Annual Report and Accounts 2019
2
Lloyds Banking Group Annual Report and Accounts 2019
Our Group
We are the largest UK retail and
commercial financial 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 through 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.
Our reporting
We aim to report in an integrated
way to reflect the way we operate. As
well as reporting our financial results,
we also report on our strategy and
approach to operating responsibly
and take into account relevant
economic, political, social, regulatory
and environmental factors.
Within this year’s report we have also
sought to address the additional
reporting requirements arising from
Section 172 of the Companies Act
2006 and the 2018 UK Corporate
Governance Code.
This Annual Report and Accounts
contains forward looking statements
with respect to the Group’s plans and
its current goals and expectations
relating to its future financial
condition, performance, results,
strategic initiatives and objectives.
For further details, reference should
be made to the forward looking
statements on page 330.
Picture this
In 2019, we offered colleagues from
across the Group an opportunity
to submit photographs that they
felt represented our purpose of
Helping Britain Prosper. The winning
photos are marked with this symbol
alongside the photographer’s name.
The 2019 Annual Report and Accounts
incorporates the strategic report and the
consolidated financial statements, both of
which have been approved by the Board
of Directors.
On behalf of the Board
Lord Blackwell
Chairman
Lloyds Banking Group
19 February 2020
Group highlights
Solid financial performance in a challenging environment
£3.0bn
(33)%
Statutory profit after tax
was lower largely due to the
additional PPI charge. Tax
expense of £1.4 billion
3.37p
+5%
Progressive and sustainable
ordinary dividend per share
including interim and
final dividends
27%
Total shareholder return
increased in the year reflecting
the increased ordinary dividend
and higher share price
7.8%
(3.9)pp
Lower return on tangible
equity given lower
statutory profit
48.5%
(0.8)pp
Cost: income ratio continues
to improve
13.8%
(0.1)pp
Common equity tier 1 ratio
remains strong
16.4m
+4%
Digitally active customers
continued to increase and we
remain the largest digital bank
in the UK
74%
+1pp
Employee engagement index
improved, two points above
the norm for top performing
UK companies
20 of 22
Helping Britain Prosper Plan
targets achieved including the
new sustainability KPI
All the above key performance
indicators directly impact
remuneration outcomes and
support the delivery of our
reward principles.
Inside this year’s Annual Report
Strategic report
Chairman’s statement
Group Chief Executive’s review
Key performance indicators
Our external environment
Our business
Our strategic priorities
Our key stakeholders and
Board engagement
Responsible business
Financial performance overview
Risk overview
Financial results
Summary of Group results
Divisional results
Other financial information
Governance
A letter from our Chairman
Board of Directors
Group Executive Committee
Corporate governance report
Directors’ report
Directors’ remuneration report
Risk management
The Group’s approach to risk
Emerging risks
Risk governance
Capital stress testing
Full analysis of risk categories
Financial statements
Independent auditors’ report
Consolidated financial statements
Parent company financial statements
Other information
Shareholder information
Five year financial summary
Forward looking statements
Abbreviations
Alternative performance measures
Subsidiaries and related undertakings
94
98
130
133
135
137
138
189
198
318
327
329
330
331
331
332
2
5
8
10
14
16
20
26
36
40
48
57
61
65
66
68
70
Lloyds Banking Group Annual Report and Accounts 2019 01
During 2019, we’ve lent £13.8 billion to
support people to buy their first home,
helped over 350,000 more people save
for their future and supported more than
100,000 businesses across the UK to start
up and grow.
Given our customer focused strategy,
ambitious transformation programme
and digital strength, the Group remains
well placed to continue to support its
customers, Help Britain Prosper and
deliver long-term sustainable success.
Helping Britain Prosper Plan
on pages 27 to 34
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationBea’s Room
02 Lloyds Banking Group Annual Report and Accounts 2019
Chairman’s statement
Significant strategic progress positioning us well
to respond to the changing environment
Given our unique
position at the heart of
the UK economy, the
successful transition
to a more sustainable,
lower-carbon economy
is of strategic
importance to us.
Lord Blackwell
Chairman
Overview and strategy
During 2019, the Group has continued to make
significant strategic progress and deliver solid
financial performance in a challenging external
environment. Much of the year was impacted
by economic and political uncertainty, but our
customer focus has remained strong and the
cornerstone of our business.
The Group is driven by our powerful purpose of
Helping Britain Prosper. As I have mentioned in
previous years, despite the external challenges,
the Board are determined to continue building
value for shareholders by maintaining our
focus on results delivery whilst simultaneously
investing in the major transformation required
to serve our customers and operate effectively
in a digital world. This transformation not only
requires adopting new technologies, but also
adapting to the new skills, culture and ways
of working that the digital revolution requires.
Delivering this effectively while remaining
true to our traditional values and focusing on
customer service is a tremendous challenge,
but we are committed to building a successful
and sustainable Group of which we can all
be proud.
We remain on track to deliver our
commitment of more than £3 billion of
strategic investment over the three year plan
period, having invested around £2 billion
to date. This investment, which in 2019
continued to focus on further enhancing our
leading customer experience, digitising the
Group, maximising Group capabilities and
transforming ways of working, is essential to
sustain our long-term competitive advantage.
At the same time we continue to invest in new
growth opportunities. In 2019 we successfully
launched Schroders Personal Wealth with the
ambition of becoming a top three financial
planning business by the end of 2023 as a
complement to our growing pensions and
retirement business in Scottish Widows. We
also acquired Tesco Bank’s £3.5 billion UK
prime residential mortgage portfolio.
Our weak spot continued to be the ongoing
legacy from past misconduct, with another
significant provision for PPI mis-selling as
we approached the deadline for customer
compensation claims last August. In addition,
despite the organisation’s best intentions to
provide rapid and generous compensation
to victims of the historic HBOS Reading
Fraud, we also had to acknowledge that
the independent review of this process by
Sir Ross Cranston highlighted shortcomings
which now require us to ensure customers
can opt into a further review if they are not
satisfied with their outcome. We have learned
a number of lessons from this, on how to
improve our handling of small business
customers, which we will build into our
ongoing operations. The Board and Executive
team remain committed to doing whatever
is necessary to ensure all victims impacted
by past failures receive fair recompense that
reflects the importance we attach to earning
and retaining the trust of our customers.
Performance and capital return
We delivered a solid financial performance
in 2019 despite the challenging external
environment. I am naturally disappointed that
our statutory result was significantly impacted
by the additional PPI charge in the year as
noted above. Despite this, our performance
continues to demonstrate the resilience of
our customer franchise and business model,
the appropriateness of our strategy and the
strength of our balance sheet.
With this in mind I am pleased to announce
that the Board has recommended an
increased final ordinary dividend of
2.25 pence per share, bringing the total
ordinary dividend for 2019 to 3.37 pence per
share, an increase of 5 per cent on last year
and in line with the Group’s policy to deliver
a progressive and sustainable ordinary
dividend. While we concluded that we should
be prudent in not distributing further capital
this year, the Board will continue to assess this
in future years.
I am also pleased, that as announced in May 2019,
the Group will be moving to quarterly dividend
payments this year with the first payment in
respect of the first quarter of 2020 due in June.
Supporting the UK economy
through uncertain times
We have and will continue to play an active
part in supporting the UK economy, to which
our success is inextricably linked. As part of our
purpose of Helping Britain Prosper, we believe
we have a responsibility to help address the
social, economic and environmental challenges
that the UK faces, whether we're helping
people buy a house, supporting businesses to
start up and grow, building digital skills, being
a leader in diversity or helping the transition to
a low carbon economy.
We are supporting businesses by providing
funding, once again lending them up to
£18 billion in 2020, and the skills and tools they
will need to develop and grow. For instance,
our Digital Academies provide relevant free
training and our International Trade Portal
helps them find new customers overseas.
Additionally we have helped 2,000 social
entrepreneurs start up and scale and we have
regional teams working with Be the Business
to address productivity issues and provide a
boost for local companies.
Given our unique position at the heart of the
UK economy, the successful transition to a
more sustainable, lower-carbon economy
is of strategic importance to us. In response
to the global issue of climate change, the
Group reached a new milestone with the
development of a new goal, working with
customers, Government and the market to
help reduce emissions we finance by more
than 50 per cent by 2030. We have made
sustainability a focus area in our Helping
Britain Prosper Plan and throughout 2019 we
have continued to build on this by developing
the new reporting framework, which can be
found on pages 28 to 31.
Lloyds Banking Group Annual Report and Accounts 2019 03
OUR CONTRIBUTION TO THE UK
As the UK’s leading financial services provider we are making a significant
positive impact on the UK economy
Suppliers
£5.9 billion paid
in 2019
>95 per cent of
direct suppliers
located in the UK
Tracey Bewick
Regulators and
Government
£2.9 billion tax paid
in 2019
The UK’s largest
corporate tax payer
a more simplified remuneration structure with
a clear alignment to the purpose and strategy
of the Group, whilst appropriately rewarding
performance. The changes also support the
long-term goal to narrow the gap between
executive and wider colleague remuneration.
Full details of the proposed Policy and
rationale for the proposed changes can
be found within the Directors’ Report on
Remuneration on pages 98 to 102. The policy
will be subject to shareholder approval at the
AGM in May.
Despite facing a challenging external
environment, we have delivered a solid
financial performance for the year. The
additional PPI charge has however significantly
impacted our statutory results. As a result of
this and other performance factors, the total
Group Performance Share (GPS) outcome
for the Group decreased 33 per cent to
£310.1 million.
The total GPS outcome remains a small
proportion of underlying profit at 3.7 per cent
and an even smaller proportion of overall
revenues. Cash GPS awards are capped at
£2,000 per colleague, with additional amounts
paid in shares and subject to deferral and
performance adjustment to ensure their
ultimate value reflects sustained performance.
More information on this year's outcomes
and on how we ensure our approach to
remuneration supports our strategy can be
found in the Directors’ Remuneration Report
on pages 98 to 123.
Customers
£15.5 trillion
of payments
processed in 2019
= 7x UK GDP
£61.2 billion SME
and Mid Markets
lending portfolio
Biggest mortgage
lender in UK with
c.£289 billion
portfolio
£18 billion lending
commitment to UK
businesses
Colleagues
One of the
largest employers
in the UK
Our stakeholders on pages 20 to 25
Equally important is how we engage with our
customers on this issue and to support this
change we have trained over 800 colleagues,
enhancing their awareness of the risks and
opportunities the transition to a low carbon
economy represents. We will also continue
our partnership with the Cambridge Institute
for Sustainability Leadership to provide high
quality training to executives and colleagues
in risk management, product development
and client facing roles.
Our partnership with Mental Health UK
began in 2017, with the aim of raising
£4 million over a two year period, however we
quickly exceeded that and have raised over
£11 million to date. As a Group we believe
that a shift in mindset is needed amongst UK
employers when it comes to mental health
and our approach focuses on a willingness
to acknowledge, support and manage
mental health in the workplace. In 2019, we
announced that we are continuing our journey
with Mental Health UK for another two years
and aim to raise a further £4 million by the
end of 2021. In addition, we aim to continue
to raise awareness and reduce stigma. We
have committed to training 2,500 colleagues
to become Mental Health Advocates by 2020,
and also provided colleagues with training to
help support customers.
Our colleagues and culture
Throughout 2019, I have travelled across
Britain to see how colleagues are embracing
new ways of working and the contribution they
are making towards Helping Britain Prosper.
These visits enabled me to see first-hand how
we support customers and respond to their
needs in a challenging environment.
I am delighted that we have been named as a
top 10 employer for working families, and also
retained our place on both the Stonewall Top
100 Employers list for the fifth year in a row
and The Times’ Top 50 Employers for Women
for the eighth consecutive year. This great
news demonstrates our clear commitment to
Shareholders
£2.4 billion paid
in dividends to
c.2.4 million
shareholders
Communities
and Environment
£50.8 million
donated to help
communities in 2019
More than 246,000
hours volunteered
ensuring all colleagues can feel confident in
bringing their true selves to work and reach
their full potential.
I also want to recognise the great work that
is done by all of our Charitable Foundations.
This was illustrated by the award recently won
by the Lloyds Bank Foundation for England
and Wales, recognised as the leading grant
maker in the Civil Society Charity Awards for
its commitment to helping small and local
charities thrive for the long-term.
The Board and senior management have a
vital role to play in shaping and embedding
a healthy corporate culture, and this has
been a major focus of the Board’s attention
over the last year. The values and standards
of behaviour we set are an important
influence and there are strong links between
governance, strategy and establishing a
culture that supports long-term success.
Throughout 2019, the Board has continued
to evolve the Group’s culture plan, focusing
on our Group values; putting customers
first, keeping it simple and making a
difference together. Our aim is a culture
where every colleague is encouraged to take
responsibility for ensuring we do the right
thing for every customer.
The results from the Group’s 2019 colleague
survey, which can be found on page 9,
acknowledge the positive work that has been
completed. Transforming our culture with
colleagues, empowered to speak out and
drive their personal development, is critical to
the successful delivery of our current strategy.
Remuneration
There has been a substantial focus on
remuneration throughout 2019. The
Remuneration Committee has engaged
extensively with our shareholders and other
key stakeholders to develop the proposed
2020 Directors’ Remuneration Policy. The
changes proposed within the new policy
have been designed in the interests of our
stakeholders and take on board feedback for
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
04 Lloyds Banking Group Annual Report and Accounts 2019
Chairman’s statement continued
SOCIETY OF THE FUTURE
We recognise that society’s expectations of the Group
as a major UK corporation are evolving
As a UK, customer-focused business,
we recognise that our success and
prospects are inextricably linked to the
health of the UK economy. Our focus
on helping to improve the prosperity of
individuals, businesses and communities
across the UK therefore not only makes
commercial sense, but also represents a
social responsibility for an organisation
such as ours. In recent years, we have fully
embraced this through our purpose of
Helping Britain Prosper which continues to
make a significant positive impact across
the UK, while also giving our colleagues a
real sense of pride and meaning.
As we look ahead, we recognise that the
external environment is changing at an
extraordinary rate and the UK is being
confronted by a range of evolving social,
economic and environmental challenges
that are unprecedented in nature and
require a bold response. At the same
time, stakeholder expectations of how
major UK institutions should respond are
changing, raising fundamental questions
regarding how companies can retain
their implicit licence to operate while also
remaining both relevant and attractive to
a diverse range of stakeholders, including
customers, colleagues, shareholders and
the broader society.
In June 2019, the Board and the senior
management team took part in an
intensive two-day strategy meeting to
revisit our expectations of the current
strategy and review the key trends that
have emerged since. As part of this,
the Board debated the transformation
required to meet these evolving
expectations and obligations to the
Society of the Future.
This recognised that, to continue to
operate as a successful business, it
will be increasingly important that we
demonstrate the contribution we make
to the communities in which we operate
and the value we provide in Helping
Britain Prosper, with an emphasis on
demonstrating that acting responsibly and
ethically and delivering good outcomes for
customers, colleagues and shareholders
should not come at the detriment of
shareholder returns, but rather be an
integral part of achieving them. This
session provided a solid foundation for us
to develop the next phase of our strategy
during the course of 2020.
Directors
We review the Board’s composition and
diversity regularly and have continued
to strengthen and further diversify the
knowledge and experience on our Board.
During 2019, we have announced a number
of Board changes, as outlined below.
George Culmer, our Group Financial Officer
retired in the third quarter of 2019. George
played a vital role in helping the Group navigate
its way through the aftermath of the financial
crisis to return to full private ownership.
I want to pay tribute to George’s tremendous
contribution and to thank him on behalf of the
Board, our colleagues and our shareholders.
I am pleased to welcome William Chalmers,
who formally took the reins as the Group’s
Chief Financial Officer in August 2019. We
are pleased to have been able to attract a
candidate of William’s calibre to the Board.
He brings a wealth of experience that will be
of significant benefit to the Group.
I am also pleased to welcome two new
independent Non-Executive Directors
to the Board; Sarah Legg, who became
a member of the Audit and Board Risk
Committee in December 2019 and
Catherine Woods who will join us in
March 2020. Catherine will join the Board Risk
and Remuneration Committees.
In addition to these changes, after many
years as a Senior Executive for the Group,
Juan Colombás, Executive Director and
Chief Operating Officer, announced his plan
to retire in July 2020. The Board is grateful to
Juan for the major contribution he has made
to the transformation of the Group. Anita Frew
stepped down as Senior Independent
Director in December and will also retire
as Deputy Chairman and Non-Executive
Director in May 2020, having served nine years
on the Board. Anita has been an extremely
valuable Board member and will be much
missed. Alan Dickinson succeeded Anita as
Senior Independent Director and will also
take on the role of Deputy Chairman, bringing
his significant Board, financial and regulatory
experience to these roles.
Last October I also announced that I plan
to retire from my role as Chairman of Lloyds
Banking Group once my successor is appointed,
at or before the AGM in 2021, which would mark
nine years on the Board. I will be sad to leave,
but know I will do so with great pride in what
has been accomplished to rebuild the Group’s
strength and shape its development so it can
continue to play its important role in supporting
the UK’s prosperity.
Summary
I would like to thank all of our colleagues for
their significant contribution in 2019. It is the
commitment, support and dedication from
all of them that enables us to succeed and
I believe the Group remains well positioned
as a result of the transformation underway
to continue delivering for customers
and shareholders.
Lord Blackwell
Chairman
Lloyds Banking Group Annual Report and Accounts 2019 05
Group Chief Executive’s review
Solid financial performance with
market leading efficiency and returns
We have made
significant strategic
progress and our
performance continues
to demonstrate
the competitive
advantage of our
business model.
António Horta-Osório
Group Chief Executive
reductions in the closed mortgage book and
lower balances in Mid Markets and Global
Corporates. The reduction in Commercial
balances is due to continued optimisation of
the portfolio as we actively address low risk-
adjusted return relationships.
The Group is strongly capital generative,
although this has been impacted by PPI in
2019. Given our strong capital position at the
year end, the Board has recommended a final
ordinary dividend of 2.25 pence per share,
bringing the total ordinary dividend for the
year to 3.37 pence per share. This represents
an increase of 5 per cent on 2018 and is in
line with our progressive and sustainable
ordinary dividend policy. The Group’s capital
position remains strong with a pro forma
CET1 ratio of 13.8 per cent after allowing
for ordinary dividends.
Creating competitive advantages
Net cost
reduction
Market
leading efficiency
Sustainable
and superior
returns
Greater
investment
capacity
Enhancements
to internal
processes
Improvement
to customer
experience
In 2019 the Group has continued to deliver for
customers while making significant strategic
progress and delivering a solid financial
performance in a challenging external
market. While it is disappointing that this
was impacted by the additional PPI charge
in the year, as a result of this performance,
the Board has been able to recommend
an increased total ordinary dividend of
3.37 pence per share.
In February 2018 we announced an ambitious
plan to transform the Group for success in a
digital world, supported by over £3 billion of
strategic investment. We are now two-thirds
of the way through the plan and have made
significant progress in further digitising the
Group, enhancing customer experience,
maximising our capabilities as an integrated
financial services provider and transforming
the way we work.
We have made significant progress in our
customer proposition. For example, our
unique Single Customer View capability
provides customers with the ability to view
their pensions and long-term savings products
alongside their banking products. Insurance
and Wealth has seen strong growth in life
and pensions sales, driven by new members
in existing workplace schemes, increased
auto enrolment workplace contributions and
bulk annuities. In partnership with Schroders,
during the third quarter of 2019 we launched
Schroders Personal Wealth, with the ambition
of becoming a top three financial planning
business by the end of 2023. Also in the third
quarter, the Group announced the acquisition
of Tesco Bank’s prime UK residential
mortgage portfolio, which complements
our organic strategy.
Historic conduct issues remain disappointing
but we continue to be focused on doing the
right thing for our customers. The Group
is fully committed to implementing all of
the recommendations contained within
Sir Ross Cranston's report relating to HBOS
Reading and ensuring that victims of the
HBOS Reading fraud have their claims
assessed in an open and transparent manner.
We have apologised to those impacted and
are determined to put things right.
Given our clear UK focus, our performance
is inextricably linked to the health of the
UK economy. During 2019, UK economic
performance has remained resilient
in the face of significant political and
economic uncertainty, supported by record
employment, low interest rates and rising real
wages. Although uncertainty remains given
the ongoing negotiation of international
trade agreements, there is now a clearer sense
of direction and we remain well placed to
Help Britain Prosper, support our customers
and deliver strong and sustainable returns
for shareholders.
Financial performance
Statutory profit before tax of £4.4 billion was
26 per cent lower than 2018 and earnings per
share at 3.5 pence was down 36 per cent,
due to the PPI charge of £2.45 billion in
2019 (2018: £0.75 billion). Underlying profit
of £7.5 billion was down 7 per cent on 2018,
reflecting continued revenue pressure and
higher impairments partly offset by lower
total costs. Our relentless focus on cost
efficiency has led to a reduction in operating
costs, where we enhanced our guidance
twice during 2019. This was achieved whilst
increasing strategic investment and our
net promoter scores. Our cost:income ratio
improved again to 48.5 per cent. Credit quality
remains strong with the Group’s net asset
quality ratio of 29 basis points in line with the
target of less than 30 basis points, despite two
material corporate cases.
Loans and advances decreased by £4 billion
to £440 billion. The acquisition of Tesco
Bank’s prime UK residential mortgage
portfolio, as well as organic growth in targeted
segments including SME and UK Motor
Finance, was more than offset by continued
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
06 Lloyds Banking Group Annual Report and Accounts 2019
Group Chief Executive’s review continued
IGITIS E
D
M
A
X
I
M
I
S
E
LEADING
CUSTOMER
EXPERIENCE
TRANSF O R M
The Group’s ambitious three year strategic
plan was launched in February 2018 and we
are on track to achieve our targeted strategic
outcomes. We have made significant
progress in transforming the Group for
success in a digital world and, in line with our
commitment to invest more than £3 billion
over the period, have invested £2 billion to
date across our four strategic pillars.
In addition to completing the third stage
of our strategic plan, in 2020 we will also
begin to consider the next phase of our
journey. Work will begin at pace in the
summer on the new strategic plan, which
we expect to announce in February 2021,
along with updated longer term financial
targets. This work will take into account a
wide range of factors, including the evolving
external environment, emerging changes
across society and changing expectations
of how companies should respond to
such challenges.
Our strategic priorities on pages 16 to 19
STRATEGIC PROGRESS
Leading customer
experience
Digitising
the Group
We are committed to maintaining the UK’s
number one branch network and customer-
facing colleagues in branch now spend
around 50 per cent of their time addressing
customers’ complex needs
We are trialling new branch formats,
including a new flagship Bank of Scotland
branch and Home by Halifax
We have continued to develop our digital
proposition and our digitally-active
customer base has increased again to
16.4 million, of which 10.7 million are active
on their mobile banking app; 75 per cent of
products are now originated digitally
We are using our deep understanding
of our diverse customer base to deliver
tailored propositions such as Club Lloyds
and the Halifax Prize Draw
Investment in technology remains a
key strategic priority for the Group and
enables us to improve the experience
of our customers and colleagues;
technology spend now represents
19 per cent of operating costs
Having introduced automation for
repetitive tasks, we have created over
1 million cumulative hours of colleague
capacity and our transformation has
covered around 55 per cent of the
Group’s cost base
Virtual assistants are currently managing
up to 5,000 customer conversations daily,
with satisfaction increasing by more than
10 points. Around 25 per cent of queries
are handled without being passed to a
colleague and we expect this to increase
In enhancing capabilities and accelerating
our transformation, we are working in
collaboration with a number of fintechs
and we continue to monitor opportunities
in this space
16.4m
digitally active customers
14%
year-on-year increase
in technology spend
Maximising Group
capabilities
Transforming
ways of working
Open Banking is now available to all
digital customers and our unique Single
Customer View capability is available to
over 5 million customers
We have exceeded our goal of attracting
over 1 million new pension customers,
a year ahead of target and we have
continued to make progress towards the
target of growing open book assets under
administration by £50 billion by the end
of 2020, with cumulative net growth of
£37 billion since 2017
We launched Schroders Personal Wealth,
with the ambition of becoming a top three
financial planning business by end of 2023
Commercial Banking has supported
Insurance and Wealth by sourcing
£0.6 billion of new long-term assets to
support five new bulk annuity transactions
We are making our biggest ever
investment in people, with a focus on
ensuring that we are able to continue to
attract, develop and retain the talent and
capabilities we will need in the future
We have significantly increased the ‘skills
of the future’ training delivered to our
colleagues to a cumulative 3.2 million
hours since 2018 and around 33 per cent
of change is now delivered using
Agile methodologies
The Group has hired over 1,200
colleagues in 2019 across critical areas
such as engineering, data science and
cyber security, in line with our plan to
treble strategic hiring compared to 2018
and enabling the Group to reduce the use
of external resource
>5m
customers with access to
Single Customer View
3.2m
hours of future skills
training delivered
Helping Britain Prosper Plan
We are committed to the long-term success
of the UK with our purpose of Helping
Britain Prosper. This is why we launched our
Helping Britain Prosper Plan in 2014 which
also underpins our environmental, social and
governance efforts. For 2019 we met 20 out
of 22 objectives of the Plan, and some key
achievements are outlined below.
The Group is committed to helping customers
to buy a home. In 2019 we lent £13.8 billion
to first time buyers across the UK including
through innovative products like our Lloyds
Bank Lend a Hand and Halifax Family Boost
mortgages. We have also increased net
lending to start-ups, SMEs and Mid Market
customers to £3.4 billion since 2018 together
with achieving our target of lending £18 billion
to UK businesses in 2019.
We are working hard to help people save
for the future and in 2019 in partnership
with Schroders, we launched Schroders
Personal Wealth. Our open book assets under
administration have increased by £37 billion
since the start of the current strategic plan.
More generally, our banking savings range
operates transparent pricing for all, with
customers able to upgrade their accounts
online with one click when better products
become available.
The Group is committed to helping the
UK transition to a sustainable, low carbon
economy. Over the last five years we have
raised over £2.8 billion in green bonds for
UK corporate issuers, more than any other
UK financial services company. We have also
supported renewable energy projects that
power the equivalent of 5.1 million homes.
As we look forward, we want to play our part in
tackling climate change and we have targeted
working with our customers, government
and the market to help reduce the emissions
we finance by more than 50 per cent by
2030, in line with the UK’s Net Zero Goal
and the Paris Agreement. We are one of the
first organisations in the world to commit to
all three of The Climate Group’s ambitious
sustainability initiatives, which aim to speed
up the transition to a low carbon economy
by committing to source 100 per cent of
our electricity from renewable sources,
improve energy productivity and transition to
electric vehicles.
The Group was the first FTSE100 company
to establish targets for championing
diversity within its business and we now have
36.8 per cent of senior roles held by women,
up almost 8 percentage points since 2014
and we continue to aim to meet our target
of 40 per cent by the end of 2020. With
10.2 per cent of roles across the Group held
by Black, Asian and Minority Ethnic (BAME)
colleagues, we have exceeded our 2020 target
of 10 per cent.
We have also helped over 700,000 individuals,
small businesses and charities to develop
digital skills in 2019, and we are on track for
our target of 1.8 million by 2020. Our Digital
Knowhow workshops have also helped
thousands of organisations learn how to
avoid fraud and take advantage of digital
marketing techniques.
Lloyds Banking Group Annual Report and Accounts 2019 07
Protecting
the planet
for future
generations
In January 2020, the Group announced
its new ambitious goal to work with
customers, government and the market
to help reduce the carbon emissions
we finance by more than 50 per cent
by 2030.
>50% by 2030
We aim to help reduce the emissions we
finance by more than 50 per cent by 2030
This goal recognises the urgent need to
tackle climate change, grow the green
economy and promote green finance
for the future prosperity of the UK. Read
more on pages 28 to 31.
Pekwor Jones
The next decade will be crucial for
protecting the planet for future
generations, and financial services
has a critical role to play. We are fully
committed to supporting our customers,
clients and colleagues to transition
to a low carbon economy, working
closely with other organisations and
government to create the solutions that
will accelerate progress and ultimately
Help Britain Prosper.
António Horta-Osório,
Group Chief Executive
Net asset quality ratio expected to be less
than 30 basis points
Capital build expected to be within the
Group’s ongoing guidance range of 170 to
200 basis points per year and risk-weighted
assets to be broadly in line with 2019
Expect increased statutory return on
tangible equity of 12 to 13 per cent, driven
by resilient underlying profit and lower
below the line charges
The Group faces the future with confidence.
As a result, we will continue to target a
progressive and sustainable ordinary
dividend. In 2020, the Group will also
commence paying dividends quarterly,
accelerating payments to shareholders, with
the first dividend being paid in June 2020.
António Horta-Osório
Group Chief Executive
Our colleagues have also taken an active role
in supporting good causes, including raising
over £11 million for Mental Health UK over
a two year period, as well as volunteering
246,000 hours of their time through our Day to
Make a Difference initiative.
In addition, the Group has paid £2.9 billion
tax in 2019 and we are proud to be the largest
corporate tax payer in the UK.
We have issued a separate presentation on
our approach to environmental, social and
governance issues, which can be found on the
Group's external website.
Outlook
Over 2019, UK economic performance has
remained resilient in the face of significant
political and economic uncertainty, supported
by record employment, low interest rates
and rising real wages. Although uncertainty
remains given the ongoing negotiation of
international trade agreements and the rate
outlook remains challenging, there is now a
clearer sense of direction and we remain well
placed to Help Britain Prosper, support our
customers and deliver strong and sustainable
returns for shareholders. The Group’s
confidence in the business model and future
performance is reflected in our guidance
for 2020:
Net interest margin of 2.75 to 2.80 per cent
Operating costs to be less than
£7.7 billion with the cost:income ratio
lower than in 2019
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
08 Lloyds Banking Group Annual Report and Accounts 2019
Key performance indicators
Our strategy has delivered solid performance
Financial
Pay for performance
across the Group
Key performance indicators are
regularly reviewed by the Board, with
an aim to provide a fair, balanced and
comprehensive view of the Group's
performance. The measures outlined
on these pages identify the most
effective output measures for assessing
financial and non-financial performance
including progress towards becoming
the best bank for customers, colleagues
and shareholders.
To ensure our colleagues act in the
best interests of all our stakeholders,
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.
Within this year’s report we have
updated our key performance indicators
to reflect these priorities. All the key
performance indicators directly impact
remuneration outcomes and support the
delivery of our reward principles.
The remuneration awarded to Executive
Directors is heavily weighted towards
the delivery of long-term, sustainable
performance. As part of our 2020
Remuneration Policy, our proposed
move to long-term share awards
continues to support the Group’s
strategic aims and the long-term
sustainable success of the business,
page 117.
As per pages 101 and 110 our 2020
balanced scorecard measures will
remain broadly unchanged from 2019
and will be used in both short term and
long-term reward decision making.
KPIs have been proposed to underpin
the long term share awards focusing
on capital strength, relative returns
and a progressive and sustainable
ordinary dividend.
Financial performance overview
on pages 36 to 39
Underlying profit before tax
£m
Statutory profit after tax
£m
7,531
2019
2018
20171
20161
20151
3,006
2019
20181
20171
20161
20151
7,531
8,066
7,628
6,782
7,275
3,006
4,506
3,649
2,605
1,036
Underlying profit before tax was lower in 2019,
reflecting lower net income and higher impairment
charges, partly offset by the Group’s continued
progress in cost reductions.
1 Restated to include remediation.
Statutory profit after tax was lower in 2019, largely
due to the additional PPI charge. The tax expense
was £1.4 billion.
We previously reported statutory profit before tax
but changed to statutory profit after tax at full year
2019 to further align our key performance indicators
to remuneration.
1 Restated to reflect amendments to IAS12.
Statutory return on tangible equity
%
7.8
2019
2018
2017
2016
2015
3.37
3.21
3.05
2.55
2.25
7.8
11.7
8.9
6.6
2.6
Ordinary dividend
p per share
3.37
2019
2018
2017
2016
2015
An increased ordinary dividend of 3.37 pence per
share, in line with our progressive and sustainable
ordinary dividend policy.
The statutory return on tangible equity was lower in
2019 given the lower statutory profit, largely due to
additional PPI charges.
2020 TARGET
Statutory return on tangible equity
12 to 13%
Cost:income ratio
%
Common equity tier 1 ratio (CET1)
%
48.5
2019
2018
2017
2016
20151
13.8
48.5
49.3
51.8
55.3
54.2
20191
20181
20171
20161
20151
13.8
13.9
13.9
13.0
13.0
The Group’s market-leading cost:income ratio
including remediation continued to provide a
competitive advantage and further strengthened to
48.5 per cent in 2019.
CURRENT TARGET
Cost income ratio including remediation
to be lower in 2020
1 Excluding TSB.
Our common equity tier 1 ratio remains strong.
CURRENT TARGET
Ongoing CET1 capital ratio target of c.12.5 per
cent plus a management buffer of c.1 per cent
1 Pro forma, reflecting insurance dividends paid in the
subsequent reporting period. 2018 also includes share
buyback and 2016 reflects MBNA.
Financial
Non-Financial
Lloyds Banking Group Annual Report and Accounts 2019 09
Economic profit
£m
3,138
2019
2018
2017
2016
2015
Customer satisfaction
(net promoter score)
Digitally active customers
m
62.8
3,138
3,291
3,987
3,377
2,233
2019
2018
2017
2016
2015
16.4
62.8
61.8
61.2
61.8
58.5
2019
2018
2017
2016
2015
16.4
15.7
13.4
12.5
11.5
Economic profit, a measure of profit taking into
account expected losses, tax and a charge for equity
utilisation. Economic profit in 2019 was impacted by
lower net income received in the year.
Our net promoter score is the measure of
customer service at key touch points and reflects
the likelihood of customers recommending us.
Customer satisfaction increased in 2019.
From a strategic perspective this measures how well
we are delivering a leading customer experience.
It tells us how effective we are in building strong
customer relationships.
Reflecting the pace of digital adoption, the number
of active digital customers increased in the year to
16.4 million, with 10.7 million mobile banking app
customers and average customer logons at 23 times
per month.
From a strategic perspective this indicates the
progress we are making in digitising the Group
from the customer usage standpoint.
Total shareholder return
%
Customer complaints
FCA reportable complaints per 1,000 accounts
Employee engagement index
% favourable
27
2019
2018
2017
2016
2015
2.9
H1 2019
H2 2018
H1 2018
H2 2017
H1 2017
27
(20)
14
(10)
(2)
74
2019
2018
2017
2016
2015
2.9
3.4
3.9
4.2
4.1
74
73
76
71
71
Total shareholder return reflects share price
performance and dividends received. Our share
price increased by 21 per cent in 2019.
FCA reportable complaints excluding PPI and claims
management companies have significantly
reduced over the last five years.
We do make mistakes, but when this happens, we
work hard to fix the issue quickly for the customers
involved and learn from any mistakes.
From a strategic perspective, reduction in customer
complaints confirms our achievements in delivering
a leading customer experience.
Helping Britain Prosper Plan
targets achieved
20/22
2019
2018
2017
2016
2015
20/22
20/22
21/22
20/24
27/28
We have made strong progress since we launched
the Plan in 2014. In 2019, 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 27.
From a strategic perspective achievement of these
targets helps us to learn what progress we are
making in across all areas of our strategy.
Colleague engagement was two points above
the norm for top performing UK companies with
colleagues continuing to score pride and advocacy
favourably. High scores were also achieved for
customer focus, wellbeing, recognition and
speaking out.
From a strategic perspective this indicates how
much progress we are making in transforming ways
of working.
NEW KPI
Green finance
£bn
>4.9
This year an additional key performance indicator
has been included to reflect the work we’re doing to
support the transition to a low carbon economy.
We have quantified the finance we provide through
existing green finance products (Clean Growth
Finance Initiative; Commercial Real Estate Green
Loans Initiative; Renewable Energy Financing) and
green bonds facilitation. Since 2016, this totalled
more than £4.9 billion and we will continue to add to
this activity in 2020.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
10 Lloyds Banking Group Annual Report and Accounts 2019
Our external environment
The UK market, to which our performance is
inextricably linked, continues to evolve
ECONOMY
Highlights
Given our focus on UK customers, the
Group’s prospects are closely linked to the
fortunes of the UK economy
On the assumption that the global
economy remains broadly stable, we would
expect the UK economy to grow in 2020 to
2022 at a pace slightly above that achieved
in the past two years
Our low risk business model and focus on
efficiency positions us well irrespective
of macro conditions. Nevertheless, if the
economy was to be impacted significantly
by crystallisation of either domestic
or international risks, Group financial
performance would be impacted
Overview
As a leading UK bank, our prospects are
closely aligned to the outlook for the UK
economy. Through 2019, the economy
continued to show resilience to twin
challenges from a slowing global economy
and increasing domestic political uncertainty.
Although growth of the UK economy has
slowed to its weakest since the financial
crisis a decade ago, and interest rates
remain very low, unemployment has fallen
further to a 44 year low and house prices
have continued to grow. Barring any sudden
shocks to business or consumer confidence,
growth is expected to rise mildly in 2020, but
international trade-protectionism, the current
coronavirus outbreak in China, geo-political
instability and the nature of the UK’s exit from
the EU, all present risks to that outlook.
Market dynamics
During 2019, there have been divergent trends
between UK businesses and households.
For businesses, uncertainty for the domestic
political and economic outlook translated
into a second consecutive year of reduced
investment spending and commercial real
estate prices fell slightly. Low productivity
growth remains a key challenge for the
UK economy, however, the flip-side has
been buoyant employment. Households
continued to increase spending in 2019 as low
unemployment boosted pay growth whilst
softening global growth reduced inflation.
The UK housing market remained subdued
through much of 2019, although falling
mortgage rates and the election of a
government with a strong Parliamentary
majority appeared to be beginning to
stimulate the market towards the end of
the year. The level of housing transactions
was broadly flat at around 20 per cent lower
than the norm prior to 2008, with muted
price growth.
The economic outlook appears to be
improving. Nevertheless, in a long-term
context growth is expected to remain
subdued and interest rates low - core to
that is the low rate of productivity growth,
with the recent weakness of businesses’
investment spending suggesting a
significant improvement is unlikely near-term.
Uncertainty for some UK companies may
persist in 2020 and drag on investment as the
UK attempts to negotiate a comprehensive
trade deal with the EU to a tight timescale.
However, improved pay growth is likely to
support households’ spending, and the likely
fiscal stimulus is expected to provide some
boost to the economy.
The fundamental drivers behind the subdued
trends in the housing market are expected
to remain in place - the high level of prices
relative to incomes that constrains first-time-
buyer demand, and expectations that interest
rates could rise from their current low level.
There are, or course, significant risks to this
outlook. The growth-cycle in both of the
world’s largest economies - US and China
- is in its mature stage, and the coronavirus
outbreak and ongoing trade war could
complicate the task of policymakers in guiding
growth towards a stable and sustainable
level. Conversely, high asset prices and
corporate debt levels in some countries
could be vulnerabilities if an improvement in
global economic growth and a resulting rise
in interest rates causes unexpected shifts
in currencies or herd behaviour in financial
markets as shareholders change their appetite
between different types of investments.
Domestically, the future trading relationship
with the EU remains uncertain, as does
businesses’ response to that uncertainty.
Barring sudden shocks stemming from these
challenges, the UK economy is expected
to grow through 2020 to 2022 at around
1.5 per cent, slightly above the 1.4 per cent
average across the past two years. The
unemployment rate is expected to rise only a
little from its current 44 year low. The outlook
for the bank rate is uncertain, but capacity
constraints and a fiscal boost may support a
moderate increase in interest rates. House
prices are expected to continue to grow mildly.
This picture of subdued but broadly stable
growth is likely to be reflected across our
markets. Consumer credit growth has slowed
significantly over the past couple of years after
a prior period of strong growth, but we expect
that the slowdown has now run its course.
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.
UK economic growth
1.4%
GDP growth
2.5
2.0
1.5
1.0
0.5
0.0
15
16
17
18
19
Source: ONS
UK unemployment rates
3.8%
Unemployment rate
Source: ONS
UK housing market
2.3%
House price growth
(Q4 vs. Q4 Basis)
6
5
4
3
2
1
0
8
7
6
5
4
3
2
1
0
15
16
17
18
19
15
16
17
18
19
Source: Halifax house price index
Pay growth vs inflation
5
4
3
2
1
0
Pay growth
CPI inflation
2015
2016
2017
2018
2019
Source: ONS
Link to principal risks
Credit
Capital
Funding and liquidity
Market
Link to strategic priorities
Maximising Group capabilities
Lloyds Banking Group Annual Report and Accounts 2019 11
CUSTOMER
Highlights
Customer expectations are being shaped
by experiences outside of financial services,
with convenience, choice and greater levels
of personalisation becoming increasingly
important
While customers want to be in control
of their finances through digital channels,
human interaction is still valued for more
complex financial needs
Expectations on how companies engage with
environment and societal issues are rising
Market dynamics
Consistent with recent trends, customer
expectations continue to be shaped by their
experience outside of financial services, with
speed and convenience and greater levels of
choice and personalisation, based on richer
data insight, becoming more important in an
increasingly competitive market.
As technological capabilities across the
banking sector continue to become more
sophisticated, customers also increasingly
want and expect to be in control of their
finances, with the ability both to see their
accounts and monitor transactions across
multiple providers. Against this, human
interaction for more complex or emotive
needs continues to be valued as part of a
multi-channel servicing approach.
Similar to personal customers, business client
expectations spanning speed, convenience
and insight-driven personalisation are being
shaped by experiences outside of financial
services. Alongside this, smaller business
customers are starting to look for support
beyond their banking needs.
While not yet a major driver of behaviour
and preferences, customers are becoming
increasingly aware of societal and
environmental issues, with rising expectations
of how the companies they engage with are
responding to these challenges.
Our response
We have a strong track record in providing our
customers with the products and services they
value, while also offering convenience and
choice in the channel they choose to interact
with us.
We remain committed to our multi-channel
model, comprising the UK’s largest digital
bank and branch network, and are focused
on ensuring that this remains relevant to
evolving customer preferences. As part of
this, we are continuing to strengthen our
digital capabilities, with a number of recent
enhancements putting our customers more in
control of their finances and resulting in strong
digital customer satisfaction scores.
We are also investing in our branch and
telephony channels to ensure that these are
able to address our customers’ more complex
needs more effectively, and continue to
provide access to banking services for our
more vulnerable customers.
Given our history and scale, we have a wealth
of customer data and remain focused on
using this valuable insight ethically and
responsibly to develop products and services
that are more personalised to our different
customers’ needs.
Against the broader backdrop of increasing
expectations and an evolving competitive
environment, we cannot become complacent
and need to continue to improve the
customer experience to remain relevant and
attractive to customers.
Customer satisfaction
(net promoter score)
+3%
Improvement in customer
satisfaction during our
current strategic plan
63
61
17
19
Adapting to changing behaviours
Customer channel interactions
(indexed to 2014)
300
200
100
0
2014
Start of current
strategic plan
Digital
Branch
2017
2019
REGULATION
Highlights
The UK financial services sector is expected
to remain highly regulated
New regulation and market reviews
continue to be issued, with further
regulatory changes anticipated
Uncertainty remains around the impact of
the UK’s exit from the EU on the existing
regulatory and legal framework
Market dynamics
A number of regulatory changes have been
implemented in the last 12 months including
Open Banking, overdraft charging and the
embedding of ring-fencing requirements with
key areas of focus for 2020 as below:
Customer treatment
Fair treatment of customers remains a priority
for the FCA, with particular focus on those
in vulnerable circumstances as well as long
standing customers.
Capital regulation
The Group continues to prepare for further
regulatory capital developments in particular
implementation of the final Basel III reforms.
LIBOR transition
The transition from LIBOR to alternative
reference rates will mean changes to products
and funding structures.
Other
A number of other regulatory initiatives are in
the pipeline which seek to address, amongst
other things; operational resilience, climate
change, General Insurance, revised Payment
Services Directive (PSD2) requirements,
MIFIDII and fraud.
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
Regulatory and legal
Conduct
Operational
Link to strategic priorities
Delivering a leading customer
experience
Link to principal risks
Credit
Capital
Funding and liquidity
Market
Link to strategic priorities
Maximising Group capabilities
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
12 Lloyds Banking Group Annual Report and Accounts 2019
Our external environment continued
TECHNOLOGY
Highlights
The pace of digital adoption and disruption
continues to surpass expectations and is
likely to increase further in the coming years
The use of new technologies is increasing
efficiency within the financial services sector
and delivering meaningful improvements
to the customer experience
Cyber security and the protection
and appropriate use of customer data
remain important factors in retaining
customer trust
Market dynamics
Digital adoption trends continue to surpass
expectations, with the significant uptake
driven by changes in demographics and an
increasing similarity in customer behaviour
across multiple geographies. As a result,
we are seeing a significant change in how
customers interact with financial services
providers, while expectations of service are
often being influenced by technology-led
experiences outside of financial services.
The combination of heightened expectations
and increasing levels of competition has
resulted in greater levels of investment in
technology across the sector, with banks
placing increasing importance on delivering
innovative new features for customers as well
as continually upgrading and modernising
back-office infrastructure. Banks are also
regularly adopting new technologies such
as machine learning and artificial intelligence
to increase the effectiveness and efficiency
with which more routine tasks are performed,
while also using greater data driven insight to
deliver an improved customer experience.
In addition, as the sharing of data becomes
increasingly important to both banks and
customers, there is a growing onus on how
this is safeguarded. For example, the shift
towards cloud technologies from in-house
data storage can deliver a number of benefits
for customers. These include increasing
levels of insight and faster rates of product
innovation, but open up the financial services
sector to new cyber-related risks which must
be carefully managed. In a period in which
competition from digital-only providers
has grown significantly, trust remains a key
differentiator for established banks and
therefore security and resilience remain
areas of great importance.
Our response
In line with our position as the largest digital
bank in the UK, we are investing heavily in
technology to ensure that we can continue
to deliver meaningful enhancements to the
customer experience while also delivering
organisational improvements in terms of
responsiveness, insight and efficiency. Our
technology spend is among the top quartile
of global peers, with the amount spent in
2019 equivalent to 19 per cent of our
operating cost base. Importantly, in excess
of 75 per cent of this spend is focused on
creating new capabilities and enhancing
existing ones, with this investment critical
to successfully delivering our modular
approach to transformation.
We view our market leading efficiency
position as a unique competitive advantage
in this respect, as it creates capacity for further
significant investment. This investment,
such as in the increased use of intelligent
systems and machine learning, is delivering
improved processes and further productivity
enhancements, and through this, is helping
to future proof our business.
In 2019, we surpassed more than 1 million
hours saved through the use of robotics since
the launch of our latest strategic plan in 2018,
creating significant capacity for our colleagues
to focus their time on delivering tangible
improvements to our customer experience.
These improvements are being delivered in
the form of new features, such as the roll
out of location based searches to improve
the identification of fraudulent payments,
as well as by making better use of data
for the benefit of our customers, such as
harnessing the insights from robotics to
improve credit decisioning.
We also continue to invest in the resilience
and security of our systems, ensuring
that customer data remains safe despite
the significant pace of change in
technological trends.
Link to principal risks
Credit
Capital
Funding and liquidity
Market
Link to strategic priorities
Maximising Group capabilities
16.4 million
digitally active
customers
Technology spend1
as a % of operating costs
Highest in peer-set:
19%
16%
19%
19
17
15
14
Technology
spend
up 14%
year on
year
Lloyds
North
America
Average
UK
Average
European
Average
1 Estimated. Regional averages based on a selection of
peers where disclosure exists. Proxy for technology
spend calculated based on available disclosure in prior
annual reports or shareholder presentations and may not
be like for like.
Customers are using the digital channel
more than ever for simpler needs
% volume of products originated digitally
68
45
78
86
82
59
34
39
54
18
New bank
accounts
Savings
Loans
Credit
cards
Home
insurance
2014
2019
Lloyds Banking Group Annual Report and Accounts 2019 13
Our response
We continue to respond effectively to the
increasingly competitive environment,
supported by our significant reach and
proven track record of providing products
and services that our customers value
with this underpinned by significant
investment capacity.
Across our core markets such as mortgages,
we have looked to prioritise value while
maintaining share and supporting our
purpose of Helping Britain Prosper. As
marginal players have withdrawn from the
market, we have more recently strengthened
our position, including through the acquisition
of Tesco Bank’s mortgage portfolio in
September. Alongside this, we have also
continued to invest in areas where we are
under-represented, such as Insurance
and Commercial Banking, in line with the
commitments outlined at the start of this
strategic plan.
In response to changes to the competitive
environment from the ongoing shift in digital
usage and new entrants, our multi-channel
and multi-brand offering enables us to
continue to effectively meet the varying
needs of our diverse customer base. Our
digital channel is now our most prominent,
with 75 per cent of products now originated
digitally and we operate the largest digital
bank in the UK with 16.4 million customers and
10.7 million mobile app customers, while our
customer satisfaction scores remain strong.
In addition, we remain committed to retaining
the largest branch network in the UK. This
allows our customers to interact with us in
whichever way they prefer, while also providing
a human touch point for more complex financial
needs. Our network is also key to building and
deepening our business banking relationships.
We see these as unique competitive
advantages, and combined with our ongoing
commitment to innovation, provide us with
a strong platform to maintain relevance and
deepen relationships with our customer base.
Link to principal risks
Regulatory and legal
Conduct
Operational
People
Link to strategic priorities
Delivering a leading customer
experience
Maximising Group capabilities
The evolving competitive environment1
L A R G E T E C HNOLOGY COMPANIES
N E O B A N KS AND FINTECHS
C H A L L ENGER BAN
K
S
I SHED P
E
L
B
E
R
S
EST A
1 Selective participants, not exhaustive.
COMPETITION
Highlights
Regulatory changes have resulted in
increased competition across more
traditional product lines, as excess liquidity
is deployed within ring-fenced bank entities
The competitive landscape also continues
to evolve with growth across a number of
digital-only providers, while we are also
seeing emerging signs of participation from
large technology companies
Market dynamics
We continue to operate in an highly
competitive environment, driven by regulatory
changes, shifting customer behaviours
and increasing levels of innovation across
the sector.
Across our traditional business lines, ring-
fencing regulation has seen a number of
our competitors deploy excess liquidity
to support asset growth within the UK,
specifically within mortgages where customer
rates have in the last few years hit record lows.
While this is beneficial for our customers,
this has depressed margins across the UK
banking sector and more recently has resulted
in some smaller participants stepping back
from the market.
Beyond this, digital-only providers have
grown their share of the UK market within
the past year. This growth has predominantly
been driven by neo-banks that provide a
more traditional customer offering alongside
leading digital functionality and are able to
target selected customer segments. This is
supported by the emergence of marketplace
models which enable these providers to
collaborate with more specialist fintechs
to provide a broader suite of products and
financial services, both for personal and
business banking customers.
In response, a number of traditional
competitors have attempted to replicate
the success of neo-banks by developing
their own digital-only offerings, often under
separate and newly created brand names.
A number of international peers have also
entered the UK market through digital
only challengers, taking advantage of the
supportive regulatory environment and
increasing similarity in customer behaviours
across multiple geographies.
Elsewhere, we have also started to see the
first signs of large technology companies
participating in financial services, often
partnering with local incumbent banks across
different geographies. While the scale of their
future ambitions is uncertain at this stage,
the power of their brand and large customer
bases pose future disruption threats.
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14 Lloyds Banking Group Annual Report and Accounts 2019
Our business
Our business
How we create value, and what sets us apart
How we create value, and what sets us apart
OUR PURPOSE
OUR CULTURE
Helping Britain Prosper
Given our focus on the UK, our success is
interwoven with the UK’s prosperity. We aim
to Help Britain Prosper through creating a
responsible business that focuses on customers’
needs, and delivering long-term sustainable
success for shareholders.
Helping Britain Prosper Plan on pages 27 to 34
Our core values underpin our purpose
to Help Britain Prosper
Ensuring we create the right environment for our
colleagues to deliver our aim to become the best
bank for customers, colleagues and shareholders
Putting customers first
Keeping it simple
Making a difference together
Our culture on page 74
OUR BUSINESS MODEL
We are a simple, low-risk, customer focused
UK financial services provider with distinctive
and sustainable competitive strengths:
Multi-brand, multi-channel proposition
with data driven customer experience
Operating in an integrated way through a
range of distribution channels and brands
ensures our customers can interact with us
when and how they want and enables us
to address the needs of different customer
segments more effectively.
Comprehensive product range with all
financial needs served in one place
Our product range is driven by customer
needs and is informed through
comprehensive customer analysis and insight.
UK’s largest digital bank, branch network
and customer franchise with leading
integrated propositions
Our scale and reach across the UK means
that our franchise extends to around
26 million customers, with 16.4 million
digitally active. We are uniquely positioned
to deal with customers’ banking and
investment needs.
Market leading efficiency through
tech-enabled productivity improvements
Our simpler operating model and focus
on efficiency provide a cost advantage,
enabling us to invest more to the benefit of
both customers and shareholders.
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 quality of our loan portfolio and
underwriting criteria. Our financial strength
has been transformed in recent years and
our capital position is strong.
Rigorous execution and management
discipline focusing on key skills of the future
Experience of delivering change in recent
years provides benefit as we further
transform the business.
Creating competitive advantages
We believe that these capabilities provide
competitive advantage and enable us to
continue to deliver for customers whilst also
delivering sustainable and superior returns
over the longer term, as outlined below.
Net cost
reduction
Market
leading efficiency
Sustainable
and superior
returns
Enhancements
to internal
processes
Improvement
to customer
experience
RISKS TO OUR
BUSINESS MODEL
As a large, UK focused financial services
provider we face several external and
internal challenges:
The main external challenges we face are
as previously discussed on pages 10 to 13
Uncertain outlook for the UK economy
Evolving customer needs
and behaviours
High levels of regulation
Radically changing competitive and
regulatory landscape
Technologies and societal attitudes
rapidly reshaping business models
We also face a number of
internal challenges:
Operating as efficiently as
possible, while remaining the best
bank for customers
Attracting, developing and retaining
the best talent to respond to new ways
of working
Greater
investment
capacity
Ensuring IT systems are effective and
resilient and that we are prepared for
the threat of cyber risk
We recognise these challenges and
continue to evolve our business model
and strategy, to enhance their sustainability
over the longer term.
Lloyds Banking Group Annual Report and Accounts 2019 15
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 GROUP
OUR STRATEGY
The Group has a unique customer
proposition enabling us to serve the
financial needs of customers in one place.
We operate multiple-brands through three
core divisions; Retail, Commercial Banking
and Insurance and Wealth.
Transforming the Group for success in a digital world
In February 2018, we launched our three
year strategy to transform the Group
for success in a digital world.
Our simple, low risk customer focused
strategy builds on our purpose of
Helping Britain Prosper and our
distinctive strengths.
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.
Board oversight of our strategy on page 75
Strategic priorities on pages 16 to 19
Strategic priorities
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 Group 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.
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16 Lloyds Banking Group Annual Report and Accounts 2019
Our strategic priorities
Leading customer experience
Progress in 2019
In 2019, we have built on the strong progress
delivered in 2018, with further improvements
in our customer propositions supporting
the continued growth of our franchise and
improved measures of customer satisfaction.
Building a market leading digital
experience
We are the largest digital bank in the UK, with
16.4 million digitally active and 10.7 million
mobile app customers. During the year, we
have seen increased customer engagement
with the enhanced digital features introduced
in 2018 and have launched a range of new
features that enable our customers to be more
in control of their finances. These include
the ability to change address via the mobile
app and app statement searches, the latter
of which is being used c.1.2 million times per
month on average and is helping us to reduce
our use of paper.
Consistent with this focus, we have also built
on our progress in allowing our customers
to see all their bank accounts, across
different providers, in one place. In 2019,
we were the first UK bank to expand this
Open Banking aggregation capability to
include both savings accounts and credit
cards. We’re unique amongst our banking
peers in enabling our customers to also view
these products together with their Group
insurance and pensions products, with our
Single Customer View demonstrating strong
engagement levels.
#1 branch network, serving complex needs
As a core element of our multi-channel
model, we remain committed to maintaining
the largest branch network in the UK and
our market share of around 21 per cent by
2020. In the year we have continued to make
a number of changes to ensure that our
network reflects our customers’ evolving
needs. As part of this, we have expanded the
reach of our remote advice service to around
580 branches, which alongside the ability to
access the service from the comfort of their
own homes, is providing our customers with
increased choice and convenience in how
they can discuss their financial needs with
us. In addition, our branch colleagues have
also been able to increase their focus on
addressing customers more complex financial
needs, with this now accounting for around
50 per cent of their time.
Personalising our customer propositions
We recognise that our diverse customer base
want and expect different things and have
continued to develop products and services
that are more personalised to their specific
needs. Among these, we have launched
a range of smart tools that our customers
can access digitally, including upcoming
payment alerts and a ‘Save the Change’
feature, through which they can aim to achieve
a range of financial goals through small
behavioural changes.
Focus for 2020
In 2020, we will continue to focus
on improving our customers’ digital
banking experience, with new features
providing them with greater insights into
their transactional activity and ability
to achieve their financial goals. We will
also continue to deepen our customer
insights to develop more personalised
products and services, while also
ensuring our branch network remains
relevant to our customers’ needs.
Our unique Single
Customer View
Our Single Customer View capability allows
our customers to see all their financial
needs in one place, from bank accounts
to pension and insurance products. At the
end of 2019, more than 5 million customers
had access to this, with priorities for 2020
including extending this to around 9 million
customers, while also increasing
functionality.
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
16.4 million
digitally active customers
#1
Maintained the largest branch
network in the UK
helping me
see the
full picture
I can see my pension
alongside my banking
now which is great,
really useful
Lloyds Banking Group customer
Lloyds Banking Group Annual Report and Accounts 2019 17
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
19%
Top quartile technology spend,
equivalent to 19% of operating costs
55%
of the cost base covered
by transformation
Accelerating our
transformation
Increased fintech engagement
As well as investing in technology capabilities,
we recognise that we also need to embrace
external innovation and work collaboratively
to transform the Group for success in a
digital world. Our Corporate Ventures Panel
encourages colleagues from across the
Group to propose opportunities to a panel of
experts. This has already resulted in a number
of exciting partnerships, such as with Thought
Machine, Trov and OneUp, our most recent
partnership which provides online financial
management services for smaller businesses.
Progress in 2019
We have continued to progress our technology
enabled transformation during the course
of the year, delivering better products and
services that customers value and reducing
time to market. We are also driving additional
operational efficiencies across the organisation
as we progressively modernise our IT and data
architecture and improve processes. This has
been underpinned by a continued commitment
to invest significantly in technology.
Top quartile technology spend
Consistent with the scale of our transformation,
we continue to invest significantly in
technology. In 2019, our technology spend,
which increased by 14 per cent year on year,
equated to 19 per cent of operating costs
and remains among the top quartile of
global peers. Importantly this was achieved
while reducing operating costs, with our
modular approach to transformation and IT
modernisation delivering business efficiencies
and creating capacity for greater levels
of investment. The mix of our technology
spend also continues to evolve, with greater
emphasis on the development of new
capabilities, with the combination of this and
enhancing existing capabilities accounting for
over 75 per cent of spend in 2019.
Embracing the power of technology
As our transformation progresses, we have
significantly increased our adoption of new
technologies and are seeing a number of
tangible customer and colleague benefits as a
result. For example, having introduced the use
of robotics for simple, repetitive tasks in 2018,
we have now created in excess of 1 million
cumulative hours of colleague capacity,
allowing them to focus on more value adding
activities for our customers. In addition,
around 55 per cent of our cost base has now
been covered by transformation. This is up
from just from 12 per cent at the end of 2017
and we expect this to surpass 70 per cent by
the end of 2020.
The scaling of our use of machine learning is
also delivering improved customer outcomes.
For example, virtual assistants managed up
to 5,000 customer conversations daily in 2019,
with customer satisfaction increasing by more
than 10 points. In addition, around 25 per cent
of queries are handled without being passed
to a colleague, a trend that is expected to
increase further.
The Group has also significantly increased
its adoption of private cloud, with more
than 650 applications now migrated. These
investments deliver a more efficient, scalable
and flexible infrastructure and underpin the
continuous improvement of our products and
services for our customers’ benefit.
The largest digital bank in the UK
With 16.4 million digitally active users and
10.7 mobile app users, we are the largest
digital bank in the UK, with 75 per cent of
products now originated digitally. In line with
this continued shift to digital channels, we
are continuing to roll out new features for our
customers, resulting in increased engagement
as adoption increases.
Focus for 2020
Our technology investment will
continue to focus on areas that deliver
meaningful benefits for our customers
and colleagues. We will further embrace
new technologies and increase data
capabilities to develop insight-driven
propositions, while ensuring that these
reflect customer expectations. This will
be delivered alongside a rigorous focus
on ensuring the safety and security of our
customers’ data.
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18 Lloyds Banking Group Annual Report and Accounts 2019
Our strategic priorities continued
Maximising Group 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
£37 billion
cumulative open book assets under
administration growth
>5m
customers on Single Customer View
>1m
new pension customers, achieving
target a year ahead of schedule
£3.4bn
net lending to start-ups, SMEs
and Mid Market customers
helping me
save for the
future
Progress in 2019
In 2019 we have continued to enhance and
leverage the Group’s capabilities and unique
business model 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 2019, we extended our Single
Customer View capability to over 5 million
customers, who are now able to view their
insurance and pension products alongside
the banking products they hold with us and
other providers. Importantly, this is enabling
our customers to engage with their longer-
term savings needs more proactively, with
engagement levels surpassing those of stand
alone insurers.
Building on our progress in 2018, we have also
rolled out a number of improvements to our
long-term savings and pensions customer
propositions, with our workplace pensions
offering also benefiting from the close
coordination of our Commercial Banking and
Insurance & Wealth businesses. Taken together
with further transfers from the acquired Zurich
book, we have successfully grown our open
book retirement and investment assets under
administration by around £30 billion in the year,
or £37 billion since 2017.
Leveraging our partnership with Schroders
to accelerate our Wealth strategy
In 2019 we formally launched Schroders
Personal Wealth, a market-leading wealth
proposition, which combines the investment
capabilities and innovative product offering
of Schroders with our distribution footprint
and digital reach. This allows us to better
serve our customers’ financial planning and
retirement needs, and underpins this
joint-venture’s target of becoming a top three
UK financial planning business by the end
of 2023. In addition, as part of our broader
strategic partnership, we are developing a full
service offering for our customers, including
access to a leading wealth and investment
management business and a mass market
direct offering that is due to launch in 2020.
Improving the experience of our
Commercial Banking clients
We have delivered material improvements
to our client experience, while also meeting
our £18 billion gross lending commitment to
UK businesses, remaining a leader in green
financing and maintaining our strong support
for exporters and manufactures. We have
significantly reduced the time taken to fulfil
various client needs through the digitisation of
key banking processes. In business banking,
the average time to cash for new unsecured
loans has been reduced from 6 days in 2018
to a few hours. Similarly, the launch of API
connectivity has resulted in a response time
of 1.5 seconds for payables transactions,
while also driving significantly quicker and
more accurate asset finance credit decisions.
Through the enhancement of our cash
management and payments capabilities,
we have also successfully deepened our
client relationships.
Focus for 2020
In 2020, we will extend the reach and
functionality of Single Customer View to
around 9 million customers, introducing
new features that will enable customers
to engage with their long-term savings
and investments more proactively. In
addition, we will continue to support
the development of Schroders Personal
Wealth in line with its ambitious
targets, while also making further
improvements to our business clients’
digital banking experience.
Strong start for Schroders
Personal Wealth
Our joint venture with Schroders has
harnessed the unique strengths of two of the
UK’s strongest financial services businesses
to create a market-leading wealth proposition
with the expertise and broad spectrum
of investment and retirement products to
optimise customers’ entire financial lives.
Schroders Personal Wealth has got off to a
strong start since its launch, with Retail wealth
referrals from the Group up 33 per cent
in 2019.
Scan the QR code
to watch the advert
Lloyds Banking Group Annual Report and Accounts 2019 19
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, colleagues’
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
Up to 30 per cent change efficiency
improvement
MEASURING
PERFORMANCE
3.2 million
cumulative future skills training
hours delivered
33%
of change delivered by Agile
methodologies
Colleague training
and development
As part of our largest ever investment in
our people, we are rolling out 4.4 million
cumulative additional training hours to
develop key skills of the future. These skills
are split across 10 categories ranging from
leadership to data analytics and customer
excellence and will ensure that we are well
positioned to transform the Group for success
in a digital world, while also providing growth
opportunities for our colleagues.
I think it’s great that
the bank is investing
so heavily in my
development. It has
allowed me to develop
new skills and gives me
the confidence to put
them into practice
Lloyds Banking Group colleague
Changing the way we work
Consistent with our aim to embrace new ways
of working, we have continued to make things
easier than ever before for our colleagues
to work in a more collaborative manner.
96 per cent of our colleagues are now based
in one of our six strategic hub locations. We
continue to invest in improving the working
environment with 34,000 colleagues benefiting
from refreshed workplaces in 2019. Our
ongoing changes to working environments are
helping create a hub of agile working, focusing
on collaborative activity-based spaces which
foster innovation and make it easier for our
colleagues to focus on delivering better
experiences for our customers. Moreover, by
creating an environment where colleagues
can collaborate more easily regardless of
location, this will help us as an organisation
significantly reduce our carbon footprint. The
combination of these factors is resulting in
a cultural shift across the Group, with over
33 per cent of change now delivered using
Agile methodologies and we continue to
expect this number to surpass 50 per cent by
the end of 2020.
Focus for 2020
We will continue to provide our
colleagues with the required skills to
support our ongoing transformation,
with more specialist skills gaps being
addressed by targeted recruitment. This,
combined with our shift towards a more
collaborative culture will enable us to
reduce bureaucracy, harness innovation
and deliver change more efficiently than
ever before, while also making the Group
a more attractive place for people to work.
Progress in 2019
With our competitive environment
increasingly influenced by technological
change and innovation, it is critical that
we continue to equip our colleagues with
the skills needed to deliver our ongoing
transformation. We have made significant
progress in 2019 and are seeing tangible
benefits as these changes take effect. These
achievements also continue to be supported
by improvements to our working environment,
with benefits including greater collaboration
and efficiency.
Building skills for the future
To deliver our significant transformation,
we are continuing to make our biggest ever
investment in our people during the course
of the current strategic plan. In 2019, we
delivered 5.5 million of total training hours, an
increase of 28 per cent compared to 2018. We
have also now delivered more than 3.2 million
of cumulative training hours to develop the
skills for the future since the end of 2017, and
are well positioned to deliver our target of
4.4 million cumulative training hours by the
end of 2020.
In addition to up-skilling our colleagues,
we are also using targeted recruitment to
introduce new skills into the organisation
across areas that will support the new strategic
competencies of the Group going forward.
We have also hired over 1,200 colleagues
across critical areas such as engineering, data
science and cyber security. The integration
of skills such as these into our colleague base
positions us well to continue transforming the
Group for success in a digital world, with other
benefits including a reduced reliance on third-
party providers.
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20 Lloyds Banking Group Annual Report and Accounts 2019
Our key stakeholders and Board engagement
Reflecting the needs of our stakeholders in Board decisions
Engaging, consulting and acting on
the needs of different stakeholders is
critical for the development of a culture
and strategy that achieves long-term
sustainable success.
The Board has a comprehensive stakeholder
engagement programme and always aims
to act in the best interest of the Group and
to be fair and balanced in its approach. The
needs of different stakeholders are always
considered as well as the consequences of any
decision in the long-term and the importance
of our reputation for high standards of
business conduct. It may not always be
possible to provide a positive outcome for all
stakeholders and the Board frequently has to
make difficult decisions based on competing
priorities. However, comprehensive
engagement enables informed decision
making taking into account the consequences
for different stakeholders.
To enable and ensure stakeholder
considerations are at the heart of all corporate
decision making, a wide range of papers
relating to different stakeholder groups are
presented and discussed regularly by the
Board. In addition all papers submitted to the
Board are required to consider the impact of
proposals on key stakeholder groups.
We engage in many different ways and this
section outlines our key stakeholder groups,
how we are interacting with them and how
they inform strategic decision making. It
also provides examples of key strategic
decisions made during the year and the Board
engagement involved.
This section (pages 20 to 27) acts as our
Section 172(1) statement; however, given the
importance of stakeholder focus, long-term
strategy and reputation, these are integrated
throughout the report.
Section 172(1) Statement and Statement
of Engagement with Employees and
Other Stakeholders
In accordance with the Companies Act 2006
(the ‘Act’) (as amended by the Companies
(Miscellaneous Reporting) Regulations
2018), the Directors provide this statement
describing how they have had regard to the
matters set out in section 172(1) of the Act,
when performing their duty to promote the
success of the Company, under section 172.
Further details on key actions in this regard
are also contained within the Corporate
Governance Report on pages 65 to 94 and
the Directors’ Report on pages 94 to 97.
In accordance with the Large and
Medium-sized Companies and Groups
(Accounts and Reports) Regulations
2008 (as amended by the Companies
(Miscellaneous Reporting) Regulations
2018), this statement also provides details
of how the Directors have engaged with
and had regard to the interest of our
key stakeholders.
CUSTOMERS
As a retail and commercial financial services
provider we understand that long-term
success is only possible with a customer-
centric business model and therefore
customer impact is critical to all Board
decisions.
Indirect engagement
The Board reviews the customer dashboard,
which provides a detailed insight into the
Group’s performance in respect of delivering
on our customer related ambitions and agreed
improvements in the dashboard’s construct
during the course of the year. The Board also
approves the annual customer plans, which
set out the customer related priorities for the
Group’s divisions for the coming year.
With around 26 million customers, we strive
to treat them fairly, making it easy for them to
find, understand and access products that are
right for them, whatever their circumstances.
The Chairman, Chief Executive and other Board
members regularly review customer complaints
to understand areas where we can improve and
review how we respond to complaints.
To ensure the Board truly understands the
changing needs of customers and their views
on the bank, various initiatives, direct and
indirect have been implemented.
Customer priorities
Market leading digital proposition
with branch access
Single home for customers’
banking and insurance needs
Personalised customer propositions
Better experience across all channels
Direct engagement
The Board takes advantage of all available
opportunities to engage with customers. In
2019, these included a series of branch/office
visits and customer events for retail, commercial
and insurance customers. Client contact
enables direct feedback and informs strategic
decision making.
In July 2019, we launched the reconnecting
with customers pilot programme, specifically
designed to bring senior leaders across the
Group closer to our customers and customer-
facing teams.
The Chairman and a number of Non-Executive
Directors also attended customer insights
sessions monthly across the UK to hear
directly from customers about their lives and
what is important to them.
Earning and retaining the trust of customers
is a priority for the Board with regular updates
received. The Group remains committed
to doing whatever is necessary to ensure
all customers impacted by past conduct
failures receive fair recompense. During
2019, an independent review highlighted
shortcomings in our approach to victims of the
historic HBOS Reading fraud and as a result
the Board is now taking swift action to contact
the impacted victims and ensure they receive
fair recompense.
Having identified the need to upgrade the
skills of small businesses in technology,
productivity and export opportunities,
we have been engaging with government
and other organisations to provide
additional support.
The Board also looks to benchmark
performance among customers and uses
insight from a range of internal and external
research, including net promoter scores and
other customer indices, to improve services.
The Board receives regular updates and
reports on progress of the Group strategy,
including the development of the next
strategic phase, ensuring the customer remains
at the heart of our strategic investment.
The Board receives insight and guidance in
relation to the competitive environment and
market shares, providing strategic insight and
generating good discussion among the Board,
resulting in either actions or key learnings
taken in the Group.
The focus on customers is not just evidenced
by the regularity of presentations to Board,
but also by the existence of the Group
Customer First Committee. This Committee
is composed of members of senior
management and regularly reports to the
Board. The Committee acts as the custodian
of Group wide customer experience and has
responsibility for monitoring, reviewing and
challenging the divisions to make changes to
support the delivery of the Group’s aim and
customer-centric culture.
Our response to customer priorities
Leading customer experience
Read more on page 16
Digitising the Group
Read more on page 17
Maximising Group capabilities
Read more on page 18
Helping Britain Prosper
Read more on pages 27 to 34
Customer feedback
is crucial to Board
discussions and
achieving a leading
customer experience
Lloyds Banking Group Annual Report and Accounts 2019 21
We have a large footprint, with an important
role in society and many different stakeholders
to consider as we run the Group
Lord Blackwell
Chairman
KEY BOARD DECISION
ADOPTING A QUARTERLY DIVIDEND
In May 2019 the Group announced that
it will move to the payment of quarterly
dividends, from the first quarter of 2020.
The new approach will be to adopt three
equal interim ordinary dividend payments
for the first three quarters of the year
followed by, subject to performance, a
larger final dividend for the fourth quarter
of the year.
The first three quarterly payments, payable
in June, September and December will
each be 20 per cent of the previous year’s
total ordinary dividend per share with the
fourth quarter payment payable in May,
following approval at the AGM.
The Group has around 2.4 million
shareholders, the vast majority of whom
are retail shareholders, and this approach
will provide a more regular flow of
dividend income to all shareholders whilst
accelerating the receipt of payments.
Additional information on the changes,
including how shareholders can move to
direct credit payments, is available on the
Group website
www.lloydsbankinggroup.com/investors/
shareholder-info/dividends/.
Our decision process
The decision to introduce quarterly
dividends was made following
shareholder feedback and extensive
discussion at both management and
Board level
The Board considered the benefits
and possible drawbacks for different
types of shareholders, in particular retail
shareholders given the size of their
holdings, along with the Group impact
The management team consulted
with external advisors, with payment
approaches by other large corporates
considered, and engaged with the
regulators
The Board also looked at various options
for the phasing of dividend payments,
while remaining mindful of the goal to
accelerate payments
This approach both supports our
purpose to Help Britain Prosper whilst
aligning to the Group’s progressive and
sustainable ordinary dividend policy
Link to strategic priorities
Leading customer experience
Indirect engagement
Board members are keen to be aware of
shareholder sentiment and ensure follow up
actions are taken as appropriate. As such all
institutional shareholder letters are registered
and discussed at the Group Nomination and
Governance Committee.
Investor Relations provides regular reports
and feedback to the Board on key market
issues and shareholder concerns. This
includes an annual presentation involving our
corporate brokers on market dynamics and
corporate perception.
Regular feedback is provided to the Board
and appropriate Committees on retail
shareholder correspondence.
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, the Group Chief
Executive also specifically writes to all
shareholders, updating them on progress,
every six months.
We regularly engage with our shareholders
about the information we provide to them
and, where appropriate, incorporate
their feedback to enhance our disclosure.
In support of this, in February 2020, we
published our first ESG focused presentation
online: ‘Our approach to ESG’
www.lloydsbankinggroup.com/investors/
financial-performance/
Given the Group's significant retail
shareholder base, we have actively looked
to increase engagement in the past twelve
months and will continue to do so in 2020. We
aim to build a sustainable communications
infrastructure, including an enhanced
corporate website, to ensure improvements
deliver better insight for all our shareholders.
Our response to shareholder priorities
Group financial performance
Read more on pages 36 to 39
ESG presentation online
www.lloydsbankinggroup.com/investors/
financial-performance/
Our 2020 Remuneration policy
Read more on pages 115 to 126
The Board is accountable
to shareholders and aims
to ensure that a good
dialogue is maintained
SHAREHOLDERS
The Group has the largest shareholder
base in the UK with around 2.4 million
shareholders and we undertake a
comprehensive shareholder engagement
programme including both institutional and
retail shareholders with regular feedback to
management and the Board. We strive to
consider all shareholder groups evenly when
making key decisions for the Group.
Shareholder priorities
Superior returns and lower cost of equity
Strong capital generation and attractive
distribution policy
Sustainable and low risk growth
Responsible, sustainable business model
Direct engagement
The Group understands the need to effectively
communicate with existing and potential
shareholders, briefing them on strategic and
financial progress and attaining feedback. The
Group therefore undertakes c.500 shareholder
meetings a year, with the Group Chief
Executive and Chief Financial Officer
undertaking more than 80 meetings in 2019.
In addition, various Non-Executive Directors
have engaged with shareholders through
the year, including the Chairman and the
Remuneration Committee Chair. The
Chairman’s meetings were largely focused
on corporate strategy, governance and
sustainability, whilst the Remuneration
Committee Chair has been consulting widely
on the new remuneration policy. In total, Non-
Executive Board members have engaged
directly with shareholders representing
around 30 per cent of our issued share capital
during the year.
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 2019:
– around 200 shareholders attended
– over 67 per cent of total voting rights voted
During 2019, we hosted two retail shareholder
briefings, one in London and one in Edinburgh,
in which we updated shareholders on strategy
and performance and obtained feedback.
These briefings were hosted by Investor
Relations and senior management.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
22 Lloyds Banking Group Annual Report and Accounts 2019
Our key stakeholders and Board engagement continued
COLLEAGUES
The Group has around 65,000 colleagues, who
take pride in working for an inclusive and diverse
Group and, with their support, we are building
a culture in which everyone feels included,
empowered and inspired to do the right thing
for customers. Through our strategy we have
made our biggest ever investment in colleagues
to ensure that we continue to attract, develop
and retain these skills and capabilities.
Colleague priorities
Customer and value led culture
Investment in training and IT
Compelling colleague proposition
Attractive reward structure
Direct engagement
We work to maintain an open dialogue with
our colleagues. During the year the Board
communicated directly with colleagues
through videos, webcasts, and our Group
intranet, 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.
The Board places great importance on
opportunities to engage directly with
colleagues. The Board visited office locations
throughout the UK, taking the opportunity
to hear directly from colleagues about their
work and their successes, passion, drive and
commitment to improve the business for the
benefit of the Group’s customers.
The Chairman also held a number of Town
Hall sessions in locations across the country,
meeting with colleagues and answering their
questions about the Group and its business,
in addition to regular and informal lunches
and breakfasts with members of the senior
leadership team to discuss business issues.
The Group held its biggest signature annual
event, Helping Britain Prosper LIVE, which was
attended by over 5,000 colleagues and was
broadcast live to all colleagues.
This event, hosted by the Group Chief
Executive with support from key members of
the executive leadership team, provided the
opportunity for our colleagues to hear and see
first-hand how we are progressing our strategy
and Helping Britain Prosper every day.
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 improving the
customer and colleague experience.
Indirect engagement
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.
In 2019, the Board agreed how they would
engage with the workforce. The definition of
workforce, was agreed by the Board as: Our
permanent colleagues, contingent workers and
third-party suppliers that work on the Group’s
premises delivering services to our customers
and supporting key business operations.
KEY BOARD DECISION
CHANGING OUR
REMUNERATION POLICY
The Group’s Remuneration Policy was last
approved by shareholders at the AGM in
2017 and has been in operation for the
last three years. We have published our
proposed revised Remuneration Policy
within the Directors’ Remuneration Report
on pages 98 to 123.
We have thought carefully about the purpose
of remuneration and believe this is an
opportune time to propose a simplified reward
package that provides greater alignment with
the Group’s strategy and the experience of
customers, colleagues and shareholders.
The proposed policy comprises:
A significant reduction in executive
pension contributions
The introduction of a new long-term
(restricted) share plan
Continued simplification of the
balanced scorecard
Our engagement process
Proactive engagement took place
throughout 2019 with key stakeholders
including shareholders, colleagues and
the regulator to understand some of the
drivers for change
Our Remuneration Committee Chair
consulted with shareholders representing
over 30 per cent of our issued share capital
on initial proposals and continued the
dialogue as the policy evolved
Consultations with our recognised unions
took place to discuss key changes to
colleague pension provisions
Management have been focused on
ensuring key proposed changes in variable
reward structures are fit for purpose for
colleagues across the Group as part of a
fair and consistent reward package
Please see page 99 and 101 for further
information on key areas of focus discussed with
stakeholders.
A workplan was discussed and agreed in
February 2019 and as a result, the Board now
receives a quarterly Workforce Engagement
report which comprises two component parts:
A summary of the Board’s engagement
activity with colleagues
Key themes raised by colleagues and trends
on people matters, including, for example
absence or attrition
The Board considers that the above
arrangements are invaluable in giving them an
understanding of the views of the workforce
and encouraging meaningful dialogue
between the Board and the workforce.
The Board are committed to improving the
transparency of workforce disclosure, and
the Group participates in the Workforce
Disclosure Initiative.
In June 2019, the Group People and
Productivity Director, presented to the Board
on people and transforming ways of working,
providing them with an update on the Group’s
people strategy, read more on page 19.
The Board also receives regular updates on
culture, read more on page 74.
Our decision process
The engagement that has taken place in 2019
has heavily influenced the decisions made by the
Remuneration Committee. Further details of the
feedback we received can be found on page 99.
The Remuneration Committee has been
mindful of the trend towards pay simplification
across UK organisations. Shareholders have
previously voiced that the Group’s current
construct is overly complex. Our new proposed
Remuneration Policy has been designed to
deliver a simplified variable reward approach.
In addition to wholesale change of some
reward structures, such as the introduction
of the Long Term Share Plan, the Committee
also decided to maintain some existing
components considered important
parts of the overall package. We have
agreed to maintain the existing Balanced
Scorecard structure which is considered
a transparent and effective tool to drive
and assess performance. To provide
further understanding for shareholders, an
explanation alongside the Policy as to why the
measures included in the scorecard provide
good strategic alignment is provided within
the Directors’ Remuneration Report.
Long-term implications
We believe the revised reward structure
will incentivise long-term stewardship and
promote good governance through a simple
alignment with shareholders. Reductions in
fixed pay and potential variable reward payouts
will support reducing the gap between
colleague and executive remuneration.
We offer a competitive and fair reward package.
Colleagues are also eligible to participate in
HMRC approved share plans which promote
share ownership by giving colleagues an
opportunity to invest in Group shares. Further
information can be found on page 116 in the
Directors’ Remuneration Report.
Link to strategic priorities
Maximising Group capabilities
The Group believes that a diverse workforce
is critical to performance and regular progress
updates are provided to the Board.
As well as its own engagement survey, the
Group also takes part in the Banking Standards
Board assessment on a yearly basis, which
provides member firms with the evidence,
support and challenge to help them achieve
and maintain high standards of behaviour and
competence both individually and collectively.
There are five parts to the assessment; an online
employee survey, a set of Board questions,
interviews with Executive and Non-Executive
Directors and employee focus groups.
Our response to colleague priorities
Improved employee engagement
Fair and competitive pay and remuneration
structure
Championing Britain’s diversity
Read more on page 34
Transforming ways of working
Read more on page 19
EU exit preparations
Lloyds Banking Group Annual Report and Accounts 2019 23
The Board recognises the
responsibility the Group
has to engage with and
respond to some of the
economic, social and
environment challenges
the UK faces
We define key Board decisions as those
that are significant to any of our stakeholders
Lord Blackwell
Chairman
COMMUNITIES AND ENVIRONMENT
As the largest retail and commercial financial
services provider in the UK, we have a
presence across the country. We specifically
invest in local communities across Britain to
help them prosper economically and build
social cohesion by tackling disadvantage.
Community and environmental priorities
Helping the transition to a sustainable low
carbon economy
Helping Britain get a home
Helping people save for the future
Helping businesses start up and grow
Building capability and digital skills
Direct engagement
The Board continued to support the Group's
four charitable Foundations and during Small
Charities Week, the Group ran campaigns
with each Foundation showcasing the work
they do for small but vital charities including
those tackling domestic abuse and mental
health. This demonstrated the alignment
between the Group supporting vulnerable
customers and the work done by charities
to support these social issues. Sara Weller,
Chair of the Group's Responsible Business
Committee, is a Bank Trustee of the Lloyds
Bank Foundation, England and Wales.
Members of the Board visited several charities
in 2019, including the Manchester Digital
Academy, Angel Eyes in Northern Ireland and
the Cathedral Archer project in Sheffield.
Indirect engagement
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, a sub-
committee of the Board, provides oversight
and support for the Group’s Helping Britain
Prosper Plan, and the plans for delivering
the aspiration to be seen as a trusted and
responsible business.
During 2019, the Board reviewed responses
from the Responsible Business materiality
study which outlined a wide range of views on
the Group. These responses then informed
and guided our responsible business strategy
and reporting.
The Board undertook various related deep
dives throughout 2019, including key areas of
strategic focus such as ESG, cyber security
and inclusion and diversity within the Group,
with specific focus on BAME colleagues. This
highlighted a number of strengths but also
identified opportunities for the Group to
further improve its behaviours and approach.
KEY BOARD DECISION
TACKLING
CLIMATE CHANGE
Across the globe, action to combat
climate change is needed. We support the
Government's Clean Growth Strategy and
are supporting our customers with a range
of initiatives to help them become more
sustainable and think about environmental
impacts, including access to green finance.
The transition to a low carbon economy
impacts us all and subsequently is a
fundamental element of our strategy and
core to Helping Britain Prosper.
In 2018 following a detailed review by the
Board, we introduced a new sustainability
metric to our Helping Britain Prosper Plan,
signalling our intent and commitment
and in January 2020, we announced an
ambitious new goal to help reduce the
carbon emissions we finance by more than
50 per cent by 2030. Read more about our
ambitious goal and other commitments on
pages 28 to 31 or in our approach to ESG
presentation online
www.lloydsbankinggroup.com/ investors/
financial-performance/
Our engagement process
In developing our proposals, various
stakeholder groups have been engaged
including customers, colleagues,
shareholders, suppliers, government
and regulators
The annual responsible business
materiality study specifically identified
environmental sustainability and climate
change as a critical issue and as a result
further detailed analysis was undertaken
by the Group sustainability teams
The Responsible Business Committee,
a sub-committee of the Board, provides
direction and oversight, whilst at
Executive level, the Group Executive
Sustainability Committee (GESC),
supported by divisional Governance
Forums and working groups,
provide oversight
The Board were briefed on key climate
related issues by external industry
experts and also engaged on a number
of external fronts
Long-term implications
The Board believe we have a responsibility
to help drive progress towards a
sustainable and resilient UK economy,
taking into consideration the needs of
different stakeholders and risks to the
business, and were comfortable endorsing
ambitious plans, given the benefit to the
Group and future generations.
>£4.9bn
Green finance
Read more about our approach to green finance
on page 29
>50% by 2030
We aim to help reduce the emissions we
finance by more than 50 per cent by 2030
Link to strategic priorities
Leading customer experience
Maximising Group capabilities
Our response to community and
environmental priorities
Help Britain Prosper
Read more on pages 27 to 34
ESG presentation online
www.lloydsbankinggroup.com/investors/
financial-performance/
The Board supports the Group’s 10 regional
ambassadors that cover the home nations
of Scotland, Wales and Northern Ireland,
and the seven regions of England. Through
the programme we have established strong
relationships with politicians, the media, local
councils and other community institutions to
offer our insight on the major economic and
social debates the country faces.
Given our unique position within the UK, we
are eager to play our part in tackling climate
change, by working with our stakeholders to
help reduce the carbon emissions we finance.
We want to finance a green future together.
We are developing longer-term broader social
impact goals during 2020, as we develop our
thinking around the Society of the Future.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
24 Lloyds Banking Group Annual Report and Accounts 2019
Our key stakeholders and Board engagement continued
REGULATORS AND GOVERNMENT
KEY BOARD DECISION
EU EXIT PREPARATIONS
We have a strong, open and transparent
relationship with our regulators and other
government authorities including HMRC.
We liaise with them regularly to ensure
the business is aligned to the evolving
regulatory framework.
Regulators and Government priorities
Ensuring firms have robust prudential
standards and supervision in place
Fair treatment of customers
Adapting to market changes and horizon
scanning (including climate change and
developments in data and technology)
Culture
Financial and operational resilience
Risk management
Recovery and resolution
Preparations for EU withdrawal
Direct Engagement
During 2019 we had regular meetings with
our various regulators at different levels of the
organisation from Board to senior management.
The Board and senior management continue
to engage with our regulators through
proactive meetings to discuss various key
themes, such as: customer-centric culture;
transformation and change; operational and
financial resilience; and credit risk.
The Chairman has had extensive dialogue
with both the FCA and PRA on all aspects of
their regulatory agenda.
Indirect Engagement
The Board Risk Committee receives monthly
updates on Group regulatory interaction
providing a view of key areas of focus, alongside
progress made addressing regulatory actions,
and current enforcement activity.
Our response to regulator
and government priorities
The Board are committed to complying
with all relevant legislation, in particular that
relating to prudential and conduct regulation.
Appropriate regulation is considered in all
Board decision making.
The Board continue to closely monitor
the status of our regulatory relationships,
enhancing proactive engagement across key
regulatory changes and areas of focus. Read
more on regulatory change on page 11.
In 2020, we will continue to adapt our
engagement strategy, ensuring alignment with
emerging areas of focus and the regulators'
business plans.
When reviewing the possible impacts of
the EU exit, the Board have given particular
consideration to the Group’s strong UK
focus and UK-centric strategy, with specific
focus on the trading, financial, operational
and reputational impacts for the Group,
as well as the cyber, physical security and
fraud risks, and the continued support of
our customers.
We 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.
Long-term implications
Like all UK banks impacted by the EU exit,
we submitted contingency plans to the
regulators both in the UK and elsewhere
as to how we would manage potential
EU exit scenarios and are well prepared
to ensure continuity of our limited EU
business activities at the end of transition
period; new European entities have been
established and are now operational.
Given the vast majority of our business is
in the UK, the direct impact on the Group
from leaving the EU is relatively modest.
Link to strategic priorities
Maximising Group capabilities
Given our UK focus, our performance is
inextricably linked to the health of the
UK economy and throughout 2019 we
continued to prepare for an EU exit.
Given the importance of this topic for
the Group and the country, numerous
stakeholders were engaged to inform
our approach including customers,
colleagues, shareholders, suppliers,
regulators and government.
Our engagement process
The Chairman was an active member of
CityUK’s EU exit Steering Group, working
with other major financial institutions to
inform government decision making
The extended EU Exit Executive
Forum was established, chaired by
the Group Chief Financial Officer,
with comprehensive cross-Group
representation, to provide an update
to the Board on the Group’s EU Exit
contingency planning
Additional updates from the EU Exit
Forum were also submitted to the
Board Risk Committee and Group
Risk Committee
Engagement with politicians, officials,
media, trade and other bodies to
reassure our commitment to Helping
Britain Prosper
Our decision process
The Group’s EU exit contingency plans
continue to be monitored closely by
the Board via specific regular updates,
covering both operational status and
external developments, a suite of early
warning indicators and corresponding risk
mitigation plans.
Our approach to tax
Our comprehensive and diligent approach
to regulation is typified by our approach to
tax, with HMRC being a key stakeholder for
the Group.
As a Group with the purpose to Help
Britain Prosper, and with 98 per cent of our
business subject to tax in the UK, we’re
proud to be one of the largest contributors
of UK tax revenues. As well as our tax
expense of £1.4 billion as seen in the
income statement, in 2019 we also paid
£0.8 billion of other business taxes
(including the Bank levy and our employer
NIC costs) and £0.8 billion of irrecoverable
VAT, a total tax contribution for the year of
£2.9 billion. In addition, we are also a major
tax collector, gathering £1.9 billion on behalf
of HMRC.
The Board recognise that tax is one of the
ways in which the Group contributes to
society, therefore appropriate, prudent
and transparent tax behaviour is a key
component of Board responsibility.
We have a clear tax policy which is part
of our Board-approved Group risk
management framework. This policy sets
out clear actions for colleagues to manage
tax risks. Like any business, our success
rests on maintaining a good reputation.
We understand that the way we approach
our tax obligations has a powerful impact
on this reputation, so finding the most
responsible balance is vital. We comply with
the HMRC Code of Practice on Taxation
for Banks and Confederation of British
Industry’s Statement of tax principles.
Tax is also covered in our Code of
Responsibility, a code that applies to every
colleague, team and business in our Group
– day in, day out. The code makes tax a
personal responsibility for every colleague
in the Group.
Read more about our tax strategy online
www.lloydsbankinggroup.com/
globalassets/our-group/responsible-
business/reporting-centre/
Lloyds Banking Group Annual Report and Accounts 2019 25
Our two way
communication and
partnership with our
suppliers is vital to the
success of our Group
SUPPLIERS
Given the size of our organisation, we are
reliant on external suppliers for a number of key
services. As well as being important for future
success, we believe that dealing with suppliers
in the right way is the right thing to do.
Supplier priorities
Being treated fairly and professionally
during the sourcing process
Clear guidance about the Group’s payment
procedures
Working closely to share expertise in
developing innovative, high quality
products and services and effectively
managing risk
Engaging in ways that ensure we achieve
the best value for customers in terms of
price, quality and social impact
Building strong, collaborative relationships
and understanding the environment in
which we operate so that they can meet our
needs and our customers’ needs
Supporting suppliers in meeting our
requirements for cybersecurity in
our supply chain
Direct engagement
We want to improve the experience of our
suppliers. As such we regularly seek feedback
on the Group’s on-site assurance process
from suppliers in order to continually improve
the process.
Suppliers are encouraged to express their
satisfaction or dissatisfaction to their points
of contact within the Group e.g. the supplier
manager, the sourcing manager, the finance
contacts. Suppliers also have access to the
Speak Up line.
The Group collaborates with its suppliers
on key issues. The Group held a supplier
breakfast with a roundtable discussion on
cyber, resilience and information security.
Indirect engagement
We work with around 3,100 active suppliers
of varying sizes, most in professional services
sectors such as IT, cyber, operations,
management consultancy, legal, HR,
marketing and communication.
All material contracts are subject to rigorous
cost management governance and updates
on key supplier risks are provided to the Board.
The Board Risk Committee oversees our
detailed process to assess the cybersecurity
of suppliers and help them meet our
security requirements.
Board approved governance has been
established to ensure that the ordering
processes for all expenditure: allow
challenge to be made in line with our cost
management processes; maximise the use
of appropriately sourced third party suppliers;
offer appropriate pre-commitment controls
to minimise risks and unnecessary costs; give
the opportunity to negotiate further savings
with third party suppliers; facilitate third party
suppliers being paid in a timely manner and
avoid risk and costs associated with the use
of non-approved channels.
Our response to supplier priorities
In 2019 our supplier expenditure was
£5.9 billion with over 95 per cent of our third
party suppliers located in the UK.
It is important that we have the right
framework to operate responsibly. The
Sourcing and Supply Chain Management
Policy applies to all businesses, divisions,
Group functions and legal entities across the
Group, whether based in the UK or overseas,
including joint ventures. This Policy has been
designed to assist in managing the inherent
risk in outsourcing services, and dealing with
third party suppliers.
We require suppliers to adhere to relevant
Group policies and UK suppliers are
additionally required to comply with our
Code of Supplier Responsibility. This outlines
our expectations for responsible business
behaviour, underpinning our efforts to share
and extend good practice. This can be found
on our Group website
www.lloydsbankinggroup.com/our-group/
working-with-suppliers/
The Board has a zero tolerance attitude
towards modern slavery in our supply chain
and continue to make enhancements to
address the risk of and provide specific
training on human trafficking and modern
slavery for specialist colleagues.
KEY BOARD DECISION
ACQUISITION OF TESCO BANK’S UK
RESIDENTIAL MORTGAGE PORTFOLIO
The Group announced in September 2019
that we had entered into an agreement
with Tesco Bank to acquire its prime UK
residential mortgage portfolio.
Our decision process
The Group has a clear strategy as
outlined on pages 16 to 19, and the
Board regularly reviews this strategy
in light of the changing external
environment to ensure that our focus
remains the right one
All potential acquisitions are assessed to
ensure alignment with strategy and that
they deliver appropriate returns
The Board agreed the acquisition criteria
and discussed the key risks that needed
to be assessed
Detailed analysis of the transaction was
undertaken by senior management
before attaining Board approval
including consultation with regulators
The acquisition of the Tesco mortgage
book was proposed as it is expected
to generate good returns to the
Group, in excess of current organic
market opportunities, while delivering
open mortgage book growth within
the Group’s low risk strategy. It will
also provide additional flexibility
in participation choices in the
mortgage market
The Board received regular reports
and feedback on the progress of the
transaction from senior management
The transaction is consistent with
Group strategy and value accretive
to shareholders
As previously indicated, the Group’s
strong free capital build gives us
flexibility to consider inorganic growth
opportunities in selected target areas,
where we see value for shareholders
The transaction is in line with this
approach and demonstrates the Group’s
strong commitment to the strategically
core prime mortgage market
Following this transaction, the Group’s
open mortgage book assets at the
year end were ahead of the year end
2018 balance
As a customer focused business the
impact on the acquired customers was
considered and we are working closely
together with Tesco Bank to ensure
a smooth transition for the 23,000
new customers
Link to strategic priorities
Leading customer experience
Maximising Group capabilities
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
26 Lloyds Banking Group Annual Report and Accounts 2019
Responsible business
Responsible, sustainable and inclusive
With the Group’s unique
position at the heart of the
British economy, we embrace
our responsibility to help address
some of the economic, social
and environmental challenges
the UK faces. We have been
Helping Britain Prosper for the
past 250 years, by delivering for
our customers and communities,
as a responsible, sustainable and
inclusive business.
Engaging with our stakeholders
Engaging and responding to stakeholders is
fundamental to being a responsible business.
Each year we gather a wide range of views
through our formal materiality assessment
with our stakeholders, which guides both our
strategy and reporting. Our key response
to their needs is the Helping Britain Prosper
Plan which focuses on critical issues including
environmental sustainability on page 28,
digital skills on page 33, and support for
homeowners, savers, and businesses
on page 32. Further topics highlighted by
stakeholders, and discussed below, include
responsible governance and accountability,
support for colleagues, customer privacy
and data security, and support for
vulnerable customers.
Responsible governance
and accountability
Creating and sustaining a values-based
culture with good governance is crucial to
ensuring our colleagues remain engaged,
well informed and can effectively deliver our
strategy. Our rigorous internal governance
and controls, comprising numerous policies
and standards ensure that we treat all
stakeholders fairly, while minimising risk.
Our Board level Responsible Business
Committee (RBC) oversees the Group’s
performance as a responsible business,
and delivery of our sustainability strategy.
Both the Board and RBC are supported
by the Group Executive Committee,
which is in turn supported by a dedicated
Sustainability Committee.
Helping colleagues
to do the right thing
All of our colleagues must be equipped
to make the right decisions. The Group
supports this by consistently promoting and
embedding our policies, processes and
training. Each year as part of mandatory
training, colleagues review our Code of
Responsibility, which outlines Group values
and behaviours, and our Anti-Bribery Policy.
If our colleagues witness something
inappropriate, they can report the matter to
the colleague conduct management team, or
make use of our independent and confidential
whistleblowing service, Speak Up. In 2019
colleagues reported 451 concerns, of which
216 were formally investigated following
triage, with 39 per cent of those investigations
substantiated, resulting in remedial action.
We are working to empower our colleagues
and one example of this is our award winning
behavioural experiments initiative, where
colleagues test new ways of working that
can lead to permanent process and policy
changes, including those that improve
customer satisfaction.
The Group understands that engagement
is a two way process, so each year we ask
colleagues to share their views via our
independently run colleague survey, and
participate in the annual Banking Standards
Board Culture Assessment.
All Group colleagues receive a competitive
and fair reward package. To encourage
ownership, colleagues are eligible to
participate in HMRC approved share plans.
Further information can be found on page 116.
Protecting our customers’
finances and data
Customers trust us to keep their money
and data safe, and the Group deploys
sophisticated technology to protect both.
In addition, we play a significant role in
the Joint Fraud Taskforce, a collaboration
between Government and industry, and
champion the Banking Protocol, which
enables colleagues to request immediate
police support for at-risk customers.
The Group also works continuously to
bolster defences against cyber-attacks,
paying particular attention to reducing the
risks that vulnerable people face. We are a
founding member of the Financial Services
Cyber Collaboration Centre, working with the
Government’s National Cyber Crime Centre,
and the Cross-Market Operational Resilience
Group. We also work closely with other banks,
recognising the importance of collaboration
when it comes to security, including being
part of the Cyber Defence Alliance (CDA).
We also meet all of the requirements set
out in the EU General Data Protection
Regulation (GDPR).
While there’s much we can do, customers
play a significant role in keeping their
accounts secure. Public awareness
campaigns are therefore crucial, and we
support the Take Five campaign, while also
training colleagues so that they can help
protect our customers.
We embrace our
economic, social
and environmental
responsibilities to
Help Britain Prosper
by operating as a
responsible, sustainable
and inclusive Group.
Sara Weller
Non-Executive Director and Chair,
Responsible Business Committee
Supporting vulnerable
customers
Vulnerability for our customers exists in many
forms, from a specific life event to something
long-term. That’s why the Group is committed
to raising awareness, fighting stigma and
providing meaningful support across a range
of challenging issues. Whether supporting our
customers’ financial worries following a cancer
diagnosis, with our partners at Macmillan, or
working with Hope for Justice to provide bank
accounts for modern slavery survivors, the
Group continues to create innovative solutions
for our customers.
Another example is the development of
a domestic and financial abuse team, our
contribution to a very complex issue that can
impact a wide range of our customers. The
Group has also signed up to the Financial
Abuse Code of Practice, and we signpost
the free-to-download Bright Sky app, that
provides comprehensive support to people
affected by domestic abuse.
In 2019, we were the first bank to sign up to
the Mental Health Accessibility Standards,
supporting customers with mental health
problems. For customers at risk of gambling
related harm, we have enabled controls on
all of our credit and debit cards, and built
on our own internal controls to run a pilot in
partnership with Gamban, that helps restrict
access to gambling websites and applications
worldwide to provide further assistance.
Responsible business
Lloyds Banking Group Annual Report and Accounts 2019 27
Our Helping Britain Prosper Plan
Addressing some of the social,
economic and environmental
challenges facing the UK is the
foundation of our Helping Britain
Prosper Plan. The Plan takes us
beyond business as usual, uniting
the Group behind an inspiring set
of objectives.
Launched in 2014 and reviewed annually,
the Plan focuses on the areas where we
believe we can make the biggest difference.
In 2018, as part of its inclusion in the Group
Balanced Scorecard, we set specific targets
across seven areas of focus aligned to our
three year strategy, including environmental
sustainability and progress is outlined below.
