Lloyds Banking Group Annual Report and Accounts 2020
1
Lloyds Banking Group
Annual Report and Accounts 2020
Our Group
We are the largest UK retail and
commercial financial services provider
with over 25 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 the largest
branch network and digital bank in
the UK, with 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,
while retaining separate sections
for our environmental and social
performance for ease of reference.
As well as reporting our financial
results, we also report on our
strategy and approach to operating
responsibly while taking into account
relevant economic, political, social,
regulatory and environmental factors.
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 347.
Snap happy
As we did previously, in 2020, we offered
colleagues from across the Group an
opportunity to submit photographs
that they felt represented their year. The
winning images have been highlighted on
the divider pages of this report alongside
the photographer's name.
The 2020 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
Robin Budenberg
Chair
Lloyds Banking Group
23 February 2021
Group performance
Continued strategic progress with financial
performance impacted by the coronavirus
pandemic, deterioration of the economic outlook
and lower interest rates
£1.4bn
0.57p
(54)%
Statutory profit after tax
reduced significantly; largely
due to increased impairments
given the deterioration in the
economic outlook
Ordinary dividend per share,
given the Group’s strong
capital position dividends
have resumed at the
maximum allowed
55.3%
6.8pp
Cost:income ratio deteriorated
due to lower income
3.7%
(4.1)pp
Return on tangible equity
of 3.7 per cent given lower
statutory profit
17.4m
+6.1%
Digitally active customers
continued to increase and we
remain the largest digital bank
in the UK
81%
+7pp
Colleague engagement
remains at its highest ever
level with our employee
engagement index seven
points higher than 2019
Inside this year’s Annual Report
Strategic report
Our COVID response
Chair's statement
Group Chief Executive’s review
Our business model
Key performance indicators
Our progress in building a sustainable
and responsible business
Our external environment
Strategic review 2021
Our key stakeholders and
Board engagement
Financial performance overview
Risk overview
Financial results
Summary of Group results
Divisional results
Other financial information
Governance
A letter from our Chair
Our Board
Group Executive Committee
Corporate governance report
01
04
08
12
14
16
32
36
46
52
56
62
73
77
81
82
84
86
Directors’ report
Directors’ remuneration report
Other remuneration disclosures
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
111
115
138
144
147
150
152
153
206
215
335
344
346
347
348
348
349
Lloyds Banking Group Annual Report and Accounts 2020
01
Our COVID response
During an extraordinarily challenging time we
are Helping Britain Recover, as part of our
Group purpose of Helping Britain Prosper.
We have lent over £12 billion to help businesses
bounce back and granted around 1.3 million
payment holidays to support customers, while
increasing customer satisfaction, strengthening
our franchise with growth in deposits and further
enhancing our leading digital proposition, which
now serves 17.4 million customers.
Over the following pages and throughout
this report we highlight what Helping Britain
Recover means and how we are supporting
people, businesses and communities to emerge
stronger than before.
Our Group
We have and will continue to support our
customers and colleagues to get through
these extraordinary times.
We have an important role to play in
Britain’s recovery, working with others to
help build an inclusive, greener and more
resilient economy for the whole of the UK.
Read more on how we're supporting
the UK through these extraordinary
times on the pages that follow.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
02 Lloyds Banking Group Annual Report and Accounts 2020
Our COVID response continued
Supporting our stakeholders during the COVID crisis
Supporting
businesses
As a result of the lockdowns, businesses are facing
challenges like never before. Many have been
forced to close and furlough their staff, while others
have had to adapt to external changes. Whatever
situation our business customers have faced, we’ve
stood by their side.
We have supported them to obtain more than
£12 billion in finance through the Government-
backed lending schemes, helped them to manage
their cash flow by granting around 34,000 capital
repayment holidays and helped their working
capital by agreeing around 22,000 fee-free
overdrafts to businesses.
We are doing our best to help and advise British
businesses of all sizes so that as lockdown eases
they can adapt their business models to re-open
safely and profitably.
The public health crisis caused by coronavirus has
affected all of us and the society in which we live.
Our priority is to help the UK recover in an effective,
inclusive and sustainable way.
We’re giving our customers the flexibility they need
to manage their finances, while helping protect them
from fraud.
We’re working with the Government to provide loans
and working capital support for the businesses of
Britain, at the same time as providing the sector-
by-sector expertise needed to help them adapt for
success.
We’re keeping our colleagues as safe as we can
while they provide essential services to people across
the UK. And we’re working with the Government
to get practical help to those who need it most, in
communities across all the regions of the UK.
For over 320 years, with our unique family of brands,
we have supported Britain through the good times
and the bad and this time is no different. In 2021, we
will continue to do all we can to Help Britain Recover,
as this is in the best interests of all our stakeholders.
More information on our next chapter on pages
36 to 45.
Supporting
customers
Many people continue to feel the impact of the past
year on their personal finances. We have approved
around 1.3 million payment holidays for
customers who have mortgages, personal loans,
credit cards and car finance with us since the start
of the outbreak, and are helping our customers to
replan their finances.
Our dedicated telephone services, with extended
opening hours for the over 70s and NHS workers,
have taken around 880,000 calls since the end
of March, allowing us to prioritise support for these
customers and their urgent needs. We’ve also
proactively made over 750,000 calls to check
on the wellbeing of our vulnerable customers.
These services will continue.
Lloyds Banking Group Annual Report and Accounts 2020
03
Supporting
communities
The effects of coronavirus will remain for some time to
come; that’s why we’re providing extra practical and
emotional support for the most vulnerable in society.
Through a range of new and existing partnerships
we are providing extra capacity in friendship
services, mental health programmes and digital skills
training. We have also provided £25.5 million
to our charitable Foundations in 2020 and
have guaranteed the same funding for 2021, to keep
those who are most isolated connected and give
people support when they need it most.
Supporting
our colleagues
We’re taking every precaution to protect our
colleagues. More than 50,000 colleagues
worked from home for most of 2020, up from
15,000 before the pandemic, and this will continue,
until at least Summer 2021.
Where our colleagues are providing an essential
service for the UK, such as in our call centres and
branches, we are following social distancing rules,
to keep both our colleagues and customers safe.
Board oversight of the pandemic in
2020 can be found on pages 90 and 91
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04 Lloyds Banking Group Annual Report and Accounts 2020
Chair's statement
Our unique position allows us to Help Britain Recover
and play our part in returning the UK to prosperity
The Group has been playing a
leading role in the immediate
national response, supporting
customers, colleagues and our
communities through the crisis
and beyond.
Robin Budenberg
Chair
Overview
My first annual statement to you as Chair
comes at the end of what has been a
tumultuous and extraordinary year for both
the UK and Lloyds Banking Group. It has been
a year of unprecedented challenge in which
many people have suffered but also one in
which the Group has proved it can make a
difference and truly support its customers
and the UK economy.
Having joined the Board in October and
taken over the role of Chair from 1 January
2021, I have been hugely impressed with the
response of the Group to the COVID-19 crisis
and the achievements during the last year.
I am particularly proud of our workforce and
the continued commitment and dedication
in supporting our customers and each other.
We provided over £12 billion of lending to
businesses through Government-backed
schemes and granted around 1.3 million
payment holidays to retail customers,
providing vital support at a time of crisis.
Helping Britain Recover
and Strategic Review 2021
The role of Chair is to help ensure that the
Board and the executive team are focusing
on the right issues and developing the right
purpose and strategy, executing it effectively
and with the right values and cultures as
an organisation.
We recognise that the focus of the Group's
purpose must evolve in response to the
current environment and changing customer
needs and expectations. Many individual and
business customers have been impacted by
the crisis and we have a responsibility, as the
UK’s largest bank, to help these customers
and Help Britain Recover. This is completely
aligned with our ongoing purpose of Helping
Britain Prosper, and is in the best interests of
all stakeholders.
In September 2020, the Group launched
The Big Conversation and since then we have
brought together more than 900 people,
including industry leaders, local politicians
and expert voices in virtual sessions around
the country to discuss what the pandemic has
meant for them and what support they need
to survive and thrive.
These five priorities for 2021 consist of a number
of commitments in areas where we can make
the biggest difference, create value for our
customers and, given they will enable us to
build a sustainable and inclusive business, will
also benefit shareholders. Further detail on our
purpose and the areas of focus are provided on
pages 38 and 39.
We have subsequently published the
findings which can provide insight and
direction to different stakeholder groups
as we explore together how we can help
to rebuild the economy. We are privileged
to be able to use our comprehensive
regional and national network and our
sector expertise to bring together people
with a diverse range of perspectives.
Although the next couple of years will be
challenging, the pandemic provides a unique
opportunity for banks to evidence their
importance to customers and the economy
and we will continue to play the important role
expected of us as the UK’s leading financial
services provider. We will help Britain rebuild
sustainably by playing our part in the country’s
economic recovery.
Helping Britain Recover is at the heart of
Strategic Review 2021, which launched the
same day as our full year results, in February
2021 and will further enhance our capabilities
to create the UK's preferred financial partner
for personal customers and the best bank for
business. Having been heavily involved in the
development of the evolution of strategy, the
Board is excited about the opportunities for
the Group.
Given the Group’s unique position in the UK
economy, as part of Strategic Review 2021, we
have identified five areas where we can make
a transformational societal impact and which
are also deeply integrated into the strategic
development of our business: Help rebuild
households’ financial health and wellbeing,
Support businesses to recover, adapt and
grow, Expand availability of affordable and
quality homes, Accelerate the transition to a
low carbon economy and Build an inclusive
society and organisation.
Continued transformation
of the Group
The Group’s significant investment in
transformation and digital in recent years has
clearly positioned us well. It is also clear that
we will need to continue to evolve and invest
to build on this advantage. The COVID-19
crisis, which is having an unprecedented
impact on the overall economy, on businesses
across sectors, and on how we all live our lives,
has accelerated the pace of change in the
banking industry. It has also highlighted new
emerging trends that will shape the industry
in the future.
To compete effectively against new
competitors we will need to continue to
modernise our technology architecture,
transform how we work and enhance our use
of data across the business. As an efficient,
scale operator with strong multi-brand, multi-
channel capabilities and a fantastic customer
franchise we have significant advantages,
but sustainable success will only be possible
through further embracing technology and
enhancing our customer propositions.
To do this, we need to continue our journey
to become a much more flexible organisation
with a more agile culture and faster decision-
making. We will need to reinvent the way we
do business and are increasingly likely to
partner with specialist technology and fintech
providers. The first stages of this approach are
laid out in our evolution of strategy, Strategic
Review 2021. I believe it is a solid foundation
for our continued transformation and
delivering strong and superior returns.
Lloyds Banking Group Annual Report and Accounts 2020
05
STRATEGIC REVIEW 2021: BUILDING THE UK'S PREFERRED FINANCIAL PARTNER
Lloyds Banking Group is a customer focused, sustainable,
efficient and low risk UK financial services leader with a
clear purpose of Helping Britain Prosper.
Given the pandemic and our unique position at the heart
of the UK economy, our priority for the next phase of our
strategy is to focus on Helping Britain Recover.
Strategic Review 2021 is focused on delivering
co-ordinated growth opportunities across our core
business areas to create the UK’s preferred financial partner
for personal customers and the best bank for business. The
strategy is supported by further investment in four specific
capabilities: a modernised technology architecture,
integrated payments, creating a data-driven organisation
and reimagined ways of working
Helping Britain Recover: We have identified five priority areas,
based on where we feel we can make the most difference
Help rebuild
households’ financial
health and wellbeing
Support businesses
to recover, adapt
and grow
Expand availability of
affordable and quality
homes
Accelerate the
transition to a low
carbon economy
Build an inclusive
society and
organisation
We will develop
appropriate recovery
plans for our
customers, supported
by 1,100 business
specialists
We will support at least
75,000 UK businesses
to start up in 2021
We will help at
least 185,000 small
businesses boost their
digital capability
We will have over
6,500 colleagues
trained to support
customers to build
their financial resilience
We will expand our
existing ‘Mental
Health Accessible’
accreditation for Lloyds
Bank across Halifax
and Bank of Scotland
We will partner with
independent debt
advice organisations
to ensure customers
have access to
practical support
We will provide
£10 billion of lending
to first-time-buyers
and lead a national
conversation on access
to the housing market
We will provide
£1.5 billion of new
funding support,
incl. £500 million in
ESG-linked funding, in
support of the social
housing sector
We will assess the
energy retrofit
requirements of over
200,000 homes in the
social housing sector
We will expand the
funding available
under our green
finance initiatives from
£3 billion to £5 billion
We will ensure our own
operations are net zero
by 2030
We will become the
first major pensions
and insurance provider
to target halving the
carbon footprint of
all our investments
by 2030
We will introduce a
flagship fossil fuel-free
fund to support
green growth
We will set new
aspirations for
50 per cent women,
3 per cent Black and
13 per cent Black,
Asian and Minority
Ethnic colleagues in
senior roles by 2025
We will maintain
our £25.5 million
contribution to
foundations in 2021
We will support
regional regeneration,
including launching
the 'Regional Housing
Growth Initiative'
We will support
financial inclusion by
providing banking to
potentially excluded
groups of people
Strategic Review 2021: Building
the UK's preferred financial partner
pages 36 to 45
Enhancing
our
Capabilities
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
06 Lloyds Banking Group Annual Report and Accounts 2020
Chair's statement continued
Our colleagues and culture
The sheer amount of change that people
have coped with during 2020 is phenomenal
and the role of our colleagues cannot
be understated. I have heard of so many
wonderful examples of colleagues supporting
each other and our customers, and the
empathy and dedication our colleagues
have shown is a testament to the Group.
COVID-19 is likely to change ways of working
beyond what we ever thought was possible
with more virtually-connected, remote
working teams and fewer offices. Also,
employees’ expectations are evolving with
over 77 per cent of our colleagues, who are
currently working from home, indicating in
recent colleague surveys that they would like
to work from home three or more days per
week. All this requires companies to rethink
the way they manage their business and, given
that we want to be an employer of choice,
attracting the best staff, this hybrid approach
is likely to be increasingly prevalent.
The Board and senior management have a
vital role to play in shaping and embedding a
healthy corporate culture. With this in mind,
creating structures which put customers at
the heart of decision-making has been a major
focus for the Board’s attention over the last
few years. During the pandemic, there has
been increased focus on ensuring customers
are supported appropriately and the Board
is determined that this will continue. More
information on the Board oversight of our
culture journey can be found on page 92.
The values and standards of behaviour we set
are an important guiding influence and we are
determined to address and learn from historic
failures, including those at HBOS Reading
which occurred before Lloyds acquired
HBOS in 2009. An independent re-review of
compensation for those impacted is currently
being progressed and we await the outcome
of the Dame Linda Dobbs’ review on the
Group’s handling of the issue. We are already
implementing lessons learnt so far and are
committed to ensuring all those impacted are
treated fairly and compensated appropriately.
There are strong links between governance
and establishing a culture that supports long-
term sustainable success and I am keen to
ensure the Group continues to build a strong
reputation in this area.
While the Group was the first FTSE 100
company to set targets to increase both
gender and ethnic diversity at senior levels,
the Board recognises that there is always
more that can be done to ensure a diverse
workforce. The Board was therefore pleased
to endorse a Race Action plan in support of
Black colleagues to drive cultural change,
recruitment and progression across the
Group. Further information about the Race
Action plan can be found on page 25.
The Big
Conversation
– Helping
Britain
Recover
Lloyds Banking Group has brought together more than
900 businesses, community members, policy makers
and subject-matter experts across the UK’s nations and
regions to explore how we can help the UK recover from
the impact of coronavirus.
Conversations have covered a range of topics, from
accessing the finance and skills to support the recovery
journey, to the opportunities brought about by an
increasingly digital economy. Conversations also revealed
a shared view of what the critical priorities should be for
policy-makers to emerge with an economy that is both
more resilient and more sustainable.
We've partnered with the Confederation of British
Industry (CBI), bringing the voices and experience of
its 190,000 members to the conversation.
Scan the QR
code to read
the report
Remuneration
Protecting our colleagues and recognising
their efforts to support our customers during
this unprecedented year has been important
to the Group. We were able to confirm to all
full-time and part-time permanent colleagues
that they would continue to be paid their
contracted hours as normal, no matter what
their role, how the outbreak affected what
they did for the Group or what their personal
circumstances were, and did not take any
Government funding to pay colleagues.
We have a duty to support our customers,
colleagues and communities during this
uncertain time and we believe the changes
we made to our pay and absence policies
during the course of 2020 have ensured that
our colleagues received the support they
needed during such a challenging year.
Given the financial performance of the
business, we were not able to pay any bonuses
for 2020, but to ensure that the support shown
to customers was appropriately recognised,
we made a one-off recognition award to
40,000 colleagues, predominantly those in
customer-facing roles and are awarding all
colleagues a £400 share award to motivate
delivery of the next phase of our strategy.
In addition, the vast majority of colleagues
will receive an above inflation pay increase
this year with larger relative increases for
lower grade colleagues. As a result, the total
package for the vast majority of customer-
facing colleagues was largely unchanged in
the year.
We also gained shareholder approval for
the 2020 Directors’ Remuneration Policy at
the AGM in May last year. We do however
recognise that a substantial proportion of
our shareholders voted against the Policy
and against the Long Term Share Plan and
are sensitive to concerns on remuneration
in the sector. Following further engagement
with our shareholders, we have therefore
committed to a series of changes in how
the new Policy is to be implemented and
disclosed in 2021. Our new Chief Executive
Officer, Charlie Nunn, has also agreed to a
significantly reduced reward package. For
further details, please refer to pages 115 to 142
in our Directors’ Remuneration Report.
Shareholder returns
The Group's financial performance in 2020
was clearly impacted by the pandemic and
the consequent challenging economic
environment. Despite this we delivered a
resilient financial performance and continued
to make good strategic progress. Our
performance continues to demonstrate
the stability of our customer franchise and
business model, the appropriateness of our
strategy and the strength of our balance sheet.
I am also pleased to announce that the Board
has recommended a final ordinary dividend
of 0.57 pence per share. This is the maximum
dividend we were able to recommend given
current regulatory constraints. Going forward
our capital position remains strong and we
remain committed to future capital returns.
Lloyds Banking Group Annual Report and Accounts 2020
07
Group Chief Executive
One of my first actions when I joined the
Group was to recruit a new Group Chief
Executive and I was delighted to be able to
announce in November the appointment
of Charlie Nunn. Charlie will, subject to
regulatory approval, join the Group in
August 2021 from HSBC and brings with
him significant operational, technology and
strategic expertise. I am personally excited
about Charlie’s vision for the Group, as well
as his passion for our commitment to Helping
Britain Recover. The Board and I look forward
to working with him to ensure the success of
the next stage of development of the Group.
On 30 April 2021, António Horta-Osório will
retire as Group Chief Executive and Director
of Lloyds Banking Group plc having led the
Group for the last ten years. I would like to
take this opportunity to pay tribute to the
outstanding contribution that António has
made to first turning round and then leading
the strategic development of the Group over
the last decade. His personal commitment
and strong vision have driven a period of
substantial and successful change in the
Group, restoring Lloyds to its pre-eminent
position as the UK’s leading financial services
provider. During his tenure, he has overseen a
comprehensive transformation of the Group's
balance sheet, operations, and customer
propositions, including the repayment of the
UK Government's £21 billion investment and
evolution of the Group into the UK's largest
digital bank.
As previously indicated, the Board has agreed
that during any interim period between
António Horta-Osório stepping down and
Charlie Nunn joining the Group, William
Chalmers, Chief Financial Officer will, subject
to regulatory approval, take on the role of
acting Group Chief Executive in addition to
his ongoing responsibilities as Chief Financial
Officer, with the support of Alan Dickinson
and myself. It will be critically important to
maintain momentum during this period
and arrangements will be made to support
William in this role and manage his wider
responsibilities appropriately.
In addition Lord Blackwell retired from the
Board on 1 January 2021 having been a
member of the Board for nearly nine years
and Chairman since April 2014. He has been
instrumental in helping turn the business
around since the financial crisis and refocus
the business on Helping Britain Prosper. I must
thank him for his strong stewardship during this
period and sage advice since I joined the Board.
Also, as recently announced, Sara Weller
will have served 9 years as a Non-Executive
Director in February 2021 and accordingly plans
to retire as Chair of the Responsible Business
Committee and a Non-Executive Director at
the AGM in May 2021. Amanda Mackenzie will
take on the role of Chair of the Responsible
Business Committee following Sara's retirement
from the Board and Sarah Legg has been
appointed as a member of the Responsible
Business Committee with effect from
1 February 2021.
Full details of the changes are provided in
the Nomination and Governance Committee
Report on pages 98 to 100.
Summary
In summary, what is very clear, is that we are
operating in an increasingly dynamic and
competitive market. Only by truly focusing
on the needs of the customer and embracing
technology will banks be successful.
Given significant investment and transformation
in recent years we are well positioned with
strong foundations to support our response
to the evolving banking landscape. We
intend to further build and adapt our
compelling offering for customers, while
at the same time delivering a positive
societal impact and long-term superior
and sustainable returns for shareholders.
I would like to end by reiterating my thanks
to our colleagues for their significant
contribution in 2020. It is the commitment,
innovation and dedication from all of them
that enables us to deliver for our customers
and shareholders. There are difficult times
and more change ahead, both this year
and beyond, however we will do our best
to fulfil our role in the country’s recovery.
Lloyds Banking Group will Help Britain Recover
and Help Britain Prosper again.
Robin Budenberg
Chair
Board changes
We have a strong, diverse and experienced
Board, which proved its effectiveness
throughout the year. A number of Board
changes have been seen during the year,
as outlined below.
As disclosed in last year’s annual report,
Catherine Woods joined the Board as a
Non-Executive Director in March. In May,
Anita Frew retired as Deputy Chair and Non-
Executive Director, having served 9 years on
the Board. Alan Dickinson succeeded Anita as
Senior Independent Director and also took on
the role of Deputy Chair, bringing his significant
Board, financial and regulatory experience
to these roles. In addition, Nick Prettejohn
took on the role of Chair of the Board Risk
Committee on an interim basis in May, with
Catherine Woods taking over from Nick from
1 January 2021.
In addition, during September 2020 both Simon
Henry and Juan Colombás retired from the
Board. Sarah Legg assumed the role of Chair
of the Audit Committee in October.
Introducing our new
Group Chief Executive
Charlie Nunn
Charlie Nunn will, subject to regulatory
approval, join the Group in August
2021, as our new Group Chief Executive.
He was previously the Global Chief
Executive of Wealth and Personal
Banking at HSBC. Charlie has had a long
and successful career in financial services.
He began as a management consultant
at Accenture where he worked for
13 years in the US, France, Switzerland
and the UK. He then moved to McKinsey
& Co. as a Senior Partner for five years,
joining HSBC in 2011.
At HSBC, he has held a series of
leadership positions including Global
Chief Operating Officer of Retail Banking
and Wealth Management, Group Head
of Wealth Management and Digital, and
Chief Executive of Retail Banking and
Wealth Management before taking on
his most recent role.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
08 Lloyds Banking Group Annual Report and Accounts 2020
Group Chief Executive’s review
Continued strategic progress while supporting
customers and colleagues in difficult times
Coronavirus has had a
profound impact on our lives
and the economy but the
Group has delivered a resilient
performance with continued
strategic progress.
António Horta-Osório
Group Chief Executive
The impact of the coronavirus pandemic on
the people, businesses and communities
in the UK and around the world in 2020 has
been profound. Many countries, including
the UK, have seen unprecedented levels of
economic contraction as a result of lockdown
measures, as well as comprehensive and
co-ordinated Government support measures.
In this environment, we remain absolutely
focused on working with all our stakeholders
to support our customers and ensure a
sustainable recovery.
The Group’s successful ongoing
transformation, continued investment and
growing franchise strength positioned us
well to face the pandemic. In response to
the challenging economic environment,
we provided around 1.3 million payment
holidays on mortgages, loans, credit cards
and motor finance products while we also
set up dedicated phone lines for customers
over 70 years old and for customers who
are working on the frontline in the NHS.
We are also providing significant support
for our business clients, providing more
than £31 billion of gross lending to small
and medium sized businesses, including
Government-backed lending. Within
Insurance and Wealth, we have supported the
NHS by providing free additional insurance
cover to its workers and by alleviating pressure
on GPs with a reduction in medical evidence
required for insurance claims.
The Group has benefited from its multi-brand,
multi-channel distribution model during the
pandemic, as we have been able to continue
serving customers through the UK's leading
digital bank, the largest branch network
in the UK and our telephony centres. I am
particularly pleased with how quickly the
Group adapted to the initial lockdown and
how well our digital banking proposition
has performed in a period of significantly
heightened usage.
Our infrastructure has been highly resilient,
with around 90 per cent of our branches
remaining open while our digital channels
have performed well, attaining record levels
of customer satisfaction despite significantly
increased usage.
Once again I would like to express my
gratitude to all of our colleagues for their
resilience, dedication and hard work
throughout 2020. Our people have retained
their clear focus on supporting their
customers and Helping Britain Prosper in
very challenging circumstances. I am proud
of everything the Group has done to support
the UK economy in 2020. This would not
have been possible without the exemplary
dedication of our colleagues.
Given our clear UK focus, the Group’s
financial performance is inextricably linked to
the health of the UK economy and thereby
the impact of the coronavirus pandemic.
Significant uncertainties remain relating to
the pandemic, the third national lockdown
and the speed and efficacy of the vaccination
programme. Nonetheless, the Group’s
purpose, unique business model, competitive
advantages and ambitious strategic evolution
will ensure that it will be able to Help Britain
Recover from the crisis whilst delivering long-
term sustainable returns for our shareholders.
Financial performance
In the context of the pandemic, statutory
profit after tax was £1.4 billion. This was
54 per cent lower than 2019 and earnings
per share of 1.2 pence were down 66 per
cent. Lower profits were significantly due
to the impairment charge of £4.2 billion in
2020 (2019: £1.3 billion), primarily reflecting
the deterioration in the economic outlook.
Trading surplus of £6.4 billion was down
27 per cent on 2019, reflecting continued
revenue pressures partly offset by lower
total costs. Our relentless focus on cost
efficiencies has led to a 4 per cent reduction in
operating costs despite absorbing additional
coronavirus-related expenses during 2020.
Loans and advances were broadly in line with
prior year at £440.2 billion. Growth in the
open mortgage book of £7.2 billion, including
£10.2 billion in the second half of the year,
and £11.1 billion (£12.4 billion approved at
12 February 2021) of Government-backed
lending more than offset lower unsecured
Retail balances and other Corporate and
Institutional lending, as well as the continued
reduction in the closed mortgage book.
The Group’s capital position remains
strong with a CET1 ratio of 16.4 per cent
before allowing for ordinary dividends and
16.2 per cent after dividends, both ahead of
the Board’s ongoing target of c.12.5 per cent,
plus a management buffer of c.1 per cent.
Given our strong capital position at the year
end and the regulator’s clarification that banks
may resume capital distributions, the Board
has recommended a final ordinary dividend of
0.57 pence per share, the maximum allowed
under the Prudential Regulation Authority's
temporary framework on 2020 distributions.
Lloyds Banking Group Annual Report and Accounts 2020
09
2018 TO 2020 STRATEGIC HIGHLIGHTS
Leading customer
experience
>17 million
digitally active customers
>12 million
mobile app users
67
digital net promoter score,
a year end record high
Digitising the Group
78 per cent
of cost base covered by digitisation
>£4 billion
cumulative technology
spend 2018-2020
Maximising Group
capabilities
>£6 billion
of net lending to start-ups, SMEs
and Mid Market customers
1.5 million
additional pension customers
>6 million
customers able to see their banking,
insurance and pension products in
one place through Single Customer
View functionality
Transforming
ways of working
5.3 million
cumulative additional future skills
training hours delivered
65 per cent
of change delivered by agile
methodologies
Read more on pages 18 and 19
Maximising Group capabilities
We have actively supported our Commercial
Banking clients through the pandemic,
exceeding our £6 billion target for increasing
net lending to start-ups, SME and Mid Market
clients over the last three years. Outside of our
support for the Government lending schemes,
in 2020 we also achieved our £18 billion
commitment for gross lending to UK businesses.
In 2020 we increased the number of customers
with access to our unique Single Customer View
capability by c.1.5 million to c.6.5 million. We
also expanded the scope of Single Customer
View to include Halifax Share Dealing so that
customers with this functionality are now
able to view their pensions and investment
portfolios alongside their banking products.
We have seen cumulative growth in open book
assets under administration of £46 billion, or
69 per cent, over the GSR3 period to £113 billion,
only narrowly missing the £50 billion growth
target despite challenging market conditions.
Transforming ways of working
The coronavirus pandemic is having significant
implications for our colleagues, in both their
personal and professional lives. These include
accelerating the transition to new ways of
working for the majority of the Group and
accentuating the skills that we have sought to
develop over the course of GSR3. Since March
2020, more than 50,000 colleagues (over 70 per
cent of our workforce) have worked remotely
and we have increased our adoption of remote
working tools to greatly increase collaboration
and support more agile working practices.
In 2020 we delivered an additional 2.1 million
training hours to develop the skills for the future,
taking the total to 5.3 million hours over the
course of GSR3, ahead of our target. In addition,
the proportion of change programmes
delivered using agile methodologies has
increased to 65 per cent over the course of
GSR3, ahead of our target of 50 per cent.
Our 2020 Colleague Survey received almost
50,000 responses and showed positive increases
in all main areas, including overall engagement
up 7 percentage points to 81 per cent. This
reflects the highest level since measurement
started in 2011 and is above the UK high-
performing norm.
Strategic progress
The Group’s previous three-year strategic
plan was launched in February 2018 and we
have now achieved our ambitious target of
transforming the Group for success in a digital
world by investing £2.8 billion across our four
strategic pillars.
Leading customer experience
In 2020, we successfully built on our track record
of improving customer propositions, even in
the context of our focus on supporting our
customers and ensuring operational resilience
during the coronavirus crisis. The pandemic
has accelerated the shift towards digital for
everyday banking needs. We are the largest
digital bank in the UK and have seen our digitally
active customer base increase to 17.4 million
customers, while our active mobile app users
have increased by nearly two million in 2020
to 12.5 million customers. At the same time,
we have continued to enhance our digital
propositions, with a focus on convenience and
control. As a consequence, we have seen our
digital customer satisfaction scores improve
to a year end record high of 67.
Alongside creating the UK’s leading digital
bank, we have maintained the UK’s largest
branch network. We have managed to keep
around 90 per cent of our branches open during
the coronavirus pandemic, using appropriate
safeguarding measures. In addition, we have
maintained our ATM network at over 95 per cent
capacity and have set up dedicated telephone
lines our customers over 70 years old and those
working on the frontline in the NHS.
Digitising the Group
We have accelerated the digitisation of the Group
by progressively modernising and simplifying the
IT architecture, continuing to digitise customer
journeys and migrating applications to private
cloud. We have now digitised 78 per cent of the
Group’s cost base, ahead of our GSR3 target of
70 per cent. With cumulative technology spend
of more than £4 billion over GSR3, our ongoing
focus on transforming the business and investing
in digital enabled us to respond effectively to
the accelerated shift to digital channels brought
about by the coronavirus pandemic. The
proportion of products originated via digital
channels increased significantly in 2020, up
10 percentage points to 85 per cent, our highest
level to date.
Despite this significant progress, we are only just
starting to see the transformation that technology
is enabling. Customers will increasingly expect
to interact with us in a more effective, agile and
personalised way. To compete effectively against
new entrants and respond to these evolving
customer expectations, we need to continue
to transform how we work, replace some of our
legacy systems and enhance our use of data
across the business. Some of this development
will be internal but we will also increasingly use
partnerships with specialist technology and
fintech providers.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
10 Lloyds Banking Group Annual Report and Accounts 2020
Group Chief Executive’s review continued
Strategic Review 2021
Today's environment continues to evolve and
provide new challenges. The macroeconomic
environment remains uncertain, whilst we are
witnessing increasing societal expectations, an
accelerated shift to digital and new technology
capabilities in the context of the pandemic
driving a step change in ways of working.
Throughout 2020 the management team,
in conjunction with the Board, have worked
on developing an evolution of our strategy
to address these issues. We have made
significant progress in recent years, leveraging
the unique strengths and assets of the Group,
including our purpose driven and customer
focused business model, our low risk approach
to business, our market leading efficiency
and our leading multi-channel propositions,
including the largest digital bank and branch
network in the UK. This has created the
platform for Strategic Review 2021, the next
stage of our journey.
The Group has a clear purpose of Helping
Britain Prosper, which drives our strategy.
Given the pandemic and the challenging
macroeconomic environment, our focus for
2021 is Helping Britain Recover. This is in the
context of delivering co-ordinated growth
opportunities by building the UK’s preferred
financial partner for personal customers and
the best bank for business. Delivery of the
Group's customer focused ambitions in our
two main segments, will be underpinned by
the enhancement of four core capabilities
within our business. These capabilities focus
on delivering a modernised technology
architecture, building an integrated
payments platform, creating a data-driven
organisation and implementing reimagined
ways of working. Strategic execution in
2021, supported by increased investment, is
underpinned by long-term strategic vision in
these customer segments and capabilities.
Enhancing
our
Capabilities
Helping Britain Prosper
We recognise that the focus of the Group's
purpose must evolve in response to the
current environment with changing societal
and customer needs and expectations. Given
our focus on the UK, we are dedicated to
helping our customers, clients, colleagues
and communities get through the coronavirus
pandemic and rebuild livelihoods, whilst
delivering long-term sustainable success for
shareholders. Our core values underpin our
purpose to Help Britain Prosper. With this in
mind, our focus for the near-term will be to
Help Britain Recover.
We are committed to supporting a sustainable
recovery which supports all of the people and
regions in our society. In 2021, we will Help
Britain Recover by concentrating on five key
areas where we can make the most difference,
all of which are embedded in our business
strategy. This is discussed further in the
Strategic Review 2021 section.
Help rebuild households’ financial health
and wellbeing
Support businesses across the UK to
recover, adapt and grow
Expand availability of affordable and quality
homes
Accelerate the transition to a low carbon
economy
Build an inclusive society and organisation
The Group is committed to helping the UK
transition to a sustainable low carbon economy.
We continue to make progress in implementing
our financed emissions reduction ambition on
the path to net zero by 2050 or sooner, working
with customers, Government and the market
to help reduce the emissions we finance. In
so doing, we are also focusing on enhancing
our green finance products and services.
This includes supporting renewable energy
projects since the start of 2018 that could
power the equivalent of 10.1 million homes,
more than doubling the number of electric
vehicles we finance, raising around £2.9 billion
funding in green and sustainable bonds for
our clients since 2016 and offering pensions to
our customers and colleagues with sustainable
investment choices.
We are working hard to tackle social
disadvantage across Britain. In 2020, the
Group’s four independent charitable
Foundations received £25.5 million of funding,
enabling them to continue their work in
supporting nearly 2,800 charities. These
charities tackle vital issues such as domestic
abuse, mental health, modern slavery
and human trafficking, and employability.
The Group has committed to maintain its
£25.5 million funding to the Foundations in
2021, ensuring that these charities can secure
a more certain future during these difficult
times and safeguard their important work.
Our ongoing commitment to helping people
save for the future is key to developing social
mobility and we have increased the open book
assets that we hold on behalf of customers
in retirement and investment products by
£46 billion since the start of 2018.
As the UK's largest mortgage lender, we
recognise the vital importance of helping
Britain get a home. We have provided close
to £9 billion of finance for the social housing
sector and lent c.£40 billion to first-time buyers
over 2018 to 2020.
Building capability and digital skills was more
important in 2020 than ever, given the need
for customers to access services during
periods of lockdown. We have now facilitated
digital training for 1.8 million individuals,
SMEs and charities since the start of 2018
and delivered over 12,500 devices to
customers, enabling them to safely book
medical appointments, connect with family
and access internet banking facilities.
Supporting businesses to start up and to
grow is fundamental to Helping Britain
Recover. We have now helped over 265,000
businesses start up since the beginning of
2018 and trained over 1,200 apprentices
through our investment in the Lloyds Bank
Advanced Manufacturing Training Centre
since the beginning of 2018.
The Group launched The Big Conversation:
Helping Britain Recover in September 2020,
a national programme of events which
brought together more than 900 businesses,
community members, policy makers and
subject-matter experts across the UK’s
nations and regions to explore how we can
together help the UK recover from the impact
of coronavirus and build a more resilient and
sustainable economy.
We are championing Britain’s diversity and
in 2020 launched our Race Action plan. This
makes the Group the first FTSE 100 company
to make such public commitments, including
a new goal to specifically increase Black
representation in senior roles to align with the
overall UK labour market. We also published
our first Ethnicity Pay Gap Report, made
progress on gender diversity and published
our annual Gender Pay Gap Report.
Further information on our approach to
environmental, social and governance issues
can be found in our 2020 Environmental,
Social and Governance Report, available on
the Group’s website.
Management change
It is with mixed emotions that I will step down
as Group Chief Executive at the end of April.
It has been a great honour to work alongside
all of my colleagues and achieve the
remarkable transformation of the past ten
years, but now is the right time to move on,
following my announcement last July.
Charlie Nunn will be the next Group Chief
Executive. He was previously the Global Chief
Executive of Wealth and Personal Banking
at HSBC and has had a long and successful
career in financial services. Charlie will find a
warm welcome at Lloyds Banking Group and
a deep commitment from all of our people
to deliver on our purpose and to Help Britain
Recover. I am sure that he will find his time
here as fulfilling and fascinating as I have
done and I wish him the very best.
Lloyds Banking Group Annual Report and Accounts 2020
11
Outlook
The impact of the coronavirus pandemic on
the people, businesses and communities in
the UK and around the world continues to be
profound. Significant uncertainties remain,
specifically relating to the pandemic and
the speed and efficacy of the vaccination
programme. I remain confident that the
Group’s clear purpose, unique business
model, significant competitive advantages
and the customer focused evolution of our
strategy we have announced in Strategic
Review 2021 will ensure that the Group is able
to Help Britain Recover and in so doing, help
transition to a sustainable economy.
The Group faces the future with confidence.
This is reflected in our guidance for 2021,
based on our current macroeconomic
assumptions:
Net interest margin to be in excess of
240 basis points
Operating costs to reduce further to
c.£7.5 billion
Net asset quality ratio to be below 40 basis
points
Improving profitability with statutory return
on tangible equity of between 5 and 7 per
cent (on the new basis)
Risk-weighted assets in 2021 to be broadly
stable on 2020
Intention to accrue dividends and resume
progressive and sustainable ordinary
dividend policy
I would like to again express my thanks to all
of my colleagues, without whom the Group's
customer focus, resilient financial performance
and significant strategic transformation,
achieved in very challenging circumstances,
would not have been possible.
António Horta-Osório
Group Chief Executive
KEY MILESTONES FOR THE GROUP IN THE PAST DECADE
2011
2014
2017
2020
Completion of the Group
Strategic Review 3
An ambitious plan, with significant
additional investment, successfully
delivered a leading customer
experience; further digitised the
Group; maximised the Group’s
capabilities; and transformed ways
of working.
Largest digital bank in the UK
17.4 million digitally active customers
and 12.5 million mobile app users,
alongside the largest branch network
in the UK.
Launch of Strategic Review 2021
António joined the Board and
launched the first Group Strategic
Review
First Group Strategic Review with the
clear aim to become the best bank
for customers.
Developed a clear strategic focus
António set out a clear focus on
becoming a simple, low risk, customer
focused UK bank with significantly
reduced risk-weighted assets, lower
reliance on short-term funding, strong
asset quality and capital levels, and a
new executive team.
The strategy focused on supporting
the real economy of the UK, in the
retail, commercial and insurance areas.
Launch of Helping Britain Prosper
Plan, and Group Strategic Review 2
Alongside the next phase of the
strategy, the Group launched the
Helping Britain Prosper Plan to
address some of the social, economic
and environmental challenges facing
the UK. The Plan took us beyond
business as usual, uniting the Group
behind an inspiring set of objectives.
Recognising the importance
of digital
We became the first UK bank to
have a digital division, reporting
directly to the Chief Executive.
First dividend in six years
announced
Returning the Group to profitability
with over £12 billion to date returned
to shareholders since dividends were
resumed in 2014.
Completion of the Group
Strategic Review 2
GSR2 enabled the Group to become
the largest digital bank in the UK
while delivering a simple, low risk,
customer focused, UK retail and
commercial bank.
Partnership with Mental Health UK
Drawing on his own personal
experiences, António shone a
spotlight on the importance of good
mental health, both within the Group
and across the UK corporate world,
helping to break down stigmas.
The Group has raised over £13 million
for Mental Health UK to date.
Lloyds Banking Group returns
to private ownership
In May 2017, the Government
completed the sale of their
shares and the Group returned
to private ownership.
Launch of Group Strategic
Review 3
Overview: Transformed the business from 2011 to 2020
Built the largest digital bank in the UK while
maintaining the largest branch network
Simplified, UK-focused business model
with presence in 6 countries, down from
30 countries in 2011
Committed to Helping Britain Prosper and
deepening our support for communities
across the UK
Significant improvement in customer
satisfaction levels
Integrated multi-brand, multi-channel model
Significant dividends for shareholders
and full repayment to the taxpayer
Delivered a financially strong business with
lower costs as a competitive advantage
and superior levels of investment
Targeted and strategic growth
Led the conversation on mental health
in the workplace
Increasingly engaged workforce
First FTSE 100 company to set a public
goal on gender diversity in 2014 and 2018,
the first FTSE 100 company to target an
increase in the proportion of Black, Asian
and Minority Ethnic colleagues
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
12 Lloyds Banking Group Annual Report and Accounts 2020
Our business model
How we create value, and what sets us apart
OUR GROUP
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.
OUR PURPOSE
Helping Britain Prosper
The Group has a clear ongoing purpose of Helping
Britain Prosper, and given the considerable impact
of the pandemic, the current focus is on Helping
Britain Recover.
We aim to help our customers, clients, colleagues and
communities get through the crisis and back on their
feet, while delivering long-term sustainable success
for shareholders.
OUR CULTURE
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
Lloyds Banking Group Annual Report and Accounts 2020
13
OUR BUSINESS MODEL
We are a customer focused, sustainable, efficient and low risk UK financial services leader
with distinctive capabilities
As we enter the next phase of our strategy we will build on these capabilities and accelerate the Group's
transformation to become the UK's preferred financial partner
Multi-brand, multi-channel proposition with the
UK's largest digital bank and branch network
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.
Differentiated and sustainable customer franchise
with leading integrated propositions
Our scale and reach across the UK means that our franchise
extends to over 25 million customers, with 17.4 million digitally
active. We are uniquely positioned to serve our customers’
banking, insurance and wealth management needs in one place
through a comprehensive product range informed by customer
analysis and insight.
Market leading efficiency through tech-enabled
productivity improvements
Our simpler operating model and continued focus on efficiency
provide a cost advantage, enabling us to invest more to the
benefit of both customers and shareholders.
Creating competitive advantages
We believe that these capabilities provide significant competitive
advantage. The Group's significant investment in transformation
and digital in recent years, enabled by our efficiency, has
positioned us well. Continued investment will remain important to
further build this advantage and enable us to continue to deliver
for customers while also delivering sustainable and superior returns
over the longer-term, as outlined on the accompanying diagram.
Prudent, low risk business 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
Experience of delivering change in recent years provides benefit
as we further transform the business.
Purpose-driven and customer focused culture
Our clear purpose of Helping Britain Prosper is driving the business
and our current focus on Helping Britain Recover is at the heart of
our evolution of strategy.
Inclusive and diverse organisation
Being one of the largest employers in the country, we will
further focus on developing an inclusive, diverse, skilled and
future-ready workforce.
Market leading
efficiency
Sustainable
and superior
returns
Greater
investment
capacity
Improvement
to customer
experience
Net cost
reduction
Enhancements
to internal
processes
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
discussed on pages 32 to 35
Unprecedented societal demands
Macro economic environment to remain challenging
and uncertain
Accelerated shift to digital and new capabilities
Step change in ways of working
We also face a number of internal challenges:
Repositioning and growing the business to deliver revenue
generation and diversification
Meeting demand for more personalised value added solutions
Using technology to deliver step change in efficiency and agility
Attracting, developing and retaining the best talent to respond
to new ways of working
We recognise these challenges to our business model and strategy
and regularly review the associated risk implications, to enhance
our sustainability over the longer-term. For further details on the
risks associated to our strategy, please refer to pages 56 to 59.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
14 Lloyds Banking Group Annual Report and Accounts 2020
Key performance indicators
Resilient business model in a
challenged economic environment
Our performance
2020 was a difficult year, with the effects of the
coronavirus pandemic and lower interest rates
impacting our financial performance, in line
with the banking industry as a whole.
FINANCIAL
Underlying profit before tax
£m
2,193
Although the economic outlook remains
uncertain, our financial strength and
business model will ensure that the
Group can continue to support its
customers and Help Britain Recover.
Pay for performance
across the Group
Key performance indicators are regularly
reviewed by the Board and the Group
Executive Committee, to evidence
performance against the Group’s most
important priorities. These include measures
for assessing financial and non-financial
performance, balancing the interests of
various stakeholders including customers,
shareholders and colleagues.
To ensure colleagues act in the best
interests of customers and shareholders,
variable remuneration at all levels across
the Group is aligned to these priorities
and takes into account the Group’s
financial performance and specific
conduct and risk management controls.
All the key performance indicators shown here
directly impact remuneration outcomes and
support the delivery of our reward principles.
In 2021
Further to stakeholder feedback we
are looking to further simplify and
enhance the single balanced scorecard
used for performance assessment,
the bonus (Group Performance Share)
and the Long Term share plan in 2021.
The new balanced scorecard has been
aligned to our strategic priorities and
has been structured to incentivise
the right behaviours and results. The
weighting for financial performance has
been increased to 50 per cent while the
number of measures in the balanced
scorecard has been reduced from 15 to 7
to ensure greater focus and simplicity.
Our 2021 balanced scorecard
Financial (50%)
- Statutory Profit After Tax (20%)
- Statutory ROTE (20%)
- Operating Costs (excl. remediation) (10%)
Strategic (50%)
- Reducing operational carbon emissions
(7.5%)
- Increasing our gender and ethnic
representation in senior roles (7.5%)
- Group Customer Dashboard – our
assessment of how effectively we are
serving customers across all brands,
products and services (25%)
- Colleague engagement – our
performance relative to external
benchmark scores (10%)
2020
2019
2018
20171
20161
Statutory profit after tax
£m
1,387
2,193
7,531
8,066
7,628
6,782
2020
2019
20181
20171
20161
1,387
3,006
4,506
3,649
2,605
Underlying profit before tax was lower in
2020, 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 2020,
largely due to increased impairment charges
and lower income.
1 Restated to reflect amendments to IAS12.
Ordinary dividend
p per share
0.57
2020
2019
2018
2017
2016
Statutory return on tangible equity
%
3.7
0.57
1.12
3.21
3.05
2.55
2020
2019
2018
2017
2016
3.7
7.8
11.7
8.9
6.6
Ordinary dividend per share, given the
Group’s strong capital position dividends have
resumed at the maximum allowed under the
Prudential Regulation Authority's temporary
framework on 2020 distributions.
The statutory return on tangible equity was
lower in 2020 given the lower statutory profit,
largely due to increased impairment charges
and lower income.
In 2021, to aid comparability with peers, we
will report return on tangible equity without
adding back the post-tax amortisation of
intangible assets.(2020 return on tangible
equity would have been 2.3 per cent on the
new basis).
Cost:income ratio
%
55.3
2020
2019
2018
2017
2016
Common equity tier 1 ratio (CET1)
%
16.2
55.3
48.5
49.3
51.8
55.3
2020
20191
20181
20171
20161
16.2
13.8
13.9
13.9
13.0
The Group's cost:income ratio deteriorated in
the year, driven by lower income, but remains
market leading.
In 2021, this key performance indicator
will be replaced by operating costs
(excl. remediation). This will align to our 2021
balanced scorecard.
Ongoing target: c.12.5 per cent plus a
management buffer of c.1 per cent
Our common equity tier 1 ratio remains strong
and is significantly in excess of our current
target and regulatory requirement.
1 Reported on a pro forma basis, reflecting the
dividend paid up by the Insurance business and
declared share buybacks in 2017 and 2018.
Lloyds Banking Group Annual Report and Accounts 2020
15
Economic profit
£m
688
2020
2019
2018
2017
2016
NON-FINANCIAL
Customer satisfaction
(all channel net promoter score)
68.0
688
3,138
3,291
3,987
3,377
2020
2019
2018
2017
2016
Digitally active customers
£m
17.4
68.0
66.0
63.4
65.0
62.7
2020
2019
2018
2017
2016
17.4
16.4
15.7
13.4
12.5
Economic profit, a measure of profit taking into
account expected losses, tax and a charge
for equity utilisation. Economic profit in 2020
was impacted by lower net income received
in the year.
2020 basis has been amended in line with changes to
reward scheme performance measures, on equivalent
basis to prior years 2020 economic profit would be
£1,197 million
Our all channel net promoter score measures
the customer perception of day-to-day
services across our channels. In 2020, we
have seen record satisfaction with an uplift
of 2 year-on-year. This encompasses positive
contributions from Branch and Digital, with
customers appreciating the service provided.
This measures how well we are delivering
a leading customer experience. It tells us
how effective we are in building strong
customer relationships.
Historical scores restated to reflect changes in
measurement approach
Reflecting the pace of digital adoption, the
number of active digital customers increased
in the year to 17.4 million, with 12.5 million
mobile banking app customers and average
customer logons at 26 times per month.
This indicates the progress we are making
in digitising the Group from the customer
usage standpoint.
Total shareholder return
%
(42)
Customer complaints
FCA reportable complaints per 1,000 accounts
2.6
Employee engagement index
% favourable
81
2020
2019
2018
2017
2016
(42)
27
(20)
14
(10)
H1 2020
H2 2019
H1 2019
H2 2018
H1 2018
2.6
3.0
2.9
3.4
3.9
2020
2019
2018
2017
2016
81
74
73
76
71
Total shareholder return reflects share price
performance and dividends paid. Our share
price decreased significantly in 2020, in line
with other UK banks, with no dividend payable
in the year given the regulatory restrictions.
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.
H2 2020 data not available at time of publishing.
Employee engagement is at an all time high
and was six points above the norm for top
performing UK companies with increases in
scores for advocacy, pride and satisfaction.
Colleagues were also positive about their
wellbeing, process improvements and
performance management. Preferences on
working arrangements were also captured
in our Autumn survey and will inform future
working styles.
This indicates how much progress we are
making in transforming ways of working.
Helping Britain Prosper Plan
targets achieved
17/22
2020
2019
2018
2017
2016
Green finance
£bn (cumulative)
>7.3
2020
2019
17/22
20/22
20/22
21/22
20/24
>£7.3
>£4.9
We have made strong progress since we
launched the Plan in 2014. In 2020, we have
seen the impact of the pandemic reflected in
our Helping Britain Prosper plan performance
with selected areas unable to reach their
targets. This has resulted in the Group
achieving 17 out of 22 targets for 2020. Find
out more on pages 20 to 31.
In 2020, we provided over £2.3 billion of green
finance in Commercial Banking, through our
Clean Growth Finance Initiative, Commercial
Real Estate Green Lending Initiative,
Renewable Energy Financing and Green
Bond facilitation. This increased our total
green finance to over £7.3 billion since 2016.
In addition, we have supported clients with
over £1.8 billion of Sustainability Linked Loans
since 2017.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
16 Lloyds Banking Group Annual Report and Accounts 2020
Our progress in building a sustainable and responsible business
2018 – 2020: What we have achieved over the last three years
Group Strategic Review 3 priorities
We have invested around £2.8 billion in our strategic priorities
across four pillars over the past three years, with this investment
helping us deliver significant progress in our ongoing
transformation of the Group for success in a digital world.
2018 – 2020
Leading customer experience
Maximising Group capabilities
The largest digital bank in the UK, with our
digitally-active customer base of 17.4 million
up over 30 per cent since 2017
Over £6 billion of net lending to start-ups, SMEs
and Mid Market customers since 2018, comfortably
exceeding our cumulative 3 year target
Maintained the UK’s No.1 branch network
1.5 million new pension customers
Improved customer satisfaction, with digital net
promoter score increasing by 2 per cent vs. 2017
to an all-time high of 67
£46 billion cumulative growth in open book assets
under administration since the end of 2017, despite
challenging market conditions during 2020
Read more on page 18
Read more on page 19
Digitising the Group
Transforming ways of working
78 per cent of cost base covered by digitisation,
while progressively modernising and simplifying our
IT architecture
>£4 billion cumulative technology spend 2018 - 2020
5.3 million cumulative additional future skills
training hours delivered
65 per cent of change delivered by agile
methodologies
Read more on page 18
Read more on page 19
Lloyds Banking Group Annual Report and Accounts 2020
17
2018 – 2020
Our Helping Britain Prosper priorities
Addressing some of the social, economic and environmental
challenges facing the UK was the foundation of our Helping Britain
Prosper Plan. Below are the impacts achieved since 2018 against
our seven priority performance areas. Further information on
progress in each of the priorities can be found on pages 20 to 31
and in our 2020 Lloyds Banking Group ESG Report.
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
10.1 million
Tackling social disadvantage
across Britain
Number of charities we supported in
2020 as a result of our £100 million
commitment to the Group’s independent
charitable Foundations
2,787
Read more on pages 20 to 23
Read more on page 29
Helping people save
for the future
Growth in open book assets that we
hold on behalf of customers in retirement
and investment products3
£45.6 billion
Read more on page 28
Helping Britain get a home
Amount of lending committed to help
people buy their first home
£39.7 billion
Read more on page 27
Building capability
and digital skills
Number of individuals, SMEs and
charities trained in digital skills,
including internet banking
1.8 million
Read more on page 28
Supporting businesses
to start up and grow
Increased amount of net lending to start
up, SME and Mid Market businesses
>£6 billion
Read more on page 27
Championing Britain’s diversity
Percentage of senior roles held by
women in 2020
37 per cent1
Read more on pages 25 to 26
Percentage of roles held by Black,
Asian and Minority Ethnic colleagues
in 2020
Percentage of senior roles held by Black,
Asian and Minority Ethnic colleagues
in 2020
10.6 per cent1
7.7 per cent1
1 2020 Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2020 Annual Responsible Business Reporting
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
18 Lloyds Banking Group Annual Report and Accounts 2020
Our progress in building a sustainable and responsible business continued
2020: Progress against our strategic priorities
Progress in 2020
Leading customer
experience
Digitising
the Group
Key Objectives 2018 to 2020
Key Objectives 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
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
In line with our purpose of Helping Britain Prosper, our primary focus
during the current pandemic has been to support and do what is
right for our customers. Despite this challenging backdrop, we have
successfully built on our track record of strengthening our propositions
and improving the experience of both our personal and business
customers during the course of 2020.
Improving the experience of our personal customers
COVID-19 has accelerated the shift towards digital for everyday banking
needs. We are the largest digital bank in the UK and have seen our
digitally-active customer base increase by 6 per cent to 17.4 million
customers, while our active mobile app users have also increased
by nearly 2 million to 12.5 million customers. We have continued to
enhance our digital propositions, with a focus on speed, convenience,
personalisation and control. These include the broadening of our
unique Single Customer View functionality to include stockbroking
portfolios, biometric functionality to authorise payments through the
mobile banking app, more personalised customer communication
and navigation within digital apps, and enhanced control features,
such as upcoming payment notifications and ’confirmation of payee’
functionality, to protect against fraud. As a consequence, we have seen
our digital and all channel customer satisfaction scores continue to
improve and reach respective all-time highs of 67 and 68.
Improving the experience of our business customers
Business customers are also turning to digital channels for everyday
needs, while continuing to value human interaction for more complex
needs. We have proactively supported approximately 60,000 business
customers via our Client Outreach Programme, while also improving the
digital propositions available to them. Amongst other developments,
we were the first bank globally to implement ’SWIFT GPI Instant’ to
increase the speed and transparency of cross-border payments. In
addition, we launched a Green Building Tool to help customers make
their properties more energy-efficient, as well as a pilot Business
Finance Assistant tool designed to help clients save time on financial
admin and manage their finances more effectively.
Our ongoing focus on transforming the business and investing in digital
have enabled us to respond effectively to the accelerating shift to digital
channels brought about by the COVID-19 pandemic, with the benefits of
this investment evidenced throughout the crisis.
Delivering for customers
The proportion of products originated via digital channels increased
significantly in 2020, up 10 percentage points to 85 per cent, the highest
level to date. Despite increased usage, this was not at the expense of
customer satisfaction where net promoter scores reached an all-time
high, as ongoing investment in systems and functionality meant that we
were able to meet the increased customer demand, while also adapting
our offering to make it easier for our customers to perform activities
online. For example, we doubled the size of cheque scanning limits
for our customers, resulting in a more than 80 per cent increase in the
number of cheques deposited by our retail customers.
Continued adoption of new technologies
In addition, we have continued to increase our adoption of new
technologies and these have allowed us to support our customers at
pace. As an example, we have used robotics to process over 90 per cent
of Bounce Back Loan applications and, through this, have created
significant colleague capacity during a period of increased demand.
The use of technology has also created opportunities to further improve
operational efficiencies as we modernise our IT and data architecture
and improve processes at the same time as prioritising our technology
based investment. By the end of 2020, 78 per cent of our cost base was
covered by digitisation. This compares to our original GSR3 target of
70 per cent and represents nearly a five and a half fold increase versus
the equivalent figure of 12 per cent at the end of 2017. In addition,
we have continued to make progress on migrating applications to
cloud solutions.
Personalising our customer
experience
We are improving the experience of our
customers through the combination of
new technological capabilities and our
extensive data insights. Using real time
customer triggers and predicted needs,
based on machine learning, we are now
able to deliver enhanced navigation
within our digital apps as well as more
timely, relevant and co-ordinated
communications across email, SMS and
within apps that are specifically tailored
our customers’ individual needs
Supporting our customers
Through the use of robotics over
300,000 Bounce Back Loans have been
approved with a total value of over
£9 billion and an approval rate of
around 97 per cent
Without our robotics
capability, we wouldn’t
have been able to provide
such timely support to our
customers at a time when
they needed it the most.
Lloyds Banking Group
colleague
Lloyds Banking Group Annual Report and Accounts 2020
19
Progress in 2020
Maximising
Group capabilities
Transforming
ways of working
Key Objectives 2018 to 2020
Key Objectives 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
50 per cent increase in training and development
to 4.4 million hours
Up to 30 per cent change efficiency improvement
We have continued to make strong progress in meeting our personal
customers’ growing financial planning and retirement needs, while
continuing to support our Commercial Banking clients through
increased lending and further customer proposition improvements.
Meeting our customers’ growing financial planning
and retirement needs
In 2020 we increased the number of customers with access to our
unique Single Customer View capability by approximately 1.5 million
to c.6.5 million, but did not achieve our original target of extending this
to 9 million customers, due to our revised focus on more immediate
customer priorities in light of COVID-19. We also expanded the scope of
Single Customer View to include Halifax Share Dealing so that customers
with this functionality are now able to view their pensions and investment
portfolios alongside their banking products. Separately, we also launched
an equity release product via our Scottish Widows brand, through which
customers can access equity in their homes to help family members get
onto the housing ladder or supplement their own retirement income.
While the pandemic has caused some delays, our ambition for Schroders
Personal Wealth to become a top three UK financial planning business
remains unchanged, although we now expect to achieve this by 2025.
Improving the experience of our Commercial Banking clients
We have actively supported our Commercial Banking clients throughout
the COVID-19 crisis. In 2020 we achieved our gross lending commitment
to businesses of £18 billion and comfortably exceeded our cumulative
three year target of increasing net lending to start-ups, SME and Mid
Market clients by £6 billion. In addition, we extended our support for
business clients who trade overseas by successfully completing the
Bank’s first UK Export Finance backed Export Development Guarantee
transaction, participating in the completion of transactions with a total
syndicated value of £4.4 billion to support clients with their trading
ambitions. We have also launched a number of new client propositions.
These include our Payables API proposition, ’PayTo’, which has seen rapid
client uptake, having processed around 500,000 transactions totalling
over £2 billion over the course of the year, as well as a 25-fold increase in
the value of transactions processed between the first and fourth quarters.
The COVID-19 pandemic is having significant implications for our
colleagues. These include accelerating the transition to new ways of
working for the majority of the Group while also challenging the skills
that we have sought to develop over the course of this strategic plan.
This significant change has also increased our focus on our broader
workforce proposition, ensuring our colleagues feel valued and
engaged in an uncertain environment.
New ways of working
Since March, more than 50,000 colleagues have worked remotely
as a result of the pandemic. In order to facilitate this and to improve
colleague experiences of working from home, we have enabled the
distribution of over 100,000 office items to our colleagues’ homes. In
addition, we increased our adoption of remote working tools to increase
collaboration and support more agile working practices. At the height of
the crisis, we also demonstrated significant operational agility by rapidly
redeploying over 2,500 colleagues to customer support functions to
respond to elevated customer demand.
In addition to physical and technological support, we have also
prioritised the mental health of our colleagues in a period of significant
uncertainty and change with regular check-ins throughout the year and
increasing access to a number of wellbeing tools. For example, over
14,000 colleagues have made use of the mindfulness app, Headspace,
for which the Group provides a free annual subscription.
Delivering the skills for the future
Despite significant levels of change during the year, we remain focused
on ensuring our colleagues have the skills to deliver our longer-term
transformation aims and, as such, have continued to invest in their
development. We delivered an additional 2.1 million training hours to
develop the skills for the future in 2020, taking the total to a cumulative
5.3 million over GSR3, surpassing our target for this strategic plan.
Improving customer experience
Our PayTo payments proposition enables our
Commercial Banking clients to make single Faster
Payments directly from their own systems in less
than a second, via a secure, direct connection
with the Bank, and without human intervention.
Since launch, PayTo has processed around 500,000
transactions totalling over £2 billion, with its real-time
response also enabling our clients to significantly
improve their own working capital management as
well as the experience of their customers.
Delivering for each other
and our customers
Throughout the year our colleagues have
done a brilliant job of making the best of
this situation by adapting at speed and
continuing to deliver for our customers
and each other. As we consider how our
business can thrive in whatever the new
world may look like, we’re also seizing
the opportunity to pause, learn from our
experiences and reimagine how we all
might work in the future.
I have worked for the Group
for over 20 years and I have
never been prouder to
say that I work for Lloyds
Banking Group; the support
for staff (and in turn our
customers) throughout the
pandemic has been simply
exceptional
Lloyds Banking Group
colleague
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
20 Lloyds Banking Group Annual Report and Accounts 2020
Our progress in building a sustainable and responsible business continued
2020: Progress in environmental and social performance
Our Helping Britain Prosper Plan has served
to unite the Group behind an inspiring set of
environmental and social impact ambitions
which have enabled us to provide significant
support for key areas where we believed
we could make the biggest difference as
a Group. The Helping Britain Prosper plan
is underpinned and supported by various
additional Environmental, Social and
Governance (ESG) performance areas which
form a firm foundation for the Group to be
a responsible, inclusive, ethical and
sustainable company.
For the 2020 reporting period, we have
included updates on our Helping Britain
Prosper plan objectives as well as disclosing
additional ESG aspects of our performance to
reflect the evolving information needs of our
stakeholders.
Our 2020 performance on our 7 priority
Helping Britain Prosper areas can be
identified in the following text by this
indicator
Selected disclosures related to good
governance practices that support
conducting our business in a responsible
manner are included in this report. Further
disclosures related to the governance of the
Group can be found on page 86.
We have produced a supplementary ESG
Report on our performance in 2020 which
contains further details on all disclosures
included in this section which is available on
our webpage.
E S G
We have provided indicators next to
each area of performance to provide the
reader with clear guidance as to which
aspect of our ESG performance the
section supports as well as an indication
of the United Nations Sustainable
Development Goals (SDGs) that we
support through our activities. Through
both our Helping Britain Prosper Plan
(HBP) and wider responsible business
activities, we’re actively supporting the
UN’s sustainable development agenda,
working towards the SDGs.
E Environmental Our environmental
indicator relates to areas of our
performance which have an
environmental impact.
S Social Our social indicator relates to
areas of our performance indicating
our management of relationships
with employees, suppliers,
customers, and the communities
within which we operate.
G Governance Our governance
indicator relates to areas of
performance that support good
governance practices and facilitate
Lloyds Banking Group being
considered a responsible business.
Helping Britain
transition to a
sustainable low
carbon economy
E
S G
Highlights
We continue to make progress in
implementing our financed emissions
reduction ambition on the path to net
zero by 2050 or sooner, working with
customers, Government and the market
to help reduce the emissions we finance.
We calculated our initial estimated view
of 2018 financed emissions baseline and
developed our first emissions intensity
reduction ambition for the power sector.
We continue to make progress
in the implementation of the
recommendations of the Taskforce
on Climate-related Financial
Disclosures (TCFD).
We have developed three new
operational climate pledges which will
accelerate our plan to tackle climate
change and apply across our operations.
We have launched several new green
finance products, tools and services in
the year.
This section contains certain disclosures in
alignment with the recommendations of
the Task Force on Climate-related Financial
Disclosures (TCFD). Additional TCFD related
disclosures can be found in the Lloyds
Banking Group ESG Report.
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, the UK
Government’s Net Zero target and Ten Point
Plan for a Green Industrial Revolution; and the
recommendations of the TCFD.
The economic recovery required post-
COVID-19 provides a critical opportunity
to drive Clean Growth and ensure that the
UK’s decarbonisation requirements sit at the
heart of the UK’s policy framework. In 2020,
we joined over 200 businesses, investors
and business organisations in calling on the
Government to deliver a clean, inclusive and
resilient recovery plan. The Group produced a
separate document outlining why we believe
prioritising a green recovery is critical and the
priority areas we thought should feature within
any economic stimulus plan.
Our strategy
Our goal and approach
As a signal of our commitment we set an
ambitious goal in 2020, working with customers,
Progress in 2020
Government and the market to help reduce
the emissions we finance by more than 50 per
cent by 2030, on the path to net zero by 2050 or
sooner, which will support the UK Government's
ambition and the 2015 Paris Agreement. During
the course of 2020, we have calculated an initial
estimate of our 2018 financed emissions baseline
and we developed our first emission intensity
reduction ambition for the power sector, the
decarbonisation of which is critical to the UK
achieving its climate targets. We will continue
to develop additional sector specific ambitions
throughout 2021.
In addition, the Insurance and Wealth division
(excluding Wealth Private Banking) have
published a target to reach net zero across our
full portfolio of investments by 2050, halving
their investments’ carbon footprint by 2030.
More detail is provided in the metrics and
targets section (see page 22).
In order to meet our overall 2030 and 2050
goals, we will continue to:
Identify new ways to support our customers
and clients with the management of
opportunities and risks associated with
climate change, and the transition to a low
carbon economy.
Identify, manage and disclose material
sustainability and climate-related risks across
the Group and their impacts on the Group and
its financial planning processes, in line with
the TCFD framework. This includes working
with industry bodies, specialist consultancies
and leading academics to develop a robust
climate risk measurement capability.
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. To support this
we have updated our operational climate
pledges, setting a new net zero goal for
2030 (see page 22).
We participate in several industry initiatives
and have signed up to key principles that drive
action on climate change and sustainability,
which are detailed in our Lloyds Banking
Group ESG Report.
Recognition of activity
To address the increasing needs of our
stakeholders, and to enhance our ESG
disclosures we have included a full table of
the Group’s performance against various ESG
indices, which includes our 2020 CDP (formerly
Carbon Disclosure Project) rating, in the
Lloyds Banking Group ESG Report.
Risk management
The Group has adopted a comprehensive
approach to embedding climate-related
risks into our Enterprise Risk Management
Framework through:
Creation of a new principal risk for climate
risk, in order to drive dedicated focus and
a consistent approach, whilst enhancing
Board-level insight
Lloyds Banking Group Annual Report and Accounts 2020
21
Progress in 2020
OUR AMBITION
We set ourselves seven leadership
ambitions to support the UK’s
transition to a sustainable future:
How we are delivering against our ambitions
In 2020, we have focused on enhancing our green finance products and services to
achieve our ambitions. Examples of this include the following.
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
Since 2018 the Group has supported renewable
energy projects that could power the equivalent
of 10.1 million homes, significantly exceeding our
Helping Britain Prosper Plan 2020 target
We launched several new green finance
products, tools and services: a Lloyds Bank
and Bank of Scotland Green Buildings Tool; a
Sustainability Fixed Term Deposit and 95 Day
Notice Account; and we also structured and
co-ordinated the first Sterling Overnight Index
Average (SONIA) Sustainability Linked Loan for
Affinity Water
Homes
Be a leading UK provider of
customer support for energy
efficient, sustainable homes
We launched our Green Living and Eco Home
Hub for Halifax and Lloyds customers
To support Halifax customers with the cost
of green home improvements, we have also
introduced a Green Living Reward under the UK
Department for Business, Energy and Industrial
Strategy (BEIS) Green Home Finance Innovation
Fund
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 challenges 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
exacerbated 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
In 2020, we more than doubled the number of electric vehicles financed through our Motor Finance and
Leasing subsidiaries, Lex Autolease and Black Horse
We have launched our Responsible Investment
Framework in March 2020 and our supporting
Stewardship Policy
Our Exclusions Policy focuses on companies that
have failed to meet our environmental, social and
governance standards, namely manufacturers
of controversial weapons, UN Global Compact
violators and those deriving more than 10 per
cent of their revenue from thermal coal and tar
sands extraction. We are currently divesting
an initial £440 million from these companies,
starting with those investments where we have
direct control and are working to expand the
application of this policy into external pooled
funds that underpin our multi-asset funds as well.
Early success of our engagement with one of our
We continue to partner with RedArc to operate
a trauma helpline that aids customers needing
extra help after a traumatic claim such as a fire
or flood
partner asset managers has led the investment
manager to introduce an exclusions policy
for all their Europe-domiciled passive funds
totalling over £20 billion, leading to an additional
divestment of approximately £280 million within
our customer pension portfolios
Through our shareholder investments we provide
direct loans for renewable energy, including for
offshore wind and solar energy
We are also investing £2 billion of our Pension
and Retirement Portfolio Pension Funds into
a new fund, the ACS Climate Transition World
Equity Fund, co-created with BlackRock that
looks to increase investment in companies that
are well prepared for the low carbon transition
and to reduce exposure to those that are less so
We are also investing in ways to minimise the
impact of flooding on our customers. For example,
we continue to provide a Rapid Response Vehicle
to quickly assess claims and release funds to
customers in the worst affected areas
Since the launch of this ambition in 2016, we have maintained our role as a leader for our UK corporate
clients between 2016 and 2020, raising around £2.9 billion.
We continue to improve the sustainability of our
own operations and have recently updated our
operational climate pledges (see page 22)
This year we have calculated and disclosed
the emissions associated with increased
homeworking as a result of COVID-19, and
sponsored a white paper in this area
We have continued to reduce the energy and
carbon intensity of our properties and have
supported low carbon travel
Our overall location-based carbon emissions
were 159,487 tonnes CO2e; a 24 per cent
decrease since 2019 and 72 per cent since our
2009 baseline (legacy scope)
Integration of climate risk into our existing
principal risks, to ensure comprehensive
consideration across all aspects of our
business activity.
Climate Risk is included as both a principal and
emerging risk this year given it is such a new
and fast moving area. We continue to ensure
our approach for climate risk management has
suitable Board-level visibility. The Board has
approved a Risk Appetite Statement for climate
risk, as well as an interim metric to ensure the
Group continues to progress activities at pace,
supported by Board-level risk reporting.
As the understanding and importance of
climate risk progresses, climate scenario
analysis is becoming an essential capability
and risk management tool. Scenario analysis
assists the identification, measurement and
ongoing assessment of climate risks over
the longer-term, and the potential threats to
the Group’s strategic objectives. In 2020, the
Group has developed its climate scenario
analysis framework and will see outputs from
this in 2021.
To further accelerate progress, we have
engaged with third-party consultants to
support the development of our climate risk
management framework and high priority
sector analysis, thereby extending our
modelling and assessment capabilities for
quantifying climate risk.
Climate risk and sustainability has been a key
consideration in the credit assessment process
in recent years, and in 2020 we have deepened
the integration of sustainability into our credit
risk processes and appetite statements. We
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
22 Lloyds Banking Group Annual Report and Accounts 2020
Our progress in building a sustainable and responsible business continued
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Helping Britain transition to a sustainable low
carbon economy continued
continue to refine the Group’s external sector
statements, which help articulate appropriate
areas of climate-related risk appetite and
our approach to the risk assessment of our
customers. For more information on the Group’s
external sector statements see page 24.
As part of the Group's credit risk policy, we
have mandatory requirements to consider
environmental risks in key risk management
activities. In Commercial Banking, Relationship
Managers must continue to ensure that
sustainability risk is considered for all new and
renewal facilities, and specifically commented
on where credit limits exceed £500,000. We
have also developed and are piloting a tool in
Commercial Banking to help qualitatively assess
our clients’ physical and transition risks.
In Retail, we consider exposure to physical
risks, such as flooding, in our mortgages
origination criteria and we have also introduced
sustainability related criteria into our motor
finance businesses. Within Insurance, an
assessment of climate-related risks to General
Insurance (GI) liabilities is integrated into the
internal model governance process. We further
developed our weather modelling capabilities
in 2020 through completion of a research
partnership between the Group's GI Weather
Modelling Team and the University of Reading
on extreme wind and flood risk in the UK.
Sectors with increased climate risk
The Group has identified those sectors where
we have lending to customers that may likely
contribute a higher share of Lloyds Banking
Group’s financed emissions (see Table 1). Not all
customers in these sectors have high emissions
or are exposed to significant transition risks. As
discussed within our disclosure, we continue
to enhance and refine this work at both
counterparty and sector level, considering both
risks and opportunities as we look to support
our customers' responses to climate change.
Metrics and targets
Financed emissions
Lloyds Banking Group believes it is appropriate
to provide more financial information on our
financed emissions, although we also recognise
this is a rapidly developing area, with evolving
and sometimes limiting data availability, data
completeness and calculation methodologies.
We expect these to continue to improve in
2021 and beyond, helping us to refine our
approaches, estimates and understanding of
the climate risk within Lloyds Banking Group’s
portfolios. However, in order to enhance
disclosure, whilst recognising these limitations,
we detail in Table 2 an initial estimated view of
the 2018 financed emissions baseline across
the Group’s own lending activity (excluding
Insurance and Wealth).
This will serve as an initial basis for our goal of
helping to reduce the emissions we finance
by more than 50 per cent by 2030 and to
help us better support customers in their
transition plans to a low-carbon economy (see
Table 2). We selected 2018 as there is more
comprehensive company emissions reporting
and UK Government Office of National Statistics
(ONS) emissions data available at that time.
We have used the emerging industry standard
for calculating financed emissions developed
by the Partnership for Carbon Accounting
Financials (PCAF). The baseline is an estimate,
as client or asset level emissions data is currently
not available in all cases and where appropriate,
we have used internal and external data and
proxies to fill these data gaps. Given this is a
new discipline that will continue to develop
and evolve, it is expected that our baseline
will change in the future (perhaps materially),
which may require restatement. We expect
methodologies for calculating financed
emissions to mature, with data availability
and quality also improving from clients and
Government sources.
Our initial estimated view of the 2018 financed
emissions baseline covers approximately
70 per cent of the Group’s balance sheet
(excluding Insurance and Wealth)1 comprised of:
Motor vehicle loans (Lex and Black Horse) –
at individual vehicle level, vehicle emission
intensity and contracted (or estimated) miles
driven per annum
Mortgages (Retail UK Mortgages) – from
Energy Performance Certificates (EPCs) where
available with estimates used for properties
without EPC ratings
Business loans (Commercial Banking only) –
on client-level emissions data and asset-based
estimates using ONS UK sector emissions
Cash balances – with no associated emissions
Governance
Our governance structure provides clear oversight and ownership of the Group’s
sustainability strategy and management of climate-related risks. Governance for
climate-related risks is embedded into the Group’s existing governance structure and is
complementary to governance of the Group’s sustainability strategy.
Lloyds Banking Group Board
Responsible Business Committee
Board Risk Committee
Group Executive Committee
Group Executive Sustainability Committee
Group Risk Committee
Group Sustainability team
Climate Risk Executive Management
Divisional forums/
working groups
Group Sustainability
forum
Climate Risk Planning
& Prioritisation
Progress in 2020
For the remaining balance sheet, 26 per cent
currently have no method for calculating
emissions and 4 per cent do not have data readily
available to enable emissions to be calculated.2
As currently recommended by PCAF, the
baseline only includes Scope 1 and 2 emissions
of clients and does not include undrawn lending
commitments, off balance sheet contingents or
areas where there is no methodology.
Insurance and Wealth financed emissions
The financed emissions for the Insurance and
Wealth division are not included in the Group’s
total financed emissions or the Group’s target
to reduce financed emissions by 50 per cent by
2030. Due to the different nature of banking and
investment activity, the Insurance and Wealth
division will be further developing its approach
to reporting appropriate climate metrics and
targets during 2021.
Power sector ambition
In Commercial Banking, we have been working
to develop a power sector ambition as power
sector decarbonisation is critical for the UK to
achieve its Net Zero goal.
We have determined that our power generation
portfolio, comprising Commercial Banking
large corporate and project finance portfolio
facilities, generated financed emissions of
0.7MtCO2e in 2018, with an emission intensity of
141gCO2e/kWh on a drawn basis, covering both
UK and EU exposures. This is lower than the UK
average grid emissions intensity of 283 gCO2e/
kWh in 2018, due to our market leading support
for UK offshore and renewable energy.
Having assessed our Commercial Banking
large corporate and project finance power
generation portfolio against decarbonisation
plans and our commitment to Help Britain
Prosper, we are now setting an ambition to
reduce the portfolio’s emission intensity to
less than 75gCO2e/kWh by 2030* This is in line
with the UK’s net zero ambition, but takes into
account the combination of UK and European
clients in our portfolio.
*We have followed the PCAF recommendation to only
account for drawn lending exposure in our financed emission
disclosure. It is important to highlight that the undrawn portion
of the power generation portfolio could result in fluctuations to
the emission and power intensity baseline.
Achieving our ambition will be dependent on the
UK and European countries putting in place the
policy frameworks to meet decarbonisation goals
and major utilities achieving their decarbonisation
objectives. We will work with the Government and
our clients to help support this transition.
Green finance
In 2020, we provided over £2.3 billion of green
finance in Commercial Banking, through our
Clean Growth Finance Initiative, Commercial
Real Estate Green Lending Initiative, Renewable
Energy Financing and Green Bond facilitation.
This increased our total green finance to over
£7.3 billion since 2016. In addition, we have
supported clients with over £1.8 billion of
Sustainability Linked Loans since 2017.
New climate pledges for our own operations
In 2019 we announced achievement of our
2030 carbon emission reduction goal for our
own operations, 11 years early, having reduced
carbon emissions by 63 per cent between
2009 and 2019, and exceeding our 60 per cent
reduction target. We are now able to announce
three new operational climate pledges which
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Progress in 2020
Lloyds Banking Group Annual Report and Accounts 2020
23
accelerate our plan to tackle climate change and
apply across our operations.
We will achieve net zero carbon operations
by 2030. We plan to reduce our direct
emissions (known as Scope 1 and 2
emissions) by at least 75 per cent (compared
to 2018/9 levels)
We will reduce our total energy consumption
by 50 per cent by 2030 (compared to
2018/9). Whilst we already procure zero
carbon electricity, it remains crucial that we
reduce the amount of power we consume
to support the UK in meeting an increasing
demand for renewable energy
We will maintain travel carbon emissions
below 50 per cent of pre COVID-19 (2018/9)
levels, embedding for the long-term the
reduced levels of commuting and business
travel seen during the pandemic and
supporting colleagues to switch to low
carbon transport.
Achieving these goals will not be easy, and we
will need to invest in our buildings over the next
decade, supporting the UK to make a green
recovery. We will continue to deploy energy
efficient technology including LED lighting and
improved building controls. We will remove all
use of natural gas from our estate, replacing
our gas boilers with zero carbon heating
technologies and create more sustainable
branches in communities across the UK. Many
of the technologies we will need to use are still
new and we will need to work closely with our
partners and supply chain to innovate.
Looking forward
In 2021, we will continue to develop additional
sector-based ambitions to support our goal to
help reduce the emissions we finance by more
than 50 per cent by 2030. We will continue to
enhance our methodologies and framework
for reporting climate risks and opportunities,
taking into account relevant industry guidelines
and regulatory reporting requirements. This
will further advance our disclosures and
respond to the evolving needs of both our
shareholders and other stakeholders.
Read more on climate change related
performance
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
Table 1. Lending1 to customers in sectors at increased risk from the impacts of climate change
Commercial Banking sector4
Energy use in buildings
Agriculture
Transport
Energy use in industry
Energy supply
Real estate (inc housing associations)
Agriculture, forestry & fishing5
Passenger transport
Industrial transport
Automotives6
Housebuilders
Construction7
Cement, construction materials, chemicals & steel manufacture
General manufacturing
Food manufacturing and wholesalers
Oil & Gas8
Utilities
Coal mining
Total
Retail division areas9
UK Mortgages
UK Motor Finance
Total
Lending to Commercial Banking
customers (£m)2
% of total Group loans
& advances to customers3
Dec 2020
25,426
7,464
1,135
1,374
1,485
870
1,210
317
1,301
1,312
1,099
1,638
8
44,639
Dec 2019
27,124
7,219
1,120
1,674
1,272
1,168
1,179
391
1,285
1,844
1,393
1,779
21
47,469
Dec 2020
5.04%
1.48%
0.22%
0.27%
0.29%
0.17%
0.24%
0.06%
0.26%
0.26%
0.22%
0.32%
0.002%
8.85%
Dec 2019
5.44%
1.45%
0.22%
0.34%
0.26%
0.23%
0.24%
0.08%
0.26%
0.37%
0.28%
0.36%
0.004%
9.53%
Loans & advances to
customers (£m)
% of total Group loans
& advances to customers3
Dec 2020
294,806
15,201
310,007
Dec 2019
289,198
15,976
305,174
Dec 2020
58.42%
3.01%
61.44%
Dec 2019
58.04%
3.21%
61.25%
1. Commercial Banking and Retail divisions only. Excludes Insurance and Wealth division.
2. Commercial Banking division only, excludes Commercial Finance. Drawn lending is gross of significant risk transfers. Excludes Business Banking lending, which sits within Retail division.
