ventures
Items that may subsequently be reclassified to profit or loss:
Movements in revaluation reserve in respect of debt securities held
at fair value through other comprehensive income:
Change in fair value
Income statement transfers in respect of disposals
Tax
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.
2018
£ million
4,400
2017
£ million
3,547
2016
£ million
2,514
167
(47)
120
(97)
22
(75)
533
(144)
389
8
(37)
(275)
119
(193)
234
(701)
113
(354)
(8)
(113)
628
(146)
482
(1,348)
320
(1,028)
(55)
15
(40)
–
–
–
–
–
–
303
(446)
6
63
(74)
(363)
(651)
283
(731)
(32)
(395)
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
4,287
3,152
3,756
433
4,189
98
4,287
2,647
415
3,062
90
3,152
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
172 Lloyds Banking Group Annual Report and Accounts 2018
Consolidated balance sheet
Assets
Cash and balances at central banks
Items in the course of collection from banks
Financial assets at fair value through profit or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Financial assets at fair value through other comprehensive income
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
1 See note 54.
The accompanying notes are an integral part of the consolidated financial statements.
31 December
2018
£ million
Note
1 January
20181
£ million
31 December
2017
£ million
54,663
647
58,521
755
58,521
755
158,529
176,008
162,878
23,595
6,283
484,858
5,238
496,379
24,815
2,310
4,762
3,347
25,474
4,246
461,016
3,314
468,576
42,917
2,310
4,839
2,835
25,834
6,611
472,498
3,643
482,752
42,098
2,310
4,839
2,835
12,300
12,727
12,727
5
2,453
1,267
12,526
797,598
16
2,609
723
12,872
811,182
16
2,284
723
13,537
812,109
16
17
18
21
22
23
24
25
26
36
35
27
Lloyds Banking Group Annual Report and Accounts 2018 173
31 December
2018
£ million
Note
1 January
20181
£ million
31 December
2017
£ million
28
17
29
31
33
34
35
36
37
38
39
40
41
42
43
30,320
418,066
636
30,547
21,373
1,104
91,168
98,874
13,853
19,633
245
377
–
3,547
17,656
29,804
418,124
584
50,935
26,124
1,313
72,402
29,804
418,124
584
50,877
26,124
1,313
72,450
103,413
103,413
15,447
20,741
358
274
–
5,789
17,922
15,447
20,730
358
274
–
5,546
17,922
747,399
763,230
762,966
7,116
17,719
13,210
5,389
43,434
6,491
49,925
274
50,199
797,598
7,197
17,634
13,553
3,976
42,360
5,355
47,715
237
47,952
811,182
7,197
17,634
13,815
4,905
43,551
5,355
48,906
237
49,143
812,109
Equity and liabilities
Liabilities
Deposits from banks
Customer deposits
Items in course of transmission to banks
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
1 See note 54.
The accompanying notes are an integral part of the consolidated financial statements.
The directors approved the consolidated financial statements on 19 February 2019.
Lord Blackwell
Chairman
António Horta-Osório
Group Chief Executive
George Culmer
Chief Financial Officer
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
174 Lloyds Banking Group Annual Report and Accounts 2018
Consolidated statement of changes in equity
for the year ended 31 December
Balance at 31 December 2017
Adjustment on adoption of IFRS 9 and IFRS 151
Balance at 1 January 2018
Comprehensive income
Profit for the year
Other comprehensive income
Post‑retirement defined benefit scheme
remeasurements, net of tax
Share of other comprehensive income of
associates and joint ventures
Movements in revaluation reserve in respect of
financial assets held at fair value through other
comprehensive income, net of tax:
Debt securities
Equity shares
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
Share buyback
Issue of other equity instruments (note 43)
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Changes in non‑controlling interests
Total transactions with owners
Realised gains and losses on equity shares held
at fair value through other comprehensive
income
Attributable to equity shareholders
Share capital
and premium
£ million
24,831
–
Other
reserves
£ million
13,815
(262)
24,831
13,553
Retained
profits
£ million
4,905
(929)
3,976
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
5,355
–
5,355
237
–
237
Total
£ million
43,551
(1,191)
42,360
Total
£ million
49,143
(1,191)
47,952
4,302
4,302
–
–
–
–
–
–
–
–
–
–
–
–
162
(158)
–
–
–
–
–
4
–
–
–
–
(193)
(75)
–
(354)
(8)
(630)
(630)
–
–
–
–
–
–
–
–
158
129
120
8
–
–
389
–
–
517
4,819
(2,240)
(327)
–
(5)
40
53
207
–
120
8
(193)
(75)
389
(354)
(8)
(113)
4,189
(2,240)
(327)
162
(1,005)
(5)
40
53
207
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,136
–
–
–
–
(3,277)
(3,115)
1,136
(129)
5,389
–
43,434
–
6,491
158
(1,005)
98
4,400
–
–
–
–
–
–
–
–
98
(61)
–
–
–
–
–
–
–
–
(61)
–
274
120
8
(193)
(75)
389
(354)
(8)
(113)
4,287
(2,301)
(327)
162
(1,005)
1,131
40
53
207
–
(2,040)
–
50,199
At 31 December 2018
24,835
13,210
1 See note 54.
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 2018 175
Attributable to equity shareholders
Share capital
and premium
£ million
24,558
Other
reserves
£ million
12,260
Retained
profits
£ million
4,416
Total
£ million
41,234
Other equity
instruments
£ million
Non‑controlling
interests
£ million
Balance at 1 January 2016
Comprehensive income
Profit for the year
Other comprehensive income
Post‑retirement defined benefit scheme
remeasurements, net of tax
Movements in revaluation reserve in respect
of available‑for‑sale financial assets, net of tax
Movements in cash flow hedging reserve,
net of tax
Currency translation differences (tax: £nil)
Total other comprehensive income
Total comprehensive income
Transactions with owners
Dividends
Distributions on other equity instruments,
net of tax
–
–
–
–
–
–
–
–
–
–
–
1,197
1,409
(4)
2,602
2,602
–
–
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
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
Balance at 31 December 2017
–
–
–
–
–
–
–
–
210
24,768
(210)
14,652
–
–
–
–
–
–
–
–
–
–
63
–
–
–
–
63
–
–
(74)
–
(731)
(32)
(837)
(837)
–
–
–
–
–
–
–
–
24,831
13,815
The accompanying notes are an integral part of the consolidated financial statements.
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
3,457
3,457
482
–
(40)
–
–
442
3,899
(2,284)
(313)
–
(411)
82
332
–
(2,594)
4,905
482
(74)
(40)
(731)
(32)
(395)
3,062
(2,284)
(313)
63
(411)
82
332
–
(2,531)
43,551
5,355
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,355
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,355
Total
£ million
46,980
2,514
(1,028)
1,197
1,409
(4)
1,574
4,088
(2,043)
(321)
–
(175)
141
168
(23)
(2,253)
48,815
391
101
–
–
–
–
–
101
(29)
–
–
–
–
–
(23)
(52)
440
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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
176 Lloyds Banking Group Annual Report and Accounts 2018
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 other equity instruments
Proceeds from issue of ordinary shares
Share buyback
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
Adjustment on adoption of IFRS 91
Cash and cash equivalents at 1January 2018
1 See note 1.
The accompanying notes are an integral part of the consolidated financial statements.
Note
53(A)
53(B)
53(C)
53(E)
53(F)
53(D)
2018
£ million
5,960
(4,472)
(8,673)
(2,892)
(1,030)
(11,107)
(12,657)
26,806
(3,514)
1,334
(49)
1
11,921
(2,240)
(433)
(61)
(1,268)
1,729
1,131
102
(1,005)
(2,256)
–
(4,301)
3
(3,484)
58,708
55,224
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
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
(2,274)
58,708
Lloyds Banking Group Annual Report and Accounts 2018 177
Notes to the consolidated financial statements
for the year ended 31 December
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. As noted below, in adopting IFRS 9, the Group has elected to continue applying hedge accounting under IAS 39. 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, financial
assets measured at fair value through other comprehensive income, trading securities and certain other financial assets and liabilities at fair value through
profit or loss and all derivative contracts. As stated on page 80, the directors consider that it is appropriate to continue to adopt the going concern basis in
preparing the financial statements.
The Group has adopted IFRS 9 and IFRS 15 with effect from 1 January 2018.
(i) IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 and addresses classification, measurement and derecognition of financial assets and liabilities, the impairment of financial assets
measured at amortised cost or fair value through other comprehensive income, expected credit loss provisions for loan commitments and financial
guarantee contracts and general hedge accounting.
Impairment: IFRS 9 replaces the IAS 39 ‘incurred loss’ impairment approach with an ‘expected credit loss’ approach. The revised approach applies to
financial assets including finance lease receivables, recorded at amortised cost or fair value through other comprehensive income; loan commitments and
financial guarantees that are not measured at fair value through profit or loss are also in scope. The expected credit loss approach requires an allowance to
be established upon initial recognition of an asset reflecting the level of losses anticipated after having regard to, amongst other things, expected future
economic conditions. Subsequently the amount of the allowance is affected by changes in the expectations of loss driven by changes in associated credit risk.
Classification and measurement: IFRS 9 requires financial assets to be classified into one of the following measurement categories: fair value through
profit or loss, fair value through other comprehensive income and amortised cost. Classification is made on the basis of the objectives of the entity’s
business model for managing its financial assets and the contractual cash flow characteristics of the instruments. The requirements for derecognition are
broadly unchanged from IAS 39. The standard also retains most of the IAS 39 requirements for financial liabilities except for those designated at fair value
through profit or loss whereby that part of the fair value change attributable to the entity’s own credit risk is recorded in other comprehensive income.
The Group early adopted this requirement with effect from 1 January 2017.
General hedge accounting: The new hedge accounting model aims to provide a better link between risk management strategy, the rationale for hedging
and the impact of hedging on the financial statements. The standard does not explicitly address macro hedge accounting solutions, which are being
considered in a separate IASB project – Accounting for Dynamic Risk Management. Until this project is finalised, the IASB has provided an accounting
policy choice to retain IAS 39 hedge accounting in its entirety or choose to apply the IFRS 9 hedge accounting requirements. The Group has elected to
continue applying hedge accounting as set out in IAS 39.
In adopting IFRS 9, the Group has reclassified loans and advances to banks with a maturity of less than three months totalling £2,274 million to financial
assets measured at fair value through profit or loss, resulting in a corresponding reduction in cash and cash equivalents at 1 January 2018 compared to the
amount previously reported at 31 December 2017.
(ii) IFRS 15 Revenue from Contracts with Customers
IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction Contracts. 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.
Details of the impact of adoption of IFRS 9 and IFRS 15 are provided in note 54.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2018 and which have
not been applied in preparing these financial statements are given in note 55.
Note 2: Accounting policies
The Group’s accounting policies are set out below. These accounting policies have been applied consistently.
(A) Consolidation
The assets, liabilities and results of Group undertakings (including structured entities) are included in the financial statements on the basis of accounts
made up to the reporting date. Group undertakings include subsidiaries, associates and joint ventures. Details of the Group’s subsidiaries and related
undertakings are given on pages 289 to 295.
(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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
178 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
less than a majority beneficial interest. Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported in
other liabilities and the movement in these interests in interest expense.
Structured entities are entities that are designed so that their activities are not governed by way of voting rights. In assessing whether the Group has power
over such entities in which it has an interest, the Group considers factors such as the purpose and design of the entity; its practical ability to direct the
relevant activities of the entity; the nature of the relationship with the entity; and the size of its exposure to the variability of returns of the entity.
The treatment of transactions with non‑controlling interests depends on whether, as a result of the transaction, the Group loses control of the subsidiary.
Changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions; any difference
between the amount by which the non‑controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly
in equity and attributed to the owners of the parent entity. Where the Group loses control of the subsidiary, at the date when control is lost the amount
of any non‑controlling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary is remeasured to its fair
value; the gain or loss that is recognised in profit or loss on the partial disposal of the subsidiary includes the gain or loss on the remeasurement of the
retained interest.
Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration for the acquisition of a subsidiary is
the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value of any
asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred except those relating to the
issuance of debt instruments (see (E)(5) below) or share capital (see (P) below). Identifiable assets acquired and liabilities assumed in a business combination
are measured initially at their fair value at the acquisition date.
(2) Joint ventures and associates
Joint ventures are joint arrangements over which the Group has joint control with other parties and has rights to the net assets of the arrangements.
Associates are entities over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy
decisions of the entity, but is not control or joint control of those policies, and is generally achieved through holding between 20 per cent and 50 per cent
of the voting share capital of the entity.
The Group utilises the venture capital exemption for investments where significant influence or joint control is present and the business unit operates as a
venture capital business. These investments are designated at initial recognition at fair value through profit or loss. Otherwise, the Group’s investments in
joint ventures and associates are accounted for by the equity method of accounting.
(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
(1) Net interest income
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 to the gross carrying amount of the
financial asset (before adjusting for expected credit losses) or to the amortised cost of the 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. Interest income from non‑credit impaired financial assets is recognised by applying the
effective interest rate to the gross carrying amount of the asset; for credit impaired financial assets, the effective interest rate is applied to the net carrying
amount after deducting the allowance for expected credit losses. Impairment policies are set out in (H) below.
(2) Fee and commission income and expense
Fees and commissions receivable which are not an integral part of the effective interest rate are recognised as income as the Group fulfils its performance
obligations. The Group’s principal performance obligations arising from contracts with customers are in respect of value added current accounts, credit
cards and debit cards. These fees are received, and the Group’s provides the service, monthly; the fees are recognised in income on this basis. The Group
also receives certain fees in respect of its asset finance business where the performance obligations are typically fulfilled towards the end of the customer
contract; these fees are recognised in income on this basis. Where it is unlikely that the loan commitments will be drawn, loan commitment fees are
recognised in fee and commission income over the life of the facility, rather than as an adjustment to the effective interest rate for loans expected to be
drawn. Incremental costs incurred to generate fee and commission income are charged to fees and commissions expense as they are incurred.
(3) Other
Dividend income is recognised when the right to receive payment is established.
Revenue recognition policies specific to trading income are set out in E(3) below, life insurance and general insurance business are detailed below (see (M)
below); those relating to leases are set out in (J)(2) below.
Lloyds Banking Group Annual Report and Accounts 2018 179
Note 2: Accounting policies continued
(E) Financial assets and liabilities
On initial recognition, financial assets are classified as measured at amortised cost, fair value through other comprehensive income or fair value through profit
or loss, depending on the Group’s business model for managing the financial assets and whether the cash flows represent solely payments of principal and
interest. The Group assesses its business models at a portfolio level based on its objectives for the relevant portfolio, how the performance of the portfolio is
managed and reported, and the frequency of asset sales. Financial assets with embedded derivatives are considered in their entirety when considering their
cash flow characteristics. The Group reclassifies financial assets when and only when its business model for managing those assets changes. A reclassification
will only take place when the change is significant to the Group’s operations and will occur at a portfolio level and not for individual instruments;
reclassifications are expected to be rare. Equity investments are measured at fair value through profit or loss unless the Group elects at initial recognition
to account for the instruments at fair value through other comprehensive income. For these instruments, principally strategic investments, dividends are
recognised in profit or loss but fair value gains and losses are not subsequently reclassified to profit or loss following derecognition of the investment.
The Group initially recognises loans and advances, 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 the obligation is discharged, cancelled or expires.
(1) Financial instruments measured at amortised cost
Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at
amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest on the principal amount
outstanding. Where the contractual cash flows introduce exposure to risks or volatility unrelated to a basic lending arrangement such as changes in equity
prices or commodity prices, the payments do not comprise solely principal and interest. Financial assets measured at amortised cost are predominantly
loans and advances to customers and banks together with certain debt securities. Loans and advances are initially recognised when cash is advanced to
the borrower at fair value inclusive of transaction costs. Interest income is accounted for using the effective interest method (see (D) above).
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.
(2) Financial assets measured at fair value through other comprehensive income
Financial assets that are held to collect contractual cash flows and for subsequent sale, where the assets’ cash flows represent solely payments of principal
and interest, are recognised in the balance sheet at their fair value, inclusive of transaction costs. Interest calculated using the effective interest method
and foreign exchange gains and losses on assets denominated in foreign currencies are recognised in the income statement. All other gains and losses
arising from changes in fair value are recognised directly in other comprehensive income, until the financial asset is either sold or matures, at which time the
cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement other than in respect of equity shares,
for which the cumulative revaluation amount is transferred directly to retained profits. The Group recognises a charge for expected credit losses in the
income statement (see (H) below). As the asset is measured at fair value, the charge does not adjust the carrying value of the asset, it is reflected in other
comprehensive income.
(3) Financial instruments measured at fair value through profit or loss
Financial assets are classified at fair value through profit or loss where they do not meet the criteria to be measured at amortised cost or fair value through
other comprehensive income or where they are designated at fair value through profit or loss to reduce an accounting mismatch. All derivatives are carried
at fair value through profit or loss.
The assets backing the insurance and investment contracts issued by the Group do not meet the criteria to be measured at amortised cost or fair value
through other comprehensive income as they are managed on a fair value basis and accordingly are measured at fair value through profit or loss. Similarly,
trading securities, which 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, do not meet these criteria and are also measured at fair value through profit or loss. Financial assets measured
at fair value through profit or loss are recognised in the balance sheet at their fair value. Fair value gains and losses together with interest coupons and
dividend income are recognised in the income statement within net trading income.
Financial liabilities are measured at fair value through profit or loss where they are trading liabilities or where they are designated at fair value through profit
or loss in order to reduce an accounting mismatch; where the liabilities are part of a group of liabilities (or assets and liabilities) which is managed, and its
performance evaluated, on a fair value basis; or where the 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. Financial liabilities measured at fair value through profit or loss are
recognised in the balance sheet at their fair value. Fair value gains and losses 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 are recognised in other comprehensive income.
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. The fair values of derivative financial instruments are adjusted where appropriate to reflect credit risk
(via credit valuation adjustments (CVAs), debit valuation adjustments (DVAs) and funding valuation adjustments (FVAs)), market liquidity and other risks.
(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
carrying value of the liability and the fair value of the new equity is recognised in profit or loss.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
180 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
(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 advances measured at amortised cost 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 advance
measured at amortised cost or customer deposit.
(F) Derivative financial instruments and hedge accounting
As permitted by IFRS 9, the Group continues to apply the requirements of IAS 39 to its hedging relationships. All derivatives are recognised at their
fair value. Derivatives are carried on the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer
to note 49(3) (Financial instruments: Financial assets and liabilities carried at fair value) for details of valuation techniques and significant inputs to
valuation models.
Changes in the fair value of all derivative instruments, other than those in effective cash flow and net investment hedging relationships, are recognised
immediately in the income statement. As noted in (2) and (3) below, the change in fair value of a derivative in an effective cash flow or net investment
hedging relationship is allocated between the income statement and other comprehensive income.
Derivatives embedded in a financial asset are not considered separately; the financial asset is considered in its entirety when determining whether its cash
flows are solely payments of principal and interest. Derivatives embedded in financial liabilities 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.
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. Note 17 provides details of the types of derivatives held by the Group and presents separately those designated in hedge relationships.
Further information on hedge accounting is set out below.
(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 a
financial asset at fair value through other comprehensive income. 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
The impairment charge in the income statement includes the change in expected credit losses and certain fraud costs. Expected credit losses are
recognised for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through
other comprehensive income, and certain loan commitments and financial guarantee contracts. Expected credit losses are calculated as an unbiased and
probability‑weighted estimate using an appropriate probability of default, adjusted to take into account a range of possible future economic scenarios,
and applying this to the estimated exposure of the Group at the point of default after taking into account the value of any collateral held, repayments, or
other mitigants of loss and including the impact of discounting using the effective interest rate.
At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is made for expected credit losses resulting
from default events that are possible within the next 12 months (12‑month expected credit losses). In the event of a significant increase in credit risk since
origination, allowance (or provision) is made for expected credit losses resulting from all possible default events over the expected life of the financial
instrument (lifetime expected credit losses). Financial assets where 12‑month expected credit losses are recognised are considered to be Stage 1; financial
Lloyds Banking Group Annual Report and Accounts 2018 181
Note 2: Accounting policies continued
assets which are considered to have experienced a significant increase in credit risk since initial recognition are in Stage 2; and financial assets which have
defaulted or are otherwise considered to be credit impaired are allocated to Stage 3. Some Stage 3 assets, mainly in Commercial Banking, are subject to
individual rather than collective assessment. Such cases are subject to a risk‑based impairment sanctioning process, and these are reviewed and updated
at least quarterly, or more frequently if there is a significant change in the credit profile.
An assessment of whether credit risk has increased significantly since initial recognition considers the change in the risk of default occurring over the
remaining expected life of the financial instrument. The assessment is unbiased, probability‑weighted and uses forward‑looking information consistent
with that used in the measurement of expected credit losses. In determining whether there has been a significant increase in credit risk, the Group uses
quantitative tests based on relative and absolute probability of default (PD) movements linked to internal credit ratings together with qualitative indicators
such as watchlists and other indicators of historical delinquency, credit weakness or financial difficulty. However, unless identified at an earlier stage, the
credit risk of financial assets is deemed to have increased significantly when more than 30 days past due. Where the credit risk subsequently improves such
that it no longer represents a significant increase in credit risk since origination, the asset is transferred back to Stage 1.
Assets are transferred to Stage 3 when they have defaulted or are otherwise considered to be credit impaired. Default is considered to have occurred
when there is evidence that the customer is experiencing financial difficulty which is likely to affect significantly the ability to repay the amount due. IFRS 9
contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due. The Group uses this 90 day backstop for all its
products except for UK mortgages. For UK mortgages, the Group uses a backstop of 180 days past due as mortgage exposures more than 90 days past
due, but less than 180 days, typically show high cure rates and this aligns with the Group’s risk management practices.
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. In the latter circumstances, the loan will remain classified as either Stage 2 or Stage 3
until the credit risk has improved such that it no longer represents a significant increase since origination (for a return to Stage 1), or the loan is no longer
credit impaired (for a return to Stage 2). Renegotiation may also lead to the loan and associated allowance being derecognised and a new loan being
recognised initially at fair value.
Purchased or originated credit‑impaired financial assets (POCI) are financial assets that are purchased or originated at a deep discount that reflects
incurred credit losses. At initial recognition, POCI assets do not carry an impairment allowance; instead, lifetime expected credit losses are incorporated
into the calculation of the effective interest rate. All changes in lifetime expected credit losses subsequent to the assets’ initial recognition are recognised
as an impairment charge.
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 continuing attempts to recover are 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.
(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 allowances for expected credit losses, 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.
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182 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
(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.
(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.
Lloyds Banking Group Annual Report and Accounts 2018 183
Note 2: Accounting policies continued
(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).
– 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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
184 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
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
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 non‑monetary financial
assets measured at fair value through other comprehensive income, 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.
Lloyds Banking Group Annual Report and Accounts 2018 185
Note 2: Accounting policies continued
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 expected credit losses in respect of irrevocable undrawn loan commitments and financial guarantee contracts (see (H) above).
(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 judgements and 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
At 31 December 2018 the Group’s expected credit loss allowance was £3,362 million (1 January 2018: £3,533 million), of which £3,169 million (1 January
2018: £3,260 million) was in respect of drawn balances.
The calculation of the Group’s expected credit loss (ECL) allowances and provisions against loan commitments and guarantees under IFRS 9 requires the
Group to make a number of judgements, assumptions and estimates. The most significant are set out below.
Definition of default
The probability of default (PD) of an exposure, both over a 12 month period and over its lifetime, is a key input to the measurement of the ECL allowance.
Default has occurred when there is evidence that the customer is experiencing significant financial difficulty which is likely to affect the ability to repay
amounts due. The definition of default adopted by the Group is described in note 2(H) Impairment of financial assets. The Group has rebutted the
presumption in IFRS 9 that default occurs no later than when a payment is 90 days past due for UK mortgages. As a result, approximately £0.6 billion of UK
mortgages were classified as Stage 2 rather than Stage 3 at 31 December 2018; the impact on the Group’s ECL allowance was not material.
Lifetime of an exposure
The PD of a financial asset is dependent on its expected life. A range of approaches, segmented by product type, has been adopted by the Group
to estimate a product’s expected life. These include using the full contractual life and taking into account behavioural factors such as early repayments
and refinancing. For non‑revolving retail assets, the Group has assumed the expected life for each product to be the time taken for all significant losses
to be observed and for a material proportion of the assets to fully resolve through either closure or write‑off. For retail revolving products, the Group
has considered the losses beyond the contractual term over which the Group is exposed to credit risk. For commercial overdraft facilities, the average
behavioural life has been used. Changes to the assumed expected lives of the Group’s assets could have a material effect on the ECL allowance
recognised by the Group.
Significant increase in credit risk
Performing assets are classified as either Stage 1 or Stage 2. An ECL allowance equivalent to 12 months expected losses is established against assets in
Stage 1; assets classified as Stage 2 carry an ECL allowance equivalent to lifetime expected losses. Assets are transferred from Stage 1 to Stage 2 when
there has been a significant increase in credit risk (SICR) since initial recognition.
The Group uses a quantitative test together with qualitative indicators to determine whether there has been a SICR for an asset. For retail, a deterioration
in the Retail Master Scale of four grades for credit cards, personal loans or overdrafts, three grades for personal mortgages, or two grades in the
Corporate Master Scale for UK motor finance accounts is treated as a SICR. For Commercial a doubling of PD with a minimum increase in PD of 1 per cent
and a resulting change in the underlying grade is treated as a SICR. All financial assets are assumed to have suffered a SICR if they are more than 30 days
past due.
The setting of precise trigger points combined with risk indicators requires judgement. The use of different trigger points may have a material impact upon
the size of the ECL allowance. The Group monitors the effectiveness of SICR criteria on an ongoing basis.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
186 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 3: Critical accounting judgements and estimates continued
Origination PDs
The assessment of whether there has been a significant increase in credit risk is a relative measure, dependent on an asset's PD at origination. For assets
existing at 1 January 2018, the initial application date of IFRS 9, this information is not generally available and consequently management judgement has
been used to determine a reasonable basis for estimating the original PD. Management used various information sources, including regulatory PDs and
credit risk data available at origination, or where this is not available the first available data. In addition, the Group has not created a forward looking view
of PDs at initial recognition for the back book as to do so would involve the use of hindsight and could introduce the risk of bias. The use of proxies and
simplifications is not considered to materially impact the ECL allowance on transition.
Post-model adjustments
Limitations in the Group’s impairment models or input data may be identified through the on‑going assessment and validation of the output of the
models. In these circumstances, management make appropriate adjustments to the Group’s allowance for impairment losses. These adjustments are
generally modelled taking into account the particular attributes of the exposure which have not been adequately captured by the primary impairment
models. At 31 December 2018, post‑model adjustments were mainly related to UK secured lending with no individual adjustment being material.
Forward looking information
The measurement of expected credit losses is required to reflect an unbiased probability‑weighted range of possible future outcomes. In order to do this, the
Group has developed an economic model to project sixteen key impairment drivers using information derived mainly from external sources. These drivers
include factors such as the unemployment rate, the house price index, commercial property prices and corporate credit spreads. The model‑generated
economic scenarios for the six years beyond 2018 are mapped to industry‑wide historical loss data by portfolio. Combined losses across portfolios are used to
rank the scenarios by severity of loss. Four scenarios from specified points along the loss distribution are selected to reflect the range of outcomes; the central
scenario reflects the Group’s base case assumptions used for medium‑term planning purposes, an upside and a downside scenario are also selected together
with a severe downside scenario. Rare occurrences of adverse economic events can lead to relatively large credit losses which means that typically the most
likely outcome is less than the probability‑weighted outcome of the range of possible future events. To allow for this a relatively unlikely severe downside
scenario is therefore included. At 1 January and 31 December 2018, the base case, upside and downside scenarios each carry a 30 per cent weighting;
the severe downside scenario is weighted at 10 per cent. The choice of alternative scenarios and scenario weights is a combination of quantitative analysis
and judgemental assessment to ensure that the full range of possible outcomes and material non‑linearity of losses are captured. A committee under the
chairmanship of the Chief Economist meets quarterly, to review and, if appropriate, recommend changes to the economic scenarios to the Chief Financial
Officer and Chief Risk Officer. Findings dealing with all aspects of the expected credit loss calculation are presented to the Group Audit Committee.
For each major product grouping models have been developed which utilise historical credit loss data to produce PDs for each scenario; an overall
weighted average PD is used to assist in determining the staging of financial assets and related ECL.
The key UK economic assumptions made by the Group as at 31 December 2018 averaged over a five‑year period are shown below:
Economic assumptions
At 31 December 2018
Interest rate
Unemployment rate
House price growth
Commercial real estate price growth
At 1 January 2018
Interest rate
Unemployment rate
House price growth
Commercial real estate price growth
Base Case
%
Upside
%
Downside
%
Severe
downside
%
1.25
4.5
2.5
0.4
1.18
5.0
2.7
0.0
2.34
3.9
6.1
5.3
2.44
4.0
7.0
3.0
1.30
5.3
(4.8)
(4.7)
0.84
6.1
(2.4)
(2.5)
0.71
6.9
(7.5)
(6.4)
0.01
7.1
(8.2)
(5.4)
The Group’s base‑case economic scenario has changed little over the year and reflects a broadly stable outlook for the economy. Although there remains
considerable uncertainty about the economic consequences of the UK’s planned exit from the European Union, the Group considers that at this stage
the range of possible economic outcomes is adequately reflected in its choice and weighting of scenarios. The averages shown above do not fully reflect
the peak to trough changes in the stated assumptions over the period. The tables below illustrate the variability of the assumptions from the start of the
scenario period to the peak and trough.