Helping Britain Prosper Plan
targets achieved
20/22
2019
2018
2017
2016
2015
2014
20/22
20/22
21/22
20/24
27/28
20/25
Read more online
www.lloydsbankinggroup.com/our-group/
responsible-business/prosper-plan/
The Principles for
Responsible Banking
In September 2019, the Group became a
founding signatory of the United Nations
Environment Programme Finance Initiative
(UNEP FI) Principles for Responsible Banking.
This sets out a framework for a reformed
banking system that will better meet the
changing expectations of society. Through
both our responsible business activities and
the Helping Britain Prosper Plan, we are
supporting the UN’s broader sustainable
development agenda,
and contributing
towards reaching
the UN Sustainable
Development Goals
(SDGs).
HELPING BRITAIN PROSPER PLAN 2020
Area of focus
2019
achieved
20201
targets
SDG
Supported
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
5.1m2
5m
Helping Britain get a home
Amount of lending committed to help people buy their first home
£13.8bn
£30bn
Helping people save for the future
Growth in assets that we hold on behalf of customers in retirement
and investment products3
£37.1bn2
£50bn
Supporting businesses to start up and grow
Increased amount of net lending to start up, SME and
Mid Market businesses
£3.4bn2
£6bn
Tackling social disadvantage across Britain
Number of charities we support as a result of our £100 million
commitment to the Group’s independent charitable Foundations
2,929
2,500
Building capability and digital skills
Number of individuals, SMEs and charities trained in digital skills,
including internet banking
738,504
1.8m
Championing Britain’s diversity
Percentage of senior roles to be held by women
Percentage of roles held by Black, Asian and Minority Ethnic colleagues
Percentage of senior roles held by Black, Asian and Minority
Ethnic colleagues
36.8%
10.2%
6.7%
40%
10%
8%
1 Figures are all cumulative 2018 to 2020 excluding Tackling social disadvantage across Britain and Championing Britain’s diversity.
2 Figures are cumulative from 2018.
3 Growth in assets under administration in our open book.
Full year HBP plan www.lloydsbankinggroup.com/our-group/responsible-business/prosper-plan/
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
28 Lloyds Banking Group Annual Report and Accounts 2019
Responsible business
Helping the transition to a
sustainable low carbon economy
The UK is committed to the vision
of a sustainable, low carbon
future. Our unique position within
the UK economy means that the
successful transition to a more
sustainable, low carbon economy
is of strategic importance to us.
We support the aims of the 2015 Paris
Agreement and the UK Government’s Clean
Growth Strategy, which will require a radical
reinvention of ways of working, living and
doing business including new Government
policies and sustainable finance solutions. In
2018 we set out our Sustainability Strategy and
when reporting on our progress, we support
the Taskforce on Climate-Related Financial
Disclosure (TCFD) framework, and currently
plan to achieve full disclosure by 2022 in line
with the TCFD recommendations and the UK
Government’s Green Finance Strategy.
OUR STRATEGY
>50%
by 2030
We aim to help reduce
the emissions we
finance by more than
50 per cent by 2030
Our goal and approach
As a signal of our commitment we have set an ambitious goal,
working with customers, Government and the market to help
reduce the emissions we finance by more than 50 per cent by 2030,
supporting the UK’s ambition to be net zero by 2050 and the 2015 Paris
Agreement. During the course of 2020, we intend to conduct a review
of our portfolio to establish our current financed emissions and set
appropriate metrics and targets for material sectors.
In order to meet our goal, we will:
Identify new opportunities to support our customers and clients and
finance the UK transition to a low carbon economy
Identify and manage material sustainability and climate related risks
across the Group, disclosing these, their impacts on the Group and
its financial planning processes, in line with the TCFD framework
Use our scale and reach to help drive progress towards a sustainable
and resilient UK economy through engagement with customers,
communities, industry, Government, shareholders and suppliers
Embed sustainability into the way we do business and manage
our own operations in a more sustainable way
Our ambition
We have set ourselves seven leadership ambitions to support the
UK’s transition to a sustainable future:
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 and investments: be a leading UK pension provider that
offers our customers and colleagues sustainable investment choices,
and challenge the 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
Steven Pratt
Responsible business
Metrics and targets
In 2018, we committed to develop a reporting
framework to track performance against
our sustainability strategy. This includes
measures for our energy use, emissions,
water and waste; Group and portfolio metrics
that drive emission reductions related to our
financing activity; the amount of green finance
we provide; and metrics that track climate
change risk (including exposure to high
carbon sectors and sectors at high risk from
climate change).
The complexity of accessing robust data
has prevented us from setting a full suite of
targets in 2019. We intend, however, to set
appropriate targets during 2020 for material
sectors. Our new goal to reduce the emissions
we finance by more than 50 per cent by 2030
will frame the level of ambition across our
targets and metrics.
Extending our own carbon
footprint measurement
We met our 2030 carbon reduction target in
2019, having reduced emissions by 63 per cent
since 2009. We also expanded our Scope 3
emissions measurement to include additional
categories of emissions from business travel
and colleague commuting. We continue to
pursue our targets to reduce emissions by
80 per cent by 2050, operational waste by
80 per cent by 2025 (compared to 2014/15)
and water consumption by 40 per cent
by 2030 (compared to 2009). We will be
developing new carbon, energy and travel
targets in 2020. See Directors' report, page 97
for Group Emissions data.
Green finance
We have provided more than £4.9 billion in
green finance since 2016 through our Clean
Growth Finance Initiative, Commercial Real
Estate Green Loans Initiative, Renewable
Energy Financing, and green bonds
facilitation. While green loan standards are
evolving, we have teamed up with leading
sustainability consultants when developing
green finance products to determine a list
of qualifying green criteria. These green
finance products support a range of eligible
product activity including; reducing emissions,
improving energy efficiency, reducing waste,
improving water efficiency, and funding low
carbon transport and renewable energy.
Climate risk sectors
In line with TCFD recommendations, we
have identified our loans and advances to
customers in high carbon sectors and a
selection of other sectors that will be exposed
to transition risk (see table). This is our initial
view and will be reviewed as our transition risk
insight develops. We continue to work with
our customers to support transition, taking
into account both risks and opportunities.
Our exposure to high carbon sectors is low
(less than 0.5 per cent of total loans and
advances to customers). In addition, data for
these loans and advances is presented at
an overall sector level and not all customers
in these sectors will have high emissions or
be exposed to significant transition risks.
Lloyds Banking Group Annual Report and Accounts 2019 29
For example:
Utilities includes financing to entities
that have both renewable energy and
non-renewable energy generation.
We have provided finance for more than
40 renewable energy projects, including
supporting projects such as the Neart
na Gaoithe offshore wind farm
Real estate and mortgages will include
loans and advances supported by
assets which have a full range of Energy
Performance Certificate (EPC) ratings
including energy efficient properties
UK motor finance includes loans and
advances for low emission vehicles
Loans and advances to customers in high carbon sectors and selected other
sectors subject to transition risks
Sector/area1
Dec 2019
Dec 2018
Dec 2019
Dec 2018
Loans and advances to
customers (£m)2
% of total loans and advances
to customers3
n
o
b
r
a
c
h
g
H
i
s
r
o
t
c
e
s
j
t
c
e
b
u
s
s
r
o
t
c
e
s
r
e
h
t
o
d
e
t
c
e
e
S
l
s
k
s
i
r
n
o
i
t
i
s
n
a
r
t
o
t
Energy Coal Mining
Oil and Gas
(Electric and Gas)
Utilities
Total
Agriculture, Forestry and Fishing
Construction and Real Estate
Transportation (Automotive, Aviation,
Shipping and Rail)
Cement, Chemicals and Steel
Manufacture
Mortgages
UK Motor Finance
21
1,368
964
2,353
7,558
28,228
4,353
28
975
1,251
2,254
7,314
29,470
5,429
<0.01%
0.27%
0.19%
0.47%
1.52%
5.67%
0.87%
<0.01%
0.20%
0.26%
0.46%
1.50%
6.04%
1.11%
143
250
0.03%
0.05%
299,141
15,976
297,497
14,933
60.05%
3.21%
60.96%
3.06%
1 Exposures are based on 2007 Standard Industrial Classification codes except for Agriculture, Forestry and Fishing (based on
NACE code A00-0) and Mortgages and UK Motor Finance, where the full portfolios have been used. These exposures will
include green and other sustainable finance loans, which support the transition to the low carbon economy. As such, these
figures and/or trends should not be read as the only measure to gauge transition risk or financed emissions.
2 Disclosures are based on loans and advances to customers on a statutory basis, before allowance for impairment losses.
Analysis covers at least 95 per cent of loans and advances and does not include data from the Insurance and Wealth division.
3 Total loan and advances to customers were £488,088 million at 31 December 2018 and £498,247 million at 31 December 2019,
see page 293.
£2.3bn
greenfield offshore
wind farm in
Scotland
In November, Lloyds Banking
Group provided funding and
risk management services to the
£2.3 billion Neart na Gaoithe
(Strength of the Wind) offshore
wind farm, a joint venture between
EDF Energy Renewables and ESB
Group. Located 15km off the coast
of Fife, with the potential to power
c.375,000 Scottish homes and
offsetting 400,000 tonnes of CO2
emissions annually.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
30 Lloyds Banking Group Annual Report and Accounts 2019
Responsible business
Risk management
Climate risk is a key emerging risk for
the Group. Our approach to identifying
and managing climate risk is founded
on embedding it into our existing risk
management framework, and integrating it
through policies, authorities and risk control
mechanisms. During 2019, we updated our
TCFD implementation plan to incorporate
Prudential Regulatory Authority (PRA)
supervisory expectations and refined
deliverables, with further resource invested
in the programme.
In 2019, we included commentary on climate
change risk within our Internal Capital
Capacity Adequacy Assessment Process
(ICAAP) submission, and in 2020 we are
building on this through our analysis of initial
scenarios to assess the impact on capital
requirements. We are also engaged in the
industry response to the Bank of England
Discussion Paper to identify the best
approach to explore the financial risks posed
by climate change within its 2021 Biennial
Exploratory Scenario (BES).
We have updated our external sector
statements to include positions on six new
sectors including manufacturing, automotive,
agriculture, animal welfare, fisheries and
UNESCO World Heritage Sites. This is in
addition to the existing statements on power,
coal, mining, oil and gas, forestry and defence.
www.lloydsbankinggroup.com/Our-Group/
responsible-business/reporting-centre/. Our
statement on coal has been updated and
made more ambitious. We continue with
our policy of not financing new coal fired
power stations. We have now tightened our
requirements for providing general banking or
funding, and now require new clients to have
less than 30 per cent of their revenue from the
operation of coal fired power stations and/or
coal mines (previously less than 50 per cent).
In addition, existing customers whose overall
operations include coal mining and coal power
generation or who supply equipment or services
to the sector will be expected to explain how
they plan to reduce their reliance on revenue
from coal fired power stations and/or coal
mines. This includes reducing such revenue
to less than 30 per cent by 2025 and, where
relevant, to eliminate UK coal power generation
in line with UK Government commitments.
Sustainability is now a mandatory part of credit
applications in Commercial Banking for facilities
greater than £500,000, and we continue to
develop sector specific guidance to help
relationship managers identify climate risks.
We will review climate risk as part of the 2020
annual refresh of the Group’s Risk Appetite.
In line with TCFD, we are also developing
forward-looking scenario analysis,
incorporating physical and transition risks,
to help us identify risks and opportunities
over the short, medium and long-term. For
example, Commercial Banking are conducting
analysis on the real estate sector for business
as usual and low carbon transition scenarios
and our Insurance business has conducted
an initial climate stress test. We are working
with external consultants to enhance scenario
analysis across our divisions and will use the
outputs to support our scenario analysis
assessments and inform our credit risk
appetite decisions and future disclosures.
Governance
Given the strategic importance of our sustainability ambitions, our governance structure
provides clear oversight and ownership of the sustainability strategy. This includes:
Lloyds Banking Group Board
Responsible Business Committee
Group Executive Committee
Group Executive Sustainability Committee
Other committees where issues are
discussed as appropriate
Audit Committee
Board Risk Committee
GEC Risk Committee
Divisional Risk Committees
Group sustainability team
Divisional forums/
working groups
Group sustainability
forum
TCFD working
group
–
–
–
–
The Responsible Business Committee (RBC), a sub-committee of the Board, chaired by Sara Weller,
Group Non-Executive Director and which includes the Chairman, Lord Blackwell as a member
The Group Executive Sustainability Committee (GESC) which provides oversight and recommends
decisions to the Group Executive Committee (GEC)
The TCFD working group, co-chaired by senior executives in risk and sustainability, coordinates
the implementation of the TCFD recommendations and supports adherence to key regulatory
requirements on climate risk
The Group Chief Risk Officer (CRO) has assumed responsibility for identifying and managing the risks
arising from climate change, alongside the CROs for key legal entities
Our Group sustainability team is supported by divisional sustainability governance forums led by
Divisional Managing Directors, ensuring a coordinated approach to oversight, delivery and reporting of
the Group’s sustainability strategy.
Clean growth in
the fashion industry
Teemill Tech, a sustainable
t-shirt manufacturer, bought a
15,000 square feet site to expand
its operations with support from
Lloyds Bank’s Clean Growth
Finance Initiative. Their renewable
energy-powered factory on the Isle
of Wight uses robotics and Artificial
Intelligence, creating efficiencies
that make sustainability affordable.
Their expansion will increase
capacity tenfold, creating 100 new
jobs over the next three years.
Teemill Tech is an ambitious firm,
which operates with sustainability
at its core. The rapid growth of
Teemill’s customer base speaks for
itself, with customers across the UK
valuing the quality of its products.
Ben Mackett
Relationship Manager,
Lloyds Bank
Responsible business
Lloyds Banking Group Annual Report and Accounts 2019 31
How we are delivering
against our ambitions
In 2019, we have focused on developing new
products, services and processes to achieve
our ambitions, and our progress has been
recognised.
Lloyds Banking Group achieved the
Leadership level in the 2019 Carbon
Disclosure Project (CDP) Climate Change
survey, scoring an A minus; the highest
placed financial services firm on the
Fortune Sustainability All Stars list; and won
the Real Estate Capital Sustainable Finance
Provider of the Year
One in 14 electric cars in the UK was
supplied by Group subsidiary Lex
Autolease in 2019, supported by a £1 million
cashback offer on pure electric vehicle
(EV) orders, reducing future carbon dioxide
emissions by an estimated 28 kilotonnes
We continue to partner with the
Cambridge Institute for Sustainability
Leadership to provide high quality
training to executives and colleagues in
risk management, product development
and client facing roles. In 2019, over
800 colleagues were trained, ensuring they
are able to support clients on this journey
Since 2018 the Group has supported
renewable energy projects that power the
equivalent of 5.1 million homes, achieving
our Helping Britain Prosper Plan 2020
target a year early
Our £2 billion Clean Growth Finance
Initiative (CGFI) provides discounted
lending to low carbon projects. In 2019,
we expanded eligibility to include
hire purchase and leasing in the agriculture
and manufacturing sectors. We have
provided more than £950 million since
launching in 2018.
Evolving our disclosure
In 2020, we will continue to review and
enhance our methodologies and framework
for reporting Environmental, Social and
Governance risks. This review will take into
account a range of industry guidelines
including TCFD, Principles for Responsible
Banking, Sustainability Accounting Standards
Board (SASB), the evolving World Economic
Forum (WEF) ESG standards, and regulatory
reporting requirements with a view to further
enhancing our disclosures and responding to
the evolving needs of both our shareholders
and other stakeholders.
Initiatives and collaboration
Climate change is a global challenge that requires collaboration across companies and
industries to ensure the risks and opportunities can be adequately identified and managed.
To support this, we participate in several industry initiatives and have signed up to key principles
that drive action on climate change and sustainability, including:
United Nations Environment Programme
Finance Initiative (UNEP FI)
We became a member of UNEP FI in 2019
and joined its Phase 2 Banking TCFD Pilot.
We also became a signatory to the Principles
for Responsible Banking and Principles for
Sustainable Insurance.
Coalition for Climate Resilient Investment
In September 2019, we joined the newly
formed coalition that aims to transform
infrastructure investment by integrating
climate risks into decision making.
University of Cambridge Banking
Environment Initiative (BEI) – Bank 2030
We have been working with 12 leading
banks to develop a roadmap for how
the industry can direct capital towards
environmentally and socially sustainable
economic development.
The Climate Group
In 2019, we were one of the first businesses
globally to sign up to all three of The Climate
Group’s campaigns:
RE100 – a commitment to source
100 per cent of our electricity from
renewable sources by 2030 (which
we achieved in 2019)
EP100 – a commitment to set ambitious
energy productivity targets by 2030
EV100 – a commitment to accelerate the
transition to Electric Vehicles by 2030
Climate Financial Risk Forum
In 2019, we joined the PRA and FCA’s joint
Climate Financial Risk Forum, participating
in the Risk Management Working Group
that aims to deliver a UK best practice
handbook on implementation of the
TCFD recommendations.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
32 Lloyds Banking Group Annual Report and Accounts 2019
Responsible business
Helping Britain
get a home
As the largest lender to the UK housing
sector, we recognise the importance of home
ownership, and that a lack of affordable
housing can lead to social disadvantage.
Working with more than 200 housing
associations across the UK, we have provided
more than £6.4 billion of finance for the social
housing sector since 2018.
We also continue to support The Housing
Growth Partnership, which provides help
and mentoring to small and mid-sized
house builders, who have built 1,636 new
homes across the UK since 2018. In June,
Vanessa Murden, Chief Operating Officer,
Retail, joined the Board of Homes England,
the UK Government’s vehicle supporting the
delivery of affordable housing.
This year we lent £13.8 billion to first-time
buyers, and introduced the Lend a Hand and
Family Boost mortgage propositions, which
make it easier for those with little or no savings
to buy their first home.
Reducing
waste,
creating
growth
Company Shop Group is the largest
commercial redistributor of surplus food
and household products in the UK,
enabling some of the biggest retailers,
manufacturers, food service and logistics
providers to unlock value from surplus,
which may have otherwise gone to
waste. Supported by a £4.2 million
funding package from the Lloyds Bank
Clean Growth Financing Initiative (CGFI),
Company Shop Group, whose head office
is in South Yorkshire, opened three new
stores in 2019, handled over 75 million
units, saved over 25,000 tonnes of good
food from going to waste and diversified
into more non-food categories.
Lloyds Bank plays a key role in helping
us to expand and increase our positive
commercial, social and environmental
impact as we aim to handle more
stock, open more stores and attract
more members.
John Marren
Founder and Chairman of Company
Shop Group
Supporting social
housing ambitions
LiveWest own and manage over 36,000
homes from Cornwall to Gloucestershire,
and plan to provide 7,000 new homes
over the next 5 years and invest £2 billion
in the regional economy over the next
10 years. In September they issued a
£250 million bond. Lloyds Bank were
delighted to support this finance
package to deliver much needed new
and affordable homes.
LiveWest offer affordable rent and
shared ownership, building new
homes, and using the profits to build
more affordable homes. With sites
across the South West and employing
over 1,400 people, they have a
strong positive social impact. Their
investment plans will sustain around
7,000 jobs in the building supply chain,
protecting livelihoods and offering
fresh opportunities.
Helping people
save for the
future
We want to make saving as easy as possible
for our customers, as it helps to build financial
resilience, and can play a meaningful role
in tackling disadvantage. Accordingly, we
continue to improve choice, flexibility and
control for those who are investing, saving
or planning for retirement.
We continually look at ways of widening
access to savings for everyone. For example,
our Next Generation Text service supports
customers with hearing difficulties. And
we are currently the only UK bank to offer
EasyRead statements for savings accounts,
where pictures are used to support the
meaning of the text. Our Banking savings
range operates with transparent pricing for
all, and customers can upgrade their accounts
online with one click when better products
become available.
In 2019, we launched Schroders Personal
Wealth. This market leading proposition aims
to tackle a growing need for professional
advice as the number of people taking
responsibility for their financial future
increases. In September Scottish Widows
launched its standard annuity into the open
Market, enabling us to deliver a secure income
for life to customers in a market that many
providers have left.
As a Group we remain committed to
responsible investment, as signatory to both
the Equator Principles and the UN Principles
for Responsible Investment.
Supporting
businesses to
start up and grow
Supporting businesses of all types and sizes
is fundamental to Helping Britain Prosper. In
2019 small businesses and SMEs represent
over 99 per cent of the business population,
three fifths of employment and half of all
turnover in the private sector. Since 2018 we
have helped over 233,000 businesses start
up, increased net lending to start up, SME
and Mid Market businesses to £3.4 billion,
and re-affirmed our commitment to the UK’s
manufacturing sector providing £2.6 billion
of dedicated investment.
Our Clean Growth Finance Initiative (CGFI),
which aims to offer the most inclusive UK
green funding in the commercial banking
market, provides the incentive of discounted
borrowing to all types of businesses that
invest in reducing their environmental impact.
Since 2018, we helped 17.4 million sq. ft. of
commercial real estate become more energy
efficient, reducing greenhouse gas emissions
in core business processes, properties
and infrastructure.
This year, we also built on our financial
commitments, broadening our support for
a range of issues that impact businesses
every day. For example, we are giving
SMEs access to information and support
on mental health so that they can manage
it more effectively, and we are proud to be
the first financial partner of Be the Business,
which offers funding, research and tools to
help UK businesses measure and increase
their productivity.
Responsible business
Lloyds Banking Group Annual Report and Accounts 2019 33
Tackling social
disadvantage
across Britain
Building
capability and
digital skills
As one of the UK’s largest corporate
donors, we use our scale to reach people in
communities across the country. Our four
independent charitable Foundations, which
cover the whole of the UK and the Channel
Islands, are critical to our vision of tackling
social disadvantage by partnering with local
charities to help overcome complex social
issues and rebuild lives.
Our total community investment in
2019 was £50.8 million and includes our
colleagues’ time, direct donations, and a
share of the Group’s profits given annually
to the Foundations. In 2019, the Foundations
received £25.9 million, enabling them to
support 2,929 charities. These charities are
tackling issues such as domestic abuse,
mental health, modern slavery and human
trafficking, and employability. In addition
to providing funding, colleagues across the
UK also volunteered as mentors to charities
supported by the Foundations.
Looking to a
brighter future
Angel Eyes Northern Ireland is a small
charity based in Belfast, which was set
up in 2007 by parents of visually impaired
children, to improve the support available
to other parents in the same situation. The
charity offers a range of services to families
including an education service, Saturday
club and advocacy work. The Halifax
Foundation for Northern Ireland was one
of the first funders of this charity, helping it
to secure five community grants since 2014.
The charity’s work is delivered through
its 2 full time and 2 part time staff and
44 volunteers. Last year, they were a
winner of the Foundation’s Pitching
4 Pounds programme, seeing the
charity successfully pitch for a grant of
£15,000 to develop an innovative virtual
reality app, which will help parents and
professionals see the world through the
eyes of a partially sighted child.
In early 2019 the Chairman paid a
personal visit to the charity to meet the
staff and experience the developments
for himself.
The UK’s skills and productivity gap requires
significant enhancements in capability
including digital skills. To help make that
happen, we are facilitating digital training for
1.8 million people by 2020, at the same time as
investing in a range of apprenticeship schemes.
The digital skills gap
The 2019 Lloyds Bank Consumer Digital
Index showed that more people than ever
are digitally connected. Digital skills help
individuals find a job, make progress in
work, save money on bills, and reduce social
isolation by connecting them to support
services, as well as friends and family. The 2019
Lloyds Bank Business Digital Index showed
that digital benefits businesses and charities
too. Digital marketing skills for businesses can
open up growth opportunities, while cyber
skills make them more secure.
Nearly one third of charities recognise they
can save around a day a week due to increased
digital capability. Not everyone, however, is
enjoying the benefits that digital can bring.
11.9 million people do not have the essential
digital skills for life, increasing to 17.3 million
people lacking digital skills in the workplace.
While the number of people who are digitally
disengaged is dropping, it is forecast that
4.5 million people will remain disengaged
by 2030.
Small businesses without essential digital
skills are nearly two and a half times more
likely to close in the next two years, than those
with full digital skills. The Group is part of the
Department of Digital Culture Media and
Sport’s Digital Skills Partnership, working with
organisations like Google, Be the Business and
Tata Consultancy Services to deliver impactful
solutions. The Group also helped found
future.now – a coalition led by organisations
such as the City of London, Accenture, BT and
Nominet, with over 60 partners all seeking to
close the digital divide.
Lloyds Bank Academy
The Group has developed the Lloyds Bank
Academy to take on these challenges. Initially
launched in Manchester in November 2018,
the Academy teaches basic digital and
workplace skills through online and face-to-
face courses. In November 2019 we launched
the Bristol Academy, providing additional
support for start ups and SMEs.
Working with a range of partner organisations,
including our charitable Foundations,
academia, industry and Government, the
Academy has taught around 65,000 learners
in Manchester and Bristol.
In addition, over 20,000 colleagues have
volunteered to become Digital Champions
supporting their local communities. Our
Digital Knowhow workshops have helped
thousands of organisations learn how to avoid
fraud and take advantage of digital marketing
techniques, read more online
www.lloydsbankacademy.co.uk/
Supporting apprenticeships
Supporting diverse talent development
is essential if we are to genuinely become
the best bank for customers, colleagues
and shareholders. Internally, we are
delivering over 25 different apprenticeship
programmes, available to all colleagues
regardless of location, career stage or
working pattern. The Group has partnered
with a range of institutions including
Manchester Metropolitan University who
offered colleagues and new recruits the
chance to join the degree-level Digital and
Technology Solutions Degree Apprenticeship.
This structured programme provided
opportunities to benefit from applying the
skills and knowledge developed at university.
Externally, we have committed £9 million
over three years to help SMEs to develop
apprenticeships through our Levy Transfer
initiative. And our investment of £10 million
over 10 years in the Lloyds Bank Advanced
Manufacturing Training Centre in Coventry
will support 3,500 apprentices, graduates
and engineers to be trained by 2024. We
also work with the National Autistic Society
to recruit and train young people with
autism, with Business in the Community to
recruit and train ex-offenders, and with the
National Apprenticeship Service as active
members of the Apprenticeship Diversity
Champions Network.
Working
Better Together
Angela Loveridge created Better
Together after identifying a gap in
parents’ understanding of online safety
for children. It provides training to help
safeguard children online, delivering
workshops for schools, childrens centres,
businesses and charities, and in 2018
was nominated for the NSPCC Child
Protection Trainer award.
Angela signed up to the Lloyds Bank
Academy in Bristol to draw on our
expert knowledge and experience,
and generate ideas to improve her own
business. Through the courses, Angela
has gained digital confidence and now
understands the positive difference
that digital marketing can make such as
how engaging with online reviewers can
make a positive impact to her business.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
34 Lloyds Banking Group Annual Report and Accounts 2019
Responsible business
Championing
Britain’s diversity
Approaching diversity as a business issue
reflects our firm view that diverse teams,
working within inclusive environments, are
more innovative, engaged, and deliver better
outcomes for our customers. As the first FTSE
100 company to set targets to increase both
gender and ethnic diversity at senior levels, we
continue to invest in being a leading inclusive
employer, where the unique differences our
colleagues bring to work every day are valued.
Focus on ethnic diversity
Encouraging ethnic diversity starts with
talking to colleagues and communities about
their experiences. We know that role models
and understanding cultural difference are
vital, which is why we delivered cultural
capability training to all colleagues in 2019,
building knowledge of identity, race, faith
and background.
This year, we published our Ethnicity Role
Models list, featuring 70 Black, Asian and
Minority Ethnic (BAME) colleagues, and in
June, two colleagues were named in the top
100 ethnic minority executives, and a further
two colleagues in the 50 future ethnic minority
leaders in the EMpower Ethnic Minority Role
Model lists.
As a result of our focus on the issue, we
exceeded our 2020 target delivering
10.2 per cent of roles held by BAME
colleagues, and increased the senior roles
held by BAME colleagues to 6.7 per cent,
working towards our stretching target of
8 per cent by 2020.
Gender, gender identity and
sexual orientation
In 2019, 36.8 per cent of senior roles were held
by women, and we remain focused on our
target of 40 per cent by the end of 2020.
We remain on track to meet the voluntary
2020 target, set by the Hampton-Alexander
Review, of having 33 per cent representation
of women on, or reporting into, our Executive
Committee, through a focus on dedicated
succession planning and skills development.
For the eighth year running the Group
featured in the Times ‘Top 50 employers for
women’ and the Bloomberg Gender Equality
Index for the first time.
We are also creating an inclusive environment
for our LGBT+ colleagues, being named Top
Financial Employer, and seventh overall in
2019’s Stonewall Top 100 Employers. Our
LGBT+ colleague network Rainbow, has over
5,000 members, one of the largest of its kind
in the UK.
Supporting disability
We are moving the debate on from
accommodating disabilities, to developing
talent and careers. In 2019, 2.8 per cent of
colleagues disclosed a disability and we
support them in a range of ways. We ensure
full and fair consideration to applications from
people with disabilities. We offer bespoke
training, career development, promotions and
adjustments for colleagues and applicants
e-learning and we’re training 2,500 colleagues
to become Mental Health Advocates by 2020.
In July, Lloyds Bank was the first organisation
to sign up to the Mental Health Accessibility
Standards, which were developed to help
companies support customers with mental
health problems.
Finding the right
solution
Throughout 2019 many colleagues
shared their experiences to help
reduce stigma around mental illness
in the workplace. One colleague
accessed telephone counselling
through the Employee Assistance
Programme. He then saw his GP,
which in turn led to treatment through
Cognitive Behavioural Therapy and
psychotherapy.
I am incredibly grateful for the support
I have had from the Group. I recognise
that I have been fortunate, and many
others may not have access to the
support I did. I’m sharing my story,
to act as an advocate for the support
I received.
with disabilities, including those who became
disabled while employed. We hold a Business
Disability Forum (BDF) Gold Standard, and
Disability Confident Leader status with
the Department for Work and Pensions.
In July, we received the National Autistic
Society’s Autism Friendly Award, marking our
commitment to become the UK’s first autism
friendly bank for customers.
Mental health
We are passionate advocates for removing the
stigma attached to mental ill-health, actively
creating a culture of openness and support,
while developing efforts to prevent mental
health challenges.
In 2019, the Group featured in Fortune’s
Change the World list for our work with
Mental Health UK and the Group Chief
Executive was named a top 50 world leader
by Fortune magazine for raising mental health
awareness.
We are a founding signatory of the Mental
Health at Work Commitment and our
colleague wellbeing resources provide a
range of support including direct access to
counselling services. We also offer colleagues
private medical benefits that give parity to
mental and physical health conditions.
We recognise prevention is equally as
important as support, and in September we
launched a personal resilience portal, for
colleagues to better understand preventative
measures available for both mental and
physical health.
In August, our Resilient Leader training course
received a Princess Royal Training Award,
recognising its lasting impact. Over 40,000
colleagues have completed our Mental Health
Our Inclusion and Diversity data
Gender
Board Members
GEC and GEC Direct Reports
Senior Managers
Colleagues
Male
Female
Male
Female
Male
Female
Male
Female
2019
2018
9
4
111
50
4,539
2,647
29,522
41,033
10.2%
9.5%
6.7%
9
4
107
45
4,701
2,573
30,458
42,372
9.5%
9.0%
6.4%
2.8%
1.7%
2.2%
2.0%
Ethnic background
Percentage of colleagues from a BAME background
BAME managers
BAME senior managers
Disability
Percentage of colleagues who disclose they have a disability
Sexual orientation
Percentage of colleagues who disclose they are lesbian, gay,
bisexual or transgender
All data as at 31/12/2019. Group Executive Committee (GEC) assists the Group Chief Exec. in strategic, cross-business or Group-
wide matters and inputs to Board. GEC and Direct Reports includes the Group Chief Exec., GEC and colleagues who report to a
member or attendee of GEC, excluding administrative or executive support roles (personal assistant, executive assistant).
Reporting: A colleague is an individual who is paid via the Group's payroll and employed on a permanent or fixed term
contract (employed for a limited period). Includes parental leavers, and internationals (UK includes Guernsey, IOM, Jersey
and Gibraltar). Excludes leavers, Group Non-Executive Directors, contractors, temps, and agency staff
Diversity: Calculation is based on headcount, not FTE (full-time employee value). Data source is HR system (Workday)
containing all permanent colleague details. Gender: includes international, those on parental/maternity leave, absent without
leave (AWOL) and long-term sick. Excludes contractors, Group Non-Executive Directors, temps and agency staff. All other
diversity information is UK Payroll only. All diversity information is based on voluntary self-declaration, apart from gender, so is
not 100 per cent representative; our systems do not record diversity data of colleagues who have not declared this information.
BAME: comprising of mixed/multiple, Asia, Black, Middle Eastern, North African and other (non-white) ethnicities.
Colleague grades: from A through to J, Senior Executive (SE), Executive (EX) and Executive Director (ED) A being the lowest.
Senior Managers: Grades F, G, H, J, SE, E and ED (F being the lowest). Managers: Grade D-E (D being the lowest).
Lloyds Banking Group Annual Report and Accounts 2019 35
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
Stakeholders
Policies and standards which govern
our approach
Information necessary to understand our Group and its
impact, policies due diligence and outcomes
Annual materiality assessment1
Supplier management
– Engaging and responding to our stakeholders
www.lloydsbankinggroup.com/our-group/responsible-
business/reporting-centre/
– Code of Supplier Responsibility
www.lloydsbankinggroup.com/our-group/working-with-
suppliers/being-a-supplier-to-lloyds-banking-group/
Environmental matters
Environmental (TCFD) statement
– Reflecting the needs of our stakeholders, pages 20 and 26
Employees
Respect for Human Rights
Colleague Policy1
Code of Responsibility
Health and Safety Policy1
Human Rights Policy statement
Colleague Policy1
Pre-Employment vetting standards1
Data Privacy Policy1
Modern Slavery and Human Trafficking
Statement
Information and Cyber Security Policy1
Social matters
Volunteering standards1
Matched giving guidelines1
– Helping the transition to a sustainable low carbon economy,
page 28
– Reflecting the needs of our stakeholders, pages 20 and 26
– Championing Britain’s diversity, page 34
– Reflecting the needs of our stakeholders, page 26
– Suppliers, page 25
– Championing Britain’s diversity, page 34
– Reflecting the needs of our stakeholders:
Customers, page 20
– Reflecting the needs of our stakeholders:
Communities and Environment, page 23
– Helping Britain Prosper Plan, page 27
– Helping Britain get a home, Helping people save for the
future, Supporting business to start up and grow, Building
capability and digital skills, pages 32 to 33
– Tackling social disadvantage across Britain, page 33
Anti-corruption
and anti-bribery
Anti-Bribery Policy1
Anti-Bribery Policy Statement
Anti-Money Laundering and Counter
Terrorist Financing Policy1
Fraud Risk Management Policy1
– Reflecting the needs of our stakeholders:
Customers, page 20
– Reflecting the needs of our stakeholders:
Colleagues, page 22
Description of
principal risks and
impact of business activity
Description of the
business model
Non-financial key
performance indicators
– Helping the transition to a sustainable low carbon economy:
Risk management, page 30
– Risk overview 2019 themes, page 40
– Our principal risks, page 42
– Our Business Model, page 14
– Key performance indicators, page 08
– Our strategic priorities, page 06
– Helping Britain Prosper Plan, page 27
– Global Reporting Initiative (GRI) standards
www.lloydsbankinggroup.com/our-group/responsible-
business/reporting-centre/
– Reporting Criteria
www.lloydsbankinggroup.com/our-group/responsible-
business/reporting-centre/
– Responsible Business Data Sheet
www.lloydsbankinggroup.com/our-group/responsible-
business/reporting-centre/
1 Certain Group Policies, internal standards and guidelines are not published externally.
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 2019.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationNon-Financial Information Statement
36 Lloyds Banking Group Annual Report and Accounts 2019
Financial performance overview
Group
Solid financial performance
The Group’s statutory profit after tax was
£3,006 million, 33 per cent lower than in 2018
with resilient underlying profit partly offset by
the significant payment protection insurance
(PPI) charge of £2,450 million taken in the year.
The statutory return on tangible equity was
7.8 per cent.
Trading surplus was resilient at £8,822 million
(2018: £9,003 million) with lower net income
partly offset by the Group's continued
progress in delivering cost reductions.
Underlying profit was £7,531 million compared
to £8,066 million in 2018, reflecting lower
net income and higher impairment charges,
partly offset by the Group’s strong cost
performance. The Group’s market-leading
underlying return on tangible equity was
14.8 per cent.
The Group’s balance sheet remains strong
with lending growth in the open mortgage
book as well as targeted segments, including
SME and UK Motor Finance. This was more
than offset by lower balances in Mid Markets
and Global Corporates, primarily as a result of
the optimisation of the Commercial portfolio,
as well as continued reductions in the closed
mortgage book. The Group’s capital position
remains strong with a pro forma CET1 ratio
of 15.0 per cent pre dividend accrual and
13.8 per cent post dividend.
The Group is strongly capital generative
and although this has been impacted by
PPI in 2019, the Board has recommended
a final ordinary dividend of 2.25 pence per
share, making a total ordinary dividend of
3.37 pence per share, an increase of 5 per cent
on 2018 and in line with our progressive and
sustainable ordinary dividend policy.
Income statement
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Trading surplus
Impairment
Underlying profit
Restructuring
Volatility and other items
Payment protection insurance provision
Statutory profit before tax
Tax expense1
Statutory profit after tax1
Earnings per share
Dividends per share – ordinary
Share buyback value
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
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
Pro forma risk-weighted assets5
Tangible net assets per share
2019
£m
2018
£m
Change
%
12,377
12,714
5,732
(967)
17,142
(7,875)
(445)
(8,320)
8,822
(1,291)
7,531
(471)
(217)
(2,450)
4,393
(1,387)
3,006
3.5p
3.37p
–
6,010
(956)
17,768
(8,165)
(600)
(8,765)
9,003
(937)
8,066
(879)
(477)
(750)
5,960
(1,454)
4,506
5.5p
3.21p
£1.1bn
(3)
(5)
(1)
(4)
4
26
5
(2)
(38)
(7)
46
55
(26)
5
(33)
(36)
5
2.88%
2.93%
£435bn
£436bn
48.5%
0.29%
14.8%
7.8%
49.3%
0.21%
15.5%
11.7%
(5) bp
–
(0.8) pp
8bp
(0.7) pp
(3.9) pp
At 31 Dec
2019
£440bn
£412bn
107%
86bp
13.8%
32.6%
5.2%
At 31 Dec
2018
£444bn
£416bn
107%
210bp
13.9%
32.6%
5.6%
£203bn
£206bn
Change
%
(1)
(1)
–
(124)bp
(0.1)pp
–
(0.4)pp
(1)
50.8p
53.0p
(2.2)p
1 2018 restated to reflect amendments to IAS 12, see basis of presentation on page 206.
2 Excludes reverse repos of £54.6 billion (31 December 2018: £40.5 billion).
3 Excludes repos of £9.5 billion (31 December 2018: £1.8 billion).
4 Capital build is reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent
first quarter period and is also reported before accruing for ordinary dividends, the cancellation of the remaining 2019 share
buyback and the acquisition of Tesco Bank’s UK prime residential mortgage portfolio.
5 The CET1, MREL, leverage ratios and risk-weighted assets at 31 December 2019 and 31 December 2018 are reported on a pro
forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The pro forma
CET1 ratio at 31 December 2018 incorporates the effects of the share buyback announced in February 2019 and is reported
post dividend accrual.
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 customers with choice
and flexibility, with propositions
increasingly personalised to
their needs.
Retail operates a multi-brand
and multi-channel strategy. It
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.
£3,839m
Underlying profit decreased by 9%
£13.8bn
Lending to first time buyers
£3.5bn
Acquired Tesco’s Bank UK prime
residential mortgage portfolio
supporting 23,000 new customers
#1
Maintained the largest branch
network in UK
+5pts
Improvement in branch net
promoter score at 66pts
UK’s largest digital bank
Active online users (m)
16.4
2019
2018
2017
2016
2015
16.4
15.7
13.4
12.5
11.5
Lloyds Banking Group Annual Report and Accounts 2019 37
Progress in 2019
Leading customer experience
UK’s largest digital bank with 16.4 million
active digital customers and 10.7 million
mobile banking app customers, with
average customer logons at 23 times per
month and 75 per cent of new products
now originated digitally
Maintained the largest UK branch network
while trialling new branch formats with the
latest flagship Bank of Scotland branch
in Glasgow, and Home by Halifax, an
innovative store dedicated to supporting
customers purchase a property
Branch net promoter score up 5 points with
around 50 per cent of customer facing time
being spent on complex needs
Supporting first time buyers with further
£13.8 billion of lending, building on success
of Lloyds Lend a Hand mortgage, launched
Halifax Family Boost mortgage, providing
customers' financial supporters with
enhanced savings rates
Encouraging customers to talk more openly
about their finances, through the launch of
the M Word campaign earlier this year and
co-funding a brand new television series with
Channel 4 called ‘Save Well, Spend Better’
Reduced complaints (excluding PPI) by
13 per cent in 2019 and mobile app NPS
increased 3 per cent since 2017
Digitising the Group
Recognised for innovations by being first in
the Business Insider mobile banking study,
with recent updates including
– Push notification alerts helping to plan
ahead with upcoming payment reminders
and confirmations
– Statement search helping customers
find transactions quicker and easier, with
c.300,000 searches per week
Remote mortgage applications up 30 per
cent, with re-mortgage applications starting
digitally up 50 per cent in value
Maximising Group capabilities
Acquired Tesco Bank’s UK prime
residential mortgage portfolio supporting
23,000 new customers
Completed the integration of MBNA,
realising a return on investment of
18 per cent, ahead of original target
Renewed the successful Jaguar Land
Rover relationship1
Transforming ways of working
Continued progress in 'skills of the future'
training delivered to colleagues with over
750,000 additional hours in 2019
Financial performance
Net interest income was 3 per cent lower
due to a 5 basis point reduction in net
interest margin with continued pressure on
mortgages margin, partly offset by lower
funding costs and a benefit from aligning
credit card terms
Other income reduced 4 per cent reflecting
a lower Lex fleet size. Operating lease
depreciation includes an associated benefit,
more than offset by some weakening in
used car prices through the first three
quarters of 2019
Operating costs reduced 3 per cent, as
increased investment in the business was
more than offset by efficiency savings.
Remediation decreased 11 per cent to
£238 million
Impairment increased 21 per cent, with
some weakening in used car prices,
methodology refinements and lower cash
recoveries following prior year debt sales,
while underlying drivers remain strong,
particularly in the mortgage book
Customer lending increased by 1 per cent
with the acquisition of Tesco Bank's
mortgage portfolio and growth in UK
Motor Finance, partly offset by closed
book mortgages. Organic open mortgage
balances remained flat year on year
Customer deposits include current account
growth, stable relationship savings and
reduced low margin tactical savings
Risk-weighted assets increased
by 5 per cent mainly driven by
mortgage model refinements and the
Tesco acquisition
1 Subject to contract.
Providing a
family boost
Following the successful launch of the Lloyds
Bank campaign, Lend a Hand, Halifax launched
the Family Boost mortgage, to help first time
buyers without a deposit onto the property
ladder by using savings from family members to
provide 10 per cent of the loan.
In Peterlee, County Durham, one customer visited
his local Halifax branch to enquire about the
Family Boost scheme. The customer was very
reluctant to rent, as he wanted to make a home
for his son and himself.
Within 48 hours of applying, the customer
secured a mortgage offer meaning that now with
the help of his brother, he has bought a home
to put down roots in an area he wanted his son
to grow up in. It also enabled the customer’s
brother to get a better return on his savings whilst
supporting a family member.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
38 Lloyds Banking Group Annual Report and Accounts 2019
Financial performance overview continued
Commercial Banking
Commercial Banking has a
client-led, low risk, capital
efficient strategy, 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.
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.
£1,777m
Underlying profit decreased by 19%
2.14%
Return on risk weighted assets,
down 36bps
19%
Market share in SME and small
business lending balances
Funding for UK manufacturers
£bn
2.6
2019¹
2018
2017
2016
2015
1 Figures are cumulative from 2018.
2.6
1.5
1.1
1.4
1.0
Progress in 2019
Leading customer experience
95 per cent of SME and Mid Market clients
migrated onto Commercial Banking Online
platform with customers now having 24/7
access to their accounts, and 5 years of
transaction history. The platform sees around
130,000 payments processed every day and
around 1.2 million log ons per month
Awarded ‘Business Bank of the Year’ at
the FDs’ Excellence Awards for the 15th
consecutive year
Digitising the Group
Cash management and payments API
launched, allowing clients to send faster
payments directly from their systems without
human intervention and reducing payment
times to 1.5 seconds
Launched Asset Finance Broker API, linking
new business proposals directly from broker
to Group, reducing manual intervention
by 87 per cent, enabling quicker and
more accurate credit decisions with real-
time updates
Improved eTrading capability, enabling
larger clients to undertake foreign exchange
trades electronically 24 hours per day across
multiple geographies and supporting clients
in automating their businesses
Maximising Group capabilities
Achieved the committed £18 billion gross
new lending to UK businesses; a further
£18 billion committed for 2020
On track to meet the Group’s target
of £3 billion of investment in the UK
manufacturing sector by the end of 2020
Over 900 manufacturing apprentices,
graduates and engineers trained since
2018 as a result of the £1 million annual
investment in the Lloyds Bank Advanced
Manufacturing Centre
Beat the sustainability target of supporting
energy efficient improvements for a further
one million square feet of commercial real
estate in 2019 and have supported renewable
energy projects capable of powering
5 million homes by the end of 2019
Transforming ways of working
Completed rollout of the SME Business
Lending Tool, freeing up relationship
manager time for increased client
engagement, and new auto-credit
decisioning capability with around 25 per
cent of SME annual renewals now automated
Continued progress in developing
colleagues with the skills and capabilities
needed for the future, with 210,000 colleague
training hours completed in 2019, exceeding
the year-end target
Financial performance
In challenging market conditions, maintained
a strong focus on risk-weighted asset (RWA)
optimisation and actively addressed low
returning client relationships, delivering a
significant reduction in RWA of over £9 billion
Net interest income of £2,918 million reduced
3 per cent, reflecting asset margin pressure
Other income of £1,422 million was
15 per cent lower than in 2018, driven by
lower levels of client activity in challenging
market conditions in Global Corporates and
Financial Institutions
Operating costs of £2,081 million reduced
5 per cent, as increased investment in the
business was more than offset by continued
focus on efficiency savings
Asset quality ratio of 30 basis points was
24 basis points higher, largely driven by
material charges raised against two corporate
cases, with stable underlying portfolio trends
Return on risk-weighted assets of 2.14 per cent
was 36 basis points lower, despite the
acceleration of risk-weighted asset
optimisation in the second half, driven by two
material corporate impairment charges
SME lending balances up c.1 per cent,
continuing to grow slightly ahead of
the market
Customer deposits at £145.1 billion, down
2 per cent, reflecting funding optimisation
activity including a reduction in short-term
financial institutions deposits with growth in
current accounts of 3 per cent in the second
half of the year
In a £4 million project supported by Bank of
Scotland and the Scottish Government’s Low
Carbon Infrastructure Programme, ice cream
maker, Mackie’s of Scotland, is set to have one
of the most sophisticated refrigeration systems
in Europe. The results will see CO2 emissions
cut by 80 per cent and energy costs by up to
80 per cent, supporting Mackie’s ambition of
becoming the greenest company in the UK.
With Bank of Scotland’s support we are realising
our green ambitions and, in the long run, we
hope that our new system will set a precedent
and make the energy-intensive food and drink
sector more sustainable.
Gerry Stephens,
Finance Director, Mackie’s of Scotland
Supporting
green
ambitions
Lloyds Banking Group Annual Report and Accounts 2019 39
Insurance and Wealth
Insurance and Wealth offers
insurance, investment and
wealth management products
and services.
Our wealth management
joint venture with Schroders
harnesses the unique strengths
of two of the UK’s strongest
financial services businesses.
The Group continues to invest
significantly in the business,
with the aims of capturing
considerable opportunities in
pensions and financial planning
whilst driving growth across
intermediary and relationship
channels through a strong
distribution model, offering
customers a single home for their
banking and insurance needs.
£1,101m
Underlying profit increased by 19%
>1m
new pension customers
19%
increased new business income
14%
Market share in workplace pensions
Strong open book AUA
customer net inflows
£bn
18
2019
2018
2017
2016
2015
18
13
2
1
2
Progress in 2019
Leading customer experience
Scottish Widows now offers its standard
annuities on the open market allowing a
wider range of customers to access the
product and secure income for retirement.
Aiming to achieve a 15 per cent market share
by end of 2020
Successful migration of around 400,000
policies from a number of legacy systems to
a single platform managed by the Group’s
partner Diligenta, enabling customers
to better manage their policies with
Scottish Widows
New ‘Plan and Protect’ life and critical illness
cover launched in 2019 helps create financially
resilient families by understanding their
needs and protecting what matters most,
providing a safety net if the worst happens
Scottish Widows won 5 star service awards at
the Financial Adviser Service Awards for the
fourth consecutive year
Digitising the Group
Significant progress on Single Customer View,
with home insurance and individual pension
customers added in 2019. Over 5 million
customers now able to access their insurance
products alongside their bank account
Addressing an underserved customer need
for home contents insurance for renters
through a partnership with the fintech
firm Trov. New online low cost product
offers a flexible on-demand monthly
subscription policy
Maximising Group capabilities
Schroders Personal Wealth launched with
ambition of becoming a top 3 financial
planning business by end of 2023
Provided new functionality and customer
choice in general insurance with full rollout
in the last quarter of a flexible, multi-channel
home insurance product offering to the
branch network
Continued progress towards target
of growing open book assets under
administration by £50 billion by the end
of 2020, with strong customer net inflows
of £18 billion (including Zurich transfer) in
2019. Cumulative net inflows of £30 billion
and market movements give overall growth
of £37 billion since the start of the current
strategic plan in 2018
Sourced £0.6 billion of new long-term assets
in collaboration with Commercial Banking
to support five bulk annuity transactions,
generating over £2 billion of new
business premiums
Financial performance
Strong growth in life and pensions sales,
up 22 per cent, driven by increases in new
members in existing workplace schemes,
increased auto enrolment workplace
contributions and bulk annuities. On track
to achieve 15 per cent market share of
workplace business by end of 2020 compared
to 10 per cent market share at start of 2018
New underwritten household premiums
increased 19 per cent, resulting in number
one market share for new business earlier
than expected; total underwritten premiums
decreased 3 per cent driven by a competitive
renewal market
Life and pensions new business income up
19 per cent to £628 million. Lower existing
business income due to equity hedging
strategy to reduce capital and earnings
volatility. Higher experience and other items
includes one-off benefit from the change in
investment management provider. General
insurance benefitted from benign weather
in 2019
Wealth income and operating costs
impacted by the transfer of assets to
Schroders Personal Wealth in October 2019
Underlying profit increased by 19 per cent
to £1,101 million. Net income increased by
£145 million to £2,133 million, whilst operating
costs decreased by £39 million with cost
savings offsetting higher investment in
the business
Insurance capital
Estimated pre final dividend Solvency II ratio
of 170 per cent. The rise in the ratio over 2019
includes the impact of an equity hedge partly
offset by lower long term interest rates. A
final dividend of £250 million and a special
dividend of £185 million related to the gain on
the establishment of the Schroders Personal
Wealth joint venture were paid to the Group
in February 2020, with total dividends paid in
respect of 2019 performance of £535 million
Helping our
customers
secure an
income
for life
In September 2019, Scottish Widows launched
its standard annuity into the open market
enabling a wider range of customers to access
the product.
Through significant investment in technology
we are able to support customers looking to
secure income for life with their pension savings.
Helping people save for the future is just one
way in which we support the UK through our
Helping Britain Prosper Plan.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
40 Lloyds Banking Group Annual Report and Accounts 2019
Risk overview
Effective risk management and control
Our approach to risk
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 robust risk
management, supported by a consistent
risk-focused culture.
This risk overview provides a summary of risk
management within the Group, with a prudent
approach and rigorous controls to support
sustainable business growth and minimise
losses. Through a strong and independent
risk function, 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 decisions.
The risk management section from
pages 129 to 187 provides a more in-depth
picture of how risk is managed within the
Group, detailing the Group’s emerging risks
from pages 133 to 134, approach to stress
testing, risk governance, committee structure,
appetite for risk and a full analysis of the
principal risk categories, the framework by
which risks are identified, managed, mitigated
and monitored.
Risk as a strategic
differentiator
Risks are identified, managed, mitigated
and monitored using our comprehensive
enterprise 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 139 to 187.
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
Our enterprise 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
annually. 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 stress analysis at a risk type
and portfolio level, as appropriate
Our enterprise risk management framework
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.
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 enable effective decision-making.
Our risk management framework outlines the framework in
place for risk management across the Group. During 2019,
we updated this framework to be more succinct and to
better ensure it is accessible to all colleagues.
A number of key components support the
delivery of effective risk management, with
four overarching objectives:
Define a robust and consistent approach
to risk governance to be applied across
the Group and its legal entities
Articulate individual and collective
accountabilities for risk appetite,
oversight and assurance
Establish a common approach to
categorise risks to support assessment,
aggregation and reporting
Provide colleagues and stakeholders
with a single point of reference for risk
management understanding, and
supporting reference sources
Board
and senior
management
Risk culture
and the customer
Risk appetite
Risk and control self assessment
Risk governance
Three lines of defence
The Board delegate executive authorities
to ensure there is effective oversight of
risk management.
The appropriate culture ensures
performance, risk and reward are aligned.
The framework ensures our risks are
managed in line with our risk appetite.
The identification, measurement and control
of our risks form an integral part of our Risk
and Control Self Assessment.
The governance framework supports a
consistent approach to enterprise-wide
behaviour and decision-making.
The robust approach to monitoring,
oversight and assurance ensures effective
risk management across the Group.
Lloyds Banking Group Annual Report and Accounts 2019 41
Managing risk means
making the right
decisions and doing the
right thing for customers.
It is at the heart of our
Code of Responsibility
and supports our aim
to be the best bank for
customers
António Horta-Osório
Group Chief Executive
Risk culture and the customer
The effectiveness of our risk management
approach relies upon a culture of transparency
and openness that is encouraged by both the
Board and senior management.
Based on the Group’s conservative
business model, prudent approach to risk
management, and guided by the Board,
senior management articulate the core
risk values to which the Group aspires,
and set the tone from 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.
Tone from
the top
Incentives
Customer
focused
risk culture
Accountability
Effective
communication
and challenge
Tone from the top
Senior leaders set a clear tone from the top
and lead by example, reflecting our Group
values; putting customers first, keeping it
simple, and making a difference together,
encouraging a culture of intellectual curiosity
and proactive risk management amongst
all colleagues.
Accountability
Risk management is a team effort with all
colleagues playing their part and taking full
individual responsibility for their actions.
Effective communication and challenge
As a Group we are open, honest and
transparent with risk colleagues working in
collaboration with business areas to:
Support effective risk management
Understand root causes when things
go wrong
Share lessons learned
Provide constructive challenge
Incentives
Remuneration, performance management
and succession planning that support our core
values and put the customer at the heart of
everything we do.
2019 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 some
themes have been particularly prevalent
in 2019.
Climate risk
Climate change is a key global risk,
impacting our customers, our investors
and our business in making the required
transition towards a low carbon economy.
We are committed to delivering the
Task Force for Climate-Related Financial
Disclosures by 2022 and we are taking steps
to fully integrate climate risk into our existing
Enterprise Risk Management Framework,
including our policies, risk appetite, controls
and disclosures.
We continue to invest in supporting this
activity as part of the wider sustainability
strategy (see Responsible business section
on pages 26 to 34), and are also active
participants in a number of external initiatives
to help drive consistency across the industry.
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 have taken the necessary steps to
ensure continuity of our limited EU business
activities, where permitted.
Our UK focus means 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 UK/EU trade
agreement negotiations, we continue to
monitor closely. We are also taking a prudent
approach to our balance sheet, accelerating
issuance where appropriate.
Our customer focused strategy remains the
right one. Guided by the overriding principle
of Helping Britain Prosper, we continue
to focus on customer needs and support
our personal and business customers.
We have delivered on our commitment to
lend £18 billion to UK businesses in 2019,
reaffirming our support for the UK economy.
Change / execution risk
Delivering change is a key part of how the
Group continues to serve our customers,
fulfil our strategic objectives, and deliver
our aim of Helping Britain Prosper.
During 2019 key change initiatives included
continued digitisation of the Group and
transforming ways of working. There has
also been significant delivery of regulatory
change in order to adapt to the changing
regulatory landscape.
The Group continues its drive to deliver
a leading customer experience whilst
managing a varied change portfolio. Focus
on improvements to the control environment
and managing within risk appetite has
enabled the safe delivery of change.
The need to protect existing processes and
minimise adverse impact on colleagues and
clients will support the delivery of a leading
customer experience.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
42 Lloyds Banking Group Annual Report and Accounts 2019
Risk overview continued
Our principal risks
Principal risks and uncertainties are reported regularly to the Board Risk Committee.
Change/execution, data and operational resilience have been elevated from existing
risks to principal risks during 2019, and strategic added as a new principal risk
NEW
NEW
NEW
CHANGE/EXECUTION
DATA
OPERATIONAL RESILIENCE
The risk that, in delivering our change agenda,
we fail to ensure compliance with laws and
regulation, maintain effective customer
service and availability, and/or operate within
our approved risk appetite.
The risk that we fail to effectively govern,
manage, and control our data (including data
processed by third party suppliers) leading to
unethical decisions, poor customer outcomes,
loss of value and mistrust.
Example
Ineffective change/execution risk
management could lead to increased periods
of time where we cannot serve our customers,
and could lead to impacts associated with
other risk types such as regulatory censure.
Risk Appetite
We have limited appetite for negative impacts
on customers, colleagues, or the Group as a
result of change activity.
Mitigation
Continued focus on strengthening the
control environment, maturation of the
change policy and associated policies and
procedures, which set out the principles and
key controls that apply across the business
and are aligned to the Group risk appetite.
Senior Management continue to drive
improvements to Change and Execution
Risk metrics, in particular those affecting
customers and colleagues
Businesses assess the potential impacts
of undertaking any change activity on
their ability to execute effectively, and the
potential consequences for the existing
risk profiles
Further detail on principal risk, including
mitigation on page 139
Alignment to strategic priorities
and future focus
Delivering a leading
customer experience
We recognise the importance of delivering
the Group’s strategic priorities and will
continue to invest in the transformation of
the Group to deliver a leading customer
experience
New principal risk
Change/execution risk was elevated
from a secondary risk to a principal risk in
recognition of the significant volumes of
complex change the Group is currently
undertaking to deliver its strategy. This
includes key change initiatives, digitising the
Group and transforming ways of working
which will help to future-proof against the
heightened risks associated with the use of
new technologies and manage regulatory
requirements and expectations. The
decision aligns with the Group’s progress in
developing and embedding its change and
execution risk management capabilities
The risk that we fail to design resilience into
business operations, underlying infrastructure
and controls (people, process, technology) so
that it is able to withstand external or internal
events which could impact the continuation
of operations, and fails to respond in a way
which meets customer and stakeholder
expectations and needs when the continuity
of operations is compromised.
Example
Ineffective risk management could lead to
vital services not being available to customers
and stakeholders.
Risk Appetite
We have a limited appetite for disruption to
services to customers and stakeholders from
significant unexpected events.
Mitigation
The Group has increased its focus on
operational resilience and has updated its
strategy to reflect changing priorities of
both customers and regulators
Further detail on principal risk, including
mitigation on page 140
Alignment to strategic priorities
and future focus
Delivering a leading
customer experience
End-to-end resilience of our critical
processes is a key strategic priority and the
Group operational resilience programmes
continue to invest in improving our control
environment and resilience. We continue
to exercise, test and improve our resilience
through scenario testing as well as learning
from real events (those impacting ourselves
but also those impacting others) through
understanding the root cause
We recognise the importance of the Group’s
operational resilience to our customers,
markets and the wider financial sector
Example
The loss of trust from customers, colleagues,
business partners or regulators arising from a
failure to manage and control our data.
Risk Appetite
We have limited appetite for material events
or losses that occur due to the inappropriate
use of data.
Mitigation
Significant investment has been made
to enhance the maturity of data risk
management in recent years
In addition to the General Data Protection
programme which delivered the necessary
infrastructure to achieve compliance with
the new regulations in May 2018, a number
of other large investments have been made
Further detail on principal risk, including
mitigation on page 139
Alignment to strategic priorities
and future focus
Delivering a leading
customer experience
The quality of the data that the Group holds
and the choices we make in how it is used
is a key strategic enabler to future business
growth, delivering a leading customer
experience and Helping Britain Prosper
We recognise that lawful, fair and
transparent collection and appropriate use
of data, is critical to delivering a leading
customer experience and maintaining trust
across the wider industry
Internal programmes ensure that data is
used correctly, and the control environment
is regularly assessed through both internal
and third-party testing
New principal risk
Data was elevated from a secondary risk to
a principal risk as one of our most valuable
assets. It is critical to our business and is the
subject of significant regulatory oversight and
media focus. Our Group is trusted with large
volumes of data, and we must ensure that the
information we hold is accurate, secure and
managed appropriately
New principal risk
Operational resilience was elevated from a
secondary risk to a principal risk as our ability to
continue operations when subject to internal
or external incidents, safeguarding our most
critical processes and assets, protecting
our colleagues, continuing to service our
customers and minimising any impact on the
banking systems is crucial
Lloyds Banking Group Annual Report and Accounts 2019 43
NEW
STRATEGIC
CREDIT
REGULATORY AND LEGAL
The risk of financial penalties, regulatory
censure, criminal or civil enforcement action
or customer detriment as a result of failure
to identify, assess, correctly interpret,
comply with, or manage regulatory and/or
legal requirements.
Example
Failure to deliver key regulatory changes or
to comply with ongoing requirements.
Risk Appetite
We interpret and comply with all relevant
regulation and all applicable laws (including
codes of conduct which could have legal
implications) and/or legal obligations.
Mitigation
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
Business units identify, assess and
implement policy and regulatory
requirements and establish local controls,
processes, procedures and resources
to ensure appropriate governance
and compliance
Further detail on principal risk, including
mitigation on page 162
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
The risk that parties with whom we have
contracted fail to meet their financial
obligations (both on or 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.
Risk Appetite
We have a conservative and well balanced
credit portfolio through the economic
cycle, generating an appropriate return on
equity, in line with our target return on equity
in aggregate.
Mitigation
Prudent, through the cycle credit principles,
risk policies and appetite statements
Robust models and controls
Further detail on principal risk, including
mitigation on page 142
Alignment to strategic priorities
and future focus
Maximising Group 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
Portfolios have benefited from relatively
favourable economic conditions and a
prolonged period of low interest rates.
Underlying impairments remain below
long-term levels, but are expected to
increase as impairments normalise
Key risk indicators
£1,291m
Impairment charge
2018: £937m
1.8%
Stage 3 loans and advances as a % of total
2018: 1.9%
The risks which result from strategic plans
which do not adequately reflect trends in
external factors, ineffective business strategy
execution, or failure to respond in a timely
manner to external environments or changes
in stakeholder behaviours and expectations.
Example
The financial services sector operates
in evolving regulatory and competitive
environments with an increased pace, scale
and complexity of change which creates a
risk to the Group’s strategic plans
Shareholder expectations continue to
evolve potentially impacting the Group’s
role in society
Greater competition for specialist skill sets
(such as data science and engineering),
alongside demographic challenges in the
working population, may result in a skills
shortage impacting delivery of key strategic
initiatives
Risk Appetite
We have business plans that are responsive
to internal and external factors including
changes to the regulatory, macroeconomic
and competitive environments.
Mitigation
Continued digitisation of customer
journeys, thereby enabling the delivery of
market leading customer experiences that
are seamless, accessible and personal
Robust operating and contingency planning
to ensure potential impacts of strategic
initiatives and external drivers are mitigated
Further detail on principal risk, including
mitigation on page 141
Alignment to strategic priorities
and future focus
Delivering a leading
customer experience
The Group’s forward looking approach to
managing strategic risk will help the Group
identify new risks and opportunities, and
allow the Group to be better prepared to
respond to changes in the regulatory and
competitive environments
New principal risk
Strategic risk is a new principal risk in
acknowledgment of the increasing rate of
change in customer expectations, regulatory
and competitive environments along with
the demands for specialist skills to meet
these evolving needs. This aligns with our
strategic priorities to deliver a leading
customer experience by digitising the
Group, maximising Group capabilities and
transforming ways of working
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
44 Lloyds Banking Group Annual Report and Accounts 2019
Risk overview continued
CONDUCT
OPERATIONAL
PEOPLE
The risk of customer detriment across
the customer lifecycle including: failures
in product management, distribution
and servicing activities; from other risks
materialising, or other activities which could
undermine the integrity of the market
or distort competition, leading to unfair
customer outcomes, regulatory censure,
reputational damage or financial loss.
Example
The most significant conduct cost in recent
years has been PPI mis-selling.
Risk Appetite
We deliver fair outcomes for our customers.
Mitigation
Simplified and enhanced conduct policies
and procedures in place to ensure
appropriate controls and processes
that deliver fair customer outcomes,
and support market integrity and
competition requirements
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
Further detail on principal risk, including
mitigation on page 163
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. Our conduct risk framework
continues to support this through robust
and effective management. This supports
our vision of being the best bank for
customers, enabling the delivery of a
leading customer experience through
effective root cause analysis and learning
from customer feedback
The risk of loss from inadequate or failed
internal processes, people and systems,
or from external events.
Example
Ineffective risk management could lead
to adverse customer impact, reputational
damage and financial loss, across all of our
principal risks.
Risk Appetite
We have robust controls in place to manage
operational losses, reputational events and
regulatory breaches. We identify and assess
emerging risks and act to mitigate these.
Mitigation
The Group continues to review and invest
in its control environment to ensure it
addresses the inherent risks faced
The Group employs a range of risk
management strategies, including:
avoidance, mitigation, transfer (including
insurance) and acceptance
Further detail on principal risk, including
mitigation on page 164
Alignment to strategic priorities
and future focus
Delivering a leading
customer experience
The Group continues to manage
operational risk within the appetite
articulated by the Board and in compliance
with legal and regulatory requirements to
insurance a robust control environment and
a positive customer experience
The risk that we fail 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.
Example
Inability to attract or retain colleagues with
key skills could impact the achievement of
business objectives.
Risk Appetite
We lead responsibly and proficiently, manage
people resource effectively, support and
develop colleague talent, and meet legal and
regulatory obligations related to our people.
Mitigation
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
Further detail on principal risk, including
mitigation on page 165
Alignment to strategic priorities
and future focus
Transforming ways of working
Regulatory requirements relating to
personal accountability and remuneration
rules could affect our 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
Lloyds Banking Group Annual Report and Accounts 2019 45
INSURANCE UNDERWRITING
CAPITAL
FUNDING AND LIQUIDITY
The risk of adverse developments in the
timing, frequency and severity of claims for
insured/underwritten events and in customer
behaviour, leading to reductions in earnings
and/or value.
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.
Risk Appetite
We have robust controls in place to manage
the insurance underwriting risk inherent in
the products our Insurance business offers to
meet customer needs.
Mitigation
General Insurance exposure to
accumulations of risk and possible
catastrophes is mitigated by reinsurance
arrangements broadly spread over
different reinsurers
Insurance processes on underwriting, claims
management, pricing and product design
Further detail on principal risk, including
mitigation on page 166
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
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
Alternatively a shortage of capital could
arise from an increase in the amount of
capital that needs to be held
Risk Appetite
We maintain capital levels commensurate
with a prudent level of solvency and aim to
deliver consistent and high quality returns to
shareholders.
Mitigation
The Group has a capital management
framework that includes the setting of
capital risk appetite
The Group maintains a recovery plan which
sets out a range of potential mitigating
actions that could be taken in response to
a stress
Further detail on principal risk, including
mitigation on page 167
Alignment to strategic priorities
and future focus.
Maximising Group 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
Funding risk is the risk that we do not have
sufficiently stable and diverse sources of
funding or the funding structure is inefficient.
Liquidity risk is the risk that we do not have
sufficient financial resources to meet our
commitments when they fall due, or can only
secure them at excessive cost.
Example
A deterioration in either our or the UK’s credit
rating, or a sudden and significant withdrawal
of customer deposits, would adversely impact
our funding and liquidity position.
Risk Appetite
We maintain a prudent liquidity profile and a
balance sheet structure that limits our reliance
on potentially volatile sources of funding.
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
The Group’s funding and liquidity position
is underpinned by its significant customer
deposit base, and is supported by strong
relationships across customer segments
Further detail on principal risk, including
mitigation on page 175
Alignment to strategic priorities
and future focus
Maximising Group 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 us to grow
targeted business segments, and better
address our customers’ needs
Key risk indicators
£17,515m
Life and pensions present value
of new business premiums
2018: £14,384m
£671m
General insurance underwritten
total gross premiums
2018: £690m
Key risk indicators
13.8%1
CET1 ratio
2018: 13.9%1,2
5.2%1
UK leveraged ratio
2018: 5.6%1
1 Pro forma basis
2 Incorporates the effects of the share buyback announced
in February 2019.
Key risk indicators
£118bn
LCR eligible assets
2018: £129bn
107%
Loan to deposit ratio
2018: 107%
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
46 Lloyds Banking Group Annual Report and Accounts 2019
Risk overview continued
GOVERNANCE
MARKET
MODEL
The risk that our organisational infrastructure
fails to provide robust oversight of decision
making and the control mechanisms to ensure
strategies and management instructions are
implemented effectively.
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
SMCR requirements could result in lack
of clear accountability, and legal and
regulatory consequences
Risk Appetite
We have governance arrangements that
support the effective long-term operation of
the business, maximise shareholder value and
meet regulatory and societal expectations.
Mitigation
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
Further detail on principal risk, including
mitigation on page 181
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 SMCR requirements and enable
us to demonstrate clear accountability
for decisions
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, credit spreads and
interest rates 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 and
interest rate 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
Risk Appetite
We have robust controls in place to manage
our inherent market risk and do not engage in
any proprietary trading, reflecting the customer
focused nature of the Group’s activities
Mitigation
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
Further detail on principal risk, including
mitigation on page 183
Alignment to strategic priorities
and future focus
Maximising Group 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 2019.
This allows us to more efficiently utilise
available capital resources
Key risk indicators
£550m
IAS 19 pension surplus
2018: £1,146m
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.
Risk Appetite
Material models are performing in line
with expectations.
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
Further detail on principal risk, including
mitigation on page 187
Alignment to strategic priorities
and future focus
Digitising the Group
Our models play a vital role in supporting
our Group strategy to ensure profitable
growth in targeted segments and the 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 ourselves and customers.
The Group’s Viability statement can be
found on pages 95 to 96.
The Group’s emerging risks are shown
on pages 133 to 134 and a full analysis
of the Group’s risk categories is on
pages 129 to 187.
Lloyds Banking Group Annual Report and Accounts 2019 47
Lloyds Banking Group Annual Report and Accounts 2019 47
Financial results
Summary of Group results
Divisional results
Other financial information
48
57
61
Anwyl Homes
One of the UK’s leading independent housing
developers has boosted its turnover by
60 per cent, after receiving support from
Lloyds Bank to expand its presence across
the North West.
Anwyl Homes, founded in 1930, builds high
quality houses across North Wales and the
North West of England. Lloyds Bank has worked
with Anwyl Homes for more than 70 years,
providing the firm with the funding and working
capital support it’s needed to expand.
During the last five-year expansion
plan the firm has built 754 new homes,
completing developments across North
Wales, Shropshire, Staffordshire, Cheshire,
Merseyside and Lancashire. As a result of
expansion, the firm has also been able to
create a number of new jobs within the local
area, boosting its workforce by 24 per cent
over the same period.
www.lloydsbankinggroup.com/
our-group/responsible-business/
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
48 Lloyds Banking Group Annual Report and Accounts 2019
Summary of Group results
Solid financial performance
The Group’s statutory profit after tax was £3,006 million, 33 per cent lower than in 2018 with resilient underlying profit partly offset by the significant
payment protection insurance (PPI) charge of £2,450 million taken in the year. The statutory return on tangible equity was 7.8 per cent.
Trading surplus was resilient at £8,822 million (2018: £9,003 million) with lower net income partly offset by the Group’s continued progress in delivering
cost reductions. Underlying profit was £7,531 million compared to £8,066 million in 2018, reflecting lower net income and higher impairment charges,
partly offset by the Group’s strong cost performance. The Group’s market-leading underlying return on tangible equity was 14.8 per cent.
The Group’s balance sheet remains strong with lending growth in the open mortgage book as well as targeted segments, including SME and UK
Motor Finance. This was more than offset by lower balances in Mid Markets and Global Corporates, primarily as a result of the continued optimisation
of the Commercial portfolio, as well as continued reductions in the closed mortgage book. The Group’s capital position remains strong with a pro
forma CET1 ratio of 15.0 per cent pre dividend accrual and 13.8 per cent post dividend.
The Group is strongly capital generative and although this has been impacted by PPI in 2019, the Board has recommended a final ordinary dividend of
2.25 pence per share, making a total ordinary dividend of 3.37 pence per share, an increase of 5 per cent on 2018 and in line with our progressive and
sustainable ordinary dividend policy.
Net income
Net interest income
Other income excluding Vocalink gain on sale
Vocalink gain on sale
Other income
Operating lease depreciation1
Net income
Banking net interest margin
Average interest-earning banking assets
2019
£m
12,377
5,682
50
5,732
(967)
17,142
2.88%
2018
£m
12,714
6,010
–
6,010
(956)
17,768
2.93%
£434.7bn
£436.0bn
Change
%
(3)
(5)
(5)
(1)
(4)
(5)bp
–
1 Net of profits on disposal of operating lease assets of £41 million (2018: £60 million).
Net income of £17,142 million was 4 per cent lower than in 2018, reflecting lower net interest income and other income, while operating lease depreciation
increased by 1 per cent.
Net interest income of £12,377 million was down 3 per cent with a slightly lower net interest margin and stable average interest-earning banking assets.
Net interest margin reduced in line with guidance to 2.88 per cent, with the benefit of lower deposit costs, higher Retail current account balances and a
benefit from aligning credit card terms, more than offset by continued pressure on asset margins, particularly in the mortgage market.
Average interest-earning banking assets at £434.7 billion were stable, with growth in targeted segments, in particular SME (£0.3 billion) and UK Motor
Finance (£1.4 billion), more than offset by lower balances in the closed mortgage book (£2.5 billion) and the effect of the sale of the Irish mortgage portfolio
in the first half of 2018 (£1.6 billion).
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 2019 the Group’s structural hedge had a nominal balance of £179 billion (31 December 2018:
£180 billion) and an average duration of around three years (31 December 2018: around four years). The Group generated £2.7 billion of income from the
structural hedge balances in 2019 (2018: £2.7 billion). Within this, the benefit from the hedge in the year was £1.1 billion over LIBOR (2018: £1.4 billion) with
a fixed earnings rate of approximately 0.7 per cent over LIBOR (2018: 0.7 per cent).
Other income at £5,732 million decreased by 5 per cent with healthy growth in new business in Insurance and Wealth more than offset by lower other
income in Commercial Banking and Retail. Insurance and Wealth continued to perform well reflecting growth in workplace pensions new business from
increased auto enrolment contributions in the first half of 2019 and higher general insurance income, net of claims. Insurance and Wealth other income
also includes the benefit from the change in investment management provider taken in the first half of 2019 and longevity assumption change benefits.
Commercial Banking was impacted by more subdued levels of client activity given challenging external conditions particularly in large corporate markets
and Retail other income was impacted by a lower Lex fleet size. Other income includes a gain of £185 million on the sale of £8 billion of gilts and other
liquid assets, compared with a £270 million gain on sale of such assets in 2018.
Operating lease depreciation increased by 1 per cent reflecting some weakening in used car prices through the first three quarters of 2019, partly offset by
a lower fleet size.
Total costs
Operating costs
Remediation
Total costs
Business as usual costs1
Cost: income ratio
Lloyds Banking Group Annual Report and Accounts 2019 49
2019
£m
2018
£m
Change
%
7,875
445
8,320
5,478
48.5%
8,165
600
8,765
5,836
49.3%
4
26
5
6
(0.8)pp
1 2018 Business as usual costs are adjusted to reflect the impact of applying IFRS 16. Excluding the impact of IFRS 16 business as usual costs in 2018 were £6,048 million.
Total costs of £8,320 million were 5 per cent lower than in 2018, driven by the reduction in both operating costs and remediation charges.
Operating costs of £7,875 million were 4 per cent lower with a 6 per cent reduction in business as usual costs, largely driven by increased efficiency from
digitalisation and process improvements, in parallel with strategic investment of £1.0 billion in the business, up 6 per cent in the year. During 2019 the
Group capitalised around £1.5 billion of investment spend, of which around £1.0 billion related to intangible assets. Total capitalised spend was equivalent
to around 60 per cent of above the line investment, in line with 2018.
Remediation charges of £445 million, including additional charges of £219 million in the fourth quarter of 2019 relating to a number of items across existing
programmes, were significantly lower than the £600 million in 2018.
The Group’s market-leading cost:income ratio continues to provide a competitive advantage and further strengthened to 48.5 per cent with positive jaws
of 1 per cent.
The Group expects operating costs in 2020 to be less than £7.7 billion with the cost:income ratio lower than in 2019.
Impairment
Impairment charge
Asset quality ratio
Gross asset quality ratio
Stage 2 loans and advances to customers as % of total
Stage 2 ECL2 allowances as % of Stage 2 drawn balances
Stage 3 loans and advances to customers as a % of total
Stage 3 ECL2 allowances as % of Stage 3 drawn balances
Total ECL2 allowances as % of drawn balances
1 Underlying basis.
2 Expected credit loss.
2019
£m
1,291
0.29%
0.37%
At 31 Dec
20191
%
7.7
3.7
1.8
22.5
0.8
2018
£m
937
0.21%
0.28%
At 31 Dec
20181
%
7.8
4.1
1.9
24.3
0.9
Change
%
(38)
8bp
9bp
Change
%
(0.1)pp
(0.4)pp
(0.1)pp
(1.8)pp
(0.1)pp
Credit quality remains strong with a net asset quality ratio of 29 basis points and a gross asset quality ratio of 37 basis points compared with 21 basis points
and 28 basis points respectively in 2018. The impairment charge increased to £1,291 million with the increase primarily driven by two material corporate
cases in Commercial Banking, along with some weakening in used car prices in Black Horse.
The Group’s loan portfolios continue to be well positioned, reflecting the Group’s prudent, through the cycle approach to credit risk, and benefiting from
continued low interest rates and a resilient UK economy.
Overall credit performance in the secured book remains strong with the average mortgage loan to value increasing slightly to 44.9 per cent (31 December
2018: 44.3 per cent). New business average loan to value was 64.3 per cent and 88 per cent of the portfolio has a loan to value ratio of less than 80 per cent.
New to arrears as a proportion of the total book remains low in both the secured and unsecured books. In Commercial Banking, the book continues to
benefit from low interest rates and effective risk management, including a prudent approach to vulnerable sectors.
The Group’s outlook and IFRS 9 base case economic scenario used to calculate expected credit loss (ECL) have remained broadly stable throughout 2019,
reflecting an orderly exit of the UK from the European Union. During 2019 the Group made small improvements to its economic scenario modelling. The
Group’s ECL allowance continues to reflect 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.
Stage 2 loans and advances to customers as a proportion of total lending reduced by 0.1 percentage points to 7.7 per cent, whilst Stage 3 loans and
advances fell by the same amount to 1.8 per cent. The Group’s coverage of Stage 2 assets reduced by 0.4 percentage points to 3.7 per cent, reflecting
a number of model refinements, including an enhanced approach to loan amortisation in the Commercial Banking portfolio. Coverage of Stage 3
assets reduced by 1.8 percentage points to 22.5 per cent largely as a result of the improved performance of mortgage cases in long-term default, and a
change in the mix of Commercial assets due to a combination of write-offs and the transfer in of cases with lower likelihood of net loss. The Group’s total
underlying ECL at 31 December 2019 was £4.2 billion and broadly stable compared to prior year (31 December 2018: £4.4 billion). Total ECL allowances as
a percentage of drawn balances fell slightly to 0.8 per cent. The Group expects the 2020 net asset quality ratio to be less than 30 basis points.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
50 Lloyds Banking Group Annual Report and Accounts 2019
Summary of Group results continued
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 expense1
Statutory profit after tax1
Earnings per share
Return on tangible equity
2019
£m
7,531
(471)
126
(68)
(275)
(217)
(2,450)
4,393
(1,387)
3,006
3.5p
7.8%
2018
£m
8,066
(879)
(50)
(108)
(319)
(477)
(750)
5,960
(1,454)
4,506
5.5p
11.7%
Change
%
(7)
46
37
14
55
(26)
5
(33)
(36)
(3.9)pp
1 Comparatives restated to reflect amendments to IAS12, see basis of presentation on page 206.
Further information on the reconciliation of underlying to statutory results is included on page 61.
The Group’s statutory profit after tax was £3,006 million, 33 per cent lower than in 2018 with resilient underlying profit partly offset by the PPI charge. The
return on tangible equity was 7.8 per cent (2018: 11.7 per cent) and earnings per share was 3.5 pence (2018: 5.5 pence).
Restructuring costs of £471 million were down 46 per cent, primarily reflecting the completion of both the integration of MBNA and the ring-fencing
programme, which were partially offset by costs associated with establishing the Schroders Personal Wealth joint venture.
Market volatility and asset sales of £126 million included adverse movements in banking volatility, a gain on the establishment of the Schroders Personal
Wealth joint venture as well as the one-off charge for exiting the Standard Life Aberdeen investment management agreement, taken in the first half of
2019. In 2018 market volatility and asset sales included a loss on sale of the Irish mortgage portfolio and an adjustment to past service pension liability.
The decrease in amortisation of purchased intangibles to £68 million (2018: £108 million) and fair value unwind and other items to £275 million
(2018: £319 million) were driven by a number of assets fully amortising in 2018 and the run down of the subordinated liabilities acquired during the
HBOS acquisition.
The PPI provision charge of £2,450 million was largely due to the significant increase in PPI information requests (PIRs) leading up to the deadline for
submission of claims on 29 August 2019, and also reflects costs relating to complaints received from the Official Receiver as well as administration costs.
An initial review of around 60 per cent of the five million PIRs received in the run-up to the PPI deadline has been undertaken, with the conversion rate
remaining low, and consistent with the provision assumption of around 10 per cent. The Group has also reached final agreement with the Official Receiver.
The unutilised provision at 31 December 2019 was £1,578 million.
Taxation
The tax expense was £1,387 million (2018: £1,454 million) representing an effective tax rate of 32 per cent (2018: 24 per cent). This reflected the increase in
non-deductible conduct provision charges in relation to PPI, partially offset by the release of a deferred tax liability.
The Group continues to expect a medium term effective tax rate around 25 per cent, although this is likely to be lower in 2020 if the UK’s corporate tax rate
remains unchanged, given a revaluation of the Group’s deferred tax assets.
Return on tangible equity
The underlying return on tangible equity was 14.8 per cent, primarily reflecting resilient underlying profit and slightly lower average tangible equity. The
statutory return on tangible equity was 7.8 per cent and was impacted by PPI.
In 2020, the Group expects an increased statutory return on tangible equity of 12 to 13 per cent, driven by resilient underlying profit and lower below the
line charges.
Balance sheet
Loans and advances to customers1
Customer deposits2
Loan to deposit ratio
Wholesale funding
Wholesale funding <1 year maturity
Of which money-market funding <1 year maturity3
Liquidity coverage ratio – eligible assets4
Liquidity coverage ratio5
1 Excludes reverse repos of £54.6 billion (31 December 2018: £40.5 billion).
2 Excludes repos of £9.5 billion (31 December 2018: £1.8 billion).
At 31 Dec
2019
£440bn
£412bn
107%
£128bn
£43bn
£22bn
£131bn
137%
At 31 Dec
2018
£444bn
£416bn
107%
£123bn
£33bn
£21bn
£126bn
128%
Change
%
(1)
(1)
–
4
31
5
4
9pp
3 Excludes balances relating to margins of £4.2 billion (31 December 2018: £3.8 billion) and settlement accounts of £1.9 billion (31 December 2018: £1.2 billion).
4 Eligible assets are calculated as a simple average of month end observations over the previous 12 months.
5 The Liquidity coverage ratio is calculated as a simple average of month end observations over the previous 12 months.
Lloyds Banking Group Annual Report and Accounts 2019 51
Loans and advances to customers were £440 billion (31 December 2018: £444 billion). Growth in the open mortgage book and targeted segments
including SME and Motor Finance, was more than offset by continued reductions in the closed mortgage book and lower balances in Mid Markets and
Global Corporates. Commercial Banking has continued to optimise its portfolio in challenging market conditions, maintaining a strong focus on risk-
weighted asset reduction and actively addressing low risk-adjusted returning client relationships. In line with the Group’s expectations, the open mortgage
book grew by £3.5 billion driven by the acquisition of Tesco Bank’s UK prime residential mortgage portfolio and was broadly flat excluding the acquisition.
The Group continues to optimise funding and target current account balance growth, with Retail current accounts up 4 per cent at £76.9 billion
(31 December 2018: £73.7 billion). The loan to deposit ratio was flat at 107 per cent.
Wholesale funding increased by 4 per cent to £128 billion (31 December 2018: £123 billion) in part as a result of refinancing Funding for Lending Scheme
maturities in the year. The proportion maturing in less than one year increased by 31 per cent to £43.4 billion (31 December 2018: £33.1 billion) due to
higher term funding maturities in 2020. The Group’s liquidity position continues to exceed the regulatory minimum and internal risk appetite.
Capital
Capital build1
Pro forma CET1 ratio2
CET1 ratio
Pro forma transitional total capital ratio2
Pro forma transitional MREL ratio2
Pro forma UK leverage ratio2
Pro forma risk-weighted assets2
Shareholders' equity
Tangible net assets per share
At 31 Dec
2019
At 31 Dec
2018
Change
%
86bp
13.8%
13.6%
21.5%
32.6%
5.2%
210bp
13.9%
14.6%
23.1%
32.6%
5.6%
£203bn
£206bn
£42bn
50.8p
£43bn
53.0p
(124)bp
(0.1)pp
(1.0)pp
(1.6)pp
–
(0.4)pp
(1)
(4)
(2.2)p
1 Capital build is reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period and is also reported before accruing for
ordinary dividends, the cancellation of the remaining 2019 share buyback and the acquisition of Tesco Bank’s UK prime residential mortgage portfolio.
2 The CET1, total, MREL, leverage ratios and risk-weighted assets at 31 December 2019 and 31 December 2018 are reported on a pro forma basis, reflecting the dividend paid up by the
Insurance business in the subsequent first quarter period. The pro forma CET1 ratio at 31 December 2018 incorporates the effects of the share buyback announced in February 2019 and
is reported post dividend accrual.
The Group’s capital position remains strong with the CET1 capital ratio increasing to 15.0 per cent pre dividend accrual. After accruing 123 basis points for
the ordinary dividend, the CET1 ratio stands at 13.8 per cent.
A summary of the CET1 capital build is set out in the table below.
Pro forma CET1 ratio at 31 December 2018
Banking business underlying capital build (bps)
Insurance dividends (bps)
Impact from the implementation of IFRS 16 on risk-weighted assets (bps)
RWA and other movements (bps)
PPI charge (bps)
Cancellation of the remaining 2019 share buyback programme (bps)
Capital used for the acquisition of the Tesco Bank’s mortgage portfolio (bps)
Ordinary dividend accrual (bps)
Pro forma CET1 ratio at 31 December 2019
13.9%
180
18
(11)
20
207
(121)
86
34
(9)
(123)
13.8%
The Group’s CET1 capital build in the year amounted to 207 basis points before PPI, and to 86 basis points after the in-year PPI charge, equivalent to
121 basis points. Solid financial performance has driven underlying capital build of 198 basis points, including 18 basis points from the dividend from the
Insurance business. Capital build also included 20 basis points from favourable, risk-weighted asset and other movements (reflecting market movements
and the continued optimisation of Commercial Banking risk-weighted assets, net of additional pension contributions and model updates), partly offset by
the 11 basis points impact of IFRS 16. The Group’s capital position also benefitted by 34 basis points from the cancellation of the remaining c.£650 million
of the 2019 buyback programme, as announced in September 2019. The Group used 9 basis points of capital for the acquisition of Tesco Bank’s UK prime
residential mortgage portfolio.
During 2019 the Prudential Regulation Authority (PRA) reduced the Group’s Pillar 2A CET1 requirement from 2.7 per cent to 2.6 per cent. Separately, the
Financial Policy Committee of the Bank of England announced an increase in the Countercyclical Capital Buffer (CCYB) rate for the UK from 1.0 per cent to
2.0 per cent, effective from December 2020. During 2020 the PRA will consult on a proposed reduction in Pillar 2A total capital requirements by 50 per cent
of this increase in the CCYB, equivalent to reducing the Pillar 2A CET1 requirement by 28 per cent of the increase. Taking into account the current and
potential future changes to capital requirements, the Board’s view of the current level of CET1 capital required by the Group to grow the business, meet
regulatory requirements and cover uncertainties continues to be c.12.5 per cent plus a management buffer of c.1 per cent.
The transitional total capital ratio reduced to 21.5 per cent on a pro forma basis (31 December 2018: 23.1 per cent) and the Group’s transitional minimum
requirement for own funds and eligible liabilities (MREL), which came into force on 1 January 2020, is 32.6 per cent on pro forma basis (31 December 2018:
32.6 per cent). The UK leverage ratio remains strong at 5.2 per cent on a pro forma basis.
Risk-weighted assets on a pro forma basis have reduced by £3.0 billion to £203.4 billion driven primarily by the optimisation of the Commercial Banking
portfolio, offset in part by model updates in mortgages, the implementation of IFRS 16 and the acquisition of the Tesco Bank’s mortgage portfolio. We
now expect risk-weighted assets at the end of 2020 to be broadly in line with the end of 2019, including regulatory headwinds.
Tangible net assets per share reduced by 2.2 pence in 2019 to 50.8 pence (31 December 2018: 53.0 pence) with the effects of the Group’s statutory profit
after tax and positive cash flow hedge movements being more than offset by dividends paid in 2019, the revaluation of the Group’s retirement benefit
obligations, the effects of the share buyback and other reserve movements.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
52 Lloyds Banking Group Annual Report and Accounts 2019
Summary of Group results continued
Dividend
The Group has a progressive and sustainable ordinary dividend policy whilst maintaining the flexibility to return surplus capital through buybacks or special
dividends.
Given the solid financial performance in 2019, the Board has recommended a final ordinary dividend of 2.25 pence per share. This is in addition to the
interim ordinary dividend of 1.12 pence per share that was announced in the 2019 half year results. The recommended total ordinary dividend per share for
2019 is therefore 3.37 pence per share and has increased by 5 per cent from 3.21 pence per share in 2018.
The Group has announced that it will move to the payment of quarterly dividends in 2020, with the first quarterly dividend in respect of the first quarter
of 2020 payable in June 2020. The new approach will be to adopt three equal interim ordinary dividend payments for the first three quarters of the
year followed by, subject to performance, a larger final dividend for the fourth quarter of the year. The first three quarterly payments, payable in June,
September and December will be 20 per cent of the previous year’s total ordinary dividend per share. The fourth quarter payment will be announced with
the full year results, with the amount continuing to deliver a full year dividend payment that reflects the Group’s financial performance and its objective of a
progressive and sustainable ordinary dividend. The final dividend will continue to be paid in May, following approval at the AGM. The Group believes that
this approach will provide a more regular flow of dividend income to all shareholders whilst accelerating the receipt of payments.
The key dates for the payment of the three interim dividends are:
First interim dividend
Shares quoted ex-dividend
Record date
Final date for joining or leaving the dividend reinvestment plan
Dividends paid
Second interim dividend
Shares quoted ex-dividend
Record date
Final date for joining or leaving the dividend reinvestment plan
Dividends paid
Third interim dividend
Shares quoted ex-dividend
Record date
Final date for joining or leaving the dividend reinvestment plan
Dividends paid
4 June 2020
5 June 2020
19 June 2020
30 June 2020
6 August 2020
7 August 2020
21 August 2020
14 September 2020
5 November 2020
6 November 2020
20 November 2020
11 December 2020
Lloyds Banking Group Annual Report and Accounts 2019 53
Income statement – underlying basis
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Trading surplus
Impairment
Underlying profit
Restructuring
Volatility and other items
Payment protection insurance provision
Statutory profit before tax
Tax expense1
Statutory profit after tax1
Earnings (loss) per share
Dividends per share – ordinary
Share buyback value
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
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
Pro forma risk-weighted assets5
Tangible net assets per share
2019
£m
12,377
5,732
(967)
17,142
(7,875)
(445)
(8,320)
8,822
(1,291)
7,531
(471)
(217)
(2,450)
4,393
(1,387)
3,006
3.5p
3.37p
–
2.88%
£435bn
48.5%
0.29%
14.8%
7.8%
2018
£m
12,714
6,010
(956)
17,768
(8,165)
(600)
(8,765)
9,003
(937)
8,066
(879)
(477)
(750)
5,960
(1,454)
4,506
5.5p
3.21p
£1.1bn
2.93%
£436bn
49.3%
0.21%
15.5%
11.7%
Change
%
(3)
(5)
(1)
(4)
4
26
5
(2)
(38)
(7)
46
55
(26)
5
(33)
(36)
5
(5)bp
–
(0.8)pp
8bp
(0.7)pp
(3.9)pp
At 31 Dec
2019
£440bn
£412bn
107%
86bp
13.8%
32.6%
5.2%
At 31 Dec
2018
£444bn
£416bn
107%
210bp
13.9%
32.6%
5.6%
£203bn
£206bn
Change
%
(1)
(1)
–
(124)pp
(0.1)pp
–
(0.4)pp
(1)
50.8p
53.0p
(2.2)pp
1 2018 restated to reflect amendments to IAS 12, see basis of presentation on page 206.
2 Excludes reverse repos of £54.6 billion (31 December 2018: £40.5 billion).
3 Excludes repos of £9.5 billion (31 December 2018: £1.8 billion).
4 Capital build is reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period and is also reported before accruing for ordinary
dividends, the cancellation of the remaining 2019 share buyback and the acquisition of Tesco Bank’s UK prime residential mortgage portfolio.
5 The CET1, MREL, leverage ratios and risk-weighted assets at 31 December 2019 and 31 December 2018 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance
business in the subsequent first quarter period. The pro forma CET1 ratio at 31 December 2018 incorporates the effects of the share buyback announced in February 2019 and is reported
post dividend accrual.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
54 Lloyds Banking Group Annual Report and Accounts 2019
Quarterly information
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Trading surplus
Impairment
Underlying profit
Restructuring
Volatility and other items
Payment protection insurance provision
Statutory profit before tax
Tax expense1
Statutory profit (loss) after tax1
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
Asset quality ratio
Gross asset quality ratio
Underlying return on tangible equity
Return on tangible equity
Loans and advances to customers2
Customer deposits3
Loan to deposit ratio
Pro forma risk-weighted assets4
Tangible net assets per share
Quarter
ended
31 Dec
2019
£m
3,102
1,267
(236)
4,133
(2,058)
(219)
(2,277)
1,856
(341)
1,515
(191)
122
–
1,446
(427)
1,019
2.85%
£437bn
55.1%
0.30%
0.39%
12.2%
11.0%
£440bn
£412bn
107%
£203bn
50.8p
Quarter
ended
30 Sept
2019
£m
3,130
1,315
(258)
4,187
(1,911)
(83)
(1,994)
2,193
(371)
1,822
(98)
126
(1,800)
50
(288)
(238)
2.88%
£435bn
47.6%
0.33%
0.40%
14.3%
(2.8) %
£447bn
£419bn
107%
£209bn
52.0p
Quarter
ended
30 June
2019
£m
3,062
1,594
(254)
4,402
(1,949)
(123)
(2,072)
2,330
(304)
2,026
(56)
(126)
(550)
1,294
(269)
1,025
2.89%
£433bn
47.1%
0.27%
0.38%
15.6%
10.5%
£441bn
£418bn
106%
£207bn
53.0p
Quarter
ended
31 Mar
2019
£m
3,083
1,556
(219)
4,420
(1,957)
(20)
(1,977)
2,443
(275)
2,168
(126)
(339)
(100)
1,603
(403)
1,200
2.91%
£433bn
44.7%
0.25%
0.30%
17.0%
12.5%
£441bn
£417bn
106%
£208bn
53.4p
Quarter
ended
31 Dec
2018
£m
3,170
1,400
(225)
4,345
(2,151)
(234)
(2,385)
1,960
(197)
1,763
(267)
(270)
(200)
1,026
(260)
766
2.92%
£436bn
54.9%
0.18%
0.30%
13.6%
7.8%
£444bn
£416bn
107%
£206bn
53.0p
Quarter
ended
30 Sept
2018
£m
3,200
1,486
(234)
4,452
(1,990)
(109)
(2,099)
2,353
(284)
2,069
(235)
(17)
–
1,817
(394)
1,423
2.93%
£435bn
47.1%
0.25%
0.30%
15.9%
14.8%
£445bn
£422bn
105%
£207bn
51.3p
Quarter
ended
30 June
2018
£m
3,173
1,713
(245)
4,641
(2,016)
(197)
(2,213)
2,428
(198)
2,230
(239)
(16)
(460)
1,515
(369)
1,146
2.93%
£436bn
47.7%
0.18%
0.26%
17.3%
11.9%
£442bn
£418bn
106%
£207bn
52.1p
Quarter
ended
31 Mar
2018
£m
3,171
1,411
(252)
4,330
(2,008)
(60)
(2,068)
2,262
(258)
2,004
(138)
(174)
(90)
1,602
(431)
1,171
2.93%
£437bn
47.8%
0.23%
0.27%
15.4%
12.3%
£445bn
£413bn
108%
£211bn
52.3p
1 Comparatives for 2018 restated to reflect amendments to IAS 12, see basis of presentation on page 206.
2 Excludes reverse repos.
3 Excludes repos.
4 Risk-weighted assets at 30 June 2018 are reported on a pro forma basis reflecting the sale of the Irish mortgage portfolio.
Lloyds Banking Group Annual Report and Accounts 2019 55
Balance sheet analysis
At 31 Dec
2019
£bn
At 30 Sept
2019
£bn
Change
%
At 30 June
2019
£bn
Change
%
At 31 Dec
2018
£bn
Change
%
Loans and advances to customers
Open mortgage book
Closed mortgage book
Credit cards
UK Retail unsecured loans
UK Motor Finance
Overdrafts
Retail other1
SME2
Mid Markets3
Global Corporates and Financial Institutions
Commercial Banking other
Wealth
Central items
Loans and advances to customers4
Customer deposits
Retail current accounts
Commercial current accounts2,5
Retail relationship savings accounts
Retail tactical savings accounts
Commercial deposits2,6
Wealth
Central items
Total customer deposits7
Total assets8
Total liabilities8
Shareholders’ equity
Other equity instruments
Non-controlling interests
Total equity
270.1
18.5
17.7
8.4
15.6
1.3
9.0
32.1
29.1
30.8
5.2
0.9
1.7
440.4
76.9
34.9
144.5
13.3
127.6
13.7
0.9
411.8
833.9
786.1
41.7
5.9
0.2
47.8
271.0
19.1
17.7
8.4
15.6
1.3
9.2
32.4
30.7
33.7
5.2
0.9
2.0
447.2
76.1
34.6
144.3
14.1
135.8
13.6
0.7
419.2
858.5
810.4
42.5
5.4
0.2
48.1
–
(3)
–
–
–
–
(2)
(1)
(5)
(9)
–
–
(15)
(2)
1
1
–
(6)
(6)
1
29
(2)
(3)
(3)
(2)
9
–
(1)
264.9
19.8
17.7
8.2
15.5
1.2
9.0
32.3
30.6
34.7
4.3
0.9
1.9
441.0
76.0
34.0
144.4
15.3
133.2
13.8
0.9
417.6
822.2
773.2
43.4
5.4
0.2
49.0
2
(7)
–
2
1
8
–
(1)
(5)
(11)
21
–
(11)
–
1
3
–
(13)
(4)
(1)
–
(1)
1
2
(4)
9
–
(2)
266.6
21.2
18.1
7.9
14.6
1.3
8.6
31.8
31.7
34.4
4.3
0.9
3.0
444.4
73.7
34.9
145.9
16.8
130.1
14.1
0.8
416.3
797.6
747.4
43.4
6.5
0.3
50.2
Ordinary shares in issue, excluding own shares
70,031m
70,007m
–
70,740m
(1)
71,149m
1 Primarily Europe.
2 Includes Retail Business Banking.
3 Includes Mid Corporates (31 December 2019: £5.3 billion; 30 September 2019: £5.2 billion; 30 June 2019: £5.4 billion; 31 December 2018: £5.8 billion).
4 Excludes reverse repos.
5 Primarily non-interest-bearing Commercial Banking current accounts.
6 Primarily Commercial Banking interest-bearing accounts.
7 Excludes repos.
8 The adoption of IFRS 16 on 1 January 2019 resulted in the recognition of a right-of-use asset of £1.7 billion and lease liabilities of £1.8 billion.