2019 restated on a consistent basis with 2020.
3. Percentages calculated using total Group loans and advances to customers on a statutory basis, before allowance for impairment losses (£504,603 million at 31 December 2020 and
£498,247 million at 31 December 2019 - see page 316).
4. Commercial lending classified using ONS SIC codes at legal entity level.
5. Agriculture lending includes Agricultural Mortgage Corporation (AMC) based on loans and advances to customers £4,186 million (2019: £3,998 million).
6. Includes Automotive manufacture, retail & wholesale trade, rentals and parts but excludes finance captives and securitisations.
7. Construction excludes 41100 Development of building projects (included within Real Estate) and 41202 Construction of domestic buildings (reported separately as Housebuilders).
8. Excludes Commodity Traders.
9. Based on loans and advances to customers within Retail Division.
Table 2. Initial estimated view of the 2018 financed emissions baseline for the Group’s own lending
(excluding the Insurance and Wealth division)
Asset class
Estimated MtCO2e
(Scope 1 & 2 emissions)
Equivalent share of UK
total emissions by sector
/ asset class6
Motor vehicle
loans3
3.2
Mortgages4
6.3
Business
loans5
15.9
c.4%
c.6%
c.6%
Total
25.41,2
c.5.6%
1 Includes Nil emissions for cash balances, which accounted for 8% of the Group’s balance sheet
2 Examples of areas where there is no current method for calculating emissions include: Government securities,
derivatives, personal loans, credit cards and reverse repos. Areas where data was not readily available, but
coverage may be expanded in the future include: business banking, non-UK mortgages, loans and advances
to banks and some assets at fair value through profit and loss.
3 Covers 95 per cent of motor vehicle loans and operating lease assets. Excludes assets that do not have a motor,
specialist vehicles and vehicles where mileage is difficult to estimate. Currently does not apply a loan-to-value
ratio for emissions.
4 Covers 97 per cent of mortgages. Excludes non-UK mortgages. Uses EPC emissions estimates for 45% of
properties and average emission intensity profiles of EPC C to G properties to calculate emissions for the
balance of properties where EPCs are not available. Property index value as at end 2018 is used for current
property value in PCAF emission attribution calculations.
5 Includes 99% of Commercial Banking business loans, based on drawn lending. The PCAF sector-based
approach has been used for the majority of the business loans baseline, using Office of National Statistics (ONS)
UK emissions. The business loans method has been applied to project finance (excluding Power project finance)
and commercial real estate assets, which will be refined in the future as better data becomes available.
6 Total UK emissions in 2018 were: 88 MtCO2e from cars and vans; c.100 MtCO2e from homes, including emissions
from both electricity and heating; and 263 MtCO2e from business (excluding emissions from electricity used in
residential property). Source: Department for Business, Energy and Industrial Strategy - 2018 UK Greenhouse
Gas Emissions, Final Figures.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
24 Lloyds Banking Group Annual Report and Accounts 2020
Our progress in building a sustainable and responsible business continued
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Progress in 2020
ESG lending
and investment
E
S G
Highlights
We have tightened our lending appetite
for the coal sector.
We have further enhanced our
environmental and social risk lending
due diligence processes. In 2020, we
have developed and piloted a tool in
Commercial Banking to help assess our
clients' physical and transitions risks.
We have established a dedicated
Responsible Investment team in our
Insurance and Wealth division and have
launched our Responsible Investment
Framework and Stewardship policy
through Scottish Widows.
The Group expects all of our customers
to comply with applicable international
conventions, sanctions and embargoes,
legislation, and licensing requirements whilst
showing a clear commitment to robust
ESG performance and risk management.
Lloyds Banking Group
sector statements
The Group has identified selected sectors and
defined specific risk appetites related to our
financing activities.
Our 2020 review of our sector statements
has tightened our lending appetite for
exposure to the coal sector even further.
The Group will not:
Engage new Commercial Banking
customers where any revenue is derived
from operating thermal or metallurgical
coal mines,
Directly finance new or existing UK coal-
fired power stations by the end of 2022,
Support new project finance or direct
investment in coal power operations of
diversified utility companies elsewhere
in the world, unless the finance is used to
decommission the coal power generation or
convert to renewable power generation, or
Provide general purpose banking or lending
to any new customers where any revenue
is derived from operating coal-fired power
stations in the UK.
We will continue to support existing
customers in the coal industry to diversify
their strategy to eliminate coal mining or coal
power operations from their UK operations
in line with the Government’s 2024 phase-out
target. We will also continue to encourage
clients with international coal-related
operations to reduce their exposure in line
with the Paris Agreement.
The Climate
Transition
World Equity
fund
Scottish Widows partnered with BlackRock to create a new fund
aligned to the goals of the Paris Agreement, helping mitigate
climate change risks and benefiting from the opportunities
relating to the low carbon transition. We have now initially
committed £2 billion from our default pension offering to be
invested into this fund – the Climate Transition World Equity
fund, which was launched in August. This will enable over
2.6 million pension savers to invest more sustainably.
We are also expanding its use within our wider multi-asset
fund range. Compared to benchmark, this fund could be
expected to achieve a 50 per cent reduction in carbon emissions
intensity and to achieve 60 per cent more revenue from ‘green’
technologies. We continue to integrate ESG factors into the rest
of the default pension investment offering, with the underlying
funds moving to introduce exclusions on companies which fail
to meet our standards on United Nations Global Compact,
Controversial Weapons, Thermal Coal and Tar Sands over the
next year, as publicised in the Scottish Widows Exclusions Policy.
During 2020 we have placed additional
emphasis on the importance of engagement
with clients in the oil and gas sector to
determine whether they have Paris-aligned
transition plans in place.
We will continue to develop sector specific
guidance to help relationship managers
identify climate risks.
Our full sector statements are available on
our website, and further detail related to the
sector statements can be found in the 2020
Lloyds Banking Group ESG report.
Sustainability risks and lending
As part of the Group's credit risk policy, we
have mandatory requirements to consider
environmental risks in key risk management
activities. In Commercial Banking, Relationship
Managers must continue to ensure that
sustainability risk is considered for all new and
renewal facilities, and specifically commented
on where credit limits exceed £500,000.
In 2020, we have developed and piloted a
tool in Commercial Banking to help assess
our clients’ physical and transition risks.
The Group is a signatory to The Equator
Principles, a risk management framework
for managing environmental and social
risks in Project Finance transactions, such
as large scale energy, industrial, or
infrastructure projects.
Our 2020 performance table related to The
Equator Principles can be found in the 2020
Lloyds Banking Group ESG Report.
Responsible investment
and stewardship
Over the course of 2020 we have focused
on building robust foundations for future
responsible investment activity, launching
our responsible investment framework in
March and developing Stewardship and
exclusions policies. We have also established
a Responsible Investment (RI) team which
is made up of professionals with diverse
backgrounds in RI, policy, research, advocacy,
data, and climate science.
Executive oversight is provided by a
Responsible Investment Committee. This
Committee, with strong Board support, plays
a pivotal role in setting Scottish Widows’
sustainability agenda and provides strategic
direction to our responsible investment activity.
As an asset owner, we work with the largest of
our investee companies to engender positive
change and enhance their approach to
climate and Board diversity issues. We ask all
of our fund managers to comply with the UK
Stewardship Code or an equivalent for their
jurisdiction.
Read more on ESG in Lending and
Investment practices
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Progress in 2020
Lloyds Banking Group Annual Report and Accounts 2020
25
Building a truly inclusive organisation also
requires us to be an anti-racist organisation –
one where all colleagues speak up, challenge,
and act to take an active stance against racism
and discrimination of any kind.
Getting this right is at the heart of our purpose
to Help Britain Prosper – a more inclusive
society is a more prosperous society, and a
diverse business is a better business.
Ethnic diversity
In 2018 we made a public commitment to
increase the ethnic diversity of both our overall
and senior workforce, which has led to positive
changes. Feedback from our Black colleagues
however, demonstrated that there was still
more to do.
In July 2020, our Group Chief Executive,
António Horta-Osório launched our Race
Action plan. The Group was the first FTSE 100
company to make such a public commitment,
which includes a new public goal to specifically
increase Black representation in senior roles
from 0.6 per cent at senior grades to at least
3 per cent by 2025, to align with the overall UK
labour market. We have already delivered a
number of activities, including establishing a
Championing
inclusion and diversity
E
S G
Highlights
During 2020, we launched our Race
Action plan. The Group was the first
FTSE 100 company to launch a new
public goal to specifically increase Black
representation in senior roles to align
with the overall UK labour market.
We have published our first Ethnicity Pay
Gap Report.
We have published our annual Gender
Pay Gap Report.
We achieved the external Hampton-
Alexander goal of 33 per cent women in
the combined Executive Committee and
Direct Report population.
Lloyds Banking Group aims to create a fully
inclusive environment that is representative
of modern-day Britain and where everyone
can reach their potential. We continue to
invest in making the Group a leading inclusive
employer, where the unique differences our
colleagues bring to work every day are valued.
Our inclusion and diversity data
Gender
Board members
GEC and GEC direct reports
Senior managers
Colleagues
Male
Female
Male
Female
Male
Female
Male
Female
2020
2019
8
4
86
41
4,540
2,670
28,948
39,817
8.3%
7.7%
10.6%
9
4
111
50
4,539
2,647
29,522
41,033
NR
6.7%
10.2%
3.2%
2.8%
2.3%
2.2%
Ethnicity
% of Board members from an ethnic minority background
% of Senior managers from an ethnic minority background*
% of Colleagues from an ethnic minority background*
Disability
% of colleagues who disclose that they have a disability
Gender identity and sexual orientation
% of colleagues who disclose that they are lesbian, gay,
bisexual or transgender
All data as at 31/12/2020. 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.
Ethnic background: 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, EX and ED (F being the lowest).
NR: Data not reported during period.
* 2020 Indicator is subject to Limited ISAE 3000 (revised) assurance by Deloitte LLP for the 2020 Annual Responsible Business
Reporting
The Lloyds
Banking Group
Race Action plan
Our Race Action plan aims to drive cultural
change, recruitment and progression across
the Group.
The plan includes a new public goal,
complementing our broader 2018 ethnic
diversity target, to specifically increase Black
representation in senior roles from 0.6 per
cent at senior roles to at least 3 per cent by
2025, aligning the Group with the overall UK
labour market.
To ensure we make robust progress in
delivering our plan, we have appointed a
dedicated senior leader to lead a Race Action
plan team, who will work together with our
Race Action plan working group to drive
action. We have also appointed 23 Black,
Asian and Minority Ethnic colleagues to
form a Race advisory panel, who are already
providing invaluable input into our plan.
In December 2020, we broadened our plan to
go further and work beyond our own internal
boundaries by actively supporting Black
communities through our partnerships with
Foundervine and the Black Business Network.
Further information and progress in relation
to our implementation of our Race Action
plan can be found in the 2020 Lloyds Banking
Group ESG Report.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
26 Lloyds Banking Group Annual Report and Accounts 2020
Our progress in building a sustainable and responsible business continued
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Progress in 2020
Championing inclusion and diversity
continued
Assisting our
customers
E
S G
We recognise that many customers have
chosen to interact with us digitally through
this period, and have developed a number
of new online journeys which give customers
access to set up and service forbearance plans
with us. This also helps us to keep our phone
lines available for those who need or want to
speak to us. Further information on our digital
support to customers is on page 28.
Read more on how we are supporting
our customers
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
Customer mental
health
It has never been more important to continue
to work to support our customers’ mental
health and wellbeing, given the extra
pressures the current pandemic has placed
upon us all. During the pandemic, we have
provided mental health support including
funding for The Silverline, who support the
over 55s who may be feeling lonely and
isolated. In addition to this, we worked in
partnership with our Charity Partner Mental
Health UK to create bespoke mental health
support for our website. Signposting for
customers was introduced to mental health
support available through our websites,
mobile apps and direct mail.
new Race Advisory Panel made up of Black,
Asian and Minority Ethnic colleagues to
influence and inform our diversity strategy,
delivering a series of race education sessions
for our senior leaders, and publishing our first
Ethnicity Pay Gap report. The Board currently
meets, and will aim to continue to meet, the
objectives of the Parker review for at least one
Black, Asian or Minority Ethnic Board member.
Gender diversity
We champion gender equality through
promoting a strong pipeline of executive
female talent for the future. Our ambitious
target to have 40 per cent of senior
management roles filled by women by the
end of 2020 has seen us advance from 28
per cent in 2014 to 37 per cent at the end of
2020. Our progress has been recognised
externally for the second year in the 2020
Bloomberg Gender Equality Index, and for
the 9th consecutive year in the Times Top 50
Employers for Women. We have also been
recognised by Working Families as a Top 10
Employer for working families. We achieved
both the external Hampton-Alexander goals of
33 per cent women in the combined Executive
Committee and Direct Report population and
33 per cent female Board representation, and
will aim to continue to do so.
Gender identity
and sexual orientation
We are proud to have created an inclusive
and open working environment for our LGBT+
colleagues. Our LGBT+ colleague network,
Rainbow, plays a pivotal role in our approach,
and with over 5,000 members and supporters,
is one of the largest networks of its kind in the
UK. In 2020, our Rainbow network celebrated
their 10 year anniversary and held a series of
virtual Pride events for colleagues spanning
ten weeks, reaching over 1,600 colleagues and
raising £10,000 for LGBT+ charities.
Supporting disability
The Group is committed to creating an
inclusive and diverse organisation where
colleagues with disabilities or long-term health
conditions feel valued and supported to reach
their full potential. This has been recognised
through the Group holding the Business
Disability Forum Gold Standard accreditation
and retaining Disability Confident Leader
status from the Department for Work and
Pensions, which recognise the inclusive culture
of the Group and the support we provide our
colleagues who identified as having a disability.
The Group offers bespoke training, career
development and adjustments for colleagues
and applicants with disabilities, including those
who became disabled while employed.
Read more on our progress and actions
on supporting Inclusion and Diversity
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
Highlights
To assist our customers during the
pandemic, we launched a number of
financial, digital and mental health
support initiatives.
We made it easier for our customers less
able to see us in branch, to contact us
by launching priority phone lines with
increased telephony resource, allowing
them to reach us quickly and to avoid the
need for unnecessary journeys.
We made over 750,000 outbound
wellbeing calls to customers to offer
support in 2020 through our branch
networks, and partnered with Mental
Health UK to create a mental health
support section to our customer-facing
webpages.
The Group is committed to providing
meaningful support to meet the needs of
our customers, aiming to provide positive
outcomes and working to mitigate or
reduce the risk of financial harm. The
COVID-19 pandemic has magnified
existing challenges faced by customers,
and brought new challenges affecting
health, income, and relationships.
We have supported over a million
customers with payment holidays across
Mortgages, Credit Cards, Loans and
Motor Finance. This has given customers
the flexibility they need to help get
them back on track and the comfort that
their credit file will not be impacted.
Across Mortgages and Motor Finance, we
remain committed to giving customers time
to recover from the impact of the pandemic
without losing their home or vehicle.
Additionally, further support was provided
to our current account customers, with all
customers benefiting from an initial three
month interest free buffer on their overdraft.
We made it easier for our customers less able
to see us in branch, to contact us by launching
a priority phone number. Priority lines have
been set up for NHS workers and over 70’s
along with increased telephony resource,
to support our customers, allowing them to
reach us quickly and to avoid the need for
unnecessary journeys. Our branch colleagues
made over 750,000 outbound wellbeing calls
to customers throughout the year not only to
support customers with their banking needs
but to check on their wellbeing, and in some
cases connect customers to local support.
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Lloyds Banking Group Annual Report and Accounts 2020
27
Supporting
businesses and SMEs
E
S
G
Highlights
We have provided over £12 billion of
lending through Government-backed
lending schemes.
We have helped over 265,000
businesses start up since 2018.
We have trained 1,211 apprentices,
graduates and engineers through our
investment in the Lloyds Bank Advanced
Manufacturing Training Centre
since 2018.
We have invested over £5 million in
supporting over 230 businesses and 450
apprentices to develop STEM skills that
will support the UK’s recovery.
We have supported over 368,000
organisations in gaining digital skills
and to adapt their businesses with
technology since 2018 through strategic
partnerships.
To support businesses in their transition
to a low carbon future, we launched
several new green finance products,
tools and services (page 21).
Supporting businesses of all types and sizes
is fundamental to helping Britain to both
prosper and recover. The pandemic has had a
profound impact on the way we live our lives
and on the global economy. We remain fully
focused on helping our customers and the
UK economy recover, in collaboration with
Government and our regulators.
This year we have actively supported our
clients with over £12 billion of Government
backed lending in addition to a range of
propositions including approximately 34,000
capital repayment holidays and around 22,000
fee-free overdrafts as part of the Group's
£2 billion COVID-19 fund. As the impact of
the pandemic has been felt across the UK, we
have also looked to address wider concerns
related to the impact on businesses in a
number of ways through providing online
guides and a webcast series. Content has
covered topics such as managing fraud risks,
mental health, the road to a low carbon
economy, optimising working capital and
risk management.
Since 2018, we have now helped over 265,000
businesses start up and re-affirmed our
commitment to the UK’s manufacturing sector
providing £3.7 billion of dedicated investment,
whilst continuing to build on our financial
commitments with our broader support for a
range of issues that impact business skills and
productivity every day.
Our Apprenticeship strategy
The Group has continued with its long-term
investment of £10 million over ten years in
the Lloyds Bank Advanced Manufacturing
Training Centre at the Manufacturing
Technology Centre (AMTC) in Coventry,
which is on track to support the training
and upskilling of around 3,500 apprentices,
graduates and engineers by the end of
2024. Through our annual investment in the
AMTC, we have trained and upskilled 1,211
manufacturing apprentices, graduates and
engineers in manufacturing since 2018.
In addition, by utilising our apprenticeship
levy we have now committed in excess of
£5.4 million supporting over 230 businesses
and 450 apprentices to invest in critical
science, technology, engineering, maths
(STEM) and digital skills that will support
the UK’s recovery across London, West
Midlands and Greater Manchester. This is
part of a £9 million commitment by the Group
over three years to help small and medium
enterprises to develop apprenticeships
through our Levy Transfer initiative.
Supporting businesses
with digital skills
For over five years, Lloyds Banking Group has
evidenced how crucial technology is for small
businesses and the digital economy through
the Business Digital Index reports. We partner
with Be the Business, Google, Microsoft,
Small Business Britain and others to support
small businesses to gain skills and confidence
to both recover and thrive, by adapting their
businesses with technology. We have held
free workshops, peer to peer networking
sessions across all regions of the UK and have
a range of free on-demand learning available,
helping over 368,000 organisations since 2018,
with more in plan for 2021.
Further information on how we are supporting
businesses and SMEs as well as our strategic
partnerships can be found in the 2020
Lloyds Banking Group ESG Report.
Partnering with the
Woodland Trust
Progress in 2020
Helping Britain
get a home
E
S
G
Highlights
We have delivered close to £9bn of
finance for the Social Housing sector
since 2018.
1,900 new homes were built through The
Housing Growth Partnership by SME’s
through our support.
We provided £39.7 billion to first time
home buyers since 2018.
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 delivered
more than £2.5 billion of finance for the social
housing sector in 2020 and close to £9 billion
since 2018. We also continue to support The
Housing Growth Partnership, who provide
help and mentoring to small and mid-sized
house builders and have built 1,900 new
homes across the UK during 2020.
This year we provided £13 billion to first-
time buyers, and across the last three years
have provided £39.7 billion of lending, this
outcome is significantly above our £30 billion
commitment. We have also increased the
ways in which we support first time buyers in
accessing the property market by welcoming
applications from the new Scottish First
Homes Fund, making it easier for those with
little or no savings to buy their first home.
Further information on how we are helping
Britain to get a home can be found in the 2020
Lloyds Banking Group ESG Report.
Read more on how we are helping Britain
to get a home
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
In January 2020 we announced a new
partnership with the Woodland Trust to
plant ten million trees over the next ten years
expanding the UK’s carbon sink and helping to
reforest the UK. Our partnership has three parts.
Supporting Farmers: We are helping farmers
and landowners transition to a low carbon
future by offering preferential funding when
planting more than 0.5ha of new woodland.
Working with Communities: We are
supporting the Woodland Trust with their
Community Tree Pack scheme.
Funding New Woods: We will be creating 10
brand new 'woods within woods' at existing
Woodland Trust sites across the UK.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
28 Lloyds Banking Group Annual Report and Accounts 2020
Our progress in building a sustainable and responsible business continued
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Progress in 2020
Building financial
resilience
E
S G
Highlights
We have facilitated digital training for
1.8 million people since 2018 to assist in
narrowing the digital skills gap.
We have facilitated the delivery of
over 12,500 devices through the
DevicesDotNow campaign and We Are
Digital Helpline. Through the latter, we
have assisted over 8,000 people to learn
digital skills to be able to access online
services and connect virtually with family
and friends.
We established a Domestic and
Economic Abuse Team, conducted
training for our colleagues on how
to support customers facing these
circumstances through strategic
partnerships, and supported charities
assisting victims.
The digital skills gap
Lloyds Bank Academy
To facilitate the shift to a more digital
economy, the Group has developed the
Lloyds Bank Academy. The Academy teaches
basic digital and workplace skills through
online and face-to face courses, aiming to
provide support where, when and how people
need it. During 2020 these courses shifted to
online webinars due to lockdown restrictions.
The Group has facilitated digital training
for 1.8 million people since 2018 through
the Academy and the Academy curriculum
continues to expand having a breadth
of content and partners, including large
corporates, charities, credit unions and
job seekers. Our insight is used by both
Government and other organisations in
the UK. Our Consumer Digital Index was
viewed in over 85 countries with over 37,000
views online.
FutureDotNow
Lloyds Banking Group is a founding
organisation of FutureDotNow, a coalition of
leading companies in the UK dedicated to
accelerating the UK’s digital skills at scale, with
a focus on the employees and customers of
large organisations. As the pandemic started
to impact communities in the UK, the Group
was heavily involved with the DevicesDotNow
emergency campaign, helping with the call
to industry for devices, data and support for
people who were shielding. The campaign
raised over £1.5 million and funding secured to
deliver over 11,500 devices, data and support
to customers.
Helping people
save for the future
We recognise the importance of savings to
build financial resilience and to help tackle
disadvantage. We want to make saving for the
future as easy as possible and we continue
to improve choice, flexibility and control
for customers who are investing, saving or
planning for retirement. The Group has had a
£45.6 billion growth in open book assets1 that
we hold on behalf of customers in retirement
and investment products since 2018.
1 Growth in assets under administration on our front books
We Are Digital Helpline
The Group delivered a new dedicated phone
line which provides guidance and remote
training to customers less able to see us in
branch, to help them stay connected with
everyday digital activities, including online
banking. Customers were contacted and able
to access free and practical support to help
them stay connected online. With guidance
from We Are Digital’s agents, users learn skills
to help with everyday tasks such as online
shopping, booking a doctor’s appointment
using the NHS website, connecting virtually
with family and friends, as well as internet
banking. The service provides not just remote
help via a telephone, but has also allowed for
customers and charities in need to be able
to be provided with a basic tablet device. We
provided over 1,000 devices and data, and
helped 12,500 callers to the helpline.
Domestic and economic abuse
Through the year the UK has seen an
increase in reports of economic and
domestic abuse. We are proud of the
support we have made available to victims
and survivors. The introduction of the
Domestic and Economic Abuse Team to
help victims of financial and economic abuse
was an important next step in both raising
awareness and supporting our customers.
Our engagement with the charity Surviving
Economic Abuse has been critical to
achieving this and working with them, we have
developed an ability to support victims in
separating financial affairs quickly and, where
appropriate, to offer forbearance from debt
incurred as a result of coercion.
During 2020, to support our initiatives,
we have partnered with the charities
Surviving Economic Abuse and Tender to
train our colleagues to support customers
experiencing domestic and financial abuse,
and have engaged with a number of charities
to refer victims and survivors of abuse to our
Domestic and Economic Abuse Team for
support with their finances. We work very
closely with the charity Safe Lives. Safe Lives
have participated in our live broadcasts and
colleague webinars which we run all year
round to provide expert advice and guidance
to colleagues.
Financial capability
The Group has a suite of financial capability
resources available online. These interactive
tools are designed to be an engaging and
informative way of helping children and young
people understand money and financial
management.
In support of our communities and in the
spirit of Helping Britain Recover from the
ongoing pandemic, content has been made
available to all via the Lloyds Bank Academy.
This provides the opportunity for the lesson
plans to be delivered by individuals, parents,
teachers, employers or charities, encouraging
positive conversations about money at home,
at work and in our communities.
Read more on Financial resilience initiatives,
Lloyds Bank Consumer Digital Index, 2020
Transformation with Tech
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Progress in 2020
Lloyds Banking Group Annual Report and Accounts 2020
29
Supporting
our communities
Supporting
our colleagues
E
S
G
E
S
G
Highlights
Highlights
£51.2 million in total was provided for
community investment in 2020.
£25.5 million was donated to our 4
independent charitable foundations in
2020.
2,787 charities were supported in 2020.
As one of the UK’s largest corporate donors,
we use our scale to reach millions of people
and help tackle social disadvantage in
communities across the UK.
Spanning across the past 35 years, our four
regional Foundations have been providing
essential funding and support to charities
across the UK and Channel Islands, helping
communities overcome complex social issues
and rebuild lives.
In 2020, the Foundations received £25.5 million
enabling them to support 2,787 charities. These
charities are tackling issues such as domestic
abuse, mental health, modern slavery and
human trafficking, and employability. The
Group’s commitment to maintain its £25.5
million in the Foundations funding in 2021
helps secure a more certain future for charities
during these difficult times and safeguard the
important work that they do.
In addition to adapting many of our
community engagement initiatives to virtual
delivery, we have responded directly to
community needs through new investments.
These investments included the expansion of
our Mental Health and Money Advice lines,
CLIC online chat services run by our Charity
of the Year partner Mental Health UK (MHUK),
and the provision of mobile devices through a
partnership with We Are Digital (See page 28)
Our total community investment in
2020 was £51.2 million and includes
our colleagues’ time, direct donations,
and a share of the Group’s profits
given annually to the Foundations.
Further information related to how we are
supporting our community initiatives can
be found in the 2020 Lloyds Banking Group
ESG Report.
Read more on how we are supporting our
community initiatives
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
Health and safety of our colleagues and
customers was a key COVID-19 response
focus, ensuring our offices and branches
were compliant with regulations, safe and
able to remain open.
Over 50,000 colleagues were supported
in converting to a working from
home arrangement with technology,
equipment and IT assistance.
Free access was provided for all
colleagues to the Headspace app, and
we have continued to train colleagues to
become mental health advocates.
Our colleague engagement surveys
indicated overall that colleagues felt
supported, that the company culture
was more positive and caring, and that
there is an interest by colleagues to
explore changing ways of working in
the future.
4.1 million hours of training were
delivered to colleagues primarily via
virtual training delivery.
Providing a safe
work environment
During 2020, a key challenge posed by the
pandemic was for the Group to continue
to provide essential financial services
through its physical infrastructure and
remain open to customers. The Group has
been implementing business changes to
manage the pandemic since early 2020,
and has reviewed every iteration of the UK
Government's advice. By the end of 2020,
the Group had co-ordinated over 3,000
risk assessments across our operations
to ensure all offices and branches are
compliant with legislation and safe for
our colleagues and customers.
Agile working
We have seen changing customer demands,
changing colleague needs and expectations,
a fluctuating and less stable business
environment, and significant economic issues
which have led the Group to consider how to
reimagine the way we work.
Prior to the pandemic, the Group had
approximately 35 per cent of colleagues
with an existing agile working arrangement
however, due to national lockdown in early
2020, this extended to over 50,000 colleagues
working from a home environment. During
2021 we will continue to reimagine ways of
working and use behavioural experiments to
test our thinking and identify the practicalities
of various options.
Colleague mental health
Highlights in 2020 related to our colleague
mental health initiatives included the
continued expansion of our ‘Optimal
Leadership Resilience Programme’ to more
of our leaders in order to help them build
personal resilience. In addition, we continue
to promote the ‘Your Resilience’ portal to all
colleagues, including new content to support
our colleagues with the additional challenges
they may face as a result of the pandemic.
We have extended our partnership with
Headspace, offering all colleagues a
free subscription to the market leading
meditation app, providing access to
mindfulness modules covering a range
of topics from stress to self-esteem.
Emergency support
The pandemic has brought the issue of
domestic and economic abuse to the fore. In
2020, we launched an Emergency Assistance
Programme covering the cost of emergency
accommodation and one-to-one support.
This is available to all Lloyds Banking Group
colleagues and their children, at no cost
to them. During this emergency stay, the
colleague can receive additional support from
our Employee Assistance Programme which
will help them through their next steps and
provide support.
Colleague engagement
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 (BSB) Culture Assessment. Our Spring
Pulse colleague survey had a 66 per cent
response rate and indicated positive
reflections related to colleagues feeling
supported, the company culture being more
positive and caring and indicated an interest
by colleagues to explore changing ways of
working in the future. Our Autumn survey was
completed by 72 per cent of the organisation
and showed further increases in pride,
satisfaction and overall engagement.
Colleague remuneration
A number of key decisions were taken to
support colleagues in relation to pay and
financial and non-financial recognition. All
Group employees receive a competitive and
fair reward package. To encourage ownership
colleagues are eligible to participate in HMRC-
approved share plans. Further information is
provided on page 115.
Read more on how we support our colleagues
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
30 Lloyds Banking Group Annual Report and Accounts 2020
Our progress in building a sustainable and responsible business continued
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
Progress in 2020
Conducting our
Business Responsibly
E
S G
Highlights
482 concerns were raised through our
Speak Up line of which 178 were formally
investigated with 41 per cent of those
investigations substantiated.
We became members of the United for
Wildlife Financial Taskforce.
We co-sponsored the National
Economic Crime Centre (NECC) initiative
to tackle criminals seeking to exploit
COVID-19.
Supplier expenditure was £5.1 billion
with over 95 per cent of our third-party
supplier spend incorporated in the UK.
£4 billion of taxes paid over to the
UK Government.
Supporting colleagues
to do the right thing
Our Values and Behaviours alongside the
Financial Conduct Authority’s Conduct rules
set out the expectations of colleagues and
colleagues are encouraged to make decisions
aligned to these. The Group's Code of Ethics
and Responsibility is available on our website.
Speak Up
Colleagues are encouraged to speak up,
challenge and act if they witness anything
inappropriate and we provide colleagues
with a variety of channels to do this. They
can report the matter directly to Group
Conduct Investigations, or make use of our
independent and confidential Speak Up
service, that is operated by a third party.
All concerns are taken seriously and if an
investigation is required, it will be conducted
sensitively by an independent party. In 2020
colleagues reported 482 concerns, of which
178 were formally investigated following
triage, with 41 per cent of those investigations
substantiated, resulting in remedial action.
Other Group services also exist to support
colleagues in trying to informally resolve
grievances. In addition, a new informal
resolution channel ‘Let’s Talk’ was launched
to support colleagues to reflect on their
concerns and understand their rights and
options so that grievances can be effectively
and appropriately resolved through formal
and informal channels.
Human rights
and modern slavery
The Group believes in the importance
of doing business in ways that value and
respect the human rights of our colleagues,
customers, business partners and
communities affected by our business. We
are guided by the International Bill of Human
Rights as well as the International Labour
Organisation’s (ILO) Core Labour Standards
and its Tripartite Declaration of Principles.
As signatories to the United Nations (UN)
Global Compact, we are aligned with its
human rights and labour standards and
report on our progress annually. We also
recognise the Organisation for Economic
Co-Operation and Development (OECD)
Guidelines for Multinational Enterprises
and the UN’s Guiding Principles on
Business and Human Rights.
Pursuant to the UK Modern Slavery Act, we
produce a Modern Slavery Statement on an
annual basis. The Statement outlines the steps
we take to combat modern slavery and human
trafficking in our business and supply chains
and the steps we take to respond and support
survivors and is available on our website.
Conduct risk
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 fair customer outcomes
sets the tone from the top and supports the
development of our Values led culture which
puts customers at the heart, strengthening
links between actions to support conduct,
culture and customers and enabling more
effective control management.
More information related to our approach and
management of Conduct Risk can be located
on page 197.
Customer complaints
Our goal, in line with our purpose of Helping
Britain Prosper, is to support customers
whenever they have cause to complain.
To ensure that we supported our customers,
we introduced prioritisation principles to
ensure customers in challenging financial
situations were prioritised. We reviewed
approximately 35,000 complaints and
prioritised over 2,300 to our highest
category, aiming to make contact with the
customer within 24 hours. Where we noted a
concentration of complaints, we reviewed our
working patterns to ensure those customers
were supported.
We evolved our method of customer
communication by contacting our customers
via SMS to reduce the time they would need
to wait for an update, and to minimise our
colleagues’ need to visit an office. We will
review on an ongoing basis how we can
continue to help our customers.
Protecting customer
data and finances
Cyber security
Customers trust us to keep their money
and data safe, and the Group deploys
sophisticated technology to protect both.
We recognise the importance of secure
behaviours and continue to educate our
customers and colleagues on cyber threats.
We continue as a founding member of the
Financial Services Cyber Collaboration
Centre, working with the Government’s
National Cyber Security Centre, and the
Cross-Market Operational Resilience Group.
We work closely with other banks recognising
the importance of collaboration when it
comes to security, including as part of the
Cyber Defence Alliance (CDA). Recognising
cyber security as a non-competitive issue, we
continue to collaborate externally to protect
the Group and the wider industry.
Fraud and financial crime
The financial crime landscape is undergoing
unprecedented change in terms of both
regulatory reform and evolving crime threats.
The Group’s adoption of a risk-based
approach to managing and mitigating fraud
and financial crime risk ensures compliance
with applicable regulations via a control
framework which focuses on those customers,
products, channels, and jurisdictions that carry
heightened risk.
There are core Group wide policies within
the Group’s risk management framework
relating to fraud, anti-money laundering,
counter terrorist financing, sanctions and
prohibitions, and anti-bribery. A combined
fraud and financial crime mandatory training
course reflecting key policy requirements is
undertaken by all colleagues annually.
Further information related to how we are
conducting our business responsibly can
be found in the 2020 Lloyds Banking Group
ESG Report.
Read more on information related to our
progress in Fraud and Financial Crime
initiatives
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
OUR ENVIRONMENTAL AND SOCIAL PERFORMANCE
NON-FINANCIAL INFORMATION STATEMENT
Lloyds Banking Group Annual Report and Accounts 2020
31
Responsible sourcing
We work closely with our suppliers of
goods and services to manage risks and
drive continuous improvements in the
standards of performance and quality.
We work with approximately 3,000 active
suppliers of varying sizes, with the majority
in the professional services sectors such
as management consultancy, legal, HR, IT,
operations, marketing and communication. In
2020 our supplier expenditure was £5.1 billion
with over 95 per cent of our third-party
supplier spend incorporated in the UK.
The Group requires suppliers to adhere to
relevant Group policies, and suppliers are
additionally required to comply with our Code
of Supplier Responsibility which outlines
our expectations for responsible business,
sustainability practice and behaviour. Our
suppliers are asked in addition to this, to
comply with specific third-party supplier
policies as applicable to the services they
provide to the Group.
Any supplier related grievances or concerns
can be raised using our confidential SpeakUp
whistleblowing service. Further information
related to key Board decisions on supplier
management are located on page 51.
Tax
Appropriate, prudent and transparent tax
behaviour is a key component of corporate
responsibility. Tax is one of the ways in which
businesses contribute to the societies in which
they operate, and we are proud to be among
the UK’s highest payers of corporate taxes.
In 2020 we paid £2.1 billion of cash taxes.
This was primarily on business profits, VAT
on goods and services needed to run our
business, bank levy and employer social
security on staff salaries. In addition, we
collected £1.9 billion of cash taxes primarily
from payroll taxes and customer product
taxes. We comply with the HMRC Code of
Practice on Taxation for Banks.
For further information about the taxes
we pay, and the economic value we
generate for the UK, please refer to
our annual Tax Strategy document on
the Lloyds Banking Group website.
Additional information on how we are
conducting our business responsibly
can be found in the 2020 Lloyds
Banking Group ESG Report.
Read more on how we are conducting our
business responsibly
lloydsbankinggroup.com/who-we-are
responsible-business/downloads.html
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
Annual materiality assessment1
Supplier management
Information necessary to understand
our Group and its impact, policies due
diligence and outcomes
– Reflecting the needs of our stakeholders,
page 51
– Code of Supplier Responsibility
https://www.lloydsbankinggroup.com/
who-we-are/working-with-suppliers/
responsible-sourcing-supplier-
management.html
Environmental (TCFD) statement – Reflecting the needs of our stakeholders,
Environmental
matters
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
Anti-corruption
and anti-bribery
Anti-Bribery Policy1
Anti-Bribery Policy Statement
Anti-Money Laundering and
Counter Terrorist Financing Policy1
Fraud Risk Management Policy1
Description of
principal risks and
impact of business activity
Description of the
business model
Non-financial key
performance indicators
pages 49 and 50
– Helping the transition to a sustainable low
carbon economy, page 20
– Reflecting the needs of our stakeholders,
pages 48
– Supporting our Colleagues page 29
– Championing inclusion & diversity, page 25
– Reflecting the needs of our stakeholders,
page 51
– Suppliers, page 51
– Championing inclusion & diversity, page 25
– Conducting our business responsibly,
page 30
– Modern Slavery and Human Trafficking
Statement
https://www.lloydsbankinggroup.com/
who-we-are/responsible-business/
downloads.html
– Reflecting the needs of our stakeholders:
Communities and Environment, page 49
– Helping Britain Prosper Plan, page 17
– Championing inclusion and diversity,
Assisting our customers, Supporting
businesses and SMEs, Helping Britain
get a home, Building financial resilience,
Supporting our communities, Supporting
our colleagues, Conducting our business
responsibly, page 25 to 31
– Conducting our business responsibly,
page 30
– Reflecting the needs of our stakeholders:
Colleagues, page 48
– Helping the transition to a sustainable
low carbon economy: Risk management,
page 20
– Risk overview 2020 themes, page 56
– Our principal risks, page 57
– Our Business Model, page 13
– Key performance indicators, page 14
– Our strategic priorities, page 18
– Helping Britain Prosper Plan, page 17
– Global Reporting Initiative (GRI) standards
https://www.lloydsbankinggroup.com/
who-we-are/responsible-business/
downloads.html
– Reporting Criteria
https://www.lloydsbankinggroup.com/
who-we-are/responsible-business/
downloads.html
– ESG 2020 Report
https://www.lloydsbankinggroup.com/
who-we-are/responsible-business/
downloads.html
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 2020.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
32 Lloyds Banking Group Annual Report and Accounts 2020
Our external environment
The Group continues to adapt to evolving market trends
ECONOMY
Highlights
Given our focus on UK customers, the
Group’s prospects are closely linked to
the fortunes of the UK economy.
The economic outlook is highly
uncertain, dependent on how fast the UK
can deliver vaccines and how effective
they are against potential variants of
COVID-19.
We expect the UK economy to grow
by 3 per cent in 2021 after a weak
start this quarter, followed by brisker
growth of 6 per cent in 2022. There are
uncertainties in both directions.
Our low risk business model and focus on
efficiency serves us well in an uncertain
environment. Nevertheless, improving
Group financial performance is heavily
dependent on economic recovery.
Overview
2020 was an extraordinarily difficult year for
the UK economy with GDP falling by almost
10 per cent due to the restrictions on activity
necessary to contain the COVID-19 pandemic.
Emergency action from the Government and
banks was key in limiting long-term damage, but
the pace and extent of recovery are uncertain,
dependent crucially on how quickly and how
completely vaccine programmes in the UK and
abroad can be delivered and suppress mutating
variants of COVID-19. Significant restrictions
on activity are expected to ease only gradually
through 2021, and unemployment and business
closures will drag on the economy’s ability to
return to the pre-COVID level of output, which
we expect to take until during 2024.
The economy could perform better than
this central expectation, if there is a quicker
impact of vaccines on the ability to ease activity
restrictions or a sudden release of unexpected
savings that some households have accrued. On
the other hand, difficulties in deploying effective
vaccines and consequences on spending plans
of the sharp rise in Government and companies'
debt could lead to an even weaker economic
recovery than expected. Uncertainty for the
longer-term outlook has also increased, around
the ability of productivity growth to improve,
the impact of increased indebtedness on future
interest rates and Government policy reaction
to the deep and unequal societal impacts of the
COVID-19 recession.
Market dynamics
The 2020 recession has been unlike any
previous recession, driven by mandated
restrictions on activity focused on sectors
where social contact is highest, but
accompanied by unprecedented policy
support. The younger and lower-paid have
been at greatest risk of lost employment or
reduced income, while some others have had
their financial position improved by a period of
continued income but reduced spending.
This recession has impacted our markets very
differently to previous recessions. Consumer
credit fell sharply as spending was constrained,
but growth in households’ deposits was
buoyed to over 10 per cent from 4 per cent
in 2019. Mortgage balance growth slowed
only slightly to 3.0 per cent from 3.4 per cent
in 2019, companies lending rose strongly by
over 9 per cent driven by the Government’s
guaranteed lending schemes, and companies
deposits growth was also boosted to a very
strong 28 per cent. The rise in unemployment,
of 1.2 per cent by November has been much
less than would normally be expected for such
a deep fall in GDP, due to Government support
via the Coronavirus Job Retention Scheme and
the Jobs Support Scheme. The housing market
has also been more buoyant through the
second half of 2020 than expected, with prices
rising by almost 6 per cent in 2020, benefiting
from employment support, from the temporary
cut in stamp duty, and from unexpected
households’ savings.
2021 is expected to see the start of unwinding
of many of these impacts as consumer
spending recovers further and businesses
begin to pay down some of the debt recently
accrued. Unemployment is expected to rise
further to a peak around 8 per cent during
the second half of 2021 as furlough support
is withdrawn. We expect average house
prices to fall 4 per cent in 2021, as the stamp
duty reduction expires and as first time buyer
demand is constrained by a lower employment
rate amongst the young and very limited pay
growth. Mortgages growth is expected to
weaken to its slowest in seven years. Consumer
credit growth is expected to remain subdued,
and growth in households’ deposits to slow
sharply from its high rate of 2020. Balances
of companies' lending and deposits are
both expected to fall in 2021 after their large
increases of 2020. Interest rates are likely to
stay very low near-term, to help the economy
recover at a time when Government and
companies' debt has increased significantly.
Uncertainty for the longer-term growth outlook
has increased. Productivity growth averaged
just 0.4 per cent per annum over the five years
to 2019, compared with nearly 2 per cent per
annum before the 2008 financial crisis, and it
is unclear how it will evolve in future. The post-
financial-crisis recovery in business investment
was weak, and investment fell very sharply
again during the pandemic. Additionally, the
change in our trading relationship with the EU
has introduced additional processes and costs
for some businesses. The pandemic may have
provided an opportunity to boost productivity
through more rapid changes to working
practices, preferences for living locations, and
accelerated adoption of online purchasing
than would have happened otherwise. More
positively, the Government’s plans to ‘level-up’
the UK across its regions via a step-change in
infrastructure investment could help to spur
improved productivity growth.
Uncertainty for the longer-term outlook
for interest rates has also increased. If high
indebtedness drags on growth it may keep
interest rates very low for a long time. However,
it could also spur a change in policymakers’
frameworks for managing economies, towards
higher inflation targets and higher nominal
interest rates, although this is unlikely for the
UK over the coming year at least in our view.
An early return to austerity or significant fiscal
tightening represents a risk to the outlook.
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
(9.9)%
GDP growth
1.7
1.7
1.3
1.4
Source: ONS
2016
2017
2018
2019
2020
-9.9
UK unemployment rates
4.9
4.5%
Unemployment rate
4.4
4.5
4.1
3.8
Source: ONS
2016
2017
2018
2019
2020
UK housing market
5.8%
House price growth
(Dec vs. Dec basis)
5.5
5.8
4.0
2.8
2.0
Source: Halifax house
price index
2016
2017
2018
2019
2020
Pay growth vs inflation
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
2.4
0.7
2016
0.0
Source: ONS
3.0
2.5
2.7
2.3
3.4
Pay growth
1.8
CPI inflation
1.8
0.9
2017
2018
2019
2020f
Link to principal risks
Credit
Capital
Funding and liquidity
Market
Lloyds Banking Group Annual Report and Accounts 2020
33
Online spending
Share of online transactions by month, %
50%
40%
30%
20%
10%
0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2019
2020
Channel change
Shift to digital channels over time
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2014
Branch
Digital
2015
2016
2017
2018
2019
2020
Link to principal risks
Conduct
Operational resilience
Credit
CUSTOMER
Highlights
COVID-19 has profoundly impacted
our customers’ financial and non-
financial circumstances, while also
accelerating some underlying
behavioural shifts
Customers are increasingly turning
to digital channels for their simpler
banking needs
Against the challenging backdrop
caused by COVID-19, we have
provided significant financial and non-
financial support to our customers,
while also ensuring continued good
access to banking services and
maintaining investment in enhancing
our customer propositions
We will continue to respond
to increasing expectations for
speed, convenience, control
and personalisation and deepen
relationships with our customers and
clients across our unique integrated
banking, insurance and wealth offering
Market dynamics
The unprecedented social and economic
challenges posed by COVID-19 have
significantly impacted the lives of our personal
and business customers, while also having the
potential to adversely affect financial resilience
and vulnerability, as well as inequality more
generally, in the longer-term.
Against this backdrop, a number of customer
trends that existed prior to the pandemic
have accelerated, most notably the shift to
digital channels. Customers are increasingly
shopping online and turning to digital
channels to meet everyday banking needs,
while continuing to value human interaction
and more direct support for more complex
and immediate needs, such as addressing
financial difficulties.
Customer expectations continue to be
shaped by experiences outside financial
services, with speed, convenience and
greater levels of personalisation, based
on more sophisticated data insight,
becoming ever more important in an
increasingly competitive market.
Our response
During the COVID crisis, we have been fully
focused on providing the necessary financial
and practical support in an empathic way to
our personal and business customers.
We have introduced a range of measures
to alleviate the most immediate financial
pressures and provided support through
dedicated Government backed schemes.
We have ensured that our customers could
continue to benefit from our multi-channel
model and have maintained good access to
our banking services. We have also set up
dedicated phone lines to give priority access
to NHS staff and our more elderly customers.
Looking beyond our customers’ financial
needs, we have provided digital skills training
to help more of our personal and business
customers get online, mentoring support to
our business customers, and increased support
for our customers’ mental health needs.
In addition to these more immediate priorities,
we have continued to invest in our capabilities,
improve our service and support, develop
new propositions and deliver a number of
significant enhancements, especially to the
digital propositions available to our personal
and business customers.
The COVID-19 crisis has impacted our
customers in different ways and we need to
ensure we are able to respond to everyone's
circumstances and needs. From helping
customers in financial difficulties to get back
on track, to building their financial resilience
and supporting the achievement of their
life-goals across generations, we will continue
to leverage our unique data and insights,
capabilities and multi-channel business
model, to deliver personalised and fit-for
purpose propositions.
Now more than ever it is vital that we
address our customers' needs holistically
and leverage our unique reach, strength of
our franchise as well as capabilities, such as
Single Customer View. An end-to-end focus
on customers' life-time needs will create
additional value for our customers and
strengthen our competitive advantages.
In order to meet all our customers' evolving
payment needs in their channel of choice,
we will need to continue modernising our
payments infrastructure to deliver a seamless
customer experience. Our unparalleled
market position and strong participation
across the payments ecosystem mean we
can support our clients in improving their
payments systems for their customers, while
simplifying the retail experience.
Our commercial clients have also seen their
businesses being impacted in different ways
and we will continue to support them through
the crisis and get back on their feet, whatever
their circumstances might be. We are also
looking to help our business customers adapt
and grow back stronger and more sustainably,
introducing new value adding services and
improving our capabilities. As businesses are
increasingly looking to self-serve their simple
banking needs, we are enhancing our digital
offering and improving our product portfolio
to deepen our client relationships through
the cycle.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
34 Lloyds Banking Group Annual Report and Accounts 2020
Our external environment continued
REGULATION
Highlights
COMPETITION
Highlights
The UK financial services sector is
expected to remain highly regulated
Increased volume of 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,
in particular the extent of friction
created by changing arrangement and
potential for the UK to deviate from the
EU’s regulatory system
Market dynamics
The regulatory response to the COVID-19
pandemic has seen increased regulatory
intervention and prioritisation of regulatory
requirements relating to the fair treatment of
customers. Key areas of focus for 2021
are below:
Customer treatment
Fair treatment of customers continues to be
a priority for the FCA, with particular focus on
those in vulnerable circumstances as well as
long standing customers.
Capital regulation
The Group continues its implementation of
regulatory capital developments including the
final Basel III reforms.
IBOR transition
Progress continues, with alternative products
delivered and transfer of clients to updated
products underway.
Other
A number of other regulatory initiatives are
underway which seek to address, amongst
other things; operational resilience, climate
change, general insurance pricing, onshoring
EU regulations, strong customer authentication,
culture and fraud. The Group also continues to
respond to regulatory initiatives in respect of
the COVID-19 pandemic.
Our response
As a Group we always seek to comply with
all applicable regulation. Given the Group’s
customer focused, sustainable and low risk
business model, it is well placed to meet these
requirements and welcomes the positive
effect that they have on the industry, its
customers and other stakeholders.
Link to principal risks
Regulatory and legal
Conduct
Credit
Capital
Market
Operational resilience
Climate
Our competitive landscape continues
to broaden with an increasing number
of digital-only providers, although the
current environment has increased
scrutiny on the profitability and
sustainability of these business models
Established competitors continue
to re-focus on core business areas,
with some restructuring exercises
accelerated to offset increasing
revenue headwinds in the low-rate
environment. More diversified peers
have benefited through the COVID-19
crisis to date due to a reduced reliance
on interest income and increased
market volatility
Threat from big-tech and large
international peers remains
Market dynamics
The Group continues to operate in
competitive markets, with competition
supported by regulatory change,
ongoing shifts in customer behaviours
and increasing levels of innovation.
Against this backdrop the COVID-19
pandemic has significantly accelerated
the pace of change in numerous areas.
Digital-only providers have continued
to gain traction with customers. Neo-
banks, in particular, have replicated
a more traditional customer offering
alongside strong digital functionality, while
marketplace models enable collaboration
and provide customers access to a
broader suite of products and services.
However, the COVID-19 crisis has had a
meaningful impact on a number of these
businesses, slowing growth and limiting
revenue streams. This has created a
heightened focus on the profitability and
sustainability of these models, with greater
levels of uncertainty reflected in lower
valuations in a number of recent funding
rounds. While these pressures have the
potential to limit disruptive threats over the
near to medium-term, the threat from more
differentiated businesses, often those who
pursue a more traditional banking model, are
likely to persist.
Beyond this, more traditional competitors
have continued to re-focus on core business
areas while also improving their own digital
offerings. During the COVID-19 crisis, peers
with more diversified revenue streams that
are less dependent on interest income have
tended to perform more resiliently, although
the sustainability of these trends is uncertain
given market volatility levels. In addition, some
peers have accelerated existing restructuring
exercises as a means to offset future revenue
headwinds.
Finally, we continue to see a threat from
leading technology companies and
international incumbents, with these
well positioned to potentially capture
opportunities in the UK market with digital
only offerings, and we have seen some
emerging signs of this.
Our response
We continue to respond effectively to
the threats posed by increasing levels
of competition and a more challenging
operating environment by offering products
and services that our customers value.
Our strong franchise, combined with an
ongoing focus on innovation, provide
us with the ability to not only be relevant
but also deepen relationships with our
customers as we effectively respond
to the changing environment.
Across our core markets we have remained
open for business across all channels at
a time when our customers have needed
support, in line with our purpose of Helping
Britain Prosper. Our multi-channel offering,
including our leading branch network, allows
us to reach a broad variety of customers and
enables them to interact with us in whichever
manner they prefer. This model, combined with
the breadth of our offering as the UK's only
integrated financial services provider, drives
customer value, engagement and trust. This
remains an important competitive advantage,
which we will continue to strengthen and
enhance, as we are looking to further
deepen relationships with our customers
through delivering holistic propositions
across Retail, Insurance and Wealth.
Looking specifically at our non-physical
channels, we remain committed to investing
in our digital offering. We continue to
respond to functionality developments
from neo-bank and big-tech peers that our
customers expect to be replicated, and
have a strong pipeline of developments
for 2021, with faster time-to-market thanks
to ongoing investment in technology. Our
market leading, simple, low risk business
model, and integrated financial services
offering position us strongly to compete with
a variety of other players in the market. It is
therefore crucial that we further strengthen
our competitive advantages and develop new
ones by diversifying our business, expand
our value-adding offering to our customers
and capture new growth opportunities.
Link to principal risks
Regulatory and legal
Conduct
Operational
People
Lloyds Banking Group Annual Report and Accounts 2020
35
This includes using robotics to process over
90 per cent of Bounce Back Loan applications,
having built this process from scratch, using
technology to accurately and at scale provide
credit decisions at a time when customers
required urgent support. The use of robotics
has significantly improved colleague capacity
to focus on providing additional customer
support. Across the Group, we have saved
more than 1.8 million hours through the use
of robotics over the last three years, including
over 700,000 in 2020 alone.
In addition to improving outcomes for
customers, significant investment in new
technologies and the modernisation of our
existing IT architecture have supported our
ongoing focus on efficiency, with business
as usual costs down 4 per cent in 2020. This
relentless focus on efficiency continues to
create capacity for future investment, helping
us to future-proof our business.
Given the ongoing shift to digital, ensuring
that customer data remains safe is becoming
increasingly important. We are therefore
continuing to invest in the resilience and
security of our systems.
Link to principal risks
Data
Change/execution
Operational resilience
Banks have also continued to invest
significantly in their data capabilities in order
to harness insights and utilise these in order
to further improve customer experience. By
having a better understanding of customer
trends and expectations, banks are able to
increase their relevance and offer greater
levels of personalisation, replicating
experiences that are commonplace in other
digitally focused industries. The increased
focus on the sharing and utilisation of data has
created a growing onus on the safeguarding
of this, with this of particular importance given
that trust remains a key differentiator between
established banks and newer, digital-only
financial service providers.
Our response
To support our position as the largest digital
bank in the UK, we have continued to invest
heavily in technology and digital initiatives
to ensure that we can continue to deliver
a leading customer experience across our
differentiated multi-brand, multi-channel
model. While the COVID-19 pandemic has
led to some slowdown in overall investment
spend, we have continued to prioritise
digital initiatives, with our technology spend
remaining weighted towards creating new
capabilities and enhancing existing ones to
improve the overall customer experience.
During the course of the year we have
continued to improve our digital functionality
and have simplified digital journeys for our
customers, and we expect to further develop
these areas in 2021 with a customer-centric
pipeline of updates.
During the course of 2020, we have also
continued to embrace the use of new
technologies to improve processes and
deliver productivity enhancements, which in
turn deliver improved experiences for both
customers and colleagues.
TECHNOLOGY
Highlights
Digital adoption continues to increase
at pace, with a significant acceleration
in 2020 as a result of COVID-19
Investment in new technologies is
of increasing importance in order to
deliver continued improvements to the
customer experience and to improve
operational efficiencies
Cyber security and the protection
and appropriate use of customer data
remain important factors in retaining
customer trust
Overview
The pace of digital adoption has continued
to accelerate in recent years. This has been
underpinned by increasing similarities in
customer behaviours and preferences across
multiple geographies, heightened expectations
of service based on experiences outside of
financial services and continued improvements
in functionality and capabilities within digital
channels. Moreover, the pace of change has
accelerated significantly in 2020 as lockdown
measures reduced interactions through physical
channels, despite these remaining available to
customers should they be needed. This trend
appears to have continued throughout the year,
suggesting a more profound shift rather than a
temporary one.
This continued change in channel preference
has created an ongoing need for investment in
technology across the sector. This investment
often includes but is not limited to enabling
the delivery of innovative new features for
the benefit of customers, the upgrading
and modernising of legacy systems, and
the adoption of new technologies such as
machine learning, artificial intelligence and
cloud based solutions in order to increase the
effectiveness and efficiency of an organisation.
Customers are using the digital channel
more than ever for simpler needs
% volume of products originated digitally
85%
73%
75%
68%
40%
2014
2017
2018
2019
2020
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
36 Lloyds Banking Group Annual Report and Accounts 2020
Strategic review 2021: Building the UK's preferred financial partner
Our next chapter
Our strategic planning process
We regularly review our strategy in light of our
changing operating environment to ensure that
our focus remains the right one for our customers,
colleagues, shareholders and broader society. Over
the past two years we have considered how we
can build on the Group’s successful transformation,
with a defining purpose further embedded in a
refreshed strategy that can be at the heart of Britain’s
recovery while delivering enduring value to all our
stakeholders.
Why the change?
Since 2011, we have significantly transformed our
business for the benefit of our customers and other
key stakeholders, while also positioning us well to
succeed in a digital world. We are not complacent,
however, and recognise that we need to continually
evolve in response to increasing customer and
societal expectations, new technologies and a
rapidly changing competitive environment. Most
importantly, we also recognise that we have a critical
role to play in Helping Britain Recover from the
COVID pandemic.
Up to June 2019
Up to June 2020
Up to February 2021
2021 focus
Building the UK's
preferred financial
partner
Over the following pages, we
outline our strategic priorities for
2021 and beyond, and how they
have both been shaped by and
will be instrumental in Helping
Britain Recover.
Review of strategic
progress and look
ahead to the next
strategic plan
As part of our strategic cycle,
the Board and Executive
Management team attend an
annual two-day strategy meeting.
In June 2019, the Board
discussed how recent and
expected trends across customer
behaviours, technology and
competition pointed to a
narrowing of scenarios for the
banking sector’s longer-term
evolution. In addition, the Board
considered the key societal and
environmental challenges facing
the UK and the Group’s role in
addressing them.
These assessments led to
the identification of the
key emerging priorities for
the next strategic plan.
Development of high-
level strategic options
with Helping Britain
Recover at their heart
While these priorities remain
relevant for the Group’s
long-term strategic focus, the
significant impacts of COVID-19
on the UK and our stakeholders,
have become the most important
drivers of our shorter-term
response and strategic priorities.
In light of this, the Board and
Executive Management team
agreed in June 2020 that the
Group's purpose should be firmly
embedded at the heart of our
strategy, with our immediate
focus on Helping Britain Recover
framing our strategic plan for
2021 as well as the associated
priorities regarding our customer
propositions, colleagues and
Group capabilities.
Finalisation of strategy
and communication
Teams across the Group then
helped translate these priorities
into more detailed initiatives,
ensuring that Helping Britain
Recover remains the key focus.
At an extended Board session
in November, attended by
both the then incumbent and
incoming Chair, these initiatives
were subsequently discussed
in the context of the investment
required in 2021 and the Group’s
longer-term financial plan.
Since then, the Board have
supported the development of
detailed plans, with measurable
outcomes designed to support
successful delivery and mitigate
execution risks, as well as the
communication approach for
our evolution of strategy.
Lloyds Banking Group Annual Report and Accounts 2020
37
Building the UK’s preferred financial partner
Enhancing
our
Capabilities
Strategic Review 2021
Lloyds Banking Group is a customer focused,
sustainable, efficient and low risk UK financial services
leader with the clear purpose of Helping Britain
Prosper. The next phase of our strategy, Strategic
Review 2021, is focused on Helping Britain Recover
and further enhancing our core capabilities.
Through this approach, which is focused on near
term execution and underpinned by our longer
term strategic vision, we are aiming to capture the
co-ordinated growth opportunities available to us
in our two core business areas by creating the UK's
preferred financial partner for personal customers
and the best bank for business.
Strategic Review 2021 builds on our core capabilities
and the strong foundations from previous strategic
reviews, reinforcing our customer focus. We have
made significant progress in recent years, leveraging
the unique strengths and assets of the Group,
including our purpose driven and customer focused
business model, our low risk approach to business,
our market leading efficiency and our leading
multi-channel propositions including the largest
digital bank and branch network in the UK. This has
created the platform for Strategic Review 2021.
The UK’s preferred financial partner
Through delivery of the strategy we intend to
create the preferred financial partner for personal
customers and the best bank for business. Delivery
of our customer-centric ambitions will be supported
by accelerating the Group’s transformation, with
particular focus on four capabilities:
Delivering a modernised technology
architecture
Building an integrated payments platform
Creating a data-driven organisation
Implementing reimagined ways of working
Our superior cost structure has enabled us to
maintain high levels of strategic investment. We will
invest around £0.9 billion this year to support the
Strategic Review 2021 initiatives and the long-term
strength of the business.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
38 Lloyds Banking Group Annual Report and Accounts 2020
Strategic review 2021: Building the UK's preferred financial partner continued
Helping Britain Recover
Enhancing
our
Capabilities
Help rebuild
households’ financial
health and wellbeing
Support businesses
to recover, adapt
and grow
We will help rebuild households’
financial health and wellbeing
We remain committed to supporting our
customers to become financially resilient
and to plan and save for the future. We will
provide practical support, and flexibility where
possible, to help our customers facing financial
difficulty to get back on track and help as many
customers as we can to stay in their own home.
In 2021, we will:
Have over 6,500 colleagues trained
to support customers to build their
financial resilience
Maintain our commitment to supporting
mental health and become accredited as
‘Mental Health Accessible’ for Halifax and
Bank of Scotland, in addition to the existing
Lloyds Bank accreditation
Partner with independent debt advice
organisations to ensure customers have
access to practical support
We will support businesses
to recover, adapt and grow
We will be by the side of businesses as they
recover, supporting UK business to adapt
and grow, and create quality jobs across the
regions of the UK.
In 2021, we will:
Develop appropriate recovery plans for our
customers, supported by 1,100 business
specialists in communities across Britain
Support at least 75,000 UK businesses to
start up in 2021
Help at least 185,000 small businesses
boost their digital capability through our
Regional Academies, partnerships and
digital mentoring
Helping Britain Recover
We recognise that the focus
of the Group's purpose must
evolve in response to the current
environment and changing
customer needs
and expectations.
With the evolution of our
strategy, we will further embed
our purpose across all of our
activities. This will ensure
we contribute to creating an
environmentally sustainable and
inclusive future for the UK and
by doing so build a successful
and sustainable business.
The global pandemic will have
lasting social and economic
effects on the United Kingdom.
Its impact has been felt by
everyone, whether through
financial hardship, reduced
choices, mental distress or
personal loss.
Our focus will therefore be to
Help Britain Recover, and we
are committed to working with
others in five areas where we
can make the most difference.
Lloyds Banking Group Annual Report and Accounts 2020
39
Expand availability
of affordable and
quality homes
Accelerate the
transition to a low
carbon economy
Build an inclusive
society and
organisation
We will expand the availability
of affordable and quality homes
As the UK recovers from the pandemic, we
aspire to a UK in which all households have
access to stable, affordable and safe homes
in places they want to live. We are committed
to broadening access to home ownership
and exploring opportunities to increase our
support to the UK rental sector.
In 2021, we will:
Provide £10 billion of lending to help
people to buy their first home in 2021, and
lead a national conversation on how more
households can access the housing market
Provide £1.5 billion of new funding
support, including £500 million in ESG-
linked funding, in support of the social
housing sector
Support the creation of national
sustainability standards for house-building
finance and assess the energy retrofit
requirements of over 200,000 homes in the
social housing sector
We will help accelerate the
transition to a low carbon
economy
With recovery comes an opportunity to build
a greener future, creating new businesses and
jobs for the future. We want to play our part
in supporting the transition to net zero and
are committed to working with customers,
Government and the market to help reduce
the carbon emissions we finance by more than
50 per cent by 2030 on the path to net zero by
2050 or sooner.
In 2021, we will:
Expand the funding available under our
green finance initiatives from £3 billion
to £5 billion, to support businesses
to transition
Launch a new goal to ensure our own
operations are net zero by 2030
Become the first major pensions and
insurance provider to target halving
the carbon footprint of all our c.£170bn
investments by 2030 on our path to net zero
by 2050
Introduce a flagship fossil fuel-free fund
to support green growth, allowing pension
savers to choose to invest in UK companies
pursuing a positive environmental impact
We will help build an inclusive
society through our financial
services offering and by
creating an organisation that
reflects the society we serve
We believe that the economic and social
recovery should be one that’s truly inclusive
and involves communities across the UK's
nations and regions.
In 2021, we will:
Set new aspirations for a leadership
team that reflects the society we serve,
of 50 per cent women, 3 per cent Black
and 13 per cent Black, Asian and Minority
Ethnic colleagues in senior roles by 2025
Maintain our £25.5 million contribution to
our independent charitable foundations,
with the Lloyds Bank Foundation for
England and Wales focusing 25 per cent
of its support on Black, Asian and
Minority Ethnic led charities
Support regional regeneration, including
launching the ‘Regional Housing Growth
Initiative’, helping small- and medium-
sized housebuilders create more homes
in the North of England, the Midlands
and the regions of Scotland
Support financial inclusion by
providing banking for groups of
people experiencing homelessness,
financial abuse or victims of
modern slavery and supporting the
prisoner banking programme
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
40 Lloyds Banking Group Annual Report and Accounts 2020
Strategic review 2021: Building the UK's preferred financial partner continued
Britain's preferred financial partner
Enhancing
our
Capabilities
Preferred financial
partner for personal
customers
Why this is important
The COVID-19 pandemic has accelerated
a number of pre-existing shifts in
customer behaviours and preferences,
while also starkly demonstrating financial
vulnerabilities affecting customers of all
ages across the UK. As the UK’s largest
financial services provider, we have a
unique opportunity to meet more of our
customers’ broader financial needs and
improve their overall resilience throughout
their lifetime, with personalised and value-
adding products and services that are
relevant to them.
Long-term vision
Leveraging our unique capabilities to meet
more of our customers' needs
2021 investment focus
To achieve our vision and become the
preferred financial partner for personal
customers, we are focusing on three key
areas of investment in 2021:
Enable financial resilience and wellbeing
through dedicated customer assessment
and support
Significantly deepen relationships with
priority segments through enhanced
journeys and new capabilities
Digitise to reduce cost to serve
Measures of success:
Net open book mortgage growth in 2021
Maintain record all channel net promoter
score in 2021
Increase priority segment customers with
needs met by both Retail and Insurance
and Wealth
Positive annual net new money in
Insurance and Wealth open book assets;
to deliver a £25 billion increase by 2023
Enable financial resilience and wellbeing
through dedicated customer assessment
and support
Consistent with our broader societal and
strategic focus on Helping Britain Recover,
we will use our unique position as the UK’s
only integrated financial services provider
to address both the short-term financial
challenges facing our customers and build
longer-term resilience, with products and
services relevant to their changing needs.
Over the course of 2021, we will support our
customers, with a dual focus on building
short-term resilience through savings and
borrowings, and on strengthening long-term
resilience by broadening access to protection
and other insurance coverage against
unforeseen life events. As part of our overall
approach, in 2021 we will launch a range
of tools that enable a better assessment of
financial wellbeing, while also building on
our strong track record in supporting our
most vulnerable customers by simplifying
our customer treatment approaches and
deploying specialist vulnerable customer
support where needed.
Significantly deepen relationships with
priority segments through enhanced
journeys and new capabilities
We have the largest personal customer
franchise for financial needs in the UK, with
approximately 50 per cent of UK adults having
a relationship with the Group and 17.4 million
digitally-active customers. We have a
considerable opportunity to build on these
strong foundations and significantly deepen
our customer relationships, especially within
our priority segments.
We will meet more of our customers’ broader
banking, insurance and wealth needs
throughout their lifetime, making better
use of our unique scale and data insights to
develop a more personalised approach and
offering products and services that meet
their specific needs at a time and via channels
that are relevant to them. Consistent with
this focus, we will make a number of further
enhancements to our customer journeys,
building on the significant improvements
already delivered during our most recent
strategic plan.
We will also broaden customer access to
long-term financial planning and long-term
saving with priorities including the better
integration of our Schroders Personal Wealth
offering across our Retail branch network.
Through these and other initiatives, we expect
to achieve net growth in open book mortgage
balances in 2021. Looking beyond this, we are
aiming to increase priority segment customers
with needs met by both Retail and Insurance
and Wealth propositions and expect to
generate positive annual net new money
into our open book Insurance and Wealth
propositions, delivering a £25 billion increase
by 2023.
Digitise to reduce cost to serve
We have a strong track record in simplifying
customer processes to improve their overall
experience and satisfaction, while also
capturing operational efficiencies and cost
savings. Looking ahead, we remain focused
on improving the experience of all our
customers, with increasing levels of data-
driven personalisation being accompanied by
other improvements that provide them with
richer insights and put them more in control
of their finances.
To achieve this and drive further
improvements in operational efficiency, in
2021 we will continue to utilise the latest
technologies to digitise key customer
journeys and support greater levels
of self-service, while also migrating
high volume telephony users to digital
services to reduce failure demand and
improve the customer experience. In
doing this, we recognise that our multi-
channel approach remains important
for a large number of our customers.
We will therefore continue to offer our
customers a seamless experience across
channels, with our branch network
increasingly optimised to meet more complex
needs. Taking all these elements together, in
2021 we are aiming to maintain our record all
channel net promoter scores, following the
all-time highs that were achieved in 2020.
Enhancing
our
Capabilities
Best bank
for business
Why this is important
We are committed to remaining by the side
of British businesses of all sizes, with market-
leading propositions that are relevant to
their very specific and evolving needs. As we
emerge from the COVID pandemic, we will
need to continue supporting our clients, not
only with their immediate financial needs, but
with a focus on helping them adapt, grow
and thrive as we transition to a low carbon
economy.
Long-term vision
Leading digital SME bank; disciplined and
strengthened large client proposition
2021 investment focus
To achieve our vision and become the
best bank for all UK businesses, while also
supporting a more sustainable UK economic
recovery, we have identified three key areas
of strategic focus and investment for 2021:
Enhance SME channel and service with
increased digitisation
Automate recovery support and finance the
green transition
Strengthen Corporate and Institutional
product capabilities
Measures of success:
More than 50 per cent growth in SME
products originated via a digital source
in 2021
5 point increase in SME and Retail Business
Banking digital net promoter score by 2023
Profitably improve share in markets
products for core clients in 2021
Lloyds Banking Group Annual Report and Accounts 2020
41
Enhance SME channel and service
with increased digitisation
SMEs play a vital role in the UK economy and
we have remained steadfast in our support to
them, having achieved significant market share
growth in recent years. We will build on this
track record by ensuring that our products and
services continue to respond effectively to their
evolving needs.
As SMEs increasingly turn to digital channels
for speed, convenience and control, we will
expand our end-to-end digital origination
for simple products, while also enhancing
self-service capabilities for day-to-day banking,
with priorities in 2021 including the delivery of a
self-serve platform with automated decisioning
for Asset Finance products. Looking beyond
banking, we will extend the capabilities of
our accountancy solution for SMEs, while also
making this available to more clients. Through
these initiatives, in 2021 we expect to achieve
at least 50 per cent growth in SME products
originated via a digital source and to increase
our SME and Retail Business Banking digital
net promoter score by 5 points by 2023.
SMEs continue to value human interaction for
their more complex needs. Through our strong
network of relationship managers and leading
branch network for smaller business clients we
have a significant competitive advantage in
responding to these needs, and will continue
to upskill our colleagues to provide an
enhanced service, while also delivering a more
seamless experience across channels.
Automate recovery support
and finance the green transition
In 2020, we stood firmly by the side of UK
business, providing support to clients
impacted by the pandemic. We will continue
to work closely with these clients and the
Government to ensure that businesses
approaching the end of COVID capital support
have the best chance to build resilience,
adapt and return to growth. As part of this,
we will roll out a digital-led BBLs engagement
model enabling clients to access support and
self-serve, while also working individually with
clients requiring specialist help.
We strongly believe that there is a unique
opportunity to rebuild the UK economy on a
more sustainable and low-carbon basis and
that, through our focus on Helping Britain
Recover, we can be at the forefront of this.
We have already started working with our
clients, the Government and the market
to help reduce the carbon emissions we
finance by more than 50 per cent by 2030
on the path to net zero and, as part of this,
in 2021 will expand our funding for green
finance initiatives from £3 billion to £5 billion.
We will also continue to help fund
sustainable housing development, with
other priorities including supporting the
creation of national sustainability standards
for new-build housing and working with
housing associations to improve the energy
efficiency of social housing accommodation.
Strengthen Corporate and
Institutional product capabilities
We also have a significant presence at the
larger end of the market, with over 60 per
cent of FTSE 100 companies having an
active relationship with the Group. We will
build on the progress made in our previous
strategic plan by continuing to deepen
our relationships with these larger clients
and strengthening our simple and low risk
commercial banking offering. At the same
time we will enhance our fee based client
propositions, with the aim of diversifying
our revenue generation.
We already provide our Corporate and
Institutional clients with a personalised
service proposition and tailored support:
an approach which was incredibly effective
as the impacts of the pandemic were felt
very differently across the portfolio. We will
build on these foundations by improving
the alignment of our coverage model and
creating an ecosystem for Corporate and
Institutional clients. In addition we will
modernise our markets capabilities, with
areas of focus including the upgrading of
our FX platform and digitisation of our rates
capability. Through these initiatives, we are
looking to profitably improve our share in
markets products for core clients in 2021.
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42 Lloyds Banking Group Annual Report and Accounts 2020
Strategic review 2021: Building the UK's preferred financial partner continued
Enhancing our capabilities
Modernised
technology
architecture
Why this is important
In order to remain relevant to our customers
and retain our cost leadership position
in an increasingly competitive operating
environment, we will need to continue
modernising our technology architecture.
Through this, we aim to deliver a further
step change in agility and responsiveness
to customer trends, while also supporting
our broader strategic priorities around
enhanced data insights, improved
customer experience and operational
resilience and efficiency.
Long-term vision
Efficient, scalable and resilient cloud-
based architecture, supporting business
transformation
2021 investment focus
We have identified three key areas for
strategic investment in 2021 to support
our vision of delivering a modernised
technology architecture:
Further broaden self-service capabilities
through digitisation
Prove and leverage public cloud to
create foundations for future technology
architecture
Simplify legacy estate through
technology optimisation
Measures of success
Mobile app releases to double year-on-
year in 2021
Further mobile app enhancement
to maintain record mobile-app net
promoter score
c.30 per cent of technology applications
and services migrated and c.20 per cent
decommissioned by 2023
Deliver new technology architecture pilot
Further broaden self-service
capabilities through digitisation
In recent years we have made significant
progress in the development of our
technology platform and capabilities, having
invested over £4 billion cumulatively in these
strategic priorities by the end of 2020. This
investment has, in turn, played a fundamental
role in helping us to deliver a leading
customer experience and in improving our
operational agility, resilience and efficiency.
Our successes in these areas are reflected,
amongst other things, in our digital
net promoter scores, which reached a
record high in 2020, our year-on-year
reductions in net costs, and our ability to
now make simple changes to our digital
propositions intraday, as opposed to
our previous 30 day release cycles.
Looking ahead, we will build on this strong
track record and respond to the growing
customer demand for convenience and
control by broadening the self-service
capabilities available to our digital customers.
Consistent with this focus and our objective
of maintaining our record mobile app net
promoter score, we will double the number
of enhancements we make to our mobile app
in 2021.
Prove and leverage public cloud
to create foundations for future
technology architecture
To support our long-term strategic vision of
building and operating an efficient, scalable
and resilient cloud-based architecture, we will
increase our investment in R&D to assess the
customer and business benefits that next-
generation technologies could have on the
organisation. In 2021 we will initially focus on
proving the appropriateness of public cloud
for our specific customer and operational
needs, with a view to assessing how this can
be leveraged to create the foundations for our
future technology architecture and drive the
next phase of our operational transformation.
In doing this, we will build on the next
generation capabilities and insights
that we are already developing through
strategic partnerships with specialist
partners such as Google Cloud, Thought
Machine, Microsoft Azure and Form3, as
well as the new insights and capabilities
that we are developing ourselves.
While our adoption of a cloud-based
technology architecture is likely to be an
ongoing area of focus into the long-term, we
are confident that this will drive a step change
in our customer propositions and efficiency.
Simplify legacy estate through
technology optimisation
Through our investment in technology, we
have a significant opportunity to simplify
our estate, and by the end of 2023 expect
to have migrated around 30 per cent and
decommissioned about 20 per cent of our
technology applications and services.
To achieve our longer-term ambitions, we will
ultimately need to migrate our customers and
relevant applications to this new environment.
In doing this, it is vitally important that our
core systems and customer data remain
protected and that operational continuity is
maintained. To gain comfort in this regard, we
will initially conduct a focused, pilot migration
of our own back-book customers to the new
cloud-based architecture in 2021. This will
help us identify potential issues that can be
effectively addressed before we replicate this
migration on a much larger scale.
By the end of the year, we are aiming to
have achieved a c.40 per cent reduction in
applications from our legacy architecture
through this pilot exercise and to have safely
migrated approximately 400,000 customer
accounts to the new bank architecture.
Our success in delivering these targeted
milestones in 2021 will, in turn, help determine
the pace and scale of our approach as we
simplify our legacy estate, with a view to
capturing the significant medium-term
opportunities available to us, including
transformed customer experiences and
improved operational agility.
Lloyds Banking Group Annual Report and Accounts 2020
43
Integrated
payments
Why this is important
In recent years digital payments have
grown significantly, fuelled by the rapid
rise in online shopping and e-commerce,
as well as increased demand for speed,
convenience, security and choice. Looking
ahead, these trends are expected to continue,
with the ability to offer a leading payments
proposition vital in capturing this significant
growth opportunity in the face of increased
competitive disruption.
Long-term vision
Seizing the payments growth opportunity in
our customers' channel of choice
2021 investment focus
For 2021 we have identified three key areas
of focus:
Enhance card e-commerce and
international payments experience to drive
increased customer usage
Build capability and integration of new cash
management and payments platform
Enhance merchant services proposition with
improved distribution capabilities
Measures of success
Maintain leading card spend market share
in 2021, with growth in credit card spend
market share from 2022
3x increase in corporate clients on new
cash management and payments platform
in 2021
15 per cent to 20 per cent new client growth
per annum in merchant services
As part of this overall approach, we will
continue to build out our international
and complex liquidity capabilities, while
also improving the integration between
our payments platform and other digital
channels used by our corporate clients.
Through these initiatives, we have set an
objective of achieving a threefold increase
in the number of corporate clients using
our new cash management and payments
platform in 2021.
Enhance merchant services proposition
with improved distribution capabilities
Against a backdrop of ongoing and
significant growth in e-commerce and
digital payment volumes, our merchant
customers are increasingly demanding
the ability to accept multiple payment
methods, with a view to improving checkout
conversion rates and lower payment costs.
To address these needs, in 2021 we will
modernise our payments gateway to
offer integrated journeys across different
payment types as well as a range of
value-added services. In addition, this will
form part of a strong merchant services
proposition with key features including real-
time data insights and customer analytics.
To ensure that we are able to meet more
of our merchant customers’ needs through
these proposition enhancements, we are
also focused on improving our distribution
capabilities. In light of these developments,
we are targeting new client growth of
between 15 and 20 per cent per year in this
fast-growing and evolving market.
Enhance card e-commerce and
international payments experience
to drive increased customer usage
As a Group, we are well-positioned to
capture the significant growth opportunity
associated with the accelerated shift to
digital payments. We are the largest card
issuer in the UK and have over a 20 per
cent share in card-based payments.
In addition, we have strong participation
across the payments ecosystem, ranging
from more traditional debit and credit card
methods across our High Street banking
brands to more emerging and innovative
methods across APIs and Open Banking. To
capture this opportunity, we will enhance the
consumer payments experience, with a focus
on speed, convenience, choice and security.
Amongst other developments, in 2021
we will continue to expand real-time push
notifications and will look to translate
improvements in customer experience into
improved loyalty, with a range of customer
rewards and offers that are targeted, based
on our rich data insights. Through these
initiatives, our objective for 2021 is to maintain
our leading share of card spend, with a longer-
term objective of achieving market share
growth in credit card spend from 2022.
Build capability and integration of new
cash management and payments platform
During the course of our most recent
strategic plan, we significantly invested in the
development of a new cash management
and payments platform with leading API
functionality for our corporate clients.
To capitalise on this past investment,
meet additional client needs across cash
management and payments, and address the
growing demand for payment solutions that
are increasingly integrated into our clients’
clients' business flows, we will continue to
enhance our platform capabilities.
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44 Lloyds Banking Group Annual Report and Accounts 2020
Strategic review 2021: Building the UK's preferred financial partner continued
Enhancing our capabilities
Data-driven
organisation
Why this is important
As the UK’s largest financial services
provider, processing approximately
14 billion customer transactions and
interactions in 2020 alone, we have
access to a wealth of customer data. In an
increasingly competitive market, it is vital
that we are able to appropriately use this
data to create insights that deliver better
customer outcomes and strengthen our
own risk management processes.
Long-term vision
Leveraging our data proposition to create
value for all stakeholders
2021 investment focus
We have identified three key areas of
strategic investment focus in 2021 to
support our medium-term vision and
become a data-driven organisation
Expand use of data to enable better
customer and business propositions
Extend machine learning capabilities to
drive faster and more accurate pricing
and risk decisions
Deliver organisational reform of data
strategy and management, supporting
collaboration
Measures of success:
Increase in meeting personal customer
needs using advanced analytics (e.g.