Economic assumptions – start to peak
At 31 December 2018
Interest rate
Unemployment rate
House price growth
Commercial real estate price growth
Economic assumptions – start to trough
At 31 December 2018
Interest rate
Unemployment rate
House price growth
Commercial real estate price growth
Base Case
%
Upside
%
Downside
%
1.75
4.8
13.7
0.1
4.00
4.3
34.9
26.9
1.75
6.3
0.6
(0.5)
Base Case
%
Upside
%
Downside
%
0.75
4.1
0.4
(0.1)
0.75
3.5
2.3
0.0
0.75
4.3
(26.5)
(23.8)
Severe
Downside
%
1.25
8.6
(1.6)
(0.5)
Severe
Downside
%
0.25
4.2
(33.5)
(33.8)
Lloyds Banking Group Annual Report and Accounts 2018 187
Note 3: Critical accounting judgements and estimates continued
The table below shows the extent to which a higher ECL allowance has been recognised to take account of forward looking information from the weighted
multiple economic scenarios.
Impact of multiple economic scenarios
UK mortgages
Other Retail
Commercial Banking
Other
At 31 December 2018
At 1 January 2018
Base Case
£m
Probability
weighted
£m
Difference
£m
253
1,294
1,472
81
3,100
3,182
460
1,308
1,513
81
3,362
3,533
207
14
41
–
262
351
The table below shows the Group’s ECL for the upside and downside scenarios using a 100 per cent weighting compared to the base case scenario; both
stage allocation and the ECL are based on the single scenario only. All non‑modelled provisions, including management judgement, remain unchanged.
ECL allowance
Upside
£m
2,775
Downside
£m
3,573
The impact of changes in the UK unemployment rate and House Price Index (HPI) have also been assessed. Although such changes would not be
observed in isolation, as economic indicators tend to be correlated in a coherent scenario, this gives insight into the sensitivity of the Group’s ECL to
changes in these two critical economic factors. The assessment has been made against the base case with the reported staging unchanged. The changes
to HPI and the unemployment rate have been phased in to the forward‑looking economic outlook over three years.
The table below shows the impact on the Group’s ECL resulting from a decrease/increase in Loss Given Default for a 10 percentage point (pp) increase/
decrease in the UK House Price Index (HPI).
ECL impact, £m
10pp increase
in HPI
(114)
10pp decrease
in HPI
154
The table below shows the impact on the Group’s ECL resulting from a decrease/increase for a 1 percentage point (pp) increase/decrease in the UK
unemployment rate.
ECL impact, £m
1pp increase in
unemployment
1pp decrease in
unemployment
172
(155)
Valuation of assets and liabilities arising from insurance business
At 31 December 2018, the Group recognised a value of in‑force business asset of £4,491 million (2017: £4,533 million) and an acquired value of in‑force
business asset of £271 million (2017: £306 million).
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 2018 are set out in note 24.
At 31 December 2018, the Group carried total liabilities arising from insurance contracts and participating investment contracts of £98,874 million
(2017: £103,413 million). The methodology used to value these liabilities is described in note 31.
Elements of the valuations of liabilities arising from insurance contracts and participating investment contracts require management to estimate future
investment returns, future mortality rates and future policyholder behaviour. These estimates are subject to significant 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 effect on the Group’s profit before tax and shareholders’ equity of changes in key assumptions used in determining the life insurance assets and
liabilities is set out in note 32.
Defined benefit pension scheme obligations
The net asset recognised in the balance sheet at 31 December 2018 in respect of the Group’s defined benefit pension scheme obligations was
£1,146 million (comprising an asset of £1,267 million and a liability of £121 million) (2017: a net asset of £509 million comprising an asset of £723 million and
a liability of £214 million). The Group’s accounting policy for its defined benefit pension scheme obligations is set out in note 2(K).
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 18 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 part (iii) of note 35.
Recoverability of deferred tax assets
At 31 December 2018 the Group carried deferred tax assets on its balance sheet of £2,453 million (2017: £2,284 million) principally relating to tax losses
carried forward.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
188 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 3: Critical accounting judgements and estimates continued
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 £3,778 million (2017: £4,034 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 2033. It is possible that future tax law
changes could materially affect the value of these losses ultimately realised by the Group.
As disclosed in note 36, deferred tax assets totalling £585 million (2017: £683 million) have not been recognised in respect of certain capital and trading
losses carried forward, unrelieved foreign tax credits and other tax deductions, as there are currently no expected future taxable profits against which these
assets can be utilised.
Payment protection insurance and other regulatory provisions
At 31 December 2018, the Group carried provisions of £2,385 million (2017: £4,070 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
(2018 £1,524 million; 2017: £2,778 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 in note 37.
Fair value of financial instruments
At 31 December 2018, the carrying value of the Group’s financial instrument assets held at fair value was £206,939 million (2017: £230,810 million), and its
financial instrument liabilities held at fair value was £51,920 million (2017: £77,001 million).
In accordance with IFRS 13 Fair Value Measurement, the Group categorises financial instruments carried on the balance sheet at fair value using a three
level hierarchy. Financial instruments categorised as level 1 are valued using quoted market prices and therefore there is minimal judgement applied
in determining fair value. However, the fair value of financial instruments categorised as level 2 and, in particular, level 3 is determined using valuation
techniques including discounted cash flow analysis and valuation models.
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 note 49. 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 also set out in note 49. Details about sensitivities to market risk
arising from trading assets and other treasury positions can be found in the risk management section on page 154.
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 (GEC) 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 GEC 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 and 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 in 2016 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; and
– payment protection insurance.
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.
In 2018 charges in relation to other conduct provisions (referred to as remediation) have been reclassified so that they are now included in underlying profit.
In addition, results in relation to certain assets which are outside the Group's risk appetite, previously reported as part of run‑off within Other, have been
reclassified into Retail and Commercial. Comparative figures have been restated accordingly.
The Group’s activities are 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.
Lloyds Banking Group Annual Report and Accounts 2018 189
Note 4: Segmental analysis continued
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
190 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 4: Segmental analysis continued
Year ended 31 December 2018
Net interest income
Other income, net of insurance claims
Total underlying income, net of insurance claims
Operating lease depreciation1
Net income
Operating costs
Remediation
Total 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
Analysis of segment underlying other income, net of insurance claims:
Current accounts
Credit and debit card fees
Commercial banking and treasury fees
Unit trust and insurance broking
Private banking and asset management
Factoring
Other fees and commissions
Fees and commissions receivable
Fees and commissions payable
Net fee and commission income
Operating lease rental income
Rental income from investment properties
Gains less losses on disposal of financial assets at fair value through
other comprehensive income
Lease termination income
Net trading income, excluding insurance
Insurance and other, net of insurance claims
Other external income, net of insurance claims
Inter‑segment other income
Segment other income, net of insurance claims
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 Net of profits on disposal of operating lease assets of £60 million.
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
9,066
2,171
11,237
(921)
10,316
(4,915)
(267)
(5,182)
(862)
4,272
13,097
(1,860)
11,237
3,004
1,653
4,657
(35)
4,622
(2,167)
(203)
(2,370)
(92)
2,160
4,876
(219)
4,657
123
1,865
1,988
–
1,988
(1,021)
(39)
(1,060)
(1)
927
1,895
93
1,988
349,719
252,808
260,378
164,897
148,633
191,071
140,487
14,063
147,673
503
988
–
13
–
–
52
1,556
(855)
701
1,305
–
–
–
71
247
1,623
(153)
2,171
1,573
–
121
2,092
4
142
4
305
–
5
83
253
792
(57)
735
38
–
–
7
766
358
1,169
(251)
1,653
278
–
48
208
6
5
1
–
208
92
–
163
469
(418)
51
–
197
–
–
–
2,146
2,343
(529)
1,865
154
(55)
20
223
–
Other
£m
521
321
842
–
842
(62)
(91)
(153)
18
707
(1,144)
1,986
842
142,495
2,562
148,277
–
–
–
–
–
–
31
31
(56)
(25)
–
–
275
–
227
(1,089)
(587)
933
321
400
–
216
991
81
Underlying
basis total
£m
12,714
6,010
18,724
(956)
17,768
(8,165)
(600)
(8,765)
(937)
8,066
18,724
–
18,724
797,598
418,066
747,399
650
993
305
221
97
83
499
2,848
(1,386)
1,462
1,343
197
275
7
1,064
1,662
4,548
–
6,010
2,405
(55)
405
3,514
91
Note 4: Segmental analysis continued
Year ended 31 December 20171
Net interest income
Other income, net of insurance claims
Total underlying income, net of insurance claims
Operating lease depreciation2
Net income
Operating costs
Remediation
Total 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
Analysis of segment underlying other income, net of insurance claims:
Current accounts
Credit and debit card fees
Commercial banking and treasury fees
Unit trust and insurance broking
Private banking and asset management
Factoring
Other fees and commissions
Fees and commissions receivable
Fees and commissions payable
Net fee and commission income
Operating lease rental income
Rental income from investment properties
Gains less losses on disposal of available‑for‑sale financial assets
Lease termination income
Trading income
Insurance and other, net of insurance claims
Other external income, net of insurance claims
Inter‑segment other income
Segment other income, net of insurance claims
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 Restated see page 188.
2 Net of profits on disposal of operating lease assets of £32 million.
Lloyds Banking Group Annual Report and Accounts 2018 191
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying basis
total
£m
8,706
2,221
10,927
(947)
9,980
(4,866)
(633)
(5,499)
(711)
3,770
12,682
(1,755)
10,927
350,219
253,127
258,612
572
948
–
10
–
–
95
1,625
(873)
752
1,281
–
–
–
26
6
1,313
156
2,221
1,547
–
149
2,431
12
3,030
1,798
4,828
(105)
4,723
(2,230)
(173)
(2,403)
(89)
2,231
3,176
1,652
4,828
133
1,846
1,979
–
1,979
(1,040)
(40)
(1,080)
–
899
1,883
96
1,979
451
340
791
(1)
790
(48)
(19)
(67)
5
728
784
7
791
177,808
148,313
224,577
151,986
13,770
157,824
132,096
2,914
121,953
135
4
321
–
5
91
273
829
(50)
779
63
1
29
74
490
27
684
335
1,798
322
–
52
130
6
5
1
–
214
93
–
184
497
(380)
117
–
212
(3)
–
–
2,223
2,432
(703)
1,846
197
(165)
25
274
–
–
–
–
–
–
–
14
14
(79)
(65)
–
–
420
–
(98)
(129)
193
212
340
304
–
133
820
47
12,320
6,205
18,525
(1,053)
17,472
(8,184)
(865)
(9,049)
(795)
7,628
18,525
–
18,525
812,109
418,124
762,966
712
953
321
224
98
91
566
2,965
(1,382)
1,583
1,344
213
446
74
418
2,127
4,622
–
6,205
2,370
(165)
359
3,655
65
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
192 Lloyds Banking Group Annual Report and Accounts 2018
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
Remediation
Total 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
Analysis of segment underlying other income, net of insurance claims:
Current accounts
Credit and debit card fees
Commercial banking and treasury fees
Unit trust and insurance broking
Private banking and asset management
Factoring
Other fees and commissions
Fees and commissions receivable
Fees and commissions payable
Net fee and commission income
Operating lease rental income
Rental income from investment properties
Gains less losses on disposal of available‑for‑sale financial assets
Lease termination income
Trading income
Insurance and other, net of insurance claims
Other external income, net of insurance claims
Inter‑segment other income
Segment other income, net of insurance claims
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 188.
2 Net of profits on disposal of operating lease assets of £58 million.
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying
basis total
£m
8,074
2,165
10,239
(777)
9,462
(4,761)
(750)
(5,511)
(648)
3,303
12,243
(2,004)
10,239
340,253
256,453
265,128
614
854
–
–
–
–
125
1,593
(783)
810
1,142
–
–
–
46
(2)
1,186
169
2,165
1,345
–
141
2,362
9
2,863
1,875
4,738
(118)
4,620
(2,215)
(148)
(2,363)
(11)
2,246
3,656
1,082
4,738
80
1,878
1,958
–
1,958
(1,046)
(103)
(1,149)
–
809
1,373
585
1,958
418
86
504
–
504
(71)
(23)
(94)
14
424
167
337
504
193,054
142,439
231,450
154,782
13,798
160,815
129,704
2,770
111,585
131
4
303
–
5
112
237
792
(54)
738
83
2
17
1
1,937
(627)
1,413
(276)
1,875
326
–
51
145
28
7
1
–
244
94
–
292
638
(424)
214
–
227
(2)
–
–
1,613
1,838
(174)
1,878
169
472
31
481
–
–
16
–
–
–
–
6
22
(95)
(73)
–
–
76
–
(570)
372
(122)
281
86
540
–
64
772
22
11,435
6,004
17,439
(895)
16,544
(8,093)
(1,024 )
(9,117)
(645)
6,782
17,439
–
17,439
817,793
415,460
768,978
752
875
303
244
99
112
660
3,045
(1,356)
1,689
1,225
229
91
1
1,413
1,356
4,315
–
6,004
2,380
472
287
3,760
59
Lloyds Banking Group Annual Report and Accounts 2018 193
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 2018
Net interest income
Other income, net of insurance claims
Total income, net of insurance claims
Operating lease depreciation3
Net income
Operating expenses
Impairment
Profit before tax
Year ended 31 December 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 before tax
Year ended 31 December 2016
Net interest income
Other income, net of insurance claims
Total income, net of insurance claims
Operating lease depreciation3
Net income
Operating expenses
Impairment
Profit before tax
Lloyds
Banking
Group
statutory
£m
13,396
5,230
18,626
18,626
(11,729)
(937)
5,960
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
Removal of:
Volatility
and other
items1
£m
Insurance
gross up2
£m
152
107
259
(956)
(697)
2,053
–
1,356
(834)
673
(161)
–
(161)
161
–
–
Removal of:
Volatility
and other
items4
£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
items5
£m
Insurance
gross up2
£m
263
121
384
(895)
(511)
1,948
107
1,544
1,898
(2,110)
(212)
–
(212)
212
–
–
PPI
£m
–
–
–
–
–
750
–
750
PPI
£m
–
–
–
–
–
1,650
–
1,650
PPI
£m
–
–
–
–
–
1,000
–
1,000
Underlying
basis
£m
12,714
6,010
18,724
(956)
17,768
(8,765)
(937)
8,066
Underlying
basis
£m
12,320
6,205
18,525
(1,053)
17,472
(9,049)
(795)
7,628
Underlying
basis
£m
11,435
6,004
17,439
(895)
16,544
(9,117)
(645)
6,782
1 In the year ended 31 December 2018 this comprises the effects of asset sales (loss of £145 million); volatility and other items (gains of £95 million); the amortisation of purchased
intangibles (£108 million); restructuring (£879 million, comprising severance related costs, the rationalisation of the non‑branch property portfolio, the work on implementing the
ring‑fencing requirements and the integration of MBNA and Zurich’s UK workplace pensions and savings business); and the fair value unwind and other items (losses of £319 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 £60 million (2017: £32 million; 2016: £58 million) .
4 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) .
5 Comprises the write‑off of the Enhanced Capital Note embedded derivative and premium paid on redemption of the remaining notes (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) .
Geographical areas
Following the reduction in the Group’s non‑UK activities, an analysis between UK and non‑UK activities is no longer provided.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
194 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 5: Net interest income
Interest and similar income:
Loans and advances to customers
Loans and advances to banks
Debt securities held at amortised cost
Held‑to‑maturity investments
Interest receivable on financial assets held at
amortised cost
Financial assets at fair value through other
comprehensive income
Available‑for‑sale financial assets
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
Weighted average
effective interest rate
2018
%
3.17
0.84
1.60
2.87
1.98
2.82
1.39
0.53
0.27
7.63
0.96
0.79
(6.07)
0.60
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
1.44
2.83
1.88
2.77
0.65
0.69
0.94
8.35
0.46
1.07
10.85
1.44
2018
£m
2017
£m
2016
£m
15,078
14,712
15,190
565
66
271
43
–
381
56
231
15,709
15,026
15,858
640
16,349
980
16,006
762
16,620
(117)
(80)
(68)
(1,813)
(234)
(1,388)
(245)
(3,797)
844
(2,953)
13,396
(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
1 Includes £31 million (2017: £12 million; 2016: £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
2.68 per cent (2017: 2.43 per cent; 2016: 2.70 per cent) .
3 Includes £10 million (2017: £50 million; 2016: £51 million) of interest expense on assets with negative interest rates.
Included within interest and similar income is £227 million (2017: £179 million; 2016: £205 million) in respect of impaired financial assets. Net interest income
also includes a credit of £701 million (2017: credit of £651 million; 2016: credit of £557 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
Commercial banking and treasury fees
Unit trust and insurance broking
Private banking and asset management
Factoring
Other fees and commissions
Total fee and commission income
Fee and commission expense
Net fee and commission income
Lloyds Banking Group Annual Report and Accounts 2018 195
2018
£m
650
993
305
221
97
83
499
2,848
(1,386)
1,462
2017
£m
712
953
321
224
98
91
566
2,965
(1,382)
1,583
2016
£m
752
875
303
244
99
112
660
3,045
(1,356)
1,689
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.
The Group adopted IFRS 15 ’Revenue from Contracts with Customers’ on 1 January 2018, comparatives have not been restated. Further details on the
impact of the new accounting standard, which was not significant, are set out in note 54. At 31 December 2018, the Group held on its balance sheet
£282 million in respect of these services and £168 million in respect of amounts received from customers for services to be provided after the balance
sheet date. Current unsatisfied performance obligations amount to £314 million at 31 December 2018; the Group expects to receive substantially all of this
revenue by 2021.
The most significant performance obligations undertaken by the Group are the provision of bank account and transactional services and other value
added offerings in respect of current accounts; factoring and loan commitments for commercial customers; card services to cardholders and merchants in
respect of credit cards and debit cards; and the management and administration of policyholders’ funds in accordance with investment mandates.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
196 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 7: Net trading income
Foreign exchange translation gains/(losses)
Gains on foreign exchange trading transactions
Total foreign exchange
Investment property gains (losses) (note 26)
Securities and other gains (see below)
Net trading income
2018
£m
342
580
922
139
2017
£m
(174)
517
343
230
(4,937)
(3,876)
11,244
11,817
2016
£m
1,363
542
1,905
(83)
16,723
18,545
Securities and other gains comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss as follows:
Net income arising on assets and liabilities mandatorily held at fair value through profit or loss:
Financial instruments held for trading
Other financial instruments mandatorily held at fair value through profit or loss:
Debt securities, loans and advances
Equity shares
Net (expense) income arising on assets and liabilities designated at fair value through profit or loss
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
Note 9: Other operating income
Operating lease rental income
Rental income from investment properties (note 26)
Gains less losses on disposal of financial assets at fair value through other comprehensive income
(2017 and 2016: 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
2018
£m
2017
£m
2016
£m
(8)
404
(428)
(26)
(4,747)
(4,781)
(156)
(4,937)
1,122
9,862
11,388
(144)
11,244
4,771
12,534
16,877
(154)
16,723
2018
£m
2017
£m
2016
£m
6,612
2,178
8,790
(271)
8,519
670
9,189
2018
£m
1,343
197
275
(55)
–
9
151
1,920
6,273
1,082
7,355
(168)
7,187
743
7,930
2017
£m
1,344
213
446
(165)
(14)
6
165
1,995
5,613
1,685
7,298
(88)
7,210
858
8,068
2016
£m
1,225
229
575
472
(598)
(1)
133
2,035
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows:
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
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.
Lloyds Banking Group Annual Report and Accounts 2018 197
2018
£m
2017
£m
2016
£m
(8,735)
4,565
628
(3,542)
404
(3,138)
8
(3,130)
(335)
(3,465)
(721)
(1,198)
(5,548)
(1,032)
(236)
(8,735)
(8,898)
(9,067)
2,836
(8,617)
(14,160)
679
(15,129)
(22,098)
35
(15,094)
(147)
(15,241)
(337)
(15,578)
(675)
(1,280)
(5,674)
(985)
(284)
(8,898)
106
(21,992)
14
(21,978)
(366)
(22,344)
(635)
(1,347)
(5,444)
(949)
(242)
(8,617)
2018
£m
2017
£m
2016
£m
2,482
2,679
2,750
509
343
705
249
474
4,762
370
190
169
729
1,121
197
287
225
653
2,483
1,852
40
513
2,405
–
10,379
750
600
1,350
11,729
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
475
363
555
241
433
4,817
365
187
120
672
848
198
265
200
873
2,384
1,761
37
582
2,380
–
10,181
10,253
1,650
865
2,515
12,696
1,000
1,024
2,024
12,277
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
Note
198 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 11: Operating expenses continued
Performance-based compensation
The table below analyses the Group’s performance‑based compensation costs between those relating to the current performance year and those relating
to earlier years.
Performance‑based compensation expense comprises:
Awards made in respect of the year ended 31 December
Awards made in respect of earlier years
Performance‑based compensation expense deferred until later years comprises:
Awards made in respect of the year ended 31 December
Awards made in respect of earlier years
2018
£m
362
147
509
152
37
189
2017
£m
334
139
473
127
35
162
2016
£m
312
163
475
123
41
164
Performance‑based awards expensed in 2018 include cash awards amounting to £137 million (2017: £102 million; 2016: £116 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
Note 12: Auditors’ remuneration
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
The following types of services are included in the categories listed above:
2018
71,857
769
72,626
2017
75,150
794
75,944
2016
79,606
812
80,418
2018
£m
1.5
19.1
2.9
23.5
1.2
24.7
–
–
–
–
2.0
2.0
26.7
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
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 in 2017, 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.
Note
Lloyds Banking Group Annual Report and Accounts 2018 199
Note 12: Auditors’ remuneration continued
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
2018
£m
0.1
0.3
0.4
–
2017
£m
0.1
0.3
0.2
0.1
Note 13: Impairment
Year ended 31 December 2018
Impact of transfers between stages
Other changes in credit quality
Additions (repayments)
Methodology changes
Other items
Other items impacting the impairment charge
Total impairment
In respect of:
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Other assets
Impairment charge on drawn balances
Loan commitments and financial guarantees
Financial assets at fair value through other comprehensive income
Total impairment
The Group’s impairment charge comprises the following items:
Transfers between stages
The net impact on the impairment charge of transfers between stages.
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
(12)
(20)
18
(71)
(13)
(86)
(98)
1
(66)
–
(65)
–
(65)
(19)
(14)
(98)
51
(47)
(82)
(21)
–
(150)
(99)
–
(51)
–
(51)
–
(51)
(48)
–
(99)
446
541
43
72
32
688
1,134
–
1,139
–
1,139
1
1,140
(6)
–
1,134
–
69
(69)
–
–
–
–
–
–
–
–
–
–
–
–
–
2016
£m
0.3
0.4
1.2
1.0
Total
£m
485
543
(90)
(20)
19
452
937
1
1,022
–
1,023
1
1,024
(73)
(14)
937
Other changes in credit quality
Changes in loss allowance as a result of movements in risk parameters that reflect changes in customer quality, but which have not resulted in a transfer
to a different stage. This also contains the impact on the impairment charge as a result of write‑offs and recoveries, where the related loss allowances are
reassessed to reflect ultimate realisable or recoverable value.
Additions (repayments)
Expected loss allowances are recognised on origination of new loans or further drawdowns of existing facilities. Repayments relate to the reduction of loss
allowances as a result of repayments of outstanding balances.
Methodology changes
Increase or decrease in impairment charge as a result of adjustments to the models used for expected credit loss calculations; either as changes to the
model inputs (risk parameters) or to the underlying assumptions.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
200 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 13: Impairment continued
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
Impairment of available‑for‑sale financial assets
Other credit risk provisions
Total impairment charged to the income statement
Movements in the Group‘s impairment allowances are shown in note 20.
Note 14: 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 expense
2017
£m
697
(6)
691
6
(9)
688
2016
£m
592
–
592
173
(13)
752
2018
£m
2017
£m
2016
£m
(1,342)
122
(1,220)
(1,010)
156
(854)
(1,386)
11
(1,375)
(34)
5
(29)
(40)
10
(30)
(1,404)
(1,250)
(127)
(29)
(156)
(430)
(48)
(478)
(20)
2
(18)
(872)
(758)
(94)
(852)
(1,560)
(1,728)
(1,724)
2018
£m
14
(1,574)
(1,560)
2017
£m
(82)
(1,646)
(1,728)
2016
£m
(301)
(1,423)
(1,724)
Lloyds Banking Group Annual Report and Accounts 2018 201
Note 14: Taxation continued
(B) Factors affecting the tax expense for the year
The UK corporation tax rate for the year was 19.0 per cent (2017: 19.25 per cent; 2016: 20 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
(Derecognition) recognition of losses that arose in prior years
Remeasurement of deferred tax due to rate changes
Differences in overseas tax rates
Policyholder tax
Policyholder deferred tax asset in respect of life assurance expenses
Adjustments in respect of prior years
Tax effect of share of results of joint ventures
Tax expense
Note 15: 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
2018
£m
5,960
(1,132)
(432)
(101)
(43)
(90)
87
124
(9)
32
6
(62)
73
(13)
–
2017
£m
5,275
(1,015)
(452)
(352)
(44)
(59)
72
128
–
(9)
(15)
(66)
–
85
(1)
2016
£m
4,238
(848)
(266)
(219)
(40)
(135)
75
19
59
(201)
10
(57)
(184)
64
(1)
(1,560)
(1,728)
(1,724)
2018
£m
3,869
106
3,975
2018
million
71,638
641
72,279
5.5p
5.5p
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
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 38 million (2017: 57 million; 2016: 140 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 (2017: none; 2016: weighted‑average
of 0.3 million).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
202 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 16: Financial assets at fair value through profit or loss
These assets are comprised as follows:
31 December 2018
Other financial
assets
mandatorily at
fair value
through
profit or loss
£m
Trading
assets
£m
1 January 2018
Other financial
assets
mandatorily at
fair value
through
profit or loss
£m
Total
£m
Trading
assets
£m
Total
£m
Trading
assets
£m
26,886
10,964
37,850
29,976
11,434
41,410
29,976
848
2,178
3,026
1,614
2,582
4,196
1,614
31 December 2017
Other financial
assets at
fair value
through
profit or loss
£m
–
–
Total
£m
29,976
1,614
7,192
10,903
18,095
9,833
11,117
20,950
9,833
12,187
22,020
–
–
10
63
2,064
2,064
1,105
1,105
215
286
225
349
–
–
189
95
247
7,512
–
–
18,063
32,636
77,485
18,310
40,148
77,485
20
20
523
10,640
6
–
1,543
1,543
222
222
213
233
19,707
33,035
86,703
402
328
20,230
43,675
86,709
18
18
–
–
189
95
523
10,640
6
–
1,527
1,527
222
222
211
926
19,467
34,540
86,084
400
1,021
19,990
45,180
86,090
18
18
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
35,246
123,283
158,529
42,236
133,772
176,008
42,236
120,642
162,878
Other financial assets at fair value through profit or loss include assets backing insurance contracts and investment contracts of £116,903 million (1 January
2018: £126,968 million; 31 December 2017: £117,323 million). Included within these assets are investments in unconsolidated structured entities of
£26,028 million (1 January 2018: £28,759 million; 31 December 2017: £28,759 million), see note 48.
For amounts included above which are subject to repurchase and reverse repurchase agreements see note 52.
Lloyds Banking Group Annual Report and Accounts 2018 203
Note 17: Derivative financial instruments
The fair values and notional amounts of derivative instruments are set out in the following table:
31 December 2018
31 December 2017
Contract/
notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
Fair value
assets
£m
Fair value
liabilities
£m
Trading and other
Exchange rate contracts:
Spot, forwards and futures
Currency swaps
Options purchased
Options written
Interest rate contracts:
Interest rate swaps
Forward rate agreements
Options purchased
Options written
Futures
Credit derivatives
Equity and other contracts
Contract/
notional
amount
£m
31,716
223,624
8,191
6,684
41,571
311,491
10,202
11,393
374,657
746
4,566
485
–
5,797
549
3,709
–
495
4,753
270,215
4,381,271
13,624
12,629
2,264,834
494,430
30,724
26,463
128,211
–
2,107
–
16
2
–
1,997
4
239,797
32,097
32,817
35,542
1,023
3,157
580
–
4,760
15,791
5
2,329
–
9
5,061,099
15,747
14,632
2,605,087
18,134
13,757
15,145
99
389
181
699
4,568
25,150
77
982
Total derivative assets/liabilities – trading and other
5,464,658
22,032
20,265
2,905,020
23,953
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
490
150,971
151,461
556,945
–
10,578
567,523
718,984
6,183,642
3
947
950
358
–
255
613
1,563
23,595
29
187
216
844
–
48
892
1,108
1,327
109,670
110,997
549,099
73,951
7,310
630,360
741,357
21,373
3,646,377
19
1,145
1,164
597
–
120
717
1,881
25,834
The notional amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current cost of replacing contracts
with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as
netting and collateralisation, where security is provided against the exposure. Further details are provided in note 52 Credit risk.