1
(13)
(2)
6
7
–
5
1
(8)
(10)
21
–
(43)
(1)
4
–
(1)
(21)
(2)
(3)
13
(1)
5
5
(4)
(9)
(33)
(5)
(2)
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
56 Lloyds Banking Group Annual Report and Accounts 2019
Segmental analysis – underlying basis
2019
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Trading surplus
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
2018
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Trading surplus
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
Retail
£m
8,807
2,014
(946)
Commercial
Banking
£m
Insurance
and Wealth
£m
2,918
1,422
(21)
112
2,021
–
Central
items
£m
540
275
–
Group
£m
12,377
5,732
(967)
9,875
4,319
2,133
815
17,142
(4,760)
(2,081)
(238)
(155)
(982)
(50)
(4,998)
(2,236)
(1,032)
4,877
2,083
1,101
(52)
(7,875)
(2)
(54)
761
(445)
(8,320)
8,822
(1,038)
(306)
–
53
(1,291)
3,839
1,777
1,101
814
7,531
2.63%
3.14%
2.88%
£341.6bn
£92.2bn
£0.9bn
– £434.7bn
0.30%
3.99%
0.30%
2.14%
0.29%
3.65%
£342.3bn
£95.5bn
£0.9bn
£1.7bn £440.4bn
£252.1bn £145.1bn
£13.7bn
£0.9bn £411.8bn
£98.4bn
£77.4bn
£1.3bn
£26.3bn £203.4bn
Retail3
£m
9,060
2,097
(921)
10,236
(4,897)
(267)
(5,164)
5,072
(861)
4,211
Commercial
Banking3
£m
Insurance
and Wealth
£m
Central
items3
£m
3,013
1,670
(35)
4,648
(2,191)
(203)
(2,394)
2,254
(71)
2,183
123
1,865
–
1,988
(1,021)
(39)
(1,060)
928
(1)
927
518
378
–
896
(56)
(91)
(147)
749
(4)
745
2.68%
3.27%
Group
£m
12,714
6,010
(956)
17,768
(8,165)
(600)
(8,765)
9,003
(937)
8,066
2.93%
£342.3bn
£91.2bn
£0.8bn
£1.7bn
£436.0bn
0.25%
4.57%
0.06%
2.50%
0.21%
3.86%
£340.1bn
£100.4bn
£0.9bn
£252.8bn
£148.6bn
£14.1bn
£3.0bn
£0.8bn
£444.4bn
£416.3bn
£93.5bn
£86.5bn
£1.2bn
£25.2bn
£206.4bn
1 Excludes reverse repos.
2 Excludes repos.
3 Prior period segmental comparatives restated to reflect the transfer of the Cardnet business from Retail into Commercial Banking and certain equities business from Commercial Banking
into Central items.
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 331.
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 rationalisation of the non-branch property portfolio, the establishment of the Schroders partnership, 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
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 provisions.
Lloyds Banking Group Annual Report and Accounts 2019 57
Divisional results – Retail
Performance Summary
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Trading surplus
Impairment
Underlying profit
Banking net interest margin
Average interest-earning banking assets
Asset quality ratio
Return on risk-weighted assets
Open mortgage book
Closed mortgage book
Credit cards
UK unsecured loans
UK Motor Finance
Business Banking
Overdrafts
Other2
Loans and advances to customers
Operating lease assets
Total customer assets
Current Accounts
Relationship savings3
Tactical savings
Customer deposits
Risk-weighted assets
1 Prior period comparatives restated to reflect the transfer of the Cardnet business from Retail into Commercial Banking.
2 Includes Europe and run-off.
3 Includes Business Banking.
2019
£m
8,807
2,014
(946)
9,875
(4,760)
(238)
(4,998)
4,877
(1,038)
3,839
20181
£m
9,060
2,097
(921)
10,236
(4,897)
(267)
(5,164)
5,072
(861)
4,211
Change
%
(3)
(4)
(3)
(4)
3
11
3
(4)
(21)
(9)
2.63%
2.68%
£341.6bn
£342.3bn
0.30%
3.99%
0.25%
4.57%
(5)bp
–
5bp
(58)bp
At 31 Dec
2019
£bn
270.1
At 31 Dec
2018
£bn
266.6
18.5
17.7
8.4
15.6
1.7
1.3
9.0
342.3
4.3
346.6
76.9
161.9
13.3
252.1
98.4
21.2
18.1
7.9
14.6
1.8
1.3
8.6
340.1
4.7
344.8
73.7
162.3
16.8
252.8
93.5
Change
%
1
(13)
(2)
6
7
(6)
–
5
1
(9)
1
4
–
(21)
–
5
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
58 Lloyds Banking Group Annual Report and Accounts 2019
Divisional results – Commercial Banking
Performance summary
Net interest income
Other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Trading surplus
Impairment
Underlying profit
Banking net interest margin
Average interest-earning banking assets
Asset quality ratio
Return on risk-weighted assets
SME
Mid Markets2
Global Corporates and Financial Institutions
Other
Loans and advances to customers
SME including Retail Business Banking
Customer deposits
Current accounts including Retail Business Banking
Other deposits including Retail Business Banking
Risk-weighted assets
2019
£m
2,918
1,422
(21)
4,319
(2,081)
(155)
(2,236)
2,083
(306)
1,777
20181
£m
3,013
1,670
(35)
4,648
(2,191)
(203)
(2,394)
2,254
(71)
2,183
Change
%
(3)
(15)
40
(7)
5
24
7
(8)
(19)
3.14%
3.27%
(13)bp
£92.2bn
£91.2bn
0.30%
2.14%
0.06%
2.50%
1
24bp
(36)bp
At 31 Dec
2019
£bn
At 31 Dec
2018
£bn
Change
%
30.4
29.1
30.8
5.2
95.5
30.0
31.7
34.4
4.3
100.4
32.1
31.8
145.1
34.9
127.6
77.4
148.6
34.9
130.1
86.5
1
(8)
(10)
21
(5)
1
(2)
–
(2)
(11)
1 Prior period segmental comparatives restated to reflect the transfer of the Cardnet business from Retail into Commercial Banking and certain equities business from Commercial Banking
into Central items.
2 Includes Mid Corporates (31 December 2019: £5.3 billion; 31 December 2018: £5.8 billion).
Lloyds Banking Group Annual Report and Accounts 2019 59
Divisional results – Insurance and Wealth
Performance summary
Net interest income
Other income
Net income
Operating costs
Remediation
Total costs
Trading surplus
Impairment
Underlying profit
Life and pensions sales (PVNBP)1
General insurance underwritten new GWP2
General insurance underwritten total GWP2
General insurance combined ratio
Insurance Solvency II ratio3
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
Wealth
Net income
2019
£m
112
2,021
2,133
(982)
(50)
2018
£m
123
1,865
1,988
(1,021)
(39)
(1,032)
(1,060)
1,101
–
1,101
928
(1)
927
17,515
14,384
127
671
82%
107
690
89%
At 31 Dec
2019
£bn
170%
0.9
13.7
1.3
170.0
At 31 Dec
2018
£bn
165%
0.9
14.1
1.2
141.3
New
business
£m
2018
Existing
business
£m
333
160
20
13
526
153
84
22
414
673
Change
%
(9)
8
7
4
(28)
3
19
19
22
19
(3)
(7)pp
%
5pp
–
(3)
8
20
Total
£m
486
244
42
427
1,199
143
272
1,614
374
1,988
New
business
£m
387
209
21
11
628
2019
Existing
business
£m
120
68
24
384
596
Total
£m
507
277
45
395
1,224
255
326
1,805
328
2,133
1 Present value of new business premiums. Further information on page 331.
2 Gross written premiums.
3 Equivalent regulatory view of ratio (including With Profits funds) at 31 December 2019 was 154 per cent (31 December 2018: 156 per cent).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
60 Lloyds Banking Group Annual Report and Accounts 2019
Central items
Net income
Operating costs
Remediation
Total costs
Trading surplus
Impairment
Underlying profit
2019
£m
815
(52)
(2)
(54)
761
53
814
20181
£m
896
(56)
(91)
(147)
749
(4)
745
Change
%
(9)
7
98
63
2
9
1 Prior periods segmental comparatives restated to reflect the transfer of certain equities business from Commercial Banking into Central items.
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.
Net income includes the central recovery of the Group’s distributions on other equity instruments and gains and losses on the sale of gilts and other
liquid assets.
During 2019, impairment included releases relating to the reassessment of credit risk associated with debt instruments held within the Group’s equity
investments business.
Lloyds Banking Group Annual Report and Accounts 2019 61
Other financial information
Reconciliation between statutory and underlying basis results
The table below sets out the reconciliation from the statutory results to the underlying basis results.
2019
Net interest income
Other income, net of insurance claims
Operating lease depreciation
Net income
Operating expenses4
Trading surplus
Impairment
Profit before tax
2018
Net interest income
Other income, net of insurance claims
Operating lease depreciation
Net income
Operating expenses4
Trading surplus
Impairment
Profit before tax
Removal of:
Volatility
and other
items1,2
£m
Insurance
gross up3
£m
379
(426)
(967)
(1,014)
1,697
683
5
688
152
107
(956)
(697)
2,053
1,356
–
1,356
1,818
(2,021)
–
(203)
203
–
–
–
(834)
673
–
(161)
161
–
–
Statutory
basis
£m
10,180
8,179
18,359
(12,670)
5,689
(1,296)
4,393
13,396
5,230
18,626
(11,729)
6,897
(937)
5,960
PPI
£m
–
–
–
–
2,450
2,450
–
2,450
–
–
–
–
750
750
–
750
Underlying
basis
£m
12,377
5,732
(967)
17,142
(8,320)
8,822
(1,291)
7,531
12,714
6,010
(956)
17,768
(8,765)
9,003
(937)
8,066
1 In the year ended 31 December 2019 this comprises the effects of market volatility and asset sales (gains of £126 million); the amortisation of purchased intangibles (£68 million);
restructuring (£471 million, comprising severance related costs, the integration of Zurich’s UK workplace pensions and savings business and costs associated with the establishment of the
Schroders Personal Wealth Joint venture); and the fair value unwind and other items (losses of £275 million).
2 In the year ended 31 December 2018 this comprises the effects of market volatility and asset sales (losses of £50 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).
3 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.
4 The statutory basis figure is the aggregate of operating costs and operating lease depreciation.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
62 Lloyds Banking Group Annual Report and Accounts 2019
Other financial information continued
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)1
Banking net interest income – underlying basis (£m)
Net loans and advances to customers (£bn)2
Impairment provision and fair value adjustments (£bn)
Non-banking items:
Fee-based loans and advances (£bn)
Other non-banking (£bn)
Gross banking loans and advances (£bn)
Averaging (£bn)
Average interest-earning banking assets (£bn)
Banking net interest margin (%)
1 2019 includes impact from the implementation of IFRS 16.
2 Excludes reverse repos.
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
2019
2018
10,180
13,396
1,818
379
(834)
152
12,377
12,714
145
12,522
440.4
3.9
(6.3)
(3.1)
434.9
(0.2)
434.7
2.88
54
12,768
444.4
4.0
(7.2)
(4.7)
436.5
(0.5)
436.0
2.93
2019
£m
230
193
423
(347)
76
2018
£m
(506)
46
(460)
357
(103)
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.
In-year volatility movements were largely driven by insurance volatility arising from interest rate and credit spread movements. The capital impact of equity
market movements is now hedged within Insurance and this also reduces the IFRS earnings exposure to equity market movements.
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.
Lloyds Banking Group Annual Report and Accounts 2019 63
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
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)1
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)1
Adjusted statutory profit after tax (£m)
Statutory return on tangible equity (%)
1 Prior period restated to reflect amendments to IAS 12, see basis of presentation on page 206.
At 31 Dec
2019
£m
41,697
(2,324)
(3,808)
(247)
269
At 31 Dec
2018
£m
43,434
(2,310)
(3,347)
(271)
228
35,587
37,734
70,031m
71,149m
50.8p
53.0p
2019
43.0
(5.9)
37.1
5,690
364
(547)
5,507
2018
43.0
(5.4)
37.6
6,057
296
(531)
5,822
14.8
15.5
3,006
364
74
(547)
2,897
4,506
296
111
(531)
4,382
7.8
11.7
Share buyback
During 2019, the Group completed £1.1 billion of the announced up to £1.75 billion share buyback programme, with an average price paid of 57.89 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 2019 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 2018 figures restated to reflect the Group’s current structure.
At 31 Dec
2019
35,327
6,605
5,246
17,797
64,975
(1,906)
63,069
At 31 Dec
20181
35,344
7,188
5,610
18,470
66,612
(1,685)
64,927
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
64 Lloyds Banking Group Annual Report and Accounts 2019
64 Lloyds Banking Group Annual Report and Accounts 2019
Governance
A letter from our Chairman
Board of Directors
Group Executive Committee
Corporate governance report
Directors' report
Directors' remuneration report
Other remuneration disclosure
65
66
68
70
94
98
124
Top 50 Women
in Engineering
A second year apprentice training with the
Coventry-based Lloyds Bank Advanced
Manufacturing Training Centre has been
named as one of the top 50 women in
engineering in the UK.
Melissa Chigubu aged 19, has been given
the accolade by the Women's Engineering
Society at a ceremony at the Royal Academy
of Engineering. The award was founded by
the Women's Engineering Society in 2016.
It aims to address the skills shortage in
engineering and highlight the discrepancy
between men and women entering
engineering and manufacturing.
Melissa came to the UK in 2012 and was the
first female to complete the Foundation
Gateway in the Advanced Manufacturing
Training Centre's new Apprenticeship
Engineering Standard programme.
www.lloydsbankinggroup.com/our-group/
responsible-business/
Lloyds Banking Group Annual Report and Accounts 2019 65
Lloyds Banking Group Annual Report and Accounts 2019 65
A letter from our Chairman
Delivering on our purpose – Helping Britain Prosper
The Board recognises
the importance of
meeting the Group’s
responsibilities and duties
both to shareholders
and the communities we
serve across the UK.
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.
The Board recognises the importance of
meeting the Group’s responsibilities and duties
both to shareholders and the communities we
serve across the UK. These are embedded into
our processes and thinking. Our commitment
to good governance and the directors’ duties,
including under s.172 of the Companies Act
2006, make sure that we continually challenge
our assumptions and risks. Our purpose to
Help Britain Prosper reflects our understanding
that a sustainable business organisation needs
to continuously demonstrate its value as a
responsible corporate citizen. Further details
of how the Board takes account of shareholder
and wider stakeholder interests in its strategic
planning and decision making processes are
set out on pages 20 to 25.
A major focus over the last year has been the
continued implementation of our strategic
transformation programme. This has 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, including
a two day joint Board and Executive offsite.
We have paid 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. 2019 has also been the first year
in which we have operated under the new
ring-fencing governance requirements. Further
details of the Group’s ring-fencing governance
structure and the Board’s oversight of our
strategic transformation programme are set
out on pages 76 and 75 respectively.
Board and Committee changes
Succession planning and the composition of
the Board and its committees are important
components of good governance. There
were a number of changes to the Board
and Committees during the year. George
Culmer retired as Chief Financial Officer and
Executive Director of the Group on 1 August
2019 and was succeeded by William Chalmers,
who brought a wealth of experience to the
Group. George was a crucial member of the
team that helped turn Lloyds around and left
with our thanks and best wishes for the future.
Following a recruitment process led by the
Nomination and Governance Committee,
Sarah Legg was appointed to the Board in
December 2019 as a new independent
Non-Executive Director and Catherine Woods
will join the Board on 1 March 2020 as a new
independent Non-Executive Director. While
selected on merit, these appointments help
meet our commitments to both gender and
BAME diversity. Sarah became a member
of the Audit and Board Risk Committees
and Catherine will join the Board Risk and
Remuneration Committees.
Anita Frew stepped down as Senior
Independent Director on 1 December 2019
and will retire as Deputy Chairman and
Non-Executive Director at the AGM in May
2020. Anita has been an extremely valuable
Board member, and will be much missed.
Alan Dickinson succeeded Anita as Senior
Independent Director on 1 December 2019
and will also take on the role of Deputy
Chairman following Anita’s retirement from
the Board. Alan’s significant board, financial
and regulatory experience, including as a
chairman, make him ideally suited to this role.
Juan Colombás, Executive Director and
Chief Operating Officer, announced that he
plans to retire in July 2020 after many years
as a senior executive in which he has made
a major contribution to the transformation
of the Group. In line with the UK Corporate
Governance Code 2018 (the Code), I also
announced that I plan to retire as Group
Chairman at or before the AGM in 2021 as I will
by then have served some nine years on the
Group Board. The Board has initiated a search
process to allow time to identify my successor
and enable an orderly handover.
Quarterly dividend
I am pleased to report that the Board approved
the Group moving to the payment of quarterly
dividends in 2020, with the first quarterly
dividend in respect of the first quarter of 2020
payable in June 2020. The Group has around
2.4 million shareholders, the vast majority
of whom are retail shareholders, and this
approach will provide a more regular flow of
dividend income to all shareholders whilst
accelerating the receipt of payments. Further
information on quarterly dividends can be
found on pages 21 and 268.
Board effectiveness
The Board carried out an annual evaluation
of its effectiveness during the year. This was
an internal evaluation, which ran between
October 2019 and January 2020 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 77 to 78, together with
information about our progress against the
2018 review actions.
Corporate Governance Code
The year under review was the first year that
the Code has applied to the Group. Our
statement of compliance with the Code and
a summary of the requirements of the Code
can be found on pages 80 to 81. The Group
also implemented our approach to workforce
engagement and further information on this
can be found on page 22.
Lord Blackwell
Chairman
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
66 Lloyds Banking Group Annual Report and Accounts 2019
66 Lloyds Banking Group Annual Report and Accounts 2019
Board of Directors
Comprising Directors with the right mix of skills and experience, the Board
is collectively responsible for overseeing delivery of the Group’s strategy
11
22
32
4
5
NG Re RB Ri
A NG Re RB Ri
A NG Re
Ri
A
Ri
6
7
8
9
A
Ri
10
RB Ri
11
Re RB
Ri
A
NG
Ri
Re RB Ri
NG
NG Re RB Ri
12
133
A Member of Audit Committee
Ri Member of Board Risk
Committee
Re Member of Remuneration
Committee
RB Member of Responsible
Business Committee
NG Member of Nomination and
Governance Committee
Committee Chairman
1 Lord Blackwell has announced his plan to retire as Group Chairman at or before the AGM in 2021.
2 Alan Dickinson succeeded Anita Frew as Senior Independent Director on 1 December 2019 and will succeed her as Deputy Chairman when she retires from the Board at the AGM in May 2020.
3 Juan Colombás has announced his plan to retire from the Group in July 2020.
1. Lord Blackwell Chairman
Appointed: June 2012 (Board), April 2014
(Chairman)
Skills, experience and contribution:
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
Appointed: December 2010 (Board), May 2014
(Deputy Chairman), May 2017 to December
2019 (Senior Independent Director)
Skills, experience and contribution:
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 Senior Independent
Director
Appointed: September 2014 (Board),
December 2019 (Senior Independent Director)
Skills, experience and contribution:
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. 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 and Non-Executive Director
of England and Wales Cricket Board.
4. Simon Henry Independent Director
Appointed: June 2014
Skills, experience and contribution:
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 and Chair of their Audit Committee,
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. Sarah Legg Independent Director
Appointed: December 2019
Skills, experience and contribution:
Strong financial leadership skills
Significant experience in financial and
regulatory reporting
Strong transformation programme experience
Sarah has spent her entire career in financial
services with HSBC in finance leadership
roles. She was the Group Financial Controller
and a Group General Manager of HSBC until
early 2019 and previously Chief Financial
Officer for HSBC’s Asia Pacific region. She also
spent 8 years as a Non-Executive Director
on the Board of Hang Seng Bank Limited, a
Hong Kong listed bank.
External appointments: Honorary Vice
President of The Hong Kong Society for
Rehabilitation and Chair of the Campaign
Advisory Board of King’s College,
Cambridge University.
Lloyds Banking Group Annual Report and Accounts 2019 67
Lloyds Banking Group Annual Report and Accounts 2019 67
6. Lord Lupton CBE Independent Director
and Chairman of Lloyds Bank Corporate
Markets plc
Appointed: June 2017
Skills, experience and contribution:
Extensive international corporate experience,
especially in financial markets
Strong board governance experience,
including investor relations and remuneration
Regulatory and public policy experience
Significant experience in strategic planning
and implementation
Lord Lupton was Deputy Chairman of Baring
Brothers, co-founded the London office
of Greenhill & Co., and was Chairman of
Greenhill Europe. 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, Trustee of the Lovington
Foundation and Chairman of the Board of
Visitors of the Ashmolean Museum with effect
from 1 January 2020.
7. Amanda Mackenzie OBE Independent
Director
Appointed: October 2018
Skills, experience and contribution:
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 as a Non-Executive Director of
Mothercare plc. Amanda is a Life Fellow of
the Royal Society of Arts and Fellow and past
President of the Marketing Society.
External appointments: Chief Executive of
Business in the Community – The Prince’s
Responsible Business Network.
8. Nick Prettejohn Independent Director
and Chairman of Scottish Widows Group
Appointed: June 2014
Skills, experience and contribution:
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.
9. Stuart Sinclair Independent Director
Appointed: January 2016
Skills, experience and contribution:
Extensive experience in retail banking,
insurance and consumer finance
Governance and regulatory experience
Significant experience in strategic planning
and implementation
Experience in consumer analysis, marketing
and distribution
Stuart is a former Non-Executive Director
of TSB Banking Group plc, TSB Bank plc,
LV Group, Virgin Direct and Vitality Health
(formerly Prudential Health). He was previously
the Interim Chairman of Provident Financial plc
and 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).
10. Sara Weller CBE Independent Director
Appointed: February 2012
Skills, experience and contribution:
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
Governing Council Member of Cambridge
University, 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, Lead
Non-Executive Director at the Department for
Work and Pensions, Chair of the Remuneration
Committee of New College, Oxford and
Trustee of Lloyds Bank Foundation for
England and Wales.
11. António Horta-Osório Executive Director
and Group Chief Executive
Appointed: January 2011 (Board), March 2011
(Group Chief Executive)
Skills, experience and contribution:
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 and
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.
12. William Chalmers Executive Director and
Chief Financial Officer
Appointed: August 2019
Skills, experience and contribution:
Significant board level strategic and financial
leadership experience including strategic
planning and development, mergers
and acquisitions, equity and debt capital
structuring and risk management
Worked in financial services for over 25 years
William was previously Co-Head of the
Global Financial Institutions Group at Morgan
Stanley. Prior to that, he held a number of
senior roles at Morgan Stanley, including
Head of EMEA Financial Institutions Group.
Before joining Morgan Stanley, William
worked for JP Morgan, again in the Financial
Institutions Group.
External appointments: None.
13. Juan Colombás Executive Director and
Chief Operating Officer
Appointed: November 2013 (Board), January
2011 to September 2017 (Chief Risk Officer),
September 2017 (Chief Operating Officer)
Skills, experience and contribution:
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: Member of the FCA
Practitioner Panel.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
68 Lloyds Banking Group Annual Report and Accounts 2019
68 Lloyds Banking Group Annual Report and Accounts 2019
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
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 67
William Chalmers
Executive Director and
Chief Financial Officer
William joined the Board
in August 2019 as an
executive director and the
Chief Financial Officer.
Read his full biography on
page 67.
Juan Colombás
Executive Director and
Chief Operating Officer
Juan joined the Group as
Chief Risk Officer in January
2011 and joined the Board
as an Executive Director in
November 2013. He became
Chief Operating Officer in
September 2017.
Read his full biography on
page 67.
Other members and attendees
1
6
2
7
3
8
4
9
5
10
11
12
13
1. Carla Antunes da Silva Group Strategy,
Corporate Development and Investor
Relations Director
Appointed: June 2018 (GEC attendee)
Skills and experience: Carla joined the
Group in October 2015 and 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 and corporate ventures,
and also manages the Group’s relationships
with shareholders, analysts and the wider
investment community. Prior to that Carla
spent 18 years as an equity analyst leading the
European Banks research team, with coverage
of UK banks at Credit Suisse, JPMorgan
and Deutsche Bank. Carla currently serves
as a Non-Executive Director of Lloyds Bank
Corporate Markets plc.
2. John Chambers Group Chief Information
Officer
Appointed: June 2018 (GEC attendee)
Skills and experience: John joined the
Group in February 2015 as Chief Information
Officer for Group Operations, Functions and
Enterprise and 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 as part of global operating
environments such as Barclays, Capita and
Indian headquartered IT and business process
outsourcing firms.
3. Kate Cheetham Group General Counsel
and Company Secretary
Appointed: July 2017 (GEC attendee)
Skills and experience: Kate was appointed
Group General Counsel in January 2015 and
Group Company Secretary in July 2019.
Kate joined the Group in 2005 from Linklaters,
where she was a corporate lawyer specialising
in mergers and acquisitions transactions.
Before her current role, Kate held a number
of senior positions including Deputy Group
General Counsel and General Counsel for
Group Legal. Kate is 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
Appointed: September 2016 (GEC attendee)
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 and
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 joined the Group
in June 2011 and is currently responsible for
the Group’s Retail products and distribution,
as well as Customer Services and brands and
marketing activity for the Group. He is also
Executive Co-Sponsor for Ethnicity and holds
a position on the UK Finance Board. Vim has
extensive experience in Retail banking having
worked in financial services for nearly 20 years.
Prior to joining the Group, Vim spent 12 years
at Santander in a range of roles in corporate
strategy, mergers and acquisitions, the Life
Division and most recently held the position
of Director, Retail Products.
7. Zak 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
Lloyds Banking Group Annual Report and Accounts 2019 69
Lloyds Banking Group Annual Report and Accounts 2019 69
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.
and development and Group costs. Prior to
this role, Jen was Group Customer Services
and Managing Director, Business Banking.
Jen joined the Group in 2005 having
previously worked in the engineering and
airline sector. Jen is a Non-Executive Director
of Lloyds Bank Corporate Markets plc. In
March 2020 Jen will join the Board of Morgan
Sindall plc as a Non-Executive Director.
13. Andrew Walton Group Corporate
Affairs Director
Appointed: September 2018 (GEC)
Skills and experience: Andrew joined
the Group in September 2018, as Group
Corporate Affairs Director, with responsibility
for internal and external communications,
reputation management and public affairs.
Prior to joining the Group, Andrew was
Senior Managing Director and Global
Head of Financial Services for the strategic
communications segment of FTI Consulting.
9. 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.
10. 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 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. Stephen is also
the Group’s Executive Sponsor for Gender
Diversity and Equality.
11. Letitia Smith Group Director, Conduct,
Compliance and Operational Risk
Appointed: June 2019 (GEC attendee)
Skills and experience: Letitia joined the Group
in 2014, undertaking Conduct, Compliance
and Operational Risk roles across both
Retail and Commercial divisions before
being appointed into her current role as the
Group Director, Conduct, Compliance and
Operational Risk in 2016. Prior to joining
the Group, Letitia was Chief Risk Officer
at Kleinwort Benson Private Bank with
responsibility for Risk, Compliance, Legal,
Internal Audit and Company Secretariat.
She spent 11 years at RBS in various roles,
but latterly as the Chief Risk Officer of the
Wealth Division with responsibility for Risk and
Compliance across several banks including
Coutts UK and Coutts Switzerland. Letitia
is also a qualified accountant and has a
background in forensic accountancy.
12. Jennifer Tippin Group People and
Productivity Director
Appointed: July 2017 (GEC)
Skills and experience: Jen was appointed as
the Group People and Productivity Director
in July 2017 and is responsible for several
functions including people, property, sourcing
and supply chain management, divestment
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
70 Lloyds Banking Group Annual Report and Accounts 2019
70 Lloyds Banking Group Annual Report and Accounts 2019
Corporate governance report
Our Board in 20191
Gender diversity
Skills and experience
(Non-Executive Directors only)
A
Retail/Commercial Banking
B
A. Male: 9
B. Female: 4
Financial markets/wholesale banking/
corporate clients
Insurance
Prudential and conduct risk in
financial institutions
Core technology operations
Government/regulatory
Board tenure
Age
E A
A
8 out of 10
8 out of 10
6 out of 10
D
5 out of 10
10 out of 10
A. 0-2 years: 3
B. 2-4 years: 2
C. 4-6 years: 3
10 out of 10
D. 6-8 years: 3
E. 8+ years: 2
C
B
B
C
A. 46-55: 3
B. 56-65: 7
C. 66-75: 3
Consumer/marketing/distribution
7 out of 10
Strategic thinking
Digital impact
Major change programmes
10 out of 10
8 out of 10
9 out of 10
1 Data as at 31 December 2019.
Board and Committee composition and attendance at scheduled meetings in 20196
Board member
Lord Blackwell (C)
António Horta-Osório
William Chalmers1
Juan Colombás
George Culmer1
Alan Dickinson2
Anita Frew2
Simon Henry
Sarah Legg3
Lord Lupton
Amanda Mackenzie
Nick Prettejohn
Stuart Sinclair
Sara Weller
Board
11/11
11/11
3/3
11/11
8/8
11/11
11/11
10/114
–
11/11
11/11
11/11
11/11
11/11
Nomination and
Governance Committee
Audit
Committee
Board Risk
Committee
Remuneration
Committee
Responsible
Business Committee
7/7 C
–
–
–
–
7/7
7/7
–
–
–
–
5/5
–
7/7
–
–
–
–
–
6/6
6/6
6/6 C
–
3/3
–
6/6
–
–
8/8
–
–
–
–
8/8 C
8/8
7/84
–
8/8
8/8
8/8
8/8
7/84
6/6
–
–
–
–
6/6
6/6
–
–
–
3/3
–
6/6 C
6/6
4/4
–
–
–
–
–
3/44
–
–
1/25
4/4
–
4/4
4/4 C
1 George Culmer retired from, and William Chalmers was appointed to, the Board on 1 August 2019.
2 Alan Dickinson succeeded Anita Frew as Senior Independent Director on 1 December 2019.
3 Sarah Legg joined the Board and respective Committees on 1 December 2019. There were no meetings in December 2019.
4 Unable to attend due to a scheduling clash with a prior business commitment.
5 Unable to attend due to a scheduling clash with another Group business commitment.
6 Where a Director is unable to attend a meeting s/he receives papers in advance and has the opportunity to provide comments to the Chairman of the Board or to the relevant Committee
Chairman.
C Chairman
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 colleagues. 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 20 to 25 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.
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.
Lloyds Banking Group Annual Report and Accounts 2019 71
Lloyds Banking Group Annual Report and Accounts 2019 71
How our Board works
Meetings, activities and processes
The right processes in place
to deliver on our strategy
During the year, there were 11 scheduled
Board meetings, with details of attendance
shown on page 70. 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 Chairman of the respective
meeting discusses 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 below.
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/our-group/
corporate-governance
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
The draft Board agenda is discussed with 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
Papers compiled
and distributed
Templates and guidelines are included within targeted training for authors of papers to ensure consistency and high
quality of information
Meeting packs are uploaded and communicated to all Directors via a secure electronic Board portal typically a week in
advance of the meeting to ensure sufficient time to review the matters which are to be discussed and seek clarification
or any additional information
Before the
meeting
Executive meetings are held ahead of all Board and Committee meetings to ensure matters being presented to the Board
have been through a thorough discussion and escalation process
Committee meetings are generally 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 certain
GEC members
The agenda includes free agenda discussion time
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 has 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 Board 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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
72 Lloyds Banking Group Annual Report and Accounts 2019
72 Lloyds Banking Group Annual Report and Accounts 2019
How our Board works continued
Key focus areas
Discussions and decisions
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.
This page 72 and page 73 show the key
focus areas of the Board during the year and
highlight the link between those focus areas
and our strategic objectives. Also listed are
stakeholder groups central to the matters
considered and decisions taken.
The agenda for each Board meeting is
discussed in advance with the Chairman
and Chief Executive Officer and reviewed at
Group Executive Committee meetings and
includes 30 minutes ‘free agenda’ discussion
time. Regular updates are provided to
the Board by the Chairmen of the Audit,
Nomination and Governance, Remuneration,
Responsible Business and Board Risk
Committees as well as by the Chief Executive
Officer, the Chief Financial Officer, the Chief
Operating Officer and the Chairman and
the chairmen of the Lloyds Bank Corporate
Markets plc and Scottish Widows Group
Limited boards.
Leading customer experience
Digitising the Group
Maximising Group capabilities
Transforming ways of working
CULTURE AND VALUES
Reviewed and approved the Helping
Britain Prosper Plan
Link to strategic priorities:
Link to stakeholder groups:
Customers; Community and Environment;
Suppliers
Discussed conduct, culture and values
– culture dashboard and change
management
Link to strategic priorities:
Link to stakeholder groups:
Customers; Colleagues; Regulatory and
Government; Suppliers
Received reports on responsible business
including on climate change matters and
sustainability
Link to strategic priorities:
Link to stakeholder groups:
Customers; Colleagues; Community and
Environment; Shareholders; Suppliers;
Regulatory and Government
Reviewed and approved the Group’s
diversity policy
Deep dive on data ethics
Link to strategic priorities:
Link to strategic priorities:
Link to stakeholder groups:
Colleagues
Considered updates on workforce
engagement
Link to strategic priorities:
Link to stakeholder groups:
Colleagues
Considered updates on proposed
new Remuneration Policy
Link to strategic priorities:
Link to stakeholder groups:
Colleagues; Regulatory and Government;
Shareholders
CUSTOMERS
Discussed the Group’s performance
against customer dashboard
Link to strategic priorities:
Link to stakeholder groups:
Customers
Discussed improvements in customer
outcomes from strategic transformation
plan (GSR3)
Link to strategic priorities:
Link to stakeholder groups:
Customers; Regulatory and Government
Discussed how the Group supports
vulnerable customers and customers
in financial difficulty
Link to strategic priorities:
Link to stakeholder groups:
Customers; Regulatory and Government
Link to stakeholder groups:
Customers; Regulatory and Government
FINANCIAL
Approved the 2019 budget
Discussed the regular finance report,
forecasts and capital and liquidity positions
Reviewed and approved income
statement, draft results and presentations
to analysts
Link to stakeholder groups:
Colleagues; Shareholders
Reviewed and approved funding and
liquidity plans and capital plan
Link to stakeholder groups:
Regulatory and Government
Approved the payment of final and interim
dividends
Link to stakeholder groups:
Shareholders
Approved the launch of a share
buyback programme and its subsequent
curtailment as conditions changed
Link to stakeholder groups:
Shareholders
Approved the payment of quarterly
dividends
Link to stakeholder groups:
Shareholders
Considered updates on structural hedging
strategy & Group Corporate Treasury’s
regular management information report
Link to stakeholder groups:
Regulatory and Government
Discussed the annual review of customer
conduct framework and risk
Link to stakeholder groups:
Customers; Regulatory and Government
Received an annual update on pension
scheme valuations
Link to stakeholder groups:
Customers
Deep dive on strong customer
authentication
Link to strategic priorities:
Link to stakeholder groups:
Customers; Regulatory and Government
Deep dive on Open Banking
Link to strategic priorities:
Link to stakeholder groups:
Customers; Regulatory and Government
Discussed processes and outcomes for the
fair treatment of customer complaints and
remediation
Link to strategic priorities:
Link to stakeholder groups:
Customers; Regulatory and Government
Discussed GSR3 and four year
operating plan
Link to strategic priorities:
Reviewed and approved Basel Pillar 3
disclosures
Link to stakeholder groups:
Regulatory and Government
Reviewed and approved Annual Report
and Form 20-F
Link to stakeholder groups:
Regulatory and Government; Shareholders
Reviewed and approved Group treasury
plan 2020
Link to stakeholder groups:
Regulatory and Government
Discussions and decisions
Lloyds Banking Group Annual Report and Accounts 2019 73
Lloyds Banking Group Annual Report and Accounts 2019 73
GOVERNANCE AND STAKEHOLDERS
REGULATORY
STRATEGY
Considered an update on the
implementation of the Group’s ring-fencing
model
Link to stakeholder groups:
Customers; Regulatory and Government
Discussed outcome of Board effectiveness
review and agreed actions arising from it
Link to stakeholder groups:
Shareholders
Discussed Chairman’s performance review
Link to stakeholder groups:
Shareholders
Approved AGM documentation and
received update on voting
Link to stakeholder groups:
Shareholders
Reviewed and approved the corporate
governance framework
Link to stakeholder groups:
Shareholders
Reviewed and approved various Group
policies including the signing authorities,
and Board and GEC dealing policy
Link to stakeholder groups:
Colleagues; Regulatory and Government
Considered updated Board skills matrix
Link to stakeholder groups:
Shareholders
Considered reviews of Chairman’s fee
(without Chairman present) and Non-
Executive Directors’ fees (with Non-
Executive Directors abstaining)
Reviewed and approved going concern
and viability statement
Discussed update on Banking Standards
Board 2018 survey
Link to stakeholder groups:
Colleagues; Regulatory and Government
Approved Board and Board Committee
appointments
Considered Board, Board Committee
and Executive succession plans
Link to stakeholder groups:
Colleagues; Shareholders
Approved attestation of ring-fencing
compliance
Link to stakeholder groups:
Customers; Regulatory and Government
Considered whistleblowing updates
Link to stakeholder groups:
Colleagues; Customers; Regulatory and
Government
Considered regulatory updates
Link to stakeholder groups:
Regulatory and Government
Received updates on the Senior Manager
and Certification Regime
Link to stakeholder groups:
Regulatory and Government
Discussed the FCA firm evaluation letter
Link to stakeholder groups:
Regulatory and Government
Held discussions with the PRA
Link to stakeholder groups:
Regulatory and Government
RISK MANAGEMENT
Approved Group risk appetite
Link to stakeholder groups:
Customers; Shareholders; Colleagues;
Community and Environment; Regulatory and
Government; Suppliers
Considered cyber security updates
Link to stakeholder groups:
Colleagues; Customers; Suppliers
Considered key areas of conduct risk
Link to stakeholder groups:
Colleagues; Customers; Regulatory and
Government
Reviewed and approved PRA stress
testing results
Link to stakeholder groups:
Customers; Shareholders; Regulatory and
Government
Reviewed and approved the risk
management framework
Link to stakeholder groups:
Customers; Shareholders; Colleagues;
Regulatory and Government; Suppliers
Approved annual review of Group
ring-fencing policy
Link to stakeholder groups:
Customers; Regulatory and Government
Two strategy away days to review the
progress in implementing the Group’s
strategy
Link to strategic priorities:
Link to stakeholder groups:
Customers; Shareholders; Colleagues;
Community and Environment; Regulatory and
Government; Suppliers
Deep dive on data and machine
intelligence programme
Link to strategic priorities:
Link to stakeholder groups:
Customers; Colleagues; Regulatory
and Government
Deep dive on Open Banking and on strong
customer identification
Link to strategic priorities:
Link to stakeholder groups:
Customers; Regulatory and Government
Deep dive on fintech
Link to strategic priorities:
Link to stakeholder groups:
Customers; Colleagues
Considered and approved large
transactions and contracts
Link to strategic priorities:
Link to stakeholder groups:
Customers; Shareholders; Suppliers
Considered the Group’s EU exit preparations
Link to strategic priorities:
Link to stakeholder groups:
Customers; Shareholders; Colleagues;
Community and Environment; Regulatory and
Government; Suppliers
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.
Details of the deep dive sessions that
were held in 2019 are set out in the key
focus areas section on pages 72 and
73. In addition, detailed updates were
received from, and joint discussions held
with, Scottish Widows Group Limited and
Lloyds Bank Corporate Markets plc.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
74 Lloyds Banking Group Annual Report and Accounts 2019
74 Lloyds Banking Group Annual Report and Accounts 2019
How our Board works continued
Governance in action
Board oversight: culture
The Group aims to continually develop a
values-led culture with the Board providing
sponsorship of this approach. Our values
and behaviours are the foundation of our
culture, providing us with a clear framework
to ensure we understand what is expected
of each other every day. Despite many
strengths, the Board recognises that the
Group’s culture needs to continually change
to ensure the business can adapt rapidly to
a changing environment while delivering the
best outcomes for customers.
The Group’s culture plan is driven by our
three core values; putting customers first,
keeping it simple and making a difference
together and these are underpinned
by our six drivers of culture: Vision and
Values, Leaders and Line Managers,
Communication and Colleague Voice,
Enabling and Developing Colleagues,
Reward and Recognition and Accountability
and Empowerment. These are also reflected
in divisional plans and align to the FCA’s four
key drivers of culture. Culture initiatives are
designed and delivered collaboratively, with
input from colleagues and various teams
across the Group, including divisional culture
leads, Inclusion and Diversity, Responsible
Business and Group Corporate Affairs.
Q&A with Sara Weller
The Group is
committed to
Helping Britain
Prosper by
supporting a
thriving low carbon
economy.
Sara Weller
Non-Executive Director and
Chairman, Responsible Business
Committee
The Board provides oversight and direction of
culture activities and believes that establishing
the right culture is important to ensure we are
building an environment where all colleagues
feel included, empowered and inspired to
do the right things for customers. During
2019, the Board assessed and monitored the
Group’s progress on culture through regular
updates at Board meetings, which included:
Regular updates on our Group strategic
review, which incorporates our biggest ever
investment in colleagues, with a significant
focus on transforming the way we work and
our culture
Quarterly workforce engagement reports,
which provide an update on culture
initiatives and colleague feedback
Specific bi-annual updates on
culture initiatives
An understanding of the impact of the
management initiatives is developed by
reviewing a wide range of data and metrics,
including the outputs from our colleague
engagement survey, the Banking Standards
Board assessment and other business
metrics. Please see page 9 for our employee
engagement index for 2019.
As a result of this oversight, our culture
plan and associated activities are regularly
refined and tailored to incorporate insight
into our progress. By doing this, we are
able to recognise areas of positive progress
and understand where we still have more
work to do so that we can focus on areas for
improvement.
Culture highlights from 2019 include:
Continued roll out and embedding of
Your Best, our transformational approach
to performance management and career
development. As part of the roll out we
undertook the biggest capability uplift for
line managers ever seen across the Group
Simplifying and improving our ways
of working, through focusing on key
colleague journeys
Continued focus on developing the skills
required for the future, with significant
progress made towards achieving
our commitment to deliver 4.4 million
additional learning and development hours
during 2018 to 2020
Building resilience through a range of
interventions for colleagues throughout
the organisation, including the launch of
an online portal providing access to a wide
range of resources
The Group has a number of initiatives planned
for 2020 to accelerate cultural change,
in particular in relation to empathy and
promoting simplicity.
Q
How does the Board oversee
the Group’s sustainability strategy?
Given the strategic importance of our
sustainability ambitions, our governance
structure provides clear oversight and
ownership of the sustainability strategy. The
Board of Directors as a whole is responsible
for sustainability and has oversight via the
Responsible Business Committee, a sub-
committee of the Board, chaired by me and
which includes the Chairman, Lord Blackwell,
and Deputy Chairman, Anita Frew, as
members. The Responsible Business
Committee regularly reports to the Board
to enable the Board to discuss pertinent
issues as whole. Day to day accountability
for sustainability rests with executive
management, in particular the Group Chief
Executive. Further information in relation to
the sustainability governance structure can be
found on page 30.
Q
How important is sustainability and
the management of climate change risk
to the Group?
Sustainability and climate change has become
a pressing priority for the country and beyond.
Over the past year we have been working,
right across the business, on the best ways for
the Group to respond to these challenges,
and have developed a sustainability strategy
which is committed to supporting the UK’s
transition to a sustainable, low-carbon
economy, and is fully aligned to the Paris
Agreement and the UK’s commitment to a net
zero future by 2050. From our position at the
heart of the UK economy, we are committed
to supporting the UK successfully to engage
with the challenges and opportunities
presented by climate change and the carbon
economy. We have identified and will manage
material sustainability related risks across the
Group, disclosing these in line with the Task
Force on Climate-related Financial Disclosures
(TCFD) recommendations. We have created
a detailed implementation plan for the TCFD
and the PRA supervisory expectations related
to climate change. We have appointed Senior
Management Function positions responsible
for Climate Change risk, covering the three
main legal entities, for example, for Lloyds
Bank and Bank of Scotland this is the Chief
Risk Officer.
Q
Can you tell us about your personal
highlights in 2019?
There are so many matters on which great
progress has been made in 2019. However, if
I had to pick a couple of areas, I would choose
highlights where colleagues have gone the
extra mile and more to support individuals
at the risk of disadvantage. Firstly our Digital
Skills Academy, piloted in Manchester and
now rolling out to other cities, starting with
Bristol. Secondly, our work to provide support
to Mental Health UK to allow them to set
up the UK’s first Money and Mental Health
Advice line.
Lloyds Banking Group Annual Report and Accounts 2019 75
Lloyds Banking Group Annual Report and Accounts 2019 75
the task is made all the more challenging
by the need to find senior people who have
appreciation for technology and innovation
generally and how it can improve customer
experience while helping the cost structure.
It was also important, in this round, to build
in as much optionality as we could, so that
change in society’s expectations or regulation
or indeed the market for top talent could be
accommodated within the new Policy. The
various tests which have been engineered into
the Policy, along with the continued expectation
of Committee override and discretion, give the
Committee some reassurance that a degree of
future proofing has been built in.
Q
In your opinion, what makes an
effective Remuneration Committee
to support the Board?
Our role is to ask the right questions, get
comfortable we have engaged with the
right stakeholders and listened to them
properly to give the Board assurance that
the proposals we put forward are right for
the Group. Composition of the Committee
is important and we have a mix of male and
female Non-Executive Directors with a wealth
of financial and non-financial, executive and
non-executive experience to bring to the
table. Importantly, all Committee members
also have a good understanding of what
factors, both internal and external, have an
impact on remuneration.
Key Board decisions
During the year, the Board covered a number
of key focus areas and some examples of
these decisions can be found on pages 21
to 25:
Adopting a quarterly dividend
Changing the Group’s Remuneration Policy
Adapting to climate change
EU Exit preparations
The acquisition of Tesco Bank’s UK
residential mortgage portfolio
Workforce engagement
Please refer to page 22 for details of how
the Board engages with the Group’s
workforce and why the Board considers
these arrangements to be effective.
Q
How does the Board oversee the Group’s
Remuneration Policy and get assurance
that it has been designed to align to the
Group’s purpose and values and is clearly
linked to the successful delivery of the
company’s long-term strategy?
This year, we were given an opportunity
to take a step back and think about the
remuneration philosophy for the Group
and focus on what our main stakeholders
would like us to consider. I personally have
spent considerable time listening to a wide
cross-section of our investor base, as well as
receiving the input of stakeholders such as
our recognised unions, regulators and the
Work and Pensions Select Committee. With
the insights from these discussions in mind,
the Remuneration Committee has been
able to discuss a great deal of material with
management and independent advisers to
gain comfort that the final proposals we have
recommended to the Board are suitable and
align to the Group’s culture and values.
Q
What has been your greatest
challenge since becoming
Remuneration Committee Chairman?
The greatest challenge lay in crafting a new
Remuneration Policy for the Group that
would remain relevant for three years, while
also being commercially sensible. To achieve
this, Committee members spent time with
a large cross section of investors and others
(as noted in the Directors’ Remuneration
Report), while, as ever, being mindful of the
need to set pay at a level which will continue to
attract candidates who can run large, complex
organisations. In this remuneration period,
Board oversight:
transformation
The Board is responsible for the overall
strategic direction of the Group and has
been engaged with the Group’s strategy
to transform its business for success in a
digital world through multiple touchpoints
throughout the year. These have included:
The annual cycle of two strategy away
days to debate priorities and agree
implementation plans
A suite of formal Board metrics and
qualitative reporting to monitor progress
and risks
Deep dives sessions on key areas
(see pages 72 and 73 for more information)
Customer insight sessions with workstream
teams in research labs and other locations
(see page 79 for more information)
A range of informal interactions to feel
the pulse
These touchpoints enable the Board to
oversee the Group’s transformation strategy,
continually challenge and develop that
strategy and take informed decisions on the
critical issues relating to the Group’s strategy.
Q&A with Stuart Sinclair
2020 marks the
beginning of a
new policy period
that must remain
relevant for three
years. This offered
the opportunity for
a fresh look.
Stuart Sinclair
Non-Executive Director and
Chairman, Remuneration
Committee
Board oversight: operational
resilience
The Board believes that operational
resilience has become ever more important:
maintaining the Group’s most important
services for our customers and the market
in which we operate is critical and requires
ongoing focus as the Group becomes more
reliant on technology against a changing
threat landscape.
Operational Resilience receives significant
attention from the Board, primarily through
the Board Risk Committee. The Board
approves the list of the Group’s most
important business services annually, reviews
a suite of operational resilience Board Risk
Appetite Metrics on at least a quarterly basis
and the operational resilience risk profile
monthly, as it represents one of the Group’s
most important non-financial risks. Please
see page 91 for a summary of operational
resilience matters considered by the Board
Risk Committee.
The Board also approved, and receives
regular updates from the Group Chief
Operating Officer, on progress against the
Group’s Operational Resilience strategy,
and the operational resilience investment
programmes that are delivering the strategy.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
76 Lloyds Banking Group Annual Report and Accounts 2019
76 Lloyds Banking Group Annual Report and Accounts 2019
How our Board works continued
Group Structure
The subsidiaries of the Group are structured
into the following sub-groups under Lloyds
Banking Group plc providing effective
governance for the business undertaken in
each sub group:
Ring-Fenced Banks sub-group containing
Lloyds Bank plc and Bank of Scotland
plc (including the Halifax and MBNA
businesses), serving both their UK personal
and commercial customers
Non Ring-Fenced bank sub-group - Lloyds
Bank Corporate Markets plc (LBCM) - which
provides products and services to Group
customers that are not allowed within the
ring-fence as well as serving Financial
Service customers and holding the Group’s
subsidiaries and branches outside the UK
Insurance sub-group under Scottish
Widows Group Limited (including
Scottish Widows Limited)
Equity sub-group under LBG Equity
Investments Limited, for which the
principal subsidiary is Lloyds Development
Capital Limited
Group Structure and
Ring-Fencing Governance
Arrangements
From 1 January 2019 UK legislation requires
large UK banks to separate personal
banking services such as current and savings
accounts from riskier activities, such as
investment banking, in other parts of their
business. This is called ring-fencing. The
Group has established a Group structure
and governance arrangements which are
appropriate for the Group and meet the
regulatory requirements. Lloyds Bank plc
and Bank of Scotland plc are the banks, within
the Group, which have been included within
the ring-fence (together, the Ring-Fenced
Banks). The governance structure focuses
on ensuring:
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
Risks affecting the Ring-Fenced Banks are
considered and managed from the Ring-
Fenced Banks’ perspective – including
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
Board Structures
Since the Ring-Fenced Banks represent the
core banking activity of the Group, all of the
Directors of Lloyds Banking Group plc also
sit on the Boards of the Ring-Fenced Banks,
which are chaired by the Group Chairman. The
ring-fencing governance structures have been
operating since 1 January 2019. The Group
Chief Executive is also Chief Executive of the
Ring Fenced Banks. In addition, the Ring-
Fenced Bank Boards have three additional
independent Non-Executive Directors.
These Ring-Fenced Bank only directors are
independent of the management and the
rest of the Group and play a critical role in the
governance structure, with an enhanced role
in managing any potential conflicts between
the Ring-Fenced Banks and the Group. One
of the Directors, Nigel Hinshelwood, acts as
Senior Independent Director of the Ring-
Fenced Banks and also chairs the cross-Group
Information Technology and Cyber Security
Advisory Forum.
Lloyds Bank Corporate Markets has its
own Board as a separately constituted and
regulated banking subsidiary, chaired by
a Non-Executive Group Board member,
Lord Lupton, and with its own independent
Non-Executive Directors. Scottish Widows
Group, which is regulated as an insurance
group, similarly has its own Board with
independent Non-Executive Directors, and is
chaired by a Group Non-Executive Director,
Nick Prettejohn. The Chief Executives and
Functional Heads of these businesses have
reporting lines to the Group executives, and
the Group Board receives regular updates on
their strategic development and performance.
António Horta-Osório visits Glasgow
doing to Help Britain Prosper and embody the
Group’s values and a business breakfast with
local Small and Medium-sized Enterprise and
Corporate clients.
Across the two days António heard directly
from colleagues about their work and their
successes, passion, drive and commitment
to improve the business for the benefit of
customers and the Group.
Whilst meeting the Connect and Resolve
teams in our Atlantic Quay building,
António listened in to customer calls with
the teams who support Schroders Personal
Wealth and handle credit disputes. He also
watched mobile messaging interactions with
customers, seeing and hearing first-hand
how we are meeting our customers’ needs
through a range of channels and products.
This experience was part of the Reconnecting
with Customers pilot programme, launched
in July 2019 to bring senior leaders across the
Group closer to our customers and customer-
facing teams.
The Credit Disputes team shared with
António the success it has had in improving
the customer journey for credit card disputes.
António was able to see the difference this
transformation has made for customers by
dialling into a live credit dispute call.
Group Chief Executive António Horta-Osório
undertook a number of visits throughout the
UK in 2019. During his regional visit to Glasgow
in October 2019, António took the opportunity
to spend time with our teams and customers,
including holding a town hall, a recognition
dinner to celebrate colleagues and all they are
Lloyds Banking Group Annual Report and Accounts 2019 77
Lloyds Banking Group Annual Report and Accounts 2019 77
Assessing our effectiveness
Board evaluation
How the Board performs and is evaluated
The annual evaluation, 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 to enable the Board
continuously to improve its own performance
and the performance of the Group.
The Chairman of the Board, with the
support of the Nomination and Governance
Committee, leads the Board in considering
and responding to the annual review of the
Board’s effectiveness, which includes a review
of its Committees and individual Directors.
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.
The Board is in the second year of its three
year evaluation cycle. An external evaluation
was conducted in 2018, facilitated by
EgonZehnder¹, an external board review
specialist, with an internal evaluation having
been carried out in respect of 2019. The
current expectation is that the 2020 evaluation
will be conducted internally.
2019 evaluation of the Board’s
performance
The 2019 evaluation was conducted internally
between October 2019 and January 2020 by
the Company Secretary, and was overseen by
the Nomination and Governance Committee.
The 2019 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,
experience and knowledge; diversity; culture;
how members work together, and with
executive management, to achieve objectives;
the Board’s calendar and agenda; the quality
and timeliness of information; and support for
Directors and Committees. The topics were
selected by the Company Secretary and the
Chairman of the Nomination and Governance
Committee as being the most pertinent when
considering the Board’s effectiveness.
If Directors have concerns about the
Company or a proposed action which cannot
be resolved, their concerns are 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 2019 and up to
the date of this report.
Internal evaluation process
October 2019
Detailed questionnaire issued to all Directors
by the Company Secretary
October 2019 to January 2020
Individual meetings held between each
Director and the Company Secretary
to discuss responses and opportunity
for Directors to raise any other matters
concerning the Board or its Committees.
December 2019 to January 2020
Report prepared by the Company Secretary
based on the questionnaire results and
matters raised in individual meetings.
April 2020
Actions to be recommended to the Board by
the Nomination and Governance Committee
to reflect the Board discussion in January.
January 2020
Draft report discussed by the Company
Secretary with the Chairman.
Final report discussed at a meeting of the
Board, following its consideration by the
Nomination and Governance Committee.
Subsequently the Board will consider the
recommendations and agree an action plan.
Highlights from the 2019 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 and contributed effectively. The Board is also regarded as very able, collegiate and well-run,
with an open and supportive culture and strong governance relating to risks and controls.
The key findings and areas for consideration include the following:
Findings
Areas for consideration
Ring-fencing
governance
Ring-fencing governance requirements, with an increased
number of participants at the Board, require individual
Directors and the Chairman and Committee Chairmen
to manage meetings, to ensure all Directors are able to
contribute fully and effectively
Whilst ring-fencing governance has been embedded
successfully, it is important to streamline governance
processes further and ensure the Board’s and its
Committees’ time is used to best effect
Strategy
The Board’s detailed engagement in the formulation of
strategy is seen as a key strength, with the strategy away
days playing an important role in this
Continue to increase time allowed in Board meetings
for expansive discussion of broader strategic issues and
themes
Board
papers and
presentations
Board deep dives into particular topics and the continued
use of more informal Board sessions to facilitate greater
depth of discussion continue to be appreciated
Whilst the quality of Board papers was seen to have
improved, there remain concerns about the length of
Board papers and the inclusion of unnecessary detail
Board and Committee papers to be shorter in length
and the amount of time spent in Board meetings on
presentations to be reduced, to allow more time for open
discussion and debate
1 At the time of the 2018 review EgonZehnder provided certain Board and senior management level services from time to time, including in respect of succession planning as detailed on page 67 of
the 2018 Annual Report and Accounts, otherwise EgonZehnder had no other connection with the Group.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
78 Lloyds Banking Group Annual Report and Accounts 2019
78 Lloyds Banking Group Annual Report and Accounts 2019
How our Board works continued
Progress against the 2018 external Board effectiveness review
During the year, work focused particularly on the Board becoming more outwardly focused and ensuring that the Board agenda was less rooted in
regulatory compliance and risk mitigation. A summary of the Board’s progress against the actions arising from the 2018 effectiveness review are set
out below.
Recommendations from the 2018 evaluation
Actions taken during 2019
Board focus
Board agenda to become less rooted in
regulatory compliance and risk mitigation
Board to become more outwardly focused
Added 30 minutes ‘free agenda’ discussion time to Board meetings
June strategy session updated views of external environment
(customer, technology, competition, society) to prepare for 2020
discussions on GSR4
Executive Director performance reports continue to evolve towards
flagging issues and priorities
Regular competition reports to include more on the activities of
new competitors
Chairman to continue moving focus of agenda to give more time
to business discussions
Size of Board
Ensure size of Board and large attendance at
Committee meetings does not inhibit debate
Requirement for Board and Committee Chairmen to be more
directive when required
Commitments by individual Directors to self-discipline contributions
Continued use of informal sessions to air issues that need
more discussion
Board papers
and agenda
Board skills
and diversity
Individual
Non-Executive
Director skills
and experience
Further streamline meeting papers and
agendas to enable more expansive discussion
Continued to streamline length and time spent on ‘taken as
read’ reports
Further development and simplification of GSR3 reporting
Continue to evolve Board skills and diversity
Chairman continued to share succession timetables and skills matrix
for discussion in Nomination and Governance Committee and
wider Board
Reviewed wording of Board diversity objective during 2019
Look at ways to better leverage individual
Non-Executive Director skills and experience
Chairman discussed and agreed potential focus areas with
Non-Executive Directors during regular performance reviews
Individual Non-Executive Directors encouraged to communicate
topics they are engaging with to other Non-Executive Directors
Lord Blackwell’s visit to Birmingham
Lord Blackwell was joined all day on this visit
by Kendall Akhurst, a colleague from Group
Transformation. As a strong advocate for,
and member of, the Group’s Access network,
which supports colleagues with disabilities,
Kendall was particularly interested in the visit
to the Birmingham Disability Resource Centre
(BDRC). The BDRC is one of the many charities
the Group supports through its charitable
Foundations and provides support for people
with all kinds of disabilities. Lord Blackwell
spent time hearing about the wide range of
support BDRC has received from the Group
and also from people who use the centre
and their experience of the Journey to Work
scheme, which aims to help people turn their
lives around by building up their confidence
and self-esteem to get back into work.
After the branch and charity visits, Lord
Blackwell moved to Brindley Place where
he hosted a recognition lunch for around
20 colleagues from Group Client Information
Office and Commercial, discussing their
successes and also what challenges they
might be facing. He then spent time with
teams from within those divisions and heard
about work to investigate suspicious activity
reports raised from branches, the cash
management and payments model office, the
automation journey for payments, including
demonstrations of robotics and also how the
Group is supporting business clients through
their trade journey.
The visit continued with a Town Hall session
for around 80 colleagues at which Lord
Blackwell invited questions and answered
a wide variety of questions covering topics
such as resilience for colleagues and the
Group, his own mentors and inspirations, the
branch network, EU exit and leadership styles
and skills.
The visit ended with a recognition dinner for
25 colleagues to celebrate how they have
truly lived the Group’s values and what they
have done to embody the Group’s purpose
of Helping Britain Prosper.
As part of his programme of regional visits,
Lord Blackwell spent time in Birmingham
in September. He met colleagues from
Lloyds Bank and Halifax branches, as well
as spending time with colleagues from
Brindley Place.
Lord Blackwell took part in the branch team
talk with colleagues from the Lloyds Bank
Branch. Topics covered the Group’s joint
venture with Schroders Personal Wealth,
customer referrals and supporting our
local communities. There were questions
for Lord Blackwell covering the economic
environment, digital technology, the Group’s
brands and its branch network.
Lloyds Banking Group Annual Report and Accounts 2019 79
Lloyds Banking Group Annual Report and Accounts 2019 79
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 emerging and principal risks facing the
company, including those that would threaten
its business model, future performance,
solvency or liquidity and reputation, the
likelihood of a risk event occurring and the
costs of control. The process for identification,
evaluation and management of the emerging
and principal risks faced by the Group is
integrated into the Group’s overall framework
for risk governance. 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 129 to 187. 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.
Lord Blackwell and Non-Executive Director visits to customer insight sessions
Lord Blackwell and a number of Non-
Executive Directors attended multiple
Customer Insight sessions during 2019.
Our customers’ world is changing at pace so
it is important to stay in touch with the reality
of customers’ daily lives, their changing needs
and priorities.
Customer insight sessions are held monthly
in research labs and other locations across
the country to hear directly from customers
about their lives and what is important to
them. The discussions cover topics such as life
priorities and money management providing
a rich insight into evolving needs, attitudes
and behaviours.
This insight is a valuable input into
understanding how customers’ lives are
evolving to help develop the Group’s
strategic direction.
The Chairman and Non-Executive Directors
were impressed by customers’ openness
and willingness to share their views. The
sessions they attended gave a deep insight
into customers’ lives and needs and their
ideas on how a bank can provide a leading
customer experience.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
80 Lloyds Banking Group Annual Report and Accounts 2019
80 Lloyds Banking Group Annual Report and Accounts 2019
Complying with the UK Corporate Governance Code 2018
The UK Corporate Governance Code 2018 (the ‘Code’) applied to the financial year ended 31 December 2019. The Group confirms that it applied the
principles and complied with all the provisions of the Code throughout the year except in relation to that part of provision 36 that provides that the
remuneration committee should develop a formal policy for post-employment shareholding requirements encompassing both unvested and vested
shares. Whilst the Remuneration Committee has not introduced a formal post-employment shareholding policy, the existing reward structure ensures
that Executive Directors will continue to meet the Group’s shareholding requirements for a minimum of two years after leaving the Group. On this
basis, the Group believes that it already complies with best practice and with the spirit of provision 36 notwithstanding the fact that a specific formal
policy has not been introduced. Please refer to pages 100 and 108 for a more detailed explanation of the Group’s approach to post-employment
shareholding requirements.
The Code is publicly available at www.frc.org.uk. This page and the following page explain how we have applied the principles and related provisions
of the Code during the year. The alphabetical references in the paragraphs below correspond to the principles, and related provisions, of the Code.
The Group has adopted the UK Finance Code for Financial Reporting Disclosure and its 2019 financial statements have been prepared in compliance
with its principles.
1. Board Leadership and Company Purpose
Independent Responsibilities
Chairman
Lord Blackwell
Executive Directors
Group Chief Executive
António Horta-Osório
Chief Financial Officer
William Chalmers1
Chief Operating Officer
Juan Colombás
Non-Executive Directors
Deputy Chairman
Anita Frew
Senior Independent
Director
Alan Dickinson
Simon Henry
Sarah Legg2
Lord Lupton
Amanda Mackenzie
Nick Prettejohn
Stuart Sinclair
Sara Weller
Group Company
Secretary
Kate Cheetham
Lord Blackwell leads the Board and promotes the highest standards of corporate governance. He leads in
building an effective and complementary Board, and sets the Board’s agenda. The Chairman also leads
Board succession planning and ensures effective communication with shareholders.
António Horta-Osório manages and leads the Group on a day-to-day basis, making decisions on matters
affecting the operation and performance of the Group’s business and the delivery of the Board’s approved
strategy. He delegates aspects of his authority, as permitted under the Corporate Governance Framework,
to other members of the Group Executive Committee.
Under the leadership of the Group Chief Executive, William Chalmers, who joined the Board during the year,
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, William Chalmers and Juan Colombás design, develop and implement strategic plans and deal with
day-to-day operations of the Group.
As Deputy Chairman, Anita Frew supports the Chairman in representing the Board, and acts as a
spokesperson for the Group. She deputises for the Chairman and is available to the Board for consultation
and advice. The Deputy Chairman may also represent the Group’s interests to official enquiries and
review bodies. Having spent nine years on the Board, Anita will retire at the forthcoming AGM. Anita’s
independence up to the point of her retirement is confirmed on page 81.
As Senior Independent Director, Alan Dickinson is a sounding board for the Chairman and Group Chief
Executive. He acts as a conduit for the views of other Non-Executive Directors and conducts the Chairman’s
annual performance appraisal. He is available to help resolve shareholders’ concerns and attends 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,
also determine the remuneration of Executive Directors.
Kate Cheetham was appointed Group Company Secretary during the course of the year, and in this role
advises the Board on matters relating to governance, ensuring good information flows and comprehensive
practical support is provided to Directors. She maintains the Group’s Corporate Governance Framework
and organises Directors’ induction and training. The Company Secretary also communicates with
shareholders as appropriate and ensures due regard is paid to their interests. Both the appointment and
removal of the Group Company Secretary is a matter for the Board as a whole.
1 William Chalmers joined the Board with effect from 1 August 2019.
2 Sarah Legg joined the Board with effect from 1 December 2019.
A. The Group is led by an effective, committed Board, which is collectively responsible for the long-term, sustainable success of the Group, ensuring
due regard is paid to the interests of the Group’s stakeholders, with its effectiveness assessed with an annual Board effectiveness review, discussed
further on page 77 to 78. The Group’s Corporate Governance Framework, which is reviewed annually by the Board, sets out the key decisions and
matters reserved for the Board’s approval, which includes matters relating to the Group’s long-term strategy and priorities. Further details of the
Corporate Governance Framework can be found online at www.lloydsbankinggroup.com/our-group/corporate-governance, and on page 71.
B. The Board assumes responsibility for establishing the purpose of the Company, setting its strategy, establishing its culture, and determining
the values to be observed in achieving that strategy. Central to this is the Company’s role as a trusted and responsible business, with the Board’s
Responsible Business Committee overseeing the Group’s ambitions in this regard. The Group’s approach to acting as a responsible business is
discussed in detail on pages 26 to 35, and in the report of the Responsible Business Committee on page 93.
C. The Board retains ultimate responsibility for ensuring adequate resource is available to meet agreed objectives and strategy, and ensures such
resources are responsibly and effectively deployed. The effective management of risk is central to the Company’s strategy, supported by the Group’s
enterprise risk management framework, as discussed in the risk management report on pages 129 to 187.
D. The Board recognises that engaging with and acting on the needs of the Group’s stakeholders is key to achieving the strategy and long-term
objectives of the Company. Engagement with stakeholders, across the organisation and including that of the Board, is discussed further on pages 20
to 27, and in the Directors’ statement of compliance with their duties under section 172 of the Companies Act 2006, also on pages 20 to 27.
E. All policy and practice relating to Group colleagues is developed
and implemented in a way which is consistent with the Group’s
purpose and values, with the Board receiving regular updates on
matters relevant to colleagues. The Board has appointed Anita Frew
as its whistleblowing champion, with responsibility for overseeing
the integrity, independence and effectiveness of the Group’s
whistleblowing procedures. In addition, the Audit Committee reviews
reports on whistleblowing to ensure there are arrangements in place
which colleagues can use in confidence to report relevant concerns, as
discussed on page 88 and reports on such review to the Board.
2. Division of Responsibilities
F. The Chairman has overall responsibility for the leadership of the
Board and for ensuring its effectiveness in all aspects of its operation.
The responsibilities of the Chairman in this regard are formalised
within the Corporate Governance Framework. Lord Blackwell was
independent on appointment.
G. 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 of skills and experience helps to
ensure Directors discharge their duties effectively. 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 82. As of 1 December 2019, Anita Frew
had spent 9 years on the Board and will retire at the AGM in May. In
relation to the period from 1 December 2019, being the ninth anniversary
of Anita’s appointment to the Board, to her retirement at the AGM in
May, the Board considered and agreed that the period beyond nine
years as a director did not impact on Anita’s level of independence or
the effectiveness of her contributions and her continuing treatment as
an independent Non-Executive Director of the Company for that period.
The decision was based on a number of factors including consideration
of Anita’s interests outside the Group and the continued challenge
and oversight Anita provides in the role, whilst noting the benefits of
enabling the phased transition of responsibilities to other Non-Executive
Directors during this short period. More information on the annual Board
effectiveness review can be found on pages 77 to 78 and information on
the Board Diversity Policy can be found on page 83.
H. Non-Executive Directors are advised of time commitments prior to
their appointment and are required to devote such time as is necessary to
discharge their duties effectively. The time commitments of the Directors
are considered by the Board on appointment and annually thereafter,
and, following the most recent review, the Board is satisfied there are
no directors whose time commitments are considered to be a matter
for concern. External appointments, which may affect existing time
commitments relevant to the Board, must be agreed with the Chairman,
and prior Board approval must be obtained before taking on any new
external appointments. The Board has not approved any significant
external commitments during 2019. No Executive Director has 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 meetings can be found on page 70.
I. The Chairman, supported by the Group 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.
3. Composition, Succession and Evaluation
J. The process for Board appointments is led by the Nomination and
Governance Committee, which makes recommendations to the Board.
A combination of open advertising and an external search consultancy
is used for the appointment of the Chairman and Non-Executive
Directors. More details about succession planning can be found on
page 82 and 84. More information about the work of the Nomination
and Governance Committee can be found on pages 82 to 84.
K. The Chairman leads the training and development of Directors and
the Board regularly reviews and agrees with each Director their individual
and combined training and development needs. 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, taking account of the specific role
Lloyds Banking Group Annual Report and Accounts 2019 81
Lloyds Banking Group Annual Report and Accounts 2019 81
the Director has been appointed to fulfil and their skills and experience
to date. Directors who take on or change roles during the year attend
induction meetings in respect of those new roles. The Group Company
Secretary maintains a training and development log for each Director.
At the 2020 AGM all Directors will seek re-election or election save for
Anita Frew, who will be stepping down at the 2020 AGM. Being the
first AGM since their respective appointments, William Chalmers and
Sarah Legg will stand for election, together with Catherine Woods, who,
as announced in October 2019, will join the Board on 1 March 2020. The
Board believes that all Directors continue to be effective and committed
to their roles.
L. An internally facilitated Board evaluation was completed in 2019, with
an externally facilitated evaluation having taken place in 2018. Individual
evaluation is carried out by the Chairman on behalf of the Board.
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. More information on the
Board effectiveness review can be found on pages 77 to 78, along with
the findings, actions, and progress made during the year.
4. Audit, Risk and Internal Control
M. The Board has delegated a number of responsibilities to the Audit
Committee, including oversight of financial reporting processes, the
effectiveness of internal controls and the risk management framework,
whistleblowing arrangements and the work undertaken by the external
and internal auditors. The Audit Committee reports regularly to the
Board on its activities, and its report for 2019, confirming how it has
discharged its duties can be found on pages 85 to 88.
N. Requirements that the Annual Report is fair, balanced and
understandable are considered throughout the drafting and reviewing
process and the Board has concluded that the 2019 Annual Report
meets this requirement. The Directors’ and Auditors’ Statements of
Responsibility can be found on pages 97 and 196 respectively. Related
information on the Company’s business model and strategy can be
found on pages 2 to 46.
O. The Board is responsible for the Group’s risk management and
internal controls systems, including the determination of the nature and
extent of risk the Company is willing to take. Risk is further managed
through the Board approved Risk Control Framework, as discussed in
the risk management report on pages 129 to 187. The Audit Committee
assumes further responsibility for the effectiveness of internal controls,
with the Board Risk Committee assuming responsibility for the review of
the risk culture of the Group, ensuring the correct ‘tone from the top’ in
respect of risk management. The related Directors’ Viability Statement
can be found on pages 95 to 96 and confirmation that the business is a
going concern can be found on page 96.
5. Remuneration
P. 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 and sustainable success of
the Company. The Directors’ Remuneration Report on pages 98 to 128
provides further details regarding the remuneration of Directors.
The current Remuneration Policy can be found in the 2016 Annual
Report and Accounts and remains unchanged since last approved
by shareholders at the 2017 AGM. A new Remuneration Policy will be
proposed for approval by shareholders at the 2020 AGM.
Q. The Remuneration Committee seeks to ensure all remuneration
policy, including that relevant to executive remuneration, is fair and
transparent. The work of the Remuneration Committee during the year,
including its review of the Remuneration Policy, is discussed further in its
report on page 114.
R. The Remuneration Policy seeks to ensure all remuneration decisions
made by Directors fully consider the wider circumstances as relevant to
that decision, including, but not limited to, individual performance. The
Remuneration Committee’s decision making in respect of remuneration
outcomes is discussed further in the Directors’ Remuneration Report
on pages 98 to 128 which includes additional confirmation of the use
of remuneration consultants, including where any such consultant has
another connection to the Company.
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82 Lloyds Banking Group Annual Report and Accounts 2019
82 Lloyds Banking Group Annual Report and Accounts 2019
Nomination and Governance Committee report
Good succession planning
and recognition of diversity
is integral to maintaining a
strong Board and supporting
the development of the
Executive population.
Lord Blackwell
Chairman, Nomination and Governance Committee
Dear Shareholder
I am pleased to report on the activity of the
Nomination and Governance Committee
(the ‘Committee’) during 2019.
Board and GEC changes
As set out in my introduction to the
Governance Report on page 65 there have
been a number of changes to the Board and
its Committees during the year, all of which
have been overseen by the Committee.
During the year, the Committee undertook
a thorough process to identify and assess
candidates which resulted in the appointment
of two new Group Non-Executive Directors:
Sarah Legg was appointed to the Board on
1 December 2019 and Catherine Woods
will join the Board on 1 March 2020. While
selected on the basis of their strong banking
experience and skills, these two appointments
help meet our continuing commitment to
gender diversity. Sarah’s appointment also
supports our objective of BAME diversity.
Details of the selection process can be found
on page 84.
The Committee oversaw the planned
transition of the Senior Independent Director
role from Anita Frew to Alan Dickinson with
effect from 1 December 2019, ahead of Anita’s
planned retirement from the Board at the
forthcoming AGM when Alan will also succeed
her as Deputy Chairman. Alan’s breadth and
depth of experience make him ideally suited
to the role of Deputy Chairman and Senior
Independent Director.
Following our announcement in February
2019, William Chalmers joined the Board
on 1 August 2019 as an Executive Director
and Chief Finance Officer, succeeding
George Culmer. As announced in October
2019, Juan Colombás plans to retire from
the Group in July 2020, and I plan to retire
as Group Chairman at or before the AGM
in 2021, by which time I will have served
9 years on the Group Board. The Committee
has initiated a search process for my
successor under the leadership of the Senior
Independent Director.
A number of changes have also been made to
the membership of Board Committees during
the year, reflecting Board changes and the
ongoing review of Committee membership.
Succession planning
As can be seen from these changes, the
Committee continued to focus on succession
planning at both a Board and Executive
level, building on work undertaken in
previous years.
The Committee continues to keep under
review, on an ongoing basis, the structure,
size and composition of the Board and its
Committees, making recommendations to
the Board as appropriate. Consideration
was given to anticipated retirements from
the Group Board over the next two years,
together with the need to ensure the
appropriate mix of knowledge, skills and
experience, and diversity.
At an Executive level, the Committee
considered the overall health of the Executive
talent pipeline, together with detailed
Executive succession planning aimed at
supporting the development of executives
for the Bank of the Future. Further detail on
succession planning can be found on page 84.
Board effectiveness and training
As highlighted in my introduction to the
Governance Report on page 65, an internal
Board effectiveness review, undertaken by
the Company Secretary, was overseen by the
Committee. The Committee also considered,
and recommended to the Board, actions
arising from the previous externally facilitated
review undertaken by Egon Zehnder. Full
details are provided on pages 77 to 78.
Annually, as part of the Board effectiveness
review, the Committee also undertakes a
review of its own effectiveness. The findings
of this review, which were considered
by the Committee at its meeting in
January 2020, found that the Committee
had met its key objectives and carried out
its responsibilities effectively.
The Committee also oversees training
undertaken by the Non-Executive Directors.
Learning and engagement opportunities
have been undertaken by all Non-Executive
Directors in relation to material aspects of
the Group’s business.
Independence and
time commitments
Based on its assessment for 2019, the
Committee is satisfied that, throughout
the year, all Non-Executive Directors
remained independent1 as to both character
and judgement. The Committee, and
the Board gave specific consideration to
Anita Frew’s continuing independence as
detailed on page 81.
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, taking into consideration individual
capabilities, skills and experiences and any
relationships that have been disclosed.
All Directors were considered to have
appropriate roles. Details of conflicts of
interest can be found on page 94.
The Group’s Corporate
Governance Framework
The annual review of the Corporate
Governance Framework was undertaken
during the year with the inclusion of further
enhancements to the ring-fenced banking
governance arrangements which came into
effect on 1 January 2019, together with various
other minor amendments, and updates to
committee terms of reference.
As part of its broader governance
responsibilities, the Committee also
considered regular updates on developments
in corporate governance, including the
initiation of HM Treasury’s review of the
financial services regulatory framework,
provided ongoing oversight of the
embedding of the ring-fenced banks’
governance structure and considered
correspondence with shareholders.
UK Corporate
Governance Code
As highlighted in last year’s report and referred
to in the Governance Report, the Financial
Reporting Council’s amended UK Corporate
Governance Code (the ‘Code’), came into
effect from 1 January 2019, with requirements
relating to the annual report applicable to
the report and accounts for the year ended
31 December 2019. The Group applied the
1 The Chairman was independent on appointment in accordance with the Code. Following the Financial Reporting Council’s Guidance on Board Effectiveness, the Chairman is not subject to the
Code’s independence test, other than on appointment.
Lloyds Banking Group Annual Report and Accounts 2019 83
Lloyds Banking Group Annual Report and Accounts 2019 83
Code. Our statement of compliance with the
Code and a summary of the requirements of
the Code can be found on pages 80 and 81.
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, Deputy Chairman, the Chairman
of the Board Risk Committee (and Senior
Independent Director since December 2019),
the Chairman of our Insurance Subsidiary, and
the Chairman of the Responsible Business
Committee. In addition, as announced on
25 November 2019, Stuart Sinclair, Chairman
of the Remuneration Committee, was
appointed as a member of the Committee
with effect from 1 December 2019.
The Group Chief Executive attends meetings
as appropriate. Details of Committee
memberships and meeting attendance can
be found on page 70.
Lord Blackwell
Chairman, Nomination and
Governance Committee
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. The Board places great
emphasis on ensuring that its membership
reflects diversity in its broadest sense.
Consideration is given to the combination
of demographics, skills, experience, race,
age, gender, educational and professional
background and other relevant personal
attributes on the Board to provide the range
of perspectives, insights and challenge
needed to support good decision making.
New appointments are made on merit,
taking account of the specific skills and
experience, independence and knowledge
needed to ensure a rounded Board and the
diversity benefits each candidate can bring
to the overall Board composition.
As part of the decision to appoint Sarah
Legg and Catherine Woods to the Board,
diversity was considered in its broadest
sense. These appointments bring strong
banking and asset management experience
to the Group.
Objectives for achieving Board diversity may
be set on a regular basis. In April (and then
again in January 2020) the Board considered
and approved updates to aspirations set
out in the Board Diversity Policy relating to
gender diversity and the number of senior
roles held by Black, Asian and Minority
Ethnic (BAME) executives.
On gender diversity the Board is committed
to maintaining at least 3 female Board
members and over time will expect female
representation on the Board to match
the 40 per cent target that the Group has
set for senior executives. Reflecting these
aspirations, the Board will aim to meet the
Hampton-Alexander objective of 33 per
cent female representation by, or as soon
as possible after, the target date of 2020.
Female representation on the Board is
currently 31 per cent (based on four female
Directors and nine male Directors).
The Group also set a target of 8 per cent of
senior roles to be held by BAME executives
by 2020. At Board level, the Group aims to
meet the objectives of the Parker review
for at least one BAME Board member by,
or as soon as possible after, the target date
of 2021. The appointment of Sarah Legg in
2019 supports this objective.
As noted, the Board places high emphasis
on ensuring the development of diversity
in 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 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. As at 31 December
2019, female representation within senior
management and their direct reports
was 31.1 per cent in total (29.4 per cent
and 31.3 per cent respectively). Female
representation across all senior roles was
36.8 per cent, and BAME representation in
senior roles was 6.7 per cent.
A copy of the Policy is available on our
website at www.lloydsbankinggroup.
com/our-group/responsible-business and
further information on the Board’s broader
approach to diversity and inclusion as part
of its strategic priorities, and continued
investment in being a leading inclusive
employer, can be found on page 34.
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84 Lloyds Banking Group Annual Report and Accounts 2019
84 Lloyds Banking Group Annual Report and Accounts 2019
Nomination and Governance Committee report continued
Succession Planning
Effective succession planning contributes
to the delivery of the Group’s strategy
by ensuring the desired mix of skills and
experience of Board members now and in
the future. The Board is also committed to
recognising and nurturing talent within the
executive and management levels across
the Group to ensure the Group creates
opportunities to develop current and
future leaders.
The role of succession planning in promoting
diversity is recognised and the Group has
a range of policies which promote the
engagement of underrepresented groups
within the business in order to build a diverse
talent pipeline.
The Committee supports the Chairman in
keeping the composition of the Board and
its Committees under regular review and
in leading the appointment process for
nominations to the Board. This has been a
particular area of focus during 2019, with a
number of changes to Board Committee
membership, and the appointment of two
new Non-Executive Directors, discussed
further below.
Central to this is an ongoing assessment, led
by the Chairman, of the collective Board’s
technical and governance skill set. From
this the Chairman creates a Board skills
matrix which is used to track the Board’s
strengths and identify any gaps in the
desired collective skills profile of Board.
Various factors are taken into consideration
such as the Group’s future strategic direction,
and helping ensure due weight is given to
diversity in its broadest sense. The skills
matrix was considered in the appointment
of Sarah Legg and Catherine Woods and
the appointment of Alan Dickinson as Senior
Independent Director and, in due course,
also as Deputy Chairman.
Outcomes of the annual Board evaluation
process are also taken into consideration.
During the year, the Committee also
considered the adequacy of succession
arrangements for key senior management
roles, also taking into consideration the
changing opportunities as the shape of
the Group continues to evolve through
delivery of the Group’s strategy. The
Chairman is responsible for developing and
maintaining a succession plan for the Group
Chief Executive who is, in turn, primarily
responsible for developing and maintaining
succession plans for key leadership positions
in the senior executive team.
Appointment Process - Assessment of new Non-Executive Directors
Outcome
Key considerations
During the year the Committee led the
search process for, and appointment of, new
Non-Executive Directors which culminated
in the appointment of Sarah Legg, who
joined the Board on 1 December, and
Catherine Woods who will join the Board on
1 March 2020.
In establishing criteria for the new
appointments, the Committee considered
a number of factors including the collective
Board’s technical and governance skill set,
anticipated retirements in 2020 and 2021
based on current FRC Code guidance, and
support for the Group’s diversity objectives.
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
The Committee
considered a number
of search firms before
appointing Heidrick
& Struggles1 to assist
with the identification
of potential
candidates based on
the Board’s criteria.
The Committee were
provided with a list of
potential candidates
for consideration, from
which a short list was
identified.
Interviews were
then held between
the candidates, the
Chairman and the
Senior Independent
Director.
Further meetings for
selected candidates
were held with other
members of the
Board.
After further
consideration,
the Committee
recommended
to the Board the
appointment of the
preferred candidates.
The Board formally
approved the
appointments, subject
to any remaining
checks and approvals
required.
1 Aside from assisting with senior recruitment Heidrick & Struggles have no other connection to the Company, or individual Directors.
Audit Committee report
Lloyds Banking Group Annual Report and Accounts 2019 85
Lloyds Banking Group Annual Report and Accounts 2019 85
The Committee has
delivered on its key
responsibilities, ensuring
oversight of financial
reporting and the
control environment.
Simon Henry
Chairman, Audit Committee
Dear Shareholder
I am pleased to report on how the Group Audit
Committee (the ‘Committee‘) has discharged
its responsibilities throughout 2019.
The Committee has continued to focus on
the issues relevant to the Group’s financial
reporting, including consideration of key
accounting judgements, and ensuring the
integrity of financial reporting and related
disclosures. The Committee has also spent a
significant proportion of its time considering
other related areas, including monitoring of
the Group’s internal control framework, to
ensure it remains effective and fit for purpose.
The key sources of information here remain
the company’s Financial Controllership, the
Risk function, Internal Audit and External
Audit. The Committee is hence receiving
multiple, independent and objective reports,
in support of assurance provided.
Assessing the final provisioning for the costs
relating to Payment Protection Insurance
redress has remained a significant area of
judgement in the Group’s financial reporting,
with the Committee continuing to challenge
management’s assumptions used to calculate
the Group’s provision.
Reports from management were considered
on the ongoing application of IFRS 9,
including challenge of management
judgements underpinning credit impairment
provisions. The Committee also oversaw the
successful implementation of IFRS 16, which
was adopted by the Group on 1 January 2019,
and received updates from the project to
implement IFRS 17, which is expected to be
effective for the 2022 financial year.
The potential for economic uncertainty arising
from the exit of the UK from the European
Union was considered in particular in respect
of any potential impact on the Group’s credit
impairment provision.
The Committee continued to oversee the
role of Group Internal Audit, with particular
focus on the key risk themes across the Group,
including the transformation programmes,
which continue to play an increasingly
important role in the Group’s strategy.
The Committee also oversaw the establishment
of a sub-committee to consider improvements
in the Group’s whistleblowing arrangements.
Looking ahead to 2020, beyond continued
focus on financial reporting and related
controls, the Committee will oversee the
transition in January 2021 to Deloitte LLP
as the Group’s external auditor.
The Committee also expects to review
ongoing developments in the Group’s
approach to climate change reporting, as this
area continues to develop. The Committee
will also consider the developments in
Corporate Governance, external audit
practice, and regulation of this industry, arising
from reviews by Sir Donald Brydon and others.
The Committee has already given initial
consideration to the matters these reviews
have raised, and will continue to contribute
to the ongoing consultation processes.
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 following pages, including
discussion of the conclusions the Committee
reached, and the key factors considered in
reaching conclusions, including a continuing
focus on the judgements and assumptions
used by management in its models. In addition,
the Committee considered a number of other
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 conclusion.
Committee composition, skills,
experience and operation
The Committee acts independently of
the executive to ensure 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 66 to 67.
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 71.
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 2020 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 70, 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
as appropriate. Details of Committee
membership and meeting attendance can
be found on page 70.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
86 Lloyds Banking Group Annual Report and Accounts 2019
86 Lloyds Banking Group Annual Report and Accounts 2019
Audit Committee Report continued
Financial Reporting
During the year, the Committee considered the following issues in relation to the Group’s financial statements and disclosures, with input from
management, 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
on loans and
advances
Retirement
benefit
obligations
Management judgement is used
to determine the assumptions
used to calculate the Group’s
PPI provision. Following the
deadline for submission of claims
in August 2019, the principal
year-end assumptions used in
the calculation are the extent
to which customer enquiries
convert to valid complaints, are
then upheld, the average redress
to be paid and expected future
administration costs.
During 2019, the Group made
provisions totalling £2,450 million
in respect of PPI.
There were relatively few new
conduct matters in 2019. The
Group made provisions totalling
£445 million in respect of other
conduct matters, including
£188 million for costs of identifying
and rectifying certain arrears
management fees and activities.
The Group’s impairment provision
is dependent on management’s
judgements on matters such as
future 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.
The allowance for impairment
losses on loans and advances
to customers at 31 December
2019 was £3,259 million
(2018: £3,150 million).
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.
Recoverability
of deferred tax
asset
Uncertain tax
provisions
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 Group has open tax
matters which require it to make
judgements about the most likely
outcome for the purposes of
calculating its tax position.
The Committee reviewed 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 considered management’s use of sensitivities used to
evaluate this uncertainty.
The Committee concluded that the provision for PPI redress and the Group’s external
disclosures were appropriate. The disclosures relating to PPI are set out in note 38:
‘Other provisions’ of the financial statements.
The Committee’s consideration of PPI is discussed further on page 87.
The Committee has considered management’s assessment of the provisions required
for other conduct matters and was satisfied that the provisions were appropriate.
The disclosures relating to other conduct provisions are set out in note 38: ‘Other
provisions’ of the financial statements.
During the year, the Committee has challenged both the level of provision held by the
Group, and the judgements and estimates used to calculate the provision. It regularly
reviewed management’s analysis of the Group’s lending portfolios. As part of each
of its reviews, the Committee considered management’s assessment of the potential
impact of the UK leaving the European Union. The Committee has also considered
the disclosure recommendations published by The Taskforce on Disclosures about
Expected Credit Losses in December 2019.
The Committee was satisfied that the impairment provisions and associated
disclosures were appropriate. The disclosures relating to impairment provisions
are set out in note 20: ‘Allowance for impairment losses’ and note 53: ‘Financial risk
management’ of the financial statements.
The Committee reviewed the process used by management to determine an
appropriate discount rate and considered the other critical assumptions underlying
the calculation of the defined benefit liabilities, including those in respect of 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 also satisfied that the Group’s disclosures made in respect of
retirement benefit obligations are appropriate. The relevant disclosures are set out in
note 36: ‘Retirement benefit obligations’ of the financial statements. The defined benefit
obligation at 31 December 2019 was £45,241 million (31 December 2018: £41,092 million).
The Committee considered 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.
The Committee agreed with management’s judgement that the deferred tax
assets were appropriately supported by forecast taxable profits, taking into
account the Group’s long-term financial and strategic plans. The disclosures
relating to deferred tax are set out in note 37: ‘Deferred tax’ of the financial
statements. The Group’s net deferred tax asset at 31 December 2019 was
£2,622 million (31 December 2018: £2,453 million).
The Committee reviewed management’s assessment of the Group’s uncertain tax
positions which took into account the views of the relevant tax authorities and any
external advice it received.
The Committee was satisfied that the provisions and disclosures made in respect of
uncertain tax positions were appropriate. The relevant disclosures are set out in note 48:
‘Contingent liabilities, commitments and guarantees’ of the financial statements.
Lloyds Banking Group Annual Report and Accounts 2019 87
Lloyds Banking Group Annual Report and Accounts 2019 87
Key issues
Committee review and conclusion
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.
Wealth
management
partnership
Determining the appropriate
accounting for certain one-
off transactions requires
management to assess the facts
and circumstances specific to
each transaction.
The Committee considered updates from management and 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 most significant assumptions were in
respect of annuitant mortality, workplace pension persistency and expenses.
The Committee was satisfied that the assumptions used to calculate the VIF asset
(2019: £5,558 million; 2018: £4,762 million) and liabilities arising from insurance contracts
and participating investment contracts (2019: £111,449 million; 2018: £98,874 million)
were appropriate. The disclosures are set out in note 25: ‘Value of in-force business’
and note 32: ‘Liabilities arising from insurance contracts and participating investment
contracts’ of the financial statements.
During 2019, the Group entered into a wealth management partnership with Schroders
plc. This involved the Group retaining a 50.1 per cent ownership interest in an entity
into which it transferred assets under management and associated advisers from its
existing business. Determining the appropriate accounting classification of the new
activities required management judgement. The Committee reviewed the accounting
proposed by management which determined that the entity should be accounted for
as a joint venture and was satisfied that this was appropriate.
The relevant disclosures are set out in note 23 of the financial statements.
IFRS 16
Leases
The Committee has discussed the
requirement of IFRS 16 which the
Group adopted on 1 January 2019.
The Committee noted that the principal impact of the standard on the Group was
to recognise property leases ‘on-balance sheet’ rather than as operating leases. The
Committee was satisfied that the disclosures made in respect of IFRS 16 in the Group’s
financial statements were appropriate.
IFRS 17
Insurance
contracts
IFRS 17 Insurance Contracts is
expected to be effective 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 received an update on the Group’s IFRS 17 implementation project,
which noted that, whilst the effective date of the standard is expected to be deferred,
the Group will broadly maintain its existing timetable for elements of the programme
that will improve processes. The Committee also noted the progress made to date
on the IT development and actuarial models. The Committee was satisfied with the
Group’s progress and its disclosure included in note 56 to the financial statements
setting out the impact of accounting standards that were not effective for the Group at
31 December 2019.
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 pages 95 to 96.
Payment Protection Insurance
The Group increased its provision for
payment protection insurance (PPI)
redress and associated administration
costs by £2,450 million in the year ended
31 December 2019, bringing the total
amount provided to £21,875 million. As in
previous years, the Committee has reviewed
management’s assumptions used to
calculate the Group’s provision.
In the lead up to the 29 August 2019 deadline
for the submission of claims (the Industry
Deadline), the Group received a significant
number of PPI Information Requests (PIRs).
Management determined that the rate at
which these enquiries convert to valid claims
was a significant judgement in 2019, with the
quality of PIRs deteriorating as the Industry
Deadline approached.
The Committee reviewed management’s
assessment that the quality of the PIRs
received in the period leading up to the
deadline was low, with about one in ten PIRs
leading to a valid claim, and its calculation
that an additional provision of £1,800 million
was required in the third quarter. At
the year end, the Committee reviewed
management’s assessment that, based on
actual experience in the fourth quarter of
2019, no further provision was required.
The overall cost associated with PPI
remains uncertain and the Committee
has considered management’s use of
sensitivities used to evaluate this uncertainty.
At 31 December 2019, for every one per
cent increase in the PIR conversion rate
on the stock at the Industry Deadline, the
Group would expect an additional charge of
approximately £100 million.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
Prior to engagement of the auditor for a
permitted service, the policy requires that
senior management confirms whether the
Committee has pre-approved the service or
specific approval is required. The total amount
of fees paid to the auditor for both audit and
non-audit related services in 2019 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 2019,
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 July 2019. 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
2019. PwC has been auditor to the
Company and the Group since 1995, and
will continue as auditor until the year ending
31 December 2020.
In October 2018, the Board, following a
tender exercise and formal review to choose
a new auditor and the recommendation of
the Committee, approved the proposed
appointment of Deloitte LLP. Subject to
shareholder approval, Deloitte LLP will
undertake the Group audit for the year ending
31 December 2021. The Company and the
Group have no plans therefore as at the date
of this report to conduct a tender exercise for
external audit services.
88 Lloyds Banking Group Annual Report and Accounts 2019
88 Lloyds Banking Group Annual Report and Accounts 2019
Audit Committee Report continued
Other significant issues
The following matters were also considered
by the Committee:
Group Internal Audit
In monitoring the activity, role and
effectiveness of the internal audit function and
their audit programme the Committee:
Risk management and
internal control systems
Full details of the internal control and
risk management systems in relation to
the financial reporting process are given
within the risk management section on
pages 129 to 187. Specific related 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.
Risk weighted assets
The Committee asked management to
prepare a summary of the Group’s end-to-
end processes to calculate its risk-weighted
assets, highlighting those areas that require
management judgement and interpretation.
Whilst no issues were identified, it was agreed
further internal assurance work would be
undertaken. The Committee also asked that
a programme of targeted external assurance
reviews be carried out; it will review the
findings from both the internal and external
reviews in 2020.
Climate-related financial disclosure
The Committee has received updates
on the Group’s plans to develop
disclosures implementing the Taskforce
on Climate-Related Financial Disclosure
recommendations by 2022 and the Group’s
proposed current year Annual Report
disclosure. Climate change disclosure will
remain an area of focus for the Committee
and it will continue to monitor its development
during the coming year.
Q1 and Q3 Interim Management
Statements (‘IMS’)
The Committee considered the processes
and format of the Company’s IMS reporting
and concluded that improvements could be
made, which resulted in simplification of IMS
reporting in Q1 and Q3 for 2019.
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
Monitored the progress of internal audit’s
coverage of key risk themes across the
Group, including Transformation and
Change, Cyber & Information Security,
Data Management and IT, Business &
Operational Resilience
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
Monitored and assessed the
independence of Group Internal Audit
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 inappropriate and
unacceptable practices, and that there is
proportionate and independent investigation
of such matters or appropriate follow up. The
Committee reported on its consideration of
whistleblowing arrangements to the Board.
The Committee also established an interim
sub-committee to consider whistleblowing
cases where allegations relate to Material Risk
Takers or Senior Managers, and to oversee
improvements being made to the Group’s
whistleblowing arrangements.
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. The Committee has received
confirmation from Deloitte, the incoming
auditor from 2021, that it is independent
of the Group as at 1 January 2020. This will
permit Deloitte to commence audit planning
activities in the first half of 2020. In January
2020, the Committee amended its non-audit
service policy to reflect revisions made by the
Financial Reporting Council to its rules and
to require Deloitte to comply with the policy.
The main change related to due diligence
services, which can no longer be provided
to the Group by either PwC or Deloitte. In
addition to detailing those services that the
Committee prohibits the external auditor
from providing to the Group, the policy pre-
approves certain services provided the fee is
below a threshold; all other permitted services
must be specifically approved in advance by
the Committee.
Board Risk Committee report
Lloyds Banking Group Annual Report and Accounts 2019 89
Lloyds Banking Group Annual Report and Accounts 2019 89
The Group’s resilience,
through strategic
change and continually
emerging risks, has been
a core consideration.
Alan Dickinson
Chairman, Board Risk Committee
Dear Shareholder
I am pleased to report on how the Board Risk
Committee (the ‘Committee‘) has discharged
its responsibilities throughout 2019.
During the year, the Committee again focused
on a wide range of existing and emerging
risks, using dedicated sub-committees and
effective planning of the agenda to ensure
that focus and attention was given to those
risks which were considered to be of ongoing
importance to the Group and its customers.
The environment within which the Group
operates remained subject to continually
evolving risks with considerable degrees of
change and uncertainty.
The Committee was concerned to oversee
the successful delivery of significant regulatory
change such as the embedding of ring-
fenced banking, data risk and operational
resilience. Operational resilience has been
elevated to a primary risk category along with
change and execution risk, recognising the
extensive Group strategic change agenda.
The Committee was pleased to see that good
progress was made with the management
of customer rectifications. The Committee
also focused very closely on conduct risks
and, in particular, the Group’s management
of customers in financial difficulty, including
implementation of a revised operating model
to improve customer outcomes. Each of these
areas will be subject to ongoing focus in 2020.
Other areas of focus for the year ahead will
include continued improvements in the
Group’s treatment of vulnerable customers,
fraud and financial crime, consumer
indebtedness, and continually evolving
risks within IT and cyber – as part of the
broader operational resilience agenda. The
Committee will again consider impacts on
the Group’s broader risk profiles arising
from delivery of the strategic change
agenda. Inevitably, the external environment
continues to provide challenges and potential
impacts for the Group’s risk profile which the
Committee continues to closely monitor.
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
support the Group in achieving its core aim
of operating as a digitised, simple, low risk
provider of financial services.
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 129 to 187. 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
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 2020 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 70.
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 2019, 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. The Committee receives regular
updates from the Lloyds Bank Corporate
Markets and Insurance business sub-groups,
which summarise the key discussions and
decisions taken at the relevant entities’ risk
committees. 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.
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90 Lloyds Banking Group Annual Report and Accounts 2019
90 Lloyds Banking Group Annual Report and Accounts 2019
Board Risk Committee report continued
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.
CiFD
The Committee continues
to focus closely on the
Group’s management
of conduct risks and
issues associated
with customers in
financial difficulty.
Throughout 2019 the Committee has considered reports on the Group’s Rectifications
portfolio performance, with particular interest in reducing the number of customers with
outstanding remediations. The Committee has noted continued progress in the pace and
quality of remediations, delivering a reduction in the number of customers awaiting redress
and improvements in 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 in 2020.
During 2019, the Committee considered reports on the ongoing activity to improve the way we
support customers experiencing financial difficulty.
The Committee held a deep dive into financial difficulty cases to provide deeper insight into
root cause analysis and the actions being taken to improve customer outcomes. Other key focus
areas included the initiatives being delivered and progressed through the Financial Wellbeing
lab and implementation of a revised operating model to improve outcomes.
The Committee also noted the impact of a potential economic downturn and new regulatory
requirements such as Persistent Debt.
Conclusion: Whilst progress has been made, further improvement in the Group’s treatment of
customers in financial difficulty will be a key focus area in 2020.
The Committee continues
to focus on ensuring
the Group is resolving
customer complaints in
a timely and fair manner
and eradicating the
causes for complaints.
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 via
Board Risk Appetites and quality as measured by the Financial Ombudsman Service.
Conclusion: The Group continues to make good progress in reducing the causes for customer
complaints however focus needs to remain on reducing the time taken to resolve complaints in
2020 and to learn from root cause analysis.
Complaints
Vulnerability
Vulnerable customers
represent a significant
proportion of the
Group’s customer
base and continue to
be an area of close
focus with increasing
regulatory focus.
Climate
change
During the year the
Committee has increased
focus on climate change,
sustainability and the
potential impact to the
Group and impact on
our customers.
The Committee recognises the importance of the Group’s vulnerability strategy in delivering
customer outcomes, against a backdrop of increasing regulatory focus and noted the Group’s
response to the FCA’s consultation on Vulnerable Customers, considering the potential impact
on the Group’s strategy going forward.
The Committee considered the progress that continues to be made to implement the Group’s
vulnerability strategy, and the enhancements made to support the embedding of regulatory
Framework and Guidance.
The Committee noted the actions in train, including defining solutions to allow vulnerability
information to be recorded and shared, the continued development of vulnerability dashboards
and enhancements to the control framework along with the proposals for an enhanced
approach to investment prioritisation for vulnerability initiatives.
Conclusion: The Committee recognise the importance of this subject and the increasing
regulatory focus. It will continue to require ongoing focus and investment to execute the
Group’s strategy in relation to vulnerable customers and meet external expectations.
Climate change and sustainability have been added as top areas of ongoing focus and the
Committee has increased consideration of the risks that may arise.
The Group is committed to delivering Taskforce on Climate-related Financial Disclosure
Recommendations (TCFD) and is working to ensure that regulatory expectations with regards
to managing the financial risks arising from climate change are met. A proactive approach is
required to continue to anticipate the sustainability impact on client’s business models.
Conclusion: The Committee will continue to closely monitor climate change and sustainability
risks, looking at the impact on both the Group and our customers, and the delivery of TCFD and
other commitments.
Financial risk – covering Credit and Market risk
Commercial
credit quality
The Committee
continues to review the
Commercial lending
portfolio through regular
credit quality update
papers, including reviews
of key portfolio and
sector trends observed
and external threats to
portfolio performance.
Detailed reviews allowed the Committee to assess the overall quality of the portfolio and new
business written. Risk levels and credit exposure, including to material individual names, were
monitored with reference to management information and risk appetite limits, as appropriate.