20 per cent increase in home insurance
needs met)
>10 per cent increase in fraud detection
rates from expansion of machine learning
50 per cent return on investment from
year 1 investment in advanced analytics
In addition, advanced analytics will be
used to deliver early insights into financial
vulnerabilities, which is particularly important
as our personal customers and business
clients recover from the effects of pandemic.
Deliver organisational reform of data
strategy and management, supporting
collaboration
In order to realise these significant customer
and organisational benefits, we will need to
access our data more efficiently and flexibly,
while also ensuring that we adhere to the
highest standards of data management and
protection. To achieve this, we will implement
organisational changes in respect of our data
strategy and management and will establish
centralised centres of excellence to help drive
innovation and develop best data practice
that can be consistently deployed across the
Group.
In addition, we will further embed data and
analytics capabilities within our business
functions, with the aim of achieving a more
effective alignment between our technical
and business expertise. Through this
approach, we also expect to be able to direct
our strategic investment in a more effective
and immediate way, in turn helping us to
deliver greater financial and operational
benefits. Through this and our broader
approach to data, we expect to be able to
deliver a 50 per cent return on our investment
in advanced analytics in the first year.
Expand use of data to enable better
customer and business propositions
As customers’ expectations of financial
services are increasingly being shaped by
their experiences outside of the sector,
personalisation has become an increasingly
important differentiator. In our most recent
strategic plan, we were able to successfully
develop our data and advanced analytics
capabilities to deliver more personalised
propositions and improve the customer
experience.
We will continue to enhance our data and
advanced analytics capabilities to deliver
better customer and business propositions.
Through data-driven marketing we are already
able to meet 20 per cent of customer needs,
with the use of appropriate data insights
helping to ensure that our propositions are
more targeted to genuine needs and, through
this, lead to better customer outcomes and
response rates.
Through the further development of our
capabilities in this area we are targeting a
significant increase in personal customers'
needs we can meet using advanced analytics,
including for example, a 20 per cent increase
in Home Insurance needs met.
Extend machine learning capabilities to
drive faster and more accurate pricing and
risk decisions
The potential benefits from improved data
and analytics capabilities extend beyond
customer outcomes and an improvement
in the overall customer experience, with
significant efficiency and risk opportunities
also available through the further
development and deployment of our machine
learning across key business processes.
In 2021, we will increase the use of machine
learning to drive faster and more accurate
pricing and risk decisions, while also
expanding its usage to cover at least 50 per
cent of customer transactions. We expect
this approach to achieve at least a 10 per cent
increase in fraud detection rates and therefore
play an important role in our ongoing efforts
to protect our customers and the Group from
this growing threat.
Lloyds Banking Group Annual Report and Accounts 2020
45
Reimagined ways
of working
Why this is important
Our people are crucial to the success of the
Group and our purpose. To retain this source
of competitive advantage, we must evolve our
colleague proposition to reflect new working
patterns and colleague expectations post
COVID, while also delivering a sustainable
workspace that supports increased
collaboration and innovation. We must also
invest in developing future skills, ensuring
that everything we do is underpinned by a
purpose-driven and inclusive culture.
Long-term vision
Purpose-led future ready and inclusive
workforce in a transformed workspace
2021 investment focus
In order to evolve to a future-ready workplace,
ways of working and workforce, our activity
and investment will centre around three areas
in 2021:
Further build our purpose-led culture
through refreshed values and behaviours
Build career pathways to attract
and retain a more diverse, skilled
and future ready workforce
Deliver sustainable workplace solutions,
including reduced office footprint
Measures of success:
Maintain leading Employee Engagement
Index
Aspiration of 50 per cent of senior roles
held by women and 13 per cent senior roles
held by Black, Asian and Minority Ethnic
colleagues by 2025
8 per cent reduction in office space in 2021,
with c.20 per cent cumulative reductions
by 2023.
Further build our purpose-led culture
through refreshed values and behaviours
Helping Britain Prosper is at the heart
of everything we do. We want all of our
colleagues to be able to identify with this
purpose, while also recognising how they are
contributing to Britain’s recovery.
To achieve this and ensure that our culture
continues to accurately reflect our purpose,
we will rollout a new behaviours framework
and aligned purpose driven values. Our
colleagues continue to demonstrate great
determination, flexibility and mutual support
during the pandemic as they adapt to new
circumstances and new ways of working. We
recognise the importance of retaining the
positive learnings and behaviours from this
challenging period as we continue to explore
new ways of working.
During the pandemic, we increased the
support available to our colleagues for their
physical and mental health, with the wellbeing
of our people remaining a key priority going
forward. Through all of these initiatives, we
are aiming to maintain our leading employee
engagement scores in 2021 and beyond.
Build career pathways to attract and retain
a more diverse, skilled and future ready
workforce
We were the first FTSE100 company to
introduce targets for senior roles held by
female and Black, Asian and Minority Ethnic
colleagues and have made significant
progress towards these ambitious goals. We
will build on this, with the goal of ensuring
our workforce is more diverse and mirrors
the society we serve. Consistent with this,
we will increase female and Black, Asian and
Minority Ethnic representation at the most
senior levels, with the aspiration of increasing
this to 50 per cent and 13 per cent respectively
by 2025.
As our business becomes increasingly
technology-driven, we will need to continue
attracting and developing future skills. We
have already exceeded our recent colleague
training targets and reduced our dependency
on external contractors.
We will build on this, with a range of
initiatives designed to help us attract
targeted skills. We will also continue to
encourage our colleagues to develop
future-ready skills, while providing
them with tailored and easily-accessible
content to achieve this. In addition, we
recognise that new ways of working,
hybrid workplaces and more agile working
patterns will also require softer skills and
leadership capabilities, and we will work
with all our colleagues to ensure they have
the right foundations to succeed in this
new normal.
Deliver sustainable workplace solutions,
including reduced office footprint
The pandemic has led to unprecedented
change in the way companies operate,
while also accelerating the shift to more
agile working patterns. While recent
internal surveys show that the vast majority
of our colleagues would like to retain
some form of home working, offices
will undoubtedly remain important for
colleague interaction, collaboration and
innovation.
In response, we will deliver a reduced,
sustainable and future ready office
footprint, with activity expected to
commence in several of our collaboration
hubs as we emerge from the COVID crisis.
These programmes, which are expected
to deliver an 8 per cent reduction in our
office space in 2021 as well as cumulative
reductions of c.20 per cent by 2023, will be
informed by behavioural experiments and
pilots that will help us determine the future
look of our offices and ways of working.
We will also reduce our own carbon
footprint, with key initiatives including
improved energy efficiency across our
office and branch real estate, new ways of
working and reduced travel requirements.
Consistent with this focus, we have set
a target of achieving net zero carbon
operations by 2030.
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46 Lloyds Banking Group Annual Report and Accounts 2020
Our key stakeholders and Board engagement
Reflecting the needs of our stakeholders in Board decisions
The Board is responsible for the long-term
success of the Company, setting and
overseeing the culture, purpose, values
and strategy of the Group. The Board’s
understanding of stakeholders’ interests
is central to these responsibilities, crucial
to the Company’s success, and informs key
aspects of Board decision-making as set out
in this statement.
Stakeholder engagement is embedded in all
aspects of the Board’s decision-making and
can be seen in the range of tailored activities
across the stakeholder groups. It is also
embedded in the Board’s delegation of the
management of the business to the Executive,
with examples of related action taken included
across the report, in particular the sections
referenced under ‘More Detail’.
The Executive, including the Group Chief
Executive and Chief Financial Officer, provide
the Board with details of material stakeholder
interaction and feedback, through regular
business updates. Stakeholder interests are
also identified by the Executive in the wider
proposals put to the Board.
This year interaction with stakeholders was
adapted to comply with the Government’s
measures in relation to COVID-19, and has been
undertaken virtually as necessary.
This section (pages 46 to 51) acts as our Section
172(1) statement; but, given the importance of
stakeholder interests, our reputation for high
standards of business conduct and a long-term
perspective, these matters are discussed
where relevant throughout the report.
Section 172(1) Statement
In accordance with the Companies Act
2006 (the ‘Act’), 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 81 to 110
and the Directors’ Report on pages 111
to 114.
This statement also provides details of
how the Directors have engaged with
and had regard to the interests of our key
stakeholders.
CUSTOMERS
The Board’s deep understanding of
customers’ needs is vital in setting and
achieving the Company’s goals. Customer
needs and a customer-centric approach
remain therefore a key consideration in
Board decisions.
COVID-19 response
The Group’s response to the COVID pandemic
has been a central focus for the Board since the
start of the outbreak. The Board has sought to
take all possible steps to support customers
through these challenging times.
Regular Board updates from across the Group
identified key areas of customer concern. In
addition, the Group Chief Executive attended
virtual customer engagement events, which
provided an important opportunity for
customers to raise directly any concerns on the
matters of most significance to them. Areas
of worry included customers’ ability to meet
their ongoing financial commitments, and to
continue to operate their businesses as the
extent of the economic impacts emerged.
The Board considered and approved the
Group’s vital role in the Government’s
COVID related business loan schemes,
which provided funding to a range of client
businesses across a number of economic
sectors. Customer payment holidays were
also introduced, complementing other
means of Group support, including removing
fees for missed payments and access to
fixed term accounts without charge.
The Board supported further key actions,
including the launch of two initiatives with digital
inclusion training provider, We Are Digital. These
included providing tablet devices free of charge
to over-70s isolated by COVID, and a dedicated
phone line giving vulnerable customers support
in staying connected with digital activities,
including managing online banking. The Board
was also keen that the Group play a part in
tackling the isolation many feel as a result of
the crisis. The Group was therefore pleased to
partner with Age UK in providing The Silver Line,
a 24/7 helpline for those aged 55 and over who
may be feeling lonely or isolated.
The essential nature of a deep understanding
of challenges faced by customers in financial
difficulty was also highlighted by the pandemic.
The Board was updated regularly on the needs
of these customers, which resulted in the
provision of additional support. This included
increasing our capacity to serve customers who
needed the help of a colleague, and delivering
related self-serve functionality where preferred
by customers.
Customer feedback
Customer feedback is always a priority for the
Board. Regular updates are provided which give
valuable insight into the Group’s performance in
delivering on our customer-related objectives,
and on improving customer outcomes.
With Board oversight, new means of sharing
customer views were developed for use over the
coming year. These will provide greater insight
not only on customer experience, but also on
the progress being made to improve customer
satisfaction in the areas of most importance.
This will in turn help in ensuring the Board can
continue to focus on the things that matter most
to our customers and our clients.
The Board recognises the importance of
understanding our performance in supporting
customers, including how the Group performs
relative to our peers. Related updates covered
a range of internal and external measures,
including customer indices and market share
updates. Such updates provided important
insight, and enabled the Board to recommend
suitable customer related actions.
Helping Britain Recover
The needs of customers once the pandemic
abates has also been a focus for the Board.
This has included providing direction for the
development of our Helping Britain Recover
ambitions, building on the Group's purpose of
Helping Britain Prosper.
These ambitions seek to address the changes
in priorities for our stakeholders, including our
customers, as the country emerges from the
pandemic.
The Board oversaw the development of these
ambitions, which aim to make sure the Group’s
purpose remains aligned to a changing society,
fully integrating our societal objectives with our
business objectives. Read more on the Board’s
role in this process on page 49.
Technology transformation
The Board has taken steps to make sure the
Group continues to build on its response to
customer demand for technology. Digital
transformation has therefore remained
a key focus, including supporting the
development of the Group’s Cloud strategy,
and the ongoing roll-out of technological
developments for customers, discussed
further on page 51.
More detail
COVID-19 response
Read more on pages 1 to 3
Helping Britain Recover
Read more on pages 38 to 39
Technology transformation
Read more on page 18
Lloyds Banking Group Annual Report and Accounts 2020
47
KEY BOARD DECISION
DIVIDENDS
SHAREHOLDERS
ECONOMY
Despite the challenging economic
environment, the Group has delivered
a robust financial performance, and
demonstrated resilience and ability
to continue to generate capital. This
has been supported by our customer-
centric strategy and the strength of our
balance sheet.
At the end of March, in response to a
request from the PRA the Board took the
decision not to make quarterly or interim
dividend payments, accrual of dividends,
or share buybacks on ordinary shares.
While the Board understood this was a
difficult decision from the perspective
of the Group's stakeholders, it was
nonetheless important in helping the
Group serve the needs of businesses and
households through the extraordinary
challenges of COVID-19.
In addition, to preserve additional capital
for use in serving our customers, the
Board agreed to cancel the final 2019
dividend on ordinary shares.
These were hard decisions for the Board.
They involved balancing the interests
of our shareholders, for whom regular
distributions are important, and those of
our customers, many of whom needed
additional support during the pandemic.
The Board has recommended a final
ordinary dividend of 0.57 pence
per share, the maximum allowed
under the Prudential Regulation
Authority's temporary framework on
2020 distributions.
The decision is supported by the
regulator, and follows extensive
shareholder feedback and discussion with
other stakeholders. Read more about our
approach to dividends on page 68.
Link to strategic priorities
Leading customer experience
The Board is pleased that
despite the challenges which
the year has presented, the
Group’s strong performance
has enabled us to recommence
dividend payments, and
recommend to shareholders
a final ordinary dividend of
0.57 pence per share.
Robin Budenberg
Chair
The Group has the largest shareholder
base in the UK, with around 2.3 million
shareholders including most employees.
The Board recognises the importance of
understanding the priorities of different
shareholder groups when developing
and implementing strategy, with ongoing
engagement with both institutional and
retail shareholders.
The Group places great importance on
making sure shareholders are effectively
briefed on strategic and financial progress, in
addition to considering their valued feedback.
Comprehensive disclosure is provided with
results and, given the increasing focus of
investors on ESG matters, we now issue
a specific ESG-focused presentation for
investors ‘Our approach to ESG’.
The Group undertook more than
340 institutional investor meetings in 2020,
many of which were with management, and
also hosted a retail investor event. In addition,
various Non-Executive Directors engaged
directly with shareholders through the year,
including the Chair and the Remuneration
Committee Chair. Meetings held by the
Chair largely focused on corporate strategy,
governance and sustainability, while the
Remuneration Committee Chair consulted
extensively on the new remuneration policy,
both pre and post the 2020 AGM.
To ensure investors were fully briefed on
Group governance initiatives a Governance
event was also held in November, hosted
by the Chair and the Chairs of all the Board
Committees. Key topics discussed included
governance, sustainability and remuneration,
and it provided an excellent forum for Board
members to hear directly investor views on
key topics.
Board members are also kept up to date on
market views and shareholder sentiment
by Investor Relations, including an annual
presentation with the Group’s corporate
brokers on market dynamics and corporate
perception. The Board’s Nomination
and Governance Committee considers
correspondence received from institutional
shareholders, with feedback provided to
the Board on material retail shareholder
correspondence.
The Annual General Meeting
The Board recognises that the Annual General
Meeting (‘AGM’) is an important opportunity
for shareholders, institutional and retail alike,
to hear from and engage with the Board.
The Board was keen that 2020’s AGM adapt to
the challenges of the pandemic, and provision
was made so shareholders could access as
many of the benefits of an AGM as possible.
The opportunity was provided for
shareholders to hear from and put questions
to the Board, on a virtual basis in line with
safety guidance. Answers to questions, and
remarks from the Chair and Group Chief
Executive were also made available online.
Given the importance of the AGM in
shareholder engagement, the Board
continues to consider what will be possible
for the 2021 meeting. The Board is
especially keen to make sure the best
possible engagement is safely available
for shareholders.
Succession planning
The Board recognises the key role played
by the Chair and the Group Chief Executive
in the Group’s future success, and the
relevance of these important appointments
to all of the Group’s stakeholders,
including to our many shareholders.
Considerable time was therefore given
to the processes relating to succession
and recruitment to these positions,
which concluded in the appointment of
Robin Budenberg as Chair, and confirmation
that Charlie Nunn would be appointed as
Group Chief Executive. These processes
are discussed in greater detail in the report
of the Board’s Nomination and Governance
Committee on page 98.
Future strategy
The Board considered the development
of the next phase of the Group’s strategy,
to be implemented during 2021. To help in
this, dedicated sessions were held with the
Executive in both June and November, to
shape strategic priorities and agree how these
would be implemented.
Consideration was given to feedback from
key stakeholders, including understanding
the priorities of the Group’s shareholders
in respect of our strategic direction. The
Group’s approach to the environment and
climate change was of particular importance
in shaping strategy, and is discussed further
on page 50.
More detail
Annual General Meeting
Read more on page 344
Appointment of new Chair
Read more on page 99
Appointment of new Chief Executive
Read more on page 99
Future strategy
Read more on pages 36 to 45
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
48 Lloyds Banking Group Annual Report and Accounts 2020
Our key stakeholders and Board engagement continued
COLLEAGUES
Colleagues are vital to the delivery of the
Group’s strategy and ambitions. This is
recognised by the Board in its engagement
with colleagues throughout the year.
The Board considers that maintaining open
dialogue is crucial in informing its thinking,
allowing Directors to hear first-hand the varied
colleague views on the matters most important
to them, and to the Group.
The Board agreed in 2019 its approach to
workforce engagement, which has remained
unchanged during the year. The definition
of workforce agreed by the Board is 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.
The Board continues to receive Workforce
Engagement reports which comprises two
component parts, a summary of the Board’s
engagement activity with colleagues,
and key themes raised by colleagues and
trends on people matters. These covered
all matters of colleague engagement, in
particular key and emerging issues for
colleagues, including Group culture and
our response to the COVID pandemic.
During the year the Board communicated
with colleagues through a number of means.
These included informal colleague lunch and
breakfast meetings, held by the Group Chief
Executive and the Chair, and attended by
Non-Executive Directors.
Virtual Town Hall sessions were hosted by
both the Chair and the Group Chief Executive.
These were complemented by engagement
sessions led by other senior leaders, with
feedback from all sessions shared with the
Board. Town Hall sessions were particularly
helpful in allowing colleagues the opportunity
to ask questions, share their views, and receive
a direct answer in real time.
During the year the Board gained further
understanding of colleague views through a
number of surveys completed by colleagues
across the Group. These included the annual
colleague survey, ad hoc ‘Pulse’ surveys, and
participation by colleagues in the survey of the
Banking Standards Board.
The Board considers these arrangements
invaluable in giving them an understanding of
the views of the workforce and encouraging
meaningful dialogue between the Board and
the workforce.
During the year the Group also communicated
directly with colleagues detailing Group
performance, changes in the economic and
regulatory environment and updates on key
strategic initiatives.
Meetings were also held throughout the year
between Group representatives and our
recognised unions.
The Group offers a competitive and fair reward
package. Colleagues are eligible to participate
in HMRC-approved share plans which promote
share ownership by giving employees an
opportunity to invest in Group shares. Further
information can be found on page 136 in the
Directors’ Remuneration Report.
Culture acceleration
Following engagement, cultural acceleration
initiatives have been a focus for the Board
as the Group looks to accelerate the cultural
change started in 2019.
The Board reviewed plans to further
improve ways of working, encourage greater
collaboration, and continue the reduction in
bureaucracy. Opportunities were encouraged
to promote simplicity in process and practice
wherever possible.
A number of related initiatives were successfully
completed during the year. These included
a project to simplify the Group’s Committee
structure, and retain a more agile approach to
decision-making which had been necessary
during the pandemic.
Diversity
The Board believes a diverse workforce is
vital to the Group’s success, and values the
differences each colleague brings to their role,
making the Group stronger and better able to
meet the needs of our customers.
In support of this the Board approved in July
2020 the introduction of our Race Action plan,
designed to drive race related cultural change,
recruitment and progression across the Group.
The plan will be taken forward by a dedicated
team, who will work with a newly formed
Race Advisory Panel to further develop and
implement the plan over the coming year.
The Board also approved a target to increase
Black representation in senior roles to at
least 3 per cent by 2025. This complemented
the Group’s broader 2018 Black, Asian and
Minority Ethnic representation targets of
10 per cent overall, and 8 per cent at senior
management levels.
More detail
Colleague engagement
Read more on page 29
Diversity
Read more on page 25
Speak Up
Read more on page 30
KEY BOARD DECISION
COVID RESPONSE
While the COVID pandemic has been
challenging for our customers, it has also
posed challenges for our colleagues.
The Board was therefore keen to ensure
colleagues received all the support the
Group could give.
Regular and open engagement with
colleagues was crucial, with the Group
Chief Executive undertaking a series
of related video broadcasts, keeping
colleagues informed of developments.
This was supported by other members of
the Executive, including colleague Q&A
sessions held by the Group’s People
Director, where colleagues posed the
questions which mattered to them most.
The Board agreed various measures
of support for colleagues in response
to the crisis. These included the
temporary suspension of staff
reductions, enhancements to working
environment safety, flexible holiday
entitlement and a commitment to
pay colleagues in full, regardless of
how their work had been impacted.
The Board took steps to ensure along
with the Executive that colleague
wellbeing was prioritised. Resources
were made available to help
colleagues in adjusting to the changing
circumstances, including support in areas
such as work life balance, health and
financial management.
The Board considered it important
that priority continue to be given to
supporting colleague mental health.
A number of related steps were taken,
including support via the Group’s ‘Your
Resilience’ portal, with new content to
address the challenges colleagues faced
as a result of the pandemic. The Group’s
partnership with Headspace was also
extended, offering all colleagues a free
subscription to an app providing access
to modules covering a range of mental
health related topics.
The Board was also keen the Group’s
response should include faster roll-out of
our Digital Workplace programme, which
on completion allowed the majority
of colleagues to work from home. The
Board in addition approved a recognition
payment to frontline colleagues, in
thanks for their efforts in supporting our
customers during the pandemic.
The Board has considered how colleague
working practices will develop beyond
the COVID crisis, in particular how more
flexible and efficient ways of working
seen during 2020 could be retained.
This included the agreement of steps to
be taken by the Executive to ensure the
Group’s workplace continues to evolve
with both the needs of the business, and
the changing ways in which colleagues
wish to work.
Lloyds Banking Group Annual Report and Accounts 2020
49
COMMUNITIES AND ENVIRONMENT
KEY BOARD DECISION
HELPING BRITAIN RECOVER
As one of the largest financial services
providers in the UK, the Group has a
presence in almost every community. As
such, the Group places great importance
on engagement and action to help
these communities prosper, and build a
more sustainable future. This has been
a core consideration for the Board in the
development of the Group’s next strategic
phase.
The Board is supported in environmental
and community matters by its Responsible
Business Committee. This Committee
supports the Board with consideration of
stakeholder views on all matters relating
to the Group’s goals to be a trusted,
sustainable and responsible business.
Helping Britain Recover
The Board has given much focus to
overseeing the development of the Group’s
Helping Britain Recover ambitions. This
continues our strategy of Helping Britain
Prosper, designed to play a part in the UK’s
recovery from the COVID pandemic, and is
discussed in more detail below.
The views of stakeholders have informed the
development of these ambitions, which aim to
integrate fully the Group’s societal objectives
with its business objectives, and will be key in
the next phase of our strategy.
Environmental ambitions
During the year the Board approved an
ambitious goal, working with customers,
Government and the market to help reduce
the carbon emissions the Group finances
by at least 50 per cent by 2030. With the
Group's 2030 carbon emission reduction
goal for our own operations met, the
Board also considered the development
of new internal carbon, energy and travel
targets. Consideration was also given to the
development of several new green finance
products, tools and services.
A commitment was approved to invest
£2 billion in BlackRock’s ACS Climate
Transition World Equity Fund, via Scottish
Widows' default fund offering. The Group’s
investment will make up 10 per cent of the
equities portion of our default pension
investment approach within Scottish Widows,
focused on investing in the companies
already at the forefront of decarbonisation
and responsible use of natural resources.
The Board’s consideration of environmental
ambitions is discussed further on page 50.
Regional Ambassadors
The Board continues to value the support
provided by the Group’s ten regional
ambassadors, who between them help in
establishing strong relationships with local
politicians, councils and other community
institutions across the UK.
The feedback of these ambassadors informs
not only the Board’s view of stakeholder
priorities, but allows the Group to offer locally
its insight on the major economic and social
debates the country faces.
Charitable Foundations
The Board continued to support the work
of the Group's charitable Foundations.
Together during the year they have funded
local charities in tackling issues ranging from
financial disadvantage and social exclusion, to
domestic abuse and modern slavery.
As well as grant funding, the Foundations
offer charities additional support, with
mentoring, learning, training and networking
support also provided.
The Board was particularly pleased at the
positive impact of the Foundations in helping
charities respond locally to the COVID crisis.
During the year the Board agreed the Group
would continue to fund the important work of
the Foundations in 2021, at levels of funding in
line with those of 2020.
The Chair undertook virtual visits to several
charities supported by the Foundations,
including the Tom Harrison House in
Liverpool, providing important insight into the
role of the Group in supporting communities
across the UK.
More detail
Environmental ambitions
Read more on pages 20 to 24
Helping Britain Recover
Read more on pages 38 to 39
Charitable Foundations
Read more on page 29
The Board considered it vital that the
Group as one of the UK’s main financial
services providers plays a key role in the
country’s plan to rebuild the economy.
In September 2020 the Group launched
The Big Conversation: Helping Britain
Recover. A three-month series of
roundtable discussions were held
across all nations and regions of the UK,
which encouraged open debate of the
challenges facing the country during
the pandemic, and how the UK could
emerge with an economy that is more
resilient and more sustainable.
The Big Conversation brought together
many of the Board’s key stakeholders,
including businesses, community
members, policy makers and subject-
matter experts across the UK’s nations
and regions. Focus was given to
discussing the support and policy
interventions that these stakeholders
considered necessary for a strong
recovery from the pandemic.
A final report, published in December
2020, was shared with all participants
as well as with key politicians and policy
makers, and is available on the Group’s
website. The Board was pleased the
Group was in this way able to amplify
its stakeholders’ voices to those who
can make a difference. We anticipate
extending this initiative in 2021 to
encompass more topics of importance
to our stakeholders.
In addition, the Board agreed in June
that it was important to build a long-
term framework which would help the
Group more fully integrate its business
ambitions with its societal objectives,
acting wherever possible as a positive
driver for change.
After considering recommendations
from the Executive, built around
feedback from stakeholders, the Board
concluded the plan would focus on five
key areas of stakeholder priority. These
included Help rebuild households’
financial health and wellbeing, Support
businesses to recover, adapt and grow,
Expand availability of affordable and
quality homes, Accelerate the transition
to a low carbon economy and Build an
inclusive society and organisation.
In 2021, we’ll continue to listen to our
key stakeholders from across the UK to
understand what local communities and
economies need to emerge from the
pandemic stronger and more resilient.
Link to strategic priorities
Leading customer experience
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
50 Lloyds Banking Group Annual Report and Accounts 2020
Our key stakeholders and Board engagement continued
REGULATORS AND GOVERNMENT
The Board and the Group continue to
maintain strong, open and transparent
relationships with our regulators and
Government authorities, including key
stakeholders such as HMRC and HM
Treasury.
Liaison with regulators and Government
is an ongoing priority, at all levels of
the organisation, allowing the Board to
ensure the Group’s strategic aims align
with the requirements of these important
stakeholders.
COVID response
Extensive engagement was needed with
regulators and Government in the initial
response to the COVID crisis. This helped
ensure the Group’s response could both
best support our customers, but also remain
in step with Government priorities for
supporting the stability of the wider
UK economy.
Senior leaders worked closely with the FCA,
PRA and representatives of HM Treasury to
agree the Group’s participation in the COVID
related support schemes, keeping the Board
apprised of all developments.
Following these interactions, the Board
approved the Group’s participation in
the Government’s economic response,
successfully providing our customers with
access to the Government’s support measures
and loan schemes.
Board members proactively engage with the
regulators across all these areas, in addition to
a standing programme of monthly updates,
including to the Board’s Risk Committee.
These updates cover all aspects of the
regulatory agenda, with emerging regulatory
and legal risks, in addition to an overview of
the Group’s wider regulatory interaction. This
provides a focused view of areas of priority,
alongside detail of regulatory actions, and
enforcement activity.
The Board continues to closely monitor the
status of the Group’s regulatory relationship,
seeking to enhance engagement particularly
in key areas of regulatory change. During
the coming year this is expected to include
the ongoing impacts of COVID, including
customer relief, in addition to EU exit
transition, climate risk management, dividend
distribution and remuneration policy.
The Board continued to review the provision
of this support as the year progressed,
remaining close to the developing priorities of
Government and of our regulators, as well as
the impact on our customers and business.
More detail
COVID-19 response
Read more on pages 1 to 3
Environmental ambitions
Read more on pages 20 to 24
As the amount of new
regulation continues to increase,
and uncertainty remains about
the impact of the UK’s exit
from the EU on regulatory
frameworks, the Board
recognises the importance of
continuing to strengthen the
Group’s relationships with our
key regulators.
Sara Weller
Independent Director
Regulatory agenda
The Chair and individual Directors,
in particular the Chairs of the Board’s
Committees, have in the ordinary course of
business had continuing discussions with the
FCA and PRA on a number of aspects of the
regulatory agenda.
The Board in turn reviewed regular updates on
this and wider Group regulatory interaction.
This provided a view of key areas of regulatory
focus, alongside progress being made in
addressing key regulatory priorities.
Key areas of regulatory interest for the
Board have included ensuring robust
prudential standards, the fair treatment
of customers, and the Group’s ongoing
response to market changes. During the
year such changes have included not only
the response to COVID, but the UK’s exit
from the EU, in addition to climate change
responsibilities, and ensuring the Group’s
ongoing financial and operational resilience.
KEY BOARD DECISION
ENVIRONMENTAL AMBITIONS
As a signal of the Group’s commitment
to sustainability, the Board approved an
ambitious goal to reduce the emissions
we finance by 2030, on the path to net
zero by 2050 or sooner.
Achieving these goals will not be easy,
and the Board recognises the Group will
need to take a number of actions.
These will over the coming years include
investing in our buildings, removing the
use of natural gas from our estate, and
progressing our plans for zero carbon
branches in communities across the UK.
Many of the technologies needed are
still new. The Board therefore recognises
that close work will be needed with our
partners and suppliers in developing
innovative new solutions.
Some initiatives were however approved
for 2020, including the launch of a
number of green finance products, tools
and services. These included the Green
Buildings Tool, a free to use insight tool,
launched specifically for Commercial
Banking clients. The tool helps clients
identify energy efficiency improvements
relating to both commercial and
residential buildings, along with the
associated costs and benefits of those
improvements.
The tool also complements the existing
Green Lending Initiative in the real estate
and housing sectors, and our Clean
Growth Finance Initiatives across all of
Commercial Banking’s sectors.
The Board was also pleased that
the Group was able to launch its
Green Living and Eco Home Hub for
Halifax and Lloyds Bank customers.
This online tool is first in the market
amongst lenders, providing mortgage
customers with a tailored action
plan on home improvements which
can help improve sustainability.
Further initiatives included the
introduction of the Sustainability Fixed
Term Deposit and 95 Day Notice
Accounts, where deposited funds are
used to support sustainability ambitions.
The Board will continue to oversee
initiatives to help the Group achieve its
sustainability goals, which will form a
core part of the Group’s strategy in the
coming years.
Link to strategic priorities
Leading customer experience
Lloyds Banking Group Annual Report and Accounts 2020
51
SUPPLIERS
We rely on a number of partners for
important aspects of our operations and
customer service provision.
The Board recognises the importance of its
role in overseeing these relationships, which
are integral to the Group’s future success.
Supplier experience
Recognising the role of suppliers in the
Group’s day-to-day operations, and its future
ambitions, the Board was keen that supplier
experience be continually reviewed in order
that it may be improved wherever it was
possible to do so.
As such the Board regularly considered
supplier feedback on the Group’s processes,
ensuring areas of potential improvement were
acted upon.
Supplier framework
A Board-approved framework ensures the
most significant supplier contracts receive the
approval of the Board.
This has during the year included those
supporting the Group’s digital ambitions, as
discussed in more detail below, with the Board
approving certain supplier contracts which
were key in progressing this strategic priority.
The framework also ensures appropriate
Executive oversight of supplier
spending not considered by the Board,
allowing challenge to be made where
appropriate, and minimising risks and
unnecessary cost. The Board reviewed
updates on material related actions.
Supplier payment
The Board recognises that late payment of
suppliers can represent a significant financial
impact for them.
As such the Board seeks to ensure the Group’s
supplier payment practices continue to meet
wider industry standards.
To that end, the Board’s Audit Committee
considered reports from the Group’s
Sourcing and Finance teams on the efficiency
of supplier payment practices, including
those relating to the Group’s key supplier
relationships.
Supply Chain Resilience
The impacts of the COVID crisis have been no
less material within the Group’s supply chain,
with the Board keen to ensure these important
relationships were not unduly impacted. The
Board has also been mindful of the effects of
the EU Exit on the Group’s supply chain, as the
UK approached the deadline of the related
transition period.
Related updates were considered on the
work of the Group’s Supply Chain Resilience
programme. This along with the Supplier
Framework provided valuable assurance
on the Group’s most critical supplier
relationships, including those located in the
EU. In particular the Board considered the
work of the Group’s Incident Management
process and the contribution from sourcing
and supply chain SME’s from across the
Group, an important means of support to key
suppliers in managing the impacts of COVID
on their relationships with the Group.
The Board recognised the challenge of
preparations by suppliers for finalisation of the
EU Exit, in particular when combined with the
pressures of the COVID crisis. This included
regular related updates for suppliers provided
using the Group’s website.
Modern slavery
The Board continues to have a zero tolerance
attitude towards modern slavery in the
Group’s supply chain, receiving updates on
progress made in the ongoing enhancements
to our supplier practices.
These included measures which address the
risk of human trafficking and modern slavery in
our wider supply chain.
More detail
Responsible sourcing
Read more on page 31
The Board recognises that
the Group’s supply chain, and
ensuring strong and mutually
beneficial relationships with
our suppliers, are key to the
Group’s ongoing success.
Catherine Woods
Independent Director
KEY BOARD DECISION
DIGITAL TRANSFORMATION
As part of how the Group can continue to
Help Britain Recover, the Board agreed
that digital investment played a key role,
enabling the Group to best adapt to and
support our stakeholders’ developing
priorities.
The Board agreed that as we prepare
for the next phase of our strategy,
acceleration of our approach to the
public cloud was central in further
digitising our business, enabling us to
greatly improve the experience of both
our customers and of our colleagues.
While the Group has already taken
some big steps in digital transformation,
modernising how we serve customers,
and changing how we work, the Board
agreed that cloud technology was key to
building on this progress.
This will include continuing to simplify
our IT systems, and enhancing our IT
architecture. Combining future-proofed
cloud technology with smart customer
data and insight, we want to deliver an
even better and more personalised
experience, regardless of the channel a
customer chooses to do business with us.
Progress overseen by the Board has
included the mobilising of the Group’s
new Cloud Centre of Excellence,
an important step in harnessing the
opportunities cloud technology presents.
The Board held two deep dive sessions
in June and October to review the
Group’s cloud strategy in detail. This
allowed debate and challenge of the
risks and further development of plans.
The Board also participated in an insights
programme on cloud technology to
augment their current knowledge and
understanding.
The Board has also overseen progress
in the Group’s use of external platforms,
key in establishing our cloud services. The
Board’s IT and Cyber Advisory Forum
has assisted in this by reviewing detailed
aspects of the cloud strategy.
The Board was pleased that, despite
the challenges of the pandemic,
progress was also made in delivering
technological developments which have
helped to further improve our customer
experience. These included industry
leading capability for customers to view
and cancel subscription services for items
such as their monthly TV streaming and
broadband service providers, paid for
via their current account. Functionality
was also introduced allowing more of our
general insurance customers to submit
their claims digitally, improving the speed
and efficiency our claims process.
Link to strategic priorities
Leading customer experience
Maximising Group capabilities
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
52 Lloyds Banking Group Annual Report and Accounts 2020
Financial performance overview
Group
Financial performance reflects
the challenging economic
environment
The Group’s statutory profit before tax for the
year was £1,226 million with statutory profit
after tax of £1,387 million. Both measures
were impacted by the significant impairment
charge taken during the year, the majority
of which was recognised during the first
half and reflected the Group’s revised
economic outlook for the UK, following the
outbreak of the coronavirus pandemic. In
the fourth quarter, statutory profit before tax
was £792 million and statutory profit after
tax was £680 million, both benefiting from
improved business conditions and a reduced
impairment charge.
Trading surplus for the year was £6,440 million,
a reduction of 27 per cent on 2019, reflecting
the challenging external environment.
Net income was down 16 per cent to
£14,404 million, driven by both lower net
interest income and lower other income. The
Group has maintained its focus on delivering
cost savings, with total costs down 4 per cent,
while continuing to invest in the Group's
digital propositions.
The Group’s underlying profit was
£2,193 million for the year, compared to
an underlying profit of £7,531 million in
2019, reflecting lower net income and the
significant impairment charge of £4,247 million
taken in 2020.
The Group’s balance sheet remains very
strong. Loans and advances to customers
were flat on prior year at £440 billion. This
includes an increase in open mortgage
book net lending of £7.2 billion in the year,
with £6.7 billion growth in the fourth quarter,
reflecting the strength of the UK housing
market. Total customer deposits increased
by £38.9 billion in the year, to £450.7 billion.
Retail current account growth was £20.5 billion
in 2020 and ahead of the market, driven by
lower levels of customer spending during the
pandemic and inflows to the Group’s trusted
brands. Commercial Banking current account
growth also illustrates the Group's strong
customer relationships and a proportion
of the Government-backed lending being
retained on deposit by SME customers.
The Group’s CET1 capital ratio post
dividend increased 242 basis points
over the year, from 13.8 per cent on
a pro forma basis to 16.2 per cent, or
16.4 per cent pre dividend accrual.
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 credit (expense)
Statutory profit after tax
Earnings per share
Dividends per share – ordinary
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
Asset quality ratio
Return on tangible equity - existing basis
Return on tangible equity - new basis
Key balance sheet metrics
Loans and advances to customers1
Customer deposits2
Loan to deposit ratio
CET1 ratio3,4
CET1 ratio pre IFRS 9 transitional relief3,4
Transitional MREL ratio3,4
UK leverage ratio3,4
Risk-weighted assets3
Tangible net assets per share
2020
£m
10,773
4,515
(884)
14,404
(7,585)
(379)
(7,964)
6,440
(4,247)
2,193
(521)
(361)
(85)
1,226
161
1,387
1.2p
0.57p
2.52%
£435bn
55.3%
0.96%
3.7%
2.3%
At 31 Dec
2020
£440bn
£451bn
98%
16.2%
15.0%
36.4%
5.8%
£203bn
52.3p
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
1.12p
2.88%
£435bn
48.5%
0.29%
7.8%
6.6%
At 31 Dec
2019
£440bn
£412bn
107%
13.8%
13.4%
32.6%
5.2%
£203bn
50.8p
Change
%
(13)
(21)
9
(16)
4
15
4
(27)
(71)
(11)
(66)
(72)
(54)
(66)
(36) bp
–
6.8 pp
67bp
(4.1) pp
(4.3) pp
Change
%
–
9
(9)pp
2.4pp
1.6pp
3.8pp
0.6pp
–
1.5p
1 Excludes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
2 Excludes repos of £9.4 billion (31 December 2019: £9.5 billion).
3 The CET1, MREL and leverage ratios and risk-weighted assets at 31 December 2019 are reported on a pro forma basis,
reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The CET1 ratio pre IFRS 9
transitional relief reflects the full impact of IFRS 9, prior to the application of transitional arrangement for capital that provide
relief for the impact. Excluding dividend accrual, the CET 1 ratio at 31 December 2020 was 16.4 per cent.
4. CET1 ratios at 31 December 2020 include an increase of 51 basis points following the implementation of the revised capital
treatment of intangible software assets. The benefit through CET1 capital is reflected through the MREL and leverage ratios.
Lloyds Banking Group Annual Report and Accounts 2020
53
Progress against strategic
priorities
Leading customer experience
UK’s leading digital bank with digitally
active customers up 6 per cent to
17.4 million and mobile users up 16 per
cent to 12.5 million. Over 4 billion internet
banking logins in 2020, with average
monthly logins up 12 per cent
Maintained the UK’s largest branch
network with around 90 per cent of
branches remaining open throughout
the pandemic, whilst implementing
coronavirus safeguarding measures to
protect customers and colleagues
Supported customers through the
pandemic with c.1.3 million payment
holidays, c.880,000 calls answered on
dedicated lines for NHS workers and over
70s, along with over 750,000 wellbeing
calls made by branch colleagues
Continued to support first time buyers
with c.£40 billion of mortgage lending
in 2018 to 2020, exceeding the Group's
target by over 30 per cent.
Improved customer experience reflected
in increased branch and digital net
promoter scores reaching record highs
Digitising the Group
Supporting customers in financial
difficulty with more accessible support
through digital channels for the first time
5 million customers now receiving push
notification alerts helping them manage
their finances (up 80 per cent)
Launched Business Finance Assistant, to
support small businesses managing their
finance needs
Maximising Group capabilities
£7.6 billion of Bounce Back Loans
provided to Business Banking customers
(out of Group total £12.4 billion)
£37 billion increase in deposits, reflecting
the strength of the Group's trusted
brands in an uncertain environment
Transforming ways of working
Over 2,500 branch colleagues redeployed
to support customers through the
pandemic, whilst over 21,000 colleagues
were able to work from home and over
13,000 laptops distributed to colleagues
across the Retail Bank
1,000 strong Branch Financial Assistance
team created to support customers in
financial difficulty
Launched new green propositions
including an Energy Saving Tool, helping
customers improve energy efficiency of
their homes and an electric vehicle salary
sacrifice proposition
Financial performance
Net interest income 9 per cent lower,
reflecting the low rate environment,
actions to support customers
and lower unsecured balances
with reduced levels of activity and
demand during the pandemic
Other income 14 per cent lower with
reduced levels of customer activity and
customer spending and the continued
impact of a smaller Lex fleet size in line
with the market, in part offset by lower
operating lease depreciation
Operating costs flat, with efficiency
savings offsetting an increase in costs
related to supporting customers during
the coronavirus pandemic. Remediation
costs decreased 47 per cent on prior year
to £125 million
Impairment increased significantly
to £2,384 million, primarily driven by
the charge in the first half of the year
reflecting a material deterioration in
the economic outlook as a result of the
coronavirus pandemic
Customer lending increased 2 per cent
with increased mortgage activity,
including open book growth of
£6.7 billion in the fourth quarter and
support for Business Banking customers,
partly offset by lower unsecured balances
Customer deposits increased 15
per cent with strong inflows to the
Group's trusted brands and lower
spend activity, along with increased
Bounce Back Loan driven deposits
Risk-weighted assets up 1 per cent, with
credit migration and model changes
offset by lower unsecured balances
A nurse contacted the dedicated payment
holiday line to explain how she had been
impacted by COVID. She normally made
up her income working additional shifts,
however because of COVID had only been
able to work on one ward, to prevent the
spread of the virus across wards, which had
reduced her income by half. Her husband
who worked in a restaurant had also been
furloughed.
With a mortgage, credit card and a loan,
it was a worrying time for the customer.
We were able to give the customer a
payment holiday across all products saving
the customer c.£2,000 per month. The
customer was emotional, overwhelmed and
very grateful for the support the bank had
been able to give her and her family when
they most needed it.
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 preferred
financial partner for personal customers, by
building deep and enduring relationships
that meet more of our customers' financial
needs and improve their financial resilience
throughout their lifetime, with personalised
products and services that are increasingly
relevant to them. 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 risk, whilst working within
a prudent risk appetite.
£1,991 million
Underlying profit decreased by 53 per cent
c.£40 billion
Exceeded target of mortgage lending to first
time buyers by over 30 per cent across
2018 to 2020
#1
Maintained largest branch network with around
90 per cent of branches remaining open during
pandemic
76/ 67
Record highs of net promoter scores across
branch and digital
UK's largest digital bank
Active online users (m)
17.4
2020
2019
2018
2017
2016
17.4
16.4
15.7
13.4
12.5
Key worker very
thankful for
payment holiday
support
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
54 Lloyds Banking Group Annual Report and Accounts 2020
Financial performance overview continued
Commercial
Banking
Commercial Banking has a client-led,
low risk, capital efficient strategy and is
committed to becoming the best bank for
business. 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 will enable the business to
build a leading digital SME proposition and
a disciplined and strengthened Corporate
and Institutional client franchise.
£96 million
Underlying profit decreased by 95 per cent
19 per cent
market share of SME lending
>£6.0 billion
net SME and Mid Market lending
target exceeded
Funding for UK manufacturers
£bn cumulative total (2018 - 2020)
3.7
2020
2019
2018
2017
2016
3.7
2.6
1.5
1.1
1.4
Supporting
green ambitions
Progress against
strategic priorities
Leading customer experience
Implemented an extensive client outreach
programme across SME and Mid
Corporates in response to the coronavirus
crisis, reaching c.60,000 businesses
impacted by the pandemic to date
SME mentoring service launched in
partnership with Be The Business to help
clients recover from the pandemic
Digitising the Group
First globally to implement SWIFT
GPI Instant, increasing the speed and
transparency of cross-border payments
Over £2 billion processed through the
Payables API, allowing clients to send
Faster Payments directly from their
systems without human intervention
Launched the Trade Tracker API, giving
clients greater transparency through real-
time transaction status updates
Rapid deployment of robotics to
automate the opening of Bounce Back
Loans, enabling over 300,000 loans with a
value of over £9 billion to be opened since
May and supported over £1 billion on the
first day following the launch
Maximising Group capabilities
Exceeded the Group’s three year target
to provide £6 billion of additional net
lending to start-up, SME and Mid Market
clients by end-2020 and surpassed the
2020 target of £18 billion gross new
lending target to these businesses
Actively supported clients with over
£12 billion of Government-backed
lending, in addition to c.34,000 capital
repayment holidays and c.22,000 fee-free
overdrafts as part of the Group's £2 billion
COVID-19 fund
Supported £3.7 billion of investment
in the UK manufacturing sector and
participated in the completion of a
number of UK Export Finance backed
Export Development Guarantee
transactions to the syndicated value of
£4.4 billion to support clients' trading
ambitions, whilst helping c.15,000 SMEs
export for the first time over the past
three years
French oil major Total has advanced its
diversification into renewable energy by
taking a majority stake in the UK’s Seagreen
1 offshore wind project.
Cost of more than £3.0 billion, Seagreen
is one of the largest investments
in Scottish infrastructure. Upon
completion it will provide sustainable
energy to 1 million homes.
In 2020, provided over £2.3 billion of
green finance, taking the total green
finance provided to over £7.3 billion
since 2016. In addition, we have
supported clients with over £1.8 billion of
Sustainability Linked Loans since 2017
Transforming ways of working
Upgraded the Business Banking Online
Lending Tool to accommodate the
Government’s coronavirus lending
schemes, enabling faster decision making
and freeing up Relationship Manager
time to help clients
Financial performance
Net interest income of £2,357 million,
down 18 per cent on prior year, reflecting
competitive asset markets, lower deposit
income due to bank rate reductions partly
offset by ongoing business optimisation
across assets and liabilities
Other income decreased by 9 per cent
to £1,292 million, primarily driven by
lower transaction banking income as
a consequence of coronavirus-related
impacts on customer trading volumes,
with markets income remaining resilient
Operating costs were 11 per cent
lower reflecting the result of continued
investment in efficiency initiatives
Impairments increased to £1,464 million,
reflecting a significant deterioration in the
Group's economic outlook, as well as a
small number of single name charges
Customer lending was lower at
£86.2 billion, with higher lending in SME
driven by Government-backed lending,
more than offset by lower Corporate and
Institutional lending due to the continued
optimisation of the asset portfolio
Customer deposits grew by 1 per cent to
£145.6 billion, as optimisation within the
term deposit book was more than offset
by growth in SME deposits, given the
partial retention of Government-backed
lending on deposit and growth in SME
deposits generally
Risk-weighted assets decreased
3 per cent to £75.0 billion, driven by
ongoing optimisation in the Corporate
book, partly offset by regulatory
headwinds and credit migrations
The Seagreen transaction is the first
partially-subsidised offshore wind project to
be financed in the UK, as the sector moves
away from its dependency on Government
subsidies. Approximately 40 per cent of the
turbines benefit from a fixed power price
guarantee from the UK Government
As part of Lloyds Bank’s Clean Growth
Financing Initiative (CGFI), the Group
provided £198 million to the project in a
total debt package of £1.4 billion.
Lloyds Banking Group Annual Report and Accounts 2020
55
Insurance
and Wealth
Insurance and Wealth offers insurance,
investment and wealth management
products and services. It supports
over 10 million customers with assets
under administration of £172 billion and
annualised annuity payments of over
£1.1 billion. The Group continues to invest
significantly in the development of the
business, with the aims of capturing the
considerable opportunities in pensions
and financial planning, whilst meeting
more of our customers’ financial needs
and improving their financial resilience
throughout their lifetime.
£338 million
Underlying profit decreased by 68 per cent
69 per cent
Growth in open book AuA over the GSR3
period
15 per cent
Achieved GSR3 target market share in
workplace pensions
1.5 million
new pension customers in GSR3 period
Strong open book AUA
(customer net inflows)
£bn
5
2020
2019
2018
2017
2016
5
18
13
2
1
Saving for
the future
Progress against
strategic priorities
Leading customer experience
Achieved 5 stars for the fifth consecutive
year in the Financial Adviser Service
Awards in Investments, Pensions and
Protection, and Mortgages, together
with the Editor’s Achievement Award for
30 years’ Consistent Service
Being the first major pensions and
insurance provider to target halving the
carbon footprint of its investments by
2030 on its path to net zero by 2050
Commenced £2 billion investment in
BlackRock's Climate Transition fund
expected to deliver c.50 per cent carbon
reduction compared to benchmark;
helping customers save for retirement,
whilst investing in sustainable businesses
Achieved GSR3 target of 15 per cent
market share of workplace business, up
from 10 per cent at start of 2018
Supported customers throughout the
pandemic, including free additional
insurance cover to NHS workers and
reducing medical evidence requirements
to help alleviate pressures on GPs
Digitising the Group
Launched Scottish Widows app in the
fourth quarter to c.500,000 customers.
Customers are able to engage with their
retirement planning, representing a key
strengthening of the Group's proposition
Single Customer View expanded to
include stockbroking portfolios with
c.6.5 million customers able to access
their insurance and wealth products
alongside their bank account, up from
over 5 million at the end of 2019
Maximising Group capabilities
Grew open book assets under
administration by £46 billion, or
69 per cent, over the GSR3 period
to £113 billion, narrowly missing the
£50 billion growth target despite
challenging market conditions
Further exceeded GSR3 target of 1 million
new pension customers, with 1.5 million
now added
Completed migration to Schroders
Personal Wealth. Continue to
target becoming a top 3 financial
planning business
For 16 years, Scottish Widows has been
researching the savings habits of women in
the UK. Tracking retirement planning over
the years means we can see patterns of
behaviour evolve over a long period of time.
The good news is that the gender pensions
gap is now the narrowest on record, with
just a 1 per cent difference between the
proportion of men and women putting
enough money aside for a comfortable
retirement. Almost three in five (59 per cent)
women – the highest since we began this
research – are saving adequately, compared
to 60 per cent of men.
Financial performance
Underlying profit fell to £338 million,
driven by impact of reduced market
activity, lower non-recurring items and
adverse assumption changes in 2020
(versus net positive in 2019)
Sales in individual annuities, non-branch
protection, and workplace, planning and
retirement, excluding auto-enrolment
step-ups, have increased despite
pandemic headwinds
Life and pensions experience and other
items includes adverse impacts from
assumption changes (further details of
which are included in Other Financial
Information) and the response to the
Asset Management Market Review
General insurance combined operating
ratio remains strong at 85 per cent in the
context of absorbing £36 million claims
due to storms in 2020. Total gross written
premiums remain resilient despite the
reduction in branch footfall
Reduction in Wealth income reflects the
transfer of business to Schroders Personal
Wealth in 2019, and lower net interest
income as a result of the lower rate
environment. Stockbroking other income
more than double prior year
Costs reduced by £80 million,
c.£60 million of which reflects the transfer
of business to Schroders Personal Wealth
Insurance capital
Estimated Solvency II ratio of 151 per cent,
reflects the dividend paid in February
2020, continued investment in new
business, and the impact of lower
interest rates
Credit asset portfolio is average ‘A’ rated,
well diversified and non-cyclical, with less
than 1 per cent sub investment grade or
unrated. No Insurance ordinary dividend
will be paid for 2020
Scottish Widows is continuing its call for
a series of pension reforms to remove the
persistent barriers to more women saving
more money for retirement. This includes
enhanced pensions for those on maternity
leave, the mandatory inclusion of pensions
in divorce proceedings and scrapping the
minimum earnings threshold for of auto-
enrollment to make pensions more inclusive
for part-time workers.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
56 Lloyds Banking Group Annual Report and Accounts 2020
Risk overview
Effective risk management and control
Our approach to risk
Risk management is at the heart of Helping
Britain Recover and building the UK's
preferred financial partner.
Our mission is to protect our customers,
colleagues, the Group, investors and society,
while enabling sustainable growth. This is
achieved through informed risk decision-
making and robust risk management,
supported by a consistent risk-focused culture.
A prudent approach to risk is fundamental
to our business model and drives our
participation choices.
The risk management section from pages 143
to 204 provides an in-depth picture of
how risk is managed within the Group,
including the approach to stress testing,
risk governance, Committee structure, risk
appetite and detailed analysis of the principal
risk categories, the framework by which
risks are identified, managed, mitigated
and monitored.
Our enterprise risk
management framework
Risks are identified, managed, mitigated
and monitored using our comprehensive
enterprise risk management framework. This
is the foundation for the delivery of effective
risk control.
The Group's risk appetite, principles,
policies, procedures, controls and reporting
are regularly reviewed and updated when
needed to ensure they remain fully in line with
regulation, law, corporate governance and
industry good practice.
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.
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.
Governance is maintained through delegation
of authority from the Board down to
individuals. Senior executives are supported
by a Committee based structure which is
designed to ensure open challenge and
enable effective decision-making. More
information on our Risk Committees can be
found on pages 150 to 152.
Simplified approach
to managing risks
Over the course of the year, there has been
a strong focus on simplifying and enhancing
the enterprise risk management framework. A
One Risk and Control Self Assessment (One
RCSA) approach to managing risks across the
Group has been adopted, which supports the
proactive identification of risks to customers
and the Group's business objectives, as well
as enabling a strong control framework.
More information on One RCSA is available
on page 145.
Risk culture and the customer
A transparent risk culture resonates across the
organisation and is supported by the Board
and its tone from the top.
Risk management requires all colleagues
to play their part with individuals taking
responsibility for their actions.
Within our approach there is a strong
focus on building and sustaining long-term
relationships with customers through the
economic cycle.
Senior Management articulate the core risk
values to which the Group aspires, based on
the Group's conservative business model,
prudent approach to risk management and
the Board's guidance.
As a Group, we are open, honest and
transparent with colleagues working in
collaboration with business areas to:
support effective risk management and
provide constructive challenge
share lessons learned and understand root
causes when things go wrong
consider horizon risks and opportunities
Connectivity of risks and our
strategic risk management
framework
The unprecedented events of this year
have demonstrated how individual risks in
aggregate can place significant pressure on
the Group's strategy, business model and
performance. It is essential that we not only
manage our individual risks, but understand
how emerging and strategic risks are
connected, and how they impact either existing
principal risks or create new risks. By doing
so we can ensure we continue to respond
dynamically and protect our customers and
support our colleagues and stakeholders.
Connectivity of risks is very much at
the forefront of the Group’s thinking
and additional work is being launched
in 2021 to further embed this into our
risk management framework.
Connectivity of risks: The impact of emerging and strategic risks on the Group's principal risks
Emerging Risk
Principal Risks
Impact on other existing
principal risks
Strategic
Risk
Principal Risks
The Board-approved
enterprise-wide risk
categories used to monitor
and report the risk exposures
posing the greatest impact
to the Group.
Emerging Risk
A future internal or external
event or trend, which
could have a material
positive or adverse impact
on the Group and our
customers, but where the
probability, timescale and/
or materiality may be difficult
to accurately assess.
Strategic Risk
A principal risk arising from:
A failure to understand
the potential impact of
strategic responses on
existing risk types
Incorrect assumptions
about internal or external
operating environments
Inappropriate
strategic responses
and business plans
Lloyds Banking Group Annual Report and Accounts 2020
57
Principal risks
2020 has been a year of significant uncertainty,
including the spread of COVID-19 and its
impact on global and domestic economies
and the UK's exit from the European Union.
COVID-19 has had a significant impact on
all risk types in 2020. Understanding and
managing its impacts dynamically has
been a major area of focus. The Group has
responded quickly to the challenges faced,
putting in place risk mitigation strategies and
refining its investment and strategic plans.
All of the Group's principal risks, which are
outlined on this page, are reported regularly
to the Board.
The risk management section from pages 143
to 204 provides a more in-depth picture of how
risk is managed within the Group.
Key focus areas during 2020
Climate – new
The Group recognises the evolving pace of
climate risk and has adopted a comprehensive
approach to embedding this risk within its
enterprise risk management framework. This
includes the creation of a new principal risk as
well as its integration into our existing principal
risks. Work has also continued to develop
scenario modelling and other analytical tools
and to increase the level of external disclosure to
further align to the Task Force on Climate-related
Financial Disclosures (TCFD) recommendations.
Market
The Group’s structural hedge, nominal
balance £186 billion (2019: £179 billion),
provides protection against margin
compression caused by falling interest rates.
In addition, customer deposits have seen
significant growth in 2020 which creates
near-term interest rate exposure. Customer
behaviour and hedging of these balances are
reviewed regularly.
The Group’s defined benefit pension
schemes have seen an improvement in
IAS19 accounting surplus to £1.6 billion
(2019: £0.5 billion), as a result of deficit
reduction contributions and greater than
expected asset returns partially offset by
the impact of the Retail Price Index (RPI)
reform announced by the Chancellor of the
Exchequer in November 2020.
Credit
A range of measures have been deployed to
help support customers, including around
1.3 million of payment holidays, over £12 billion
of additional Government support scheme
lending through the Bounce Back Loan (BBLS)
and Coronavirus Business Interruption Loan
(CBILS) schemes, together with liquidity
facilities for larger clients.
This support together with the wide array of
public policy interventions, such as the job
retention scheme, has limited the increase
in unemployment, and helped to suppress
credit defaults and business failures.
The Group has responded dynamically to
mitigate and address credit risk, with specific
focus on higher risk segments, sectors
and counterparties, as well as undertaking
extensive preparation to support the
expected increase in customers who may
experience financial difficulty.
The 2020 full year impairment charge of
£4,247 million (2019: £1,291 million) reflects the
weaker economic outlook, with reserves built
in anticipation of an increase in losses during
2021 as unemployment increases and more
business failures are seen.
Funding and liquidity
The Group maintained its strong funding
and liquidity position in 2020, with the loan
to deposit ratio decreasing to 98 per cent
(2019: 107 per cent). Customer deposits
increased significantly as spending reduced
and customers deposited Government
lending scheme balances. During the year,
the Group repaid all outstanding amounts of
its Term Funding Scheme (TFS) and Funding
for Lending Scheme (FLS) drawings and drew
£13.7 billion from the Term Funding Scheme
with additional incentives for SMEs (TFSME).
Total wholesale funding reduced by
£14.8 billion principally as a result of the
growth in customer deposits.
Capital
Capital build was adversely impacted by
impairment provisions in 2020, however
the year end capital position is significantly
strengthened due to the earlier reversal of
the 2019 full year ordinary dividend accrual
and enhanced IFRS 9 transitional relief, which
partially offset the increase in impairment
provisions. Closing CET1 ratio of 16.21 per cent
(15.01 per cent excluding transitional relief).
The Group’s capital requirements have
reduced in 2020 due to lower Pillar 2A
requirements and the reduction in the UK
countercyclical capital buffer rate in response
to the impact of COVID-19. The Group
therefore has significant headroom to absorb
further potential losses and to continue to
support households and businesses as they
recover from the COVID-19 pandemic.
Insurance underwriting
Lower market activity as a result of the pandemic
and noting the one-off 2019 benefit from
workplace auto-enrolment step-ups, saw Life
and Pensions present value of new business
premium fall to £14.5 billion in 2020 (2019:
£17.5 billion). Near-term underwriting risk
increased, reflecting policyholder behaviour
on workplace savings products. Significant
amounts of life and morbidity risk continued
to be re-insured. No material change to
General Insurance underwriting risk in 2020,
with total gross written premium falling slightly
to £662 million (2019: £671 million) due to the
reduction in branch footfall.
Change/execution
The Change/execution risk profile has
remained stable in the year. The Group’s
change portfolio was reprioritised at pace
to support critical and COVID-19 related
activities. Enhanced, targeted control
monitoring was implemented to ensure safe
delivery of change during the year.
Conduct
The Group has adapted quickly to the impacts
of the pandemic, providing significant support
to impacted customers. Comprehensive
preparations have been undertaken to help
identify and further support those customers
in financial difficulty.
Data
The Group continues to improve its
capabilities in the management of data risk,
with an improvement seen in the regular half
yearly capability assessment.
Areas of improvement include delivery of a
new data risk and control library, embedding
data by design and ethics principles into the
data science lifecycle, increasing capabilities
and broader awareness.
Governance
Governance risk has remained stable, despite
the need for accelerated decision-making and
a significant increase in the amount of remote
working, together with a number changes
to GEC and Board members throughout
the year. Ensuring appropriate and efficient
governance remains a key priority.
People
2020 has seen increased colleague workloads
and significant changes to ways of working,
with more than 50,000 colleagues working
from home. Improved colleague sentiment
demonstrates that the extensive support
measures deployed by the Group, with a
continued focus on colleague wellbeing and
resilience, are helping to mitigate these risks.
Operational resilience
Business continuity plans have proved
resilient, with particular attention applied to
heightened risks in the supply chain.
Operational
Despite anticipated heightened operational
risks in the areas of cyber, fraud and
technology, the volume of operational loss
events has remained broadly consistent in
2020 compared to 2019.
Model
Model risk has increased due to the nature
and uncertainty of the economic outlook.
The effect of Government-led customer
support initiatives have weakened established
relationships between model inputs and
outputs, reducing the ability to forecast using
models alone. While underlying model drivers
are expected to remain valid in the longer-
term, year end impairment reporting contains
a greater element of governed judgement to
reflect current conditions.
Regulatory and legal
Regulatory risk has been impacted by a small
number of instances of non-compliance,
requiring forbearance from regulators.
Forbearance requirements have been
due to the reprioritisation of resource to
support the provision of essential services to
customers and to respond to new regulatory
requirements, such as payment holidays.
Legal risk has been impacted by the UK’s
exit from the EU, in particular continued
uncertainty of the future UK legal and
regulatory financial services framework.
Strategic
Strategic risk is a significant source of risk for
the Group, influencing the Group’s strategy,
business model, performance and risk
profile. The development of our strategic risk
framework is a key priority for the Group.
Significant work has been undertaken during
2020 to understand the risk implications of
the Group’s strategy and the key drivers of
strategic risk. These are outlined in more
detail on the following pages and will be
further developed and embedded across the
Group during 2021.
1 Includes a 0.5 per cent benefit following the implementation
of the revised capital treatment of intangible software assets
which the PRA is proposing to reverse.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
58 Lloyds Banking Group Annual Report and Accounts 2020
Risk overview continued
Emerging risks
In addition to the principal risks, the Group
takes a proactive approach to horizon
scanning and assessing the potential impact
of an existing or future trend which could have
a material impact on the Group, where the
probability, timescale and/or materiality may
be difficult to accurately assess.
The Board Risk Committee approved the
Group’s enhanced definition for emerging
risks in October 2020.
Internal working groups have been
established to regularly scan the horizon
and identify emerging risks. In addition the
working groups have sought to analyse
the impact of material events, such as
COVID-19, on those trends and assess
whether those have accelerated the
impact of existing risks on our customers,
colleagues and wider stakeholders.
The key areas of focus in 2020 are broadly
unchanged from 2019. In addition,
three themes have been magnified and
exacerbated as a result of the pandemic:
Technology: Which considers the long-term
technology changes disrupting the industry,
the emergence of new technology-driven
business models, and the likely impact of
technology change on our customers.
Societal expectations: Which reflects the
expectations of the role the Group can play
in supporting society across a range of issues
such as housing, environmental sustainability
and helping customers in financial difficulty.
People, ways of working and skills: Trends
include the significant acceleration in remote
working due to COVID-19 and higher demand
for workers with digital and analytical skills.
Some emerging risks, such as data, have
materialised and are recognised by the
Group as principal risks. However, with
risks continuing to evolve there will be
important aspects of these risks that will
need to continue to be captured through our
emerging risks framework.
The emerging risks that the Group have
monitored during 2020 are outlined in
more detail in pages 147 to 149 of the risk
management section.
ILLUSTRATIVE MAP OF EMERGING RISKS – NON EXHAUSTIVE
Trends impacting the Group
Most pertinent trends
Trade corridors
and geopolitics
Future
pandemics
Rising societal
expectations
Greater
Government role
Big tech and
international
incumbent threat
Increased pace
of change
Low growth
and rates
Acceleration
of digitisation
Increased inequality and
financial vulnerability
Changing ways
of working
Scarcity
of natural
resources
Cyber resilience and security
Skills gap and changing
employment trends
Deflationary vs.
inflationary shocks
Ageing population
Data protection
and remediation
r
e
h
g
H
i
t
c
a
p
m
i
l
a
i
t
n
e
t
o
P
r
e
w
o
L
Lower
Likelihood
Higher
Emerging risks are assessed through an impact/likelihood matrix whereby the most pertinent
trends are considered when shaping and refreshing our major strategic priorities and
responses.
Key emerging risks are outlined in more detail in pages 147 to 149 of the risk management
section.
Internal
External
People/Ways of Working and Skills
Geopolitical
IT and Data/Cyber
Financial and macroeconomic
Competition and customer trends
Natural environment/climate
Societal expectations
Strategic risk
Risk view of key Strategic
Review 2021 themes
The Group’s strategy plays an important role
in managing our strategic risks, responding
to the priorities identified by the Board, and
transforming our capabilities to deliver on
these priorities. Some of the key themes
from our strategy, as outlined on pages 36 to
45, represent new opportunities, while also
posing corresponding risks that need to
be understood.
In 2020 the Group undertook an initiative to
enhance our framework and approach for
identifying and understanding our strategic
risks, with particular focus on the connectivity
of risks.
Our understanding of the relationship and
impact amongst emerging risks, strategic
responses and principal risks played a key role
in the development of our strategy. This was
supplemented with engagement across the
Group’s businesses and functions, to establish
a strong understanding of the Group’s
strategic challenges.
In line with the Group’s strategy to gain
greater organisational value from data and
advanced analytics, we are also developing a
quantitative approach to further strengthen
our strategic risk management framework.
The health of the UK economy and the financial
health and wellbeing of our customers are
core influences on the Group’s principal and
strategic risks. We are therefore committed
to Helping Britain Prosper and placing this
purpose at the heart of our strategy.
We are well-positioned to respond to
potential challenges posed by increased
customer financial vulnerability and societal
disparity, ensuring our proposition resonates
with evolving customer needs.
Significant investment is planned to reimagine
our customer offerings. Transforming our
technology architecture, appropriately and
securely using data science and upskilling
our colleagues, we aim to deliver a holistic
proposition, together with an excellent
customer experience.
The Group’s strategy aims to support a more
sustainable future, while diversifying our
income streams. The Group is working hard
to ensure that our purpose, commitment
to Helping Britain Prosper and delivery
are harmonious with the expectations of
our colleagues, customers and other key
stakeholders, all the while adapting to
changing societal expectations and customer
and colleague preferences.
Lloyds Banking Group Annual Report and Accounts 2020
59
Strategic risk
Understanding the potential risk implications of Strategic Review 2021 is an important area of focus. The key strategic risk drivers outlined below
have been assessed as part of the development of our strategic themes and objectives.
Strategic risk drivers
Potential risk implications
Strategy and
Mitigation
Strategic risk
impacts
HBR
HBR
Implications of COVID-19
and our responses
Acceleration of underlying growth in
economic and societal disparity
Customer and colleague resilience
heading into longer-term uncertain future
Impact of prolonged remote working
– Misalignment of customer proposition,
product and service offerings
– Potential failure to address customers’
personal and financial resilience needs
– Adverse impacts on productivity,
creativity, customer treatment, colleague
wellbeing and data security
Sustainability initiatives responding to
societal and Government expectations
Desire to establish and build market share
in sustainable sectors
Impact of evolving regulatory requirements
Shifting consumer and colleague
expectations
– Calibration of risk appetite, pricing and
model approach to achieve external
commitments
– Risk arising from participation choices
in respect of green economy and
sustainability
– Recruitment and retention of customers
and colleagues dependent on the Group's
response to evolving societal expectations
Implications of low long-term
economic growth
Structural challenge for Group’s business
model and revenue streams due to low
growth and low or negative interest rates
– Risk of disrupting traditional banking
models, creating unfavourable customer
responses
– Inability to sufficiently diversify income
streams to mitigate the challenges of a
low growth environment
Legacy systems and ageing technology
– Increased risk of outages and system
Managing through ageing platforms
Complex and inefficient technology
architecture and systems
failure impacting operational resilience
risk, and inability to respond in an agile,
efficient manner to growing threats from
modern competitors
– Greater costs and operational risks due to
duplication or complexity of infrastructure
and processes and the need to retain
legacy skills
Evolving challenges amid backdrop
of digitisation and pace of change
Changing consumer behaviour, with
customer expectations increasingly
shaped by their experiences elsewhere
Larger and more diverse threat landscape
Skills requirements in response to
changing environment
– Failure to keep pace with peers and
competitors poses potential for loss
of income
– Greater volumes of data at risk, with more
challenging control environment
– Evolution of colleague skills to deliver and
maintain new systems, processes and
transitioning to the cloud
Strategy and mitigation key
Strategic risk impacts key
Preferred financial partner for
personal customers
Best bank for business
Data-driven organisation
Financial risks
Change/execution risk
Modernised technology
architecture
Conduct, compliance,
operational and data risks
Climate risk
Other risks
Integrated payments
Reimagined ways of working
People risk
HBR Helping Britain Recover
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
60 Lloyds Banking Group Annual Report and Accounts 2020
2020 CAPTURED BY LLOYDS BANKING GROUP COLLEAGUES
Financial results
Results for the full year
Summary of Group results
Divisional results
Other financial information
61
62
73
77
Michael Bond
Estelle Nicol
Eleanor Brown
Christopher Hall
Amanda Gamble
Catherine Allnutt
Chanel Dixson
Julia Newell
Helen Cockcroft
Emma Dare
Georgia Kemp
Lloyds Banking Group Annual Report and Accounts 2020 61
Results for the full year
Successfully supporting customers, colleagues and communities through the pandemic
Over £12 billion lending to businesses through Government-backed schemes, including Bounce Back Loan, Coronavirus Business Interruption Loan and
Coronavirus Large Business Interruption Loan schemes
Around 1.3 million payment holidays granted to retail customers and 34,000 capital repayment holidays to small businesses and corporates to alleviate
temporary financial pressures whilst also supporting a number of Corporate and Institutional clients with Covid Corporate Financing Facility advances
More than 50,000 colleagues working from home for most of 2020, increased from up to 15,000 before the pandemic
c.90 per cent of branches remained open through the pandemic, enabling the Group to continue to serve customers
Resilient financial performance in a highly challenging macroeconomic environment
Net income of £14.4 billion, down 16 per cent with net interest income of £10.8 billion, down 13 per cent. Net interest margin of 2.52 per cent,
reflecting lower rates, actions taken to support customers and changes in asset mix, including growth in high quality UK mortgages and lower levels
of unsecured lending; average interest-earning assets stable at £435 billion. Other income of £4.5 billion, impacted by lower levels of customer
activity, the impact of negative assumption changes in Insurance and Wealth and lower non-recurring items
Total costs of £8.0 billion, 4 per cent lower, enabling continued investment in digital projects and enhanced support for customers during the pandemic
Trading surplus of £6.4 billion, a reduction of 27 per cent although providing significant capacity to absorb impairment impact of the coronavirus crisis
Impairment charge of £4.2 billion, including £3.8 billion in the first half, primarily reflecting a significant deterioration in the economic outlook and
including a management overlay of £400 million applied in the second half, given ongoing uncertainties as a result of coronavirus
Statutory profit before tax of £1.2 billion and statutory profit after tax of £1.4 billion, both impacted by lower income and the increased impairment
charge; tangible net asset value per share of 52.3 pence
Strong balance sheet and capital position
Loans and advances broadly in line with prior year at £440.2 billion with growth in the open mortgage book and Government-backed lending of
£11.1 billion (£12.4 billion approved at 12 February 2021), more than offsetting lower balances in unsecured Retail, Corporate and Institutional, and
the closed mortgage book
Open mortgage book up £7.2 billion in the year, including £10.2 billion in the second half and with a strong pipeline
Customer deposits up £38.9 billion in the year to £450.7 billion with Retail current accounts up 27 per cent having grown ahead of the market
Loan to deposit ratio of 98 per cent, providing a strong liquidity position and significant potential to lend into recovery
Board has recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the regulator’s guidelines
CET1 ratio of 16.4 per cent before dividends and 16.2 per cent after, both significantly ahead of the ongoing target of c.12.5 per cent, plus a
management buffer of c.1 per cent and regulatory requirements of c.11 per cent
Significant transformation achieved under the third phase of the Group’s strategy (GSR3)
In 2018 we launched our ambitious strategy to transform the Group for success in a digital world and over the last three years we have invested £2.8 billion
across our four strategic pillars, enabling us to:
Develop a leading customer experience; including the largest digital bank in the UK with 17.4 million digitally active customers and 12.5 million
mobile app users with record NPS, alongside the largest UK branch network
Further digitise the Group; by progressively modernising and simplifying the IT architecture across 78 per cent of the Group’s cost base whilst
continuing to migrate applications to private cloud
Maximise Group capabilities; by exceeding the £6 billion target for increasing net lending to start-ups, SMEs and Mid Market clients over the three years,
whilst surpassing the 2020 target of £18 billion gross new lending to these businesses and also extending the Group’s unique Single Customer View
functionality to c.6.5 million customers
Transform ways of working; by delivering 5.3 million hours of future skills training and 65 per cent of change using agile methodologies
Strategic Review 2021
Strategic Review 2021 builds on our core capabilities and the strong foundations from previous strategic reviews, while reinforcing our customer focus.
We have made significant progress in recent years, leveraging the unique strengths and assets of the Group, including our purpose driven and customer-
focused business model, our low risk approach to business, our market leading efficiency and our leading multi-channel propositions, including the largest
digital bank and branch network in the UK. Strategic Review 2021 will deliver co-ordinated growth opportunities in our two core customer segments,
supported by enhanced capabilities in four areas. With 2021 execution underpinned by long-term strategic vision, we aim to:
Significantly deepen our customer relationships across banking, insurance and wealth, building our position as the preferred financial partner for
personal customers
Build a leading digital SME proposition and a disciplined and strengthened Corporate and Institutional client offering, enabling the Group to be the
best bank for business
Further enhance and leverage core capabilities, including through a modernised technology architecture, integrated payment solutions, a truly
data-driven organisation and reimagined ways of working for our colleagues
2021 guidance, based on our current economic assumptions, reflects confidence in the Group’s unique
business model and customer focused strategy
Net interest margin to be in excess of 240 basis points
Operating costs to reduce further to c.£7.5 billion
Net asset quality ratio to be below 40 basis points
Improving profitability with statutory return on tangible equity of between 5 and 7 per cent (on the new basis)
Risk-weighted assets in 2021 to be broadly stable on 2020
Intention to accrue dividends and resume progressive and sustainable ordinary dividend policy
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
62 Lloyds Banking Group Annual Report and Accounts 2020
Summary of Group results
Financial performance reflects the challenging economic environment
The Group’s statutory profit before tax for the year was £1,226 million with statutory profit after tax of £1,387 million. Both measures were impacted by the
significant impairment charge taken during the year, the majority of which was recognised during the first half and reflected the Group’s revised economic
outlook for the UK, following the outbreak of the coronavirus pandemic. In the fourth quarter, statutory profit before tax was £792 million and statutory
profit after tax was £680 million, both benefiting from improved business conditions and a reduced impairment charge.
Trading surplus for the year was £6,440 million, a reduction of 27 per cent on 2019, reflecting the challenging external environment. Net income was down
16 per cent to £14,404 million, driven by both lower net interest income and lower other income. The Group has maintained its focus on delivering cost
savings, with total costs down 4 per cent, while continuing to invest in the Group’s digital propositions.
The Group’s underlying profit was £2,193 million for the year, compared to an underlying profit of £7,531 million in 2019, reflecting lower net income and
the significant impairment charge of £4,247 million taken in 2020.
The Group’s balance sheet remains very strong. Loans and advances to customers were flat on prior year at £440 billion. This includes an increase in open
mortgage book net lending of £7.2 billion in the year, with £6.7 billion growth in the fourth quarter, reflecting the strength of the UK housing market.
Total customer deposits increased by £38.9 billion in the year, to £450.7 billion. Retail current account growth was £20.5 billion in 2020 and ahead of the
market, driven by lower levels of customer spending during the pandemic and inflows to the Group’s trusted brands. Commercial Banking current account
growth also illustrates the Group’s strong customer relationships and a proportion of the Government-backed lending being retained on deposit by SME
customers.
The Group’s CET1 capital ratio post dividend increased 242 basis points over the year, from 13.8 per cent (on a pro forma basis) to 16.2 per cent, or 16.4 per
cent pre dividend accrual.
Net income
Net interest income
Other income
Operating lease depreciation
Net income
Banking net interest margin
Average interest-earning banking assets
2020
£m
10,773
4,515
(884)
14,404
2.52%
2019
£m
12,377
5,732
(967)
17,142
2.88%
£435.0bn
£434.7bn
Change
%
(13)
(21)
9
(16)
(36) bp
–
Net income of £14,404 million was 16 per cent lower than in the prior year, reflecting both lower net interest income and lower other income in the
period, partially offset by a decrease in operating lease depreciation.
Net interest income of £10,773 million was down 13 per cent, driven by a reduction in the banking net interest margin and stable average interest-
earning banking assets. The net interest margin was down 36 basis points to 2.52 per cent. This reflected the lower rate environment, actions taken
during the year to support customers and a change in asset mix, largely as a result of reduced levels of customer activity and demand during the
coronavirus pandemic. The net interest margin in the fourth quarter of 2.46 per cent, up 4 basis points on the third quarter, reflected the positive
impact of deposit repricing and improved mortgage pricing, together with reduced funding costs, partially offset by lower income from the Group’s
structural hedge.
In 2021, based on current economic assumptions, the Group expects a net interest margin of in excess of 240 basis points.
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 2020 the Group’s structural hedge had an approved capacity of £210 billion (increased from the
prior year reflecting account management and core deposit growth in 2020), a nominal balance of £186 billion (31 December 2019: £179 billion) and a
weighted-average duration of around two and a half years (31 December 2019: around three years). The Group generated £2.4 billion of gross income
from the structural hedge balances in 2020 (2019: £2.7 billion). In 2021, based on current economic assumptions, the Group expects c.£60 billion of
maturities and c.£400 million lower income from the structural hedge, with lower maturities in 2022 and 2023.
Average interest-earning banking assets were stable compared to prior year at £435 billion, with growth due to Government-backed lending
to support business clients through the coronavirus crisis, open mortgage book growth and the full impact of the 2019 Tesco mortgage book
acquisition. This was offset by lower balances in the closed mortgage book and in credit cards, as well as reductions in revolving credit facilities (RCFs)
and the continued optimisation of the Corporate and Institutional book within Commercial Banking. Average interest-earning banking assets in
the fourth quarter increased marginally to £437 billion as the Group continued to benefit from strong growth in the open mortgage book (lending
balances up £6.7 billion in the fourth quarter), offset by further RCF reductions in Commercial Banking. The Group expects average interest-earning
assets in 2021 to be flat to modestly higher than in 2020.
Other income of £4,515 million in 2020 was 21 per cent lower than in 2019 reflecting lower levels of customer activity across the Group’s main
business lines, largely due to the coronavirus pandemic, combined with an adverse impact from assumption changes in Insurance and Wealth and
lower non-recurring items. Within Retail, other income fell as a result of reduced customer spending and the continuing impact of a lower Lex fleet
size. Commercial Banking saw lower transaction banking income as a consequence of coronavirus-related activity levels, with resilience in markets
income. Insurance and Wealth income was lower than the prior year, impacted by reduced new business given the effects of the pandemic, the non-
recurrence of c.£140 million of new business income associated with workplace pensions auto-enrolment benefits in 2019 and £60 million of negative
methodology and assumption changes in 2020 versus £336 million of positive assumption changes, including the benefit of the change in investment
management provider in 2019. In addition, across the Group a £77 million charge was incurred as a consequence of the response to the Asset
Management Market Review, largely incurred in Insurance and Wealth. Income associated with the Group’s equity investments business, including
Lloyds Development Capital, was £281 million (2019: £341 million), with £166 million recognised in the fourth quarter.
Other income includes a gain of £149 million (2019: £185 million) on the sale of gilts and other liquid assets. 2019 also benefited from the non-
recurrence of a £50 million performance related earn-out following the sale of Vocalink.
Operating lease depreciation reduced to £884 million (2019: £967 million) as a result of the continued impact of a smaller Lex fleet size, combined with
the benefit of resilient used car prices.