The Group holds derivatives as part of the following strategies:
– Customer driven, where derivatives are held as part of the provision of risk management products to Group customers;
– To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy
adopted by the Group is to utilise a combination of fair value and cash flow hedge approaches as described in note 52; and
– Derivatives held in policyholder funds as permitted by the investment strategies of those funds.
789
3,534
–
627
4,950
15,364
1
–
2,524
7
17,896
423
1,242
24,511
38
407
445
1,053
1
114
1,168
1,613
26,124
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
204 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 17: 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.
Details of the Group’s hedging instruments are set out below:
31 December 2018
Fair value hedges
Interest rate
Cross currency swap
Notional
Average fixed interest rate
Average EUR/USD exchange rate
Average USD/GBP exchange rate
Average NOK/GBP exchange rate
Interest rate swap
Notional
Average fixed interest rate
Cash flow hedges
Foreign exchange
Currency swap
Notional
Average USD/EUR exchange rate
Average USD/GBP exchange rate
Interest rate
Interest rate swap
Notional
Average fixed interest rate
Up to 1 month
£m
1-3 months
£m
3-12 months
£m
1-5 years
£m
Over 5 years
£m
Total
£m
Maturity
–
–
–
–
–
393
1.38%
67
1.15
–
36
4.82%
–
–
9.22
417
2.06%
47
–
1.32
–
–
–
–
–
32,876
1.65%
2,234
1.13
1.34
283
5.88%
1.13
1.30
9.19
86,451
1.75%
2,111
1.10
1.27
490
150,971
10,578
171
4.44%
–
–
9.03
30,834
2.98%
6,119
1.07
1.28
4,874
1.47%
11,204
1.03%
66,312
0.99%
292,712
1.46%
181,843
1.85%
556,945
The carrying amounts of the Group’s hedging instruments are as follows:
31 December 2018
Fair value hedges
Interest rate
Currency swaps
Interest rate swaps
Cash flow hedges
Foreign exchange
Currency swaps
Interest rate
Interest rate swaps
All amounts are held within Derivative financial instruments.
Carrying amount of the hedging instrument
Contract/notional
amount
£m
Assets
£m
Liabilities
£m
Changes in fair
value used for
calculating hedge
ineffectiveness
(YTD)
£m
490
150,971
10,578
556,945
3
947
255
358
29
187
48
844
(10)
104
229
(781)
Lloyds Banking Group Annual Report and Accounts 2018 205
Note 17: Derivative financial instruments continued
The Group’s hedged items are as follows:
31 December 2018
Fair value hedges
Interest rate
Fixed rate mortgages1
Fixed rate issuance2
Fixed rate bonds3
Cash flow hedges
Foreign exchange
Foreign currency issuance2
Customer deposits4
Interest rate
Customer loans1
Central bank balances5
Customer deposits4
Carrying amount of the hedged
item
Accumulated amount of fair
value adjustment on the
hedged item
Assets
Liabilities
Assets
Liabilities
Change in fair
value of
hedged item
for
ineffectiveness
assessment
(YTD)
Cash flow hedge/currency
translation reserve
Continuing
hedges
Discontinued
hedges
£m
£m
£m
£m
£m
£m
£m
53,136
–
–
63,746
23,285
–
(45)
–
232
–
1,598
–
(173)
807
(666)
(165)
(62)
456
(16)
(118)
114
70
867
30
(9)
327
(78)
60
20
(6)
1 Included within Loans and advances to customers
2 Included within Debt securities in issue
3 Included within Financial assets at fair value through other comprehensive income
4 Included within Customer deposits
5 Included within Cash and balances at central banks
The accumulated amount of fair value hedge adjustments remaining in the balance sheet for hedged items that have ceased to be adjusted for hedging
gains and losses is a liability of £170 million.
Gains and losses arising from hedge accounting are summarised as follows:
31 December 2018
Fair value hedge
Interest rate
Fixed rate mortgages
Fixed rate issuance
Fixed rate bonds
Cash flow hedges
Foreign exchange
Foreign currency issuance
Customer deposits
Interest rate
Customer loans
Central bank balances
Customer deposits
Amounts reclassified from reserves to
income statement as:
Gain (loss)
recognised in
other
comprehensive
income
Hedge
ineffectiveness
recognised in the
income statement1
Hedged item
affected income
statement
Income statement
line item that
includes reclassified
amount
£m
£m
£m
106
(17)
(27)
–
(2)
(17)
(5)
(1)
85
(22)
(418)
(63)
(49)
(81)
Interest expense
(32)
Interest expense
(467)
Interest income
(52)
Interest income
(69)
Interest expense
1 Hedge ineffectiveness is included in the income statement within net trading income.
There were no forecast transactions for which cash flow hedge accounting had to cease in 2018 as a result of the highly probable cash flows no longer
being expected to occur.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
206 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 18: Financial assets at amortised cost
(A) Loans and advances to customers
At 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
At 1 January 2018
Exchange and other movements
Additions (repayments)
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Recoveries
Disposal of businesses
Financial assets that have been written off during the year
At 31 December 2018
Allowance for impairment losses
Total loans and advances to customers
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
474,699
(10,460)
403,881
37,245
5,140
17,973
464,239
958
34,942
19,524
(15,743)
(2,031)
1,750
–
–
32
(2,187)
(19,501)
15,996
(2,220)
(5,725)
–
(4,020)
441,531
25,345
(525)
(994)
441,006
24,351
–
–
990
(2,074)
(2,609)
28,072
(23)
(253)
4,251
3,975
553
(277)
(1,576)
5,741
(1,553)
4,188
–
–
–
–
27
–
–
580
(4,297)
(1,576)
15,391
488,008
(78)
(3,150)
15,313
484,858
Stage 2 balances show a large reduction in the year largely as a result of the refinements to the transfer criteria approach in mortgages.There is also a
reduction from the disposal of the Irish mortgage portfolio together with improvements in credit quality.
(B) Loans and advances to banks
At 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
At 1 January 2018
Exchange and other movements
Additions (repayments)
At 31 December 2018
Allowance for impairment losses
Total loans and advances to banks
(C) Debt securities
At 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
At 1 January 2018
Exchange and other movements
Additions (repayments)
Financial assets that have been written off during the year
At 31 December 2018
Allowance for impairment losses
Total debt securities
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
4,245
(29)
2,066
6,282
(2)
6,280
2
1
–
3
–
3
–
–
–
–
–
–
–
–
–
–
–
–
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
3,291
77
1,870
5,238
–
5,238
–
–
–
–
–
–
49
(14)
–
(29)
6
(6)
–
–
–
–
–
–
–
–
Total
£m
6,611
(2,364)
4,247
(28)
2,066
6,285
(2)
6,283
Total
£m
3,669
(329)
3,340
63
1,870
(29)
5,244
(6)
5,238
Total financial assets at amortised cost
452,524
24,354
4,188
15,313
496,379
Transfers between stages are deemed to have taken place at the start of the reporting period, with all other movements shown in the stage in which the
asset is held at 31 December, with the exception of those held within Purchased or originated credit‑impaired, which are not transferrable.
Net increase and decrease in balances comprise new loans originated and repayments of outstanding balances throughout the reporting period. Loans
which are written off in the period are first transferred to Stage 3 before acquiring a full allowance and subsequent write‑off.
Lloyds Banking Group Annual Report and Accounts 2018 207
Note 19: Finance lease receivables
The Group's finance lease receivables are classified as loans and advances to customers and accounted for at amortised cost. The balance is 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
2018
£m
458
1,351
1,104
2,913
(1,068)
(23)
1,822
2018
£m
152
679
991
2017
£m
680
1,106
1,053
2,839
(692)
(53)
2,094
2017
£m
546
887
661
1,822
2,094
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 2017 and 2018 no contingent rentals in respect of finance leases were recognised in the income statement. There was
an allowance for uncollectable finance lease receivables included in the allowance for impairment losses of £1 million (2017: £nil).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
208 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 20: Allowance for impairment losses
Analysis of movement in the allowance for impairment losses by Stage
In respect of drawn balances
Balance at 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
Balance at 1 January 2018
Exchange and other adjustments
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
Other items charged to the income statement
Charge to the income statement (note 13)
Advances written off
Disposal of businesses1
Recoveries of advances written off in previous years
Discount unwind
At 31 December 2018
In respect of undrawn balances
Balance at 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
Balance at 1 January 2018
Exchange and other adjustments
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
Other items charged to the income statement
Charge to the income statement (note 13)
At 31 December 2018
Total
In respect of:
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Other assets
Provisions in relation to loan commitments and financial guarantees
Total
Expected credit loss in respect of financial assets at fair value through other
comprehensive income (memorandum item)
1 Reflects the sale of the Group's Irish mortgage portfolio.
The Group income statement charge comprises:
Drawn balances
Undrawn balances
Financial assets at fair value through other comprehensive income
Total
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
590
2
304
(46)
(32)
(233)
(7)
(58)
(65)
1,147
–
(299)
85
(131)
401
56
(107)
(51)
–
(102)
1,491
133
(5)
(39)
163
325
444
696
1,140
(1,605)
(79)
553
(63)
527
994
1,570
147
(5)
28
(6)
(2)
(25)
(5)
(14)
(19)
123
650
2
525
–
527
–
123
650
1
126
(14)
(28)
6
(5)
22
(5)
(43)
(48)
64
–
12
–
–
7
(5)
2
(8)
(6)
6
1,058
1,576
–
994
–
994
–
64
–
1,553
6
1,559
11
6
1,058
1,576
–
–
32
–
–
–
–
–
27
19
78
–
–
–
–
–
78
–
78
–
78
–
–
78
–
Total
£m
2,227
1,033
3,260
135
–
–
–
493
493
531
1,024
(1,605)
(181)
580
(44)
3,169
30
243
273
(7)
–
–
–
(8)
(8)
(65)
(73)
193
3,362
2
3,150
6
3,158
11
193
3,362
1
£m
1,024
(73)
(14)
937
Transfers between stages are deemed to have taken place at the start of the reporting period, with all other movements shown in the stage in which
the asset is held at 31 December, with the exception of those held within Purchased or originated credit‑impaired, which are not transferrable. As assets
are transferred between stages, the resulting change in expected credit loss of £493 million for drawn balances, and £8 million for undrawn balances, is
presented separately as Impacts of transfers between stages, in the stage in which the expected credit loss is recognised at the end of the reporting period.
Net increase and decrease in balances comprise the movements in the expected credit loss as a result of new loans originated and repayments of
outstanding balances throughout the reporting period. Loans which are written off in the period are first transferred to Stage 3 before acquiring a full
allowance and subsequent write‑off. Consequently, recoveries on assets previously written‑off also occur in Stage 3 only.
Lloyds Banking Group Annual Report and Accounts 2018 209
Note 20: Allowance for impairment losses continued
For the year ended 31 December 2017
At 1 January 2017
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 13)
At 31 December 2017
Loans and
advances
to customers
£m
Debt
securities
£m
2,412
132
(1,499)
482
(23)
697
2,201
76
–
(44)
–
–
(6)
26
Total
£m
2,488
132
(1,543)
482
(23)
691
2,227
Of the total allowance in respect of loans and advances to customers at 31 December 2017 £1,772 million related to lending that had been determined to
be impaired (either individually or on a collective basis) at that reporting date.
Of the total allowance in respect of loans and advances to customers at 31 December 2017 £1,201 million was assessed on a collective basis.
Note 21: Financial assets at fair value through other comprehensive income
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
Treasury and other bills
Equity shares
31 December
2018
£m
1 January
2018
£m
18,971
118
120
131
5,151
24,491
303
21
34,708
167
2,381
467
4,615
42,338
–
579
Total financial assets at fair value through other comprehensive income
24,815
42,917
All assets have been assessed at Stage 1 at 1 January and 31 December 2018.
Note 22: Available-for-sale financial assets
Debt securities:
Government securities
Bank and building society certificates of deposit
Asset‑backed securities:
Mortgage‑backed securities
Other asset‑backed securities
Corporate and other debt securities
Equity shares
Total available-for-sale financial assets
Note 23: Goodwill
At 1 January
Acquisition of businesses
Impairment charged to the income statement (note 11)
At 31 December
Cost1
Accumulated impairment losses
At 31 December
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.
2017
£m
34,708
167
1,156
255
4,615
40,901
1,197
42,098
2017
£m
2,016
302
(8)
2,310
2,664
(354)
2,310
2018
£m
2,310
–
–
2,310
2,664
(354)
2,310
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
210 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 23: Goodwill continued
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 (2017: £2,310 million), £1,836 million, or 79 per cent of the total
(2017: £1,836 million, 79 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 (2017: £302 million, or 13 per cent of the total) has been allocated to Cards in the Group’s Retail division; and £170 million, or
7 per cent of the total (2017: £170 million, 7 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 three‑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 three‑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.
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 recoverable amount of the goodwill relating to the Cards business 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
Key assumptions
The impact of reasonably possible changes in the key assumptions made in respect of the Group's life insurance business, which include the impact on the
value of in force business, are disclosed in note 32.
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
128 basis points at 31 December 2018 (2017: 114 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
2018
%
2017
%
0.00 to 4.05
0.00 to 4.20
1.28 to 5.33
1.14 to 5.34
0.00 to 4.05
0.00 to 4.20
3.43
3.75
3.43
3.67
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.
Lloyds Banking Group Annual Report and Accounts 2018 211
Note 24: Value of in-force business continued
The gross value of in‑force business asset in the consolidated balance sheet is as follows:
Acquired value of in‑force non‑participating investment contracts
Value of in‑force insurance and participating investment contracts
Total value of in-force business
The movement in the acquired value of in‑force non‑participating investment contracts over the year is as follows:
At 1 January
Acquisition of business
Amortisation (note 11)
At 31 December
2018
£m
271
4,491
4,762
2018
£m
306
5
(40)
271
2017
£m
306
4,533
4,839
2017
£m
340
–
(34)
306
The acquired value of in‑force non‑participating investment contracts includes £167 million (2017: £185 million) in relation to OEIC business.
Movement in value of in‑force 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 (note 9)
At 31 December
2018
£m
4,533
13
2017
£m
4,702
(4)
675
348
(304)
(122)
(67)
(237)
(55)
4,491
(318)
(226)
(238)
269
(165)
4,533
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 year from those included in assumptions used to calculate new and existing business returns.
Note 25: Other intangible assets
Brands
£m
Core deposit
intangible
£m
Purchased
credit card
relationships
£m
Customer-
related
intangibles
£m
Capitalised
software
enhancements
£m
Total
£m
Cost:
At 1 January 2017
Acquisition of businesses
Additions
Disposals
At 31 December 2017
Additions
Disposals
At 31 December 2018
Accumulated amortisation:
At 1 January 2017
Charge for the year
Disposals
At 31 December 2017
Charge for the year
Disposals
At 31 December 2018
Balance sheet amount at 31 December 2018
Balance sheet amount at 31 December 2017
596
2,770
–
–
–
596
–
–
596
171
22
–
193
23
–
216
380
403
–
–
–
2,770
–
–
315
702
–
–
1,017
–
(15)
2,770
1,002
2,757
13
–
2,770
–
–
2,770
–
–
311
44
–
355
71
(15)
411
591
662
538
2,167
6,386
–
–
–
538
–
–
538
499
20
–
519
19
–
538
–
19
–
850
(77)
2,940
1,046
(55)
3,931
967
293
(71)
1,189
400
(34)
1,555
2,376
1,751
702
850
(77)
7,861
1,046
(70)
8,837
4,705
392
(71)
5,026
513
(49)
5,490
3,347
2,835
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
212 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 25: Other intangible assets continued
Included within brands above are assets of £380 million (31 December 2017: £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 purchased credit card relationships represent the benefit of recurring income generated from portfolios of credit cards purchased. The balance sheet
amount at 31 Deceber 2018 is expected to be amortised over its remaining useful life of nine years.
Note 26: Property, plant and equipment
Cost or valuation:
At 1 January 2017
Exchange and other adjustments
Acquisition of businesses
Additions
Expenditure on investment properties (see below)
Change in fair value of investment properties (note 7)
Disposals
At 31 December 2017
Exchange and other adjustments
Additions
Expenditure on investment properties (see below)
Change in fair value of investment properties (note 7)
Disposals
At 31 December 2018
Accumulated depreciation and impairment:
At 1 January 2017
Exchange and other adjustments
Depreciation charge for the year
Disposals
At 31 December 2017
Exchange and other adjustments
Depreciation charge for the year
Disposals
At 31 December 2018
Balance sheet amount at 31 December 2018
Balance sheet amount at 31 December 2017
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
Total
£m
3,764
–
–
–
209
230
(504)
3,699
–
–
143
139
(211)
3,770
–
–
–
–
–
–
–
–
–
3,770
3,699
2,550
(37)
3
70
–
–
(795)
1,791
–
72
–
–
(647)
1,216
1,333
(8)
125
(722)
728
1
121
(634)
216
1,000
1,063
5,965
6,206
18,485
–
3
382
–
–
(1,282)
5,068
(6)
519
–
–
(574)
5,007
2,671
(9)
734
(1,271)
2,125
(8)
715
(534)
2,298
2,709
2,943
(44)
–
2,262
–
–
(1,896)
6,528
11
1,755
–
–
(81)
6
2,714
209
230
(4,477)
17,086
5
2,346
143
139
(1,540)
6,754
(2,972)
16,747
1,509
(34)
1,085
(1,054)
1,506
6
1,016
(595)
1,933
4,821
5,022
2018
£m
81
62
143
5,513
(51)
1,944
(3,047)
4,359
(1)
1,852
(1,763)
4,447
12,300
12,727
2017
£m
82
127
209
Rental income of £197 million (2017: £213 million) and direct operating expenses arising from properties that generate rental income of £23 million
(2017: £24 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 £33 million
(2017: £21 million).
The table above analyses movements in investment properties, all of which are categorised as level 3. See note 49 for details of levels in the fair
value hierarchy.
At 31 December the future minimum rentals receivable under non‑cancellable operating leases were as follows:
Receivable within 1 year
1 to 5 years
Over 5 years
Total future minimum rentals receivable
2018
£m
1,095
1,156
6
2,257
2017
£m
1,301
1,419
128
2,848
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2017 and 2018 no contingent
rentals in respect of operating leases were recognised in the income statement.
Total future minimum sub‑lease income of £60 million at 31 December 2018 (£71 million at 31 December 2017) is expected to be received under
non‑cancellable sub‑leases of the Group’s premises.
Lloyds Banking Group Annual Report and Accounts 2018 213
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: Financial liabilities at fair value through profit or loss
Liabilities designated at fair value through profit or loss:
Debt securities in issue
Other
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Other deposits
Short positions in securities
Financial liabilities at fair value through profit or loss
2018
£m
749
90
743
7,111
91
3,742
12,526
2018
£m
7,085
11
7,096
21,595
242
1,614
23,451
30,547
2017
£m
602
104
720
7,786
65
4,260
13,537
2017
£m
7,812
3
7,815
41,378
381
1,303
43,062
50,877
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 2018 was £15,435 million,
which was £8,350 million higher than the balance sheet carrying value (2017: £14,224 million, which was £6,412 million higher than the balance sheet
carrying value). At 31 December 2018 there was a cumulative £386 million decrease in the fair value of these liabilities attributable to changes in credit
spread risk; this is determined by reference to the quoted credit spreads of Lloyds Bank plc, the issuing entity within the Group. Of the cumulative amount
a decrease of £533 million arose in 2018 and an increase of £52 million arose in 2017.
For the fair value of collateral pledged in respect of repurchase agreements see note 52.
Note 29: Debt securities in issue
Medium‑term notes issued
Covered bonds (note 30)
Certificates of deposit issued
Securitisation notes (note 30)
Commercial paper
Total debt securities in issue
2018
£m
37,490
28,194
12,020
5,426
8,038
91,168
2017
£m
29,418
26,132
9,999
3,660
3,241
72,450
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
214 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 30: Securitisations and covered bonds
Securitisation programmes
Loans and advances to customers and debt securities carried at amortised cost 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 29.
Securitisation programmes
UK residential mortgages
Commercial loans
Credit card receivables
Motor vehicle finance
Less held by the Group
Total securitisation programmes (notes 28 and 29) 1
Covered bond programmes
Residential mortgage‑backed
Social housing loan‑backed
Less held by the Group
Total covered bond programmes (note 29)
Total securitisation and covered bond programmes
2018
2017
Loans and
advances
securitised
£m
Notes
in issue
£m
Loans and
advances
securitised
£m
21,158
6,616
7,701
–
35,475
30,361
1,628
31,989
25,018
22,485
5,746
8,060
2,850
41,674
34,963
1,839
36,802
6,577
5,263
2,855
37,180
(31,701)
5,479
27,694
1,200
28,894
(700)
28,194
33,673
Notes
in issue
£m
14,105
7,001
4,090
–
25,196
(21,536)
3,660
25,632
1,200
26,832
(700)
26,132
29,792
1 Includes £53 million (2017: £nil) of securitisation notes held at fair value through profit or loss.
Cash deposits of £4,102 million (2017: £3,507 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 2018 these obligations had not been triggered; the maximum exposure under these
facilities was £88 million (2017: £95 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 2018 (2017: none).
Lloyds Banking Group Annual Report and Accounts 2018 215
Note 31: Liabilities arising from insurance contracts and participating investment contracts
Insurance contract and participating investment contract liabilities are comprised as follows:
Life insurance (see (1) below) :
Insurance contracts
Participating investment contracts
Non‑life insurance contracts (see (2) below) :
Unearned premiums
Claims outstanding
Total
2018
2017
Gross
£m
Reinsurance1
£m
Net
£m
Gross1
£m
Reinsurance2
£m
Net
£m
84,366
13,912
98,278
342
254
596
98,874
(716)
–
(716)
(13)
–
(13)
(729)
83,650
13,912
97,562
86,949
15,881
102,830
329
254
583
358
225
583
(563)
–
(563)
(13)
–
(13)
86,386
15,881
102,267
345
225
570
98,145
103,413
(576)
102,837
1 During the year the Group has reviewed the classification of pre‑2007 unitised pension savings products and as a result these products have been reclassified from insurance contracts to
participating investment contracts; comparatives have been restated accordingly.
2 Reinsurance balances are reported within other assets (note 27) .
(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 2017
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2017
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2018
Insurance
contracts
£m
77,881
Participating
investment
contracts
£m
15,896
4,154
4,928
9,082
(14)
86,949
5,476
(8,072)
(2,596)
13
43
(58)
(15)
–
15,881
31
(2,000)
(1,969)
–
Gross
£m
93,777
4,197
4,870
9,067
(14)
102,830
5,507
(10,072)
(4,565)
13
Reinsurance
£m
(671)
(21)
129
108
–
(563)
(42)
(111)
(153)
–
Net
£m
93,106
4,176
4,999
9,175
(14)
102,267
5,465
(10,183)
(4,718)
13
84,366
13,912
98,278
(716)
97,562
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
7,851
7,438
15,289
2018
Non-profit
fund
£m
76,515
6,474
82,989
Total
£m
84,366
13,912
98,278
With‑profit
fund
£m
8,946
8,481
17,427
2017
Non‑profit
fund
£m
78,003
7,400
85,403
Total
£m
86,949
15,881
102,830
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
216 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
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 2018 of £2.5 billion (2017: £2.8 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:
Lloyds Banking Group Annual Report and Accounts 2018 217
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 2018 resulted in the following key impacts on profit before tax:
– Change in persistency assumptions (£135 million decrease) .
– Change in the assumption in respect of current and future mortality and morbidity rates (£173 million increase) .
– Change in expenses assumptions (£43 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 £39 million (2017: £35 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
2018
£m
358
681
(697)
(16)
342
(13)
329
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
2018
£m
225
(306)
335
29
254
–
254
170
84
254
2017
£m
404
724
(770)
(46)
358
(13)
345
2017
£m
209
(321)
337
16
225
–
225
174
51
225
1 Of which an increase of £367 million (2017: £350 million) was in respect of current year claims and a decrease of £32 million (2017: a decrease of £13 million) was in respect of prior year claims.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
218 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 32: Life insurance sensitivity analysis
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
2018
2017
Increase
(reduction)
in profit
before tax
Increase
(reduction)
in equity
£m
22
(234)
89
262
76
(3)
(5)
(364)
153
£m
18
(194)
74
217
63
(2)
(4)
(303)
127
Increase
(reduction)
in profit
before tax
£m
Increase
(reduction)
in equity
£m
23
(221)
75
289
(40)
(6)
(7)
(235)
145
19
(184)
62
240
(33)
(5)
(6)
(195)
120
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
2018
£m
15,447
668
(2,262)
13,853
2017
£m
20,112
608
(5,273)
15,447
The balances above are shown gross of reinsurance. As at 31 December 2018, related reinsurance balances were £20 million (2017: £26 million); reinsurance
balances are reported within other assets (note 27). Liabilities arising from non‑participating investment contracts are categorised as level 2. See note 49 for
details of levels in the fair value hierarchy.
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
2018
£m
485
12,933
382
5,833
19,633
2017
£m
501
14,480
390
5,359
20,730
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
Lloyds Banking Group Annual Report and Accounts 2018 219
2018
£m
401
4
405
300
705
2017
£m
362
7
369
256
625
2018
£m
1,267
(245)
1,022
2018
£m
1,146
(124)
1,022
2016
£m
279
8
287
268
555
2017
£m
723
(358)
365
2017
£m
509
(144)
365
Pension schemes
Defined benefit schemes
(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 section of the Lloyds Bank Pension Schemes No. 1, the Lloyds Bank Pension Scheme No. 2 and the HBOS
Final Salary Pension Scheme. At 31 December 2018, these schemes represented 94 per cent of the Group’s total gross defined benefit pension assets (2017:
95 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 2018 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 and are in compliance with the Pensions Act 2004. 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, was completed during
2018. The valuation showed 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 that the Group
has made as a result of its Structural Reform Programme, the Group agreed a recovery plan with the trustees. Under the plan, deficit contributions of
£412 million were paid during 2018, and these will rise 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 £1,050 million to its defined benefit schemes
in 2019.
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 2018, the limited liability partnerships held assets of approximately £6.7 billion. The limited liability partnerships are consolidated fully in
the Group’s balance sheet.
The Group has also established three private limited companies which hold assets to provide security for the Group’s obligations to the HBOS Final Salary
Pension Scheme, a section of the Lloyds Bank Pension Scheme No 1 and the Lloyds Bank Offshore Pension Scheme. At 31 December 2018 these held
assets of approximately £4.6 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 2018.
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 2018 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
220 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 35: Retirement benefit obligations continued
In July 2018 a decision was sought from the High Court in respect of the requirement to equalise the Guaranteed Minimum Pension (GMP) benefits
accrued between 1990 and 1997 from contracting out of the State Earnings Related Pension Scheme. In its judgment handed down on 26 October 2018
the High Court confirmed the requirement to treat men and women equally with respect to these benefits and a range of methods that the Trustee is
entitled to adopt to achieve equalisation. The Group continues to work with the Trustee on the detail of implementing this judgment and has recognised
a past service cost of £108 million consistent with the principles outlined within the judgment. This is based on a number of assumptions and the actual
impact may be different.
(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 gains (losses) 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 losses – experience
Actuarial (losses) gains – demographic assumptions
Actuarial gains (losses) – 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
2018
£m
2017
£m
(41,092)
42,238
1,146
(44,384)
44,893
509
2018
£m
509
(401)
1,707
(1,558)
863
26
1,146
2017
£m
(244)
(362)
(731)
1,267
580
(1)
509
2018
£m
2017
£m
(44,384)
(261)
(1,130)
(45,822)
(295)
(1,241)
(439)
(201)
2,347
3,079
(108)
(12)
17
–
(347)
1,084
(1,468)
3,714
(14)
(10)
15
–
(41,092)
(44,384)
2018
£m
2017
£m
(6,448)
(14,208)
(18,885)
(1,551)
(41,092)
(7,947)
(15,823)
(19,014)
(1,600)
(44,384)
Lloyds Banking Group Annual Report and Accounts 2018 221
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
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
(iii) 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
2018
£m
261
(22)
12
1
108
41
401
Quoted
£m
846
5,344
17,439
6,903
121
29,807
–
3,937
1,501
36,091
Quoted
£m
637
7,449
16,477
8,813
138
32,877
2018
Unquoted
£m
222
–
–
–
–
–
–
556
Total
£m
859
7,449
16,477
8,813
138
32,877
556
4,578
10,494
15,072
(283)
37,809
(6,843)
4,429
(7,126)
42,238
1 Of the total debt instruments, £29,033 million (31 December 2017: £27,732 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
2018
£m
2017
£m
44,893
45,578
(1,558)
1,152
863
(3,079)
(18)
(41)
26
1,267
1,242
580
(3,714)
(18)
(41)
(1)
42,238
44,893
2017
£m
295
(1)
10
3
14
41
362
2017
Unquoted
£m
5
–
–
–
–
–
544
13,443
(5,190)
8,802
2018
£m
2,329
2,487
2,329
313
7,614
2016
£m
257
(40)
–
6
20
36
279
Total
£m
851
5,344
17,439
6,903
121
29,807
544
17,380
(3,689)
44,893
2017
£m
2,669
2,377
2,877
1,830
7,627
15,072
17,380
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
222 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 35: Retirement benefit obligations continued
(iv) 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
2018
%
2.90
3.20
2.15
0.00
2.73
2018
Years
27.8
29.4
28.8
30.6
2017
%
2.59
3.20
2.15
0.00
2.73
2017
Years
27.9
29.5
28.9
30.7
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 2018 is assumed
to live for, on average, 27.8 years for a male and 29.4 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.