Key sector concentrations, including commercial real estate and the funds business, as well
as those sectors more vulnerable to the wider economic backdrop or structural change, were
also examined in greater detail, including construction, manufacturing and consumer related
sectors, such as retail. Specific consideration was also given to the automotive sector, which
continues to face into disruptors such as new technologies and changing consumer behaviours.
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 broadly 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.
Lloyds Banking Group Annual Report and Accounts 2019 91
Lloyds Banking Group Annual Report and Accounts 2019 91
Key issues
Committee review and conclusion
Customer
indebtedness
The Committee reviewed
the risks relating to retail
lending indebtedness.
Consideration was given to the Group’s lending controls, risk appetite monitoring and new
lending indebtedness risk for the consumer unsecured, motor, retail secured and buy-to-let
portfolios.
Operational risk
Operational
resilience
Data risk
People risk
Operational resilience is
one of the Group’s most
important non-financial
risks. Key focus in 2019
has been to continue
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.
The Committee continues
to focus on data
governance, privacy and
data ethics risks including
oversight of the Group’s
compliance with the
General Data Protection
Regulation (GDPR),
and the associated risks
and controls.
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.
The Committee noted that lending controls, risks appetite metrics and segmented reporting
for both indebtedness and affordability assessments are in place, and acknowledged the
Group’s continued actions closely to monitor and control higher risk and marginal indebtedness
segments and reduce exposure over time. The Committee reviewed management action
which had also been taken within retail secured lending, including buy-to-let, to protect against
contagion risk from growth in consumer debt levels, and to ensure that customers’ finances
were resilient to stress.
Conclusion: The Committee was satisfied that the 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.
Key areas of focus for the Committee have included updates on the Group’s operational
resilience programmes, progress against the operational resilience strategy and continued
regulatory engagement in advance of the publication of Bank of England’s consultation paper.
Given the significance of the risk to the Group, the Committee is supported by the IT and
Cyber Advisory Forum specifically focused on IT and cyber risks. The Committee has reviewed
papers relating to Group operational resilience investment, proposals for considering Impact
Tolerances and Advanced Intrusion Testing.
Conclusion: In 2019, operational resilience was classified as a primary risk. The Committee
takes the operational resilience of its services very seriously and has drawn valuable insight from
having independent advice and guidance. It has agreed risk appetite statements for critical
services and will continue to strengthen these 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.
Data risk continues to be an area of significant regulatory and media attention. The Committee
has remained focused on ensuring effective controls are in place regarding the governance,
privacy, ethics and management of our customers’ data. Third party oversight controls continue
to embed and mature following the successful implementation of GDPR. Compliance with
the principles of the Basel Committee of Banking Supervision (BCBS) also remains a key area
of focus.
Conclusion: The Group continues to enhance the controls required to identify and manage
data risk.
Throughout 2019, the Committee has continued to focus on the People risk profile, recognising
the challenges faced with successfully delivering the Group’s strategic agenda, alongside the
regulatory change agenda. The Group recognises the increasing demands on colleagues
and is focusing on the ongoing monitoring of colleague wellbeing and engagement, and
on developing colleague skills to achieve capability enhancement for a digital era. Particular
consideration is given to critical populations and high performing individuals to support the
Group’s core commitments. The Group has also made significant progress in evolving and
refining the compliance control environment for the Senior Manager and Certification Regime
(SMCR) and delivery of the SMCR extension was completed in 2019.
Conclusion: Regular monitoring continues to confirm that the People risk profile is managed
effectively. The Committee ensures the necessary risk oversight as the Group continues to
deliver simplified colleague processes and maximises colleague skills and potential to achieve
the workforce of the future.
Change and
execution risk
The Committee continues
to focus on the risks
associated with delivery
and embedding of
an extensive strategic
change agenda, including
both discretionary and
regulatory change.
The Committee continues to focus on the risks associated with the extensive Group strategic
change agenda, recognising the challenges faced in ensuring both successful delivery and
embedding of change.
Change and execution risk has been elevated to a primary risk category to recognise the risk
attached to the delivery of GSR3 and its impact on the enterprise wide risk profile.
The Group has matured in its ability to define, measure and report execution risk. The
articulation and quantification of this risk continues to embed through regular reviews of the
execution risk dashboard and its metrics, as well as the implementation of the change and
execution risk library.
An area of focus has been on increasing understanding of the wider risk impacts of the initiatives
that are driving investment funding decisions and the impact of GSR3 on the Group’s risk profile.
For instance, as GSR3 is transforming both ways of working and colleague journeys, there is a
deeper understanding of the impact of those changes on People risk.
The Group continues to increase its use of agile delivery approaches and tools and our change
oversight has been reviewed and refreshed to support this.
Conclusion: Change and execution risk will remain an area of focus for the Committee as the
Group continues to increase its understanding of the change and execution risk associated with
our transformation agenda and evolve its change delivery approaches. Further focus is required
fully to reflect the enterprise wide impacts of our strategic agenda into business risk profiles and
to leverage this awareness in key investment funding decisions.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
92 Lloyds Banking Group Annual Report and Accounts 2019
92 Lloyds Banking Group Annual Report and Accounts 2019
Board Risk Committee report continued
Key issues
Committee review and conclusion
Macroeconomic
environment
EU Exit
planning
Money
laundering
Fraud
The Committee
continues to consider
key economic
and political risks,
particularly given the
increasingly uncertain
outlook.
Negotiations continue
to determine the final
terms of the UK’s exit
from the EU.
The prolonged
uncertainty regarding
the options, timing
and the process itself
could affect the outlook
for the UK and global
economy.
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 continued
legislative change and
regulatory scrutiny.
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 continues to consider key economic and political risks. Consideration is focused on
risks that may impact the Group’s central economics forecast that is incorporated into the Group’s four
year operating plan. Continuation of the current global trade tensions, deterioration in the UK property
market or UK productivity, or a global economic slowdown and low (or negative) interest rates could
have an adverse impact on profitability, capital generation and the Group’s credit risk profile.
Conclusion: The Committee will continue to closely monitor risks arising from economic
uncertainty. The Committee will also focus on risks emerging due to slower economic growth and
political challenges, as well as risks from wider global events.
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
continue to operate in line with current practice across borders.
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, operational impacts for the Group, as well
as the cyber, physical security and fraud risks, and the continued support of our customers.
Conclusion: The Group’s EU exit contingency plans continue to be closely monitored by
the Committee via specific regular updates, covering both operational status and external
developments, a suite of early warning indicators and corresponding risk mitigation plans.
The Committee acknowledged the continued focus the Group places on the fight against
financial crime and is playing an active part in developing and delivering on the strategic aims
of HM Government’s Economic Crime Reform programme, including designing and delivering
improvements in the UK SARs (Suspicious Activity Reporting) regime. This is a multi-year programme
delivering through a private and public partnership, and for which the Group is represented by the
Chief Operating Officer attending the Home Office’s Economic Crime Strategic Board.
The Committee also recognised significant strengthening of the Group’s intelligence capability
to inform assessment of risk, for example the work to understand exposure to allegations of
money laundering through Baltic banks; and cash-based money laundering through instant
deposit machines.
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. Additionally, the Committee acknowledged the strategic plans in
place to further enhance and digitise the Group’s financial crime control framework, designed to
deliver more effective and agile controls whilst improving the customer experience.
The Committee considered the challenging and evolving nature of the fraud risk environment
influenced by factors such as an increasing sophistication of fraud typologies and an uplift
in industry reported gross fraud losses. The Committee noted the correlated impact on the
Group’s gross authorised fraud losses albeit our market share remains below our market share of
transactions. Gross unauthorised fraud losses at both Industry and Group level rose during 2019.
However, they remain within Group appetite and the Group’s net losses remain stable year on year
on a like-for-like basis.
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 was implemented
in May 2019 and the Group has demonstrated compliance and good customer outcomes. Some
operational improvements, expectations from the Financial Ombudsman’s Service regarding the
provision of warnings and the issue of funding cases where neither the financial institution nor the
customer is to blame continue to be addressed.
Conclusion: The Committee noted the positive work undertaken in the detection and prevention
of fraud and recognised the continuing efforts of the Group to protect the integrity of genuine
customer journeys with strategic plans aimed at enhancing the fraud control environment of the
Group which reflect the comprehensive nature of the challenge and require internal evolution and
external engagements.
Regular reporting categories
Regulatory
and legal risk
Managing regulatory
risk continues to be a
key focus within the
Group due to the
significant amount
of highly complex
and interdependent
regulatory reform that
we have managed in
2019, and will continue
to manage in 2020.
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 regulatory and
legal risks. There have been ongoing significant regulatory change and oversight programmes
in which the Board has placed increased focus to ensure successful execution, including the
Basel Committee on Banking Supervision (BCBS 239), IBOR Transition, EU Exit, product pricing,
customers in financial difficulty, HBOS Reading and climate change.
In addition, a key area of focus for the Committee has been ensuring ring-fencing requirements
have been fully embedded and the Committee has operated in line with its commitments to
the PRA and continued to demonstrate independent decision making for the ring-fenced bank.
Key topics have included reviews of the ring-fenced bank perimeter, management of legal entity
conflicts and governance.
Conclusion: The Group continues to place significant focus on implementing complex regulatory
changes, as well as ensuring effective horizon scanning of upcoming trends. The Committee
has discussed the topics raised, and will continue to closely monitor compliance with regulatory
requirements, including ring-fencing in 2020. Regulatory risk will remain a priority area of focus for
the Committee in 2020.
Responsible Business Committee report
Lloyds Banking Group Annual Report and Accounts 2019 93
Lloyds Banking Group Annual Report and Accounts 2019 93
We have a responsibility
to help address some
of the challenges faced
by the UK. We manage
this through our Helping
Britain Prosper Plan.
Sara Weller CBE
Chairman, Responsible Business Committee
Dear Shareholder
I am pleased to report on the activity of
the Responsible Business Committee (the
‘Committee’), during a busy 2019.
The Committee continues to oversee and
track progress against the Group’s Helping
Britain Prosper Plan, including reviewing
performance against strategic aims, focusing
on digital skills, sustainability and our
Charitable Foundations.
The Group made good progress against
targets in the Helping Britain Prosper Plan.
Some examples, set out later on this page,
include the launch of a unique Resilience
portal to support colleagues mental health.
The Group was recognised by Fortune
magazine as a leading business worldwide
for its work on both sustainability and
mental health.
The Group continued to support its UK-wide
Charitable Foundations, showcasing the work
they do, including with domestic abuse and
mental health charities.
The Committee regularly reviewed
progress on our aim to have more women
in senior roles. It also discussed the Group’s
opportunity and plans to advance the
representation of colleagues from BAME
backgrounds at all levels.
I would like to thank the thousands of
colleagues across the entire Group for their
hard work and extraordinary commitment to
supporting Responsible Business activity in
their daily work, as well as by volunteering over
246,000 hours of their time and helping to
raise over £11 million to date for our charity of
the year, Mental Health UK.
The following report gives more examples
of our activity to Help Britain Prosper in
2019. I hope you find it both interesting
and informative.
Sara Weller
Chairman, Responsible Business Committee
How the Committee
spent its time in 2019
The Committee continued to focus on the
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 The programme was
reviewed regularly, with updates on the
direction of and progress with the Lloyds
Bank Academy which successfully launched
a second location in Bristol. The Committee
also considered ‘future.now’ launched
by the Lord Mayor of London, bringing
together organisations to boost digital skills
in the UK
The Group’s Sustainability strategy made
consistent progress in 2019. A number
of targets were achieved ahead of plan
such as the EV1000 initiative of supporting
1,000 electric vehicles which was achieved
during the third quarter of 2019. The
Committee continues to present challenge
on the Group’s strategy of developing
new products and strategies to help and
support customers in a sustainable way.
The Company’s sustainability strategy is
available on the Group’s website
www.lloydsbankinggroup.com/our-group/
responsible-business
The relationship between the Group
and the Charitable Foundations is a
key area of focus and the Group worked
closely with the Foundations to showcase
the work they do. The Committee
continues to review the work done to
support the Charitable Foundations
work in the charitable sector through
strengthening skills-based volunteering
across their-supported charities
In other activities, the Committee undertook
an in-depth review of Inclusion and
Diversity within the Group, focusing on
BAME colleagues. This demonstrated some
of the Group’s strengths and uniqueness but
also identified opportunities to strengthen
further its approach to attracting and
developing talent. The Committee looked
closely at progress on mental health and
resilience in conjunction with the launch
of a Resilience portal for colleagues.
This highlighted scientific research into
human behaviours provided by medical
professionals based on clinical data.
The Committee will continue to discuss and
monitor the effectiveness of the portal.
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 from page 27. This
contains further information on the activities
which the Committee keeps under review.
Committee purpose
and operation
The Committee supports 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 embedding responsible business as
part of the Group’s purpose to Help Britain
Prosper. This Committee provides oversight
and challenge on activities which impact
the Group’s trust and reputation and by
considering and recommending to the Board
for approval the Responsible Business Report
and Helping Britain Prosper Plan.
The Committee’s Chair 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
The Committee is composed of
Non-Executive Directors.
Representatives from Group Internal Audit
and the Chief Operating Office attend
meetings as appropriate.
During the year, the Committee met
its key objectives and carried out its
responsibilities effectively, as confirmed
by the annual effectiveness review. The
Committee will consider the output from
the 2019 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 70.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
94 Lloyds Banking Group Annual Report and Accounts 2019
94 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ report
Corporate governance statement
The Corporate Governance report found on pages 65 to 93 together
with the discussion of the composition of the Remuneration Committee
on page 114 and this Directors’ report, which form part of the Corporate
Governance Report, 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 2019 of £4,393 million
(2018: £5,960 million). The Directors have recommended a final dividend
for 2019, which is subject to approval by the shareholders at the AGM, of
2.25 pence per share totalling £1,586 million. The final dividend will be
paid on 27 May 2020.
The final dividend in respect of 2018 of 2.14 pence per ordinary share
was paid to shareholders on 21 May 2019, and an interim dividend for
2019 of 1.12 pence per ordinary share was paid on 13 September 2019;
these dividends totalled £2.312 billion. Further information on dividends
is shown in note 45 on page 268 and is incorporated by reference.
Appointment and retirement of Directors
The appointment and retirement of Directors is governed by the
Company’s articles of association, the UK Corporate Governance Code
and the Companies Act 2006. The Company’s articles of association
may only be amended by a special resolution of the shareholders in a
general meeting.
William Chalmers and Sarah Legg have been appointed to the
Board since the 2019 AGM and will therefore stand for election at the
forthcoming AGM, together with Catherine Woods, who, as announced
in October 2019, will join the Board on 1 March 2020. Anita Frew
will retire at the 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 66 to 67. 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 2019 up to the
date of this report are shown in the table below:
Joined the Board
Left the Board
William Chalmers
George Culmer
Sarah Legg
1 August 2019
1 December 2019
1 August 2019
Directors’ and Officers’ liability insurance
Throughout 2019 the Group had appropriate insurance cover in place
to protect Directors, including the Director who retired during the year,
from liabilities that may arise against them personally in connection with
the performance of their role.
As well as insurance cover, the Group agrees to indemnify the Directors
to the maximum extent permitted by law. Further information on
the Group’s indemnity arrangements is provided in the Directors’
indemnities section.
Capital Requirements (Country-by-Country
Reporting)
As required under the Capital Requirements (Country-by-Country
Reporting) Regulations 2013, the Group’s related disclosures may
be found online, at www.lloydsbankinggroup.com/globalassets/
documents/investors/2018/2018_lbg_crdiv_country_by_country_
disclosures.pdf
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 Directors appointed
in 2019. 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 2019
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.
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.
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 2019 AGM. Shareholders
will be asked to renew these authorities at the 2020 AGM. The authority
in respect of purchase of the Company’s ordinary shares is limited to
7,124,228,884 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 2019 AGM circular.
The Company undertook an ordinary share buyback programme, which
was launched on 1 March 2019, until it was cancelled in September 2019
as a result of the additional PPI charges announced in September. The
programme repurchased in aggregate 1,886,917,377 ordinary shares for
an aggregate consideration of c.£1.1 billion (aggregate nominal value
of the ordinary shares £188,691,737.70) as a means by which to return
capital to shareholders, given the amount of surplus capital. The 2019
ordinary share buyback also assisted in the normalisation of ordinary
dividends. All of the repurchased ordinary shares were cancelled, and
together represented 2.69 per cent of the called up share capital of
the Company at completion of the programme. Further information
in relation to the 2019 ordinary share buyback programme is provided
on page 63.
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.
Lloyds Banking Group Annual Report and Accounts 2019 95
Lloyds Banking Group Annual Report and Accounts 2019 95
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 2019, the Company had been notified by its
substantial shareholders under Rule 5 of the DTR of the following
interests in the Company’s shares:
% of issued share capital with
rights to vote in all circumstances at
general meetings1
5.14%
4.99%
Branches
The Group provides a wide range of banking and financial services
through branches and offices in the UK and overseas.
BlackRock Inc.
Harris Associates L.P.
Interest in shares
3,668,756,7652
3,551,514,5713
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 20191
Directors’
emoluments
Internal control
and financial risk
management
Financial reporting risk
Risk management
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
Supporting people with
disabilities
Engagement with colleagues
Engagement with customers,
suppliers and others
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
36 to 39
268
66 to 67
66 to 67
98 to 128
131
129 to 187
275 to 286 and
289 to 314
2 to 46
34
22
20 to 27
271 to 272
268
45 and 175 to
180
166 to 175
263
263
263
1 George Culmer also served as a director during the year, retiring from the Company on
1 August 2019.
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 2020,
which identifies beneficial ownership of 4,698,292,748 shares in the Company representing
6.7 per cent of the issued share capital in the Company. This variance is attributable to
different notification and disclosure requirements between these regulatory regimes.
3 An indirect holding.
No further notifications have been received under Rule 5 of the DTR
as at the date of this report.
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
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 2020 to
2023 inclusive
In particular, the assessment included consideration of the impact of the
UK’s exit from the EU on the economy and on the regulatory agenda,
and the implications of alternative interest rate scenarios given volatility
in interest rate markets.
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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
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. 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 and
purchase of electricity for own use, calculated using both the location
and market based methodologies. Reported Scope 3 emissions relate
to business travel and commuting undertaken by colleagues and
emissions associated with waste and the extraction and distribution
of each of our energy sources; electricity, gas and oil. In 2019 we have
expanded Scope 3 emissions as part of our sustainability strategy to
increase transparency of reporting of our carbon footprint, and to drive
reductions in additional categories of emissions; these include Waste
Emissions, Upstream Business Travel (the well to tank emissions of rail, air,
road vehicles, hired vehicles); Hotels; Commuting; Tube; Taxis. A detailed
definition of these emissions can be found in our 2019 Reporting Criteria
online at www.lloydsbankinggroup.com/our-group/responsible-business
Intensity ratio
Legacy
GHG emissions (CO2e) per £m of
underlying income (Location Based)1
GHG emissions (CO2e) per £m of
underlying income (Market Based)1
Expanded
GHG emissions (CO2e) per £m of
underlying income (Location Based) –
expanded scope2
GHG emissions (CO2e) per £m of
underlying income (Market Based) –
expanded scope2
Oct 2018 –
Sept 2019
Oct 2017 –
Sept 2018
Oct 2016 –
Sept 2017
11.5
13.0
5.6
6.2
15.5
16.4
Oct 2018 –
Sept 2019
Oct 2017 –
Sept 2018
Oct 2016 –
Sept 2017
15.8
17.3
9.9
10.5
–
–
1 Intensities have been restated for 2016-2017 and 2017-2018 to reflect changes to emissions
data only, replacing estimated data with actuals; underlying income figures for those years
have not changed.
2 Scope 3 emissions have been expanded to include additional elements within the Group’s
own operations including emissions from waste, colleague commuting and additional
elements of business travel (including taxis, tube, well to tank emissions of business travel
and hotels). We have disclosed these figures parallel to legacy scope numbers to allow fairer
comparison to numbers previously disclosed and to demonstrate performance versus our
previous targets.
This year, our overall location based carbon emissions were
207,768 tCO2e; a 14.6 per cent decrease since 2018 and 63.1 per cent
decrease against our 2009 baseline (legacy scope). Reductions achieved
are attributable to an extensive energy optimisation programme and
reductions in business travel, alongside decarbonisation of the UK
electricity grid. In addition, there has been a reduction in property
footprint and headcount.
Our market based emissions figure is equal to 101,042 tCO2e – a
comparative decrease of 12.9 per cent year on year and 82.0 per cent
decrease against 2009 baseline. Further reductions in market emissions
are attributable to the purchase of renewable energy certificates
for each of our operations outside of the UK equivalent to their
consumption since January 2019. We continue to source solar, wind
hydro and biomass Renewable Energy Guarantees of Origin (REGOs)
equivalent to our total UK electricity consumption.
96 Lloyds Banking Group Annual Report and Accounts 2019
96 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ report continued
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 79, is taken into account. Further
information on stress testing and reverse stress testing is provided on
page 137 to 138
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 leaving 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 2
to 46
Emerging risks are disclosed on pages 133 to 134
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 129 to 187
The Group’s approach to stress testing and reverse stress testing,
including both regulatory and internal stresses, is described on
page 137 to 138
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 2022.
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 45 and pages 175 to 180 and capital position on pages 166 to 175.
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.
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 table
below. Deloitte LLP has provided limited level ISAE 3000 (revised) and
3410 (ISAE 3410) assurance over selected non-financial indicators as
noted by
online at
www.lloydsbankinggroup.com/our-group/responsible-business
. Their full, independent assurance statement is available
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 2018 to 30 September 2019, which is different to
that of our Directors’ report (January 2019 – December 2019). This is in
Lloyds Banking Group Annual Report and Accounts 2019 97
Lloyds Banking Group Annual Report and Accounts 2019 97
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/investors/financial-performance. 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 66 to 67 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
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
the Group together with a description of the principal risks and
uncertainties 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
Kate Cheetham, Company Secretary
19 February 2020
Lloyds Banking Group plc
Registered in Scotland, No. SC095000
CO2E emissions (tonnes) – Expanded scope
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 32
Oct 2018 –
Sept 2019
Oct 2017 –
Sept 20181
Oct 2016 –
Sep 20171
179,324
286,051
47,524
387
107,113
131,414
197,484
324,816
49,299
1,951
129,284
146,233
n/a
n/a
51,935
178,711
162,598
n/a
CO2E emissions (tonnes) – Legacy scope
CO2E Emissions Tonnes:
Total CO2e (market based)
Total CO2e (location based)
Total Scope 32
Oct 2018 –
Sept 2019
Oct 2017 –
Sept 20181
Oct 2016 –
Sept 20171
101,042
207,768
53,131
115,961
243,293
64,710
303,065
286,892
72,876
1 Restated 2018/2017 and 2017/2016 emissions data to improve the accuracy of reporting,
using actual data to replace estimates.
Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard (2004) including
revised Scope 2 guidance (2015) which discloses 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 available online at
www.lloydsbankinggroup.com/our-group/responsible-business
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.
2 Scope 3 emissions have been expanded to include additional elements within the Group’s
own operations including emissions from waste, colleague commuting and additional
elements of business travel (including taxis, tube, well to tank emissions of business travel
and hotels). We have also disclosed legacy scope numbers to allow fairer comparison to
numbers previously disclosed and to demonstrate performance versus our previous targets.
Indicator is subject to Limited ISAE 3000 (revised) and 3410 (ISAE 3410) assurance by
Deloitte LLP for the 2019 Annual Responsible Business Reporting. Deloitte’s 2019
assurance statement and the 2019 Reporting Criteria are available online at www.
lloydsbankinggroup.com/our-group/responsible-business
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 imported heat, steam or imported 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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
98 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report
Remuneration Committee Chairman’s statement
Our latest policy provides direct
alignment between remuneration
and the purpose of the Group, and
is designed to be fair and consistent.
We have thought carefully about the
simplest and clearest way to reward
the right behaviours and outcomes.
Stuart Sinclair
Chairman, Remuneration Committee
In November 2019, we announced our
decision, subject to AGM approval, to reduce
pension allowances for Executive Directors
to 15 per cent of salary in a single step in 2020
with no offsetting adjustment in salary or
other remuneration.
We are also making improvements to
pensions for all the 50,000 colleagues who
participate in Defined Contribution (DC)
arrangements (the majority of our workforce)
to make all members eligible for a maximum
employer contribution of 15 per cent, and to
increase the employer contribution for our
lower paid colleagues by one per cent.
This represents a significant investment
of approximately £20 million per annum
in our colleagues and aligns the employer
contributions available to the wider workforce
with those of Executive Directors. At the same
time, the Group supports the third largest
private sector defined benefit (DB) scheme
accruing benefits for a further 16,000 current
colleagues.
We have listened to feedback and the external
sentiment around executive remuneration.
Some of the sentiments that resonated with
me and my Committee were that executive
remuneration should be re-evaluated in the
context of colleagues as a whole; be truly
variable, and not managed within a ‘corridor’
without being closely aligned with outcomes.
We have tackled these sentiments head
on with our proposals in the new Policy by
reducing the new maximum opportunity for
Executive Directors and by demonstrating
with this year’s outcomes that performance
and conduct do have material consequences,
resulting in lower total remuneration.
Our new Policy
In approaching the refresh of the Directors’
Remuneration Policy, my committee
colleagues and I thought carefully about what
behaviours and outcomes we wanted to see
and how the remuneration structure could
support them. We approached the review
with the following core aims:
Purpose
Behaviours
Simplicity
Clarity
Remuneration should be linked
to the Group’s purpose of
Helping Britain Prosper
Remuneration should reward
and drive the right behaviours
and outcomes and reflect both
strategic (non-financial) and
financial achievements
Remuneration should be
designed in a manner that is
clear for all stakeholders and
reflects their expectations
Remuneration should be
easy to explain and be
viewed as fair
It was with these objectives in mind that we
designed the new Policy detailed on page
115 and summarised on page 100. The key
headlines are as follows:
The maximum pension allowance
for Executive Directors is reduced to
15 per cent of salary
We are introducing a new long-term
variable reward plan to align pay more
closely to our business model of producing
sustainable long-term returns
As a result of the new Policy, the Group
Chief Executive’s fixed pay will reduce
by 8 per cent and his maximum total
remuneration opportunity by 29 per cent
Given the feedback we have received, we
hope you will support the aims and the
methods we outline, and vote accordingly at
the AGM in May.
Remuneration Content
Chairman’s statement and
remuneration policy overview
pages 98 to 102
Annual report on remuneration
pages 103 to 114
2020 Remuneration Policy
pages 115 to 123
Other remuneration disclosures
(Pillar III reporting)
pages 124 to 128
Dear Shareholder
On behalf of the Board I am pleased to
present the Directors’ Remuneration Report
for the year ended 31 December 2019 and
the proposed Directors’ Remuneration Policy
(our Policy) for which we are seeking your
support and approval at our Annual General
Meeting in May 2020.
Our upcoming AGM marks the beginning of
our next remuneration policy cycle, which will
run until the end of 2022. This offered the
opportunity to take a fresh look at how
we incentivise and reward our colleagues,
and what values and outcomes we wish
to encourage.
The timing coincided with a great deal of
public interest in matters of executive pay,
fairness, employee engagement and the pay
gap between those at the top of organisations
compared to other colleagues. We have
been active participants in these discussions,
through meetings with shareholders, our
unions, the Investment Association and some
members of Parliament, as well as through an
open dialogue with colleagues on a variety
of topics related to their pay and benefits.
These talks have had a material impact on
the priorities and recommendations of the
Remuneration Committee throughout the last
year. In the pages which follow, the proposals
which have emerged from these discussions
are laid out in detail.
While we were pleased to receive over
90 per cent support for our Annual Report on
Remuneration at the AGM in 2019, we heard
during that process a continued desire for
greater simplicity and transparency in our
approach. To that end, we started to make
changes early in 2019, without waiting for our
full redesign to be finalised.
Group performance and
variable remuneration
For 2019, the performance of the Group
was resilient in a challenging and uncertain
economic environment. Despite a softening
of margins and income, continued discipline
in operating costs enabled the Group to
maintain its significant investment in digitising
and transforming the way we support
customers, as well as to pay an increased
dividend to shareholders. Financial results
were however heavily impacted by the
PPI provision of £2.45 billion; therefore a
significant downward adjustment was made to
the Group Performance Share pool to reflect
this along with other conduct-related costs.
The final 2019 Group Performance Share
pool is £310.1 million, which is a reduction of
33 per cent compared to 2018. The vesting
of the 2017 Executive Group Ownership
Share was similarly affected by financial
performance and shareholder returns, with a
formulaic vesting outcome of 49.7 per cent.
No discretion was used to change the
vesting outcome.
The performance and strategic progress
of the Group was however overshadowed
by significant non-financial conduct issues
during the latter part of the year, not least the
findings of Sir Ross Cranston’s review into how
the Group has treated customers who were
the victims of the HBOS Reading fraud. These
issues are reflected in the variable reward
outcomes for Executive Directors.
Executive Director variable
rewards decisions
As a result of the overall performance of the
Group and the issues faced during 2019, the
Group Chief Executive and Chief Operating
Officer independently requested that they
be withdrawn from consideration for Group
Performance Share awards for 2019. The
Committee exercised its discretion to accept
this request and welcomed the judgement
shown in volunteering it as a consequence of
the non-financial conduct issues mentioned
above. No downward adjustment has been
made to the overall Group Performance Share
pool as a result of these individual decisions,
which was therefore distributed to other
colleagues outside the executive team.
For the newly appointed Chief Financial
Officer, overall performance for 2019 was
assessed at 3.12 out of 5 with a corresponding
Group Performance Share award of £195,528.
An award of 250 per cent of salary will be
awarded under the final Executive Group
Ownership Share to the Group Chief
Executive and 237.5 per cent for Chief
Financial Officer. No Group Ownership Share
award is being made to the Chief Operating
Officer who has announced his retirement.
Further details of awards are provided on
pages 105 and 111.
Lloyds Banking Group Annual Report and Accounts 2019 99
Executive Director total remuneration outcomes
The information below summarises Executive Director remuneration for the 2018 and 2019
performance years. Full details are provided in the Single total figure of remuneration table on
page 103.
Director
António Horta Osório Group Chief Executive
Juan Colombás Chief Operating Officer
2018
2019
£6.54m
£4.73m
£3.42m
£2.58m
William Chalmers Chief Financial Officer 1 Aug 2019
–
£5.14m
George Culmer Former Chief Financial Officer 1 Jan-1 Aug 2019 £3.43m
£1.95m
28%
25%
–
–
How we have responded to your feedback
Executive remuneration should be
re-evaluated in the context of colleagues
as a whole.
The proposed Policy for 2020 reduces
the maximum total compensation
opportunity for the Group Chief
Executive by 29 per cent
The Group Chief Executive's pension
reduced from 46 per cent to 33 per cent
of salary in 2018 and will now be
15 per cent with effect from 2020,
a decrease of 67 per cent from 2018
to 2020
The ratio of CEO pay to the medium
employee has reduced by 24 per cent
between 2018 and 2019
We are very focused on addressing the
pay gap from the bottom up and not
just from the top down, in other words,
by taking action to increase pay and
pensions for more junior colleagues
In 2019 we have continued our
commitment for pay progression
with higher pay awards for lower paid
colleagues and colleagues paid lower
within their pay range
The pay budget for colleagues this
year is 2.4 per cent, above the budget
of 2 per cent for executives and we
will once again make an award of free
shares worth £200 to every permanent
colleague in the Group. All these actions
are intended to reduce the gap between
executives and the wider workforce
Variable pay should be truly variable and
not managed within a corridor without
being closely aligned with outcomes.
The Balanced Scorecard is made up
of an appropriate balance of financial
and non-financial measures. Targets are
determined at the beginning of the year
and my Committee and I discuss them
thoroughly to ensure they are stretching
Together with my Committee members,
I look forward to hearing your views on the
remuneration arrangements outlined in the
report and we hope the new Policy alongside
the resolutions relating to remuneration will
receive your support at the upcoming AGM.
When determining reward outcomes,
other factors outside of the scorecard
are considered. Scores directly correlate
to reward outcomes and, as can be seen
with this year’s awards, there is clear pay
for performance alignment
GPS award outcomes for 2019 show that
award outcomes are truly variable and
that the structure of the plan ensures that
performance and conduct will have a
direct impact on remuneration
Your remuneration structure
is overly complex
We recognise that our process for
determining short-term variable (GPS)
outcomes has been perceived to be
complex and the link between pay and
performance is not easily understood
We have taken steps to reduce
complexity through reducing the
number of measures in our Group
Balanced Scorecard from 20 to 15
grouped under three equally weighted
areas for 2019 and 2020. We believe
this provides the optimum breadth of
measures for a large and complex Group
We’ve focused on simplifying the
allocation to our overall Group
Performance Share pool by agreeing to
use a fixed 5 per cent of underlying profit
as the starting position. The Committee
will retain discretion to ensure that 5 per
cent remains appropriate
To support colleagues understanding
of the approach to determine Group
Performance Share awards across the
Group, including for Executive Directors,
we have used internal media channels
to explain the process in a clear and
transparent way and to emphasise the
link between pay and performance
On behalf of the Board
Stuart Sinclair
Chairman, Remuneration Committee
19 February 2020
Lloyds Banking Group plc
Registered in Scotland, No. SC095000
Strategic reportFinancial resultsRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
100 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Proposed Policy overview
Pages 100 to 103 provide an overview of the new proposed 2020 Policy. The full policy can be found on page 115.
Base
Salary
+
Fixed
Share
Award
+
Pension
+
Benefits
+
Short
Term
Variable
+
Long
Term
Variable
=
Total
Reward
The Group’s approach to shareholding requirements
The Group currently operates a shareholding policy, please see page 108 for further details.
The Group considers it important to ensure Executive Directors continue to have a substantial shareholding after employment to continue to align
their interests with shareholders over a longer time horizon than simply whilst in role. Our existing reward structures and the structure designed
through the Long Term Share Plan, which, in line with regulatory requirements, mean that a substantial proportion of variable reward for Executive
Directors and other senior employees takes the form of shares, deferred and held over a period of up to eight years. These structures achieve the
outcomes intended from the introduction of a post-employment shareholding requirement and ensure that Executive Directors continue to meet
their shareholding requirements for a minimum of two years after leaving the Group. On this basis, the Group already complies with best practice and
therefore no formal post-employment shareholding policy is necessary.
Current Policy Proposed changes in Policy and why FIXEDBase Salary– Reflective of individual role, taking account of responsibilities, experience and pay in the wider Group.– Typically reviewed annually, with increases effective 1 January.What: – We are changing the effective date of increases from 1 January to 1 April for new Executive Directors (EDs).Why: – Provides alignment to the award timeline for other colleagues in the Group, meeting our alignment principle.Fixed Share Award– Ensures fixed remuneration is commensurate with role.– Delivered in shares.– Five year delivery with 20 per cent each year.What: – We are changing the release schedule from five to three years. All other aspects remain the same, including quantum.Why: – Provides alignment to the release schedule for other colleagues eligible for a Fixed Share Award in the Group meeting our alignment principle.Pension– Contributions set as a percentage of base salary (cash salary only).– Maximum allowance of 46 per cent for Group Chief Executive (GCE) and 25 per cent for other EDs and all future appointments.What: – We are reducing the maximum employer pension contribution available to all EDs to 15 per cent of base salary with no compensation for the reduction.Why: – We agree comparable pension contributions should be available to all colleagues, including EDs. Benefits– Flexible benefit allowance of 4 per cent of base salary in line with other colleagues.– Other benefits include private medical insurance and car allowance.– No changes.VARIABLEShort Term VariableGroup Performance Share (GPS) – Maximum opportunity of 140 per cent of salary for GCE and 100 per cent of salary for other EDs with normal target to 30 per cent of maximum.– Performance adjustment including malus and clawback provisions apply.– No award can be made if threshold performance is not met by the Group or the individual.What: – There will be no change in maximum opportunities, however expected value for performance in line with target will change to 50 per cent of maximum.Why: – We believe the GPS award is an effective short term variable reward opportunity.– Simplifying the approach to target performance aligns the design structure to other colleagues and is clearer to articulate. The calibration of the 2020 scorecard has been set so that the payout outcome for achieving target performance is no less stretching. Long Term VariableGroup Ownership Share (GOS) – Maximum opportunity of 400 per cent for the GCE and a maximum of 300 per cent of salary for other EDs.– Vesting will be subject to the achievement of performance conditions measured over a period of three years.– The Committee retains full discretion to amend the payout levels should the award not reflect business and/or individual performance.– Award levels set at the time of grant under the rules of the 2016 Long-Term Incentive Plan approved at the AGM on 12 May 2016 and made in the form of conditional shares.What: – Introducing the Long Term Share Plan (LTSP), subject to approval at the 2020 AGM. An alternative reward structure to a traditional LTIP that has similarities with a restricted share awards.– Maximum opportunities will significantly reduce from 400 per cent for the GCE and 300 per cent for other EDs to 200 per cent of base salary. The normal ‘target’ level of award will be 150 per cent of base salary. Please see page 101 for further explanation of how we determined the right maximum opportunities for the business.– Remuneration Committee will grant awards based on a discretionary pre-grant test using the Balanced Scorecard to inform decision making.– Vesting will be subject to a set of three financial underpins.– Remuneration Committee retains full discretion to amend the vesting levels from that determined should they not reflect performance.Why: – The proposed structure provides greater alignment to the delivery of the strategic aims for the Group. Please see our Policy FAQs on pages 101 to 102 for further understanding of our rationale for the LTSP and how it is structured. Lloyds Banking Group Annual Report and Accounts 2019 101
New Policy FAQs
Long Term Share Plan
Q
Why did you decide the new Long
Term Share Plan is more appropriate
for your business compared to the
traditional LTIP?
We believe this Policy cycle is the most
opportune time to restructure our reward
package and introduce the LTSP for the
following core reasons.
Lower and less volatile potential reward
outcomes aligned to a stable long-term
business model
We believe that a reward package that has
less volatile outcomes is more reflective
of our objective of delivering stable and
sustainable returns and will incentivise
stewardship over longer timeframes.
A simpler structure with one set
of annual metrics
In recent years we have received significant
feedback on the complexity of our
reward structures. Removing multiple
scorecards and focusing on a single
simplified Balanced Scorecard will give
management clearer line of sight and
greater alignment of interests to long-term
company performance.
Amending the existing LTIP by reducing
the number of measures was considered.
However, we felt that this would not match
the wider objectives of alignment to the
Group’s strategy and the experience
of colleagues.
The use of a single Balanced Scorecard to
inform both variable reward components
provides clear line of sight to important
annual and strategic measures, which
can be tracked year on year through
our disclosure.
Promote fairness and consistency
The structure supports reducing the
gap between colleague and executive
remuneration; the increase in certainty
of award outcomes is offset by reduced
opportunities.
Performance against strategic goals will
be assessed and Committee discretion
will play an important role
The Committee will have four opportunities
to test performance, using a mixture of
clear metrics and discretion, applied
against a pre-determined approach.
Balanced Scorecard
Strategic decisions will, as now, be
measured through the inclusion of both
financial and non-financial performance
metrics within the Balanced Scorecard
Individual assessment
As now, the Committee will determine
if an Executive Director’s personal
performance justifies a variation in the
assessment of performance or award
values determined by the Balanced
Scorecard, and will explain how this is
determined
Pre-grant test
Committee discretion, incorporating
an assessment of risk and conduct, will
be applied where actual behaviours or
outcomes are not adequately captured in
the Balanced Scorecard assessment
Underpin assessment
The Committee will make an assessment
against the three financial underpins. In
addition, the Committee will consider
applying a downward discretionary
adjustment by asking itself whether there
are any non-financial factors that should be
considered at vesting
failure.’ After considerable debate, we
are confident that focusing on capital
strength, relative returns and a progressive
and sustainable ordinary dividend aligns
with our commitments to shareholders.
Underpins will be measured over a three
year period year period from grant and
each underpin element will determine the
vesting of 33 per cent of the original award.
The Committee will have discretion
to consider any other events before
confirming the vesting of awards using the
questions outlined above.
Balanced Scorecard
Q
What factors will the Committee take
into account when exercising discretion?
Q
How does the use of the Balanced
When considering the use of discretion in
conjunction with the underpin assessment,
the Committee will consider the following
key questions:
Do the Group’s financial results and capital
position adequately reflect risk, conduct
and any other non-financial considerations?
Has the Group suffered a serious conduct
event or has severe reputational damage
arisen from the Group not living its values?
Has the bank lived up to its ambition to be
the Best Bank for Customers?
The Committee will explain its reasons for
applying discretion in either direction, or for
not doing so.
Q
How did you determine the new
maximum opportunity for the Long
Term Share Plan and did you consider
shareholder guidelines that there should
be at least a 50 per cent discount when
moving to a restricted share model?
We are reducing the maximum opportunity
for the Group Chief Executive’s long-term
awards by 50 per cent from 400 per cent to
200 per cent of base salary, and the normal
‘target’ level of award to 150 per cent of base
salary. Unlike a number of restricted share
schemes, our Long Term Share Plan will have
a pre-grant test to determine the value of
awards. As outlined, this will be based on the
Balanced Scorecard (consistent with the short
term variable award) with the expectation that
the achievement of an overall outcome in line
with target will lead to an award of 150 per
cent of base salary.
Under the Group Ownership Share Plan
Executive Directors were eligible to receive a
maximum award of 300 per cent. We wanted
consistency in award maximum for all other
Executive Directors. This therefore marks a
discount of 33 per cent but we are confident
this is appropriate for the business given
the use of a pre-grant test, underpins and
the Committee’s intention to use discretion
where appropriate.
Q
Why did the Committee decide that
the three underpins chosen for the plan are
the most appropriate?
The pre-vest test against defined underpins
after three years is an important feature to
guard against the potential of ‘rewards for
Scorecard ensure that Executive
Directors are rewarded for performance
aligned to the strategic objectives of
the Group?
The Balanced Scorecard is considered by
non-executives and management to be
a transparent and effective tool to drive
and assess performance while meeting
regulatory requirements. Each measure has
pre-set underlying objectives determined
by the Remuneration Committee at the
start of the performance year. In the interest
of transparency, the Committee can
confirm that for 2020 there is no change1
to the 15 measures in the 2019 Balanced
Scorecard (fully disclosed on page 104)
which the Committee consider provide
sufficient breadth across the Group’s core
business objectives and the optimum
balance to measure our performance
as a simple, low-risk, customer-focused
UK financial services provider, as
highlighted below:
Customer measures (33%)
Providing a leading customer experience
sits at the core of our strategy. The
Group customer dashboard provides
an assessment of how effectively we
are serving customers across all brands,
products and services, while other
measures focused on complaint handling,
customer perception, and trust in the
Group, measure how effectively we are at
being the best bank for customers
Colleagues and Conduct measures (33%)
Colleagues are critical to the delivery of
the Group’s long-term strategy and we
confirmed our investment in training and
development as part of transforming
ways of working to drive better customer
outcomes. Ensuring the way we operate is
aligned with the Group’s low-risk appetite,
as well as in line with the Group’s cultural
aspiration, values and behaviours is key to
our long-term success
Finance measures (33%)
Our financial measures assess the Group’s
ability to deliver a capital efficient, low cost
and profitable bank
1 The measure in relation to external reputation has been
expanded to now also include relationship with the
Group’s regulators.
Strategic reportFinancial resultsRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
102 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Our new variable
reward structure
The Group’s purpose is to support our
customers, colleagues and communities
and to Help Britain Prosper. The Group’s
business model is to be a low risk UK
bank and rewards for the executive
management team in that business should
reflect and encourage the steady creation
of shareholder value over the long-term,
best measured through the share price.
The long-term sustainable success of the
business is driven by meeting the needs of
different stakeholders and our proposed
move to Long Term (restricted) Share awards
within our revised variable reward structure
How the new structure operates
supports these strategic aims. We have set
out why we believe the implementation of
this new approach is now appropriate for the
Group and aligns to our business model in
our Policy FAQs on page 101.
The diagram below illustrates the
performance inputs, underpin assessment
and delivery of the Group’s proposed short
and long-term variable reward structures.
The new structure has multiple test points to
ensure the Remuneration Committee can use
its discretion and make an evaluation beyond
formulaic outcomes. Further details on the use
of discretion are explained in full within the
Policy on page 118.
Removing complex standalone LTIP metrics
and instead using a simplified Balanced
Scorecard will give management clearer line
of sight and greater alignment of interest to
long-term share price performance whilst the
underpin and pre-vest test, combined with the
long-term delivery of shares over up to eight
years, ensure that long-term and multi-year
performance assessment is not compromised.
Short Term
Variable
60%
Long Term
Variable
TEST
TEST
40%
Balanced
Scorecard
Individual ED
Assessments
Y1
Y2
Y3
Y4
Y5
Y6
Y7
Y8
Group
Performance
Share
40%
1 yr hold
40%
1 yr hold
20%
1 yr hold
TEST
Pre-grant performance
assessment and sizing
of award determined
at Remuneration
Committee’s
discretion, taking into
consideration the key
questions outlined
on page 101.
Long Term
Share Plan
Award
Long Term Share Plan
Underpin Assessment
TEST
20%
1 yr hold
20%
1 yr hold
20%
1 yr hold
20%
1 yr hold
20%
1 yr hold
Underpins (Pre-Vest Test)1
TEST
Remuneration Committee evaluation. See page 101 for further detail.
CET 1 Ratio
Group CET1 ratio above the guided management
target each year, including all regulatory buffers
ROTE
Group ROTE exceeds average for UK peer banks
(excluding the Group) over the 3 years
1 Indicative underpin definitions; final details to be confirmed in
2020 DRR Implementation Report.
Ordinary
Dividend
Actual ordinary dividend payments do not fall
below stated progressive policy in any year of
the vesting period
33%
33%
33%
How have the maximum opportunities for Executive Directors changed?
As a result of the proposed changes
in policy, total variable opportunities
will reduce from 540 per cent of salary
to 340 per cent for the Group Chief
Executive. This is a reduction of 29 per cent
in maximum total compensation when
reductions in fixed pay through the
pension changes are taken into account.
Other Executive Directors' total variable
opportunities will reduce from 400 per cent
to 300 per cent of salary resulting in a
19 per cent reduction in maximum total
compensation.
Group Chief Executive
António Horta-Osório
£9,826
£000
Chief Financial Officer
William Chalmers
£4,805
£000
29%
£3,913
19%
£5,179
£7,005
£1,813
£2,835
£2,589
£1,813
£2,603
£2,433
£1,622
£811
£811
£1,562
£1,481
In light of the Chief Operating Officer, Juan Colombás’ retirement announcement in 2020, an illustration has not been provided here.
Current
Policy
New
Policy
Current
Policy
New
Policy
Fixed Pay
Short Term Variable
Long Term Variable
Lloyds Banking Group Annual Report and Accounts 2019 103
2019 Annual report on remuneration
Executive Director Single Total Figure of Remuneration (audited)
António Horta-Osório
Juan Colombás
William Chalmers
George Culmer
Total
£000
2019
2018
2019
2018
Base Salary
Fixed Share Award
Benefits
Pension
Total Fixed Pay
Group Performance Share1
Group Ownership Share/
Long Term Incentive (LTIP)2,3
Total Variable Pay
Other Remuneration4
Buy out award5
Total Remuneration
1,269
1,050
166
419
2,904
–
1,821
1,821
2
–
4,727
1,244
900
157
573
2,874
1,178
2,490
3,668
2
–
6,544
795
497
74
199
1,565
–
1,011
1,011
1
–
2,577
779
497
68
195
1,539
527
1,355
1,882
1
–
3,422
2019
331
252
19
83
685
81
–
81
–
4,378
5,144
2018
–
–
–
–
–
–
–
–
–
–
–
2019
461
298
41
130
930
113
911
1,024
1
–
1,955
2018
2019
2018
776
504
49
194
1,523
527
1,374
1,901
1
–
3,425
2,856
2,097
300
831
6,084
194
3,743
3,937
4
4,378
14,403
2,799
1,901
274
962
5,936
2,232
5,219
7,451
4
–
13,391
1 William Chalmers was awarded a full year Group Performance Share award of £195,528 which has been pro-rated to reflect five months as an Executive Director for the purpose of the table above.
Awards for William Chalmers and George Culmer will be made in March 2020 in a combination of cash 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 2021. The remaining 60 per cent is deferred into shares with
40 per cent vesting in 2021 and 20 per cent in 2022. 50 per cent of each release will be subject to a further 12-month holding in line with regulatory requirements.
2 The 2017 Group Ownership Share (GOS) vesting (see page 106) at 49.7 per cent and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting
on 18 February 2020. The total number of shares vesting were 2,643,386 and 425,413 shares delivered in respect of dividend equivalents for António Horta-Osório, 1,467,137 shares vesting
and 236,113 shares delivered in respect of dividend equivalents for Juan Colombás and 1,322,490 shares vesting and 212,834 shares delivered in respect of dividend equivalents for George
Culmer. This award was pro-rated to reflect George’s leave date. William Chalmers was not granted a 2017 GOS award. The average share price between 1 October 2019 and 31 December 2019
(59.34 pence) has been used to indicate the value. The shares were awarded in 2017 based on a share price of 68.814 pence and as such no part of the reported value is attributable to share price
appreciation.
3 LTIP and dividend equivalent figures for 2018 have been adjusted to reflect the share price on the date of vesting (62.9679 pence) instead of the average price (56.04 pence) reported in the
2018 report.
4 Other remuneration payments comprise income from all employee share plans, which arises through employer matching or discounting of employee purchases.
5 William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019 on the retirement of George Culmer. He was granted deferred cash of
£2,046,097 and deferred share awards over 4,086,632 Shares, to replace unvested awards from his former employer, Morgan Stanley, that were forfeited as a result of him joining the Group. The
deferred cash and the number of Shares over which the deferred share awards were granted was calculated using the USD:GBP exchange rate and the respective mid-market closing prices of
Mr Chalmers’ previous employer and the Group on 3 June 2019.
The awards are subject to a vesting schedule and retention periods that match the vesting schedule and retention periods of the awards forfeited and as a result, the awards vest in tranches until
January 2022. The awards were granted pursuant to Listing Rule 9.4.2, and in accordance with the regulatory requirements for buy-outs and are subject to clawback. Clawback will also apply to any
awards exercised prior to the first anniversary of employment.
Pension and benefits (audited)
Pension/Benefits £
António Horta-Osório
Juan Colombás
William Chalmers
George Culmer
Cash allowance in lieu of pension contribution
Car or car allowance
Flexible benefits payments
Private medical insurance
Tax preparation
Transportation
418,865
12,000
49,776
42,341
24,000
37,606
198,735
12,000
31,174
19,246
9,000
2,359
82,806
5,000
13,249
279
–
–
129,892
19,646
20,783
481
–
–
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 and it provided for 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. In March 2019, the GCE asked that his defined benefit pension be based on a percentage of his pensionable salary
in 2014. The total pension due is now fixed at 6 per cent of his 2014 reference salary of £1,220,000, or £73,200.
There are no other Executive Directors with defined benefit pension entitlements.
Under terms agreed when joining the Group, Juan Colombás is entitled to a conditional lump sum benefit of £718,996 either (i) on reaching normal
retirement age of 65 unless he voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death.
Strategic reportFinancial resultsRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
104 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Calculating the 2019 Group Performance Share outcome (audited)
STEP 1
STEP 2
STEP 3
STEP 4
Allocating Underlying Profit
To simplify the approach to determining the Group Performance Share outcome for 2019, the Committee agreed
that a fixed 5 per cent of Underlying Profit (UP)would be used as a starting position for the overall pool
The threshold, below which no bonus is payable, remains set at 20 per cent below target UP
For 2019, UP target was £8,637 million, actual UP was £8,349 million
£8,349m1 x 5% = £417.4m
1 Underlying profit of £7,531 million, adjusted by £21 million for year-on-year Prudential Value Adjustment in line with regulatory requirement, £445 million for conduct and costs, and £352 million for
Group Performance Share expenses in 2019.
STEP 1
STEP 2
STEP 3
STEP 4
Measurement of performance against Balanced Scorecard objectives.
Strategic objectives Measure
Minimum: 1
Maximum: 5
Score
Performance Range/Outcome
Customer
33%
Leading customer
experience
Satisfying our
Customers
Retaining and
growing valuable
customers
Helping Britain
Prosper
Customer dashboard
Segmented Customer
Index
Deliver Helping Britain
Prosper Plan targets
<30
<2.0
64
3.75
≥85
>4.5
<50% of Helping Britain Prosper Plan
metrics are Green
≥90% of Helping Britain Prosper Plan metrics are Green
and none are Red
20/22 metrics were rated green (90.9%)
Fewer complaints,
better handled,
driving better
customer outcomes
Total FCA Complaints
per ‘000
FOS Change Rate (ex PPI)
>3.04
>30%
Building great
relationships with
external stakeholders
Reputation with External
Stakeholders (Excluding
Regulators)
<2.0 &/or >30% rated 1
Building a better
culture
Colleague Culture &
Engagement survey
<64
Building skills for the
future
Maintaining a low
risk Bank
Change delivered
safely
Delivering a capital
efficient, low cost,
profitable Bank
Colleagues successfully
completing upskilling/
retraining
Board Risk Appetite
Cumulative hours <1,980,000
Change Execution Risk
>10%
Green <75% and Red >15%
Investment Performance
Cost:Income Ratio
Statutory Profit after tax
Common Equity Tier 1
Statutory Return on
Tangible Equity
<5
>50.4%
<4,241
<127bps
<11.5%
£3,006m
77bps
7.8%
Colleagues
& Conduct
33%
Transforming ways
of working
Finance
33%
Maximising Group
capabilities
2.72
≤2.81
≤25%
26%
4.00
>4.5 & none rated 1
>73
3,193,087
Cumulative hours ≥2,640,000
69
7.4%
92.2% green and 6.4% red
Green >92.5% and Red <5%
≤4%
11
48.5%
≥14
≤46.4%
≥5,831
>200.bps
≥15.8%
3
3
4
5
4
4
3
5
3
4
4
3
1
1
1
STEP 1
STEP 2
STEP 3
STEP 4
Application of Group performance modifier
The modifier determined by Group Balanced Scorecard performance is applied to the proportion of UP allocated under Step 1.
Overall
3.20/5
2019 Balanced
Scorecard Outcome
Group Balanced
Scorecard Modifier
1.00-1.49 1.5-1.79 1.8-2.09 2.1-2.39 2.4-2.69 2.7-2.99 3.0-3.29 3.3-3.59 3.6-3.89 3.9-4.19 4.2-4.49 4.5-4.79
4.8-5
0.00
0.55
0.70
0.80
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
Group Balanced Scorecard Modifier
STEP 1
STEP 2
STEP 3
STEP 4
£417.4m x 1.00 = £417.4m
Application of adjustments for risk, conduct and other factors.
The overall pool was reduced by £107.3 million to reflect the impact of conduct-related provisions and regulatory fines received during 2019. £107.3m
£310.1m
Overall GPS pool
Lloyds Banking Group Annual Report and Accounts 2019 105
Executive Directors’ Group Performance Share outcome for 2019 (audited)
STEP 1
STEP 2
STEP 3
STEP 4
Balanced Scorecard performance
Individual awards for Executive Directors are determined through the assessment of individual performance using the Group or their divisional
balanced scorecard. Awards will not be made if the Group does not meet threshold financial performance or if an individual receives a score below
2.6 out of 5.
Group Chief Executive
António Horta-Osório
Chief Operating Officer
Juan Colombás
Chief Financial Officer
William Chalmers
Chief Financial Officer (Former)
George Culmer
The Group Chief Executive’s
Balanced Scorecard
assessment for 2019 reflects
the Group's scorecard
for which he has overall
accountability.
Chief Operating Office
Scorecard rating
Finance Division Scorecard
rating
Finance Division Scorecard
rating
BSC category
Customer
Colleague & Conduct
Assessment
BSC category
Assessment
BSC category
Assessment
3.00
3.63
4.33
Customer
Colleague & Conduct
Finance
3.00
3.29
2.71
Customer
Colleague & Conduct
Finance
3.00
3.29
2.71
For Group Balanced Scorecard
please see page 103
Finance
STEP 1
STEP 2
STEP 3
STEP 4
Individual Performance Assessment and Committee Discretion
Personal contribution and how performance has been achieved through leadership approach may be considered where it diverges from scorecard
outcomes. Judgement may be applied in deciding whether personal contribution should alter the mechanical outcome provided by balanced
scorecard metrics.
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
Other performance
considerations
Strong progress in executing the
Group’s strategic transformation
programme, with significant
investment in technology,
people and improved
customer propositions
Further progress on the strategy
for growing our Financial Planning
& Retirement business with the
successful launch of our Schroders
Personal Wealth joint venture
But acknowledged organisational
failures in the Group’s handling
of some customers, including
the victims of the historic HBOS
Reading fraud
Strong leadership and oversight
of the Group’s strategic
transformation programme,
transforming the Group for
success in a digital world
Further investment and
improvements delivered in the
Group’s operational resilience,
resulting in a c.30% reduction
in critical incident occurrences
in 2019
Acknowledged failures in the
handling of those affected by
the historic HBOS Reading fraud
Strong start to tenure as CFO,
overseeing a challenging second
half, marked by the substantial
increase in PPI provision
related to the deadline for
claims submission
Delivered costs and investments
favourable to plan in 2019,
maintaining cost efficiency
versus peers
Successful acquisition of the
Tesco mortgage book finalised
under William’s stewardship
Prior to his retirement at the end
of July, George oversaw delivery
of a good financial performance
in H1, with market leading
efficiency and returns
Balance sheet strength
maintained with lower
capital requirement
Maintained prudent approach
to growth and risk
The Group Chief Executive and Chief Operating Officer voluntarily requested
to be withdrawn from consideration for a 2019 award.
Overall score 3.12/5
Overall score 3.12/5
STEP 1
STEP 2
STEP 3
STEP 4
GPS award commensurate with performance determined
Awards are initially based on pre-determined formulaic pay out ranges, commensurate with performance scores as follows:
Individual Performance
Score
1.00 –
2.59 –
Opportunity (% of
maximum)
0%
l
d
o
h
s
e
r
h
T
2.60 –
2.69–
0.0% –
19.5%–
2.70–
2.99–
19.5% –
30.0%–
t
e
g
r
a
T
3.00–
3.29–
3.30–
3.59–
3.60–
3.89–
3.90–
4.19–
4.20–
4.49–
4.50–
4.79–
30.0% – 40.5% 40.5% – 51.0%
51.0% –
61.5%–
61.5% –
72.0%–
72.0% – 82.5% 82.5% – 93.0%
4.80–
5.00–
93.0% –
100.0%–
m
u
m
x
a
M
i
STEP 1
STEP 2
STEP 3
STEP 4
Committee determine final award outcome
Judgement is applied by the Remuneration Committee to determine award levels within the formulaic pay-out ranges.
The Remuneration Committee exercised its overall discretion to accept the voluntary withdrawal of the Group Chief Executive and Chief Operating
Officer from consideration for a 2019 GPS award. Accordingly, no award value was determined.
Executive
Directors
António Horta–Osório
Juan Colombás
William Chalmers3
George Culmer2
Balanced
Scorecard
Group
Chief Operating Office
Finance
Finance
Final
Individual
Score
–
–
3.12
3.12
Award
(% of max)
–
–
34.2%
34.2%
Group
Funding
Modifier1
Final
Award
(% of max)
GPS Maximum
Opportunity
(% of salary)
Final Award
(% of salary)
Final Award
(£)
–
71.9%
–
–
24.6%
24.6%
140%
100%
100%
100%
–
–
24.6%
24.6%
–
–
£195,528
£113,407
1 The overall GPS pool of £310.1 million was 28.1 per cent below the target pool of £431.2 million. Therefore, a downward adjustment of 28.1 per cent was applied to the award recommendations of
William Chalmers and George Culmer.
2 Award pro-rated to reflect working days of employment.
3 GPS award reflects full year in line with hiring commitment.
Strategic reportFinancial resultsRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
106 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
2017 Executive Group Ownership Share (audited)
Group Ownership Share (GOS) Awards in the form of conditional rights to free shares in 2017 were made over shares with a value of 300 per cent of
reference salary for the GCE and 275 per cent of salary for the former CFO and COO. These awards are vesting at 49.7 per cent, as detailed in the table
below. The formulaic outcome reflects the Group’s solid financial and strong strategic performance over the three years ended 31 December 2019,
balanced against a challenging economic and political environment impacting negatively on share price performance. This has resulted in no vesting
for the Total Shareholder Return component and lower than expected Economic Profit.
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 and that share price performance can also be considered. The Committee
agreed that no adjustment would be applied to the vesting outcome of 49.7 per cent.
Shares will vest on a pro–rata basis up to the seventh anniversary of the award grant and each set of vested shares will be subject to a further holding
period. Further details on deferral and holding can be found on pages 110 to 111.
Weighting
Measure
Threshold
Maximum
Actual
Vesting
30%
25%
10%
10%
10%
7.5%
7.5%
Absolute Total Shareholder Return
Economic Profit1
Cost : Income Ratio2
Customer Complaint Handling
FCA reportable complaints
Financial Ombudsman Service (FOS) uphold rate
Customer Satisfaction
Group performance relative to market peers
Digital
Active Customer Growth
People
Employee Engagement Index
8% p.a.
£3,074m
47.2%
3.52 complaints per 1,000
16% p.a. 5.6% p.a.
£3,769m £3,138m
45.9%
2.72
45.7%
3.18 complaints per 1,000
0.00%
7.97%
8.00%
5.00%
=< 29% FOS uphold rate
=<25% FOS uphold rate
26%
3.75%
3rd
14.3m
67
1st
1st
10.00%
14.9m
15.0m
7.50%
7.50%
Award (% maximum) vesting 49.70%
74
73
1 A measure of profit taking into account Expected Losses, tax and a charge for equity utilisation.
2 Adjusted to exclude remediation costs.
Single Total Figure of Remuneration for Chairman and Non-Executive Directors (audited)
Chairman and current Non–Executive Directors
Lord Blackwell
Alan Dickinson
Anita Frew
Simon Henry
Lord Lupton
Amanda Mackenzie OBE
Nick Prettejohn
Stuart Sinclair
Sara Weller CBE
Sarah Legg1
Former Non–Executive Directors
Deborah McWhinney
1 Appointed 1 December 2019.
Fees £000
Benefits £0002
Total £000
2019
2018
2019
2018
2019
2018
758
240
356
186
314
156
471
210
203
6
–
743
230
380
182
318
31
449
172
199
–
174
12
1
1
–
1
–
5
–
4
–
–
12
–
–
–
–
–
–
–
–
–
–
–
770
241
357
186
315
156
476
210
207
6
–
755
230
380
182
318
31
449
172
199
–
174
2 The Chairman receives a car allowance of £12,000. Other benefits relate to reimbursement for expenses incurred in the course of duties.
Payments for loss of office (audited)
George Culmer retired as Chief Financial Officer and an Executive Director with effect from 1 August 2019 and retired from the Group
on 2 August 2019.
He received a payment of £79,595 in lieu of unused annual leave entitlement up to his Retirement Date. In accordance with contractual entitlements,
George was entitled to a capped contribution of up to £10,000 (excluding VAT) towards legal fees incurred in connection with his retirement from the
Company.
In accordance with retirement provisions, George has maintained outstanding deferred Group Performance Share awards under the 2016 GPS Plan
(83,466 Shares), 2017 GPS Plan (176,108 Shares) and under the 2018 GPS Plan (501,341 Shares) which continue to be released on their scheduled release
dates, subject to the relevant terms (including post-vesting holding periods, malus and, where applicable, clawback and deductions for national
insurance and income tax). 2016 GPS shares released in September 2019.
A 2019 Group Performance Share award was made, pro-rated for the period of 2019 elapsed to George Culmer's retirement date, as described on
page 105. This award is subject to deferral, holding periods, malus and clawback. Under the Executive Group Ownership Plan Rules (Executive GOS),
George Culmer’s outstanding 2017 and 2018 Executive GOS awards will be time pro-rated to his retirement date (2017 becomes 2,660,946 Shares and
2018 becomes 2,144,958 Shares). The awards remain subject to the performance measures which apply to the relevant awards and will continue to vest
at the normal vesting dates and be released on their scheduled release dates, subject to the relevant terms (including post-vesting retention periods,
malus and, where applicable, clawback and to deductions for national insurance and income tax).
No other payment for loss of office were made in 2019.
Lloyds Banking Group Annual Report and Accounts 2019 107
Payments within the reporting year to past Directors (audited)
There were no payments made to past directors in 2019.
External appointments
António Horta-Osório – During the year ended 31 December 2019, 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 £349,303 in total.
No other Executive Director served as a Non-Executive Director in 2019.
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.
1
Dividend
£m
2019
2018
Salaries and performance-based
compensation £m
2,375
4,039
2019
2018
2,919
2,991
1 2019: Ordinary dividend in respect of the financial year ended 31 December 2019, partly paid in 2019 and partly to be paid in 2020.] 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.
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 31 December 2009 (to 31 December 2019)
9
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 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Lloyds Banking Group
FTSE 100 index
CEO
GCE single figure
of remuneration
£000
J E Daniels
António
Horta-Osório
2010
2,572
2011
855
2012
–
2013
–
2014
–
2015
–
2016
–
2017
–
2018
–
2019
–
–
1,765
3,398
7,475
11,540
8,704
5,791
6,434
6,544
4,727
J E Daniels
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%
–
0%
0%
0%
0%
–
62%
71%
54%
57%
77%
77%
67.60%
–
–
–
–
–
–
–
0%
54%
97%
94.18%
55%
66.30%
68.70%
49.7%
–
–
–
–
0%
25.30%
30%
30%
–
0%
–
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 and independently
requested that he be withdrawn from consideration for a Group Performance Share award in 2019.
Strategic reportFinancial resultsRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
108 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
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
2019
Total at
20 February
2020
Expected value
at 31 December
2019 (£000s)2
20,817,507
10,713,340
705,398
16,626,666
1,509,516 19,729,182
694,247 11,171,375
–
6,854,490
–
677,449
53,618
29,109
3,268,460
–
42,109,823 42,110,4757
22,608,071 22,608,6397
3,973,858
24,158,605 24,158,605
3,973,858
20,165
10,645
2,485
12,964
150,000
200,000
450,000
250,000
0
1,000,000
63,567
69,280
362,664
372,988
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
150,000
200,000
450,000
250,000
0
1,000,000
63,567
69,280
362,664
372,988
150,000
200,000
450,000
250,000
0
1,000,000
63,567
69,280
362,664
372,988
n/a
n/a
n/a
n/a
–
n/a
n/a
n/a
n/a
n/a
Executive Directors
António Horta-Osório
Juan Colombás
William Chalmers³
George Culmer4
Non-Executive Directors
Lord Blackwell
Alan Dickinson
Anita Frew
Simon Henry
Sarah Legg5
Lord Lupton
Amanda Mackenzie OBE
Nick Prettejohn6
Stuart Sinclair
Sara Weller CBE
1 Including holdings of connected persons.
2 Awards subject to performance under the GOS 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 2019
closing price of 62.535 pence.
3 Appointed 1 August 2019.
4 Retired as Chief Financial Officer and an Executive Director with effect from 1 August 2019 and from the Group 2 August 2019. The number of shares in respect of which the GOS Awards (unvested
subject to performance) vests, will be reduced to reflect the period from the start of the Performance Period to 2 August 2019, date of leaving, at the point of vest.
5 Appointed 1 December 2019.
6 In addition, Nick Prettejohn held 400 (6.475 per cent) preference shares at 1 January 2019 and 31 December 2019.
7 The changes in beneficial interests for António Horta-Osório (652 shares), Juan Colombás (568 shares) relate to ‘partnership’ and ‘matching’ shares acquired under the Lloyds Banking Group
Share Incentive Plan between 31 December 2019 and 20 February 2020. There have been no other changes up to 20 February 2020.
Shareholding requirements (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 follows: 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. 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.
For the year ending 31 December 2019, the GCE and COO continued to meet their shareholding requirements, as detailed within the illustration
below. William currently holds 52 per cent of his salary in shares and will have until 2 June 2022 to achieve the requirement. At the time of his departure
in August 2019, George Culmer held 1,233 per cent of his salary in shares.
The Group does not operate a formal post-employment shareholding policy. Existing reward structures and the Long Term Share Plan under
the proposed new Policy have been designed in line with regulatory requirements and ensure that a substantial proportion of variable reward for
Executive Directors and other senior employees takes the form of shares deferred and held over a period of up to eight years. These structures
already ensure that Executive Directors continue to meet our shareholding requirements for a minimum of two years after leaving the Group.
António Horta-Osório
Shareholding requirement
Actual shareholding1
Juan Colombás
Shareholding requirement
Actual shareholding1
William Chalmers
Shareholding requirement
Actual shareholding1
George Culmer
Shareholding requirement
Actual shareholding1
0
0
0
130
260
390
520
650
780
910
1040
1170
1300
130
260
390
520
650
780
910
1040
1170
1300
250%
782%
130
260
390
520
650
780
910
1040
1170
1300
250%
52%
350%
952%
250%
1,233%
0
130
260
390
520
650
780
910
1040
1170
1300
1 Calculated using the average share price for the period 1 January 2019 to 31 December 2019 (58.07 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.
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.
Lloyds Banking Group Annual Report and Accounts 2019 109
Outstanding share plan interests (audited)
At 1 January
2019
Granted/
awarded
Dividends
awarded
Vested /
released /
exercised
At 31
December
Exercise periods
Lapsed
2019 Exercise price
From
To
Note
14,554
21,728
5,015,210
5,318,685
6,725,221
António Horta-Osório
LTIP 2016-2018
GOS 2017-2019
GOS 2018-2020
GOS 2019-2021
Deferred GPS awarded in 2018 1,166,466
Deferred GPS awarded in 2019
2016 Sharesave
2017 Sharesave
2019 Sharesave
Juan Colombás
LTIP2016-2018
GOS 2017-2019
GOS 2018-2020
GOS 2019-2021
Deferred GPS awarded in 2018
Deferred GPS awarded in 2019
2016 Sharesave
William Chalmers
Share Buy-Out
2,728,973
2,951,987
3,807,302
528,320
29,109
–
–
–
7,685,276
1,494,258
–
17,336
–
4,412,086
668,453
–
818,172
1,457,748
1,124,627
686,085
–
–
–
509,271 3,445,449
–
–
–
777,644
373,564
–
–
–
–
–
–
–
1,569,761
–
– 5,318,685
– 6,725,221
– 7,685,276
388,822
–
– 1,120,694
14,554
–
21,728
–
17,336
–
277,114
–
–
–
–
1,874,804
–
–
–
352,212
167,112
–
818,172
854,169
–
– 2,951,987
– 3,807,302
4,412,086
176,108
501,341
29,109
–
47.49p 01/01/2020 30/06/2020
51.03p 01/01/2021 30/06/2021
39.87p 01/01/2023 30/06/2023
47.49p 01/01/2020 30/06/2020
1,457,748
1,124,627
686,085
28/01/2020 27/01/2025
28/01/2021 27/01/2026
28/01/2022 27/01/2027
George Culmer
LTIP 2016-2018
GOS 2017-2019
GOS 2018-2020
Deferred GPS awarded in 2018
Deferred GPS awarded in 2019
2016 Sharesave
2,767,409
2,993,565
3,860,925
528,320
–
281,017
–
–
14,554
668,453
–
–
1,901,209
–
–
352,212
167,112
13,341
866,200
–
– 2,993,565
– 3,860,925
176,108
501,341
–
1,213
47.49p
1,2,3
3
3
3, 4
10
6
1,2,3
3
3
3,4
10
6
7,8
7
7
7
1,2,3
3,5
3,5
10
6
9
1. The shares awarded in March 2016 vested on 7 March 2019. The closing market price of the Group’s ordinary shares on that date was 62.15 pence. Shares vested are subject to a further two-year
holding period.
2. 2016 LTIP award was eligible to receive an amount equal in value to any dividends paid during the performance period. Dividend equivalents have been paid based on the number of shares
vested and have been paid in shares. The dividend equivalent shares were paid on 7 March 2019. The closing market price of the Group’s ordinary shares on that date was 62.15 pence. The
dividend equivalent shares are not subject to any holding period.
3. All 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 2019 were made over shares with a value of 300 per cent of salary for António Horta-Osório (7,685,276 shares with a face value of
£3,733,200) and 275 per cent for Juan Colombás (4,412,086 shares with a face value of £2,143,215). No award was made to George Culmer. The share price used to calculate face value is the
average price over the five days prior to grant (27 February to 5 March 2019), which was 63.052 pence. As regulations prohibit the payment of dividend equivalents on awards in 2018 and
subsequent years, the number of shares awarded has been determined by applying a discount factor to the share price on award. An adjustment of 29.8 per cent was applied. Performance
conditions for this award are set out in the table on page 110.
5. The number of Shares in respect of the 2017 and 2018 GOS Awards are stated in full and will be reduced to reflect the period from the start of the Performance Period to the date of leaving
(2 August 2019) at the point of vest in accordance with the appropriate plan rules.
6. Part of GPS is deferred into shares (in the form of conditional rights to free shares). The face value of the share awards in respect of GPS granted in March 2019 was £942,160 (1,494,258 shares) for
António Horta-Osório; £421,473 (668,453 shares) for Juan Colombás and £421,473 (668,453) for George Culmer. 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 2019), which was 63.052 pence.
7. William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019 on the retirement of George Culmer. He was granted deferred cash of
£2,046,097 and deferred share awards over 4,086,632 Shares, to replace unvested awards from his former employer, Morgan Stanley, that were forfeited as a result of him joining the Group. The
deferred cash and the number of Shares over which the deferred share awards were granted was calculated using the USD:GBP exchange rate of 1.2664 and the respective mid-market closing
prices of Mr Chalmers’ previous employer and the Group on 3 June 2019 (57.05 pence) resulting in a face value of the awards of £4,377,521. The award is subject to vesting terms in line with those
forfeited as set out above, and is on materially the same terms as the Executive Group Ownership Share (ExGOS), including the discretions as summarised on page 93 of the 2017 Annual Report,
but as the award is a buy-out it is not subject to performance conditions and is not subject to time pro-rating in a good leaver circumstances. The award is subject to malus and clawback on the
same terms as ExGOS awards, and in addition is subject to clawback in the event of resignation within one year of grant. The value of the award is not pensionable.
8. Options vested on 18 July 2019 and William Chalmers exercised on 1 August 2019. The closing market price of the Group’s ordinary shares on that date was 52.84 pence. Mr Chalmers retained all
the shares apart from 384,733 shares which were sold to meet income tax and National Insurance contributions. Shares are subject to a six month holding period from the date of vesting on
18 July 2019.
9. Mr Culmer had six months from his date of retirement to exercise his Sharesave options. Options were exercised on 7 November 2019 and savings made to date were used to buy shares. The
closing market price of the Group’s ordinary shares on that date was 57.20 pence.
10. Part of 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 Juan Colombás and £479,200 (704,426) for George Culmer. 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 2019), which was 63.052 pence.
Strategic reportFinancial resultsRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
110 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
2019 Group Ownership share performance measures (for awards made in March 2019) (audited)
Meeting threshold performance will result in 25 per cent vesting of each metric, relative to each weighting.
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 2021
Set relative to 2021 targets
Becoming simpler and
more efficient
FCA total reportable1 complaints and Financial
Ombudsman Service (FOS) change rate2
Statutory economic profit3
Set relative to 2021 targets
Average rates over 2021
Set relative to 2021 targets
Cost:income ratio
Set relative to 2021 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 2021 markets
norms
Threshold: 3rd
Maximum: 1st
Threshold: 65.3
Maximum: 68.3
Threshold: 2.89 and ≤ 29%
Maximum: 2.61 and ≤ 25%
Threshold: £2,210m
Maximum: £3,315m
Threshold: 45.9%
Maximum: 43.4%
Threshold: 8% p.a.
Maximum: 16% p.a.
Threshold: +5% vs. 2021 UK Norm
Maximum: +2% vs. 2021 UK High
Performing Norm
10%
7.5%
10%
25%
10%
30%
7.5%
1 FCA reportable complaints per 1,000 accounts.
2 FOS uphold rate.
3 A measure of profit taking into account Expected Losses, tax and a charge for equity utilisation.
Implementation of the policy in 2020
The 2020 Remuneration Policy is subject to approval at the Annual General Meeting in May 2020. We propose to implement the Policy in the following
ways subject to shareholder approval. A final 2020 Group Ownership Share award will be granted under the existing Remuneration Policy prior to the
AGM when the 2020 Remuneration Policy is intended to come into effect.
Base Salary
The Group has applied a total pay budget of 2.4 per cent including
a minimum pay award of £500 for eligible colleagues. Focussing on
lower paid colleagues and colleagues paid lower in their pay range,
the Group’s pay approach ensures over 63 per cent of colleague will
receive a pay award of 2.5 per cent or more. The pay budget for senior
executives is set below the budget for the wider colleague at 2 per cent.
Fixed Share
Award
Awards remain unchanged from 2019 as follows:
GCE: £1,050,000
COO: £497,000
CFO: £504,000
Pension
With effect from 1 January 2020, pension allowances will be reduced for
all Executive Directors to 15 per cent of base salary. Any new Executive
Director appointments in 2020 will also attract a maximum allowance of
15 per cent of base salary.
It was agreed that a salary increase of 2 per cent would apply for
the Group Chief Executive (GCE) and Chief Financial Officer (CFO).
Following confirmation that the Chief Operating Officer (COO) is due
to retire in 2020, his salary is due to remain in line with 2019.
Salaries will therefore be as follows:
GCE: £1,294,674 (with effect from 1 January 2020)
COO: £794,938
CFO: £810,837 (with effect from 1 April 2020)
Subject to approval shares will be released in equal tranches over
three years. (See page 116 for further details).
Over 50,000 colleagues participate in the Group’s Defined
Contribution (DC) Pension scheme. We therefore believe the DC
pension provisions provide an accurate reflection of the pension rate
available to the majority of the workforce. With effect from July 2020
the maximum employer contribution for all colleagues will be 15 per
cent of base salary and Executive Directors will be aligned to the
majority of the workforce.
Benefits
Group
Performance
Share
Benefits remain unchanged from 2019. Executive Directors receive a
flexible benefit allowance in line with colleagues, (4 per cent of base
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’s Group Performance Share
outcome for 2020 will remain aligned to the approach from 2019. A fixed
five per cent of adjusted Underlying Profit (UP) will be used as a starting
position for the overall pool. This remains within the maximum plan limit
of 10 per cent of UP and 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.
A measurement of the Group’s performance will be assessed against
Balanced Scorecard objectives and receive a score from 1 to 5. The
Group Balanced Scorecard must exceed a threshold score of 1.5, below
which no award will be payable.
The fixed 5 per cent of UP will be adjusted by a scorecard modifier
commensurate with the Group Balanced Scorecard performance score.
Adjustments for conduct and risk factors will also be considered when
determining the final overall pool.
Individual maximum opportunities for Executive Directors remain
unchanged from 2019 at 140 per cent of base salary for the GCE and
100 per cent of base salary for other Executive Directors.
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 a balanced
scorecard and an individual performance assessment. The Committee
will determine if an Executive Director’s personal performance justifies a
variation up or down in the rating or award values determined by the
scorecard, and will explain how this is determined. The Group Chief
Executive’s individual performance will be measured through the
Group Balanced Scorecard, the Chief Operating Officer will be
measured through the Chief Operating Office scorecard and the
Chief Financial Officer will be measured through the Finance Division
scorecard.
The 2020 scorecards will provide a balanced view across 15 financial,
operational and strategic measures equally weighted between
Financial, Customer and Colleague and Conduct measures. Target will
be assessed against a rating scale of 1 to 5.
The Committee considers the specific targets that apply to 2020 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 2020 performance year, any Group Performance Share
opportunity will be awarded in March 2021 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 2022. The remaining 60 per cent is
deferred into shares with 40 per cent vesting in 2022 and 20 per cent in
2023. 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.
Lloyds Banking Group Annual Report and Accounts 2019 111
Group
Ownership
Share
A Group Ownership Share award will be granted in relation to 2019
performance under the terms of the current Remuneration Policy.
On the basis of the new Long Term Share Plan being approved by
shareholders at the 2020 AGM, no further Group Ownership Share
awards would then be made.
The maximum Group Ownership Share award for Executive Directors
is 300 per cent of salary and the Remuneration Committee has the
ability to grant an award up to 400 per cent of salary for exceptional
circumstances for the Group Chief Executive. Following confirmation
that the Chief Operating Officer (COO) is due to retire in 2020, no award
will be made.
Awards in 2020 are being made as follows:
GCE: 250 per cent of base salary
COO: No award
CFO: 237.5 per cent of base salary
As regulations prohibit the payment of dividend equivalents on awards,
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 29.03 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. Meeting
threshold performance will result in 25 per cent vesting of each metric,
relative to each weighting.
Awards made in 2020 will vest based on the Group’s performance
against the financial and strategic measures, set out below. In line with
the current 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 2019 plan and continued
alignment 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.
Strategic priorities
Measure
Basis of payout range
Metric
Weighting
Group
Ownership
Share
continued
Creating the best
customer experience
Customer satisfaction
Major Group average
ranking over 2022
Digital net promoter score
Set relative to 2022 targets
FCA total reportable
complaints and Financial
Ombudsman Service (FOS)
change rate
Set relative to 2022 targets
Average rates over 2022
Becoming simpler and
more efficient
Statutory economic profit1
Set relative to 2022 targets
Cost:income ratio
Set relative to 2022 targets
Delivering sustainable
growth
Absolute total shareholder
return (TSR)
Growth in share price
including dividends over
3-year period
Building the best team
Employee engagement
index
Set relative to 2022 markets
norms
Threshold: 3rd
Maximum: 1st
Threshold: 65.3
Maximum: 68.3
Threshold: 2.65
Maximum: 2.52
Threshold: 30%
Maximum: 25%
Threshold: £1,965m
Maximum: £2,948
Threshold: 46.4%
Maximum: 43.9%
Threshold: 8%
Maximum: 16%
Threshold: +5% vs UK norm
Maximum: +2% vs UK High
Performing Norm
1 A measure of profit taking into account expected losses, tax and a charge for equity utilisation.
10%
7.5%
10%
15%
10%
40%
7.5%
Performance
adjustment
Performance adjustment is determined by the Remuneration
Committee and/or Board Risk Committee and may result in a reduction
of up to 100 per cent of the GPS and/or GOS opportunity for the
relevant period. It can be applied on a collective or individual basis.
When considering collective adjustment, the Senior Independent
Performance Adjustment and Conduct Committee (SIPACC) submits
a report to the Remuneration Committee and Board Risk Committee
regarding any adjustments required to 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.
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112 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Chairman and Non-Executive Director fees in 2019
The annual fee for the Chairman was increased by 2 per cent to £772,855, 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 2020.
2020
2019
Basic Non-Executive Director fee
Deputy Chairman
Senior Independent Director
Audit Committee Chairmanship
Remuneration Committee Chairmanship
Risk Committee Chairmanship
Responsible Business Committee Chairmanship
IT Forum Chairmanship
Audit Committee Membership
Remuneration Committee Membership
Risk Committee Membership
Responsible Business Committee Membership1
Nomination and Governance Committee Membership
1 New members only.
£81,200
£79,600
£106,000 £104,000
£62,400
£72,800
£72,800
£72,800
£41,600
£41,600
£33,300
£33,300
£33,300
£15,600
£15,600
£63,600
£74,300
£74,300
£74,300
£42,400
£42,400
£34,000
£34,000
£34,000
£15,900
£15,900
Non-Executive Directors may receive more than one of the above fees.
Percentage change in remuneration levels
Figures for ‘All employees’ are calculated using figures for all colleagues eligible for 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 2019, 66,216 colleagues
were included in this category.
GCE (salary increase effective 1 January 2020)
All employees
% change in base salary
(2018 to 2019)
% change in GPS
(2018 to 2019)
% change in benefits
(2018 to 2019)
2.0%
2.4%2
(100%) 1
(31.7%)2
2.0%
2.4%2
1 Reflects the increase in base salary from 1 January 2019 against which the award is determined.
2 Adjusted for movements in colleagues numbers and other impacts to ensure a like-for-like comparison. Salary increases effective 1 April 2020.
Gender Pay
We have further reduced our gender pay gap in 2019 resulting in a 1.9 per cent improvement since 2017.
At Lloyds Banking Group we are committed to promoting a diverse and inclusive working environment. Our focus is on improving the gender pay and
bonus gaps by increasing the proportion of women in senior roles. In doing so, the gender gaps will reduce over time. We are committed to attracting
and retaining the best talent and we are pleased that our 2019 mean gender pay and bonus gaps have reduced further this year.
The reduction in the pay gap can be attributed to an improvement in female representation across the Bank, with an increase in the proportion of
female colleagues in senior roles. The proportion of women in the upper pay quartile for the Group has increased. We are pleased to see that our
efforts have started to decrease our gender pay gap, however we are aware that there continue to be more men in senior roles. Addressing female
representation across the Bank will take time and we are committed to achieving our gender targets that will have an impact on our pay gaps in future
years. Further information is available at: www.lloydsbankinggroup.com/globalassets/our-group/responsible-business/reporting-centre/lloyds-
banking-group-gender-pay-gap-report-2019.pdf
Mean Pay Gap
%
2019
2018
Mean Bonus Gap
%
30.9%
31.5%
2019
2018
64.2%
66.4%
Lloyds Banking Group Annual Report and Accounts 2019 113
CEO pay ratio
Total Compensation
Year
Methodology
P25
(Lower Quartile)
2019
2018
2017
Y-o-Y
(2018 vs 2019)
A
A
A
179:1
237:1
245:1
P50
(Median)
128:1
169:1
177:1
(24%)
P75
(Upper Quartile)
P25
(Lower Quartile)
71:1
93:1
97:1
114:1
113:1
113:1
Fixed pay
P50
(Median)
P75
(Upper Quartile)
47:1
48:1
48:1
82:1
81:1
82:1
1%
Notes to the calculation:
The 2019 total remuneration for the colleagues identified at P25, P50 and P75 are as follows: £26,419, £36,975, £66,944
The 2019 base salary for the colleagues identified at P25, P50 and P75 are as follows: £22,227, £31,671, £50,431
The P25, P50 and P75 colleagues were determined on 12 February 2020 based on calculating total remuneration for all UK employees for the 2019
financial year. Payroll data from 1 January 2019 to 31 December 2019 and variable remuneration outcomes approved in February 2020 were used
Methodology option A has been used and was selected on the basis that it provided the most accurate means of identifying the median, lower and
upper quartile colleagues
Colleague total remuneration has been calculated in line with the single total figure of remuneration. The single total figure of remuneration
calculated for each of the 62,364 UK colleagues includes full time equivalent base pay, Group Performance Share awards for the 2019 performance
year, vesting Group Ownership Share awards (for eligible colleagues), core benefits, pension, overtime and shift payments, travel/relocation
payments (for eligible colleagues) and private medical benefit
The average share price between 1 October 2019 and 31 December 2019 (59.34 pence) has been used to indicate the value of vesting Group
Ownership Share awards
The colleague identified at P50 did not receive a separate car benefit and does not participate in the long-term incentive plan. As a result, the ratio
does not provide a direct comparison to the total remuneration of the Group Chief Executive
Each of the three individuals identified was a full-time employee during the year
Due to operational constraints, inflationary adjustments to defined benefit pensions are excluded
All other data has been calculated in line with the methodology for the single total figure of remuneration for the Group Chief Executive
The median ratio has decreased 24 per cent year-on-year. The reduction is largely attributed to the Group Chief Executive’s request to withdraw from
consideration by the Remuneration Committee (the Committee) for a Group Performance Share award for 2019. Volatility in variable reward outcomes
has contributed to the year-on-year changes in the ratio.
The Committee is thoughtful of the volatility in pay ratios due to variable reward outcomes. Although the pay ratio is used as a useful reference point
to inform policy-setting, the Committee takes into account a number of other factors to assess colleague pay progression.
For the majority of colleagues, year-on-year changes in remuneration are principally driven by pay increases. We are committed to reducing the pay
gap between executives and wider colleagues and continue to remain focused on addressing the gap from the bottom up and not just from the top
down. To support this, the Group has a commitment to pay progression and a continued focus on ensuring higher pay awards for colleagues who are
lower paid, or paid lower within their pay range.
For 2020, the pay budget has been set at 2.4 per cent, with over 63 per cent of colleagues at lower grades receiving a pay award of 2.5 per cent or over.
The pay budget for senior colleagues was set lower, at 2 per cent.
A minimum pay award of £500 will apply for all eligible colleagues and pay awards of up to 3.5 per cent for the lowest paid colleagues. We are proud
to be an accredited Living Wage employer since 2015, and from April 2020 we will go further and raise the minimum salary for all full-time colleagues
to £18,200, reflecting a rate of £10 per hour. For some colleagues this will result in an increase of up to 3.94 per cent and is 22 per cent greater than the
National Living Wage and 70 pence greater than current National Living Wage Foundation’s UK wide real Living Wage.
We believe our approach to pay progression has contributed to the reduction of the 2019 median pay ratio and supports reducing the gap between
executive and wider colleague pay over time. For example, the colleague who is now at P25 for 2019 received a 2.69 per cent pay increase which
brought them up from P24 to that level.
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114 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Remuneration Committee
The Committee comprises six Non-Executive Directors; Stuart Sinclair (Chair), Lord Blackwell, Alan Dickinson, Anita Frew, Sara Weller and
Amanda Mackenzie; to provide a balanced and independent view on remuneration matters. Stuart Sinclair has been Chair of the Committee since
1 September 2018 and has been a member of the Committee since January 2016. For further details of Committee membership and attendance at
meetings, please see page 70.
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, purpose and values and the long-term interests of the Group, and recognises the interests
of relevant stakeholders, including the wider workforce. The Committee's operation is designed to ensure that no conflicts of interest arise, and in
particular, the Committee ensures that no individual is present when matters relating to their own remuneration are discussed.
Mercer was appointed by the Committee in 2016 following a competitive tender process and was retained for 2019. The Committee is of the view that
Mercer provides independent remuneration advice to the Committee and does not have any connections with the Group or any director that may impair its
independence. The broader Mercer company provides unrelated advice on accounting and investments. During the year the Committee requested advice
and independent research on market and best practice in relation to fixed and variable reward structures to support formulating the Policy. Mercer attended
Committee meetings upon invitation and fees payable for the provision of services in 2019 were £31,630.
How the Remuneration Committee spent its time in 2019 and compliance with the 2018 Corporate Governance Code
Executives
Key highlights:
Assurance that the new Policy supports the
delivery of the Group’s purpose and long-term
goals while rewarding the right behaviours in
line with the Group’s culture and values.
Oversight and approval
Review of 2018 performance and
remuneration for EDs and senior
management. Particularly focused on
discussing and challenging performance
outcomes and the direct implications of
risk and conduct on reward outcomes
Comfortable that the Directors’
Remuneration Policy worked effectively
in 2019, ensuring that there was true
alignment between pay and performance
notwithstanding that there were areas of
development to consider when designing
the new Policy
The 2019 executive pay budget was set
in the context of the wider colleague pay
budget. Pay increases were approved
on the basis that they were lower than
pay increases for wider colleagues. The
implications of pay increases on future
CEO pay ratios and the Group’s approach
to pay progression was considered
Code Provision 40. When designing the
new Directors’ Remuneration Policy, the
Committee has aimed to design clear and
transparent remuneration structures that
reduce complexity and promote behaviours
that support the Group’s purpose, values
and culture. Risk and conduct has been
considered to avoid rewarding for failure
and the range of possible values of rewards
EDs can potentially receive have been
reviewed. Please see pages 98 to 102 for
examples of how we have considered the
key principles of Provision 40 in 2019
Colleagues and Wider Workforce
Additional Stakeholders
Key highlights:
Consideration of a balanced range of
opinions from stakeholders on remuneration
matters.
Oversight and engagement
Regular updates on corporate governance
and institutional remuneration principles
changes
The regulators were invited to attend
committee meetings in 2019 and gain
greater understanding of Committee
debates in relation to performance and
reward outcomes
The Chair attended the Work and
Pensions Select Committee and reiterated
intentions to focus on purpose and
behaviour when designing the Policy in its
entirety whilst also gaining further insight
into external sentiment felt in relation to
executive pensions
Key highlights:
Delivery of the Group’s new performance
management approach ‘Your Best’ and
colleague understanding of the link between
performance and reward.
Oversight
2020 Colleague Pension Policy and how
the changes support the Group’s culture.
When finalising the changes to the
Group’s DC employer pension offering
including the reduction to ED pensions,
the potential impact on pay ratios
including gender pay were considered
Received a quarterly report on key
colleague and wider workforce reward
activity including in-year spend on
colleague pay increases and a review of
the Group Remuneration Policy for third
party suppliers sharing enhancements to
the assessment framework used to ensure
third party reward polices align to the
Group’s own principles
Constructive engagement with
the Group’s recognised Unions,
particularly on the deployment of the
Group Performance Share model with
the introduction of ‘Your Best’, the
improvements to the DC pension scheme
for all colleagues, the broader reward
package the Group offers and 2019
discussions on pay budgets. Together the
Unions are recognised across a bargaining
unit of circa. 95 per cent of colleagues
and continue to play a valuable role in
representing colleagues across the Group
To support colleagues to better
understand the approach to determining
GPS awards across the Group, including
Executive Directors, the Committee
gained insight into how the Group has
used internal media channels to explain
the process in a clear and transparent way
and to emphasise the link between pay
and performance
Statement of voting at Annual General Meeting
The table below sets out the voting outcome at the Annual General Meeting in May 2019 in relation to the annual report on remuneration and the
Remuneration Policy, last voted on in 2017.
2018 annual report on remuneration (advisory vote)
Directors’ remuneration policy (binding vote in 2017)
43,322
47,673
91.95%
98.03%
3,790
959
8.05%
1.97%
1,006
535
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 2019 115
2020 Remuneration Policy
Approval for this Remuneration Policy will be sought at the AGM on 21 May 2020 and, if approved, will take effect from that date.
It is intended that approval of the Remuneration Policy will be sought at three-year intervals, unless amendments to the Policy are required, in which
case further shareholder approval will be sought. Information on how the Policy will be implemented in 2020 is included in the annual report on
remuneration.
The objective of the Policy is to align individual reward with the Group’s performance, the interests of its shareholders and a prudent approach to risk
management. In this way, the requirements of the major stakeholders are balanced: customers, shareholders, employees, and regulators.
The policy is based on principles which are applicable to all employees within the Group and, in particular, the principle that the reward package
should support the delivery of the Group’s purpose of Helping Britain Prosper and the strategic aim of becoming the best bank for customers
whilst delivering long-term superior and sustainable returns to shareholders. It fosters performance in line with the Group’s values and behaviours,
encourages effective risk disciplines and is in line with relevant regulations and codes of best practice.
Decision making process for determining the Policy and consideration of stakeholder views
In formulating the Policy, the Remuneration Committee has consulted extensively with a number of stakeholders including institutional shareholders
and the Group’s main regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). A formal consultation on the
remuneration of Executive Directors was not undertaken with colleagues. However, constructive engagement with the Group's recognised Unions
took place on key elements of the reward package and the unions continue to play a valuable role in representing colleagues across the Group. The
Committee also increased its level of oversight on remuneration matters for colleagues and the wider workforce in 2019, receiving overviews and
analysis on key reward matters on a quarterly basis to support decisions in relation to executive remuneration.
The Chairman of the Remuneration Committee alongside senior management consulted with shareholders extensively and the proposed
amendments to the Policy were deliberated by the Remuneration Committee at three separate committee meetings. Throughout the process, the
Committee Chair kept an open dialogue with key stakeholders to provide updates on amendments and additional points of consideration within
the Policy following their feedback. The final Policy is proposed on the basis that it has been widely consulted on with stakeholders and has been
designed to align to the Group’s culture, values and purpose whilst also remaining aligned to wider stakeholder interests.
No Executive Director has been involved in the determination of their own remuneration but has remained well informed to ensure alignment
between executive and wider colleague remuneration structures. To manage conflicts of interests effectively, Executive Directors were asked to step
out of committee meetings and relevant paperwork was also redacted for individuals if required. The Committee has also considered gender pay and
CEO pay ratio analysis when finalising policy proposals.
Directors’ Remuneration Policy and Group Remuneration Policy alignment
There is no significant difference between the Policy for Executive Directors and that for other colleagues. If a significant difference for any individual
were proposed, this would be subject to approval by the Remuneration Committee (within regulatory requirements). The table below summarises
how the Policy applies across the Group.
Fixed
Variable
Base salary
Fixed share award1
Pension and benefits
Short-term incentive
Long term incentive1
Executive Directors
3
3
3
3
3
Group Executive
Committee
3
3
3
3
3
Other Material
Risk Takers
3
3
3
3
3
Other Employees
3
3
3
3
3
1 Eligibility based on seniority and / or role.
Base salary
Purpose and link to strategy
Operation
Maximum potential
Performance measures
Changes
To support the recruitment and retention of Executive Directors of the calibre required to develop and deliver the
Group’s strategic priorities. Base salary reflects the role of the individual, taking account of market competitiveness,
responsibilities and experience, and pay in the Group as a whole.
Base salaries are typically reviewed annually with any increases normally taking effect from 1 January for existing
Executive Directors and 1 April for future appointments. When determining and reviewing base salary levels,
the Committee takes into account base salary increases for employees throughout the Group and ensures that
decisions are made within the following two parameters:
– An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective
job-sizing methodologies.
– Pay for comparable roles in comparable publicly listed financial services groups of a similar size.
Salary may be paid in sterling or other currency and at an exchange rate determined by the Committee.
The Committee will make no increase which it believes is inconsistent with the two parameters above. Increases
will normally be in line with the increase awarded to the overall employee population. However, a greater salary
increase may be appropriate in certain circumstances, such as a new appointment made on a salary below a market
competitive level, where phased increases are planned, or where there has been an increase in the responsibilities
of an individual. Where increases are awarded in excess of the wider employee population, the Committee will
provide an explanation in the relevant annual report on remuneration.
N/A
The effective date will change from January to April each year for future Executive Directors to align delivery with
the rest of the workforce.
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116 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Fixed share award
Purpose and link to strategy
Operation
Maximum potential
Performance measures
Changes
Pension
Purpose and link to strategy
Operation
Maximum potential
Performance measures
Changes
Benefits
Purpose and link to strategy
Operation
Maximum potential
Performance measures
Changes
All-employee plans
Purpose and link to strategy
Operation
Maximum potential
Performance measures
Changes
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.
The fixed share award will be delivered entirely in Lloyds Banking Group shares, released over three years with
33 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.
The maximum award is 100 per cent of base salary.
N/A
Delivery of vested shares will change from five to three years to align the delivery schedule with other colleagues
eligible to receive a Fixed Share Award.
To provide cost effective and market competitive retirement benefits, supporting Executive Directors in building
long-term retirement savings.
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.
The maximum allowance for all Executive Directors is 15 per cent of base salary. All future appointments as
Executive Directors will also attract a maximum allowance of 15 per cent of base salary in line with the majority of the
workforce. Maximum allowance may be increased or decreased in order to remain aligned.
N/A
Maximum employer pension contribution available has been reduced to 15 per cent of cash salary with no
compensation for the reduction to align to the maximum employer pension contribution available to colleagues on
the defined contribution pension scheme.
To provide flexible benefits as part of a competitive remuneration package.
Benefits may include those currently provided and disclosed in the annual report on remuneration.
Core benefits include a company car or car allowance, private medical insurance, life insurance and other benefits
that may be selected through the Group’s flexible benefits plan.
Additional benefits may be provided to individuals in certain circumstances such as relocation. This may include
benefits such as accommodation, relocation, and travel. The Committee retains the right to provide additional
benefits depending on individual circumstances.
When determining and reviewing the level of benefits provided, the Committee ensures that decisions are made
within the following two parameters:
– An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective
job-sizing methodologies.
– Benefits for comparable roles in comparable publicly listed financial services groups of a similar size.
The Committee will only make 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 colleagues.
The flexible benefits allowance does not currently exceed 4 per cent of base salary.
N/A
No change to Policy
Executive Directors are eligible to participate in HMRC-approved share plans which promote share ownership
by giving employees an opportunity to invest in Group shares.
Executive Directors may participate in these plans in line with HMRC guidelines currently prevailing (where relevant),
on the same basis as other eligible employees.
Participation levels may be increased up to HMRC limits as amended from time to time. The monthly savings limits
for Save As You Earn (SAYE) is currently £500. The maximum value of shares that may be purchased under the
Share Incentive Plan (SIP) in any year is currently £1,800 with a two-for-one match. Currently a three-for-two match is
operated up to a maximum colleague investment of £30 per month.
The maximum value of free shares that may be awarded in any year is £3,600.
N/A
No change to policy
Lloyds Banking Group Annual Report and Accounts 2019 117
Group Performance Share plan
Purpose and link to strategy
To incentivise and reward the achievement of the Group’s annual financial and strategic targets whilst supporting
the delivery of long-term superior and sustainable returns.
Operation
Measures and targets are set annually and awards are determined by the Committee after the year end based
on performance against the targets set. The Group Performance Share may be delivered partly in cash, shares,
notes or other debt instruments including contingent convertible bonds. Where all or part of any award is deferred,
the Committee may adjust these deferred awards in the event of any variation of share capital, demerger, special
dividend or distribution or amend the terms of the plan in accordance with the plan rules.
Where an award or a deferred award is in shares or other share-linked instrument, the number of shares to
be awarded may be calculated using a fair value or based on discount to market value, as appropriate.
The Committee applies its judgement to determine the payout level commensurate with business and/or
individual performance or other factors as determined by the Committee. 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. Awards may
be subject to malus and clawback for a period of up to seven years after the date of award which may be extended
to 10 years where there is an ongoing internal or regulatory investigation.
Maximum potential
Performance measures
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.
Measures and targets are set annually by the Committee in line with the Group’s strategic business plan and further
details are set out in the annual report on remuneration for the relevant year.