Total costs
Operating costs
Remediation
Total costs
Business as usual costs
Cost: income ratio
Lloyds Banking Group Annual Report and Accounts 2020 63
2020
£m
7,585
379
7,964
5,233
2019
£m
Change
%
7,875
445
8,320
5,478
4
15
4
4
55.3%
48.5%
6.8pp
Total costs of £7,964 million were 4 per cent lower than in 2019, driven by continued reductions in operating costs and lower levels of remediation.
Operating costs of £7,585 million were 4 per cent lower, in the context of continued investment in the Group’s digital transformation. Business as usual
costs were down 4 per cent, driven by ongoing cost management as well as lower remuneration and reduced travel costs, partially offset by increased
pension costs and coronavirus-related expenses.
Total investment spend in 2020 amounted to £2.0 billion, down 14 per cent on 2019. This included £0.9 billion relating to strategic investment, taking the
cumulative strategic spend since the start of GSR3 to £2.8 billion. Although investment spend continues to be managed carefully in response to the current
operating environment, the Group has continued to prioritise technology and digital projects and will continue to invest in the long-term success of the
business.
During 2020 the Group capitalised c.£1.3 billion of investment spend, of which c.£0.9 billion related to intangible assets. Total capitalised spend was
equivalent to c.60 per cent of above the line investment, in line with prior periods.
Despite the continued delivery of cost savings, the lower net income over the period meant that the Group’s cost:income ratio of 55.3 per cent was higher
than in 2019.
The Group now expects operating costs to reduce further to c.£7.5 billion in 2021.
Remediation charges were £379 million (2019: £445 million) and down 15 per cent on 2019, including additional charges of £125 million in the fourth
quarter relating to pre-existing programmes. During the year additional charges, both redress and operational costs, of £159 million, have been taken in
relation to HBOS Reading, as well as further costs in relation to arrears handling, packaged bank account complaints and various settlements in relation to
historic claims. A number of programmes are now close to conclusion. Others, such as HBOS Reading, including the conclusion of the recommendations
from the Cranston Review, are still ongoing and further costs are likely to be incurred.
Impairment
The impairment charge for the year was £4,247 million, an increase of £2,956 million compared to 2019. This was primarily driven by the charge in the
first half reflecting potential future losses in light of the Group’s revised economic outlook for the UK as a consequence of the coronavirus pandemic. The
charge of £128 million taken in the fourth quarter was below typical pre-crisis levels and reflected the relative economic stability in the quarter.
The Group’s net asset quality ratio was 0.96 per cent compared with 0.29 per cent in 2019, largely driven by increases in expected credit loss (ECL)
allowance in the first half of the year. Excluding the updated economic assumptions and coronavirus-impacted restructuring cases, the asset quality ratio
would not have been materially higher than in 2019.
Charges of £403 million were taken in the year on restructuring cases whose recovery strategies were affected more immediately by the coronavirus
pandemic. Aside from these cases, observed credit performance has remained stable, in part as a result of the continued effectiveness of Government
support schemes and payment holidays extended by the Group. Additional funding has been made available by those schemes to businesses impacted
by lockdown restrictions which has prevented a more material increase in business failures and unemployment.
Observed credit quality remains stable with the flow of assets into arrears, defaults and write-offs remaining at low levels. The Group has built a significant
ECL allowance in the expectation that when the support schemes unwind, insolvencies and unemployment will consequently increase. The Group’s total
ECL allowance across all asset classes has increased from £4.2 billion to £6.9 billion in the year, with the majority of the increase in provisions established
for up to date assets in Stage 1 and Stage 2. This increase was established in the first half of 2020 in response to changes in the Group’s economic outlook.
Subsequent improvements to the economic outlook are redicated upon coronavirus vaccine developments which have emerged, reversing some of the
ECL increases in the second half, including in the fourth quarter.
Overall the Group’s loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to credit risk and high levels of
security. The Retail portfolio is heavily weighted toward high quality mortgage lending where low loan-to-value ratios provide security against potential
risks. The prime consumer finance portfolio also benefits from high quality growth in past periods in the context of the Group’s prudent risk appetite.
The commercial portfolio reflects a diverse client base with relatively limited exposure to the most vulnerable sectors so far affected by the coronavirus
outbreak. Within Commercial Banking, the Group’s management of concentration risk includes single name and country limits as well as controls over the
overall exposure to certain higher risk and vulnerable sectors or asset classes.
Charges pre-updated multiple economic scenarios1
Retail
Commercial Banking
Other
Coronavirus impacted restructuring cases2
Updated economic outlook
Retail
Commercial Banking
Other
Impairment charge
Asset quality ratio
Gross asset quality ratio
2020
£m
2019
£m
Change
%
1,359
252
(1)
1,610
403
1,025
809
400
2,234
4,247
0.96%
0.99%
1,038
306
(53)
1,291
–
–
–
–
–
(31)
18
98
(25)
–
–
–
–
–
1,291
0.29%
0.37%
(229)
67bp
62bp
1 Represents charge excluding impact of updating for economic outlook in 2020.
2 Additional charges made during 2020 on cases subject to restructuring at the end of 2019, where the coronavirus pandemic is considered to have had a direct effect upon the recovery strategy.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
64 Lloyds Banking Group Annual Report and Accounts 2020
Summary of Group results continued
Stage 2 gross loans and advances to customers
Stage 2 loans and advances to customers as % of total
Stage 2 ECL allowances2
Stage 2 ECL allowances2 as % of Stage 2 drawn balances
Stage 3 gross loans and advances to customers
Stage 3 loans and advances to customers as a % of total
Stage 3 ECL allowances2
Stage 3 ECL allowances2 as % of Stage 3 drawn balances3
Total loans and advances to customers4
Total ECL allowance on loans and advances to customers2
Total ECL allowances on loans and advances to customers2 as % of drawn balances3
1 Underlying basis. Refer to basis of presentation.
2 Expected credit loss allowances on loans and advances to customers (drawn and undrawn).
At 31
Dec 20201
%
60,514
12.0%
2,727
4.5%
9,089
1.8%
2,508
At 31
Dec 20191
%
38,440
7.7%
1,423
3.7%
8,754
1.8%
1,922
Change
%
57
4.3pp
92
0.8pp
4
–
30
28.1%
22.5%
5.6pp
505,129
498,805
6,832
1.4%
4,142
0.8%
1
65
0.6pp
3 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £179 million (31 December 2019: £205 million).
4 Includes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
The updated economic outlook in the fourth quarter drove a £659 million ECL release which was partially offset by a central overlay of £400 million. This
overlay was added in recognition of the significant uncertainty that remains as to the efficacy of the vaccine, the vaccination programme, potential virus
mutation, further lockdowns and economic performance post lockdown restrictions and Government support, recognising that the full range of these risks
is not captured in the Group’s method of generating alternative scenarios around its base case. The previous £200 million central overlay noted at the half-
year for the severe scenario is now included in model outputs within divisional ECL provisions. The scale of the current uncertainty overlay approximately
equates to a c.1 percentage point increase in unemployment allied with a 5 per cent lower HPI in 2021, or a c.10 percentage point higher weighting of the
severe downside scenario.
The resulting ECL on drawn and undrawn loans and advances to customers of £6.8 billion represents 1.4 per cent coverage of gross loans and advances
to customers, up 0.6 percentage points from 0.8 per cent at 31 December 2019. The ECL allowance remains high by historical standards and consistent
with the Group’s updated macroeconomic projections, assumes that a large proportion of expected losses will crystallise over the next 12 to 18 months as
support measures subside and unemployment increases.
The ECL allowance continues to reflect a probability-weighted view of future economic scenarios with a 30 per cent weighting applied to base case,
upside and downside scenarios and a 10 per cent weighting to the severe downside. All scenarios have deteriorated since the start of the year, following
the changes made to the base case. They also reflect a widening of the range of potential outcomes, following changes to the generation of scenarios
around the base case.
Stage 2 loans and advances increased to £60.5 billion (31 December 2019: £38.4 billion), equivalent to 12.0 per cent (31 December 2019: 7.7 per cent) of
total loans and advances to customers, as a result of the deterioration in economic outlook. Of these, 89 per cent are up to date (31 December 2019: 79
per cent, 30 September 2020: 89 per cent). Stage 3 loans and advances as a proportion of the portfolio have remained stable at 1.8 per cent in 2020 with
limited increase in flows to default, given the availability of Government support and payment holidays. Approximately 90 per cent of payment holidays
have now recommenced payment, with only £5.8 billion outstanding as at 16 February 2021. At 31 December £6.4 billion remained outstanding, of which
31 per cent was included in the £60.5 billion of Stage 2 assets. If those Retail customers in Stage 1 with payment holidays still in place at 31 December 2020
were moved to Stage 2, the impact on ECL would be less than £50 million.
The Group’s ECL coverage of Stage 2 assets increased to 4.5 per cent (31 December 2019: 3.7 per cent), again reflecting the updated economic outlook.
Coverage of Stage 3 assets has also increased to 28.1 per cent (31 December 2019: 22.5 per cent) primarily due to an increase in ECL of £403 million on
distressed existing clients whose recovery strategies were affected by the coronavirus pandemic.
Despite action taken to mitigate the significant levels of uncertainty through the use of the central overlay, the extent of the impairment charge in 2021 will
depend on the potential severity and duration of the economic shock in the UK. Based on current macroeconomic assumptions, the Group expects the
2021 net asset quality ratio to be below 40 basis points.
Commercial Banking lending in key coronavirus-impacted sectors1
Retail non-food
Automotive dealerships2
Oil and gas
Construction
Passenger transport
Hotels
Leisure
Restaurants and bars
Total
At 31 December 2020
At 30 June 2020
Drawn
£bn
Undrawn
£bn
Drawn and
undrawn
£bn
2.2
1.8
1.1
1.2
1.2
1.9
0.7
0.7
1.7
2.0
2.7
1.7
1.1
0.3
0.7
0.5
3.9
3.8
3.8
2.9
2.3
2.2
1.4
1.2
10.8
10.7
21.5
Drawn as
a % of
loans and
advances
%
0.5
0.4
0.2
0.2
0.2
0.4
0.1
0.1
2.1
Drawn
£bn
Undrawn
£bn
Drawn and
undrawn
£bn
Drawn as a
% of
loans and
advances
%
2.4
2.4
1.4
1.3
1.3
1.9
0.8
0.8
12.3
1.8
1.5
2.7
1.7
0.6
0.3
0.5
0.5
9.6
4.2
3.9
4.1
3.0
1.9
2.2
1.3
1.3
21.9
0.5
0.5
0.3
0.3
0.4
0.3
0.2
0.2
2.7
1 Lending classified using ONS SIC codes at legal entity level.
2 Automotive dealerships includes Black Horse Motor Wholesale lending (within Retail Division).
Lloyds Banking Group Annual Report and Accounts 2020 65
Retail payment holiday characteristics1
Total payment holidays granted
First payment holiday still in force
Matured payment holidays – repaying
Matured payment holidays – extended
Matured payment holidays – missed payment
As a percentage of total matured
Mortgages
Cards
Loans
Motor
Total
000s
489
10
£bn
61.9
1.4
428
53.8
26
24
3.7
3.1
000s
338
14
276
11
36
£bn
1.7
0.1
1.4
0.1
0.2
000s
298
11
248
18
20
£bn
2.4
0.1
2.0
0.2
0.2
000s
155
9
127
9
10
£bn
2.3
0.1
1.8
0.2
0.2
000s
£bn
1,279
68.3
44
1.7
1,079
58.9
64
91
4.1
3.6
Matured payment holidays – repaying
89% 89%
85% 85%
87% 86%
87% 83%
87% 89%
Matured payment holidays – extended
Matured payment holidays – missed payment
5%
5%
6%
5%
3%
4%
11% 11%
6%
7%
7%
7%
6%
7%
9%
8%
5%
7%
6%
5%
1 Mortgages, credit cards and personal loans at 16 February 2021; Motor finance at 16 February 2021. Analysis of mortgage payment holidays excludes St James Place, Intelligent Finance
and Tesco; Motor finance payment holidays excludes Lex Autolease. Total payment holidays granted are equal to the sum of first payment holiday still in force and matured payment
holidays Totals and percentages calculated using unrounded numbers.
Government-backed loan scheme approvals and value1
Coronavirus Business Interruption Loan Scheme
Bounce Back Loan Scheme
Coronavirus Large Business Interruption Loan Scheme
Total
1 Data as at 12 February 2021.
000s
10.1
327.0
0.1
337.2
£bn
2.4
9.3
0.7
12.4
Around 1.3 million Retail payment holidays, on £68.3 billion of lending, have been granted to help alleviate temporary financial pressure on customers
during the crisis. Payment holidays of up to three months have been granted across Retail mortgages, personal loans, credit cards and motor finance,
with extensions available of up to three months should customers request them. There are c.44,000 (£1.7 billion) payment holidays where the first payment
holiday is still in force and 1.2 million (£66.6 billion) that have matured, including c.64,000 (£4.1 billion) that have then been extended.
The vast majority of first payment holidays (98 per cent) have now matured, of which 89 per cent by value have restarted payments, 6 per cent have been
extended and 5 per cent have missed payment when due.
Mortgages account for the largest proportion of payment holidays, with a total of around 489,000 having been granted, equating to customer balances of
£61.9 billion. As at 16 February 2021, 98 per cent, or c.479,000, have matured with 89 per cent, or 428,000, of those having resumed repayments, 5 per cent
having extended and 5 per cent having missed payment. The average LTV of customers extending their mortgage payment holidays and still in extension
remains relatively low at 50 per cent, compared to 44 per cent for the total mortgage book.
The Group also granted c.338,000 payment holidays on £1.7 billion of credit card balances, 298,000 payment holidays on £2.4 billion of unsecured personal
loans and c.155,000 payment holidays on £2.3 billion of motor finance products. These products have experienced c.85 per cent of customers resuming
payments at the end of their payment holidays. Only £0.1 billion of credit card balances have been subject to a payment holiday extension and are still in
extension. £0.2 billion of total credit card payment holidays granted have missed payment.
Across all products, customers who are in extension remain of a typically lower credit quality than the wider book and tend to have higher average
balances than customers who have not requested payment holidays. It should also be noted that of the customers missing payments after conclusion of
the payment holiday, typically one third were in arrears at the start of the payment holiday.
Following the announcement of the latest national coronavirus-related lockdown, since 1 January 2021, the Group has granted c.28,000 new payment
holidays on £0.8 billion of Retail balances.
For the duration of the payment holiday the Group continues to recognise interest on the loan under the effective interest rate method.
The Group has approved c.337,000 loans with a total value of £12.4 billion to customers under Government-backed loan schemes including c.327,000
loans totalling £9.3 billion approved under the Bounce Back Loan Scheme.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
66 Lloyds Banking Group Annual Report and Accounts 2020
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
Payment protection insurance provision
Statutory profit before tax
Tax credit (expense)
Statutory profit after tax
Earnings per share
Return on tangible equity – existing basis1
Return on tangible equity – new basis1
1 Calculation shown on page 79.
Further information on the reconciliation of underlying to statutory results is included on page 77.
Restructuring
Severance costs
Property transformation
Technology research and development
Regulatory programmes
Mergers and acquisitions, integration and other restructuring costs
Total restructuring
2020
£m
2,193
(521)
(59)
(69)
(233)
(361)
(85)
1,226
161
1,387
1.2p
3.7%
2.3%
2020
£m
(156)
(146)
(61)
(42)
(116)
(521)
2019
£m
7,531
(471)
126
(68)
(275)
(217)
(2,450)
4,393
(1,387)
3,006
3.5p
7.8%
6.6%
Change
%
(71)
(11)
(1)
15
(66)
(72)
(54)
(66)
(4.1)pp
(4.3)pp
2019
£m
(97)
(121)
(6)
(63)
(184)
(471)
Change
%
(61)
(21)
33
37
(11)
Restructuring costs of £521 million were 11 per cent higher than in 2019 with £233 million incurred in the fourth quarter, as the Group resumed the property
transformation programme and role reduction activities that were paused earlier in the year and also as a function of increased investment in technology
research and development. The Group expects to increase its investment in technology research and development in 2021 and as a result expects
restructuring costs to be higher in 2021 than in 2020.
Volatility and other items at a net loss of £361 million in 2020 comprised £59 million of negative market volatility and asset sales, £69 million of amortisation
of purchased intangibles and £233 million of fair value unwind. Market volatility and asset sales included £222 million of negative insurance volatility, driven
mainly by falling equity markets and a loss of £106 million relating to liability management exercises largely occurring in the fourth quarter. This was offset
against positive banking volatility of £392 million, primarily reflecting exchange rate and interest rate movements. Comparatives for 2019 include a one-off
charge for exiting the Standard Life Aberdeen investment management agreement.
The Group recognised a charge of £85 million for PPI in the final quarter of the year. This charge was driven by the impact of coronavirus delaying
operational activities during 2020, the final stages of work to ensure operational completeness and final validation of information requests and complaints
with third parties that resulted in a limited number of additional complaints to be handled. Of the approximately six million enquiries received pre-
deadline, more than 99 per cent have now been processed. A small part of the costs incurred during the year also reflect the costs associated with
litigation activity to date.
The return on tangible equity for 2020 was 3.7 per cent (2019: 7.8 per cent) and earnings per share were 1.2 pence (2019: 3.5 pence). In the fourth quarter of
the year, return on tangible equity was 7.2 per cent.
Going forward and in order to aid comparability across the banking sector, the Group will report its statutory return on tangible equity without adding back
the post-tax amortisation of intangible assets to the return. On this new basis and given improving profitability, the Group is targeting a return on tangible
equity of between 5 and 7 per cent in 2021 and in excess of the cost of equity in the medium-term.
Tax
The Group recognised a tax credit of £161 million in the period, which was impacted by an uplift in the value of deferred tax assets of c.£350 million
recognised in the first half of 2020. This credit reflected the UK corporation tax rate being held at 19 per cent, as substantively enacted on 17 March 2020.
The Group continues to expect a medium-term effective tax rate around 25 per cent.
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
Lloyds Banking Group Annual Report and Accounts 2020 67
At 31 Dec
2020
£440bn
£451bn
98%
£109bn
£34bn
£22bn
£142bn
136%
At 31 Dec
2019
£440bn
£412bn
107%
£124bn
£39bn
£25bn
£130bn
137%
Change
%
–
9
(9)pp
(12)
(13)
(14)
9
(1)pp
1 Excludes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
2 Excludes repos of £9.4 billion (31 December 2019: £9.5 billion).
3 Excludes balances relating to margins of £5.3 billion (31 December 2019: £4.2 billion).
4 Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. 2019 assets have been restated accordingly.
5 The Liquidity coverage ratio is calculated as a simple average of month end observations over the previous 12 months.
Loans and advances to customers were stable at £440.2 billion (31 December 2019: £440.4 billion). Within Retail, the open mortgage book increased by
£10.2 billion in the second half of 2020 with £6.7 billion in the fourth quarter, reflecting the strength of the UK housing market. Commercial Banking loans,
including Retail Business Banking, reduced by £2.2 billion in 2020 as the continued optimisation of the portfolio and reduced revolving credit facilities
balances more than offset support provided to clients through Government-backed lending schemes.
Total customer deposits increased by £38.9 billion in the year, to £450.7 billion. The Group continues to target current account balance growth and
optimise funding with Retail current accounts up 27 per cent at £97.4 billion (31 December 2019: £76.9 billion), having grown ahead of the market in the
year. The Group’s loan to deposit ratio of 98 per cent, down 9 percentage points on 2019, was driven by increased customer deposits and evidences a
strong liquidity position and significant potential to lend into an economic recovery. The Group continues to access wholesale funding markets across a
variety of currencies and markets. During the year, the Group repaid all outstanding amounts of its Term Funding Scheme (TFS) drawings of £15.4 billion
and the remaining £1 billion outstanding of its Funding for Lending Scheme (FLS) drawings. In addition to the £1 billion drawn in the first half of the year,
the Group has made drawings of £12.7 billion in the second half from the new Term Funding Scheme with additional incentives for SMEs (TFSME), taking
the total outstanding amount to £13.7 billion at 31 December 2020. Overall, total wholesale funding has reduced to £109.4 billion at 31 December 2020 (31
December 2019: £124.2 billion) principally as a result of the growth in customer deposits.
Capital
CET1 ratio1,2
CET1 ratio pre IFRS 9 transitional relief1,2
Transitional total capital ratio1,2
Transitional MREL ratio1,2
UK leverage ratio1,2
Risk-weighted assets1
Shareholders' equity
Tangible net assets per share
At 31 Dec
2020
At 31 Dec
2019
16.2%
15.0%
23.3%
36.4%
5.8%
13.8%
13.4%
21.5%
32.6%
5.2%
£203bn
£203bn
£43bn
52.3p
£42bn
50.8p
Change
%
2.4pp
1.6pp
1.8pp
3.8pp
0.6pp
–
4
1.5p
1 The CET1, total capital, MREL and leverage ratios and risk-weighted assets at 31 December 2019 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance
business in the subsequent first quarter period. The CET1 ratio pre IFRS 9 transitional relief reflects the full impact of IFRS 9, prior to the application of transitional arrangements.
Excluding dividend accrual, the CET1 ratio at 31 December 2020 was 16.4 per cent.
2 CET1 ratios at 31 December 2020 include an increase of 51 basis points following the implementation of the revised capital treatment of intangible software assets. The benefit through
CET1 capital is reflected through the total capital, MREL and leverage ratios.
Capital movements
Banking business capital build excluding impairment
Impairment charge
Banking business underlying capital build
IFRS 9 transitional relief
RWA and other movements
Capital build pre software change
Revised treatment of intangible software assets
Reversal of FY 2019 ordinary dividend accrual
Capital build pre dividend
Ordinary dividend accrual
Capital build post dividend
bps
192
(174)
18
83
28
129
51
83
263
(21)
242
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
68 Lloyds Banking Group Annual Report and Accounts 2020
Summary of Group results continued
The Group’s CET1 capital ratio post dividend increased 242 basis points over the year, from 13.8 per cent on a pro forma basis to 16.2 per cent. Capital
build prior to the dividend accrual of 21 basis points, the impact of the revised treatment of intangible software assets of 51 basis points and the 2019 full
year dividend reversal of 83 basis points, was 129 basis points. Banking business capital build of 192 basis points was largely offset by the 174 basis point
impact of impairment in the year, mitigated by the benefit of the IFRS 9 transitional relief (83 basis points). RWA and other movements contributed 28 basis
points, with pension contributions (equivalent to 46 basis points) more than offset by reductions in underlying risk-weighted assets and excess expected
losses as well as favourable market and other movements.
The increase in the CET1 ratio of 118 basis points in the fourth quarter (pre dividend accrual) reflected underlying profitability, risk-weighted asset reductions
and the introduction of the revised capital treatment of intangible software assets.
The PRA is consulting on a proposal to reverse the revised capital treatment of software assets (which currently follows EU capital regulations). Should the
PRA proceed with their proposal then the reinstatement of the original requirement to deduct these assets from capital will come into force during 2021.
This could lead to a c.50 basis points reduction in the Group’s CET1 capital ratio (net of a reduction in associated RWAs), and based on the position at 31
December 2020 the ratio would reduce to 15.7 per cent.
The Group applies the revised IFRS 9 transitional arrangements for capital as set out under current capital regulations. The arrangements provide for
temporary capital relief for the increase in accounting impairment provisions following the initial implementation of IFRS 9 (‘static’ relief) and subsequent relief
for any increases in Stage 1 and Stage 2 expected credit losses since 1 January 2020 (‘dynamic’ relief). The transitional arrangements do not cover Stage 3
expected credit losses.
Whilst the net increase in IFRS 9 transitional relief over the year amounted to 83 basis points, the Group’s total relief recognised at 31 December 2020
amounted to 115 basis points, including static relief.
Risk-weighted assets reduced by £0.7 billion over the year from £203.4 billion to £202.7 billion. Increases were from credit migrations and model calibrations
(c.£2.5 billion); regulatory changes, including the revised capital treatment of intangible software assets (net £2.2 billion); and other movements, including
Retail model updates (c.£1.9 billion). In addition, there were increases in risk-weighted assets attributable to deferred tax assets and the risk-weighted element
of the Group’s investment in Insurance following the increase in the Group’s capital base (£1.6 billion). These were more than offset by reductions in lending
balances outside Government-backed schemes (£3.6 billion) and optimisation activity undertaken in Commercial Banking (c.£5.3 billion).
Risk-weighted assets reduced by £2.5 billion in the fourth quarter, largely reflecting reductions from credit migrations and model calibrations (including HPI
improvement), continued optimisation of the Commercial Banking portfolio and the disposal of a legacy equity investment in Visa Inc., offset in part by an
increase as a result of the revised capital treatment of intangible software assets.
Whilst credit migration in 2020 has been less than expected, it is expected to have a fuller impact in 2021 and into 2022, consistent with economic forecasts. It
is also expected that a material part of the Group’s IFRS 9 dynamic relief that built up during 2020 will unwind in 2021 with the remainder expected to largely
unwind in 2022, impacting CET1 ratios. As a result, based on current economic forecasts, the Group expects capital build in 2021 to be impacted by the
expected unwind of IFRS 9 transitional relief, as well as profitability.
The deferral of the UK implementation of the remainder of CRR 2 means that expected risk-weighted asset inflation driven by changes to the new
standardised approach for calculating counterparty credit risk exposure (SA-CCR) will now impact in 2022, with no significant regulatory changes expected
in 2021, other than the PRA’s proposed reversal of the revised treatment of software assets. Given these movements, as well as continued optimisation in the
Commercial Banking portfolio, the Group expects risk-weighted assets in 2021 to be broadly stable on 2020, but with headwinds from regulatory changes
in 2022.
During the first half of 2020 the PRA reduced the Group’s Pillar 2A CET1 requirement from 2.6 per cent to 2.3 per cent. In December 2020 the PRA further
reduced the requirement to c.2.1 per cent in the context of a higher UK countercyclical capital buffer rate, which in normal conditions will be set at 2 per cent
(currently set at zero per cent). In line with PRA policy, the latter reduction is currently fully offset by other regulatory capital requirements at the CET1 level.
Following the decision by the PRA to reduce the UK countercyclical capital buffer rate to zero earlier in the year, combined with the initial Pillar 2A
reduction noted above, the Group’s CET1 capital regulatory requirement has reduced to c.11 per cent. Consequently, current CET1 headroom over
requirements has increased.
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
remains at c.12.5 per cent, plus a management buffer of c.1 per cent.
The transitional total capital ratio increased to 23.3 per cent (31 December 2019: 21.5 per cent on a pro forma basis) and the Group’s transitional minimum
requirement for own funds and eligible liabilities (MREL), which came into force on 1 January 2020, is 36.4 per cent (31 December 2019: 32.6 per cent on a
pro forma basis). The UK leverage ratio increased to 5.8 per cent.
Pensions
Terms have now been agreed in principle with the Group Pensions Trustee in respect of the valuations of the Group’s three main defined benefit pension
schemes. The valuations showed an aggregate ongoing funding deficit of £7.3 billion as at 31 December 2019 (£7.3 billion deficit at 31 December 2016).
The revised deficit now includes an allowance for the impact of RPI reform announced by the Chancellor of the Exchequer in November 2020.
Under the previous recovery plan, deficit contributions were committed of c.£0.8 billion in 2020 and c.£1.3 billion per annum from 2021 to 2024. Under
the new recovery plans, c.£0.8 billion was paid in 2020 with contributions looking forward equating to c.£0.8 billion per annum, plus a further 30 per cent
of in year capital distributions to ordinary shareholders, up to a limit on total deficit contributions of £2.0 billion per annum payable until this deficit has
been removed. The Group continues to provide security to these pension schemes, with corporate guarantees and collateral pledged, while also making
additional annual contributions for future service and scheme running costs.
Dividend
Following a request made by the PRA to large UK banks in March 2020, the Group suspended the payment of dividends on ordinary shares for the
remainder of the year and cancelled the payment of the final dividend for 2019. These actions were undertaken as a precautionary measure to preserve
capital as the spread of the coronavirus pandemic led to a UK-wide lockdown, with the potential to create a significant and prolonged downturn.
In December 2020, the PRA announced that dividend payments could recommence, provided that this was subject to a prudent framework for the setting
of such distributions. As a result the PRA has established a cap on distributions for year end 2020.
Given the Group’s strong capital position at the year end and the regulator’s clarification that banks may resume capital distributions, the Board has
recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the PRA’s guidelines.
The PRA has additionally noted its intention to provide a further update on distributions ahead of the 2021 half year results for the large UK banks.
It is expected that the PRA will take account of the outcome of the first stage of the Bank of England 2021 solvency stress test exercise in informing
its approach to half year distributions. Ahead of the update at half year, dividends may be accrued for via capital, provided this is undertaken on an
appropriately prudent basis, but may not be paid.
The Group will update the market on interim dividend payments with the half year results, following receipt of the update from the regulator and based on
macroeconomic conditions at the time.
The Board remains committed to future capital returns. In 2021, the Board intends to accrue dividends and resume its progressive and sustainable ordinary
dividend policy with the dividend at a higher level than 2020. As normal, the Board will give due consideration at year end to the size of the final dividend
payment and any return of surplus capital in addition to the ordinary dividend, based on circumstances at the time.
Lloyds Banking Group Annual Report and Accounts 2020 69
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 credit (expense)
Statutory profit after tax
Earnings per share
Dividends per share – ordinary
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
Asset quality ratio
Return on tangible equity – existing basis
Return on tangible equity – new basis
Key balance sheet metrics
Loans and advances to customers1
Customer deposits2
Loan to deposit ratio
CET1 ratio3,4
CET1 ratio pre IFRS 9 transitional relief3,4
Transitional MREL ratio3,4
UK leverage ratio3,4
Risk-weighted assets3
Tangible net assets per share
2020
£m
10,773
4,515
(884)
14,404
(7,585)
(379)
(7,964)
6,440
(4,247)
2,193
(521)
(361)
(85)
1,226
161
1,387
1.2p
0.57p
2.52%
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
1.12p
2.88%
£435bn
£435bn
55.3%
0.96%
3.7%
2.3%
48.5%
0.29%
7.8%
6.6%
At 31 Dec
2020
£440bn
£451bn
98%
16.2%
15.0%
36.4%
5.8%
At 31 Dec
2019
£440bn
£412bn
107%
13.8%
13.4%
32.6%
5.2%
£203bn
£203bn
52.3p
50.8p
Change
%
(13)
(21)
9
(16)
4
15
4
(27)
(71)
(11)
(66)
(72)
(54)
(66)
–
(36)bp
–
6.8pp
67bp
(4.1)pp
(4.3)pp
Change
%
–
9
(9)pp
2.4pp
1.6pp
3.8pp
0.6pp
–
1.5p
1 Excludes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
2 Excludes repos of £9.4 billion (31 December 2019: £9.5 billion).
3 The CET1, MREL and leverage ratios and risk-weighted assets at 31 December 2019 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the
subsequent first quarter period. The CET1 ratio pre IFRS 9 transitional relief reflects the full impact of IFRS 9, prior to the application of transitional arrangements. Excluding dividend
accrual, the CET1 ratio at 31 December 2020 was 16.4 per cent.
4 CET1 ratios at 31 December 2020 include an increase of 51 basis points following the implementation of the revised capital treatment of intangible software assets. The benefit through
CET1 capital is reflected through the MREL and leverage ratios.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
70 Lloyds Banking Group Annual Report and Accounts 2020
Quarterly information
Quarter
ended
31 Dec
2020
£m
2,677
1,066
(150)
3,593
(2,028)
(125)
(2,153)
1,440
(128)
1,312
(233)
(202)
(85)
792
(112)
680
2.46%
£437bn
59.9%
0.11%
0.16%
7.2%
5.9%
£440bn
£451bn
98%
£203bn
52.3p
Quarter
ended
30 Sept
2020
£m
2,618
988
(208)
3,398
(1,858)
(77)
(1,935)
1,463
(301)
1,162
(155)
29
–
1,036
(348)
688
2.42%
£436bn
56.9%
0.27%
0.28%
7.4%
6.0%
£439bn
£447bn
98%
£205bn
52.2p
Quarter
ended
30 June
2020
£m
2,528
1,235
(302)
3,461
(1,822)
(90)
(1,912)
1,549
(2,388)
(839)
(70)
233
–
(676)
215
(461)
2.40%
£435bn
55.2%
2.16%
2.19%
(4.8%)
(6.1%)
£440bn
£441bn
100%
£207bn
51.6p
Quarter
ended
31 Mar
2020
£m
2,950
1,226
(224)
3,952
(1,877)
(87)
(1,964)
1,988
(1,430)
558
(63)
(421)
–
74
406
480
2.79%
£432bn
49.7%
1.30%
1.35%
5.0%
3.7%
£443bn
£428bn
103%
£209bn
57.4p
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%
11.0%
9.8%
£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%
(2.8%)
(4.0%)
£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%
10.5%
9.3%
£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%
12.5%
11.4%
£441bn
£417bn
106%
£208bn
53.4p
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 (loss) before tax
Tax (expense) credit
Statutory profit (loss) after tax
Banking net interest margin
Average interest-earning banking assets
Cost:income ratio
Asset quality ratio
Gross asset quality ratio
Return on tangible equity – existing basis
Return on tangible equity – new basis
Loans and advances to customers1
Customer deposits2
Loan to deposit ratio
Risk-weighted assets3
Tangible net assets per share
1 Excludes reverse repos.
2 Excludes repos.
3 Risk-weighted assets at 30 June 2019 and 31 December 2019 are reported on a pro forma basis reflecting the Insurance dividend paid to the Group in the subsequent reporting period.
Lloyds Banking Group Annual Report and Accounts 2020 71
Balance sheet analysis
At 31 Dec
2020
£bn
At 30 Sept
2020
£bn
Change
%
At 30 June
2020
£bn
Change
%
At 31 Dec
2019
£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 Corporates3
Corporate and Institutional3
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 assets
Total liabilities
Shareholders’ equity
Other equity instruments
Non-controlling interests
Total equity
277.3
16.5
14.3
8.0
14.7
0.9
10.4
40.6
4.1
46.0
4.3
0.9
2.2
440.2
97.4
47.6
154.1
14.0
122.7
14.1
0.8
450.7
871.3
821.9
43.3
5.9
0.2
49.4
270.6
17.0
14.8
8.2
14.8
1.0
10.2
40.0
4.4
50.2
4.6
0.9
2.5
439.2
91.7
45.7
149.9
12.5
132.9
13.6
0.9
447.2
868.9
819.4
43.4
5.9
0.2
49.5
2
(3)
(3)
(2)
(1)
(10)
2
2
(7)
(8)
(7)
–
(12)
–
6
4
3
12
(8)
4
(11)
1
–
–
–
–
–
–
267.1
17.5
15.2
8.2
15.3
1.0
9.7
38.4
4.6
55.0
5.0
0.9
2.5
440.4
87.5
44.2
148.5
12.7
133.8
13.5
0.9
441.1
873.0
824.1
42.8
5.9
0.2
48.9
4
(6)
(6)
(2)
(4)
(10)
7
6
(11)
(16)
(14)
–
(12)
–
11
8
4
10
(8)
4
(11)
2
–
–
1
–
–
1
270.1
18.5
17.7
8.4
15.6
1.3
9.0
32.1
5.3
54.6
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
Ordinary shares in issue, excluding own shares
70,812m
70,776m
–
70,735m
–
70,031m
1 Primarily Europe.
2 Includes Retail Business Banking.
3 Commercial Banking segmentation has been updated to reflect new client coverage model.
4 Excludes reverse repos.
5 Primarily non-interest-bearing Commercial Banking current accounts.
6 Primarily Commercial Banking interest-bearing accounts.
7 Excludes repos.
3
(11)
(19)
(5)
(6)
(31)
16
26
(23)
(16)
(17)
–
29
–
27
36
7
5
(4)
3
(11)
9
4
5
4
–
–
3
1
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
72 Lloyds Banking Group Annual Report and Accounts 2020
Segmental analysis – underlying basis
2020
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
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
1 Excludes reverse repos.
2 Excludes repos.
Retail
£m
8,384
1,733
(856)
9,261
(4,761)
(125)
(4,886)
4,375
(2,384)
1,991
2.52%
Commercial
Banking
£m
Insurance
and Wealth
£m
Central
items
£m
2,357
1,292
(28)
3,621
(1,851)
(210)
(2,061)
1,560
(1,464)
96
2.83%
49
1,250
–
1,299
(902)
(50)
(952)
347
(9)
338
(17)
240
–
223
(71)
6
(65)
158
(390)
(232)
Group
£m
10,773
4,515
(884)
14,404
(7,585)
(379)
(7,964)
6,440
(4,247)
2,193
2.52%
£345.5bn
£88.6bn
£0.9bn
– £435.0bn
0.69%
2.01%
1.53%
0.12%
0.96%
1.07%
£350.9bn
£86.2bn
£0.9bn
£2.2bn £440.2bn
£290.2bn £145.6bn
£14.1bn
£0.8bn £450.7bn
£99.0bn
£75.0bn
£1.3bn
£27.4bn £202.7bn
Retail3
£m
9,184
2,019
(946)
10,257
(4,768)
(238)
(5,006)
5,251
(1,038)
4,213
2.77%
Commercial
Banking3
£m
Insurance
and Wealth3
£m
Central
items3
£m
2,892
1,417
(21)
4,288
(2,073)
(155)
(2,228)
2,060
(306)
1,754
3.22%
77
2,021
–
2,098
(982)
(50)
(1,032)
1,066
–
1,066
224
275
–
499
(52)
(2)
(54)
445
53
498
Group
£m
12,377
5,732
(967)
17,142
(7,875)
(445)
(8,320)
8,822
(1,291)
7,531
2.88%
£341.9bn
£91.9bn
£0.9bn
–
£434.7bn
0.30%
4.36%
0.30%
2.14%
0.29%
3.65%
£342.6bn
£95.2bn
£0.9bn
£253.2bn
£144.0bn
£13.7bn
£1.7bn
£0.9bn
£440.4bn
£411.8bn
£98.4bn
£77.4bn
£1.3bn
£26.3bn
£203.4bn
3 Prior period segmental comparatives restated. See note 4 on page 240.
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 348.
Underlying basis
In order to allow a comparison of the Group’s underlying performance, the results are adjusted for certain items including restructuring, including
severance-related costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration
costs, 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.
Retail
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
Lloyds Banking Group Annual Report and Accounts 2020 73
2020
£m
8,384
1,733
(856)
9,261
(4,761)
(125)
(4,886)
4,375
(2,384)
1,991
20191
£m
9,184
2,019
(946)
10,257
(4,768)
(238)
(5,006)
5,251
(1,038)
4,213
Change
%
(9)
(14)
10
(10)
–
47
2
(17)
(53)
2.52%
2.77%
(25) bp
£345.5bn
£341.9bn
0.69%
2.01%
0.30%
4.36%
1
39bp
(235) bp
At 31 Dec
2020
£bn
277.3
At 31 Dec
20191
£bn
270.1
16.5
14.3
8.0
14.7
8.8
0.9
10.4
350.9
3.9
354.8
97.4
178.8
14.0
290.2
99.0
18.5
17.7
8.4
15.6
2.0
1.3
9.0
342.6
4.3
346.9
76.9
163.0
13.3
253.2
98.4
Change
%
3
(11)
(19)
(5)
(6)
(31)
16
2
(9)
2
27
10
5
15
1
1 Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail and to reflect the Group’s adoption of
the Sterling Overnight Index Average (SONIA).
2 Includes Europe and run-off.
3 Includes Business Banking.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
74 Lloyds Banking Group Annual Report and Accounts 2020
Commercial Banking
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 Corporates
Corporate and Institutional
Other
Loans and advances to customers
SME loans and advances including Retail Business Banking
Customer deposits
Current accounts including Retail Business Banking
Other customer deposits including Retail Business Banking
Risk-weighted assets
2020
£m
2,357
1,292
(28)
3,621
(1,851)
(210)
(2,061)
1,560
(1,464)
96
20191
£m
2,892
1,417
(21)
4,288
(2,073)
(155)
(2,228)
2,060
(306)
1,754
Change
%
(18)
(9)
(33)
(16)
11
(35)
7
(24)
(95)
2.83%
3.22%
(39)bp
£88.6bn
£91.9bn
1.53%
0.12%
0.30%
2.14%
(4)
123bp
(202)bp
At 31 Dec
2020
£bn
At 31 Dec
20191
£bn
Change
%
31.8
4.1
46.0
4.3
86.2
40.6
145.6
47.6
122.7
75.0
30.1
5.3
54.6
5.2
95.2
32.1
144.0
34.9
127.6
77.4
6
(23)
(16)
(17)
(9)
26
1
36
(4)
(3)
1 Restated to reflect migration of certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail and to reflect the Group’s adoption of
the Sterling Overnight Index Average (SONIA).
Insurance and Wealth
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)2
General insurance underwritten new gross written premiums
General insurance underwritten total gross written premiums
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
Wealth4
Net income
Lloyds Banking Group Annual Report and Accounts 2020 75
2020
£m
49
1,250
1,299
(902)
(50)
(952)
347
(9)
338
20191
£m
77
2,021
2,098
(982)
(50)
(1,032)
1,066
–
1,066
14,529
17,515
111
662
85%
127
671
82%
At 31 Dec
2020
£bn
151%
0.9
14.1
1.3
171.9
At 31 Dec
2019
£bn
170%
0.9
13.7
1.3
170.0
New
business
£m
20191
Existing
business
£m
387
209
21
11
628
120
68
24
384
596
Change
%
(36)
(38)
(38)
8
–
8
(67)
(68)
(17)
(13)
(1)
3pp
Change
%
(19)pp
–
3
–
1
Total
£m
507
277
45
395
1,224
220
326
1,770
328
2,098
New
business
£m
203
166
16
9
394
2020
Existing
business
£m
124
84
21
346
575
Total
£m
327
250
37
355
969
(195)
309
1,083
216
1,299
1 Restated to reflect the Group’s adoption of the Sterling Overnight Index Average (SONIA).
2 Present value of new business premiums. Further information on page 348.
3 Equivalent estimated regulatory view of ratio (including With Profits funds) was 144 per cent (31 December 2019: 154 per cent).
4 2019 wealth income includes c.£70 million relating to business that was transferred to Schroders Personal Wealth in October 2019.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
76 Lloyds Banking Group Annual Report and Accounts 2020
Central items
Net income
Operating costs
Remediation
Total costs
Trading surplus
Impairment
Underlying (loss) profit
1 Prior period restated. See note 4 on page 240.
2020
£m
223
(71)
6
(65)
158
(390)
(232)
Change
%
(55)
(37)
(20)
(64)
20191
£m
499
(52)
(2)
(54)
445
53
498
Central items includes income and expenditure not attributed to divisions, including residual net interest income after transfer pricing (including the central
recovery of the Group’s distributions on other equity instruments), in period gains from gilt sales and the unwind of associated hedging costs, as well as the
Group’s equities business, including Lloyds Development Capital.
During 2020, net income included a gain of £149 million on the sale of gilts and other liquid assets, compared with a £185 million gain on sale of such
assets in 2019. The Group’s equities business, including Lloyds Development Capital, contributed net income of £150 million compared to £223 million in
the prior year. In addition, the net income comparative for 2019 included a gain of £50 million relating to the sale of the Group’s interest in Vocalink.
The impairment charge incurred in 2020 includes a £400 million central uncertainty overlay applied in respect of uncertainty in the economic outlook not
captured within the modelled divisional ECL allowances. In 2019 impairment included releases relating to the reassessment of credit risk associated with
debt instruments held within the Group’s equity investment business.
Lloyds Banking Group Annual Report and Accounts 2020 77
Other financial information
1. Reconciliation between statutory and underlying basis financial information
The tables below set out the reconciliation from the statutory results to the underlying basis results, the principles of which are set out in the basis of
presentation.
2020
Net interest income
Other income, net of insurance claims
Operating lease depreciation
Net income
Operating expenses4
Impairment5
Profit before tax
2019
Net interest income
Other income, net of insurance claims
Operating lease depreciation
Net income
Operating expenses4
Impairment
Profit before tax
Removal of:
Volatility
and other
items1,2
£m
Insurance
gross up3
£m
174
165
(884)
(545)
1,522
(95)
882
379
(426)
(967)
(1,014)
1,697
5
688
(150)
(27)
–
(177)
174
3
–
1,818
(2,021)
–
(203)
203
–
–
Statutory
basis
£m
10,749
4,377
15,126
(9,745)
(4,155)
1,226
10,180
8,179
18,359
(12,670)
(1,296)
4,393
The table below sets out the reconciliation from statutory profit before tax to underlying trading surplus.
Statutory profit before tax
Add back: impairment
Volatility and other items1,2
Insurance gross up
Payment protection insurance
Underlying trading surplus
PPI
£m
–
–
–
–
85
–
85
–
–
–
–
2,450
–
2,450
2020
£m
1,226
4,155
977
(3)
85
6,440
Underlying
basis
£m
10,773
4,515
(884)
14,404
(7,964)
(4,247)
2,193
12,377
5,732
(967)
17,142
(8,320)
(1,291)
7,531
2019
£m
4,393
1,296
683
–
2,450
8,822
1 In the year ended 31 December 2020 this comprises the effects of market volatility and asset sales (loss of £59 million); the amortisation of purchased intangibles (£69 million);
restructuring (£521 million, including severance costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration
costs); and fair value unwind (losses of £233 million).
2 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, including severance, property optimisation, technology research and development, regulatory programmes and merger, acquisition and integration costs; and
fair value unwind (losses of £275 million).
3 The Group’s insurance businesses’ income statements include income and expense attributable to the policyholders of the Group’s long-term assurance funds. These items have no
impact in total upon profit attributable to equity shareholders and, 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.
5 Certain derivative valuation adjustments associated with credit-impaired customers are included within the impairment charge on an underlying basis but reported within other income,
net of insurance claims on a statutory basis.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
78 Lloyds Banking Group Annual Report and Accounts 2020
Other financial information continued
2. Banking net interest margin and average interest-earning assets
Group net interest income – statutory basis (£m)
Insurance gross up (£m)
Volatility and other items (£m)
Group net interest income – underlying basis (£m)
Non-banking net interest expense (£m)
Banking net interest income – underlying basis (£m)
Net loans and advances to customers (£bn)1
Impairment provision and fair value adjustments (£bn)
Non-banking items:
Fee-based loans and advances (£bn)
Other non-banking (£bn)
Gross banking loans and advances (£bn)
Averaging (£bn)2
Average interest-earning banking assets (£bn)
Banking net interest margin (%)
1 Excludes reverse repos.
2 2020 includes the effects of the growth in the open mortgage book towards the end of the year.
3. Volatility arising in the insurance business
Volatility included in the Group’s statutory results before tax comprises the following:
Insurance volatility
Policyholder interests volatility
Total volatility
Insurance hedging arrangements
Total
2020
2019
10,749
(150)
174
10,773
177
10,950
440.2
6.3
(5.1)
(2.6)
438.8
(3.8)
435.0
2.52
10,180
1,818
379
12,377
145
12,522
440.4
3.9
(6.3)
(3.1)
434.9
(0.2)
434.7
2.88
2020
£m
(220)
(74)
(294)
72
(222)
2019
£m
230
193
423
(347)
76
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. The impact of the actual return
on these investments differing from the expected return is included within insurance volatility.
Insurance volatility movements in 2020 were largely driven by significant movements in global equity markets, credit spreads and interest rate movements.
Although the Group manages its exposures to equity, interest rate, foreign currency exchange rate, inflation and market movements within the Insurance
division, it does so by balancing the importance of managing the impacts on both capital and earnings volatility. For example, equity market movements
are hedged within Insurance on a Solvency II capital basis and whilst this also reduces the IFRS earnings exposure to equity market movements, the hedge
works to a lesser extent from an IFRS earnings perspective.
4. Changes in Insurance assumptions
The following impacts from assumption changes are included within Insurance and Wealth other operating income.
Persistency
Mortality, longevity and morbidity
Expense assumptions
Other
Total
2020
£m
(74)
52
(124)
(5)
(151)
2019
£m
(67)
164
208
31
336
Key life and pensions assumptions and methodologies are reviewed through the annual basis review in the fourth quarter of each year, however
assumptions are monitored continuously and updated when necessary.
Current year changes reflect the macroeconomic impacts of the pandemic such as redundancies and furlough; prior year included annuitant longevity
benefit from updates to the industry standard model for the projection of future mortality rates. The changes in expense assumptions reflect lower in-year
new business volumes impacting average per policy administration costs, reallocation of costs between business lines and future short-term committed
expenditure on specific projects. 2019 included the benefit of the change in investment management provider.
The above table excludes a c.£91 million benefit from methodology changes recognised in the first half of 2020.
Lloyds Banking Group Annual Report and Accounts 2020 79
5. 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
6. Return on tangible equity
Average shareholders' equity (£bn)
Average intangible assets (£bn)
Average tangible equity (£bn)
Group statutory profit after tax (£m)
Less profit attributable to non-controlling interests and other equity holders (£m)
Adjusted statutory profit after tax (£m) – new basis
Add back amortisation of intangible assets (post tax) (£m)
Adjusted statutory profit after tax (£m) – existing basis
Return on tangible equity – existing basis (%)
Return on tangible equity – new basis (%)
At 31 Dec
2020
£m
43,278
(2,320)
(4,140)
(221)
459
At 31 Dec
2019
£m
41,697
(2,324)
(3,808)
(247)
269
37,056
35,587
70,812m
70,031m
52.3p
50.8p
2020
43.5
(6.2)
37.3
1,387
(522)
865
502
1,367
3.7
2.3
2019
43.0
(5.9)
37.1
3,006
(547)
2,459
438
2,897
7.8
6.6
Under the existing definition of return on tangible equity, statutory profit after tax is adjusted to remove profit attributable to non-controlling interests and
other equity holders and to add back the post-tax amortisation of intangible assets, before being divided by average tangible equity. Under the new basis,
the post-tax amortisation of intangible assets is no longer added back. Going forward the Group will adopt this revised basis in order to aid comparability
across the banking sector.
Number of employees (full-time equivalent)
Retail
Commercial Banking
Insurance and Wealth
Other
Total inc. PPI
Agency staff, interns and scholars
Total number of employees
1 2019 figures restated to reflect the Group’s current structure.
At 31 Dec
2020
33,426
6,487
4,903
18,024
62,840
(1,264)
61,576
At 31 Dec
20191
35,359
6,573
5,246
17,797
64,975
(1,906)
63,069
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
80 Lloyds Banking Group Annual Report and Accounts 2020
Governance
A letter from our Chair
Our Board
Group Executive Committee
Corporate governance report
Directors’ report
Directors’ remuneration report
Other remuneration disclosure
81
82
84
86
111
115
138
2020 CAPTURED BY LLOYDS BANKING GROUP COLLEAGUES
Adam Backshall
Shauni Uttley
Vicky Taylor
Steven Cachia
Gemma McCartney
John Shearer
Adrian Simmonds
Suzanne Bennett
Eleanor Brown
Patrick So
Matthew De Monte
Lloyds Banking Group Annual Report and Accounts 2020
81
A letter from our Chair
Engaging with our stakeholders to Help Britain Recover
Board and Committee changes
There have been a number of changes to the
Board and its Committees during 2020.
Catherine Woods joined the Board as a
Non-Executive Director in March and I joined
the Board as a Non-Executive Director in
October ahead of succeeding Lord Blackwell
as Chair of the Group on his retirement on
1 January 2021.
Juan Colombás retired as Chief Operating
Officer in September. Juan played key roles in
turning the Group around after the financial
crisis and in the Group's initial response to the
pandemic. Juan left with our thanks and we
wish him every success for the future.
Anita Frew retired as Deputy Chair and a
Non-Executive Director at the Company’s
AGM in May 2020 and was succeeded by
Alan Dickinson. As part of these changes,
Nick Prettejohn took on Alan's previous role
as Chair of the Board Risk Committee for a
limited time. Catherine Woods succeeded
Nick Prettejohn in that role on 1 January 2021.
Simon Henry retired as a Non-Executive
Director in September and was succeeded
as Chair of the Audit Committee by Sarah
Legg. Anita and Simon both made significant
contributions to the Board and left with our
thanks and best wishes.
Full details of the changes are set out on
page 98.
Although this is the Company's Corporate
Governance Report, I would also like to take
the opportunity to thank Nigel Hinshelwood,
Sarah Bentley and Brendan Gilligan for
their huge contribution as ongoing board
members of Lloyds Bank plc and Bank of
Scotland plc.
Board evaluation
The Board carried out an annual evaluation
of its effectiveness during the year. This year’s
was an internal evaluation overseen by the
Nomination and Governance Committee.
The process which was undertaken, and
the findings of the review, can be found on
pages 94 to 95, together with information
about our progress against the 2019
review actions.
Corporate Governance Code
During the year under review, the UK
Corporate Governance Code 2018 applied to
the Company. Our statement of compliance
with the Code and a summary of the
requirements of the Code can be found
on pages 96 to 97. Details of the Group’s
approach to workforce engagement and
further information on this can be found
on page 48.
Robin Budenberg
Chair
The Board believes that
good governance and
stakeholder engagement
are more important than
ever and key to the Group
achieving its purpose of
Helping Britain Prosper.
Robin Budenberg
Chair
As I write my introduction to this Corporate
Governance Report, the pandemic continues
to have a major impact on society and on
how companies operate. In these times, the
Board believes that good governance and
stakeholder engagement are more important
than ever and key to the Group achieving
its purpose of Helping Britain Prosper and
to the successful delivery of its strategy.
Further information about our oversight of
the Group’s response to the pandemic can be
found on pages 90 to 91.
Set out below are some of the Group's key
corporate governance activities during the year.
Stakeholder engagement
While supporting customers and colleagues
has been a key focus during these troubling
times, the Board has remained aware of the
need for the Group to continue to engage
effectively with all its stakeholders. Meeting
the Group’s responsibilities and duties both to
shareholders and the communities we serve
is central to our purpose of Helping Britain
Prosper. 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 46 to 51.
Succession planning
Succession planning, both in respect of
Non-Executive Directors and the executive,
is a key component of good governance and
was in focus during 2020 when the Board
approved the appointment of a new Group
Chair and Group Chief Executive. Further
information about these appointment
processes and succession planning can be
found on pages 99 to 100.
Culture
The Board supports the Group’s aim to
develop its values-led culture. That culture
needs to continue to develop to ensure
that the business can adapt rapidly to a
changing environment while delivering the
best outcome for customers. During the
year, the Board has regularly assessed and
monitored the Group’s progress on culture.
Further information about our oversight of
the Group’s culture journey can be found on
page 92.
Inclusion & 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. The Board was
pleased to endorse a Race Action plan in
support of Black colleagues to drive cultural
change, recruitment and progression across
the Group. Further information about the
Race Action plan can be found on page 25.
Climate change
The Board is conscious of the impact of
climate change on the Group’s business
and how the Group’s activities affect the
environment. These topics have been
discussed by the Board and a number of its
Committees. Further information about the
Group’s new pledges to reduce the emissions
that the Group finances and the carbon
footprint and energy consumption of its own
operations can be found on pages 20 to 24.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
82 Lloyds Banking Group Annual Report and Accounts 2020
Our Board
Responsible for overseeing delivery of the Group's strategy
NG Re RB Ri
A NG Re
RB
Ri
A
RB
Ri
Robin Budenberg CBE
Chair
Appointed: October 2020 (Board),
January 2021 (Chair)
Skills, experience, and contribution:
Extensive financial services and investment
banking experience
Strong governance and strategic advisory
skills to companies and government
Regulatory, public policy and stakeholder
management experience
Robin spent 25 years advising UK companies
and the UK Government while working for
S.G. Warburg/UBS Investment Bank, and was
formerly Chief Executive and Chairman of
UK Financial Investments (UKFI), managing
the Government’s investments in UK banks
following the 2008 financial crisis. He was
awarded a CBE in 2015 for services to the
taxpayer and the economy, and is a qualified
Chartered Accountant.
External appointments: Chairman of
The Crown Estate.
Alan Dickinson
Deputy Chair and Senior
Independent Director
Appointed: September 2014 (Board),
December 2019 (Senior Independent
Director), May 2020 (Deputy Chair)
Skills, experience, and contribution:
Highly regarded retail and commercial banker
Strong strategic, risk management 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 formerly
Chairman of Urban&Civic plc and of Brown,
Shipley & Co. Limited, a Non-Executive
Director and Chairman of the Risk Committee
of the Nationwide Building Society and of
Willis Limited, and a Governor of Motability.
Alan is a Fellow of the Chartered Institute of
Bankers and the Royal Statistical Society.
External appointments: Non-Executive
Director of the England and Wales Cricket
Board.
Sarah Legg
Independent Director
Appointed: December 2019
Skills, experience, and contribution:
Strong financial leadership and regulatory
reporting skills
Significant audit and risk experience in
financial leadership
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,
a Group General Manager, and also 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: Chair of the
Campaign Advisory Board, King’s College,
Cambridge University and Honorary Vice
President of the Hong Kong Society for
Rehabilitation.
RB
Ri
Re
RB
Ri
A
NG
Ri
Lord Lupton CBE
Independent Director and Chair 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 is a former Treasurer
of the Conservative Party and became a Life
Peer in October 2015, serving on the House of
Lords Select Committee on Charities.
External appointments: Senior Advisor to
Greenhill Europe, a Trustee of The Lovington
Foundation and Chairman of the Board of
Visitors of the Ashmolean Museum.
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 7 years as Chief Marketing and
Communications Officer and was seconded
to help launch the United Nation’s Sustainable
Development Goals. She is also a former
Director of British Airways AirMiles, BT,
Hewlett Packard Inc and British Gas.
External appointments: Chief Executive
of Business in the Community, The Prince's
Responsible Business Network.
Nick Prettejohn
Independent Director and Chair of
Scottish Widows Group
Appointed: June 2014
Skills, experience, and contribution:
Deep financial services and 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 was
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.
External appointments: Chairman of the
board of Reach plc, Chairman of the charity
Prisoners Abroad and a member of the board
of Opera Ventures.
Lloyds Banking Group Annual Report and Accounts 2020
83
Key to Committees
A Audit Committee Member
Re Remuneration Committee
NG Nomination and Governance
Ri Board Risk Committee
Member
Member
RB Responsible Business
Committee Member
Committee Member
Committee Chair
Full biographical details of each director
are available on lloydsbankinggroup.com/
who-we-are/group-overview/directors-and-
governance.html
NG
Re RB Ri
NG Re
RB
Ri
A
Re
Ri
Stuart Sinclair
Independent Director
Appointed: January 2016
Skills, experience, and contribution:
Extensive experience in retail banking,
insurance and consumer finance
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, LV Group and
Virgin Direct. He was previously the Interim
Chairman of Provident Financial plc, Senior
Independent Director of Swinton Group and
of QBE and a Council Member, Chatham
House. In his executive career, he was
President and Chief Operating Officer of
Aspen Insurance, President of GE Capital
China, Chief Executive Officer of Tesco
Personal Finance and Director of UK Retail
Banking at the Royal Bank of Scotland.
External appointments: Chairman of
International Personal Finance plc and of
Willis Limited.
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
Considerable experience of boards at both
executive and non-executive level
Passionate advocate of customers, the
community and financial inclusion
Sara’s previous appointments include
Managing Director of Argos, various senior
positions at J Sainsbury plc, Lead Non-
Executive Director at the Department for
Work and Pensions, a Non-Executive Director
of United Utilities Group as well as a number
of senior management roles for Abbey
National and Mars Confectionery.
External appointments: Non-Executive
Director of BT Group plc, Chair of the
Remuneration Committee, New College,
Oxford and a Trustee of Lloyds Bank
Foundation for England & Wales.
Catherine Woods
Independent Director
Appointed: March 2020
Skills, experience, and contribution:
Extensive executive experience of
international financial institutions
Deep experience of risk and
transformation oversight
Strong focus on culture and corporate
governance
Catherine is a former Deputy Chair and
Senior Independent Director of AIB Group
plc where she also chaired the Board Audit
Committee. In her executive career with
J P Morgan Securities, she was Vice President,
European Financial Institutions, Mergers
and Acquisitions, and Vice President Equity
Research Department, forming the European
Banks Team.
External appointments: Non-Executive
Director of Beazley plc and Chair of the re-
insurance and European insurance subsidiary,
Beazley Insurance. Non-Executive Director
and Deputy Chair of BlackRock Asset
Management Ireland Limited.
Other Board members
during 2020
Anita Frew – retired from the Board on
21 May 2020.
Juan Colombás – retired from the
Board on 18 September 2020.
Simon Henry – retired from the Board
on 30 September 2020.
Lord Blackwell – retired from the
Board on 1 January 2021.
António Horta-Osório
Executive Director and
Group Chief Executive
William Chalmers
Executive Director and
Chief Financial Officer
Appointed: January 2011 (Board), March 2011
(Group Chief Executive)
Skills, experience, and contribution:
Extensive experience in and understanding of
both retail and commercial banking
Drive 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 Chief Executive of
Santander UK.
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.
Appointed: August 2019
Skills, experience, and contribution:
Significant board level strategic and financial
leadership experience
Strategic planning and development, mergers
and acquisitions, equity and debt capital
structuring and risk management
William has worked in financial services for
over 25 years, and previously held a number
of senior roles at Morgan Stanley, including
Co-Head of the Global Financial Institutions
Group and Head of EMEA Financial
Institutions Group. Before joining Morgan
Stanley, William worked for JP Morgan, again
in the Financial Institutions Group.
External appointments: None.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
84 Lloyds Banking Group Annual Report and Accounts 2020
Group Executive Committee
Delivering our vision and managing a more agile organisation
C
M
A
A
António Horta-Osório
Executive Director and
Group Chief Executive
William Chalmers
Executive Director and
Chief Financial Officer
António joined the Board as an
Executive Director in January
2011 and became Group Chief
Executive in March 2011. Read his
biography on page 83
William joined the Board in
August 2019 as an Executive
Director and the Chief Financial
Officer. Read his biography on
page 83
Carla Antunes da Silva
Group Strategy, Corporate
Development and Investor
Relations Director
Appointed June 2018
Skills and experience
Carla joined in October 2015
and since then has led the
Group’s strategic work, as
well as the Group’s mergers,
acquisitions/disposals and
corporate ventures, and oversees
the Group’s relationships with
shareholders, analysts and the
wider investment community.
Prior to Lloyds, Carla spent
18 years as an equity analyst at
Credit Suisse, JP Morgan and
Deutsche Bank. Carla is a
Non-Executive Director
of Lloyds Bank Corporate
Markets plc.
John Chambers
Group Chief Information Officer
Appointed June 2018
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. Over 25 years
in the IT industry John has
been responsible for delivering
large scale IT solutions across
enterprise application platforms,
infrastructure and data analytics,
working as part of global
operating environments such as
Barclays, Capita and business
process outsourcing firms.
A
A
M
M
Paul Day
Chief Internal Auditor
Appointed September 2016
Skills and experience
Paul joined the Group in June
2017 as Chief Internal Auditor.
He joined from Deloitte where
Paul 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.
Kate Cheetham
Group General Counsel
and Company Secretary
Appointed July 2017
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.
Antonio Lorenzo
Chief Executive, Scottish Widows
and Group Director, Insurance
and Wealth
Appointed March 2011
Skills and experience
Antonio joined the Group in 2011
and is currently responsible for
the insurance, investment and
wealth management businesses.
Antonio is also Chairman of
Schroders Personal Wealth and a
Board member of the Association
of British Insurers. Prior to his
current role, Antonio led Group
Corporate Development,
Group Strategy and the former
Consumer Finance Division.
Antonio also led the IPO and
divestment of TSB and reshaped
the Group’s international
presence. Before joining the
Group, Antonio was Chief
Financial Officer of Santander UK.
Vim Maru
Group Director, Retail
Appointed September 2013
Skills and experience
Vim joined the Group in 2011
and is responsible for Retail
products and distribution,
customer services and brands
and marketing. Vim has worked
in financial services for over
20 years and prior to joining
the Group, spent 12 years at
Santander UK in a range of roles.
Vim is a Chartered Accountant,
and sits on the UK Finance Board,
the FCA’s Practitioner Panel and
supports HM Treasury’s Financial
Inclusion Policy Forum and the
Money and Pensions Service
Advisory Group.
Lloyds Banking Group Annual Report and Accounts 2020
85
Key
C Group Executive Committee
M Group Executive Committee
A Group Executive Committee
Chair
Member
Attendee
Full biographical details of
each GEC member or attendee are available on
lloydsbankinggroup.com/who-we-are/group-
overview/group-executive-committee.html
M
M
M
M
Zak Mian
Group Director, Transformation
Appointed August 2016
Skills and experience
Zak joined the Group in 1989
as a Business Analyst in IT and
has carried out multiple roles
involving Retail Chief Information
Office, 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.
David Oldfield
Group Director, Commercial
Banking
Janet Pope
Chief of Staff and Group Director,
Sustainable Business
Appointed May 2014
Appointed January 2015
Skills and experience
David was appointed Group
Director, Commercial Banking
in September 2017 responsible
for supporting corporate
clients from SMEs through to
Large Corporates and Financial
Institutions. David started his
career with Lloyds Bank in 1984
on the graduate programme
and has held key leadership roles
across the Group. Immediately
prior to his current role he was
Group Director Retail and
Consumer Finance. David is a
Fellow of the Chartered Institute
of Bankers, Group Executive
Sponsor for Disability and Chairs
the Wellbeing leadership group
for Business in The Community.
Skills and experience
Janet joined in 2008 to run the
Group’s Savings business. Janet
was previously Chief Executive
at Alliance Trust Savings and
EVP Global Strategy at Visa.
Janet held a variety of roles
at Standard Chartered Bank
including Retail Banking MD
for Africa and Non-Executive
Director positions at Standard
Chartered Bank Zimbabwe,
Kenya, Zambia and Botswana.
Janet is Chair of the Charities
Aid Foundation Bank, a Non-
Executive Director of the Banking
Standards Board and is the
Group’s Executive Sponsor for
Sexual Orientation and Gender
Identity.
Stephen Shelley
Chief Risk Officer
Appointed September 2017
Skills and experience
Stephen was appointed Chief
Risk Officer in September 2017.
Stephen joined the Group in May
2011 as Chief Credit Officer for
Wholesale and International. In
October 2012 he became Risk
Director, Commercial Banking
Risk. Previously Stephen was
Chief Risk Officer at Barclays
Corporate, and prior to that Chief
Credit Officer UK Retail and
Corporate. In his 21-year career,
Stephen undertook a variety of
roles in the front office and risk.
Stephen is the Group’s Executive
Sponsor for Gender Diversity
and Equality.
A
A
M
Matthew Sinnott
Group Director of People
and Property
Appointed April 2020
Skills and experience
Matthew was appointed as
Group People and Property
Director in April 2020 and is
responsible for the Group’s
strategy on skills, culture, and the
future of work and the workplace.
Matthew joined the Group in
early 2017 as Reward Director,
Governance and Executive
Reward, and was subsequently
promoted to Group Reward
Director in October 2017. Prior
to joining the Group, Matthew
held senior positions in specialist
reward, finance and broader
HR roles across a number of
Financial Services companies,
including RBS, Nomura
International and Merrill Lynch.
Letitia Smith
Group Director, Conduct,
Compliance and Operational
Risk
Appointed June 2019
Skills and experience
Letitia joined the Group in
2014, undertaking Conduct,
Compliance and Operational
Risk roles across various divisions
before being appointed as
the Group Director, CCOR
in 2016. Letitia is also a Non-
Executive Director of Lloyds
Bank Corporate Markets plc.
Prior to joining the Group,
Letitia was Chief Risk Officer at
Kleinwort Benson Private Bank.
She previously worked at RBS for
11 years, latterly as the Chief Risk
Officer of the Wealth Division.
Letitia is a qualified accountant
with a background in forensic
accountancy.
Andrew Walton
Group Corporate Affairs Director
Appointed September 2018
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
86 Lloyds Banking Group Annual Report and Accounts 2020
Corporate governance report
Our Board in 20201
Skills and experience2
Gender diversity Board tenure
Age
Retail/Commercial banking
9 out of 10
A
Financial markets/
wholesale banking
Insurance
Prudential and conduct risk
in financial institutions
8 out of 10
B
8 out of 10
10 out of 10
A Male: 8
B Female: 4
A
E
D
BC
A 0-2 years: 5
B 2-4 years: 1
C 4-6 years: 1
A
C
B
A 45-55: 2
B 56-65: 7
C 66-75: 3
Core technology operations
4 out of 10
Government/regulatory
Consumer/marketing/
distribution
Strategic thinking
Digital impact
Major change programmes
6 out of 10
10 out of 10
10 out of 10
9 out of 10
9 out of 10
D 6-8 years: 2
E 8+ years: 33
Ethnic diversity
The Board currently meets the recommendation of the Parker Review of at least one member
of the Board (8.3% of the Board as at 31 December 2020) being of Black, Asian or Minority
Ethnic background, and the Group intends to continue to meet that recommendation.
1 Data as at 31 December 2020 (and therefore includes Lord Blackwell).
2 Non-Executive Directors; during 2021 the Group will be reviewing its skills matrix to explicitly consider
environmental and climate change skills and experience.
3 Comprising Lord Blackwell (who retired from the Board on 1 January 2021), António Horta-Osório
(an Executive Director, who has announced that he will retire from the Group on 30 April 2021) and
Sara Weller (who the Group has announced intends to stand down at the Company’s 2021 AGM).
Board and Committee composition and attendance at meetings in 202013
Board member
Lord Blackwell (C)
António Horta-Osório
William Chalmers
Juan Colombás1
Robin Budenberg2
Alan Dickinson3
Anita Frew4
Simon Henry5
Sarah Legg6
Lord Lupton
Amanda Mackenzie
Nick Prettejohn7
Stuart Sinclair
Sara Weller8
Catherine Woods7 9
Board
13/13
13/13
13/13
9/9
3/3
13/13
5/610
10/10
13/13
13/13
13/13
12/1311
12/1310
13/13
11/11
Nomination and
Governance Committee
Audit
Committee
Board Risk
Committee
Remuneration
Committee
Responsible
Business Committee
7/7 C
–
–
–
1/1
7/7
3/3
–
–
–
–
5/611
6/712
5/711 12
–
–
–
–
–
–
6/6
3/3
5/5
6/6 C
–
–
6/6
–
–
1/1
8/8
–
–
–
2/2
8/8
4/4
5/612
8/8
8/8
8/8
8/8 C
8/8
7/812
6/6
7/7
–
–
–
2/2
7/7
3/410
–
–
–
7/7
–
7/7 C
7/7
5/5
4/4
–
–
–
1/1
1/1
2/2
–
–
4/4
4/4
–
4/4
4/4 C
–
Juan Colombás retired from the Board on 18 September 2020.
C Chair
1
2 Robin Budenberg joined the Board and respective Committees on 1 October 2020 and became Chair of the Nomination and Governance Committee on 1 January 2021.
3 Alan Dickinson succeeded Anita Frew as Deputy Chair on 21 May 2020.
4 Anita Frew retired from the Board on 21 May 2020.
5 Simon Henry retired from the Board on 30 September 2020.
6 Sarah Legg succeeded Simon Henry as Chair of the Audit Committee with effect from 1 October 2020 and became a member of the Responsible Business Committee on 1 February 2021.
7 Nick Prettejohn succeeded Alan Dickinson as Chair of the Board Risk Committee on 21 May 2020 and was succeeded in that role by Catherine Woods on 1 January 2021.
8 Sara Weller plans to retire as Chair of the Responsible Business Committee and a Non-Executive Director at the AGM in May 2021. Amanda Mackenzie will take on the role of Chair of the
Responsible Business Committee following Sara's retirement from the Board.
9 Catherine Woods joined the Board and the Board Risk and Remuneration Committees on 1 March 2020 and the Audit Committee on 10 September 2020.
10 Unable to attend due to illness.
11 Unable to attend ad hoc meeting scheduled on a Sunday evening at short notice.
12 Unable to attend due to another business commitment.
13 Where a Director is unable to attend a meeting s/he receives papers in advance and has the opportunity to provide comments to the Chair of the Board or to the relevant Committee Chair.
Our Board meetings in 2020
During the year, there were 13 Board meetings,
including three ad hoc meetings called at short
notice to consider matters of a time-sensitive
nature such as the appointments of the new
Group Chair and Group Chief Executive. Details
of attendance at Board meetings is shown above.
The Board recognises the need to be
adaptable and flexible to respond to changing
circumstances, such as switching to virtual
meetings because of the pandemic, and to
emerging business priorities, while ensuring
the continuing monitoring and oversight of
core issues, such as the impact of, and the
Group’s response to, the pandemic.
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 Chair leads the
process, assisted by the Group Chief Executive
and Group Company Secretary. The process
ensures that sufficient time is being set aside
for strategic discussions and business critical
items. The Chair and the Chairs of each
Committee ensure Board and Committee
meetings are structured to facilitate open
discussion, debate and challenge.
The process of escalating issues and agenda
setting is reviewed at least annually as part of
the Board evaluation with enhancements made
to the process, where necessary, to ensure it
remains effective.
The Non-Executive Directors also receive
regular updates from management to
give context to current issues. In-depth
and background materials are regularly
provided via a designated area on the secure
Board portal.
Lloyds Banking Group Annual Report and Accounts 2020
87
OUR BOARD AND GOVERNANCE STRUCTURE
Lloyds Banking Group Board
Group Chief
Executive
Group Chief
Executive
Committees
Read more on
pages 150 to 151
Nomination
and Governance
Committee
Read more
on pages 98 to 100
Board Risk
Committee
Read more
on pages 105 to 109
Remuneration
Committee
Read more
on pages 115 to 116
and 134
Audit
Committee
Read more
on pages 101 to 104
Responsible
Business
Committee
Read more
on page 110
The Board is supported by its Committees
which make decisions and recommendations
on matters delegated to them under
the Corporate Governance Framework,
including Board appointments, internal
control risk, financial reporting, governance
and remuneration issues. This enables the
Board to spend a greater proportion of its
time on strategic, forward-looking agenda
items. Each Board Committee comprises
Non-Executive Directors only and has an
experienced Chair. Each Committee Chair
reports to the Board on the activities of their
Committee at a subsequent Board meeting.
The management of all Committees is
on the same basis as the Board. Each of
the Committees’ structures facilitates
open discussion and debate, and ensures
adequate time for members of the
Committees to consider all proposals.
The Executive Directors make decisions
within the parameters and principles
set out in the Corporate Governance
Framework. However, where appropriate,
any activity can be brought to the full Board
for consideration, even if the matter falls
within agreed parameters. The Corporate
Governance Framework seeks to ensure that
decisions are made by management under
the correct authority. In the rare event of a
Director being unable to attend a meeting,
wherever possible the Chair of the meeting
discusses the matters proposed with the
Director concerned, seeking their views. The
Chair subsequently represents those views
to the meeting.
A full schedule of matters reserved can be
found at https://www.lloydsbankinggroup.
com/who-we-are/group-overview/
corporate-governance.html
CHAIR INDUCTION
Robin Budenberg
Non-Executive Director and Chair
Robin Budenberg, an experienced Non-
Executive Director with extensive financial
services experience, received a tailored
induction that focused on the Group’s
culture and values, stakeholders, strategy,
structure, operations and governance. As
Chair Designate, Robin worked closely
with Lord Blackwell, the Group’s former
Chairman, in ensuring an effective handover
of responsibilities.
Robin’s induction included:
An Induction Pack containing key corporate documents and information relating to the
Group covering aspects such as the role of a director (including relevant Group policies such
as anti-bribery, conflicts of interest, expenses, gifts and hospitality and share dealing), the
Board and its Committees, financials and strategy, governance, risk management, culture,
shareholders and training.
Meetings with Senior Management and Board Directors held in October through
December 2020 with all GEC members, Board Directors, the Group Company Secretary and
other senior managers to discuss aspects including:
– The UK banking regulatory framework and corporate governance including ring-fencing
requirements, the Senior Managers and Certification Regime, culture and conduct
expectations and whistleblowing
– Strategic challenges facing the Group (including, for example, the impact of COVID-19
and the operational and conduct challenges it presents and targets and risks associated
with managing the Group’s response to climate change)
– Culture and values
– Group Operations
– Risk Management (including consideration of operational risk, conduct risk and customer
outcomes)
– Financials (including meetings with internal and external auditors)
– Capital management and liquidity
– Inclusion & Diversity
– Retail Banking (including Digital Transformation) and Wealth Management
– Commercial Banking
– Scottish Widows Group Limited and the Insurance sub-group
– Lloyds Bank Corporate Markets plc and the Non Ring-Fenced Bank sub-group
– LBG Equity Investments and the Equity sub-group
Meetings with Major Shareholders held in October and November 2020
During 2021, Robin will continue his programme of visits (either in person or virtually) with
customers, service providers and key stakeholders across the retail, commercial and insurance
sectors to build upon and deepen his understanding of the customer offering and experience.
Robin will continue to develop his knowledge of the Group and its people through site
visits (either in person or virtually) to the Group’s regional offices as well as through focused
discussions with smaller teams and individual colleagues.
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88 Lloyds Banking Group Annual Report and Accounts 2020
How our Board works
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 88 and page 89 show the key
focus areas of the Board during the year and
highlight the link between those focus areas
and our strategic priorities. 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 Chair, Group
Chief Executive and Group Company
Secretary and reviewed at Group Executive
Committee meetings. Regular updates
are provided to the Board by the Chairs of
the Audit, Nomination and Governance,
Remuneration, Responsible Business and
Board Risk Committees as well as by the
Group Chief Executive, the Chief Financial
Officer, the Chief Risk Officer and the Chair
and the Chairs of the Lloyds Bank Corporate
Markets plc and Scottish Widows Group
Limited boards.
Key: GSR3 strategic priorities
Stakeholders
Leading customer
experience
Digitising
the Group
Customers
Colleagues
Suppliers
Maximising Group
capabilities
Transforming ways
of working
Community and
Environment
Shareholders
Regulatory and
Government
Considered workforce engagement
mechanisms and engagement results
Strategic priorities Stakeholder groups
Deep dive on ways of working post
pandemic
Strategic priorities Stakeholder groups
CUSTOMERS
Considered retail customer and supplier
support during the pandemic including
financial, operational and customer treatment
Strategic priorities Stakeholder groups
Deep dive on payments proposition
Strategic priorities Stakeholder groups
Deep dive on Insurance and Wealth
Strategic priorities Stakeholder groups
Discussed financial support for businesses
through Government-backed schemes
Strategic priorities Stakeholder groups
Deep dive on economics and financial
impacts
Strategic priorities Stakeholder groups
Considered the recovery of SME customers
affected by the pandemic
Strategic priorities Stakeholder groups
Approved large transactions and contracts
Strategic priorities Stakeholder groups
Discussed customers in financial difficulty
Strategic priorities Stakeholder groups
Considered the Group’s EU exit
preparations
Strategic priorities
Stakeholder groups
CULTURE AND VALUES
Approved the Helping Britain Prosper Plan
Strategic priorities Stakeholder groups
Discussed the Group’s performance
against customer dashboard and targets
for 2020
Strategic priorities Stakeholder groups
Discussed conduct, culture and values,
cultural transformation initiatives and the
Group's Society of the Future plans
Strategic priorities Stakeholder groups
Discussed the annual review of customer
conduct framework and risk
Strategic priorities Stakeholder groups
FINANCIAL
Approved the 2020 budget and the
operating plan
Strategic priorities Stakeholder groups
Considered and discussed climate change
risk and pledges
Strategic priorities Stakeholder groups
Approved the Group’s diversity policy
including a discussion on Black Lives Matter
and endorsement of the Race Action plan
Strategic priorities Stakeholder groups
Considered the operation and
effectiveness of the remuneration policy
Stakeholder groups
Discussed the Group's approach to
customer communications
Strategic priorities Stakeholder groups
Discussed the regular finance report,
forecasts and capital and liquidity positions
Stakeholder groups
STRATEGY
Discussed progress against Group
Strategic Review 3 objectives
Strategic priorities Stakeholder groups
Approved the income statement, draft
results and presentations to analysts
Stakeholder groups
Two day meeting to review the Group’s
strategy and progress
Strategic priorities Stakeholder groups
Approved funding and liquidity plans and
capital plan including capital risk appetite
Stakeholder groups
Approved a request from the PRA on
suspension of dividend payments for 2020
Stakeholder groups
Discussions and decisions
Lloyds Banking Group Annual Report and Accounts 2020
89
Considered updates on structural hedging
strategy and Group Corporate Treasury’s
regular management information report
Stakeholder groups
Approved an update to the statements on
Modern Slavery and Human Rights
Stakeholder groups
Approved various Group policies including
signing authorities and the Board and
Group Executive Committee dealing policy
Stakeholder groups
Reviewed an annual update on pension
scheme and valuation
Stakeholder groups
Considered updates on the Group’s
progress towards resolvability as required
under the Bank of England Resolvability
Assessment Framework
Stakeholder groups
Approved Basel Pillar 3 disclosures
Stakeholder groups
Considered regulatory updates
Stakeholder groups
Reviewed the Chairman’s fee (without the
Chairman present) and Non-Executive
Directors’ fees (with Non-Executive
Directors abstaining)
Approved going concern and viability
statement
Discussed the update on Banking
Standards Board 2019 survey
Stakeholder groups
Received updates on the Senior Managers
and Certification Regime
Stakeholder groups
Approved Board and Board Committee
appointments
Stakeholder groups
Approved Annual Report and Form 20-F
Stakeholder groups
RISK MANAGEMENT
Approved Group risk appetite
Stakeholder groups
Considered cloud services strategy and
cyber security
Strategic priorities Stakeholder groups
Approved actions in relation to the PRA
Periodic Summary Meeting letter
Stakeholder groups
Discussed the FCA firm evaluation letter
and agreed ownership of actions
Stakeholder groups
Considered the key areas of conduct risk
Stakeholder groups
Held discussions with the PRA and FCA
Stakeholder groups
Approved the risk management framework
Stakeholder groups
GOVERNANCE AND STAKEHOLDERS
Discussed the outcome of the annual Board
evaluation and agreed actions arising from it
Stakeholder groups
REGULATORY
Approved the attestation of ring-fencing
compliance application to PRA to renew
modifications to ring-fencing governance
rules
Stakeholder groups
Approved the whistleblowing policy
and considered whistleblowing
updates
Stakeholder groups
Discussed the review of the Chairman’s
effectiveness
Stakeholder groups
Discussed how to hold the Annual General
Meeting during the pandemic, approved
revised arrangements for it and received
an update on voting
Stakeholder groups
Approved the Corporate Governance
Framework
Stakeholder groups
Discussed Board and executive succession
planning and approved the appointment of
the new Chair and Group Chief Executive
Stakeholder groups
More detail
Key Board Decisions
Read more on pages 46 to 51
Deep dive sessions
The Board regularly holds 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, while 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 2020 are set out in the
key focus areas section on page 88
and this page 89. In addition, detailed
updates were received from Scottish
Widows Group Limited and Lloyds
Bank Corporate Markets plc and joint
discussions held with Scottish Widows
Group Limited.