(v) 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 materially 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 materially 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 asset 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.
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
Lloyds Banking Group Annual Report and Accounts 2018 223
Effect of reasonably possible alternative assumptions
Increase (decrease)
in the income
statement charge
Increase (decrease) in the
net defined benefit pension
scheme liability
2018
£m
2017
£m
14
(14)
(27)
25
43
(42)
16
(15)
(28)
26
44
(41)
2018
£m
410
(395)
(670)
686
2017
£m
472
(453)
(773)
794
1,299
(1,257)
1,404
(1,357)
1 At 31 December 2018, the assumed rate of RPI inflation is 3.20 per cent and CPI inflation 2.15 per cent (2017: RPI 3.20 per cent and CPI 2.15 per cent) .
2 At 31 December 2018, the assumed discount rate is 2.90 per cent (2017: 2.59 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 2018 the asset‑liability matching strategy mitigated 105 per cent of the liability sensitivity to interest rate movements and 106 per cent
of the liability sensitivity to inflation movements. In addition a small amount of interest rate sensitivity arises 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:
Within 12 months
Between 1 and 2 years
Between 2 and 5 years
Between 5 and 10 years
Between 10 and 15 years
Between 15 and 25 years
Between 25 and 35 years
Between 35 and 45 years
In more than 45 years
2018
Years
18
2018
£m
1,225
1,299
4,303
8,305
9,416
18,417
15,631
9,924
4,270
2017
Years
19
2017
£m
1,174
1,235
4,089
8,082
9,360
19,044
16,735
11,156
5,219
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
224 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
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 2018 the charge to the income statement in respect of defined contribution schemes was £300 million
(2017: £256 million; 2016: £268 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 2018 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 (2017: 6.81 per cent).
Movements in the other post‑retirement benefits obligation:
At 1 January
Actuarial gains
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:
2018
£m
(144)
18
5
(4)
1
2017
£m
(236)
92
7
(7)
–
(124)
(144)
Statutory position
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
2018
£m
2,453
–
2,453
2017
£m
2,284
–
2,284
Tax disclosure
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
2018
£m
4,731
(2,278)
2,453
2017
£m
4,989
(2,705)
2,284
The statutory position reflects the deferred tax assets and liabilities as disclosed in the consolidated balance sheet and takes into account the ability of
the Group to net assets and liabilities where there is a 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, before such netting.
As a result of legislation enacted in 2016, 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 2018 is a credit of £32 million in the income statement and a charge of £19 million in other comprehensive income.
On 29 October 2018, the UK government announced its intention to restrict the use of capital tax losses to 50 per cent of any future gains arising. Had this
restriction been substantively enacted at 31 December 2018, the effect would have been to reduce net deferred tax assets by £41 million.
Lloyds Banking Group Annual Report and Accounts 2018 225
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 2017
(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
Adjustment on adoption of IFRS 9 and IFRS 15 (note 54)
At 1 January 2018
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Other (charge) credit to equity
At 31 December 2018
Deferred tax liabilities
At 1 January 2017
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Impact of acquisitions and disposals
At 31 December 2017
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Exchange and other adjustments
At 31 December 2018
Property,
plant and
equipment
£m
Pension
liabilities
£m
Provisions
£m
Share-based
payments
£m
Other
temporary
differences
£m
Tax losses
£m
4,298
(264)
–
–
–
4,034
–
4,034
(256)
–
–
969
(226)
–
–
–
743
–
743
(100)
–
–
3,778
643
228
(287)
149
–
–
90
–
90
64
(92)
–
62
40
(7)
25
–
–
58
322
380
(45)
(138)
–
197
61
7
–
(17)
–
51
–
51
(6)
–
(5)
40
Long-term
assurance
business
£m
Acquisition
fair value
£m
Pension
assets
£m
Derivatives
£m
Asset
revaluations1
£m
(914)
115
–
–
(799)
162
–
–
(798)
76
–
(157)
(879)
142
–
–
(85)
199
(295)
–
(181)
(67)
(25)
–
(643)
(139)
283
–
(499)
(19)
113
–
(637)
(737)
(273)
(405)
(234)
(40)
67
–
(207)
(33)
141
–
(99)
38
(28)
–
–
3
13
3
16
(5)
–
–
11
Other
temporary
differences
£m
(254)
116
–
(2)
Total
£m
5,634
(805)
174
(17)
3
4,989
325
5,314
(348)
(230)
(5)
4,731
Total
£m
(2,928)
327
55
(159)
(140)
(2,705)
7
–
6
192
229
6
(127)
(2,278)
1 Financial assets at fair value through other comprehensive income (2017: available‑for‑sale financial assets).
Deferred tax not recognised
No deferred tax has been recognised in respect of the future tax benefit of certain expenses of the life assurance business carried forward. The deferred
tax asset not recognised in respect of these expenses is approximately £371 million (2017: £470 million), and these expenses can be carried forward
indefinitely. The unrecognised deferred tax asset has reduced in 2018, as the Group's utilisation estimate has improved over the year.
Deferred tax assets of approximately £78 million (2017: £76 million) have not been recognised in respect of £438 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 (2017: £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, £36 million (2017: £35 million) relates to losses that will expire if not used within 20 years, and £53 million
(2017: £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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
226 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 37: Other provisions
At 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
Balance at 1 January 2018
Exchange and other adjustments
Provisions applied
Charge for the year
At 31 December 2018
Provisions for
financial
commitments
and guarantees
£m
30
243
273
(7)
–
(73)
193
Payment
protection
insurance
£m
2,778
Other
regulatory
provisions
£m
1,292
Vacant
leasehold
property
£m
56
100
(2,104)
750
1,524
1
(1,032)
600
861
–
(44)
50
62
Other
£m
1,390
41
(619)
95
907
Total
£m
5,546
243
5,789
135
(3,799)
1,422
3,547
Provisions for financial commitments and guarantees
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. See also note 20.
Payment protection insurance (excluding MBNA)
The Group increased the provision for PPI costs by a further £750 million in the year ended 31 December 2018, bringing the total amount provided to
£19,425 million.
The charge in 2018 related to a number of factors including higher expected complaint volumes, which increased to 13,000 per week, and associated
administration costs, an increase in average redress per complaint, additional operational costs to deal with potential complaint volatility and continued
improvements in data interrogation and the Group’s ability to identify valid complaints. The remaining provision is consistent with an average of
approximately 13,000 complaints per week to the industry deadline of the end of August 2019.
At 31 December 2018, a provision of £1,329 million remained unutilised relating to complaints and associated administration costs. Total cash payments
were £1,859 million during the year ended 31 December 2018.
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
including with respect to future complaint 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 also uncertainty around the impact of the regulatory changes, Financial Conduct Authority media
campaign and Claims Management Company and customer activity, and potential additional remediation arising from the continuous improvement of the
Group’s operational practices.
For every additional 1,000 reactive complaints per week above 13,000 on average from January 2019 through to the industry deadline of the end of
August 2019, the Group would expect an additional charge of approximately £85 million.
Payment protection insurance (MBNA)
As announced in December 2016, the Group’s exposure is capped at £240 million, which is already provided for through an indemnity received from
Bank of America. MBNA increased its PPI provision by £100 million in the year ended 31 December 2018 but the Group’s exposure continues to remain
capped at £240 million under the arrangement with Bank of America, notwithstanding this increase by MBNA.
Lloyds Banking Group Annual Report and Accounts 2018 227
Note 37 Other provisions continued
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 2018 the Group charged a further £600 million in respect of legal actions and other regulatory matters, and the unutilised balance at
31 December 2018 was £861 million (31 December 2017: £1,292 million). The most significant items are as follows.
Arrears handling related activities
The Group has provided an additional £151 million in the year ended 31 December 2018 for the costs of identifying and rectifying certain arrears
management fees and activities, taking the total provided to date to £793 million. The Group has put in place a number of actions to improve its handling
of customers in these areas and has made good progress in reimbursing arrears fees to impacted customers.
Packaged bank accounts
The Group has provided a further £45 million in the year ended 31 December 2018 (£245 million was provided in the year ended 31 December 2017) in
respect of complaints relating to alleged mis‑selling of packaged bank accounts, raising the total amount provided to £795 million. A number of risks and
uncertainties remain particularly 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), with smaller numbers received from customers in Austria and Italy. The industry‑wide issue regarding notification of
contractual ‘cooling off’ periods continued to lead to an increasing number of claims in 2016 and 2017 levelling out in 2018. Up to 31 December 2017 the
Group had provided a total of £639 million, with no further amounts provided during the year ended 31 December 2018. 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 has now completed its compensation assessment for all 71 business customers within the customer review, with more than 96 per cent of these
offers accepted. In total, more than £96 million has been offered of which £78 million has been accepted, in addition to £9 million for ex‑gratia payments
and £5 million for the reimbursements of legal fees.
The 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 a further £15 million in the year ended 31 December 2018 for customer settlements, raising the total amount provided to £115 million
and is now nearing the end of the process of paying compensation to the victims of the fraud, including ex‑gratia payments and re‑imbursements of
legal fees.
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 three 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, the Group raised a provision of £665 million in relation to various ongoing commitments; £168 million of this
provision remained unutilised at 31 December 2018.
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 2018 provisions of £191 million (31 December 2017: £104 million) were held.
The Group carries provisions of £122 million (2017: £136 million) for indemnities and other matters relating to legacy business disposals in prior years.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
228 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 38: Subordinated liabilities
The movement in subordinated liabilities during the year was as follows:
At 1 January 2017
Repurchases and redemptions during the year1
Foreign exchange movements
Other movements (all non‑cash)
At 31 December 2017
Issued during the year1
Repurchases and redemptions during the year1
Foreign exchange movements
Other movements (all non‑cash)
At 31 December 2018
1 The repurchases and redemptions resulted in cash outflows of £2,256 million (2017: £1,008 million) .
Issued during 2018
Dated subordinated liabilities
1.75% Subordinated Fixed Rate Notes 2028 callable 2023
4.344% Subordinated Fixed Rate Notes callable 2048
Repurchases and redemptions during 2018
Preferred securities
6.461% Guaranteed Non‑voting Non‑cumulative Perpetual Preferred Securities
Undated Perpetual Preferred Securities
Dated subordinated liabilities
10.5% Subordinated Bonds callable 2018
6.75% Subordinated Fixed Rate Notes callable 2018
Repurchases and redemptions during 2017
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
Preference
shares
£m
864
–
(43)
(8)
813
–
–
18
(28)
803
Preferred
securities
£m
4,134
(237)
(221)
14
3,690
–
(614)
131
(2)
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
599
–
(34)
–
565
–
–
20
3
14,234
(771)
(487)
(122)
12,854
1,729
(1,642)
377
(258)
Total
£m
19,831
(1,008)
(785)
(116)
17,922
1,729
(2,256)
546
(285)
3,205
588
13,060
17,656
£m
664
1,065
1,729
£m
600
14
614
£m
150
1,492
1,642
£m
163
74
237
£m
771
771
There were no repurchases of preference shares or undated subordinated liabilities during 2017 or 2018.
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 Group has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during 2018
(2017: none).
Lloyds Banking Group Annual Report and Accounts 2018 229
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
2018
Number of shares
2017
Number of shares
2016
Number of shares
2018
£m
2017
£m
2016
£m
Ordinary shares of 10p
(formerly 25p) each
At 1 January
71,972,949,589
71,373,735,357
71,373,735,357
Issued under employee share schemes
768,551,098
518,293,181
Share buyback programme (note 41)
(1,577,908,423)
–
Redesignation of limited voting ordinary
shares (see below)
–
80,921,051
–
–
–
At 31 December
71,163,592,264
71,972,949,589
71,373,735,357
Limited voting ordinary shares
of 10p (formerly 25p) each
At 1 January
Redesignation to ordinary shares
(see below)
At 31 December
Total issued share capital
–
–
–
80,921,051
80,921,051
(80,921,051)
–
–
80,921,051
7,197
77
(158)
–
7,116
–
–
–
7,138
7,138
51
–
8
–
–
–
7,197
7,138
8
(8)
–
8
–
8
7,116
7,197
7,146
Share issuances
In 2018, 769 million shares (2017: 518 million shares) were issued in respect of employee share schemes; no shares were issued in 2016.
(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 80.
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 24 May 2018. 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 2018, 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 2018 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 accounting standards and which are included in
note 38.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
230 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 40: Share premium account
At 1 January
Issued under employee share schemes
Redemption of preference shares1
At 31 December
2018
£m
2017
£m
2016
£m
17,634
17,622
17,412
85
–
12
–
–
210
17,719
17,634
17,622
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.
Note 41: Other reserves
Other reserves comprise:
Merger reserve
Capital redemption reserve
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
Revaluation reserve in respect of available‑for‑sale financial assets
Cash flow hedging reserve
Foreign currency translation reserve
At 31 December
2018
£m
2017
£m
2016
£m
7,766
4,273
279
5
1,051
(164)
7,766
4,115
7,766
4,115
685
1,405
(156)
759
2,136
(124)
13,210
13,815
14,652
The merger reserve primarily comprises the premium on shares issued in January 2009 as part of the recapitalisation of the Group and 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 reserves in respect of debt securities and equity shares held at fair value through other comprehensive income represent the cumulative
after tax unrealised change in the fair value of financial assets so classified since initial recognition; or in the case of financial assets obtained on acquisitions
of businesses, since the date of acquisition.
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
Capital redemption reserve
At 1 January
Shares cancelled under share buyback programme (see below)
At 31 December
2018
£m
2017
£m
7,766
–
7,766
7,766
–
7,766
2016
£m
7,976
(210)
7,766
2018
£m
2017
£m
2016
£m
4,115
158
4,273
4,115
–
4,115
4,115
–
4,115
On 8 March 2018 the Group announced the launch of a share buyback programme to repurchase up to £1 billion of its outstanding ordinary shares;
the programme ended on 24 August 2018. The Group entered into an agreement with UBS AG, London Branch (UBS) to conduct the share buyback
programme on its behalf and to make trading decisions under the programme independently of the Group. UBS purchased the Group’s ordinary shares
as principal and sold them to the Group in accordance with the terms of their engagement. The Group cancelled the shares that it purchased through the
programme.
The Group bought back and cancelled 1,578 million shares under the programme, for a total consideration, including expenses, of £1,005 million.
Upon cancellation, £158 million being the nominal value of the shares repurchased was transferred to the capital redemption reserve.
Lloyds Banking Group Annual Report and Accounts 2018 231
Note 41: Other reserves continued
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
At 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
At 1 January 2018
Change in fair value
Deferred tax
Current tax
Income statement transfers:
Disposals (note 9)
Deferred tax
Current tax
At 31 December 2018
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
At 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
At 1 January 2018
Change in fair value
Deferred tax
Current tax
Realised gains and losses transferred to retained profits
Deferred tax
Current tax
At 31 December 2018
2018
£m
472
472
(37)
35
–
(2)
(275)
84
–
(191)
279
2018
£m
(49)
(49)
(97)
22
–
(75)
151
(22)
–
129
5
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
232 Lloyds Banking Group Annual Report and Accounts 2018
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
2018
£m
1,405
2,136
234
(69)
165
(701)
182
(519)
1,051
2018
£m
(156)
(8)
–
(164)
(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)
Lloyds Banking Group Annual Report and Accounts 2018 233
Note 42: Retained profits
At 31 December 2017
Adjustment on adoption of IFRS 9 and IFRS 15 (note 54)
At 1 January
Profit for the year
Dividends paid1
Issue costs of other equity instruments (net of tax) (note 43)
Distributions on other equity instruments (net of tax)
Share buyback programme (note 41)
Realised gains and losses on equity shares held at fair value through other comprehensive income
Post‑retirement defined benefit scheme remeasurements
Share of other comprehensive income of associates and joint ventures
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
2018
£m
4,905
(929)
3,976
4,302
(2,240)
(5)
(327)
(1,005)
(129)
120
8
389
40
53
207
5,389
2017
£m
2016
£m
3,600
3,457
(2,284)
–
(313)
–
482
–
(40)
(411)
82
332
4,905
4,416
2,413
(2,014)
–
(321)
–
(1,028)
–
–
(175)
141
168
3,600
1 In 2017 and 2016, 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 (2018: £nil).
Retained profits are stated after deducting £499 million (2017: £611 million; 2016: £495 million) representing 909 million (2017: £861 million;
2016: £730 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 140.
Note 43: Other equity instruments
At 1 January
Issued in the year:
US dollar notes ($1,500 million nominal)
At 31 December
2018
£m
5,355
1,136
6,491
2017
£m
5,355
–
5,355
2016
£m
5,355
–
5,355
During the year ended 31 December 2018 the Group issued £1,136 million (US$1,500 million) of Additional Tier 1 (AT1) securities; issue costs of £5 million,
net of tax, have been charged to retained profits.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
234 Lloyds Banking Group Annual Report and Accounts 2018
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 2.14 pence
per share (2017: 2.05 pence per share; 2016: 1.7 pence per share) representing a total dividend of £1,523 million (2017: £1,475 million; 2016: £1,212 million),
which will be paid on 21 May 2019. At 31 December 2016 the directors also recommended a special dividend of 0.5 pence per share representing a total
dividend of £356 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
2018
pence
per share
2017
pence
per share
2016
pence
per share
2018
£m
2017
£m
2016
£m
2.05
–
1.07
3.12
1.70
0.50
1.00
3.20
1.50
0.50
0.85
2.85
1,475
–
765
2,240
1,212
356
720
2,288
1,070
357
607
2,034
The cash cost of the dividends paid in the year was £2,240 million (2017: £2,284 million; 2016: £2,014 million), in 2017 and 2016 this was net of a credit in
respect of unclaimed dividends written‑back in accordance with the Company's Articles of Association.
In addition, the Group intends to implement a share buyback of up to £1.75 billion (2017: £1 billion) which will commence in March 2019 and is expected to
be completed by 31 December 2019.
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 2018: 5,538,164 shares, 31 December 2017: 12,414,401 shares, waived rights to all dividends), the HBOS Share Incentive Plan Trust (holding
at 31 December 2018: 445,625 shares, 31 December 2017: 445,625 shares, waived rights to all dividends), the Lloyds Banking Group Employee Share
Ownership Trust (holding at 31 December 2018: 5,679,119 shares, 31 December 2017: 13,346,132 shares, on which it waived rights to all dividends)
and Lloyds Group Holdings (Jersey) Limited (holding at 31 December 2018: 42,846 shares, 31 December 2017: 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
2018
£m
325
14
71
85
16
17
33
443
2017
£m
313
17
81
98
17
9
26
437
2016
£m
266
16
138
154
15
7
22
442
During the year ended 31 December 2018 the Group operated the following share‑based payment schemes, all of which are equity settled.
Group Performance Share plan
The Group operates a Group Performance Share plan that is equity settled. Bonuses in respect of employee performance in 2018 have been recognised in
the charge in line with the proportion of the deferral period completed.
Lloyds Banking Group Annual Report and Accounts 2018 235
Note 45: Share-based payments continued
Save-As-You-Earn schemes
Eligible employees may enter into contracts through the Save‑As‑You‑Earn (SAYE) 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
2018
2017
Number of
options
860,867,088
188,866,162
(135,721,404)
(22,909,999)
(78,073,042)
(10,033,887)
802,994,918
68,378
Weighted
average
exercise price
(pence)
51.34
47.92
59.00
49.85
50.66
55.20
49.30
60.02
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
–
The weighted average share price at the time that the options were exercised during 2018 was £0.67 (2017: £0.67). The weighted average remaining
contractual life of options outstanding at the end of the year was 2.16 years (2017: 1.4 years).
The weighted average fair value of SAYE options granted during 2018 was £0.13 (2017: £0.15). 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 (to compensate new recruits for any lost share awards), and also to make grants to key individuals for retention
purposes. In some instances, grants may be made subject to individual performance conditions.
Participants are not entitled to any dividends paid during the vesting period.
Outstanding at 1 January
Granted
Exercised
Vested
Forfeited
Lapsed
Outstanding at 31 December
Exercisable at 31 December
2018
2017
Number of
options
14,523,989
3,914,599
(6,854,043)
(148,109)
(662,985)
(510,423)
10,263,028
3,305,442
Weighted
average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
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
The weighted average fair value of options granted in the year was £0.55 (2017: £0.62). 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 2018 was £0.65 (2017: £0.69).
The weighted average remaining contractual life of options outstanding at the end of the year was 5.2 years (2017: 4.9 years).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
236 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 45: Share-based payments continued
Other share plans
Lloyds Banking Group Executive Share Ownership Plan
The plan, 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 2016 and 2017 plan 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 2015 grant, the targets had not been fully met and therefore these awards vested in 2018 at a rate
of 66.3 per cent.
Outstanding at 1 January
Granted
Vested
Forfeited
Dividend award
Outstanding at 31 December
2018
Number of
shares
2017
Number of
shares
370,804,915
358,228,028
160,586,201
139,812,788
(73,270,301)
(57,406,864)
(48,108,870)
(73,268,966)
7,373,691
3,439,929
417,385,636
370,804,915
Awards in respect of the 2016 grant vested in 2019 at a rate of 68.7 per cent.
The weighted average fair value of awards granted in the year was £0.48 (2017: £0.57).
The fair value calculations at 31 December 2018 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
0.96%
Executive
Share Plan
2003
0.74%
LTIP
0.94%
3.3 years
1.3 years
3.7 years
28%
4.0%
£0.59
£0.48
21%
4.0%
£0.58
Nil
29%
4.0%
£0.67
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 2018, the Group made an award of £200 (2017: £200) of shares to all eligible employees. The number of shares awarded was 21,513,300
(2017: 21,566,047), with an average fair value of £0.67 (2017: £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 2018 was 34,174,161 (2017: 32,025,497), with an average fair value of £0.63 (2017: £0.67),
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 2018 was 8,965,562 (2017: 9,313,314).
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 2018 237
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
2018
£m
2017
£m
2016
£m
14
–
18
32
13
–
22
35
17
–
23
40
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £nil million (2017: £0.05 million;
2016: £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
2018
million
2017
million
2016
million
1
–
(1)
–
3
–
(2)
1
9
3
(9)
3
2018
million
2017
million
2016
million
82
39
(37)
84
65
37
(20)
82
82
29
(46)
65
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
2018
£m
2017
£m
2016
£m
2
1
(1)
2
4
1
(3)
2
5
3
(4)
4
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 6.70 per cent
and 24.20 per cent in 2018 (2017: 6.45 per cent and 23.95 per cent; 2016: 2.49 per cent and 23.95 per cent).
No provisions have been recognised in respect of loans given to key management personnel (2017 and 2016: £nil).
Deposits
At 1 January
Placed (includes deposits of appointed key management personnel)
Withdrawn (includes deposits of former key management personnel)
At 31 December
2018
£m
20
33
(33)
20
2017
£m
12
41
(33)
20
2016
£m
13
41
(42)
12
Deposits placed by key management personnel attracted interest rates of up to 3.5 per cent (2017: 4.0 per cent; 2016: 4.0 per cent).
At 31 December 2018, the Group did not provide any guarantees in respect of key management personnel (2017 and 2016: none).
At 31 December 2018, 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 £0.5 million with 3 directors and 3 connected persons (2017: £0.01 million
with three directors and two connected persons; 2016: £0.4 million with five directors and two connected persons).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
238 Lloyds Banking Group Annual Report and Accounts 2018
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 289 to 295. 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 2018, customer deposits of
£225 million (2017: £337 million) and investment and insurance contract liabilities of £79 million (2017: £307 million) related to the Group’s pension funds.
Collective investment vehicles
The Group manages 131 (2017: 134) collective investment vehicles, such as Open Ended Investment Companies (OEICs) and of these 82 (2017: 83)
are consolidated. The Group invested £620 million (2017: £418 million) and redeemed £404 million (2017: £616 million) in the unconsolidated collective
investment vehicles during the year and had investments, at fair value, of £2,513 million (2017: £2,328 million) at 31 December. The Group earned fees of
£128 million from the unconsolidated collective investment vehicles during 2018 (2017: £133 million).
Joint ventures and associates
At 31 December 2018 there were loans and advances to customers of £57 million (2017: £123 million) outstanding and balances within customer deposits
of £2 million (2017: £9 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 2018, these companies had total assets of approximately £4,091 million (2017: £4,661 million), total liabilities
of approximately £4,616 million (2017: £5,228 million) and for the year ended 31 December 2018 had turnover of approximately £4,522 million
(2017: £4,601 million) and made a loss of approximately £125 million (2017: net loss of £87 million). In addition, the Group has provided £1,141 million
(2017: £1,226 million) of financing to these companies on which it received £49 million (2017: £81 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/licensee 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 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, have been dismissed by the US Federal Court for Southern District of New York (subject to appeals).
Certain Group companies are also named as defendants in (i) UK based claims; and (ii) in 2 Dutch class actions, 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 concluded on 5 March 2018 with judgment to follow. It is currently not possible to determine the ultimate impact on the Group (if any).
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 £770 million
(including interest) and a reduction in the Group’s deferred tax asset of approximately £250 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.
Lloyds Banking Group Annual Report and Accounts 2018 239
Note 47: Contingent liabilities and commitments continued
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
has been 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 implementing the Guidance and has now contacted nearly all affected customers with any remaining
customers anticipated to be contacted by the end of March 2019.
Mortgage arrears handling activities – FCA investigation
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 the Group continues to cooperate with the FCA. It is not currently possible to make
a reliable assessment of any liability that may result from the investigation including any financial penalty or public censure.
HBOS Reading – FCA investigation
On 7 April 2017 the FCA announced that it had resumed its investigation into the events surrounding the discovery of misconduct within the
Reading‑based Impaired Assets team of HBOS. The investigation is ongoing and the Group continues to cooperate with the FCA. It is not currently
possible to make a reliable assessment of any liability that may result from the investigation including any financial penalty or public censure.
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
2018
£m
194
632
2,425
3,057
3,251
2017
£m
71
740
2,300
3,040
3,111
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 and guarantees
Documentary credits and other short‑term trade‑related transactions
Forward asset purchases and forward deposits placed
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year original maturity:
Mortgage offers made
Other commitments and guarantees
1 year or over original maturity
Total commitments and guarantees
2018
£m
1
731
2017
£m
–
384
11,594
85,060
96,654
37,712
135,098
11,156
85,015
96,171
39,074
135,629
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £64,884 million
(2017: £65,946 million) was irrevocable.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
240 Lloyds Banking Group Annual Report and Accounts 2018
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
2018
£m
259
807
977
2017
£m
275
845
934
2,043
2,054
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 2018 amounted
to £378 million (2017: £444 million). Of this amount, £369 million (2017: £440 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: 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 30 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 30, 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
2018 was £5,122 million (2017: £6,049 million), comprising £5,012 million of loans and advances (2017: £5,939 million) and £110 million of debt securities
(2017: £110 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 2018 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 2018, the total carrying value of these consolidated collective investment vehicle assets and liabilities held by the
Group was £62,648 million (2017: £68,124 million).
The Group has no contractual arrangements (such as liquidity facilities) that would require it to provide financial or other support to the consolidated
collective investment vehicles; the Group has not previously provided such support and has no current intentions to provide such support.
(C) Unconsolidated collective investment vehicles and limited partnerships
The Group’s direct interests in unconsolidated structured entities comprise investments in collective investment vehicles, such as Open‑Ended Investment
Companies, and limited partnerships with a total carrying value of £26,028 million at 31 December 2018 (2017: £28,759 million), included within financial
assets designated at fair value through profit and loss (see note 16). These investments include both those entities managed by third parties and those
managed by the Group. At 31 December 2018, the total asset value of these unconsolidated structured entities, including the portion in which the Group
has no interest, was £2,435 billion (2017: £2,338 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 2018, are reported in note 6.
Lloyds Banking Group Annual Report and Accounts 2018 241
Note 49: Financial instruments
(1) Measurement basis of financial assets and liabilities
The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and expenses, including fair value
gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance sheet
heading.