Measures consist of both financial and non-financial measures and the weighting of these measures will be
determined annually by the Committee. The weightings of the performance measures for the 2020 financial
year are set out for 2019 on page 110. 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 receives a score of 2.6 out of 5 or below. The normal ‘target’ level of the Group
Performance Share is 50 per cent of maximum opportunity.
The Committee is committed to providing transparency in its decision making in respect of Group Performance
Share awards and will disclose historic measures and target information together with information relating to how
the Group has performed against those targets in the annual report on remuneration for the relevant year except
to the extent that this information is deemed to be commercially sensitive, in which case it will be disclosed once it
is deemed not to be sensitive.
Changes
The normal ‘target’ level of the Group Performance Share has changed to 50 per cent of maximum opportunity
from 30 per cent.
Long Term Share plan
Purpose and link to strategy
Operation
Maximum potential
Performance measures
Changes
Long term variable reward opportunity to align executive management incentives and behaviours to the Group’s
objectives of delivering long-term superior and sustainable returns. The Long Term Share Plan will incentive
stewardship over a long time horizon and promote good governance through a simple alignment with the interest
of shareholders.
From 2021, awards will be granted under the rules of the 2020 Long-Term Share Plan, subject to shareholder
approval at the AGM on 21 May 2020. Awards are made in the form of conditional shares and 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 an assessment of underpin thresholds being maintained 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.
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 maximum Long Term Share Plan opportunity is 200 per cent of base salary for all Executive Directors including
the GCE.
An award may be granted by the Remuneration Committee taking into account an assessment of performance of
the Company, any Member of the Group or business unit or team, and/or the performance, conduct or capability of
the Participant, on such basis as the Committee determine. The normal ‘target’ level of the Long Term Share award
is 150 per cent of base salary.
No further performance conditions will apply. However vesting will be subject to the underpins and Remuneration
Committee discretion as described above.
The Long Term Share Plan replaces the Executive Group Ownership Share Plan.
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118 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Deferral of variable remuneration and holding periods
Operation
Changes
The Group Performance Share and Long Term 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.
No change in deferral requirements.
Further information on which performance measures were chosen and how performance targets and underpin thresholds are set are disclosed in the
relevant sections throughout the report.
Discretion in relation to variable rewards
The Committee retains discretion with regards to these plans. This relates to:
The timing, size and type of awards and holding periods, subject to policy maxima, and the annual setting of targets
Where qualitative performance measures or underpins are used and performance against those measures or underpins is not commensurate with
the Group’s overall financial or strategic performance over the performance period
Where qualitative underpin thresholds are used and performance against those underpins is not commensurate with the Group's overall financial
performance over the underpin period
Adjustment of targets and measures if events occur which cause it to determine that it is appropriate to do so. The Committee also retains the
right to change performance measures and the weighting of measures, including following feedback from regulators, shareholders and/or other
stakeholders; and amending the plan rules in accordance with their terms and or amending the basis of operation (including but not limited to the
approach in respect of dividend equivalents) including in light of any change to regulatory requirements or guidance or feedback from regulators
To exercise discretion in accordance with the rules, including in relation to whether or not malus or clawback provisions would apply, in connection
with recruitment, or terminations of employment, or corporate events affecting the Company
Adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends)
The exercise of the Committee’s discretion will be disclosed in accordance with regulatory requirements
Legacy awards and restrictions on payments
Awards in respect of the Group Performance Share and under the long-term incentive Group Ownership share will be granted in 2020 under the
terms of the Directors’ remuneration policy approved by shareholders on 11 May 2017 (the “2017 Policy”). No further awards would be made under
the long-term incentive Group Ownership share (or the terms of the 2017 Policy) unless the new Long Term Share Plan 2020 was not approved
by shareholders. The Committee reserves the right to make any remuneration payments/awards and any payments/awards for loss of office,
notwithstanding that they are not in line with the policy set out above where the terms of the payment/award were agreed (i) before the 2017 policy
came into effect; (ii) pursuant to the 2017 policy; or (iii) at a time when the relevant individual was not a Director of the Group and, in the opinion of the
Committee, the payment/award was not in consideration for the individual becoming a Director of the Group. Such payments/awards will have been
set out in the annual report on remuneration for the relevant year. They include awards and payments made under previous approved remuneration
policy and payments in relation to deferred Group Performance Share awards and long-term incentive’ Group Ownership share awards granted in
2018, 2019 and, as referred to above, 2020.
Lloyds Banking Group Annual Report and Accounts 2019 119
Illustration of application of remuneration policy
The charts below illustrate possible remuneration outcomes under the following three scenarios:
1. The maximum that may be paid, assuming full Group Performance Share payout and full vesting under the new Long Term Share plan. For the
Long Term Share Plan, an indication of the maximum remuneration receivable assumes a share price appreciation of 50 per cent during the period
in which the award is subject to underpins. The basis of the calculation of the share price appreciation is that the share price embedded in the
calculation for the ‘maximum’ bar chart is assumed to increase by 50 per cent across the performance period.
2. The expected value of remuneration for performance midway between threshold and maximum, assuming 50 per cent of maximum Group
Performance Share opportunity and a Long Term Share award granted at 150 per cent of salary. It is also assumed that the Long Term Share Award
will vest in full.
3. The minimum that may be paid, where only the fixed element is paid (base salary, benefits, pension and the fixed share award).
Amounts are based on based salaries as at 1 January 2020 for the Group Chief Executive and Chief Operating Officer and 1 April 2020 for the Chief
Financial Officer. Implementation of the Policy in 2020 is set out in the annual report on remuneration.
Salary
Fixed share award
Pension and Benefits
Group Performance Share
Long Term Share Plan
Share price appreciation (50%)
António Horta-Osório (GCE)
Value of package (£000)
Juan Colombás (COO)
Value of package (£000)
William Chalmers (CFO)
Value of package (£000)
9000
£8,299
5000
£4,635
17%
34%
£3,840
41%
4000
3000
£3,045
39%
36%
£5,451
36%
5000
£4,724
17%
£3,913
34%
41%
4000
3000
£3,102
39%
36%
17%
5%
20%
£2,603
10%
41%
2000
17%
21%
4%
11%
4%
13%
1000
13%
5%
16%
£1,455
11%
34%
2000
17%
21%
4%
11%
4%
13%
1000
13%
5%
16%
£1,481
11%
34%
16%
31%
£7,005
37%
22%
26%
3%
13%
4%
15%
8000
7000
6000
5000
4000
3000
2000
1000
0
16%
18%
24%
49%
17%
21%
26%
55%
17%
21%
26%
55%
Maximum -
with share price
appreciation
Maximum
Mid-
Performance
Minimum
0
Maximum -
with share price
appreciation
Maximum
Mid-
Performance
Minimum
0
Maximum -
with share price
appreciation
Maximum
Mid-
Performance
Minimum
Approach to recruitment and appointment to the Board
In determining appropriate remuneration arrangements on hiring a new Executive Director, the Committee will take into account all relevant factors.
This may include the experience and calibre of the individual, local market practice, the existing remuneration arrangements for other executives and
the business circumstances. The Committee will seek to ensure that arrangements are in the best interests of both the Group and its shareholders and
will seek not to pay more than is necessary.
The Committee may make awards on hiring an external candidate to ‘buy-out’ remuneration arrangements forfeited on leaving a previous employer.
In doing so the Committee will take account of relevant factors including any performance conditions attached to these awards, the form in which they
were granted (e.g. cash or shares), the currency of the awards, and the timeframe of awards. Any such award made will be made in accordance with
the PRA’s Rulebook and made on a comparable basis to those forfeited and subject to malus and clawback at the request of the previous employer as
required by the PRA rules.
The package will normally be aligned with the remuneration policy as described in the policy report. However, the Committee retains the discretion
to make appropriate remuneration decisions outside the standard policy to facilitate the recruitment of an individual of the calibre required and in
exceptional cases.
This may, for example, include the following circumstances:
An interim recruit, appointed to fill an Executive Director role on a short-term basis
Exceptional circumstances requiring the Chairman to take on an executive function on a short-term basis
An Executive Director recruited at a time in the year when it would be inappropriate to provide a Group Performance Share or Long Term Share
award for that year, for example, where there may be insufficient time to assess performance. In this situation the Committee may feel it appropriate
to transfer the quantum in respect of the months employed during the year to the subsequent year so that reward is provided on a fair basis
An Executive Director recruited from a business or location where benefits are provided that do not fall into the definition of ‘variable remuneration
forfeited’ but where the Committee considers it reasonable to buy-out these benefits
Transitional arrangements for overseas hires, which might include relocation expenses and accommodation
The maximum level of variable remuneration (excluding buy-out awards) that may be awarded to new Executive Directors is equal to 200 per cent of
fixed remuneration, including any discount permitted by the European Banking Authority. In making any such remuneration decisions, the Committee
will apply any appropriate performance measures in line with those applied to other Executive Directors.
A full explanation will be provided of any buy-out award or discretionary payment.
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120 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Service agreements
The service contracts of all current Executive Directors are terminable on 12 months’ notice from the Group and six months’ notice from the individual.
The Chairman also has a letter of appointment. His engagement may be terminated on six months’ notice by either the Group or him.
Lord Blackwell
António Horta-Osório
William Chalmers
Juan Colombás
Notice to be given by the Group
Date of service agreement
6 months
12 months
12 months
12 months
31 March 2014
3 November 2010
3 June 2019
30 November 2010
Under his contract (dated 3 November 2010), António Horta-Osório (GCE) is entitled to an amount equivalent to base salary and pension allowance
as a payment in lieu of notice if notice to terminate is given by the Group. If notice to terminate is given by the GCE, he is entitled to an amount
equivalent to base salary if the Group chooses to make a payment in lieu of notice. Such payments in lieu will be made in monthly instalments subject
to mitigation. He is also entitled to six months’ notice from the Group in the event of his long-term incapacity. As part of a buy-out of a pension
forfeited on joining from Santander, the GCE is also entitled to the provision of a conditional unfunded pension commitment, subject to performance
conditions as described further in the annual report on remuneration. In the event of long-term incapacity, if the GCE does not perform his duties for
a period of at least 26 weeks (in aggregate over a 12 month period), the Group shall be entitled to terminate his employment by giving six months’
notice. In all other respects, the terms of the GCE’s contract in relation to payments for loss of office match those set out below for new directors.
Under terms agreed when joining the Group, Juan Colombás is entitled to a conditional lump sum benefit, payable either (i) on reaching normal
retirement age unless he voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death, as described further in the
annual report on remuneration.
The service contracts and letters of appointment are available for inspection at the Company’s registered office.
Notice periods
Newly-appointed Executive Directors will be employed on contracts that include the following provisions:
The individual will be required to give six months’ notice if they wish to leave and the Group will give 12 months’ notice other than for material
misconduct or neglect or other circumstances where the individual may be summarily dismissed by written notice. In exceptional circumstances,
new joiners will be offered a longer notice period (typically reducing to 12 months within two years of joining)
In the event of long-term incapacity, if the Executive Director does not perform their duties for a period of at least 26 weeks (in aggregate over
a 12 month period), the Group shall be entitled to terminate the executive’s employment by giving three months’ notice
At any time after notice to terminate is given by either the Group or the Executive Director, the Group may require the Executive Director to take
leave for some or all of the notice period
At any time, at its absolute discretion, the Group may elect to terminate the individual’s employment by paying to the Executive Director, in lieu
of the notice period, an amount equivalent to base salary, subject to mitigation as described more fully in the termination payments section of
this report
Lloyds Banking Group Annual Report and Accounts 2019 121
Termination payments
It is the Group’s policy that where compensation on termination is due, it should be paid on a phased basis, mitigated in the event that alternative
employment is secured. Where it is appropriate to make a bonus payment ( known as Group Performance Share) to the individual, this should relate to
the period of actual service, rather than the full notice period. Any Group Performance Share payment will be determined on the basis of performance
as for all continuing employees and will remain subject to performance adjustment (malus and clawback) and deferral. Generally, on termination of
employment, Group Performance Share awards, in flight Group Ownership Share awards, Long Term Share Plan awards and other rights to payments
will lapse except where termination falls within one of the reasons set out below. In the event of redundancy, the individual may receive a payment
in line with statutory entitlements at that time. If an Executive Director is dismissed for gross misconduct, the Executive Director will receive normal
contractual entitlements until the date of termination and all deferred Group Performance Share, Group Ownership Share and Long Term Share Plan
awards will lapse.
Base salary
Fixed share award
Resignation
Redundancy or termination by
mutual agreement
In the case of resignation to take up
new employment, paid until date of
termination (including any period
of leave required by the Group). In
the case of resignation for other
reasons, base salary will be paid in
monthly instalments for the notice
period (or any balance of it), offset
by earnings from new employment
during this period.
Paid until date of termination (including
any period of leave required by the
Group). In respect of the balance of
any notice period, base salary will be
paid in monthly instalments, offset
by earnings from new employment
during this period.
Retirement/ill health, injury,
permanent disability/death
Paid until date of retirement/death.
For ill health, injury or permanent
disability which results in the loss of
employment, paid for the applicable
notice period (including any period of
leave required by the Group).
Change of control or merger N/A
Other reason where the
Committee determines that
the executive should be
treated as a good leaver
Paid until date of termination (including
any period of leave required by the
Group). In respect of the balance of
any notice period, base salary will be
paid in monthly instalments, offset
by earnings from new employment
during this period.
Awards continue and are released
at the normal time and the number
of shares subject to the award in the
current year will be reduced to reflect
the date of termination.
Awards will normally continue and be
released at the normal time and the
number of shares subject to the award
in the current year will be reduced to
reflect the date of termination unless,
in the case of mutual agreement,
the Committee determines that
exceptional circumstances apply in
which case shares may be released
on termination.
Awards will normally continue and be
released at the normal time and the
number of shares subject to the award
in the current year will be reduced
to reflect the date of termination
except for (i) death where shares are
released on the date of termination; or
(ii) in the case of permanent disability
the Committee determines that
exceptional circumstances apply in
which case shares may be released on
the date of termination.
Awards will be payable on the date of
the Change of Control and the number
of shares subject to the award will be
reduced to reflect the shorter accrual
period. The Committee may decide
that vested awards will be exchanged
for (and future awards made over)
shares in the acquiring company or
other relevant company.
Awards continue and are released
at the normal time and the number
of shares subject to the award in the
current year will be reduced to reflect
the date of termination.
Pension, benefits and
other fixed remuneration
Paid until date of termination
including any period of leave
required by the Group (subject to
individual benefit scheme rules).
Paid until date of termination
including any period of leave
required by the Group (subject to
individual benefit scheme rules).
Paid until date of death/ retirement
(subject to individual benefit
scheme rules). For ill health, injury,
permanent disability, paid for
the notice period including any
period of leave required by the
Group (subject to individual benefit
scheme rules).
N/A
Paid until date of termination
including any period of leave
required by the Group (subject to
individual benefit scheme rules).
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122 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Group Performance Share
(Annual bonus plan)1
Long Term Share Plan
(Long term variable reward plan)2
Chairman and
Non-Executive Director fees3
Resignation
Redundancy or termination by
mutual agreement
Retirement/ill health, injury,
permanent disability
Death
Change of control
or merger2
Other reason where the
Committee determines that
the executive should be
treated as a good leaver
Awards lapse on date of leaving
(or on notice of leaving) unless the
Committee determines otherwise in
exceptional circumstances that they
will vest on the original vesting date (or
exceptionally on the date of leaving).
Where award is to vest it will be subject
to the underpins and time pro-rating
(for months worked in underpin
period). Malus and clawback will apply.
Awards vest on the original vesting
date (or exceptionally on the date
of leaving). Vesting is subject to the
underpins and time pro-rating (for
months worked in underpin period).
Malus and clawback will apply.
Awards vest on the original vesting
date (or exceptionally on the date
of leaving). Vesting is subject to the
underpins and time pro-rating (for
months worked in underpin period).
Malus and clawback will apply.
Awards vest in full on the date of death
unless in exceptional circumstances
the Remuneration Committee
determines that the underpins or pre-
vest test do not support full vesting.
Awards vest on date of event.
Vesting is subject to the underpins
and time pro-rating (for months
worked in underpin period unless
determined otherwise). Malus and
clawback will normally apply. Instead
of vesting, awards may be exchanged
for equivalent awards over the
shares of the acquiring company or
another company or equivalent cash
based awards.
Awards vest on the original vesting
date (or exceptionally on the date
of leaving). Vesting is subject to the
underpins and time pro-rating (for
months worked in underpin period).
Malus and clawback will apply.
Unvested deferred Group
Performance Share awards are
forfeited and in-year Group
Performance Share awards are
accrued until the date of termination
(or the commencement of garden
leave if earlier) unless the Committee
determines otherwise (in exceptional
circumstances), in which case such
awards are subject to deferral, malus
and clawback.
For cases of redundancy, unvested
deferred Group Performance Share
awards are retained and in-year Group
Performance Share awards are accrued
until the date of termination (or the
commencement of garden leave if
earlier). Such awards would be subject
to deferral, malus and clawback. For
termination by mutual agreement,
the same approach as for resignation
would apply.
Unvested deferred Group
Performance Share awards are
retained and in-year Group
Performance Share awards are accrued
until the date of termination (or the
commencement of garden leave if
earlier). Such awards would be subject
to deferral, malus and clawback.
Unvested deferred Group
Performance Share awards are
retained and in-year Group
Performance Share awards are accrued
until the date of termination. Deferred
Group Performance Share awards
vest on death in cash, unless the
Committee determines otherwise.
In-year Group Performance Share
accrued up until date of change
of control or merger (current year).
Where there is a Corporate Event,
deferred Group Performance Share
awards vest to the extent and timing
determined by the Committee in its
absolute discretion.
Unvested deferred Group
Performance Share awards are
retained and in-year Group
Performance Share awards are accrued
until the date of termination (or the
commencement of garden leave if
earlier). Deferred Group Performance
Share awards vest in line with normal
timeframes and are subject to malus
and clawback. The Committee may
allow awards to vest early if it considers
it appropriate.
Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
1 If any Group Performance Share is to be paid to the Executive Director for the current year, this will be determined on the basis of performance for the period of actual service, rather than the full
notice period (and so excluding any period of leave required by the Group).
2 Reference to change of control or merger includes a compromise or arrangement under section 899 of the Companies Act 2006 or equivalent. Fixed share awards may also be released/
exchanged in the event of a resolution for the voluntary winding up of the Company; a demerger, delisting, distribution (other than an ordinary dividend) or other transaction, which, in the opinion
of the Committee, might affect the current or future value of any award; or a reverse takeover, merger by way of a dual listed company or other significant corporate event, as determined by the
Committee. In the event of a demerger, special dividend or other transaction which would in the Committee’s opinion affect the value of awards, the Committee may allow a deferred Group
Performance Share award or a long term incentive award to vest to the extent relevant performance conditions are met to that date and if the Committee so determined, on a time pro-rated basis
(unless determined otherwise) to reflect the number of months of the underpin period worked.
3 The Chairman is entitled to six months’ notice.
4 The terms applicable on a cessation of employment to Group Ownership Share Awards are as shown on page 97 of the 2017 Remuneration Policy.
Lloyds Banking Group Annual Report and Accounts 2019 123
On termination, the Executive Director will be entitled to payment for any accrued but untaken holiday calculated by reference to base salary and fixed
share award.
The cost of legal, tax or other advice incurred by an Executive Director in connection with the termination of their employment and/or the cost of
support in seeking alternative employment may be met up to a maximum of £100,000. Additional payments may be made where required to settle
legal disputes, or as consideration for new or amended post-employment restrictions.
Where an Executive Director is in receipt of expatriate or relocation expenses at the time of termination (as at the date of the AGM no current
Executive Directors are in receipt of such expenses), the cost of actual expenses incurred may continue to be reimbursed for up to 12 months after
termination or, at the Group’s discretion, a one-off payment may be made to cover the costs of premature cancellation. The cost of repatriation may
also be covered.
Remuneration policy table for Chairman and Non-Executive Directors
The table below sets out the remuneration policy for Non-Executive Directors (NEDs).
Chairman and Non-Executive Director fees and benefits
Purpose and link to strategy
Operation
To provide an appropriate reward to attract and retain a high-calibre individual with the relevant skills, knowledge
and experience.
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).
The Committee will make no increase in fees or benefits currently provided which it believes is inconsistent with the
parameters above.
N/A
No change to policy.
Maximum potential
Performance metrics
Changes
Letters of appointment
The Non-Executive Directors all have letters of appointment and are appointed for an initial term of three years after which their appointment may
continue subject to an annual review. Non-Executive Directors may have their appointment terminated, in accordance with statute and the articles of
association, at any time with immediate effect and without compensation.
Date of letter of appointment
NED
Alan Dickinson
Anita Frew
Simon Henry
Nick Prettejohn
Stuart Sinclair
Sara Weller
Lord Lupton
Amanda Mackenzie
Sarah Legg
Date of letter of appointment
26 June 2014
17 November 2010
1 May 2014
1 April 2014
26 November 2015
31 January 2012
2 March 2017
17 April 2018
21 October 2019
Date of appointment
8 September 2014
1 December 2010
26 June 2014
23 June 2014
04 January 2016
01 February 2012
01 June 2017
01 October 2018
01 December 2019
All Directors are subject to annual re-election by shareholders.
The service contracts and letters of appointments are available for inspection at the Company’s registered office.
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124 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Other remuneration disclosures
This section discloses the remuneration
awards made by the Group to Material
Risk Takers (MRTs) in respect of the 2019
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 98 to 114 and the Directors’
Remuneration Policy (DRP) on pages 115
to 123. Together these disclosures 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.
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. During 2019 the Committee had
5 scheduled meetings. Further details on the
operation of the Remuneration Committee
and independent advise received during the
year can be found on page 114 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 ensure there is a clear alignment
between award outcomes and individual
performance, growth and development,
whilst also reflecting divisional achievement.
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 and
the DRP. In particular, see pages 104 to 106,
110 to 111 and 117.
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 variable to
fixed 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 2019 125
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 115 of
the DRP.
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 112
of the DRR and page 123 of the DRP.
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
The fixed share award, made annually, delivers Lloyds Banking
Group shares over a period of five years. With effect from 2020
fixed share awards will be delivered over a period of three
years (subject to shareholder approval for Executive Directors).
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 116 of the DRP.
Core benefits for UK-based colleagues include pension,
private medical insurance, life insurance 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 page 116 of the DRP. 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 123 of the DRP.
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 performance conversations
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 110 to 111 of the DRR as well as page 117 of the DRP.
1 Eligibility based on seniority, grade and role.
Strategic reportFinancial resultsRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
126 Lloyds Banking Group Annual Report and Accounts 2019
Directors’ remuneration report continued
Group
Ownership Share
Plan
Deferral, vesting
and performance
adjustment
Guaranteed
variable
remuneration
The Group Ownership Share (GOS) plan is 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 current GOS plan can be found on
pages 110 and 111 of the DRR. Subject to shareholder approval,
it is proposed that the GOS plan be replaced with a Long
Term Share Plan (LTSP) for Executive Directors with effect from
2020. The LTSP will share similarities to a restricted share plan
with vesting subject to a set of three financial underpins and a
further discretion for the Committee to amend the underpin
vesting outcome. Shares will continue to be released over a
minimum three to five-year period and subject to holding.
Further details of the proposed LTSP for Executive Directors
can be found on page 117 of the DRP.
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.
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 Function1
– Other MRTs1
– Non-MRTs1
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 110 and 111
and 118 of the DRP.
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 108.
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.
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 Function2
– Other MRTs2
– Non-MRTs2
Termination
payments
Executive Directors and GEC members: see page 96 of
the 2016 DRR.
Applies to:
– Senior Management, Executive Directors, members/
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.
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
1 Eligibility based on seniority, grade and role.
2 Requirement based on seniority and grade.
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 2019 127
2019
Material Risk
Takers3,4
2018
Material Risk
Takers4
30
5
0
4
3
0
0
0
1
0
0
30
8
7
1
2
4
0
0
0
0
1
1 Converted to Euros using the exchange rate €1 = £0.8518 (average exchange rate 1 December 2019 – 31 December 2019 based on the European Commission Budget exchange rates).
The exchange rate used for 2018 was €1 = £0.89135.
2 Values for LTIP/Group Ownership Share awards based on expected value at grant pre the application of the EBA discount factor. (50 per cent of granted LTIP/GOS before apply EBA discount
required Inclusive of uplift in response to prohibition of dividend equivalents).
3 Total number of Material Risk Takers earning more than €1m has decreased from 53 in 2018 to 43 in 2019.
4 2019 and 2018 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
Retail and
Community
Banking
£m
Commercial
Banking
£m
Insurance &
Wealth
£m
Chief
Operating
Office and
Group
Functions1
£m
Total
£m
Aggregate remuneration expenditure
18.0
47.2
9.02
83.6
157.8
1 Chief Operating Office and Group Functions comprises People and Productivity, Group Transformation, Chief Information Office and Chief Security Office, Business Risk, Finance, Legal, Strategy,
Group Corporate Affairs, Group Internal Audit, Company Secretariat, Responsible Business and Inclusion and Diversity.
Table 3 Fixed and variable remuneration (Material Risk Takers)
Analysis of remuneration between fixed and variable amounts
Remuneration £m
Awarded in relation to the 2019 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
2019 Total
4
6.9
4.8
2.1
2.8
0
2.8
0.1
2.7
9.7
19
–
–
–
–
–
–
–
–
–
120
49.3
44.9
4.4
32.9
0.2
32.7
10.2
22.5
82.2
149
41
39.2
1.8
24.9
0.3
24.6
12.9
11.7
65.9
292
97.2
88.9
8.3
60.6
0.5
60.1
23.2
36.9
157.8
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 resultsRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
128 Lloyds Banking Group Annual Report and Accounts 2019
Table 4 Total outstanding deferred variable remuneration
Remuneration £m
Total outstanding deferred variable remuneration at 31 December 2019
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
2019 Total
4
27.3
4.6
22.7
19
–
–
–
120
128.3
18.3
110
149
60.5
10.6
49.9
292
216.1
33.5
182.6
Table 5 Other payments awarded in relation to the 2019 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
–
1
–
–
0.172
–
–
–
–
–
–
–
–
–
–
–
–
–
Management body
Senior management
Other Material Risk Takers
Table 6 Deferred remuneration
Analysis of deferred remuneration at 31 December 2019
Remuneration
£m
Management body3
Senior management
Other Material Risk Takers
Total amount of outstanding
deferred1 and retained2
remuneration
Of which: Total amount of
outstanding remuneration
exposed to ex-post explicit
and/or implicit adjustment
Total amount of amendment
during the year due to ex-
post explicit adjustments
Total amount of deferred
remuneration paid out in the
performance year
27.3
128.3
60.5
27.3
128.3
60.5
–
–
–
5.9
25.4
18.4
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.
129 Lloyds Banking Group Annual Report and Accounts 2017
129 Lloyds Banking Group Annual Report and Accounts 2019
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
Risk governance
Capital stress testing
Full analysis of risk categories
130
133
135
137
138
Further information on risk management can
be found:
Risk overview
Note 53: Financial risk management
Pillar 3 report: www.lloydsbankinggroup.com
40
289
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.
Green Resource
Engineering
A designer and manufacturer of cooling
systems has delivered a £1.1 million export
order to South Korea thanks to support from
Lloyds Bank. Green Resource Engineering
(GRE) in Devon, won the contract to supply
the country’s largest smart energy supplier,
marking the first time GRE has exported
directly to South Korea.
GRE’s exporting activity is set to boost annual
turnover by 20 per cent, from £2.5 million to
more than £3 million, and increase its head
count by 10 per cent.
Jobs will be created in the workshop and
purchasing departments, alongside additional
graduate engineering roles.
www.lloydsbankinggroup.com/
our-group/responsible-business/
130 Lloyds Banking Group Annual Report and Accounts 2019
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,
shareholders, colleagues and the Group,
whilst enabling sustainable growth in targeted
segments. This is achieved through informed
risk decisions and robust risk management,
supported by a consistent risk-focused culture.
The risk overview (pages 40 to 46) 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 2019, and the role of risk
management in enhancing the customer experience, along with an
overview of the Group’s enterprise risk management framework, and the
principal risks faced by the Group.
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 and a full analysis of the principal risk categories (pages 138 to 187),
the framework by which risks are identified, managed, mitigated
and monitored.
Each principal 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 the Group's 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 enterprise 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 operate
within the Group parameters. 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 (Lloyds Bank Corporate
Markets, Insurance and Lloyds Banking Group Equity Investments).
The Group’s enterprise risk management framework (ERMF) (see risk
overview, page 40) is structured to align with the industry-accepted internal
control framework standards.
The ERMF 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 ERMF 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:
approval of the ERMF and Board risk appetite
approval of Group-wide risk principles and policies
the cascade of delegated authority (for example to Board sub-
committees and the Group Chief Executive)
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.
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 headlines are outlined within Our Principal Risks
section on pages 42 to 46.
Governance frameworks
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
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 regulation, 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.
The risk committee governance framework is outlined on page 135.
Three lines of defence model
The ERMF 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
Lloyds Banking Group Annual Report and Accounts 2019 131
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.
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 certifications by the Senior Accounting Officer relating to
maintenance of appropriate tax accounting and 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 and the US Sarbanes Oxley Act)
ensure ongoing monitoring to assess the impact of emerging regulation
and legislation on financial, prudential regulatory and tax reporting
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 85 to 88.
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.
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 ERMF
agreed by the Board that encompasses:
overseeing 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
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 primary role of Group Internal Audit (third line) is to help the Board
and senior 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 and senior 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.
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
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. No significant failings or
weaknesses were identified during the 2019 review.
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 colleagues’ accountability for the risks
they take and their responsibility to prioritise their customers’ needs.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
132 Lloyds Banking Group Annual Report and Accounts 2019
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 Financial Performance Overview on pages 37 to 39.
Risk-weighted assets (RWAs)
– Credit risk
– Counterparty credit risk3
– Market risk
– Operational risk
Total (excluding threshold)
– Threshold4
Total
Retail
£bn
78.7
–
–
19.7
98.4
–
98.4
Commercial
Banking
£bn
Insurance and
Wealth1
£bn
Central
items2
£bn
66.3
4.7
1.8
4.6
77.4
–
77.4
0.7
–
–
0.6
1.3
–
1.3
14.3
1.2
–
0.6
16.1
10.2
26.3
Group
£bn
160.0
5.9
1.8
25.5
193.2
10.2
203.4
1 As a separate regulated business, Insurance (excluding Wealth) maintains its own 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 Group's regulatory capital calculations. However, in accordance with capital rules part of the
Group's equity investment in Insurance is included in the calculation of threshold RWAs, while the remainder is taken as a deduction from common equity tier 1 (CET1) capital.
2 Central items include assets held outside the main operating divisions, including the assets of 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 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 42 to 46). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s risk
categories is on pages 138 to 187.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 133
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 experience increasing
regulation from various bodies, including government and regulators.
Regulatory rules and laws from both the UK and overseas may affect the
Group’s operation, placing pressure on expert resource and investment priorities.
– 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.
Climate: The key risks are financial, derived from both physical risks (climate
and weather-related events) and transition risks resulting from the process
of adjustment towards a low carbon economy. Climate change extends
across multiple risk types e.g. credit, market, conduct and operational. For
example, physical and transition risks could result in the impairment of asset
values, may impact the creditworthiness of our clients, and the products and
services our customers require.
– Our risk management approach to climate change is outlined in the
Strategic Report (page 30) and reflects our commitment to adopting the
framework set out by the Financial Stability Board’s Task Force on Climate-
related Financial Disclosures (TCFD).
– The Group Chief Risk Officer (CRO) has assumed responsibility for
identifying and managing the risks arising from climate change, alongside
the CROs for key legal entities.
The focus on these risks by key stakeholders including businesses, clients,
shareholders, governments and regulators is increasing, aligned to the
evolving societal, regulatory and political landscape.
– We are integrating risk management of financial risks posed by climate
change in our existing enterprise risk management framework, including
our policies, risk appetite and controls.
There also remains a risk that campaign groups or other bodies could seek
to take legal or other 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.
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
its supply chain.
Political uncertainties including EU trade deal: Following the UK’s exit
from the EU, significant negotiation is now required on the terms of the
future trade agreement. As a result, the possibility of a limited or no deal at
the end of the transition period remains and could manifest in prolonged
business uncertainty across the UK, including in the financial services sector.
This continued lack of clarity over the UK’s relationship with the EU and other
foreign countries, and ongoing challenges in the Eurozone, including weak
growth, raise additional uncertainty for the UK’s economic outlook. There also
remains the possibility of a further referendum on Scottish independence.
– We continue to support customers and clients in managing the financial
risks from the UK’s transition to a low carbon economy.
– Continued investment in and 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 (National Institute of Standards and
Technology, NIST).
– 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 cultural MI. Cyber risk is governed through
all key risk committees and there are quarterly reviews of all cyber risks.
– Engagement with politicians, regulators, officials, media, trade and other
bodies to monitor external developments and reassure our commitment to
Helping Britain Prosper.
– Entities established in the EU ensure continuity of certain business activities;
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 related
risks. Initiatives in place to help clients effectively identify and mitigate or
manage such risks.
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 effectively
can result in unethical decisions, poor customer outcomes, loss of value to the
Group and mistrust.
– 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.
– The Group is making a significant investment to improve data privacy,
including the security of data and oversight of third-parties.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
134 Lloyds Banking Group Annual Report and Accounts 2019
Risk
Key mitigating actions
Macroeconomic headwinds: The UK economic outlook remains uncertain,
since it is unclear how businesses will respond to the uncertainty relating
to ongoing negotiations of international trade agreements, especially with
the EU.
Markets have priced continued low UK interest rates, but rapid growth
in labour costs resulting from low unemployment and weak productivity
growth could boost inflation more than anticipated, pushing interest
rate expectations upward. These factors, combined with current levels of
consumer indebtedness, could lead to downward pressure on credit quality.
Internationally, growing protectionism remains a significant risk to stability of
the global economy. Notwithstanding the recent first agreement on trade
between the US and China, the fundamental nature of the disagreement
suggests that roll-back of tariffs applied so far will prove difficult and further
escalation is eminently possible. US tariffs on Europe may also increase.
More widely, concerns remain that elevated government indebtedness in
advanced economies and limited headroom for conventional monetary
policy could render the next global downturn more prolonged and lead
to a sustained period of stagflation. These circumstances may spur the
wider adoption of less conventional monetary policies such as negative
interest rates.
Geopolitical: Current geopolitical uncertainties or political upheavals
could further impede the global economic recovery, heighten instability
and impact markets. Terrorist activity including cyber-attacks also has the
potential to trigger changes in the economic outlook, market risk pricing
and funding conditions. Additionally, the more recent coronavirus outbreak
and related global health issues could potentially impact economies
and markets.
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 customers 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 a risk of systematic, 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.
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.
Uncertainty as to the nature of such potential changes may adversely affect
the value of a broad array of financial products, including any LIBOR-based
securities, loans and derivatives. This may impact the availability and cost of
hedging instruments and borrowings.
Any changes could have important implications for our customers, for
example: necessitating amendments to existing documents and contracts;
and differential in performance of benchmark rates and financial products
which reference them.
– High levels of liquidity provided by central banks has boosted asset
values and reduced spreads across a wide range of assets, but creates
vulnerability to a sharp correction if the global economy turns down.
– 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.
– 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, portfolio deep dives are conducted and regular larger
exposure reviews. Enhancements have been made to our use of early
warning indicators, including sector-specific indicators.
– Risk appetite criteria limit single counterparty exposures complemented by
a UK-focused strategy.
– The Chief Security Office develops and maintains a framework for external
incidents, including financial stability, to ensure the incident response team
convenes and acts as a rapid reaction group, should an external crisis occur.
– The Chief Security Office also maintains the operational resilience framework
to embed resilience activities across the Group and limit the impact of
internal or external events.
– Hedging of market risk considers, inter alia, potential shocks as a result of
geopolitical events.
– Group vulnerability strategy and associated actions being developed
through the value stream operating model.
– 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.
– Emerging customer risks, including those pertaining to vulnerable
customers, are managed through customer segmentation strategy
governance throughout the change lifecycle.
– Technology risks, including those related to machine learning, are escalated
and discussed through governance to ensure ongoing monitoring of any
emerging unintended consequences.
– 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.
– Maintaining 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 programme established and the appointment of an IBOR
Transition Director as accountable executive.
– Developed a communication strategy for our customers to ensure they
understand the risks or outcomes they might face from transition.
– Developing an implementation plan for new products and a transition plan
for legacy products, taking into account market developments and lead
times for product, process and system changes
– Implementing an internal communication strategy to ensure that all staff are
aware and have the tools and training required.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 135
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
Reporting
Reporting
e
c
n
a
r
u
s
s
a
–
e
c
n
e
f
e
d
f
o
e
n
i
l
d
r
i
h
T
Aggregation,
Escalation
Independent
Challenge
t
i
d
u
A
l
a
n
r
e
t
n
I
p
u
o
r
G
Independent
Challenge
Reporting
Aggregation,
Escalation
Independent
Challenge
Independent
Challenge
Reporting
Risk Division
Committees and
Governance
t
h
g
i
s
r
e
v
o
k
s
i
r
–
e
c
n
e
f
e
d
f
o
e
n
i
l
d
n
o
c
e
S
Primary Escalation
Independent Challenge of Both
First and Second Lines of Defence
Business area principal
Enterprise Risk Committees
Commercial Banking Risk Committee
Risk Division Committees and
Governance
Credit Risk Committees
Retail Bank Risk Committee
Group Market Risk Committee
Insurance and Wealth Risk Committee
Group Transformation Risk Committee
Finance Risk Committee
People and Productivity Risk Committee
Group Corporate Affairs Risk Committee
Group People Risk Committee
Responsible Business and Inclusion and
Diversity Risk Committee
Group Conduct, Compliance and Operational
Risk Committee
Group Fraud and Financial Crime
Prevention Committee
Group Financial Risk Committee
Group Capital Risk Committee
Group Model Governance Committee
Ring-Fenced Bank Perimeter
Oversight Committee
Group Chief Executive
Committees
Group Executive Committee (GEC)
Group and Ring-Fenced Banks
Risk Committees (GRC)
Group and Ring-Fenced Banks Asset and
Liability Committees (GALCO)
Group and Ring-Fenced Banks Customer
First Committees
Group and Ring-Fenced Banks Cost
Management Committees
Group and Ring-Fenced Banks Conduct
Review Committees
Group and Ring-Fenced Banks
People Committees
Group and Ring-Fenced Banks
Sustainability Committees
Senior Independent Performance
Adjustment and Conduct Committees
Group and Ring-Fenced Banks Strategic
Review 3 Committees
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationBusiness Area Principal Enterprise Risk CommitteesFirst Line of Defence – Risk ManagementAudit CommitteeBoardBoard Risk CommitteeGroup Chief ExecutiveGroup and Ring Fenced Banks Risk Committee
136 Lloyds Banking Group Annual Report and Accounts 2019
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 70 to 93, for further information on Board committees.
The divisional and functional risk committees review and recommend divisional and functional risk appetite and monitor local risk profile and adherence
to appetite.
Table 1.3: Executive and Risk Committees
The Group Chief Executive is supported by the following:
Committees
Risk focus
Group Executive Committee (GEC)
Group and Ring-Fenced Banks Risk
Committees (GRC)
Group and Ring-Fenced Banks Asset and Liability
Committees (GALCO)
Group and Ring-Fenced Banks Customer
First Committees
Assists the Group Chief Executive in exercising their authority in relation to material matters having
strategic, cross-business area or Group-wide implications.
Responsible for the development, implementation and effectiveness of the Group’s enterprise 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 of customer experience and the governing body of customer
plans and targets including governing targets and plans, oversight of customer outcomes and
experience, and learning through best practice externally and leveraging Group memberships
and partnerships.
Group and Ring-Fenced Banks Cost
Management Committees
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.
Group and Ring-Fenced Banks Conduct
Review Committees
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.
Group and Ring-Fenced Banks
People Committees
Oversees the Group’s people and colleague policies, the 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, progress of
the Group towards its culture targets and oversees the implementation of action plans.
Group and Ring-Fenced Banks
Sustainability Committees
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 purpose of Helping Britain Prosper.
Senior Independent Performance Adjustment
and Conduct Committees
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.
Group and Ring-Fenced Banks Strategic Review
3 Committees
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
Review material credit risk, both current and emerging, and adherence to agreed risk appetite;
provide insight into the performance of material credit portfolios against expectation, forecast,
metrics, portfolio controls to ensure they remain within agreed credit risk appetite; provide assurance
that new business is being written within agreed credit risk appetite; ensure credit risk exposures
causing concerns and any risks or issues are identified as early as possible so that remedial action
may be taken; review information on credit impairment levels and allowance for expected credit
losses; review information on the performance of credit risk models; and the reporting of monitoring
activities relating to residual value risk.
Reviews and recommends market risk appetites. Monitors and oversees 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.
Responsible for reviewing and proposing changes to the market risk management framework, and
for reviewing adequacy of data quality for managing market risks.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 137
Committees
Risk focus
Group Conduct, Compliance and
Operational Risk Committee
Group Fraud and Financial Crime
Prevention Committee
Group Financial Risk Committee
Group Capital Risk Committee
Group Model Governance Committee
Acts as a Risk community forum to independently challenge and oversee the Group-wide risk and
control environment, using read-across and lessons learned 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.
The Fraud and Financial Crime Prevention Committee brings together accountable stakeholders
and subject matter experts to ensure that the 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 (Anti-Money Laundering, Anti-bribery and
Sanctions) policies. It 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 overseeing, reviewing, challenging and recommending to senior executives and
Board committees on internal and regulatory stress tests, Internal Capital Adequacy Assessment
Process, Individual Liquidity 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, Ring Fenced
bank and material subsidiaries, including the Group’s latest capital position and plans, risk appetite
proposals, Pillar 2 development updates relating to ICAAP, Recovery and Resolution and the impact
from regulatory reforms and accounting developments specific to capital.
Responsible for approving 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 those models which require GRC approval to
GRC; approving summary of model performance, approving any appropriate corrective actions; and
supporting approval of risk appetite performance and escalating as required.
Ring Fenced Bank Perimeter Oversight Committee The Committee escalates perimeter control breaches to the Ring-Fenced Banks’ Board and the
Ring-Fenced Banks’ Board Risk Committee.
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 166 to 175) 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 2019, the Group participated in both the Annual Cyclical Scenario
(ACS) UK stress test and the Biennial Exploratory Scenario (BES) run by
the Bank of England (BoE). Despite the severity of the ACS stress, the
Group exceeded the capital and leverage hurdles on a transitional basis,
after the application of management actions and as a consequence was
not required to take any capital actions. The BoE continues to review the
outputs of the BES exercise.
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. Where this identifies plausible
scenarios with an unacceptably high risk, the Group or its entities will adopt
measures to prevent or mitigate that and reflect these 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 principal risk categories on
pages 138 to 187 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. From 2020 onwards, climate
change risk stress testing will be considered as part of the implementation
of the recommendations of the Taskforce on Climate-related Financial
Disclosures (TCFD).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
138 Lloyds Banking Group Annual Report and Accounts 2019
Methodology
The stress tests at all levels must comply with all regulatory requirements,
achieved through the 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.
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 engagement of all required business, Risk and Finance teams 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.
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 and Ring-
Fenced Bank’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 and Ring-Fenced Bank’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.
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 139 to 187.
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. There have been no changes to the risk categories during 2019.
Principal risk categories
Secondary risk categories
Change/Execution risk
Page 139
– Change/Execution
Data risk
Page 139
– Data
Operational resilience risk
Page 140
– Operational resilience
Strategic risk
Page 141
Credit risk
Page 141
– Strategic
– Retail credit
– Commercial credit
Regulatory and legal risk
Page 162
– Regulatory compliance
– Legal
Conduct risk
Page 163
Operational risk
Page 163
– Conduct
– Business process
– Cyber and information security
– External service provision
– Financial crime
– Financial reporting
– Fraud
– Internal service provision
– IT systems
– Physical security/health and safety
– Sourcing
People risk
Page 165
– People
Insurance underwriting risk
Page 165
– Insurance underwriting
Capital risk
Page 166
– Capital
Funding and liquidity risk
Page 175
– Funding and liquidity
Governance risk
Page 181
Market risk
Page 182
Model risk
Page 187
– 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 Change and execution risk
Definition
Change and execution is defined as the risk that, in delivering its change
agenda, the Group fails to ensure compliance with laws and regulation,
maintain effective customer service and availability, and/or operation within
the Group’s risk appetite.
Exposures
Change and execution risks arise when the Group undertakes activities
which require products, processes, people, systems or controls to change.
These changes can be as a result of external drivers (for example, a new
piece of regulation that requires the Group to put in place a new process
or reporting) and internal drivers (such as the strategic transformation that is
outlined in our GSR3).
Measurement
The Group currently measures change and execution risk against a
defined risk appetite metric which is a combination of lead, quality and
delivery indicators across the investment portfolio. These indicators are
reported through defined internal governance structures in the form of
a monthly execution risk dashboard. An associated measure, based on
the aggregate performance of the dashboard is included in the Group
Balanced Scorecard.
Mitigation
The Group takes a range of mitigating actions with respect to change and
execution risk. These include the following:
The Board establishes a Group-wide risk appetite and metric for change
and execution risk
Ensuring compliance with the Change policy and associated policies
and procedures, which set out the principles and key controls that apply
across the business and are aligned to the Group risk appetite
Businesses assess the potential impacts of undertaking any change
activity on their ability to execute effectively, and the potential
consequences for the existing risk profiles
The implementation of effective governance and control frameworks
to ensure adequate controls are in place to manage the change activity
and act to mitigate the change and execution risks identified. These
controls are monitored in line with the Change policy and any additional
monitoring that is deemed necessary
Events related to change activities are escalated and managed
appropriately in line with risk framework guidance
Monitoring
Change and execution risks from across the Group are monitored and
reported through to Board and Group Governance Committees in
accordance with the Group’s enterprise risk management framework
and aligned to our GSR3 activities. Risk exposures are discussed monthly
through established governance through to Group Transformation
Risk Committee with upwards reporting to Board Risk and Executive
Committees. In addition, oversight, challenge and reporting are completed
at Risk division level to provide oversight of management of risks and
the effectiveness of controls, recommending follow up remedial action
if required. All material change and execution risk events are escalated
in accordance with the formal Group Operational Risk policy and
Change policy.
Data risk
Definition
Data risk is defined as the risk of the Group failing to effectively govern,
manage and control its data (including data processed by third party
suppliers), leading to unethical decisions, poor customer outcomes, loss of
value to the Group and mistrust.
Lloyds Banking Group Annual Report and Accounts 2019 139
Exposures
Data risk is present in all aspects of the business where data is processed,
both within the Group and by third parties including colleague and
contractor, prospective and existing customer, client lifecycle and insight
processes. Data risk manifests
When personal data is not gathered legally, for a legitimate purpose, or
is not managed/protected from misuse and/or processed in a way that
complies with General Data Protection Regulations (GDPR) and other
data privacy regulatory obligations
When data quality (accuracy, completeness, consistency, uniqueness,
validity and timeliness) is not managed, resulting in data used in systems,
processes and products not being fit for the intended purpose
When data records are not created, retained, protected and destroyed
appropriately and when data records cannot be retrieved in a
timely manner
When data governance fails to provide robust oversight of data
decision-making and the control mechanisms to ensure strategies and
management instructions are implemented effectively
When data standards are not maintained across core data, data
management risks are not managed and data related issues are not
remediated as a result of poor data management resulting in inaccurate,
incomplete data that is not available at the right time, to the right
people, to enable business decisions to be made, and regulatory
reporting requirements to be fulfilled
When critical data mapping and data information standards are not
followed impacting compliance, traceability and understanding of data
Measurement
Data risk is measured through a series of quantitative and qualitative
indicators, aligned to key sources of data risk for the Group covering data
governance, data management and data privacy and ethics. In addition to
risk appetite measures and limits, data risks and controls are monitored and
governed on a monthly basis through divisional risk committees. Significant
issues are escalated to Group Risk Committee.
Mitigation
Data risk is a key component of the Group’s enterprise risk management
framework, where the focus is on the end to end management of data
risk. This ensures that risks are identified, measured, managed, monitored
and reported using the risk and control self-assessment process.
Significant investment has been made to enhance the maturity of data risk
management in recent years. In addition to the General Data Protection
programme which delivered the necessary infrastructure to achieve
compliance with the new regulations in May 2018, a number of other large
investments and remediation projects include:
Enhancing capability by investing in professional training for data
privacy managers
Enhancing assurance over of suppliers
Delivered enhanced controls and processes for data retention and
destruction, deleting large volumes of historic over-retained data
Delivering increased level of data maturity against the Data
Management Capability Assessment Model
Where required, these projects have also delivered enhancements
to colleague and client training, vetting procedures and access
controls processes
Monitoring
Data risk is governed through divisional risk committees and significant
issues are escalated to Group Risk Committee, in accordance with the
Group’s enterprise risk management framework. Risk exposures are
discussed at divisional risk committees, where oversight, challenge and
reporting are completed to assess the effectiveness of controls. Remedial
action is recommended, if required. All material data risk events are
escalated in accordance with the Group Operational Risk policy and Data
risk policies to the respective divisional Managing Directors and Conduct,
Compliance and Operational Risk, including, where personal data is
concerned, the Group Data Protection Officer. In addition, Group-wide
data risk issues and the top data risks that Group faces are discussed at
Group Data Committee.
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140 Lloyds Banking Group Annual Report and Accounts 2019
A number of activities support the close monitoring of data risk including:
Design and monitoring of data risk appetite metrics, including key risk
indicators and key performance indicators
Monitoring and reporting of progress against the Data Capability
Assessment Model
Monitoring of significant data related issues
Identification and effective mitigation of data risk when planning and
implementing transformation or business change
Implementation of effective controls to mitigate data risk, including data
privacy, ethics, data management and records management
Effective monitoring and testing of compliance with data privacy and
data management regulatory requirements. For example GDPR and
Basel Committee on Banking Supervision (BCBS 239) requirements
Horizon scanning for changes in the external environment, including but
not limited to changes to laws, rules and regulations
Operational resilience risk
Definition
Operational resilience risk is defined as the risk that the Group fails to
design resilience into business operations, underlying infrastructure and
controls (people, process, technology) so that it is able to withstand
external or internal events which could impact the continuation of
operations, and/or fails to respond in a way which meets customer and
stakeholder expectations and needs when the continuity of operations is
compromised.
Exposures
Ineffective operational resilience risk management could lead to vital
services not being available to customers, and in extreme circumstances,
bank failure could result. The Group has in place a transparent and effective
operating model to identify and monitor critical business processes
from a customer, Group and financial industry perspective. The failure to
adequately build resilience into a critical business process may occur in a
variety of ways, including:
The Group being overly reliant on one location to deliver a critical
business process
The Group not having an adequate succession plan in place for
designated subject matter experts
The Group being overly reliant on a supplier which fails to provide
a service
A weakness in the Group’s cyber or security defences leaving it
vulnerable to an attack
The Group failing to upgrade its IT systems and leaving them vulnerable
to failure
Operational resilience and damage to physical assets including: terrorist
acts, other acts of war or hostility, geopolitical, pandemic or other
such events
Effective operational resilience ensures the Group designs resilience
into its systems, is able to withstand and/or recover from a significant
unexpected event occurring and can continue to provide services to its
customers. A significant outage could result in customers being unable
to access accounts or conduct transactions, which as well as presenting
significant reputational risk for the Group would negatively impact the
Group’s purpose of Helping Britain Prosper. Operational resilience is also
an area of continued regulatory and industry focus, similar in importance to
financial resilience.
Failure to manage operational resilience effectively could impact the
following other risk categories:
Regulatory compliance – non-compliance with new/existing operational
resilience regulations, for example, through failure to identify emerging
regulation or not embedding regulatory requirements within the Group’s
policies, processes and procedures
Operational risk – being unable to safely provide customers with
business services
Conduct risk – an operational resilience failure may render the Group
liable to fines from the FCA for poor conduct
Market risk – the Group being unable to provide key services could have
ramifications for the wider market and could impact share price
Measurement
Operational resilience risk is managed across the Group through the
Group’s enterprise risk management framework and Operational risk
policies. The Group’s enterprise risk management framework includes a risk
and control self-assessment process, risk impact likelihood matrix, key risk
and control indicators, risk appetite, a robust incident management and
escalation process, scenario analysis and an operational losses process.
Board risk appetite metrics are in place and are well understood. These
specific measures are subject to ongoing monitoring and reporting,
including a mandatory review of thresholds on at least an annual basis.
To strengthen the management of operational resilience risk, the Group
mobilised an operational resilience enhancement programme which is
designed to focus on end to end resilience and the management of key
risks to critical processes.
Mitigation
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. The Group is carefully considering
the publication of the consultation paper by the FCA, PRA and Bank of
England (December 2019). Focus will be given to ensure that the Group’s
strategy and approach to operational resilience aligns with industry thinking
and expectation. 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 guide our response to a
range of interruptions from internal and external threats and tests these
through scenario-based testing and exercising.
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 risks it faces. Risks are reported
and discussed at local governance forums and escalated to executive
management and Board as appropriate. 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 resilience risk are:
Cyber: the threat landscape associated with cyber risk continues to
evolve and there is significant regulatory attention on this subject. The
Board continues to invest heavily to protect the Group from cyber-
attacks. Investment continues to focus 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
IT resilience: 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
People: the Group acknowledges the risks associated to the failure
to maintain appropriately skilled and available colleagues. The Group
continues to optimise its approach to ensure that where applicable,
colleagues are capable of supporting a critical business process. Key
controls and processes are regularly reported to committee(s) and
alignment to the Group Strategic Review is closely monitored
Property: the Group's property portfolio remains a key focus in ensuring
resilience requirements are appropriately maintained. Processes are
in place to identify key buildings where a critical business process is
performed. Depending on criticality, a number of mitigating controls
are in place to manage the risk of severe critical business process
disruption. The Group remains committed to investment in the upkeep
of the property portfolio, primarily through the Group Property upkeep
investment programme
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 141
Sourcing: the threat landscape associated with third party suppliers
and the critical services they provide continues to receive a significant
amount of regulatory attention. The Group acknowledges the
importance demonstrating control and responsibility for those
critical business services which could cause significant harm to
our customers. Risks and controls are regularly reported through
committee(s) and is further supported via the mobilisation of the
Sourcing enterprise programme
Monitoring
Monitoring and reporting of operational resilience risk is undertaken at
Board, Group, entity and divisional 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 the Risk division and/or Group Internal Audit.
The Group maintains a formal approach to operational resilience risk event
escalation, whereby material events are identified, captured and escalated.
Root causes are determined, 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.
Strategic risk
Definition
The risks which result from strategic plans which do not adequately reflect
trends in external factors, ineffective business strategy execution, or failure
to respond in a timely manner to external environments or changes in
stakeholder behaviours and expectations.
Exposures
The Group faces significant risks due to the changing regulatory and
competitive environments in the financial services sector, with an increased
pace, scale and complexity of change. Customers, shareholders and
employees expectations continue to evolve, with indications that current
societal trends may accelerate, impacting the Group’s ability to respond
accordingly, and negatively impacting the Group’s relevance in society.
Measurement
The Group assesses and monitors the impact of the strategic risk
implications of new business, product entries and other strategic initiatives,
as part of the business planning processes and stress testing scenarios.
Mitigation
The Group has a number of mitigating actions to manage strategic risk,
including:
Continued digitisation of customer journeys, thereby enabling the
delivery of market leading customer experiences that are seamless,
accessible and personal
Robust operating and contingency planning to ensure potential impacts
of strategic initiatives and external drivers are mitigated
Continued focus on increasing the efficiency of the Group’s operations
to ensure investment capacity, responsiveness and effectiveness to
respond to external trends
Development of a compelling colleague proposition to continue to
attract talent to the Group
Monitoring
A review of the Group’s emerging and strategic risks, which includes
the risks to the current strategic review and the mitigating actions, is
undertaken on an annual basis and the findings are reported to the Group
and Board Risk Committees.
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 53 on page 289.
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 also potentially exposed to an additional 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 2019 is shown on page 161. 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 53
on page 289.
Additionally, credit risk arises from leasing arrangements where the Group is
the lessor. Note 2(J) on page 210 provides details on the Group’s approach
to the treatment of leases.
Credit risk exposures in the Insurance and Wealth division relate mostly to
bond and loan assets which, together with some related swaps, are used
to fund annuity commitments within Shareholder funds; plus balances held
in liquidity funds to manage Insurance division’s liquidity requirements, and
exposure to reinsurers.
The investments held in the Group’s defined benefit pension schemes
also expose the Group to credit risk. Note 36 on page 253 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 classed as impaired
and/or 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 and sectors is appropriate and confirming that
appropriate loss allowances for impairment are in place. Output from these
reviews helps to inform credit risk appetite and credit policy.
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142 Lloyds Banking Group Annual Report and Accounts 2019
As the third line of defence, Group Internal Audit undertakes regular
risk-based reviews to assess the effectiveness of Credit risk management
and controls.
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 and the outlook.
Risk teams also test the adequacy of 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 187.
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 on page 235 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 credit limits 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 137.
Frequent and robust Credit risk oversight and assurance: oversight and
assurance of credit risk is undertaken by independent credit risk oversight
functions operating within the Risk division 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.
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
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.
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 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 which types of collateral valuation are acceptable, 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, rather than reliance on the disposal of any security provided.
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 primarily 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.
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 53 on page 289 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
Risk management continued 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 loan to value (LTV) of 95 per cent. This can increase to
100 per cent for specific products where additional security is provided by a
supporter of the applicant and held on deposit by the Group. 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 loan Underwriting is generally the same as that for loans
intended to be held to maturity. All hard loan/bond 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.
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. Where possible, the Group uses Continuous Linked Settlement in
order to reduce FX settlement risk.
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, with separate documentation required for each
Group entity providing facilities. 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).
Lloyds Banking Group Annual Report and Accounts 2019 143
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 nettings 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, securitisations (including Significant Risk Transfer transactions),
purchases of credit default swaps and purchase of credit insurance as a
means of mitigating or reducing credit risk and/or risk concentration, 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 model governance framework – see model risk on page 187.
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.
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.
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. 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 209.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
144 Lloyds Banking Group Annual Report and Accounts 2019
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 pays the Group all or part of the interest on the mortgage on
behalf of the customer. This is provided as a government loan which the
customer must repay.
The Group credit risk portfolio in 2019
Overview
Credit quality remains strong despite an uncertain environment
The Group’s loan portfolios continue to be well positioned, reflecting
the Group’s effective risk management and continue to benefit from a
low interest rate environment
The net asset quality ratio increased to 29 basis points
(2018: 21 basis points) as did the impairment charge to £1,291 million
(2018: £937 million). This was primarily driven by material charges
against two corporate cases in Commercial Banking, along with some
weakening in used car prices in Retail
Stage 2 loans as a proportion of total loans and advances to customers
reduced by 0.1 percentage points to 7.7 per cent (31 December
2018: 7.8 per cent). Stage 2 loans and advances were broadly flat at
£38.4 billion
Stage 2 expected credit loss allowances as a percentage of drawn
balances (coverage) decreased to 3.7 per cent (31 December 2018:
4.1 per cent), largely driven by a reduction in expected credit loss (ECL)
allowances in SME due to an enhanced approach to loan amortisation
within the IFRS 9 model and a number of other model refinements
Stage 3 loans as a proportion of total loans and advances to customers
fell to 1.8 per cent (31 December 2018: 1.9 per cent), with Stage 3 loans
and advances down £0.5 billion to £8.8 billion. Coverage of Stage 3
assets reduced by 1.8 percentage points to 22.5 per cent, largely as a
result of a the improved performance of mortgage cases in long-
term default , and a change in the mix of Commercial assets due to
a combination of write-offs and the transfer in of cases with lower
likelihood of net loss
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
Although not immune, credit portfolios are well positioned against an
uncertain economic outlook and potential market volatility
The Group continues to grow lending to targeted segments in line
with strategy, without relaxing credit criteria
The Group’s effective risk management seeks to ensure 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
Table 1.4: Group impairment charge (underlying basis)
Retail
Commercial Banking
Insurance and Wealth
Central Items
Total impairment charge
Asset quality ratio
Gross asset quality ratio
Loans
and
advances
to customers
£m
Financial
assets at
fair value
through other
comprehensive
income
£m
1,063
297
–
(53)
1,307
–
(1)
–
–
(1)
Undrawn
balances
£m
(25)
10
–
–
(15)
2019
Total
£m
1,038
306
–
(53)
1,291
0.29%
0.37%
2018¹
£m
861
71
1
4
937
0.21%
0.28%
1 Prior period segmental comparatives restated. See note 4 on page 217.
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 of 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
allowance equivalent to the expected credit losses that result from those
default events that are possible within 12 months of the reporting date
(12 month expected credit losses).
Stage 2 assets are those which have experienced a significant increase
in credit risk since origination. These assets carry an expected credit loss
allowance equivalent to the expected credit losses arising over the lifetime
of the asset (lifetime expected credit losses).
Stage 3 assets have either defaulted or are otherwise considered to be
credit impaired. These assets carry a lifetime expected credit loss.
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.
Credit risk basis of presentation
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.
In the following statutory basis tables, purchased or originated credit-
impaired (POCI) assets include 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. The residual ECL allowance and resulting low coverage ratio on
POCI assets reflects further deterioration in the creditworthiness from the
date of acquisition. Over time, these 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 purchased as part
of the HBOS acquisition. The underlying basis assumes that the lending
assets acquired as part of a business combination were originated by the
Group and are 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 2019 145
Table 1.5: 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 2019
Retail
Commercial Banking
Insurance and Wealth
Central items
Total gross lending
344,218
305,502
96,763
87,323
862
753
56,404
56,397
22,518
5,993
32
–
498,247
449,975
28,543
Expected credit loss allowance on drawn balances
(3,259)
(675)
(995)
Net balance sheet carrying value
494,988
449,300
27,548
2,484
3,447
77
7
6,015
(1,447)
4,568
13,714
–
–
–
13,714
(142)
13,572
Expected credit loss allowances (drawn and undrawn) as a
percentage of gross lending (%)1
0.7
0.2
3.8
25.0
1.0
At 31 December 20182
Retail
Commercial Banking
Insurance and Wealth
Central items
Total gross lending
Expected credit loss allowance on drawn balances
341,682
101,824
865
43,637
488,008
(3,150)
305,160
92,002
804
43,565
441,531
(525)
Net balance sheet carrying value
484,858
441,006
18,741
6,592
6
6
25,345
(994)
24,351
2,390
3,230
55
66
5,741
(1,553)
4,188
15,391
–
–
–
15,391
(78)
15,313
Expected credit loss allowances (drawn and undrawn) as a
percentage of gross lending (%)1
0.7
0.1
4.2
28.4
0.5
1 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £205 million (31 December 2018: £250 million).
2 Prior period segmental comparatives restated. See note 4 on page 217.
Table 1.6: Group loans and advances to customers (underlying basis)
At 31 December 20191
Retail
Commercial Banking
Insurance and Wealth
Central items
Total gross lending
Expected credit loss allowance on drawn balances
Net balance sheet carrying value
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
344,776
307,138
96,763
87,323
862
753
56,404
56,397
498,805
451,611
(3,965)
(702)
494,840
450,909
32,415
5,993
32
–
38,440
(1,346)
37,094
5,223
3,447
77
7
8,754
(1,917)
6,837
Expected credit loss allowances (drawn and undrawn) as a percentage of
gross lending (%)2
0.8
0.2
3.7
22.5
At 31 December 20181,3
Retail
Commercial Banking
Insurance and Wealth
Central items
Total gross lending
Expected credit loss allowance on drawn balances
Net balance sheet carrying value
342,559
101,824
865
43,637
488,885
(4,236)
305,048
92,002
804
43,565
441,419
(556)
484,649
440,863
31,647
6,592
6
6
38,251
(1,506)
36,745
5,864
3,230
55
66
9,215
(2,174)
7,041
Expected credit loss allowances (drawn and undrawn) as a percentage of
gross lending (%)2
0.9
0.2
4.1
24.3
1 These balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
2 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £205 million (31 December 2018: £250 million).
3 Prior period segmental comparatives restated. See note 4 on page 217.
0.7
3.6
8.9
–
1.2
0.7
3.2
6.4
0.2
1.2
Stage 3
as % of
total
%
1.5
3.6
8.9
–
1.8
1.7
3.2
6.4
0.2
1.9
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
146 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.7: Group’s total expected credit loss allowance (statutory basis)
Customer related balances
Drawn
Undrawn
Other assets
Total expected credit loss allowance
Table 1.8: Group’s total expected credit loss allowance (underlying basis)
Customer related balances
Drawn
Undrawn
Other assets
Total expected credit loss allowance
At
31 Dec 2019
£m
At
31 Dec 2018
£m
3,259
177
3,436
19
3,455
3,150
193
3,343
19
3,362
At
31 Dec 2019
£m
At
31 Dec 2018
£m
3,965
177
4,142
19
4,161
4,236
193
4,429
19
4,448
Table 1.9: Reconciliation between statutory and underlying basis of Group gross loans and advances to customers
At 31 December 2019
Underlying basis
Purchased or originated credit-impaired assets
Acquisition fair value adjustment
Statutory basis
At 31 December 2018
Underlying basis
Purchased or originated credit-impaired assets
Acquisition fair value adjustment
Statutory basis
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or originated
credit-impaired
£m
498,805
451,611
–
(558)
(558)
(1,718)
82
(1,636)
498,247
449,975
488,885
441,419
–
(877)
(877)
–
112
112
488,008
441,531
38,440
(9,903)
6
(9,897)
28,543
38,251
(12,917)
11
(12,906)
25,345
8,754
(2,740)
1
(2,739)
6,015
9,215
(3,476)
2
(3,474)
5,741
–
14,361
(647)
13,714
13,714
–
16,393
(1,002)
15,391
15,391
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 147
Table 1.10: Reconciliation between statutory and underlying basis of Group expected credit loss allowances on
drawn balances
At 31 December 2019
Underlying basis
Purchased or originated credit-impaired assets
Acquisition fair value adjustment
Statutory basis
At 31 December 2018
Underlying basis
Purchased or originated credit-impaired assets
Acquisition fair value adjustment
Statutory basis
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or originated
credit-impaired
£m
3,965
–
(706)
(706)
3,259
4,236
–
(1,086)
(1,086)
3,150
702
–
(27)
(27)
675
556
–
(31)
(31)
525
1,346
1,917
(334)
(17)
(351)
995
1,506
(481)
(31)
(512)
994
(455)
(15)
(470)
1,447
2,174
(599)
(22)
(621)
1,553
–
789
(647)
142
142
–
1,080
(1,002)
78
78
Table 1.11: 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
Purchased or
originated
credit-impaired
As % of
drawn
balances
%
£m
2,090
1,313
17
16
3,436
1,768
1,486
18
71
3,343
0.6
1.4
2.0
–
0.7
0.5
1.5
2.1
0.2
0.7
As % of
drawn
balances
%
0.2
0.1
0.8
–
0.2
0.2
0.1
0.7
0.1
0.1
£m
639
115
6
10
770
493
111
6
38
648
As % of
drawn
balances
%
3.6
4.2
3.1
–
3.8
3.8
5.1
16.7
100.0
4.2
£m
819
252
1
–
1,072
713
338
1
6
1,058
As % of
drawn
balances1
%
As % of
drawn
balances
%
£m
21.5
27.4
13.0
85.7
25.0
22.6
32.1
20.0
40.9
28.4
142
1.0
–
–
–
–
–
–
142
1.0
78
–
–
–
78
0.5
–
–
–
0.5
£m
490
946
10
6
1,452
484
1,037
11
27
1,559
At 31 December 2019
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
At 31 December 20182
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
1 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £205 million (31 December 2018: £250 million).
2 Prior period segmental comparatives restated. See note 4 on page 217.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
148 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.12: Group expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to
customers (underlying basis)
At 31 December 20191
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
At 31 December 20183
Retail
Commercial Banking
Insurance and Wealth
Central items
Total
Total
Stage 1
Stage 2
Stage 3
As % of
drawn
balances
%
£m
2,796
1,313
17
16
4,142
2,854
1,486
18
71
4,429
0.8
1.4
2.0
–
0.8
0.8
1.5
2.1
0.2
0.9
As % of
drawn
balances
%
As % of
drawn
balances
%
£m
0.2
0.1
0.8
–
0.2
0.2
0.1
0.7
0.1
0.2
1,170
252
1
–
1,423
1,225
338
1
6
1,570
3.6
4.2
3.1
–
3.7
3.9
5.1
16.7
100.0
4.1
£m
666
115
6
10
797
524
111
6
38
679
As % of
drawn
balances2
%
19.1
27.4
13.0
85.7
22.5
19.7
32.1
20.0
40.9
24.3
£m
960
946
10
6
1,922
1,105
1,037
11
27
2,180
1 Balances exclude the impact of the HBOS and MBNA related acquisition adjustments.
2 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £205 million (31 December 2018: £250 million).
3 Prior period segmental comparatives restated. See note4 on page 217.
Table 1.13: Group Stage 2 loans and advances to customers (statutory basis)
Total
Up to date
1-30 days past due
Over 30 days past due
PD movements
Other1
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
22,518
819
3.6
13,359
341
2.6
4,959
238
4.8
2,373
130
5.5
1,827
110
6.0
5,993
252
4.2
3,911
179
4.6
1,700
64
3.8
117
32
–
1
–
3.1
–
–
–
–
–
–
–
28
–
1
–
28,543 1,072
3.8
17,270
520
3.0
6,687
303
3.6
–
4.5
1
–
8
–
–
6.8
265
–
–
3
–
1
–
–
0.4
–
–
2,491
138
5.5
2,095
111
5.3
18,741
713
3.8
10,017
248
2.5
4,488
250
5.6
2,441
113
4.6
1,795
102
5.7
6,592
338
5.1
4,169
177
4.2
1,851
110
5.9
455
42
9.2
117
6
6
1
6
16.7
100.0
3
–
–
–
–
–
1
6
–
6
–
100.0
–
–
–
–
–
–
2
–
9
1
–
25,345
1,058
4.2
14,189
425
3.0
6,346
366
5.8
2,896
155
5.4
1,914
112
7.7
50.0
–
5.9
At 31 December
2019
Retail
Commercial
Banking
Insurance and
Wealth
Central items
Total
At 31 December
2018
Retail
Commercial
Banking
Insurance and
Wealth
Central items
Total
1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 149
Table 1.14: Group Stage 2 loans and advances to customers (underlying basis)
Total
Up to date
1-30 days past due
Over 30 days past due
PD movements
Other1
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
32,415 1,170
3.6
18,607
461
2.5
6,096
304
5.0
4,014
184
4.6
3,698
221
6.0
5,993
252
4.2
3,911
179
4.6
1,700
64
3.8
117
32
–
1
–
3.1
–
–
–
–
–
–
–
28
–
1
–
38,440 1,423
3.7
22,518
640
2.8
7,824
369
3.6
–
4.7
1
–
8
–
–
6.8
265
–
–
3
–
1
–
–
0.4
–
–
4,132
192
4.6
3,966
222
5.6
31,647
1,225
3.9
16,928
397
2.3
6,097
372
6.1
4,472
182
4.1
4,150
274
6.6
6,592
338
5.1
4,169
177
4.2
1,851
110
5.9
455
42
9.2
117
6
6
1
6
16.7
100.0
3
–
–
–
–
–
1
6
–
6
–
100.0
–
–
–
–
–
–
2
–
9
1
–
38,251
1,570
4.1
21,100
574
2.7
7,955
488
6.1
4,927
224
4.5
4,269
284
7.7
50.0
–
6.7
At 31 December
2019
Retail
Commercial
Banking
Insurance and
Wealth
Central items
Total
At 31 December
2018
Retail
Commercial
Banking
Insurance and
Wealth
Central items
Total
1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.
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.
The table below shows the ECL calculated under each scenario on both an underlying and a statutory basis.
Statutory basis
Secured
Other Retail
Commercial
Other
At 31 December 2019
Underlying basis
Secured
Other Retail
Commercial
Other
At 31 December 2019
Probability-
weighted
£m
569
1,521
1,315
50
3,455
Probability-
weighted
£m
1,216
1,580
1,315
50
4,161
Upside
£m
Base Case
£m
Downside
£m
317
1,443
1,211
50
3,021
464
1,492
1,258
50
3,264
653
1,564
1,382
50
3,649
Upside
£m
Base Case
£m
Downside
£m
964
1,502
1,211
50
3,727
1,111
1,551
1,258
50
3,970
1,300
1,623
1,382
50
4,355
Severe
Downside
£m
1,389
1,712
1,597
50
4,748
Severe
Downside
£m
2,036
1,771
1,597
50
5,454
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
150 Lloyds Banking Group Annual Report and Accounts 2019
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
Upside
£m
3,707
Downside
£m
4,383
Retail
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 continues to benefit from high employment
rates, 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 loans and advances as a per cent of total decreased slightly to 1.5 per cent (31 December 2018: 1.7 per cent)
Loans and advances increased to £345 billion (31 December 2018: £343 billion)
The impairment charge increased to £1,038 million in 2019 compared to £861 million in the same period in 2018, driven by a number of items
including some weakening in used car prices, provisioning methodology refinements and lower cash recoveries following prior year debt sales,
partially offset by releases following a reassessment of cases in long-term default and repossession and improvements in the Secured portfolio
ECL allowance as a percentage of drawn balances for Stage 3 decreased to 19.1 per cent (31 December 2018: 19.7 per cent) following a reassessment of
Secured cases in long-term default. Coverage for Stage 2 is also broadly stable at 3.6 per cent (31 December 2018: 3.9 per cent)
Portfolios
Secured credit quality remains strong, with flow to arrears stable at low levels. Total secured loans and advances are broadly flat at £289.8 billion
(31 December 2018: £289.2 billion), with an improved asset risk mix
The average indexed loan to value (LTV) remained broadly stable at 44.9 per cent (31 December 2018: 44.3 per cent) and the proportion of balances
with an LTV of greater than 90 per cent remained broadly flat at 2.5 per cent (31 December 2018: 2.4 per cent). The average LTV of new business
increased to 64.3 per cent (31 December 2018: 62.5 per cent). The Group entered into a risk transfer transaction of £1 billion worth of higher LTV new
business in 2019, which was awarded Transaction of the Year at the 2019 SCI Capital Relief Trades Awards
The impairment release of £167 million in 2019 compared to a charge of £38 million in 2018. This reflects provision releases due to improved credit
quality of the portfolio and a reassessment of Secured cases in long-term default. Total expected credit loss allowance as a percentage of loans and
advances (coverage) reduced slightly to 0.4 per cent (31 December 2018: 0.5 per cent)
Unsecured loans and advances remained broadly flat at £28.3 billion. The impairment charge increased by £265 million to £948 million for 2019
(2018: £683 million), due to provisioning methodology refinements, including the alignment of credit card methodologies, and lower cash recoveries
following prior year debt sales. The total coverage was 3.8 per cent (31 December 2018: 3.5 per cent)
The motor finance portfolio continued to grow in 2019, with loans and advances increasing by 7.0 per cent to £16.0 billion (31 December 2018:
£14.9 billion). The portfolio continues to benefit from a prudent approach to residual values at origination and provisions through the loan lifecycle.
Residual value provisions, which are included in ECL allowances for Stage 1 and Stage 2, have increased to £201 million at 31 December 2019
(31 December 2018: £99 million). This is due to an anticipated increase in residual value deficits following some weakening in used car prices, a change in
approach relating to the recognition of voluntary terminations and book growth. As a result of this, the impairment charge increased to £203 million for
2019 (2018: £113 million) and coverage for the portfolio increased to 2.4 per cent (31 December 2018: 1.9 per cent)
Other loans and advances increased by £0.2 billon to £10.6 billion. The impairment charge was £54 million for 2019 (2018: £27 million). This increase
is partly due to the non-repeat of prior year IFRS 9 methodology refinements in Business Banking. Total coverage remained flat at 1.2 per cent
(31 December 2018: 1.2 per cent)
Risk management continued
Lloyds Banking Group Annual Report and Accounts 2019 151
2019
£m
(167)
948
203
54
1,038
0.30%
2018
£m
38
683
113
27
861
0.25%
Change
%
(39)
(80)
(100)
(21)
5bp
Table 1.15: Retail impairment charge (underlying basis)
Secured
Unsecured1
UK Motor Finance
Other2,3
Total impairment charge
Asset quality ratio
1 Unsecured includes Credit cards, Loans and Overdrafts.
2 Other includes Business Banking, Europe and Retail run-off.
3 Prior period segmental comparatives restated. See note 4 on page 217.
Table 1.16: 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 2019
Secured
Unsecured1
UK Motor Finance
Other2
Total gross lending
289,198
257,043
16,935
1,506
13,714
28,411
15,976
10,633
24,921
13,884
9,654
2,812
1,942
829
344,218
305,502
22,518
678
150
150
2,484
(490)
1,994
–
–
–
13,714
(142)
13,572
Expected credit loss allowance on drawn balances
(1,961)
(563)
(766)
Net balance sheet carrying value
342,257
304,939
21,752
Expected credit loss allowances (drawn and undrawn) as a
percentage of gross lending (%)3
0.6
0.2
3.6
21.5
1.0
At 31 December 2018
Secured
Unsecured1
UK Motor Finance
Other2
Total gross lending
Expected credit loss allowance on drawn balances
Net balance sheet carrying value
Expected credit loss allowances (drawn and undrawn) as a
percentage of gross lending (%)3
1 Unsecured includes Credit cards, Loans and Overdrafts.
2 Other includes Business Banking, Europe and Retail run-off.
288,235
257,797
13,654
1,393
15,391
28,115
14,933
10,399
24,705
13,224
9,434
341,682
305,160
(1,613)
(389)
340,069
304,771
0.5
0.2
2,707
1,580
800
18,741
(662)
18,079
3.8
703
129
165
2,390
(484)
1,906
22.6
–
–
–
15,391
(78)
15,313
0.5
0.5
2.4
0.9
1.4
0.7
0.5
2.5
0.9
1.6
0.7
3 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £184 million (31 December 2018: £233 million) and £21 million
(31 December 2018: £17 million) for Business Banking in Other.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
152 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.17: Retail loans and advances to customers (underlying basis)
At 31 December 20191
Secured
Unsecured2
UK Motor Finance
Other3
Total gross lending
Expected credit loss allowance on drawn balances
Net balance sheet carrying value
Expected credit loss allowances (drawn and undrawn) as a
percentage of gross lending (%)4
At 31 December 20181
Secured
Unsecured2
UK Motor Finance
Other3
Total gross lending
Expected credit loss allowance on drawn balances
Net balance sheet carrying value
Expected credit loss allowances (drawn and undrawn) as a percentage of
gross lending (%)4
1 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.
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Stage 3 as
% of
total
%
289,845
258,760
26,838
4,247
28,322
15,976
10,633
24,840
13,884
9,654
344,776
307,138
(2,667)
(590)
342,109
306,548
2,806
1,942
829
32,415
(1,117)
31,298
676
150
150
5,223
(960)
4,263
0.8
0.2
3.6
19.1
289,237
257,797
26,571
4,869
27,990
14,933
10,399
24,593
13,224
9,434
342,559
305,048
(2,698)
(420)
339,861
304,628
0.8
0.2
2,696
1,580
800
31,647
(1,173)
30,474
3.9
701
129
165
5,864
(1,105)
4,759
19.7
1.5
2.4
0.9
1.4
1.5
1.7
2.5
0.9
1.6
1.7
4 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £184 million (31 December 2018: £233 million) and £21 million
(31 December 2018: £17 million) for Business Banking in Other.
Table 1.18: Reconciliation between statutory and underlying basis of Retail gross loans and advances to customers
At 31 December 2019
Underlying basis
Purchased or originated credit-impaired assets
Acquisition fair value adjustment
Statutory basis
At 31 December 2018
Underlying basis
Purchased or originated credit-impaired assets
Acquisition fair value adjustment
Statutory basis
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
344,776
307,138
–
(558)
(558)
(1,718)
82
(1,636)
344,218
305,502
342,559
305,048
–
(877)
(877)
–
112
112
341,682
305,160
32,415
(9,903)
6
(9,897)
22,518
31,647
(12,917)
11
(12,906)
18,741
5,223
(2,740)
1
(2,739)
2,484
5,864
(3,476)
2
(3,474)
2,390
Purchased or
originated
credit-
impaired
£m
–
14,361
(647)
13,714
13,714
–
16,393
(1,002)
15,391
15,391
Risk management continued
Lloyds Banking Group Annual Report and Accounts 2019 153
Table 1.19: Reconciliation between statutory and underlying basis of Retail expected credit loss allowances on drawn
balances
At 31 December 2019
Expected credit losses on drawn balances
Underlying basis
Purchased or originated credit-impaired assets
Pre-acquisition ECL allowances
Statutory basis
At 31 December 2018
Expected credit losses on drawn balances
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
2,667
–
(706)
(706)
1,961
2,698
–
(1,085)
(1,085)
1,613
590
–
(27)
(27)
563
420
–
(31)
(31)
389
1,117
(334)
(17)
(351)
766
960
(455)
(15)
(470)
490
1,173
1,105
(481)
(30)
(511)
662
(599)
(22)
(621)
484
Purchased or
originated
credit-impaired
£m
–
789
(647)
142
142
–
1,080
(1,002)
78
78
Table 1.20: 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
Purchased
or originated
credit-impaired
As % of
drawn
balances
%
£m
569
1,007
387
127
2,090
460
896
290
122
1,768
0.2
3.6
2.4
1.2
0.6
0.2
3.2
1.9
1.2
0.5
As % of
drawn
balances
%
–
1.5
1.6
0.4
0.2
–
1.2
1.0
0.4
0.2
£m
24
363
216
36
639
38
287
127
41
493
As % of
drawn
balances
%
1.7
14.6
4.5
4.8
3.6
1.7
14.0
4.9
3.8
3.8
£m
281
411
87
40
819
226
379
78
30
713
As % of
drawn
balances1
%
As % of
drawn
balances
%
£m
8.1
47.2
56.0
39.5
21.5
8.5
48.9
65.9
34.5
22.6
142
1.0
–
–
–
–
–
–
142
1.0
78
–
–
–
78
0.5
–
–
–
0.5
£m
122
233
84
51
490
118
230
85
51
484
At 31 December 2019
Secured
Unsecured2
UK Motor Finance3
Other4
Total
At 31 December 2018
Secured
Unsecured2
UK Motor Finance3
Other4
Total
1 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £184 million (31 December 2018: £233 million) and £21 million
(31 December 2018: £17 million) for Business Banking within other.
2 Unsecured includes Credit cards, Loans and Overdrafts.
3 UK Motor Finance for Stages 1 and 2 include £201 million (31 December 2018: £99 million) relating to provisions against residual values of vehicles subject to finance leasing agreements.
These provisions are included within the calculation of coverage ratios.
4 Other includes Business Banking, Europe and Retail run-off.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
154 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.21: Retail expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to
customers (underlying basis)
At 31 December 20192
Secured
Unsecured3
UK Motor Finance4
Other5
Total
At 31 December 20182
Secured
Unsecured3
UK Motor Finance4
Other5
Total
Total
Stage 1
Stage 2
Stage 3
As % of
drawn
balances
%
£m
1,216
1,066
387
127
2,796
1,462
980
290
122
2,854
0.4
3.8
2.4
1.2
0.8
0.5
3.5
1.9
1.2
0.8
As % of
drawn
balances
%
–
1.6
1.6
0.4
0.2
–
1.3
1.0
0.4
0.2
£m
26
388
216
36
666
38
318
127
41
524
As % of
drawn
balances
%
2.3
15.3
4.5
4.8
3.6
2.7
15.2
4.9
3.8
3.9
£m
614
429
87
40
1,170
707
410
78
30
1,225
As % of
drawn
balances1
%
13.6
50.6
56.0
39.5
19.1
14.7
53.8
65.9
34.5
19.7
£m
576
249
84
51
960
717
252
85
51
1,105
1 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £184 million (31 December 2018: £233 million) and £21 million
(31 December 2018: £17 million) for Business Banking within other.
2 These balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
3 Unsecured includes Credit cards, Loans and Overdrafts.
4 UK Motor Finance for Stages 1 and 2 include £201 million (31 December 2018: £99 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.
Table 1.22: Retail Stage 2 loans and advances to customers (statutory basis)
Total
Up to date
1-30 days past due
Over 30 days past due
PD movement
Other1
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
281
411
87
40
1.7
10,846
14.6
1,661
543
309
83
217
27
14
4.5
4.8
3.6
1.7
14.0
4.9
3.8
3.8
13,359
341
8,318
998
488
213
10,017
62
149
26
11
248
22,518
819
13,654
2,707
1,580
800
18,741
226
379
78
30
713
0.8
13.1
5.0
4.5
2.6
0.7
14.9
5.3
5.2
2.5
2,593
107
772
1,232
362
90
30
11
4,959
238
1,800
1,357
915
416
4,488
77
144
21
8
250
4.1
11.7
2.4
3.0
4.8
4.3
10.6
2.3
1.9
5.6
1,876
282
135
80
33
67
21
9
2,373
130
1,955
258
146
82
30
53
23
7
2,441
113
1.8
23.8
15.6
11.3
5.5
1.5
20.5
15.8
8.5
4.6
1,620
97
32
78
58
37
9
6
1,827
110
1,581
94
31
89
57
33
8
4
1,795
102
3.6
38.1
28.1
7.7
6.0
3.6
35.1
25.8
4.5
5.7
Gross
lending
£m
16,935
2,812
1,942
829
At 31 December
2019
Secured
Unsecured2
UK Motor Finance
Other3
Total
At 31 December 2018
Secured
Unsecured2
UK Motor Finance
Other3
Total
1 Includes forbearance and product-specific indicators not reflected within quantitative PD assessments.
2 Unsecured includes Credit cards, Loans and Overdrafts.
3 Other includes Business Banking, Europe and Retail run-off.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 155
Table 1.23: Retail Stage 2 loans and advances to customers (underlying basis)
Total
Up to date
1-30 days past due
Over 30 days past due
PD movement
Other1
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
At 31 December
20192
Secured
Unsecured3
UK Motor Finance
Other4
Total
At 31 December 20182
Secured
Unsecured3
UK Motor Finance
Other4
Total
26,838
2,806
1,942
829
614
429
87
40
32,415
1,170
26,571
2,696
1,580
800
707
410
78
30
31,647
1,225
2.3
16,100
15.3
1,656
543
308
192
228
27
14
4.5
4.8
3.6
2.7
15.2
4.9
3.8
3.9
18,607
461
15,228
998
489
213
16,928
211
149
26
11
397
1.2
13.8
5.0
4.5
2.5
1.4
14.9
5.3
5.2
2.3
3,730
171
771
1,232
363
92
30
11
6,096
304
3,419
1,348
914
416
6,097
172
171
21
8
372
4.6
11.9
2.4
3.0
5.0
5.0
12.7
2.3
1.9
6.1
3,517
282
135
80
84
70
21
9
4,014
184
3,987
257
146
82
97
55
23
7
4,472
182
2.4
24.8
15.6
11.3
4.6
2.4
21.4
15.8
8.5
4.1
3,491
97
32
78
167
39
9
6
3,698
221
3,937
93
31
89
227
35
8
4
4,150
274
4.8
40.2
28.1
7.7
6.0
5.8
37.6
25.8
4.5
6.6
1 Includes forbearance and product-specific indicators not reflected within quantitative PD assessments.
2 Balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
3 Unsecured includes Credit cards, Loans and Overdrafts.
4 Other includes Business Banking, Europe and Retail run-off.
Table 1.24: Retail secured loans and advances to customers (statutory basis)
Mainstream
Buy-to-let
Specialist
Total
At 31 Dec
2019
£m
227,975
49,086
12,137
At 31 Dec
2018
£m
223,230
51,322
13,683
289,198
288,235
Table 1.25: 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
2019
Cases
24,393
3,863
6,059
34,315
2018
Cases
30,106
4,544
7,966
42,616
2019
%
1.3
0.9
6.6
1.4
2018
%
1.5
1.0
7.8
1.7
2019
£m
2,619
502
998
4,119
2018
£m
3,262
576
1,282
5,120
2019
%
1.1
1.0
8.2
1.4
2018
%
1.5
1.1
9.3
1.8
1 Value of loans represents total gross book value of mortgages more than three months in arrears; the balances exclude the impact of the HBOS acquisition adjustments.
The stock of repossessions increased to approximately 1,150 cases at 31 December 2019 compared to approximately 750 cases at 31 December 2018.
The increase is due to the resumption of business as usual litigation activity which had been partially suspended whilst changes were made to the Group’s
handling of mortgages arrears.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
156 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.26: Period end and average LTVs across the Retail mortgage portfolios (underlying basis)
At 31 December 20191
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Total
Average loan to value2:
Stock of residential mortgages
New residential lending
At 31 December 20181
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Total
Average loan to value2:
Stock of residential mortgages
New residential lending
Mainstream
%
Buy-to-let
%
Specialist
%
51.8
16.4
16.9
12.0
2.6
0.3
54.1
25.1
18.0
2.0
0.4
0.4
62.7
17.5
11.7
4.1
1.2
2.8
Total
%
52.7
18.0
16.8
10.0
2.1
0.4
100.0
100.0
100.0
100.0
43.6
65.2
52.3
58.2
44.0
n/a
Mainstream
%
Buy-to-let
%
Specialist
%
54.1
16.7
15.9
10.8
2.2
0.3
53.5
24.9
16.6
3.7
0.8
0.5
60.9
16.4
12.0
6.1
1.7
2.9
44.9
64.3
Total
%
54.3
18.1
15.9
9.3
1.9
0.5
100.0
100.0
100.0
100.0
42.6
63.1
52.6
58.6
45.3
n/a
44.3
62.5
1 2019 LTVs (loan to value) use Markit’s 2019 Halifax House Price Index; 2018 LTVs have been restated on the same basis.
2 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 the HBOS
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 2019, owner occupier interest
only balances as a proportion of total owner occupier balances had reduced to 23.9 per cent (31 December 2018: 26.7 per cent). The average indexed loan
to value remained at 41.2 per cent (31 December 2018: 41.2 per cent).
For existing interest only mortgages, a contact strategy is in place during 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 to customers based on their individual circumstances to create fair and sustainable outcomes.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 157
Table 1.27: 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 (%)1
Maturity profile (£m)
Due
1 year
2-5 years
6-10 years
>11 years
At 31 Dec
2019
Total
57,437
At 31 Dec
2018
Total
63,138
75.6
10.0
1.2
13.2
41.2
1,459
1,968
9,852
18,606
25,552
79.1
6.6
1.0
13.3
41.2
1,144
2,405
10,229
18,562
30,798
Past term interest only balances (£m)2
1,677
1,635
Stage 1%
Stage 2%
Stage 3%
Purchased or originated credit impaired %
Average loan to value (%)1
Negative equity (%)
0.9
23.9
21.8
53.4
35.7
2.8
2.8
16.8
17.9
62.5
34.9
2.8
1 2019 interest only LTVs (loan to value) use Markit’s 2019 Halifax House Price Index; 2018 LTVs have been restated on the same basis.
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 is aligned to definitions used in the European Banking Authority’s FINREP reporting. On an underlying basis, total
forbearance for the major retail portfolios has improved by £665 million to £6.5 billion driven primarily by a reduction in customers where arrears are written
on to the loan balance (capitalisations). On a statutory basis the equivalent total forbearance position improved by £546 million to £6.2 billion.
Following the MBNA integration into Lloyds Banking Group systems the December 2019 disclosure includes £129 million of MBNA forbearance, with
December 2018 re-stated to include £128 million of MBNA forbearance (underlying basis).
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.
As a percentage of loans and advances, forbearance loans improved to 1.9 per cent at 31 December 2019 (31 December 2018: 2.2 per cent).
As at 31 December 2019, 98.8 per cent of forbearance loans are captured in Stage 2 or Stage 3 for IFRS 9 and hold provision on a lifetime basis
(31 December 2018: 98.0 per cent).
Total expected credit losses (ECL) as a proportion of loans and advances which are forborne has decreased to 9.3 per cent (31 December 2018:
9.9 per cent).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
158 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.28: Retail forborne loans and advances (statutory basis) (audited)
At 31 December 20192
Secured
Unsecured2
UK Motor Finance
Total
At 31 December 20182
Secured
Unsecured2
UK Motor Finance
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
%
1,156
168
35
1,359
1,136
204
30
1,370
736
305
26
3,659
–
–
1,067
3,659
642
289
25
956
4,241
–
–
4,241
2.1
31.2
30.4
5.0
1.6
30.3
34.8
4.3
Total
£m
5,559
540
63
6,162
6,089
563
56
6,708
1 Expected credit loss allowance as a percentage of total loans and advances which are forborne is calculated excluding loans in recoveries for Unsecured (31 December 2019: £82 million;
31 December 2018: £107 million).
2 2019 balances include MBNA, 2018 balances have been restated on the same basis.
Table 1.29: Retail forborne loans and advances (underlying basis)
At 31 December 20192
Secured
Unsecured3
UK Motor Finance
Total
At 31 December 20182
Secured
Unsecured3
UK Motor Finance
Total
Of which
Stage 2
£m
Of which
Stage 3
£m
Expected credit
losses as a % of
total loans and
advances which
are forborne1
%
3,467
168
35
3,670
3,838
204
30
4,072
2,379
305
26
2,710
2,598
290
25
2,913
7.1
31.2
30.4
9.3
8.0
30.3
34.8
9.9
Total
£m
5,857
540
63
6,460
6,506
563
56
7,125
1 Expected credit losses as a percentage of total loans and advances which are forborne are calculated excluding loans in recoveries for Unsecured (31 December 2019: £82 million;
31 December 2018: £107 million).
2 Balances exclude the impact of HBOS and MBNA acquisition related adjustments.
3 2019 balances include MBNA, 2018 balances have been restated on the same basis.
Commercial Banking
Despite the challenging environment, the overall credit quality of the portfolio and new business remains good. The portfolio continues to benefit
from effective risk management and low interest rates. Notwithstanding the current competitive market conditions, the Group is maintaining its
prudent, well-defined and controlled through the cycle credit risk appetite
The possibility of a no-deal exit from the European Union remains given the timelines for striking a trade deal. Developments continue to be
monitored proactively and various initiatives are in place to mitigate ‘No Deal’ risk to ensure portfolio quality is maintained whilst supporting the
Group’s purpose of Helping Britain Prosper
There are headwinds in a number of sectors including agriculture, construction, manufacturing and consumer related sectors such as retail.
Performance and monitoring of vulnerable sectors remains a key focus at this stage of the credit cycle
Dynamic internal and external key performance indicators are monitored closely to help identify early signs of deterioration.
Portfolios remain well positioned and are subject to ongoing risk mitigation actions as appropriate. Monitoring indicates no material deterioration in
the credit quality of the portfolio
Net impairment charge of £306 million compared with a net charge of £71 million in 2018 is largely as a result of gross charges on two corporate
cases, rather than any material deterioration in the underlying portfolio. These were partially offset by a net release in Stage 1 and 2 ECL, driven by
enhancements to model methodology and data, including the approach to modelling loan amortisation. The impact of this was weighted toward
the SME portfolio. Excluding the two large corporate cases, gross charges in 2019 were lower than 2018
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 3.6 per cent (31 December 2018: 3.2 per cent). Stage 3 ECL allowance as a percentage of Stage 3 drawn
balances has reduced to 27.4 per cent (31 December 2018: 32.1 per cent), predominantly due to the change in mix of assets due to write-offs and the
transfer in of a small number of larger, individually assessed names with lower likelihood of net loss
Stage 2 loans as a proportion of total loans and advances to customers remained broadly stable at 6.2 per cent (31 December 2018: 6.5 per cent).
Stage 2 ECL allowances as a percentage of Stage 2 drawn balances were lower at 4.2 per cent (31 December 2018: 5.1 per cent) with the reduction
weighted toward SME mainly due to enhanced approach to loan amortisation within the IFRS 9 model and a number of other model refinements
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 159
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
The Global Corporates business continues to have a predominance of UK based, and to a lesser extent, US and European-based multi-national
investment grade clients. 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. Overall performance of the portfolio
remains good
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 and 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
Table 1.30: Commercial Banking impairment charge
SME
Other
Total impairment charge
Asset quality ratio
1 Prior period segmental comparatives restated. See note 4 on page 217.
Table 1.31: Commercial Banking loans and advances to customers
2019
£m
(65)
371
306
2018¹
£m
64
7
71
0.30%
0.06%
At 31 December 2019
SME
Other
Total gross lending
Expected credit loss allowance on drawn balances
Net balance sheet carrying value
Expected credit loss allowances (drawn and undrawn) as a percentage of
gross lending (%)
At 31 December 20181
SME
Other1
Total gross lending
Expected credit loss allowance on drawn balances
Net balance sheet carrying value
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
30,698
66,065
96,763
(1,265)
27,455
59,868
87,323
(96)
95,498
87,227
2,523
3,470
5,993
(228)
5,765
720
2,727
3,447
(941)
2,506
1.4
0.1
4.2
27.4
30,296
71,528
101,824
(1,449)
26,099
65,903
92,002
(93)
100,375
91,909
3,484
3,108
6,592
(325)
6,267
713
2,517
3,230
(1,031)
2,199
Change
%
(331)
24bp
Stage 3
as % of
total
%
2.3
4.1
3.6
2.4
3.5
3.2
Expected credit loss allowances (drawn and undrawn) as a percentage of gross
lending (%)
1.5
0.1
5.1
32.1
1 Prior period segmental comparatives restated. See note 4 on page 217.
Table 1.32: Commercial Banking expected credit loss allowances (drawn and undrawn) as a percentage of loans and
advances to customers
At 31 December 2019
SME
Other
Total
At 31 December 20181
SME
Other
Total
Total
Stage 1
Stage 2
Stage 3
As % of
drawn
balances
%
0.9
1.6
1.4
1.3
1.5
1.5
£m
273
1,040
1,313
384
1,102
1,486
As % of
drawn
balances
%
0.2
0.1
0.1
0.2
0.1
0.1
£m
45
70
115
40
71
111
As % of
drawn
balances
%
5.0
3.6
4.2
6.6
3.4
5.1
£m
127
125
252
231
107
338
As % of
drawn
balances
%
14.0
31.0
27.4
15.8
36.7
32.1
£m
101
845
946
113
924
1,037
1 Prior period segmental comparatives restated. See note 4 on page 217.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
160 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.33: Commercial Banking Stage 2 loans and advances to customers
At 31 December
2019
SME
Other
Total
At 31 December
2018
SME
Other
Total
Gross
lending
£m
2,523
3,470
5,993
3,484
3,108
6,592
Total
Up to date
1-30 days past due
Over 30 days past due
PD movement
Other1
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
Gross
lending
£m
As % of
gross
lending
%
ECL
£m
127
125
252
231
107
338
5.0
3.6
4.2
6.6
3.4
5.1
2,030
1,881
3,911
2,376
1,793
4,169
104
75
179
116
61
177
5.1
4.0
4.6
4.9
3.4
4.2
410
1,290
1,700
661
1,190
1,851
17
47
64
65
45
110
4.1
3.6
3.8
9.8
3.8
5.9
56
61
117
383
72
455
6
2
8
41
1
42
10.7
3.3
6.8
10.7
1.4
9.2
27
238
265
64
53
117
–
1
1
9
–
9
–
0.4
0.4
14.1
–
7.7
1 Includes client-specific indicators not reflected within quantitative PD assessments.
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 is 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 £13.6 billion at 31 December 2019 (net of exposures subject to protection through
Significant Risk Transfer securitisations). The Group has a further £0.47 billion of UK Direct Real Estate exposure in Business Banking within Retail
Approximately 60 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 remains robust
Both investment and development lending is subject to specific credit risk appetite criteria. Development lending criteria includes maximum loan
to gross development value and maximum loan to cost, with funding typically only released against completed work as confirmed by the Group’s
monitoring quantity surveyor
Table 1.34: LTV – 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%
Unsecured3
Total Investment >£1m
Investment <£1m4
Total Investment
Development
Total
At 31 December 20191,2
At 31 December 20181,2
Stage 1/2
£m
Stage 3
£m
Total
£m
6,136
917
117
138
26
4
18
311
7,667
3,455
11,122
1,805
12,927
89
14
7
38
37
12
1
–
198
88
286
58
344
6,225
931
124
176
63
16
19
311
7,865
3,543
11,408
1,863
13,271
%
79.2
11.8
1.6
2.2
0.8
0.2
0.2
4.0
100.0
Stage 1/2
£m
Stage 3
£m
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
Total
£m
8,939
1,197
308
90
52
1
64
551
11,202
3,784
14,986
1,809
16,795
%
79.8
10.7
2.7
0.8
0.5
–
0.6
4.9
100.0
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 £0.35 billion (31 December 2018: £0.45 billion).
3 Predominantly Investment grade corporate CRE lending where the Group is relying on the corporate covenant.
4 December 2019 <£1m investment exposures have an LTV profile broadly similar to the >£1m investment exposures.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 161
Commercial Banking forbearance
Table 1.35: Commercial Banking forborne loans and advances (audited)
At 31 December 2019
Type of forbearance
Refinancing
Modification
Total
At 31 December 2018
Type of forbearance
Refinancing
Modification
Total
Total
£m
Of which
Stage 3
£m
70
4,216
4,286
41
3,322
3,363
38
3,834
3,872
29
2,949
2,978
Table 1.36: Derivative credit risk exposures
2019
Traded over the counter
2018
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
–
8
421,143
421,151
–
45
199,986
6,211,948
250,392
6,662,326
128,221
4,950,912
4,820
–
–
–
6,594
16,959
11,414
16,959
9,247
–
–
–
385,680
689,882
5,898
13,757
385,725
5,769,015
15,145
13,757
204,806
6,211,956
695,088
7,111,850
137,468
4,950,957
1,095,217
6,183,642
1,820
(1,794)
26
24,499
(23,928)
571
144
(150)
(6)
23,448
(21,222)
2,226
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 2019
and 31 December 2018 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 53 on page 289.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
162 Lloyds Banking Group Annual Report and Accounts 2019
Environmental risk management
As appropriate, the Group considers the management of the
environmental impact of its lending activities. The Group-wide credit
risk principles require all credit risk to be incurred with due regard to
environmental legislation and the Group’s Code of Responsibility. The
Group’s external sector statements determine the appetite for many
activities that impact the environment. The Group seeks to reduce
detrimental impacts and support clients as they improve their own
environmental footprint. Further detail is provided in the Responsible
Business section (see pages 26 to 34).