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90 Lloyds Banking Group Annual Report and Accounts 2020
Governance in action
Board oversight of pandemic response
The pandemic has had a profound effect on the way we live. The Board has monitored the impact of the pandemic on the
Group’s business and its stakeholders and the Group’s response as the situation evolved, seeking to ensure that the risks
posed by the pandemic are mitigated. All Board meetings have been held virtually since (and including) the March Board
meeting with Board and Board Committee agendas flexed to consider COVID-related matters. The Board considered
frequent COVID updates from management (both formally and informally) as events unfolded covering matters such as
the impact on customers, colleagues, suppliers and other stakeholders and on funding and liquidity. These pages provide
an overview of how the Board has overseen the Group’s response to the pandemic.
FEBRUARY
Gradual increase in UK
confirmed cases with
23 UK confirmed cases
as at month end
MARCH
Bank of England made
emergency base rate cuts,
Chancellor announced
furlough scheme and
Prime Minister announced
UK lockdown measures
APRIL
3 February – the Group invoked its incident management process to co-ordinate Group activity relating
to the coronavirus with the incident team providing weekly updates to the Group Executive Committee.
19 February – the Board considered an update indicating that the coronavirus outbreak was being
closely monitored, including the impact on industry sectors and that a scenario exercise had been
undertaken to simulate the Group’s response. The Board emphasised at its Board meeting the need for
contingency plans for staff protection and mass absences to be in place, the importance of maintaining
IT resilience and the potential impact on the financial systems in terms of cash flow, supply chain and
commodities.
4 March – the Board considered the first of many updates dedicated to the Group’s response to
the pandemic focusing on business continuity plans to ensure that the Group could continue to serve
customers and co-ordination of responses to a series of localised scenarios.
5 March – the Board reviewed an update from the Group Corporate Treasurer on the Group’s
funding position and capital contingency level.
26 March – the Board Risk Committee discussed the Group’s operational response to the pandemic
and highlighted the importance of continued focus on customers and colleagues (in particular colleague
mental and physical wellbeing) and regular communication to colleagues as well as contingency planning
on the Group’s ways of working.
31 March – the Board met at short notice to discuss the PRA’s request to banks to suspend dividend
payments and share buybacks. The Board agreed to suspend dividends and buybacks on ordinary
shares until the end of 2020.
UK lockdown measures
continued with a three week
extension announced and daily
testing capacity was ramped up
as the total number of recorded
deaths passed 20,000
8 April – the Board held an informal update call to discuss the Group’s response to the crisis,
including business continuity planning and operational impact and to provide a briefing on customer
support and business support schemes as well as on economic and financial projections.
28 April – the Board Risk Committee extensively discussed the impact of the pandemic at its meeting.
The Audit Committee discussed at its meeting the Group’s draft Q1 interim management statement
(including COVID-related disclosures) and recommended that the Board approve the statement.
29 April – the Board discussed the Government schemes for SME, business and corporate support at
its Board meeting and the Group’s operational approach to implementing the schemes and approved
the Group’s participation in each of the CBILS, CLBILS and BBL schemes and equivalent Government
backed support schemes. The Board approved the Group’s Q1 interim management statement, which,
given the significant change in the operating environment and economic expectations, withdrew the
Group’s previous guidance in light on the ongoing uncertainty caused by the pandemic.
MAY
The Prime Minister announced
plans to gradually ease
restrictions and contact
tracing systems went live in
England and Scotland
1 May – the Group announced that its Chief Operating Officer and Director, Juan Colombás,
had agreed to delay his retirement and to remain in post and on the Board until 18 September 2020
to enable him to continue to play a key role in the Group's response to the pandemic.
12 May – COVID-compliant AGM arrangements were announced following Board approval.
19 May – the Board Risk Committee discussed the impact of the pandemic with a focus on the
economic impact.
20 May – the Board discussed a proposed multi-step transition back to the office in line with
Government guidance and noted the importance of wellbeing desks for colleagues struggling
to work from home and of support for customers, in particular personal customers in financial
difficulty and SMEs.
Lloyds Banking Group Annual Report and Accounts 2020
91
JUNE
As restrictions were gradually
eased, primary schools and
general retail reopened
11 June – informal Board update call held to brief the Board on an analysis of economic scenarios
and the key assumptions underpinning them in relation to matters such as the continued closure of
the economy, the process for the UK's exit from the EU and the likelihood of a second wave.
24 June – the Board considered an update from the Group Chief Executive at its Board meeting,
including on COVID transition planning, payment holidays and the impact of the pandemic on
colleague ways of working.
JULY AND AUGUST
Easing of restrictions continued
as restaurants, pubs and hotels
could open and two households
could meet indoors; face
coverings were introduced; the
number of cases appeared to
have stabilised
28 July – the Audit Committee discussed at its meeting the Group’s draft half-year results news
release (including COVID-related disclosures) and recommended that the Board approve the news
release. The Board Risk Committee discussed a COVID-specific credit update and the impact of the
pandemic and emerging risks across a number of sectors.
29 July – the Board reviewed a specific paper on SME customers and participated in a deep dive
on ways of working after the pandemic. The Board also considered a summary of key feedback and
viewpoints relating to the wider workforce and the Group’s further response to the pandemic in
respect of actions taken to support colleagues and Pulse Survey results. The Board approved the
Group’s half-year news release, which included revised 2020 guidance.
6 August 2020 – the Board considered a briefing on the Bank of England’s Financial Stability
Report, which provided an update to its previous desktop stress test and commentary on the ability
of banks to withstand the current economic stress.
SEPTEMBER
“Rule of six” was introduced
as cases started rising again
with local restrictions imposed;
schools returned
23 September – the Board Risk Committee discussed an update on the impact of the pandemic, in
particular from customers in financial difficulty and risk appetite perspectives.
24 September – the Board discussed at its meeting customer sentiment through the pandemic, and
colleague ways of working, during the pandemic and on the Group’s customer support measures.
OCTOBER
Tier regulations came into
effect with differing levels of
restrictions as the NHS came
under pressure due to the
“second wave”
NOVEMBER AND DECEMBER
As England entered a second
national lockdown, Pfizer
and BioNTech announced a
vaccine with the UK vaccination
programme starting in early
December; a new strain of the
virus prompted creation of a
new “tier 4”
6 October – the Board discussed on a Board call an update on analysis of economic scenarios and
the underlying assumptions in relation to the pandemic and the UK's exit from the EU ahead of the
release of the Group’s Q3 interim management statement later that month.
27 October – the Board discussed at its meeting the Group’s priorities from a culture perspective
post pandemic and areas of focus for the Group on the exit from the pandemic. The Board Risk
Committee discussed a COVID-specific credit update and a briefing on the Group’s programme to
support Commercial Banking customers.
28 October – the Audit Committee discussed at its meeting the Group’s draft Q3 interim
management statement (including COVID-related disclosures) and recommended that the Board
approve the statement. The Board approved the Group’s Q3 interim management statement, which
included updated 2020 guidance in light of the highly uncertain economic outlook.
25 November – the Board Risk Committee discussed a COVID-specific credit update.
26 November – the Board discussed an update on the impact of the pandemic on the Group
and, in particular, on its progress with its strategy at its Board meeting.
9 December – the Board took part in a deep dive on economic forecasts, including a focus on
the impact of the pandemic on the economy and digital structural transformation and assumptions
around vaccine roll-out.
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92 Lloyds Banking Group Annual Report and Accounts 2020
BOARD OVERSIGHT OF OUR ACCELERATED CULTURE JOURNEY
OVERSIGHT & DIRECTION
The Board provides oversight and
direction in relation to culture activities
and believes that establishing the
right culture is important to ensure we
are building an environment where
colleagues are empowered and inspired
to do the right thing for customers.
IMPACT OF COVID-19
In addition to substantial delivery across
our culture change initiatives in 2020, we
have also experienced positive cultural
impact as a result of the many changes
accelerated by the pandemic.
CULTURE HIGHLIGHTS FROM 2020
Building empathy, including the re-
write of 60 per cent of our customer
communications and new training for
colleagues.
Promoting simplicity through new
principles for committees and
governance.
New ways of working have been
pioneered, tested and implemented
to support and embed our culture
change, enabled by the accelerated
delivery and adoption of technology
improvements to support remote
working and collaboration.
Continued embedding of Your
Best, our award winning approach to
performance management and career
development which was rolled out in
2019.
Building skills for the future through
focus on continued learning.
KEY METRICS
All indices and metrics have risen since
2019:
Employee engagement index
81 per cent (up 7 pts)
Performance excellence index
82 per cent (up 3 pts)
Confidence and trust index
78 per cent (up 4 pts)
The Board supports the Group's aim to develop its values-led culture. Our
values and behaviours are the foundation of our culture, providing us with
a clear framework to ensure we understand what we expect of each other.
During 2020 the Board has sponsored a plan of initiatives led by the Group
Chief Executive to accelerate our cultural change across the business,
which will be crucial to the delivery of our Group strategy and to ensure we
continue to respond to the evolving needs of our customers, colleagues
and the communities we serve.
January 2020
The Board endorsed a number of Culture Change Acceleration initiatives.
These focus on greater empathy, promoting empowerment and simplicity,
pioneering new ways of working to remove barriers to cultural change,
encouraging contrary positions to be advocated to promote rounded
decision-making and reviewing the tone of our communications.
The Group Chief Executive established an executive Culture Working Group to
oversee the Culture Change Acceleration initiatives.
February 2020
The Board reviewed the results of recent colleague surveys.
Performance against key metrics remained encouragingly stable given the
circumstances, with scores remaining high and above UK high performing
norms; areas of improvement identified with respect to bureaucracy and the
requirement to continue to simplify our ways of working.
April 2020
The Board considered progress on the Culture Change Acceleration initiatives.
Colleague response to the pandemic demonstrated how the Group was
able to adapt and work together to support our customers, colleagues and
communities through rapid decision-making.
Increased two-way communication from the Group Chief Executive and
broader Group Executive Committee focused on supporting colleagues has
been very positively received.
June 2020
The Board received highlights from the colleague Pulse Survey designed
to help leaders to understand the impact of the pandemic on colleague
sentiment and behaviours.
Colleagues reported positive shifts in culture, identifying greater support,
collaboration, flexibility and innovation.
July 2020
The Board evaluated progress on the Culture Change Acceleration initiatives
that incorporated the impact of the pandemic.
The Board agreed that positive cultural changes triggered by the pandemic
needed to be permanently embedded within the business.
Behavioural changes of greater empathy, open communication, collaboration,
and agile decision making have helped to advance our cultural development
and have complemented our ambition to accelerate culture change.
November 2020
The Board discussed a further update on the progress made across the
Culture Change Acceleration initiatives and proposed 2021 Culture Change
Acceleration Plan to embed improvements and accelerate transition towards
our desired culture.
The Board has encouraged Group Executives and Senior Leaders to role
model and pioneer new ways of working and encourage simplicity, facilitated
through the rollout of new technology.
Empathetic tone from the top has been adopted in leaders’ communications,
with colleagues noticing the change and more human, transparent tone used.
The Board reviewed results from the recent colleague surveys where
colleagues reported a more agile working environment with faster
decision-making and less bureaucracy.
Lloyds Banking Group Annual Report and Accounts 2020
93
GROUP STRUCTURE AND RING-FENCING GOVERNANCE ARRANGEMENTS
Since 1 January 2019 UK legislation has
required 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’s structure and governance
arrangements meet these 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.
Lloyds Banking Group plc
Aligned Boards
Lloyds Bank plc1
HBOS plc
Bank of Scotland plc1
1Ring-Fenced Banks
Lloyds Bank
Corporate
Markets plc
Scottish
Widows Group
Limited
LBG Equity
Investments
Limited
Non Ring-Fenced
Bank
Insurance
Equity Investments
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 –
which provides products and services to
Group customers that are not allowed
within the ring-fence as well as serving
Financial Institutions customers and
holding certain of 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.
The Ring-Fenced Bank Boards have
three additional independent Non-
Executive Directors to the Group Board:
Nigel Hinshelwood (Senior Independent
Director), Sarah Bentley and Brendan Gilligan.
These Ring-Fenced Bank only directors are
independent of the management and the
rest of the Group and play a crucial role in the
governance structure, with an enhanced role
in managing any potential conflicts between
the Ring-Fenced Banks and the Group.
CLIMATE CHANGE
INCLUSION & DIVERSITY
The Board Risk Committee receives
regular detailed updates regarding the
Group’s climate risk management and
key developments and 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 the Task Force on
Climate-related Financial Disclosures (TCFD)
recommendations and other commitments.
The Audit Committee considers climate-
related disclosures in the Group’s financial
statements.
More detail
Group’s environmental and social progress
Read more on pages 20 to 31 and
in our 2020 Lloyds Banking Group
ESG Report.
Climate change impacts are
becoming ever clearer and
need urgent action. The
Group has ambitious plans
to further reduce our own
emissions and those we
finance.
Sara Weller
Chair, Responsible Business
Committee
Board oversight of sustainability
and climate-related risks
The Board has a key role in overseeing how
the Group’s activities affect the environment
and the impact of climate change on the
Group’s business. The Responsible Business
Committee oversees and monitors the
Group’s sustainability strategy and the Board
Risk Committee oversees and monitors the
Group’s approach to managing risks arising
from climate change, with both Committees
reporting regularly to the Board. Further
details of the governance structure for the
oversight and ownership of the Group’s
sustainability strategy and management of
climate-related risks can be found on page 22.
During the year the Board approved:
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, on the
path to net zero by 2050 or sooner – read
more on this Key Board Decision on page
50 and read more on the Metrics and
Targets on page 22.
three new operational pledges to
accelerate the Group’s plan to tackle
climate change – read more on pages 22
to 23.
the creation of a new principal risk for
climate risk in the Group’s Enterprise Risk
Management Framework and integration
of climate risk into all existing principal
risks – read more on page 57.
In addition, in January 2021 the Board
approved a Risk Appetite metric for climate
risk to ensure the Group continues to
progress activities at pace.
Board oversight of Inclusion
& Diversity initiatives
The Board believes an inclusive and
diverse workforce is vital to the Group’s
success, and values the differences each
colleague brings to their role, making the
Group stronger and better able to meet
the needs of our customers.
In support of this the Board approved in
July 2020 the introduction of our Race
Action plan, designed to drive race-
related cultural change, recruitment and
progression across the Group.
The Board also approved a target to
increase Black representation in senior
roles to at least 3 per cent by 2025. This
complemented the Group’s broader
2018 Black, Asian and Minority Ethnic
representation targets of 10 per cent
overall, and 8 per cent at senior roles.
More detail
Championing Inclusion & Diversity
Read more on pages 25 to 26
Board Diversity Policy
Read more on page 100
WORKFORCE ENGAGEMENT
Please refer to page 48 for details of how
the Board engages with the Group’s
workforce and why the Board considers
these arrangements to be effective.
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94 Lloyds Banking Group Annual Report and Accounts 2020
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 Chair of the Board, with the support of
the Nomination and Governance Committee,
leads the Board in considering and
responding to the annual evaluation of the
Board’s effectiveness, which includes a review
of its Committees and individual Directors.
Performance evaluation of the Chair 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 final year of the three
year evaluation cycle recommended by
the UK Corporate Governance Code 2018.
An external evaluation was last conducted
in 2018, facilitated by Egon Zehnder1,
an external board review specialist, with
internal evaluations being carried out in 2020
and 2019. The 2021 evaluation is currently
expected to be externally facilitated, with the
Nomination and Governance Committee
beginning the search process for the external
facilitators in the due course.
2020 evaluation of the Board’s
performance
The 2020 evaluation was conducted internally
between November 2020 and January 2021
by the Group Company Secretary, and was
overseen by the Nomination and Governance
Committee.
The 2020 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 Chair of the
Nomination and Governance Committee
and the Group Company Secretary as being
the most pertinent when considering the
Board’s effectiveness, and also referenced
previous years’ topics to track trends and
improvements.
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 Chair, for circulation to the Board. No such
concerns were raised in 2020 and up to the
date of this report.
INTERNAL EVALUATION PROCESS
November 2020
Detailed online questionnaire
issued to all Directors by the
Group Company Secretary.
November 2020 to
January 2021
Individual meetings held
between each Director and the
Group Company Secretary or
Corporate Governance Director
to discuss responses and
opportunity for Directors to raise
any other matters concerning
the Board or its Committees.
December 2020 to
January 2021
Report prepared by the Group
Company Secretary based on
the questionnaire results and
matters raised in individual
meetings.
January 2021
Draft report discussed by the
Group Company Secretary with
the Chair.
Final report reviewed at a
meeting of the Board, following
its consideration by the
Nomination and Governance
Committee.
HIGHLIGHTS FROM THE 2020 BOARD EVALUATION
The evaluation concluded that the performance of the Board, its Committees, the Chair 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 and managing the regulatory requirements of
the ring-fencing regime.
The key findings and areas for consideration include the following:
Theme
Findings
Areas for consideration
Board
discussion and
debate
Board papers
Call for further strategic, forward-looking discussion.
Further refine Board and Committee meetings in terms
of timings, agendas, papers and discussions to permit
greater strategic and forward-looking discussion and
debate.
Improve quality of Board papers.
Sharpen the focus of papers to:
show more of the thinking behind proposals, including
trade-offs and options considered and give unvarnished
accounts, always sharing bad news as well as good.
be less formal and shorter.
make the ‘ask’ of the Board clearer in the paper, together
with the reason Board approval was requested, rather
than delegating authority to a committee or elsewhere.
To leverage internal and external expertise, as well
as to widen existing Non-Executive Director training
curriculum, both online and (when conditions permit) in
person.
Training
Further formal technical training for members of Boards
and Committees.
1 At the time of the 2018 review Egon Zehnder provided certain Board and senior management level services from time to time, including in respect of succession planning as detailed on page 67 of
the 2018 Annual Report and Accounts, otherwise Egon Zehnder had no other connection with the Group.
Lloyds Banking Group Annual Report and Accounts 2020
95
PROGRESS AGAINST THE 2019 BOARD EVALUATION
The main focus in improvements to Board effectiveness in 2020 have been in the technology area, including improving Non-Executive Director
access to Group IT systems with more powerful and modern devices and tools, balancing convenience and ease of access with the need to
ensure compliance with Group security policies and procedures. Enhancements to Board and Committee meeting technology, tools and
procedures were accelerated as a result of the pandemic, with considerable success and without impact on the twin focus on streamlining
meeting agendas, papers and presentations to allow deeper strategic discussion by the Board. Details of specific actions taken and
enhancements made during 2020 are set out below:
Theme
Feedback from the 2019 evaluation
Actions taken in 2020
Ring-fencing
governance
Strategy
Board
papers and
presentations
Ring-fenced governance requirements require
individual Directors, the Chair and Committee
Chairs to manage meetings, to ensure all
Directors can contribute fully and effectively.
The Board’s detailed engagement in the
formulation of strategy is seen as a key strength,
with the strategy days playing an important role
in this.
Agendas and papers are carefully structured to provide clarity in
relation to the action required for each entity.
More frequent deep dives were diarised together with free
discussion time for strategic discussion of core business activities.
Further streamline meeting agendas, papers
and presentations to enable more expansive
discussion.
Stricter guidelines on papers and presentations were developed in
conjunction with the Chair of the Board and each Committee Chair
to permit more time for discussion.
IT tools and
access
Access to Group IT systems, especially
encrypted systems, cumbersome or not user
friendly.
Control relaxations focused on user experience, while maintaining
compliance with Bank of England security framework.
Virtual Board
and Committee
meetings
Enhance technology and processes to enable
more effective virtual meetings.
All Board and Committee meetings since (and including) March 2020
have been held remotely, with the 2020 Board Evaluation feedback
noting how effectively these had operated during the period.
In addition, the Non-Executive Director training curriculum was
delivered online for the majority of the year.
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 and integrity of internal
and external reporting and compliance with
applicable laws and regulations, and for the
determination of the nature and extent of the
principal risks the Group is willing to take in
order to achieve its strategy. 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 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 143
to 204. 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
All key controls are recorded and assessed
on a regular basis, either in response to
triggers or at a minimum annually. Control
assessments consider both the adequacy
of the design and operating effectiveness.
Where a control is not effective, the root cause
is established and action plans implemented
to improve control design or performance.
Control Effectiveness against all residual risks
is reported and monitored via the monthly
Consolidated Risk Report (CRR). The CRR is
reviewed and independently challenged by
the Risk Division and provided to the Risk
Division Executive Committee and Group
Risk Committee. On an annual basis, a
point in time assessment is made for control
effectiveness against each risk category and
across the 4 sub-groups. The CRR data is
the primary source used for this point in time
assessment and a year on year comparison on
control effectiveness is reported to the Board.
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 receive 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.
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96 Lloyds Banking Group Annual Report and Accounts 2020
Complying with the UK Corporate Governance Code 2018
The UK Corporate Governance Code 2018 (the ‘Code’) applied to the financial year ended 31 December 2020. The Company 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 and, in one instance, in relation to that part of provision 15 that provides that additional external appointments should not be undertaken
without prior approval of the Board. In relation to provision 36, while 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 the Directors' Remuneration Policy which
is set out in the 2019 annual report and accounts (pages 115 to 123) which is available at: www.lloydsbankinggroup.com/investors/annual-report/
annual-report-archive.html for a more detailed explanation of the Group’s approach to post-employment shareholding requirements. In relation to
provision 15, the Chair approved Nick Prettejohn taking on the role of Chairman of the charity, Prisoners Abroad, but due to timing constraints, the
Board did not approve the appointment in advance but ratified it after Nick Prettejohn had taken on the role. The role is not considered a significant
appointment for the purposes of provision 15 of the Code.
The Code is publicly available at www.frc.org.uk. This page and the following page, together with the rest of the Corporate Governance Report,
explain and illustrate 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 2020 financial statements have been prepared in compliance with its principles.
1. Board Leadership and Company Purpose
Independent Responsibilities
Chair
Lord Blackwell/
Robin Budenberg
Executive Directors
Group Chief Executive
António Horta-Osório
Chief Financial Officer
William Chalmers
Non-Executive Directors
Deputy Chair and Senior
Independent Director
Alan Dickinson
Sarah Legg
Lord Lupton
Amanda Mackenzie
Nick Prettejohn
Stuart Sinclair
Sara Weller
Catherine Woods
Group Company
Secretary
Kate Cheetham
Robin Budenberg succeeded Lord Blackwell as Chair on 1 January 2021. The Chair 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 Chair 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 makes and implements decisions in all
matters affecting the management of financial resources. He provides specialist knowledge and experience
to the Board. Together with António Horta-Osório, William Chalmers designs, develops and implements
strategic plans and deals with day-to-day operations of the Group.
As Deputy Chair, Alan Dickinson supports the Chair in representing the Board, and acts as a spokesperson for
the Group. He deputises for the Chair and is available to the Board for consultation and advice. The Deputy
Chair may also represent the Group’s interests to official enquiries and review bodies.
As Senior Independent Director, Alan Dickinson is a sounding board for the Chair and Group Chief Executive.
He acts as a conduit for the views of other Non-Executive Directors and conducts the Chair’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.
The Group Company Secretary advises the Board on matters relating to governance, ensuring good information
flows and comprehensive practical support is provided to Directors. The Group Company Secretary maintains
the Group’s Corporate Governance Framework and organises Directors’ induction and training. Both the
appointment and removal of the Group Company Secretary is a matter for the Board as a whole.
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 annually, discussed further
on page 94 to 95. 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 on page 99.
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 20 to 31, and in the report of the
Responsible Business Committee on page 110.
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 144 to 204.
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 46 to 51, and in the Directors’ statement of compliance with their
duties under section 172 of the Companies Act 2006, also on pages 46
to 51. A final summary of the impact of the voting outcomes at the 2020
AGM for the Group’s Directors’ Remuneration Policy and Long Term
Share Plan has had on the decisions the Board has taken and the actions
or resolutions now proposed are set out on pages 118 and 119.
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 Alan Dickinson 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 104 and reports on its review to the Board.
Lloyds Banking Group Annual Report and Accounts 2020
97
At the 2021 AGM all Directors will seek re-election or election save for
António Horta-Osório, who will be stepping down with effect from
30 April 2021 and Sara Weller, who will be stepping down at the 2021
AGM. The Board believes that all Directors continue to be effective and
committed to their roles.
L. An internally facilitated Board evaluation was completed in 2020,
with an externally facilitated evaluation last having taken place in 2018.
Individual evaluation is carried out by the Chair on behalf of the Board.
Performance evaluation of the Chair 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 2020
Board evaluation can be found on pages 94 to 95, 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 2020, confirming how it has
discharged its duties can be found on pages 101 to 104.
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 2020 Annual Report
meets this requirement. The Board is supported in this by its Audit
Committee and a sign off process involving different sections of the
annual report being approved for inclusion by senior management, with
additional review by the Group Disclosure Committee. The Directors’
and Auditor’s Statements of Responsibility can be found on page 114
and page 206 respectively. Related information on the Company’s
business model and strategy can be found on pages 1 to 59.
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 144 to 204. 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 112 to 113 and confirmation that the business is a
going concern can be found on page 113.
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 115 to
142 provides further details regarding the remuneration of Directors.
The current Remuneration Policy can be found in the 2019 Annual
Report and Accounts and remains unchanged since last approved 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
is discussed further in its report on page 115.
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 115 to 142 which includes additional confirmation of the use
of remuneration consultants, including where any such consultant has
another connection to the Company.
2. Division of Responsibilities
F. The Chair has overall responsibility for the leadership of the Board
and for ensuring its effectiveness in all aspects of its operation. These
responsibilities are formalised within the Corporate Governance
Framework. Lord Blackwell and Robin Budenberg were both
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 99. As of 1 February 2021, Sara Weller had spent nine years on the
Board and will retire at the AGM in May. In relation to the period from
1 February 2021, being the ninth anniversary of Sara Weller’s appointment
to the Board, to retirement at the AGM in May, the Board considered and
agreed the continuing independence of Sara as a Non-Executive Director
of the Company for that period. The decision was based on a number of
factors including the continued challenge and oversight Sara provides in
the role and the other external roles she holds, while noting the benefits of
enabling the transition of her responsibilities as Chair of the Responsible
Business Committee during this short period. More information on the
annual Board evaluation can be found on pages 94 to 95 and information
on the Board Diversity Policy can be found on page 100.
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 Chair, and
prior Board approval must be obtained before taking on any new external
appointments. The Chair approved Nick Prettejohn taking on the role of
Chairman of the charity, Prisoners Abroad, but due to timing constraints,
the Board did not approve the appointment in advance but ratified it after
Nick Prettejohn took on the role. The role is not considered a significant
appointment. During 2020, Stuart Sinclair was appointed a Non-Executive
Director and subsequently Chairman of each of International Personal
Finance plc and Willis Limited and Sara Weller a Non-Executive Director
of BT Group plc. The Board considered the time commitments and
potential conflicts involved in Stuart and Sara taking up these significant
roles prior to them accepting the roles and were satisfied that they would
continue to have sufficient time to commit to their respective Group
Board and Committee appointments. No Executive Director has taken
up more than one Non-Executive Director role at a FTSE100 company
or taken up the chair of such a company. More information on Directors’
attendance at meetings can be found on page 86.
I. The Chair, 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.
Open advertising and/or an external search consultancy is used for the
appointment of the Chair and Non-Executive Directors. More details
about the appointment process for the Chair and Group Chief Executive
and succession planning can be found on pages 98, 99 and 100.
More information about the work of the Nomination and Governance
Committee can be found on pages 98 to 100.
K. The Chair 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 Chair 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 the
Director has been appointed to fulfil and their skills and experience to
date. More information on the new Chair’s tailored induction programme
can be found on page 87. Directors who take on or change roles during
the year attend induction meetings in respect of those new roles.
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98 Lloyds Banking Group Annual Report and Accounts 2020
Nomination and Governance Committee report
Succession planning is a key component
of good governance
Q&A WITH ROBIN BUDENBERG,
CHAIR OF NOMINATION AND
GOVERNANCE COMMITTEE
Q. As the new Chair of the
Nomination and Governance
Committee (the ‘Committee’),
and the Group, what do you see as
being the Board’s key strengths?
Collectively the Board has excellent
breadth and depth of experience and
strong commitment to the Group’s
strategic aims. This commitment has
helped to ensure that the Group plays a
successful role in Helping Britain Prosper
and, more immediately, recovering from
the pandemic.
Q. How will your appointment,
and that of the new Group Chief
Executive, further complement
these qualities?
At the time of my appointment, Lord
Blackwell commented on my knowledge
of the Group combined with broad
experience in both financial services
and other strategic roles. This, together
with Charlie Nunn’s vision for the Group,
passion and commitment to our purpose
of Helping Britain Recover and Prosper,
and his track record which brings
world class operational, technology
and strategic expertise, will all help
build on the strengths of the existing
management team in continuing to drive
forward the strategic transformation of
the Group.
Q. What are the key areas of focus
for the Committee in 2021?
Given the remit of the Committee, the
core areas of focus for 2021 will continue
to be succession planning at both Board
and executive level, managing Board
(and Committee) composition and skills,
driving diversity and inclusion at Board
level and beyond, and overseeing Board
effectiveness.
Key activities in 2020
Succession planning and Board and
executive changes
Board effectiveness and training
Corporate governance review
Diversity and inclusion
Introduction
In the months since my appointment to
the Board and, more recently, as Chair of
the Committee I have been impressed by
the level of commitment shown by Board
members, the executive and colleagues in
delivery of the Group’s aims, and support
for customers and each other during these
unprecedented times. These qualities,
together with our focus on diverse teams and
inclusive environments, will help to drive the
continued transformation of the Group and
the best outcomes for customers.
Succession planning
My introduction to the Governance Report
on page 81 highlighted a number of changes
to the Board and its Committees during the
year; all of these have been overseen by the
Committee. Strong succession planning has
been a key focus in helping to ensure the
appropriate mix of skills, experience and
backgrounds has continued. Further details
on the Committee’s approach to succession
planning can be found on page 100.
Consideration was given to planned
Board retirements and the impact of
these on membership of the Board and its
Committees. The Committee’s ongoing
review of the structure, size and composition
of the Board and its Committees helps ensure
that the appropriate mix of knowledge, skills,
experience and diversity is maintained. A
number of other changes, beyond those
set out below, have also been made to the
membership of Board Committees during the
year as a result of this ongoing review.
As indicated in last year’s report, Catherine
Woods formally joined the Board on 1 March
2020, as a Non-Executive Director. Anita Frew
retired from the Board at the AGM in May as
planned, with Alan Dickinson succeeding her
as Deputy Chair in addition to his existing
role of Senior Independent Director. Nick
Prettejohn temporarily took on Alan’s role as
Chair of the Board Risk Committee, with this
role having now passed to Catherine Woods
with effect from 1 January 2021. Simon Henry
retired as a Non-Executive Director in
September, with Simon’s role as Audit
Committee Chair passing to Sarah Legg. The
experience which Catherine and Sarah bring
to the Board, made them ideal candidates
to Chair these important Committees. As
announced on 29 January 2021, Sara Weller
will retire from the Board, and as Chair of the
Responsible Business Committee, at the AGM
in May 2021. Amanda Mackenzie will take on
the role of Chair of the Responsible Business
Committee following Sara’s retirement.
After kindly agreeing to delay his departure,
allowing him to continue to play a key role
in the Group’s response to the pandemic,
Juan Colombás retired from his role as the
Chief Operating Officer with effect from
18 September 2020.
As also discussed in last year’s report, Lord
Blackwell announced his plan to retire as
Group Chairman in 2021. The Committee
undertook a thorough search process
which culminated in my appointment as his
successor. I was appointed as a Non-Executive
Director effective from 1 October 2020.
Subsequently, Lord Blackwell’s retirement
and my succession both as Group Chair and
Chair of the Committee, became effective on
1 January 2021.
Alongside confirmation of my appointment,
António Horta-Osório’s decision to step
down as Group Chief Executive in 2021
was also announced. The Committee
undertook a similarly thorough process to
identify António’s successor, culminating
in the decision to appoint Charlie Nunn as
Group Chief Executive. Subject to regulatory
approval, Charlie will join the Board in August
2021. As announced on 1 December 2020
António will step down from his role on
30 April 2021. The Board has agreed that
during any interim period between António
stepping down and Charlie joining the Board,
William Chalmers, Chief Financial Officer will,
subject to regulatory approval, take on the role
of acting Group Chief Executive in addition
to his ongoing responsibilities, with a range of
measures put in place to provide appropriate
support. Further details of the selection
process for these appointments can be found
on page 99.
In addition to a focus on succession planning
at Board level, the Committee also has
a strong focus on succession planning
at an executive level. The Committee
continues to consider the overall health of
the executive talent pipeline, together with
detailed executive succession planning. Key
considerations include, for example, cultural
and strategic capabilities which will help
ensure the continued transformation of the
Group and the delivery of its strategic aims.
Board effectiveness and
training
As referred to in my introduction to the
Governance Report on page 81, this year
an internal Board Evaluation has been
undertaken, overseen by the Committee.
The Committee also considered, and
recommended to the Board, actions arising
from the previous internal review undertaken
in 2019. Full details are provided on pages 94
and 95. The 2021 Board Evaluation is currently
expected to be facilitated externally, in line
with the recommended approach set out in
the UK Corporate Governance Code.
Annually, as part of the Board Evaluation, 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 2021, found that the
Committee had met its key objectives and
carried out its responsibilities effectively.
Lloyds Banking Group Annual Report and Accounts 2020
99
Committee composition,
skills and experience
To ensure a broad representation of
experienced and independent Directors,
membership of the Committee currently
comprises the Chair, Deputy Chair (who is also
the Senior Independent Director), the Chairs
of each of the Remuneration Committee and
the Responsible Business Committee, and the
Chair of our Insurance sub-group.
The Group Chief Executive attends meetings
as appropriate. Details of Committee
membership and meeting attendance can be
found on page 86.
The Group’s commitment to
building a diverse Board and
workforce will help support
the continuing transformation
of the Group and strengthen
the embedding of cultural
change.
Robin Budenberg
Chair, Nomination and
Governance Committee
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 2020, the
Committee is satisfied that, throughout the
year, all Non-Executive Directors remained
independent1 in character and judgement.
The Committee, and the Board, gave specific
consideration to Sara Weller’s continuing
independence as detailed on page 97.
In recommending Directors for election
and re-election at the AGM, the Committee
has reviewed 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
potential conflicts of interest that have been
disclosed. The external roles held by all
Directors were considered to be appropriate.
Fuller details of any conflicts of interest can be
found on page 111.
The Group’s Corporate
Governance Framework
The annual review of the Corporate
Governance Framework was undertaken
during the year. There were no material
changes, with updates this year focusing
on simplification and clarity, together with
various other minor amendments, and revision
of committee terms of reference driven by
recommended best practice and the aim of
maintaining good governance standards.
As part of its broader governance
responsibilities, the Committee considered
regular updates on developments in
corporate governance, including BEIS and
FRC guidance on shareholder meetings
and FRC views on corporate reporting,
and also considered correspondence with
shareholders.
UK Corporate Governance
Code
The Company applied the UK Corporate
Governance Code 2018 for the year-ending
31 December 2020 and complied with
all the provisions with two exceptions. A
detailed summary setting out the Company’s
compliance, together with details of these
exceptions, can be found on pages 96 and 97.
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/who-we-
are/group-overview/corporate-governance.
html
advisory roles, combined with his knowledge
of the Group and leadership qualities. Lord
Blackwell was not involved in the selection or
appointment of his successor.
Appointment Process – Chair and Group Chief Executive
Following the announcement of Lord
Blackwell’s intention to retire, the Board
initiated a search process at the start of
2020, led by the Senior Independent
Director, to identify his successor. Following
a competitive tender process, Heidrick
& Struggles were appointed to assist the
Board in identifying a diverse list of potential
candidates with the experience and personal
qualities to become Chair. The Senior
Independent Director kept the Board and
the Committee informed on progress, with
regular discussions being held throughout.
A long list of candidates was considered
and narrowed down to a diverse short list.
All interested candidates had preliminary
meetings with the Senior Independent
Director and were interviewed by Heidrick
& Struggles. Further detailed consideration
of each of the interested candidates led to a
final shortlist of three for interview, with each
being scored and assessed formally against
defined competencies. Robin Budenberg
was identified as the preferred candidate
on the basis of his broad experience in
both financial services and other strategic
Once the Chair succession was in place,
António Horta-Osório informed the Board
of his intention to step down as Group
Chief Executive during 2021. Timing of this
would help support a smooth transition
and allow the new Group Chief Executive
to work with the new Chair in the next
stage of the Group’s development and
transformation. The Committee delegated
authority to the (now former) Chairman and
Deputy Chair, working closely with Robin
Budenberg, to begin the process. After a
competitive tender process Russell Reynolds
were appointed, with an instruction to
produce a diverse list of individuals with
the experience and personal qualities to
become Group Chief Executive. Emphasis
was also placed on strategic capabilities and
relevant experience to lead the organisation
through the significant technology
transformation currently in progress. A long
list of potential candidates was identified
and narrowed down to an initial short list
with diverse backgrounds, characteristics
and experience. A series of rounds of
interviews led to a final shortlist of three,
who were further considered by Committee
members. Following this process, the
Committee recommended to the Board
that Charlie Nunn be appointed as the new
Group Chief Executive, recognising the
particular strengths that Mr. Nunn would
bring to the role including his world class
operational, technology and strategic
expertise, combined with his passion for and
commitment to the Group’s purpose and
strategic aims.
Throughout each of these formal, rigorous
and transparent appointment processes,
consideration was given to a broad range of
factors such as merit and objective criteria,
consideration of diversity of gender, social
and ethnic backgrounds, cognitive and
personal strengths, and the Group’s future
strategic direction. Neither search firm has
any further connection with the Group or
individual Directors beyond undertaking
search and recruitment related activity.
1 The former Chairman was independent on appointment. Under the Code, thereafter the test of independence is not appropriate in relation to the former Chairman.
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100 Lloyds Banking Group Annual Report and Accounts 2020
Nomination and Governance Committee report continued
Succession Planning
Effective succession planning is a key
component of good governance. With
the appointment of a new Chair and the
announcement of a new Group Chief
Executive during the year, this has been a
particular area of focus for the Committee.
The arrangements being put in place to
cover any interim period before Charlie
Nunn joins the Group help illustrate how
effective succession planning can be used to
address short-term requirements. Effective
succession planning also contributes to the
ability of the Group to deliver on its strategic
objectives 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 that the
Group creates opportunities to develop
current and future leaders.
The Committee supports the Chair in
keeping the composition of the Board and
its Committees under regular review and
in leading the appointment process for
Board Diversity Policy
The Board Diversity Policy (the ‘Policy’) sets
out the Board’s approach to diversity and
provides a high level indication of the Board’s
approach to inclusion and 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 diverse
benefits each candidate can bring to the
overall Board composition.
Objectives for achieving Board diversity may
be set on a regular basis. In January 2021 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 executives.
nominations to the Board. This helps ensure
continued focus on increasing the overall
diversity of the Board, and capacity for future
succession planning. The appointment
process for the new Chair and Group Chief
Executive, set out on the previous page,
helps illustrate how the appointment process
works in practice.
Central to the Group’s approach to
succession planning is an ongoing
assessment, led by the Chair, of the collective
Board’s technical and governance skill set.
From this, the Chair 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 the 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 is considered in the appointment of
all Board members. The Group’s diversity
commitments and outcomes of the annual
Board Evaluation process are also taken into
consideration.
On gender diversity the Board is committed
to maintaining at least three female Board
members and over time will aim to reach
50 per cent female representation on the
Board to match the 50 per cent ambition that
the Group has set for female senior roles.
Reflecting these aspirations, the Board
will aim to continue to meet the Hampton-
Alexander objective of 33 per cent female
representation. Female representation on
the Board is currently 36.4 per cent (based on
4 female Directors and 7 male Directors).
The Group has also set a target of 13 per cent
of senior roles to be held by Black, Asian and
Minority Ethnic executives by 2025. The Board
currently meets, and will aim to continue to
meet, the objectives of the Parker review with
at least one Black, Asian and Minority Ethnic
Board member.
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 ambition
of achieving 50 per cent of senior roles
held by female executives by 2025, and of
13 per cent of senior roles held by Black, Asian
and Minority Ethnic executives by 2025. This
is underpinned by a range of policies within
the Group to help provide mentoring and
development opportunities for female and
Black, Asian and Minority Ethnic executives
The role of succession planning in promoting
diversity is fully recognised. The Group
has a range of policies which promote the
engagement of under-represented groups
within the business in order to build a diverse
talent pipeline.
The Committee also continued to consider
the adequacy of succession arrangements
for key senior management roles. During
the year, additional focus was given to
development plans together with cultural
and capability assessments, which will
help nurture talent and drive cultural
transformation across the Group, and
support the ongoing delivery of the Group’s
strategy.
The Chair 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.
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 2020, female
representation within Group Executive
Committee and their direct reports was
32.3 per cent in total (with 26.7 per cent
for Group Executive Committee and
33.0 per cent for their direct reports ). Female
representation across all senior roles was
37.0 per cent, and Black, Asian and Minority
Ethnic representation in senior roles was
7.7 per cent. The Group also launched its Race
Action plan during 2020, which aims to drive
cultural change, recruitment and progression
across the Group, including a new public goal
to increase Black representation in senior roles
from 0.6 per cent to at least 3 per cent by 2025,
aligning the Group with the overall UK labour
market. Further details of the Race Action
plan, and the Group’s further achievements
in championing inclusion and diversity in its
widest sense can be found on pages 25.
A copy of the Policy is available on our website
at www.lloydsbankinggroup.com/who-we-
are/responsible-business.html 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
pages 25 and 26.
Lloyds Banking Group Annual Report and Accounts 2020
101
Audit Committee report
Ensuring oversight of financial reporting
and the control environment
audit and external audit. These issues are also
discussed in detail on the final page of the report.
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 82 to 83.
Sarah Legg is a Fellow of the Chartered
Institute of Management Accountants and of
the Association of Corporate Treasurers, with
extensive knowledge of financial markets,
treasury, risk management and international
accounting standards. She 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 87.
The Committee undertakes an annual review of
its effectiveness, the review forming 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
2021 meeting. On the basis of the evaluation,
the feedback was that the performance of the
Committee continues to be effective.
While the Committee’s membership comprises
the Non-Executive Directors noted on page 86,
all Non-Executive Directors may attend
meetings as agreed with the Chair of the
Committee. The Group Financial Controller,
Chief Internal Auditor, the external auditor,
the Group Chief Executive, the Chief Financial
Officer and the Chief Risk Officer also attend
meetings as appropriate. Details of Committee
membership and meeting attendance can be
found on page 86.
The strength of the Group's
internal control environment
and our ongoing
commitment to improving
this end to end will be key
in supporting the Group's
ongoing transformation.
Sarah Legg
Chair, Audit Committee
Key activities in 2020
Responding to the pandemic,
including assessing its impact on loan
loss provisions, and other key aspects
of the Group’s financial reporting.
Ensuring the effectiveness of the
Group’s internal control systems, and
of the Group’s Internal Audit function,
key in delivering the Group’s strategic
priorities.
Overseeing the important relationship
with the Group’s external auditor, and
ensuring a smooth transition to our
new external auditor, Deloitte.
Henry to myself, and I would like to take the
opportunity to note my thanks to Simon on
behalf of the Board and the Company for his
excellent work in chairing the Committee over
the preceding three years.
The impacts of the COVID pandemic have been
a key focus during the year across the Group,
and continue to be felt as we go into 2021, and
I am pleased to report that the Committee
has played its part in supporting the Group’s
response to the crisis. I am also pleased to
report that the opinion of the Audit Committee
continues to be that the Company has met its
obligations for financial reporting and disclosure,
and that the internal control framework is both
effectively designed and operated.
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 external 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/
who-we-are/group-overview/corporate-
governance.html. 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 these conclusions.
In addition, the Committee considered a number
of other issues not related directly to financial
reporting, including internal controls, internal
Q&A WITH SARAH LEGG,
CHAIR OF AUDIT COMMITTEE
Q. How has the work of the Audit
Committee (the 'Committee')
supported the Group’s response to
the pandemic?
Having effective controls is invaluable in
times such as these, ensuring we mitigate
the impacts of the pandemic wherever
it’s possible to do so. The Committee’s
work in this regard has therefore been
particularly important. This, along with our
review of the implications of the pandemic
from a disclosure perspective, have been
key contributions to the considerable
Group wide efforts to respond to the crisis.
Q. What have been the other
significant challenges the Committee
has faced this year?
The Committee has spent a significant
amount of time considering the key
judgements in respect of financial
reporting matters, including economic
assumptions. Our oversight of the control
environment and the Group’s internal
and external auditors has had the added
challenge of remote working, where
the response has been both agile and
adaptive. The Committee has continued
to oversee the transition from our existing
external auditor to our new external
auditors, Deloitte, with focus on the 2021
audit plan in support of a smooth transition.
Q. What do you see as the
Committee’s key priorities and
challenges in the coming year?
Assessing the ongoing impact of the
pandemic on the Group’s reporting
and controls will, of course, continue to
be a priority in 2021. In addition to the
Committee’s standing obligations, I
expect there to be increased focus on
the evolving areas of climate-related
disclosures and audit reform. Continuous
improvement in our ability to report in an
agile and well-controlled manner will also
be a priority.
Introduction
I am pleased to report, for the first time
since assuming the role of Chair of the Audit
Committee, on how the Committee has
discharged its responsibilities during what has
and continues to be very challenging times. I
assumed the role of Chair of the Committee
in October 2020, following a comprehensive
handover of responsibilities from Simon
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102 Lloyds Banking Group Annual Report and Accounts 2020
Audit Committee report continued
Financial Reporting
During the year, the Committee has spent a significant amount of time discussing the financial reporting implications of the COVID-19 pandemic,
and in particular its impact upon the Group’s loan loss provisions, the fair value of its financial instruments and the assessment of the carrying value
of its deferred tax asset, goodwill and other intangible assets. These are discussed below in more detail, together with other key issues which have
impacted the Group’s financial statements in 2020.
Activities for the year
Key issues
Committee review and conclusion
Allowance for
impairment
on loans and
advances
Conduct risk
provisions
Going
concern
and viability
statement
Recoverability
of deferred tax
assets
Uncertain tax
provisions
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 the exposure has suffered
a significant increase in credit risk.
The allowance for impairment
losses on loans and advances
to customers at 31 December
2020 was £5,760 million (2019:
£3,259 million).
Management judgement is used
to determine the population likely
to be impacted by conduct risk
matters, the cost of remediation
and, where appropriate, any
related administration costs.
During 2020, the Group made
provisions of £464 million (2019:
£2,895 million), including £85
million for PPI (2019: £2,450 million).
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.
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’s net deferred tax
asset at 31 December 2020 was
£2,696 million (31 December 2019:
£2,622 million).
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.
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.
The Committee has regularly reviewed management’s allocation of exposures
between different stages and considered the appropriateness of the indicators for a
significant increase in credit risk, particularly where customers have been granted a
payment holiday.
The Committee has also reviewed the economic assumptions used to calculate the
impairment allowance as it has been updated during the year to reflect the Group’s
expectations of the impact of COVID-19 as the pandemic has evolved. It has reviewed
the adjustments made by management to the output from the models to confirm the
adjustments were appropriate and had been properly calculated.
Conclusion: The Committee was satisfied that the impairment provision and associated
disclosures, including those recommended by the Taskforce on Disclosures about
Expected Credit Losses, were appropriate. The disclosures relating to impairment
provision are set out in note 18: ‘Financial assets at amortised cost' and note 51: ‘Financial
risk management’ of the financial statements.
In relation to PPI, the Committee has continued to receive regular updates on the
progress being made processing the customer information requests received before
the industry deadline in 2019. These have included operational updates given the
coronavirus pandemic, and an assessment of the continuing adequacy of the provision
held.
In respect of other conduct related matters, the Committee reviewed updates on the
actions being undertaken and the estimated cost to resolve the issues.
Conclusion: The Committee was satisfied with the adequacy of the provisions held
at 31 December 2020 for conduct related issues; the related disclosures are set out in
note 36.
The Committee assisted the Board in determining the appropriateness of adopting
the going concern basis of accounting and in performing the assessment of the
viability of the Company and the Group. These assessments were based on the
Group’s operating plan which considered the implications of the COVID-19 pandemic
on the Group’s performance, projected funding and capital position. The Committee
also took into account the results of the Group’s stress testing activities and the
principal and emerging risks, which are set out on pages 152 to 153, page 57 and
pages 147 to 149 respectively.
Conclusion: The Committee determined that the going concern basis of accounting
was appropriate, advised the Board that three years was a suitable period of review for
the viability statement, and that the viability statement could be provided. The viability
statement is disclosed within the Directors’ report on pages 112 to 113.
The Committee has reviewed management’s assessment of forecast taxable profits
based on the Group’s operating plan, the split of these forecasts by legal entity, and
the Group’s long-term financial and strategic plans. Management’s forecasts included
estimates of both the immediate impact on the economy of the COVID-19 pandemic
and the subsequent economic recovery.
Conclusion: 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 35: ‘Deferred tax’ of the financial statements.
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. In particular, it considered the Group’s claim for group relief
of losses incurred in its former Irish banking subsidiary.
Conclusion: 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 46: ‘Contingent liabilities, commitments and guarantees’ of the financial
statements.
Lloyds Banking Group Annual Report and Accounts 2020
103
Key issues
Committee review and conclusion
Retirement
benefit
obligations
The value of the Group’s defined
benefit pension plan obligations
is determined by making financial
and demographic assumptions,
both of which are significant
estimates made by management.
The Committee reviewed the process used by management to determine appropriate
assumptions to calculate the Group’s defined benefit liabilities. During 2020, these
included the discount rate, the future rate of inflation and expected mortality rates. In
addition, the Committee considered management’s assessment of the impact of the
UK Statistics Authority’s consultation on changes to Retail Price Index on the Group’s
retirement benefit obligations.
Conclusion: 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 34: ‘Retirement benefit obligations’ of the financial statements.
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 workplace pension persistency, annuitant longevity, and expenses.
Conclusion: The Committee was satisfied that the assumptions used to calculate the
VIF asset and liabilities arising from insurance contracts and participating investment
contracts were appropriate. The disclosures are set out in notes 23 and 30.
During the year the Committee reviewed key balance sheet substantiation metrics,
covering ownership of general ledger balances, reconciliation, and independent
quality review status. The Committee noted the improvement in these metrics over
the last few years. The Committee also considered a summary of a small number of
specific key control matters, including remediation thereof.
Consideration was given to the Group’s approach to financial control, which has
been enhanced in the year due to the rollout of a number of thematic initiatives. This
review of the Group’s Financial Control and Reporting Framework focused on areas
such as data and metrics, basis of substantiation, End User Computing and manual
workarounds, 3rd party and non-finance reconciliation activity.
Conclusion: The Committee was satisfied with the approach to Balance Sheet
Substantiation and Control.
Value-In-Force
(VIF) asset
and insurance
liabilities
Balance Sheet
Substantiation
and Control
The defined benefit obligation
at 31 December 2020 was
£49,549 million (31 December
2019: £45,241 million).
Determining the value of the VIF
asset and insurance liabilities
requires management to make
significant estimates for both
economic and non-economic
actuarial assumptions.
At 31 December 2020, the Group’s
VIF asset was £5,617 million (2019:
£5,558 million) and its liabilities
arising from insurance contracts
and participating investment
contracts were £116,060 million
(2019: £111,449 million).
Focus within the Group remains
on operating a strong Financial
Control Framework, ensuring that
appropriate controls are in place.
Balance sheet substantiation
forms a key component of this
framework, with regular reporting
to Senior Management on its
effectiveness. Where control
issues do arise, they are addressed
appropriately.
Balance Sheet Substantiation and
Control forms part of the Group’s
wider risk management process,
detailed on pages 144 to 204.
Regular updates are given to
the Committee on the status of
key balance sheet substantiation
metrics and key control issues.
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104 Lloyds Banking Group Annual Report and Accounts 2020
Audit Committee report continued
Other significant issues
The following matters were also considered
by the Committee.
Risk management and internal control
systems
Full details of the internal control and risk
management systems in relation to the
financial reporting process are given within
the risk management section on pages 144 to
204. 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 (RWA) and regulatory
reporting
In 2019, the Committee commissioned work
to commence on external RWA Assurance
and a programme of agreed internal second
and third line activity. In addition to this,
following the industry wide Dear CEO letter
on Regulatory Reporting, management
also commissioned a programme to review
and strengthen the quality of Regulatory
Reporting across the Group. Management
provided regular updates to the Committee
over the year. These highlighted the progress
made in both the development of a principles
based framework and improvements in
the reporting control environment across a
number of regulatory reports.
Group Internal Audit
In monitoring the activity, role and
effectiveness of the internal audit function and
their audit programme the Committee:
Monitored the effectiveness of Group
Internal Audit and their audit programme
through quarterly reports on the activities
undertaken and a report from the Quality
Assurance function within Group Internal
Audit
Considered the major findings of significant
internal audits, and management’s
response
Monitored the progress of internal audit’s
coverage of key risk themes across the
Group, including Delivery of Strategic
Change, Cyber & Information Security,
Data Management, Operational Resilience,
Third Party Management and Credit Risk
Management
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.
Group Internal Audit reports on its detailed
internal skills assessment including on the
availability of specialist skills. The Group
Internal Audit Quality Assurance function
separately reports to the Committee giving
a view on the adequacy of Group Internal
Audit resource and skills.
Monitored and assessed the
independence of Group Internal Audit
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 continued to
operate 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. In January 2020, the
Committee amended its non-audit service
policy (the Policy) to reflect changes to the
FRC’s rules on auditor independence and to
require Deloitte, who will be appointed as the
Group’s auditors during 2021, to comply with
the Policy.
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. The Policy will be reviewed
again in April 2021. 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 2020 and further information on the
Policy is disclosed in note 12 to the financial
statements.
External auditor
PricewaterhouseCoopers (PwC) has been
the auditor of the Company and the Group
since 1995, and in accordance with legal and
regulatory requirements, will be resigning as
auditor following completion of the audit for
the year ended 31 December 2020. Following
a tender process in 2018, the Committee
recommended to the Board that Deloitte
be appointed as the Group’s auditor for the
financial year beginning on 1 January 2021.
The Committee received confirmation from
Deloitte that it was independent of the
Group as at 1 January 2020 and, as a result,
Deloitte was able to commence its planning
activities in the first half of 2020. During the
year, regular meetings have been held with
Deloitte’s audit engagement team to assist
in its development of the 2021 external audit
plan. The Committee has recommended to
the Board that Deloitte be recommended
for appointment at the forthcoming Annual
General Meeting.
The Committee oversees the relationship
with the external auditor including its terms
of engagement and remuneration, and
monitors its independence and objectivity;
PwC was the Group’s auditor for the year
ended 31 December 2020. 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 2020,
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 Financial Reporting Council’s
(FRC) Audit Quality Inspection Report
published in July 2020. In addition, the FRC’s
Audit Quality Review team reviewed PwC’s
audit of the Group’s 2019 financial statements
as part of its latest annual inspection of audit
firms. The Committee received a copy of the
findings and discussed them with PwC. While
there were no significant findings, some areas
of PwC’s audit procedures were identified
as needing limited improvements only. The
Committee concluded that it was satisfied
with the auditor’s performance.
Statutory Audit Services compliance
The Company and the Group confirm
compliance with the provisions of The
Statutory Audit Services for Large Companies
Market Investigation (Mandatory Use of
Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014 for
the year to 31 December 2020.
Subject to shareholder approval, Deloitte will
undertake the audit of the Company and the
Group for the year ended 31 December 2021.
There are no plans as at the date of this report
to conduct a tender exercise for external audit
services.
Lloyds Banking Group Annual Report and Accounts 2020
105
Board Risk Committee report
Making the right decisions and
doing the right things for customers
Q&A WITH CATHERINE WOODS,
CHAIR OF BOARD RISK COMMITTEE
Q. How has the Board Risk Committee
(the ‘Committee’) responded to the
additional challenges faced during
2020 arising from the pandemic?
A. As identified in the following pages,
the Committee has considered the
impacts of the pandemic on the existing
risk profile, and reviewed actions taken
by management to mitigate. The most
significant areas have included the
financial impacts for our customers,
the wellbeing and resilience of our
colleagues, and ensuring their ability
to continue to safely help and support
our customers.
Q. How is the Committee addressing
risks associated with climate change
which the Group will face?
A. Climate change is a top issue for
the Group and the Committee. The
Committee continues to increase its
focus on climate risk, ensuring that the
Group’s risk management capabilities are
developed at pace. This helps ensure a
proactive response overall, and allows the
Committee to closely monitor impacts
for both the Group and its customers,
together with delivery of climate change
commitments by the Group.
Q. What are the key areas of
focus for the Committee in 2021?
A. The Committee will continue to
consider the following important areas:
Broader impacts of the pandemic on
the Group’s risk profile.
Macroeconomic factors including the
impact from the UK’s exit from the EU.
The treatment of customers in financial
difficulty where increased focus is
required.
The management of Cyber and
Technology risks.
The strengthening of the Group’s risk
culture and control environment.
Effective control of Change and
Execution risk.
Management of strategic and
emerging risks for the Group in
support of the Group’s strategic aims.
be found at https://www.lloydsbankinggroup.
com/who-we-are/group-overview/corporate-
governance.html
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, and the three designated
independent Non-Executive Directors of the
Ring-Fenced Banks also attend. 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.
The Committee undertakes an annual
effectiveness review. This 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 2021 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 86.
As the most senior risk committee in the Group,
the Committee interacts with other related risk
committees, including the executive Group
Risk Committee. These interactions assist with
the agenda planning process, where matters
considered by the Group Risk Committee are
reviewed to ensure escalation of all relevant
matters to the Committee.
The Committee continues to
closely monitor emerging risks,
including those impacted by
the pandemic, and the potential
impacts for both the Group and
its customers
Catherine Woods
Chair, Board Risk Committee
Key activities in 2020
Considering the impacts of the
pandemic on credit quality and
customers in financial difficulty
Focusing on the operational resilience
of the Group and strengthening of the
Group’s control environment
Reviewing the Group’s response to
the heightened People risks, and
colleague impacts, of the pandemic
Continued focus on the Group’s
management of customer
rectifications and complaints
Introduction
I was delighted to take on the role of Chair
of the Committee with effect from 1 January
2021, and am pleased to report on how the
Committee has discharged its responsibilities
throughout 2020.
The past year has been unprecedented with
the impacts of the pandemic being felt by
all. The Group, and the Committee, have
responded to the additional challenges which
this has driven, taking actions to mitigate the
impacts for the Group, and its customers,
wherever possible. These areas, together with
the impacts of EU exit, will continue to be a
key focus for the Committee in the near term.
I would also like to place on record my thanks
to Alan Dickinson and Nick Prettejohn for their
chairmanship of the Committee, particularly
during what has been an unprecedented
year, and for the support provided during the
transition of the Chair role.
Committee purpose
and responsibilities
The overriding purpose of the Committee
is to assist the Group's Board in fulfilling its
risk governance and oversight roles and
responsibilities. 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 is
responsible for reviewing and reporting its
conclusions to the Board on 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 143 to 204.
Full details of the Committee’s responsibilities
are set out in its terms of reference, which can
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106 Lloyds Banking Group Annual Report and Accounts 2020
Board Risk Committee report continued
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 on the
previous page.
As part of this review, certain risks were
identified which required further detailed
consideration, not least of which were the
impacts of the pandemic. Set out below and
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 2020, the Committee continued to
use established sub-committees and fora to
provide additional focus on areas such as IT
resilience and cyber, and stress testing and
recovery planning. These sub-committees
and fora 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. The
Committee also reviewed regular updates
from the Non Ring-Fenced Bank and Insurance
sub-groups, headed up by Lloyds Bank
Corporate Markets plc and Scottish Widows
Group Limited respectively, summarising key
discussions and decisions taken at the relevant
entities’ risk committees.
Activities during the year
Key issues
Committee review and conclusion
Conduct Risk
Customers
in Financial
Difficulty (CiFD)
The Group’s management
of conduct risks, plus
issues associated with
customers in financial
difficulty and customer
vulnerability.
During 2020, the Committee has considered reports on the ongoing activity to improve the
way we support customers experiencing financial difficulties as well as the heightened risks the
increased volume of these customers are facing as a result of the pandemic. The Committee
also recognises the importance of the Group’s strategy for both customers in financial difficulty
and recently bereaved customers, in delivering good outcomes for those most vulnerable,
against a backdrop of continued regulatory focus.
Rectifications
The Group’s
management of customer
rectifications.
Complaints
Climate Risk
Climate risk
Ensuring the Group
is resolving customer
complaints in a timely
and fair manner and
eradicating the causes for
complaints through root
cause analysis.
Climate change,
sustainability and the
impact to the Group
and on our customers.
Frequent reviews have allowed the Committee to assess the plans to support customers in
need with easy access to payment holidays and improved self-support and digital journeys. The
Committee has assessed the risks of introducing strategic changes such as a new vulnerable
customer strategy and new treatments and toolkits while recruiting and training new colleagues
to meet increased collections demand. Regular monitoring of the key changes have been
reviewed by the Committee ensuring that focus is maintained on how changes are improving
customer outcomes.
Conclusion: While the Committee has observed that considerable changes have been made
to improve the treatment of customers in financial difficulty, there will be increased emphasis
throughout 2021 to enhance and improve customer outcomes.
Throughout 2020 the Committee has considered updates on the Group’s rectifications portfolio
performance, with particular interest in reducing the number of customers awaiting remediation.
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 also noted that prioritisation principles were agreed
and implemented to reflect the impacts of the pandemic during the year.
The Committee has also remained close to progress on material rectifications, including
implementation of the recommendations in the Cranston report, arising from the review of the
Group’s management of the HBOS Reading incident.
Conclusion: Root cause analysis and read-across activity continues to improve and embed
across the Group. This will remain a key focus for the Committee in 2021, along with
rectifications impacted by the pandemic.
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.
Conclusion: The Committee is satisfied with the good progress made by the Group in reducing
the causes for customer complaints, and work is underway to address the impacts the pandemic
has had on the Group’s ability to resolve complaints as efficiently as possible.
Climate change and sustainability are established top issues for the Group, elevating climate risk
to a principal risk type in 2020.
Following its specific request, the Committee considered regular detailed updates regarding
the Group’s climate risk management and key developments. The Group is committed to
delivering the Task Force on Climate-related Financial Disclosures (TCFD) recommendations
and is working to ensure compliance with regulatory expectations by end 2021, as well as wider
stakeholder requirements. Accordingly, the Committee continues to ensure that the Group’s risk
management capabilities are developing at pace, and that it is adopting a proactive response to
the challenges, risks and opportunities arising from climate change.
Conclusion: The Committee is satisfied with the progress made in 2020. 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.
Lloyds Banking Group Annual Report and Accounts 2020
107
Key issues
Committee review and conclusion
Financial Risks – covering credit and market risk
Commercial
credit quality
Risks and external threats
to the Commercial credit
portfolio performance,
including pandemic
related impacts, together
with sectors potentially
exposed to the impact of
EU exit and climate risks.
The Committee provided oversight of the Commercial portfolios via regular credit quality
papers, sector deep dives, spotlight reviews and additional pandemic and climate risk updates.
Detailed reviews allowed the Committee to assess risk levels and credit exposures, including
increased pandemic related lending and Government-backed funding granted, as well as levels
of downgrades and clients requiring closer management via Watchlist or Business Support
Unit; noting that pandemic related liquidity and support schemes are likely to be masking
true underlying risk. The Committee noted that defaults are expected to increase as support
schemes unwind.
Retail credit
quality
Risks relating to retail
lending, including
impacts of the pandemic.
Areas such as Retail
Secured lending,
Buy-to-Let, Motor,
Business Banking and
Unsecured portfolios,
together with customer
indebtedness.
Operational Risk
One RCSA
implementation
One Risk and Control
Self-Assessment (One
RCSA) is part of the
Group’s Risk and Control
Strategy to deliver a
stronger risk culture and
simplified risk and control
environment.
Operational
resilience
Operational resilience is
one of the Group’s most
important non-financial
risks, as exemplified
during the pandemic.
The Committee reviewed pandemic impacts and emerging risks across a range of sectors
considered more vulnerable, including non-essential retail, passenger transport, travel agents
and hotels. Other sector concentrations also considered were automotives and commercial
real estate (including Office and Retail commercial real estate), sectors also impacted by the
pandemic and structural changes. Sectors potentially exposed to the impacts of the UK’s exit
from the EU have been identified with credit appetite being adjusted where appropriate.
Conclusion: Proactive risk management and close monitoring continues, with consideration
given to the macroeconomic outlook, and evolving climate risks and opportunities. While
recognising the risks in the portfolio, the Committee were satisfied that management were
continuing to take appropriate action to mitigate and address risks, while preparing to manage
a substantial increase in defaults and clients requiring additional support.
Attention focused on lending controls, risk appetite monitoring, and new lending quality across
Retail portfolios.
Credit performance remained in appetite as economic impacts of the pandemic were mitigated
through Government support and payment holidays. The Committee noted that withdrawal
of these exceptional levels of support was expected to lead to rising arrears in 2021, and that
management had meanwhile taken extensive action to prepare for future risk emergence,
while continuing to ensure provision of credit to the economy. The Group continued to closely
monitor and manage higher risk segments such as customers on payment breaks, those with
reduced incomes due to the pandemic, and those with higher levels of indebtedness.
Owing to guarantees, direct financial risk posed by the Group’s active support for Bounce Back
Loans and Coronavirus Business Interruption Loans was considered manageable, however
customer support and management of future defaults were flagged as future potential issues.
The Committee fully appreciates the Group will take appropriate steps to ensure repayment of
loans from customers.
General economic impacts arising through the UK’s exit from the EU will be addressed through
broad based risk appetite controls, as used successfully through the pandemic. Where
exposures may be at risk through legal uncertainty, additional appetite and lending controls will
also be in place.
Conclusion: The Committee was satisfied that appropriate lending controls and monitoring
were in place to control risks across the Retail lending portfolios, and that actions taken to
manage economic risks were proportionate.
The three lines of defence have worked together to identify improvements to the Group’s
approach to risk management. Following pilot activity, this new approach (One RCSA) is being
adopted across the Group through a phased plan. The Committee supports the revised
approach, the required cultural change to ensure successful adoption, as well as the Group’s
plans for implementation. In light of the pandemic, the Committee gave direction to continue
with the implementation, while recognising that potential pressures on key business resource
may require adjustments to the plan.
Conclusion: All aspects of the 2020 plan for One RCSA have been delivered. The Committee
supports the 2021 plans for capturing the remaining highest risks to customers and the business,
and will continue to review progress on embedding the cultural change and improving the risk
and control environment.
A key focus for the Group in 2020 has been to manage the resilience risks from the pandemic as
well as enhancing the existing approach to operational resilience and strengthening the control
environment, improving the Group’s ability to respond to incidents, and to continue delivering
key services to our customers. Multiple updates were presented to the Committee relating to
the impact of the pandemic covering operational impacts, cyber, fraud and sourcing. 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.
Conclusion: The Committee takes the operational resilience of the Group’s services very
seriously and has drawn valuable insight from the discussions this year. 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.
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108 Lloyds Banking Group Annual Report and Accounts 2020
Board Risk Committee report continued
Key issues
Committee review and conclusion
Data risk
People risk
Data governance,
privacy and data
ethics risks including
oversight of the
Group’s compliance
with the General Data
Protection Regulation
(GDPR), Basel
Committee of Banking
Supervision (BCBS) and
the associated risks and
controls.
Ensuring the Group has
the right capabilities
and culture as we
continue to build the
Bank of the Future.
Data risk continues to be an area of significant regulatory and media attention. The Group has
developed a data management strategy to provide the common framework and direction
required to improve data management across the Group. The Committee is supportive of
this strategy which includes uplifting data quality, simplifying data architecture and enhancing
data governance, in order to mature data capability and deliver a data-first culture, facilitated
by a simplified modern IT architecture. The Committee acknowledges the need for continued
investment in managing risks relating to the ethical use of data, in particular, advanced analytics
and artificial intelligence together with continued monitoring of regulatory developments.
Conclusion: The Group successfully implemented the 2020 Data Risk and Control Library as part
of the One RCSA programme and continues to develop risk metrics to ensure that data risks are
managed within appetite. The Committee supports the 2021 strategy of uplifting data capability in
order to deliver the digital Bank of the Future.
Throughout 2020, there has been heightened attention on the People risk profile in view of the
longevity of the pandemic and the impacts on colleagues. The Group recognises the increased
demands and outside pressures on colleagues, as a result of the pandemic, and there has been
significant focus on colleague wellbeing and resilience in light of prolonged periods of home working.
Particular consideration is given to critical populations and high performing individuals to support
the Group’s core commitments and the retention risk of certain groups of SMEs is being closely
monitored. A strategy for Reimagined ways of working is being developed, and the Committee will
continue to oversee these developments, monitoring closely the impacts on colleague sentiment and
engagement.
Conclusion: The Committee is satisfied that the People risk profile is being managed effectively.
The Committee ensures the necessary risk oversight as the Group manages the impact of the
pandemic, monitors retention, develops new ways of working and develops plans to build the right
skills and capabilities for the future.
Change and
execution risk
Risks associated with
the extensive current
and future Group
strategic change
agenda, recognising
challenges faced
in ensuring both
successful delivery and
embedding of change.
The Group has further matured its ability to define, measure and report execution risk. The
articulation and quantification of this risk continues to be managed through consolidated reporting
of the execution risk dashboard and its related Board Risk Appetite Metrics, as well as through the
implementation of the change and execution risk and control library across the Group. The Committee
considers change and execution risk management within other linked risk types, such as operational
resilience and supplier risks; and when investment activities are discussed. A focus this year has been
effective and efficient reprioritisation of change activity during the pandemic, where execution risks
were proactively managed and enhanced control monitoring was put in place. This ensured safe,
prioritised change activity in 2020.
Conclusion: Change and execution risk has been managed within appetite and will remain an area
of attention for the Committee as the Group moves into its next phase of strategic change.
As the Group further evolves its change delivery approach, control of these risks will continue
to mature, particularly as risk libraries embed within business areas. The Committee will further
consider the interconnectedness of change risk appetite with areas such as technology risk,
supplier risk and operational resilience to support strategic change activities.
EU Exit
planning/
preparedness
The uncertainty
regarding the practical
implications could
affect the outlook for
the UK and global
economy.
The key risks for the Group, including 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, have continued to be closely monitored. When
reviewing the possible impacts, while noting the Group’s strong UK focus and UK-centric strategy, the
Committee has given particular consideration to the treatment of its EU based clients and customers
where continuity of certain aspects of its business has not been permitted.
Fraud
The Group’s
management of fraud
risk, while minimising
the impact of controls
on genuine customer
journeys.
Conclusion: The UK’s ongoing negotiations, the Group’s EU exit contingency plans and risk
mitigation responses have been closely monitored by the Committee via specific regular updates,
covering both operational status and external developments.
The Committee considered the challenging and evolving nature of the fraud risk environment
influenced by factors such as the pandemic, Government-backed lending schemes and the
continuing growth of Authorised Push Payment (APP) scams.
The Committee acknowledged that the Group reduced its market share of fraud, measured
against published industry numbers. With regards to the Government-backed lending schemes,
the Committee takes the Group’s responsibilities with respect to fraud detection very seriously,
and noted that fraud within these lending schemes was within risk appetite and aligned with
market share. The Committee acknowledged the continued investment in fraud defences and
tools, and the work being done with industry bodies to reduce the impact of fraud on customers.
Conclusion: The Committee noted the positive work undertaken in the detection and prevention
of fraud. The Group’s continuous efforts to recognise and protect genuine customer journeys was
acknowledged, as was its strategic plans to reflect the comprehensive nature of the challenge, that
requires both internal evolution and external engagement.
Lloyds Banking Group Annual Report and Accounts 2020
109
Key issues
Committee review and conclusion
Money
laundering
and financial
crime
The Group’s
management of
financial crime risk
considering continuous
legislative change and
regulatory scrutiny.
Other Risk Categories
Regulatory
and legal risk
Emerging and
strategic risk
categories
Managing regulatory
risk within the Group
with a significant
amount of highly
complex and
interdependent
regulatory interactions
managed during 2020,
which will continue to
require management
into 2021. This is in
addition to continuing
to fulfil regulatory
obligations against a
backdrop of industry
wide challenges
faced as a result of the
pandemic and EU exit.
Significance to the
Group of strategic risk,
strategic choices and
ability to effectively
respond to material
changes in internal and
external factors.
The Committee acknowledged the Group’s continued efforts to fight financial crime and to
develop its intelligence capability to ensure that the programme is intelligence-led.
The Committee considered the Group’s response to several high-profile industry money
laundering events such as allegations of money laundering through Baltic banks and the leak
of Financial Crimes Enforcement Network (FinCEN) files and was provided assurance that the
Group’s risk exposure was very low. Finally, the Committee acknowledged the contributions being
made by the Group to the UK Government’s Economic Crime Reform Programme.
Conclusion: The Committee noted satisfaction with the standard of compliance documented
in the Money Laundering Reporting Officer report and acknowledged the action plans in place
across the Group to further enhance the Group’s position. The Committee noted the conclusion of
the investigations into Baltic money laundering and FinCEN files.
The Committee has provided effective oversight and ensured effective controls are in place
to comply with existing regulatory obligations, including greater consideration of these at an
individual legal entity level. The Committee considered regular updates on emerging regulatory
and legal risks and continued to closely monitor a number of significant regulatory change and
oversight programmes to ensure successful execution such as IBOR Transition, CRDIV, BCBS
239, EU exit and customers in financial difficulty. In addition, the Committee has focused on
understanding and oversighting activities undertaken by the Group in response to the pandemic
and EU exit.
Conclusion: The Group places significant focus on complex regulatory changes, as well as
ensuring effective horizon scanning of upcoming trends and evolving risks. The Committee has
discussed the topics raised, and will continue to closely monitor compliance with regulatory
requirements, including ring-fencing, in 2021. Regulatory risk will remain a priority area of focus for
the Committee in 2021.
Strategic and emerging risks are significant sources of risk to the Group. The Committee
recognised this in 2019, elevating strategic risk to a principal risk type. Work has continued through
2020 to refine the Group’s definitions and enhance the framework for managing strategic and
emerging risk. This will continue to be an area of focus in 2021.
The unprecedented events of 2020 have highlighted interconnectivity as a key factor in the
acceleration or amplification of risks. The Committee has considered this, together with emerging
trends influencing our strategic themes and potential consequences of the Group’s strategic
decisions.
The Committee discussed the evolution of risks under the latest strategy refresh and considered
key strategic risk drivers, identified by business leaders as being especially pertinent, warranting
the Committee’s attention. The Committee noted the key findings from the review of strategic and
emerging risk and supported the proposals for evolving the Group’s strategic risk management
framework.
Conclusion: Managing individual risks, as well as the cumulative challenges of connected risks, will
be essential for protecting the Group’s customers, while delivering the Group’s strategic vision.
With this in mind, the Committee supported major work commencing in 2021, for incorporating
risk connectivity into the Group’s strategic risk management framework.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
110 Lloyds Banking Group Annual Report and Accounts 2020
Responsible Business Committee report
Being a responsible business is at the core
of our purpose to Help Britain Prosper
Culture and colleague engagement: The
Board and senior management have a vital role
to play in shaping and embedding a healthy
corporate culture. The Committee received
regular updates on colleague engagement
and the evolution of the Group’s culture
plan, discussing the progress being made in
reimagining ways of working and what can be
done to support colleagues during the current
crisis and what it would take to deliver an
enduring solution post COVID.
Inclusion and diversity: The Committee
received updates on:
proposed actions to enable the Group to
respond to the issues raised by the Black
Lives Matter movement, including key
insights from our Black colleagues
the development of the Race Action plan,
supporting the setting of a 3% target of
Black senior leaders by 2025
our aim to have more women in senior
roles and the representation of colleagues
from Black, Asian and Minority Ethnic
backgrounds at all levels
Helping Britain Prosper Plan: Regular
updates have been provided on performance
against the metrics within the Helping Britain
Prosper Plan, on which a report is provided
on pages 17 and 20 to 31 and further detail is
provided in our 2020 Lloyds Banking Group
ESG Report.
More detail
Board oversight of our accelerated
culture journey
Read more on page 92
Race Action plan
Read more on page 25
Diversity policy
Read more on page 100
Taken together, the effects
of the COVID pandemic and
advancing climate change
bring fundamental shifts in
our economy and society. The
Group’s role is more vital than
ever, and the Responsible
Business Committee will
support the Board in
developing and overseeing the
business’s plans to play its part
in Helping Britain Recover.
Sara Weller
Chair, Responsible Business Committee
for approval the Environmental, Social and
Governance (ESG) Report and the Helping
Britain Prosper Plan. The Committee’s terms
of reference can be found at
www.lloydsbankinggroup.com/who-we-are/
group-overview/corporate-governance.html
Committee composition, skills,
experience and operation
The Committee is composed of
Non-Executive Directors ensuring a broad
spread of differing perspectives, insight
and experience with representatives from
Group Internal Audit and the Chief Operating
Office attending meetings as appropriate.
The Committee met on four occasions in
2020. Details of Committee membership
and meeting attendance can be found
on page 86.
During the year, the Committee met its key
objectives and carried out its responsibilities
effectively, as confirmed by the findings of
the annual effectiveness review, which were
considered by the Committee at its January
2021 meeting.
Key activities in 2020
Charitable Foundations: The Group’s
independent Charitable Foundations do
critical work to tackle disadvantage across the
UK and are often the first responders in a crisis.
The Committee:
met with Paul Streets, Chief Executive
Officer of the Lloyds Bank Foundation
for England and Wales, to discuss how
the Group’s support for the Charitable
Foundations could be magnified at this time
spent time discussing how the Group
planned to provide a broader societal
response to the pandemic crisis
considered the current work on Digital
Skills alongside the Mental Health initiatives
as core responses in the crisis phase
Society of the future: The Committee
considered the development of our Society
of the Future ambitions and the aim to fully
integrate the Group’s societal objectives with
its business objectives which will be key in the
next phase of our Group strategy. Shaping of
the Group strategy was a significant area of
discussion and debate, with regular updates
provided on the direction and the progress of
the strategy. The Committee provided insight
and challenge to the executive on the strategy
and on how the Group could support the
recovery and new economic environment.
Sustainability: The Committee provided
oversight of the overall approach, progress
to date, targets and metrics and provided
input and challenge to the team working
on the sustainability strategy wanting to
understand the methodology more fully and
gain confidence in the proposed approach
and data.
Q&A WITH SARA WELLER, CHAIR OF
RESPONSIBLE BUSINESS COMMITTEE
Q. How do you feel the Group has
responded to the unprecedented
demands on it during the pandemic?
A. The Group moved quickly to support
colleagues so that they could work safely
to serve customers with emergency
loans and repayment holidays to tide
them over the very difficult period.
That support will continue to be vital
as hopefully the situation gradually
improves through the year and
customers look to put their finances back
on an even keel, and plan for the future.
Q. This is your last year chairing the
Responsible Business Committee
(the 'Committee'). What are your
reflections on the last five years?
A. Being a responsible business has
long been core to the Group’s work,
and, since the financial crash a decade
or more ago, the Group has renewed
its focus on its purpose, to Help Britain
Prosper. In this year’s discussions about
the Group’s strategic response to the
Group’s Society of the Future ambitions,
it’s been great to see issues such as
Inclusion & Diversity, helping vulnerable
customers, responding to climate
change and supporting regional growth
through SME lending, digital skills
provision, and housing investment, being
put at the heart of the Group’s plans.
Q, What are the Committee’s
priorities for next year?
A. The Committee will seek to ensure that
the Helping Britain Recover commitments
are fully embedded into business plans,
that these plans stay flexible to respond to
changing needs and that they are actually
delivering real impact for the individuals,
businesses and communities who need
our support the most.
Committee purpose
and responsibilities
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. The Committee provides oversight
and challenge on activities which impact
the Group’s trust and reputation and by
considering and recommending to the Board
Lloyds Banking Group Annual Report and Accounts 2020
111
Directors’ report
Corporate governance statement
The Corporate Governance report found on pages 81 to 110, together
with this Directors’ report, of which it forms part, fulfils the requirements
of the Corporate Governance Statement for the purpose of the Financial
Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR).
Profit and dividends
The consolidated income statement shows a statutory profit
before tax for the year ended 31 December 2020 of £1,226 million
(2019 £4,393 million). The Directors have recommended a final dividend
for 2020 which is subject to approval by the shareholders at the AGM, of
0.57 pence per share totalling £404 million. The final dividend will be paid
on 25 May 2021.