Mandatorily held at fair value
through profit or loss
Derivatives
designated
as hedging
instruments
£m
Held for
trading
£m
Other
£m
Designated at
fair value
through profit
or loss
£m
At fair value
through other
comprehensive
income
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
At 31 December 2018
Financial assets
Cash and balances at central banks
Items in the course of collection from
banks
Financial assets at fair value through profit
or loss
–
–
–
Derivative financial instruments
1,563
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Financial assets at fair value through other
comprehensive income
–
–
–
–
–
–
–
35,246
22,032
–
–
–
–
–
–
–
123,283
–
–
–
–
–
–
1,563
57,278
123,283
Derivative financial instruments
1,108
Total financial assets
Financial liabilities
Deposits from banks
Customer deposits
Items in course of transmission to banks
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
–
–
–
–
–
–
–
–
–
–
–
–
–
23,451
20,265
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,096
–
–
–
–
–
–
–
7,096
–
–
–
–
–
–
–
–
54,663
647
–
–
6,283
484,858
5,238
496,379
24,815
24,815
–
551,689
30,320
418,066
636
–
–
1,104
91,168
–
–
–
17,656
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
54,663
647
158,529
23,595
6,283
484,858
5,238
496,379
24,815
758,628
30,320
418,066
636
30,547
21,373
1,104
91,168
98,874
98,874
13,853
13,853
382
–
382
17,656
1,108
43,716
558,950
113,109
723,979
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
242 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 49: Financial instruments continued
At 31 December 2017
Financial assets
Cash and balances at central banks
Items in the course of collection from banks
Financial assets at fair value through profit or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Available‑for‑sale financial assets
Total financial assets
Financial liabilities
Deposits from banks
Customer deposits
Items in course of transmission to banks
Financial liabilities at fair value through profit or loss
Derivative financial instruments
Notes in circulation
Debt securities in issue
Liabilities arising from insurance contracts
and participating investment contracts
Liabilities arising from non‑participating investment
contracts
Unallocated surplus within insurance businesses
Subordinated liabilities
Total financial liabilities
Derivatives
designated
as hedging
instruments
£m
At fair value
through profit or loss
Held for
trading
£m
Other
£m
Available‑
for‑sale
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
–
–
–
1,881
–
–
–
–
–
–
–
42,236
23,953
–
–
–
–
–
–
–
120,642
–
–
–
–
–
–
1,881
66,189
120,642
–
–
–
–
–
–
–
–
42,098
42,098
–
–
–
–
1,613
–
–
–
43,062
24,511
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,815
–
–
–
–
–
–
–
1,613
67,573
7,815
–
–
–
–
–
–
–
–
–
–
–
–
58,521
755
–
–
6,611
472,498
3,643
482,752
–
542,028
29,804
418,124
584
–
–
1,313
72,450
–
–
–
17,922
540,197
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
390
–
119,250
15,447
390
17,922
736,448
(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.
Lloyds Banking Group Annual Report and Accounts 2018 243
Note 49: 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
244 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 49: Financial instruments continued
(3) Financial assets and liabilities carried at fair value
(A) Financial assets, excluding derivatives
Valuation hierarchy
At 31 December 2018, the Group’s financial assets carried at fair value, excluding derivatives, totalled £183,344 million (31 December 2017: £204,976 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 243). 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 2018
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
Treasury and other bills
Equity shares
Total financial assets at fair value through profit or loss
Financial assets at fair value through other comprehensive income
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
Treasury and other bills
Equity shares
Total financial assets at fair value through other comprehensive income
Total financial assets carried at fair value, excluding derivatives
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
–
27,285
3,026
17,926
–
84
–
–
–
18,010
20
75,701
93,731
18,847
–
–
–
32
18,879
303
–
19,182
112,913
169
2,064
1,021
219
231
16,840
20,544
–
26
50,881
124
118
–
5
5,119
5,366
–
–
5,366
56,247
10,565
–
–
–
–
6
118
1,470
1,594
–
1,758
13,917
37,850
3,026
18,095
2,064
1,105
225
349
18,310
40,148
20
77,485
158,529
–
–
18,971
118
120
126
–
246
–
21
267
120
131
5,151
24,491
303
21
24,815
14,184
183,344
Note 49: Financial instruments continued
At 31 December 2017
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
Treasury and other bills
Equity shares
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
Lloyds Banking Group Annual Report and Accounts 2018 245
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
–
20,268
–
–
3
5
–
20,276
18
84,694
104,988
34,534
–
–
–
229
34,763
555
35,318
140,306
29,976
1,614
1,729
1,526
222
348
229
18,542
22,596
–
18
54,204
174
167
1,156
163
4,386
6,046
38
6,084
60,288
–
–
23
1
–
49
787
1,448
2,308
–
1,378
3,686
–
–
–
92
–
92
604
696
29,976
1,614
22,020
1,527
222
400
1,021
19,990
45,180
18
86,090
162,878
34,708
167
1,156
255
4,615
40,901
1,197
42,098
4,382
204,976
Movements in Level 3 portfolio
The table below analyses movements in level 3 financial assets, excluding derivatives, carried at fair value (recurring measurement).
2018
2017
At 31 December 2017
Adjustment on adoption of IFRS 9 (note 54)
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 financial assets at fair
value through other comprehensive income
(2017: available‑for‑sale financial assets)
Purchases/increases to customer loans
Sales
Transfers into the level 3 portfolio
Transfers out of the level 3 portfolio
At 31 December
Gains (losses) recognised in the income
statement, within other income, relating to the
change in fair value of those assets held at
31 December
Financial
assets at fair
value through
profit or loss
£m
At fair value
through other
comprehensive
income
£m
3,686
10,466
14,152
87
439
–
2,480
(3,593)
815
(463)
13,917
302
302
(2)
–
(4)
2
(95)
348
(284)
267
Available-
for-sale
£m
696
(696)
Total level 3
assets carried
at fair value,
excluding
derivatives
(recurring basis)
£m
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
4,382
10,072
14,454
85
439
(4)
2,482
(3,688)
1,163
(747)
14,184
3,806
(1)
202
–
774
(1,005)
152
(242)
3,686
894
(24)
–
(117)
41
(61)
2
(39)
696
4,700
(25)
202
(117)
815
(1,066)
154
(281)
4,382
(104)
–
(104)
125
–
125
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
246 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 49: 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 2018, the Group’s financial liabilities carried at fair value, excluding derivatives, comprised its financial liabilities at fair value through
profit or loss and totalled £30,547 million (31 December 2017: £50,877 million). The table below analyses these financial liabilities by balance sheet
classification and valuation methodology (level 1, 2 or 3, as described on page 243). 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 2018
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 2017
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
–
–
–
1,464
1,464
1,464
3
–
–
1,106
1,106
1,109
7,085
11
7,096
21,595
242
150
21,987
29,072
7,812
41,378
381
197
41,956
49,768
–
–
–
–
11
–
–
–
–
–
–
21,595
242
1,614
23,451
30,547
7,815
41,378
381
1,303
43,062
50,877
Lloyds Banking Group Annual Report and Accounts 2018 247
Note 49: Financial instruments continued
The table below analyses movements in the level 3 financial liabilities portfolio, excluding derivatives.
At 1 January
Losses (gains) recognised in the income statement within other income
Redemptions
Transfers into the level 3 portfolio
Transfers out of the level 3 portfolio
At 31 December
Gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities held
at 31 December
2018
£m
–
–
–
11
–
11
–
2017
£m
2
(2)
–
–
–
–
–
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 and the resulting gain or
loss is recognised in other comprehensive income.
At 31 December 2018, the own credit adjustment arising from the fair valuation of £7,085 million (2017: £7,812 million) of the Group’s debt securities
in issue designated at fair value through profit or loss resulted in a gain of £533 million (2017: loss of £55 million), before tax, recognised in other
comprehensive income.
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 2018, such assets totalled £23,595 million (31 December
2017: £25,834 million) and liabilities totalled £21,373 million (31 December 2017: £26,124 million). The table below analyses these derivative balances by
valuation methodology (level 1, 2 or 3, as described on page 243). 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
93
(132)
2018
Level 2
£m
22,575
(20,525)
Level 3
£m
927
(716)
Total
£m
23,595
(21,373)
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)
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
248 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 49: 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
Transfers into the level 3 portfolio
Transfers out of the level 3 portfolio
At 31 December
Gains (losses) recognised in the income statement, within other income, relating to the
change in fair value of those assets or liabilities held at 31 December
2018
2017
Derivative
assets
£m
1,056
7
(84)
–
(52)
–
–
Derivative
liabilities
£m
(804)
(5)
49
(68)
112
–
–
Derivative
assets
£m
1,399
24
(208)
103
(79)
33
(216)
927
(716)
1,056
(424)
82
(208)
Derivative
liabilities
£m
(960)
(20)
215
(18)
53
(74)
–
(804)
213
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 2017 and 2018:
At 1 January
Income statement charge (credit)
Transfers
At 31 December
Represented by:
Credit Valuation Adjustment
Debit Valuation Adjustment
Funding Valuation Adjustment
2018
£m
521
47
(6)
562
2018
£m
409
(79)
232
562
2017
£m
744
(260)
37
521
2017
£m
408
(37)
150
521
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
£89 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 2018).
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.
Lloyds Banking Group Annual Report and Accounts 2018 249
Note 49: Financial instruments continued
A one per cent rise in the CDS spread would lead to an increase in the DVA of £67 million to £146 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 £108 million fall in the overall valuation adjustment to £222 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 £23 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 2018, the Group’s derivative trading business held mid to bid‑offer valuation adjustments of £80 million (2017: £74 million).
(D) Sensitivity of level 3 valuations
Valuation techniques
Significant unobservable
inputs1
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
At 31 December 2018
At 31 December 2017
Effect of reasonably possible
alternative assumptions2
Effect of reasonably possible
alternative assumptions2
10,565
380
(371)
–
11
1,879
(21)
(55)
(57)
50
92
54
48
Financial assets at fair value
through profit or loss
Loans and advances to
customers
Discounted
cash flows
Debt securities
Equity and venture
capital investments
Discounted
cash flows
Market approach
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
Gross interest rates,
inferred spreads (bps)
97bps/208bps
Credit spreads (bps)
(1bps/2bps)
Earnings multiple
(0.9/14.6)
n/a
n/a
Financial assets at fair value through other
comprehensive income/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
n/a
n/a
Derivative financial assets
Interest rate
derivatives
Option pricing
model
Interest rate volatility
(19%/80%)
Level 3 financial assets carried at fair value
Financial liabilities at fair value through
profit or loss
Derivative financial liabilities
Interest rate
derivatives
Option pricing
model
Interest rate volatility
(19%/80%)
Level 3 financial liabilities carried at fair value
274
1,657
523
898
13,917
246
21
267
927
927
15,111
11
716
716
727
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.
2
(45)
3
2
7
–
–
(5)
(2)
(5)
–
–
1,746
3,686
92
604
696
1,056
1,056
5,438
–
804
804
804
–
–
65
5
26
–
83
–
–
(65)
(5)
(76)
(4)
(42)
11
(3)
–
–
–
–
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
250 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 49: Financial instruments continued
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows:
– Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives depends
on the behaviour of those underlying references through time.
– Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality;
higher spreads lead to a lower fair value.
– Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of possible outcomes.
– Earnings multiples are used to value certain unlisted equity investments; a higher earnings multiple will result in a higher fair value.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group’s level 3 instruments often involve the use of two or more inputs whose relationship is interdependent.
The calculation of the effect of reasonably possible alternative assumptions included in the table above reflects such relationships.
Debt securities
Reasonably possible alternative assumptions have been determined in respect of the Group’s structured credit investment by flexing credit spreads.
Derivatives
Reasonably possible alternative assumptions have been determined in respect of swaptions in the Group’s derivative portfolios which are
priced using industry standard option pricing models. Such models require interest rate volatilities which may be unobservable at longer
maturities. To derive reasonably possible alternative valuations these volatilities have been flexed within a range of 19 per cent to 80 per cent
(2017: 9 per cent to 94 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 243). Financial assets carried at amortised cost 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 2018
Financial assets at amortised cost:
Loans and advances to customers: Stage 1
Loans and advances to customers: Stage 2
Loans and advances to customers: Stage 3
Loans and advances to customers: purchased
or originated credit‑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 2017
Financial assets at amortised cost:
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
441,006
440,542
24,351
4,188
25,516
3,289
15,313
15,313
484,858
484,660
6,283
5,238
6,286
5,244
40,483
40,483
461
461
467,670
4,828
472,498
6,611
3,643
16,832
771
467,276
4,809
472,085
6,564
3,586
16,832
771
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
40,483
400,059
–
–
–
25,516
3,289
15,313
40,483
444,177
461
5,233
40,483
461
16,832
–
16,832
771
3,571
16,832
771
5,825
11
–
–
450,444
4,809
455,253
5,793
15
–
–
Lloyds Banking Group Annual Report and Accounts 2018 251
Note 49: 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 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 243).
At 31 December 2018
Deposits from banks
Customer deposits
Debt securities in issue
Subordinated liabilities
Repos included in above amounts:
Deposits from banks
Customer deposits
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
Valuation methodology
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Valuation hierarchy
30,320
30,322
418,066
418,450
91,168
17,656
21,170
1,818
29,804
418,124
72,450
17,922
23,175
2,638
93,233
19,564
21,170
1,818
29,798
418,441
75,756
21,398
23,175
2,638
–
–
–
–
–
–
–
–
–
–
–
–
30,322
412,283
93,233
19,564
21,170
1,818
29,798
411,591
75,756
21,398
23,175
2,638
–
6,167
–
–
–
–
–
6,850
–
–
–
–
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
252 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 49: Financial instruments continued
(5) Reclassifications of financial assets
Other than the reclassifications on adoption of IFRS 9 on 1 January 2018 (note 54), there have been no reclassifications of financial assets in 2017 or 2018.
Note 50: Transfers of financial assets
There were no significant transferred financial assets which were derecognised in their entirety, but with ongoing exposure. Details of transferred financial
assets that continue to be recognised in full are as follows.
The Group enters into repurchase and securities lending transactions in the normal course of business that do not result in derecognition of the financial
assets covered as substantially all of the risks and rewards, including credit, interest rate, prepayment and other price risks are retained by the Group. In all
cases, the transferee has the right to sell or repledge the assets concerned.
As set out in note 30, included within financial assets measured at amortised cost 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
Financial assets at fair value through profit or loss
Financial assets at fair value through other comprehensive income
(2017: available‑for‑sale financial assets)
Securitisation programmes
Financial assets at amortised cost:
Loans and advances to customers1
2018
2017
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
6,815
961
9,946
3,257
7,279
5,337
19,359
16,753
41,674
5,479
35,475
3,660
1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £31,701 million (31 December 2017: £21,536 million) .
Lloyds Banking Group Annual Report and Accounts 2018 253
Note 51: Offsetting of financial assets and liabilities
The following information relates to financial assets and liabilities which have been offset in the balance sheet and those which have not been offset but for
which the Group has enforceable master netting agreements or collateral arrangements in place with counterparties.
At 31 December 2018
Financial assets
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
Financial assets at fair value through other
comprehensive income
Financial liabilities
Deposits from banks:
Excluding repos
Repos
Customer deposits:
Excluding repos
Repos
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
–
(622)
(622)
(6,039)
(2,676)
–
(2,676)
(978)
129,194
(27,735)
(28,713)
(15,642)
–
129,194
1,914
–
(461)
(461)
3,146
–
3,146
(1,319)
(3,241)
439,815
–
(1,319)
–
–
(40,483)
(43,724)
–
–
439,815
5,238
(5,361)
19,454
130,172
33,472
163,644
78,607
5,822
461
6,283
447,020
42,494
489,514
5,238
24,815
9,150
21,170
30,320
–
130,172
(5,115)
(5,115)
(55,012)
28,357
158,529
23,595
5,822
461
6,283
444,375
40,483
484,858
5,238
24,815
–
–
–
(2,645)
(2,011)
(4,656)
–
–
–
–
–
9,150
21,170
30,320
(5,291)
–
(5,291)
–
3,859
(21,170)
(21,170)
–
3,859
417,652
(1,404)
416,248
(1,370)
1,818
–
1,818
–
419,470
(1,404)
418,066
(1,370)
(3,241)
(1,818)
(5,059)
411,637
–
411,637
8,952
28,721
37,673
77,626
–
(7,126)
(7,126)
(56,253)
8,952
21,595
30,547
21,373
–
–
–
(3,995)
–
(21,595)
(21,595)
(17,313)
8,952
–
8,952
65
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
254 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 51: Offsetting of financial assets and liabilities continued
At 31 December 2017
Financial assets
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
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
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
417,009
2,638
419,647
9,499
48,670
58,169
73,352
–
(7,292)
(7,292)
(47,035)
–
–
–
131,288
31,590
162,878
25,834
5,840
771
6,611
(1,716)
455,666
–
16,832
(1,716)
472,498
–
–
–
–
–
3,643
42,098
6,629
23,175
29,804
(1,523)
415,486
–
2,638
(1,523)
418,124
–
(7,292)
(7,292)
(47,228)
9,499
41,378
50,877
26,124
–
–
–
(5,419)
(2,293)
(646)
(2,939)
(1,656)
–
(1,656)
–
–
(4,860)
–
(4,860)
(1,205)
–
(1,205)
–
–
–
(3,949)
(3,322)
(31,590)
(34,912)
(13,807)
–
(125)
(125)
(7,030)
(16,832)
(23,862)
–
(16,751)
–
(23,175)
(23,175)
(7,030)
(2,638)
(9,668)
–
(41,378)
(41,378)
(17,459)
127,966
–
127,966
6,608
3,547
–
3,547
446,980
–
446,980
3,643
25,347
1,769
–
1,769
407,251
–
407,251
9,499
–
9,499
4,716
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.
Lloyds Banking Group Annual Report and Accounts 2018 255
Note 52: Financial risk management
As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments
represent a significant component of the risks faced by the Group.
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign
exchange risk; liquidity risk; capital risk; and insurance risk. Information about the Group’s exposure to each of the above risks and capital can be found on
pages 105 to 159. 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
(A) 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’s risk management policy is to optimise reward whilst managing its market risk exposures within the risk appetite defined by the Board. 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. 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 the Group Asset and Liability Committee.
Further details on the Group market risk policy can be found on page 154.
The Group establishes hedge accounting relationships for interest rate risk using cash flow hedges and fair value hedges. The Group is exposed to cash
flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt. The derivatives used to manage the structural
hedge may be designated into cash flow hedges to manage income statement volatility. The economic items related to the structural hedge, for example
current accounts, are not suitable hedge items to be documented into accounting hedge relationships. 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. The Group applies netting between similar risks before applying hedge
accounting.
Hedge ineffectiveness arises during the management of interest rate risk due to residual unhedged risk. Sources of ineffectiveness, which the Group may
decide to not fully mitigate, can include basis differences, timing differences and notional amount differences. The effectiveness of accounting hedge
relationships is assessed between the hedging derivatives and the documented hedged item, which can differ to the underlying economically hedged
item.
At 31 December 2018 the aggregate notional principal of interest rate swaps designated as fair value hedges was £150,971 million (2017: £109,670 million)
with a net fair value asset of £760 million (2017: asset of £738 million) (note 17). The gains on the hedging instruments were £94 million (2017: losses of
£420 million). The losses on the hedged items attributable to the hedged risk were £32 million (2017: gains of £484 million). The gains and losses relating to
the fair value hedges are recorded in net trading income.
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 17
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 2018 was £556,945 million (2017: £549,099 million) with a net fair value liability of
£486 million (2017: liability of £456 million) (note 17). In 2018, ineffectiveness recognised in the income statement that arises from cash flow hedges was a
loss of £25 million (2017: loss of £21 million).
(B) 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 159. The Group also manages foreign currency risk via
cash flow hedge accounting, utilising currency swaps.
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 ceased all hedging of the currency translation risk of the net investment in foreign operations on 1 January 2018. At 31 December 2017 the
Group used foreign currency borrowings with an aggregate principal of £41 million to hedge currency translation risk. In 2017, an ineffectiveness loss of
£11 million before tax and £8 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:
(C) Functional currency of Group operations
Gross exposure
Net investment hedges
Total structural foreign currency exposures, after net
investment hedges
2018
2017
Euro
£m
112
–
112
US Dollar
£m
Other
non-sterling
£m
59
–
59
60
–
60
Euro
£m
73
(41)
32
US Dollar
£m
Other
non‑sterling
£m
374
–
374
32
–
32
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
256 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 52: Financial risk management continued
Credit risk
The Group’s credit risk exposure arises in respect of the instruments below and predominantly in the United Kingdom. Information about the Group’s
exposure to credit risk, credit risk management, measurement and mitigation can be found on pages 115 to 135.
(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.
Loans and advances to banks, net1
Loans and advances to customers, net1
Debt securities, net1
Financial assets at amortised cost
Financial assets at fair value through other comprehensive
income/available‑for‑sale financial assets3
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
Off‑balance sheet items:
Acceptances and endorsements
Other items serving as direct credit substitutes
Performance bonds and other transaction‑related
contingencies
Irrevocable commitments and guarantees
At 31 December 2018
At 31 December 2017
Maximum
exposure
£m
6,283
484,858
5,238
Offset2
£m
Net exposure
£m
–
6,283
(3,241)
481,617
–
5,238
Maximum
exposure
£m
6,611
472,498
3,643
Offset2
£m
Net exposure
£m
–
6,611
(7,030)
465,468
–
3,643
496,379
(3,241)
493,138
482,752
(7,030)
475,722
24,794
40,876
40,168
81,044
23,595
749
194
632
2,425
64,884
68,135
–
–
–
–
(14,327)
–
–
–
–
–
–
24,794
40,901
40,876
40,168
81,044
9,268
749
194
632
2,425
64,884
68,135
31,590
45,198
76,788
25,834
602
71
740
2,300
65,946
69,057
–
–
–
–
(13,049)
–
–
–
–
–
–
40,901
31,590
45,198
76,788
12,785
602
71
740
2,300
65,946
69,057
694,696
(17,568)
677,128
695,934
(20,079)
675,855
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.
Lloyds Banking Group Annual Report and Accounts 2018 257
Note 52: Financial risk management continued
(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 115.
At 31 December 2018 the most significant concentrations of exposure were in mortgages (comprising 61 per cent of total loans and advances to
customers) and to financial, business and other services (comprising 16 per cent of the total).
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
31 December
2018
£m
1 January
2018
£m
31 December
2017
£m
7,314
1,517
8,260
4,684
14,113
2,711
28,451
77,505
7,074
1,384
7,886
4,378
14,074
2,148
27,631
50,707
7,461
1,609
7,886
4,428
14,074
2,148
30,980
57,006
297,498
304,515
304,665
28,699
1,822
15,434
28,757
2,094
13,591
28,757
2,094
13,591
488,008
464,239
474,699
(3,150)
(3,223)
(2,201)
484,858
461,016
472,498
Following the reduction in the Group’s non‑UK activities, an analysis of credit risk exposures by geographical region has not been provided.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
258 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 52: Financial risk management continued
(C) Credit quality of assets
Loans and advances
The analysis of lending has been prepared based on the division in which the asset is held; with the business segment in which the exposure is recorded
reflected in the ratings system applied. The internal credit ratings systems used by the Group differ between Retail and Commercial, reflecting the
characteristics of these exposures and the way that they are managed internally; these credit ratings are set out below. All probabilities of default (PDs)
include forward‑looking information and are based on 12 month values, with the exception of credit impaired.
Good quality
Satisfactory quality
Lower quality
Below standard
Credit impaired
Gross carrying amount
At 31 December 2018
Stage 1
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 2
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 3
Credit‑impaired
Purchased or originated credit-impaired
Credit‑impaired
Total
Expected credit losses
Stage 1
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 2
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 3
Credit‑impaired
Purchased or originated credit-impaired
Credit‑impaired
Total
Retail
Corporate
Grade
1–6
7–9
10
11–13
14
IFRS 9 PD%
0.00–4.50
4.51–14.00
14.01–20.00
20.01–99.99
100.00
Grade
1–10
11–14
15–18
19
20–23
IFRS 9 PD%
0.00–0.50
0.51–3.00
3.01–20.00
20.01–99.99
100.00
Loans and
advances
to banks
£m
Loans and advances to customers
Retail –
mortgages
£m
Retail –
other
£m
Commercial
£m
Other
£m
Total
£m
6,177
105
–
–
257,740
57
–
–
44,314
2,562
72
415
65,089
25,472
1,441
–
44,369
411,512
–
–
–
28,091
1,513
415
6,282
257,797
47,363
92,002
44,369
441,531
3
–
–
–
3
–
–
10,784
1,709
262
899
13,654
2,737
1,158
285
907
5,087
100
3,450
2,988
54
6,592
1,393
997
3,296
6
6
–
–
12
55
13,627
6,323
3,535
1,860
25,345
5,741
15,391
–
–
–
15,391
6,285
288,235
53,447
101,890
44,436
488,008
2
–
–
–
2
–
–
–
–
–
–
–
2
37
–
–
–
37
141
34
9
42
226
118
78
459
279
65
4
4
352
89
100
40
207
436
32
50
11
–
93
1
86
231
7
325
366
1,058
–
1,154
–
1,476
43
–
–
–
43
1
6
–
–
7
11
–
61
391
115
15
4
525
232
226
280
256
994
1,553
78
3,150
Stage 3 assets include balances of approximately £250 million (with outstanding amounts due of approximately £2,200 million) which have been subject to
a partial write‑off and where the Group continues to enforce recovery action.
Stage 2 and Stage 3 assets with a carrying amount of approximately £1,000 million were modified during the year. No material gain or loss was recognised
by the Group.
Note 52: Financial risk management continued
Loan commitments and financial guarantees
At 31 December 2018
Stage 1
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 2
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 3
Credit‑impaired
Purchased or originated credit-impaired
Credit‑impaired
Total
Expected credit losses
Stage 1
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 2
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 3
Credit‑impaired
Total
Lloyds Banking Group Annual Report and Accounts 2018 259
Retail –
mortgages
£m
Retail –
other
£m
Commercial
£m
Other
£m
Total
£m
12,024
60,379
2
–
–
532
10
363
51,632
6,501
126
31
246
124,281
–
–
–
7,035
136
394
12,026
61,284
58,290
246
131,846
19
1
–
–
20
5
90
1,858
156
27
50
–
693
297
11
2,091
1,001
39
–
6
–
–
–
–
–
–
–
–
1,877
850
324
61
3,112
50
90
12,141
63,414
59,297
246
135,098
1
–
–
–
1
–
–
–
–
–
–
1
98
5
–
–
103
28
10
3
10
51
–
154
9
7
1
1
18
–
7
5
1
13
6
37
1
–
–
–
1
–
–
–
–
–
–
1
109
12
1
1
123
28
17
8
11
64
6
193
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
260 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 52: Financial risk management continued
Gross carrying amount
At 1 January 2018
Stage 1
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 2
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 3
Credit‑impaired
Purchased or originated credit-impaired
Credit‑impaired
Total
Expected credit losses
Stage 1
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 2
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 3
Credit‑impaired
Purchased or originated credit-impaired
Credit‑impaired
Total
Loans and
advances
to banks
£m
Loans and advances to customers
Retail –
mortgages
£m
Retail –
other
£m
Commercial
£m
Other
£m
Total
£m
4,245
251,663
–
–
–
44
–
–
40,951
3,203
127
276
64,207
25,577
557
–
17,276
–
–
–
374,097
28,824
684
276
4,245
251,707
44,557
90,341
17,276
403,881
2
–
–
–
2
–
–
4,247
1
–
–
–
1
–
–
–
–
–
–
–
1
17,599
1,359
290
861
20,109
2,711
1,377
299
823
5,210
210
4,470
2,616
469
7,765
67
4,094
–
–
4,161
20,587
11,300
3,205
2,153
37,245
1,232
873
2,714
321
5,140
17,973
291,021
–
–
–
50,640
100,820
21,758
17,973
464,239
30
–
–
–
30
169
24
7
36
236
86
32
384
276
104
9
5
394
92
123
42
147
404
313
35
60
6
–
101
1
134
183
64
382
957
–
1,111
–
1,440
72
–
–
–
72
16
110
–
–
126
90
–
288
413
164
15
5
597
278
391
232
247
1,148
1,446
32
3,223
Note 52: Financial risk management continued
Loan commitments and financial guarantees
At 1 January 2018
Stage 1
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 2
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 3
Credit‑impaired
Purchased or originated credit-impaired
Credit‑impaired
Total
Expected credit losses
Stage 1
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Stage 2
Good quality
Satisfactory quality
Lower quality
Below standard, but not credit‑impaired
Total
Lloyds Banking Group Annual Report and Accounts 2018 261
Retail –
mortgages
£m
Retail –
other
£m
Commercial
£m
Other
£m
Total
£m
11,690
60,305
–
–
–
801
26
7
53,335
5,463
226
–
287
–
–
–
125,617
6,264
252
7
11,690
61,139
59,024
287
132,140
50
–
–
–
50
–
113
11,853
1
–
–
–
1
–
–
–
–
–
1
1,908
221
32
45
59
577
347
76
2,206
1,059
61
–
–
–
–
–
–
–
–
–
–
2,017
798
379
121
3,315
61
113
63,406
60,083
287
135,629
91
19
2
1
113
37
15
4
20
76
189
11
19
1
–
31
–
28
14
8
50
81
2
–
–
–
2
–
–
–
–
–
2
105
38
3
1
147
37
43
18
28
126
273
Loans and advances carried at fair value through profit or loss comprise £27,734 million (1 January 2018: £31,590 million) of trading assets of which
£27,685 million (1 January 2018: £31,548 million) have a good quality rating and £49 million (1 January 2018: £42 million) have a satisfactory rating; and
£13,142 million (1 January 2018: £14,016 million) of other assets mandatorily held at fair value through profit or loss of which £12,509 million (1 January 2018:
£13,338 million) is viewed by the business as investment grade.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
262 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 52: Financial risk management continued
Debt securities held at amortised cost
An analysis by credit rating of the Group’s debt securities held at amortised cost 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 held at amortised cost
1 Credit ratings equal to or better than ‘BBB’.
31 December 2018
1 January 2018
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
3,263
763
4,026
1,176
5,202
9
17
26
16
42
2,265
1,025
3,290
27
3,317
–
7
7
16
23
3,272
780
4,052
1,192
5,244
(6)
5,238
2,265
1,032
3,297
43
3,340
(26)
3,314
2 Other comprises sub‑investment grade (31 December 2018: £6 million; 1 January 2018: £nil) and not rated (31 December 2018: £36 million; 1 January 2018: £23 million) .