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.
The Group has been a signatory to the Equator Principles since 2008 and
has adopted and applied the expanded scope of Equator Principles III
and committed itself to adoption of Equator Principles 4 during 2020.
The Equator Principles support the Group’s approach to assessing and
Table 1.37: Environmental risk management approach
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 resources are available to colleagues,
including environmental risk theory, procedural guidance, and information
on environmental legislation and sector-specific environmental impacts.
We also continue to partner with the Cambridge Institute for Sustainability
Leadership to provide high quality training to executives and colleagues
focused on risk management, product development and in client-
facing roles.
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 of financial penalties,
regulatory censure, criminal or civil enforcement action or customer
detriment as a result of failure to identify, assess, correctly interpret, comply
with, or manage regulatory and/or legal requirements.
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 has established 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 departments provide oversight, proactive support and
constructive challenge to the business in identifying and managing
regulatory and legal issues
Risk department 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 teams,
conduct ongoing horizon scanning to identify and address 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.
Risk management continued Conduct risk
Definition
Conduct risk is defined as the risk of customer detriment across the
customer lifecycle including: failures in product management, distribution
and servicing activities; from other risks materialising, or other activities
which could undermine the integrity of the market or distort competition,
leading to unfair customer outcomes, regulatory censure, reputational
damage or financial 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 could
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
Outsourcing of customer service and product delivery to third-parties
that do not have the same level of control, oversight and culture as
the Group
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 such as London Inter-bank Offered Rate (LIBOR) and
foreign exchange (FX).
Due to the level of enhanced focus on 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, in
a manner that fails to deliver fair and reasonable customer treatment, or is
inconsistent with market integrity or competition requirements.
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 has, and continues to, evolve
its approach to conduct risk measurements, including those supporting
customer vulnerability, process delivery and customer journeys.
Mitigation
The Group takes a range of mitigating actions with respect to conduct risk
and remains focused on delivering a leading customer experience. 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 encourage 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
Lloyds Banking Group Annual Report and Accounts 2019 163
Simplified and enhanced conduct policies and procedures in
place to ensure appropriate controls and processes that deliver
fair customer outcomes, and support market integrity and
competition requirements
Customer needs considered through divisional customer plans, with
integral conduct lens, reviewed and challenged by Group Customer
First Committee (GCFC)
Cultural transformation: achieving our values-led culture through a
focus on our behaviours to ensure we are transforming our Group
culture for success in a digital world. This is supported by strong
direction and tone from senior executives and the Board
Continuous embedding of the customer vulnerability framework.
Development and continued oversight of the implementation of
the vulnerability strategy continues through the Group Customer
Vulnerability Committee (GCVC) operating at a senior level to
prioritise change, drive implementation and ensure consistency
across the Group. The Group is also in the third year of its partnership
with Macmillan to support customers with cancer, has launched
specialist support for those impacted by financial and domestic abuse
and has signed up to standards supporting customers with mental
health problems
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 senior
committees, ensuring holistic consideration of key Group-wide
conduct risks
Robust recruitment and training, with a continued focus on how
the Group manages colleagues’ performance with clear 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 and member of the Fixed Income,
Currencies and Commodities Markets Standard Board
Adoption of robust change delivery methodology to enable prioritisation
and delivery of initiatives to address conduct challenges
Continued focus on proactive identification and mitigation of conduct
risk in the GSR3
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, entity and
divisional 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, providing
oversight of customer outcomes and customer experience and providing
challenge to divisions to make changes 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.
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164 Lloyds Banking Group Annual Report and Accounts 2019
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:
A cyber-attack
Failure of IT systems, due to volume of change, and/or
aged infrastructure
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
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 1.38 below shows high level loss and event trends for the Group
using Basel II categories. Based on data captured on the Group’s Risk and
Control Self-Assessment, in 2019 the highest frequency of events occurred
in external fraud (67.89 per cent) and execution, delivery and process
management (18.04 per cent). Clients, products and business practices
accounted for 72.70 per cent of losses by value, driven by legacy issues
where impacts materialised in 2019 (excluding PPI).
Table 1.38: 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
2019
0.78
12.84
0.15
0.10
18.04
67.89
0.20
2018
1.46
12.30
1.64
0.06
21.21
62.98
0.35
2019
2.45
72.70
0.03
0.01
20.60
4.16
0.05
2018
3.53
65.12
0.21
–
25.96
5.05
0.13
100.00
100.00
100.00
100.00
1 2018 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
continues to invest heavily to protect the Group from malicious cyber-
attacks. Investment continues to focus 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 continues to optimise its approach to IT by investing in
technology improvements; focusing on simplification of IT architecture;
and decommissioning legacy systems in order to maintain reliable
banking services for its customers. IT risk mitigation programmes are
in place to continually improve customers’ experience, which receive
considerable time and focus at Board and Board Risk Committees
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 holistically cover 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
requirements. 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 continues to lead and support industry wide activity to help
address fraud, such as leadership on the design and implementation
of the industry code for Authorised Push Payment (APP) fraud, in
addition to making more bespoke commitments with key partners,
such as the City of London Police. Such initiatives support the continued
enhancement of the Group’s control framework, whilst contributing to
the raising of standards across the industry. The Group also continues
to make material annual investments in both technology and colleague
development to help mitigate this growing area of risk
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, modern-day
slavery and wildlife trafficking, and activities prohibited by legal and
regulatory sanctions. Against a background of increasingly complex and
detailed laws and regulations, and of increased criminal and terrorist
activity, the Group regularly reviews and assesses its policies, procedures
and organisational arrangements to keep them current, effective
and consistent across markets and jurisdictions. The Group requires
mandatory training on these topics for all employees. Specifically,
the anti-money laundering procedures include ‘know-your-customer’
requirements, transaction monitoring technologies, reporting of
suspicions of money laundering or terrorist financing to the applicable
regulatory authorities, and interaction between the Group’s Financial
Intelligence Unit and external agencies and other financial institutions.
The Anti-Bribery Policy prohibits the payment, offer, acceptance or
request of a bribe, including ‘facilitation payments’ by any employee
Risk management continued 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
Monitoring
Monitoring and reporting of operational risk is undertaken at Board,
Group, entity and divisional 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, 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, particularly in the context of increasing volumes
of organisational, political and external market change and increasing
digitisation. The Group is exposed to the following key people risks:
Failure to recruit, develop and retain colleagues, including ineffective
management of succession planning or failure to identify appropriate
talent pipeline
The increasing digitisation of the business is changing the capability mix
required and may impact our ability to attract and retain talent
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
Failure to manage capacity, colleagues having excessive demands
placed on them resulting in wellbeing issues and business objectives not
being met
Failure to meet all colleague-related legal and regulatory requirements
Ineffective leadership, poor communication, weak performance,
inappropriate remuneration policies
Colleague engagement may continue to be challenged by ongoing
media attention on culture within the banking sector, conduct and ethical
considerations
Inadequately designed people processes that are not resilient to
withstand unexpected events
Lloyds Banking Group Annual Report and Accounts 2019 165
Measurement
People risk is measured through a series of quantitative and qualitative
indicators, aligned to key sources of people risk for the Group such as
succession, retention, colleague engagement and wellbeing. 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
Ongoing consultation with the Group’s recognised unions on changes
which impact their members
Reviewing and enhancing people processes to ensure they are fit for
purpose and operationally resilient
Monitoring
Monitoring and reporting is undertaken at Board, Group, entity and
divisional committees. Key people risk metrics are reported and discussed
monthly at the Group People Risk Committee with escalation to Group
Risk and Executive Committees and the Board where required.
All material people risk events are escalated in accordance with the Group
Operational Risk Policy.
Insurance underwriting risk
Definition
Insurance underwriting risk is defined as the risk of adverse developments
in the timing, frequency and severity of claims for insured/underwritten
events and in customer behaviour, leading to reductions in earnings and/
or value.
Exposures
The major 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.
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 36 to the
financial statements.
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.
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166 Lloyds Banking Group Annual Report and Accounts 2019
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 the Insurance business'
regulatory capital assessments and other supporting measures where
appropriate, including those set out in note 33 to the financial statements.
Mitigation
Insurance underwriting risk in the Insurance business is mitigated in a
number of ways:
General Insurance exposure to accumulations of risk and possible
catastrophes is mitigated by reinsurance arrangements broadly spread
over different reinsurers. Detailed modelling, including that of the
potential losses under various catastrophe scenarios, supports the choice
of reinsurance arrangements
Insurance processes on underwriting, claims management, pricing and
product design
Longevity risk transfer and hedging solutions are considered on a regular
basis and since 2017 we have reinsured £3.1 billion of annuitant longevity.
A team of longevity and pricing experts has been built to support the
annuity proposition
Exposure limits by risk type are assessed through the business planning
process and used as a control mechanism to ensure risks are taken within
risk appetite
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 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 both
regulatory and 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, Ring-Fenced Bank (RFB) sub-
group level or at a regulated entity level. The Group’s capital management
approach is focused on maintaining sufficient capital resources across all
regulated levels of its structure in order to prevent such exposures while
optimising value for shareholders.
Measurement
The Group maintains capital levels commensurate with a prudent level
of solvency and aims to deliver consistent and high quality returns to
shareholders. To support this the capital risk appetite is calibrated by taking
into consideration both an internal view of the amount of capital the Group
should hold as well as recognising external regulatory requirements.
The Group measures both its capital requirements and the amount of
capital resources it holds to meet those requirements through applying
the regulatory framework defined by the Capital Requirements Directive
and Regulation (CRD IV), as amended by provisions of the revised Capital
Requirements Regulation (CRR II) that came into force in June 2019.
Directive requirements are implemented in the UK by the Prudential
Regulation Authority (PRA) and supplemented through additional
regulation under the PRA Rulebook. Further details of the regulatory
capital and leverage frameworks that the Group is subject to, 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’s Pillar 2A capital requirement
at 31 December 2019 was 4.6 per cent of risk-weighted assets, of which
2.6 per cent must be met by CET1 capital.
The Group is also required to hold 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) came into force for UK ring-fenced
banks during 2019, with the PRA setting a buffer of 2.0 per cent of risk-
weighted assets for the RFB sub-group. The size of the buffer applied
to the RFB sub-group is dependent upon its total assets. The SRB
equates to 1.7 per cent of risk-weighted assets at Group level, with the
difference reflecting the risk-weighted assets of the Group that are not
in the Ring-Fenced Bank sub-group and for which the SRB does not
therefore 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 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 applied by the Bank of England’s Financial Policy Committee (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 and will increase
to 2.0 per cent from December 2020 following a review by the FPC of the
appropriate level to set in the current standard risk environment. As a result
of this change the PRA will consult in 2020 on a reduction in Pillar 2A capital
requirements by 50 per cent of the relevant bank specific increase in the
CCYB, which would leave overall loss absorbing capacity (MREL) broadly
unchanged, but increase the Group’s requirement plus buffers for CET1 by
c.65 basis points.
Risk management continued 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 2019
non-zero buffer rates also currently apply for Bulgaria, the Czech Republic,
Denmark, France, Hong Kong, Iceland, Ireland, Lithuania, Norway, Slovakia
and Sweden. During 2020 Belgium, Germany, and Luxembourg will
implement non-zero buffer rates. The Group’s overall countercyclical capital
buffer at 31 December 2019 was 0.9 per cent of risk-weighted assets which
reflects the concentration of exposures of the Group to the UK.
As part of the capital planning process, forecast capital positions are
subjected to wide ranging programme of 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 and non-stress
related elements, 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. Usage 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, as referenced above) would give rise to
mandatory restrictions upon any discretionary capital distributions.
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 the leverage exposure which is 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 2019 the CCLB for the Group
was 0.3 per cent. This is set to increase in proportion to the increase in
the countercyclical capital buffer following the FPC’s decision to increase
the UK CCYB rate to 2.0 per cent with effect from December 2020. An
additional leverage ratio buffer (ALRB) of 0.7 per cent applies to the Ring-
Fenced Bank sub-group and is determined by multiplying the Ring-Fenced
Bank sub-group leverage exposure measure by 35 per cent of the SRB.
This equates to 0.6 per cent of the total leverage exposure measure at
Group level.
At least 75 per cent of the 3.25 per cent minimum leverage ratio requirement
as well as 100 per cent of regulatory leverage buffers must be met by
CET1 capital.
The leverage ratio framework does not currently give rise to higher
regulatory capital requirements for the Group than the risk-based capital
framework.
Mitigation
The Group has a capital management framework that includes the setting
of capital risk appetite. Close monitoring of capital and leverage ratios is
undertaken to ensure the Group meets regulatory requirements and risk
appetite levels and deploys its capital resources efficiently. Comprehensive
stress testing analyses take place to evidence capital adequacy.
The Group maintains a recovery plan which sets out a range of potential
mitigating actions that could be taken in response to a stress. For example,
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.
Lloyds Banking Group Annual Report and Accounts 2019 167
Monitoring
The Group’s 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 Ring-Fenced Bank sub-group and key individual
banking entities. Multi-year base case 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 Group’s capital
plan is tested for capital adequacy using a range of stress scenarios and
sensitivities covering adverse economic conditions as well as other adverse
factors that could impact the Group.
The Group’s capital plan also considers 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 the short to medium 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.
For the Bank of England Annual Cyclical Scenario stress test, the Bank of
England has taken action to avoid an unwarranted de facto increase in
capital requirements that could result from the interaction of IFRS 9. The
stress hurdle rates for banks participating in the exercise are adjusted
to recognise the additional resilience provided by the earlier provisions
taken under IFRS 9. The Bank of England is considering options for a
more enduring treatment of IFRS9 provisions in the capital framework
and alternative options will be explored further during the 2020 Bank of
England ACS stress test.
Regular reporting of actual and base case and stress scenario projected
ratios for Group, the Ring-Fenced Bank sub-group and key legal entities 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 and management actions, 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 ongoing level of CET1 capital required by the
Group to grow the business, meet regulatory requirements and cover
uncertainties continues to be c.12.5 per cent plus a management buffer of
c.1 per cent.
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 set by the PRA. During the year the PRA reduced
the Group’s Pillar 2A requirement from 4.7 per cent to 4.6 per cent of
risk-weighted assets at 31 December 2019, of which 2.6 per cent must be
met by CET1 capital
the capital conservation buffer (CCB) requirement of 2.5 per cent of
risk-weighted assets
the Group’s current countercyclical capital buffer (CCYB) requirement
of 0.9 per cent of risk-weighted assets, which is set to increase following
the FPC’s decision to increase the UK CCYB rate from 1.0 per cent to
2.0 per cent, effective from December 2020. In conjunction the PRA
will consult during 2020 on a proposed reduction in Pillar 2A capital
requirements by 50 per cent of this increase in the CCYB, equivalent to
reducing the Pillar 2A CET1 requirement by 28 per cent of the increase.
the Ring-Fenced Bank sub-group’s systemic risk buffer (SRB) of
2.0 per cent of risk-weighted assets, which equates to 1.7 per cent of risk
weighted assets at Group level
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
168 Lloyds Banking Group Annual Report and Accounts 2019
the Group’s PRA Buffer, which the PRA sets after taking account of the
results of the annual PRA stress test 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 a policy to pay a progressive and sustainable
ordinary dividend. Any growth in 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 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.
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 2019 Lloyds Banking Group plc (‘the Company’)
had accumulated distributable reserves of approximately £10 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 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 and Scottish
Widows Group Limited (the insurance business). The principal
operating subsidiary is Lloyds Bank plc which, at 31 December 2019,
had a consolidated CET1 capital ratio of 14.3 per cent (31 December
2018: 14.9 per cent). 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 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 levels. The Group operates a
formal capital management policy which requires all subsidiary entities to
remit surplus capital to their parent companies.
In May 2019 the Group announced that it will move to the payment of
quarterly dividends in 2020, with the first quarterly dividend in respect of
the period to 31 March 2020 payable in June 2020. The new approach
will result in three equal interim ordinary dividend payments for the first
three quarters of the year followed by, subject to performance, a larger
final dividend for the fourth quarter of the year. The first three quarterly
payments, payable in June, September and December will be equal to
20 per cent of the previous year’s total ordinary dividend per share. The
fourth quarter payment will be announced with the full year results, with
the amount continuing to deliver a full year dividend payment that reflects
the Group’s financial performance and objective of a progressive and
sustainable ordinary dividend.
Minimum requirement for own funds and eligible
liabilities (MREL)
In 2015, the Financial Stability Board established an international standard
for the total loss absorbing capacity (TLAC) of global systemically
important banks (G-SIBs). The standard, which applies from 1 January
2019, is designed to enhance the resilience of the global financial system
by ensuring that failing G-SIBs have sufficient capital to absorb losses
and recapitalise under resolution, whilst continuing to provide critical
banking services.
At EU level, G-SIBs are subject to the minimum requirements for own
funds and eligible liabilities (MREL) that came into force in June 2019
following the implementation of CRR II. The MREL framework reflects the
European implementation of the global TLAC standard. The purpose
of MREL is to require firms to maintain sufficient own funds and eligible
liabilities that are capable of credibly bearing losses or recapitalising a bank
whilst in resolution. MREL requirements can be satisfied by a combination
of regulatory capital and certain unsecured liabilities (which must be
subordinate to a firm’s operating liabilities).
In the UK the Bank of England has implemented the requirements of the
TLAC standard through a statement of policy on MREL (the MREL SoP).
As the Group is not classified as a G-SIB it is not directly subject to the
CRR II MREL requirements. However the Group is subject to the Bank
of England’s MREL SoP and must therefore maintain a minimum level of
MREL resources from 1 January 2020. The Group operates a single point
of entry (SPE) resolution strategy, with Lloyds Banking Group plc as the
designated resolution entity.
Applying the Bank of England’s MREL SoP to current minimum capital
requirements, the Group’s indicative MREL requirement, excluding
regulatory capital and leverage buffers, is as follows:
From 1 January 2020, the higher of 2 times Pillar 1 plus Pillar 2A,
equivalent to 20.6 per cent of risk-weighted assets, or 6.5 per cent of the
UK leverage ratio exposure measure
From 1 January 2022, the higher of 2 times Pillar 1 plus 2 times Pillar 2A,
equivalent to 25.2 per cent of risk-weighted assets, or 6.5 per cent of the
UK leverage ratio exposure measure
In addition, CET1 capital cannot be used to meet both MREL requirements
and capital or leverage buffers.
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 the Basel III reforms.
Internal MREL requirements will also apply to the Group’s material
sub-groups and entities, including the RFB sub-group, Lloyds Bank
plc, Bank of Scotland plc and Lloyds Bank Corporate Markets plc,
from 1 January 2020.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 169
Analysis of capital position
The Group’s pro forma CET1 capital build amounted to 207 basis points
before PPI, and to 86 basis points after the in-year PPI charge, reflecting:
Underlying capital build (198 basis points), including the dividend paid
up by the Insurance business in February 2020 in relation to its 2019
earnings (18 basis points)
Other movements (20 basis points), reflecting market movements
and the continued optimisation of Commercial Banking risk-weighted
assets, net of additional pension contributions and model updates
Offset by a reduction of 121 basis points relating to the in-year PPI
charge and 11 basis points relating to the impact of changes arising
from the implementation of IFRS 16 on risk-weighted assets
The Group’s capital position also benefitted by 34 basis points as a result
of the cancellation of the remaining c.£650 million of the 2019 buyback
programme, as announced in September 2019. The Group used 9 basis
points of capital for the acquisition of the Tesco UK prime residential
mortgage portfolio.
Overall the Group’s CET1 capital ratio is 15.0 per cent on a pro forma
basis before ordinary dividends and 13.8 per cent on a pro forma basis
after ordinary dividends (31 December 2018: 13.9 per cent pro forma, after
ordinary dividends and incorporating the effects of the share buyback
announced in February 2019).
Excluding the Insurance dividend paid in February 2020 the Group’s actual
CET1 ratio is 13.6 per cent after ordinary dividends (31 December 2018:
14.6 per cent).
The accrual for foreseeable dividends reflects the recommended final
ordinary dividend of 2.25 pence per share.
The transitional total capital ratio, after ordinary dividends, reduced to
21.3 per cent (21.5 per cent on a pro forma basis), largely reflecting the
reduction in CET1 capital and the net reduction in AT1 capital instruments,
partially offset by the reduction in risk-weighted assets.
The UK leverage ratio, after ordinary dividends, reduced from 5.6 per cent
on a pro forma basis to 5.2 per cent on a pro forma basis, largely reflecting
the reduction in the fully loaded tier 1 capital position, partially offset by a
reduction in the exposure measure.
Total capital requirement
The Group’s total capital requirement (TCR) as at 31 December 2019,
being the aggregate of the Group’s Pillar 1 and current Pillar 2A capital
requirements, was £25,608 million (31 December 2018: £26,124 million).
Capital resources
An analysis of the Group’s capital position as at 31 December 2019
is presented in the following section on both a CRD IV transitional
arrangements basis and a CRD IV fully loaded basis, as amended by
provisions of the revised Capital Requirements Regulation (CRR II) that
came into force in June 2019. In addition the Group’s capital position
reflects the application of the transitional arrangements for IFRS 9.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
170 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.39: 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
less: deductions from tier 2
Significant investments1
Total capital resources
Transitional
Fully loaded
At 31 Dec
2019
£m
At 31 Dec
2018
£m
At 31 Dec
2019
£m
At 31 Dec
2018
£m
41,697
43,434
41,697
43,434
(1,586)
2,337
26
(1,504)
247
(1,523)
2,273
(280)
(1,051)
(19)
(1,586)
2,337
26
(1,504)
247
(1,523)
2,273
(280)
(1,051)
(19)
41,217
42,834
41,217
42,834
(4,179)
(3,667)
(4,179)
(3,667)
(509)
(243)
(531)
(185)
(4,626)
(3,200)
(529)
(27)
(994)
(191)
(4,222)
(3,037)
(509)
(243)
(531)
(185)
(4,626)
(3,200)
(529)
(27)
(994)
(191)
(4,222)
(3,037)
27,744
30,167
27,744
30,167
5,881
4,127
(2,474)
7,534
6,466
4,008
(1,804)
8,670
5,881
6,466
–
–
–
–
5,881
6,466
(1,286)
33,992
(1,298)
37,539
–
–
33,625
36,633
13,003
13,648
13,003
13,648
(1,796)
2,278
(3,101)
(1,767)
1,504
(2,717)
10,384
10,668
(1,796)
(2,204)
(3,101)
5,902
(1,767)
(1,266)
(2,717)
7,898
(960)
(973)
43,416
47,234
(2,246)
37,281
(2,271)
42,260
Risk-weighted assets (unaudited)
203,431
206,366
203,431
206,366
Common equity tier 1 capital ratio3
Tier 1 capital ratio
Total capital ratio
13.6%
16.7%
21.3%
14.6%
18.2%
22.9%
13.6%
16.5%
18.3%
14.6%
17.8%
20.5%
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 (via ‘significant investments’ in the table above) and the remaining amount is risk-weighted, forming part of threshold risk-weighted assets.
2 Preference shares, preferred securities and other subordinated liabilities are categorised as subordinated liabilities in the balance sheet.
3 The common equity tier 1 ratio is 13.8 per cent on a pro forma basis reflecting the dividend paid up by the Insurance business in February 2020 in relation to its 2019 earnings
(31 December 2018: 13.9 per cent pro forma, incorporating the effects of the share buyback announced in February 2019).
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 171
Movements in capital resources
The key difference between the transitional capital calculation as at 31 December 2019 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 the regulation, 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. In addition, following revisions to eligibility
criteria for capital instruments under CRR II, certain tier 1 capital instruments of the Group that will transition to tier 2 capital by 2022 will cease to qualify as
regulatory capital in June 2025. The key movements on a transitional basis are set out in the table below.
Table 1.40: Movements in capital resources
At 31 December 2018
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
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
Movements in other equity, subordinated debt and other tier 2 items:
Repurchases, redemptions and other
Issuances
Other movements
At 31 December 2019
Common
Equity tier 1
£m
30,167
2,228
(63)
(2,312)
450
(1,095)
(49)
233
463
(1,117)
(142)
20
(163)
(512)
(216)
(404)
–
–
256
Additional
Tier 1
£m
7,372
Tier 2
£m
9,695
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12
13
Total
capital
£m
47,234
2,228
(63)
(2,312)
450
(1,095)
(49)
233
463
(1,117)
(142)
20
(163)
(512)
(216)
(379)
(2,032)
(284)
(2,316)
896
–
–
–
896
256
27,744
6,248
9,424
43,416
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 £450 million of dividends received from Insurance during the year include £350 million in respect of their 2018 full year ordinary dividend and £100 million in respect of
their 2019 interim ordinary dividend.
2 Reflects the accrual for the 2019 full year ordinary dividend and the reversal of the accrual for the 2018 full year ordinary dividend which was paid during the year.
CET1 capital resources have reduced by £2,423 million over the year, primarily reflecting:
the interim dividend paid in September 2019 and the accrual for the 2019 full year ordinary dividend
the extent of the 2019 share buyback programme completed during the year prior to the cancellation of the remaining 2019 buyback programme in
September 2019
the impact of additional pension contributions made during the year
the increase in other intangible assets, excess expected losses and significant investments in financial sector entities
offset in part by profit generation during the year (net of PPI provision charges), the receipt of dividends paid by the Insurance business during the year
and movements in treasury shares and employee share schemes
AT1 capital resources have reduced by £1,124 million over the year, primarily reflecting a redemption during the year and the annual reduction in the
transitional limit applied to grandfathered AT1 capital instruments, offset in part by the issuance of new capital instruments.
Tier 2 capital resources have reduced by £271 million over the year, largely reflecting the amortisation of dated instruments and a reduction in eligible
provisions, partially offset by the transitioning of grandfathered AT1 instruments to tier 2.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
172 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.41: Minimum requirement for own funds and eligible liabilities (MREL)
An analysis of the Group’s current transitional MREL position is provided below.
Total capital resources (transitional basis)
Ineligible AT1 and tier 2 instruments1
Amortised portion of eligible tier 2 instruments issued by Lloyds Banking Group plc
Senior unsecured securities issued by Lloyds Banking Group plc
Total MREL resources2
Risk-weighted assets
MREL ratio3
Leverage exposure measure
MREL leverage ratio
Transitional2
At 31 Dec
2019
£m
43,416
(874)
24
23,554
66,120
At 31 Dec
2018
£m
47,234
(613)
–
20,213
66,834
203,431
206,366
32.5%
32.4%
654,387
663,277
10.1%
10.1%
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 upon recognition of the dividend paid up by the Insurance business in February 2020 in relation to its 2019 earnings (31 December
2018: 32.6 per cent pro forma).
During 2019, the Group issued externally £3.5 billion (sterling equivalent) of senior unsecured securities from Lloyds Banking Group plc which, while not
included in total capital, are eligible to meet MREL requirements. Combined with previous issuances made over the last few years the Group remains
comfortably positioned to meet MREL requirements from 1 January 2020 and, as at 31 December 2019, had a transitional MREL ratio of 32.5 per cent of
risk-weighted assets.
Total MREL resources reduced by £714 million, largely as a result of the reduction in total capital resources, offset in part by the increase in senior unsecured
securities following the issuances made during the year.
Table 1.42: 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
2019
£m
53,842
63,208
18,544
At 31 Dec
2018
£m
60,555
59,522
15,666
135,594
135,743
24,420
25,757
160,014
161,500
5,083
5,718
210
584
25,482
1,790
830
702
25,505
2,085
193,163
196,340
10,268
10,026
203,431
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 investment in the Group’s Insurance business.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 173
Table 1.43: Risk-weighted assets movement by key driver
Credit risk
IRB
£m
Credit risk
STA
£m
Credit risk
total1
£m
Counterparty
credit risk2
£m
Market risk
£m
Operational
risk
£m
Total risk-weighted assets as at 31 December 2018
Less threshold risk-weighted assets3
Risk-weighted assets as at 31 December 2018
135,743
25,757
161,500
Total
£m
206,366
(10,026)
Asset size
Asset quality
Model updates
Methodology and policy
Acquisitions and disposals
Movements in risk levels (market risk only)
Foreign exchange movements
Other
(2,707)
(1,184)
(3,891)
2,190
2,284
(682)
–
1,508
2,284
(1,083)
(747)
(1,830)
(339)
–
–
(833)
–
1,326
1,326
–
(50)
–
–
(883)
(105)
–
–
7,250
(257)
(672)
–
–
–
2,085
(110)
–
(110)
4
–
(79)
–
–
25,505
196,340
–
–
–
–
–
–
–
(23)
(4,258)
836
2,174
(2,165)
1,326
(79)
(988)
(23)
Risk-weighted assets as at 31 December 2019
135,594
24,420
160,014
5,877
1,790
25,482
193,163
Threshold risk-weighted assets3
Risk-weighted assets as at 31 December 2019
1 Credit risk includes securitisation risk-weighted assets.
10,268
203,431
2 Counterparty credit risk includes movements in contributions to the default funds of central counterparties and movements in credit valuation adjustment risk.
3 Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital.
Significant investments primarily arise from investments in the Group’s Insurance business.
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 reduction of £3.9 billion, largely driven by commercial portfolio management, includes changes in book size (both drawn and undrawn
balances) and composition, excluding acquisitions and disposals
Asset quality increase of £1.5 billion includes increases in the valuation of equity investments as well as movements due to changes in borrower risk,
including changes in the macro-economic environment
Model updates increase in risk-weighted assets of £2.3 billion which relates to changes to the Retail mortgage models
Methodology and policy changes reduced risk-weighted assets by £1.8 billion principally as a result of securitisation activity, partially offset by the
introduction of IFRS 16
Acquisition and disposals increase of £1.3 billion reflects the purchase of the Tesco Bank UK prime residential mortgage portfolio
Counterparty credit risk, risk-weighted assets reduced by £1.4 billion due to reduced contributions to the default fund of a central counterparty,
movement in CVA and a reduction in asset size.
Market risk, risk-weighted assets reductions of £0.3 billion were driven by refinements to internal models, a change in the business model following
ring-fencing and movement in risk levels.
Leverage ratio
Analysis of leverage movements
The Group’s fully loaded UK leverage ratio reduced to 5.1 per cent, primarily driven by the reduction in tier 1 capital. This was partially offset by the
£8.9 billion reduction in the leverage exposure measure which largely reflected the reduction in the derivatives exposure measure and off-balance sheet
items.
On a pro forma basis the UK leverage ratio reduced to 5.2 per cent from 5.6 per cent pro forma at 31 December 2018.
The derivatives exposure measure, representing derivative financial instruments per the balance sheet net of deconsolidation and derivatives adjustments,
reduced by £3.6 billion during the period, predominantly reflecting a move from a collateralised-to-market to a settled-to-market approach for swaps
transacted through a central counterparty.
The SFT exposure measure, representing SFT assets per the balance sheet net of deconsolidation and other SFT adjustments, reduced by £0.6 billion
during the period, largely reflecting a reduction in volumes.
Off-balance sheet items reduced by £3.2 billion during the period, reflecting an overall reduction in corporate facilities driven by commercial portfolio
management, offset in part by new residential mortgage offers placed.
The average UK leverage ratio of 5.0 per cent over the quarter largely reflected a higher average exposure measure compared to the position at
31 December 2019, with the reductions in the derivative exposure measure and off-balance sheet items described above largely occurring towards the
end of the quarter.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
174 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.44: 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 ratio2,4
Average UK leverage ratio3
CRD IV exposure measure5
CRD IV leverage ratio5
Fully loaded
At 31 Dec
2019
£m
27,744
5,881
33,625
At 31 Dec
2018
£m
30,167
6,466
36,633
26,369
67,424
740,100
833,893
23,595
69,301
704,702
797,598
(49,590)
(50,105)
(1,293)
(334)
(167,410)
(169,037)
(11,298)
(12,551)
458
16,337
(7,054)
1,164
53,191
(8,180)
654,387
667,433
5.1%
5.0%
(1,376)
(487)
(130,048)
(131,911)
(8,828)
(10,536)
539
18,250
(575)
40
56,393
(8,163)
663,277
5.5%
703,977
713,382
4.8%
5.1%
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 2019 to 31 December 2019).
The average of 5.0 per cent compares to 4.9 per cent at the start and 5.1 per cent at the end of the quarter.
4 The UK leverage ratio is 5.2 per cent on a pro forma basis upon recognition of the dividend paid up by the Insurance business in February 2020 in relation to its 2019 earnings
(31 December 2018: 5.6 per cent pro forma).
5 Calculated in accordance with CRD IV rules which include central bank claims within the leverage exposure measure.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 175
Table 1.45 : 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 (%)
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 2019 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 conducted a macroeconomic stress test of the four
year operating plan in the first quarter of 2019.
The Group also participates in the UK wide Annual Cyclical Scenario stress
tests run by the Bank of England. In the 2019 Bank of England stress test
the Group exceeded the capital and leverage hurdles on a transitional
basis after the application of management actions and was not required to
take any action as a result of the test.
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
2019 Basel G-SIBs annual exercise will be disclosed from April 2020 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 fund 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 December 2019.
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.
IFRS 9 full impact
At 31 Dec
2019
27,002
33,249
43,153
At 31 Dec
2018
29,592
36,964
47,195
203,083
206,614
13.3%
16.4%
21.2%
14.3%
17.9%
22.8%
653,643
663,182
5.0%
5.4%
Funding and liquidity risk
Definition
Funding risk is defined as the risk that the Group does not have sufficiently
stable and diverse sources of funding. Liquidity risk is defined as the risk
that the Group has insufficient financial resources to meet its commitments
as they fall due.
Exposure
Liquidity exposure represents the potential stressed outflows in any future
period less expected inflows. The Group considers liquidity exposure from
both an internal and a regulatory perspective.
Measurement
Liquidity risk is managed through a series of measures, tests and reports
that are primarily based on contractual maturities with behavioural overlays
as appropriate. Note 53 on page 289 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 both with regard to
its internal risk appetite and the Liquidity Coverage Ratio (LCR) as 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 funding
and liquidity risk monitoring framework, 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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
Funding and liquidity management in 2019
The Group has maintained its strong funding and liquidity position with a
stable loan to deposit ratio of 107 per cent.
During 2019, the Group repaid its Funding for Lending Scheme (FLS)
contractual maturities of £12.1 billion and early repaid £4.5 billion of its
Term Funding Scheme (TFS) drawings, representing all of its 2020 TFS
maturities. This has reduced the balance of FLS outstanding to £1 billion
and the balance of TFS to £15.4 billion as at 31 December 2019.
The Group’s liquidity coverage ratio (LCR) was 137 per cent (based on a
monthly rolling average over the previous 12 months) as at 31 December
2019 calculated on a consolidated basis based on the EU Delegated Act.
Following the implementation of structural reform, liquidity risk is managed
at a legal entity level with the Group consolidated LCR representing the
composite of the ring-fenced bank and non ring-fenced bank entities.
The Group’s credit ratings continue to reflect its robust balance sheet,
resilient underlying profitability and bail-in capital position. There were no
changes to the ratings over 2019, although in November, Moody’s revised
the Group’s and Lloyds Bank plc’s outlooks to negative due to concern
relating to the UK’s exit from the European Union. In March Fitch placed
the majority of UK banks, including the Group’s entities, on Ratings Watch
Negative before stabilising the ratings in December given the reduced risk
of a no-deal exit from the EU.
176 Lloyds Banking Group Annual Report and Accounts 2019
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, for example, 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. 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.
The Group carries out internal stress testing of its liquidity and potential
cash flow mismatch position over both short (up to one month) and
longer-term horizons against a range of scenarios forming an important
part of the internal risk appetite. The scenarios and assumptions are
reviewed at least annually to ensure that they continue to be relevant to the
nature of the business including reflecting emerging horizon risks to the
Group. For further information on the Group’s 2019 liquidity stress testing
results refer to page 179.
The Group maintains a Contingency Funding Framework as part of the
wider Recovery 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.
Risk management continued Table 1.46: Group funding position
Funding requirement
Loans and advances to customers1
Loans and advances to banks2
Debt securities at amortised cost
Reverse repurchase agreements
Financial assets at fair value through other comprehensive income – non-LCR eligible3
Cash and balances at central bank – non-LCR eligible4
Funded assets
Other assets5
On balance sheet LCR eligible liquid assets
Reverse repurchase agreements
Cash and balances at central banks4
Debt securities at amortised cost
Financial assets at fair value through other comprehensive income
Trading and fair value through profit and loss
Repurchase agreements
Total Group assets
Less: other liabilities5
Funding requirement
Funded by
Customer deposits6
Wholesale funding7
Term funding scheme
Total equity
Total funding
Lloyds Banking Group Annual Report and Accounts 2019 177
At 31 Dec
2019
£bn
At 31 Dec
2018
£bn
Change
%
440.4
444.4
8.1
3.9
–
0.1
5.7
458.2
251.7
709.9
56.2
49.4
1.6
25.0
4.0
(12.2)
124.0
833.9
(230.6)
603.3
411.8
128.3
540.1
15.4
47.8
603.3
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)
37
(3)
–
(88)
(2)
–
18
5
37
1
33
4
(66)
–
5
23
(1)
(1)
4
–
(23)
(5)
(1)
1 Excludes reverse repos of £54.6 billion (31 December 2018: £40.5 billion).
2 Excludes £0.1 billion (31 December 2018: £nil) of loans and advances to banks within the Insurance business and £1.6 billion (31 December 2018: £0.4 billion) of reverse
repurchase agreements.
3 Non-LCR eligible liquid assets comprise a diversified pool of highly rated unencumbered collateral (including retained issuance).
4 Cash and balances at central banks are combined in the Group’s balance sheet.
5 Other assets and other liabilities primarily include balances in the Group’s Insurance business and the fair value of derivative assets and liabilities.
6 Excludes repos of £9.5 billion (31 December 2018: £1.8 billion).
7 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
Fair value
and other
accounting
methods
£bn
(0.1)
(4.4)
0.5
Balance
sheet
£bn
28.2
97.7
17.1
–
421.3
(0.1)
(5.9)
(0.2)
–
30.3
91.2
17.7
418.1
Total at
31 Dec
2018
£bn
8.3
12.0
8.0
45.4
27.1
4.6
97.1
17.9
123.3
178 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.47 Reconciliation of Group funding to the balance sheet (audited)
At 31 December 2019
Deposits from banks
Debt securities in issue
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
At 31 December 2018
Deposits from banks
Debt securities in issue
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
Included in
funding
analysis
£bn
9.6
102.1
16.6
128.3
411.8
540.1
8.3
97.1
17.9
123.3
416.3
539.6
Repos
and cash
collateral
received by
Insurance
£bn
18.7
–
–
18.7
9.5
28.2
22.1
–
–
22.1
1.8
23.9
Table 1.48: Analysis of 2019 total wholesale funding by residual maturity
Deposits from banks
Debt securities in issue:
Certificates of deposit
Commercial paper
Medium-term notes
Covered bonds
Securitisation
Subordinated liabilities
Total wholesale funding1
Less
than one
month
£bn
7.3
1.2
1.3
1.0
0.8
0.4
4.7
–
One to
three
months
£bn
1.3
2.6
3.5
0.8
1.3
–
8.2
1.2
12.0
10.7
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
0.3
0.1
0.1
0.2
0.3
2.8
2.8
1.8
–
1.1
8.5
–
8.8
2.4
0.9
1.2
2.9
0.9
8.3
1.0
9.4
1.2
0.4
0.2
–
0.4
2.2
0.1
2.4
0.4
–
6.6
6.1
1.7
14.8
0.5
15.5
–
–
19.3
10.6
1.4
31.3
4.3
35.9
–
–
–
17.1
7.0
–
24.1
9.5
33.6
Total at
31 Dec
2019
£bn
9.6
10.6
8.9
48.0
28.7
5.9
102.1
16.6
128.3
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.
Table 1.49: Total wholesale funding by currency (audited)
At 31 December 2019
At 31 December 2018
Table 1.50: Analysis of 2019 term issuance (audited)
Securitisation
Medium-term notes
Covered bonds
Private placements1
Subordinated liabilities2
Total issuance
1 Private placements include structured bonds.
2 Consists of AT1 issuances.
Sterling
£bn
28.7
25.8
US Dollar
£bn
49.6
45.2
Euro
£bn
40.9
42.8
Other
currencies
£bn
9.1
9.5
Total
£bn
128.3
123.3
Sterling
£bn
US Dollar
£bn
1.6
0.5
2.0
0.1
0.5
4.7
0.4
3.2
0.8
0.3
0.4
5.1
Euro
£bn
–
1.8
2.8
0.9
–
5.5
Other
currencies
£bn
–
1.1
–
–
–
Total
£bn
2.0
6.6
5.6
1.3
0.9
1.1
16.4
Risk management continued
Lloyds Banking Group Annual Report and Accounts 2019 179
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 has continued 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, the ring-
fenced bank operating company, across senior unsecured, covered bonds,
ABS and RMBS. In 2019, the Group launched an operating company
funding programme for LBCM, the non-ring-fenced bank, and have since
issued a number of trades for this entity including an inaugural five year
£500 million senior unsecured public benchmark transaction. The maturity
of the Funding for Lending and Term Funding Schemes are fully factored
into the Group’s funding plans.
Liquidity Portfolio
At 31 December 2019, the banking business had £118.3 billion of
highly liquid unencumbered LCR eligible assets (31 December 2018:
£129.4 billion), of which £115.7 billion is LCR level 1 eligible (31 December
2018: £128.6 billion) and £2.6 billion is LCR level 2 eligible (31 December
2018: £0.8 billion). These assets are available to meet cash and collateral
outflows and regulatory requirements. Total LCR eligible liquid assets
represent over five times the Group’s money market funding less than one
year to maturity (excluding derivative collateral margins and settlement
accounts) and thus provide a substantial buffer in the event of market
dislocation. The Insurance business manages a separate liquidity portfolio
to mitigate insurance liquidity risk.
Table 1.51: 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 1.52: LCR eligible assets by currency
At 31 December 2019
Level 1
Level 2
Total
At 31 December 2018
Level 1
Level 2
Total
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 2019 showed that
the banking business had liquidity resources representing 158 per cent of
modelled outflows over a three month period from all wholesale funding
sources, retail and corporate deposits, intraday requirements and rating
dependent contracts under the Group’s most severe liquidity stress
scenario.
This scenario includes 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.
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.
At 31 Dec
2019
£bn
At 31 Dec
2018
£bn
Change
%
Average
2019
£bn
Average
2018
£bn
49.4
63.9
2.4
115.7
2.6
118.3
48.9
78.7
1.0
128.6
0.8
129.4
1
(19)
50.9
76.4
1.9
(10)
129.2
1.5
(9)
130.7
58.1
66.2
0.8
125.1
0.8
125.9
Sterling
£bn
US Dollar
£bn
Euro
£bn
Other
currencies
£bn
91.5
1.7
93.2
98.2
0.4
98.6
11.7
0.5
12.2
19.8
0.4
20.2
12.5
0.4
12.9
10.6
–
10.6
–
–
–
–
–
–
Total
£bn
115.7
2.6
118.3
128.6
0.8
129.4
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 2019, the Group had £60.6 billion
(31 December 2018: £53.4 billion) of externally encumbered on-balance
sheet assets with counterparties other than central banks. The increase
in encumbered assets was primarily driven by an increase in covered
bond issuance. The Group also had £639.5 billion (31 December 2018:
£584.3 billion) of unencumbered on-balance sheet assets, and £133.7 billion
(31 December 2018: £159.8 billion) of pre-positioned and encumbered
assets held with central banks, the reduction in the latter was primarily
driven by a decrease in encumbrance relating to FLS and TFS maturities in
the year. 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
180 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.53: On balance sheet encumbered and unencumbered assets
Encumbered with
counterparties other
than central banks
Securitisations
£m
Covered
bond
£m
Other
£m
Total
£m
Pre-
positioned
and
encumbered
assets
held with
central banks
£m
Unencumbered assets
not pre-positioned
with central banks
Readily
realisable1
£m
Other
realisable
assets2
£m
Cannot be
used3
£m
Total
£m
Total
£m
At 31 December 2019
Cash and balances at central
banks
Financial assets at fair value
through profit or loss
Derivative financial instruments
Financial assets at amortised
cost:
–
51
–
Loans and advances to banks
–
–
–
–
–
–
–
4,834
4,885
–
1
–
1
–
–
–
–
49,270
–
5,860
55,130 55,130
2,469
–
– 152,835 155,304 160,189
–
26,369
26,369 26,369
1,858
3,851
4,065
9,774
9,775
Loans and advances to
customers
Debt securities
Financial assets at fair value
through other comprehensive
income
Other4
Total assets
At 31 December 2018
Cash and balances at central
banks
Trading and other 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
7,319
33,161
7,109
47,589
133,732
14,087 171,370 128,210 313,667 494,988
–
–
553
553
–
3,200
–
1,791
4,991
5,544
7,319
33,161
7,663
48,143
133,732
19,145 175,221 134,066 328,432 510,307
–
–
–
–
7,617
7,617
–
–
–
–
16,919
–
556
17,475 25,092
–
514
56,292
56,806 56,806
7,370
33,161
20,114
60,645
133,732
87,803 175,735 375,978 639,516 833,893
–
54
–
–
–
–
–
–
–
–
2,646
2,700
–
–
12
12
–
–
–
–
49,645
5,190
–
–
–
–
5,018
54,663
54,663
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
2,627
43,466
159,822
12,098
155,278
116,833
284,209
484,858
–
2,581
4
26
2,611
5,238
159,822
15,902
157,837
119,352
293,091
496,379
–
–
–
–
7,278
7,278
–
–
–
–
17,114
56
–
612
423
38,949
17,537
39,617
24,815
39,617
5,828
29,041
18,575
53,444
159,822
87,907
158,449
337,976
584,332
797,598
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 9/6 ‘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; investments in joint ventures and associates; assets arising from reinsurance contracts held 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 2019 181
Under the banner of the ERMF, 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 ERMF 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 ERMF, 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 70 to 93.
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 enterprise risk management framework (ERMF) 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 managemen
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
182 Lloyds Banking Group Annual Report and Accounts 2019
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 1.54 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 1.54: Market risk linkage to the balance sheet
2019
Assets
Banking
Total
£m
Trading
book only
£m
Non-trading
£m
Insurance
£m
Primary market risk factor
Cash and balances at central banks
55,130
–
55,130
–
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
160,189
26,369
9,775
494,988
5,544
510,307
25,092
5,558
51,248
17,982
18,885
5,352
5,119
Interest rate, foreign exchange, credit spread
136,855
2,365
Interest rate, foreign exchange, credit spread
–
–
–
–
–
–
–
9,710
494,948
5,544
510,202
65
40
–
105
Interest rate
Interest rate
Interest rate, credit spread
25,092
–
Interest rate, foreign exchange, credit spread
–
5,558
Equity
22,410
28,838
Interest rate
833,893
36,867
623,305
173,721
28,179
421,320
21,486
25,779
97,689
148,908
17,130
25,596
13,955
15,654
–
–
–
–
–
–
28,179
421,320
7,531
7,719
97,689
Interest rate
Interest rate
Interest rate, foreign exchange
–
–
–
2,406
Interest rate, foreign exchange, credit spread
–
Interest rate, credit spread
–
148,908
Credit spread
15,335
10,678
1,795
Interest rate, foreign exchange
14,918
Interest rate
786,087
29,609
588,451
168,027
The defined benefit pension schemes’ assets and liabilities are included
under Other assets and Other liabilities in this table and note 36 on
page 253 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 187.
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 25, page 243).
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 asset swapped and held 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 175.
The majority of debt issuance originates from the Group’s capital and
funding activities 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 183).
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 183
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
undertaken across the Group to manage portfolios and seek to ensure they
remain within approved limits. The mitigation actions will vary dependent
on exposure but will, in general, look to reduce risk in a cost effective
manner by offsetting balance sheet exposures and externalising 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 1.54) 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 53 on page 289). In addition, the Group incurs foreign exchange
risk through non-functional currency flows from services provided by
customer-facing divisions, the Group’s debt and capital management
programmes and is exposed to volatility in its CET1 ratio, due to the impact
of changes in foreign exchange rates on the retranslation of non-sterling-
denominated RWAs.
Equity risk
Equity risk arises primarily from three different sources;
the Group’s private equity investments held by Lloyds Development
Capital within the Equities sub-group
the Group’s strategic equity holdings, for example Visa Inc Preference
Shares, now held in the Equities sub-group
a small exposure to Lloyds Banking Group share price through deferred
shares and deferred options granted to employees as part of their
benefits package
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; (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; and (iv) banking
book assets held at fair value in Commercial Banking under IFRS9.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
184 Lloyds Banking Group Annual Report and Accounts 2019
Measurement
Interest rate risk exposure is monitored monthly using, primarily:
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.
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.
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:
embedded optionality within products
the duration of balances that are contractually repayable on demand, such as current accounts and overdrafts, together with net free reserves of
the Group
the re-pricing behaviour of managed rate liabilities namely variable rate savings
Table 1.55 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 1.55: Group Banking activities: market value sensitivity
Sterling
US Dollar
Euro
Other
Total
Up
25bps
£m
13.6
(5.6)
(7.2)
0.2
1.0
2019
Down
25bps
£m
(13.6)
5.8
2.3
(0.2)
(5.7)
Up
100bps
£m
52.7
(21.3)
(27.0)
0.8
5.2
Down
100bps
£m
(47.4)
24.3
11.1
(0.8)
(12.8)
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)
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 1.56 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 1.56: Group Banking activities: market value sensitivity to a steepening and flattening of the yield curve
Sterling
US Dollar
Euro
Other
Total
2019
2018
Steepener
£m
Flattener
£m
Steepener
£m
Flattener
£m
46.6
(13.2)
(15.5)
0.4
18.3
(47.5)
15.3
9.7
(0.4)
(22.9)
38.3
6.5
(6.8)
(0.1)
37.9
(36.5)
(5.7)
3.6
0.1
(38.5)
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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2019 185
Table 1.57: Group Banking activities: net interest income sensitivity
Client facing activity and associated hedges
109.4
(147.9)
430.8
(702.8)
Up
25bps
£m
2019
Down
25bps
£m
Up
100bps
£m
Down
100bps
£m
Up
25bps
£m
76.2
2018
Down
25bps
£m
(125.4)
Up
100bps
£m
341.6
Down
100bps
£m
(538.6)
Income sensitivity is measured over a rolling 12 month basis.
The increase in the net interest income sensitivity to a downwards 100bps
shock reflects additional margin compression risk within retail savings and a
reduction in the size of the structural hedge.
Basis risk, foreign exchange, equity, and credit spread risks are measured
primarily through scenario analysis by assessing the impact on profit before
tax over a 12 month horizon arising from a change in market rates, and
reported within the Board risk appetite on a monthly basis. Supplementary
measures such as sensitivity and exposure limits are applied where
they provide greater insight into risk positions. Frequency of reporting
supplementary measures varies from daily to quarterly appropriate to each
risk type.
Mitigation
The Group’s policy is to optimise reward whilst managing its market risk
exposures within the risk appetite defined by the Board. The Group
Market Risk Policy and procedures outlines the hedging process, and the
centralisation of risk from divisions into GCT, e.g. via the transfer pricing
framework. GCT is responsible for managing the centralised risk and
does this through natural offsets of matching assets and liabilities, and
appropriate hedging activity of the residual exposures, subject to the
authorisation and mandate of GALCO within the Board risk appetite. The
hedges are externalised to the market by derivative desks within GCT and
Commercial Banking Markets. The Group mitigates income statement
volatility through hedge accounting. This reduces the accounting volatility
arising from the Group’s economic hedging activities by utilising both
LIBOR and bank base rate assets. Any hedge accounting ineffectiveness
that leads to accounting volatility is continuously monitored.
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. The Group makes use of both
accounting and economic foreign exchange exposures, as an offset
against the impact of changes in foreign exchange rates on the value of
non-sterling-denominated RWAs. This involves the holding of a structurally
open currency position; sensitivity is minimised where, for a given currency,
the ratio of the structural open position to RWAs equals the CET1 ratio.
Continually evaluating this structural open currency position against
evolving non-sterling-denominated RWAs, mitigates volatility in the
Group’s CET1 ratio.
Monitoring
The appropriate limits and triggers are monitored by senior executive
committees within the banking divisions. Banking assets, liabilities and
associated hedging are actively monitored and if necessary rebalanced to
be within agreed tolerances.
Defined benefit pension schemes
Exposures
The Group’s defined benefit pension schemes are exposed to significant
risks from their assets and liabilities. The liability discount rate exposes the
Group 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 exposes the Group to longevity risk.
For further information on defined benefit pension scheme assets and
liabilities please refer to note 36 on page 253.
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 will be
liable for meeting any funding deficit that may arise. As part of the triennial
valuation process, the Group 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.
The Trustees have put in place a longevity swap to mitigate longevity
risk. The merits of longevity risk transfer and hedging solutions are
reviewed regularly.
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 monthly 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 25 on page 243). 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
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 1.58 demonstrates the impact of the Group’s UK Recession scenario
on the Insurance business’ portfolio (with no diversification benefit,
but after the impact of Group consolidation on interest rate and credit
spreads). The amounts include movements in assets, liabilities and the
value of in-force business in respect of insurance contracts and participating
investment contracts.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
186 Lloyds Banking Group Annual Report and Accounts 2019
Table 1.58: 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
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 premium, as applied to profit before tax are set out in note 33 on
page 252.
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. Unit
matching has been used since 2018 to reduce the sensitivity of equity
movements by matching unit-linked liabilities on a best-estimate view.
Hedging strategies are also 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.
Increase (reduction)
in profit before tax
2019
£m
116
30
(859)
(68)
(47)
(828)
2018
£m
297
93
(823)
(38)
(50)
(521)
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 £0.9 million for 31 December 2019 compared to £0.8 million for
31 December 2018.
Trading market risk measures are applied to all of the Group’s regulatory
trading books and they include daily VaR (table 1.59), sensitivity based
measures, and stress testing calculations.
Measurement
The Group internally uses VaR as the primary risk measure for all trading
book positions.
Table 1.59 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 2019 and year end 2018.
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 2019 187
Table 1.59: 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 2019
At 31 December 2018
Close
£m
Average
£m
Maximum
£m
Minimum
£m
Close
£m
Average
£m
Maximum
£m
Minimum
£m
0.6
0.1
–
0.1
0.4
1.2
(0.4)
0.8
0.8
0.1
–
0.2
0.2
1.3
(0.4)
0.9
1.6
0.3
–
0.3
0.6
2.2
1.6
0.4
0.0
–
0.1
0.1
0.9
0.5
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
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 a 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
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 principal 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 enterprise 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
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.
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188 Lloyds Banking Group Annual Report and Accounts 2019
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
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. Tax expense
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
189
198
199
200
202
205
206
20. Allowance for impairment losses
21. Financial assets at fair value through
other comprehensive income
22. Available-for-sale financial assets
23. Acquisitions
24. Goodwill
25. Value of in-force business
26. Other intangible assets
27. Property, plant and equipment
28. Other assets
29. Financial liabilities at fair value through
profit or loss
30. Debt securities in issue
31. Securitisations and covered bonds
32. Liabilities arising from insurance contracts
and participating investment contracts
33. Life insurance sensitivity analysis
34. Liabilities arising from non-participating
investment contracts
35. Other liabilities
36. Retirement benefit obligations
37. Deferred tax
38. Other provisions
39. Subordinated liabilities
40. Share capital
41. Share premium account
42. Other reserves
43. Retained profits
44. Other equity instruments
45. Dividends on ordinary shares
46. Share-based payments
47. Related party transactions
48. Contingent liabilities, commitments
and guarantees
49. Structured entities
50. Financial instruments
51. Transfers of financial assets
52. Offsetting of financial assets and liabilities
53. Financial risk management
54. Consolidated cash flow statement
55. Adoption of IFRS 16
56. Future accounting developments
318
319
320
321
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
Lloyds Banking Group Annual Report and Accounts 2019 189
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 2019 and of the Group’s profit and the Group’s
and the parent company’s cash flows for the year then ended;
– have been properly prepared in accordance with 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: consolidated and
parent company balance sheets as at 31 December 2019; 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; and 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.
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 12 to the financial statements, we have provided no non-audit services to the Group or the parent company in the
period from 1 January 2019 to 31 December 2019.
Our audit approach
Overview
– Overall Group materiality: £360 million (2018: £360 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 (2018: £360 million), based on 1 per cent of total assets but limited to the overall Group materiality.
– 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 address the risk of material misstatement in the residual
components.
The key audit matters which in our professional judgement were of most significance in the audit and involved the greatest allocation of our efforts and
resources:
– Allowance for Expected Credit Losses (ECL) (Group)
– Payment Protection Insurance (PPI) (Group)
– Insurance actuarial assumptions (Group)
– Defined benefit obligation (Group)
– Valuation of certain level 3 financial instruments (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 May 2019 and supplemented with updates in January
2020. These were the key audit matters for discussion at the conclusion of our audit.
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.
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190 Lloyds Banking Group Annual Report and Accounts 2019
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 preparation of the financial statements such as the Companies Act 2006, Consumer Credit Act 1974 and
Banking Reform Act 2013. 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 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;
– Performing testing over period end adjustments;
– Incorporating 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 the allowance
for ECL; the provision for PPI; insurance actuarial assumptions; the defined benefit obligation; the valuation of certain level 3 financial instruments; and
hedge accounting (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.
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
Allowance for Expected Credit Losses (ECL)
Group economics
Group
Refer to page 85 (Audit Committee report), page 206
(Note 2: Accounting policies), page 214 (Note 3: Critical
accounting judgements and estimates) and page 238
(Note 20: Allowance for impairment losses).
The determination of the allowance for ECL is a
judgemental area. A number of judgements and
assumptions are outlined in the financial statements,
including the definition of significant increases in credit risk
and the application of forward looking information.
Group economics
The Group’s economics team develops future economic
scenarios. The base case economic scenario is
determined through the application of judgement, and
the outer scenarios are generated and selected through
the use of a statistical model. The four economic scenarios
represent distinct parts of the loss distribution which is
developed based on historical experience. The scenarios,
together with their weightings, are provided to the Retail
and Commercial Banking divisions for incorporation into
the calculation of the allowance for ECL.
We understood management’s process and tested key controls relating to the
generation, selection and weighting of economic scenarios. We engaged our internal
economic experts and actuarial modelling specialists to assist us as we considered:
– The approach to the determination of the base case economic scenario;
– The identification and use of appropriate external economic data;
– The approach to the generation and selection of economic scenarios representing the
upside, downside and severe downside;
– The operation of the Group’s internally developed statistical model; and
– The review, challenge and approval of the economic scenarios by the Group’s
governance processes.
We found the 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 by
comparing them to our independent view of the economic outlook and market
consensus data. We investigated any economic variables outside of our thresholds. We
also assessed the risk of bias in the forecasts, as well as the existence of contrary
evidence.
We independently re-performed the Group’s model and performed testing to evaluate
the level of non-linearity captured in the allowance for ECL. We also assessed the
appropriateness of the weightings adopted.
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.
Lloyds Banking Group Annual Report and Accounts 2019 191
Key audit matter
Retail
How our audit addressed the key audit matter
Retail
The allowance for ECL relating to loans and advances in
the Retail division is 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 ECL on past term interest
only exposures. Our work therefore focused on the
appropriateness of modelling methodologies adopted
and significant judgements made in determining overlays
as well as the measurement of those overlays.
Commercial Banking
The allowance for ECL relating to credit impaired loans and
advances (referred to herein also as being in Stage 3) in the
Commercial Banking division is 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 allowance
for ECL is determined for 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 methodology and data limitations, or risks not
captured by the model.
We understood management’s process and tested key controls around the
determination of the allowance for ECL, 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 allowances for ECL, 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. 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. For selected portfolios, we created our own
independent models covering certain parts of the model calculation which enabled us to
re-perform management’s calculation and challenge their outputs.
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 ECL 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). 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
We understood management’s process and evaluated and tested key controls around the
determination of the allowance for ECL.
For the Stage 1 and 2 allowance, we focused on:
– The identification and assessment of the completeness and accuracy of critical data
applied in the ECL calculation.
– The governance over the ECL determination, including the validation of the ECL
methodology, assumptions and inputs, and the annual model performance validation;
and
– The review, challenge and approval processes in place to assess the overall
reasonableness of the allowance for ECL.
For the Stage 3 allowance, we focused on:
– The controls in place for the identification of credit impaired loans and subsequent
transfer of these cases to the credit loss assessment team; and
– The review, challenge and approval processes that are in place to assess the overall
reasonableness of the allowance for ECL.
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 performed the following procedures over the Stage 1 and 2 allowance for ECL:
– We critically assessed whether the methodology applied in the calculation is compliant
with IFRS 9;
– We tested the formulae applied within the calculation, including the appropriateness,
and application of, the quantitative and qualitative criteria used to assess significant
increases in credit risk;
– 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 allowance models; and
– We critically assessed the impact of identified model limitations and the completeness
of overlays applied by management.
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192 Lloyds Banking Group Annual Report and Accounts 2019
Key audit matter
How our audit addressed the key audit matter
We performed the following procedures to test the completeness of credit impaired
assets requiring a Stage 3 allowance for ECL:
– We critically assessed the criteria for determining whether a credit impairment event had
occurred; and
– 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 types of borrowers
with an elevated risk of weaker financial performance or distress. For each risk based
sample, as well as an additional haphazardly selected sample of Stage 1 and 2 loans,
we independently assessed whether there was evidence indicating 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;
– Re-performed management’s allowance calculation, assessing supporting evidence in
relation to key inputs on a case by case basis, that included expected future cash flows,
discount rates, valuations of collateral held, and the weightings applied to scenario
outcomes; and
– Where relevant, specifically considered whether valuations were up to date, and
consistent with the strategy being followed in respect of the particular borrower and
assessed the sensitivity to key assumptions used.
Based on the evidence assessed, we found the methodologies, modelled assumptions
and data used within the allowance for ECL assessment to be appropriate and in line with
the requirements of IFRS 9.
Our work focused on the valuation of conduct provisions relating to PPI policies.
We understood and tested the key controls around the appropriateness of the model
calculation.
We found that 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.
The provision is 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 was
an appropriate indicator of future experience. For example, we challenged management
on how many complaints eligible for redress would arise from the information requests
which had been received.
We independently recalculated the provision and compared our results to management’s
model output. We performed sensitivity analysis on the assumptions used within the
model to inform our risk assessment of which were significant. We performed sample
testing over the data used to inform the key assumptions within the model.
We considered regulatory developments and reviewed the Group’s correspondence with
the FCA and PRA, 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 the PPI provision and its 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 significant uncertainties and the sensitivity of the provision to changes
in the underlying assumptions.
Based on the procedures performed and evidence obtained, we found management’s
assumptions to be appropriate.
Payment Protection Insurance (PPI)
Group
Refer to page 85 (Audit Committee report), page 206
(Note 2: Accounting policies), page 214 (Note 3: Critical
accounting judgements and estimates) and page 260
(Note 38: Other provisions).
Provisions reflecting the Group’s best estimate of present
obligations relating to anticipated customer redress
payments, operational costs and regulatory costs as a
result of PPI continues to be significant and therefore
represent a key audit matter.
Determining the measurement of provisions requires a
number of assumptions which are made using a significant
degree of management judgement. Key assumptions
include the conversion ratio of PPI information requests to
complaints, related redress costs and operational costs.
Lloyds Banking Group Annual Report and Accounts 2019 193
Key audit matter
How our audit addressed the key audit matter
Insurance actuarial assumptions
Group
Refer to page 85 (Audit Committee report), page 206
(Note 2: Accounting policies), page 214 (Note 3: Critical
accounting judgments and estimates) and pages 243, 249
and 252 (Notes 25, 32 and 33).
A number of significant assumptions about future
experience contribute as key inputs into the valuation of
the Group’s insurance contracts, participating investment
contracts (‘insurance contract liabilities’) and the 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).
Defined benefit obligation
Group
Refer to page 85 (Audit Committee report), page 206
(Note 2: Accounting policies), page 214 (Note 3: Critical
accounting judgements and estimates) and page 253
(Note 36: Retirement benefit obligations).
The valuation of the retirement benefit obligations 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.
Valuation of certain level 3 financial instruments
Group
Refer to page 206 (Note 2: Accounting policies), page 214
(Note 3: Critical accounting judgements and estimates)
and pages 275 and 289 (Notes 50 and 53).
Within its Level 3 financial instruments, the Group holds
two portfolios (Loans and advances to customers of
£8.2bn and £1.6bn of debt securities) which are each
concentrations of similar, non-traded assets. They 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 key controls relating to the governance and 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 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 following the increase in the
minimum contribution rate for auto-enrolment 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 the long-term insurance business and
the resulting allocation of attributable costs to product types which then form the basis of
the per-policy costs assumptions.
For credit default and illiquidity premium, we assessed the appropriateness of the
methodology against our knowledge and experience with 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 the evidence obtained, we found that the methodologies, modelled
assumptions, data used within the models and overlays to modelled outputs to be
appropriate.
We understood and tested key controls over the pensions process involving the use of
members 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 engaged our actuarial experts, met with management and communicated with their
actuaries to understand the judgements made in determining key economic assumptions
used in the calculation of the liability. We assessed the reasonableness of those
assumptions by comparing to our own independently determined benchmarks and
concluded that the assumptions used by management were appropriate.
We performed testing over the members data used in calculating the obligation through
a combination of substantive testing and consideration of member-related controls at the
administrators. Where material, we also considered the treatment of curtailments,
settlements, past service costs, remeasurements, benefits paid and any other movement
in 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 management’s process and evaluated and tested the key controls around
the financial instrument’s 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 valuation’s specialists, we performed the following further testing:
– Evaluating the appropriateness of management’s 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 the methodologies, inputs and
assumptions to be appropriate.
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194 Lloyds Banking Group Annual Report and Accounts 2019
Key audit matter
Hedge accounting
Group
Refer to page 206 (Note 2: Accounting policies) and
page 289 (Note 53: Financial risk management).
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 largely manual in nature,
which increases the risk of errors and hence the risk that
financial reporting is not compliant with IFRS
requirements.
Privileged access to IT systems
Group and parent company
Refer to page 85 (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,
implementation 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
across the IT estate, 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.
How our audit addressed the key audit matter
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
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
models used to manage hedging relationships;
– Independently assessing whether management have captured and are monitoring all
material sources of ineffectiveness, including any impact of reference rate reform;
– 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 from IT platforms that are
used by downstream IT security processes;
– The onboarding and management of IT privileged accounts through the privileged
access break-glass 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 during the period.
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.
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.
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 significant and elevated risk areas 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 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 present
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 addressed 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 98 per cent of Group total assets and 86 per cent of Group total income.
Lloyds Banking Group Annual Report and Accounts 2019 195
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
£360 million (2018: £360 million).
Group financial statements
Parent company financial statements
£360 million (2018: £360 million).
How we determined it
Rationale for benchmark
applied
5 per cent of the adjusted profit before tax. Profit was
adjusted to remove 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.
1 per cent of total assets but limited to the overall Group
materiality.
We have selected total assets as an appropriate
benchmark for parent company materiality. Profit based
benchmarks are not considered the most appropriate for
parent company materiality as the Group is not required
to disclose a parent company income statement. 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 the Group audit, we allocated a materiality that is less than the overall Group materiality. The range of materiality
allocated across components was between £50 million and £100 million. Certain components were audited to a local statutory audit materiality that was
also less than the allocated materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £18 million (Group and parent
company audit) (2018: £15 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or
draw attention to in respect of the directors’ statement in the financial
statements about whether the directors considered it appropriate to
adopt the going concern basis of accounting in preparing the financial
statements and the directors’ identification of any material uncertainties
to the Group’s and the parent company’s ability to continue as a going
concern over a period of at least twelve months from the date of approval
of the financial statements.
We are required to report if the directors’ statement relating to Going
Concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent
with our knowledge obtained in the audit.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be predicted,
this statement is not a guarantee as to the Group’s and parent company’s
ability to continue as a going concern. For example, the terms of the
United Kingdom’s withdrawal from the European Union are not clear, and
it is difficult to evaluate all of the potential implications on the Group’s
trade, customers, suppliers and the wider economy.
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 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 2019 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)
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
196 Lloyds Banking Group Annual Report and Accounts 2019
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 95 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; and
– The directors’ explanation on page 95 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 97, 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 85 describing the work of the Audit Committee does not appropriately address matters communicated by us
to the Audit Committee; and
– The directors’ statement relating to the parent company’s compliance with the Code does not properly disclose a departure from a relevant provision of
the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
(CA06)
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ Responsibilities set out on page 97, 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.
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.
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.
Lloyds Banking Group Annual Report and Accounts 2019 197
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 25 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 25 years, covering the years ended
31 December 1995 to 31 December 2019. 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 and we will cease to be auditor of the Group.
Mark Hannam (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
19 February 2020
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
198 Lloyds Banking Group Annual Report and Accounts 2019
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
† Restated, see note 1 .
The accompanying notes are an integral part of the consolidated financial statements.
Note
5
6
7
8
9
10
11
13
14
15
15
2019
£ million
16,861
(6,681)
10,180
2,756
(1,350)
1,406
18,288
9,574
2,908
32,176
42,356
(23,997)
18,359
(2,895)
(9,775)
(12,670)
5,689
(1,296)
4,393
(1,387)
3,006
2,459
466
2,925
81
3,006
3.5p
3.4p
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
(1,454)
4,506
3,975
433
4,408
98
4,506
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
(1,626)
3,649
3,144
415
3,559
90
3,649
4.4p
4.3p
Lloyds Banking Group Annual Report and Accounts 2019 199
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:
(Losses) gains 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
Impairment recognised in the income statement
Tax
Movements in revaluation reserve in respect of available for sale financial assets:
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
1 Restated, see note 1 .
The accompanying notes are an integral part of the consolidated financial statements.
2019
£ million
3,006
20181
£ million
4,506
20171
£ million
3,649
(1,433)
316
(1,117)
–
12
12
(419)
113
(306)
–
(30)
(196)
(1)
71
(156)
1,209
(608)
(148)
453
(12)
(1,126)
1,880
1,333
466
1,799
81
1,880
167
(47)
120
(97)
22
(75)
533
(144)
389
8
(37)
(275)
–
119
(193)
234
(701)
113
(354)
(8)
(113)
628
(146)
482
(55)
15
(40)
–
303
(446)
6
63
(74)
(363)
(651)
283
(731)
(32)
(395)
4,393
3,254
3,862
433
4,295
98
4,393
2,749
415
3,164
90
3,254
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
200 Lloyds Banking Group Annual Report and Accounts 2019
Consolidated balance sheet
at 31 December
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
Investments in joint ventures and associates
Goodwill
Value of in-force business
Other intangible assets
Property, plant and equipment
Current tax recoverable
Deferred tax assets
Retirement benefit assets
Assets arising from reinsurance contracts held
Other assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
Note
2019
£ million
2018
£ million
55,130
313
54,663
647
160,189
158,529
26,369
9,775
23,595
6,283
494,988
484,858
5,544
510,307
25,092
304
2,324
5,558
3,808
5,238
496,379
24,815
91
2,310
4,762
3,347
13,104
12,300
7
2,666
681
23,567
4,474
5
2,453
1,267
7,860
4,575
833,893
797,598
16
17
18
21
22
24
25
26
27
37
36
28
Lloyds Banking Group Annual Report and Accounts 2019 201
Note
2019
£ million
2018
£ million
29
17
30
32
34
35
36
37
38
39
40
41
42
43
44
28,179
421,320
373
21,486
25,779
1,079
97,689
111,449
37,459
20,333
257
187
44
3,323
17,130
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
786,087
747,399
7,005
17,751
13,695
3,246
41,697
5,906
47,603
203
7,116
17,719
13,210
5,389
43,434
6,491
49,925
274
47,806
833,893
50,199
797,598
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
The accompanying notes are an integral part of the consolidated financial statements.
The directors approved the consolidated financial statements on 19 February 2020.
Lord Blackwell
Chairman
António Horta-Osório
Group Chief Executive
William Chalmers
Chief Financial Officer
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
202 Lloyds Banking Group Annual Report and Accounts 2019
Consolidated statement of changes in equity
for the year ended 31 December
Balance at 1 January 2019
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
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
Issue of ordinary shares
Share buyback
Redemption of preference shares
Issue of other equity instruments (note 44)
Redemptions of other equity instruments
(note 44)
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Changes in non-controlling interests
Total transactions with owners
Attributable to equity shareholders
Share capital
and premium
£ million
24,835
Other
reserves
£ million
13,210
Retained
profits
£ million
5,389
Total
£ million
43,434
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
6,491
274
Total
£ million
50,199
–
–
–
–
–
–
–
–
–
–
–
107
(189)
3
–
–
–
–
–
–
(79)
–
–
2,925
2,925
(1,117)
(1,117)
(156)
12
–
–
–
(306)
453
(12)
297
297
–
–
–
–
–
(1,423)
1,502
(2,312)
(466)
–
(156)
12
(306)
453
(12)
(1,126)
1,799
(2,312)
(466)
107
189
(1,095)
(1,095)
(3)
–
–
–
–
–
–
–
(3)
–
(3)
71
165
–
–
(3)
–
(3)
71
165
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
896
(1,481)
–
–
–
–
186
(3,643)
(3,536)
(585)
81
3,006
–
–
–
–
–
–
–
81
(1,117)
(156)
12
(306)
453
(12)
(1,126)
1,880
(138)
(2,450)
–
–
–
–
–
–
–
–
–
(14)
(152)
(466)
107
(1,095)
–
893
(1,481)
(3)
71
165
(14)
(4,273)
Realised gains and losses on equity shares held
at fair value through other comprehensive
income
–
2
(2)
–
At 31 December 2019
24,756
13,695
3,246
41,697
–
5,906
–
203
–
47,806
Further details of movements in the Group’s share capital, reserves and other equity instruments are provided in notes 40, 41, 42, 43 and 44.
The accompanying notes are an integral part of the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2019 203
Attributable to equity shareholders
Share capital
and premium
£ million
24,831
–
24,831
Other
reserves
£ million
13,815
(262)
13,553
Retained
profits
£ million
4,905
(929)
3,976
Total
£ million
43,551
(1,191)
42,360
4,408
4,408
–
–
–
–
–
–
–
–
–
–
–
–
162
(158)
–
–
–
–
4
–
24,835
–
–
–
(193)
(75)
(354)
(8)
(630)
(630)
–
–
–
158
–
–
–
–
158
–
389
120
8
–
–
–
–
517
4,925
(2,240)
(433)
–
(1,005)
(5)
40
53
120
8
(193)
(75)
389
(354)
(8)
(113)
4,295
(2,240)
(433)
162
(1,005)
(5)
40
53
207
(3,383)
207
(3,221)
129
13,210
(129)
5,389
–
43,434
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
5,355
–
5,355
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,136
–
–
–
1,136
–
6,491
237
–
237
98
–
–
–
–
–
–
–
–
98
(61)
–
–
–
–
–
–
–
(61)
–
274
Total
£ million
49,143
(1,191)
47,952
4,506
120
8
(193)
(75)
389
(354)
(8)
(113)
4,393
(2,301)
(433)
162
(1,005)
1,131
40
53
207
(2,146)
–
50,199
Balance at 31 December 2017
Adjustment on adoption of IFRS 9 and IFRS 15
Balance at 1 January 2018
Comprehensive income
Profit for the year1
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 instruments1
Issue of ordinary shares
Share buyback
Issue of other equity instruments
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Total transactions with owners
Realised gains and losses on equity shares held
at fair value through other comprehensive
income
At 31 December 2018
1 Restated, see note 1.
The accompanying notes are an integral part of the consolidated financial statements.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
204 Lloyds Banking Group Annual Report and Accounts 2019
Consolidated statement of changes in equity
for the year ended 31 December
Balance at 1 January 2017
Comprehensive income
Profit for the year1
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 instruments1
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
1 Restated, see note 1.
Attributable to equity shareholders
Share capital
and premium
£ million
24,768
Other
reserves
£ million
14,652
Retained
profits
£ million
3,600
Total
£ million
43,020
–
–
–
–
–
–
–
–
–
–
63
–
–
–
–
63
–
–
(74)
–
(731)
(32)
(837)
(837)
–
–
–
–
–
–
–
–
24,831
13,815
3,559
3,559
482
482
–
(40)
–
–
442
4,001
(2,284)
(415)
–
(411)
82
332
–
(2,696)
4,905
(74)
(40)
(731)
(32)
(395)
3,164
(2,284)
(415)
63
(411)
82
332
–
(2,633)
43,551
The accompanying notes are an integral part of the consolidated financial statements.
Other equity
instruments
£ million
Non-controlling
interests
£ million
5,355
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,355
Total
£ million
48,815
3,649
482
(74)
(40)
(731)
(32)
(395)
3,254
440
90
–
–
–
–
–
–
90
(51)
(2,335)
–
–
–
–
–
(242)
(293)
237
(415)
63
(411)
82
332
(242)
(2,926)
49,143
Consolidated cash flow statement
for the year ended 31 December
Profit before tax
Adjustments for:
Change in operating assets
Change in operating liabilities
Non-cash and other items
Tax paid
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchase of financial assets
Proceeds from sale and maturity of financial assets
Purchase of fixed assets
Proceeds from sale of fixed assets
Acquisition of businesses, net of cash acquired
Disposal of businesses, net of cash disposed
Net cash (used in) provided by 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
Redemption of other equity instruments
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 9
Cash and cash equivalents at 1 January 2018
The accompanying notes are an integral part of the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2019 205
Note
54(A)
54(B)
54(C)
54(E)
54(F)
54(D)
2019
£ million
4,393
(11,049)
3,642
15,573
(1,278)
11,281
(9,730)
9,631
(3,442)
1,432
(21)
–
2018
£ million
5,960
(4,472)
(8,673)
(2,892)
(1,030)
(11,107)
(12,657)
26,806
(3,514)
1,334
(49)
1
(2,130)
11,921
(2,312)
(466)
(138)
(1,178)
–
893
36
(1,095)
(818)
(1,481)
(6,559)
(5)
2,587
55,224
57,811
(2,240)
(433)
(61)
(1,268)
1,729
1,131
102
(1,005)
(2,256)
–
(4,301)
3
(3,484)
58,708
55,224
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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
206 Lloyds Banking Group Annual Report and Accounts 2019
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 and its subsidiary undertakings (the Group) 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. On adoption of IFRS 9 in 2018, the Group 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 96, the directors consider that it is appropriate to continue to adopt the going concern basis in
preparing the financial statements.
The Group adopted IFRS 16 Leases from 1 January 2019. IFRS 16 replaces IAS 17 Leases and addresses the classification and measurement of all leases.
The Group’s accounting as a lessor under IFRS 16 is substantially unchanged from its approach under IAS 17; however for lessee accounting there is no
longer a distinction between the accounting for finance and operating leases. For all assets the lessee recognises a right-of-use asset and a corresponding
liability at the date at which the leased asset is available for use. Assets and liabilities arising from a lease are initially measured on a present value basis.
The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the lessee’s incremental borrowing rate.
Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce
a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the
asset's useful life and the lease term on a straight-line basis. Payments associated with leases with a lease term of 12 months or less and leases of low-value
assets are recognised as an expense in profit or loss on a straight-line basis.
The Group elected to apply the standard retrospectively with the cumulative effect of initial application being recognised at 1 January 2019, comparatives
have therefore not been restated. There was no impact on shareholders' equity. Further details of the impact of adoption of IFRS 16 are provided in note 55.
The Group has also implemented the amendments to IAS 12 Income Taxes with effect from 1 January 2019 and as a result tax relief on distributions on
other equity instruments, previously taken directly to retained profits, is reported within tax expense in the income statement. Comparatives have been
restated. Adoption of these amendments to IAS 12 has resulted in a reduction in tax expense and an increase in profit for the year in 2019 of £115 million
(2018: £106 million; 2017: £102 million) for the Group and £89 million (2018: £82 million; 2017: £79 million) for the Company. There is no impact on
shareholders' equity or on earnings per share.
The Group has early adopted the hedge accounting amendments Interest Rate Benchmark Reform, issued by the IASB as a response to issues arising
from the planned replacement of interest rate benchmarks in a number of jurisdictions. The amendments confirm that entities applying hedge accounting
can continue to assume that the interest rate benchmark on which the hedged cash flows and cash flows of the hedging instrument are based is not
altered as a result of the uncertainties of the interest rate benchmark reform. Comparatives have not been restated. Further details are provided in note 53.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2019 and which have
not been applied in preparing these financial statements are given in note 56.
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 332 to 337.
(1) Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it has power over the entity, is exposed to, or has rights to, variable
returns from its involvement with the entity, and has the ability to affect those returns through the exercise of its power. This generally accompanies a
shareholding of more than one half of the voting rights although in certain circumstances a holding of less than one half of the voting rights may still result
in the ability of the Group to exercise control. The existence and effect of potential voting rights that are currently exercisable or convertible are considered
when assessing whether the Group controls another entity. The Group reassesses whether or not it controls an entity if facts and circumstances indicate
that there are changes to any of the above elements. Subsidiaries are fully consolidated from the date on which control is transferred to the Group; they
are de-consolidated from the date that control ceases.
The Group consolidates collective investment vehicles if its beneficial ownership interests give it substantive rights to remove the external fund manager
over the investment activities of the fund. Where a subsidiary of the Group is the fund manager of a collective investment vehicle, the Group considers
a number of factors in determining whether it acts as principal, and therefore controls the collective investment vehicle, including: an assessment of the
scope of the Group’s decision making authority over the investment vehicle; the rights held by other parties including substantive removal rights without
cause over the Group acting as fund manager; the remuneration to which the Group is entitled in its capacity as decision maker; and the Group’s exposure
to variable returns from the beneficial interest it holds in the investment vehicle. Consolidation may be appropriate in circumstances where the Group has
less than a majority beneficial interest. Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported in
other liabilities and the movement in these interests in interest expense.
Structured entities are entities that are designed so that their activities are not governed by way of voting rights. In assessing whether the Group has power
over such entities in which it has an interest, the Group considers factors such as the purpose and design of the entity; its practical ability to direct the
relevant activities of the entity; the nature of the relationship with the entity; and the size of its exposure to the variability of returns of the entity.
The treatment of transactions with non-controlling interests depends on whether, as a result of the transaction, the Group loses control of the subsidiary.
Changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions; any difference
between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly
in equity and attributed to the owners of the parent entity. Where the Group loses control of the subsidiary, at the date when control is lost the amount
of any non-controlling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary is remeasured to its fair
Lloyds Banking Group Annual Report and Accounts 2019 207
Note 2: Accounting policies continued
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. Joint
control is the contractually agreed sharing of control of an arrangement and only exists when decisions about the relevant activities require the unanimous
consent of the parties sharing control. 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) (1) below.
(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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
208 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
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 used by the Group to manage its liquidity. 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.
(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.
Lloyds Banking Group Annual Report and Accounts 2019 209
Note 2: Accounting policies continued
(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 50(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.
In respect of interest rate benchmark reform, the Group assumes that the interest rate benchmark on which the hedged cash flows and/or the hedged
risk are based, or the interest rate benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of interest rate
benchmark reform. The Group does not discontinue a hedging relationship during the period of uncertainty arising from the interest rate benchmark
reform solely because the actual results of the hedge are not highly effective.
(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 hedging 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
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
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210 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
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 initial recognition, 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) include 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
Under IFRS 16, a lessor is required to determine whether a lease is a finance or operating lease. A lessee is not required to make this determination.
(1) 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 property, plant and equipment 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.
(2) As lessee
Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Assets
and liabilities arising from a lease are initially measured on a present value basis. The lease payments are discounted using the interest rate implicit in the
lease, if that rate can be determined, or the Group’s incremental borrowing rate appropriate for the right-of-use asset arising from the lease.
Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce
a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the
asset's useful life and the lease term on a straight-line basis.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term
leases are leases with a lease term of twelve months or less. Low-value assets comprise IT equipment and small items of office furniture.
(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.
Lloyds Banking Group Annual Report and Accounts 2019 211
Note 2: Accounting policies continued
(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. The tax consequences of the Group's dividend payments (including distributions on other equity instruments) , if any, are charged or credited to the
statement in which the profit distributed originally arose.
Current tax is the amount of corporate income taxes expected to be payable or recoverable based on the profit for the period as adjusted for items that
are not taxable or not deductible, and is calculated using tax rates and laws that were enacted or substantively enacted at the balance sheet date.
Current tax includes amounts provided in respect of uncertain tax positions when management expects that, upon examination of the uncertainty by
Her Majesty’s Revenue and Customs (HMRC) or other relevant tax authority, it is more likely than not that an economic outflow will occur. Provisions reflect
management’s best estimate of the ultimate liability based on their interpretation of tax law, precedent and guidance, informed by external tax advice as
necessary. Changes in facts and circumstances underlying these provisions are reassessed at each balance sheet date, and the provisions are re-measured
as required to reflect current information.
For the Group’s long-term insurance businesses, the tax expense is analysed between tax that is payable in respect of policyholders’ returns and tax that is
payable on the shareholders’ returns. This allocation is based on an assessment of the rates of tax which will be applied to the returns under the current UK
tax rules.
Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet.
Deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the balance sheet date, and which are expected to
apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax liabilities are generally recognised for all taxable temporary differences but not recognised for taxable temporary differences arising on
investments in subsidiaries where the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the
foreseeable future. Deferred tax liabilities are not recognised on temporary differences that arise from goodwill which is not deductible for tax purposes.
Deferred tax assets are recognised to the extent it is probable that taxable profits will be available against which the deductible temporary differences
can be utilised, and are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are not recognised in respect of temporary differences that arise on initial recognition of assets and liabilities acquired
other than in a business combination. Deferred tax is not discounted.
(M) Insurance
The Group undertakes both life insurance and general insurance business. Insurance and participating investment contracts are accounted for under
IFRS 4 Insurance Contracts, which permits (with certain exceptions) the continuation of accounting practices for measuring insurance and participating
investment contracts that applied prior to the adoption of IFRS. The Group, therefore, continues to account for these products using UK GAAP and UK
established practice.
Products sold by the life insurance business are classified into three categories:
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212 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
– 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
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.
Lloyds Banking Group Annual Report and Accounts 2019 213
Note 2: Accounting policies continued
(2) General insurance business
The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included in insurance premium
income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred in the
balance sheet within liabilities arising from insurance contracts and participating investment contracts on a basis that reflects the length of time for which
contracts have been in force and the projected incidence of risk over the term of the contract and only credited to the income statement when earned.
Broking commission is recognised when the underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is
made for the effect of future policy terminations based upon past experience.
The underwriting business makes provision for the estimated cost of claims notified but not settled and claims incurred but not reported at the balance sheet
date. The provision for the cost of claims notified but not settled is based upon a best estimate of the cost of settling the outstanding claims after taking
into account all known facts. In those cases where there is insufficient information to determine the required provision, statistical techniques are used which
take into account the cost of claims that have recently been settled and make assumptions about the future development of the outstanding cases. Similar
statistical techniques are used to determine the provision for claims incurred but not reported at the balance sheet date. Claims liabilities are not discounted.
(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.
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.
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214 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 2: Accounting policies continued
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 expected credit losses
The Group recognises an allowance for expected credit losses 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 commitment and financial guarantee contracts.
At 31 December 2019 the Group’s expected credit loss allowance was £3,455 million (31 December 2018: £3,362 million) , of which £3,278 million
(31 December 2018: £3,169 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, at 31 December 2019,
approximately £0.6 billion of UK mortgages (31 December 2018: £0.6 billion) were classified as Stage 2 rather than Stage 3; 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. 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 impact
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 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.
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 to ensure the overall
provision adequately reflects all material risks. These adjustments are generally determined taking into account the particular attributes of the exposure
which have not been adequately captured by the primary impairment models.
At 31 December 2019, significant post-model adjustments included within the allowance for expected credit losses amounted to £161 million
(2018: £195 million) , less than 5 percent of overall provisions. This comprises increases for the additional end of term risk on interest only mortgages of
£132 million (2018: £114 million) ; mortgage accounts in long term default of £33 million (2018: £47 million) ; the extension of modelled lifetime on Retail
revolving products of £36 million (2018: £34 million) ; and a decrease from the temporary effects of bureau data changes which artificially inflate PDs, and
the resulting ECL, of £40 million; (2018: Nil) .
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 a wide range of 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 2019 are mapped to industry-wide historical loss data by portfolio. Combined losses across portfolios
are used to rank the scenarios by severity of loss. Alongside a defined central scenario three further scenarios are generated by averaging a group of
individual scenarios around specified points along the loss distribution 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 produced 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
31 December 2018 and 2019, the base case, upside and downside scenarios each carry a 30 per cent weighting; the severe downside scenario is weighted
Lloyds Banking Group Annual Report and Accounts 2019 215
Note 3: Critical accounting judgements and estimates continued
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 averaged over a five-year period are shown below:
Economic assumptions
Interest rate
Unemployment rate
House price growth
Commercial real estate price growth
At 31 December 2019
At 31 December 2018
Base case
%
1.25
4.3
1.3
(0.2)
Upside
%
2.04
3.9
5.0
1.8
Downside
%
Severe
downside
%
Base case
%
0.49
5.8
(2.6)
(3.8)
0.11
7.2
(7.1)
(7.1)
1.25
4.5
2.5
0.4
Upside
%
2.34
3.9
6.1
5.3
Downside
%
Severe
downside
%
1.30
5.3
(4.8)
(4.7)
0.71
6.9
(7.5)
(6.4)
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 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
Interest rate
Unemployment rate
House price growth
Commercial real estate price growth
Economic assumptions – start to trough
Interest rate
Unemployment rate
House price growth
Commercial real estate price growth
At 31 December 2019
At 31 December 2018
Upside
%
Downside
%
2.56
4.6
26.3
10.4
0.75
6.9
(1.9)
(0.6)
Severe
downside
%
0.75
8.3
(2.3)
(1.1)
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)
Severe
downside
%
1.25
8.6
(1.6)
(0.5)
At 31 December 2019
At 31 December 2018
Upside
%
0.75
3.4
(0.8)
0.3
Downside
%
Severe
downside
%
Base case
%
0.35
3.9
(14.8)
(17.5)
0.01
3.9
(33.1)
(30.9)
0.75
4.1
0.4
(0.1)
Upside
%
0.75
3.5
2.3
0.0
Downside
%
Severe
downside
%
0.75
4.3
(26.5)
(23.8)
0.25
4.2
(33.5)
(33.8)
Base case
%
1.75
4.6
6.0
0.1
Base case
%
0.75
3.8
(1.9)
(0.9)
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. The most significant difference between these bases arises on UK mortgages as the probability weighted ECL includes the
impact of house price movements on the loss given default. For other portfolios adjustment is made only for the probability of default. All non-modelled
provisions, including post model adjustments, are based on the probability weighted modelled ECL across all scenarios.
Impact of multiple economic scenarios
UK mortgages
Other Retail
Commercial Banking
Other
At 31 December 2019
At 31 December 2018
Base case
£m
Probability
weighted
£m
Difference
£m
Base case
£m
Probability
weighted
£m
Difference
£m
464
1,492
1,258
50
3,264
569
1,521
1,315
50
3,455
105
29
57
–
191
253
1,294
1,472
81
3,100
460
1,308
1,513
81
3,362
207
14
41
–
262
The table below shows the Group’s ECL for the upside and downside scenarios using a 100 per cent weighting, with stage allocation based on each
specific scenario.
ECL allowance
At 31 December 2019
At 31 December 2018
Upside
£m
3,001
Downside
£m
3,677
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
216 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 3: Critical accounting judgements and estimates continued
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
At 31 December 2019
At 31 December 2018
10pp increase
in HPI
(110)
10pp decrease
in HPI
147
10pp increase
in HPI
10pp decrease
in HPI
(114)
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
At 31 December 2019
At 31 December 2018
1pp increase in
unemployment
1pp decrease in
unemployment
1pp increase in
unemployment
1pp decrease in
unemployment
141
(143)
172
(155)
Valuation of assets and liabilities arising from insurance business
At 31 December 2019, the Group recognised a value of in-force business asset of £5,311 million (2018: £4,491 million) and an acquired value of in-force
business asset of £247 million (2018: £271 million) .
The value of in-force business asset represents the estimated 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 2019 are set out in note 25.
At 31 December 2019, the Group carried total liabilities arising from insurance contracts and participating investment contracts of £111,449 million
(2018: £98,874 million) . Elements of the valuations of liabilities arising from insurance contracts and participating investment contracts require management
to estimate future investment returns, future mortality rates, future expenses 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 32.
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 33.
Defined benefit pension scheme obligations
The net asset recognised in the balance sheet at 31 December 2019 in respect of the Group’s defined benefit pension scheme obligations was
£550 million (comprising an asset of £681 million and a liability of £131 million) (2018: a net asset of £1,146 million comprising an asset of £1,267 million and
a liability of £121 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 (v) of note 36.
Recoverability of deferred tax assets
At 31 December 2019 the Group carried deferred tax assets on its balance sheet of £2,666 million (2018: £2,453 million) principally relating to tax losses
carried forward. Further information on the Group's deferred tax assets and uncertain tax positions is provided in notes 37 and 48 respectively.
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 £3,611 million (2018: £3,778 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 2039. 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 37, deferred tax assets totalling £428 million (2018: £584 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.
Lloyds Banking Group Annual Report and Accounts 2019 217
Note 3: Critical accounting judgements and estimates continued
Regulatory provisions
At 31 December 2019, the Group carried provisions of £2,408 million (2018: £2,385 million) against the cost of making redress payments to customers and
the related administration costs in connection with historical regulatory breaches.
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 and estimate. It will often be necessary to form a view on matters which are inherently uncertain, such as the scope of reviews
required by regulators, and to estimate 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 38.
Fair value of financial instruments
At 31 December 2019, the carrying value of the Group’s financial instrument assets held at fair value was £211,650 million (2018: £206,939 million) , and its
financial instrument liabilities held at fair value was £47,265 million (2018: £51,920 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 minimal estimates are made in
determining fair value. 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 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 50. 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 50. Details about sensitivities to market risk arising from trading assets and
other treasury positions can be found in the risk management section on page 187.
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:
– market volatility and asset sales, including 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;
– the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets;
– restructuring costs, principally comprising severance costs, the costs of integrating newly acquired businesses, the costs of regulatory reform and the
rationalisation of the non-branch property portfolio; 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.
During 2019, the Group transferred Cardnet, its card payment acceptance service, from Retail into Commercial Banking and also transferred certain equity
business from Commercial Banking into Central items. 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.
Insurance and Wealth offers insurance, investment and wealth management products and services.
Other 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.
Inter-segment services are generally recharged at cost, although some attract a margin. In particular a profit margin is charged on the internal commission
arrangements between the UK branch and other distribution networks and the insurance product manufacturing businesses within the Group. 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 function
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 function. 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
218 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 4: Segmental analysis continued
Year ended 31 December 2019
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 (expense)
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
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 Net of profits on disposal of operating lease assets of £41 million.
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying
basis total
£m
8,807
2,014
10,821
(946)
9,875
(4,760)
(238)
(4,998)
(1,038)
3,839
13,109
(2,288)
10,821
2,918
1,422
4,340
(21)
4,319
(2,081)
(155)
(2,236)
(306)
1,777
3,394
946
4,340
112
2,021
2,133
–
2,133
(982)
(50)
(1,032)
–
1,101
1,740
393
2,133
540
275
815
–
815
(52)
(2)
(54)
53
814
(134)
949
815
350,585
252,056
259,964
145,060
145,122
183,390
175,869
13,677
182,333
162,379
10,465
160,400
518
652
–
9
–
–
54
1,233
(571)
662
1,225
–
–
–
47
206
1,478
(126)
2,014
1,712
–
108
2,208
4
136
330
248
–
4
103
249
1,070
(321)
749
25
–
(5)
12
812
72
916
(243)
1,422
315
–
43
260
–
5
–
–
197
65
–
156
423
(405)
18
–
191
–
–
–
2,216
2,407
(404)
2,021
181
825
19
174
–
–
–
–
–
–
–
30
30
(53)
(23)
–
–
201
–
278
(954)
(475)
773
275
452
–
75
1,007
300
12,377
5,732
18,109
(967)
17,142
(7,875)
(445)
(8,320)
(1,291)
7,531
18,109
–
18,109
833,893
421,320
786,087
659
982
248
206
69
103
489
2,756
(1,350)
1,406
1,250
191
196
12
1,137
1,540
4,326
–
5,732
2,660
825
245
3,649
304
Note 4: Segmental analysis continued
Year ended 31 December 20181
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 (expense)
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 Restated, see page 217.
2 Net of profits on disposal of operating lease assets of £60 million.
Lloyds Banking Group Annual Report and Accounts 2019 219
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying
basis total
£m
9,060
2,097
11,157
(921)
10,236
(4,897)
(267)
(5,164)
(861)
4,211
13,022
(1,865)
11,157
349,412
252,808
259,778
503
660
–
13
–
–
52
1,228
(601)
627
1,305
–
–
–
71
247
1,623
(153)
2,097
1,573
–
121
2,092
4
3,013
1,670
4,683
(35)
4,648
(2,191)
(203)
(2,394)
(71)
2,183
4,889
(206)
4,683
123
1,865
1,988
–
1,988
(1,021)
(39)
(1,060)
(1)
927
1,895
93
1,988
165,030
148,635
191,687
140,487
14,063
147,673
142
332
305
–
5
83
253
1,120
(311)
809
38
–
–
7
711
356
1,112
(251)
1,670
278
–
49
208
–
5
1
–
208
92
–
163
469
(418)
51
–
197
–
–
–
2,146
2,343
(529)
1,865
154
(55)
20
223
–
518
378
896
–
896
(56)
(91)
(147)
(4)
745
(1,082)
1,978
896
142,669
2,560
148,261
–
–
–
–
–
–
31
31
(56)
(25)
–
–
275
–
282
(1,087)
(530)
933
378
400
–
215
991
87
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
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
220 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
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 (expense)
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 217.
2 Net of profits on disposal of operating lease assets of £32 million.
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying basis
total
£m
8,695
2,150
10,845
(947)
9,898
(4,847)
(633)
(5,480)
(710)
3,708
12,606
(1,761)
10,845
350,051
253,127
258,246
572
640
–
10
–
–
95
1,317
(636)
681
1,281
–
–
–
26
6
1,313
156
2,150
1,547
–
149
2,431
12
3,040
1,803
4,843
(105)
4,738
(2,249)
(173)
(2,422)
(95)
2,221
3,181
1,662
4,843
133
1,846
1,979
–
1,979
(1,040)
(40)
(1,080)
–
899
1,883
96
1,979
452
406
858
(1)
857
(48)
(19)
(67)
10
800
855
3
858
177,763
148,313
224,918
151,986
13,770
157,824
132,309
2,914
121,978
135
312
321
–
5
91
273
1,137
(287)
850
63
1
5
74
481
(6)
618
335
1,803
322
–
53
130
–
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)
–
–
444
–
(89)
(96)
259
212
406
304
–
132
820
53
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
Lloyds Banking Group Annual Report and Accounts 2019 221
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 2019
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 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
Lloyds
Banking
Group
statutory
£m
10,180
8,179
18,359
18,359
(12,670)
(1,296)
4,393
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
Removal of:
Volatility
and other
items1
£m
Insurance
gross up2
£m
379
(426)
(47)
(967)
(1,014)
1,697
5
688
1,818
(2,021)
(203)
–
(203)
203
–
–
Removal of:
Volatility
and other
items4
£m
Insurance
gross up2
£m
152
107
259
(956)
(697)
2,053
–
1,356
(834)
673
(161)
–
(161)
161
–
–
Removal of:
Volatility
and other
items5
£m
Insurance
gross up2
£m
228
(186)
42
(1,053)
(1,011)
1,821
(107)
703
1,180
(1,356)
(176)
–
(176)
176
–
–
PPI
£m
–
–
–
–
–
2,450
–
2,450
PPI
£m
–
–
–
–
–
750
–
750
PPI
£m
–
–
–
–
–
1,650
–
1,650
Underlying
basis
£m
12,377
5,732
18,109
(967)
17,142
(8,320)
(1,291)
7,531
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
1 In the year ended 31 December 2019 this comprises the effects of asset sales (gains of £214 million) ; volatility and other items (losses of £88 million) ; the amortisation of purchased
intangibles (£68 million) ; restructuring (£471 million, comprising severance related costs, the integration of Zurich’s UK workplace pensions and savings business and costs associated with
establishing the Schroders Personal Wealth joint venture) ; and the fair value unwind and other items (losses of £275 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 £41 million (2018: £60 million; 2017: £32 million) .
4 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) .
5 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) .
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
222 Lloyds Banking Group Annual Report and Accounts 2019
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
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
Lease liabilities
Liabilities under sale and repurchase agreements
Interest payable on liabilities held at amortised cost
Amounts payable to unitholders in consolidated
open-ended investment vehicles4
Total interest and similar expense3
Net interest income
Weighted average
effective interest rate
2019
%
2018
%
3.17
0.78
2.23
2.89
1.64
2.83
0.86
0.59
1.24
6.79
2.49
1.12
0.98
3.17
0.84
1.60
2.87
1.98
2.82
1.39
0.53
0.27
7.63
2.46
0.96
0.79
13.64
1.31
(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
2.38
0.58
0.79
9.15
1.06
2019
£m
2018
£m
2017
£m
15,790
15,078
14,712
514
122
565
66
271
43
16,426
15,709
15,026
435
640
16,861
16,349
980
16,006
(96)
(117)
(80)
(2,015)
(1,204)
(1,201)
(42)
(301)
(4,859)
(1,822)
(6,681)
10,180
(1,812)
(234)
(1,388)
(1)
(245)
(3,797)
844
(2,953)
13,396
(1,721)
(266)
(1,481)
(1)
(110)
(3,659)
(1,435)
(5,094)
10,912
1 Includes £26 million (2018: £31 million; 2017: £12 million) of interest income on liabilities with negative interest rates and £45 million (2018: £46 million; 2017: £49 million) in respect of interest
income on finance leases.