No final dividend was paid in respect of 2019, and no interim dividends
have been paid during 2020. Further information on dividends is shown
in note 43 on page 291 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 2018 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.
Robin Budenberg has been appointed to the Board since the 2020
AGM and will therefore stand for election at the forthcoming AGM.
Sara Weller will retire at the AGM. In the interests of good governance
and in accordance with the provisions of the UK Corporate Governance
Code 2018, 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 82 to 83. 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 2020 up to the
date of this report are shown in the table below:
Catherine Woods
Anita Frew
Juan Colombás
Simon Henry
Robin Budenberg
Lord Blackwell
Joined the Board
Left the Board
1 March 2020
21 May 2020
18 September 2020
30 September 2020
1 January 2021
1 October 2020
As announced in December 2020, António Horta-Osório will step down as a Director of the
Company and as Group Chief Executive on 30 April 2021, to be succeeded by Charlie Nunn,
who will as announced in November 2020, and subject to regulatory approval, join the Group
in August 2021 as a Director of the Company and as Group Chief Executive. As announced in
January 2021, Sara Weller will retire at the forthcoming AGM.
Directors’ and Officers’ liability insurance
Throughout 2020 the Group had appropriate insurance cover in place
to protect Directors, including the Directors who retired during the year
and since year end, 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/investors/financial-
downloads.html
Directors’ indemnities
The Directors of the Company, including the former Directors who retired
during the year and since year end, have entered into individual deeds
of indemnity with the Company which constituted ‘qualifying third-party
indemnity provisions’ for the purposes of the Companies Act 2006. The
deeds indemnify the Directors to the maximum extent permitted by law
and remain in force. The deeds were in force during the whole of the
financial year or from the date of appointment in respect of the Director
appointed during 2020. 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 2020 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 2020 AGM. Shareholders
will be asked to renew these authorities at the 2021 AGM. The authority
in respect of purchase of the Company’s ordinary shares is limited to
7,044,210,261 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 2020 AGM circular.
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 Chair and Group Company Secretary
as soon as they become aware of actual or potential conflict situations.
Changes to commitments of all Directors are approved by 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.
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 this
position. The Board has authorised the potential conflicts and requires
Lord Lupton to recuse himself from discussions, should the need arise.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
Pages
52 to 55
291
82 to 83
82 to 83
115 to 142
145 to 146
144 to 204
298 to 310
314 to 332
1 to 59
26
48
46 to 51
294 to 295
112 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ report continued
Branches
The Group provides a wide range of banking and financial services
through branches and offices in the UK and overseas.
Research and development activities
During the ordinary course of business the Group develops new
products and services within the business units.
Information incorporated by reference
Content
Board of Directors
Summary of Group Results
Group results
Ordinary dividends Dividends on ordinary shares
Directors’
biographies
Directors in 2020
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
291
57 and 183 to
187
188 to 196
287
287
287
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 2020, the Company had been notified by its
substantial shareholders under Rule 5 of the DTR of the following
interests in the Company’s shares:
BlackRock, Inc.
Harris Associates L.P.
Interest in shares
3,668,756,7652
3,523,149,1613
% of issued share capital with
rights to vote in all circumstances at
general meetings1
5.14%
5.00%
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 29 January 2021, which identifies beneficial
ownership of 5,443,120,289 shares in the Company representing 7.7 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 2021 Strategic Review which sets out the Group's customer and
business strategy for the year ahead
The Group’s 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 from
the pandemic, the UK’s recovery thereafter and the UK’s exit from the
EU on the economy and regulatory agenda, and included the volatility
experienced in interest rate markets.
Group, divisional and business unit operating plans are produced and
subject to rigorous stress testing on an annual basis. The planning
process takes account of the Group’s business objectives, the risks taken
to seek to meet those objectives and the controls in place to mitigate
those risks to remain within the Group’s overall risk appetite.
The Group’s annual planning process comprises the following key
stages:
The Board reviews and revises the Group’s strategy, risk appetite and
objectives in the context of the operating environment and external
market commitments
The divisional teams develop their operating plans based on the
Board’s objectives ensuring that they are in line with the Group’s
strategy and risk appetite
The financial projections and the underlying assumptions in respect
of expected market and business changes, and future expected
legal, accounting and regulatory changes are subject to rigorous
review and challenge from both divisional and Group executives
In addition, the Board obtains independent assurance from Risk
Division over the alignment of the plan with Group strategy and the
Board’s risk appetite. This assessment performed by Risk Division
also identifies the key risks to delivery of the Group’s operating plan
The planning process is also underpinned by a robust capital and
funding stress testing framework. This framework allows the Group
to assess compliance of the operating plan with the Group’s risk
appetite
The scenarios used for stress testing are designed to be severe but
plausible, and take account of the availability and likely effectiveness
of mitigating actions that could be taken by management to avoid
or reduce the impact or occurrence of the underlying risks. In
considering the likely effectiveness of such actions, the conclusions of
the Board’s regular monitoring and review of risk and internal control
systems, as discussed on page 95, is taken into account. Further
information on stress testing and reverse stress testing is provided on
pages 152 to 153
In 2020, the operating plan has been subject to revision to reflect
the volatility in the economic environment. This has allowed the
Board to consider in November 2020 a scenario which recognised
the downside impacts from further lockdowns and the positive
aspects from the vaccine rollout, and a further refresh in January 2021
recognising the latest assessment of the economy
The final 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 current plan period. The Board considers
that a three year period continues to present a reasonable degree of
confidence over expected events and macroeconomic assumptions,
while still providing an appropriate longer-term outlook. Information
relevant to the assessment can be found in the following sections of the
annual report and accounts:
The Group’s principal activities, business and operating models
and strategic direction are described in the strategic report
on pages 1 to 59
Emerging risks are disclosed on pages 147 to 149
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 144 to 204
The Group’s approach to stress testing and reverse stress testing,
including both regulatory and internal stresses, is described
on pages 152 to 153
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 2023.
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 the
implications of the COVID-19 pandemic upon the Group’s performance
and projected funding and capital positions and also taken into account
the impact of further stress scenarios as well as a number of other key
dependencies which are set out in the risk management section under
principal risks and uncertainties: funding and liquidity on page 57 and
pages 183 to 187 and capital position on pages 188 to 196. 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.
Scope 1, 2 and 3 emissions
Greenhouse gas emissions
The Group has 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 and its applicable
regulations. Our total emissions, in tonnes of CO2 equivalent, are
reported in the table below. Deloitte LLP has provided limited level ISAE
3000 (Revised) assurance over selected non-financial indicators as noted
by
. Their full, independent assurance statement is available online
at www.lloydsbankinggroup.com/who-we-are/responsible-business/
downloads.html
Methodology
The Group follows the principles of the Greenhouse Gas (GHG) Protocol
Corporate Accounting and Reporting Standard to calculate Scope 1, 2
and 3 emissions from our worldwide operations. The reporting period
is 1 October 2019 to 30 September 2020, which is different to that of
our Directors’ report (January to December 2020). This is in line with the
regulations in that the majority of the emissions reporting year falls within
the period of the Directors’ Report. Emissions are reported based on the
operational control approach.
Lloyds Banking Group Annual Report and Accounts 2020
113
Reported Scope 1 emissions are those generated from gas and oil
used in buildings, emissions from fuels used in UK company owned
vehicles used for business travel and fugitive emissions from the use
of air conditioning and chiller/refrigerant plant. Reported Scope 2
emissions are generated from the use of electricity and are calculated
using both the location and market-based methodologies. Reported
Scope 3 emissions relate to business travel and commuting undertaken
by colleagues, waste and the extraction and distribution of each of
our energy sources – electricity, gas and oil. This year, in light of the
coronavirus pandemic’s impacts on Group operations, we have included
the emissions of colleagues working from home before and during the
pandemic in our Scope 3 totals.
Intensity ratio
Legacy Scope
GHG emissions (CO2e) per £m of
underlying income (Location Based)*
GHG emissions (CO2e) per £m of
underlying income (Market Based)*
Expanded Scope
GHG emissions (CO2e) per £m of
underlying income (Market Based) –
expanded scope**
GHG emissions (CO2e) per £m of
underlying income (Location Based) –
expanded scope**
Oct19-
Sep20
Oct18-
Sep19
Oct17-
Sep18
10.4
11.5
13.0
4.7
5.6
6.2
Oct19-
Sep20
Oct18-
Sep19
Oct17-
Sep18
13.6
15.8
17.3
7.9
9.9
10.6
* Intensities have been restated for 2017-2018 and 2018-2019 to reflect changes to emissions
data only, replacing estimated data with actuals; underlying income figures for those years
have not changed.
**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. Additionally, October 19-Sep 20 scope 3 figures include an allowance for
emissions from homeworkers not previously accounted for, owing to the significant increase
in materiality year to year due to the impacts of coronavirus. Previous years have not been
restated.
This year, our overall location-based carbon emissions were
159,487 tCO2e; a 24 per cent decrease since 2019 and 72 per cent
against our 2009 baseline (legacy scope). Significant reductions were
achieved between October and March of this reporting year. These
are attributable to our programme of environmental action since 2010,
which has delivered a reduction in gas and electricity consumption
through extensive energy management, alongside decarbonisation of
the UK electricity grid from October to March 2020. Further reductions
have been caused by the impact of coronavirus on our operations and
reported emissions. A large proportion of our colleagues worked from
home in 2020 in line with travel restrictions and advice, which has led to
a considerable reduction in both scope 1 and 3 business travel numbers
reported. Group building energy, gas and electricity, also reduces in
part due to the impacts of this operational shift, though impacts are not
as significant.
Our scope 2 market-based emissions figure is zero tCO2e, as we have
procured renewable energy certificates equal to our total electricity
consumption in each of the markets we operate since January 2019.
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther informationStrategic reportGovernanceRisk managementFinancial statementsOther information
114 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ report continued
Carbon Emissions (tonnes CO2e)
Legacy Scope
Total CO2e (market based)
Total CO2e (location based)
Total Scope 1 & 2 (location-based)
– Of Which UK Scope 1 & 2 (location-
based)
Total Scope 1 & 2 (market-based)
– Of Which UK Scope 1 & 2 (market-
based)
Total Scope 1
Total Scope 2 (market based)
Total Scope 2 (location-based)
Total Scope 3
Expanded Scope
Total CO2e (market based)
Total CO2e (location based)
Total Scope 3
Oct19-
Sep20
Oct18-
Sep191
Oct17-
Sep181
71,704
159,487
126,890
101,856
208,495
155,270
116,100
243,028
178,378
126,209
39,107
152,893
48,631
176,676
51,450
38,806
39,107
–
87,783
32,597
47,946
48,246
385
107,025
53,225
49,213
49,505
1,945
128,873
64,650
Oct19-
Sep20
Oct18-
Sep191
Oct17-
Sep181
120,308
208,092
81,202
180,153
286,792
131,522
197,623
324,551
146,173
Global Energy Use (kWhs)
Total Global Energy Use
– Of Which UK Energy Use
Total Building Energy
Total Company Owned Vehicle
Energy
Total Grey Fleet Vehicle Energy2
Oct19-
Sep20
Oct18-
Sep191
Oct17-
Sep181
524,024,822 591,341,929 623,467,500
518,717,523 585,136,101 617,185,723
503,709,548 551,778,914 577,606,213
14,436,436 29,987,906 34,889,251
9,575,109 10,972,036
5,878,838
1 – Restated 2018/2017 emissions data to improve the accuracy of reporting, using actual data
to replace estimates.
2 – Grey fleet refers to colleague and hired road vehicles being used for a business purpose.
Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard (2004). We are
reporting to the revised Scope 2 guidance, disclosing a market-based figure in addition to the
location-based figure.
The measure and report Scope 1, 2, 3 emissions is provided in the Lloyds Banking Group
Reporting Criteria statement available online at www.lloydsbankinggroup.com/who-we-are/
responsible-business.html
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.
Scope 3 emissions reported are disclosed in line with our legacy target, per the 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 ISAE3000 (revised) assurance by Deloitte LLP for the 2020
Annual Responsible Business Reporting. Deloitte’s 2020 assurance statement and the
2020 Reporting Criteria are available online at www.lloydsbankinggroup.com/who-we-are/
responsible-business.html
Energy efficiency
While coronavirus has significantly impacted our energy performance
year on year, we did see a 4 per cent year to year energy consumption
reduction achieved in a 6 month period prior to the impacts of coronavirus,
largely due to our energy reduction initiatives. These initiatives include
an energy optimisation programme; an energy intervention scheme that
includes remote and onsite optimisation and strategic alterations of BMS
and controls systems to match the run hours of plant to core operating
hours and ensure temperature settings are aligned with Group comfort
guidelines. In 2020, 89 deep-dives, 88 onsite optimisations, 13 remote
optimisations and 550 bank holiday programming were completed, which
resulted in a 105 GWh saving. Additionally, the Group saw a 14% year to
year energy reduction in our company owned vehicles energy usage in the
6 month period prior to April 2020, due to our ongoing focus on reducing
business travel.
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 appointment of Deloitte 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, including 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 accounting standards in conformity with the
requirements of the Companies Act 2006. Additionally, the Financial Conduct
Authority’s Disclosure Guidance and Transparency Rules require the Directors
to prepare the group financial statements in accordance with international
financial reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in 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 for the Group
and Company, international accounting standards in conformity with the
requirements of the Companies Act 2006 and, for the Group, international
financial reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union have been followed.
The Directors are responsible for keeping adequate accounting records that
are sufficient to show and explain the Company’s transactions and disclose
with reasonable accuracy at any time the financial position of the Company
and the Group and enable them to ensure that the financial statements
and the Directors’ remuneration report comply with the Companies Act
2006 and, as regards the Group financial statements, international financial
reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as
it applies in the European Union. 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. 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 82 to 83 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 international accounting standards in conformity with
the requirements of the Companies Act 2006 and in accordance with
international financial reporting standards adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union and the Company
financial statements which have been prepared in accordance with
international accounting standards in conformity with the requirements of
the Companies Act 2006, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group and the Company.
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 and the Group’s
position, 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
23 February 2021
Lloyds Banking Group plc
Registered in Scotland, No. SC095000
Lloyds Banking Group Annual Report and Accounts 2020
115
Directors' remuneration report
Remuneration Committee Chair's statement
2020 IN SUMMARY
There are no annual bonus (Group
Performance Share) awards for 2020
Group Chief Executive total
remuneration is down 22 per cent year-
on-year
We have protected the total
remuneration for our lowest paid
colleagues and are awarding
above-inflation pay increases in
April 2021
All eligible colleagues will receive a
£400 recognition share award
2018 Executive Group Ownership Share
vesting at 33.75 per cent reflecting
strong strategic progress
2020. This outcome is in no way reflective of
the hard work, commitment and sacrifice our
colleagues have made throughout the year
to keep our business running and help our
customers.
The Remuneration Committee acknowledges
that colleague reward was considerably
affected by external factors in 2020 and
intends that for fairness, just as colleague
awards absorbed the impact of the fall in
profitability, they should participate in any
recovery in profitability in 2021.
Our wider workforce
Measured against our core principle of
ensuring there is fairness in our remuneration
structure, the Remuneration Committee
has paid particular regard to the impact its
decisions have had for all colleagues. We
made an above inflation pay award to our
lowest paid colleagues in April 2020, and paid
a one-off £250 cash recognition award to
nearly 40,000 predominantly customer-facing
colleagues in July 2020. This means for almost
half of our colleagues, their total remuneration
has stayed flat from 2019 to 2020 despite the
absence of any bonus pool.
For the April 2021 pay review, the average
pay award for our lowest-paid colleagues will
be 1.7 per cent and up to 2.2 per cent again,
above inflation. There are no increases for
Executive Directors.
To recognise further the considerable role
that all colleagues have played in supporting
customers in 2020, and the part they will play
in delivering the next phase of the Group’s
strategy, every permanent eligible colleague
across the Group will receive a £400 share
award. These free shares that vest after three
years ensure that each and every colleague
has a personal interest in the longer-term
success of the Group.
Remuneration Content
Chair's statement pages 115 - 116
Remuneration at a glance page 117
Engaging with our shareholders
and responding to feedback
pages 118 - 119
Other Remuneration disclosures
(Pillar III reporting) pages 138 - 142
Dear Shareholder
On behalf of the Board we are pleased to
present the Directors’ Remuneration Report
for the year ended 31 December 2020.
The unprecedented events of 2020 and the
impact of the coronavirus pandemic have
led the Remuneration Committee to make
decisions on remuneration outcomes that
reflect the experiences of our customers,
colleagues and shareholders. We recognise
the need for restraint in the remuneration
outcomes for Executive Directors and other
senior colleagues, while ensuring additional
support was targeted toward our customer-
facing colleagues in recognition of their
tremendous efforts in continuing to support
our customers.
As we move into the next phase of the
Group’s strategy, we recognise more than
ever the need to incentivise and retain critical
talent while maintaining a direct alignment
to the experience of our shareholders and
responding to the broader societal challenges
we face.
2020 – an unprecedented year
We knew as the pandemic developed that in
order to support our customers in the best
possible way, we would first need to support
our colleagues through the uncertainty that
they were facing. We therefore confirmed in
March 2020 that all colleagues would continue
to be paid in full, no matter how the pandemic
affected them. This meant that colleagues
who were sick or shielding and unable to
work at all, or had to change their working
arrangements for caring responsibilities or
their personal wellbeing, were able to do so
whilst continuing to be paid and receiving the
support they needed.
Members of our Group Executive Committee
confirmed in April 2020 that, regardless of
Group and individual performance through
the remainder of 2020, they would waive their
right to be considered for a bonus award; an
early decision that the Committee welcomed.
Consistent with the framework set by the
Remuneration Committee at the start of
the year, the impact of the pandemic on our
financial results means that there will be no
annual bonus pool (Group Performance Share)
for 2020 as the profit threshold has not been
met. Full details are provided on page 121. In
keeping with our approach to timely, open
and honest communication with colleagues,
we communicated this outcome in December
In this unprecedented year,
we continue to strive for
a simple reward package
with clear alignment to our
purpose that rewards and
drives the right behaviours
and outcomes.
Stuart Sinclair
Chair, Remuneration Committee
Q. How has the Remuneration
Committee and the Group supported
colleagues through COVID-19?
We committed to colleagues that
we would support them during this
unprecedented time. Our priority was to
take away as much uncertainty as possible
when it came to work, their families and
remuneration. This at times meant making
some difficult but important decisions,
but ones we feel were in the interest
of shareholders, colleagues and the
communities we serve.
The Group is continuing to provide
support on mental and physical
wellbeing as well as continuing to pay
colleagues their full salary, no matter
how the outbreak affects what they do
for the Group or what their personal
circumstances are.
In July, 40,000 predominantly customer-
facing colleagues, received a £250 award
to say thank you for the support and to
recognise the incredible commitment
shown to our customers and communities
throughout the pandemic.
Q. How have we responded to
shareholder concerns following the
2020 AGM?
During 2020 in total we engaged with
shareholders representing more than
60 per cent of our register, as well as the
proxy agencies, including both those who
voted 'for' and 'against' our remuneration
resolutions at the 2020 AGM.
I am very grateful to shareholders for
their engagement on a broad range of
remuneration issues including our new
Policy. Following extensive and productive
discussions additional clarity has been
provided regarding the discount applied
to the Long Term Share Plan (LTSP), as
well as detail regarding our simplified
balanced scorecard for 2021.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
116 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
Executive Director
remuneration decisions
and outcomes
The Remuneration Committee considers
the need for significant restraint in respect of
remuneration outcomes. There are no pay
increases proposed for Executive Directors
and only limited awards made to other senior
colleagues where they are paid below market
rate, creating a retention risk.
In order to ensure the continued long-term
motivation and retention of key staff the
Remuneration Committee supported making
awards under the new Long Term Share
Plan (LTSP) introduced at the AGM in May
2020. The LTSP is subject to underpins for
three years, with vesting spread between the
third and seventh anniversary of award for
Executive Directors.
Awards will be granted to a small number of
senior colleagues, to ensure there is alignment
to shareholder experience and retain critical
talent through the next phase of the Group’s
strategic delivery. In deciding to make the
LTSP awards, the Remuneration Committee
has taken into account the Group’s
performance during 2020 (as set out in full on
pages 121 to 122) and the current share price.
The Remuneration Committee carefully
considered the impact of a lower share price
on award sizes in assessing the ‘pre-grant
test’ as outlined and explained in more detail
on page 118. The decision has been taken
that adjusting awards upfront for a potential
increase in the share price over time would not
be appropriate, but instead took the decision
that the level of LTSP awards should be
reduced by 40 per cent to reflect the Group’s
performance in 2020, the current share price
and the wider experience of shareholders.
This in-year adjustment applies in addition
to the 50 per cent discount applied from the
previous long term incentive plan as explained
on page 118. In making this assessment,
the Committee reviewed the scorecard
outcome (see pages 121 to 122) and took into
account the fact that while there has been
weak performance against financial metrics
set before the true impact of the pandemic
was known, the overall performance against
customer and other non-financial metrics
is strong. In particular, the Committee
considered that risk and conduct have
been adequately reflected in the scorecard
outcome and the Group has lived up to its
ambition to be the Best Bank for Customers,
as evidenced by performance against the
Customer and Conduct dimension of the
scorecard, and materially lower conduct-
related costs for 2020. The purpose of the
LTSP is to reward long-term performance
rather than short-term financial outcomes.
There is no LTSP award for the Group Chief
Executive as he will leave the Group in
April 2021. In setting the award size for the
Chief Financial Officer, the Remuneration
Committee considered the award range for
normal performance of 125 per cent to 150 per
cent (see page 132) and considered an award
of 125 per cent was appropriate to reflect
Group and individual contribution in 2020 (see
page 122) alongside the need to incentivise
delivery of the next phase of strategy aligned
to long-term shareholder returns. A further
adjustment of 40 per cent was applied to
scale the award in line with the overall budget
for LTSP awards, resulting in a final award of
75 per cent of salary for the Chief Financial
Officer. This adjustment ensures there is a
consistent approach applied for all recipients of
LTSP awards and supports a ‘one team’ ethos
across the Group’s senior management team.
Full details of the 2021 LTSP award, including
the factors supporting the pre-grant
assessment and the underpins that apply, are
included on page 132.
The Remuneration Committee has been
mindful that in-flight awards made under the
Group Ownership Share plan for performance
in 2019 to 2020 remain in place (and will run
until the end of 2022) and the Committee has
confirmed that there has not been, nor will be,
any softening of the performance measures
for these awards despite the unprecedented
impact of external events and economic
volatility. Under these circumstances, we
believe that re-alignment of these targets
would compromise the alignment of these
awards with the interests of our shareholders.
Strong delivery of the non-financial measures
in the Executive Group Ownership Share
awards made in 2018 resulted in vesting
at 33.75 per cent as shown in the table on
page 123.
Board changes
With the departure of the Chief Operating
Officer in September 2020 and the
announcement of the Group Chief
Executive’s retirement in 2021, supporting
the Board in the search for a new Chief
Executive has been a significant focus for the
Remuneration Committee.
The Committee was mindful of the need to
keep narrowing the gap in total remuneration
between Executive Directors and the wider
workforce, while not compromising on the
quality of the candidate pool. The total
maximum reward package for the new Group
Chief Executive has therefore been reduced
by approximately 20 per cent from the current
Directors’ Remuneration Policy maximum that
was approved at the 2020 AGM and is a total
reduction of over 40 per cent from the Policy in
force until as recently as 2019.
Each component of the package for the new
Group Chief Executive, Charlie Nunn, has been
set in accordance with the approved Policy.
Responding to shareholder
feedback and the challenges
ahead
In addition to our deliberate efforts to
support and reward our colleagues during
this unprecedented time, 2020 has also
marked the first year of implementation of our
updated Directors’ Remuneration Policy. We
welcomed receiving majority votes in support
of both the Policy and Long Term Share Plan,
though recognise that there were a significant
number of votes opposing both these
resolutions. As a result, we have consulted
widely on the changes we are making to the
implementation of the approved Policy in
2021 and thank those shareholders and proxy
agencies that we have met for their feedback.
When designing the new Policy, we thought
carefully about how we could achieve our
core aim of creating a simple reward package
with clear alignment to our Group's purpose
and shareholders’ interests. On page 118
under ‘Engaging with our shareholders and
responding to feedback’, we explain the main
feedback received and our response.
In particular, I would like to draw your attention
to the new approach to the Group balanced
scorecard on page 119 where I hope you
will agree we have taken on board specific
feedback that we should have fewer and
simpler quantitative metrics that have clear
alignment to the purpose of the Group
and shareholders’ interests. We have also
responded to feedback that there should
be specific and identifiable measures of
performance against our inclusion and
diversity objectives (in support of our ethnic
and gender diversity goals) and our long-term
sustainability agenda.
We know that 2021 will not be a normal year
as we start delivering on our revised strategy
and Help Britain Recover, while adapting
to the changing needs of our customers,
colleagues and societal expectations resulting
from the pandemic. We believe that our
balanced scorecard for 2021, which will drive
the reward outcomes for our whole Group
Executive Committee, not just the Group
Chief Executive, ensures that management is
focused as ‘one team’ on the right behaviours
and delivering sustainable results.
Together with my Committee members,
I look forward to hearing your views on the
remuneration arrangements outlined in the
report and hope we will receive your support
at the upcoming AGM.
On behalf of the Board
Stuart Sinclair
Chair, Remuneration Committee
Lloyds Banking Group Annual Report and Accounts 2020
117
2020 Remuneration at a glance
Our remuneration package
The below summarises the different
remuneration elements for Executive Directors.
Single total figure for 2020 remuneration (£000)
António Horta-Osório
Group Chief Executive
William Chalmers
Chief Financial Officer
Base
Salary
Fixed
Share
Award
Pension
Benefits
Short
Term
Variable
Long
Term
Variable
Base Salary
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.
Fixed Share Award
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.
Pension
To provide cost effective and
market competitive retirement
benefits, supporting Executive
Directors in building long-term
retirement savings.
Benefits
To provide flexible benefits
as part of a competitive
remuneration package.
Group Performance
Share (Bonus)
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.
Long Term Share Plan
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 incentivise stewardship
over a long time horizon and
promote good governance
through a simple alignment with
the interest of shareholders.
This replaces Group Ownership
Share Plan/LTIP.
£4,422
Year on year
reduction
£1,518
(22%)
£3,438
£740
£2,904
£2,698
£1,477
£1,477
£766*
£81
£685
2019
2020
2019
2020
Fixed Pay
Short Term Variable
Long Term Variable
* Part year, joined in June 2019
Fixed Pay: includes Base Salary, Fixed Share Award, Pension and Benefits
2018 Executive Group Ownership Share performance
and vesting
Customer satisfaction
(10% weighting)
Statutory economic profit
(25% weighting)
10%
0%
Total
vesting
33.75%
Digital net promoter score
(7.5% weighting)
Absolute TSR
(30% weighting)
7.5%
0%
FCA reportable complaints
(5% weighting)
Cost:income ratio
(10% weighting)
5%
0%
FOS uphold rate
(5% weighting)
Employee engagement
(7.5% weighting)
3.75%
7.5%
2020 Group Performance Share (GPS) Pool
£0m
Underlying profit of £2.2bn was below the threshold required under
our GPS plan rules and so has resulted in no GPS (bonus) pool being
payable in respect of 2020 full year performance.
2020 Group balanced scorecard performance
3.13
Group balanced scorecard performance: Despite the challenging
economic conditions and the resulting impact on our financial
measures, our Group balanced scorecard reflects an otherwise
resilient performance with the score being marginally down on the
prior year score of 3.20. Further details can be found on page 121.
2021 Long Term Share Plan
The Remuneration Committee decided to make an award under the 2021 Long Term Share
Plan to the Chief Financial Officer. In setting the award size the Remuneration Committee
considered an award of 125 per cent was appropriate to reflect Group and individual
contribution in 2020 (see page 122). A further adjustment of 40 per cent was applied,
resulting in a final award of 75 per cent of salary for the Chief Financial Officer.
For additional information see page 132.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
118 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
Engaging with our shareholders
and responding to feedback
We gained support at the 2020 AGM for
the amendments we made to our Directors’
Remuneration Policy and welcomed the
majority votes for both the Policy and Long
Term Share Plan (LTSP). The Policy became
effective for 2020 however we recognise
that there were a significant number of votes
opposing these resolutions indicating that
there were concerns with some aspects of our
policy’s design.
During 2020 we engaged with shareholders
representing more than 60 per cent of
our register, which has provided us with a
thorough indication of the main areas of
concern to reflect on. We value the opinions
of all our stakeholders and thank all our
shareholders, regulators, Unions and others
for their input and collaboration. As a result
we have made some key changes to how we
intend to implement the Policy in 2021 and
beyond that seek to address these concerns
and continue to support our aim of delivering
a simple reward package with clear alignment
to the Group’s purpose. The main concerns
related to the new Long Term Share Plan
and also a simpler performance assessment
approach with clear alignment to reward
outcomes.
1. THE NEW LONG TERM SHARE PLAN
The discount applied
to the new LTSP award
A number of shareholders expressed
concern over the way in which the discount
of 50 per cent from the previous Group
Ownership Share (GOS) was applied to
reach the maximum opportunity under the
new plan. Under the previous GOS plan,
the Remuneration Committee had the right
to grant an award of up to 400 per cent in
exceptional circumstances (for example, in
the context of hiring a new CEO), or where
individual performance had been deemed
exceptional, and therefore the normal
maximum award level under the GOS plan
was 300 per cent. We acknowledge that a
50 per cent discount from that level would
mean that the LTSP policy should provide for
a normal maximum award of no more than
150 per cent.
We have confirmed that the maximum
opportunity for the Group Chief Executive
will be 150 per cent of salary not 200 per
cent. Our Policy maximum will continue
to be 200 per cent, however any awards
made above 150 per cent of salary would be
reserved for truly exceptional circumstances
only, and with clear justification.
The inclusion of the
pre-grant test
A number of shareholders expressed
confusion over the need for, and operation
of, the pre-grant test to determine LTSP
award levels, particularly as other companies
have recently introduced restricted share
plans that do not include this feature.
Under the regulatory requirements that
apply to large UK banks, in order for variable
remuneration to count within the ‘bonus
cap’ for the year of grant it must include in
some way a measure of the performance
of the year of grant, among other gateways
which will normally be conduct risk and
customer outcomes. Under the GOS plan,
this resulted in the possibility of awards
to the Group Chief Executive being lower
than 300 per cent, notably for 2019 when to
reflect the reduction in statutory profit his
award was reduced to 250 per cent. We will
reflect this approach under the LTSP, with
awards, subject to appropriate gateways,
expected to be in the range of 125 per cent
to 150 per cent as shown in the table below.
When considering the use of discretion in
conjunction with the balanced scorecard
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?
These same questions are repeated at
vesting to ensure that performance has been
sustainable, and nothing has subsequently
arisen that would give a different outcome if
known at the point of award.
The use of the balanced
scorecard in determining
LTSP awards
The balanced scorecard will continue to play
a role, however the long-term focus of this
plan means that there would be only limited
variability in the size of the award based on
performance in the year of grant. We expect
that this approach will provide greater clarity
to the way in which awards are determined,
whilst bringing it closer to the ‘restricted
share’ model and reflecting regulatory
requirements. We are now focusing on
how we can improve the simplicity and
transparency of the way in which the
pre-grant test is set out as outlined above.
The following table provides an indication
of scorecard performance outcomes and
resulting LTSP awards. The Remuneration
Committee will use this as a guide although
will make any discretionary adjustment to
the final grant size based on factors that
are considered important outside of the
scorecard.
For 2021 LTSP awards, performance was
measured against the 'old style' scorecard
for 2020, as outlined in full on page 121. The
Remuneration Committee considered that the
performance outcome was at the lower end
of the range of normal performance (a score
of 3 to 4) and accordingly set the award at
125 per cent before adjusting for other factors
in the pre-grant assessment, as outlined on
page 132. By comparison, the award for similar
performance in 2019 under the GOS was
250 per cent, demonstrating a real discount of
50 per cent has been applied.
Scorecard outcomes
Performance outcome
All LTSP grant (up to % of Base Salary)
0% – 50%
0% – 125%
50% – 100%
125% – 150%*
* Awards above 150 per cent and up to 200 per cent in line with Policy maximum reserved for exceptional circumstance or exceptional performance for all eligible colleagues other than the
incoming Group Chief Executive who has agreed to cap his maximum award at 150 per cent of salary.
Lloyds Banking Group Annual Report and Accounts 2020
119
2. A SIMPLE PERFORMANCE ASSESSMENT APPROACH WITH CLEAR ALIGNMENT TO REWARD OUTCOMES
We know that most shareholders would like to see further simplification of the balanced scorecard and the way in which variable pay
awards are decided, with greater weighting to financial performance.
As the Group moves towards a new strategic phase, we have thought carefully about how we should design a new, simplified balanced
scorecard, with the objective of having simple metrics that incentivise the right behaviours and results.
Clearer alignment to purpose
Consistent feedback suggested the
structure of our balanced scorecard with
15 equally weighted measures, made it
difficult for shareholders to determine
how these measures clearly linked to
the Group’s strategy and performance.
Providing equal weighting to all measures
was criticised, with the view that some
measures, in particular the core financial
measures, should have greater influence
on reward outcomes. We have thought
hard about the right choice and balance
of measures for 2021 and have consulted
with a large proportion of shareholders and
other stakeholders to get input into the
design. As a result, we have significantly
reduced the number of measures and
rebalanced the scorecard to ensure there
is a clear weighting between financial and
non-financial metrics while appropriately
capturing ESG and customer dimensions.
In addition all measures are subject to
consideration of risk and conduct.
The targets and the level of performance
achieved, will be disclosed in the 2021
Annual Report and Accounts.
Greater transparency to substantiate our
performance assessment
We have always tried to be as transparent as
possible to disclose all our Group scorecard
measures and what would be required to
meet threshold or maximum performance.
We accept however that the presentation of
our scorecard outputs in the past has made it
difficult for our shareholders to comfortably
come to the same performance conclusion
as the Remuneration Committee using
simply the level of information previously
disclosed. This is particularly the case where
internally-facing measures have been used.
Moving forward we would like to present a
far more qualitative disclosure to support our
predominantly quantitative metrics, to provide
key insights into how the Remuneration
Committee has chosen certain measures and
how performance has been assessed.
We hope you find the disclosure of our old
style 2020 balanced scorecard assessment
on page 121 has improved in this regard and
we will continue to focus on improving the
quality of our disclosure in the 2021 Annual
Report and Accounts when the new scorecard
structure is presented in full.
Clearer pay for performance alignment
We hope the proposed changes will be
supported by our shareholders as they will
provide further clarity that performance
outputs and GPS and LTSP award outcomes
directly align. However, we have also
accepted the feedback that the four step
approach we have used to go from a Group
balanced scorecard score to a final award as
a percentage of maximum for our Executive
Directives could be simplified further.
For 2021, all Executive Directors and the
Group Executive Committee will be assessed
based on the same single Group balanced
scorecard.
This supports a 'one team' ethos in the
Group's leadership team. GPS awards as a
percentage of maximum will then directly
correlate to final performance outcomes. The
Remuneration Committee will continue to be
able to use their discretion to adjust awards
should they believe other factors outside of
the scorecard measures should be considered
when determining a final award and we will
always disclose this rationale as part of the
remuneration report. This judgment may
include consideration of performance against
personal and business area objectives and
long-term strategic ambitions.
Our 2021 balanced scorecard
Financial (50%)
Delivery of core financial measures is key to the sustainability
of our business and to delivering long-term shareholder
value. We have therefore increased the weighting for Financial
measures from 33 per cent to 50 per cent and each of the three
simple measures chosen for 2021 will have their own individual
weighting for additional transparency on pay for performance
alignment.
Measure
Weighting Quantitative
Statutory Profit After Tax
Statutory ROTE
Operating Costs (excl. remediation)
20%
20%
10%
Yes
Yes
Yes
t
c
u
d
n
o
C
/
k
s
i
R
Strategic (50%)
As the Group moves into a new strategic phase (see pages 36
to 45 for full details), focused in 2021 on our ‘Helping Britain
Recover’ priorities, we have chosen four measures that we
consider best demonstrate delivery against and alignment to
our strategic ambitions.
We have consulted widely on the use of ESG metrics and
whether these should be captured within our overall strategy
or separately identifiable. On balance, we have determined
that these measures should be separately identified and
quantifiable to ensure we are specifically held to account for
delivery against these factors. For 2021, we believe this focus
should be ensuring management delivers its commitments
centred around making the Group an inclusive and diverse
workplace and our journey toward delivering zero carbon
operations by 2030. We expect the specific measures for these
commitments to evolve over time, most notably to reflect our
increasing role in supporting the UK’s climate change goals.
Measure
Weighting Quantitative
Helping
Britain
Recover
Reducing operational carbon
emissions
7.5%
Yes
Increasing our gender and ethnic
representation in senior roles
7.5%
Yes
Group Customer Dashboard – our assessment
of how effectively we are serving customers
across all brands, products and services
25%
Yes
Colleague engagement – our performance
relative to external benchmark scores
10%
Yes
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
120 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
2020 annual report on remuneration
Executive Director single total figure of remuneration (audited)
£000
Base salary
Fixed Share Award
Benefits
Pension
Total Fixed Pay
Group Performance Share1
Long-term incentive2,3
Total Variable Pay
Other remuneration4
Buy out
Total remuneration
Less: Performance adjustment
Total remuneration less buy-outs and performance
adjustment
António Horta-Osório
William Chalmers
Juan Colombás
Totals
2020
1,295
1,050
159
194
2,698
–
740
740
2
–
3,440
–
2019
1,269
1,050
166
419
2,904
–
1,518
1,518
2
–
4,424
–
2020
807
504
45
121
1,477
–
–
–
–
–
1,477
–
2019
331
252
19
83
685
81
–
81
–
4,378
5,144
–
2020
572
357
71
85
1,085
–
384
384
–
–
1,469
415
2019
795
497
74
199
1,565
–
843
843
1
–
2,409
–
2020
2,674
1,911
275
400
5,260
–
1,124
1,124
2
–
6,386
415
2019
2,395
1,799
259
701
5,154
81
2,361
2,442
3
4,378
11,977
–
3,440
4,424
1,477
766
1,428
2,409
6,345
7,599
1 The Remuneration Committee set a policy at the start of 2020 that if Underlying Profit was 20 per cent below target, no GPS awards would be payable. The Group’s underlying profit was £2.2bn,
62 per cent below the £5.7bn target. The threshold was not met and therefore there are no GPS awards for 2020 performance.
2 The 2018 Group Ownership Share (GOS) vesting (see page 123) at 33.75 per cent was confirmed by the Remuneration Committee at its meeting on 19 February 2021. The total number of shares
vesting were 2,269,762 for António Horta-Osório and 1,177,883 shares vesting for Juan Colombás. This award was pro-rated to reflect Juan Colombás leaving date. The average share price
between 1 October 2020 and 31 December 2020 32.62 pence has been used to indicate the value. No part of the reported value is attributable to share price appreciation. Shares were awarded
based on a Share price of 68.027, as regulations prohibited the payment of dividend equivalents on awards in 2018 and subsequent years, the number of Shares subject to award was determined
by applying a 25 percentage discount factor to the Share price on award, as previously disclosed.
3 LTIP and dividend equivalent figures for 2019 have been adjusted to reflect the share price on the date of vesting (6 March) 49.48 pence instead of the average price 59.34 pence reported in the
2019 report.
4 Other remuneration payments comprise income from all employee share plans, which arises through employer matching or discounting of employee purchases.
5 In June 2020, the Financial Conduct Authority (FCA) fined the Group for failures in relation to the handling of mortgage customers in payment difficulties or arrears. As a result, the Committee
decided to apply a performance adjustment in respect of bonuses awarded to the Chief Risk Officer (among other senior colleagues) from 2011 to 2015 given his ultimate oversight. The number of
shares adjusted was 68,536, and the value shown is calculated using the relevant deferred bonus award share price for each respective year.
Pension and benefits (audited)
Pension/Benefits £
Cash allowance in lieu of pension contribution
Car or car allowance
Flexible benefits payments
Private medical insurance
Tax preparation
Transportation (Chauffeur)
Subtotal for Total Benefits less pension
António
Horta-Osório William Chalmers
Juan Colombás
2020
194,201
12,000
50,772
20,980
39,600
35,908
159,260
2020
121,028
12,000
31,798
1,130
–
–
44,928
2020
85,456
8,636
23,848
20,980
14,640
3,358
71,462
Defined benefits 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 Group Chief Executive'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 Group Chief Executive 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 on reaching normal retirement
age of 65.
Lloyds Banking Group Annual Report and Accounts 2020
121
Calculating the 2020 Group performance share outcome (audited)
1. Underlying profit
2. Balanced scorecard
assessment
3. Risk and conduct
considerations
Total GPS pool
There are no Group performance share awards payable in respect of 2020 performance
STEP 1
STEP 2
Underlying profit threshold
The threshold below which no Group Performance Share awards were payable remained set at 20 per cent below target Underlying Profit.
The Group’s underlying profit was £2.2bn, 62 per cent below the £5.7bn target set at the start of 2020.
The threshold was not met and therefore there are no GPS awards for 2020 performance.
STEP 1
STEP 2
Measurement of performance against balanced scorecard objectives
Regardless of the Group’s performance against 2020 balanced scorecard objectives, no GPS awards will be payable to colleagues or Executive
Directors as per step 1, but in the interest of transparency, the 2020 balanced scorecard performance assessment is disclosed below.
Individual awards for Executive Directors would have been determined through the assessment of individual performance using the Group
balanced scorecard for the Group Chief Executive, or Divisional balanced scorecards for the Chief Financial Officer and Chief Operating Officer in
conjunction with an assessment of their personal contribution and proactive management of any risk and conduct issues.
A score of 1 – 5 is attributed to each scorecard measure based on its performance relative to target, resulting in an overall score ranging from a
minimum of 1 to a maximum of 5, and hence with 3 being classed as ‘at target’.
2020 Group balanced scorecard
15 equally weighted measures
Financial measures Weighting 33%
Measure
Target
performance
Actual
performance
Performance
score
Performance commentary
Total block
score
Cost:Income Ratio: Total Cost as a % of
net income
48.2%
55.3%
Statutory Profit after tax: Statutory
measure of Group profitability after costs
incl. tax
£4,677m
£1,387m
Capital Build: Basis points of capital
build (excl. intangibles)
181bps
129bps
Statutory Return on Tangible Equity:
Statutory measure of shareholder value
creation
Investment Performance: Measures the
Group’s investment portfolio through 3
lenses of Benefits, Cost and Delivery
12.6%
3.7%
11
8
1
1
1
1
3
The Finance measures were heavily impacted by
COVID-19 and the resulting economic downturn, resulting
in income being £2.1bn below budget.
The most significant impact is seen in the impairment
charge of £4.3billion, which includes £2.9billion not in
budget.
The Group’s balance sheet remains strong, with capital
build of 129bps before dividend accrual (excluding any
benefit from the revised treatment of intangible software
assets or reversal of the FY2019 dividend) and CET1 ratio
remaining well ahead of regulatory requirements.
1.40
The Return on Tangible Equity was impacted by COVID-19
in terms of both lower income and higher impairment
charges as the economic outlook deteriorated.
The Investment Performance measure was impacted
by the Group’s decision to re-prioritise the investment
portfolio and divert resources to support the response to
the pandemic.
Customer measures Weighting 33%
Chosen to align to our KPI's and strategic objective of delivering a leading customer experience. Inclusion of performance against our Helping
Britain Prosper Plan also aligns reward outcomes with our core purpose.
Measure
Customer dashboard outputs:
Assessment of how effectively we are
meeting the needs of customers across
brands, channels and products
Segmented Customer Index: Measures
customer experience and account
growth amongst our targeted segments
Deliver Helping Britain Prosper Plan:
Wide ranging plan with 22 objectives in
support of our Group purpose
Total FCA Complaints per
‘000 customers: Reportable complaints
per ‘000 customers excluding PPI cases
FOS Change Rate (ex PPI): Ensures
focus on customer outcomes by
measuring the complaints referred to the
ombudsman which result in the original
outcome being amended
Target
performance
Actual
performance
Performance
score
Performance commentary
Total block
score
70
74
4.0
5.0
85% of Helping
Britain Prosper
Plan metrics
Green
77.3%
Green
2.64
2.47
29%
26%
4
5
2
5
4
Improvement in Group Customer Dashboard
performance with a score of 74 up from 64 in 2019.
Service NPS scores amongst our targeted customer
segments were up, at 30.7 vs. target of 28.6.
Helping Britain Prosper plan activity was significantly
impacted by the pandemic, but we reported 17 out of 22
measures as ‘Green’.
4.00
Total FCA Complaints were 2.47 per ‘000 customers, well
ahead of the 2.64 per ‘000 target and reflecting an 8.9%
reduction year on year.
FOS change rate of 26% was ahead of the 29% target and
maintains our position ahead of the accepted industry
benchmark of 30%.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
122 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
Colleague and conduct measures Weighting 33%
We believe colleagues are critical to the delivery of the Group’s long-term strategy and measures to understand how our colleagues are feeling
about working for the Group and our commitments to invest in our colleagues and their development have been chosen in support of strategy
to transform our ways of working.
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. The inclusion of conduct metrics in the performance assessment supports this.
Measure
Colleague Culture & Engagement
survey: Combined culture and
engagement score incorporating results
from our Colleague Survey and the
Banking Standards Board survey
Board Risk Appetite: Comprehensive
suite of metrics across all key risk
categories including credit, people and
operational resilience
Change Execution Risk: Designed
to ensure that the Group executes
its broad change transformation
programme safely
Reputation with External
Stakeholders (Including Regulators):
Measure reputation and the
effectiveness of our engagement
across various media, political and
regulatory audiences
Colleagues successfully completing
upskilling/retraining: GSR3 measure to
develop the digital and leadership skills
of the future across the Group
Target
performance
Actual
performance
Performance
score
Performance commentary
Total block
score
71
74
6% Red
metrics
9% Red
Green
>87.5% and
Red < 10%
97.5%
Green and
1.3% Red
8
6
4.75 million
hours
5.28 million
hours
5
2
5
3
5
Significant increase in Colleague Culture & Engagement
survey scores to 74 vs. 69 in 2019, ahead of the UK average
for high performing companies.
Board Risk Appetite was reported with 8 out of 89 (9%)
Red metrics vs. target of 6%.
Change Execution Risk metric performance has remained
stable and strong throughout 2020 with over 97.5%
metrics reported as ‘Green’ compared to target of 87.5%.
4.00
Reputation with external stakeholders was managed
effectively, particularly with political and media audiences
and a positive and strengthening relationship with
regulators.
5.28m colleague development hours successfully
delivered over the 3 years to end 2020, vs. target of 4.75m
hours.
Overall score 3.13
Personal performance and contribution
Personal performance and contribution
Group Chief Executive
António Horta-Osório
The Group Chief Executive’s balanced scorecard assessment for 2020
reflects the Group's scorecard for which he has overall accountability.
Detail of the Group balanced scorecard performance can be found
above.
Chief Financial Officer
William Chalmers
Finance Division scorecard rating
Balanced scorecard category
Customer
Colleague and conduct
Finance
Assessment
4.00
3.29
2.67
Decisive leadership throughout the COVID-19 pandemic, co-ordinating
the Group's wide-ranging response to evolving customer and
colleague needs
Group financial results adversely impacted by pandemic balanced with
strong results across non-financial performance areas
Ongoing improvement in customer satisfaction rankings and Net
Promoter Scores, particularly via digital channels
Improvement in colleague engagement scores, up significantly year on
year, reflecting the support provided to colleagues working in branches
and offices, and the significant number working remotely
Launched the Group’s Race Action plan to ensure greater
representation of ethnic minorities amongst our colleague and senior
leadership populations
Continued strong cost discipline, despite the unprecedented
economic challenges created by the pandemic, with costs £111m below
budget, maintaining market leading operating model efficiency
Strong balance sheet management with CET1 ratio of 16.2%
significantly ahead of regulatory requirements
Prioritisation of the Group’s investment portfolio, ensuring allocation of
resources to support customers through the pandemic
Leadership of culture change initiatives, driving simplification and
greater business ownership of risk management
Successful expansion of accountabilities to incorporate leadership of
Chief Operating Office functions (incl. Group Transformation and Chief
Information Office) following the retirement of Juan Colombás
Overall Score 3.13/5
Overall Score 3.36/5
Lloyds Banking Group Annual Report and Accounts 2020
123
2018 Executive Group Ownership Share (audited)
The 2018 EGOS targets were set at the time of grant three years ago. The outcome against the targets has been influenced by the COVID-19
pandemic which has significantly impacted the macro-economic landscape and in turn our financial performance. The Remuneration Committee took
an early decision not to re-base any in-flight targets or apply upward discretion in terms of vesting outcomes. Although the financial measures have
therefore all vested at zero at the end of 2020, it is reassuring that the non-financial measures have performed so strongly as we believe this reflects our
ongoing strategic progress, our commitment to driving better customer outcomes and to ensuring we continue to build a values led culture among
our colleagues.
Measure (and weighting)
Absolute TSR (30%)p.a.
Statutory economic profit (25%)
Cost:cost/income (10%)
Customer satisfaction (10%)
Digital NPS score (7.5%)
Threshold
8% p.a.
£2,300m
46.4%
3rd
64.0
Maximum
12.0% p.a.
£3,451m
43.9%
1st
67.0
Actual
-15.1%
£688m
55.3%
1st
67.6
Employee engagement (7.5%)
+5% vs. UK norm
FCA reportable complaints per 1,000 (5%)
FOS uphold rate (5%)
2.97
29%
+2% vs. UK high
performing norm
2.69
25%
+6% vs. UK high
performing norm
2.47
26%
Vesting
0%
0%
0%
10%
7.5%
7.5%
5%
3.75%
Award (% maximum) vesting: 33.75%
Payments for loss of office (audited)
Juan Colombás retired as an Executive Director on the 18th September 2020 and retired from the Group. Employees taking retirement are treated as
‘good leavers’ under the Company’s Group Performance Share Plan (GPS Plan) Rules.
He received a payment of £45,188 in lieu of unused annual leave entitlement up to the Retirement Date.
As part of Juan Colombás’ buyout of retirement benefits from his employment with Santander, the Group agreed to make an unfunded promise of
a lump-sum payment of £718,996 at a defined Normal Retirement Age (‘NRA’) of 65. The deed of terms between the Group and Juan provides that
where his service ends before NRA for any reason other than Ill-Health Retirement, Dismissal for Cause or Voluntary Resignation, that the entitlement
to the lump-sum payment continues and will be paid at NRA.
Juan 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. Juan will be provided with Tax Assistance from the Group’s preferred supplier for tax years 2020/2021 and 2021/2022 of up to £15,000 each
tax year. Private medical cover will also be provided until the end of 2020.
In accordance with retirement provisions, Juan has maintained outstanding deferred Group Performance Share awards under the 2017 GPS Plan
(124,370 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 retention periods, malus and, where applicable, clawback and to deductions for national insurance and income tax).
Juan will remain entitled to his Fixed Share Award, time pro-rated to his retirement date. The award is paid in Shares in quarterly instalments and the
final award of £108,125 was made in Shares in September 2020 and restricted over three years.
His outstanding 2018 and 2019 Executive GOS awards will be time pro-rated to his retirement date (2018 becomes 3,490,027 Shares and 2019
becomes 2,573,717 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).
In relation to the 2017 Executive Group Ownership Share which achieved a performance outcome of 49.7 per cent, Juan received the first 20 per cent
of the award in March 2020. The remaining four outstanding tranches will not be time pro-rated as the three year performance period has been
achieved and will continue to vest at the normal vesting times and be released on their scheduled release dates, subject to the relevant terms (as
outlined above).
Juan did not receive an Executive Group Ownership Share for 2020.
No other payment for loss of office were made in 2020.
Payments made to Juan Colombás related to his retirement from the Group and not for loss of office.
Payments within the reporting year to past Directors (audited)
There were no payments made to past directors in 2020.
External appointments
António Horta-Osório – During the year ended 31 December 2020, the Group Chief Executive served as a Non- Executive Director of Exor, Fundacao
Champalimaud, Stichting INPAR Management/Enable and Sociedade Francisco Manuel dos Santos. The Group Chief Executive is entitled to retain
the fees, which were £317, 989 in total.
No other Executive Director served as a Non-Executive Director in 2020.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
124 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
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
2020
2019
Salaries and performance-based
compensation2 £m
(49%)
404
789
2020
2019
(8%)
2,685
2,919
1 In response to the PRA request in March 2020 to cancel capital distributions, the final 2019 dividend was cancelled and accordingly this value has been restated from £2,375m as previously
reported. The Board also took the decision not to make quarterly or interim dividend payments during 2020 in line with the PRA request, however has agreed a final dividend for 2020 of
0.57 pence per share in line with the revised PRA guidance issued in December 2020.
2 Performance-based compensation includes expense for the following plans: Group Performance Share (2020: £81.3m, 2019: £338.5m), Executive Group Ownership Share (2020: £23.3m, 2019:
£30.8m), Executive Share Awards (2020: £0.4m, 2019: £0.6m) and LDC Assets under Management Plan (2020: £12m, 2019: £10m). The expenses for Group Performance Share in 2020 relate to prior
year deferrals. For the 2020 performance year, the face value of awards was £0 for Group Performance Share and £32.9m for the Long Term Share Plan.
Comparison of returns to shareholders and Group Chief Executive 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
Historical TSR Performance
Growth in the value of a hypothetical £100 holding since 31 December 2010 (to 31 December 2020)
0
1
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
200
180
160
140
120
100
80
60
40
20
0
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Dec 2020
Lloyds Banking Group
FTSE 100 index
CEO
GCE single figure
of remuneration
£000
J E Daniels
António
Horta-Osório
2011
855
2012
–
2013
–
2014
–
2015
–
2016
–
2017
–
2018
–
2019
–
2020
–
1,765
3,398
7,475
11,540
8,704
5,791
6,434
6,544
4,424
3,440
Annual bonus/
GPS payout
(% of maximum
opportunity)
J E Daniels
0%
–
–
–
–
–
–
–
António
Horta-Osório
–
62%
71%
54%
57%
77%
77%
67.60%
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%
54%
97%
94.18%
55%
66.30%
68.70%
49.7% 33.75%
–
–
–
–
0%
25.30%
30%
30%
–
0%
–
0%
–
0%
–
0%
–
0%
Notes: J E Daniels served as Group Chief Executive until 28 February 2011; António Horta-Osório was appointed Group Chief Executive 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 and 2020. There are no GPS awards for 2020 performance.
–
–
–
–
–
–
Lloyds Banking Group Annual Report and Accounts 2020
125
Single total figure of remuneration for Chairman and Non-Executive Directors (audited)
Chairman and current Non–Executive Directors
Lord Blackwell
Robin Budenberg CBE1
Alan Dickinson
Anita Frew2
Simon Henry2
Lord Lupton CBE
Amanda Mackenzie OBE
Nick Prettejohn
Stuart Sinclair
Sara Weller CBE
Sarah Legg
Catherine Woods
Fees (£000)
Benefits (£000)3
Total (£000)
2020
2019
2020
2019
2020
2019
773
45
347
120
142
313
165
508
254
207
166
135
758
–
240
356
186
314
156
471
210
203
6
–
12
–
1
–
–
4
–
8
–
3
–
–
12
–
1
1
–
1
–
5
–
4
–
–
785
45
348
120
142
317
165
516
254
210
166
135
770
–
241
357
186
315
156
476
210
207
6
–
1 Robin Budenberg was appointed on 1 October 2020.
2 Anita Frew retired 21 May 2020 and Simon Henry retired 30 September 2020.
3 The Chairman receives a car allowance of £12,000. Other benefits relate to reimbursement for expenses incurred in the course of duties.
4 Non- Executive Directors do not receive variable pay.
Directors’ share interests and share awards
Directors’ interests (audited)
Number of shares
Number of options
Total shareholding1
Value
Unvested
subject to
continued
employment
Unvested
subject to
performance
Unvested
subject to
continued
employment
Owned
outright
Vested
unexercised
Totals at
31 December
2020
Totals at
23 February
2021
Expected value
at 31 December
2020 (£000s)2
Executive Directors
António Horta-Osório
William Chalmers
Juan Colombás3
Non-Executive Directors
Lord Blackwell
Robin Budenberg CBE4
Alan Dickinson
Sarah Legg
Lord Lupton CBE
Amanda Mackenzie OBE
Nick Prettejohn5
Stuart Sinclair
Sara Weller CBE
Catherine Woods
Anita Frew
Simon Henry
23,271,908
3,454,344
11,793,272
373,566 24,806,584
4,927,191
237,342
9,393,097
167,117
68,754
1,857,029
–
150,000
500,410
200,000
200,000
2,250,000
63,567
69,280
362,664
372,988
100,000
450,000
250,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
48,520,812 48,521,859 7
10,475,906 10,475,906 7
21,353,486 21,353,486 7
13,175
2,926
5,696
150,000
500,410
200,000
200,000
2,250,000
63,567
69,280
362,664
372,988
100,000
450,000
250,000
n/a 7
n/a 7
n/a 7
n/a 7
n/a 7
n/a 7
n/a 7
n/a 7
n/a 7
n/a 7
n/a 6,7
n/a 6,7
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1 Including holdings of connected persons.
2 Awards granted under the 2017 GOS vested at 49.7 per cent, awards under the 2018 GOS will vest at 33.75 per cent and all other GOS awards have an expected value of 50 per cent of face value at
grant (in line with the 2017 Remuneration Policy). All values are based on the mid closing price on the 31 December closing price of 36.515 pence.
3 Juan Colombás retired as Chief Operating Officer and an Executive Director with effect from 18 September 2020. The number of shares in respect of any GOS Awards (in line with the applicable
Remuneration Policy) due to vest, will be reduced to reflect the period from the start of the Performance Period to 18 September 2020, date of leaving.
4 Appointed 1 October 2020.
5 In addition, Nick Prettejohn held 400 (6.475 per cent) preference shares at 1 January 2020 and 31 December 2020.
6 Anita Frew retired 21 May 2020 and Simon Henry retired 30 September 2020. Shares held at date of resignation.
7 The changes in beneficial interests for António Horta-Osório (1,047) shares) relate to ’partnership’ and ’matching’ shares acquired under the Lloyds Banking Group Share Incentive Plan between
31 December 2020 and 23 February 2021. There have been no other changes up to 23 February 2021. Non-Executive Directors are not eligible to participate in these schemes, therefore, changes
non-applicable.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
126 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
Outstanding share plan interests (audited)
At 1 January
2020
Granted/
awarded
Dividends
awarded
Vested /
released /
exercised
At 31
December
2020
Exercise
price
Lapsed
Exercise periods
From
To
Note
5,318,685
6,725,221
7,685,276
António Horta-Osório
GOS 2017-2019
GOS 2018-2020
GOS 2019 - 2021
GOS 2020 - 2022
Deferred GPS awarded in 2018
388,822
Deferred GPS awarded in 2019 1,120,694
14,554
2016 Sharesave
21,728
2017 Sharesave
2019 Sharesave
17,336
2020 Sharesave
–
–
–
8,281,379
–
–
–
–
–
29,690
William Chalmers
GOS 2020-2022
Deferred GPS awarded in 2020
Share Buy-Out
2020 Sharesave
4,927,191
316,456
–
–
–
46,317
1,457,748
1,124,627
686,085
85,082
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Juan Colombás
GOS 2017-2019
GOS 2018-2020
GOS 2019 -2021
Deferred GPS awarded in 2018
Deferred GPS awarded in 2019
2016 Sharesave
2,951,987
3,807,302
4,412,086
176,108
501,341
29,109
–
–
–
–
–
–
47,222
–
–
–
–
–
528,677 2,675,300 2,114,708
– 6,725,221
– 7,685,276
– 8,281,379
–
–
14,554
–
–
–
–
–
–
388,822
747,128
–
–
–
–
373,566
47.49p
51.03p
21,728
17,336
39.87p
29,690 24.25p
–
79,114
1,457,748
–
–
– 4,927,191
237,342
–
–
– 1,124,627
686,085
–
30/06/2020
01/01/2020
01/01/2021 30/06/2021
01/01/2023
30/06/2023
01/01/2024 30/06/2024
28/01/2020 27/01/2025
28/01/2021 27/01/2026
28/01/2022 27/01/2027
–
–
46,317 24.25p
01/01/2024
30/06/2024
293,427 1,484,851 1,173,709
– 3,807,302
– 4,412,086
–
167,117
–
–
124,370
334,224
–
51,738
–
29,109
47.49p
01/01/2020
30/06/2020
1,2,3
3
3
3,4
10
11
5
3,4
6
7
7,8
7
7
1,2,3
3,9
3,9
10
11
5
1 The shares awarded in March 2017 vested on 6 March 2020. The closing market price of the Group's ordinary shares on that date was 45.68 pence. Shares vested are subject to a further two-year
holding period. Remaining shares will vest over a period of 4 years and are subject to holding periods.
2 2017 GOS award was eligible to receive an amount equal in value to any dividends paid during the performance period. Dividend equivalents have been paid based on the number of shares
vested and have been paid in shares. The dividend equivalent shares were paid on 6 March 2020. The closing market price of the Group's ordinary shares on that date was 45.68 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 In 2020, awards (in the form of conditional rights to free shares) were made with a value of 250 per cent of salary for António Horta-Osório (8,281,379 shares with a face value of £4,093,453) and
237.5 per cent for William Chalmers (4,927,191 shares with a face value of £2,435,491). No award was made to Juan Colombás. The share price used to calculate face value was 49.429 pence, the
average mid market closing share price over the five days prior to grant (27 February to 4 March 2020). As regulations prohibit the payment of dividend on such awards, the number of shares
awarded has been determined by applying a share price adjusted to exclude the value of estimated future dividends (38.3175 pence).
5 2016 Sharesave options were not exercised due to the prevailing share price and lapsed on 1 July 2020.
6 Part of GPS deferred into shares. The face value of the share awards in respect of deferred GPS granted in March 2020 was £156,423 (316,456 shares) for William Chalmers. The share price used to
calculate the face value is the average price over the five days prior to grant (27 February to 4 March 2020), which was 49.4296 pence. António Horta-Osório and Juan Colombás waived their 2019
GPS The first tranche vested on 6 March 2020 the closing market price of the Group's ordinary shares on that date was 45.68 pence. Shares vested are subject to a further one-year holding period.
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 William 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 (GOS), 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 GOS 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 27 January 2020 and William Chalmers exercised on 6 March 2020. The closing market price of the Group’s ordinary shares on that date was 45.68 pence. Mr Chalmers retained
all the shares apart form 685,366 shares which were sold to meet income tax and National Insurance contributions. 176,593 shares are subject to a six month holding period and 595,789 shares are
subject to a 12 month holding period from the date of vesting on 27 January 2020.
9 The number of Shares in respect of the 2018 and 2019 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
(18 September 2020) at the point of vest in accordance with the appropriate plan rules.
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 and
(704,426 shares) for Juan Colombás. The share price used to calculate the face value is the average price over the five days prior to grant (27 February to 5 March 2019), which was 63.052 pence.
The final tranche of this award vested on 6 March 2020. The closing market price of the Group’s ordinary shares on that date was 45.68 pence. 50 per cent of the final tranche is subject to a one year
holding period. The Financial Conduct Authority (FCA) fined the Group for failures in relation to the handling of mortgage customers in payment difficulties or arrears. As a result the Chief Risk
Officer had a total adjustment of 68,536 shares (16,798 shares were adjusted in relation to the award made in 2017 and 51,738 shares adjusted in relation to the award made in 2018).
11 Part of GPS is deferred into 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 and
(668,453 shares) for Juan Colombás. The share price used to calculate the face value is the average price over the five days prior to grant (27 February to 5 March 2019), which was 63.052 pence.
The second tranche of this award vested on 6 March 2020. The closing market price of the Group’s ordinary shares on that date was 45.68 pence. 50 per cent of the final tranche is subject to a one
year holding period.
Lloyds Banking Group Annual Report and Accounts 2020
127
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 Group Chief Executive 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 2020, the Group Chief Executive continued to meet his shareholding requirements, as detailed within the illustration below.
The Chief Financial Officer currently holds 153 per cent of his salary in shares and has until 2 June 2022 to achieve the requirement. At the time of his
departure in September 2020 the Chief Operating Officer, Juan Colombás held 531 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.
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.
António Horta-Osório
Shareholding requirement
Actual shareholding1
Juan Colombás
Shareholding requirement
Actual shareholding1
William Chalmers
Shareholding requirement2
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%
531%
130
260
390
520
650
780
910
1040
1170
1300
250%
153%
350%
643%
1 Calculated using the average share price for the period 1 January 2020 to 31 December 2020 (35.79 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.
2 The Chief Financial Officer has until 2 June 2022 to achieve the requirement.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
128 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
2020 Group Ownership share performance measures (for awards made in March 2020) (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 2022
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
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 2022 markets
norms
1 A measure of profit taking into account expected losses, tax and a charge for equity utilisation.
Threshold: 3rd
Maximum: 1st
Threshold: 65.3
Maximum: 68.3
Threshold: 2.65
Maximum: 2.52
Threshold: 30%
Maximum: 25%
Threshold: £1,965m
Maximum: £2,948m
Threshold: 46.4%
Maximum: 43.9%
Threshold: 8%
Maximum: 16%
Threshold: +5% vs. UK Norm
Maximum: +2% vs. UK High
Performing Norm
10%
7.5%
10%
15%
10%
40%
7.5%
Chair and Non-Executive Director fees in 2020
The annual fee for the Chair will remain at £618,230 and there will be no increase in Non-Executive Directors fees for 2021, in line with executive
population.
2021
2020
Basic Non-Executive Director fee
Deputy Chair
Senior Independent Director
Audit Committee Chair
Remuneration Committee Chair
Risk Committee Chair
Responsible Business Committee Chair
IT Forum Chair
Audit Committee Member
Remuneration Committee Member
Risk Committee Member
Responsible Business Committee Member
Nomination and Governance Committee Member
Non-Executive Directors may receive more than one of the above fees.
£81,200
£81,200
£106,000 £106,000
£63,600
£74,300
£74,300
£74,300
£42,400
£42,400
£34,000
£34,000
£34,000
£15,900
£15,900
£63,600
£74,300
£74,300
£74,300
£42,400
£42,400
£34,000
£34,000
£34,000
£15,900
£15,900
Lloyds Banking Group Annual Report and Accounts 2020
129
Group wide remuneration
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 Group Chief Executive. For 2020,
69,147 colleagues were included in this category.
All employees4
Executive Directors
António Horta-Osório
Juan Colombás
William Chalmers
Non-Executive Directors
Robin Budenberg CBE
Alan Dickinson
Simon Henry
Sarah Legg
Lord Lupton CBE
Amanda Mackenzie OBE
Nick Prettejohn
Stuart Sinclair
Sara Weller CBE
Catherine Woods
% change in
base salary/fees
(2019 to 2020)
2.4%2
% change in GPS
(2019 to 2020)
% change in benefits
(2019 to 2020)
(100)%2,3
2.4%2
2%
0%
2%
NA
2%
2%
2%
2%
2%
2%
2%
2%
2%
0%1,3
0%1,3
(100)%1,3
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2%
0%
2%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1 Reflects the increase in base salary from 1 January 2020 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.
3 The Remuneration Committee set a policy at the start of 2020 that if Underlying Profit was 20 per cent below target, no GPS awards would be payable. The threshold was not met and therefore
there are no GPS awards for 2020 performance.
4 Lloyds Banking Group is not a contracting entity but considered this population to be appropriate for purposes of a 'All employees' calculation.
Gender pay
While we have further reduced the mean pay gap this year to 30.5 per cent from 32.8 per cent in 2017 the pay gaps are still larger than we would like.
Our ambitious goal of women comprising 40 per cent of our senior management by the end of 2020 has seen us advance from 27 per cent in 2014 to
37 per cent at the end of 2019. This demonstrates the significant progress we have made, and it would not have happened without the goal and all the
measures we put into place. Further information is available at https://www.lloydsbankinggroup.com/assets/pdfs/who-we-are/responsible-business/
downloads/lbg-gender-pay-gap-report-2019-20.pdf/lloydsbankinggroup.com)
Mean pay gap
%
2020
2019
Mean bonus gap
%
30.5%
30.9%
2020
2019
62.5%
64.2%
Ethnicity pay
While there is currently no legal requirement to publish Ethnicity Pay Data in the UK, we are publishing this data not only because it is the right thing to
do, but it also holds us to account for the goals we have set.
On average, and at all grades within Lloyds Banking Group, our Black, Asian and Minority Ethnic colleagues are not paid less than White colleagues.
Instead our Ethnicity pay and bonus gaps reflect our organisational makeup. Further information is available at https://www.lloydsbankinggroup.com/
who-we-are/responsible-business/inclusion-and-diversity/ethnicity/ethnicity-pay-gap-report.html
Mean pay gap
%
2020
Mean bonus gap
%
6.8%
2020
2019
26.3%
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
130 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
Chief Executive Officer pay ratio
The Remuneration Committee views pay ratios as a useful reference point to inform policy setting, but also takes into consideration a number of other
factors. The table below shows the ratios of the Group Chief Executive’s total remuneration to the remuneration of colleagues since 2017. The change
in the pay ratios for 2020 is explained in more detail below.
Year
Methodology
P25
(Lower Quartile)
P50
(Median)
P75
(Upper Quartile)
P25
(Lower Quartile)
Total Compensation
A
A
A
A
2020
2019
2018
2017
Y-o-Y
(2019 v 2020)
Notes to the table:
132:1
179:1
237:1
245:1
95:1
128:1
169:1
177:1
(26%)
54:1
71:1
93:1
97:1
103:1
114:1
113:1
113:1
Fixed pay
P50
(Median)
P75
(Upper Quartile)
42:1
47:1
48:1
48:1
75:1
82:1
81:1
82:1
(9%)
The 2020 total remuneration for the colleagues identified at P25, P50 and P75 are as follows: £26,135, £ 36,165, £63,522
The 2020 base salary for the colleagues identified at P25, P50 and P75 are as follows: £22,617, £31,953, £53,857
The P25, P50 and P75 colleagues were determined on 31 December 2020 based on calculating total remuneration for all UK employees for the 2020
financial year. Payroll data from 1 January 2020 to 31 December 2020.
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 has
been calculated for 64,767 UK colleagues within the Group for a full year including full-time equivalent base pay, 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 2020 and 31 December 2020 (32.62 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.
Due to operational constraints, the calculation of the colleague Pension Input Figure excludes inflationary adjustments for those on the defined
benefit scheme. The omission of this factor does not materially affect the outcome of the ratio and/or distort the validity of the valuation.
All other data has been calculated in line with the methodology for the single total figure of remuneration for the Group Chief Executive.
The median ratio has decreased 26 per cent year-on-year. The reduction can be attributed to the decision not to make awards under the Group
Performance Share Plan; the reduction in the performance of vesting LTIP; reduced performance in the vesting of the 2018 Group Ownership plan
compared to 2017 and the reduction in the Group Chief Executive's pension allowance from 33 per cent to 15 per cent of salary.
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 and the impacts of Group performance
and collective adjustment which has resulted in a reduction in the bonus pool. 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. 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, 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 2021, the pay budget has been set at 1.2 per cent, with the vast majority of colleagues receiving an above inflation pay increase. In addition a
minimum pay award of £400 will apply for all eligible colleagues and pay awards of up to 2.2 per cent for the lowest paid colleagues. There was no pay
budget for senior colleagues.
We believe our approach to pay progression has contributed to the reduction of the 2020 median pay ratio and supports reducing the gap between
executive and wider colleague pay over time.
We are proud to be an accredited Living Wage employer since 2015, and from April 2021 we will go further and raise the minimum salary for all full-
time colleagues to £18,385, reflecting a rate of £10.10 per hour which is 16 per cent greater than the National Living Wage1 and 60 pence greater than
current Living Wage Foundation’s UK wide real Living Wage2.
1 National Living wage rate of £8.72 per hour
2 National Real Living Wage rate of £9.50 per hour
Lloyds Banking Group Annual Report and Accounts 2020
131
Implementation of the policy in 2021
The 2020 Directors’ Remuneration Policy was approved at the 2020 AGM in May. The Group proposes to operate the
policy in the following way for 2021. No decisions have been reached on how the current Group Chief Executive will be
treated for variable remuneration during 2021 (prior to departure), and this will be communicated in the normal course of
business during 2021.
Base Salary
The Group has applied a total pay budget of
1.2 per cent including a minimum pay award
of £400 for eligible colleagues. The approach
focuses on lower paid colleagues and
colleagues lower in their pay range.
It was agreed that no salary increases would
apply for the Group Chief Executive (GCE)
and Chief Financial Officer (CFO).
Salaries will therefore be as follows:
Current Group Chief Executive: £1,294,674
Chief Financial Officer: £810,837
Incoming Group Chief Executive
Salary: £1,125,000 a reduction of 13 per cent
compared to current incumbent.
Fixed Share Award
Awards remain unchanged from 2020
as follows:
Current Group Chief Executive: £1,050,000
Chief Financial Officer: £504,000
Pension
Pension allowances for all Executive
Directors is set at 15 per cent of base salary.
Any new Executive Director appointments in
2021 will also attract a maximum allowance
of 15 per cent of base salary, this include the
incoming Group Chief Executive.
Shares will be released in equal tranches
over three years. (See page 135 for further
details).
Incoming Group Chief Executive
Fixed Share Award: £1,050,000 no change
compared to current incumbent.
Over 50,000 colleagues participate in the
Group’s Defined Contribution (DC) Pension
scheme where the maximum opportunity
for the workforce is 15 per cent of base
salary. Executive Directors employer
pension contributions are therefore aligned
with those available to the majority of the
workforce.
In addition to the DC arrangement, the
Group currently has almost 14,000 active
members in defined benefit plans, with the
effective cost of employer contributions into
these arrangements being 38 per cent of
salary.
Benefits
Benefits remain unchanged from 2020.
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.
Group Performance Share (Bonus)
The performance measures for determining
any individual 2021 Group Performance
Share awards for Executive Directors are
outlined in the 2021 balanced scorecard
below.
Individual maximum opportunities for
Executive Directors remain unchanged from
2020 at 140 per cent of base salary for the
current and incoming Group Chief Executive
and 100 per cent for other Executive
Directors.
Individual awards as a percentage of
maximum will directly correlate to the overall
performance assessment outcome.
For the 2021 performance year, any Group
Performance Share opportunity will be
awarded in March 2022 in a combination of
cash (up to 50 per cent) and shares.
In accordance with the Policy, deferral
and vesting of any Group Performance
Share awards will be structured so that in
combination with any award under the Long
Term Share Plan, there will be a deferral of
variable remuneration in line with applicable
regulatory requirements (currently requiring
a deferral of 60 per cent of variable
remuneration for executive directors).
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
132 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
Long Term Share Plan
It is an important feature of the LTSP that
performance is assessed and appropriately
recognised upfront in the award size as there
are no performance conditions that apply
after the award is granted (only underpins –
see below). This is not however a mechanical
outturn, as with GPS, and the Remuneration
Committee may exercise its judgement.
Pre-grant test
The decision to award Long Term Share Plan
awards for 2021 is based on the performance
assessment from the 2020 balanced
scorecard provided on page 121.
The Remuneration Committee concluded
that the Group’s score of 3.13 (out of 5) and
specifically the performance of non-financial
and strategic components within the
scorecard which remain strong, supported
making awards at the lower end of the
range for normal expected performance
(125 – 150 per cent of salary for Executive
Directors). However, the Remuneration
Committee considers that restraint should be
shown in any reward for 2020 performance,
and therefore has reduced the award
recommended for the Chief Financial Officer
from 125 per cent of salary to 75 per cent
of salary. This reduction of 40 per cent
is consistent with awards made to other
members of senior management and applies
in addition to the 50 per cent discount
applied in setting the policy maximum when
converting from the old LTIP to the new LTSP
awards. There is no award for the Group Chief
Executive.
In deciding to make this reduction in award
size, the Group’s share price was considered,
as well as the following three questions:
Do the Group’s financial results and capital
position adequately reflect risk, conduct
and any other non-financial considerations,
including ESG?
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 concluded that the Group’s
strong capital position, positive reputation
through 2020 and the support for customers
and businesses during 2020 supported the
making of awards. Risk was well managed and
there was a material reduction in conduct-
related costs. The Committee noted that
there was still work to do toward achieving
the Group’s gender and diversity goals, but
felt comfortable that these were reflected
in stretch targets in the 2021 balanced
scorecard.
Underpins
The underpins that will apply to the 2021 LTSP
awards are:
CET 1 ratio – Group CET1 ratio above the
guided management target each year,
including all regulatory buffers
ROTE – Group ROTE exceeds the average
for UK peer banks over the three years
Ordinary Dividend – Increased ordinary
dividend payments over the plan period
(subject to any further sector-wide
regulatory constraints).
The peer comparator group for the ROTE
underpin is set at Barclays Group PLC,
HSBC Holdings PLC, Natwest Group PLC,
Santander UK PLC and Virgin Money UK
PLC. ROTE will be measured on the new
basis adopted from 2021 and will take into
account adjustments (as appropriate) for
methodology differences between peers
and any other factors the Remuneration
Committee considers should reasonably be
reflected, including relative under or out-
performance or change in business mix.
Awards will not be subject to further
performance conditions however vesting
will be subject to three underpins thresholds
applicable for the first three years from grant.
Each year the Remuneration Committee
will monitor the Group’s progress in relation
to the underpins. An assessment will be
made at the end of the three year period to
determine whether the underpins have been
successfully maintained over the three years
and to what extent the LTSP award should
vest. The Remuneration Committee also will
retain the right to consider other factors and
apply discretion prior to making a decision
on vesting.
Pre-vest test
In conjunction with the assessment of
performance against the underpins, the
Remuneration Committee will consider the
three core questions above to satisfy itself
that the performance considered in the
pre-grant test has been sustainable. The
Remuneration Committee will retain the right
to consider other factors and apply general
discretion in making a decision on the vesting
of awards. This approach helps to avoid
any potential unintended outcomes that
might arise from the application of formulaic
performance criteria in the underpins and
ensure that there is a fair outcome. The
Committee will explain its reasons for
applying discretion in either direction, or for
not doing so
Incoming Group Chief Executive
Salary:
see table above
Fixed Share Award:
see table above
Pension:
15 per cent of salary, in accordance with the
level set in the Directors' Remuneration Policy
that aligns with arrangements for the majority
of the workforce.
Group performance share:
Maximum Group Performance Share award
of 140 per cent of base salary.
Long Term Share Plan:
Maximum award of 150 per cent of base
salary.
Buy out / lost opportunity award:
On appointment, Mr. Nunn will be granted
deferred cash and share awards to replace,
like for like, unvested HSBC awards that are
forfeited as a result of him joining Lloyds
Banking Group. The awards to be granted
match the vesting and retention period
attached to the awards being forfeited.
In addition, to acknowledge the loss in
expected bonus awards from HSBC for the
2020 performance year, a 'lost opportunity'
bonus award will be made on hire or as soon
as reasonably practicable thereafter. The
value of this award will be calculated by
reference to the 2019 bonus, adjusted as
appropriate by reference to HSBC's total
Group bonus pool as disclosed in their 2020
Annual Report and Accounts. The awards
granted will be delivered in a mixture of
cash and shares in accordance with the rules
generally applicable to Lloyds Banking Group
awards.
Details of these awards will be published
during 2021.
Total reward:
The total maximum reward package for the
incoming Group Chief Executive has been
reduced by approximately 20 per cent from
the current Directors’ Remuneration Policy
maximum that was approved at the 2020
AGM and is a total reduction of over
40 per cent from the Policy in force until as
recently as 2019.
Lloyds Banking Group Annual Report and Accounts 2020
133
2021 Group Performance Scorecard
The performance measures for determining
any 2021 Group performance share awards
and 2022 long term share plan awards for the
Executive Directors are shown in the table
below.
The measures and targets are set annually
by the Remuneration Committee to reflect
the strategic priorities of the Group and take
into account both the annual financial plan
and operating plan against the backdrop of
the rapidly evolving external economic and
societal landscape.
Quantitative financial measures make
up 50 per cent of the scorecard, with the
remaining 50 per cent made up of strategic
measures assessed by the Remuneration
Committee using quantitative inputs.
When determining the final outcome, the
Remuneration Committee may consider any
personal or business area objectives and
whether there has been effective, consistent
and proactive risk management and conduct
outcomes across all dimensions.
When assessing performance, the
Committee can exercise its judgment to
determine the appropriate outcome. This
helps to avoid any potential unintended
outcomes that might arise from the
application of formulaic performance criteria.
Proposed measures and weightings
Targets
Targets will be disclosed
retrospectively in the 2021 Annual
Report alongside the level of
performance achieved, as the
Remuneration Committee considers
such targets to be commercially
sensitive. However a target range has
been set in line with our operating
plan and, where applicable, forward-
looking guidance.
Measures of strategic non-financial
performance have been agreed by the
Remuneration Committee to evaluate
performance during 2021.
Statutory profit after tax
50%
Financial
Statutory ROTE
t
c
u
d
n
o
C
/
k
s
i
R
Operating costs (excl. remediation)
Reducing operational carbon emissions
50%
Strategic
Increasing our gender and ethnic representation in
senior roles
Customer Dashboard – our assessment of how
effectively we are serving customers across all
brands, products and services
Culture and colleague engagement – our
performance relative to external benchmark scores
20%
20%
10%
7.5%
7.5%
25%
10%
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 variable remuneration
opportunity for the relevant period. It can be
applied on a collective or individual basis.
When considering collective adjustment,
the Remuneration Committee and Board
Risk Committee regarding any adjustments
required to balanced scorecards or the overall
GPS and/or LTSP 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
variable remuneration 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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
134 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
Remuneration Committee
The Committee comprises of six Non-Executive Directors from a wide background to provide a balanced and independent view on remuneration
matters. Lord Blackwell retired from the Board and the Committee on 1 January 2021. Anita Frew retired from the Board and the Committee on 21 May
2020. 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 86.