Financial assets at fair value through other comprehensive income/available-for-sale financial assets (excluding equity shares)
An analysis of the Group’s financial assets at fair value through other comprehensive income (available‑for‑sale financial assets at 31 December 2017) is
included in note 21. The credit quality of the Group’s financial assets at fair value through other comprehensive income (available‑for‑sale financial assets at
31 December 2017) (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 debt securities
Treasury and other bills
Total financial assets at fair value through other
comprehensive income/available‑for‑sale financial assets
1 Credit ratings equal to or better than ‘BBB’.
31 December 2018
1 January 2018
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
18,971
118
120
–
120
4,934
24,143
303
24,446
–
–
–
131
131
217
348
–
348
18,971
118
120
131
251
5,151
24,491
303
34,708
167
2,381
358
2,739
4,250
41,864
–
24,794
41,864
–
–
–
109
109
365
474
–
474
34,708
167
2,381
467
2,848
4,615
42,338
–
42,338
2 Other comprises sub‑investment grade (31 December 2018: £85 million; 1 January 2018: £98 million) and not rated (31 December 2018: £263 million; 1 January 2018: £376 million) .
Lloyds Banking Group Annual Report and Accounts 2018 263
Note 52: Financial risk management continued
Debt securities, treasury and other bills held at fair value through profit or loss
An analysis of the Group’s financial assets at fair value through profit or loss is included in note 16. 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’.
2018
2017
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
7,192
10
63
73
228
7,493
10,903
2,059
1,105
208
283
491
16,141
30,699
20
30,719
38,212
–
–
–
–
19
19
–
5
–
7
3
10
1,922
1,937
–
1,937
1,956
7,192
9,833
–
9,833
10
63
73
247
7,512
10,903
2,064
1,105
215
286
501
18,063
32,636
20
32,656
40,168
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
10,640
12,187
1,527
222
211
926
1,137
19,467
34,540
18
34,558
45,198
2 Other comprises sub‑investment grade (2018: £411 million; 2017: £331 million) and not rated (2018: £1,545 million; 2017: £1,972 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 17. 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 £9,268 million
(2017: £12,785 million), cash collateral of £6,039 million (2017: £5,419 million) was held and a further 213 million was due from OECD banks
(2017: £275 million).
Trading and other
Hedging
Total derivative financial instruments
1 Credit ratings equal to or better than ‘BBB’.
Investment
grade1
£m
19,797
1,534
21,331
2018
Other2
£m
2,235
29
2,264
Total
£m
22,032
1,563
23,595
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
2 Other comprises sub‑investment grade (2018: £1,920 million; 2017: £1,878 million) and not rated (2018: £344 million; 2017: £340 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 116. The Group holds collateral against loans and
advances and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral below.
Collateral held as security for financial assets at fair value through profit or loss and for derivative assets is also shown below.
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 financial assets held at amortised cost.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
264 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 52: Financial risk management continued
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 £461 million (2017: £771 million), against which the Group held collateral with a fair value of £481 million (2017: £796 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 allowances for indexation error and dilapidations.
In some circumstances, where the discounted value of the estimated net proceeds from the liquidation of collateral (i.e. net of costs, expected haircuts and
anticipated changes in the value of the collateral to the point of sale) is greater than the estimated exposure at default, no credit losses are expected and
no ECL allowance is recognised.
At 31 December 2018
Less than 70 per cent
70 per cent to 80 per cent
80 per cent to 90 per cent
90 per cent to 100 per cent
Greater than 100 per cent
Total
At 31 December 2017
Less than 70 per cent
70 per cent to 80 per cent
80 per cent to 90 per cent
90 per cent to 100 per cent
Greater than 100 per cent
Total
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total gross
£m
186,974
38,865
26,353
5,136
469
10,853
1,704
837
154
106
1,058
176
90
33
36
11,658
210,543
1,864
1,024
349
496
42,609
28,304
5,672
1,107
257,797
13,654
1,393
15,391
288,235
Neither past due
nor impaired
£m
Past due but not
impaired
£m
Impaired
£m
Gross
£m
211,366
4,211
2,348
217,925
41,323
22,421
5,036
1,326
754
422
145
95
544
398
209
387
42,621
23,241
5,390
1,808
281,472
5,627
3,886
290,985
Other
The majority of non‑mortgage retail lending is unsecured. At 31 December 2018, Stage 3 non‑mortgage lending amounted to £631 million, net of an
impairment allowance of £366 million (2017: impaired non‑mortgage lending amounted to £817 million, net of an impairment allowance of £542 million).
Stage 1 and Stage 2 non‑mortgage retail lending amounted to £52,450 million (2017: unimpaired non‑mortgage lending amounted to £49,482 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.
Commercial lending
Reverse repurchase transactions
At 31 December 2018 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of £40,483 million
(2017: £16,832 million), against which the Group held collateral with a fair value of £42,339 million (2017: £17,122 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 (2017: £nil).
These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Stage 3 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 2018, Stage 3 secured commercial lending amounted to £658 million, net of an impairment allowance of £215 million (2017: impaired
secured commercial lending amounted to £698 million, net of an impairment allowance of £242 million). The fair value of the collateral held in respect
of impaired secured commercial lending was £590 million (2017: £797 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.
Stage 3 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.
Lloyds Banking Group Annual Report and Accounts 2018 265
Note 52: Financial risk management continued
Stage 1 and Stage 2 secured lending
For Stage 1 and Stage 2 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.
Stage 1 and Stage 2 secured commercial lending is predominantly managed on a cash flow basis. On occasion, it may include an assessment of
underlying collateral, although, for Stage 3 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.
Financial assets at fair value through profit or loss (excluding equity shares)
Included in financial assets at fair value through profit or loss are reverse repurchase agreements treated as collateralised loans with a carrying value of
£28,356 million (2017: £31,590 million). Collateral is held with a fair value of £36,101 million (2017: £39,099 million), all of which the Group is able to repledge.
At 31 December 2018, £31,013 million had been repledged (2017: £31,281 million).
In addition, securities held as collateral in the form of stock borrowed amounted to £51,202 million (2017: £61,469 million). Of this amount, £49,233 million
(2017: £44,432 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 £14,327 million (2017: £12,785 million), cash collateral
of £6,039 million (2017: £5,419 million) was held.
Irrevocable loan commitments and other credit-related contingencies
At 31 December 2018, the Group held irrevocable loan commitments and other credit‑related contingencies of £62,640 million (2017: £63,237 million).
Collateral is held as security, in the event that lending is drawn down, on £10,661 million (2017: £10,956 million) of these balances.
Collateral repossessed
During the year, £245 million of collateral was repossessed (2017: £297 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 £21,170 million (2017: £23,175 million); the fair value of the collateral
provided under these agreements at 31 December 2018 was £19,615 million (2017: £23,082 million).
Customer deposits
Included in customer deposits are balances arising from repurchase transactions of £1,818 million (2017: £2,638 million); the fair value of the collateral
provided under these agreements at 31 December 2018 was £1,710 million (2017: £2,640 million).
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 £28,438 million (2017: £48,765 million).
Securities lending transactions
The following on balance sheet financial assets have been lent to counterparties under securities lending transactions:
Financial assets at fair value through profit or loss
Loans and advances to customers
Financial assets at fair value through other comprehensive income (2017: available‑for‑sale financial assets)
2018
£m
5,837
–
1,917
7,754
2017
£m
6,622
197
2,608
9,427
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 30 and 48.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
266 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 52: Financial risk management continued
The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual period at the balance
sheet date; balances with no fixed maturity are included in the over 5 years category. Certain balances, included in the table below on the basis of their
residual maturity, are repayable on demand upon payment of a penalty.
(A) 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 2018
Assets
Cash and balances at central banks
54,662
1
–
–
–
Financial assets at fair value through profit or loss
10,686
8,826
8,492
5,133
2,587
Derivative financial instruments
Loans and advances to banks
579
2,594
688
520
418
584
336
172
441
203
–
2,090
1,064
160
–
–
54,663
5,467 115,248 158,529
3,075
16,994
23,595
–
2,050
6,283
Loans and advances to customers
36,326
19,383
18,415
14,378
11,318
30,459
72,028 282,551 484,858
Debt securities held at amortised cost
7
–
–
521
–
–
2,262
2,448
5,238
Financial assets at fair value through other
comprehensive income
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
Derivative financial instruments and 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 2017
Assets
166
453
2,667
1,552
249
196
800
238
1,685
2,536
11,496
7,430
24,815
219
387
1,118
33,240
39,617
107,687
31,423
28,354
21,578
16,453
36,696
95,446 459,961 797,598
2,793
1,688
748
54
45
380,753
10,623
5,628
4,543
4,431
4,758
6,421
16,052
4,182
30,320
3,244
2,423 418,066
5,160
4,172
11,877
5,692
1,844
4,403
85
1,850
3,201
145
5,048
9,007
2,316
733
95
1,663
4,668
2,302
1,182
251
522
1,104
4,108
22,438
51,920
1,694
13,062
28,676
24,197
91,168
2,104
1,383
7,995
20,986
73,330 112,727
756
232
13,652
25,542
–
2,600
2,559
11,921
17,656
399,210
35,076
23,575
14,663
10,179
36,696
75,857 152,143 747,399
Cash and balances at central banks
Financial assets at fair value through profit or loss
Derivative financial instruments
Loans and advances to banks
58,519
11,473
449
3,104
2
–
–
–
–
13,345
4,858
2,781
1,056
2,655
601
314
763
190
451
190
503
192
965
131
–
5,341
2,763
2,405
–
58,521
121,369
162,878
19,339
85
25,834
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 and 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
10
59
3,807
29
365
897
–
286
414
–
1,025
1,170
7
265
854
350
3,040
725
2,775
15,366
5,618
472
21,692
26,541
3,643
42,098
40,026
105,718
31,506
20,096
17,498
13,359
37,206
105,235
481,491
812,109
2,810
366,778
19,215
3,248
1,898
4,229
–
2,318
18,821
16,932
6,014
2,003
2,805
202
1,885
10,615
4,933
4,431
2,484
239
1,588
87
5,524
3,419
3,506
2,466
2,216
–
28
5,074
948
2,902
2,425
1,894
570
–
7,823
1,961
6,333
8,532
1,498
574
22,378
2,986
4,298
25,669
21,842
1,933
3,983
298
503
29,804
418,124
25,295
20,347
77,210
13,991
11,005
77,001
72,450
118,860
28,805
17,922
398,178
49,095
26,175
17,218
13,841
26,721
83,089
148,649
762,966
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 2018 267
Note 52: Financial risk management continued
The table below analyses financial instrument liabilities of the Group, excluding those arising from insurance and participating investment contracts, on
an undiscounted future cash flow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the balance
sheet date; balances with no fixed maturity are included in the over 5 years category.
At 31 December 2018
Deposits from banks
Customer deposits
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
At 31 December 2017
Deposits from banks
Customer deposits
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
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
Over 5
years
£m
Total
£m
2,820
380,985
9,693
5,942
13,853
247
413,540
39,165
(38,301)
864
13,511
14,375
2,516
367,103
21,286
3,444
15,447
231
410,027
23,850
(23,028)
822
17,425
18,247
2,710
10,584
10,984
7,314
–
1,017
32,609
1,022
14,169
7,553
22,564
–
1,144
46,452
20,920
11,634
930
48,233
–
8,231
89,948
3,502
1,554
10,771
24,201
–
19,328
59,356
30,974
418,926
39,931
108,254
13,853
29,967
641,905
27,976
(27,283)
23,978
(23,134)
43,239
(40,690)
33,763
168,121
(28,933)
(158,341)
693
103
796
3,545
18,854
14,424
6,331
–
454
43,608
31,974
(30,972)
1,002
128
1,130
844
209
1,053
2,096
21,308
6,499
12,562
–
2,907
45,372
24,923
(23,886)
1,037
776
1,813
2,549
782
3,331
21,498
11,198
4,251
36,999
–
7,170
81,116
43,444
(43,523)
(79)
974
895
4,830
2,193
7,023
660
2,375
13,044
23,923
–
19,164
59,166
30,605
(32,065)
(1,460)
2,795
1,335
9,780
16,798
26,578
30,315
420,838
59,504
83,259
15,447
29,926
639,289
154,796
(153,474)
1,322
22,098
23,420
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 £27 million (2017: £24 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
268 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 52: Financial risk management continued
Further information on the Group’s liquidity exposures is provided on pages 147 to 152.
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:
At 31 December 2018
At 31 December 2017
Up to
1 month
£m
1,667
1,708
1-3
months
£m
1,624
1,747
3-12
months
£m
5,925
6,467
1-5
years
£m
25,414
26,479
Over 5
years
£m
64,244
67,012
Total
£m
98,874
103,413
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 2018
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
Up to
1 month
£m
1-3
months
£m
3-6
months
£m
6-9
months
£m
9-12
months
£m
64
450
514
83
484
567
34
203
237
13
223
236
–
150
150
1-3
years
£m
–
665
665
3-5
years
£m
–
133
133
Over 5
years
£m
–
749
749
Total
£m
194
3,057
3,251
Lending commitments and guarantees
67,055
2,947
4,474
6,055
16,123
17,737
15,374
4,602
134,367
Other commitments
Total commitments and guarantees
Total contingents and commitments
At 31 December 2017
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
428
67,483
67,997
–
–
2,947
3,514
4,474
4,711
2
6,057
6,293
92
20
13
176
731
16,215
16,365
17,757
18,422
15,387
15,520
4,778
5,527
135,098
138,349
12
392
404
51
669
720
4
210
214
–
131
131
–
205
205
4
506
510
–
271
271
–
656
656
71
3,040
3,111
Lending commitments and guarantees
66,964
3,137
5,966
5,525
14,572
18,001
16,577
4,503
135,245
Other commitments
Total commitments and guarantees
Total contingents and commitments
19
66,983
67,387
–
3,137
3,857
–
5,966
6,180
38
5,563
5,694
–
46
71
14,572
14,777
18,047
18,557
16,648
16,919
210
4,713
5,369
384
135,629
138,740
Note 53: Consolidated cash flow statement
(A) Change in operating assets
Change in financial assets held at amortised cost
Change in derivative financial instruments and 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 and liabilities
at fair value through profit or loss
Change in investment contract liabilities
Change in other operating liabilities
Change in operating liabilities
2018
£m
2017
£m
(27,038)
(24,747)
2016
£m
710
22,046
520
(4,472)
9,916
(661)
(13,889)
961
(15,492)
(12,218)
2018
£m
515
(322)
18,579
(24,606)
(1,594)
(1,245)
(8,673)
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)
Lloyds Banking Group Annual Report and Accounts 2018 269
2016
£m
2,380
83
592
(1,272)
(13)
173
14,084
1,000
1,085
(27)
287
(3,157)
(32)
(155)
721
1,864
–
(575)
153
309
(175)
465
1
(557)
(93)
(17)
Note 53: Consolidated cash flow statement continued
(C) Non-cash and other items
Depreciation and amortisation
Revaluation of investment properties
Allowance for loan losses
Write‑off of allowance for loan losses, net of recoveries
Impairment charge relating to undrawn balances
Impairment of financial assets at fair value through other comprehensive income
(2017: 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 financial assets at fair value through other comprehensive income
(2017: available‑for‑sale financial assets)
Hedging valuation adjustments on subordinated debt
Value of employee services
Transactions in own shares
2018
£m
2,405
(139)
1,024
(1,025)
(73)
(14)
(4,547)
750
600
(518)
405
–
(44)
191
–
1,388
–
(275)
(429)
260
40
2017
£m
2,370
(230)
691
(1,061)
(9)
6
9,168
1,650
865
(8)
369
–
(23)
125
–
1,436
–
(446)
(327)
414
(411)
Accretion of discounts and amortisation of premiums and issue costs
1,947
1,701
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
(9)
(701)
(104)
(34)
1,098
(868)
(2,104)
(1,032)
14
(3,990)
(2,892)
(6)
(650)
(120)
–
15,504
17,124
(587)
(1,657)
(928)
–
(3,172)
12,332
(630)
(2,200)
(761)
2
(3,589)
13,535
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
2018
£m
2017
£m
2016
£m
54,663
(2,553)
52,110
6,283
(3,169)
3,114
55,224
58,521
(957)
57,564
6,611
(3,193)
3,418
60,982
47,452
(914)
46,538
26,902
(11,052)
15,850
62,388
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 2018 is £40 million (31 December 2017: £2,322 million; 1 January 2018 £48 million; 31 December
2016: £14,475 million) held within the Group’s long‑term insurance and investments businesses, which is not immediately available for use in the business.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
270 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 53: Consolidated cash flow statement continued
(E) Acquisition of group undertakings and businesses
Net assets acquired:
Cash and cash equivalents
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 subsidiaries and businesses
Acquisition of and additional investment in joint ventures
Net cash outflow from acquisitions in the year
1 Upon acquisition in 2017, the funding of MBNA was assumed by Lloyds Bank plc.
(F) Disposal and closure of group undertakings and businesses
Loans and advances to customers
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)
2018
£m
–
–
–
21
–
6
–
(1)
–
26
–
26
23
49
2018
£m
–
–
1
1
1
–
–
1
–
1
2017
£m
123
7,811
16
702
6
414
(6,431)
(927)
302
2,016
(123)
1,893
30
1,923
2017
£m
342
(242)
29
129
129
–
–
129
–
129
2016
£m
–
–
–
–
–
–
–
–
–
–
–
–
20
20
2016
£m
–
–
5
5
5
–
–
5
–
5
Lloyds Banking Group Annual Report and Accounts 2018 271
Note 54: Adoption of IFRS 9 and IFRS 15
The following table summarises the adjustments arising on the adoption of IFRS 9 and IFRS 15 (see below) to the Group’s balance sheet as at
1 January 2018.
As at
31 December
2017
£m
IFRS 9:
Classification and
measurement
£m
IFRS 9:
Impairment
£m
IFRS 15
£m
Adjusted as at
1 January 2018
£m
Assets
Cash and balances at central banks
Items in course of collection from banks
Financial assets at fair value through profit or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Financial assets at fair value through other comprehensive income
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
Equity and liabilities
Liabilities
Deposits from banks
Customer deposits
Items in course of transmission to banks
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
Other provisions
Subordinated liabilities
Total liabilities
Equity
Shareholders’ equity
Other equity instruments
Non‑controlling interests
Total equity
Total equity and liabilities
58,521
755
162,878
25,834
6,611
472,498
3,643
482,752
42,098
2,310
4,839
2,835
12,727
16
2,284
723
13,537
812,109
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
762,966
43,551
5,355
237
49,143
812,109
−
−
13,130
(360)
(2,364)
(10,460)
(329)
(13,153)
42,917
(42,098)
−
−
−
−
−
22
−
(655)
(197)
−
−
−
58
−
−
(48)
−
−
−
−
−
−
−
10
(207)
−
−
(207)
(197)
−
−
−
−
(1)
(1,022)
−
(1,023)
−
−
−
−
−
−
−
300
−
(10)
(733)
−
−
−
−
−
−
−
−
−
(3)
−
−
243
−
240
(973)
−
−
(973)
(733)
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
3
−
−
3
−
−
−
−
−
−
−
−
−
14
−
−
−
−
58,521
755
176,008
25,474
4,246
461,016
3,314
468,576
42,917
2,310
4,839
2,835
12,727
16
2,609
723
12,872
811,182
29,804
418,124
584
50,935
26,124
1,313
72,402
103,413
15,447
20,741
358
274
5,789
17,922
14
763,230
(11)
−
−
(11)
3
42,360
5,355
237
47,952
811,182
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
272 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 54: Adoption of IFRS 9 and IFRS 15 continued
IFRS 9 Financial Instruments
Impairment
The Group adopted IFRS 9 from 1 January 2018. In accordance with the transition requirements of IFRS 9, comparative information for 2017 has not
been restated and transitional adjustments have been accounted for through retained earnings as at 1 January 2018, the date of initial application; and
as a result shareholders’ equity reduced by £1,180 million, driven by the effects of additional impairment provisions following the implementation of the
expected credit loss methodology and measurement adjustments following the reclassification of certain financial assets to be measured at fair value
rather than amortised cost. It is not practicable to quantify the impact of adoption of IFRS 9 on the results for the current year.
The following table summarises the impact of the transitional adjustment on the Group’s loss allowances at 1 January 2018:
IAS 39 allowance
at 31 December
2017
£m
Transitional
adjustment to loss
allowance
£m
IFRS 9 loss
allowance at
1 January 2018
£m
Loans and advances to banks
Loans and advances to customers
Debt securities
Other
Provisions for undrawn commitments and financial guarantees
Total loss allowance
–
2,201
26
–
2,227
30
2,257
1
1,022
–
10
1,033
243
1,276
There were no impacts on the Group’s loss allowances as a result of changes in the measurement category of financial assets at 1 January 2018.
The net impact of IFRS 9 on transition was an increase in impairment allowances of £1,276 million which is analysed as follows:
Retail
Secured
Unsecured
UK Motor Finance
Other
Commercial Banking
Insurance and Wealth
Other
Total
IAS 39
Latent risk
£m
12‑month
expected loss
£m
Lifetime
expected loss
£m
Undrawn
commitments
£m
Multiple
economic
scenarios
£m
(561)
(133)
(99)
(30)
(823)
(190)
(5)
(115)
(1,133)
24
279
112
30
445
108
15
51
619
371
251
72
29
723
330
6
144
1,203
1
161
1
13
176
60
–
–
236
226
8
1
4
239
63
1
48
351
1
3,223
26
10
3,260
273
3,533
Total
£m
61
566
87
46
760
371
17
128
1,276
The key drivers for the provision movements from IAS 39 to IFRS 9 for the Group are as follows:
– Latent risk: under IAS 39 provisions were held against losses that had been incurred at the balance sheet date but had either not been specifically
identified or not been adequately captured in the provisioning models. Under IFRS 9 assets which had not defaulted are allocated to Stages 1 and 2 and
an appropriate expected credit loss allowance made.
– 12‑month expected loss: IFRS 9 requires that for financial assets where there has been no significant increase in credit risk since origination (Stage 1) a
loss allowance equivalent to 12‑month expected credit losses should be held. Under IAS 39 these balances would not be specifically provided against
although a provision for latent risk would be held.
– Lifetime expected credit loss: financial assets that have experienced a significant increase in credit risk since initial recognition (Stage 2) and credit
impaired assets (Stage 3) are required to carry a lifetime expected credit loss allowance. Under IAS 39, Stage 2 assets were treated as performing and
consequently no specific impairment provision was held, although a proportion of the provision held against latent risks was held against these assets.
Assets treated as impaired under IAS 39 carried a provision reducing the carrying value to the estimated recoverable amount.
– Undrawn commitments: IFRS 9 requires a loss allowance to be held against undrawn lending commitments. Previously, an impairment provision would
only have been held in the event that the commitment was irrevocable and a loss event had occurred.
– Multiple economic scenarios: IFRS 9 requires that the expected credit loss allowance should reflect an unbiased range of possible future economic
outcomes. This was not required under IAS 39.
Lloyds Banking Group Annual Report and Accounts 2018 273
Note 54: Adoption of IFRS 9 and IFRS 15 continued
Reclassifications
On transition to IFRS 9, the Group assessed its business models in order to determine the appropriate classification. The Retail and Commercial Banking
loan books are generally held to collect contractual cash flows until the lending matures and met the criteria to remain at amortised cost. Certain portfolios
which are subject to higher levels of sales were reclassified as fair value through other comprehensive income. Within the Group’s insurance business,
assets are managed on a fair value basis and so continued to be accounted for at fair value through profit or loss.
Financial assets
Financial assets at fair value through profit or loss
Derivatives
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Financial assets at fair value through other
comprehensive income
Available‑for‑sale financial assets
Other assets
Total
Financial liabilities
Financial liabilities at fair value through profit or loss
Debt securities in issue
Total
IFRS 9 reclassification to
IAS 39 carrying
amount
£m
At fair value
through profit or
loss
£m
At fair value
through other
comprehensive
income
£m
Total
reclassification
£m
IFRS 9
remeasurement
£m
At
1 January 2018
before IFRS 9
impairment
adjustments
£m
162,878
25,834
6,611
472,498
3,643
482,752
42,098
13,537
727,099
50,877
72,450
123,327
14,447
(360)
(2,274)
(10,474)
–
(12,748)
(1,139)
–
(90)
–
(329)
(419)
–
42,972
13,308
(360)
(2,364)
(10,474)
(329)
(13,167)
42,972
(684)
(655)
–
48
(48)
–
(41,414)
(42,098)
–
–
–
–
–
(655)
–
48
(48)
–
(178)
–
–
14
–
14
(55)
–
–
(219)
10
–
10
176,008
25,474
4,247
462,038
3,314
469,599
42,917
–
12,882
726,880
50,935
72,402
123,337
Loans and advances accounted for at amortised cost reduced by £13,167 million largely driven by:
– lending assets transferred from the banking business to the insurance business in recent years totalling £6,882 million which had been accounted for
at amortised cost in the Group’s accounts under IAS 39. Upon implementation of IFRS 9, these assets were been designated at FVTPL, in common
with other assets within the insurance business, as they are backing insurance and investment contract liabilities which either have cash flows that are
contractually based upon the performance of the assets or are contracts whose measurement takes account of current market conditions and where
significant measurement inconsistencies would otherwise arise. Loans and advances to banks of £2,274 million were transferred to FVTPL for similar
reasons.
– assets held by the Commercial business totalling £3,116 million were reclassified to FVTPL having not met the requirements of the SPPI test. These assets
are principally holdings of notes issued by securitisation vehicles. Whilst the credit quality of these notes is generally good, there is a contractual linkage
to the underlying asset pools which are exposed to residual value risk.
– A further £847 million of Commercial lending assets were reclassified following changes in the business model.
At 1 January 2018, the Group was required to reclassify certain assets from fair value through profit or loss to fair value through other comprehensive
income; these assets were sold during the course of the year. If these assets had not been reclassified, the Group would have recognised a loss of
£0.2 million in the period before being sold. The effective interest rate applied to these assets on 1 January 2018 was 1.97 per cent, and the interest
revenue recognised prior to the sale was £20 million.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
274 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the consolidated financial statements continued
Note 54: Adoption of IFRS 9 and IFRS 15 continued
Remeasurements
There has been a pre‑tax charge of £229 million (£207 million net of tax) arising from the reclassification of financial assets and liabilities to fair value through
profit or loss and fair value through other comprehensive income and consequent remeasurement to fair value.
IFRS 15 Revenue from Contracts with Customers
The Group has adopted IFRS 15 from 1 January 2018 and in nearly all cases the Group’s existing accounting policy was consistent with the requirements of
IFRS 15; however, certain income streams within the Group’s car leasing business are now deferred, resulting in an additional £14 million being recognised
as deferred income at 1 January 2018 with 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. The impact of adoption of IFRS 15 on the current period is not material.
Accounting policies applied for comparative periods
In accordance with the transition requirements of IFRS 9 and IFRS 15, comparative information has not been restated. The comparative information
was prepared in accordance with IAS 39 and IAS 18. With the exception of certain income streams within the Group’s car leasing business, the Group
accounting policy under IAS 18 was substantially aligned with the requirements of IFRS 15 and is not reproduced here; the principal policies applied by the
Group under IAS 39 are set out below:
Impairment
At each balance sheet date the Group assesses whether, as a result of one or more events occurring after initial recognition of a financial asset accounted
for at amortised cost 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.
The Group assesses, at each balance sheet date, whether there is objective evidence that an available‑for‑sale financial asset is impaired. In addition
to the criteria for financial assets accounted for at amortised cost set out above, this assessment involves reviewing the current financial circumstances
(including creditworthiness) and future prospects of the issuer, assessing the future cash flows expected to be realised and, in the case of equity shares,
considering whether there has been a significant or prolonged decline in the fair value of the asset below its cost. If an impairment loss has been incurred,
the cumulative loss measured as the difference between the acquisition cost (net of any principal repayment and amortisation) and the current fair value,
less any impairment loss on that asset previously recognised, is reclassified from equity to the income statement.
Classification and measurement
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. 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. Loans
and receivables include loans and advances to banks and customers and are accounted for at amortised cost using the effective interest method. 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.
Gains and losses arising from changes in fair value 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 is recognised in the income statement
Note 55: Future accounting developments
The following pronouncements are not applicable for the year ending 31 December 2018 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’ and certain other minor amendments as at 19 February 2019 these pronouncements have been
endorsed by the EU.
IFRS 16 Leases
IFRS 16 replaces IAS 17 ‘Leases’ and is effective for annual periods beginning on or after 1 January 2019.
The Group’s accounting as a lessor will remain aligned to the current approach under IAS 17; however for lessee accounting there will no longer be
a distinction between finance and operating leases. The transition approach adopted by the Group will result in the recognition of right of use assets
and lease liabilities of approximately £1.8 billion in respect of leased properties previously accounted for as operating leases; there will be no impact on
shareholders’ equity. As permitted by the transition options under IFRS 16, comparative figures for the prior year will not be restated. Going forward, the
Group will recognise a finance charge on the lease liability and a depreciation charge on the right‑of‑use asset, whereas previously the Group included
lease rentals within operating expenses. The Group intends to take advantage of a number of exemptions within IFRS 16, including the election not to
recognise a lease liability and a right‑of‑use asset for leases for which the underlying asset is of low value.