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
2.57 per cent (2018: 2.68 per cent; 2017: 2.43 per cent) .
3 Includes £119 million (2018: £10 million; 2017: £50 million) of interest expense on assets with negative interest rates.
4 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.
Included within interest and similar income is £198 million (2018: £227 million; 2017: £179 million) in respect of credit-impaired financial assets. Net interest
income also includes a credit of £608 million (2018: credit of £701 million; 2017: credit of £651 million) transferred from the cash flow hedging reserve (see
note 42) .
Note 6: Net fee and commission income
Fee and commission income:
Current accounts
Credit and debit card fees
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
2019
£m
659
982
248
206
69
103
489
2,756
(1,350)
1,406
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
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.
At 31 December 2019, the Group held on its balance sheet £293 million (31 December 2018: £282 million) in respect of services provided to customers
and £140 million (31 December 2018: £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 £270 million (31 December 2018: £314 million) ; the Group expects to receive substantially all of this
revenue by 2022.
Income recognised during the year ended 31 December 2019 included £54 million in respect of amounts included in the contract liability balance at
31 December 2018 and £9 million in respect of amounts from performance obligations satisfied in previous years.
The most significant performance obligations undertaken by the Group are in respect of current accounts, the provision of other banking services for
commercial customers, credit and debit card services and investment management services.
Lloyds Banking Group Annual Report and Accounts 2019 223
Note 6: Net fee and commission income continued
In respect of current accounts, the Group receives fees for the provision of bank account and transaction services such as ATM services, fund transfers,
overdraft facilities and other value-added offerings.
For commercial customers, alongside its provision of current accounts, the Group provides other corporate banking services including factoring and
commitments to provide loan financing. Loan commitment fees are included in fees and commissions where the loan is not expected to be drawn down
by the customer.
The Group receives interchange and merchant fees, together with fees for overseas use and cash advances, for provision of card services to cardholders
and merchants.
Investment management services principally comprise the management and administration of policyholders’ funds in accordance with investment
mandates. Fees are generally based on the value of the assets under management.
Note 7: Net trading income
Foreign exchange translation (losses) gains
Gains on foreign exchange trading transactions
Total foreign exchange
Investment property (losses) gains (note 27)
Securities and other gains (losses) (see below)
Net trading income
2019
£m
(255)
677
422
(108)
17,974
18,288
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
2019
£m
120
3,509
14,559
18,188
(214)
17,974
2018
£m
342
580
922
139
(4,937)
(3,876)
2017
£m
(174)
517
343
230
11,244
11,817
2018
£m
2017
£m
(8)
404
(26)
(4,747)
(4,781)
(156)
(4,937)
1,122
9,862
11,388
(144)
11,244
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 27)
Gains less losses on disposal of financial assets at fair value through other comprehensive income
(2017: available-for-sale financial assets) (note 42)
Movement in value of in-force business (note 25)
Gain related to establishment of joint venture (note 23)
Share of results of joint ventures and associates (note 22)
Other
Total other operating income
2019
£m
2018
£m
2017
£m
6,827
2,483
9,310
(378)
8,932
642
9,574
2019
£m
1,250
191
196
825
244
6
196
2,908
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)
–
6
151
1,995
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
Total life insurance and participating investment contracts
(23,710)
(3,130)
Non-life insurance
Total non-life insurance claims, net of reinsurance
Total insurance claims
(287)
(23,997)
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows:
224 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 10: Insurance claims
Insurance claims comprise:
Life insurance and participating investment contracts
Claims and surrenders
Change in insurance and participating investment contracts (note 32)
Change in non-participating investment contracts
Reinsurers’ share
Change in unallocated surplus
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 36)
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 27)
Amortisation of acquired value of in-force non-participating investment contracts (note 25)
Amortisation of other intangible assets (note 26)
Goodwill impairment
Total operating expenses, excluding regulatory provisions
Regulatory provisions:
Payment protection insurance provision (note 38)
Other regulatory provisions (note 38)
Total operating expenses
2019
£m
2018
£m
2017
£m
(8,684)
(12,633)
(2,664)
(23,981)
290
(23,691)
(19)
(8,735)
4,565
628
(3,542)
404
(3,138)
8
(335)
(3,465)
(721)
(1,198)
(5,548)
(1,032)
(236)
(8,735)
(674)
(1,122)
(5,523)
(1,104)
(261)
(8,684)
(8,898)
(9,067)
2,836
(15,129)
35
(15,094)
(147)
(15,241)
(337)
(15,578)
(675)
(1,280)
(5,674)
(985)
(284)
(8,898)
2019
£m
2018
£m
2017
£m
2,539
2,482
2,679
380
325
532
92
383
4,251
93
187
211
491
509
343
705
249
474
4,762
370
190
169
729
1,038
1,121
170
226
224
715
197
287
225
653
2,373
2,483
2,064
30
566
2,660
–
9,775
2,450
445
2,895
12,670
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
10,181
1,650
865
2,515
12,696
Lloyds Banking Group Annual Report and Accounts 2019 225
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
2019
£m
244
136
380
113
36
149
2018
£m
362
147
509
152
37
189
2017
£m
334
139
473
127
35
162
Performance-based awards expensed in 2019 include cash awards amounting to £89 million (2018: £137 million; 2017: £102 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
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:
2019
69,321
762
70,083
2018
71,857
769
72,626
2017
75,150
794
75,944
2019
£m
1.5
20.2
3.5
25.2
1.0
26.2
–
0.7
0.7
26.9
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
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 costs incurred in connection with client asset assurance and with the Sarbanes-
Oxley Act requirements associated with the audit of the Group’s financial statements filed on its Form 20-F.
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.
Other non-audit fees: This category includes due diligence relating to corporate finance, including venture capital transactions and other assurance
services. The auditors are not engaged to provide tax 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
226 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 12: Auditors’ remuneration continued
The Group has procedures that are designed to ensure auditor independence, including prohibiting certain non-audit services. All audit and 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
2019
£m
0.1
0.4
0.2
–
2018
£m
0.1
0.3
0.4
–
Note 13: Impairment
Year ended 31 December 2019
Impact of transfers between stages
Other changes in credit quality
Additions (repayments)
Methodology, model and assumption changes
Other items
Total impairment
In respect of:
Loans and advances to banks
Loans and advances to customers
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
Year ended 31 December 2018
Impact of transfers between stages
Other changes in credit quality
Additions (repayments)
Methodology, model and assumption changes
Other items
Total impairment
In respect of:
Loans and advances to banks
Loans and advances to customers
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
2017
£m
0.1
0.3
0.2
0.1
Total
£m
604
798
(116)
14
(4)
692
1,296
–
1,307
1,307
5
1,312
(15)
(1)
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
(17)
4
94
33
(4)
127
110
–
139
139
–
139
(28)
(1)
110
89
1
(39)
(27)
–
(65)
24
–
10
10
–
10
14
–
24
532
899
(84)
8
–
823
1,355
–
1,351
1,351
5
1,356
(1)
–
–
(106)
(87)
–
–
(193)
(193)
–
(193)
(193)
–
(193)
–
–
1,355
(193)
1,296
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)
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
485
543
(90)
(20)
19
452
937
1
1,022
1,023
1
1,024
(73)
(14)
937
Lloyds Banking Group Annual Report and Accounts 2019 227
Note 13: Impairment continued
The Group’s impairment charge comprises the following items:
Transfers between stages
The net impact on the impairment charge of transfers between stages.
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, model and assumption 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 or to the underlying assumptions, as well as the impact of changing the models used.
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: Tax expense
(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
1 Restated, see note 1.
i
S
t
r
a
t
e
g
c
r
e
p
o
r
t
i
F
n
a
n
c
a
i
l
r
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
e
R
i
s
k
m
a
n
a
g
e
m
e
n
t
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
2017
£m
697
(6)
691
6
(9)
688
2019
£m
20181
£m
20171
£m
(1,389)
96
(1,293)
(70)
2
(68)
(1,280)
11
(1,269)
(34)
5
(29)
(1,240)
122
(1,118)
(40)
10
(30)
(1,361)
(1,298)
(1,148)
(165)
139
(26)
(127)
(29)
(156)
(430)
(48)
(478)
(1,387)
(1,454)
(1,626)
O
t
h
e
r
i
n
f
o
r
m
a
t
i
o
n
2019
£m
(148)
(1,239)
(1,387)
20181
£m
14
(1,468)
(1,454)
20171
£m
(82)
(1,544)
(1,626)
228 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 14: Tax expense continued
(B) Factors affecting the tax expense for the year
The UK corporation tax rate for the year was 19.0 per cent (2018: 19.0 per cent; 2017: 19.25 per cent) . An explanation of the relationship between tax
expense and accounting profit is set out below:
Profit before tax
UK corporation tax thereon
Impact of surcharge on banking profits
Non-deductible costs: conduct charges
Non-deductible costs: bank levy
Other non-deductible costs
Non-taxable income
Tax relief on coupons on other equity instruments
Tax-exempt gains on disposals
Recognition (derecognition) 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
1 Restated, see note 1.
Note 15: Earnings per share
Profit attributable to equity shareholders – basic and diluted
1 Restated, see note 1.
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
2019
£m
4,393
(835)
(364)
(370)
(43)
(121)
40
89
102
18
(6)
(14)
(67)
(53)
237
–
20181
£m
5,960
(1,132)
(409)
(101)
(43)
(90)
87
83
124
(9)
32
6
(62)
73
(13)
–
20171
£m
5,275
(1,015)
(429)
(352)
(44)
(59)
72
79
128
–
(9)
(15)
(66)
–
85
(1)
(1,387)
(1,454)
(1,626)
2019
£m
2,459
2019
million
70,603
682
71,285
3.5p
3.4p
20181
£m
3,975
2018
million
71,638
641
72,279
5.5p
5.5p
20171
£m
3,144
2017
million
71,710
683
72,393
4.4p
4.3p
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 25 million (2018: 38 million; 2017: 57 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 24 million anti-dilutive share options and awards excluded from the calculation of diluted earnings per share (2018: none; 2017: none) .
Lloyds Banking Group Annual Report and Accounts 2019 229
Note 16: Financial assets at fair value through profit or loss
These assets are comprised as follows:
Loans and advances to customers
Loans and advances to banks
Debt securities:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Equity shares
Treasury and other bills
Total
31 December 2019
31 December 2018
Other financial
assets
mandatorily at
fair value
through
profit or loss
£m
10,654
1,886
Trading
assets
£m
10,422
513
Total
£m
21,076
2,399
Trading
assets
£m
26,886
848
6,791
12,063
18,854
7,192
–
–
6
17
233
7,047
–
–
2,126
984
462
241
17,983
33,859
95,789
19
2,126
984
468
258
18,216
40,906
95,789
19
–
–
10
63
247
7,512
–
–
Other financial
assets
mandatorily at
fair value
through
profit or loss
£m
10,964
2,178
10,903
2,064
1,105
215
286
18,063
32,636
77,485
20
Total
£m
37,850
3,026
18,095
2,064
1,105
225
349
18,310
40,148
77,485
20
17,982
142,207
160,189
35,246
123,283
158,529
Other financial assets at fair value through profit or loss include assets backing insurance contracts and investment contracts of £136,855 million
(31 December 2018: £116,903 million) . Included within these assets are investments in unconsolidated structured entities of £38,177 million
(31 December 2018: £26,028 million) , see note 49.
For amounts included above which are subject to repurchase and reverse repurchase agreements see note 53.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
230 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 17: Derivative financial instruments
The fair values and notional amounts of derivative instruments are set out in the following table:
31 December 2019
31 December 2018
Trading and other
Exchange rate contracts:
Spot, forwards and futures
Currency swaps
Options purchased
Options written
Interest rate contracts:
Interest rate swaps
Forward rate agreements
Options purchased
Options written
Futures
Credit derivatives
Equity and other contracts
Contract/
notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
44,095
349,606
8,310
9,557
681
3,857
452
–
411,568
4,990
616
5,425
–
499
6,540
Contract/
notional
amount
£m
41,571
311,491
10,202
11,393
374,657
5,245,703
17,318
15,213
4,381,271
555,742
27,158
23,610
199,884
7
2,468
–
17
13
–
2,216
22
494,430
30,724
26,463
128,211
6,052,097
19,810
17,464
5,061,099
15,747
16,959
11,414
83
250
167
503
13,757
15,145
99
389
Fair value
assets
£m
Fair value
liabilities
£m
746
4,566
485
–
5,797
13,624
–
2,107
–
16
549
3,709
–
495
4,753
12,629
2
–
1,997
4
14,632
181
699
Total derivative assets/liabilities – trading and other
6,492,038
25,133
24,674
5,464,658
22,032
20,265
Hedging
Derivatives designated as fair value hedges:
Currency swaps
Interest rate swaps
Derivatives designated as cash flow hedges:
Interest rate swaps
Currency swaps
Total derivative assets/liabilities – hedging
Total recognised derivative assets/liabilities
34
183,489
183,523
426,740
9,549
436,289
619,812
7,111,850
8
798
806
355
75
430
–
229
229
743
133
876
1,236
26,369
1,105
25,779
490
150,971
151,461
556,945
10,578
567,523
718,984
6,183,642
3
947
950
358
255
613
29
187
216
844
48
892
1,563
23,595
1,108
21,373
The notional amount of the contract does not represent the Group’s 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; a large proportion of the Group's derivatives are held through exchanges
such as London Clearing House and are collateralised through those exchanges. Further details are provided in note 53 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 53; and
– Derivatives held in policyholder funds as permitted by the investment strategies of those funds.
The principal derivatives used by the Group are as follows:
– Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two
parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying
principal amounts. Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate,
applied to a notional principal amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but
not the obligation, to fix the rate of interest on a future loan or deposit, for a specified period and commencing on a specified future date.
– 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.
Lloyds Banking Group Annual Report and Accounts 2019 231
Note 17: Derivative financial instruments continued
Details of the Group’s hedging instruments are set out below:
31 December 2019
Fair value hedges
Interest rate
Cross currency swap
Notional
Average fixed interest rate
Average EUR/GBP 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 EUR/GBP 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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
331
2.58%
9,305
1.74%
37,948
1.22%
106,339
1.71%
–
–
–
413
–
1.29
1,611
–
1.30
2,389
1.05
1.31
34
183,489
9,549
34
1.28%
1.38
–
–
29,566
2.81%
5,136
1.05
–
9,675
1.05%
23,589
1.22%
58,447
1.29%
209,108
1.47%
125,921
2.39%
426,740
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
232 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 17: Derivative financial instruments continued
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 2019
Fair value hedges
Interest rate
Currency swaps
Interest rate swaps
Cash flow hedges
Foreign exchange
Currency swaps
Interest rate
Interest rate swaps
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
34
183,489
9,549
426,740
8
798
75
355
–
229
133
743
2
1,142
(185)
992
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 2019 233
Note 17: Derivative financial instruments continued
The Group’s hedged items are as follows:
31 December 2019
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
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 reserve
Continuing
hedges
Discontinued
hedges
£m
£m
£m
£m
£m
£m
£m
83,818
–
–
70,353
21,354
–
154
–
660
–
3,058
–
(73)
(1,333)
405
72
116
(680)
(263)
–
(2)
18
1,248
128
(31)
179
(48)
336
163
5
Carrying amount of the hedged
item
Accumulated amount of fair value
adjustment on the hedged item
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Change in fair
value of
hedged item
for
ineffectiveness
assessment
(YTD)
Cash flow hedge reserve
Continuing
hedges
Discontinued
hedges
£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 £692 million (2018: liability of £170 million) .
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
234 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 17: Derivative financial instruments continued
Gains and losses arising from hedge accounting are summarised as follows:
31 December 2019
Fair value hedges
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
31 December 2018
Fair value hedges
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 cashflows
will no longer
occur
Hedged item
affected income
statement
Income statement
line item that
includes reclassified
amount
£m
£m
£m
£m
186
(32)
(11)
–
–
98
36
–
(265)
(22)
651
237
–
(101)
(92)
Interest expense
–
–
–
–
7 Interest expense
(362)
Interest income
(66)
Interest income
6 Interest expense
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 was a gain of £101 million (2018: nil) reclassified from the cash flow hedging reserve for which hedge accounting had previously been used but for
which the hedged future cash flows are no longer expected to occur.
Note 18: Financial assets at amortised cost
Year ended 31 December 2019
Loans and advances to banks
At 1 January 2019
Exchange and other adjustments1
Additions (repayments)
At 31 December 2019
Allowance for impairment losses
Total loans and advances to banks
Loans and advances to customers
At 1 January 2019
Exchange and other adjustments1
Additions (repayments)
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Recoveries
Acquisition of portfolios2
Financial assets that have been written off during the year
At 31 December 2019
Allowance for impairment losses
Total loans and advances to customers
Debt securities
At 1 January 2019
Exchange and other adjustments1
Additions (repayments)
Financial assets that have been written off during the year
At 31 December 2019
Allowance for impairment losses
Total debt securities
Lloyds Banking Group Annual Report and Accounts 2019 235
Stage 1
£m
6,282
(218)
3,713
9,777
(2)
9,775
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
3
–
(3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
6,285
(218)
3,710
9,777
(2)
9,775
441,531
25,345
5,741
15,391
488,008
(498)
13,554
6,318
(34)
(2,558)
(6,286)
(13,084)
13,516
47
(858)
(32)
(432)
(1,540)
(8,306)
–
3,694
(1,440)
5,790
2,980
2,516
–
–
283
(1,934)
(202)
8,204
–
–
–
–
397
–
(1,828)
6,015
(1,447)
4,568
28
–
(54)
425
3,694
(1,882)
13,714
498,247
(142)
(3,259)
13,572
494,988
449,975
28,543
(675)
(995)
449,300
27,548
5,238
(94)
400
5,544
–
5,544
–
–
–
–
–
–
6
(2)
–
(1)
3
(3)
–
–
–
–
–
–
–
–
5,244
(96)
400
(1)
5,547
(3)
5,544
Total financial assets at amortised cost
464,619
27,548
4,568
13,572
510,307
Movements in Retail mortgage balances were as follows:
Retail mortgages
At 1 January 2019
Exchange and other adjustments1
Additions (repayments)
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Recoveries
Acquisition of portfolios2
Financial assets that have been written off during the year
At 31 December 2019
Allowance for impairment losses
Total loans and advances to customers
Stage 1
£m
Stage 2
£m
257,797
13,654
(1)
799
3,060
(7,879)
(427)
(5,246)
–
3,694
–
(1,432)
(3,057)
8,242
(472)
4,713
–
–
257,043
16,935
(23)
(281)
257,020
16,654
Purchased or
originated
credit-impaired
£m
Total
£m
15,391
288,235
283
(1,934)
284
(2,983)
–
–
–
–
57
3,694
(89)
28
–
(54)
13,714
289,198
(142)
(568)
13,572
288,630
Stage 3
£m
1,393
2
(416)
(3)
(363)
899
533
29
–
(35)
1,506
(122)
1,384
1 Exchange and other adjustments includes certain adjustments, prescribed by IFRS 9, in respect of purchased or originated credit-impaired financial assets.
2 Acquisition of portfolios in 2019 relates to the purchase, completed in September 2019, of Tesco Bank's UK residential mortgage portfolio.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
236 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 18: Financial assets at amortised cost continued
Year ended 31 December 2018
Loans and advances to banks
At 1 January 2018
Exchange and other adjustments
Additions (repayments)
At 31 December 2018
Allowance for impairment losses
Total loans and advances to banks
Loans and advances to customers
At 1 January 2018
Exchange and other adjustments
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
Debt securities
At 1 January 2018
Exchange and other adjustments
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
4,245
(29)
2,066
6,282
(2)
6,280
403,881
958
34,942
19,524
(15,743)
(2,031)
1,750
–
–
441,531
(525)
441,006
3,291
77
1,870
5,238
–
5,238
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
2
1
–
3
–
3
37,245
32
(2,187)
(19,501)
15,996
(2,220)
(5,725)
–
(4,020)
25,345
(994)
24,351
–
–
–
–
–
–
–
–
–
–
–
–
5,140
–
(2,074)
(23)
(253)
4,251
3,975
553
(277)
(1,576)
5,741
(1,553)
4,188
49
(14)
–
(29)
6
(6)
–
Total
£m
4,247
(28)
2,066
6,285
(2)
6,283
–
–
–
–
–
–
17,973
464,239
–
(2,609)
990
28,072
–
–
–
–
580
(4,297)
(1,576)
27
–
–
15,391
488,008
(78)
(3,150)
15,313
484,858
–
–
–
–
–
–
–
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
Movements on Retail mortgage balances were as follows:
Retail mortgages
At 1 January 2018
Additions (repayments)
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Recoveries
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
251,707
989
10,814
(5,396)
(317)
5,101
–
257,797
(37)
257,760
Stage 2
£m
20,109
(938)
(10,805)
5,691
(403)
(5,517)
–
13,654
(226)
13,428
Purchased or
originated
credit-impaired
£m
17,973
(2,609)
27
–
Total
£m
291,021
(2,797)
–
–
–
–
30
(19)
15,391
288,235
(78)
(459)
15,313
287,776
Stage 3
£m
1,232
(239)
(9)
(295)
720
416
3
(19)
1,393
(118)
1,275
Lloyds Banking Group Annual Report and Accounts 2019 237
Note 18: Financial assets at amortised cost continued
The movement tables are compiled by comparing the position at 31 December to that at the beginning of the year. 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.
Additions (repayments) 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.
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 2 years
Later than 2 years and not later than 3 years
Later than 3 years and not later than 4 years
Later than 4 years 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 2 years
Later than 2 years and not later than 3 years
Later than 3 years and not later than 4 years
Later than 4 years and not later than 5 years
Later than 5 years
Net investment in finance leases
2019
£m
490
347
181
145
208
883
2,254
(563)
(20)
1,671
2019
£m
406
326
130
103
171
535
2018
£m
458
516
456
201
178
1,104
2,913
(1,068)
(23)
1,822
2018
£m
303
407
353
154
130
475
1,671
1,822
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. There was an allowance for uncollectable finance lease receivables included in the allowance for impairment losses of
£12 million (2018: £1 million) .
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
238 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 20: Allowance for impairment losses
Analysis of movement in the allowance for impairment losses by Stage
Year ended 31 December 2019
In respect of drawn balances
At 1 January 2019
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
Recoveries of advances written off in previous years
Discount unwind
At 31 December 2019
In respect of undrawn balances
At January 2019
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 2019
Total at 31 December 2019
In respect of:
Loans and advances to banks
Loans and advances to customers:
Retail mortgages
Other
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)
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
527
11
229
(53)
(15)
(175)
(14)
153
139
994
(9)
(222)
92
(140)
353
83
(73)
10
1,570
23
(7)
(39)
155
420
529
827
1,356
(1,829)
397
(53)
677
995
1,464
123
–
19
(4)
(1)
(17)
(3)
(25)
(28)
95
772
64
(1)
(19)
4
(3)
24
6
8
14
77
6
–
–
–
4
(1)
3
(4)
(1)
5
Total
£m
3,169
308
–
–
–
598
598
714
1,312
(1,883)
425
(53)
3,278
193
(1)
–
–
–
6
6
(21)
(15)
177
3,455
78
283
(193)
(193)
(54)
28
–
142
–
–
–
–
–
1,072
1,469
142
2
–
–
–
2
23
652
675
–
677
–
95
772
–
281
714
995
–
995
–
77
122
1,325
1,447
3
1,450
14
5
1,072
1,469
–
–
142
–
142
–
142
–
–
142
–
568
2,691
3,259
3
3,264
14
177
3,455
–
Exchange and other adjustments include certain adjustments, prescribed by IFRS 9, in respect of purchased or originated credit-impaired financial
assets.
Lloyds Banking Group Annual Report and Accounts 2019 239
Note 20: Allowance for impairment losses continued
Movements in the Group's allowance for impairment losses in respect of Retail mortgages were as follows:
Balance at 1 January 2019
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
Advances written off
Recoveries of advances written off in previous years
Discount unwind
At 31 December 2019
Stage 1
£m
Stage 2
£m
37
–
17
(13)
(5)
(15)
(16)
3
(13)
226
–
(17)
33
(21)
105
100
(45)
55
Stage 3
£m
118
–
–
(20)
26
39
45
(59)
(14)
(35)
29
24
24
281
122
Purchased or
originated
credit-impaired
£m
78
283
(193)
(193)
(54)
28
–
142
Total
£m
459
283
–
–
–
129
129
(294)
(165)
(89)
57
24
569
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
240 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 20: Allowance for impairment losses continued
Year ended 31 December 2018
In respect of drawn balances
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 businesses
Recoveries of advances written off in previous years
Discount unwind
At 31 December 2018
In respect of undrawn balances
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 at 31 December 2018
In respect of:
Loans and advances to banks
Loans and advances to customers:
Retail mortgages (see below)
Other
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) :
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
590
2
304
(46)
(32)
(233)
(7)
(58)
(65)
–
527
147
(5)
28
(6)
(2)
(25)
(5)
(14)
(19)
123
650
2
37
488
525
–
527
–
123
650
1
1,147
–
(299)
85
(131)
401
56
(107)
(51)
(102)
994
126
(14)
(28)
6
(5)
22
(5)
(43)
(48)
64
1,491
133
(5)
(39)
163
325
444
696
1,140
(1,605)
(79)
553
(63)
1,570
–
12
–
–
7
(5)
2
(8)
(6)
6
1,058
1,576
–
–
226
768
994
–
994
–
64
118
1,435
1,553
6
1,559
11
6
1,058
1,576
–
–
32
–
–
–
–
–
27
19
78
–
–
–
–
–
78
–
78
–
78
–
78
–
–
78
–
Total
£m
3,260
135
–
–
–
493
493
531
1,024
(1,605)
(181)
580
(44)
3,169
273
(7)
–
–
–
(8)
(8)
(65)
(73)
193
3,362
2
459
2,691
3,150
6
3,158
11
193
3,362
1
Lloyds Banking Group Annual Report and Accounts 2019 241
Note 20: Allowance for impairment losses continued
Movements in the Group's allowance for impairment losses in respect of Retail mortgages were as follows:
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
Advances written off
Recoveries of advances written off in previous years
Discount unwind
At 31 December 2018
The Group income statement charge comprises:
Drawn balances
Undrawn balances
Financial assets at fair value through other comprehensive income
Total
Stage 1
£m
30
–
72
(3)
(3)
(48)
18
(11)
7
Stage 2
£m
236
1
(71)
15
(17)
82
9
(20)
(11)
37
226
118
Purchased or
originated
credit-impaired
£m
Stage 3
£m
86
1
(1)
(12)
20
40
47
(5)
42
(19)
3
5
Total
£m
384
2
–
–
–
74
74
(36)
38
(19)
30
24
459
2018
£m
1,024
(73)
(14)
937
32
–
–
–
–
27
19
78
2019
£m
1,312
(15)
(1)
1,296
The movement tables are compiled by comparing the position at 31 December to that at the beginning of the year. 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 £598 million (2018: £493 million) for drawn balances, and £6 million (2018: £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.
Other items charged to the income statement include 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.
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
2019
£m
2018
£m
13,098
–
121
60
11,051
24,330
535
227
18,971
118
120
131
5,151
24,491
303
21
Total financial assets at fair value through other comprehensive income
25,092
24,815
All assets were assessed at Stage 1 at 31 December 2018 and 2019.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
242 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 22: Investments in joint ventures and associates
The Group's share of results of, and investments in, equity accounted joint ventures and associates comprises:
Share of income statement amounts:
Income
Expenses
Impairment
Profit (loss) before tax
Tax
Share of post-tax results
Share of other comprehensive income
Share of total comprehensive income
Share of balance sheet amounts:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Share of net assets at 31 December
Movement in investments over the year:
At 1 January
Exchange and other adjustments
Acquisitions
Establishment of joint venture (note 23)
Additional investments
Disposals
Share of post-tax results
Share of other comprehensive income
Dividends paid
Share of net assets at 31 December
Joint ventures
Associates
Total
2019
£m
2018
£m
2017
£m
2019
£m
2018
£m
2017
£m
2019
£m
2018
£m
2017
£m
(5)
–
7
2
–
2
–
2
66
(59)
–
7
–
7
–
7
347
158
(35)
(177)
293
79
–
1
208
–
–
7
–
(2)
293
8
1
–
9
–
9
8
17
27
54
(2)
–
79
64
–
–
–
12
–
9
8
(14)
79
(1)
–
7
6
–
6
–
6
4
–
–
4
–
4
–
4
(1)
–
–
(1)
–
(1)
–
(1)
5
6
–
–
11
12
–
–
–
–
–
(1)
–
–
11
–
–
–
–
–
–
–
–
15
17
(20)
–
12
1
1
–
–
11
(1)
–
–
–
12
65
(59)
–
6
–
6
–
6
352
164
(35)
(177)
304
91
–
1
208
–
–
6
–
(2)
304
8
1
–
9
–
9
8
17
42
71
(22)
–
91
65
1
–
–
23
(1)
9
8
(14)
91
The Group's unrecognised share of losses of associates for the year was £nil (2018: £4 million; 2017; £nil) . For entities making losses, subsequent profits
earned are not recognised until previously unrecognised losses are extinguished. The Group's unrecognised share of losses net of unrecognised profits on
a cumulative basis of associates is £17 million (2018: £17 million; 2017 £17 million) and of joint ventures is £3 million (2018: £3 million; 2017: £29 million) .
Where entities have statutory accounts drawn up to a date other than 31 December management accounts are used when accounting for them by the Group.
Note 23: Acquisitions
Acquisition of workplace pensions business
On 1 July 2019, following the receipt of regulatory and legal approvals, the Group completed the acquisition of the UK workplace pensions and savings
business of the Zurich Insurance Group. The total fair value of the purchase consideration in the year was £20 million, settled in cash.
The acquisition is intended to enhance Scottish Widows' offering and broaden its participation in the financial planning and retirement segment whilst
delivering a modern, flexible workplace savings platform.
The table below sets out the fair value of the identifiable assets and liabilities acquired.
Assets
Financial assets at fair value through profit or loss
Loans and advances to banks
Value of in-force business
Assets arising from reinsurance contracts held
Other assets
Total assets
Liabilities
Liabilities arising from non-participating investment contracts
Other liabilities
Total liabilities
Provisional fair value of net assets acquired
Goodwill arising on acquisition
Total consideration
Book value as
at 1 July 2019
£m
Fair value
adjustments
£m
Fair value as at
1 July 2019
£m
7,350
17
–
13,616
6
20,989
20,981
8
20,989
–
–
–
6
–
–
6
–
–
–
6
7,350
17
6
13,616
6
20,995
20,981
8
20,989
6
14
20
Lloyds Banking Group Annual Report and Accounts 2019 243
Note 23: Acquisitions continued
The post-acquisition total income of the acquired business, which is included in the Group statutory consolidated income statement for the year ended
31 December 2019, is £22 million; the business also contributed profit before tax of £2 million for the same period.
Had the acquisition date been 1 January 2019, the Group’s consolidated total income would have been £18 million higher at £42,374 million and the
Group’s consolidated profit before tax would have been £3 million lower at £4,390 million.
The carrying value of the goodwill arising on acquisition of £14 million has been reviewed at 31 December 2019, with appropriate assumptions made as to
the future performance of the acquired business, and no adjustments are considered necessary.
Wealth management partnership
Following agreement with Schroders to enter into a partnership to create a new wealth management proposition, during 2019 the Group transferred
approximately £13 billion of assets under management from its UK wealth management business and £12 billion of investment funds administered by its
existing Authorised Corporate Director business into Scottish Widows Schroder Wealth Holdings Limited.
In connection with this partnership, the Group sold a 49.9 per cent interest in Scottish Widows Schroder Wealth Holdings Limited to Schroders
Administration Limited in exchange for a 19.9 per cent interest in Schroder Wealth Holdings Limited, the holding company of Schroders plc’s existing UK
wealth management business, valued at £202 million.
Following disposal of the 49.9 per cent interest, the Group accounts for its remaining 50.1 per cent interest in Scottish Widows Schroder Wealth Holdings
Limited as a joint venture, which was recorded at a fair value upon initial recognition of £208 million.
The Group recognised a gain arising from these transactions of £244 million, net of a charge of £70 million for an onerous contract provision in relation to
the services that it is now obligated to provide to the joint venture; this amount is recognised within other operating income.
Note 24: Goodwill
At 1 January
Acquisition of businesses (note 23)
At 31 December
Cost1
Accumulated impairment losses
At 31 December
2019
£m
2,310
14
2,324
2,664
(340)
2,324
2018
£m
2,310
–
2,310
2,664
(354)
2,310
1 For acquisitions made prior to 1 January 2004, the date of transition to IFRS, cost is included net of amounts amortised up to 31 December 2003.
The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is
allocated to the appropriate cash generating unit; of the total balance of £2,324 million (2018: £2,310 million) , £1,836 million, or 79 per cent of the total
(2018: £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 (2018: £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 (2018: £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 8 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 four-year period and a discount rate of 14 per cent. The cash flows beyond
the four-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 10 per cent. The cash flows beyond
the five year period assume no growth. 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 25: 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 33.
The principal features of the methodology and process used for determining key assumptions used in the calculation of the value of in-force business are
set out below:
Economic assumptions
Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. In practice, to achieve the same
result, where the cash flows are either independent of or move linearly with market movements, a method has been applied known as the ‘certainty
equivalent’ approach whereby it is assumed that all assets earn a risk-free rate and all cash flows are discounted at a risk-free rate. The certainty equivalent
approach covers all investment assets relating to insurance and participating investment contracts, other than the annuity business (where an illiquidity
premium is included, see below) .
A market-consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated
to be consistent with the market price of relevant options at each valuation date. Further information on options and guarantees can be found in note 32.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
244 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 25: Value of in-force business continued
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
91 basis points at 31 December 2019 (2018: 128 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
2019
%
2018
%
0.00 to 3.90
0.00 to 4.05
0.91 to 4.81
1.28 to 5.33
0.00 to 3.90
0.00 to 4.05
3.11
3.41
3.43
3.75
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 32 and the effect of changes in key assumptions is
given in note 33.
The gross value of in-force business asset in the consolidated balance sheet is as follows:
Acquired value of in-force non-participating investment contracts
Value of in-force insurance and participating investment contracts
Total value of in-force business
The movement in the acquired value of in-force non-participating investment contracts over the year is as follows:
At 1 January
Acquisition of business
Amortisation (note 11)
At 31 December
2019
£m
247
5,311
5,558
2019
£m
271
6
(30)
247
2018
£m
271
4,491
4,762
2018
£m
306
5
(40)
271
The acquired value of in-force non-participating investment contracts includes £150 million (2018: £167 million) in relation to OEIC business.
Lloyds Banking Group Annual Report and Accounts 2019 245
Note 25: Value of in-force business continued
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
2019
£m
4,491
(5)
2018
£m
4,533
13
696
675
(274)
(43)
102
344
825
5,311
(304)
(122)
(67)
(237)
(55)
4,491
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 26: Other intangible assets
Cost:
At 1 January 2018
Additions
Disposals
At 31 December 2018
Exchange and other adjustments
Additions
Disposals
At 31 December 2019
Accumulated amortisation:
At 1 January 2018
Charge for the year
Disposals
At 31 December 2018
Exchange and other adjustments
Charge for the year
Disposals
At 31 December 2019
Balance sheet amount at 31 December 2019
Balance sheet amount at 31 December 2018
Brands
£m
Core deposit
intangible
£m
Purchased
credit card
relationships
£m
Customer-
related
intangibles
£m
Capitalised
software
enhancements
£m
596
–
–
596
–
–
–
2,770
1,017
–
–
–
(15)
2,770
1,002
–
–
–
–
–
–
538
–
–
538
–
–
–
596
2,770
1,002
538
193
23
–
216
–
–
–
216
380
380
2,770
–
–
2,770
–
–
–
2,770
–
–
355
71
(15)
411
–
70
–
481
521
591
519
19
–
538
–
–
–
538
–
–
2,940
1,046
(55)
3,931
4
1,033
(10)
4,958
1,189
400
(34)
1,555
4
496
(4)
2,051
2,907
2,376
Total
£m
7,861
1,046
(70)
8,837
4
1,033
(10)
9,864
5,026
513
(49)
5,490
4
566
(4)
6,056
3,808
3,347
Brands of £380 million (31 December 2018: £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 December 2019 is expected to be amortised over its remaining useful life of eight years.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
246 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 27: Property, plant and equipment
Cost or valuation:
At 1 January 2018
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
Adjustment on adoption of IFRS 16 (note 55)
Balance at 1 January 2019
Exchange and other adjustments
Additions
Expenditure on investment properties (see below)
Change in fair value of investment properties (note 7)
Disposals
At 31 December 2019
Accumulated depreciation and impairment:
At 1 January 2018
Exchange and other adjustments
Depreciation charge for the year
Disposals
At 31 December 2018
Exchange and other adjustments
Depreciation charge for the year
Disposals
At 31 December 2019
Balance sheet amount at 31 December 2019
Balance sheet amount at 31 December 2018
3,553
3,770
1 Primarily premises.
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
Right-of-
use asset1
£m
3,699
1,791
–
–
143
139
(211)
3,770
–
3,770
16
–
73
(108)
(198)
3,553
–
–
–
–
–
–
–
–
–
–
72
–
–
(647)
1,216
–
1,216
3
121
–
–
(245)
1,095
728
1
121
(634)
216
–
125
(225)
116
979
1,000
5,068
(6)
519
–
–
(574)
5,007
–
5,007
5
522
–
–
(238)
5,296
2,125
(8)
715
(534)
2,298
(1)
715
(180)
2,832
2,464
2,709
6,528
11
1,755
–
–
(1,540)
6,754
–
6,754
(4)
1,693
–
–
(1,694)
6,749
1,506
6
1,016
(595)
1,933
(36)
1,008
(595)
2,310
4,439
4,821
1,716
1,716
–
196
–
–
(27)
1,885
1
216
(1)
216
1,669
–
2019
£m
21
52
73
Total
£m
17,086
5
2,346
143
139
(2,972)
16,747
1,716
18,463
20
2,532
73
(108)
(2,402)
18,578
4,359
(1)
1,852
(1,763)
4,447
(36)
2,064
(1,001)
5,474
13,104
12,300
2018
£m
81
62
143
Rental income of £191 million (2018: £197 million) and direct operating expenses arising from properties that generate rental income of £32 million
(2018: £23 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 £7 million
(2018: £33 million) .
The table above analyses movements in investment properties, all of which are categorised as level 3. See note 50 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 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
2019
£m
978
620
312
102
12
2
2018
£m
1,095
681
332
113
30
6
Total future minimum rentals receivable
2,026
2,257
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements.
Lloyds Banking Group Annual Report and Accounts 2019 247
Note 28: Other assets
Deferred acquisition and origination costs
Settlement balances
Other assets and prepayments
Total other assets
Note 29: 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
2019
£m
83
654
3,737
4,474
2019
£m
7,531
–
7,531
11,048
98
2,809
13,955
21,486
2018
£m
90
743
3,742
4,575
2018
£m
7,085
11
7,096
21,595
242
1,614
23,451
30,547
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 2019 was £14,365 million,
which was £6,834 million higher than the balance sheet carrying value (2018: £15,435 million, which was £8,350 million higher than the balance sheet
carrying value) . At 31 December 2019 there was a cumulative £33 million increase in the fair value of these liabilities attributable to changes in credit spread
risk; this is determined by reference to the quoted credit spreads of Lloyds Bank plc, the issuing entity within the Group. Of the cumulative amount an
increase of £419 million arose in 2019 and a decrease of £533 million arose in 2018.
For the fair value of collateral pledged in respect of repurchase agreements see note 53.
Note 30: Debt securities in issue
Medium-term notes issued
Covered bonds (note 31)
Certificates of deposit issued
Securitisation notes (note 31)
Commercial paper
Total debt securities in issue
2019
£m
41,291
29,821
10,598
7,288
8,691
97,689
2018
£m
37,490
28,194
12,020
5,426
8,038
91,168
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
248 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 31: 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 30.
Securitisation programmes
UK residential mortgages
Commercial loans
Credit card receivables
Motor vehicle finance
Less held by the Group
Total securitisation programmes (notes 29 and 30) 1
Covered bond programmes
Residential mortgage-backed
Social housing loan-backed
Less held by the Group
Total covered bond programmes (note 30 )
Total securitisation and covered bond programmes
2019
2018
Loans and
advances
securitised
£m
Notes
in issue
£m
Loans and
advances
securitised
£m
Notes
in issue
£m
25,815
23,505
25,018
22,485
5,746
8,060
2,850
41,674
34,963
1,839
36,802
5,116
8,164
3,450
42,545
37,579
1,552
39,131
6,037
5,767
3,462
38,771
(31,436)
7,335
29,321
600
29,921
(100)
29,821
37,156
6,577
5,263
2,855
37,180
(31,701)
5,479
27,694
1,200
28,894
(700)
28,194
33,673
1 Includes £47 million (2018: £53 million) of securitisation notes held at fair value through profit or loss.
Cash deposits of £4,703 million (2018: £4,102 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 2019 these obligations had not been triggered; the maximum exposure under these
facilities was £56 million (2018: £88 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 in respect of its securitisation issuances 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 provided financial or other support by voluntarily offering to repurchase assets from any of its public securitisation programmes during
2019 (2018: none) .
Lloyds Banking Group Annual Report and Accounts 2019 249
Note 32: Liabilities arising from insurance contracts and participating investment contracts
Insurance contract and participating investment contract liabilities are comprised as follows:
2019
2018
Gross
£m
Reinsurance1
£m
Net
£m
Gross
£m
Reinsurance1
£m
Net
£m
Life insurance (see (1) below) :
Insurance contracts
Participating investment contracts
Non-life insurance contracts (see (2) below) :
Unearned premiums
Claims outstanding
Total
1 Reinsurance balances are reported within assets .
96,812
14,063
110,875
333
241
574
111,449
(715)
–
96,097
14,063
(715)
110,160
(14)
–
(14)
(729)
319
241
560
84,366
13,912
98,278
342
254
596
110,720
98,874
(716)
–
(716)
(13)
–
(13)
(729)
83,650
13,912
97,562
329
254
583
98,145
(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 2018
New business
Changes in existing business
Change in liabilities charged to the income statement
Exchange and other adjustments
At 31 December 2018
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2019
Insurance
contracts
£m
86,949
5,476
(8,072)
(2,596)
13
84,366
5,684
6,798
12,482
(36)
Participating
investment
contracts
£m
Gross
£m
15,881
102,830
31
(2,000)
(1,969)
–
13,912
37
114
151
–
5,507
(10,072)
(4,565)
13
98,278
5,721
6,912
12,633
(36)
Reinsurance
£m
(563)
(42)
(111)
(153)
–
(716)
(45)
46
1
–
Net
£m
102,267
5,465
(10,183)
(4,718)
13
97,562
5,676
6,958
12,634
(36)
96,812
14,063
110,875
(715)
110,160
Liabilities for insurance contracts and participating investment contracts can be split into with-profit fund liabilities, accounted for using the PRA’s realistic
capital regime (realistic liabilities) and non-profit fund liabilities, accounted for using a prospective actuarial discounted cash flow methodology, as follows:
Insurance contracts
Participating investment contracts
Total
With-profit
fund
£m
8,018
7,222
15,240
2019
Non-profit
fund
£m
88,794
6,841
95,635
Total
£m
96,812
14,063
110,875
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 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
250 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 32: 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 2019 of £2.6 billion (2018: £2.5 billion) . The eventual cost of providing benefits
on policies written both pre and post demutualisation is dependent upon a large number of variables, including future interest rates and equity values,
demographic factors, such as mortality, and the proportion of policyholders who seek to exercise their options. The ultimate cost will therefore not be
known for many years.
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 2019 251
Note 32: 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, 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 2019 resulted in the following key impacts on profit before tax:
– Change in persistency assumptions (£67 million decrease) .
– Change in the assumption in respect of current and future mortality and morbidity rates (£164 million increase) .
– Change in expenses assumptions (£208 million increase) .
Included within change in expenses assumptions are the impacts associated with exiting the Standard Life Aberdeen investment management agreement.
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 £64 million (2018: £39 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
2019
£m
342
663
(672)
(9)
333
(14)
319
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
2019
£m
254
(300)
287
(13)
241
–
241
128
113
241
2018
£m
358
681
(697)
(16)
342
(13)
329
2018
£m
225
(306)
335
29
254
–
254
170
84
254
1 Of which an increase of £335 million (2018: £367 million) was in respect of current year claims and a decrease of £48 million (2018: a decrease of £32 million) was in respect of prior year claims.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
252 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 33: 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
2019
2018
Increase
(reduction)
in profit
before tax
Increase
(reduction)
in equity
£m
19
(293)
107
299
33
(1)
(2)
(424)
191
£m
16
(243)
89
248
28
(1)
(1)
(352)
159
Increase
(reduction)
in profit
before tax
£m
Increase
(reduction)
in equity
£m
22
(234)
89
262
76
(3)
(5)
(364)
153
18
(194)
74
217
63
(2)
(4)
(303)
127
Change in
variable
5% reduction
5% reduction
10% reduction
10% reduction
0.25% reduction
5% addition
1% addition
0.25% addition
0.10% addition
Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases.
1 This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate.
2 This sensitivity shows the impact on the annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate.
3 This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate.
4 This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate.
5 This sensitivity shows the impact on the value of in-force business, financial options and guarantee costs, statutory reserves and asset values of reducing the risk-free rate by 25 basis
points.
6 This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.
7 This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.
8 This sensitivity shows the impact of a 25 basis point increase in credit default spreads on corporate bonds and the corresponding reduction in market values. Swap curves, the risk-free
rate and illiquidity premia are all assumed to be unchanged.
9 This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity premia. It assumes the overall spreads on assets are unchanged and hence market values
are unchanged. Swap curves and the non-annuity risk-free rate are both assumed to be unchanged. The increased illiquidity premium increases the annuity risk-free rate.
Note 34: Liabilities arising from non-participating investment contracts
The movement in liabilities arising from non-participating investment contracts may be analysed as follows:
At 1 January
Acquisition of business (note 23)
New business
Changes in existing business
At 31 December
2019
£m
13,853
20,981
1,810
815
37,459
2018
£m
15,447
–
668
(2,262)
13,853
The balances above are shown gross of reinsurance. As at 31 December 2019, related reinsurance balances were £21 million (2018: £20 million) ; reinsurance
balances are reported within assets. Liabilities arising from non-participating investment contracts are categorised as level 2. See note 50 for details of
levels in the fair value hierarchy.
Note 35: Other liabilities
Settlement balances
Unitholders’ interest in Open Ended Investment Companies1
Unallocated surplus within insurance businesses
Lease liabilities
Other creditors and accruals
Total other liabilities
1 Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported at fair value in other liabilities.
2019
£m
760
2018
£m
485
11,928
12,933
400
1,844
5,401
20,333
382
46
5,787
19,633
Note 35: Other liabilities continued
The maturity of the Group's lease liabilities was as follows:
Not later than 1 year
Later than 1 year and not later than 2 years
Later than 2 years and not later than 3 years
Later than 3 years and not later than 4 years
Later than 4 years and not later than 5 years
Later than 5 years
The Group adopted IFRS 16 Leases from 1 January 2019, see note 1.
Note 36: 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 2019 253
2019
£m
241
4
245
287
532
2019
£m
241
222
207
170
145
859
1,844
2018
£m
401
4
405
300
705
2019
£m
681
(257)
424
2019
£m
550
(126)
424
2018
£m
10
9
7
6
2
12
46
2017
£m
362
7
369
256
625
2018
£m
1,267
(245)
1,022
2018
£m
1,146
(124)
1,022
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 main 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 2019, these schemes represented 94 per cent of the Group’s total gross defined benefit pension assets (2018:
94 per cent) . These schemes provide retirement benefits calculated as a percentage of final pensionable salary depending upon the length of service; the
minimum retirement age under the rules of the schemes at 31 December 2019 is generally 55 although certain categories of member are deemed to have a
contractual right to retire at 50.
The Group operates both funded and unfunded pension arrangements; the majority, including the three most significant schemes, are funded schemes
in the UK. All of these UK funded schemes are operated as separate legal entities under trust law, are in compliance with the Pensions Act 2004 and 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 employer 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, 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 had made as a result of its Structural Reform
Programme, the Group agreed a recovery plan with the trustees. Under the plan, deficit contributions of £618 million were paid during 2019, and these
will rise to £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 benefits accruing over the year, and to cover the expenses
of running the scheme. The Group currently expects to pay contributions of approximately £1,200 million to its defined benefit schemes in 2020.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
254 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 36: Retirement benefit obligations continued
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 2019, 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 2019 these held
assets of approximately £4.8 billion in aggregate. The private limited companies are consolidated fully in the Group’s balance sheet. The terms of these
arrangements require the Group to maintain assets in these vehicles to agreed minimum values in order to secure obligations owed to the relevant Group
pension schemes. The Group has satisfied this requirement during 2019.
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 2019 the most recent valuation results for all schemes have been updated by qualified independent actuaries. The funding valuations use a
more prudent approach to setting the discount rate and more conservative longevity assumptions than the IAS 19 valuations.
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 recognised a past service cost of £108 million in respect of equalisation in 2018 and, following
agreement of the detailed implementation approach with the Trustee, a further £33 million has been recognised in 2019.
(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
2019
£m
2018
£m
(45,241)
45,791
550
(41,092)
42,238
1,146
2019
£m
2018
£m
1,146
(241)
(4,958)
3,531
1,062
10
550
509
(401)
1,707
(1,558)
863
26
1,146
2019
£m
2018
£m
(41,092)
(201)
(1,172)
(44,384)
(261)
(1,130)
(29)
471
(5,400)
2,174
(44)
–
17
35
(439)
(201)
2,347
3,079
(108)
(12)
17
–
(45,241)
(41,092)
2019
£m
2018
£m
(6,413)
(16,058)
(21,032)
(1,738)
(45,241)
(6,448)
(14,208)
(18,885)
(1,551)
(41,092)
Lloyds Banking Group Annual Report and Accounts 2019 255
Note 36: 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
2019
£m
201
(48)
–
1
44
43
241
Quoted
£m
637
7,449
16,477
8,813
138
32,877
–
4,578
(283)
37,809
Quoted
£m
555
8,893
18,207
10,588
–
37,688
–
2019
Unquoted
£m
39
–
–
–
–
–
158
Total
£m
594
8,893
18,207
10,588
–
37,688
158
4,773
10,585
15,358
204
43,220
(8,211)
2,571
(8,007)
45,791
1 Of the total debt instruments, £33,134 million (31 December 2018: £29,033 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
2019
£m
2018
£m
42,238
44,893
3,531
1,220
1,062
(2,174)
(18)
(43)
(25)
(1,558)
1,152
863
(3,079)
(18)
(41)
26
45,791
42,238
2018
£m
261
(22)
12
1
108
41
401
2018
Unquoted
£m
222
–
–
–
–
–
556
10,494
(6,843)
4,429
2019
£m
2,429
2,886
1,126
971
7,946
2017
£m
295
(1)
10
3
14
41
362
Total
£m
859
7,449
16,477
8,813
138
32,877
556
15,072
(7,126)
42,238
2018
£m
2,329
2,487
2,329
313
7,614
15,358
15,072
The Trustee’s approach to investment is focused on acting in the members’ best financial interests, with the integration of ESG (Environmental, Social and
Governance) considerations into investment management processes and practices. This policy is reviewed annually (or more frequently as required) and
has been shared with the schemes’ investment managers for implementation.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
256 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 36: 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
2019
%
2.05
2.94
1.99
0.00
2.57
2019
Years
27.5
29.2
28.5
30.3
2018
%
2.90
3.20
2.15
0.00
2.73
2018
Years
27.8
29.4
28.8
30.6
The mortality assumptions used in the UK 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 2019 is assumed
to live for, on average, 27.5 years for a male and 29.2 years for a female. In practice there will be much variation between individual members but these
assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now.
This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of
improvement assumed the table also shows the life expectancy for members aged 45 now, when they retire in 15 years’ time at age 60.
(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 and through the use
of derivatives.
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 asset, 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 36: Retirement benefit obligations continued
Inflation (including pension increases) :1
Increase of 0.1 per cent
Decrease of 0.1 per cent
Discount rate:2
Increase of 0.1 per cent
Decrease of 0.1 per cent
Expected life expectancy of members:
Increase of one year
Decrease of one year
Lloyds Banking Group Annual Report and Accounts 2019 257
Effect of reasonably possible alternative assumptions
Increase (decrease)
in the income
statement charge
(Increase) decrease in the
net defined benefit pension
scheme surplus
2019
£m
2018
£m
12
(12)
(20)
21
40
(39)
14
(14)
(27)
25
43
(42)
2019
£m
467
(460)
(763)
784
2018
£m
410
(395)
(670)
686
1,636
(1,575)
1,299
(1,257)
1 At 31 December 2019, the assumed rate of RPI inflation is 2.94 per cent and CPI inflation 1.99 per cent (2018: RPI 3.20 per cent and CPI 2.15 per cent) .
2 At 31 December 2019, the assumed discount rate is 2.05 per cent (2018: 2.90 per cent) .
Sensitivity analysis method and assumptions
The sensitivity analysis above reflects the impact on the liabilities of 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.
On 28 January 2020, the main schemes entered into a £10 billion longevity insurance arrangement to hedge around 20 per cent of the schemes’ exposure
to unexpected increases in life expectancy. This arrangement will form part of the schemes’ investment portfolio and will provide income to the schemes
in the event that pensions are paid out for longer than expected. The transaction is structured as a pass-through with Scottish Widows as the insurer, and
onwards reinsurance to Pacific Life Re Limited.
At 31 December 2019 the asset-liability matching strategy mitigated around 106 per cent of the liability sensitivity to interest rate movements and around
103 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
2019
Years
18
2019
£m
1,274
1,373
4,455
8,426
9,229
17,400
13,999
8,291
3,160
2018
Years
18
2018
£m
1,225
1,299
4,303
8,305
9,416
18,417
15,631
9,924
4,270
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
258 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 36: Retirement benefit obligations continued
Maturity analysis method and assumptions
The projected benefit payments are based on the assumptions underlying the assessment of the obligations, including allowance for expected future
inflation. They are shown in their undiscounted form and therefore appear large relative to the discounted assessment of the defined benefit obligations
recognised in the Group’s balance sheet. They are in respect of benefits that have been accrued prior to the respective year-end date only and make no
allowance for any benefits that may have been accrued subsequently.
Defined contribution schemes
The Group operates a number of defined contribution pension schemes in the UK and overseas, principally Your Tomorrow and the defined contribution
sections of the Lloyds Bank Pension Scheme No. 1.
During the year ended 31 December 2019 the charge to the income statement in respect of defined contribution schemes was £287 million
(2018: £300 million; 2017: £256 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 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 2019 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 6.54 per cent (2018: 6.81 per cent) .
Movements in the other post-retirement benefits obligation:
At 1 January
Actuarial (losses) gains
Insurance premiums paid
Charge for the year
Exchange and other adjustments
At 31 December
Note 37: Deferred tax
The Group’s deferred tax assets and liabilities are as follows:
2019
£m
(124)
(6)
7
(4)
1
2018
£m
(144)
18
5
(4)
1
(126)
(124)
Statutory position
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
2019
£m
2,666
(44)
2,622
2018
£m
2,453
–
2,453
Tax disclosure
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
2019
£m
4,917
(2,295)
2,622
2018
£m
4,731
(2,278)
2,453
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 to 17 per cent in 2019 is a charge of £6 million in the income statement and a credit of £5 million in other comprehensive income.
During the December 2019 election campaign, the UK government stated its intention to maintain the corporation tax rate at 19 per cent on 1 April 2020.
Had this rate change been substantively enacted at 31 December 2019, the effect would have been to increase net deferred tax assets by £294 million.
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 2019, the effect would have been to reduce net deferred tax assets by £50 million.
Lloyds Banking Group Annual Report and Accounts 2019 259
Note 37: 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:
Property,
plant and
equipment
£m
Pension
liabilities
£m
Provisions
£m
Share-based
payments
£m
Derivatives
£m
Other
temporary
differences
£m
Deferred tax assets
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
(Charge) credit to the income statement
(Charge) credit to other comprehensive
income
Other (charge) credit to equity
At 31 December 2019
Tax losses
£m
4,034
(256)
–
–
3,778
(167)
–
–
743
(100)
–
–
643
(1)
–
–
90
64
(92)
–
62
(83)
74
–
53
380
(45)
(138)
–
197
(87)
116
–
226
51
(6)
–
(5)
40
4
–
7
51
–
–
–
–
–
149
–
–
16
(5)
–
–
11
174
–
–
Total
£m
5,314
(348)
(230)
(5)
4,731
(11)
190
7
3,611
642
149
185
4,917
Deferred tax liabilities
At 1 January 2018
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Exchange and other adjustments
At 31 December 2018
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Exchange and other adjustments
At 31 December 2019
1 Financial assets at fair value through other comprehensive income.
Long-term
assurance
business
£m
Acquisition
fair value
£m
Pension
assets
£m
Derivatives
£m
Asset
revaluations1
£m
(799)
162
–
–
(637)
(193)
–
–
(879)
142
–
–
(737)
221
–
–
(181)
(67)
(25)
–
(273)
59
64
–
(830)
(516)
(150)
(499)
(19)
113
–
(405)
(48)
(148)
–
(601)
(207)
(33)
141
–
(99)
(19)
83
–
(35)
Other
temporary
differences
£m
Total
£m
(140)
(2,705)
7
–
6
(127)
(35)
–
(1)
192
229
6
(2,278)
(15)
(1)
(1)
(163)
(2,295)
Deferred tax not recognised
Deferred tax of £24 million (2018: £90 million) has been recognised in respect of the future tax benefit of some expenses of the life assurance business
carried forward. The deferred tax asset not recognised in respect of the remaining expenses is approximately £254 million (2018: £371 million) , and these
expenses can be carried forward indefinitely. The unrecognised deferred tax asset has reduced in 2019, as a significant amount of brought forward
expenses have been utilised in the last year.
Deferred tax assets of approximately £48 million (2018: £78 million) have not been recognised in respect of £280 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 (2018: £46 million) , as there are no expected future
taxable profits against which the credits can be utilised. These credits can be carried forward indefinitely.
No deferred tax has been recognised in respect of foreign trade losses where it is not more likely than not that we will be able to utilise them in
future periods. Of the asset not recognised, £35 million (2018: £36 million) relates to losses that will expire if not used within 20 years, and £45 million
(2018: £53 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
260 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 38: Other provisions
At 31 December 2018
Adjustment on adoption of IFRS 16 (note 55)
Balance at 1 January 2019
Exchange and other adjustments
Provisions applied
Charge for the year
At 31 December 2019
Provisions for
financial
commitments
and guarantees
£m
193
Payment
protection
insurance
£m
1,524
Other
regulatory
provisions
£m
861
(1)
–
(15)
177
367
(2,461)
2,450
1,880
–
(778)
445
528
Other
£m
969
(97)
872
(39)
(593)
498
738
Total
£m
3,547
(97)
3,450
327
(3,832)
3,378
3,323
Provisions for financial commitments and guarantees
Provisions are recognised for expected credit losses on undrawn loan commitments and financial guarantees. See also note 20.
Payment protection insurance (excluding MBNA)
The Group increased the provision for PPI costs by a further £2,450 million in the year ended 31 December 2019, bringing the total amount provided to
£21,875 million.
The charge in 2019 was largely due to the significant increase in PPI information requests (PIRs) leading up to the deadline for submission of claims on
29 August 2019, and also reflects costs relating to complaints received from the Official Receiver as well as administration costs. An initial review of around
60 per cent of the five million PIRs received in the run-up to the PPI deadline has been undertaken, with the conversion rate remaining low, and consistent
with the provision assumption of around 10 per cent. The Group has reached final agreement with the Official Receiver.
At 31 December 2019, a provision of £1,578 million remained unutilised relating to complaints and associated administration costs excluding amounts
relating to MBNA. Total cash payments were £2,201 million during the year ended to 31 December 2019.
Sensitivities
The total amount provided for PPI represents the Group’s best estimate of the likely future cost. A number of risks and uncertainties remain including
processing the remaining PIRs and outstanding complaints. The cost could differ from the Group’s estimates and the assumptions underpinning them,
and could result in a further provision being required. These may also be impacted by any further regulatory changes and potential additional remediation
arising from the continuous improvement of the Group’s operational practices.
For every one per cent increase in PIR conversion rate on the stock as at the industry deadline, the Group would expect an additional charge of
approximately £100 million.
Payment protection insurance (MBNA)
MBNA increased its PPI provision by £367 million in the year ended 31 December 2019 but the Group’s exposure continues to remain capped at
£240 million under the terms of the sale and purchase agreement.
Lloyds Banking Group Annual Report and Accounts 2019 261
Note 38 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 2019 the Group charged a further £445 million in respect of legal actions and other regulatory matters, and the unutilised balance at
31 December 2019 was £528 million (31 December 2018: £861 million) . The most significant items are as follows.
Arrears handling related activities
The Group has provided an additional £188 million in the year ended 31 December 2019 for the costs of identifying and rectifying certain arrears
management fees and activities, taking the total provided to date to £981 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 had provided a total of £795 million up to 31 December 2018 in respect of complaints relating to alleged mis-selling of packaged bank
accounts, with no further amounts provided during the year ended 31 December 2019. 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. Whilst complaint volumes have declined,
new litigation claim volumes per month have remained fairly constant throughout 2019. Up to 31 December 2019 the Group had provided a total of
£656 million. The validity of the claims facing the Group depends upon the facts and circumstances in respect of each claim. As a result, the ultimate
financial effect, which could be significantly different from the current provision, will be known only once all relevant claims have been resolved.
HBOS Reading – review
The Group has now completed its compensation assessment for all 71 business customers within the customer review, with more than 98 per cent of
these offers to individuals accepted. In total, more than £100 million in compensation has been offered to victims of the HBOS Reading fraud prior to the
publication of Sir Ross Cranston’s independent quality assurance review of the customer review, of which £94 million has so far been accepted, in addition
to £9 million for ex-gratia payments and £6 million for the re-imbursements of legal fees. Sir Ross’s review was concluded on 10 December 2019 and made
a number of recommendations, including a re-assessment of direct and consequential losses by an independent panel. The Group has committed to
implementing Sir Ross’s recommendations in full. In addition, further ex gratia payments of £35,000 have been made to 200 individuals in recognition of
the additional delay which will be caused whilst the Group takes steps to implement Sir Ross’s recommendations. It is not possible to estimate at this stage
what the financial impact will be.
HBOS Reading – FCA investigation
The FCA’s investigation into the events surrounding the discovery of misconduct within the Reading-based Impaired Assets team of HBOS has concluded.
The Group has settled the matter with the FCA and paid a fine of £45.5 million, as per the FCA’s final notice dated 21 June 2019.
Other
Following the sale of TSB Banking Group plc, the Group raised a provision of £665 million in relation to various ongoing commitments; £117 million of this
provision remained unutilised at 31 December 2019.
Provisions are made for staff and other costs related to Group restructuring initiatives at the point at which the Group becomes committed to the
expenditure. At 31 December 2019 provisions of £129 million (31 December 2018: £191 million) were held.
The Group carries provisions of £118 million (2018: £122 million) for indemnities and other matters relating to legacy business disposals in prior years.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
Preference
shares
£m
813
–
–
18
(28)
803
(3)
(12)
114
902
Preferred
securities
£m
3,690
–
(614)
131
(2)
3,205
(49)
(83)
152
3,225
262 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 39: Subordinated liabilities
The movement in subordinated liabilities during the year was as follows:
At 1 January 2018
Issued during the year
Repurchases and redemptions during the year1
Foreign exchange movements
Other movements (all non-cash)
At 31 December 2018
Repurchases and redemptions during the year1
Foreign exchange movements
Other movements (all non-cash)
At 31 December 2019
1 The repurchases and redemptions resulted in cash outflows of £818 million (2018: £2,256 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 2019
Preference shares
6.3673% Non-cumulative Fixed to Floating Rate Preference Shares callable 2019
Preferred securities
13% Step-up Perpetual Capital Securities callable 2019
Undated subordinated liabilities
6.5% Undated Subordinated Step-up Notes callable 2019
7.375% Undated Subordinated Guaranteed Bonds
Dated subordinated liabilities
10.375% Subordinated Fixed to Fixed Rate Notes 2024 callable 2019
9.375% Subordinated Bonds 2021
6.375% Subordinated Instruments 2019
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
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
565
–
–
20
3
588
(53)
(36)
18
517
Total
£m
17,922
1,729
(2,256)
546
(285)
12,854
1,729
(1,642)
377
(258)
13,060
17,656
(713)
(402)
541
(818)
(533)
825
12,486
17,130
£m
664
1,065
1,729
£m
3
£m
49
£m
1
52
53
£m
135
328
250
713
£m
600
14
614
£m
150
1,492
1,642
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 2019
(2018: none) .
Lloyds Banking Group Annual Report and Accounts 2019 263
Note 40: Share capital
(1) Authorised share capital
As permitted by the Companies Act 2006, the Company removed references to authorised share capital from its articles of association at the annual
general meeting on 5 June 2009. This change took effect from 1 October 2009.
(2) Issued and fully paid share capital
2019
Number of shares
2018
Number of shares
2017
Number of shares
2019
£m
2018
£m
2017
£m
Ordinary shares of 10p
(formerly 25p) each
At 1 January
71,163,592,264
71,972,949,589
71,373,735,357
Issued under employee share schemes
775,882,951
768,551,098
518,293,181
Share buyback programme (note 42)
(1,886,917,377)
(1,577,908,423)
–
Redesignation of limited voting ordinary
shares (see below)
–
–
80,921,051
At 31 December
70,052,557,838
71,163,592,264
71,972,949,589
Limited voting ordinary shares
of 10p (formerly 25p) each
At 1 January
Redesignation to ordinary shares
At 31 December
Total issued share capital
–
–
–
–
–
–
80,921,051
(80,921,051)
–
7,116
78
(189)
–
7,005
–
–
–
7,197
77
(158)
–
7,116
–
–
–
7,138
51
–
8
7,197
8
(8)
–
7,005
7,116
7,197
Share issuances
In 2019, 776 million shares (2018: 769 million shares; 2017: 518 million shares) were issued in respect of employee share schemes.
(3) Share capital and control
There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and:
– certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws) ;
– where directors and certain employees of the Company require the approval of the Company to deal in the Company’s shares; and
– pursuant to the rules of some of the Company’s employee share plans where certain restrictions may apply while the shares are subject to the plans.
Where, under an employee share plan operated by the Company, participants are the beneficial owners of shares but not the registered owners, the
voting rights are normally exercised by the registered owner at the direction of the participant. Outstanding awards and options would normally vest and
become exercisable on a change of control, subject to the satisfaction of any performance conditions at that time.
In addition, the Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights.
Information regarding significant direct or indirect holdings of shares in the Company can be found on page 95.
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 16 May 2019. 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 2019, 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 2019 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 39.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
264 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 41: Share premium account
At 1 January
Issued under employee share schemes
Redemption of preference shares1
At 31 December
2019
£m
2018
£m
2017
£m
17,719
17,634
17,622
29
3
85
–
12
–
17,751
17,719
17,634
1 During the year ended 31 December 2019, the Company redeemed all of its outstanding 6.3673% Non-cumulative Fixed to Floating Rate Preference Shares at their combined sterling
par value of £3 million. These preference shares had been accounted for as subordinated liabilities. On redemption an amount of £3 million was transferred from the distributable merger
reserve to the share premium account.
Note 42: 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
2019
£m
2018
£m
2017
£m
7,763
4,462
123
19
1,504
(176)
13,695
7,766
4,273
279
5
1,051
(164)
13,210
7,766
4,115
685
1,405
(156)
13,815
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 41)
At 31 December
Capital redemption reserve
At 1 January
Shares cancelled under share buyback programmes (see below)
At 31 December
2019
£m
2018
£m
2017
£m
7,766
(3)
7,763
7,766
–
7,766
7,766
–
7,766
2019
£m
2018
£m
2017
£m
4,273
189
4,462
4,115
158
4,273
4,115
–
4,115
On 20 February 2019 the Group announced the launch of a share buyback programme to repurchase outstanding ordinary shares and the programme
commenced on 1 March 2019; the Group bought back and cancelled 1,887 million shares under the programme, for a total consideration, including
expenses, of £1,095 million. Upon cancellation £189 million, being the nominal value of the shares repurchased, was transferred to the capital redemption
reserve.
Under a similar programme in 2018, the Group bought back and cancelled 1,578 million shares for a total consideration, including expenses, of
£1,005 million; £158 million was transferred to the capital redemption reserve.
Lloyds Banking Group Annual Report and Accounts 2019 265
Note 42: Other reserves continued
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
At 1 January
Change in fair value
Deferred tax
Income statement transfer in respect of disposals (note 9)
Deferred tax
Impairment recognised in the income statement
At 31 December
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
At 1 January
Change in fair value
Deferred tax
Realised gains and losses transferred to retained profits
Deferred tax
At 31 December
2019
£m
279
(30)
10
(20)
(196)
61
(135)
(1)
123
2019
£m
5
–
12
12
14
(12)
2
19
2018
£m
472
(37)
35
(2)
(275)
84
(191)
–
279
2018
£m
(49)
(97)
22
(75)
151
(22)
129
5
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
266 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 42: Other reserves continued
Movements in other reserves were as follows:
Revaluation reserve in respect of available-for-sale financial assets
At 1 January
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
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
2019
£m
2018
£m
1,405
2,136
1,051
1,209
(303)
906
(608)
155
(453)
234
(69)
165
(701)
182
(519)
1,504
1,051
2019
£m
(164)
(12)
–
(176)
2018
£m
(156)
(8)
–
(164)
(363)
121
(242)
(651)
162
(489)
1,405
2017
£m
(124)
(21)
(11)
(156)
Lloyds Banking Group Annual Report and Accounts 2019 267
Note 43: Retained profits
At 31 December 2017
Adjustment on adoption of IFRS 9 and IFRS 15
At 1 January
Profit for the year
Dividends paid2
Issue costs of other equity instruments (net of tax) (note 44)
Distributions on other equity instruments
Share buyback programmes (note 42)
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) 3
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
At 31 December
1 Restated, see note 1.
2019
£m
5,389
2,925
(2,312)
(3)
(466)
(1,095)
(2)
(1,117)
–
(306)
(3)
71
165
3,246
20181
£m
4,905
(929)
3,976
4,408
(2,240)
(5)
(433)
(1,005)
(129)
120
8
389
40
53
207
5,389
20171
£m
3,600
3,559
(2,284)
–
(415)
–
482
–
(40)
(411)
82
332
4,905
2 Net of a credit in respect of unclaimed dividends written-back in accordance with the Company’s Articles of Association in 2017.
3 During 2017 the Group derecognised, on redemption, financial liabilities on which cumulative fair value movements relating to own credit of £3 million net of tax, had been recognised
directly in retained profits .
Retained profits are stated after deducting £575 million (2018: £499 million; 2017: £611 million) representing 902 million (2018: 909 million; 2017: 861 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 168.
Note 44: Other equity instruments
At 1 January
Issued in the year:
US dollar notes ($1,500 million nominal)
US dollar notes ($500 million nominal)
Sterling notes (£500 million nominal)
Redemption
At 31 December
2019
£m
6,491
–
396
500
(1,481)
5,906
2018
£m
5,355
1,136
–
–
–
2017
£m
5,355
–
–
–
–
6,491
5,355
During the year ended 31 December 2019 the Group issued £500 million of sterling and £396 million (US$500 million) of US dollar Additional Tier 1 (AT1)
securities; issue costs of £3 million, net of tax, were charged to retained profits.
On 27 June 2019 the Group redeemed, at par, £1,481 million of Additional Tier 1 securities at their first call date.
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 a
conversion event being triggered.
– 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 period, or on any fifth
anniversary after the first call date or period. 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
268 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 45: Dividends on ordinary shares
The directors have recommended a final dividend, which is subject to approval by the shareholders at the Annual General Meeting, of 2.25 pence
per share (2018: 2.14 pence per share; 2017: 2.05 pence per share) representing a total dividend of £1,586 million (2018: £1,523 million; 2017: £1,475 million) ,
which will be paid on 27 May 2020. 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
2019
pence
per share
2018
pence
per share
2017
pence
per share
2019
£m
2018
£m
2017
£m
2.14
–
1.12
3.26
2.05
–
1.07
3.12
1.70
0.50
1.00
3.20
1,523
–
789
2,312
1,475
–
765
2,240
1,212
356
720
2,288
The cash cost of the dividends paid in the year was £2,312 million (2018: £2,240 million; 2017: £2,284 million) , in 2017 this was net of a credit in respect of
unclaimed dividends written-back in accordance with the Company's Articles of Association.
In May 2019 the Group announced that it will move to the payment of quarterly dividends in 2020, with the first quarterly dividend in respect of the first
quarter of 2020 payable in June 2020. The new approach will be to adopt three equal interim ordinary dividend payments for the first three quarters of
the year followed by, subject to performance, a larger final dividend for the fourth quarter of the year. The first three quarterly payments, payable in June,
September and December will be 20 per cent of the previous year’s total ordinary dividend per share. The fourth quarter payment will be announced with
the full year results. The final dividend will continue to be paid in May, following approval at the AGM. The Group believes that this approach will provide a
more regular flow of dividend income to all shareholders whilst accelerating the receipt of payments.
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 2019: 6,508,529 shares, 31 December 2018: 5,538,164 shares, waived rights to all dividends) , the HBOS Share Incentive Plan Trust (holding
at 31 December 2019: 445,625 shares, 31 December 2018: 445,625 shares, waived rights to all dividends) , the Lloyds Banking Group Employee Share
Ownership Trust (holding at 31 December 2019: 11,656,155 shares, 31 December 2018: 5,679,119 shares, on which it waived rights to all dividends) and
Lloyds Group Holdings (Jersey) Limited (holding at 31 December 2019: nil, 31 December 2018: 42,846 shares, waived rights to all but a nominal amount of
one penny in total) .
Note 46: Share-based payments
Charge to the income statement
The charge to the income statement is set out below:
Deferred bonus plan
Executive and SAYE plans:
Options granted in the year
Options granted in prior years
Share plans:
Shares granted in the year
Shares granted in prior years
2019
£m
261
16
59
75
17
20
37
2018
£m
325
14
71
85
16
17
33
Total charge to the income statement
373
443
During the year ended 31 December 2019 the Group operated the following share-based payment schemes, all of which are equity settled.
2017
£m
313
17
81
98
17
9
26
437
Group Performance Share plan
The Group operates a Group Performance Share plan that is equity settled. Bonuses in respect of employee performance in 2019 have been recognised in
the charge in line with the proportion of the deferral period completed.
Lloyds Banking Group Annual Report and Accounts 2019 269
Note 46: 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 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
2019
2018
Number of
options
802,994,918
487,654,212
(27,303,963)
(15,830,204)
(130,068,149)
(49,352,741)
1,068,094,073
227,139
Weighted
average
exercise price
(pence)
49.30
39.87
51.23
48.69
49.03
58.74
44.55
60.70
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
The weighted average share price at the time that the options were exercised during 2019 was £0.59 (2018: £0.67) . The weighted average remaining
contractual life of options outstanding at the end of the year was 2.22 years (2018: 2.16 years) .
The weighted average fair value of SAYE options granted during 2019 was £0.10 (2018: £0.13) . The fair values of the SAYE options have been determined
using a standard Black-Scholes model.
Other share option plans
Lloyds Banking Group Executive Share Plan 2003
The Plan was adopted in December 2003 and under the Plan share options may be granted to senior employees. Options under this plan have been
granted specifically to facilitate recruitment (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
2019
2018
Number of
options
10,263,028
2,336,171
(4,455,481)
(69,005)
(39,250)
(400,825)
7,634,638
2,683,267
Weighted
average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
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
The weighted average fair value of options granted in the year was £0.59 (2018: £0.55) . 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 2019 was £0.60 (2018: £0.65) .
The weighted average remaining contractual life of options outstanding at the end of the year was 3.8 years (2018: 5.2 years) .
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
270 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 46: 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.
At the end of the performance period for the 2016 grant, the targets had not been fully met and therefore these awards vested in 2019 at a rate
of 68.7 per cent.
Outstanding at 1 January
Granted
Vested
Forfeited
Dividend award
Outstanding at 31 December
2019
Number of
shares
2018
Number of
shares
417,385,636
370,804,915
174,490,843
160,586,201
(88,318,950)
(73,270,301)
(55,029,439)
(48,108,870)
11,376,655
7,373,691
459,904,745
417,385,636
Awards in respect of the 2017 grant vested in 2020 at a rate of 49.7 per cent. For the 2017 grant, participants are entitled to any dividends paid during the
vesting period. 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, will be paid, based on the number of shares that vest. The Remuneration Committee can 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.
The weighted average fair value of awards granted in the year was £0.45 (2018: £0.48) .
CFO Buyout
William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019 on the retirement of George Culmer.
He was granted deferred share awards over 4,086,632 shares, to replace unvested awards from his former employer, Morgan Stanley, that were forfeited as
a result of him joining the Group.
Outstanding at 1 January
Granted
Exercised
Outstanding at 31 December
2019
Number of
shares
–
4,086,632
(818,172)
3,268,460
The weighted average fair value of awards granted in the year was £0.55.
The fair value calculations at 31 December 2019 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
0.36%
Executive
Share Plan
2003
0.62%
LTIP
CFO Buyout
0.83%
0.64%
3.2 years
1.3 years
3.7 years
1.4 years
20%
4.0%
£0.53
£0.40
23%
4.0%
£0.62
Nil
27%
4.0%
£0.63
Nil
19%
4.0%
£0.58
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 £3,600. 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 9 May 2019, the Group made an award of £200 (2018: £200) of shares to all eligible employees. The number of shares awarded was 22,422,337
(2018: 21,513,300) , with an average fair value of £0.62 (2018: £0.67) 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, all of the matching shares are forfeited.
Similarly if the employees sell their purchased shares within three years, their matching shares are forfeited.
Lloyds Banking Group Annual Report and Accounts 2019 271
Note 46: Share-based payments continued
The number of shares awarded relating to matching shares in 2019 was 37,346,812 (2018: 34,174,161) , with an average fair value of £0.56 (2018: £0.63) ,
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 2019 was 8,239,332 (2018: 8,965,562) .
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.
Note 47: Related party transactions
Key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an
entity; the Group’s key management personnel are the members of the Lloyds Banking Group plc Group Executive Committee together with
its Non-Executive Directors.
The table below details, on an aggregated basis, key management personnel compensation:
Compensation
Salaries and other short-term benefits
Post-employment benefits
Share-based payments
Total compensation
2019
£m
2018
£m
2017
£m
15
–
15
30
14
–
18
32
13
–
22
35
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £nil (2018: £nil;
2017: £0.05 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
2019
million
2018
million
2017
million
–
–
–
–
1
–
(1)
–
3
–
(2)
1
2019
million
2018
million
2017
million
84
46
(29)
101
82
39
(37)
84
65
37
(20)
82
The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information
relating to other transactions between the Group and its key management personnel:
Loans
At 1 January
Advanced (includes loans of appointed key management personnel)
Repayments (includes loans of former key management personnel)
At 31 December
2019
£m
2018
£m
2017
£m
2
1
(1)
2
2
1
(1)
2
4
1
(3)
2
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 6.45 per cent
and 24.20 per cent in 2019 (2018: 6.70 per cent and 24.20 per cent; 2017: 6.45 per cent and 23.95 per cent) .
No provisions have been recognised in respect of loans given to key management personnel (2018 and 2017: £nil) .
Deposits
At 1 January
Placed (includes deposits of appointed key management personnel)
Withdrawn (includes deposits of former key management personnel)
At 31 December
2019
£m
20
44
(41)
23
2018
£m
20
33
(33)
20
2017
£m
12
41
(33)
20
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
272 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 47: Related party transactions continued
Deposits placed by key management personnel attracted interest rates of up to 3.0 per cent (2018: 3.5 per cent; 2017: 4.0 per cent) .
At 31 December 2019, the Group did not provide any guarantees in respect of key management personnel (2018 and 2017: none) .
At 31 December 2019, 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 £0.6 million with four directors and two connected persons
(2018: £0.5 million with three directors and three connected persons; 2017: £0.01 million with three directors and two connected persons) .
Subsidiaries
Details of the Group’s subsidiaries and related undertakings are provided on pages 332 to 337. 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 2019, customer deposits of
£169 million (2018: £225 million) and investment and insurance contract liabilities of £127 million (2018: £79 million) related to the Group’s pension funds.
Collective investment vehicles
The Group manages 141 (2018: 131) collective investment vehicles, such as Open Ended Investment Companies (OEICs) and of these 75 (2018: 82)
are consolidated. The Group invested £804 million (2018: £620 million) and redeemed £1,771 million (2018: £404 million) in the unconsolidated collective
investment vehicles during the year and had investments, at fair value, of £3,417 million (2018: £2,513 million) at 31 December. The Group earned fees of
£127 million from the unconsolidated collective investment vehicles during 2019 (2018: £128 million) .
Joint ventures and associates
At 31 December 2019 there were loans and advances to customers of £75 million (2018: £57 million) outstanding and balances within customer deposits of
£5 million (2018: £2 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 2019, these companies had total assets of approximately £4,761 million (2018: £4,091 million) , total liabilities
of approximately £5,322 million (2018: £4,616 million) and for the year ended 31 December 2019 had turnover of approximately £4,286 million
(2018: £4,522 million) and made a loss of approximately £190 million (2018: net loss of £125 million) . In addition, the Group has provided £1,266 million
(2018: £1,141 million) of financing to these companies on which it received £86 million (2018: £49 million) of interest income in the year.
As discussed in note 23, in October 2019, the Group established a wealth management joint venture with Schroders. The Group subsequently transferred
approximately £12 billion of managed assets at fair value.
Note 48: Contingent liabilities, commitments and guarantees
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group is not involved in the ongoing litigation (as described below) which involves card schemes
such as Visa and Mastercard. However, the Group is a member/licensee of Visa and Mastercard and other card schemes. The litigation in question is as
follows:
– litigation brought by retailers against both Visa and Mastercard continues in the English Courts (and includes appeals heard by the Supreme Court,
judgment awaited); and
– litigation brought on behalf of UK consumers in the English Courts against Mastercard.
Any impact on the Group of the litigation against Visa and Mastercard remains uncertain at this time. Insofar as Visa is required to pay damages to retailers
for interchange fees set prior to June 2016, contractual arrangements to allocate liability have been agreed between various UK banks (including the
Group) and Visa Inc, as part of Visa Inc’s acquisition of Visa Europe in 2016. These arrangements cap the maximum amount of liability to which the Group
may be subject, and this cap is set at the cash consideration received by the Group for the sale of its stake in Visa Europe to Visa Inc in 2016.
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 Swiss Competition Commission concluded its investigation against Lloyds Bank plc
in June 2019. The Group continues to cooperate with various other government and regulatory authorities, including 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) two 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. Judgment was delivered on 15 November 2019. The Group and former directors successfully defended
the claims. The claimants have sought permission to appeal. 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
for group relief of losses. If HMRC’s position is found to be correct, management estimate that this would result in an increase in current tax liabilities of
Lloyds Banking Group Annual Report and Accounts 2019 273
Note 48: Contingent liabilities, commitments and guarantees continued
approximately £800 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.
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. It is not currently possible to make a reliable assessment of any liability resulting from the investigation including any
financial penalty.
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, commitments and guarantees arising from the banking business
Contingent liabilities
Acceptances and endorsements
Other:
Other items serving as direct credit substitutes
Performance bonds and other transaction-related contingencies
Total contingent liabilities
2019
£m
74
366
2,454
2,820
2,894
2018
£m
194
632
2,425
3,057
3,251
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
2019
£m
–
189
2018
£m
1
731
12,684
85,735
98,419
34,945
11,594
85,060
96,654
37,712
133,553
135,098
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £63,504 million
(2018: £64,884 million) was irrevocable.
Capital commitments
Excluding commitments in respect of investment property (note 27) , capital expenditure contracted but not provided for at 31 December 2019 amounted
to £405 million (2018: £378 million) . Of this amount, £400 million (2018: £369 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
274 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 49: 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 31 for securitisations and covered bond vehicles, note 36 for structured entities associated with the Group’s pension schemes, and below in
part (A) and (B) . Details of the Group’s interests in unconsolidated structured entities are included below in part (C) .
(A) Asset-backed conduits
In addition to the structured entities discussed in note 31, 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
2019 was £3,735 million (2018: £5,122 million) , comprising £3,670 million of loans and advances (2018: £5,012 million) and £65 million of debt securities
(2018: £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 2019 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 2019, the total carrying value of these consolidated collective investment vehicle assets and liabilities held by the
Group was £68,724 million (2018: £62,648 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 £38,177 million at 31 December 2019 (2018: £26,028 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 2019, the total asset value of these unconsolidated structured entities, including the portion in which the Group
has no interest, was £2,363 billion (2018: £2,435 billion) .
Given the nature of these investments, 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 2019, are reported in note 6.
Lloyds Banking Group Annual Report and Accounts 2019 275
Note 50: 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 2019
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
Financial assets at fair value through other
comprehensive income
Assets arising from reinsurance contracts
held
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
Other
Subordinated liabilities
Total financial liabilities
Derivative financial instruments
1,105
1,236
43,115
142,207
–
–
–
1,236
–
–
–
–
–
–
–
–
17,982
25,133
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,955
24,674
–
–
–
–
–
–
1,105
38,629
–
–
142,207
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
55,130
313
–
–
9,775
494,988
–
–
–
–
–
–
55,130
313
160,189
26,369
9,775
494,988
–
–
–
5,544
–
5,544
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,531
–
–
–
–
–
–
–
7,531
–
510,307
25,092
–
–
–
25,092
565,750
–
–
510,307
25,092
23,567
23,567
23,567
800,967
–
–
–
–
–
–
–
–
–
–
–
–
28,179
421,320
373
–
–
1,079
97,689
–
–
1,844
17,130
–
–
–
–
–
–
–
28,179
421,320
373
21,486
25,779
1,079
97,689
111,449
111,449
37,459
400
–
37,459
2,244
17,130
567,614
149,308
764,187
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
276 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 50: Financial instruments continued
Mandatorily held at fair value
through profit or loss
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
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
Assets arising from reinsurance contracts
held
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
Other
Subordinated liabilities
Total financial liabilities
Derivatives
designated
as hedging
instruments
£m
–
–
–
1,563
–
–
–
–
–
–
Held for
trading
£m
–
–
35,246
22,032
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23,451
20,265
–
–
–
–
–
–
1,108
43,716
Designated at
fair value
through profit or
loss
£m
At fair value
through other
comprehensive
income
£m
Other
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
–
–
123,283
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,096
–
–
–
–
–
–
–
7,096
–
–
–
–
–
–
–
–
24,815
–
54,663
647
–
–
6,283
484,858
5,238
496,379
–
–
24,815
551,689
–
–
–
–
–
–
–
–
–
–
–
–
30,320
418,066
636
–
–
1,104
91,168
–
–
46
17,656
558,996
–
–
–
–
–
–
–
–
–
54,663
647
158,529
23,595
6,283
484,858
5,238
496,379
24,815
7,860
7,860
7,860
766,488
–
–
–
–
–
–
–
30,320
418,066
636
30,547
21,373
1,104
91,168
98,874
98,874
13,853
382
–
113,109
13,853
428
17,656
724,025
1,563
57,278
123,283
Derivative financial instruments
1,108
Lloyds Banking Group Annual Report and Accounts 2019 277
Note 50: Financial instruments continued
(2) Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. It is a measure as at a specific date and may be significantly different from the amount which will actually be paid or received on
maturity or settlement date.
Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments held by the
Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been determined using valuation
techniques which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Valuation techniques used
include discounted cash flow analysis and pricing models and, where appropriate, comparison to instruments with characteristics similar to those of the
instruments held by the Group. The Group measures valuation adjustments for its derivative exposures on the same basis as the derivatives are managed.
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, assets arising from reinsurance contracts held, items in course of transmission to banks, notes in circulation and liabilities
arising from non-participating investment contracts.
Because a variety of estimation techniques are employed and significant estimates made, comparisons of fair values between financial institutions may
not be meaningful. Readers of these financial statements are thus advised to use caution when using this data to evaluate the Group’s financial position.
Fair value information is not provided for items that are not financial instruments or for other assets and liabilities which are not carried at fair value in the
Group’s consolidated balance sheet. These items include intangible assets, such as the value of the Group’s branch network, the long-term relationships
with depositors and credit card relationships; premises and equipment; and shareholders’ equity. These items are material and accordingly the Group
believes that the fair value information presented does not represent the underlying value of the Group.
Valuation control framework
The key elements of the control framework for the valuation of financial instruments include model validation, product implementation review and
independent price verification. These functions are carried out by appropriately skilled risk and finance teams, independent of the business area
responsible for the products.
Model validation covers both qualitative and quantitative elements relating to new models. In respect of new products, a product implementation review
is conducted pre- and post-trading. Pre-trade testing ensures that the new model is integrated into the Group’s systems and that the profit and loss
and risk reporting are consistent throughout the trade life cycle. Post-trade testing examines the explanatory power of the implemented model, actively
monitoring model parameters and comparing in-house pricing to external sources. Independent price verification procedures cover financial instruments
carried at fair value. The frequency of the review is matched to the availability of independent data, monthly being the minimum. Valuation differences in
breach of established thresholds are escalated to senior management. The results from independent pricing and valuation reserves are reviewed monthly
by senior management.
Formal committees, consisting of senior risk, finance and business management, meet at least quarterly to discuss and approve valuations in more
judgemental areas, in particular for unquoted equities, structured credit, over-the-counter options and the Credit Valuation Adjustment (CVA) reserve.
Valuation of financial assets and liabilities
Assets and liabilities carried at fair value or for which fair values are disclosed have been classified into three levels according to the quality and reliability of
information used to determine the fair values.
Level 1
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as
level 1 predominantly comprise equity shares, treasury bills and other government securities.
Level 2
Level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a market that is not considered to
be active or valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market
data. Examples of such financial instruments include most over-the-counter derivatives, financial institution issued securities, certificates of deposit and
certain asset-backed securities.
Level 3
Level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market
data. Such instruments would include the Group’s venture capital and unlisted equity investments which are valued using various valuation techniques that
require significant management judgement in determining appropriate assumptions, including earnings multiples and estimated future cash flows. Certain
of the Group’s asset-backed securities and derivatives, principally where there is no trading activity in such securities, are also classified as level 3.
Transfers out of the level 3 portfolio arise when inputs that could have a significant impact on the instrument’s valuation become market observable after
previously having been non-market observable. In the case of asset-backed securities this can arise if more than one consistent independent source of
data becomes available. Conversely transfers into the portfolio arise when consistent sources of data cease to be available.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
278 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 50: Financial instruments continued
(3) Financial assets and liabilities carried at fair value
(A) Financial assets, excluding derivatives
Valuation hierarchy
At 31 December 2019, the Group’s financial assets carried at fair value, excluding derivatives, totalled £185,281 million (31 December 2018: £183,344 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 277) . 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 2019
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
–
18
10,164
2,381
18,618
–
52
–
–
–
18,670
19
93,766
112,473
236
2,071
932
468
158
16,381
20,246
–
17
32,808
12,860
238
–
–
–
16
12,876
535
–
13,411
125,884
–
–
–
11,035
11,273
–
–
11,273
44,081
10,912
–
–
55
–
–
100
1,835
1,990
–
2,006
14,908
21,076
2,399
18,854
2,126
984
468
258
18,216
40,906
19
95,789
160,189
–
–
13,098
–
121
60
–
181
–
227
408
121
60
11,051
24,330
535
227
25,092
15,316
185,281
Note 50: Financial instruments continued
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
Lloyds Banking Group Annual Report and Accounts 2019 279
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
–
17,926
–
84
–
–
–
18,010
20
75,701
93,731
18,847
–
–
–
32
18,879
303
–
19,182
112,913
27,285
3,026
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
–
–
120
126
–
246
–
21
267
14,184
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
131
5,151
24,491
303
21
24,815
183,344
Movements in Level 3 portfolio
The table below analyses movements in level 3 financial assets, excluding derivatives, carried at fair value (recurring measurement) .
2019
2018
Financial assets
at fair value
through profit
or loss
£m
Financial assets
at fair value
through other
comprehensive
income
£m
Total level 3
assets carried
at fair value,
excluding
derivatives
(recurring basis)
£m
Financial assets
at fair value
through profit or
loss
£m
Financial assets
at fair value
through other
comprehensive
income
£m
Total level 3
assets carried at
fair value,
excluding
derivatives
(recurring basis)
£m
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
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
13,917
(85)
267
(10)
14,184
(95)
794
–
794
–
2,579
(2,807)
644
(134)
14,908
12
207
(87)
19
–
408
12
2,786
(2,894)
663
(134)
14,152
302
14,454
87
439
–
2,480
(3,593)
815
(463)
(2)
–
(4)
2
(95)
348
(284)
267
85
439
(4)
2,482
(3,688)
1,163
(747)
14,184
15,316
13,917
269
–
269
(104)
–
(104)
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
280 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 50: Financial instruments continued
Valuation methodology for financial assets, excluding derivatives
Loans and advances to customers and banks
The fair value of these assets is determined using discounted cash flow techniques. The discount rates are derived from market observable interest rates, a
risk margin that reflects loan credit ratings and an incremental illiquidity premium based on historical spreads at origination on similar loans.
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 2019, the Group’s financial liabilities carried at fair value, excluding derivatives, comprised its financial liabilities at fair value through
profit or loss and totalled £21,486 million (31 December 2018: £30,547 million) . The table below analyses these financial liabilities by balance sheet
classification and valuation methodology (level 1, 2 or 3, as described on page 277) . 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 2019
Financial liabilities at fair value through profit or loss
Liabilities designated 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 2018
Financial liabilities at fair value through profit or loss
Liabilities designated 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
–
–
–
2,781
2,781
2,781
–
–
–
1,464
1,464
1,464
7,483
48
7,531
11,048
98
28
11,174
18,657
7,085
21,595
242
150
21,987
29,072
–
–
–
–
48
11
–
–
–
–
11
11,048
98
2,809
13,955
21,486
7,096
21,595
242
1,614
23,451
30,547
Lloyds Banking Group Annual Report and Accounts 2019 281
Note 50: 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
2019
£m
11
–
(5)
52
(10)
48
–
2018
£m
–
–
–
11
–
11
–
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 2019, the own credit adjustment arising from the fair valuation of £7,531 million (2018: £7,085 million) of the Group’s debt securities
in issue designated at fair value through profit or loss resulted in a loss of £419 million (2018: gain of £533 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 2019, such assets totalled £26,369 million (31 December
2018: £23,595 million) and liabilities totalled £25,779 million (31 December 2018: £21,373 million) . The table below analyses these derivative balances by
valuation methodology (level 1, 2 or 3, as described on page 277) . 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
50
(54)
2019
Level 2
£m
25,456
(24,358)
Level 3
£m
863
(1,367)
Total
£m
26,369
(25,779)
Level 1
£m
93
(132)
2018
Level 2
£m
22,575
(20,525)
Level 3
£m
927
(716)
Total
£m
23,595
(21,373)
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 used to calculate CVA, FVA, and own credit adjustments, are not significant in determining the classification of the derivative
and debt instruments. Consequently, these inputs do not form part of the Level 3 sensitivities presented.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
282 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 50: 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
2019
2018
Derivative
assets
£m
927
(27)
81
4
(19)
415
(518)
863
(14)
Derivative
liabilities
£m
(716)
4
(75)
(4)
47
(959)
336
(1,367)
18
Derivative
assets
£m
1,056
7
(84)
–
(52)
–
–
927
(424)
Derivative
liabilities
£m
(804)
(5)
49
(68)
112
–
–
(716)
82
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 2018 and 2019:
At 1 January
Income statement charge (credit)
Transfers
At 31 December
Represented by:
Credit Valuation Adjustment
Debit Valuation Adjustment
Funding Valuation Adjustment
2019
£m
562
(134)
(5)
423
2019
£m
278
(27)
172
423
2018
£m
521
47
(6)
562
2018
£m
409
(79)
232
562
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
£60 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 2019) .
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 2019 283
Note 50: Financial instruments continued
A one per cent rise in the CDS spread would lead to an increase in the DVA of £99 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 £63 million fall in the overall valuation adjustment to £188 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 £21 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 2019, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £80 million (2018: £80 million) .
(D) Sensitivity of level 3 valuations
At 31 December 2019
At 31 December 2018
Effect of reasonably possible
alternative assumptions2
Effect of reasonably possible
alternative assumptions2
Significant unobservable
inputs1
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Valuation techniques
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
Interest rate spreads
(bps) 47bps/108bps
Credit spreads (bps)
(1bps/2bps)
Earnings multiple
(1.5//15.4)
n/a
n/a
Financial assets at fair value through other
comprehensive income
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
(14%/115%)
Level 3 financial assets carried at fair value
Financial liabilities at
fair value through
profit or loss
Discounted
cash flows
Derivative financial liabilities
Interest rate spreads
(+/–50bps)
Interest rate
derivatives
Option pricing
model
Interest rate volatility
(14%/115%)
Level 3 financial liabilities carried at fair value
10,912
401
(384)
10,565
380
(371)
61
1,948
935
1,052
14,908
181
227
408
863
863
16,179
48
1,367
1,367
1,415
1
89
89
(1)
(89)
274
1,657
(113)
523
19
(41)
6
7
5
1
–
(6)
(6)
(6)
(1)
–
898
13,917
246
21
267
927
927
15,111
11
716
716
727
92
54
48
2
3
2
7
–
–
(21)
(55)
(57)
(45)
(5)
(2)
(5)
–
–
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
284 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 50: 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 10 per cent to 128 per cent
(2018: 19 per cent to 80 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 277) . 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.
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Valuation hierarchy
At 31 December 2019
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 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
449,300
450,465
27,548
4,568
28,259
3,508
13,572
13,572
494,988
495,804
9,775
5,544
9,773
5,537
54,600
1,555
54,600
1,555
441,006
440,542
24,351
4,188
15,313
484,858
6,283
5,238
40,483
461
25,516
3,289
15,313
484,660
6,286
5,244
40,483
461
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
54,600
395,865
–
–
–
28,259
3,508
13,572
54,600
441,204
1,555
5,526
54,600
1,555
8,218
11
–
–
40,483
400,059
–
–
–
40,483
461
5,233
40,483
461
25,516
3,289
15,313
444,177
5,825
11
–
–
Lloyds Banking Group Annual Report and Accounts 2019 285
Note 50: 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.
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 277) .
At 31 December 2019
Deposits from banks
Customer deposits
Debt securities in issue
Subordinated liabilities
Repos included in above amounts:
Deposits from banks
Customer deposits
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
Valuation methodology
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Valuation hierarchy
28,179
421,320
97,689
17,130
28,079
421,728
100,443
19,783
18,105
9,530
30,320
418,066
91,168
17,656
21,170
1,818
18,105
9,530
30,322
418,450
93,233
19,564
21,170
1,818
–
–
–
–
–
–
–
–
–
–
–
–
28,079
416,493
100,443
19,783
18,105
9,530
30,322
412,283
93,233
19,564
21,170
1,818
–
5,235
–
–
–
–
–
6,167
–
–
–
–
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
286 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 50: Financial instruments continued
(5) Reclassifications of financial assets
Other than the reclassifications on adoption of IFRS 9 on 1 January 2018, there have been no reclassifications of financial assets in 2018 or 2019.
Note 51: 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 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 31, 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 31) . Except as otherwise noted below, none of the liabilities shown in the table below have recourse only to the
transferred assets.
Repurchase and securities lending transactions
Financial assets at fair value through profit or loss
Financial assets at fair value through other comprehensive income
Securitisation programmes
Financial assets at amortised cost:
Loans and advances to customers1
2019
2018
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
9,186
7,897
3,364
5,875
6,815
7,279
961
5,337
42,545
7,335
41,674
5,479
1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £31,436 million (31 December 2018: £31,701 million) .
Lloyds Banking Group Annual Report and Accounts 2019 287
Note 52: 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 2019
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
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
148,920
24,165
173,085
79,735
8,220
1,555
9,775
440,388
58,959
499,347
5,544
25,092
10,074
18,105
28,179
413,659
9,530
423,189
–
148,920
(12,896)
11,269
(12,896)
(53,366)
160,189
26,369
–
–
–
–
(4,359)
(4,359)
–
–
8,220
1,555
9,775
440,388
54,600
494,988
5,544
25,092
–
–
–
10,074
18,105
28,179
(1,869)
–
(1,869)
411,790
9,530
421,320
–
(366)
(366)
(7,650)
(3,377)
–
(3,377)
(2,392)
–
(2,392)
–
–
(8,016)
–
(8,016)
(1,850)
–
(2,825)
146,095
(10,903)
(13,728)
(13,892)
–
146,095
4,827
–
(1,555)
(1,555)
4,843
–
4,843
(2,123)
435,873
(54,600)
(56,723)
(211)
–
435,873
5,333
(5,859)
19,233
–
(18,105)
(18,105)
2,058
–
2,058
(2,123)
(9,530)
407,817
–
(1,850)
(11,653)
407,817
Financial liabilities at fair value through profit or loss:
Excluding repos
Repos
Derivative financial instruments
10,438
–
10,438
28,303
(17,255)
11,048
38,741
77,276
(17,255)
(51,497)
21,486
25,779
–
–
–
(5,770)
–
10,438
(11,048)
(11,048)
(16,364)
–
10,438
3,645
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
288 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 52: Offsetting of financial assets and liabilities continued
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
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
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
417,652
1,818
419,470
8,952
28,721
37,673
77,626
–
(5,115)
(5,115)
(55,012)
–
–
–
(2,645)
(2,011)
(4,656)
–
–
–
–
–
130,172
28,357
158,529
23,595
5,822
461
6,283
444,375
40,483
484,858
5,238
24,815
9,150
21,170
30,320
(1,404)
416,248
–
1,818
(1,404)
418,066
–
(7,126)
(7,126)
(56,253)
8,952
21,595
30,547
21,373
–
(622)
(622)
(6,039)
(2,676)
–
(2,676)
(1,319)
–
(1,319)
–
–
(5,291)
–
(5,291)
(1,370)
–
(1,370)
–
–
–
(3,995)
(978)
129,194
(27,735)
(28,713)
(15,642)
–
129,194
1,914
–
(461)
(461)
(3,241)
(40,483)
(43,724)
–
3,146
–
3,146
439,815
–
439,815
5,238
(5,361)
19,454
–
(21,170)
(21,170)
(3,241)
(1,818)
(5,059)
–
(21,595)
(21,595)
(17,313)
3,859
–
3,859
411,637
–
411,637
8,952
–
8,952
65
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 2019 289
Note 53: 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 129 to 187. 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 182.