The purpose of the Committee is to set the remuneration for all Executive Directors and the Chair, 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 2020. 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 2020 were £14,921.
How the Remuneration Committee spent its time in 2020 and compliance with the 2018 Corporate Governance Code
Incoming
Group Chief
Executive
Key Highlights
The total maximum reward
package for the new Group
Chief Executive has been
reduced by approximately
20 per cent from the
current Policy maximum
that was approved at the
2020 AGM
Oversight and approval
The search for a new Chief Executive has been a significant focus for the Remuneration Committee.
Each component of the package for the new Group Chief Executive, Charlie Nunn, have been set in
accordance with the approved Policy and as announced on 30 November 2020 will include a basic salary of
£1,125,000 and a Fixed Share Award of £1,050,000. The pension contribution has also been set at 15 per cent of
salary, in line with the majority of the workforce. He will be eligible for a maximum Group Performance Share
award of 140 per cent of basic salary and has agreed to limit the maximum award under the LTSP to
150 per cent.
Executive Pay
Zero pay increases for
2021
The Remuneration Committee considers the need for significant restraint and as such there are no pay
increases proposed for Executive Directors and only limited awards made to other senior colleagues where
they are paid below market rate, creating a retention risk.
Long Term
Share Plan
Awards will be granted to
a small number of senior
colleagues
Remuneration Committee supported making awards under the new Long Term Share Plan (LTSP) introduced
at the AGM in May 2020.
Awards will be granted to a small number of leaders, to ensure colleagues, to ensure there is alignment to
shareholder experience and retain critical talent through the next phase of the Group’s strategic delivery.
Colleague and wider workforce
Colleague
Fixed Pay
Above inflation pay award to
our lowest paid colleagues
Measured against our core principle of ensuring there is fairness in our remuneration structure, the
Remuneration Committee has paid particular regard to the impact its decisions have had for all colleagues.
We made an above inflation pay award to our lowest paid colleagues in April 2020, and paid a one-off £250
cash recognition award to nearly 40,000 predominantly customer-facing colleagues in July 2020. This means
that, on average, the total remuneration of the lowest paid colleagues has stayed flat from 2019 to 2020.
2020 Group
Performance
Share
Outcome
Colleague
Recognition
Award
Shareholders
Shareholder
Engagement
£0m 2020 Group
Performance Share pool
The Remuneration Committee set a policy at the start of 2020 that if Underlying Profit (UP) was 20 per cent
below target, no GPS awards would be payable.
The impact of the pandemic on our financial results meant there was no annual bonus pool.
In keeping with our approach to timely, open and honest communication with colleagues, we decided to
communicate this outcome in December 2020. This is in no way reflective of the hard work, commitment and
sacrifice our colleagues have made throughout the year to keep our business running and help our customers.
£400 share award to all
colleagues
To recognise further the considerable role that all colleagues have played in supporting customers in 2020,
and the part they will play in delivering the next phase of the Group’s strategy, every permanent colleague
across the Group will receive a £400 share award.
Responding to
Shareholder Feedback
We were pleased to gain support at the 2020 AGM for the amendments we made to our Directors’ Remuneration
Policy. However we recognise that there were a significant number of votes opposing these resolutions indicating
that there were concerns with some aspect of our policy’s design.
Following extensive and productive discussions additional clarity has been provided in the 2020 Directors
Remuneration Report regarding the 50 per cent discount applied to the Long Term Share Plan (LTSP), as well as
detail regarding our proposed simplified balanced scorecard for 2021.
Statement of voting at Annual General Meeting
The table below sets out the voting outcome at the Annual General Meeting in May 2020 in relation to the annual report on remuneration and the
Remuneration Policy. Extensive and productive discussions have been held with our shareholders and further information can be found on page 118
2019 annual report on remuneration (advisory vote)
Directors’ remuneration policy (binding vote in 2020)
44,123
29,212
94.97%
63.82%
2,338
16,562
5.03%
36.18%
171
858
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 2020
135
Directors’ Remuneration Policy
The Group’s remuneration policy was approved at the AGM on 21 May 2020 and took effect from that date. It is intended that approval of the
remuneration policy will be sought at three-year intervals, unless amendments to the policy are required, in which case further shareholder approval
will be sought; no changes are proposed for 2020. The full policy is set out in the 2019 annual report and accounts (pages 115 to 123) which is available
at: 2019_lbg_annual_report.pdf (lloydsbankinggroup.com)
The tables in this section provide a summary of the Directors’ remuneration policy. There is no significant difference between the policy for
Executive Directors and that for other colleagues. Further information about the remuneration policy for other colleagues is set out in section ‘Other
remuneration disclosures' on page 138.
Remuneration policy table for Executive Directors
Base salary
Purpose and link to strategy
To support the recruitment and retention of
Executive Directors of the calibre required
to develop and deliver the Group’s strategic
priorities. Base salary reflects the role of
the individual, taking account of market
competitiveness, responsibilities and
experience, and pay in the Group as a whole.
Operation
Base salaries are typically reviewed annually
with any increases normally taking effect
from 1 April for Executive Directors. 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:
Fixed share award
Purpose and link to strategy
To ensure that total fixed remuneration is
commensurate with role and to provide a
competitive reward package for Executive
Directors with an appropriate balance of
fixed and variable remuneration, in line with
regulatory requirements.
Pension
Purpose and link to strategy
To provide cost effective and market
competitive retirement benefits, supporting
Executive Directors in building long-term
retirement savings.
Operation
Executive Directors are entitled to participate
in the Group’s defined contribution
scheme with company contributions set
Benefits
Purpose and link to strategy
To provide flexible benefits as part of a
competitive remuneration package.
Operation
Benefits may include those currently provided
and disclosed in the annual report on
remuneration.
Core benefits include a company car or
car allowance, private medical insurance,
life insurance and other benefits that may
be selected through the Group’s flexible
benefits plan.
Additional benefits may be provided to
individuals in certain circumstances such as
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.
Maximum Potential
The Committee will make no increase
which it believes is inconsistent with the two
parameters above. Increases will normally
be in line with the increase awarded to the
overall employee population. However, a
greater salary increase may be appropriate
in certain circumstances, such as a new
appointment made on a salary below a
market competitive level, where phased
increases are planned, or where there has
been an increase in the responsibilities of an
individual. Where increases are awarded in
excess of the wider employee population, the
Committee will provide an explanation in the
relevant annual report on remuneration.
Performance measures
N/A
Operation
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.
Maximum Potential
The maximum award is 100 per cent of base
salary.
Performance measures
N/A
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.
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.
Maximum Potential
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
Performance measures
N/A
relocation. This may include benefits such
as accommodation, relocation, and travel.
The Committee retains the right to provide
additional benefits depending on individual
circumstances.
When determining and reviewing the level of
benefits provided, the Committee ensures
that decisions are made within the following
two parameters:
An objective assessment of the individual’s
responsibilities and the size and scope
of their role, using objective job-sizing
methodologies.
Benefits for comparable roles in
comparable publicly listed financial services
groups of a similar size.
Maximum Potential
The Committee will 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.
Performance measures
N/A
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136 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
All-employee plans
Purpose and link to strategy
Executive Directors are eligible to
participate in HMRC-approved share plans
which promote share ownership by giving
employees an opportunity to invest in Group
shares.
Operation
Executive Directors may participate in these
plans in line with HMRC guidelines currently
prevailing (where relevant), on the same basis
as other eligible employees.
Maximum potential
Participation levels may be increased up to
HMRC limits as amended from time to time.
The monthly savings limits for Save As You
Earn (SAYE) is currently £500. The maximum
value of shares that may be purchased under
the Share Incentive Plan (SIP) in any year is
currently £1,800 with a two-for-one match.
Currently a three-for-two match is operated
up to a maximum colleague investment
of £30 per month. The maximum value of
free shares that may be awarded in any year
is £3,600.
Performance measures
N/A
Group Performance Share Plan
Purpose and link to strategy
To incentivise and reward the achievement
of the Group’s annual financial and strategic
targets whilst supporting the delivery of long-
term superior and sustainable returns.
Operation
Measures and targets are set annually and
awards are determined by the Committee
after the year end based on performance
against the targets set. The Group
Performance Share may be delivered partly in
cash, shares, notes or other debt instruments
including contingent convertible bonds.
Where all or part of any award is deferred, the
Committee may adjust these deferred awards
in the event of any variation of share capital,
demerger, special dividend or distribution or
amend the terms of the plan in accordance
with the plan rules.
Where an award or a deferred award is in
shares or other share-linked instrument,
the number of shares to be awarded may
be calculated using a fair value or based on
discount to market value, as appropriate.
The Committee applies its judgement to
determine the payout level commensurate
with business and/or individual performance
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
The maximum Group Performance Share
opportunities are 140 per cent of base salary
for the Group Chief Executive and 100
per cent of base salary for other Executive
Directors.
Performance measures
Measures and targets are set annually by the
Committee in line with the Group’s strategic
business plan and further details are set
out in the annual report on remuneration
for the relevant year. Measures consist of
both financial and non-financial measures
and the weighting of these measures will be
determined annually by the Committee.
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 less than 40 per cent
out of 100 per cent. 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.
Long Term Share Plan
Purpose and link to strategy
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 incentives stewardship over a long
time horizon and promote good governance
through a simple alignment with the interest
of shareholders.
Operation
From 2021, awards will be granted under
the rules of the 2020 Long-Term Share
Plan, that were approved 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.
Performance measures
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 on page 132.
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.
Maximum potential
The maximum Long Term Share Plan
opportunity is 200 per cent of base salary for
all Executive Directors including the current
Group Chief Executive.
The maximum for the incoming Group Chief
Executive will be 150 per cent of base salary.
Lloyds Banking Group Annual Report and Accounts 2020
137
Deferral of variable remuneration and holding periods
Operation
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.
accommodation expenses, on a grossed-up
basis (where applicable).
Maximum potential
The Committee will make no increase in
fees or benefits currently provided which it
believes is inconsistent with the parameters
above.
Performance metrics
N/A
Chairman and Non-Executive Director fees
Purpose and link to strategy
To provide an appropriate reward to attract
and retain a high-calibre individual with the
relevant skills, knowledge and experience
Operation
The Committee is responsible for evaluating
and making recommendations to the Board
with regards to the Chair’s fees. The Chair
does not participate in these discussions.
The Group Chief Executive and the Chair
are responsible for evaluating and making
recommendations to the Board in relation
to the fees of the Non-Executive Directors.
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 job sizing
methodologies.
Fees and benefits for comparable roles in
comparable publicly listed financial services
groups of a similar size.
The Chair 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. Non-Executive Directors 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
chair to reflect additional responsibilities. Any
increases normally take effect from 1 January
of a given year.
The Chair and the Non-Executive Directors
are not entitled to receive any payment
for loss of office (other than in the case of
the Chair’s fees for the six month notice
period) and are not entitled to participate
in the Group’s bonus, share plan or pension
arrangements. Non-Executive Directors
are reimbursed for expenses incurred in
the course of their duties, such as travel and
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 Chair also has a letter of appointment. His engagement may be terminated on six months’ notice by either the Group or him.
Letters of appointment
The Non-Executive Directors all have letters of appointment and are appointed for an initial term of three years after which their appointment may
continue subject to an annual review. Non-Executive Directors may have their appointment terminated, in accordance with statute and the articles of
association, at any time with immediate effect and without compensation.
All Directors are subject to annual re-election by shareholders.
The service contracts and letters of appointments are available for inspection at the Company’s registered office.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
138 Lloyds Banking Group Annual Report and Accounts 2020
Other remuneration disclosures
This section discloses the remuneration
awards made by the Group to Material
Risk Takers (MRTs) in respect of the 2020
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 115
to 137 and the Directors’ Remuneration
Policy (DRP) on pages 115 to 123 of the 2019
Annual Report. 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 2020 the Committee had
7 scheduled meetings. Further details on the
operation of the Remuneration Committee
and independent advise received during the
year can be found on page 134 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/
ourgroup/ corporate-governance. These
terms are reviewed each year to ensure
compliance with the remuneration regulations
and were last updated in November 2020.
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 121 to 122.
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.
Directors’ remuneration report continued
Lloyds Banking Group Annual Report and Accounts 2020
139
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 Group Chief
Executive and their respective direct reports
– Approved Persons performing SIFs and/
or all colleagues performing a Senior
Management Function
– Other MRTs
– Non-MRTs
Fees
Non-Executive Director fees are reviewed
periodically by the Board. Further information
on fees can be found on page 128 of the DRR
and page 123 of the DRP.
Applies to:
– Non-Executive Directors
Fixed share award
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.
Applies to:
– Senior Management, Executive Directors,
members/attendees of the Group
Executive Committee and their respective
direct reports
– Approved Persons performing SIFs and/
or all colleagues performing a Senior
Management Function1
– Other MRTs1
– Non-MRTs1
Benefits
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
– 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 Non-Executive Directors’ benefits
are set out on page 123 of the DRP.
Applies to:
– Non-Executive Directors
– Senior Management, Executive Directors,
members/attendees of the Group
Executive Committee and their respective
direct reports
– Approved Persons performing SIFs and/
or all colleagues performing a Senior
Management Function
terms;
– Other MRTs
– Non-MRTs
Group Performance Share
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 page 136 of the DRR as well as
page 117 of the DRP.
Applies to:
– Senior Management, Executive Directors,
members/attendees of the Group
Executive Committee and their respective
direct reports
– Approved Persons performing SIFs and/
or all colleagues performing a Senior
Management Function
– Other MRTs
– Non-MRTs
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
140 Lloyds Banking Group Annual Report and Accounts 2020
Directors’ remuneration report continued
Long Term Share Plan
The Long Term Share Plan is the Group’s long-
term incentive opportunity to align executive
management and behaviour to the Group’s
objectives of delivering long-term superior
and sustainable returns. Senior colleagues,
including MRTs, are eligible to participate in
the plan. Individual awards are based upon
individual contribution.
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.
Deferral, vesting and performance
adjustment
At least 40 per cent of MRTs’ variable
remuneration above certain thresholds
is deferred into Lloyds Banking Group
Shares. For all MRTs, variable remuneration
is deferred in line with the regulatory
requirements for three, five or seven years,
(depending on MRT category). At least
50 per cent of each release is subject to a
12 month holding period.
For all colleagues, any deferred variable
remuneration amount is subject to
performance adjustment (malus) in
accordance with the Group’s Deferral and
Performance Adjustment Policy.
Vesting of awards 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. Awards for MRTs are subject
to deferral and a holding period in line with
regulatory requirements and market practice.
Further detail of the awards made in 2021 can
be found on page 132
Applies to:
– Senior Management, Executive Directors,
members/attendees of the Group
Executive Committee and their respective
direct reports1
– 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 133 and 118 of the DRP.
Guaranteed variable remuneration
Guarantees, such as sign-on awards, may only
be offered in exceptional circumstances to
new hires for the first year of service and in
accordance with regulatory requirements.
Any awards made to new hires to
compensate them for unvested variable
remuneration they forfeit on leaving their
previous employment (‘buy-out awards’) will
be subject to appropriate retention, deferral,
performance and clawback arrangements
in accordance with applicable regulatory
requirements.
Applies to:
– Senior Management, Executive Directors,
members/attendees of the GEC and their
respective direct reports
Retention awards may be made to existing
colleagues in limited circumstances and are
subject to prior regulatory approval in line
with applicable regulatory requirements.
– Approved Persons performing SIFs and/
or all colleagues performing a Senior
Management Function
– Other MRTs
– Non-MRTs
Shareholding requirement
Executive Directors: see DRR page 127.
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
pages 121 to 123 of the 2019 DRR.
All other termination payments comply with
the Group’s contractual, legal and regulatory
requirements and are made in such a way
as to ensure they do not reward failure
or misconduct and reflect performance over
time.
Applies to:
– Senior Management, Executive Directors,
members/attendees of the GEC and their
respective direct reports
– Approved Persons performing SIFs and/
or all colleagues performing a Senior
Management Function
– Other MRTs
– Non-MRTs
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 2020
141
2020
Material Risk
Takers3,4
2019
Material Risk
Takers4
10
0
6
0
1
0
0
0
0
0
0
30
5
0
4
3
0
0
0
1
0
0
1 Converted to Euros using the exchange rate €1 = £1.11804 (average exchange rate 1 December 2020 – 31 December 2020 based on the European Commission Budget exchange rates).
The exchange rate used for 2019 was €1 = £0.8518.
2 Values for Long Term Share Plan awards based on face value at grant. An EBA discount factor has not been applied to awards made in 2021 in respect of performance year 2020.
3 Total number of Material Risk Takers earning more than €1m has decreased from 43 in 2019 to 17 in 2020.
4 2020 and 2019 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 and
Wealth
£m
Chief
Operating
Office and
Group
Functions1
£m
Total
£m
Aggregate remuneration expenditure
11.2
29.5
6.2
62.7
109.6
1 Chief Operating Office comprises People and Property, Group Transformation, Chief Information Office, Chief Security Office and COO Business Risk. Group Functions comprises Risk, Finance,
Legal, Strategy, Group Corporate Affairs, Group Internal Audit, Company Secretarial, 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 2020 performance year
Management body
Executive
Directors
Non-Executive
Directors
Senior
Management2
Other MRTs
2020 Total
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 £m
3
£4,288,996
£2,734,996
£1,554,000
£608,128
£0
£608,128
£0
£608,128
£4,897,124
20
113
132
268
– £46,719,147 £35,704,477 £86,712,620
– £42,757,547 £34,549,477 £80,042,020
£1,155,000
–
£6,670,600
£3,961,600
£8,686,245 £23,763,083
– £14,468,710
–
£735,268
£0
£7,950,977 £23,027,815
– £14,468,710
£735,268
–
£0
– £14,468,710
–
£0
£7,950,977 £23,027,815
£61,187,857 £44,390,722 £110,475,703
£0
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 Long Term Share Plan awards are based on face value at grant. An EBA discount factor has not been applied to awards made in 2021 in respect of performance year 2020.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
142 Lloyds Banking Group Annual Report and Accounts 2020
Table 4 Total outstanding deferred variable remuneration
Remuneration £m
Total outstanding deferred variable remuneration at 31 December 2020
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
2020 Total
3
16.6
1.4
15.2
20
–
–
–
113
94.8
11.5
83.3
132
38
8
30
268
149.4
20.9
128.5
Table 5 Other payments awarded in relation to the 2020 performance year
Management body
Senior management
Other Material Risk Takers
Table 6 Deferred remuneration
Analysis of deferred remuneration at 31 December 2020
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
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
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
16.6
94.8
38.0
16.6
94.8
38.0
0.04
0.1
–
0.4
4.1
4.1
1 Deferred in this context refers only to any unvested remuneration.
2 Retained refers to any variable remuneration for which the deferral period has ended but which is still subject to a holding period before release.
3 Reference to the ‘Management Body’ relates to Executive Directors only. Non-Executive Directors are not eligible to receive variable remuneration.
Lloyds Banking Group Annual Report and Accounts 2020
143
Risk management
All narrative and quantative 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
144
147
150
152
153
Further information on risk management can
be found:
56
Risk overview
Note 51: Financial risk management
314
Pillar 3 report: www.lloydsbankinggroup.com
2020 CAPTURED BY LLOYDS BANKING GROUP COLLEAGUES
Julia Newell
Shona Brown
David Braithwaite
Charlotte Cartwright
John Edwards
Stuart Mason
Thomas Holmes
Scott Mankellar
Noshaba Butt
David Atherton
Kimberley Johnston
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
144 Lloyds Banking Group Annual Report and Accounts 2020
Risk management
Risk management is at the heart of Helping Britain
Recover and building the UK's preferred financial partner.
Role of the Board and senior management
Key responsibilities of the Board and senior management include:
Our mission is to protect our customers, shareholders,
colleagues and the Group, while 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 56 to 59) provides a summary of risk
management within the Group and the key focus areas for 2020, including
the significant impact that COVID-19 has had on all principal risks faced
by the Group. The risk overview also highlights the importance of the
connectivity of principal, emerging and strategic risks and how they are
embedded in to the Group's strategic risk management framework.
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 153 to
204), 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, core UK retail financial services and
ancillary retail activities are ring-fenced from other activities of the Group.
The Group's enterprise risk management framework (ERMF) 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 ERMF 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 the Group's 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.
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 its strategy.
Group strategy and risk appetite are developed in tandem. Business
planning aims to optimise value within the Group's risk appetite parameters
and deliver on its 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 the Group's control
framework and is embedded into its policies, authorities and limits, to
guide decision-making and risk management. The Board is responsible
for approving the Group’s risk appetite statement at least annually. Group
Board-level metrics are cascaded into more detailed business appetite
metrics and limits.
Group risk appetite includes the following areas:
Climate: the Group takes action to identify, manage and mitigate its climate
risk and support the Group and its customers in transitioning to a low carbon
economy
Market: the Group has robust controls in place to manage its inherent
market risk and does not engage in any proprietary trading, reflecting the
customer focused nature of the Group’s activities
Credit: the Group has a conservative and well balanced credit portfolio
through the economic cycle, generating an appropriate return on equity, in
line with the Group’s target return on equity in aggregate
Funding and liquidity: the Group maintains a prudent liquidity profile and a
balance sheet structure that limits its reliance on potentially volatile sources
of funding
Capital: the Group maintains capital levels commensurate with a prudent
level of solvency to achieve financial resilience and market confidence
Change/execution: the Group has limited appetite for negative impacts on
customers, colleagues, or the Group as a result of change activity
Conduct: the Group delivers fair outcomes for its customers
Data: the Group has zero appetite for material regulatory breaches
and material legal incidents
People: the Group leads responsibly and proficiently, manages people
resource effectively, supports and develops colleague talent, and meets
legal and regulatory obligations related to its people
Operational resilience: the Group has a limited appetite for disruption to
services to customers and stakeholders from significant unexpected events
Operational: the Group has robust controls in place to manage operational
losses, reputational events and regulatory breaches. It identifies and assesses
emerging risks and acts to mitigate these
Model: material models are performing in line with expectations
Regulatory and legal: the Group interprets and complies with all relevant
regulation and all applicable laws (including codes of conduct which could
have legal implications) and/or legal obligations
Lloyds Banking Group Annual Report and Accounts 2020
145
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 time frames
required to resolve the breach and bring risk within tolerances. There is a
clear process for escalation of risks and risk events.
All key controls are recorded and assessed on a regular basis, in response
to triggers or minimum annually. Control assessments consider both the
adequacy of the design and operating effectiveness. Where a control is
not effective, the root cause is established and action plans implemented
to improve control design or performance. Control Effectiveness against
all residual risks is reported and monitored via the monthly Consolidated
Risk Report (CRR). The CRR is reviewed and independently challenged by
the Risk Division and provided to the Risk Division Executive Committee
and Group Risk Committee. On an annual basis, a point in time assessment
is made for control effectiveness against each risk category and across
sub-groups. The CRR data is the primary source used for this point in time
assessment and a year on year comparison on control effectiveness is
reported to the Board.
One Risk and Control Self-Assessment (One RCSA) is part of the Group’s
Risk and Control Strategy to deliver a stronger risk culture and simplified risk
and control environment. The three lines of defence have worked together
to identify improvements to the Group’s approach to risk management.
Following pilot activity, this new approach (One RCSA) is being adopted
across the Group through a phased implemented plan. All aspects of the
2020 Plan for implementation of One RCSA have been delivered. The 2021
plans capture the remaining highest risks to customers and the business,
and the Board will continue to review progress with embedding the cultural
change and improving the risk and control environment.
Risk culture
Based on the Group’s prudent 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.
Senior Management establishes 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.
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.
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 where required 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 150.
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 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
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 executive management, providing opinion, challenge and
informal advice on risk and the state of the control environment. Group
Internal Audit is a single independent internal audit function, reporting to
the Audit Committee of the Group and the Audit Committees of the key
subsidiaries.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
146 Lloyds Banking Group Annual Report and Accounts 2020
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 101 to 104.
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 Chair and members of
Board Risk Committee.
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 53 to 55.
Risk-weighted assets (RWAs)
Credit risk
Counterparty credit risk3
Market risk
Operational risk
Total (excluding threshold)
Threshold4
Total
Retail
£bn
Commercial
Banking
£bn
Insurance
and Wealth1
£bn
Central
items2
£bn
79.6
—
—
19.4
99.0
—
99.0
62.9
5.4
2.2
4.5
75.0
—
75.0
0.8
—
—
0.5
1.3
—
1.3
13.7
1.3
—
0.5
15.5
11.9
27.4
Group
£bn
157.0
6.7
2.2
24.9
190.8
11.9
202.7
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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
147
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. Additional information on emerging risks and how they are connected to principal and strategic risks is
outlined in the risk overview on pages 56 to 59.
Risk
Key mitigating actions
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,
which may impact the creditworthiness of our clients, and the products and
services our customers require.
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. There also remains a
risk that the level and pace of responses taken by the Group are insufficient
to mitigate risk. This could lead to campaign groups or other bodies seeking
to take action against the Group or the financial services industry for funding
organisations that they deem to be contributing to climate change.
– The Group’s risk management approach to climate change is outlined in
the Strategic Report (page 20) and reflects its 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) alongside the CROs for key legal
entities, has assumed responsibility for identifying and managing the risks
arising from climate change
– Integrating the risk management of the financial risks posed by climate
change into the Group's existing enterprise risk management framework,
including policies, sector and credit risk appetite and controls
– 12 external sector statements have been published to help articulate
appropriate areas of environment and climate related risk appetite.
Credit risk policy has introduced mandatory requirements to consider
environmental risks in key risk management activities
– The Group continues to develop its climate risk management framework
to ensure all our activities appropriately consider climate-related risks
and opportunities and as part of this supports its customers and clients’
transition to a low carbon economy
Technology: The rapid pace of technology in the financial services industry
creates a challenge for complex organisations with ageing systems. With
the slower adoption of new technologies there is a risk that the Group is less
able to compete with new entrants to attract customers with innovative future
products, and participate in emerging business models.
– In Strategic Review 2021, the Group is embarking on an ambitious multi-
year programme to transform critical infrastructure and platforms to take
advantage of new technologies such as the public cloud and simplify the
application landscape. This will reduce legacy operational overheads,
increase business agility, and improve operational resilience
Legacy systems also create increasing operational resilience risks due to
fewer specialists with the appropriate expertise and risks to ongoing supplier
support.
Progressive deployment of new technologies in the Group, including the
scaling of public cloud usage, will also change the Group’s risk profile,
including increased supplier risks, evolved data risks, and enhanced cost risks
where new technologies are running in parallel with existing architecture.
Societal expectations: There are increasing expectations for the financial
services sector to make positive social and environmental contributions. While
these expectations are closely aligned with the Group’s purpose of Helping
Britain Prosper, there is the potential for them to generate risks.
Poorly targeted regulation can reduce operational flexibility. The Group’s
ability to attract and retain high quality talent may become increasingly
dependent on being able to demonstrate that we are meeting societal
expectations.
As technology and innovation moves at pace, there is the risk of systematic,
unintended consequences within decision-making undertaken by machine
learning, creating new operational risks that affect outcomes, for example
credit portfolio anomalies or conduct impacts.
As technology enables broader use of customer data, it is vital that data is
managed ethically and in line with customer and regulatory expectations.
– The Group has established strategic partnerships with global technology
leaders to leverage their experience and best in class capabilities
– The Group has established strategic partnerships with leading fintechs (such
as Form3 and Thought Machine) who are developing the next generation
of core financial services technology. solutions. In 2021 the Group will
migrate customers to a pilot of a new bank architecture using these
technologies
– The Group is partnering with fintechs to rapidly deploy best in class
technology and propositions to targeted domains.
– The Group is building senior technology skills through executive training
and consideration of technology knowledge in senior appointments
– The Group is creating a Cloud Centre of Excellence, operating new financial
control processes and working closely with the regulator on new technology
deployment
– The Group has a long-established purpose of Helping Britain Prosper that
is well recognised across the business divisions and with a positive track
record of demonstrating action
– Alignment of the Group’s 2021 Strategy around Helping Britain Recover,
with focus on responding to key societal trends and issues
– Strong Group action in response to key areas of societal concern, including
the Group Sustainability and Vulnerable Customer strategies
– The Group continues to engage across all stakeholder groups to
understand current and emerging areas of concern and priority. Technology
risks, including those related to machine learning, and data ethics
are escalated and discussed through governance to ensure ongoing
monitoring of any emerging unintended consequences
– Continued focus on ensuring the quality of customer outcomes is
maintained through robust risk management
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
148 Lloyds Banking Group Annual Report and Accounts 2020
Risk
Key mitigating actions
People/Ways of working and skills: Successful and sustainable adoption
of remote working and new ways of working is pivotal to ensuring customer
needs and expectations are met during and after the COVID-19 pandemic.
This requires creating a safe physical environment that promotes colleague
wellbeing within a workplace that enables all colleagues to work and
collaborate effectively together.
Inability to provide the necessary training and technologies for our colleagues
to support the cultural shift could lead to reduced colleague engagement
and loss of trust.
The Group must capitalise on the benefit of greater remote working to attract
and retain talent while ensuring effective capacity planning and provision of
future skills to meet Strategic Review 2021 objectives. Maintaining quality,
productivity and a robust control environment within these new ways of
working is essential to ensure customers are not adversely impacted.
– Support for colleague wellbeing and mental health continues to be
paramount, with a range of support measures and training available to
colleagues and line managers
– The Group continues to utilise remote working and adapt the office and
branch estate to protect colleagues and customers, while delivering on
customer expectations through the provision of technology and equipment
to support remote working
– Regular, responsive communications in an evolving landscape provide
reassurance to colleagues alongside colleague surveys to gauge sentiment
and deployment of mitigants to address concerns
– Incorporating operational resilience into future design thinking and
facilitation of office and remote experiments are designed to support
increased collaboration and support new ways of working
– Effective capacity planning and provision of future skills to fulfil resource
requirements and support the Strategic Review 2021 objectives
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. The Group can be impacted directly or through attacks
on its supply chain.
– Continued investment in and focus on the Group’s Cyber programme
to ensure the confidentiality and integrity of data and the availability of
systems. Key areas of focus relate to access controls, network security,
disruptive technology and the denial of service capability
Geopolitical tensions increases the risk of the Group being impacted directly
or indirectly, by a sophisticated cyber-attack. 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 target of a sophisticated attack.
Competition: Adoption of technological trends is accelerating with customer
preferences changing. There has been considerable growth of new business
models such as Buy Now Pay Later.
The FCA has signalled possible concerns around the impact of new products
and business models, and the conduct of providers, and is investigating these
issues further as part of the Unsecured Credit Review.
Further changes to the regulatory landscape, including prudential and capital
rules, have the potential to create additional competitive pressures for the
Group.
Operational complexity has the potential to restrict our speed of response to
market trends.
Inability to leverage data and innovate could lead to a loss of market share
as challengers capitalise on Open Banking. Although Open Banking has had
a relatively modest uptake to date, there remains significant scope for new
products and propositions to emerge.
Data: Advancements in new technologies and services, increasing external
risks such as cyber and conduct, and changing regulatory requirements all
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.
– Embedding of the Group Cyber control framework which is aligned to
the 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
– Structured approach to embed a cloud control framework to support the
Group’s public cloud ambitions
– Increased business and colleague engagement through education and
awareness, phishing testing and cultural indicators. Cyber risk is governed
through all key risk committees and reviewed quarterly
– The Group continues to transform in order to improve its customer
experience by digitising customer journeys and leveraging branches
for complex needs, in response to customers’ evolving needs and
expectations. During the pandemic, digitised customer journeys have been
used at greater scale
– The Group will deepen its 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
– The Strategic Review 2021 is designed to support the Group to strengthen
its competitive position
– The Group has developed a data management strategy to provide the
common framework and direction by uplifting data quality, simplifying data
architecture, enhancing data governance and implementing market leading
tools to enhance its ability to deliver a data-first culture
– To support the data management strategy, the Group continues to invest
in managing the risks posed by its new technologies and services. This
includes a data ethics framework, strong governance for the advanced
analytics programme and cloud programmes
– The Group continues to monitor changes in legal and regulatory
requirements and maintain close engagement with the regulators;
Information Commissioner's Office (ICO), Prudential Regulatory Authority
(PRA) and the Financial Conduct Authority (FCA) in order to monitor
external developments within data risk
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
149
Risk
Key mitigating actions
Regulatory and legal: The financial sector continues to experience
increasing regulation from various bodies, including the Government and
regulators.
– The Group works closely with regulatory authorities and industry bodies to
ensure that the Group can identify and respond to the evolving regulatory
and legal landscape
Following the UK’s exit from the EU, there is uncertainty as to what the future
UK legal and regulatory framework will look like, noting the potential for the
UK to deviate from the EU’s legal and regulatory system.
Regulatory rules and laws from both the UK and overseas are likely to impact
the Group’s operation, placing pressure on expert resource and investment
priorities.
Macroeconomic headwinds: There are large uncertainties for the global
and UK economic outlook. The pandemic-driven recession has increased
corporate and government indebtedness, raising the risk that inappropriately
quick fiscal tightening or corporate cost cutting and investment
postponement could hinder the economic recovery. Recovery is also
dependent on the successful roll-out of COVID-19 vaccines.
The inflation and interest rates outlook is also uncertain. Weak demand
could cause entrenched deflation if constrained monetary policy loosening
struggles to stimulate demand, with policy interest rates stuck close to
zero or negative. Conversely, there may be upward pressure on inflation
and interest rates due to COVID-19 impacts, or from review of monetary
policy frameworks around the world. Higher interest rates could trigger
vulnerabilities within highly indebted companies and households, and to
asset prices which have been boosted by high levels of liquidity provided by
central banks.
There are also risks to the UK economy from changes in trading
arrangements between the UK and EU, and longer term there is uncertainty
around the impact of those new arrangements on the economy via domestic
and net inward foreign investment.
Geopolitical: Current geopolitical uncertainties or political upheavals could
further impede the global economic recovery, heighten instability and impact
markets. The global reach of the COVID-19 pandemic continues to have a
profound impact on economies around the world. Terrorist activity including
cyber-attacks also has the potential to trigger changes in the economic
outlook, market risk pricing and funding conditions.
Additionally, following the UK’s exit from the EU, the long-term implications
of the new EU-UK Trade and Cooperation Agreement still bring some
uncertainty for the UK’s economic outlook and relationship with the EU.
There also remains the possibility of a further referendum on Scottish
independence.
– Following the UK’s exit from the EU, continued monitoring of new EU and
UK legislation
– The Group actively implements programmes to deliver legal, regulatory
and mandatory change requirements
– Wide array of risks considered in setting strategic plans
– Maintaining a high level of liquidity
– 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 and regular larger exposure reviews are
conducted. Enhancements have been made to the use of early warning
indicators, including sector-specific indicators
– Engagement with politicians, regulators, officials, media, trade and other
bodies to monitor external developments and reassure our commitment to
Helping Britain Prosper
– The Chief Resilience and Security Office (CRSO) develops and maintains a
framework for external incidents, including financial stability, to ensure the
incident response team convenes and acts rapidly during an external crisis.
In conjunction CRSO also maintain an operational resilience framework to
embed resilience activities across the Group and limit the impact of internal
or external events
– The Group Corporate Treasury tracks market conditions closely and actively
manage the Group’s balance sheet
– Hedging of market risk considers, inter alia, potential shocks as a result of
geopolitical events
– The Group’s sector strategies and appetite look to help mitigate risks
associated with geopolitical shocks. Credit applications and sector reviews
include assessment of any relevant geopolitical risk including the UK’s exit
from the EU
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150 Lloyds Banking Group Annual Report and Accounts 2020
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.
Risk governance structure
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Independent
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Primary Escalation
Independent Challenge of Both
First and Second Lines of Defence
Group Chief Executive Committees
Group Executive Committee (GEC)
Risk Division Committees and Governance
Group Market Risk Committee
Group and Ring-Fenced Banks Risk Committees (GRC)
Group Fraud and Financial Crime Prevention Committee
Group and Ring-Fenced Banks Asset and Liability Committees (GALCO)
Group Financial Risk Committee
Group and Ring-Fenced Banks Customer First Committees
Group Capital Risk Committee
Group and Ring-Fenced Banks Cost Management Committees
Group Model Governance Committee
Group and Ring-Fenced Banks Conduct Review Committees
Ring-Fence Compliance Committee
Group and Ring-Fenced Banks People Committees
Group and Ring-Fenced Banks Sustainability Committees
Group and Ring-Fenced Banks Conduct Investigations Committee
Risk management continuedBusiness Area Principal Enterprise Risk CommitteesFirst Line of Defence – Risk ManagementAudit CommitteeBoardBoard Risk CommitteeGroup Chief ExecutiveGroup and Ring Fenced Banks Risk Committee
Lloyds Banking Group Annual Report and Accounts 2020
151
Board, Executive and Risk Committees
The Group’s risk governance structure 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 86 to 97, 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.
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)
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.
Group and Ring-Fenced Banks Customer First
Committees
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
Group and Ring-Fenced Banks Sustainability
Committees
Group and Ring-Fenced Banks Conduct
Investigations Committee
Supporting the Group People & Property Director in exercising their responsibilities in relation to the
Group’s people and colleague policies, overseeing the development of and monitoring adherence to
the remuneration policy, 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.
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, reporting to the
GEC, GRC, Responsible Business Committee where appropriate on material sustainability related
risk and opportunities across the Group; and recommending to the GEC and Responsible Business
Committee the Group's Responsible Business Report and Helping Britain Prosper Plan.
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.
In addition, the Strategic Review 2021 Forum provides strategic deep dives across priority areas to support the Group Chief Executive and accountable
executives in monitoring strategic progress and challenges in focus areas.
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:
Group Market Risk Committee
Group Fraud and Financial Crime Prevention
Committee
Group Financial Risk Committee
Group Capital Risk Committee
Responsible for monitoring, oversight and challenge of market risk exposures across the Group.
Reviews and proposes changes to the market risk management framework, and reviews the adequacy
of data quality needed for managing market risks. It is also responsible for escalating issues of Group
level significance to GEC level (usually via GALCO) relating to the management of the Group's market
risks, including those held in the Group's insurance companies.
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 (AML,
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 while aligning to the Group's target operating model.
Responsible for overseeing, reviewing, challenging and recommending to GEC / Board Risk Committee
/ Board for the Group and Ring-Fenced Bank (i) Annual Internal Stress Tests, (ii) All Prudential Regulation
Authority (PRA) / European Banking Authority (EBA) and any other regulatory stress tests, (iii) Annual
Liquidity Stress Tests, (iv) Reverse Stress Tests, (v) Individual Liquidity Adequacy Assessment (ILAA), (vi)
Internal Capital Adequacy Assessment Process (ICAAP), (vii) Pillar 3, (viii) Recovery / Resolution Plans,
and (ix) relevant ad hoc Stress Tests or other analysis as and when required by the Committee.
Responsible for providing oversight of all relevant capital matters within the Group, Ring-Fenced Bank
and material subsidiaries, including latest capital position and plans, capital risk appetite proposals, Pillar
2 developments (including stress testing), Recovery and Resolution matters and the impact of regulatory
reforms and developments specific to capital.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
152 Lloyds Banking Group Annual Report and Accounts 2020
Committees
Risk focus
Group Model Governance Committee
Ring-Fence Compliance Committee
Responsible for supporting the Model Risk and Validation Director in fulfilling their responsibilities, from
a Group-wide perspective, under the Group Model Governance Policy through provision of debate,
challenge and support of decisions. The committee will be held as required to facilitate approval of
models, model changes and model related items as required by Model Policy, including items related
to the governance framework as a whole and its application.
This Committee is designed to provide executive sponsorship and strategic direction to ongoing
Perimeter Compliance, the closure and remediation of breaches, monitoring and reporting of new
breaches and associated governance and delivery enhancements to the Ring-Fencing Compliance Risk
Framework.
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 188 to
196) 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
The PRA have launched the 2021 Solvency Stress test which the Group will
participate in. Their objective is to update the Bank of England's Financial
Policy Committee (FPC) view on how the banking system can support the
economy, ensure banks have built up buffers of capital to be drawn on in
a stress and input into the PRA’s transition back to its standard approach
to capital-setting and shareholder distributions through 2021. Industry
level credit risk will be published in July with Bank level results published
in December. The scenario requires the bank to show how resilient it is to
a severe economic shock in addition to what has been experienced over
2020; House Price Index (HPI) and Commercial Real Estate (CRE) values fall a
further 33 per cent and unemployment peaks at 11.9 per cent.
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
153 to 204 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. The Group will undertake the Bank of England’s Climate
Biennial Exploratory Stress test in 2021 and will leverage the experience
gained through that exercise to further embed climate risk into stress testing
activities.
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.
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.
Governance
Clear accountabilities and responsibilities for stress testing are assigned
to senior management and the Risk and Finance functions throughout
the Group and its key legal entities. This is formalised through the Group
Business Planning and Stress Testing Policy and Procedure, which are
reviewed at least annually.
The Group Financial Risk Committee (GFRC), chaired by the Chief Risk
Officer and attended by the Chief Financial Officer and other senior Risk
and Finance colleagues, is the committee that has primary responsibility for
overseeing the development and execution of the Group’s 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 appropriate Finance and Risk 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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
153
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 154 to 204.
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. The only change to the risk categories during 2020 has been the addition of
Climate risk.
Principal risk categories
Secondary risk categories
Climate risk
Page 154
Market risk
Page 155
Credit risk
Page 160
– Climate
– Trading book
– Banking book
– Retail credit
– Pensions
– Insurance
– Commercial credit
Funding and liquidity risk
– Funding and liquidity
Page 183
Capital risk
Page 188
– Capital
Insurance underwriting risk
– Insurance underwriting
Page 196
Change/execution risk
– Change/execution
Page 197
Conduct risk
Page 197
Data risk
Page 199
– Conduct
– Data
Governance risk
– Governance
Page 199
People risk
Page 200
– People
Operational resilience risk
– Operational resilience
Page 200
Operational risk
Page 201
Model risk
Page 203
– Business process
– Financial reporting
– Physical security/health and safety
– Cyber and information security
– Fraud
– Sourcing
– External service provision
– Internal service provision
– Financial crime
– IT systems
– Model
Regulatory and legal risk
– Regulatory compliance
– Legal
Page 203
Strategic risk
Page 204
– Strategic
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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
154 Lloyds Banking Group Annual Report and Accounts 2020
Climate risk
Definition
Climate risk is defined as the risk that the Group experiences losses and/
or reputational damage as a result of climate change, either directly or
through its customers. These losses may be realised from physical events,
the required adaptation in transitioning to a low carbon economy, or as a
consequence of the responses to managing these changes.
Exposures
Climate risk can arise from:
Physical risks - changes in climate or weather patterns which are acute,
event driven (e.g. flood), or chronic, longer term shifts (e.g. rising sea
levels)
Transition risks - associated with the move towards a low carbon economy,
e.g. changes to policy, legislation and regulation, technology and changes
to customer preferences. Failure to manage these changes and adapt to
climate change could then result in legal risks
Climate risk manifests through, and has potential to impact, the Group’s
existing principal financial and non-financial risks. Climate risk is included as
both a principal and emerging risk this year given it is such a new and fast
moving area. The Group has undertaken an analysis of how the its principal
risks are impacted by climate change. For further information see page 26 in
the 2020 Lloyds Banking Group ESG Report.
The Group has identified loans and advances to customers in sectors at
increased risk from the impacts of climate change, see page 23.
Measurement
The Group is continuing to develop its modelling and assessment
capabilities for quantifying climate risk, including building a greater
understanding through climate scenario analysis.
In 2020, the Group has approved a Risk Appetite Statement for climate
risk, as well as an interim metric to ensure the Group continues to progress
activities at pace, and also included commentary on climate-related risks
as part of the Group's annual ICAAP, using expert judgement to assess the
financial impacts under a number of different climate scenarios.
The Group has also developed and is piloting a tool in Commercial Banking
to qualitatively assess the physical and transition risks relating to the Group's
clients.
Mitigation
The Group has twelve external sector statements that help articulate
appropriate areas of climate related risk appetite and the Group's approach
to the risk assessment of its customers. The Group is continuing to refine and
enhance these statements.
As part of the Group’s credit risk policy, we have mandatory requirements
to consider environmental risks in key risk management activities. In
Commercial Banking, Relationship Managers must ensure that sustainability
risk is considered for all new and renewal facilities, and specifically
commented on where credit limits exceed £500,000.
Other initiatives to further embed climate risk factors into the risk
management activities across the Group include: development of a risk
mitigation strategy for vehicle finance and home loans in Retail; and further
development of the Group's weather modelling capabilities in Insurance,
where an assessment of climate-related risks to General Insurance liabilities
is integrated into the internal model governance process.
The Group is continuing to develop its climate risk management framework
to ensure all activities consider the appropriate climate-related risks and
opportunities and the Group’s processes will continue to evolve as it embeds
its approach.
Monitoring
Governance for climate-related risk is embedded into the Group’s existing
governance structure and is complementary to governance of the Group’s
sustainability strategy.
Climate risk is monitored in the Group’s risk reporting and more detailed
updates are provided regularly to the Group and Ring-Fenced Banks Board
Risk Committees regarding the Group’s climate risk management activities
and key developments.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
155
Market risk
Definition
Market risk is defined as the risk that the Group's capital or earnings profile is affected by adverse market rates or prices, in particular interest rates and credit
spreads in the Banking business, interest rates, equity prices and credit spreads in the Insurance business, and credit spreads in the Group’s Defined Benefit
Pension Schemes.
Balance sheet linkages
The information provided in the table below aims to facilitate the understanding of linkages between banking, trading, and insurance balance sheet items and
the positions disclosed in the Group’s market risk disclosures.
Market risk linkage to the balance sheet
2020
Assets
Banking
Trading
book1
£m
Non-trading
£m
Total
£m
Insurance
£m Primary market risk factor
Cash and balances at central banks
73,257
—
73,257
—
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
171,626
29,613
20,234
21,773
5,487
4,729
Interest rate, foreign exchange, credit spread
145,905
3,111 Interest rate, foreign exchange, credit spread
10,746
498,843
5,405
514,994
27,603
5,617
48,559
—
—
—
—
—
—
—
10,651
498,807
5,405
514,863
27,603
95 Interest rate
36 Interest rate
—
Interest rate, credit spread
131
—
Interest rate, foreign exchange, credit spread
—
5,617 Equity
21,837
26,722 Interest rate
871,269
42,007
647,776
181,486
31,465
460,068
22,646
27,313
87,397
154,512
14,261
24,194
—
—
31,465
460,068
6,828
6,819
87,397
15,818
17,429
—
—
—
—
—
154,512
12,369
9,244
1,892 Interest rate, foreign exchange
14,950 Interest rate
821,856
33,247
614,190
174,419
Interest rate
Interest rate
Interest rate, foreign exchange
—
—
—
3,065 Interest rate, foreign exchange, credit spread
—
Interest rate, credit spread
Credit spread
1 Assets and liabilities are only classified as Trading book if they meet the requirements as set out in the Capital Requirements Regulation, article 104.
The defined benefit pension schemes’ assets and liabilities are included
under Other assets and Other liabilities in this table and note 34 on page
277 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 book 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 159.
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 23, page 267).
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 183.
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 rates or prices, predominantly
interest rates, credit spreads, exchange rates and equity prices, as described
in further detail within the Banking activities section (page 156).
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
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 Debt
Valuation Adjustment (DVA) sensitivity to credit spreads; (iii) a number of the
Group’s structured medium-term notes where the Group has elected to fair
value the notes through the profit and loss account; and (iv) banking book
assets in Commercial Banking held at fair value under IFRS 9.
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. GBP interest rates are modelled with a floor at zero per cent, with
negative rate floors modelled for non-GBP currencies where appropriate
(product-specific floors apply). 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 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. GBP interest rates are modelled
with a floor at zero per cent, with negative rate floors modelled for non-GBP
currencies where appropriate (product-specific floors apply). 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. Additional negative rate scenarios are also used, where floors are
removed or lowered, to ensure that this risk is monitored; however these are
not measured against the limit framework for the purposes of Risk Appetite.
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: the structural hedging programme managing interest
rate risk in the banking book relies on assumptions made around customer
behaviour. A number of metrics are in place to monitor the risks within the
portfolio.
156 Lloyds Banking Group Annual Report and Accounts 2020
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 the 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 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
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 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 rates or prices, predominantly interest rates, credit spreads,
exchange rates and equity prices. The volatility of market rates or prices 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 and off-balance sheet positions.
Basis risk arises from the potential changes in spreads between indices, 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 51
on page 314). 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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
157
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, such as variable rate savings
The table 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.
Group Banking activities: market value sensitivity (audited)
Sterling
US Dollar
Euro
Other
Total
Up
25bps
£m
69.7
(3.6)
(6.0)
0.2
60.3
2020
Down
25bps
£m
Up
100bps
£m
Down
100bps
£m
7.8
4.7
(5.4)
(0.1)
7.0
279.1
(13.6)
(23.0)
0.9
243.4
10.9
11.1
(9.3)
(0.1)
12.6
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)
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, in order to
minimise overall funding and hedging costs. The sensitivity, to up 100bps, increased in 2020 due to customer balance sheet changes and the associated
hedging, in particular growth in fixed rate mortgages. The level of risk remains low relative to the size of the total balance sheet.
The table 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.
Group Banking activities: market value sensitivity to a steepening and flattening of the yield curve (audited)
Sterling
US Dollar
Euro
Other
Total
2020
2019
Steepener
£m
Flattener
£m
Steepener
£m
Flattener
£m
(56.8)
(9.4)
(16.6)
0.2
(82.6)
20.1
10.0
(4.3)
0.4
26.2
46.6
(13.2)
(15.5)
0.4
18.3
(47.5)
15.3
9.7
(0.4)
(22.9)
The table below shows the banking book net interest income sensitivity to an instantaneous parallel up and down 25 and 100 basis points change to all
interest rates.
Group Banking activities: net interest income sensitivity (audited)
Client facing activity and associated hedges
260.9
(137.5)
1,065.3
(142.3)
Income sensitivity is measured on a rolling 12 month basis.
Up
25bps
£m
Down
25bps
£m
Up
100bps
£m
Down
100bps
£m
Up
25bps
£m
109.4
Down
25bps
£m
Up
100bps
£m
(147.9)
430.8
Down
100bps
£m
(702.8)
2020
2019
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158 Lloyds Banking Group Annual Report and Accounts 2020
Net interest income sensitivity, to up 100bps, has increased year-on-year
in part due to the growth in customer deposits and account management
activity during 2020. This would result in widening margins in a rates up
scenario, increasing net interest income.
The decrease in risk sensitivity year-on-year, to down 100bps, is driven by a
reduction in modelled margin compression risk following the fall in interest
rates in 2020. This is due to the Group’s assumptions for modelling GBP
interest rates with a floor of zero per cent (product-specific floors apply)
which limits the down-shock applied.
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
the Commercial Bank. The Group mitigates income statement volatility
through hedge accounting. This reduces the accounting volatility arising
from the Group’s economic hedging activities and any hedge accounting
ineffectiveness 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 34 on page 277.
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 default 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 23 on page 267. Equity risk also
arises in the with-profits funds but is less material
Credit default 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 mainly corporate bonds and loans,
move differently to the liabilities they back. This exposure arises from
credit downgrades and defaults
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.
The table below demonstrates the impact of the Group’s UK Recession
scenario on the Insurance business’ portfolio (with no diversification benefit).
The amounts include movements in assets, liabilities and the value of in-
force business in respect of insurance contracts and participating investment
contracts.
Risk management continued Insurance business: profit before tax sensitivities
Interest rates – decrease 100 basis points
Inflation – increase 50 basis points
Credit default spreads – Double
Equity – 30% fall
Property – 25% fall
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 credit assets and an increase in
illiquidity premium, as applied to profit before tax are set out in note 31 on
page 276.
Mitigation
Equity and credit spread risks are closely monitored and, where appropriate,
asset liability matching is undertaken to mitigate risk. Unit matching is used
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. The
cash flows are matched within regulatory tolerance.
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.
Lloyds Banking Group Annual Report and Accounts 2020
159
Increase (reduction)
in profit before tax
2020
£m
134
44
2019
£m
116
30
(1,105)
(1,006)
20
(58)
(68)
(47)
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 2020 compared to £0.9 million for
31 December 2019.
Trading market risk measures are applied to all of the Group’s regulatory
trading books and they include daily VaR (see Trading Portfolios: VaR table),
sensitivity based measures, and stress testing calculations.
Measurement
The Group internally uses VaR as the primary risk measure for all trading
book positions.
The Trading Portfolios: VaR table 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 2020 and year end 2019.
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.
Trading portfolios: VaR (1-day 95 per cent confidence level) (audited)
At 31 December 2020
At 31 December 2019
Interest rate risk
Foreign exchange risk
Equity risk
Credit spread risk
Inflation risk
All risk factors before diversification
Portfolio diversification
Total VaR
Close
£m
1.2
0.3
—
0.2
0.1
1.8
(0.7)
1.1
Average Maximum Minimum
£m
£m
£m
0.9
0.1
—
0.2
0.2
1.4
(0.5)
0.9
1.3
0.3
—
0.3
0.4
1.8
1.3
0.6
—
—
0.1
0.1
1.0
0.6
Close
£m
0.6
0.1
—
0.1
0.4
1.2
(0.4)
0.8
Average Maximum Minimum
£m
£m
£m
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
—
—
0.1
0.1
0.9
0.5
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160 Lloyds Banking Group Annual Report and Accounts 2020
The market risk for the trading book continues to be low with respect to the
size of the Group and in comparison to peers. This reflects the fact that the
Group’s trading operations are customer-centric and focused on hedging
and recycling client risks.
Although it is an important market standard measure of risk, VaR has
limitations. One of them is the use of 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 charts for
Lloyds Bank Group and Lloyds Bank Corporate Markets 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.
Credit Risk
Definition
Credit risk is defined as the risk that parties with whom the Group has
contracted fail to meet their financial obligations (both on and off- balance
sheet).
Exposures
The principal sources of credit risk within the Group arise from loans
and advances, contingent liabilities, commitments, debt securities and
derivatives to customers, financial institutions and sovereigns. The credit risk
exposures of the Group are set out in note 51 on page 314.
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 2020 is shown on page 175. The
notional principal amount does not, however, represent the Group’s credit
risk exposure, which is limited to the current cost of replacing contracts with
a positive value to the Group. Such amounts are reflected in note 51 on
page 314.
Additionally, credit risk arises from leasing arrangements where the Group is
the lessor. Note 2(J) on page 227 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 34 on page 277 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, expected credit loss (ECL),
risk-weighted assets, new business quality, concentration risk and portfolio
performance, are reported monthly to Risk Committees and Forums.
Measures such as 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) have been incorporated into
the Group's credit risk management practices 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.
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 203.
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
Risk management continued to higher risk countries and potentially vulnerable sectors and asset
classes. Note 51 on page 314 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. 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 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 152.
Frequent and robust Credit risk assurance: assurance of credit risk is
undertaken by an independent function 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 assurance and confidence 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 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. The
fundamental business proposition must evidence the ability of the business
Lloyds Banking Group Annual Report and Accounts 2020
161
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 51 on page 314 for further information on collateral.
Additional mitigation for Retail customers
The Group uses a variety of lending criteria when assessing applications
for mortgages and unsecured lending. The general approval process uses
credit acceptance scorecards and involves a review of an applicant’s previous
credit history using internal data and information held by Credit Reference
Agencies (CRA).
The Group also assesses the affordability and sustainability of lending for
each borrower. For secured lending this includes use of an appropriate
stressed interest rate scenario. Affordability assessments for all lending are
compliant with relevant regulatory and conduct guidelines. The Group
takes reasonable steps to validate information used in the assessment of a
customer’s income and expenditure.
In addition, the Group has in place quantitative limits such as maximum
limits for individual customer products, the level of borrowing to income and
the ratio of borrowing to collateral. Some of these limits relate to internal
approval levels and others are policy limits above which the Group will
typically reject borrowing applications. The Group also applies certain criteria
that are applicable to specific products for example applications for buy-to-
let mortgages.
For UK mortgages, the Group’s policy permits owner occupier applications
with a maximum 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
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
162 Lloyds Banking Group Annual Report and Accounts 2020
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, any risk mitigation in place, 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 foreign exchange (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).
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 and forums, 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 203.
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. However, where customers have been
temporarily impacted by COVID-19, the Group has looked to follow
regulator principles and guidance on the granting of concessions resulting
from the impact of the pandemic.
Balances in default or classified as Stage 3 are always considered to be
non-performing. Balances are non-performing, but not in default or Stage 3,
if they are greater than 90 days past due (compared with 180 days past due
for Stage 3 mortgages) or if they are within their 12 month non-performing
forbearance cure period.
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 226.
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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
163
As a result, expected credit losses on loans and advances to customers
increased to £6,832 million at 31 December 2020 (31 December 2019:
£4,142 million). Notwithstanding the likelihood of rising defaults, the
impairment impacts are expected largely to be covered by the forward-
looking provisions built up in 2020, subject to there being no material
changes to the Group's overall expectations of the severity of the
pandemic impact on the economy
Stage 2 loans and advances to customers as a percentage of total lending
have increased by 4.3 percentage points to 12.0 per cent at 31 December
2020 (31 December 2019: 7.7 per cent), reflecting the deterioration of
the Group’s forward-looking economic assumptions. Of these, 88.9 per
cent are up to date (31 December 2019: 78.9 per cent). Stage 2 coverage
increased to 4.5 per cent (31 December 2019: 3.7 per cent)
Stage 3 loans and advances increased by £335 million to £9,089 million
(31 December 2019: £8,754 million), although as a percentage of total
lending remained stable at 1.8 per cent. Stage 3 coverage increased by
5.6 percentage points to 28.1 per cent (31 December 2019: 22.5 per cent)
largely driven by additional provisions predominantly raised against pre-
existing restructuring cases in Commercial Banking’s BSU and to a lesser
extent in Retail, due to the change in the Group’s economic forecast of
collateral values for UK Mortgages and UK Motor Finance
Low risk culture and prudent risk appetite
The Group continues to take a prudent approach to credit risk and
a through the cycle credit risk appetite, whilst working closely with
customers to support them over this challenging period
Although not immune, the Group's credit portfolios are well positioned
against an uncertain economic outlook and potential market volatility
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 and asset class 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
Support for customers during the COVID-19 pandemic
Working closely with the UK Government and regulators, the Group has
continued to support its retail, small business and commercial customers
through a comprehensive and unprecedented range of flexible measures to
help alleviate temporary financial pressure on customers during the crisis.
For retail customers, the Group has provided payment holidays of up to
three months across a range of products including mortgages, personal
loans, credit cards and motor finance, with extensions available of up to six
months in total, should customers request them.
The Group has also supported its retail customers with access to a £500
interest free overdraft facility and access to fixed term savings accounts
without charge.
Similarly, the Group is providing significant support for its small business
and commercial customers and has provided loans to businesses under the
different government schemes, including Bounce Back Loan Scheme (BBLS),
Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus
Large Business Interruption Loan Scheme (CLBILS). The Group has also
supported its customers through repayment holidays and its own COVID-19
fund which includes fee-free lending for new overdrafts or overdraft limit
increases as well as new or increased invoice discounting and finance
facilities. The Group is also offering SME customers a mentoring service to
help navigate a path beyond the pandemic.
The Group credit risk portfolio in 2020
Overview
The Group has continued to actively support its customers during the
crisis through a range of flexible options and payment holidays across
major products, as well as lending through the various UK Government
support schemes
With c.85 per cent of the Group's lending secured, with robust LTVs, and
a prudent approach to credit risk appetite and risk management, the
credit portfolios were well positioned entering the crisis. Considering the
external environment, flows of accounts into arrears and defaults remain
low
However, the Group recognises and has provisioned on the basis
that payment holidays granted and other Government support
measures mean that the true underlying risk is not reflected and there
is an expectation of increased arrears and defaults as these various
arrangements, designed to alleviate short term financial pressure, come
to an end
The impairment charge for the year has increased significantly to £4,247
million (2019: £1,291 million). This is due to higher expected credit
loss allowances taken predominantly in the first half of the year. These
reflected the deterioration in economic outlook as a consequence of the
coronavirus pandemic, as well as the charges taken on restructuring cases
in the Commercial Business Support Unit (BSU)
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
164 Lloyds Banking Group Annual Report and Accounts 2020
Group impairment charge (underlying basis)
Loans and
advances to
customers
£m
Loans and
advances to
banks
£m
Debt
securities
£m
Financial
assets at
fair value
through other
comprehensive
income
£m
Other
£m
Undrawn
balances
£m
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail asset quality ratio
Commercial Banking
SME
Other
Commercial Banking asset quality ratio
Insurance and Wealth
Central Items
Total impairment charge
Asset quality ratio
Gross asset quality ratio
475
721
702
224
117
2,239
244
1,067
1,311
6
389
3,945
—
—
—
—
—
—
—
5
5
—
—
5
—
—
—
—
—
—
—
1
1
—
—
1
—
—
—
—
—
—
—
4
4
—
1
5
—
—
—
—
—
—
—
—
—
2
—
2
3
79
37
2
24
145
20
123
143
1
—
289
2020
£m
478
800
739
226
141
2,384
0.69%
264
1,200
1,464
1.53%
9
390
4,247
0.96%
0.99%
2019
£m
(167)
503
445
203
54
1,038
0.30%
(65)
371
306
0.30%
—
(53)
1,291
0.29%
0.37%
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 crystallise.
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 Group’s total expected credit loss allowance
Customer related balances
Drawn
Undrawn
Other assets
Total expected credit loss allowance
Lloyds Banking Group Annual Report and Accounts 2020
165
Statutory basis
Underlying basis
At 31 Dec
2020
£m
At 31 Dec
2019
£m
At 31 Dec
2020
£m
At 31 Dec
2019
£m
5,760
459
6,219
28
6,247
3,259
177
3,436
19
3,455
6,373
459
6,832
28
6,860
3,965
177
4,142
19
4,161
Reconciliation between statutory and underlying basis of Group gross loans and advances to customers and expected
credit loss allowances on drawn balances
At 31 December 2020
Underlying basis
POCI assets
Gross loans and advances to customers
Expected credit loss allowances on drawn balances
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
435,526
60,514
9,089
— 505,129
1,385
2,493
2,495
—
6,373
Acquisition fair value adjustment
42
9
1
(578)
(1,583)
(8,855)
(2,599)
12,511
(1,625)
(8,864)
(2,600)
13,089
—
(526)
(526)
(3)
(10)
(13)
(330)
(18)
(348)
(506)
(7)
(513)
839
(578)
261
261
—
(613)
(613)
5,760
Statutory basis
433,943
51,659
6,490
12,511 504,603
1,372
2,145
1,982
At 31 December 2019
Underlying basis
POCI assets
451,611
38,440
8,754
—
498,805
(1,718)
(9,903)
(2,740)
14,361
Acquisition fair value adjustment
82
6
1
(647)
(1,636)
(9,897)
(2,739)
13,714
Statutory basis
449,975
28,543
6,015
13,714
498,247
—
(558)
(558)
702
—
(27)
(27)
675
1,346
1,917
(334)
(17)
(351)
995
(455)
(15)
(470)
1,447
—
789
(647)
142
142
3,965
—
(706)
(706)
3,259
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
166 Lloyds Banking Group Annual Report and Accounts 2020
Movements in Group total expected credit loss allowance (statutory basis)
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
Other
Total1
ECL
at 31 Dec
2020
£m
Net ECL
increase
£m
Write-offs
and other
£m
Income
statement
charge
£m
ECL
at 31 Dec
2019
£m
1,027
923
715
501
229
3,395
2,402
450
6,247
458
377
254
114
102
1,305
1,087
400
2,792
(20)
(423)
(485)
(112)
(39)
(1,079)
(282)
(2)
(1,363)
478
800
739
226
141
2,384
1,369
402
4,155
569
546
461
387
127
2,090
1,315
50
3,455
1 Total ECL includes £28 million relating to other non customer-related assets (31 December 2019: £19 million).
Movements in Group total expected credit loss allowance (underlying basis)
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
Other
Total1
ECL
at 31 Dec
2020
£m
Net ECL
increase
£m
Write-offs
and other
£m
Income
statement
charge
£m
ECL
at 31 Dec
2019
£m
1,605
958
715
501
229
4,008
2,402
450
6,860
389
352
254
114
103
1,212
1,087
400
2,699
(89)
(448)
(485)
(112)
(38)
(1,172)
(377)
1
(1,548)
478
800
739
226
141
2,384
1,464
399
4,247
1,216
606
461
387
126
2,796
1,315
50
4,161
1 Total ECL includes £28 million relating to other non customer-related assets (31 December 2019: £19 million).
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
167
Group loans and advances to customers and expected credit loss allowances (statutory basis)
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
9.8
21.7
15.9
14.6
6.7
10.5
13.9
17.5
16.2
1.4
—
10.2
45.6
57.4
48.1
34.1
54.1
48.2
46.6
26.8
30.9
4.3
—
38.3
0.6
2.3
3.2
1.3
1.0
0.8
2.4
4.9
4.0
7.7
—
1.3
18.6
16.6
20.6
26.5
25.8
20.1
25.1
61.8
54.1
47.8
1.5
32.1
At 31 December 2020
Loans and advances to customers
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items1
Total gross lending
ECL allowance on drawn balances
Net balance sheet carrying value
Group ECL allowance (drawn and undrawn)
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance2
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
251,418
29,018
1,859
12,511
294,806
11,496
7,710
12,786
17,879
3,273
1,519
2,216
1,304
340
307
199
184
—
—
—
—
15,109
9,536
15,201
19,367
301,289
37,330
2,889
12,511
354,019
27,015
43,543
70,558
832
61,264
4,500
9,816
14,316
13
—
791
2,733
3,524
70
7
—
—
—
—
—
32,306
56,092
88,398
915
61,271
433,943
51,659
6,490
12,511
504,603
(1,372)
(2,145)
(1,982)
(261)
(5,760)
432,571
49,514
4,508
12,250
498,843
107
240
224
197
46
814
142
217
359
11
400
468
530
344
171
124
1,637
234
507
741
1
—
191
153
147
133
59
683
126
1,169
1,295
11
6
261
1,027
—
—
—
—
923
715
501
229
261
3,395
—
—
—
—
—
502
1,893
2,395
23
406
Total ECL allowance (drawn and undrawn)
1,584
2,379
1,995
261
6,219
Group ECL allowances (drawn and undrawn) as a % of
loans and advances to customers3
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total
—
2.1
2.9
1.5
0.3
0.3
0.5
0.5
0.5
1.3
0.7
0.4
1.6
16.2
22.6
7.7
9.5
4.4
5.2
5.2
5.2
7.7
—
4.6
10.3
56.0
64.2
66.8
39.3
25.2
15.9
42.8
36.7
15.7
85.7
31.6
2.1
—
—
—
—
2.1
—
—
—
—
—
2.1
0.3
6.1
7.6
3.3
1.2
1.0
1.6
3.4
2.7
2.5
0.7
1.2
1 Includes reverse repos of £58.6 billion.
2 UK Motor Finance for Stages 1 and 2 include £192 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the
calculation of coverage ratios.
3 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit cards of £67 million, £78 million in Loans and overdrafts and £34 million in
Business Banking within Retail other.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
168 Lloyds Banking Group Annual Report and Accounts 2020
At 31 December 20191
Loans and advances to customers
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items2
Total gross lending
ECL allowance on drawn balances
Net balance sheet carrying value
Group ECL allowance (drawn and undrawn)
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance3
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total ECL allowance (drawn and undrawn)
Group ECL allowances (drawn and undrawn) as a % of loans
and advances to customers4
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
5.9
9.2
11.1
12.2
7.8
6.5
8.2
5.3
6.2
3.7
—
5.7
49.4
39.9
41.9
22.5
31.5
39.2
46.5
12.0
19.2
5.9
—
31.2
0.5
2.1
2.9
0.9
1.4
0.7
2.4
4.1
3.6
8.9
—
1.2
21.4
22.9
23.4
21.7
40.2
23.4
37.0
81.3
72.0
58.8
37.5
42.3
257,043
16,935
1,506
13,714
289,198
16,132
8,788
13,884
9,904
1,681
1,131
1,942
845
385
293
150
150
—
—
—
—
18,198
10,212
15,976
10,899
305,751
22,534
2,484
13,714
344,483
27,206
59,868
87,074
753
56,397
449,975
(675)
2,507
3,470
5,977
32
—
28,543
(995)
449,300
27,548
720
2,727
3,447
77
7
6,015
(1,447)
4,568
—
—
—
—
—
30,433
66,065
96,498
862
56,404
13,714
498,247
(142)
(3,259)
13,572
494,988
24
203
160
216
36
639
45
70
115
6
10
770
—
1.3
1.8
1.6
0.4
0.2
0.2
0.1
0.1
0.8
—
0.2
281
218
193
87
40
819
127
125
252
1
—
122
125
108
84
51
490
101
845
946
10
6
142
—
—
—
—
569
546
461
387
127
142
2,090
—
—
—
—
—
273
1,040
1,313
17
16
1,072
1,452
142
3,436
1.7
13.0
17.1
4.5
4.7
3.6
5.1
3.6
4.2
3.1
—
3.8
8.1
41.0
57.1
56.0
39.5
21.5
14.0
31.0
27.4
13.0
85.7
25.0
1.0
—
—
—
—
1.0
—
—
—
—
—
1.0
0.2
3.0
4.6
2.4
1.2
0.6
0.9
1.6
1.4
2.0
—
0.7
1 Prior period segmental comparatives restated. See note 4 on page 240.
2 Includes reverse repos of £54.6 billion.
3 UK Motor Finance for Stages 1 and 2 include £201 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 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit cards of £80 million, £104 million in Loans and overdrafts and £21 million in
Business Banking within Retail other.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
169
Group loans and advances to customers and expected credit loss allowances (underlying basis)
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
12.8
21.7
15.9
14.6
6.7
13.0
13.9
17.5
16.2
1.4
—
12.0
49.7
57.2
48.1
34.1
54.1
49.5
46.6
26.8
30.9
4.3
—
39.9
1.5
2.3
3.2
1.3
1.0
1.5
2.4
4.9
4.0
7.7
—
1.8
43.4
16.7
20.6
26.5
25.8
29.8
25.1
61.8
54.1
47.8
1.5
36.7
At 31 December 2020
Retail1
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items2
Total gross lending
ECL allowance on drawn balances
Net balance sheet carrying value
Group ECL allowance (drawn and undrawn)
Retail1
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance3
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
253,043
37,882
4,459
295,384
11,454
7,710
12,786
17,879
3,264
1,519
2,216
1,304
339
307
199
184
15,057
9,536
15,201
19,367
302,872
46,185
5,488
354,545
27,015
43,543
70,558
832
61,264
4,500
9,816
14,316
13
—
791
2,733
3,524
70
7
32,306
56,092
88,398
915
61,271
435,526
60,514
9,089
505,129
(1,385)
(2,493)
(2,495)
(6,373)
434,141
58,021
6,594
498,756
110
250
224
197
46
827
142
217
359
11
400
798
548
344
171
124
697
160
147
133
59
1,605
958
715
501
229
1,985
1,196
4,008
234
507
741
1
—
126
1,169
1,295
11
6
502
1,893
2,395
23
406
Total ECL allowance (drawn and undrawn)
1,597
2,727
2,508
6,832
Group ECL allowances (drawn and undrawn) as a percentage of loans
and advances to customers4
Retail1
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total ECL allowances (drawn and undrawn) as a percentage of loans
and advances to customers
—
2.2
2.9
1.5
0.3
0.3
0.5
0.5
0.5
1.3
0.7
0.4
2.1
16.8
22.6
7.7
9.5
4.3
5.2
5.2
5.2
7.7
—
4.5
15.6
58.8
64.2
66.8
39.3
22.5
15.9
42.8
36.7
15.7
85.7
28.1
0.5
6.4
7.6
3.3
1.2
1.1
1.6
3.4
2.7
2.5
0.7
1.4
1 Retail balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
2 Includes reverse repos of £58.6 billion.
3 UK Motor Finance for Stages 1 and 2 include £192 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 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit cards of £67 million, £78 million in Loans and overdrafts and £34 million in Business
Banking within Retail other.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
170 Lloyds Banking Group Annual Report and Accounts 2020
At 31 December 20191
Retail2
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items3
Total gross lending
ECL allowance on drawn balances
Net balance sheet carrying value
Group ECL allowance (drawn and undrawn)
Retail2
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance4
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total ECL allowance (drawn and undrawn)
Group expected credit loss allowances (drawn and undrawn) as a
percentage of loans and advances to customers5
Retail2
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total ECL allowances (drawn and undrawn) as a percentage of loans and
advances to customers
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
9.3
9.2
11.1
12.2
7.8
9.4
8.2
5.3
6.2
3.7
—
7.7
50.5
38.9
41.9
22.5
31.7
41.8
46.5
12.0
19.2
5.9
—
34.4
1.5
2.1
2.9
0.9
1.4
1.5
2.4
4.1
3.6
8.9
—
1.8
47.4
23.1
23.4
21.7
41.3
34.3
37.0
81.3
72.0
58.8
37.5
46.4
258,760
26,838
4,247
289,845
16,052
8,788
13,884
9,903
1,675
1,131
1,942
845
383
293
150
150
18,110
10,212
15,976
10,898
307,387
32,431
5,223
345,041
27,206
59,868
87,074
753
56,397
451,611
(702)
450,909
26
230
160
216
34
666
45
70
115
6
10
797
—
1.4
1.8
1.6
0.3
0.2
0.2
0.1
0.1
0.8
—
0.2
2,507
3,470
5,977
32
—
38,440
(1,346)
37,094
614
236
193
87
40
1,170
127
125
252
1
—
720
2,727
3,447
77
7
30,433
66,065
96,498
862
56,404
8,754
498,805
(1,917)
(3,965)
6,837
494,840
576
140
108
84
52
960
101
845
946
10
6
1,216
606
461
387
126
2,796
273
1,040
1,313
17
16
1,423
1,922
4,142
2.3
14.1
17.1
4.5
4.7
3.6
5.1
3.6
4.2
3.1
—
3.7
13.6
46.2
57.1
56.0
40.3
19.1
14.0
31.0
27.4
13.0
85.7
22.5
0.4
3.4
4.6
2.4
1.2
0.8
0.9
1.6
1.4
2.0
—
0.8
1 Prior period segmental comparatives restated. See note 4 on page 240.
2 Retail balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
3 Includes reverse repos of £54.6 billion.
4 UK Motor Finance for Stages 1 and 2 include £201 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 Total and Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Credit cards of £80 million and £104 million in Loans and overdrafts and £21 million
in Business Banking within Retail other.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
171
Group Stage 2 loans and advances to customers (statutory basis)
Up to date
1-30 days past due2
Over 30 days past due
Total
PD movements
Other1
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
At 31 December 2020
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total
At 31 December 2019
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total
1.0
3,078
131
4.3
1,648
22,569
2,924
959
724
512
215
408
209
62
56
14.0
21.8
220
388
8.6
1,321
10.9
651
76
68
55
44
27,688
950
3.4
5,658
374
4,229
9,505
13,734
1
—
219
501
720
—
—
5.2
5.3
5.2
—
—
150
97
247
12
—
6
3
9
1
—
43
27
45
37
14
2.6
1,723
29.0
35.7
28.0
20.3
36
46
39
72
79
19
22
17
10
4.6 29,018
52.8
3,273
47.8
1,519
43.6
2,216
13.9
1,304
468
530
344
171
124
93
126
132
69
2,068
166
8.0
1,916
147
7.7 37,330
1,637
40
37
77
—
—
5
2
7
—
—
12.5
5.4
9.1
—
—
81
177
258
—
—
4
1
5
—
—
4.9
0.6
4,500
9,816
1.9 14,316
—
—
13
—
234
507
741
1
—
41,423
1,670
4.0
5,917
384
6.5
2,145
173
8.1
2,174
152
7.0 51,659
2,379
0.8
2,593
107
4.1
1,876
3.6
16,935
10,846
1,093
569
543
324
83
129
88
27
14
13,375
341
2,014
1,881
3,895
—
—
104
75
179
—
—
11.8
15.5
5.0
4.3
2.5
5.2
4.0
4.6
—
—
423
348
1,232
363
47
42
30
12
4,959
238
410
1,290
1,700
28
—
17
47
64
1
—
33
26
41
21
9
1.8
1,620
21.0
25.9
15.6
11.3
41
56
32
78
58
16
22
9
5
124
158
135
80
2,373
130
5.5
1,827
110
56
61
117
1
—
6
2
8
—
—
10.7
3.3
6.8
—
—
27
238
265
3
—
—
1
1
—
—
281
218
193
87
40
1,681
1,131
1,942
845
22,534
819
2,507
3,470
5,977
32
—
127
125
252
1
—
39.0
39.3
28.1
6.4
6.0
—
0.4
0.4
—
—
17,270
520
3.0
6,687
303
2,491
138
5.5
2,095
111
5.3
28,543
1,072
34.5
17.5
4.2
6.8
6.6
4.0
3.1
3.6
8.3
—
11.1
12.1
2.4
3.3
4.8
4.1
3.6
3.8
3.6
—
4.5
1.6
16.2
22.6
7.7
9.5
4.4
5.2
5.2
5.2
7.7
—
4.6
1.7
13.0
17.1
4.5
4.7
3.6
5.1
3.6
4.2
3.1
—
3.8
1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.
2 Includes assets that have triggered PD movements, or other rules, given that being 1-29 days in arrears in of itself is not a stage 2 trigger.
3 Expected credit loss allowances on loans and advances to customers (drawn and undrawn).
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
172 Lloyds Banking Group Annual Report and Accounts 2020
Group Stage 2 loans and advances to customers (underlying basis)
Up to date
1-30 days past due2
Over 30 days past due
Total
PD movements
Other1
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
At 31 December 2020
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total
At 31 December 2019
Retail
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Commercial Banking
SME
Other
Insurance and Wealth
Central items
Total
1.3
4,067
189
4.6
2,663
28,049
2,916
959
724
512
354
422
209
62
56
14.5
21.8
220
388
8.6
1,321
10.9
651
78
68
55
44
33,160
1,103
3.3
6,647
434
4,229
9,505
13,734
1
—
219
501
720
—
—
5.2
5.3
5.2
—
—
150
97
247
12
—
6
3
9
1
—
82
28
45
37
14
3.1
3,103
173
5.6 37,882
30.4
35.7
28.0
20.3
36
46
39
72
20
22
17
10
55.6
3,264
47.8
1,519
43.6
2,216
13.9
1,304
798
548
344
171
124
92
126
132
69
3,082
206
6.7
3,296
242
7.3 46,185
1,985
40
37
77
—
—
5
2
7
—
—
12.5
5.4
9.1
—
—
81
177
258
—
—
4
1
5
—
—
4.9
0.6
4,500
9,816
1.9 14,316
—
—
13
—
234
507
741
1
—
46,895
1,823
3.9
6,906
444
6.4
3,159
213
6.7
3,554
247
6.9 60,514
2,727
1.2
3,730
171
4.6
3,517
2.4
3,491
167
4.8
26,838
16,100
1,088
569
543
323
192
139
88
27
15
18,623
461
2,014
1,881
3,895
—
—
104
75
179
—
—
12.8
15.5
5.0
4.6
2.5
5.2
4.0
4.6
—
—
422
348
1,232
364
49
42
30
12
6,096
304
410
1,290
1,700
28
—
17
47
64
1
—
84
30
41
21
8
124
158
135
80
24.2
25.9
15.6
10.0
41
56
32
78
17
22
9
6
4,014
184
4.6
3,698
221
56
61
117
1
—
6
2
8
—
—
10.7
3.3
6.8
—
—
27
238
265
3
—
—
1
1
—
—
614
235
193
87
41
1,675
1,131
1,942
845
32,431
1,170
2,507
3,470
5,977
32
—
127
125
252
1
—
41.5
39.3
28.1
7.7
6.0
—
0.4
0.4
—
—
35.5
17.5
4.2
6.8
6.5
4.0
3.1
3.6
8.3
—
11.6
12.1
2.4
3.3
5.0
4.1
3.6
3.8
3.6
—
4.7
2.1
16.8
22.6
7.7
9.5
4.3
5.2
5.2
5.2
7.7
—
4.5
2.3
14.0
17.1
4.5
4.9
3.6
5.1
3.6
4.2
3.1
—
3.7
22,518
640
2.8
7,824
369
4,132
192
4.6
3,966
222
5.6
38,440
1,423
1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.
2 Includes assets that have triggered PD movements, or other rules, given that being 1-29 days in arrears in of itself is not a stage 2 trigger.
3 Expected credit loss allowances on loans and advances to customers (drawn and undrawn).
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
ECL sensitivity to economic assumptions
The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by generating
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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
173
The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios. 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. ECL applied through individual assessments
and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated.
Statutory basis
UK Mortgages
Other Retail
Commercial Banking
Other
At 31 December 2020
UK Mortgages
Other Retail
Commercial Banking
Other
At 31 December 2019
Underlying basis
UK Mortgages
Other Retail
Commercial Banking
Other
At 31 December 2020
UK Mortgages
Other Retail
Commercial Banking
Other
At 31 December 2019
Probability-
weighted
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
1,027
2,368
2,402
450
6,247
569
1,521
1,315
50
3,455
614
2,181
1,910
448
5,153
317
1,443
1,211
50
3,021
804
2,310
2,177
450
5,741
464
1,492
1,258
50
3,264
1,237
2,487
2,681
450
6,855
653
1,564
1,382
50
3,649
2,306
2,745
3,718
456
9,225
1,389
1,712
1,597
50
4,748
Probability-
weighted
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
1,605
2,403
2,402
450
6,860
1,216
1,580
1,315
50
4,161
1,192
2,216
1,910
448
5,766
964
1,502
1,211
50
3,727
1,382
2,345
2,177
450
6,354
1,111
1,551
1,258
50
3,970
1,815
2,522
2,681
450
7,468
1,300
1,623
1,382
50
4,355
2,884
2,780
3,718
456
9,838
2,036
1,771
1,597
50
5,454
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
174 Lloyds Banking Group Annual Report and Accounts 2020
The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios, with stage allocation based on each specific
scenario. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on
which they are evaluated. A probability-weighted scenario is not shown as this does not reflect the basis on which ECL is reported.