IFRS 17 Insurance Contracts
IFRS 17 replaces IFRS 4 ‘Insurance Contracts’ and is currently effective for annual periods beginning on or after 1 January 2021 although the International
Accounting Standards Board have proposed delaying implementation until 1 January 2022.
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 2019 and 1 January 2020 (including IAS 19 Employee Benefits,
IAS 12 Income Taxes and IFRIC 23 Uncertainty over Income Tax Treatments). The Group will adopt the changes to IAS 12 Income Taxes with effect from
1 January 2019, resulting in the presentation of the tax benefit of distributions on other equity instruments in the Group’s income statement; these impacts
are currently recognised directly in equity. Comparative information will be restated. For the comparative year ended 31 December 2018, this will result in
the reclassification of a tax credit of £106 million (2017: £102 million). These changes will have no impact on the Group’s reported balance sheet or profit
before tax. The amendments to other accounting standards are not expected to have a significant impact on the Group.
Lloyds Banking Group Annual Report and Accounts 2018 275
Parent company balance sheet
at 31 December
31 December
2018
£ million
Note
1 January
20181
£ million
31 December
2017
£ million
8
8
2
3
3
4
4
5
3
6
7
46,725
24,211
9
70,945
256
588
955
27
57
76
44,863
14,377
22
59,262
265
–
961
47
272
724
44,863
14,379
22
59,264
265
–
961
47
272
724
1,959
72,904
2,269
61,531
2,269
61,533
7,116
17,719
7,423
4,273
2,103
38,634
6,491
45,125
20,394
6,043
26,437
209
1,133
1,342
27,779
72,904
7,197
17,634
7,423
4,115
1,498
37,867
5,355
43,222
10,886
3,993
14,879
327
3,103
3,430
18,309
61,531
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
Assets
Non‑current assets:
Investment in subsidiaries
Loans to subsidiaries
Deferred tax asset
Current assets:
Derivative financial instruments
Financial assets at fair value through profit or loss
Other assets
Amounts due from subsidiaries
Cash and cash equivalents
Current tax recoverable
Total assets
Equity and liabilities
Capital and reserves:
Share capital
Share premium account
Merger reserve
Capital redemption reserve
Retained profits2
Shareholders’ equity
Other equity instruments
Total equity
Non‑current liabilities:
Debt securities in issue
Subordinated liabilities
Current liabilities:
Derivative financial instruments
Other liabilities
Total liabilities
Total equity and liabilities
1 See note 1 .
2 The parent company recorded a profit after tax for the year of £4,022 million (2017: £2,399 million) .
The accompanying notes are an integral part of the parent company financial statements.
The directors approved the parent company financial statements on 19 February 2019.
Lord Blackwell
Chairman
António Horta-Osório
Group Chief Executive
George Culmer
Chief Financial Officer
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
276 Lloyds Banking Group Annual Report and Accounts 2018
Parent company statement of changes in equity
for the year ended 31 December
Redemption of preference shares
210
(210)
Balance at 1 January 2016
Total comprehensive income1
Dividends paid
Distributions on other equity instruments,
net of tax2
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 tax2
Issue of ordinary shares
Movement in treasury shares
Value of employee services:
Share option schemes, net of tax
Other employee award schemes
Balance at 31 December 2017
Adjustment on adoption of IFRS 9 (note 1)
Balance at 1 January 2018
Total comprehensive income1
Dividends paid
Distributions on other equity instruments,
net of tax2
Issue of ordinary shares
Share buyback programme
Issue of other equity instruments
Movement in treasury shares
Value of employee services:
Share option schemes, net of tax
Other employee award schemes
Share capital
and premium
£ million
24,558
Merger
reserve
£ million
7,633
Capital
redemption
reserve
£ million
4,115
–
–
–
–
–
–
–
–
–
–
–
–
24,768
7,423
4,115
Retained
profits1
£ million
785
3,135
(2,014)
(330)
–
(301)
141
168
1,584
2,399
(2,284)
(336)
–
(277)
82
332
1,500
(2)
1,498
4,022
(2,240)
(351)
–
Total
shareholders’
equity
£ million
37,091
3,135
(2,014)
(330)
–
(301)
141
168
37,890
2,399
(2,284)
(336)
63
(277)
82
332
37,869
(2)
37,867
4,022
(2,240)
(351)
162
Other equity
instruments
£ million
5,355
–
–
–
–
–
–
–
5,355
–
–
–
–
–
–
–
5,355
–
5,355
–
–
–
–
–
1,136
–
–
–
Total
equity
£ million
42,446
3,135
(2,014)
(330)
–
(301)
141
168
43,245
2,399
(2,284)
(336)
63
(277)
82
332
43,224
(2)
43,222
4,022
(2,240)
(351)
162
(1,005)
1,129
(74)
53
207
158
(1,005)
(1,005)
–
–
–
–
(7)
(74)
53
207
(7)
(74)
53
207
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,423
–
7,423
4,115
–
4,115
–
–
–
–
–
–
–
–
–
–
–
–
63
–
–
–
24,831
–
24,831
–
–
–
162
(158)
–
–
–
–
Balance at 31 December 2018
24,835
7,423
4,273
2,103
38,634
6,491
45,125
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.
2 Distributions on other equity instruments are shown net of tax of £82 million (2017: £79 million; 2016: £82 million) credited to retained profits.
The accompanying notes are an integral part of the parent company financial statements.
Lloyds Banking Group Annual Report and Accounts 2018 277
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
Acquisitions of and capital injections to subsidiaries
Return of capital
Amounts advanced to subsidiaries
Repayment 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
Share buyback
Issue of other equity instruments
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.
2018
£ million
4,102
(715)
(572)
7,538
(4,000)
(324)
660
6,689
9
4,000
324
(12,753)
11,114
(21,577)
12,602
370
(5,911)
(2,240)
(433)
1,729
(275)
(1,005)
1,129
–
102
(993)
(215)
272
57
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
(2,933)
230
42
272
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)
–
(1,913)
18
24
42
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
278 Lloyds Banking Group Annual Report and Accounts 2018
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 2018. 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 Company adopted IFRS 9 from 1 January 2018. In accordance with the transition requirements of IFRS 9, comparative information for 2017 has not been
restated and transitional adjustments have been accounted for through retained earnings as at 1 January 2018, the date of initial application; and as a result
shareholders’ equity reduced by £2 million, due to additional impairment provisions following the implementation of the expected credit loss methodology.
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.
Investments in subsidiaries are carried at historical cost, less any provisions for impairment.
Fees payable to the Company’s auditors by the Group are set out in note 12 to the consolidated financial statements.
Note 2: Amounts due from subsidiaries
These comprise short‑term lending to subsidiaries, repayable on demand. As required by IFRS 9, the Company has established an allowance for
impairment losses for amounts due from its subsidiaries (31 December 2018: £5 million; 1 January 2018: £2 million) based on the probability of its
subsidiaries defaulting on the amounts payable in the next 12 months. The carrying value of the amounts owed by subsidiaries is a reasonable
approximation to fair value.
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
2018
£m
7,423
–
7,423
2017
£m
7,423
–
7,423
2016
£m
7,633
(210)
7,423
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.
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 shares.
Movements in the capital redemption reserve were as follows:
At 1 January
Shares cancelled under the share buyback programme
At 31 December
2018
£m
4,115
158
4,273
2017
£m
4,115
–
4,115
2016
£m
4,115
–
4,115
Note 5: Retained profits
At 31 December 2017
Adjustment on adoption of IFRS 9 (note 1)
At 1 January
Profit for the year
Dividends paid1
Issue costs of other equity instruments (net of tax)
Distributions on other equity instruments, (net of tax)
Share buyback programme2
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 2018 279
2018
£m
1,500
(2)
1,498
4,022
(2,240)
(7)
(351)
(1,005)
(74)
53
207
2,103
2017
£m
2016
£m
1,584
2,399
(2,284)
–
(336)
–
(277)
82
332
1,500
785
3,135
(2,014)
–
(330)
–
(301)
141
168
1,584
1 Details of the Company’s dividends are as set out in note 44 to the consolidated financial statements.
2 Details of the Company's share buyback programme are provided in note 41 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 2038.
Note 7: Subordinated liabilities
These liabilities will, in the event of the winding‑up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer.
Any repayments of subordinated liabilities require the consent of the Prudential Regulation Authority.
At 1 January 2017
Foreign exchange and other movements
At 31 December 2017
Issued in the year:
1.75% Subordinated Fixed Rate Notes 2028 callable 2023
4.344% Subordinated Fixed Rate Notes callable 2048
Foreign exchange and other movements
At 31 December 2018
Preference
shares
£m
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
568
(2)
566
–
–
(12)
554
10
–
10
–
–
–
10
3,751
(334)
3,417
664
1,065
333
5,479
Total
£m
4,329
(336)
3,993
664
1,065
321
6,043
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 (2017: 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 contributions
Return of capital contributions
Capital repayments
Redemptions
At 31 December
Ordinary share capital
Other capital instruments
Total
2018
£m
41,341
10,716
265
(9)
(10,597)
–
2017
£m
40,666
320
432
(77)
–
–
41,716
41,341
2018
£m
3,522
2,037
–
–
–
(550)
5,009
2017
£m
3,522
–
–
–
–
–
2018
£m
44,863
12,753
265
(9)
(10,597)
(550)
2017
£m
44,188
320
432
(77)
–
–
3,522
46,725
44,863
Details of the subsidiaries and related undertakings are given on pages 289 to 295 and are incorporated by reference.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
280 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the parent company financial statements continued
Note 8: Related party transactions continued
During 2018, as part of the Group's restructuring to comply with the ring‑fencing regulations, the Scottish Widows Group was transferred into the
direct ownership of the Company, having previously been held by the Company's subsidiary, Lloyds Bank plc. The consideration for the transfer was
£7,622 million which was funded by a dividend from Lloyds Bank plc of an equal amount, which has been treated as a return of capital. Lloyds Bank plc also
made a further return of capital of £2,975 million in 2018, which the Company has used to increase its investment in Lloyds Bank Corporate Markets plc.
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 31 December 2017
Adjustment on adoption of IFRS 9 (note 1)
At 1 January
Exchange and other adjustments
New advances
Repayments
At 31 December
2018
£m
14,379
(2)
14,377
859
21,577
(12,602)
24,211
2017
£m
6,912
(534)
8,476
(475)
14,379
In addition the Company carries out banking activities through its subsidiary, Lloyds Bank plc. At 31 December 2018, the Company held deposits of
£55 million with Lloyds Bank plc (2017: £272 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 £51 million (2017: £2,168 million) due to subsidiary undertakings. In addition, at
31 December 2018 the Company had interest rate and currency swaps with Lloyds Bank plc and Lloyds Bank Corporate Markets plc with an aggregate
notional principal amount of £1,379 million and a net positive fair value of £47 million (2017: notional principal amount of £8,068 million and a net negative
fair value of £62 million) . Of this amount an aggregate notional principal amount of £1,275 million and a net positive fair value of £150 million (2017:
notional principal amount of £4,455 million and a net positive fair value of £246 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.
Lloyds Banking Group Annual Report and Accounts 2018 281
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.
Mandatorily held at fair value
through profit or loss
£m
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
Held at
amortised
cost
£m
At 31 December 2018
Financial assets:
Cash and cash equivalents
Derivative financial instruments
Financial assets at fair value through profit or loss
Loans to subsidiaries
Amounts due from subsidiaries
Total financial assets
Financial liabilities:
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
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
–
–
588
–
–
588
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
57
256
588
–
150
–
–
–
–
106
–
–
–
57
–
–
24,211
24,211
27
27
150
106
24,295
25,139
–
–
–
–
–
265
–
–
265
–
–
19
19
209
–
–
209
–
–
–
–
–
–
–
308
308
–
20,394
6,043
26,437
209
20,394
6,043
26,646
272
–
14,379
47
14,698
10,886
3,993
–
14,879
272
265
14,379
47
14,963
10,886
3,993
327
15,206
Note 49 to the consolidated financial statements outlines the valuation hierarchy into which financial instruments measured at fair value are categorised.
The derivative assets designated as hedging instruments represent level 2 portfolios.
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 2018
Debt securities in issue
Subordinated liabilities
Total financial instrument liabilities
At 31 December 2017
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
58
–
58
46
–
46
99
39
138
6
28
34
396
254
650
218
213
431
11,945
1,929
13,874
5,437
962
6,399
11,555
9,569
21,124
7,133
7,062
14,195
Total
£m
24,053
11,791
35,844
12,840
8,265
21,105
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest
of approximately £1 million (2017: £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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
282 Lloyds Banking Group Annual Report and Accounts 2018
Notes to the parent company financial statements continued
Note 9: Financial instruments continued
Fair values of financial assets and liabilities
The valuation techniques for the Company’s financial instruments are as discussed in note 49 to the consolidated financial statements.
Valuation hierarchy
The table below analyses the assets and liabilities of the Company. With the exception of derivatives all assets and liabilities are held at amortised cost.
They are categorised into levels 1 to 3 based on the degree to which their fair value is observable. No assets or liabilities were categorised as level 1
(2017: nil) .
Fair value of financial assets and liabilities
2018
2017
Valuation hierarchy
Valuation hierarchy
Derivative financial instruments
Financial assets at fair value
through profit or loss
Carrying
value
£m
256
588
Fair value
£m
256
588
Level 2
£m
256
588
Loans to subsidiaries
24,211
24,211
24,211
Amounts due from subsidiaries
27
27
27
Total financial assets
25,082
25,082
25,082
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
209
20,394
6,043
26,646
209
20,352
6,325
26,886
209
20,352
6,325
26,886
Level 3
£m
–
–
–
–
–
–
–
–
–
Carrying
value
£m
265
–
14,379
47
14,691
327
10,886
3,993
15,206
Fair value
£m
265
–
14,379
47
14,691
327
10,966
5,160
16,453
Level 2
£m
265
–
14,379
47
14,691
327
10,966
5,160
16,453
Level 3
£m
–
–
–
–
–
–
–
–
–
The carrying amount of cash and cash equivalents (2018: £57 million; 2017: £272 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 information
Shareholder information
Five year financial summary
Forward looking statements
Abbreviations
Alternative performance measures
Subsidiaries and related undertakings
284
286
287
288
288
289
Lloyds Banking Group Annual Report and Accounts 2018 283
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Working with Macmillan
to help customers
living with cancer
We are continuing to work with Macmillan to reduce money worries
for people living with cancer, by providing a bespoke service
offering financial support following a diagnosis. Macmillan has
trained a number of our colleagues working in specialist customer
facing teams across the Group. Colleagues are able to support
customers to manage their money in ways that suit their personal
needs whilst being able to direct customers to Macmillan for
emotional and practical support as well as financial guidance
support. In turn, Macmillan’s financial guidance team actively
refer clients directly to our Cancer Support Team. This two way
partnership means customers gain the support they need from an
emotional, practical and financial perspective.
Being able to refer customers
to the Lloyds Banking Group
Cancer Support Team gives
us confidence that they will
receive the best possible
support from a team trained
by Macmillan.
Louise,
Financial Guide
visit lloydsbankinggroup.com/
prosperplan
284 Lloyds Banking Group Annual Report and Accounts 2018
Shareholder information
Annual general meeting (AGM)
The AGM will be held at the Edinburgh International Conference Centre, The Exchange, Edinburgh EH3 8EE on Thursday 16 May 2019 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 2019 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
Feb/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 2019 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.
Lloyds Banking Group Annual Report and Accounts 2018 285
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
Balance Ranges
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 +
Totals
Total
Number
of Holdings
1,952,349
386,859
60,328
2,759
601
184
285
76
81
12
11
Percentage
of Holders
Total
Number
of Shares
Percentage
Issued capital
81.23%
581,306,145
16.10% 1,028,549,963
2.51% 1,508,497,549
0.11%
656,798,111
0.03% 1,408,677,567
0.01% 1,319,283,178
0.01% 6,524,098,604
0.00% 5,232,497,753
0.00% 18,313,072,741
0.00% 8,365,104,008
0.00% 26,225,706,645
0.83%
1.45%
2.12%
0.92%
1.98%
1.85%
9.17%
7.35%
25.73%
11.75%
36.85%
2,403,545
100.00% 71,163,592,264
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
286 Lloyds Banking Group Annual Report and Accounts 2018
Five year financial summary
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 after tax for the year
Profit 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 per ordinary share
Diluted earnings per ordinary share
Dividends per ordinary share2,3
Market price (year end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions) 4
Financial ratios (%) 5
Dividend payout ratio6
Post-tax return on average shareholders’ equity
Post-tax return on average assets
Cost:income ratio7
Capital ratios (%)
Total capital
Tier 1 capital
Common equity tier 1 capital
2018
20171
20161
20151
20141
18,626
(11,729)
18,659
(12,696)
17,267
(12,277)
6,897
(937)
5,960
4,400
3,869
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
31 December
2018
31 December
2017
31 December
2016
31 December
2015
31 December
2014
7,116
43,434
6,491
61.0p
418,066
17,656
484,858
797,598
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
2018
2017
2016
2015
2014
5.5p
5.5p
3.21p
51.9p
2,404
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
71,164
71,973
71,374
71,374
71,374
2018
2017
2016
2015
2014
57.6
9.3
0.54
63.0
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
31 December
2018
31 December
2017
31 December
2016
31 December
2015
31 December
2014
22.9
18.2
14.6
21.2
17.2
14.1
21.4
17.0
13.6
21.5
16.4
12.8
22.0
16.5
12.8
1 The Group has adopted IFRS9 and IFRS15 with effect from 1 January 2018; in accordance with the transition requirements of the two standards, comparative information has not been
restated.
2 Annual dividends comprise both interim and estimated final dividend payments. The total dividend for the year represents the interim dividend paid during the year and the final
dividend which is paid and accounted for in the following year.
3 Dividends per ordinary share in 2016 include a recommended special dividend of 0.5 pence (2015: 0.5 pence).
4 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.
5 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
6 Total dividend for the year divided by earnings attributable to ordinary shareholders adjusted for tax relief on distributions to other equity holders.
7 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims) .
Lloyds Banking Group Annual Report and Accounts 2018 287
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;
the ability to achieve strategic objectives; changing customer behaviour
including consumer spending, saving and borrowing habits; changes
to borrower or counterparty credit quality; concentration of financial
exposure; management and monitoring of conduct risk; instability in the
global financial markets, including Eurozone instability, instability as a result
of uncertainty surrounding the exit by the UK from the European Union
(EU) and as a result of such exit 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; risks related to climate change; changes in laws, regulations,
practices and 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 transition from
IBORs to alternative reference rates; 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 and risks 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
288 Lloyds Banking Group Annual Report and Accounts 2018
Abbreviations
ADRs
BSU
CDS
CET1
American Depositary Receipts
Business Support Unit
Credit Default Swap
Common Equity Tier 1
CRD IV
Capital Requirements Directive IV
CVA
DVA
EBA
ECN
EP
EPS
FCA
FLS
FRC
GSR3
HMRC
Credit Valuation Adjustment
Debit Valuation Adjustment
European Banking Authority
Enhanced Capital Note
Economic Profit
Earnings Per Share
Financial Conduct Authority
Funding for Lending Scheme
Financial Reporting Council
Group Strategic Review
Her Majesty’s Revenue & Customs
IAS
IASB
ICG
IFRS
LCR
International Accounting Standard
International Accounting Standards Board
Individual Capital Guidance
International Financial Reporting Standard
Liquidity Coverage Ratio
LIBOR
London Inter-Bank Offered Rate
LTIP
OEIC
PFI
PPI
PPP
PRA
Long-Term Incentive Plan
Open Ended Investment Company
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
Business as usual costs
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, less investment expensed and depreciation.
Total 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
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, or above the line, profit
Statutory profit adjusted for certain items as detailed on page 43.
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.
Lloyds Banking Group Annual Report and Accounts 2018 289
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 2018. 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) Nominees Ltd
Bank of Scotland (Stanlife) London Nominees Ltd
Bank of Scotland Branch Nominees Ltd
Bank of Scotland Capital Funding (Jersey) Ltd
(In liquidation)
Bank of Scotland Central Nominees Ltd
Bank of Scotland Edinburgh Nominees Ltd
Bank of Scotland Equipment Finance Ltd
Bank of Scotland HongKong Nominees Ltd
(In liquidation)
Bank of Scotland Insurance Services Ltd
(In liquidation)
Bank of Scotland Leasing Ltd (In liquidation)
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
Birchcrown Finance Ltd
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
59
1
iv
13
+ *
1
4
5 *
5 *
5
62
5 *
5 *
2
11 *
73
13
13
5 *
5 *
5 *
5
iv
1
13
2
1
12
1 iv
vi
4
4
4
1
1
1 i
ii
1
1
iv
1
58
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 (In liquidation)
BOS Mistral Ltd
4 #
4 #
4 #
4 #
4
4
14 xiii
14
73
2
BOSSAF Rail Ltd
BOS Personal Lending Ltd
British Linen Leasing (London) Ltd
British Linen Leasing Ltd
British Linen Shipping Ltd
C&G Estate Agents Ltd (In liquidation)
C.T.S.B. Leasing Ltd (In liquidation)
Capital 1945 Ltd
Capital Bank Insurance Services Ltd
(In liquidation)
Capital Bank Leasing 1 Ltd (In liquidation)
Capital Bank Leasing 2 Ltd (In liquidation)
Capital Bank Leasing 3 Ltd
Capital Bank Leasing 4 Ltd (In liquidation)
Capital Bank Leasing 5 Ltd
Capital Bank Leasing 6 Ltd (In liquidation)
Capital Bank Leasing 7 Ltd (In liquidation)
Capital Bank Leasing 8 Ltd (In liquidation)
Capital Bank Leasing 9 Ltd (In liquidation)
Capital Bank Leasing 10 Ltd (In liquidation)
Capital Bank Leasing 11 Ltd (In liquidation)
Capital Bank Leasing 12 Ltd
Capital Bank Property Investments (3) Ltd
Capital Bank Vehicle Management Ltd
(In liquidation)
Capital Leasing (Edinburgh) Ltd (In liquidation)
Capital Personal Finance Ltd
Car Ownership Finance Ltd (In liquidation)
Cardnet Merchant Services Ltd
Carlease Ltd (In liquidation)
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 (In liquidation)
Charterhall (No. 2) Ltd (In liquidation)
Cheltenham & Gloucester plc
Chiswell Stockbrokers Ltd (In liquidation)
Clerical Medical (Dartford Number 2) Ltd
(In liquidation)
Clerical Medical (Dartford Number 3) Ltd
(In liquidation)
Clerical Medical Finance plc
Clerical Medical Financial Services Ltd
Clerical Medical Forestry Ltd (In liquidation)
Clerical Medical International Holdings B.V.
Clerical Medical Investment Fund Managers Ltd
Clerical Medical Managed Funds Ltd
(In liquidation)
Clerical Medical Non Sterling Property Company
SARL
Clerical Medical Properties Ltd (In liquidation)
Cloak Lane Funding Sarl
Cloak Lane Investments Sarl
CM Venture Investments Ltd
CMI Insurance (Luxembourg) S.A. (In liquidation)
Conquest Securities Ltd
Corbiere Asset Investments Ltd
Create Services Ltd
Dalkeith Corporation
Delancey Arnold UK Ltd (In liquidation)
Delancey Rolls UK Ltd (In liquidation)
Dunstan Investments (UK) Ltd
Enterprise Car Finance Ltd (In liquidation)
Eurolead Services Holdings Ltd
Exclusive Finance No. 1 Ltd (In liquidation)
Financial Consultants LB Ltd (In liquidation)
First Retail Finance (Chester) Ltd
Flexifly Ltd (In liquidation)
Fontview Ltd (In liquidation)
Forthright Finance Ltd
France Industrial Premises Holding Company
Freeway Ltd (In liquidation)
General Leasing (No. 4) Ltd (In liquidation)
General Leasing (No. 12) Ltd
General Reversionary and Investment Company
Glosstrips Ltd (In liquidation)
Godfrey Davis (Contract Hire) Ltd (In liquidation)
Gresham Nominee 1 Ltd
Gresham Nominee 2 Ltd
Halifax Credit Card Ltd
Halifax Equitable Ltd (In liquidation)
Halifax Financial Brokers Ltd
1
4 i ii
5
5
5
13
13
2
13
13
13
2
13
2
13
13
73
2
13
13
5
2
13
73
4
13
1 i #
ii
iii ^
1
2 viii
vii #
9
1
1
19
1
12
2
13
13
13
12
13
13
13
20
20
13
21
4
20
22
13
56
56
23
iv
24
1 iv
vi
1 i
ii
1
25
26
26
1
7 i #
ii
9
13 i
13
4
73
13
2
28
13
13
1
20
73
13
1
1
4 i
ii
vii
13
4
Halifax Financial Services (Holdings) Ltd
Halifax Financial Services Ltd
Halifax General Insurance Services Ltd
Halifax Group Ltd
Halifax Investment Services Ltd
Halifax Leasing (June) Ltd (In liquidation)
Halifax Leasing (March No.2) Ltd
Halifax Leasing (September) Ltd
Halifax Life Ltd
Halifax Ltd
Halifax Loans Ltd
Halifax Mortgage Services (Holdings) Ltd
(In liquidation)
Halifax Mortgage Services Ltd
Halifax Nominees Ltd
Halifax Pension Nominees Ltd
Halifax Premises Ltd
Halifax Share Dealing Ltd
Halifax Vehicle Leasing (1998) Ltd
HBOS Capital Funding (Jersey) Ltd (In liquidation)
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 plc
HBOS Social Housing Covered Bonds LLP
HBOS UK Ltd
Heidi Finance Holdings (UK) Ltd
Hill Samuel Bank Ltd
Hill Samuel Finance Ltd
Hill Samuel Leasing Co. Ltd
Hill Samuel Nominees Asia Private Ltd
(In liquidation)
Home Shopping Personal Finance Ltd
Horizon Capital 2000 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
IBOS Finance Ltd
ICC Enterprise Partners Ltd (In liquidation)
ICC Equity Partners Ltd (In liquidation)
ICC Holdings Unlimited Company
ICC Software Partners Ltd (In liquidation)
Inchcape Financial Services Ltd
Industrial Real Estate (General Partner) Ltd
(In liquidation)
Industrial Real Estate (Nominee) Ltd
(In liquidation)
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 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 VIII LP
LDC GP LLP
LDC I LP
LDC II LP
LDC III LP
LDC IV LP
LDC Parallel VIII LP
LDC Parallel (Nominees) Ltd
LDC V LP
LDC VI LP
LDC VII LP
4
4
4
4
4
13
1
1
4
4
4
13
4
4
29
1
4
4
62
4 *
13
5
20
20
20
4 i
5
iv
vi
2 *
5
1
1
1 iv
xi
1
50
4
5
1 *
1 * #
1 i
ii
1
4
2
7 i
ii
2
32
32
16
32
2 i
ii #
38
38
4
4
2 i
ii #
35 *
13
36
13
1
1
1
1
9
49
1 ^
13
13
1 ^
1
13
39
40
40
40
40 *
41 *
41 *
41 *
41 *
41 *
40 *
40
41 *
41 *
41*
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
290 Lloyds Banking Group Annual Report and Accounts 2018
Subsidiaries and related undertakings continued
LDC VIII 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 (In liquidation)
Lex Vehicle Finance 3 Ltd (In liquidation)
Lex Vehicle Leasing (Holdings) Ltd
Lex Vehicle Leasing Ltd
Lime Street (Funding) Ltd
Lloyds (General Partner) Ltd (In liquidation)
Lloyds (Gresham) Ltd
Lloyds (Gresham) No. 1 Ltd
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 (In liquidation)
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. 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 (In liquidation)
Lloyds Bank Financial Services (Holdings) Ltd
Lloyds Bank General Insurance Holdings Ltd
Lloyds Bank General Insurance Ltd
Lloyds Bank General Leasing (No. 3) Ltd
Lloyds Bank General Leasing (No. 5) Ltd
Lloyds Bank General Leasing (No. 11) Ltd
Lloyds Bank General Leasing (No. 17) Ltd
Lloyds Bank General Leasing (No. 20) Ltd
(In liquidation)
Lloyds Bank Hill Samuel Holding Company Ltd
Lloyds Bank Insurance Services (Direct) Ltd
(In liquidation)
Lloyds Bank Insurance Services Ltd
Lloyds Bank International Ltd
Lloyds Bank Leasing (No. 4) Ltd (In liquidation)
Lloyds Bank Leasing (No. 6) Ltd
Lloyds Bank Leasing (No. 8) Ltd (In liquidation)
Lloyds Bank Leasing Ltd
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
(In liquidation)
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
(In liquidation)
40 *
13
5
1
13
13
iv
v
1
1
1
13
13
2 i
ii
x
2
1
58
1
x
1
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14
1
13
1
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5
5
42
1
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9
43
1
1
1
1
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1^
44 *
1
1
1
13
13
1 i
ii
1
iv
45
1
1
1
1
1
13
1
1
1
58
13
1
13
1
13
1
13
13
13
13
1
13
13
1
1
58
1 *
1 *
1
1
34 i
ii
1 ^
^ x
1
1
1
1
1
Lloyds Bank Trustee Services Ltd
Lloyds Banking Group Pensions Trustees Ltd
Lloyds Capital GP Limited
Lloyds Commercial Leasing Ltd (In liquidation)
Lloyds Commercial Properties Ltd (In liquidation)
Lloyds Commercial Property Investments Ltd
(In liquidation)
Lloyds Corporate Services (Jersey) Ltd
Lloyds Development Capital (Holdings) Ltd
Lloyds Engine Capital (No.1) U.S LLC
Lloyds Far East Sarl
Lloyds General Leasing Ltd
Lloyds Group Holdings (Jersey) Ltd
Lloyds Holdings (Jersey) Ltd
Lloyds Hypotheken B.V.