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 eligible hedged items under IAS 39 for inclusion 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 2019 the aggregate notional principal of interest rate swaps designated as fair value hedges was £183,489 million (2018: £150,971 million)
with a net fair value asset of £569 million (2018: asset of £760 million) (note 17) . The gains on the hedging instruments were £1,144 million (2018: gains of
£94 million) . The losses on the hedged items attributable to the hedged risk were £1,001 million (2018: losses of £32 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. The
notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2019 was £426,740 million (2018: £556,945 million) with a net
fair value liability of £388 million (2018: liability of £486 million) (note 17) . In 2019, ineffectiveness recognised in the income statement that arises from cash
flow hedges was a gain of £134 million (2018: loss of £25 million) .
Interest Rate Benchmark Reform
As discussed in note 1, the Group has applied the hedge accounting amendments Interest Rate Benchmark Reform to hedge accounting relationships
directly affected by the replacement of interest rate benchmarks. Under these amendments, for the purposes of:
– determining whether a forecast transaction is highly probable;
– determining whether the hedged future cash flows are expected to occur;
– determining whether a hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk;
and
– determining whether an accounting hedging relationship should be discontinued because of a failure of the retrospective effectiveness test
the Group has assumed that the interest rate benchmark on which the hedged risk or the cash flows of the hedged item or hedging instrument are
based is not altered by uncertainties resulting from the proposed interest rate benchmark reform. In addition, for a fair value hedge of a non-contractually
specified benchmark portion of interest rate risk, the Group assesses only at inception of the hedge relationship and not on an ongoing basis that the risk
is separately identifiable and hedge effectiveness can be measured.
The Group’s most significant hedge accounting relationships are exposed to the following interest rate benchmarks: Sterling LIBOR, US Dollar LIBOR and
Euro LIBOR. The notional of the hedged items that the Group has designated into cash-flow hedge relationships that is directly affected by the interest
rate benchmark reform is £29,202 million, of which £25,438 million relates to Sterling LIBOR. These are principally loans and advances to customers in
Commercial Banking. In addition, the interest rate benchmark reforms affect assets designated in fair value hedges with a notional of £102,969 million, of
which £98,278 million is in respect of sterling LIBOR, and liabilities designated in fair value hedges with a notional of £62,295 million, of which £9,186 million
is in respect of sterling LIBOR. These fair value hedges principally relate to mortgages in Retail and debt securities in issue.
The Group is managing the process to transition to alternative benchmark rates under its Group-wide IBOR Transition Programme. This programme is
working towards ensuring that the Group has the market capability and infrastructure to deal with the reform. The programme also encompasses the
associated impacts on accounting and reporting and includes dealing with the impact on hedge accounting relationships of the transition to alternative
reference rates. Further information on the Group’s programme is set out on page 134.
The significant assumptions and judgements that the Group has made in applying these requirements include the following:
– a hedge accounting relationship is assumed to be affected by the interest rate benchmark reform if the reform gives rise to uncertainties about the
timing and/or amount of the interest rate benchmark-based cash flows of the hedged items and/or of the hedging instrument;
– where the hedged item is a forecast transaction then, in the absence of any certainty in relation to the interest rate benchmark reform, assessments have
been determined as to whether the forecast transaction is highly probable assuming that the interest rate benchmark on which the hedged cash flows
are based is not altered as a result of the interest rate benchmark reform;
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
290 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
– any reclassification of amounts in cash flow hedge reserves to profit or loss have been based on assessing whether the hedged cash flows are no longer
expected to occur assuming that the interest rate benchmark on which the hedged cash flows are based is not altered as a result of the interest rate
benchmark reform; and
– all benchmark rate referenced hedged items and hedging instruments included in hedging relationships are subject to uncertainty due to interest rate
benchmark reform.
In accordance with the Interest Rate Benchmark Reform amendments to IAS 39, the Group will cease to apply prospectively the reliefs outlined above
when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate
benchmark-based cash flows of the hedged item (or for the effectiveness assessments, the hedging instrument). The reliefs will be disapplied earlier if
the hedging relationship is discontinued or the entire amount accumulated in the cash flow hedge reserve with respect to that hedging relationship is
reclassified to profit or loss for a reason other than interest rate benchmark reform.
At 31 December 2019, the notional amount of the hedging instruments in hedging relationships to which these amendments apply was £604,602 million,
of which £117,076 million relates to Sterling LIBOR fair value hedges and £400,439 million relates to Sterling LIBOR cash flow hedges.
(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 187. 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.
The Group’s main overseas operations are in the Americas and Europe. Details of the Group’s structural foreign currency exposures are as follows:
(C) Functional currency of Group operations
Exposure
2019
US Dollar
£m
93
Other
non-sterling
£m
48
Euro
£m
63
2018
US Dollar
£m
59
Euro
£m
112
Other
non-sterling
£m
60
Lloyds Banking Group Annual Report and Accounts 2019 291
Note 53: 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 141 to 161.
(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
income3
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
2019
2018
Maximum
exposure
£m
9,775
494,988
5,544
Offset2
£m
Net exposure
£m
–
9,775
(2,792)
492,196
–
5,544
Maximum
exposure
£m
6,283
484,858
5,238
Offset2
£m
Net exposure
£m
–
6,283
(3,241)
481,617
–
5,238
510,307
(2,792)
507,515
496,379
(3,241)
493,138
24,865
23,475
40,925
64,400
26,369
23,567
74
366
2,454
63,504
66,398
–
–
–
–
(14,696)
–
–
–
–
–
–
24,865
24,794
23,475
40,925
64,400
11,673
23,567
74
366
2,454
63,504
66,398
40,876
40,168
81,044
23,595
7,860
194
632
2,425
64,884
68,135
–
–
–
–
(14,327)
–
–
–
–
–
–
24,794
40,876
40,168
81,044
9,268
7,860
194
632
2,425
64,884
68,135
715,906
(17,488)
698,418
701,807
(17,568)
684,239
1 Amounts shown net of related impairment allowances.
2 Offset items comprise deposit amounts available for offset, and amounts available for offset under master netting arrangements, that do not meet the criteria under IAS 32 to enable
loans and advances and derivative assets respectively to be presented net of these balances in the financial statements.
3 Excluding equity shares.
4 Includes assets within the Group’s unit-linked funds for which credit risk is borne by the policyholders and assets within the Group’s With-Profits funds for which credit risk is largely borne
by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back related contract liabilities.
(B) Concentrations of exposure
The Group’s management of concentration risk includes single name, industry sector and country limits as well as controls over the Group’s overall exposure
to certain products. Further information on the Group’s management of this risk is included within Credit risk mitigation, Risk management on page 142.
At 31 December 2019 the most significant concentrations of exposure were in mortgages (comprising 60 per cent of total loans and advances to
customers) and to financial, business and other services (comprising 18 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:
Mortgages1
Other
Lease financing
Hire purchase
Total loans and advances to customers before allowance for impairment losses
Allowance for impairment losses (note 18)
Total loans and advances to customers
1 Includes both UK and overseas mortgage balances.
2019
£m
7,558
1,432
6,093
4,285
13,016
1,923
27,596
89,763
2018
£m
7,314
1,517
8,260
4,684
14,113
2,711
28,451
77,505
299,141
297,498
29,272
1,671
16,497
498,247
(3,259)
494,988
28,699
1,822
15,434
488,008
(3,150)
484,858
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
292 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: 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.
Stage 3 assets include balances of £205 million (2018: £250 million) (with outstanding amounts due of approximately £1,700 million (2018: £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 £219 million (2018: £1,000 million) were modified during the year. No material gain or loss was
recognised by the Group.
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Gross drawn exposures
At 31 December 2019
Loans and advances to banks:
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Loans and advances to customers:
Retail - mortgages
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - unsecured
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - UK Motor Finance
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Total Retail
–
–
–
–
–
–
13,494
2,052
414
975
–
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
9,777
–
–
–
–
9,777
0.00-4.50%
257,028
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
15
–
–
–
257,043
16,935
22,151
2,676
76
18
–
1,098
919
189
606
–
24,921
2,812
0.00-4.50%
13,568
1,297
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
314
–
2
–
368
99
178
–
13,884
1,942
9,520
–
–
134
–
9,654
390
409
7
23
–
829
Total
£m
9,777
–
–
–
–
9,777
270,522
2,067
414
975
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,506
1,506
13,714
13,714
15,220
289,198
–
–
–
–
678
678
–
–
–
–
150
150
–
–
–
–
150
150
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23,249
3,595
265
624
678
28,411
14,865
682
99
180
150
15,976
9,910
409
7
157
150
10,633
305,502
22,518
2,484
13,714
344,218
Note 53: Financial risk management continued
Lloyds Banking Group Annual Report and Accounts 2019 293
Gross drawn exposures (continued)
At 31 December 2019
Commercial
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Total loans and advances to customers
In respect of:
Retail
Commercial
Other
Total loans and advances to customers
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
59,880
25,638
1,805
–
–
87,323
754
40
–
–
–
794
56,356
–
–
–
–
56,356
449,975
379
2,322
3,123
169
–
5,993
32
–
–
–
–
32
–
–
–
–
–
–
–
–
–
–
3,447
3,447
–
–
–
–
84
84
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
60,259
27,960
4,928
169
3,447
96,763
786
40
–
–
84
910
56,356
–
–
–
–
56,356
28,543
6,015
13,714
498,247
305,502
87,323
57,150
22,518
5,993
32
449,975
28,543
2,484
3,447
84
6,015
13,714
344,218
–
–
96,763
57,266
13,714
498,247
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
294 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
Expected credit losses in respect of drawn exposures
PD range
At 31 December 2019
Loans and advances to banks:
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Loans and advances to customers:
Retail - mortgages
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - unsecured
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - UK Motor Finance
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Total Retail
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
2
–
–
–
–
2
23
–
–
–
–
23
188
103
7
3
–
301
203
10
–
1
–
214
25
–
–
–
–
25
563
–
–
–
–
–
–
183
39
13
46
–
281
42
92
34
193
–
361
30
15
10
32
–
87
9
27
–
1
–
37
766
–
–
–
–
–
–
–
–
–
–
122
122
–
–
–
–
233
233
–
–
–
–
84
84
–
–
–
–
51
51
490
–
–
–
–
–
–
–
–
–
–
142
142
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
142
2
–
–
–
–
2
206
39
13
46
264
568
230
195
41
196
233
895
233
25
10
33
84
385
34
27
–
1
51
113
1,961
Lloyds Banking Group Annual Report and Accounts 2019 295
Note 53: Financial risk management continued
Expected credit losses in respect of drawn exposures (continued)
PD range
At 31 December 2019
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Commercial
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Total loans and advances to customers
In respect of:
Retail
Commercial
Other
Total loans and advances to customers
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
33
50
13
–
–
96
6
–
–
–
–
6
10
–
–
–
–
10
675
563
96
16
675
1
37
174
16
–
228
1
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
941
941
–
–
–
–
16
16
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
995
1,447
142
766
228
1
995
490
941
16
1,447
142
–
–
142
Total
£m
34
87
187
16
941
1,265
7
–
–
–
16
23
10
–
–
–
–
10
3,259
1,961
1,265
33
3,259
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
296 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
Gross undrawn exposures
At 31 December 2019
Loans and advances to customers:
Retail - mortgages
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - unsecured
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - UK Motor Finance
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Total Retail
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
0.00-4.50%
12,242
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
1
–
–
–
12,243
0.00-4.50%
60,653
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
62
1
–
–
–
63
1,986
218
39
73
–
389
5
1
–
61,048
2,316
1,181
193
–
–
–
1,374
1,240
–
–
–
–
–
4
–
–
–
4
–
62
–
–
–
1,240
75,905
62
2,445
–
–
–
–
8
8
–
–
–
–
83
83
–
–
–
–
–
–
–
–
–
–
3
3
–
–
–
–
79
79
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
94
79
12,304
2
–
–
87
12,393
62,639
607
44
74
83
63,447
1,181
197
–
–
–
1,378
1,240
62
–
–
3
1,305
78,523
Lloyds Banking Group Annual Report and Accounts 2019 297
Note 53: Financial risk management continued
Gross undrawn exposures (continued)
At 31 December 2019
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
Commercial
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
47,707
5,134
258
–
–
76
850
327
43
–
53,099
1,296
239
–
–
–
–
239
391
–
–
–
–
391
–
–
–
–
–
–
–
–
–
–
–
–
Total loans and advances to customers
129,634
3,741
In respect of:
Retail
Commercial
Other
Total loans and advances to customers
75,905
53,099
630
129,634
2,445
1,296
–
3,741
–
–
–
–
5
5
–
–
–
–
–
–
–
–
–
–
–
–
99
94
5
–
99
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
47,783
5,984
585
43
5
54,400
239
–
–
–
–
239
391
–
–
–
–
391
79
133,553
79
–
–
79
78,523
54,400
630
133,553
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
298 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
Expected credit losses in respect of undrawn exposures
PD range
At 31 December 2019
Loans and advances to customers:
Retail - mortgages
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - unsecured
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - UK Motor Finance
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Total Retail
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
1
–
–
–
–
1
56
6
–
–
–
62
2
–
–
–
–
2
11
–
–
–
–
11
76
–
–
–
–
–
–
24
8
3
15
–
50
–
–
–
–
–
–
–
3
–
–
–
3
53
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
1
80
14
3
15
–
112
2
–
–
–
–
2
11
3
–
–
–
14
129
Lloyds Banking Group Annual Report and Accounts 2019 299
Note 53: Financial risk management continued
Expected credit losses in respect of undrawn exposures (continued)
PD range
At 31 December 2019
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
Commercial
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Total loans and advances to customers
In respect of:
Retail
Commercial
Other
Total loans and advances to customers
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
11
7
1
–
–
19
–
–
–
–
–
–
–
–
–
–
–
–
95
76
19
–
95
–
9
13
2
–
24
–
–
–
–
–
–
–
–
–
–
–
–
77
53
24
–
77
–
–
–
–
5
5
–
–
–
–
–
–
–
–
–
–
–
–
5
–
5
–
5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11
16
14
2
5
48
–
–
–
–
–
–
–
–
–
–
–
–
177
129
48
–
177
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
300 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
Gross drawn exposures
At 31 December 2018
Loans and advances to banks:
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Loans and advances to customers:
Retail - mortgages
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - unsecured
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - UK Motor Finance
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Total Retail
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
6,177
105
–
–
–
6,282
0.00-4.50%
257,740
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
3
–
–
–
–
3
10,784
1,709
262
899
–
57
–
–
–
257,797
13,654
22,363
2,071
72
199
–
1,079
774
167
687
–
24,705
2,707
12,918
301
–
5
–
13,224
9,033
190
–
211
–
9,434
305,160
954
318
111
197
–
1,580
704
66
7
23
–
800
18,741
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,393
1,393
15,391
15,391
–
–
–
–
703
703
–
–
–
–
129
129
–
–
–
–
165
165
2,390
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
15,391
Total
£m
6,180
105
–
–
–
6,285
268,524
1,766
262
899
16,784
288,235
23,442
2,845
239
886
703
28,115
13,872
619
111
202
129
14,933
9,737
256
7
234
165
10,399
341,682
Lloyds Banking Group Annual Report and Accounts 2019 301
Note 53: Financial risk management continued
Gross drawn exposures (continued)
At 31 December 2018
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
Commercial
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Total loans and advances to customers
In respect of:
Retail
Commercial
Other
Total loans and advances to customers
65,089
25,472
1,441
–
–
100
3,450
2,988
54
–
92,002
6,592
–
–
–
–
3,230
3,230
–
–
–
–
55
55
–
–
–
–
66
66
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6
–
–
–
–
6
–
6
–
–
–
6
25,345
5,741
15,391
18,741
6,592
12
25,345
2,390
3,230
121
5,741
15,391
–
–
15,391
65,189
28,922
4,429
54
3,230
101,824
810
–
–
–
55
865
43,565
6
–
–
66
43,637
488,008
341,682
101,824
44,502
488,008
804
–
–
–
–
804
43,565
–
–
–
–
43,565
441,531
305,160
92,002
44,369
441,531
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
302 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
Expected credit losses in respect of drawn exposures
At 31 December 2018
Loans and advances to banks:
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Loans and advances to customers:
Retail - mortgages
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - unsecured
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - UK Motor Finance
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Total Retail
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
2
–
–
–
–
2
37
–
–
–
–
37
135
57
4
3
–
199
114
6
–
1
–
121
30
2
–
–
–
32
389
–
–
–
–
–
–
141
34
9
42
–
226
45
83
29
172
–
329
19
15
11
34
–
79
25
2
–
1
–
28
662
–
–
–
–
–
–
–
–
–
–
118
118
–
–
–
–
228
228
–
–
–
–
78
78
–
–
–
–
60
60
484
–
–
–
–
–
–
–
–
–
–
78
78
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
78
Total
£m
2
–
–
–
–
2
178
34
9
42
196
459
180
140
33
175
228
756
133
21
11
35
78
278
55
4
–
1
60
120
1,613
Lloyds Banking Group Annual Report and Accounts 2019 303
Note 53: Financial risk management continued
Expected credit losses in respect of drawn exposures (continued)
PD range
At 31 December 2018
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Commercial
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
32
50
11
–
–
93
43
–
–
–
–
43
–
–
–
–
–
–
1
86
231
7
–
325
1
–
–
–
–
1
–
6
–
–
–
6
–
–
–
–
1,031
1,031
–
–
–
–
11
11
–
–
–
–
27
27
Total loans and advances to customers
525
994
1,553
In respect of:
Retail
Commercial
Other
Total loans and advances to customers
389
93
43
525
662
325
7
994
484
1,031
38
1,553
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
78
78
–
–
78
Total
£m
33
136
242
7
1,031
1,449
44
–
–
–
11
55
–
6
–
–
27
33
3,150
1,613
1,449
88
3,150
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
304 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
Gross undrawn exposures
At 31 December 2018
Loans and advances to customers:
Retail - mortgages
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - unsecured
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - UK Motor Finance
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Total Retail
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
12,024
2
–
–
–
12,026
57,433
391
10
3
–
57,837
1,565
141
–
–
–
1,706
1,381
–
–
360
–
1,741
73,310
19
1
–
–
–
20
1,811
155
27
51
–
2,044
–
–
–
–
–
–
47
–
–
–
–
47
2,111
–
–
–
–
5
5
–
–
–
–
36
36
–
-
–
–
–
–
–
–
90
90
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3
3
44
–
–
–
–
–
–
–
90
12,043
3
–
–
95
12,141
59,244
546
37
54
36
59,917
1,565
141
–
–
–
1,706
1,428
–
–
360
3
1,791
75,555
Lloyds Banking Group Annual Report and Accounts 2019 305
Note 53: Financial risk management continued
Gross undrawn exposures (continued)
At 31 December 2018
PD range
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
Commercial
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Total loans and advances to customers
In respect of:
Retail
Commercial
Other
Total loans and advances to customers
51,632
6,501
126
31
–
–
693
297
11
–
–
–
–
–
–
–
–
–
6
–
58,290
1,001
6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,112
2,111
1,001
–
3,112
–
–
–
–
–
–
–
50
44
6
–
50
–
–
–
–
–
–
–
90
90
–
–
90
246
–
–
–
–
246
–
–
–
–
–
–
131,846
73,310
58,290
246
131,846
Total
£m
51,632
7,194
423
42
6
59,297
246
–
–
–
–
246
–
–
–
–
–
–
135,098
75,555
59,297
246
135,098
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
306 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
Expected credit losses in respect of undrawn exposures
PD range
At 31 December 2018
Loans and advances to customers:
Retail - mortgages
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - unsecured
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - UK Motor Finance
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Total Retail
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
100%
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Total
£m
1
–
–
–
–
1
85
5
–
–
–
90
2
–
–
–
–
2
11
–
–
–
–
11
104
–
–
–
–
–
–
26
10
3
10
–
49
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
2
51
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
1
111
15
3
10
–
139
2
–
–
–
–
2
13
–
–
–
–
13
155
Note 53: Financial risk management continued
Expected credit losses in respect of undrawn exposures (continued)
PD range
At 31 December 2018
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased or
originated
credit-impaired
£m
Lloyds Banking Group Annual Report and Accounts 2019 307
Total
£m
9
14
6
2
6
37
1
–
–
–
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
0.00-4.50%
4.51-14.00%
14.01-20.00%
20.01-99.99%
9
7
1
1
–
18
1
–
–
–
–
7
5
1
–
13
–
–
–
–
–
–
–
–
–
–
–
–
6
–
6
–
–
–
–
–
–
–
–
–
100%
–
–
–
–
–
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
1
–
–
–
–
–
–
123
104
18
1
123
–
–
–
–
–
–
–
64
51
13
–
64
–
–
–
–
–
–
–
–
–
–
–
–
–
6
–
6
–
6
–
–
–
–
–
–
1
–
–
–
–
–
–
193
155
37
1
193
Commercial
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Other
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
CMS 1-10
CMS 11-14
CMS 15-18
CMS 19
CMS 20-23
Total loans and advances to customers
In respect of:
Retail
Commercial
Other
Total loans and advances to customers
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
308 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: 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’.
2019
2018
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
3,007
876
3,883
1,650
5,533
–
–
–
14
14
3,263
763
4,026
1,176
5,202
3,007
876
3,883
1,664
5,547
(3)
5,544
Other2
£m
9
17
26
16
42
Total
£m
3,272
780
4,052
1,192
5,244
(6)
5,238
2 Other comprises sub-investment grade (31 December 2019: £nil; 31 December 2018: £6 million) and not rated (31 December 2019: £14 million; 31 December 2018: £36 million) .
Financial assets at fair value through other comprehensive income (excluding equity shares)
An analysis of the Group’s financial assets at fair value through other comprehensive income is included in note 19. The credit quality of the Group’s
financial assets at fair value through other comprehensive income (excluding equity shares) is set out below:
Investment
grade1
£m
2019
Other2
£m
2018
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
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
1 Credit ratings equal to or better than ‘BBB’.
13,084
–
121
–
121
11,036
24,241
535
24,776
14
13,098
–
121
60
181
11,051
24,330
535
18,971
118
120
–
120
4,934
24,143
303
24,865
24,446
–
–
60
60
15
89
–
89
–
–
–
131
131
217
348
–
348
18,971
118
120
131
251
5,151
24,491
303
24,794
2 Other comprises sub-investment grade (31 December 2019: £89 million; 31 December 2018: £85 million) and not rated (31 December 2019: £nil; 31 December 2018: £263 million) .
Lloyds Banking Group Annual Report and Accounts 2019 309
Note 53: 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’.
2019
2018
Investment
grade1
£m
Other2
£m
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
6,791
1
14
15
232
7,038
12,044
2,118
984
452
241
693
15,932
31,771
19
31,790
38,828
–
5
3
8
1
9
19
8
–
10
–
10
2,051
2,088
–
2,088
2,097
6,791
7,192
6
17
23
233
7,047
12,063
2,126
984
462
241
703
17,983
33,859
19
33,878
40,925
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
10
63
73
247
7,512
10,903
2,064
1,105
215
286
501
18,063
32,636
20
32,656
40,168
2 Other comprises sub-investment grade (2019: £251 million; 2018: £411 million) and not rated (2019: £1,846 million; 2018: £1,545 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 £11,673 million
(2018: £9,268 million) , cash collateral of £7,650 million (2018: £6,039 million) was held and a further £274 million was due from OECD banks
(2018: £213 million) .
Trading and other
Hedging
Total derivative financial instruments
1 Credit ratings equal to or better than ‘BBB’.
Investment
grade1
£m
22,991
1,178
24,169
2019
Other2
£m
2,142
58
2,200
Total
£m
25,133
1,236
26,369
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
2 Other comprises sub-investment grade (2019: £1,555 million; 2018: £1,920 million) and not rated (2019: £645 million; 2018: £344 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 142. 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
310 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: 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 £1,555 million (2018: £461 million) , against which the Group held collateral with a fair value of £1,516 million (2018: £481 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.
As at 31 December 2019
As at 31 December 2018
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or
originated
credit-
impaired
£m
Total gross
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or
originated
credit-
impaired
£m
Total gross
£m
179,566
13,147
1,174
10,728 204,615
185,556
44,384
27,056
5,663
374
2,343
1,057
199
189
181
1,751
48,659
86
34
31
677
207
351
28,876
6,103
945
41,827
24,854
4,957
603
10,728
1,802
832
164
128
1,035
190
95
39
34
11,846
209,165
1,884
1,032
302
327
45,703
26,813
5,462
1,092
Drawn balances
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
257,043
16,935
1,506
13,714 289,198
257,797
13,654
1,393
15,391
288,235
As at 31 December 2019
As at 31 December 2018
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or
originated
credit-
impaired
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Purchased
or
originated
credit-
impaired
£m
6
7
7
2
1
104
75
58
17
27
41
29
25
12
15
44
38
23
10
27
23
281
122
142
195
149
113
41
70
568
3
11
14
4
5
37
94
51
47
16
18
34
24
27
14
19
226
118
19
12
16
9
22
78
Total
£m
150
98
104
43
64
459
Expected credit losses on drawn
balances
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
Other
The majority of non-mortgage retail lending is unsecured. At 31 December 2019, Stage 3 non-mortgage lending amounted to £610 million, net of an
impairment allowance of £368 million (2018: £631 million, net of an impairment allowance of £366 million) .
Stage 1 and Stage 2 non-mortgage retail lending amounted to £54,042 million (2018: £52,450 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 2019 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of £54,600 million
(2018: £40,483 million) , against which the Group held collateral with a fair value of £52,982 million (2018: £42,339 million) , all of which the Group was able
to repledge. There were no collateral balances in the form of cash provided in respect of reverse repurchase agreements included in these amounts
(2018: £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 2019, Stage 3 secured commercial lending amounted to £966 million, net of an impairment allowance of £243 million
(2018: £658 million, net of an impairment allowance of £215 million) . The fair value of the collateral held in respect of impaired secured commercial lending
was £744 million (2018: £590 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
Lloyds Banking Group Annual Report and Accounts 2019 311
Note 53: Financial risk management continued
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.
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
£11,269 million (2018: £28,356 million) . Collateral is held with a fair value of £11,081 million (2018: £36,101 million) , all of which the Group is able to repledge.
At 31 December 2019, £9,605 million had been repledged (2018: £31,013 million) .
In addition, securities held as collateral in the form of stock borrowed amounted to £32,888 million (2018: £51,202 million) . Of this amount, £30,594 million
(2018: £49,233 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 £11,673 million (2018: £9,268 million) , cash collateral
of £7,650 million (2018: £6,039 million) was held.
Irrevocable loan commitments and other credit-related contingencies
At 31 December 2019, the Group held irrevocable loan commitments and other credit-related contingencies of £66,398 million (2018: £68,135 million) .
Collateral is held as security, in the event that lending is drawn down, on £12,391 million (2018: £10,661 million) of these balances.
Collateral repossessed
During the year, £413 million of collateral was repossessed (2018: £245 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 £18,105 million (2018: £21,170 million) ; the fair value of the collateral
provided under these agreements at 31 December 2019 was £17,545 million (2018: £19,615 million) .
Customer deposits
Included in customer deposits are balances arising from repurchase transactions of £9,530 million (2018: £1,818 million) ; the fair value of the collateral
provided under these agreements at 31 December 2019 was £9,221 million (2018: £1,710 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 £8,324 million (2018: £28,438 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
Financial assets at fair value through other comprehensive income
2019
£m
5,857
2,020
7,877
2018
£m
5,837
1,917
7,754
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 note 31.
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
312 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: 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 2019
Assets
Cash and balances at central banks
55,128
2
–
–
Financial assets at fair value through profit or loss
7,195
3,689
3,016
1,710
Derivative financial instruments
Loans and advances to banks
583
739
4,953
1,017
627
265
404
124
–
451
336
91
–
2,801
1,294
26
–
–
55,130
5,385 135,942 160,189
2,763
19,623
26,369
–
3,299
9,775
Loans and advances to customers
35,973
26,036
23,283
12,626
11,425
29,917
74,416 281,312 494,988
Debt securities held at amortised cost
131
19
–
–
–
74
3,085
2,235
5,544
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 2018
Assets
111
179
2,224
1,155
729
533
102
160
234
520
2,929
12,809
7,999
25,092
568
1,218
50,428
56,806
106,298
32,836
28,453
15,126
13,057
37,609
99,676 500,838 833,893
4,530
2,715
267
85
55
15,686
433
4,408
28,179
382,885
12,945
6,716
4,377
3,207
6,742
1,752
2,696 421,320
5,182
4,070
1,213
4,541
–
6,101
9,159
1,658
1,914
1,339
2,579
7,135
784
528
1,644
5,238
25,209
47,265
7,418
1,963
13,618
30,897
23,429
97,689
2,370
2,348
772
96
893
1,137
2,882
1,682
108
9,028
24,870 104,539 148,908
898
575
906
13,990
25,596
4,105
9,770
17,130
402,421
35,831
19,935
17,042
10,425
48,191
68,201 184,041 786,087
Cash and balances at central banks
Financial assets at fair value through profit or loss
Derivative financial instruments
Loans and advances to banks
54,662
10,686
579
2,594
1
–
–
–
8,826
8,492
5,133
2,587
688
520
418
584
336
172
441
203
–
2,090
1,064
160
–
5,467
3,075
–
–
54,663
115,248
158,529
16,994
2,050
23,595
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 as at amortised cost
7
–
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
166
2,667
453
1,552
–
249
196
521
800
238
–
–
2,262
2,448
5,238
1,685
219
2,536
387
11,496
1,118
7,430
33,240
24,815
39,617
107,687
31,423
28,354
21,578
16,453
36,696
95,446
459,961
797,598
2,793
380,753
5,160
4,172
1,844
4,403
85
1,688
10,623
11,877
5,692
1,850
3,201
145
748
5,628
5,048
9,007
2,316
733
95
54
4,543
1,663
4,668
2,302
1,182
251
45
4,431
522
1,694
2,104
1,383
–
4,758
6,421
1,104
13,062
7,995
756
2,600
16,052
3,244
4,108
28,676
20,986
232
2,559
4,182
2,423
30,320
418,066
22,438
24,197
73,330
13,652
11,921
51,920
91,168
112,727
25,542
17,656
399,210
35,076
23,575
14,663
10,179
36,696
75,857
152,143
747,399
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 2019 313
Note 53: 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 2019
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
Other liabilities (Lease liabilities)
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 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
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
Over 5
years
£m
Total
£m
5,009
385,864
4,370
5,335
37,459
2
942
438,981
43,118
(40,829)
2,289
23,648
25,937
2,820
380,985
9,693
5,942
13,853
247
413,540
39,165
(38,301)
864
13,511
14,375
2,564
14,433
5,543
9,858
–
61
1,462
33,921
762
14,327
2,255
19,205
–
190
1,918
38,657
20,066
10,661
2,690
54,638
–
803
7,837
96,695
317
1,393
14,653
36,321
–
946
14,857
68,487
28,718
426,678
29,511
125,357
37,459
2,002
27,016
676,741
44,379
(42,954)
34,012
(32,966)
36,012
(34,758)
18 ,238
175,759
(17,753)
(169,260)
1,425
48
1,473
2,710
10,584
10,984
7,314
–
1,017
32,609
27,976
(27,283)
693
103
796
1,046
122
1,168
1,022
14,169
7,553
22,564
–
1,144
46,452
23,978
(23,134)
844
209
1,053
1,254
700
1,954
20,920
11,634
930
48,233
–
8,231
89,948
43,239
(40,690)
2,549
782
3,331
485
2,201
2,686
3,502
1,554
10,771
24,201
–
19,328
59,356
33,763
(28,933)
4,830
2,193
7,023
6,499
26,719
33,218
30,974
418,926
39,931
108,254
13,853
29,967
641,905
168,121
(158,341)
9,780
16,798
26,578
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 £29 million (2018: £27 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
314 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 53: Financial risk management continued
Further information on the Group’s liquidity exposures is provided on pages 175 to 180.
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:
At 31 December 2019
At 31 December 2018
Up to
1 month
£m
1,340
1,667
1-3
months
£m
1,240
1,624
3-12
months
£m
5,378
5,925
1-5
years
£m
25,349
25,414
Over 5
years
£m
78,142
64,244
Total
£m
111,449
98,874
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, commitments and guarantees.
At 31 December 2019
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
25
381
406
24
409
433
4
387
391
–
177
177
21
207
228
1-3
years
£m
–
475
475
3-5
years
£m
–
101
101
Over 5
years
£m
–
683
683
Total
£m
74
2,820
2,894
Lending commitments and guarantees
68,638
2,682
15,297
4,637
7,367
17,365
14,114
3,264
133,364
Other commitments
–
1
16
5
–
72
43
52
189
Total commitments and guarantees
68,638
2,683
15,313
4,642
7,367
17,437
14,157
3,316
133,553
Total contingents, commitments and
guarantees
At 31 December 2018
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
69,044
3,116
15,704
4,819
7,595
17,912
14,258
3,999
136,447
64
450
514
83
484
567
34
203
237
13
223
236
–
150
150
–
665
665
–
133
133
–
749
749
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, commitments and
guarantees
428
67,483
67,997
–
2,947
3,514
–
4,474
4,711
2
6,057
6,293
92
20
13
16,215
16,365
17,757
18,422
15,387
15,520
176
4,778
5,527
731
135,098
138,349
Note 54: 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 liabilities1
Change in operating liabilities
1 Includes £82 million (2018: £27 million; 2017: £2 million) in respect of lease liabilities.
2019
£m
2018
£m
2017
£m
(12,423)
(27,038)
(24,747)
3,887
(2,513)
(11,049)
22,046
520
(4,472)
9,916
(661)
(15,492)
2019
£m
(2,140)
3,248
6,631
(5,078)
2,625
(1,644)
3,642
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)
Note 54: 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
Unwind of discount on impairment allowances
Foreign exchange impact on balance sheet1
Interest expense on subordinated liabilities
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
Accretion of discounts and amortisation of premiums and issue costs
Share of post-tax results of associates and joint ventures
Gain on establishment of joint venture
Transfers to income statement from reserves
Profit on disposal of tangible fixed assets
Other non-cash items
Total non-cash items
Contributions to defined benefit schemes
Payments in respect of payment protection insurance provision
Payments in respect of other regulatory provisions
Other
Total other items
Non-cash and other items
Lloyds Banking Group Annual Report and Accounts 2019 315
2019
£m
2,660
108
1,312
(1,458)
(15)
(1)
12,593
2,450
445
(165)
245
(53)
533
2018
£m
2,405
(139)
1,024
(1,025)
(73)
(14)
(4,547)
750
600
(518)
405
(44)
191
2017
£m
2,370
(230)
691
(1,061)
(9)
6
9,168
1,650
865
(8)
369
(23)
125
1,228
1,388
1,436
(196)
440
236
(3)
445
(6)
(244)
(608)
(32)
(35)
19,879
(1,069)
(2,461)
(778)
2
(4,306)
15,573
(275)
(429)
260
40
(446)
(327)
414
(411)
1,947
1,701
(9)
–
(701)
(104)
(34)
1,098
(868)
(2,104)
(1,032)
14
(3,990)
(2,892)
(6)
–
(650)
(120)
–
15,504
(587)
(1,657)
(928)
–
(3,172)
12,332
1 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
2019
£m
2018
£m
2017
£m
55,130
(3,289)
51,841
9,775
(3,805)
5,970
57,811
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
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 2019 is £49 million (31 December 2018: £40 million; 1 January 2018 £48 million; 31 December
2017: £2,322 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
316 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the consolidated financial statements continued
Note 54: 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
Financial assets at fair value through profit or loss
Assets arising from reinsurance contracts held
Intangible assets
Property, plant and equipment
Other assets
Deposits from banks1
Liabilities arising from non-participating investment contracts
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)
2019
£m
2018
£m
–
–
7,350
13,616
–
–
29
–
(20,981)
(8)
14
20
–
20
1
21
–
–
–
–
21
–
6
–
–
(1)
–
26
–
26
23
49
2019
£m
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
Lloyds Banking Group Annual Report and Accounts 2019 317
Note 55: Adoption of IFRS 16
The Group adopted IFRS 16 Leases from 1 January 2019 and elected to apply the standard retrospectively with the cumulative effect of initial application
being recognised at that date; comparative information has therefore not been restated. Comparative information was prepared in accordance with
IAS 17. Under IAS 17, where the Group was lessee it charged operating lease rentals to the income statement on a straight-line basis over the life of the
lease.
Operating lease commitments as at 31 December 2018 amounted to £2,043 million. Lease liabilities amounting to £1,813 million in respect of leased
properties previously accounted for as operating leases were recognised at 1 January 2019. These liabilities were measured at the present value of
the remaining lease payments, discounted using the Group’s incremental borrowing rate appropriate for the related right-of-use asset as at that date,
adjusted to exclude short-term leases and leases of low-value assets of approximately £20 million. The weighted-average borrowing rate applied to these
lease liabilities was 2.43 per cent in the UK, where the majority of the obligations arise, and 5.10 per cent in the US. The corresponding right-of-use asset
of £1,716 million was measured at an amount equal to the lease liabilities, adjusted for lease liabilities recognised at 31 December 2018 of £97 million.
The right-of-use asset and lease liabilities are included within property, plant and equipment and other liabilities respectively. There was no impact on
shareholders’ equity.
In applying IFRS 16 for the first time, the Group has used a number of practical expedients permitted by the standard; the most significant of which were
the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; reliance on previous assessments of whether a lease is
onerous; and the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also
elected not to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4 Determining whether an Arrangement
contains a Lease.
Note 56: Future accounting developments
The following pronouncements are not applicable for the year ending 31 December 2019 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 2020 these pronouncements have been
endorsed by the EU.
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, in its Exposure
Draft published on 26 June 2019, the International Accounting Standards Board 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.
The Group's IFRS 17 project is progressing to plan. Work has focussed on interpreting the requirements of the standard, developing methodologies and
accounting policies, and assessing the changes required to reporting and other systems. The development of the Group's data warehousing and actuarial
liability calculation processes required for IFRS 17 reporting is progressing.
Minor amendments to other accounting standards
The IASB has issued a number of minor amendments to IFRSs effective 1 January 2020 (including IFRS 3 Business Combinations and IAS 1 Presentation
of Financial Statements) . These amendments are not expected to have a significant impact on the Group.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
318 Lloyds Banking Group Annual Report and Accounts 2019
Parent company balance sheet
at 31 December
Assets
Non-current assets:
Investment in subsidiaries
Loans to subsidiaries
Deferred tax asset
Current assets:
Derivative financial instruments
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 profits1
Shareholders’ equity
Other equity instruments
Total equity
Non-current liabilities:
Debt securities in issue
Subordinated liabilities
Deferred tax liabilities
Current liabilities:
Derivative financial instruments
Financial liabilities at fair value through profit or loss
Other liabilities
Total liabilities
Total equity and liabilities
1 The parent company recorded a profit after tax for the year of £5,415 million (2018: £4,104 million, restated – see note 1) .
The accompanying notes are an integral part of the parent company financial statements.
The directors approved the parent company financial statements on 19 February 2020.
Lord Blackwell
Chairman
António Horta-Osório
Group Chief Executive
William Chalmers
Chief Financial Officer
Note
2019
£ million
2018
£ million
10
10
48,597
14,660
–
46,725
24,211
9
63,257
70,945
2
3
4
4
5
5
6
4
7
8
9
760
12,516
983
27
29
1
256
588
955
27
57
76
14,316
77,573
1,959
72,904
7,005
17,751
7,420
4,462
3,950
40,588
5,906
46,494
20,018
5,961
2
7,116
17,719
7,423
4,273
2,103
38,634
6,491
45,125
20,394
6,043
–
25,981
26,437
438
3,464
1,196
5,098
31,079
77,573
209
–
1,133
1,342
27,779
72,904
Lloyds Banking Group Annual Report and Accounts 2019 319
Parent company statement of changes in equity
for the year ended 31 December
Balance at 1 January 2017
Total comprehensive income1,2
Dividends paid
Distributions on other equity instruments1
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
Balance at 1 January 2018
Total comprehensive income1,2
Dividends paid
Distributions on other equity instruments1
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
Balance at 31 December 2018
Total comprehensive income2
Dividends paid
Distributions on other equity instruments
Redemption of preference shares
Issue of ordinary shares
Share buyback programme
Issue of other equity instruments
Redemption 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
24,768
Merger
reserve
£ million
7,423
Capital
redemption
reserve
£ million
4,115
–
–
–
63
–
–
–
24,831
–
24,831
–
–
–
162
(158)
–
–
–
–
–
–
–
–
–
–
–
7,423
–
7,423
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,115
–
4,115
–
–
–
–
158
–
–
–
–
24,835
7,423
4,273
–
–
–
–
–
–
–
–
3
107
(189)
–
–
–
–
–
–
–
–
(3)
–
–
–
–
–
–
–
Retained
profits1
£ million
Total
shareholders’
equity
£ million
1,584
2,478
(2,284)
(415)
–
(277)
82
332
1,500
(2)
1,498
4,104
(2,240)
(433)
–
(1,005)
(7)
(74)
53
207
2,103
5,415
(2,312)
(466)
–
–
37,890
2,478
(2,284)
(415)
63
(277)
82
332
37,869
(2)
37,867
4,104
(2,240)
(433)
162
(1,005)
(7)
(74)
53
207
38,634
5,415
(2,312)
(466)
–
107
Other equity
instruments
£ million
5,355
–
–
–
–
–
–
–
5,355
–
5,355
–
–
–
–
–
1,136
–
–
–
6,491
–
–
–
–
–
–
189
(1,095)
(1,095)
–
–
–
–
–
(5)
–
74
71
165
(5)
–
74
71
165
896
(1,481)
–
–
–
Total
equity
£ million
43,245
2,478
(2,284)
(415)
63
(277)
82
332
43,224
(2)
43,222
4,104
(2,240)
(433)
162
(1,005)
1,129
(74)
53
207
45,125
5,415
(2,312)
(466)
–
107
(1,095)
891
(1,481)
74
71
165
Balance at 31 December 2019
24,756
7,420
4,462
3,950
40,588
5,906
46,494
1 Restated, see note 1.
2 No statement of comprehensive income has been shown for the parent company, as permitted by section 408 of the Companies Act 2006. Total comprehensive income comprises only
the profit for the year.
The accompanying notes are an integral part of the parent company financial statements.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
320 Lloyds Banking Group Annual Report and Accounts 2019
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
Redemptions 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.
2019
£ million
5,439
(166)
(11,975)
3,151
(5,150)
(366)
70
(8,997)
5
5,150
366
(1,648)
–
(1,812)
11,257
395
13,713
(2,312)
(466)
–
(314)
(1,095)
891
(1,481)
(3)
36
(4,744)
(28)
57
29
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
Lloyds Banking Group Annual Report and Accounts 2019 321
Notes to the parent company financial statements
for the year ended 31 December
Note 1: Basis of preparation and accounting policies
Lloyds Banking Group plc (the Company) has applied International Financial Reporting Standards as adopted by the European Union in its financial statements
for the year ended 31 December 2019. 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 has implemented the amendments to IAS 12 Income Taxes with effect from 1 January 2019 and as a result tax relief on distributions on
other equity instruments, previously taken directly to retained profits, is now reported within tax expense in the income statement. Comparatives have been
restated. Adoption of these amendments to IAS 12 has resulted in a reduction in tax expense and an increase in profit for the year in 2019 of £89 million
(2018: £82 million; 2017: £79 million) . There is no impact on total shareholders' equity.
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: Financial assets at fair value through profit or loss
Debt securities
2019
£m
12,516
2018
£m
588
The assets held at fair value through profit or loss represent holdings of debt securities issued by subsidiary companies. The contractual terms of such
instruments contain certain write-down and conversion features, and so are not deemed to satisfy the solely payments of principal and interest test.
Note 3: 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 2019: £1 million; 31 December 2018: £5 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 4: Share capital, share premium and other equity instruments
Details of the Company’s share capital, share premium account and other equity instruments are as set out in notes 40, 41 and 44 to the consolidated
financial statements.
Note 5: Other reserves
The merger reserve comprises the premium on shares issued on 13 January 2009 under the placing and open offer and shares issued on 16 January
2009 on the acquisition of HBOS plc, 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
2019
£m
7,423
(3)
7,420
2018
£m
7,423
–
7,423
2017
£m
7,423
–
7,423
1 During the year ended 31 December 2019, the Company redeemed all of its outstanding 6.3673% Non-cumulative Fixed to Floating Rate Preference Shares at their combined sterling
par value of £3 million. These preference shares had been accounted for as subordinated liabilities. On redemption an amount of £3 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 share buyback programmes
At 31 December
2019
£m
4,273
189
4,462
2018
£m
4,115
158
4,273
2017
£m
4,115
–
4,115
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
322 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the parent company financial statements continued
Note 6: Retained profits
At 31 December 2017
Adjustment on adoption of IFRS 9
At 1 January
Profit for the year1
Dividends paid2
Issue costs of other equity instruments (net of tax)
Distributions on other equity instruments1
Share buyback programme3
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
At 31 December
1 Restated, see note 1.
2019
£m
2,103
5,415
(2,312)
(5)
(466)
(1,095)
74
71
165
3,950
2018
£m
1,500
(2)
1,498
4,104
(2,240)
(7)
(433)
(1,005)
(74)
53
207
2,103
2017
£m
1,584
2,478
(2,284)
–
(415)
–
(277)
82
332
1,500
2 Details of the Company’s dividends are as set out in note 45 to the consolidated financial statements.
3 Details of the Company's share buyback programmes are provided in note 42 to the consolidated financial statements.
Note 7: 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 8: Subordinated liabilities
These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer.
Any repayments of subordinated liabilities require the consent of the Prudential Regulation Authority.
Preference
shares
£m
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
At 1 January 2018
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
Foreign exchange and other movements
Redemption:
6.3673% Non-cumulative Fixed to Floating Rate Preference Shares callable 2019
At 31 December 2019
566
–
–
(12)
554
91
(3)
642
10
–
–
–
10
–
–
10
Total
£m
3,993
664
1,065
321
6,043
(79)
3,417
664
1,065
333
5,479
(170)
–
5,309
(3)
5,961
Note 9: Financial liabilities at fair value through profit or loss
Financial liabilities designated at fair value through profit or loss, which were all issued in 2019, represent debt securities in issue which are accounted for
at fair value to significantly reduce an accounting mismatch. The changes in the credit risk of these liabilities are linked to the changes in credit risk on
corresponding assets that the Company holds at fair value through profit or loss, representing debt securities issued by subsidiaries. Given the economic
relationship between these assets and liabilities, the Company presents changes in the credit risk of its liabilities in profit or loss in order to avoid creating or
enlarging an accounting mismatch.
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2019 was £3,393 million, which
was £71 million lower than the balance sheet carrying value. At 31 December 2019 there was a cumulative £101 million increase in the fair value of these
liabilities attributable to changes in credit risk, all of which arose in 2019; this is determined by reference to the quoted credit spreads of the Company.
Lloyds Banking Group Annual Report and Accounts 2019 323
Note 10: Related party transactions
Key management personnel
The key management personnel of the Group and the Company are the same. The relevant disclosures are given in note 47 to the consolidated financial
statements.
The Company has no employees (2018: 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
2019
£m
41,716
–
229
(5)
–
–
2018
£m
41,341
10,716
265
(9)
(10,597)
–
2019
£m
5,009
1,648
–
–
–
–
2018
£m
3,522
2,037
–
–
–
(550)
2019
£m
46,725
1,648
229
(5)
–
–
41,940
41,716
6,657
5,009
48,597
2018
£m
44,863
12,753
265
(9)
(10,597)
(550)
46,725
Details of the subsidiaries and related undertakings are given on pages 332 to 337 and are incorporated by reference.
Certain subsidiary companies currently have insufficient distributable reserves to make dividend payments, however, there were no further significant
restrictions on any of the Company’s subsidiaries in paying dividends or repaying loans and advances. All regulated banking and insurance subsidiaries are
required to maintain capital at levels agreed with the regulators; this may impact those subsidiaries’ ability to make distributions.
Loans to subsidiaries
At 1 January
Exchange and other adjustments
New advances
Repayments
At 31 December
2019
£m
24,211
(106)
1,812
(11,257)
14,660
2018
£m
14,377
859
21,577
(12,602)
24,211
In addition the Company carries out banking activities through its subsidiary, Lloyds Bank plc. At 31 December 2019, the Company held deposits
of £29 million with Lloyds Bank plc (2018: £55 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 £105 million (2018: £51 million) due to subsidiary undertakings. In addition, at
31 December 2019 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 £37,555 million and a net positive fair value of £338 million (2018: notional principal amount of £1,379 million and a net positive
fair value of £47 million) . Of this amount an aggregate notional principal amount of £21,164 million and a net positive fair value of £707 million (2018:
notional principal amount of £1,275 million and a net positive fair value of £150 million) were designated as fair value hedges to manage the Company’s
issuance of subordinated liabilities.
Guarantees
The Company guarantees certain of its subsidiaries’ liabilities to the Bank of England.
Other related party transactions
Related party information in respect of other related party transactions is given in note 47 to the consolidated financial statements.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
324 Lloyds Banking Group Annual Report and Accounts 2019
Notes to the parent company financial statements continued
Note 11: 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
Derivatives
designated
as hedging
instruments
£m
Held for
trading
£m
Designated at
fair value
through profit
or loss
£m
Other
£m
Held at
amortised
cost
£m
At 31 December 2019
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:
Financial liabilities at fair value through profit or loss
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
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
–
706
–
–
–
–
54
–
–
–
–
–
12,516
–
–
706
54
12,516
–
43
–
–
43
–
150
–
–
–
150
–
–
–
–
–
395
–
–
395
–
106
–
–
–
106
209
–
–
209
–
–
–
–
–
–
–
588
–
–
588
–
–
–
–
–
–
–
–
–
–
3,464
–
–
–
3,464
–
–
–
–
–
–
–
–
–
–
Total
£m
29
760
12,516
14,660
27
29
–
–
14,660
27
14,716
27,992
–
–
20,018
5,961
25,979
57
–
–
24,211
27
24,295
–
20,394
6,043
26,437
3,464
438
20,018
5,961
29,881
57
256
588
24,211
27
25,139
209
20,394
6,043
26,646
Note 50 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 10, the Company has entered into interest rate and currency swaps with its subsidiaries, Lloyds Bank plc and Lloyds Bank Corporate
Markets plc, to manage these risks.
Credit risk
The majority of the Company’s credit risk arises from amounts due from its wholly owned subsidiaries, Lloyds 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 2019
Financial liabilities at fair value through profit or loss
Debt securities in issue
Subordinated liabilities
Total financial instrument liabilities
At 31 December 2018
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
30
55
25
110
58
–
58
31
126
28
185
99
39
138
41
415
252
708
396
254
650
3,554
16,679
2,660
22,893
11,945
1,929
13,874
–
9,008
8,112
17,120
11,555
9,569
21,124
Total
£m
3,656
26,283
11,077
41,016
24,053
11,791
35,844
Lloyds Banking Group Annual Report and Accounts 2019 325
Note 11: Financial instruments continued
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest
of approximately £1 million (2018: £1 million) per annum which is payable in respect of those instruments for as long as they remain in issue
is not included beyond 5 years.
Fair values of financial assets and liabilities
The valuation techniques for the Company’s financial instruments are as discussed in note 50 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
(2018: none) .
Fair value of financial assets and liabilities
2019
2018
Valuation hierarchy
Valuation hierarchy
Derivative financial instruments
Financial assets at fair value
through profit or loss
Loans to subsidiaries
Amounts due from subsidiaries
Carrying
value
£m
760
12,516
14,660
27
Fair value
£m
760
12,516
14,660
27
Level 2
£m
760
12,516
14,660
27
Total financial assets
27,963
27,963
27,963
Financial liabilities at fair value
through profit or loss
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
3,464
438
20,018
5,961
29,881
3,464
438
20,621
7,204
31,727
3,464
438
20,621
7,204
31,727
Level 3
£m
–
–
–
–
–
–
–
–
–
–
Carrying
value
£m
256
588
24,211
27
25,082
–
209
20,394
6,043
26,646
Fair value
£m
256
588
24,211
27
25,082
–
209
20,352
6,325
26,886
Level 2
£m
256
588
24,211
27
25,082
–
209
20,352
6,325
26,886
The carrying amount of cash and cash equivalents (2019: £29 million; 2018: £57 million) is a reasonable approximation of fair value.
Level 3
£m
–
–
–
–
–
–
–
–
–
–
Note 12: 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
326 Lloyds Banking Group Annual Report and Accounts 2019
Other information
Shareholder information
Five year financial summary
Forward looking statements
Abbreviations
Alternative performance measures
Subsidiaries and related undertakings
327
329
330
331
331
332
Lloyds Banking Group Annual Report and Accounts 2019 327
Shareholder information
Annual general meeting (AGM)
The AGM will be held at the Edinburgh International Conference Centre, The Exchange, Edinburgh EH3 8EE on Thursday 21 May 2020 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 2020 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 statement
Country analysis1
Interim results
Group Chief Executive update to shareholders
Q3 interim management statement
Month
Feb
Feb/Aug
Mar
Mar
Mar
Apr
Jun/Jul
Jul
Aug
Oct
1 To be published on the Group’s website by 1 July 2020 in accordance with the Capital Requirements (country analysis) Regulations 2013.
Share dealing facilities
We offer a choice of four 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
IWeb Share Dealing
Note:
Telephone Dealing
0345 606 1188
03457 22 55 25
0345 60 60 560
03450 707 129
Internet Dealing
www.bankofscotland.co.uk/sharedealing
www.halifax.co.uk/sharedealing
www.lloydsbank.com/share-dealing.asp
www.iweb-sharedealing.co.uk/share-dealing-
home.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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
328 Lloyds Banking Group Annual Report and Accounts 2019
Shareholder information continued
American Depositary Receipts (ADRs)
Our shares are traded in the USA through a New York Stock Exchange-listed sponsored ADR facility with The Bank of New York Mellon as the depositary.
The ADRs are traded on the New York Stock Exchange under the symbol LYG. The CUSIP number is 539439109 and the ratio of ADRs to ordinary shares
is 1:4.
For details contact: BNY Mellon Shareowner Services, 462 South 4th Street, Suite 1600, Louisville KY 40202. Telephone: 1-866-259-0336 (US toll free),
international callers: +1 201-680-6825. Alternatively visit www.adrbnymellon.com or email shrrelations@cpushareownerservices.com
Analysis of shareholders
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
1,915,432
382,068
59,685
2,783
572
190
256
84
81
13
10
Percentage
of Holders
Total
Number
of Shares
Percentage
Issued capital
81.13%
567,825,413
16.18% 1,013,949,503
2.53% 1,502,360,668
0.12%
665,848,217
0.02% 1,358,100,928
0.01% 1,362,623,400
0.01% 5,901,629,562
0.00% 5,819,172,164
0.00% 18,024,809,635
0.00% 9,103,085,837
0.00% 25,158,227,467
0.80%
1.44%
2.13%
0.94%
1.93%
1.93%
8.37%
8.26%
25.58%
12.92%
35.70%
2,361,174
100.00% 70,477,632,794
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 your activation code in post
step 3
Log on
Company website
www.lloydsbankinggroup.com
Shareholder information
help.shareview.co.uk
(from here you will be able to email your
query securely)
Registrar
Equiniti Limited
Aspect House, Spencer Road, Lancing
West Sussex BN99 6DA
Shareholder helpline
0371 384 2990* from within the UK
+44 121 415 7066 from outside the UK
* Lines are open from 8.30 am to 5.30 pm Monday to Friday,
excluding English and Welsh public holidays.
The company registrar is Equiniti Limited. They provide
a shareholder service, including a telephone helpline
and shareview which is a free secure portfolio service.
Lloyds Banking Group Annual Report and Accounts 2019 329
Five year financial summary for the Group
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 year2
Profit for the year attributable to ordinary shareholders2
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 share4, 5
Market price (year end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions) 6
Financial ratios (%) 7
Dividend payout ratio8
Post-tax return on average shareholders’ equity
Post-tax return on average assets2
Cost:income ratio9
Capital ratios (%)
Total capital
Tier 1 capital
Common equity tier 1 capital
2019
20181
20171,3
20161,3
20151,3
18,359
(12,670)
5,689
(1,296)
4,393
3,006
2,459
18,626
(11,729)
18,659
(12,696)
17,267
(12,277)
17,421
(15,387)
6,897
(937)
5,960
4,506
3,975
5,963
(688)
5,275
3,649
3,144
4,990
(752)
4,238
2,605
2,092
2,034
(390)
1,644
1,036
546
31 December
2019
31 December
2018
31 December
2017
31 December
2016
31 December
2015
7,005
41,697
5,906
59.5p
421,320
17,130
494,988
833,893
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
2019
2018
2017
2016
2015
3.5p
3.4p
3.37p
62.5p
2,361
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
70,053
71,164
71,973
71,374
71,374
2019
2018
2017
2016
2015
96.6
5.7
0.36
69.0
57.6
9.3
0.55
63.0
69.8
7.2
0.45
68.0
104.0
4.9
0.31
71.1
359.3
1.3
0.12
88.3
31 December
2019
31 December
2018
31 December
2017
31 December
2016
31 December
2015
21.3
16.7
13.6
22.9
18.2
14.6
21.2
17.2
14.1
21.4
17.0
13.6
21.5
16.4
12.8
1 The Group has adopted IFRS 16 Leases with effect from 1 January 2019, in accordance with the transition requirements of the standard, comparative information has not been restated.
2 The Group has also implemented the amendments to IAS 12 Income Taxes with effect from 1 January 2019 and as a result tax relief on distributions on other equity instruments, previously
taken directly to retained profits, is now reported within tax expense in the income statement. Comparatives have been restated.
3 The Group adopted IFRS 9 and IFRS 15 with effect from 1 January 2018; in accordance with the transition requirements of the two standards, comparative information for preceding years
was not restated.
4 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.
5 Dividends per ordinary share in 2016 included a recommended special dividend of 0.5 pence (2015: 0.5 pence).
6 For 2016 and 2015, 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.
7 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
8 Total dividend for the year divided by earnings attributable to ordinary shareholders adjusted for tax relief on distributions to other equity holders.
9 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims) .
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
330 Lloyds Banking Group Annual Report and Accounts 2019
Forward looking statements
This document contains certain forward looking statements within the
meaning of Section 21E of the US Securities Exchange Act of 1934, as
amended, and section 27A of the US Securities Act of 1933, as amended,
with respect to the business, strategy, plans and/or results of Lloyds
Banking Group plc together with its subsidiaries (the Group) and its current
goals and expectations relating to its future financial condition and
performance. Statements that are not historical facts, including statements
about the 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.
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
the 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.
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.
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; any impact of the transition from IBORs to alternative reference
rates; 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; political instability including
as a result of any UK general election; 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 relating 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 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 or Form 20-F filed by Lloyds Banking Group plc 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 document are made as of today's date, and
the Group expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward looking statements
contained in this document to reflect any change in the 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 document do not constitute a
public offer under any applicable law or an offer to sell any securities or
financial instruments or any advice or recommendation with respect to
such securities or financial instruments.
Lloyds Banking Group Annual Report and Accounts 2019 331
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 56, 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
Loan to deposit ratio
Jaws
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.
Loans and advances to customers net of allowance for impairment losses and excluding reverse repurchase agreements
divided by customer deposits excluding repurchase agreements on an underlying basis.
The difference between the period on period percentage change in net income and the period on period change in total
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.
Trading Surplus
Underlying profit before impairment charge
Underlying, or above the line, profit
Statutory profit adjusted for certain items as detailed on page 56.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
332 Lloyds Banking Group Annual Report and Accounts 2019
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 2019. 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.
Capital Bank Property Investments (3) Ltd
Capital Personal Finance Ltd
Cardnet Merchant Services Ltd
CF1 Ltd (in liquidation)
Cashfriday Ltd
Cashpoint Ltd
Caveminster Ltd
CBRail S.A.R.L.
Cedar Holdings Ltd (in liquidation)
Central Mortgage Finance Ltd
CF Asset Finance Ltd (in liquidation)
Chariot Finance Ltd (In liquidation)
Cheltenham & Gloucester plc
Chiswell Stockbrokers Ltd (In liquidation)
Clerical Medical Finance plc
Clerical Medical Financial Services Ltd
Clerical Medical International Holdings B.V.
Clerical Medical Investment Fund Managers Ltd
Clerical Medical Managed Funds Ltd (In
liquidation)
47
4
1 i ii iii # ^
13 vii viii #
9
1
1
53
1
12
13
13
12
13
20
20
21
4
13
Clerical Medical Non Sterling Property Company
22
Name of undertaking
A G Finance Ltd
A.C.L. Ltd
ACL Autolease Holdings Ltd
ADF No.1 Pty Ltd
Alex Lawrie Factors Ltd
Alex. Lawrie Receivables Financing Ltd
Amberdate Ltd
Anglo Scottish Utilities Partnership 1
Aquilus Ltd (in liquidation)
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 Central Nominees Ltd
Bank of Scotland Edinburgh Nominees Ltd
Bank of Scotland Equipment Finance 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 (in
liquidation)
Birmingham Midshires Mortgage Services Ltd (in
liquidation)
Black Horse (TRF) Ltd
Black Horse Executive Mortgages Ltd (in
liquidation)
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
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
BOSSAF Rail Ltd
BOS Personal Lending Ltd
British Linen Leasing (London) Ltd
British Linen Leasing Ltd
British Linen Shipping Ltd
C.T.S.B. Leasing Ltd (In liquidation)
Capital 1945 Ltd
Capital Bank Leasing 3 Ltd (in liquidation)
Capital Bank Leasing 5 Ltd
Capital Bank Leasing 9 Ltd (In liquidation)
Capital Bank Leasing 12 Ltd
Notes
50 ii #
1
1
8
9
9
1 iv
+ *
13
4
5 *
5 *
5
5 *
5 *
13
13
5 *
5 *
5 *
5 iv
1
13
2
1
12
1 iv vi
4
13
13
1
13
1 i vi
1
1 iv
1
58
1
1
16
16
4
4
4
4 #
4 #
4 #
4 #
4
4
11 xiii
11
65
1
1
4 i ii
5
5
5
13
2
13
2
13
5
S.A.R.L.
Cloak Lane Funding S.A.R.L.
Cloak Lane Investments S.A.R.L.
CM Venture Investments Ltd
Conquest Securities Ltd
Corbiere Asset Investments Ltd
Create Services Ltd
Dalkeith Corporation
Dunstan Investments (UK) Ltd
Eurolead Services Holdings Ltd
First Retail Finance (Chester) Ltd
Forthright Finance Ltd
France Industrial Premises Holding Company
General Leasing (No. 12) Ltd
General Reversionary and Investment Company
Gresham Nominee 1 Ltd
Gresham Nominee 2 Ltd
Halifax Credit Card Ltd (in liquidation)
Halifax Financial Brokers Ltd
Halifax Financial Services (Holdings) Ltd
Halifax Financial Services Ltd
Halifax General Insurance Services Ltd
Halifax Group Ltd
Halifax Investment Services Ltd
Halifax Leasing (June) Ltd (In liquidation)
Halifax Leasing (March No.2) Ltd
Halifax Leasing (September) Ltd
Halifax Life Ltd
Halifax Ltd
Halifax Loans Ltd
Halifax Mortgage Services Ltd
Halifax Nominees Ltd
Halifax Pension Nominees Ltd
Halifax Premises Ltd (in liquidation)
Halifax Share Dealing Ltd
Halifax Vehicle Leasing (1998) Ltd
HBOS Covered Bonds LLP
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
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
Inchcape Financial Services Ltd (in liquidation)
Intelligent Finance Financial Services Ltd
Intelligent Finance Software Ltd
International Motors Finance Ltd
Kanaalstraat Funding C.V.
Katrine Leasing Ltd (in liquidation)
LB Healthcare Trustee Ltd
LB Motorent Ltd (in liquidation)
LB Quest Ltd (in liquidation)
LB Share Schemes Trustees Ltd
LBCF Ltd
LBG Brasil Administração LTDA
LBG Capital Holdings Ltd
LBG Equity Investments Ltd
56
56
23 iv
1 iv vi
1 i ii
1
24
1
9
4
2
28
1
20
1
1
13 i ii vii
4
4
4
4
4
4
13
1
1
4
4
4
4
4
29
13
4
4
4 *
5
20
20
20
4 i
5 iv vi
2 *
5
1
1
1 iv vi
1
4
5
1 *
1 * #
1 i ii
1
4
2
7 i ii
2
32
32
16
13 i ii #
4
4
2 i ii #
35 *
39
1
13
13
1
9
38
1 ^
1 ^
LBI Leasing Ltd
LDC (General Partner) Ltd
LDC (Managers) Ltd
LDC (Nominees) Ltd
LDC GP LLP
LDC I LP
LDC II LP
LDC III LP
LDC IV LP
LDC Parallel (Nominees) Ltd
LDC V LP
LDC VI LP
LDC VII LP
LDC VIII LP
Legacy Renewal Company Ltd
Lex Autolease (CH) Ltd
Lex Autolease (VC) Ltd
Lex Autolease Carselect Ltd
Lex Autolease Ltd
Lex Vehicle Finance 2 Ltd (In liquidation)
Lex Vehicle Leasing (Holdings) Ltd (in liquidation)
Lex Vehicle Leasing Ltd (in liquidation)
Lime Street (Funding) 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 (Branches) Nominees Ltd (in
liquidation)
Lloyds Bank (Colonial & Foreign) Nominees Ltd
Lloyds Bank (Fountainbridge 1) Ltd
Lloyds Bank (Fountainbridge 2) Ltd
Lloyds Bank (I.D.) Nominees Ltd
Lloyds Bank (International Services) Ltd
Lloyds Bank (Stock Exchange Branch) Nominees
Ltd (in liquidation)
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 Corporate Markets
Wertpapierhandelsbank GmbH
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 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 (in
liquidation)
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 GmbH
Lloyds Bank Hill Samuel Holding Company Ltd (in
liquidation)
Lloyds Bank Insurance Services Ltd
Lloyds Bank International Ltd
Lloyds Bank Leasing (No. 6) Ltd
Lloyds Bank Leasing (No. 8) Ltd (In liquidation)
Lloyds Bank Leasing Ltd
Lloyds Bank Maritime Leasing (No. 10) Ltd
Lloyds Bank Maritime Leasing (No. 13) Ltd (In
liquidation)
Lloyds Bank Maritime Leasing (No.16) Ltd (In
liquidation)
Lloyds Bank Maritime Leasing (No. 17) Ltd
Lloyds Bank MTCH Ltd
Lloyds Bank Nominees Ltd
Lloyds Bank Offshore Pension Trust Ltd
Lloyds Bank Pension ABCS (No. 1) LLP
Lloyds Bank Pension ABCS (No. 2) LLP
Lloyds Bank Pension Trust (No. 1) Ltd
Lloyds Bank Pension Trust (No. 2) Ltd
Lloyds Bank Pensions Property (Guernsey) Ltd
Lloyds Bank plc
Lloyds Bank Properties Ltd (in liquidation)
Lloyds Bank Property Company Ltd
Lloyds Bank S.F. Nominees Ltd
Lloyds Bank Subsidiaries Ltd
Lloyds Bank Trustee Services Ltd
Lloyds Banking Group Pensions Trustees Ltd
Lloyds Capital GP Ltd
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
1
40
40
40
41 *
41 *
41 *
41 *
41 *
40
41 *
41 *
41*
40 *
5
1
1
1
1
13
13 i ii x
13
1
1 x
1
1
11
1
13
1
5
5
1
58
13
1
9
43
1
1
1
1
1
1 ^
17
44 *
1
1
1
1 iv
45
1
1
13
1
1
13
59
1
1
58
1
13
1
1
13
13
1
1
1
33
1 *
1 *
1
1
34 i ii
1 ^ x
13
1
1
1
1
1
31 *
13
13
13
58
40
Lloyds Banking Group Annual Report and Accounts 2019 333
Lloyds Engine Capital (No.1) U.S LLC
Lloyds Far East S.A.R.L.
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 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 TSB Pacific Ltd
Lloyds UDT Asset Leasing Ltd (In liquidation)
Lloyds UDT Asset Rentals Ltd (in liquidation)
Lloyds UDT Hiring Ltd (In liquidation)
Lloyds UDT Leasing Ltd
Lloyds UDT Ltd (in liquidation)
Lloyds Your Tomorrow Trustee Ltd
Loans.co.uk Ltd
London Taxi Finance Ltd
London Uberior (L.A.S. Group) Nominees Ltd
Lotus Finance Ltd
LTGP Limited Partnership Incorporated
Mainsearch Company Ltd
Maritime Leasing (No. 19) Ltd
MBNA Direct Ltd
MBNA Europe Finance Ltd
MBNA Europe Holdings Ltd
MBNA Global Services Ltd
MBNA Indian Services Private Ltd (applied for
Strike Off)
MBNA Ltd
MBNA R & L S.A.R.L.
MBNA Receivables Ltd
Membership Services Finance Ltd
Mitre Street Funding S.A.R.L.
Moor Lane Holdings Ltd (in liquidation)
NFU Mutual Finance Ltd
Nominees (Jersey) Ltd
Nordic Leasing Ltd
NWS Trust Ltd
Ocean Leasing (July) Ltd (In liquidation)
Oystercatcher Nominees Ltd (in liquidation)
Oystercatcher Residential Ltd (in liquidation)
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
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
Savban Leasing Ltd
Scotland International Finance B.V.
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 Schroder Personal Wealth (ACD)
Ltd
Scottish Widows Schroder Personal Wealth Ltd
Scottish Widows Schroder Wealth Holdings Ltd
Scottish Widows Services Ltd
Scottish Widows Trustees Ltd
Scottish Widows Unit Funds Ltd
Scottish Widows Unit Trust Managers Ltd
Seabreeze Leasing Ltd
Seaspirit Leasing Ltd
Share Dealing Nominees Ltd
Shogun Finance Ltd
Silentdale Ltd (In liquidation)
St Andrew’s Group Ltd
11 *
56
1
58 i ii vii
58
55
1
8
13
58
1
1
1
37
48
1
1
13
1
13
1
1
1
11
51
13
13
13
1
13
1
47
1 i ii
5 *
50 i ii #
34 *
47
1
47
46
47
47
49
47
53
63
4
56
39
2 i ii vii #
58
1
5
13
13
13
1
54 *
13
13
13
1
1 i ii
5
50 i ii #
2
1
1
28
28
28
28
1
21
54
1
65
1
27
3
54 *
3 i ii x
18
1
3
54
1
1
1 i ii #
3
54
3
45
1
1
4
7 i ii #
13 iv vi
20
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
Sussex County Homes Ltd
Suzuki Financial Services Ltd
SW Funding plc
SW No.1 Ltd
SWAMF (GP) Ltd (in liquidation)
SWAMF Nominee (1) Ltd (in liquidation)
SWAMF Nominee (2) Ltd (in liquidation)
The Agricultural Mortgage Corporation plc
The British Linen Company Ltd
The Mortgage Business plc
Thistle Leasing
Three Copthall Avenue Ltd (in liquidation)
Tower Hill Property Investments (7) Ltd
Tower Hill Property Investments (10) Ltd
Tranquility Leasing Ltd
Uberior (Moorfield) Ltd
Uberior Co-Investments Ltd
Uberior ENA Ltd
Uberior Equity Ltd
Uberior Europe Ltd
Uberior Fund Investments Ltd
Uberior Infrastructure Investments Ltd
Uberior Infrastructure Investments (No.2) Ltd
Uberior Investments Ltd
Uberior Nominees Ltd
Uberior Trading Ltd
Uberior Trustees Ltd
Uberior Ventures Australia Pty Ltd
Uberior Ventures Ltd
UDT Budget Leasing 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
Vine Street IX LP
Ward Nominees (Abingdon) Ltd
Ward Nominees (Birmingham) Ltd
Ward Nominees (Bristol) Ltd
Ward Nominees Ltd
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
20
20
1
5 i ii
57 #
4
50 i ii #
3 #
3
13
13
13
45
5
4
+ *
13
47 #
47 #
1
5
5
5
5
5
5
5
1
5
5 *
5
5 *
8
5
13
13
1
1
70 *
16
41
1
1
1
1
24
24
1 i ii
60
5
1
Subsidiary undertakings
continued
The Group has determined that it has the power
to exercise control over the following entities
without having the majority of the voting rights
of the undertakings. Unless otherwise stated, the
undertakings do not have share capital or the
Group does not hold any shares.
Name of undertaking
Notes
Addison Social Housing Holdings Ltd
Cancara Asset Securitisation Ltd
Cardiff Auto Receivables Securitisation 2018-1 Plc
Cardiff Auto Receivables Securitisation 2019-1 Plc
Cardiff Auto Receivables Securitisation Holdings
Ltd
Celsius European Lux 2 S.A.R.L.
Cheltenham Securities 2017 Ltd
Cheltenham II Securities 2020 DAC
Chepstow Blue Holdings Ltd
Chepstow Blue plc
Chester Asset Options No.2 Ltd
Chester Asset Options No.3 Ltd
Chester Asset Receivables Dealings Issuer Ltd
Chester Asset Securitisation Holdings Ltd
Chester Asset Securitisation Holdings No.2 Ltd
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 Ltd
Deva Financing Holdings Ltd
Deva Financing plc
Deva One Ltd
Deva Three Ltd
Deva Two Ltd
Edgbaston RMBS 2010-1 plc
Edgbaston RMBS Holdings Ltd
Elland RMBS 2018 plc
Elland RMBS Holdings Ltd
Fontwell Securities 2016 Ltd
61
63
44
44
44
30
61
42
44
44
69
64
63
69
63
66
67
66
67
63
44
44
63
63
63
44
44
44
44
61
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. 44) UK Ltd
Gresham Receivables (No. 45) UK Ltd
Gresham Receivables (No. 46) UK Ltd
Gresham Receivables (No. 47) UK Ltd
Gresham Receivables (No. 48) UK Ltd
Guildhall Asset Purchasing Company (No 3) Ltd
Guildhall Asset Purchasing Company (No.11) UK Ltd
Housing Association Risk Transfer 2019 DAC
Leicester Securities 2014 Ltd
Lingfield 2014 I Holdings Ltd
Lingfield 2014 I plc
Lloyds Bank Covered Bonds (Holdings) Ltd
Lloyds Bank Covered Bonds (LM) Ltd
Molineux RMBS 2016-1 plc
Molineux RMBS Holdings Ltd
Penarth Asset Securitisation Holdings Ltd
Penarth Funding 1 Ltd
Penarth Funding 2 Ltd
Penarth Master Issuer plc
Penarth Receivables Trustee Ltd
Permanent Funding (No. 1) Ltd
Permanent Funding (No. 2) Ltd
Permanent Holdings Ltd
Permanent Master Issuer plc
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 Ltd
Salisbury III Securities 2019 DAC
Sandown 2012-2 Holdings Ltd
Sandown 2012-2 plc (in liquidation)
Sandown Gold 2012-1 Holdings Ltd
Sandown Gold 2012-1 plc (in liquidation)
SARL Coliseum
SARL Hiram
SAS Compagnie Fonciere De France
SCI Astoria Invest
SCI De L’Horloge
SCI Equinoxe
SCI Rambuteau CFF
Swan Funding 2 Ltd
Syon Securities 2019 DAC
Thistle Investments (AMC) Ltd
Thistle Investments (ERM) Ltd
Thistle Financing Holdings Ltd
Trinity Financing plc (in liquidation)
Wetherby II Securities 2018 DAC
Wetherby III Securities 2019 DAC
Wetherby Securities 2017 Ltd
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
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
69
69
69
69
69
63
69
42
26
44
44
44
44
44
44
44
44
44
44
44
44
44
44
44
44
44
44
36
61
61
42
44
6
44
6
62
62
62
62
62
62
62
61
42
44
44
44
6
68
42
61
52
15
52
5
47
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
334 Lloyds Banking Group Annual Report and Accounts 2019
Subsidiaries and related undertakings continued
Associated undertakings
The Group has a participating interest in the following undertakings.
Name of undertaking
Addo Food Group (Holdings) Ltd
Addison Social Housing Ltd
Adler & Allan Group Ltd
Archer Topco Ltd
Aghoco 1472 Ltd
Airline Services And Components Group Ltd
Allan Water Homes (Heartlands) Ltd
Angus International Safety Group Ltd
Applied Composites Group Ltd (in liquidation)
Aquila Bidco Ltd
Aqualisa Holdings (International) Ltd
Asset Solutions Group Ltd
Babble Cloud Holdings Ltd
Bacchus Newco Ltd
Backhouse (Westbury) JV Ltd
Backhouse (Castle Cary) JV Ltd
Bergamot Ventures Ltd
Blue Bay Travel Group Ltd
BoS Mezzanine Partners Fund LP
Bowbridge Homes (Raunds) Ltd
Brington North Holdco Ltd
Caedmon Homes (St Johns Mews) Ltd
Caedmon Homes Ltd
Caedmon Homes Kirby Hill Ltd
Cardel Group Ltd
CIPHR Group Ltd
City & General Securities Ltd
City Living (Midlands) Ltd
Citysprint (UK) Holdings Ltd
Cleanslate Ashford Ltd
Connery Ltd
Croud Holdings Ltd
Cruden Homes (Aberlady) Ltd
Cruden Homes (Longniddry) Ltd
D.U.K.E Real Estate Ltd
Delancy Arnold UK Ltd (in liquidation)
Delancy Rolls UK Ltd (in liquidation)
Devonshire Homes (Cullompton) Ltd
Devonshire Homes (Landkey) Ltd
Devonshire Homes (St Austell) Ltd
DHHG1 Ltd
Dino Newco Ltd
Duchy Homes (Bowgreave) Ltd
Duchy Homes (North Cave) Ltd
Duchy Homes (Penistone) Ltd
Duchy Homes (Scawthorpe) Ltd
Duchy Homes (Winterley) Ltd
Duncan and Todd Holdings Ltd
Ediston Homes Sauchie Ltd
Eley Group Ltd
Ellis Whittam (Holdings) Ltd
Ensco 997 Ltd
Ensco 1314 Ltd
Ensco 1320 Ltd
Ensco 1322 Ltd
Ensco 1327 Ltd
Ensco 1337 Ltd
Ensek Holdings Ltd
Erris Homes (Almondbury) Ltd
Escapade Bidco Ltd
Everest Acquisition Company Ltd
Express Engineering (Group) Ltd
FDL Salterns Ltd
FHR European Ventures LLP
Fishawack Limited
Galion (Lakeview) Ltd
Ginger Acquisition Company Ltd
Great Wigmore Property Ltd
Hamsard 3468 Ltd
Hamsard 3541 Ltd
Hedge End Place (Durkan) LLP
Hedge End Place Hold Co Ltd
Highlands Bidco Ltd
Hillcrest Homes (Hurst Green) Ltd
Hollins Homes (Aston) Ltd
Hollins Homes (Newton) Ltd
Homes By Carlton (MSTG1) Ltd
HTF Finco Ltd (applied for strike off)
Iglufastnet Ltd
Ingleby (2016) Ltd
James Taylor Homes (Kingston) Ltd
Jupiter Bidco Ltd
Kenmore Capital 2 Ltd (In liquidation)
Kenmore Capital 3 Ltd (In receivership)
% of share class
held by immediate
parent company (or
by the Group
where this varies)
76.85%
20%
89%
99%
89.25%
94.45%
50%
67.03%
67.03%
85.76%
89.25%
89.25%
76.12%
89.25%
89.25%
89.25%
89.25%
50%
50%
50%
99%
n/a
50%
50%
50%
50%
50%
89.25%
89.25%
100%
50%
82.03%
91.22%
50%
20%
99%
50%
50%
100%
50%
50%
50%
50%
50%
50%
89.25%
50%
50%
50%
50%
50%
89.25%
50%
85.86%
89.25%
30.76%
32.74%
99%
99%
99%
99%
99%
89.25%
50%
99%
99%
89.25%
99%
99%
99%
99.35%
50%
n/a
89.25%
50%
89.25%
50%
89.25%
89.25%
99%
n/a
50%
99%
50%
50%
50%
50%
33.3%
89.25%
89.25%
50%
78.29%
100%
100%
Registered office address (UK unless stated otherwise)
Queens Drive, Nottingham, NG2 1LU
35 Great St Helen’s, London, EC3A 6AP
80 Station Parade, Harrogate, HG1 1HQ
c/o Crestbridge Limited, 47 Esplanade, St Helier, Jersey JE1 0BD
58 Evans Road, Liverpool, L24 9PB
Squire Patton Boggs (UK) LLP (Ref: Csu) Rutland House 148 Edmund Street Birmingham B3 2JR
24B Kenilworth Road, Bridge Of Allan, Stirling, Scotland, FK9 4DU
Station Road, High Bentham, Near Lancaster, LA2 7NA
Notes
i &
i &
xvi &
i &
i &
i
xvii
xvi &
Westerham Trade Centre, The Flyers Way, Westerham, TN16 1DE
Victoria Works, Thrumpton Lane, Retford, DN22 6HH
Jubilee Buildings, Victoria Street, Douglas IM1 2SH Isle of Man
xvii &
xvii
iv
xvii
xxi &
Osprey House Crayfields Business Park, New Mills Road, Orpington, Kent, BR5 3QJ, United Kingdom xvii &
Bury House, 31 Bury Street, London, EC3A 5AR
Park Lane Industrial Estates, Park Lane Off Wigan Road, Ashton in Makerfield, Wigan, WN4 0BZ,United
i &
i &
Kingdon
DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United Kingdom
DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United Kingdom
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
5 Adelaide House, Corby Gate Business Park, Priors Haw Road, Corby, NN15 5JG
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
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
44 Esplanade St Helier Jersey JE4 9WG
First Floor, 39 Tabernacle Street, London EC2A 4AA
Baberton House, Juniper Green, Edinburgh, EH14 3HN, United Kingdom
Baberton House, Juniper Green, Edinburgh, EH14 3HN, United Kingdom
1st Floor, Exchange Place, 3 Semple Street, Edinburgh, EH3 8BL
4th Floor, 4 Victoria Street, St Albans, Hertfordshire, AL1 3T
4th Floor, 4 Victoria Street, St Albans, Hertfordshire, AL1 3T
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
Alexander Fleming House, 8, Southfield Drive, Elgin, Morayshire, IV30 6GR
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
Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH
Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH
Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH
6 Queens Road, Aberdeen, 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
90 Tottenham Court Road, London W1T 4TJ
One Eleven, Edmund Street, Birmingham B3 2HJ
Newbury House, 20 Kings Road West, Newbury, Berkshire, RG14 5XR
One Eleven, Edmund Street, Birmingham B3 2HJ
Cotton Tree Lane, Colne, BB8 7BH
The Watercourt, 116-118 Canal Street, Nottingham, NG1 7HF
Unit 11 Acorn Business Park, Killingbeck Drive, Leeds, LS14 6UF, United Kingdom
2nd Floor Waverley House, 7-12 Noel Street, London W1F 8GQ
Freetrade Exchange, 37 Peter Street, Manchester, M2 5GB
Kingsway North, Team Valley Trading Estate, Gateshead, NE11 0EG
2 Poole Road, Bournemouth, BH2 5QY
CMS Cameron Mckenna LLP, 78 Cannon Street, London, EC4N 6AF
3 Booths Park, Booth Hall, Knutsford WA16 8GS
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
Sterling House, Grimbald Crag Close, Knarebourgh HG5 8PJ
The Hub, Gelderd Lane, Leeds, England, LS12 6AL
4 Elstree Gate, Elstree Way, Borehamwood, Hertfordshire, WD6 1JD
25 Gresham Street, London, EC2V 7HN
Commsworld House, Peffer Place, Edinburgh EH16 4BB
Mynshulls House, 14 Cateaton Street, Manchester, M3 1SQ
Suite 4 No. 1 King Street, Manchester, M2 6AW, United Kingdom
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
Unit 22, Lodge Way, Lodge Farm Industrial Estate, Northampton, NN5 7US
James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom
The Bungalow, Church Lane, Hixon, Stafford, ST18 0PS
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
i
i
ii
xvii &
*
i
~
i
i
i
xvii &
i &
ii &
i
xvii
xvi &
i
&
i
i
i
ii ~
ii
ii
i
i
i
i
i &
i
i
i
i
i
i &
i
i &
i &
ix
xiv &
i &
i &
i &
i &
i &
xvii &
i
xvii
xvi &
i &
i
xvii
xvi
iii &
i
* &
i &
i
i &
&
xvii
xxii &
i &
*
~
i
i
i
i
i
i &
i &
xvii &
i
i &
ii ~
ii ~
Kenmore Capital Ltd (In liquidation)
Keoghs Topco Ltd
KHL 2017 Ltd
KITE Topco Ltd
LF (Holdco) Ltd
Linley & Simpson Holdings Ltd
London Topco Ltd
Mableford Ltd
Magicard Holdings Ltd
MFS Groupco Ltd
Mitrefinch Holdings Ltd
Motability Operations Group plc
Neilson Active Holidays Group Ltd
Northern Edge Ltd
Omnium Leasing Company
Onapp (Topco) II Ltd
Onapp (Topco) Ltd
Osprey Aviation Services (UK) Ltd
Paladone Holdings Ltd
Panther Partners Ltd
Patrick Parsons Holdings Ltd
Pertemps Network Group Ltd
Personal Touch Holdings Ltd (in liquidation)
PIHL Equity Administration Ltd
PIMCO (Holdings) Ltd
Prestbury 1 Limited Partnership
Project Belize Ltd
Project Chestnut Topco Ltd
Project Chicago Newco Ltd
Project Polka TopcoLtd
Project Dart Topco Ltd
Project Sketch Ltd
Quantum (Flimwell) Ltd
Quentin Park (Cumwhinton) Ltd
Ramco Acquisition Ltd
Right Choice Holdings Ltd
Rocket Science Holdings Ltd
Rolls Development UK Ltd (In Liquidation)
Sanders Brow (Armathwaite) Ltd
Scenic Topco Ltd
SDB1 Ltd
Seahawk Bidco Ltd
SHOO 802AA Ltd
Sigmat Group Ltd
SOLO Topco Ltd
Specialist People Services Group Ltd
SSP Topco Ltd
Stewart Milne (Glasgow) Ltd
Stewart Milne (West) Ltd
Stratus (Holdings) Ltd
Stroma Group Ltd
Stonewood Partnerships (Brook Farm) Ltd
Temple Topco Ltd
The Exceed Partnership LP
The Great Wigmore Partnership (G.P.) Ltd
The Great Wigmore Partnership
The Orchards (Burgh by Sands) Ltd
The Power Industrial Group Ltd (In liquidation)
Thistlerow Ltd
Timec 1634 Ltd
Timec 1667 Ltd
Travellers Cheque Associates Ltd
United House Group Holdings Ltd
Whittington Facilities Ltd (applied for strike off)
Williams Topco Ltd
ZWPV Ltd
100%
99%
84.4%
84.4%
89.25%
99%
89.25%
62.82%
50%
89.25%
89.25%
99%
89.25%
20% (40%)
20% (40%)
65.29%
39.4%
39%
82.5%
100%
82.5%
82.5%
89.25%
89.25%
89.25%
89%
89%
89.25%
93.83%
49.9%
35%
82.5%
n/a
89.25%
99%
89.25%
89.25%
97.92%
88.30%
50%
50%
89.45%
89.45%
0.18%
89.25%
99.17%
50%
50%
89.25%
99%
89.25%
89.25%
89.25%
89.25%
89.25%
99%
82.5%
82.5%
82.5%
89.25%
100%
100%
82.5%
82.5%
89%
50%
89.25%
n/a
50%
n/a
50%
82.5%
82.5%
50%
89.25%
99%
36%
82.5%
100%
89.25%
89.25%
Lloyds Banking Group Annual Report and Accounts 2019 335
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
2 The Parklands, Bolton, Lancashire, BL6 4SE
One Eleven, Edmund Street, Birmingham, England, B3 2HJ
Winchester House, Oxford Science Park, Heatley Road, Oxford, OX4 4GE
Price House, 37 Stoney Street, Nottingham NG1 1LS
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
York House, Wetherby Road, Long Marston YO26 7NH
Mitrefinch House, Green Lane Trading Estate, Clifton, York, North Yorkshire, YO30 5YY
City Gate House, 22 Southwark Bridge Road, London, SE1 9HB
ii ~
ii
i
ii &
xvi &
i &
i &
i &
i
xvii &
xvi
i &
i &
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ
Apex House, Dolphin Way, Shoreham-by-Sea, West Sussex, BN43 6NZ, United Kingdom
16 Kirby Street, London, EC1N 8TS
Locksview, Brighton Marina, Brighton, BN2 5HA
The Beacon, 176 St. Vincent Street, Glasgow, G2 5SG
N/A
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ
iv
i &
ii &
+
i &
iv
i
ii &
xvii &
xvi
i &
xvii &
xvi
xvii &
Fourth Floor Central Square, Forth Street, Newcastle upon Tyne NE1 3PJ
ii &
Meriden Hall, Main Road, Meriden, Coventry
i &
Two Snowhill, Snow Hill Queensway, Birmingham, West Midlands, B4 6GA
ii
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
i &
Four Brindleyplace, Birmingham, B1 2HZ, United Kingdom
* &
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
i &
Sawley Marina, Long Eaton, Nottinghamshire, NG10 3AE
i &
Alton House, Alton Business Park, Alton Road, Ross-on-Wye, HR9 5BP
Church Lane, Church Lane, Norton, Worcester, WR5 2PR
i &
Roundhouse Road, Faverdale Industrial Estate, Darlington, County Durham, DL3 0UR, United Kingdom ii &
i &
3 Long Acres Willow Farm Castle Donington Derbyshire DE74 2UG
i &
11 Vantage Way, Erdington, Birmingham, B24 9GZ
i
Kings Parade, Lower Coombe Street, Croydon, CR0 1AA
i
4 Cowper Road, Gilwilly Industrial Estate, Penrith CA11 9BN
xv
6 Queens Road, Aberdeen, Scotland, AB15 4ZT
xi
xviii &
i &
xvii &
ii
i
i &
i &
xvii &
xvii &
i &
xvii
xvi
i
xvii
xvi
iv &
i &
i ~
i ~
i
ii &
xvii &
i
i &
*
i ii
*
i
i &
xvii
i
xvii &
i &
St James House, 27-43 Eastern Road, Romford, Essex, United Kingdon, RM1 3NH
Unit 2, Origin Business Park, Rinasford Road, Park Royal, London NW10 7FW
4th Floor , 4 Victoria Square, St Ablans, Hertfordhsire, AL1 3TF, United Kingdom
4 Cowper Road, Gilwilly Industrial Estate, Penrith CA11 9BN
Unit 1B, Pentwyn Business Centre, Wharfedale Road, Cardiff, Wales, CF23 7HB
Thompson Close, Whittington Moor, Chesterfield, S41 9AZ
Unit 2 Springfield Court, Summerfield Road, Bolton, BL3 2NT, United Kingdom
Burleighfield House, London Road, Loudwater, Bucks. HP10 9RF
Birkbecks, Water Street, Skipton, North Yorkshire, BD23 1PB
Unit 4, Pioneer Way, Castleford, West Yorkshire, WF10 5QU
The Stonewood Office West Yatton Lane, Castle Combe, Chippenham SN14 7EY
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
4 Cowper Road, Gilwilly Industrial Estate, Penrith CH11 9BN
Deloitte LLP, 1 City Square, Leeds, LS1 2AL
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
Radleigh House 1 Golf Road, Clarkston, Glasgow, G76 7HU
5 Silverton Court, Cramlington, Northumberland, NE23 7RY, United Kingdom
Unit 7 & 8 Diamond Court, Newcastle Upon Tyne, NE3 2EN
Belgrave House, 76 Buckingham Palace Road, London, SW1W 9AX
26 Kings Hill Avenue, Kings Hill, West Malling, Kent, ME19 4AE
Third Floor Broad Quay House, Prince Street, Bristol, BS1 4DJ
The Old Post Office, St. Nicholas Street, Newcastle Upon Tyne, United Kingdom, NE1 1RH
Zip World Base Camp, Denbigh Street, Llanrwst, LL26 0LL
Onecom House, 4400 Parkway, Whiteley, Fareham, Hampshire, PO15 7FJ
7 Bradford Business Park, Kingsgate, Bradford, BD1 4SJ
i &
v
i &
i &
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
336 Lloyds Banking Group Annual Report and Accounts 2019
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.
Cautious Solution
Discovery Solution
Strategic Solution
Dynamic Solution
Defensive Solution
Adventurous Solution
JPM SYSTEMATIC ALPHA
Name of undertaking
% of fund held by
immediate parent
(or by the Group
where this varies
Notes
ABERDEEN INVESTMENT ICVC
Aberdeen European Property Share Fund
Aberdeen Sterling Bond Fund
Aberdeen European Global High Yield Bond Fund
Aberdeen Sterling Opportunistic Corporate Bond
Fund
37%
82%
23%
34%
ABERDEEN INVESTMENTS ICVC II
Aberdeen Global Corporate Bond Tracker Fund
99%
ABERDEEN INVESTMENT ICVC III
Aberdeen Global Emerging Markets Quantitative
Equity Fund
ABERDEEN LIQUIDITY FUND (LUX)
Aberdeen Liquidity Fund (Lux) – Sterling Fund
Aberdeen Liquidity Fund (Lux) – Ultra Short Duration
Sterling Fund
ABERDEEN PRIVATE EQUITY FUND OF FUNDS (2007)
PLC
ACS POOLED PROPERTY
Scottish Widows Pooled Property ACS Fund
Scottish Widows Pooled Property ACS Fund2
AGFE UK REAL ESTATE SENIOR DEBT FUND LP
61%
22%
45%
96%
100%
100%
78%
BLACKROCK BALANCED GROWTH PORTFOLIO FUND 36%
BLACKROCK UK SMALLER COMPANIES FUND
BNY MELLON INVESTMENTS FUNDS ICVC
BNY Mellon US Opportunities Fund
Insight Global Multi-Strategy Fund
Insight Global Absolute Return Fund
Newton Multi-Asset Growth Fund
Newton UK Opportunities Fund
Newton UK Income Fund
BNP PARIBAS INSTICASH
BNP Paribas InstiCash GBP
BNY MELLON MANAGED FUNDS II
BNY Mellon MF II – Absolute Insight Fund
FIDELITY ACTIVE STRATEGY
FAST-UK 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
21%
37%
44%
75%
26%
54%
27%
45%
84%
32%
94%
93%
97%
95%
81%
94%
53%
95%
52%
83%
39%
66%
51%
61%
62%
57%
48%
36%
39%
HLE ACTIVE MANAGED PORTFOLIO AUSGEWOGEN
49%
INVESCO AMERICAN INVESTMENT SERIES
Invesco US Equity Fund (UK)
21%
INVESCO PERPETUAL FAR EASTERN INVESTMENT
SERIES
Invesco Perpetual Asian Equity Income Fund
23%
INVESTMENT PORTFOLIO ICVC
IPS Income Portfolio
IPS Growth Portfolio
Balanced Solution
22%
24%
42%
8
8
8
7
3
2
11
9
9
10
5
10
24
1
1
1
1
1
18
18
18
12
12
22
32%
41%
53%
55%
70%
76%
21%
89%
72%
62%
49%
81%
53%
34%
82%
30%
20%
23%
22%
LAZARD DEVELOPING MARKETS FUND
MGI FUNDS PLC
Mercer Diversified Retirement
Mercer Multi Asset Defensive
Mercer Multi Asset Growth
Mercer Multi Asset High Growth
Mercer Multi Asset Moderate Growth
MGI UK Equity
MULTI MANAGER ICVC
Multi Manager UK Equity Growth Fund
Multi Manager UK Equity Income Fund
Multi Manager UK Equity Focus Fund
NORDEA 1-GBP DIVERSIFIED RETURN FUND
PAN EUROPEAN URBAN RETAIL FUND
PEMBERTON EUROPEAN MID-MARKET DEBT FUND II
100%
RUSSELL INVESTMENT COMPANY PLC
Russell Euro Fixed Income Fund
Russell US Bond Fund
Russell Sterling Bond Fund
SCHRODER GILT AND FIXED INTEREST FUND
SCHRODER FUNDS ICAV
Schroder Sterling Liquidity Fund
SCHRODER INTERNATIONAL SELECTION FUND SICAV
Emerging Market Bond Fund
SCOTTISH WIDOWS INCOME AND GROWTH FUNDS
ICVC
UK Index Linked Gilt Fund
Corporate Bond PPF Fund
SW Corporate Bond Tracker
Scottish Widows GTAA 1
Corporate Bond 1 Fund
Balanced Growth Fund
Adventurous Growth Fund
SCOTTISH WIDOWS INVESTMENT SOLUTIONS FUNDS
ICVC
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
32%
54%
42%
24%
46%
59%
100%
100%
100%
84%
98%
27%
73%
96%
99%
87%
100%
88%
96%
95%
98%
96%
93%
74%
83%
72%
60%
99%
92%
55%
89%
84%
76%
94%
92%
72%
22%
46%
96%
88%
48%
62%
62%
97%
28%
65%
72%
78%
93%
26
27
28
22
14
19
13
15
16
23
25
2
2
2
2
2
2
4
Lloyds Banking Group Annual Report and Accounts 2019 337
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) 40a Station Road Upminster Essex RM14 2TR
(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) T he Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801
(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) Corporation Service Company, 251 Little Falls Drive, Wilmington, DE 19808, USA
(25) Corporation Service Company, Suite 400, 2711 Centre Road, Wilmington, DE 19805,
United States
(26) 1 Grant’s Row, Lower Mount Street, Dublin 2, Ireland
(27) 1, Avenue du Bois, Luxembourg, L – 1251, Luxembourg
(28) SAB Formalities, 23 Rue de Roule, Paris, 75001, France
(29) c/o PATRIZIA, 166 Sloane Street, London, SW1X 9QF
(30) 20 Rue de la Poste, L-2346 Luxembourg
(31) 2nd Floor, 21 Palmer Street, London, SW1H 0AD
(32) McStay Luby, Dargan House, 21-23 Fenian Street, Dublin 2, Ireland
(33) 3rd Floor, Standard Bank House, 47-49 La Motte Street, St Helier, JE2 4SZ, Jersey
(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
(36) 47 Esplanade, St. Helier, Jersey, JE1 0BD
(37) Sarnia House, Le Truchot, St. Peter Port, Guernsey, GY1 4EF
(38) 296 Doctor Chucri Zaidan Avenue, Lamb Village, Sao Paulo, 04583-110 Brazil
(39) 2nd Floor, Liberation House, Castle Street, St Helier, JE1 1EY, Jersey
(40) 1 Vine Street, London, W1J 0AH
(41) 39 Queens Road, Aberdeen, AB15 4ZN
(42) 5th Floor, The Exchange, George’s Dock, IFSC, Dublin 1, D01W3P9
(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) Glategny Court, Glategny Esplanade, St Peter Port, GY1 3HQ, Guernsey
(47) Cawley House, Chester Business Park, Chester, CH4 9FB, United Kingdom
(48) 6/12, Primrose Road, , Bangalore , 560025, India
(49) The Residency, 7th Floor, 133/1 Residency Road, Bangalore, 560025, India
(50) St William House, Tresillian Terrace, Cardiff, CF10 5BH
(51) 18th Floor, United Centre, 95 Queensway, Hong Kong
(52) Pentagon House, 52-54 Southwark Street, London, SE1 1UN
(53) 1A Heienhaff, Senningerberg, L-1736, Luxembourg
(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) 8 Avenue Hoche, 75008, Paris, France
(63) 26 New Street St Helier Jersey JE2 3RA
(64) Fifth Floor, 100 Wood Street, London, EC2V 7EX, United Kingdom
(65) Atria One, 144 Morrison Street, Edinburgh, EH3 8EB
(66) Naritaweg 165, 1043 BW, Amsterdam, Netherlands
(67) Calle Pinar 7, 5º 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
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
US Tracker
CMIG Focus Euro Bond
THE TM LEVITAS FUNDS
TM Levitas A Fund
TM Levitas B Fund
UBS INVESTMENT FUNDS ICVC
UBS Global Optimal Fund
UBS UK Opportunities Fund
ZURICH HORIZON MULTI ASSET FUND V
96%
97%
100%
100%
100%
100%
86%
100%
100%
98%
77%
90%
96%
80%
63%
95%
81%
99%
31%
100%
42%
37%
29%
38%
42%
4
4
4
6
21
17
20
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
(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 Ltd, 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) 2-4, Rue Eugene Ruppert L-2453, Luxembourg
(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 Ltd, 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) The Grange, Bishops Cleave, Cheltenham, GL52 8XX
(21) Thesis Unit Trust Management Ltd, Exchange Building, St. John’s Street, Chichester, West
Sussex PO19 1UP
(22) 25 Gresham Street, London EC2V 7HN
(23) Schroder Funds ICAV, 10 Earlsfort Terrace, Dublin 2, Ireland D02 T380
(24) 2a, Rue Albert Borschette, BP 2174, L-1021, Luxembourg
(25) 5, Rue Hohenhof, L-1736, Senningerberg, Luxembourg
(26) JPMorgan Asset Management (Europe) S.A.R.L., 6, Route de Treves, L-2633,
Senningerberg, Luxembourg
(27) 50 Stratton Street, London, W1J 8LL
(28) 70 Sir John Rogersons Quay, Dublin 2, Ireland
* 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) Preferred A Ordinary Shares
(x) Redeemable Preference Shares
(xi) A4 Ordinary Shares
(xii) Redeemable Ordinary Shares
(xiii) Common Stock
(xiv) Preferred B Ordinary Shares
(xv) A3 Ordinary Shares
(xvi) A2 Ordinary Shares
(xvii) A1 Ordinary Shares
(xviii) Z Ordinary Shares
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