Lloyds Industrial Leasing Ltd
Lloyds International Pty Ltd
Lloyds Investment Bonds Ltd (In liquidation)
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 (In liquidation)
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
(In liquidation)
Lloyds TSB Pacific Ltd
Lloyds UDT Asset Leasing Ltd (In liquidation)
Lloyds UDT Asset Rentals Ltd
Lloyds UDT Business Development Ltd
(In liquidation)
Lloyds UDT Business Equipment Ltd
(In liquidation)
Lloyds UDT Hiring Ltd (In liquidation)
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
Membership Services Finance Ltd
Mitre Street Funding Sarl
Moor Lane Holdings Ltd
Newfont Ltd (In liquidation)
NFU Mutual Finance Ltd
Nominees (Jersey) Ltd
Nordic Leasing Ltd
NWS Trust Ltd
Ocean Leasing (July) Ltd (In liquidation)
Ocean Leasing (No 2) Ltd (In liquidation)
Oystercatcher Nominees Ltd
Oystercatcher Residential Ltd
Pacific Leasing Ltd
Pensions Management (S.W.F.) Ltd
Peony Eastern Leasing Ltd (In liquidation)
Peony Leasing Ltd (In liquidation)
Peony Western Leasing Ltd (In liquidation)
Perry Nominees Ltd
PIPS Asset Investments Ltd
Prestonfield Investments Ltd
Proton Finance Ltd
R.F. Spencer And Company Ltd
Ranelagh Nominees Ltd
Red Box ACD Ltd
Red Box Holdco Ltd
Red Box Opco 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
1
1
62
13
6
1
58
40
14 *
56
1
47 i #
ii
vii
58
55
1
8
13
58
1
1
1
31
iv
37
48
1
1
13
1
13
1
1
1
14
33
51
1
1
1
1
1
1
1
52
1
82
1 i
ii
5 *
79 i
ii #
34 *
82
1
82
83
82
82
81
82
76
63
4
56
58
13
2 i
ii #
vii
58
1
5
13
13
20
20
1
54 *
13
13
13
1
1 i
ii
5
7 i #
ii
2
1
1
1
1
1
28
28
28
28
Saleslease Purchase Ltd (In liquidation)
Savban Leasing Ltd
Scotland International Finance B.V.
Scottish Widows (Port Hamilton) Ltd
(In liquidation)
Scottish Widows Administration Services
(Nominees) Ltd
Scottish Widows Administration Services Ltd
Scottish Widows Annuities Ltd (In liquidation)
Scottish Widows Auto Enrolment Services Ltd
Scottish Widows Europe
Scottish Widows Financial Services Holdings
Scottish Widows’ Fund and Life Assurance
Society
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)
Share Dealing Nominees Ltd
Shogun Finance Ltd
Silentdale Ltd (In liquidation)
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 (In liquidation)
Sussex County Homes Ltd
Suzuki Financial Services Ltd
SWB (67 Morrison Street) PLC (In liquidation)
SW No.1 Ltd
SWAMF (GP) Ltd
SWAMF Nominee (1) Ltd
SWAMF Nominee (2) Ltd
SW Funding plc
Target Corporate Services Ltd (In liquidation)
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
TUTP17 Management GMBH
Uberior (Moorfield) Limited
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 Nominees Ltd
Uberior Trading Ltd
Uberior Trustees Ltd
Uberior Ventures Australia Pty Ltd
Uberior Ventures Ltd
UDT Autolease Ltd (In liquidation)
UDT Budget Leasing Ltd
UDT Ltd (In liquidation)
UDT Sales Finance Ltd (In liquidation)
United Dominions Leasing Ltd
United Dominions Trust Ltd
Universe, The CMI Global Network Fund
Upsaala Ltd
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 (In liquidation)
West Craigs Ltd
Wood Street Leasing Ltd
73
1
21
73
30
1
73
1
72
3
54 *
3 i
ii
x
18
1
3
54
3
54
3
45
1
73
73
1
13
4
7 i #
ii
13 iv
vi
vi
20
20
20
1
17 i
ii
5 #
13
4
79 i
ii #
73
3
20
20
20
3 #
1
45
5
4
+ *
1
2 #
2 #
1
17
5
5
5
5
5
5
5
1
5
5 *
5
5 *
8
5
1
1
1
1
1
1
70 *
16
13
1
1
1
1
13
25
25
1 i
ii
60
5
1
Lloyds Banking Group Annual Report and Accounts 2018 291
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 (In liquidation)
ARKLE Funding (No. 1) Ltd (In liquidation)
ARKLE Holdings Ltd (In liquidation)
ARKLE Master Issuer plc (In liquidation)
ARKLE PECOH Holdings Ltd (In liquidation)
ARKLE PECOH Ltd (In liquidation)
Cancara Asset Securitisation Ltd
Candide Financing 2007 NHG BV (In liquidation)
Candide Financing 2008-1 BV (In liquidation)
Candide Financing 2008-2 BV (In liquidation)
Candide Financing 2011-1 BV (In liquidation)
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
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
61
62
53
53
53
53
53
63
64
64
64
64
44
44
72
61
44
44
69
74
63
69
63
65
65
66
67
66
67
63
44
44
63
63
63
Edgbaston RMBS 2010-1 plc
Edgbaston RMBS Holdings Ltd
Elland RMBS 2018 plc
Elland RMBS Holdings Limited
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
44
44
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
36
71
44
44
44
44
44
44
Penarth Asset Securitisation Holdings Ltd
Penarth Funding 1 Ltd
Penarth Funding 2 Ltd
Penarth Master Issuer plc
Penarth Receivables Trustee Ltd
Permanent Funding (No. 1) Ltd
Permanent Funding (No. 2) Ltd
Permanent Holdings Ltd
Permanent Master Issuer plc
Permanent Mortgages Trustee Ltd
Permanent PECOH Holdings Ltd
Permanent PECOH Ltd
Salisbury Securities 2015 Ltd
Salisbury II Securities 2016 Ltd
Salisbury II-A Securities 2017 Limited
Sandown 2012-2 Holdings Ltd
Sandown 2012-2 plc
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 II Securities 2018 DAC
Wetherby Securities 2017 Limited
Lloyds Bank Foundation for England & Wales •
The Halifax Foundation for Northern Ireland •
Lloyds Bank Foundation for the Channel Islands•
Bank of Scotland Foundation •
MBNA General Foundation •
• A charitable foundation funded but not owned by
Lloyds Banking Group
44
61
61
44
61
44
44
44
44
44
44
44
36
61
61
44
44
44
44
75
75
75
75
75
75
75
75
75
75
75
64
61
44
44
44
44
68
61
77
15
77
5
82
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
292 Lloyds Banking Group Annual Report and Accounts 2018
Subsidiaries and related undertakings continued
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
Aghoco 1472 Limited
Aghoco 1476 Limited
Airline Services And Components Group Ltd
Allan Water Homes (Heartlands) Limited
Angus International Safety Group Ltd
Applied Composites Group Ltd
Aqualisa Holdings (International) Ltd
Aspire Oil Services Ltd
Asset Solutions Group Ltd
Australand Apartments No.6 Pty Ltd
Australand Residential Investments Pty Ltd
Australand Residential Trust
Babble Cloud Holdings Limited
Bacchus Newco Ltd
Backhouse (Westbury) JV Ltd
Backhouse (Castle Cary) JV Limited
Bergamot Ventures Ltd
Blue Bay Travel Group Limited
BoS Mezzanine Partners Fund LP
Brington North Holdco Ltd
Caedmon Homes (St Johns Mews) Limited
Caedmon Homes Limited
Caedmon Homes Kirby Hill Ltd
Cardel Group Limited
Castlegate Nexus Limited (in Administration)
Chester Business Park Management Company Ltd
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
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
D.U.K.E Real Estate Ltd
Devonshire Homes (Cullompton) Ltd
Devonshire Homes (Landkey) Ltd
Devonshire Homes (St Austell) Ltd
DHHG1 Limited
Dino Newco Ltd
Duchy Homes (Penistone) Ltd
Duchy Homes (Scawthorpe) Ltd
Duncan and Todd Holdings Limited
Ediston Homes Sauchie Ltd
Eley Group Ltd
Ellis Whittam (Holdings) Ltd
Ensco 997 Limited
Ensek Holdings Limited
Equiom Holdings Ltd
Erris Homes (Almondbury) 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
Fuel Topco Ltd
Galion (Lakeview) Ltd
Ginger Acquisition Company Limited
Great Wigmore Property Ltd
Hamsard 3468 Limited
Hedge End Place (Durkan) LLP
Hedge End Place Hold Co Ltd
Hillcrest Homes (Hurst Green) Limited
Hollins Homes (Newton) Ltd
Homes By Carlton (MSTG1) Ltd
HTF Finco Limited
Iglufastnet Ltd
Ingleby (1884) Ltd
Ingleby (2016) Ltd
James Taylor Homes (Kingston) Ltd
Kenmore Capital 2 Ltd (In liquidation)
Kenmore Capital 3 Ltd (In receivership)
Kenmore Capital Ltd (In liquidation)
Keoghs Topco Ltd
% of share class
held by immediate
parent company
(or by the Group
where this varies)
89%
76.85%
20%
89%
89.25%
89.25%
94.45%
50%
88.9%
85.76%
89.25%
86.45%
28.4%
89.25%
50%
50%
50%
89.25%
89.25%
50%
50%
50%
99%
n/a
50%
50%
50%
50%
89.25%
99%
24%
89.25%
100%
50%
82%
91.22%
50%
99%
90%
89%
89%
27.75%
20%
100%
100%
50%
99%
100%
50%
50%
50%
50%
89.25%
50%
50%
89.25%
50%
85.85%
89.25%
32.74%
99%
99%
50%
100%
24.9%
89.25%
26.98%
99%
50%
34.48%
n/a
89.25%
50%
89.25%
50%
89.25%
n/a
50%
50%
50%
50%
33.3%
89.25%
80.83%
99%
89.25%
50%
100%
100%
100%
99%
89%
89%
Registered office address (UK unless stated otherwise)
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
58 Evans Road, Liverpool, L24 9PB
100-102 King Street, Knutsford, Cheshire, WA16 6HQ
Canberra House, Robeson Way, Sharston Green Business Park, Manchester, M22 4SX
24B Kenilworth Road, Bridge Of Allan, Stirling, Scotland, FK9 4DU
Station Road, High Bentham, Near Lancaster, LA2 7NA
Victoria Works, Thrumpton Lane, Retford, DN22 6HH
Westerham Trade Centre, The Flyers Way, Westerham, TN16 1DE
Notes
ii &
i &
i &
i &
i &
i &
i
i &
xx &
xx &
xxi
&
Bishop's Court, 29 Albyn Place, Aberdeen, AB10 1YL, United Kingdom
Osprey House Crayfields Business Park, New Mills Road, Orpington, Kent, BR5 3QJ, United Kingdom xx &
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
Bury House, 31 Bury Street, London, EC3A 5AR
Park Lane Industrial Estates, Park Lane Off Wigan Road, Ashton in Makerfield, Wigan, WN4 0BZ,
i &
i &
United Kingdon
C/O DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United Kingdom
DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS
6th Floor 25 Farringdon Street, London, EC4A 4AB
A4 Bellringer Road, Trentham Business Quarter, Stoke-On-Trent, ST4 8GB
7 Melville Crescent, Edinburgh, EH3 7JA
25 Gresham Street, London, EC2V 7HN
Baldwins Wynyard Park House, Wynyard Avenue, Wynyard, TS22 5TB, United Kingdom
Baldwins Wynyard Park House, Wynyard Avenue, Wynyard, TS22 5TB, United Kingdom
Baldwins Wynyard Park House, Wynyard Avenue, Wynyard, TS22 5TB, United Kingdom
5 The Marquis Business Centre, Royston Road, Baldock, SG7 6XL
C/O Deloitte LLP, Four Brindley Place, Birmingham, B1 2HZ, United Kingdom
Drake House, Gadbrook Park, Rudheath, Northwich, CW9 7TW, United Kingdom
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
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
1st Floor, Exchange Place, 3 Semple Street, Edinburgh, EH3 8BL
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA, United Kingdom
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA, United Kingdom
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
6 Queens Road, Abderdeen, AB15 4ZT
39/1 George Street, Edinburgh, EH2 2HN
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, IM1 2SH
Unit 11 Acorn Business Park, Killingbeck Drive, Leeds, LS14 6UF, United Kingdom
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
7-9 Fashion Street, London, E1 6PX, United Kingdom
Higher Hill Farm Butleigh Hill, Butleigh, Glastonbury, Somerset, BA6 8TW, United Kingdom
Tudno Mill, Smith Street, Aston-Under-Lyne, Ol7 0DB, United Kingdom
33 Cavendish Square, London, W1G 0PW
Squire Patton Boggs (UK) LLP (Ref:CSU), Rutland House, 148 Edmund Street, Birmingham, B3 2JR
4 Elstree Gate, Elstree Way, Borehamwood, Hertfordshire, WD6 1JD
25 Gresham Street, London, EC2V 7HN
Mynshulls House, 14 Cateaton Street, Manchester, M3 1SQ
Suite 4 No. 1 King Street, Manchester, M2 6AW, United Kingdom
Carlton House, 15 Parsons Court, Welbury Way, Newton Ayciffe, County Durham, DL5 6ZE
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
James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom
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
i
i
ii
xx &
*
~
i
i
i
xx &
xx &
i &
ii &
i
xx
xxi &
i
xx &
i &
xx &
xxi
ii
&
i &
i &
i
i &
ii ~
i
i
i
i
i &
i
i
i&
i
i &
i &
iv &
xx &
i &
i
vii &
xxvii &
i &
iii &
i
i
i &
* &
i &
i
i &
&
xx &
*
~
i
i
i
&
i &
xx &
xxi
xx &
i
ii ~
ii ~
ii ~
xxix &
xxi
xxx
KHL 2017 Limited
KITE Topco Limited
Lidcombe Unincorporated JV
Linley & Simpson Holdings Ltd
London Topco Ltd
Mableford Ltd
Magicard Holdings Ltd
Mitrefinch Holdings Ltd
Motability Operations Group plc
My 360 Living Limited
Neilson Active Holidays Group Ltd
Nexinto Ltd
Northern Edge Ltd
Omnium Leasing Company
Onapp (Topco) II Ltd
Onapp (Topco) Ltd
Optimal Audio Group Ltd
Osprey Aviation Services (UK) Ltd
Paladone Holdings Ltd
Panther Partners Ltd
Patrick Parsons Holdings Limited
Paw Topco Ltd
Pertemps Network Group Ltd
Personal Touch Holdings Limited
PIHL Equity Administration Ltd
PIMCO (Holdings) Ltd
Port Coogee Unincorporated JV
Potter Topco Limited
Prestbury 1 Limited Partnership
Project Belize Ltd
Project Chicago Newco Ltd
Project Polka Bidco Limited
Project Sketch Ltd
Quantum (Flimwell) Limited
Ramco Acquisition Ltd
Right Choice Holdings Limited
Rocket Science Holdings Ltd
Rolls Development UK Ltd (In Liquidation)
Rush Hair Group Limited
Scenic Topco Limited
Seahawk Bidco Ltd
Seaspray Unincorporated JV
SHOO 788AA Ltd
SHOO 802AA Ltd
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
Temple Topco Limited
The Exceed Partnership LP
The Great Wigmore Partnership (G.P.) Ltd
The Great Wigmore Partnership
The Power Industrial Group Limited (In liquidation)
Thistlerow Ltd
Timec 1634 Ltd
Travellers Cheque Associates Ltd
United House Group Holdings Ltd
United Living Group Ltd
Whittington Facilities Limited
Williams Topco Limited
Willoughby (880) Ltd
ZWPV Ltd
84.4%
84.4%
89.25%
50%
89.25%
62.81%
50%
89.25%
89.25%
89.25%
20% (40%)
20% (40%)
50%
65.29%
81.65%
81.65%
100%
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%
96.28%
49.9%
100%
82.5%
42.8%
30.58%
50%
89.25%
n/a
89.25%
89.25%
89.25%
88.30%
50%
89.45%
89.45%
89.45%
89.25%
99%
50%
89.25%
89.25%
89.25%
n/a
89.25%
89.25%
82.5%
82.5%
82.5%
82.5%
88.80%
100%
100%
82.5%
82.5%
99%
n/a
89.25%
n/a
50%
n/a
82.5%
82.5%
50%
89.25%
36%
81.65%
100%
98.55%
100%
89.25%
89.25%
89.25%
Lloyds Banking Group Annual Report and Accounts 2018 293
One Eleven, Edmund Street, Birmingham, England, B3 2HJ
Winchester House, Oxford Science Park, Heatley Road, Oxford, OX4 4GE
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
3 Greengate Cardale Park, Harrogate, North Yorkshire, HG3 1GY, United Kingdom
Gloucester Road, Cheltenham, Gloucester, GL51 8NR
Lindum Business Park Station Road, North Hykeham, Lincoln, LN6 3QX, United Kingdom
Waverley House, Hampshire Road, Granby Industrial Estate, Weymouth, DT4 9XD
Mitrefinch House, Green Lane Trading Estate, Clifton, York, North Yorkshire, YO30 5YY
City Gate House, 22 Southwark Bridge Road, London, SE1 9HB
Strategic Business Centre, Blue Ridge Park, Thunderhead Ridge, Glasshoughton, West Yorkshire,
WF10 4AU, United Kingdom
Locksview, Brighton Marina, Brighton, BN2 5HA
2 Chester Row, London, United Kingdom, SW1W 9JH
The Beacon, 176 St. Vincent Street, Glasgow, G2 5SG
N/A
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ
Unit 2 Century Point Halifax Road, Cressex Business Park, High Wycombe, Buckinghamshire, HP12 3SL,
United Kingdom
i
ii &
xxi &
*
i&
i &
i
xx &
xxi
i &
iv
i
i &
xx &
xxi
xxii
ii &
+
i &
iv
xx &
xxi
i &
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
Fourth Floor Central Square, Forth Street, Newcastle upon Tyne NE1 3PJ
Birkbecks, Water Street, Skipton, North Yorkshire, BD23 1PB
Apex House, Dolphin Way, Shoreham-by-Sea, West Sussex, BN43 6NZ, United Kingdom
16 Kirby Street, London, EC1N 8TS
Meriden Hall, Main Road, Meriden, Coventry
Trinity 3, Trinity Park, Solihull, West Midlands, B37 7ES
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
Four Brindleyplace, Birmingham, B1 2HZ, United Kingdom
xx &
xxi
i &
xx &
xxi
xx &
xx &
xxi
ii &
xvii &
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
i &
Sawley Marina, Long Eaton, Nottinghamshire, NG10 3AE
i &
Church Lane, Church Lane, Norton, Worcester, WR5 2PR
Roundhouse Road, Faverdale Industrial Estate, Darlington, County Durham, DL3 0UR, United Kingdom ii &
i &
11 Vantage Way, Erdington, Birmingham, B24 9GZ
i
Kings Parade, Lower Coombe Street, Croydon, CR0 1AA
xxii &
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
xxvii
xix
i &
x &
ii
i &
i &
xx &
*
xx &
xx &
xx &
iii
iv
xxi
i &
i ~
i ~
xx &
xxi
xx &
*
i &
*
St James House, 27-43 Eastern Road, Romford, Essex, United Kingdon, RM1 3NH
Level 1, Devonshire House, Mayfair Place, London, England, W1J 8AJ
4th Floor , 4 Victoria Square, St Albans, Hertfordhsire, AL1 3TF, United Kingdom
23 George Street, Croydon, Surrey, CR0 1LA
One Central Square, Cardiff, CF10 1FS
Unit 2 Springfield Court, Summerfield Road, Bolton, BL3 2NT, United Kingdom
Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia
21-22 Balena Close, Poole, Dorset, BH17 7DX
Burleighfield House, London Road, Loudwater, Bucks, HP10 9RF
7 Bradford Business Park, Kingsgate, Bradford, BD1 4SJ
2nd Floor, G Mill, Dean Clough, Halifax, HX3 5AX
The Mound, Edinburgh, EH1 1YZ, United Kingdom
The Mound, Edinburgh, EH1 1YZ, United Kingdom
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
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
Deloitte LLP, 1 City Square, Leeds, LS1 2AL
Radleigh House 1 Golf Road, Clarkston, Glasgow, G76 7HU
5 Silverton Court, Cramlington, Northumberland, NE23 7RY, United Kingdom
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
Third Floor, Broad Quay House, Prince Street, Bristol, BS1 4DJ
The Old Post Office, St. Nicholas Street, Newcastle Upon Tyne, United Kingdom, NE1 1RH
IMEX, 575-599 Maxted Road, Hemel Hempstead Industrial Estate, Hemel Hempstead, Herts, HP2 7DX xx &
Zip World Base Camp, Denbigh Street, Llanrwst, LL26 0LL
i &
*
i &
xx
i
xx &
i &
i &
xvii
v
i &
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
294 Lloyds Banking Group Annual Report and Accounts 2018
Subsidiaries and related undertakings continued
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% of the nominal value of any class of shares, or a book value greater
than 20% 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
48%
Aberdeen European Property Share Fund
78%
Aberdeen Sterling Bond Fund
Aberdeen European Global High Yield Bond Fund
23%
Aberdeen Sterling Opportunistic Corporate Bond Fund 35%
ABERDEEN INVESTMENTS ICVC II
Aberdeen Global Corporate Bond Tracker Fund
100%
ABERDEEN INVESTMENT ICVC III
Aberdeen Global Emerging Markets Quantitative
Equity Fund
61%
ABERDEEN LIQUIDITY FUND (LUX)
Aberdeen Liquidity Fund (Lux) – Sterling Fund
Aberdeen Liquidity Fund (Lux) – Ultra Short Duration
25%
37%
Sterling Fund
ABERDEEN PRIVATE EQUITY FUND OF FUNDS (2007) PLC 96%
ACS POOLED PROPERTY
Scottish Widows Pooled Property ACS Fund
Scottish Widows Pooled Property ACS Fund2
AGFE UK REAL ESTATE SENIOR DEBT FUND LP
100%
100%
78%
BLACKROCK BALANCED GROWTH PORTFOLIO FUND 32%
BLACKROCK UK SMALLER COMPANIES FUND
BNP PARIBAS INSTICASH
BNP Paribas InstiCash GBP
BNY MELLON MANAGED FUNDS II
BNY Mellon MF II – Absolute Insight Fund
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
21%
58%
74%
44%
74%
29%
48%
32%
94%
92%
97%
96%
81%
94%
53%
95%
52%
83%
40%
66%
51%
62%
62%
58%
43%
42%
51%
57%
INVESCO PERPETUAL FAR EASTERN INVESTMENT
SERIES
Invesco Perpetual Asian Equity Income Fund
21%
MULTI MANAGER ICVC
Multi Manager UK Equity Growth Fund
Multi Manager UK Equity Income Fund
Multi Manager UK Equity Focus Fund
PAN EUROPEAN URBAN RETAIL FUND
RUSSELL INVESTMENT COMPANY PLC
Russell Euro Fixed Income Fund
Russell Sterling Bond Fund
SCHRODER GILT AND FIXED INTEREST FUND
81%
30%
20%
22%
33%
35%
23%
SCOTTISH WIDOWS INCOME AND GROWTH FUNDS ICVC
UK Index Linked Gilt Fund
100%
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
SCOTTISH WIDOWS UK AND INCOME INVESTMENT
FUNDS ICVC
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
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
US Tracker
Euro Tracker
INVESTMENT PORTFOLIO ICVC
IPS Income
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%
100%
27%
71%
43%
34%
42%
54%
56%
66%
76%
96%
96%
85%
100%
88%
96%
95%
98%
96%
93%
76%
82%
72%
60%
99%
92%
54%
90%
85%
77%
96%
92%
31%
28%
47%
97%
88%
49%
63%
62%
96%
27%
65%
70%
75%
91%
96%
94%
100%
100%
100%
100%
90%
100%
100%
98%
75%
88%
93%
79%
69%
94%
74%
99%
100%
28%
22%
21%
24%
34%
28%
23%
37%
2
2
2
2
2
4
4
4
4
6
2
21
17
8
8
8
7
3
2
11
9
9
5
10
10
1
1
1
1
1
18
18
18
12
2
19
15
16
2
Lloyds Banking Group Annual Report and Accounts 2018 295
(36) 47 Esplanade, St. Helier, Jersey, JE1 0BD
(37) Sarnia House, Le Truchot, St. Peter Port, Guernsey, GY1 4EF
(38) Unit 2 Spinnaker Court, 1C Becketts Place, Hampton Wick, Kingston Upon Thames,
Surrey, KT1 4EQ, United Kingdom
(39) Bank of China, Tower 1, Garden Road Central, Hong Kong
(40) 1 Vine Street, London, W1J 0AH
(41) 39 Queens Road, Aberdeen, AB15 4ZN
(42) Royal Ocean Plaza, Ocean Village, GX11 1AA, Gibraltar
(43) 110 St. Vincent Street, Glasgow, G2 4QR
(44) 35 Great St. Helen’s, London, EC3A 6AP
(45) Charlton Place, Charlton Road, Andover, SP10 1RE
(46) 22 Grenville Street, St. Helier, Jersey, JE4 8PX
(47) Queensway House, Hilgrove Street, St. Helier, Jersey, JE4 1ES
(48) 6/12, Primrose Road, Bangalore , 560025, India
(49) Avenida Jurubatuba 73, 8° Andar, Vila Cordeiro, São Paulo, SP, CEP 04583-100, Brazil
(50) C/O Ernst & Young Solutions LLP, One Raffles Quay, North Tower, #18-00,
Singapore, 048583
(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) 48 Boulevard Grande-Duchesse Charlotte, 1330, Luxembourg
(57) Caledonian Exchange, 19A Canning Street, Edinburgh, EH3 8HE
(58) 11-12 Esplanade, St Helier, Jersey, JE2 3QA
(59) Karl-Liebknecht-STR. 5, D_10178 Berlin, Germany
(60) P O Box 12, Peveril Buildings, Peveril Square, Douglas, Isle of Man, IM99 1JJ
(61) 44 Esplanade, St. Helier, Jersey, JE4 9WG
(62) IFC 5, St Helier, Jersey, JE1 1ST
(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, 5°Izquierda, 28006, Madrid, Spain
(68) 1-2 Victoria Buildings, Haddington Road, Dublin 4, Ireland
(69) Wilmington Trust SP Services (London) Limited, Third Floor, 1 King’s Arms Yard, London,
EC2R 7AF
(70) 106 Route d'Arlon, Mamer, L-8210, Luxembourg
(71) 1 Grant's Row, Lower Mount Street, Dublin 2, Ireland
(72) 20 Rue de la Poste, L-2346 Luxembourg
(73) EY Atria One, 144 Morrison Street, Edinburgh, EH3 8EB
(74) Fifth Floor, 100 Wood Street, London, EC2V 7EX, United Kingdom
(75) 8 Avenue Hoche, 75008, Paris, France
(76) 1A Heienhaff, Senningerberg, L-1736, Luxembourg
(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) T he Residency, 7th Floor, 133/1 Residency Road, Bangalore, 560025, India
(82) Stansfield House, Chester Business Park, Chester, CH4 9QQ, United Kingdom
(83) Glategny Court, Glategny Esplanade, St Peter Port, GY1 3HQ, Guernsey
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) BNP Paribas InstiCash, 10, Rue Edward Steichen, L-2540 Luxembourg, Grand-Duche de
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) 3rd Floor South, 55 Baker Street, London, W1U 8EW
(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
Luxembourg
(19) Jackson House, 18 Saville Row, London, W1S 3PW
(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%
~ The Group holds voting rights of 50%
(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
(xx) A1 Ordinary Shares
(xxi) A2 Ordinary Shares
(xxii) A3 Ordinary Shares
(xxiii) A3 Preference Shares
(xxiv) Z1 Ordinary Shares
(xxv) Z2 Ordinary Shares
(xxvi) Preferred B Ordinary Shares
(xxvii) A4 Ordinary Shares
(xxviii) B1 Ordinary Shares
(xxix) B2 Ordinary Shares
(xxx) C2 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) 4th Floor, Victoria House, Victoria Road, Chelmsford, CM1 1JR, United Kingdom
(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) 60313 Frankfurth AM Main, Thurn-Und, Taxis-Platz 6, Germany
(18) Hoogoorddreef, 151101BA, Amsterdam, Netherlands
(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) 15 Dalkeith Road, Edinburgh, EH16 5BU, United Kingdom
(31) 138 Market Street, #27-01/02, Capita Green, 048946, Singapore
(32) McStay Luby, Dargan House, 21-23 Fenian Street, Dublin 2, Ireland
(33) EY Limited of Suite 3C, Regal House, Queensway, Gibraltar
(34) P O Box 186, Royal Chambers, St Julian’s Avenue, St. Peter Port, GY1 4EF, Guernsey
(35) De Entrée 254, 1101 EE, Amsterdam, Netherlands
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
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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