Statutory basis
UK Mortgages
Other Retail
Commercial Banking
Other
Total
Underlying basis
UK Mortgages
Other Retail
Commercial Banking
Other
Total
At 31 December 2020
At 31 December 2019
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
602
2,154
1,892
448
5,096
1,180
2,189
1,892
448
5,709
797
2,299
2,157
449
5,702
1,375
2,334
2,157
449
6,315
1,269
2,509
2,738
450
2,578
2,819
4,155
457
6,966
10,009
1,847
2,544
2,738
450
3,156
2,854
4,155
457
7,579
10,622
311
1,435
1,206
49
3,001
958
1,494
1,206
49
3,707
461
1,486
1,254
50
3,251
1,108
1,545
1,254
50
3,957
670
1,570
1,387
50
3,677
1,317
1,629
1,387
50
4,383
1,667
1,740
1,625
51
5,083
2,314
1,799
1,625
51
5,789
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 gradual changes in
these two critical economic factors. The assessment has been made against the base case with the reported staging unchanged.
The table below shows the impact on the Group’s ECL in respect of UK mortgages resulting from a decrease/increase in Loss Given Default for a 10
percentage point (pp) increase or decrease in the UK House Price Index (HPI). The increase/decrease is presented based on the adjustment phased evenly
over the first ten quarters of the base case scenario.
ECL impact, £m
At 31 December 2020
At 31 December 2019
10pp increase
in HPI
(206)
10pp decrease
in HPI
284
10pp increase
in HPI
(110)
10pp decrease
in HPI
147
The table below shows the impact on the Group’s ECL resulting from a 1 percentage point (pp) increase or decrease in the UK unemployment rate. The
increase or decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario. An immediate increase or
decrease would drive a more material ECL impact as it would be fully reflected in both 12 month and lifetime PDs.
UK mortgages
Other Retail
Commercial Banking
Other
ECL impact
At 31 December 2020
At 31 December 2019
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
25
54
125
1
205
(23)
(54)
(112)
(1)
(190)
33
39
68
1
141
(34)
(54)
(54)
(1)
(143)
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
175
Group derivative credit risk exposures
Derivative credit risk exposure
2020
Traded over the counter
2019
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
—
20
419,456
419,476
—
8
275,386
6,647,014
241,340
7,163,740
199,986
6,211,948
5,264
—
—
—
4,794
7,707
10,058
7,707
4,820
—
—
—
421,143
250,392
6,594
16,959
Total
£m
421,151
6,662,326
11,414
16,959
280,650
6,647,034
673,297
7,600,981
204,806
6,211,956
695,088
7,111,850
931
(965)
(34)
28,627
(26,290)
2,337
1,820
(1,794)
26
24,499
(23,928)
571
Notional balances
Foreign exchange
Interest rate
Equity and other
Credit
Total
Fair values
Assets
Liabilities
Net (liability) asset
The total notional principal amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2020 and 31
December 2019 is shown in the table above. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to
the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 51 on page 314.
Retail
The Retail portfolio has remained robust and well positioned throughout the COVID-19 pandemic. Risk management has been enhanced since the last
financial crisis, with strong affordability and indebtedness controls for both new and existing lending and a prudent risk appetite approach. This is evident
in the significant improvement in credit quality and low arrears rates. However, customers have been significantly impacted by the pandemic and credit
performance is expected to worsen as a result
The Group has provided significant levels of support to Retail customers through 2020. Since March 2020, the Group has approved over 1.3 million payment
holidays, while personal current accounts customers have had access to up to £500 interest free arranged overdrafts and repossession activity has been
suspended
As a result of payment holidays, the arrears rate across the portfolios is below pre-crisis levels
The Group has taken targeted steps across the Retail product offering to implement tighter credit quality controls on key risk indicators such as
indebtedness and credit scores to ensure that customers and the bank are protected
The Group has participated fully in the Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS) for Retail
Business Banking customers, where government guarantees are in place at 100 per cent and 80 per cent, respectively
The Retail impairment charge increased to £2,384 million for 2020 compared to £1,038 million for 2019, largely driven by updates to the Group’s economic
forecast following the coronavirus outbreak
Existing IFRS 9 staging rules and triggers have been maintained across Retail, with additional tightening on the credit cards portfolio. Transfers between
stages have been primarily driven by credit risk rating movements and the estimated impact of the economic factors on a customer’s forward-looking
default risk
Total Retail expected credit loss (ECL) allowance as a percentage of drawn loans and advances (coverage) increased to 1.1 per cent (31 December 2019: 0.8
per cent) due to the updates in the Group’s economic forecast. As at 31 December 2020, the majority of ECL increases are reflected within Stage 2 under
IFRS 9, representing cases which have observed a Significant Increase in Credit Risk since origination (SICR). As such the proportion of Stage 2 loans and
advances comprises 13.0 per cent of the Retail portfolio (31 December 2019: 9.4 per cent), of which 86.2 per cent are up to date, performing loans
Stage 2 ECL coverage increased to 4.3 per cent (31 December 2019: 3.6 per cent), following updates to the Group’s economic forecast. This was offset by
a slight reduction in UK Mortgages Stage 2 ECL coverage where a greater proportion of Stage 2 balances was from lower risk and up to date accounts,
transferred into Stage 2 based on the forward-looking view of their credit performance
Stage 3 loans and advances have remained flat at 1.5 per cent of total loans and advances (31 December 2019: 1.5 per cent, Stage 3 ECL coverage
increased to 22.5 per cent (31 December 2019: 19.1 per cent) due to a combination of the UK Mortgages and Motor Finance portfolios where the impact of
the coronavirus outbreak on collateral values is expected to result in increased loss given default (LGD), in addition to the impact of changes to collections
processes within the credit cards portfolio
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
176 Lloyds Banking Group Annual Report and Accounts 2020
Portfolios
UK Mortgages
The UK Mortgages portfolio is well positioned with low arrears and a strong Loan to Value (LTV) profile. The Group has actively improved the quality of the
portfolio over the years using robust affordability and credit controls, whilst the balances of higher risk portfolios originated prior to 2008 have continued to
reduce
Whilst the housing market has remained resilient throughout 2020 with strong customer demand, the Group has taken action to protect credit quality, for
example by reducing the maximum LTV on new lending to 85 per cent for the majority of 2020
Total loans and advances increased to £295.4 billion (31 December 2019: £289.8 billion), with a small reduction in average LTV to 43.5 per cent (31 December
2019: 44.9 per cent). The proportion of balances with an LTV greater than 90 per cent decreased to 0.6 per cent (31 December 2019: 2.5 per cent). The
average LTV of new business decreased to 63.9 per cent (31 December 2019: 64.3 per cent)
The impairment charge was £478 million for 2020 compared to a release of £167 million for 2019, reflecting charges due to the weaker economic outlook.
Total ECL coverage increased to 0.5 per cent (31 December 2019: 0.4 per cent)
Stage 2 loans and advances increased to 12.8 per cent of the portfolio (31 December 2019: 9.3 per cent) which has contributed to a slight reduction in
Stage 2 ECL coverage to 2.1 per cent (31 December 2019: 2.3 per cent) given a greater proportion of Stage 2 balances from lower risk up to date accounts,
transferred into Stage 2 based on the forward-looking view of their credit performance
Stage 3 ECL Coverage increased to 15.6 per cent (31 December 2019: 13.6 per cent) largely due to the revised outlook for house prices across the multiple
economic scenarios utilised for IFRS 9 provisioning
Credit cards
Credit cards balances decreased to £15.1 billion (31 December 2019: £18.1 billion) due to reduced levels of customer spend, resulting in a reduction in the
volume of customers with highly utilised cards
The credit card book has performed well in recent years, with lower arrears rates compared to the High Street Bank peer group
The impairment charge was £800 million for 2020 (2019: £503 million), with overall ECL coverage increasing to 6.4 per cent (31 December 2019: 3.4 per
cent) and Stage 2 ECL coverage increasing to 16.8 per cent (31 December: 14.1 per cent). The increases were largely due to the weaker outlook within our
economic forecasts
In addition to increases caused by the weakening economic outlook, Stage 2 loans and advances also increased due to a stricter criteria adopted to trigger
movements from Stage 1 to Stage 2. As a result, Stage 2 loans and advances as a percentage of total loans and advances increased to 21.7 per cent (31
December 2019: 9.2 per cent)
Stage 3 ECL coverage increased to 58.8 per cent (31 December 2019: 46.2 per cent). This resulted from a refresh of data used to calculate loss rates that
reflects changes in collections policy, some realignment of coverage across stages and a strengthening of coverage given the current environment
Loans and overdrafts
Loans and advances for personal current account and the personal loans portfolios decreased to £9.5 billion (31 December 2019: £10.2 billion) due to
reduced customer spend and demand for credit
The impairment charge was £739 million for the full year 2020 compared to £445 million for the full year 2019. This increase is primarily due to the weaker
outlook within our economic forecasts, increasing both Stage 2 ECL coverage to 22.6 per cent (31 December 2019: 17.1 per cent) and overall ECL coverage
to 7.6 per cent (31 December 2019: 4.6 per cent)
UK Motor Finance
The UK Motor Finance portfolio decreased slightly from £16.0 billion for 2019 to £15.2 billion for 2020 due to reduced market activity as a result of the
pandemic
The impairment charge increased to £226 million for 2020 compared to £203 million for 2019, due to the weaker outlook within our economic forecasts. ECL
coverage increased to 3.3 per cent (31 December 2019: 2.4 per cent)
Updates to Residual Value (RV) and Voluntary Termination (VT) risk held against Personal Contract Purchase (PCP) and Hire Purchase (HP) lending included
within the impairment charge, however because the Group has adopted a prudent approach to modelling this risk in recent years, the updates to the
Group’s economic outlook have not resulted in a material change to provisions, which remained relatively unchanged at £192 million as at 31 December
2020 (31 December 2019: £201 million)
Stage 2 ECL coverage increased to 7.7 per cent (31 December 2019: 4.5 per cent) and Stage 3 ECL coverage increased to 66.8 per cent (31 Dec 2019: 56.0
per cent) both of which were due principally to the impact on Credit ECL from updates to the Group’s outlook on used car prices. Credit and RV
provisioning are aligned in the assumption of an anticipated near-term reduction in car prices, with an expected slow recovery until 2024
Other
Other loans and advances increased to £19.4 billion (31 December 2019: £10.9 billion). The increase was largely driven by increased lending to Retail
Business Banking customers; £7.1 billion Bounce Back Loans, which are fully guaranteed by the UK Government, and £254 million Coronavirus Business
Interruption Loans which are 80 per cent guaranteed
The impairment charge was £141 million for 2020 compared to £54 million for 2019, primarily due to the weaker outlook within our economic forecasts
Retail UK Mortgages loans and advances to customers (statutory basis)
Mainstream
Buy-to-let
Specialist
Total
1 Balances include the impact of HBOS related acquisition adjustments.
At 31 Dec
20201
£m
At 31 Dec
20191
£m
234,273
227,975
49,634
10,899
49,086
12,137
294,806
289,198
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
177
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
2020
Cases
2019
Cases
25,014
24,393
4,598
6,294
3,863
6,059
35,906
34,315
2020
%
1.4
1.1
7.6
1.5
2019
%
1.3
0.9
6.6
1.4
2020
£m
2,777
602
1,056
4,435
2019
£m
2,619
502
998
4,119
2020
%
1.2
1.2
9.6
1.5
2019
%
1.1
1.0
8.2
1.4
1 Value of loans represents total gross book value of mortgages more than three months in arrears; the balances exclude the impact of HBOS acquisition adjustments.
The stock of repossessions decreased to 343 cases at 31 December 2020 compared to 1,171 cases at 31 December 2019.
In line with regulatory guidance, the Group has suspended all repossession activity on mortgage accounts from March 2020. As a consequence of this, the
volume of cases in late stage arrears has increased.
Period end and average LTVs across the Retail mortgage portfolios (underlying basis)
At 31 December 2020
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Total
Average loan to value1:
Stock of residential mortgages
New residential lending
At 31 December 2019
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Total
Average loan to value1:
Stock of residential mortgages
New residential lending
Mainstream
%
Buy-to-let
%
Specialist
%
53.8
18.3
17.8
9.6
0.3
0.2
61.5
25.0
12.1
0.9
0.2
0.3
70.1
16.1
8.0
2.3
1.0
2.5
Total
%
55.8
19.3
16.5
7.8
0.3
0.3
100.0
100.0
100.0
100.0
42.5
65.1
49.7
58.2
40.9
n/a
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
43.5
63.9
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
44.9
64.3
1 Average loan to value is calculated as total loans and advances as a percentage of the total indexed collateral of these loans and advances; the balances exclude the impact of HBOS acquisition adjustments.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
178 Lloyds Banking Group Annual Report and Accounts 2020
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 2020, owner occupier interest-
only balances as a proportion of total owner occupier balances had reduced to 21.6 per cent (31 December 2019: 23.9 per cent). The average indexed loan to
value remained low at 39.0 per cent (31 December 2019: 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.
Analysis of owner occupier interest-only mortgages (statutory basis)
Interest-only balances (£m)
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Purchased or originated credit-impaired (%)
Average loan to value (%)
Maturity profile (£m)
Due
1 year
2-5 years
6-10 years
>11 years
At 31 Dec
2020
Total
At 31 Dec
2019
Total
53,077
57,437
69.0
16.3
1.7
13.0
39.0
1,626
2,045
9,450
18,351
21,605
75.6
10.0
1.2
13.2
41.2
1,459
1,968
9,852
18,606
25,552
Past term interest-only balances (£m)1
1,715
1,677
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Purchased or originated credit-impaired (%)
Average loan to value (%)
Negative equity (%)
1 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.
0.7
28.9
24.2
46.2
34.4
2.5
0.9
23.9
21.8
53.4
35.7
2.8
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
179
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 £286 million to £6.2 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 £259million to £5.9 billion.
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 1.7 per cent at 31 December 2020 (31 December 2019: 1.9 per cent).
As at 31 December 2020, 98.3 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
2019: 98.8 per cent).
Total expected credit losses (ECL) as a proportion of loans and advances which are forborne has increased to 12.2 per cent (31 December 2019: 9.3 per cent).
Retail forborne loans and advances (statutory basis) (audited)
At 31 December 20202
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Total
At 31 December 2019
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Total
Total
£m
Of which
Stage 2
£m
Of which
Stage 3
£m
Of which
POCI
£m
5,106
1,192
356
353
88
130
154
50
823
191
146
34
3,081
—
—
—
5,903
1,526
1,194
3,081
5,559
1,156
321
219
63
65
103
35
736
210
95
26
3,659
—
—
—
6,162
1,359
1,067
3,659
Expected credit
losses as a % of
total loans and
advances which
are forborne1
%
3.6
40.0
36.5
36.3
7.0
2.1
32.8
28.8
30.4
5.0
1 Expected credit loss allowance as a percentage of total loans and advances which are forborne is calculated excluding loans in recoveries for Credit cards, Loans and overdrafts (31 December 2020:
£75 million; 31 December 2019: £82 million).
2 In line with FINREP reporting and regulatory guidelines, Retail forborne loans and advances do not include COVID-19 moratoria.
Retail forborne loans and advances (underlying basis)
At 31 December 20202,3
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Total
At 31 December 20192
UK Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Total
Total
£m
Of which
Stage 2
£m
Of which
Stage 3
£m
5,377
3,054
2,313
356
353
88
130
154
50
191
145
34
6,174
3,388
2,683
5,857
3,467
321
219
63
65
103
35
2,379
210
95
26
6,460
3,670
2,710
Expected credit
losses as a % of
total loans and
advances which
are forborne1
%
8.4
40.0
36.5
36.3
12.2
7.1
32.8
28.8
30.4
9.3
1 Expected credit losses as a percentage of total loans and advances which are forborne are calculated excluding loans in recoveries for Credit cards, Loans and overdrafts (31 December 2020: £75
million; 31 December 2019: £82 million).
2 Balances exclude the impact of HBOS and MBNA acquisition related adjustments.
3 In line with FINREP reporting and regulatory guidelines, Retail forborne loans and advances do not include COVID-19 moratoria.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
180 Lloyds Banking Group Annual Report and Accounts 2020
Commercial Banking
Portfolio Management and Supporting the Group's Customers
Commercial Banking has actively supported its customers during this difficult time, through a range of propositions, including capital repayment holidays,
working capital line increases and financial covenant waivers, as well as supporting small businesses and corporates through full use of UK Government
schemes
The coronavirus has resulted in widespread industry disruption, with some sectors such as travel, transportation, non-essential retail and hospitality
particularly impacted, although as a proportion of the Group’s overall lending, these sectors remain relatively modest. The Group expects recovery to be
slow in a number of vulnerable sectors and anticipates longer term structural changes in a number of these. Sector and credit risk appetite continue to be
proactively managed to ensure the Group is protected and clients are supported in the right way
As the crisis has developed, Commercial Banking has continued to support its more vulnerable clients early through focused risk management via the
Group’s Watchlist and Business Support framework
With the exception of certain risk appetite extensions made to accommodate UK Government scheme guidelines, particularly Bounce Back Loans and to
a lesser extent, Coronavirus Business Interruption Loans (where government guarantees are in place at 100 per cent and 80 per cent, respectively), lending
continues to be in line with the usual approach to credit risk and through the cycle credit risk appetite: credit analysis is undertaken to ensure continued
financial viability, notwithstanding any short-term coronavirus related pressure
Although the portfolios were well positioned pre crisis, as expected, deterioration has been seen with downgrades in credit risk ratings observed, although
more so in the larger corporates segment, than in the SME book, which remains predominantly a secured portfolio. Risk rating downgrades to sub
investment grade or equivalent have, however, been more modest
Credit impacts were relatively muted in the SME portfolio in 2020. Observed credit quality is likely to be influenced by the significant temporary support
provided by the Government in light of the COVID-19 pandemic, which has the potential to distort underlying credit risk. The Group expects arrears
and defaults to increase in 2021 as this support comes to an end. Crystallisation of these impacts is expected to start from the second quarter of 2021 as
payments start to fall due, and are anticipated to be protracted over a number of years, given the flexible payment deferral options available under the
various government lending schemes
Significant uncertainties remain, relating to both the coronavirus pandemic and the full impact of the UK's exit from the European Union on the portfolios.
Notwithstanding this, the Group will continue to balance prudent risk appetite with ensuring support for financially viable clients on their road to recovery
Impairments
The net impairment charge increased to £1,464 million in 2020, compared with £306 million in 2019. The increase largely reflects charges of £809 million
following updates to the economic outlook, together with £403 million for a small number of existing Stage 3 large corporate restructuring cases in the
Business Support Unit (BSU), where coronavirus has directly hampered the client’s existing recovery strategy. The remaining charge of £252 million was
largely as a result of impairments crystallising on a small number of single name charges in the BSU
As a result, expected credit loss allowances increased by £1,082 million to £2,395 million at 31 December 2020. The Group recognises that credit quality
has been supported by the temporary measures provided by the UK Government schemes and the existing expected credit loss provision balance as at 31
December 2020 assumes additional losses will emerge as the support subsides and structural change emerges in some sectors
Stage 3 loans and advances remained broadly flat at £3,524 million (31 December 2019: £3,447 million) although given the overall Commercial portfolio
reduction, as a proportion of total loans and advances to customers, increased to 4.0 per cent (31 December 2019: 3.6 per cent). SME flows to Stage 3
remain suppressed and non-SME flows were offset by repayments and write-offs. Stage 3 ECL coverage increased to 36.7 per cent (31 December 2019: 27.4
per cent) predominantly driven by the additional provisions raised against the existing restructuring cases in the BSU
Stage 2 loans and advances have increased by £8,339 million to £14,316 million at 31 December 2020, largely driven by the IFRS 9 forward look PD staging
trigger, rather than actual PD deterioration, with 98 per cent of Stage 2 balances being current and up to date. As a result, Stage 2 loans as a proportion of
total loans and advances to customers increased to 16.2 per cent (31 December 2019: 6.2 per cent). Stage 2 ECL coverage was higher at 5.2 per cent (31
December 2019: 4.2 per cent) with the increase in coverage a direct result of the forward look multiple economic scenarios
Commercial Banking UK Direct Real Estate
Commercial Banking UK Direct Real Estate gross lending stood at £13.1 billion at 31 December 2020 (net of exposures subject to protection through
Significant Risk Transfer securitisations). The Group has a further £1.0 billion of UK Direct Real Estate exposure in Business Banking within the Retail division
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 of £6.0 billion to social housing providers are also excluded
Recognising this is a cyclical sector, appropriate caps are in place to control origination and exposure. Focus remains on the UK market and business
propositions have been written in line with a prudent, through the cycle risk appetite with conservative LTVs, strong quality of income and proven
management teams
Overall performance has remained generally acceptable, although an increase in cases moving to Watchlist has been seen, with some transfers to BSU
concentrated in the retail/shopping centres sub sector. This is somewhat to be expected, as overall rent collection has been impacted by COVID-19,
particularly in the retail space given the number of closed stores throughout the lockdowns, though the office sub sector has been reasonably resilient.
Despite these challenges the portfolio is relatively well positioned and proactively managed with appropriate risk mitigants in place:
– Exposures over £1 million continue to be heavily weighted towards investment real estate (c.90 per cent) over development. Of these investment exposures,
over 75 per cent have an LTV of less than 60 per cent, with an average LTV of 50 per cent
– C.90 per cent of exposures greater than £5 million have an interest cover ratio of greater than 2.0 times and in SME, LTV at origination has been typically
limited to c.55 per cent, given prudent repayment cover criteria (including a notional base rate stress)
– Approximately 65 per cent of exposures over £1 million relate to commercial real estate (with no speculative development lending) with the remainder
related to residential real estate. The underlying sub-sector split is diversified with c.13 per cent of exposures secured by Retail assets, with appetite
tightened since 2018
– The Office portfolio is focused on prime locations with strong sponsors and low LTVs, as well as no speculative commercial development
– Use of Significant Risk Transfer (SRT) securitisations also acts as a risk mitigant, with run off of these carefully managed and tracked
– 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
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
181
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 <£1m
Total Investment
Development
Total
At 31 December 20201,2
At 31 December 20191,2
Stage 1/2
£m
Stage 3
£m
Total
£m
5,967
883
143
48
69
—
—
367
7,477
3,238
10,715
1,620
12,335
48
6,015
7
—
4
70
40
47
97
313
41
354
27
381
890
143
52
139
40
47
464
7,790
3,279
11,069
1,647
12,716
%
77.2
11.4
1.8
0.7
1.8
0.5
0.6
6.0
100.0
Stage 1/2
£m
Stage 3
£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
Total
£m
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
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 £0.36 billion (31 December 2019: £0.35 billion).
3 Predominantly Investment grade corporate CRE lending where the Group is relying on the corporate covenant.
Commercial Banking forbearance
Commercial Banking forborne loans and advances (audited)
At 31 December 2020
Type of forbearance
Refinancing
Modification
Total
At 31 December 2019
Type of forbearance
Refinancing
Modification
Total
Commercial Banking lending in key coronavirus-impacted sectors1
At 31 December 2020
Retail non-food
Automotive dealerships2
Oil and gas
Construction
Passenger transport
Hotels
Leisure
Restaurants and bars
Total
1 Lending classified using ONS SIC codes at legal entity level.
2 Automotive dealerships includes Black Horse Motor Wholesale lending (within Retail Division).
Total
£m
Of which
Stage 3
£m
16
4,309
4,325
70
4,216
4,286
15
3,509
3,524
41
3,322
3,363
Drawn
£bn
Undrawn
£bn
Drawn and
undrawn
£bn
Drawn as a
% of Group
loans and
advances
%
2.2
1.8
1.1
1.2
1.2
1.9
0.7
0.7
1.7
2.0
2.7
1.7
1.1
0.3
0.7
0.5
3.9
3.8
3.8
2.9
2.3
2.2
1.4
1.2
10.8
10.7
21.5
0.5
0.4
0.2
0.2
0.2
0.4
0.1
0.1
2.1
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
182 Lloyds Banking Group Annual Report and Accounts 2020
Environmental risk management
Through 2020 the Group has strengthened capacity for identifying, assessing
and managing environmental risks across its lending activity. Group-wide
credit risk principles require all credit risk to be incurred with regard to
environmental legislation and the Group's Code of Responsibility.
Environmental risk is embedded in credit policy and must be assessed at
origination and monitored on an ongoing basis throughout the customer
lifecycle.
The Group continues to embed the risks and opportunities from climate
change into its business and credit risk processes, with a robust programme
underway to analyse and proactively manage business strategy and risk
appetite response for financing high-carbon intensive sectors, while
emphasising its commitment to support clients transitioning to more
sustainable, low-carbon activities.
In 2020 the Group has developed and piloted a Climate Risk Assessment
tool, and has continued to develop guidance and tools to help Relationship
Managers and Credit Officers identify and manage the climate risk
associated with its customers. This includes analysing actions being taken by
customers to reduce greenhouse gas emissions, reviewing and responding
to exposure to physical and transitional risks from climate change; and
understanding and managing potential opportunities to support customers
in their transition journey. Further detail is provided in the Responsible
Business section (see pages 16 to 31).
Lloyds Banking Group is a signatory to the Equator Principles, which is
a risk management framework for managing environmental and social
risks in Project Finance transactions, such as large scale energy, industrial,
or infrastructure projects. It ensures that such deals, where the Group
provides finance or advice, meet minimum standards for due diligence and
monitoring in keeping with responsible finance.
In 2020, the Group implemented the enhanced requirements of Equator
Principles 4. This strengthens the due diligence requirements for signatories
to consider the environmental and social risk impacts of projects specifically
on human rights, climate change and biodiversity, including aligning climate
change risk assessments with the physical and transition risk categories
recommended by the Task Force on Climate-related Financial Disclosures.
The Group has also been a signatory to the UN Principles for Responsible
Investment (UNPRI) since 2012, which incorporate environmental, social
and governance (ESG) risk considerations in asset management. Scottish
Widows is responsible for the annual UNPRI reporting process.
The risk-based environmental policy was simplified in 2020, to ensure focus
on higher risk sectors and transactions. All cases that are identified as higher
risk are subject to further review. Where specific or material environmental
risks or concerns are identified by the Group's in-house team, cases are
referred to environmental risk consultants for an opinion on the adequacy of
the mitigants in place or recommendations on managing the environmental
risk. The key findings from such due diligence must be factored into credit
applications which inform lending decisions.
The Group provides 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.
The Group continues 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.
Environmental risk management approach
Environmental risk process flow
Group Credit Principle
Environmental risk
Credit policies
Business unit
processes
Initial
transaction
screening to
assess against
criteria of
Environmental
Risk policy
Relationship
Teams
Input
Environmental
Risk Screening
Tool
Mannual Review
& Analysis of
Documentation
Additional
Environmental
Due Diligence
Environmental
Risk Review
Complete
Relationship
Teams
In-house specialist
team
Retained panel
environmental
consultants
Recommendations
made by in-house
specialist team if
applicable
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
183
Funding and liquidity risk
Definition
Funding risk is defined as the risk that the Group does not have sufficiently
stable and diverse sources of funding or the funding structure is
inefficient. Liquidity risk is defined as the risk that the Group has insufficient
financial resources to meet its commitments as they fall due, or can only
secure them at excessive cost.
Exposure
Liquidity exposure represents the 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 51 on page 314 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 its planning period, 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 the 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 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 2020 liquidity stress testing results refer to
page 186.
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.
Funding and liquidity management in 2020
The Group has maintained its strong funding and liquidity position with the
loan to deposit ratio falling to 98 per cent (107 per cent as at 31 December
2019). This was largely driven by a £38.9 billion increase in customer deposits
given reduced customer spending and customers depositing government
lending scheme balances.
During 2020, the Group repaid all outstanding amounts of its Term Funding
Scheme (TFS) drawings of £15.4 billion and the remaining £1 billion
outstanding of its Funding for Lending Scheme (FLS) drawings. The Group
has drawn £13.7 billion from the Term Funding Scheme with additional
incentives for SMEs (TFSME). Overall, total wholesale funding has reduced
to £109.4 billion as at 31 December 2020 (31 December 2019: £124.2 billion)
principally as a result of growth in customer deposits.
The Group’s liquidity coverage ratio (LCR) was 136 per cent (based on a
monthly rolling average over the previous 12 months) as at 31 December
2020 (31 December 2019: 137 per cent) calculated on a consolidated basis
based on the EU Delegated Act. Net liquidity outflows increased as a result
of a higher volume of short notice customer deposits and higher derivative
margin volatility. 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 the resilience of the Group's
business model and the strength of the balance sheet. In October,
Moody's downgraded Lloyds Bank plc from Aa3/Negative to A1/Stable
due to the removal of the uplift for government support. This impacted a
number of other UK peers and was triggered by the downgrade of the UK
sovereign rating a few days earlier given the agency's concerns around the
pandemic and the UK's exit from the European Union, but did not impact
the standalone rating of the bank. Over the year both S&P and Fitch have
affirmed the Group's ratings, albeit with negative outlooks to reflect their
concerns over the UK economy.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
184 Lloyds Banking Group Annual Report and Accounts 2020
Group funding position
Funding requirement
Loans and advances to customers1
Loans and advances to banks2
Debt securities at amortised cost
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 scheme8
Total equity
Total funding
At 31 Dec
2020
£bn
At 31 Dec
2019
£bn
Change
%
440.2
440.4
7.8
3.3
0.7
6.4
458.4
265.9
724.3
61.3
66.8
2.1
26.9
4.4
(14.5)
147.0
871.3
(248.1)
623.2
450.7
109.4
560.1
13.7
49.4
623.2
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
(234.7)
599.2
411.8
124.2
536.0
15.4
47.8
599.2
—
(4)
(15)
12
—
6
2
9
35
31
8
10
19
19
4
6
4
9
(12)
4
(11)
3
4
1 Excludes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
2 Excludes £0.2 billion (31 December 2019: £0.1 billion) of loans and advances to banks within the Insurance business and £2.7 billion (31 December 2019: £1.6 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 £9.4 billion (31 December 2019: £9.5 billion).
7 The Group’s definition of wholesale funding aligns with that used by other international market participants; including bank deposits, debt securities in issue and subordinated liabilities. 31 December
2019 has been restated to exclude margins.
8 Includes the Bank of England's Term Funding Scheme (TFS) and Term Funding Scheme with additional incentives for SMEs (TFSME).
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
185
Reconciliation of Group funding to the balance sheet (audited)
Included in
funding
analysis
£bn
Repos
and cash
collateral
received by
Insurance
£bn
Fair value
and other
accounting
methods
£bn
At 31 December 2020
Deposits from banks
Debt securities in issue
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
At 31 December 20191
Deposits from banks
Debt securities in issue
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
1 2019 restated to exclude margins.
6.1
89.7
13.6
109.4
450.7
560.1
5.5
102.1
16.6
124.2
411.8
536.0
24.3
—
—
24.3
9.4
33.7
22.8
—
—
22.8
9.5
32.3
Balance
sheet
£bn
31.5
87.4
14.3
1.1
(2.3)
0.7
—
460.1
(0.1)
(4.4)
0.5
28.2
97.7
17.1
—
421.3
Analysis of 2020 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
One to
three
months
£bn
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
3.1
1.6
1.3
0.9
2.3
0.2
6.3
—
9.4
0.9
1.4
1.3
0.1
—
—
2.8
—
3.7
1.5
3.7
4.7
1.3
0.8
0.2
10.7
0.5
12.7
0.1
0.4
0.6
1.2
2.0
0.6
4.8
—
4.9
—
0.7
0.2
1.7
0.5
0.5
3.6
—
3.6
0.2
—
—
3.3
4.3
0.9
8.5
1.4
10.1
0.3
0.2
—
25.5
8.5
0.5
34.7
5.0
40.0
—
—
—
13.5
4.8
—
18.3
6.7
25.0
Total at
31 Dec
2020
£bn
Total at
31 Dec
2019
£bn
6.1
5.5
8.0
8.1
47.5
23.2
2.9
89.7
13.6
109.4
10.6
8.9
48.0
28.7
5.9
102.1
16.6
124.2
1 The Group’s definition of wholesale funding aligns with that used by other international market participants; including bank deposits, debt securities and subordinated liabilities. Excludes balances relating to
margins of £5.3 billion (31 December 2019: £4.2 billion). 2019 restated to exclude margins.
Total wholesale funding by currency (audited)
At 31 December 2020
At 31 December 20191
1 2019 restated to exclude margins.
Analysis of 2020 term issuance (audited)
Medium-term notes
Covered bonds
Private placements1
Subordinated liabilities
Total issuance
1 Private placements include structured bonds.
Sterling
£bn
US Dollar
£bn
28.2
28.3
41.4
49.3
Euro
£bn
32.1
37.5
Other
currencies
£bn
7.7
9.1
Total
£bn
109.4
124.2
Sterling
£bn
US Dollar
£bn
1.3
1.0
0.1
1.3
3.7
2.8
—
0.3
—
3.1
Euro
£bn
2.7
—
0.1
0.3
3.1
Other
currencies
£bn
—
—
—
—
—
Total
£bn
6.8
1.0
0.5
1.6
9.9
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
186 Lloyds Banking Group Annual Report and Accounts 2020
During 2020, the Group continued to access wholesale funding markets across a variety of currencies and markets. Despite the more challenging funding
conditions around the end of the first quarter, the Group saw strong demand in a number of public issuances, and completed £9.9 billion of long-term
funding throughout 2020 across the Group's main issuing entities. This was below the Group's guidance (of the lower end of a £10-15 billion range) given the
availability of more cost effective funding via the TFSME. In addition, the Group has been active in offering liquidity to investors through buyback and liability
management activity, whilst maintaining a prudent approach to managing funding and liquidity with long-term funding buyback volumes of £7.0 billion during
2020. Overall, total wholesale funding volumes totalled £109.4 billion as at 31 December 2020. The Group plans to continue to access wholesale funding
markets in 2021. The continued availability of TFSME will limit the overall wholesale funding requirements of Lloyds Bank plc.
Liquidity Portfolio
At 31 December 2020, the banking business had £141.7 billion of highly liquid unencumbered LCR eligible assets, based on a monthly rolling average over
the previous 12 months post any liquidity haircuts (31 December 2019: £130.3 billion), of which £140.3 billion is LCR level 1 eligible (31 December 2019: £129.1
billion) and £1.4 billion is LCR level 2 eligible (31 December 2019: £1.2 billion). These assets are available to meet cash and collateral outflows and regulatory
requirements. The Insurance business manages a separate liquidity portfolio to mitigate insurance liquidity risk.
LCR eligible assets
Level 1
Cash and central bank reserves
High quality government/MDB/agency bonds2
High quality covered bonds
Total
Level 23
Total LCR eligible assets
Average
20201
£bn
Average
20191
£bn
Change
%
69.3
68.1
2.9
140.3
1.4
141.7
50.9
76.4
1.8
129.1
1.2
130.3
36
(11)
61
9
17
9
1 Based on 12 months rolling average to 31 December. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. 2019 assets have
been restated accordingly.
2 Designated multilateral development bank (MDB).
3 Includes Level 2A and Level 2B.
LCR eligible assets by currency
At 31 December 2020
Level 1
Level 2
Total1
At 31 December 2019
Level 1
Level 2
Total1
Sterling
£bn
US Dollar
£bn
109.7
0.9
110.6
100.5
0.7
101.2
15.6
0.3
15.9
15.6
0.5
16.1
Euro
£bn
15.0
0.2
15.2
13.0
—
13.0
Other
currencies
£bn
—
—
—
—
—
—
Total
£bn
140.3
1.4
141.7
129.1
1.2
130.3
1 Based on 12 months rolling average to 31 December. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. 2019 assets have been
restated accordingly.
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,
including the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME). 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 2020 (calculated as an average of month end observations over the previous 12 months) showed that
the banking business had liquidity resources representing 137 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.
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 2020, the Group had £46.9 billion (31 December 2019: £60.6 billion) of externally encumbered on-balance sheet assets with
counterparties other than central banks. The decrease in encumbered assets was primarily driven by securitisation and covered bond redemptions. The
Group also had £707.2 billion (31 December 2019: £639.5 billion) of unencumbered on-balance sheet assets, and £117.2 billion (31 December 2019: £133.7
billion) of pre-positioned and encumbered assets held with central banks, the reduction in the latter was primarily driven by the amortisation of the asset
portfolios pledged to access Bank of England funding schemes. 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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
187
On balance sheet encumbered and unencumbered assets
Securitisations
and covered
bonds
£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 2020
Cash and balances at central banks
—
—
—
Financial assets at fair value through
profit or loss
Derivative financial instruments
Financial assets at amortised cost:
Loans and advances to banks
47
6,245
6,292
—
—
—
1
—
1
—
—
—
—
66,248
1,424
—
—
—
—
7,009
73,257
73,257
163,910 165,334 171,626
29,613
29,613
29,613
2,087
4,483
4,175
10,745
10,746
Loans and advances to customers
28,089
4,901 32,990
116,858
13,069
191,456
144,470 348,995 498,843
Debt securities
—
942
942
364
2,271
—
1,828
4,099
5,405
28,089
5,844 33,933
117,222
17,427
195,939
150,473 363,839 514,994
Financial assets at fair value through
other comprehensive income
Other4
Total assets
At 31 December 2019
—
—
6,655
6,655
—
—
—
—
20,589
—
359
20,948
27,603
—
654
53,522
54,176
54,176
28,136 18,744 46,880
117,222
105,688
196,593
404,886 707,167 871,269
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
51
4,834
4,885
—
—
—
1
—
1
—
—
—
—
49,270
2,469
—
—
—
—
5,860
55,130
55,130
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
40,480
7,109
47,589
133,732
14,087
171,370
128,210
313,667
494,988
Debt securities
—
553
553
—
3,200
—
1,791
4,991
5,544
40,480
7,663
48,143
133,732
19,145
175,221
134,066
328,432
510,307
Financial assets at fair value through
other comprehensive income
Other4
Total assets
—
—
7,617
7,617
—
—
—
—
16,919
—
—
514
556
17,475
25,092
56,292
56,806
56,806
40,531
20,114
60,645
133,732
87,803
175,735
375,978
639,516
833,893
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 contracts held with reinsurers 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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
188 Lloyds Banking Group Annual Report and Accounts 2020
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, or through
a significant increase in risk-weighted assets as a result of rule changes or
economic deterioration. Alternatively a shortage of capital could arise from
an increase in the minimum requirements for capital, leverage or MREL
either at Group, Ring-Fenced Bank (RFB) sub-group or regulated entity
level. The Group’s capital management approach is focused on maintaining
sufficient and appropriate 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 across all regulated entities
commensurate with a prudent level of solvency to achieve financial resilience
and market confidence. To support this, capital risk appetite is calibrated by
taking into consideration both an internal view of the amount of capital to
hold as well as 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 revisions to the Capital Requirements
Directive implemented in December 2020 (CRD V) and by those provisions
of the revised Capital Requirements Regulation (CRR II) that came into force
in June 2019 and December 2020. The 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.
During 2020 regulators undertook a series of measures in response to the
coronavirus pandemic. This included supportive revisions made to the IFRS
9 transitional arrangements for capital, which the Group applies in full. Over
the short to medium-term, these arrangements will provide some stability
in capital requirements against the increased provisioning and subsequent
volatility connected to the impact of IFRS 9. This is particularly evident from
the current application of the arrangements which has seen the significant
increase in Stage 1 and Stage 2 expected credit losses during the first half of
2020 partially offset for capital purposes.
The UK left the EU on 31 January 2020 but remained subject to changes to
EU capital regulation until the end of the transition period on 31 December
2020. Under temporary transitional powers (TTP) granted to the PRA, EU
capital rules that existed on 31 December 2020 will continue to generally
apply until 31 March 2022. This is subject to revision following any significant
changes introduced by UK regulators, including changes which implement
the remaining parts of CRR II that are not yet in force.
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 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). During the year
the PRA reduced the Group’s total Pillar 2A capital requirement from c.4.6
per cent to c.3.8 per cent of risk-weighted assets at 31 December 2020, of
which c.2.1 per cent of risk-weighted assets must be met by CET1 capital.
This comprised of both the initial reduction applied in the first half of 2020
and a second reduction applied in December 2020 which is designed to
reflect the additional resilience from the higher UK countercyclical capital
buffer rate which in normal conditions will be set at 2 per cent (currently set
at 0 per cent). The latter reduction is currently fully offset at CET1 level by
other regulatory capital requirements as at 31 December 2020.
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 (formerly referred to as the systemic risk buffer) applies to
the Group's RFB sub-group and is currently set at 2.0 per cent of the RFB
sub-group's risk- weighted assets. The size of the buffer applied to the
RFB sub-group is dependent upon the level of its total assets. The O-SII
buffer 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 RFB sub-group and for which the O-SII buffer does not therefore
apply. It is the PRA’s policy to include this in the Group’s PRA buffer.
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 0 per cent as a result of the measures
introduced by UK regulators during the first half of 2020 in response to the
coronavirus pandemic. Given the Group’s UK focused business model, the
overall countercyclical capital buffer at 31 December 2020 for the Group
was around 0 per cent of risk-weighted assets. In December 2020, the FPC
confirmed that it expects the UK CCYB rate to remain at 0 per cent until
at least Q4 2021 and due to the usual 12-month implementation lag, any
subsequent increase would not take effect until Q4 2022 at the earliest. The
FPC also noted that the eventual pace of return to a standard 2 per cent UK
CCYB rate will depend on banks’ ability to rebuild capital while continuing to
support households and businesses.
As part of the Group's capital planning process, forecast capital positions
are subjected to stress testing to determine the adequacy of the Group’s
capital resources against minimum requirements, including the ICR. The
PRA considers outputs from both the Group’s internal stress tests and Bank
of England stress tests, in conjunction with other information, 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.
Under previous Bank of England stress tests, the BoE 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 past exercises were adjusted to recognise the additional
resilience provided by the earlier provisions taken under IFRS 9. A similar
approach will be applied for the forthcoming 2021 solvency stress test. The
Bank is continuing to work on a more enduring treatment of IFRS 9 for the
purposes of future stress tests and will collect additional data during the
2021 solvency stress test to help inform a future approach.
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 combined buffer
(all other regulatory buffers, as referenced above) would give rise to
mandatory restrictions upon any discretionary capital distributions. As
part of the regulatory response to the coronavirus pandemic the PRA has
communicated its expectation that banks' capital and liquidity buffers can
be drawn down as necessary to support the real economy through the shock
and that sufficient time will be made available to restore buffers in a gradual
manner.
In addition to the risk-based capital framework outlined above, the Group is
also subject to minimum capital requirements under the UK Leverage Ratio
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
189
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 2020 the CCLB for the Group was 0
per cent. An additional leverage ratio buffer (ALRB) of 0.7 per cent applies
to the RFB sub-group and is determined by multiplying the RFB sub-group
leverage exposure measure by 35 per cent of the O-SII buffer. 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 and capital planning and stress testing activities. 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.
The Group monitors early warning indicators and maintains a Capital
Contingency Framework as part of a Recovery Plan which are designed
to identify emerging capital concerns at an early stage, so that mitigating
actions can be taken, if needed. The Recovery Plan 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 proposed 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. This type of activity was demonstrated in Q3 2019 with the
cancellation of the remaining share buy-back programme and more recently
in Q1 2020 with the announcement to cancel the planned 2019 year-end
dividend.
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.
Capital policies and procedures are well established and subject to
independent oversight.
Monitoring
The Group’s capital is actively managed and monitoring capital ratios is a
key factor in the Group’s planning processes, which separately cover the RFB
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. This has been
a particular focus recently given the significant uncertainties caused by the
coronavirus pandemic. The Group’s capital plan is tested for capital adequacy
using relevant stress scenarios and sensitivities covering adverse economic
conditions as well as other adverse factors that could impact the Group.
Regular monitoring of the capital position is undertaken by a range of
committees, including Group Capital Risk Committee (GCRC), Group
Financial Risk Committee (GFRC), Group and Ring-Fenced Bank Asset and
Liability Committee (GALCO), Group Risk Committee (GRC), Board Risk
Committee (BRC) and the Board. This includes reporting of actual ratios
against forecasts and risk appetite, base case and stress scenario projected
ratios, and review of early warning indicators and assessment against the
Capital Contingency Framework.
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 prudential 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 around 12.5 per cent plus a management buffer of around
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 requirement set by the PRA. During the year the PRA
reduced the Group’s CET1 Pillar 2A capital requirement from c.2.6 per
cent to c.2.1 per cent of risk-weighted assets at 31 December 2020
the CCB requirement of 2.5 per cent of risk-weighted assets
the Group’s current CCYB requirement which is around 0 per cent of risk-
weighted assets
the RFB sub-group’s O-SII buffer of 2.0 per cent of risk-weighted assets,
which equates to 1.7 per cent of risk-weighted assets at Group level
the Group’s PRA Buffer
Dividend policy
Following a request made by the PRA to large UK banks in March 2020,
the Group suspended the payment of dividends on ordinary shares for
the remainder of the year and cancelled the payment of the final dividend
for 2019. These actions were undertaken as a precautionary measure to
preserve capital as the spread of the coronavirus pandemic led to a UK-wide
lockdown, with the potential to create a significant and prolonged downturn.
In December 2020, the PRA announced that dividend payments could
recommence, provided that this was subject to a prudent framework for
the setting of such distributions. The framework established by the PRA
in respect of any distributions for 2020 requires banks to take into account
the ongoing economic uncertainties and the need for banks to continue
to support the re-build of the UK economy through lending, particularly in
the event of a more severe and prolonged downturn. As a result the PRA
established a cap on distributions for year end 2020, based on the higher
of i) 20 basis points of total risk-weighted assets at 31 December 2020, or
ii) 25 per cent of cumulative profits for 2019 and 2020 after deducting prior
shareholder distributions covering the two year period.
Given the Group's strong capital position at year end and the regulator's
removal of the prohibition on capital distributions, the Board has
recommended a final ordinary dividend of 0.57 pence per share, the
maximum allowed under the PRA's framework.
In addition the PRA has noted its intent to provide a further update on
distributions ahead of the 2021 half-year results for the large UK banks. It is
expected that the PRA will take account of the outcome of the first stage
of the BoE 2021 solvency stress test exercise in informing its approach to
half-year distributions. Ahead of the update banks may accrue for (on an
appropriately prudent basis) but not pay out any dividends. The Group
will update the market on any potential interim dividend with the half year
results, following receipt of this update from the regulator.
The Board remains committed to future capital returns. In 2021, subject to
regulatory guidance, the Board intends to grow the dividend from 2020, in line
with its progressive and sustainable ordinary dividend policy, and to accrue
dividends. As normal, the Board will give due consideration at year end to the
size of the final dividend payment based on circumstances at the time.
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 made.
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 2020 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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
190 Lloyds Banking Group Annual Report and Accounts 2020
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
and interest 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 2020, had a consolidated CET1 capital ratio
of 15.5 per cent (31 December 2019: 14.3 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, subject to agreement by their governing bodies, to remit
surplus capital to their parent companies.
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 first applied 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.
G-SIBs are subject to the framework for 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 can be satisfied by a combination of regulatory
capital and certain unsecured liabilities (which must be subordinate to a
firm’s operating liabilities).
As the Group is not classified as a G-SIB it is not directly subject to the CRR
II MREL.
In the UK the Bank of England has implemented MREL through the Banking
Act and a statement of policy on MREL (MREL SoP). The Group is subject
to these requirements and must therefore maintain a minimum level of
MREL resources. 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 MREL from 1 January 2020, excluding regulatory
capital and leverage buffers, is the higher of 2 times Pillar 1 plus Pillar 2A,
equivalent to 19.8 per cent of risk-weighted assets, or 6.5 per cent of the UK
leverage ratio exposure measure.
From 1 January 2022 the Group's indicative MREL, excluding regulatory
capital and leverage buffers, will increase to the higher of 2 times Pillar 1 plus
2 times Pillar 2A, equivalent to 23.6 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 and capital or
leverage buffers.
The BoE has commenced a review of the current MREL framework and
expects to consult on proposed changes during the year with a view to
setting final end-state requirements for 1 January 2022.
Internal MREL 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.
Analysis of capital position
The Group’s CET1 capital ratio increased to 16.2 per cent after the accrual for
ordinary dividends (31 December 2019: 13.8 per cent on a pro forma basis),
amounting to a capital build for the year of 242 basis points (263 basis points
prior to the accrual for the full year ordinary dividend).
Excluding the impact of the revised capital treatment for intangible software
assets of 51 basis points and the reversal of the full year 2019 ordinary
dividend accrual of 83 basis points, the capital build for the year prior to
the accrual for the current full year ordinary dividend was 129 basis points,
reflecting the following:
banking business capital build before impairment charge of 192 basis
points, which was largely offset by the impairment charge for the year of
174 basis points
the application of IFRS 9 transitional arrangements for capital, which have
provided an in-year benefit amounting to 83 basis points in the form of
relief against the impact of the increase in the impairment charge
a net increase of 28 basis points resulting from the reduction in underlying
risk-weighted assets and excess expected losses as well as favourable
market and other movements, partially offset by pension contributions
(equivalent to 46 basis points) made during the year
The accrual for foreseeable dividends reflects the recommended final
ordinary dividend of 0.57 pence per share.
Excluding the application of the IFRS 9 transitional arrangements for capital
the Group's CET1 capital ratio after ordinary dividends would be 15.0 per
cent (31 December 2019: 13.4 per cent on a pro forma basis).
The PRA is consulting on a proposal to reverse the revised capital treatment
of intangible software assets (which currently follows EU capital regulations),
thereby reinstating the original requirement to deduct in full. Excluding the
impact of the revised capital treatment the Group's CET1 capital ratio after
ordinary dividends would be 15.7 per cent.
The transitional total capital ratio, after ordinary dividends, increased to 23.3
per cent (31 December 2019: 21.5 per cent on a pro forma basis), largely
reflecting the increase in CET 1 capital, offset in part by the reduction in
tier 2 capital, the latter reflecting instrument calls, regulatory amortisation
and other movements, partially offset by the net outcome of subordinated
liability exchange exercises undertaken during the year.
The Group's transitional minimum requirement for own funds and eligible
liabilities (MREL), after ordinary dividends, increased to 36.4 per cent (31
December 2019: 32.6 per cent on a pro forma basis), reflecting the increase
in transitional total capital and an increase in senior unsecured securities
driven by net new issuance.
The UK leverage ratio, after ordinary dividends, increased from 5.2 per cent
on a pro forma basis to 5.8 per cent, largely reflecting the increase in the fully
loaded tier 1 capital position, partially offset by the increase in the leverage
exposure measure reflecting movements in securities financing transactions
and off-balance sheet items.
Total capital requirement
The Group's total capital requirement (TCR) as at 31 December 2020,
being the aggregate of the Group's Pillar 1 and current Pillar 2A capital
requirements, was £23,918 million (31 December 2019: £25,608 million).
Capital resources
An analysis of the Group’s capital position as at 31 December 2020 is
presented in the following section on both a transitional arrangements basis
and a fully loaded basis in respect of legacy capital securities subject to
current grandfathering provisions. In addition the Group’s capital position
under both bases reflects the application of the separate transitional
arrangements for IFRS 9.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
191
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 adjustments3
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
2020
£m
At 31 Dec
2019
£m
At 31 Dec
2020
£m
At 31 Dec
2019
£m
43,278
(404)
2,333
81
(1,629)
1,721
45,380
(3,120)
(445)
—
(1,322)
—
(4,109)
(3,562)
32,822
5,881
2,705
(1,604)
6,982
(1,138)
38,666
11,556
(1,892)
1,474
(1,694)
9,444
(942)
47,168
41,697
(1,586)
2,337
26
(1,504)
247
41,217
(4,179)
(509)
(243)
(531)
(185)
(4,626)
(3,200)
27,744
5,881
4,127
(2,474)
7,534
(1,286)
33,992
13,003
(1,796)
2,278
(3,101)
10,384
(960)
43,416
43,278
(404)
2,333
81
(1,629)
1,721
45,380
(3,120)
(445)
—
(1,322)
—
(4,109)
(3,562)
32,822
41,697
(1,586)
2,337
26
(1,504)
247
41,217
(4,179)
(509)
(243)
(531)
(185)
(4,626)
(3,200)
27,744
5,881
5,881
—
—
—
—
5,881
5,881
—
—
38,703
33,625
11,556
(1,892)
(1,346)
(1,694)
6,624
(2,080)
43,247
13,003
(1,796)
(2,204)
(3,101)
5,902
(2,246)
37,281
Risk-weighted assets (unaudited)
202,747
203,431
202,747
203,431
Common equity tier 1 capital ratio
Tier 1 capital ratio
Total capital ratio
16.2%
19.1%
23.3%
13.6%
16.7%
21.3%
16.2%
19.1%
21.3%
13.6%
16.5%
18.3%
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 Includes an adjustment applied to reserves to reflect the application of the IFRS 9 transitional arrangements for capital.
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192 Lloyds Banking Group Annual Report and Accounts 2020
Movements in capital resources
The key difference between the transitional capital calculation as at 31 December 2020 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, and 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.
Movements in capital resources
At 31 December 2019
Banking business profits1
Movement in foreseeable dividends2
Dividends received from the Insurance business1
IFRS 9 transitional adjustment to retained earnings
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
Securitisation deductions
Excess of expected losses over impairment provisions and value adjustments
Significant investments
Movements in other equity, subordinated liabilities, other tier 2 items and related adjustments
Other movements3
At 31 December 2020
Common
equity tier 1
£m
27,744
1,538
1,182
250
1,529
(791)
113
(90)
64
(362)
1,059
185
243
517
—
(359)
32,822
Additional
tier 1
£m
6,248
Tier 2
£m
9,424
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
148
(552)
—
18
(940)
—
Total
capital
£m
43,416
1,538
1,182
250
1,529
(791)
113
(90)
64
(362)
1,059
185
243
683
(1,492)
(359)
5,844
8,502
47,168
1 Under the regulatory framework, profits made by Insurance are removed from CET1 capital. However, when dividends are paid to the Group by Insurance these are recognised through CET1 capital.
2 Reflects the accrual for the 2020 full year ordinary dividend and the reversal of the accrual for the 2019 full year ordinary dividend which was cancelled.
3 Includes distributions on other equity instruments.
CET1 capital resources have increased by £5,078 million over the year, primarily reflecting:
underlying banking business profits (pre impairment charge) with the impairment charge partially offset through the increase in IFRS 9 transitional relief
the reversal of the brought forward foreseeable dividend accrual following the cancellation of the 2019 full year ordinary dividend
dividends received from the Insurance business following payment of their 2019 full year ordinary dividend
the introduction of the revised capital treatment of intangible software assets
the reduction in excess expected losses following the increase in offsetting IFRS 9 expected credit losses
a reduction in the amount of significant investments deducted from capital as a result of the increase in the underlying capital base
offset in part by pensions contributions made during the year, an increase in deferred tax assets and other movements
AT1 capital resources have reduced by £404 million over the year, primarily reflecting the annual reduction in the transitional limit applied to grandfathered
AT1 capital instruments, offset in part by a reduction in the significant investments deduction.
Tier 2 capital resources have reduced by £922 million over the year, largely reflecting instrument calls, regulatory amortisation and other movements, partially
offset by the net outcome of subordinated liability exchange exercises undertaken during the year.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
193
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 instruments2
Amortised portion of eligible tier 2 instruments issued by Lloyds Banking Group plc
Other eligible liabilities issued by Lloyds Banking Group plc3
Total MREL resources1
Risk-weighted assets
MREL ratio
Leverage exposure measure
MREL leverage ratio
Transitional1
At 31 Dec
2020
£m
At 31 Dec
2019
£m
47,168
43,416
(582)
194
26,946
73,726
202,747
36.4%
666,070
11.1%
(874)
24
23,554
66,120
203,431
32.5%
654,387
10.1%
1 Until 2022, externally issued regulatory capital in operating entities can count towards the Group’s MREL resources to the extent that such capital would count towards the Group's consolidated
capital resources.
2 Instruments with less than or equal to one year to maturity or governed under non-UK law without a contractual bail-in clause.
3 Includes senior unsecured debt.
During 2020, the Group issued externally £4.9 billion (sterling equivalent at point of issuance) of senior unsecured securities from Lloyds Banking Group plc
which, while not included in total capital, are eligible to meet MREL.
Total MREL resources increased by £7.6 billion, largely reflecting the increase in total capital resources and the increase in senior unsecured securities driven by
net new issuance.
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
2020
£m
At 31 Dec
2019
£m
50,435
65,225
17,747
133,407
23,596
157,003
5,630
436
679
24,865
2,207
190,820
11,927
202,747
53,842
63,208
18,544
135,594
24,420
160,014
5,083
210
584
25,482
1,790
193,163
10,268
203,431
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.
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194 Lloyds Banking Group Annual Report and Accounts 2020
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 2019
Less threshold risk-weighted assets3
Risk-weighted assets as at 31 December 2019
135,594
24,420
160,014
Asset size
Asset quality
Model updates
Methodology and policy
Acquisitions and disposals
Movements in risk levels (market risk only)
Foreign exchange movements
Other
(8,004)
(1,253)
(9,257)
2,665
1,770
1,445
—
—
(63)
—
126
—
248
—
—
55
—
2,791
1,770
1,693
—
—
(8)
—
Total
£m
203,431
(10,268)
5,877
754
(232)
—
—
—
—
346
—
1,790
25,482
193,163
—
—
—
—
—
417
—
—
—
—
—
—
—
—
—
(8,503)
2,559
1,770
1,693
—
417
338
(617)
(617)
Risk-weighted assets as at 31 December 2020
133,407
23,596
157,003
6,745
2,207
24,865
190,820
Threshold risk-weighted assets3
Risk-weighted assets as at 31 December 2020
11,927
202,747
1 Credit risk includes securitisation risk-weighted assets.
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 £9.3 billion includes lower levels of retail unsecured lending and reductions in non-government related commercial lending, together
with continued optimisation in Commercial Banking and the exit of equity investments
Asset quality increase of £2.8 billion includes the impact of credit migration and model calibrations, partially offset by the benefit from House Price Index
increases during 2020
Model updates increase of £1.8 billion relates to changes to the retail mortgage models
Methodology and policy increase of £1.7 billion reflects the full implementation of the new securitisation framework on 1 January 2020 and the recognition
of the revised capital treatment of intangible software assets, partially offset by the impact of revisions to the SME scalar
Counterparty credit risk, risk-weighted assets increased by £0.9 billion due to movements in market rates during the year.
Market risk, risk-weighted assets increased by £0.4bn driven by a modest increase in interest rate risk exposure from a low risk base and COVID-19 related
volatility entering the VaR model.
Leverage ratio
Analysis of leverage movements
The Group’s fully loaded UK leverage ratio increased to 5.8 per cent during the period, primarily driven by the increase in tier 1 capital. The leverage exposure
measure increased by £11.7 billion during the period, largely reflecting the increase in the SFT and off-balance sheet exposure measures. Following a direction
received from the PRA the Group is permitted to exclude lending under the UK Government’s Bounce Back Loan Scheme (BBLS) from the leverage exposure
measure.
The derivatives exposure measure, representing derivative financial instruments per the balance sheet net of deconsolidation and derivatives adjustments,
reduced by £2.1 billion during the period, largely as a result of a reduction in the regulatory potential future exposure add-on following trade compressions
through central counterparties.
The SFT exposure measure, representing SFT assets per the balance sheet net of deconsolidation and other SFT adjustments, increased by £7.8 billion during
the period, primarily reflecting an increase in volumes.
Off-balance sheet items increased by £7.7 billion during the period, largely reflecting new residential mortgage offers placed and an increase in corporate
facilities.
The average UK leverage ratio was 5.6 per cent over the quarter, with the actual ratio increasing to 5.8 per cent in the final month of the quarter which largely
reflected the increase in tier 1 capital in December following the introduction of the revised capital treatment of intangible software assets.
Risk management continued 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 adjustments3
Total exposure measure
Average exposure measure2
UK Leverage ratio
Average UK leverage ratio2
Lloyds Banking Group Annual Report and Accounts 2020
195
Fully loaded
At 31 Dec
2020
£m
At 31 Dec
2019
£m
32,822
5,881
38,703
29,613
74,322
767,334
871,269
27,744
5,881
33,625
26,369
67,424
740,100
833,893
(67,093)
(49,590)
(1,549)
—
(1,293)
(334)
(171,183)
(167,410)
(172,732)
(169,037)
(12,444)
(12,679)
455
12,535
(12,133)
1,713
60,882
(15,836)
666,070
680,067
5.8%
5.6%
(11,298)
(12,551)
458
16,337
(7,054)
1,164
53,191
(8,180)
654,387
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 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 2020 to 31 December 2020). The average
of 5.6 per cent compares to 5.6 per cent at the start and 5.8 per cent at the end of the quarter.
3 Includes adjustments to exclude lending under the UK Government’s Bounce Back Loan Scheme (BBLS) and the accelerated implementation for the netting of regular-way purchases and sales
awaiting settlement in accordance with CRR Article 500d.
Application of IFRS 9 on a full impact basis for capital and leverage
Common equity tier 1 (£m)
Transitional tier 1 (£m)
Transitional total capital (£m)
Total risk-weighted assets (£m)
Common equity tier 1 ratio (%)
Transitional tier 1 ratio (%)
Transitional total capital ratio (%)
UK leverage ratio exposure measure (£m)
UK leverage ratio (%)
IFRS 9 full impact
At 31 Dec
2020
At 31 Dec
2019
30,341
36,185
46,052
27,002
33,249
43,153
201,800
203,083
15.0%
17.9%
22.8%
13.3%
16.4%
21.2%
663,590
653,643
5.5%
5.0%
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
196 Lloyds Banking Group Annual Report and Accounts 2020
The Group applies the full extent of the IFRS 9 transitional arrangements for
capital as set out under CRR Article 473a (as amended via the CRR 'Quick
Fix' revisions published in June 2020). Specifically, the Group has opted to
apply both paragraphs 2 and 4 of CRR Article 473a (static and dynamic relief)
and in addition to apply a 100 per cent risk weight to the consequential
Standardised credit risk exposure add-back as permitted under paragraph
7a of the revisions.
As at 31 December 2020, static relief under the transitional arrangements
amounted to £616 million (31 December 2019: £742 million) and dynamic
relief under the transitional arrangements amounted to £1,865 million (31
December 2019: nil) through CET 1 capital.
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
operating plan in the second half of the year which shows that the Group's
capital position is resilient to a further severe economic shock over and
above the stress in the current economic environment.
The Group also participates in stress tests run by the Bank of England. The
forthcoming 2021 solvency stress test aims to update and refine the desktop
analysis undertaken by the Bank during 2020. Though it follows a different
approach, it will require the Group to show how resilient it is to a severe
economic shock in addition to what has been experienced over 2020 (HPI
and CRE values are assumed to fall a further 33 per cent and unemployment
peaks at 11.9 per cent).
The Climate Biennial Exploratory Scenario (CBES) is scheduled to launch in
June 2021. The Group has invested significant resource to prepare for this, in
particular in acquiring climate related data, and will leverage the experience
gained through that exercise to further embed climate risk into stress testing
activities.
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 2020 Basel
G-SIBs annual exercise will be disclosed from April 2021 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
November 2020.
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.
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 34 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.
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 31 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 the Group has reinsured £4.2 billion of annuitant
longevity. An established team of longevity and pricing experts supports
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.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
197
Change/execution risk
Conduct risk
Definition
Change/execution risk 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/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 the Group's Strategic Review 2021).
Measurement
The Group currently measures change/execution risk against a defined
risk appetite metric which is a combination of leading, 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/
execution risk. These include the following:
The Board establishes a Group-wide risk appetite and metric for change/
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
existing business risk profiles
The implementation of effective governance and control frameworks to
ensure adequate controls are in place to manage change activity and
act to mitigate the change/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/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 the Group's Strategic Review 2021 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 management of
risks and the effectiveness of controls, recommending follow up remedial
action if required. All material change/execution risk events are escalated
in accordance with the formal Group Operational Risk policy and Change
policy.
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 the Group's 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 development, management and monitoring of products, their
distribution (including the sales process) and post- sales service (including
the management of customers in financial difficulties)
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 and resolution 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
The risks associated with becoming a more digitised bank
Poor management, governance and control of data
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. The COVID-19
pandemic has magnified existing challenges, and brought new challenges
for customers, affecting health, income and relationships. The Group
continues to apply significant focus to its treatment of customers in financial
difficulties and ensuring fair outcomes.
The Group is also exposed to the risk of engaging in or failing to manage
conduct which could constitute market abuse, undermine the integrity of a
market in which it is active, distort competition or create conflicts of interest.
There 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.
The evolving COVID-19 situation means increased uncertainty surrounding
the future, which poses the risk that increasingly more customers face
difficulties, become vulnerable and/or struggle to manage their existing
commitments.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
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
Adapting quickly to the evolving COVID-19 situation, being swift to
offer the new to market products (BBILs, CBILs) and new regulatory
requirements (payment holidays). The Group also continued to support
customers in challenging times by adapting support, proactively
contacting vulnerable customers, and using insight to understand who
may become vulnerable and what their needs could be
Monitoring
Conduct risk is governed through divisional risk committees and significant
issues are escalated to the Group Risk Committee, in accordance with the
Group's Enterprise Risk Management Framework, as well as through the
monthly Consolidated Risk Report. Risk exposures are discussed at divisional
risk committees, where oversight, challenge and reporting are completed
to assess the effectiveness controls. Remedial action is recommended, if
required. All material conduct risk events are escalated in accordance with
the Group Operational Risk policy to the respective divisional Managing
Directors and Conduct, Compliance and Operational Risk.
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.
A number of activities support the close monitoring of conduct risk
including:
The use of CRAMs across the Group, with a clear escalation route to Board
Second line oversight activities
Horizon Scanning
198 Lloyds Banking Group Annual Report and Accounts 2020
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 (including
outcome testing outputs) 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 other emerging conduct
themes.
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
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 a values-led culture through a focus on
behaviours to ensure the Group is transforming its 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 aligned
with the FCA guidance on fair treatment of vulnerable customers
launched in January 2021. 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
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 Financial
Ombudsman Service (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 throughout the product and service
lifecycle, and make 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 Group's Strategic Review 2021
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
199
A number of activities support the close monitoring of data risk including:
Implementation of the data risk and control library to ensure greater
coverage and insight of data risk, and ensuring data risks are managed
within appetite
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 complaints and breaches
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, for example, the UK's
exit from the EU and ensuring data flows remain unaffected
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 management
Supporting a consistent approach to Group-wide behaviour and risk
decision-making through a Group policy framework which helps everyone
understand their responsibilities by clearly articulating and communicating
rules, standards, boundaries and risk appetite measures which can be
controlled, enforced and monitored
Under the banner of the 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 reflects 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.
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.
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 lifecycle and insight processes.
Data risk manifests:
When personal data is not gathered legally, for a legitimate purpose, or
is not managed or 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, destroyed, or
retrieved appropriately
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
For emerging risks relating to Data, please refer to page 148.
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 through Group and Sub-Group Committees on a monthly basis.
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, assessed, managed, monitored and
reported using the risk and control self-assessment process.
Investment continues to be made to enhance the maturity of data risk
management. Examples including:
Delivering a data strategy and data risk and control library to ensure data
risks are managed within appetite
Enhancing capability and awareness in data management and privacy
Enhancing assurance of suppliers
Delivering enhanced controls and processes for data retention and
destruction, deleting large volumes of historic over-retained data
Embedding data by design and ethics principles into the data science
lifecycle and progressing opportunities to simplify the completion of
privacy records impact assessments
Monitoring
Data risk is governed through Group and Sub-Group 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 Group and Sub-Group committees, where oversight, challenge
and reporting are completed to assess the effectiveness of controls and agree
remedial actions. All material data risk events are escalated in accordance with
the Group Operational Risk policy and Data risk policies and 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 Data
Cross Divisional Committee and Group Data Committee.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
200 Lloyds Banking Group Annual Report and Accounts 2020
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 86 to 97.
People risk
Definition
People risk is defined as 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, 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 the Group's 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
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.
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 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
Inadequately designed people processes that are not resilient to
withstand unexpected events
The Group being overly reliant on a supplier which fails to provide a
service
For emerging risks relating to people risk and ways of working, please refer
to page 148.
A weakness in the Group’s cyber or security defences leaving it vulnerable
to an attack
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 and inclusivity strategy 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
customers’ needs and deliver the Group's strategic plan
Maintaining effective remuneration arrangements to ensure they promote
an appropriate culture and colleague behaviours that meet customer
needs and regulatory expectations
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
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
201
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.
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 of
demonstrating control and responsibility for those critical business services
which could cause significant harm to the Group's customers.
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.
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.
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.
The table below shows high level loss and event trends for the Group using
Basel II categories. Based on data captured on the Group’s One Risk and
Control Self-Assessment, in 2020 the highest frequency of events occurred
in external fraud (73.55 per cent) and execution, delivery and process
management (14.14 per cent). Clients, products and business practices
accounted for 58.21 per cent of losses by value, driven by legacy issues
where impacts materialised in 2020 (excluding PPI).
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 has carefully considered and provided
a response to 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, expectation and anticipated regulatory policy. 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 maintain and develop
playbooks that guide its response to a range of interruptions from internal
and external threats and tests these through scenario-based testing and
exercising.
Strategic Review 2021 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.
During the COVID-19 pandemic, business continuity plans have proved
resilient, with particular attention applied to heightened risks in the supply
chain.
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. With effect from 1 January 2021, the Group has entered in
to a cyber insurance policy, which provides cover for specified information
security risks.
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 building the UK's
preferred financial partner 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
Strategic Review 2021 is closely monitored.
Property: the Group's property portfolio remains a key focus in ensuring
resilience requirements are appropriately maintained. Processes are in place
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202 Lloyds Banking Group Annual Report and Accounts 2020
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
2020
0.61
11.10
0.12
0.24
14.14
73.55
0.24
2019
0.94
13.30
0.13
0.22
20.33
64.90
0.18
2020
0.39
58.21
16.19
0.04
17.40
7.77
—
2019
0.64
71.31
0.04
0.02
24.29
3.66
0.04
100.00
100.00
100.00
100.00
1 2019 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 continues to focus on changing risk management requirements,
adapting the change delivery model to be more agile and developing
the people skills and capabilities needed to be a Bank of the Future. 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 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 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 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 and 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. This is further strengthened
by material annual investment into both technology and the personal
development needs of colleagues. The Group also plays an active role
with other financial institutions, industry bodies, and enforcement agencies
in identifying and combatting fraud
The Group has adopted policies and procedures designed to detect and
prevent the use of its banking network for money laundering, terrorist
financing, bribery, tax evasion, human trafficking, modern-day slavery
and wildlife trafficking, and activities prohibited by legal and regulatory
sanctions. Against a background of complex and detailed laws and
regulations, and of continued criminal and terrorist activity, the Group
regularly reviews and assesses its policies, procedures and organisational
arrangements to keep them current, effective and consistent across
markets and jurisdictions. The Group requires mandatory training on
these topics for all employees. Specifically, the anti-money laundering
procedures include ‘know-your-customer’ requirements, transaction
monitoring technologies, reporting of suspicions of money laundering or
terrorist financing to the applicable regulatory authorities, and interaction
between the Group’s Financial Intelligence Unit and external agencies and
other financial institutions. The Anti-Bribery Policy prohibits the payment,
offer, acceptance or request of a bribe, including ‘facilitation payments’ by
any employee or agent and provides a confidential reporting service for
anonymous reporting 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
In addition to its efforts internally the Group also contributes to fraud and
financial crime prevention by supporting and championing industry level
activity, including:
– Being a signatory to the industry code for Authorised Push Payment
(APP) fraud, which has greatly increased consumer protection and the
reimbursement of funds to victims
– Co-sponsorship the National Economic Crime Centre (NECC) Fusion Cell,
which was established in response to the changing economic crime threat
related to COVID-19
– Maintaining partnerships with key partners such as City of London Police,
Trading Standards, Global Cyber Alliance and North East Business
Resilience Centre
– Active membership of Stop Scams UK, designed to stop scams at source
by bringing together partnership from various industry sectors
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 the
Risk Division and/or Group Internal Audit.
The Group maintains a formal approach to operational risk event escalation,
whereby material events are identified, captured and escalated. Root
causes of events are determined, 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.
Risk management continued Model risk
Regulatory and legal risk
Lloyds Banking Group Annual Report and Accounts 2020
203
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
The Group has adapted quickly to evolving regulatory expectations during
the COVID-19 pandemic and has engaged with regulatory authorities
throughout
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.
Definition
Model risk is defined as the risk of financial loss, regulatory censure,
reputational damage or customer detriment, as a result of deficiencies in
the development, application or ongoing operation of models and rating
systems.
Models are defined as quantitative methods that process input data
into quantitative outputs, or qualitative outputs (including ordinal letter
output) which have a quantitative measure associated with them. Model
Governance Policy is restricted to specific categories of application of
models, principally financial risk, treasury and valuation, with certain
exclusions, such as prescribed calculations and project appraisal calculations.
Exposures
There are over 300 models in the Group performing a variety of functions
including:
capital calculation
credit decisioning, including fraud
pricing models
impairment calculation
stress testing and forecasting
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.
Model risk has increased in 2020 due to the nature and uncertainty of
the economic outlook, a result of the COVID-19 pandemic. The effect of
government-led customer support initiatives have weakened established
relationships between model inputs and outputs, reducing the ability to
forecast using models alone. While underlying model drivers are expected
to remain valid in the longer term, year-end impairment reporting contains a
greater element of governed judgement that reflects current conditions.
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 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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204 Lloyds Banking Group Annual Report and Accounts 2020
Strategic risk
Definition
Strategic risk is defined as the risk which results from:
Incorrect assumptions about internal or external operating environments
Failure to respond or the inappropriate strategic response to material
changes in the external or internal operating environments
Failure to understand the potential impact of strategic responses and
business plans on existing risk types
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 and current societal trends are
likely to be accelerated by the pandemic.
Strategic risks can manifest themselves in existing principal risks or as new
exposures which could adversely impact the Group and its businesses.
In considering strategic risks, a key focus is the interconnectivity of individual
risks and the cumulative effect of different risks on the Group’s overall risk
profile.
The Group is working actively to implement a robust framework for
the identification, assessment and quantification of strategic risks. This
framework has been deployed as part of the recent strategic review and is
being embedded into the Group's day to day business operations.
Further information on strategic risk drivers and their potential risk
implications is outlined in the risk overview on pages 58 and 59.
Measurement
The Group assesses and monitors strategic risk implications as part of
business planning and in its day to day activities, ensuring they respond
appropriately to internal and external factors including changes to
regulatory, macroeconomic and competitive environments. An assessment
is made of the key strategic risks that are considered to impact the Group,
leveraging internal and external information and the key mitigants or actions
that could be taken in response.
Through 2021, a clear set of strategic risks, mitigants and controls will be
embedded to meet divisional, legal entity and Group-wide objectives.
The assessment and measurement will be supported by a quantitative
risk assessment approach and underpinned by the Group's One Risk and
Control Self-Assessment (One RCSA) framework. The Group's quantitative
risk assessment will focus specifically on assessing the connectivity of
inherent risks, which can magnify their impact and severity.
Mitigation
The range of mitigating actions includes:
Horizon scanning is conducted across the Group to identify potential
threats, risks, emerging issues, opportunities and explore future trends
The Group’s business planning processes includes formal assessment of
the strategic risk implications of new business, product entries and other
strategic initiatives
The Group’s governance framework mandates individual's and
committee’s responsibilities and decision making rights, to ensure that
strategic risks are appropriately reported and escalated
Monitoring
A review of the Group’s 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.
Risks, alongside their control effectiveness, are articulated and reported
regularly to Group and Board Risk Committees.
Risk management continued Lloyds Banking Group Annual Report and Accounts 2020
205
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
20. Financial assets at fair value through
other comprehensive income
21. Investments in joint ventures and
associates
22. Goodwill
23. Value of in-force business
24. Other intangible assets
25. Property, plant and equipment
26. Other assets
27. Financial liabilities at fair value
through profit or
28. Debt securities in issue
29. Securitisations and covered
30. Liabilities arising from insurance
contracts and participating
investment contracts
31. Life insurance sensitivity analysis
32. Liabilities arising from non-participating
investment contracts
33. Other liabilities
34. Retirement benefit obligations
35. Deferred tax
36. Other provisions
37. Subordinated liabilities
38. Share capital
39. Share premium account
40. Other reserves
41. Retained profits
42. Other equity instruments
43. Dividends on ordinary shares
44. Share-based payments
45. Related party transactions
259
265
265
266
266
267
269
270
271
271
271
272
273
276
277
277
277
283
284
286
287
287
288
290
290
291
291
294
206
215
216
217
219
222
223
223
223
231
240
245
245
246
246
247
247
248
249
250
252
253
253
254
46. Contingent liabilities, commitments
and guarantees
47. Structured entities
48. Financial instruments
49. Transfers of financial assets
50. Offsetting of financial assets and
liabilities
51. Financial risk management
52. Consolidated cash flow statement
53. Future accounting developments
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. Financial assets at fair value through
profit or loss
3. Amounts due from subsidiaries
4. Share capital, share premium and other
equity instruments
5. Other reserves
6. Retained profits
7. Debt securities in issue
8. Subordinated liabilities
9. Financial liabilities at fair value through
profit or loss
10. Related party transactions
11. Financial instruments
12. Other information
295
297
298
311
312
314
332
334
335
336
337
338
338
338
338
338
338
339
339
339
339
340
341
342
2020 CAPTURED BY LLOYDS BANKING GROUP COLLEAGUES
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Kirstene Kettlewell
Tony Priceman
Sanka Illangakoon
Joel Hamer
Sharon Tyrer
Steven Butt
206 Lloyds Banking Group Annual Report and Accounts 2020
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 parent company financial statements (together, 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 2020 and of the Group’s profit and the Group’s
and parent company’s cash flows for the year then ended;
– have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; and
– have been prepared in accordance with the requirements of the Companies Act 2006.
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 2020; the consolidated income statement and the consolidated statement of comprehensive income for the
year then ended; the consolidated and parent company cash flow statements for the year then ended; the consolidated and parent company statements of
changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.
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.
Separate opinion in relation to international financial reporting standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union
As explained in note 1 to the financial statements, the Group, in addition to applying international accounting standards in conformity with the requirements
of the Companies Act 2006, has also applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union.
In our opinion, the Group financial statements have been properly prepared in accordance with international financial reporting standards adopted pursuant
to Regulation (EC) No 1606/2002 as it applies in the European Union.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in note 1 to the financial statements, the Group, in addition to applying international accounting standards in conformity with the requirements
of Companies Act 2006, has also applied international financial reporting standards (IFRSs) as issued by the International Accounting Standards Board (IASB).
In our opinion, the financial statements have been properly prepared in accordance with IFRSs as issued by the IASB.
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.
Other than those disclosed in note 12 to the financial statements, we have provided no non-audit services to the Group in the period under audit.
Our audit approach
Overview
Audit scope
– 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 above
performance materiality.
Key audit matters
– Allowance for Expected Credit Losses (ECL) (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)
– Impact of COVID-19 (Group and parent)
Lloyds Banking Group Annual Report and Accounts 2020
207
Materiality
– Overall Group materiality: £300m (2019: £360m) based on 5 per cent of the four-year average adjusted profit before tax for the financial years ended 31
December 2017, 2018, 2019 and 2020, adjusted to remove the effects of certain items which were considered to have a disproportionate impact.
– Overall parent company materiality: £300m (2019: £360m) based on 1 per cent of total assets, but limited to the overall Group materiality.
– Performance materiality: £220m (Group and parent company).
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.
Capability of the audit in detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined in
the Auditors’ responsibilities for the audit of the financial statements section, to detect material misstatements in respect of irregularities, including fraud. The
extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
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. 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; insurance actuarial assumptions; the defined benefit obligation; and the valuation of certain level 3 financial instruments (see related key audit matters
below).
– Identifying and testing journal entries, in particular any manual journal entries posted by unexpected or unusual users, posted with descriptions indicating a
higher level of risk, and posted late with a favourable impact on financial performance.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and
regulations that are not closely related to events and transactions reflected in the financial statements. 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.
The Impact of COVID-19 on the audit is a new key audit matter this year. Payment Protection Insurance (PPI), which was a key audit matter last year, is no
longer included because of the significant reduction in the amount and the level of estimation uncertainty of the PPI provision by 31 December 2020. This was
a result of the Group processing almost all PPI information requests and complaints. The key audit matter in respect of defined benefit obligations has been
extended to include harder to value assets within the pensions asset portfolio. Otherwise, the key audit matters below are consistent with last year.
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208 Lloyds Banking Group Annual Report and Accounts 2020
Key audit matter
How our audit addressed the key audit matter
Allowance for Expected Credit Losses (ECL) (Group)
Group economics
Refer to page 102 (Audit Committee report), page 226
(Note 2: Accounting policies), page 231 (Note 3: Critical
accounting judgements and estimates) and page 259 (Note
18: Financial assets at amortised cost.
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. There
is a high level of estimation uncertainty in the base case
due to the inherent complexity in forecasting future
economic outcomes. The impact of COVID-19 on the
economy has significantly increased the level of
uncertainty in the base case forecasts. A central
adjustment to the allowance of ECL of £400 million has
been recognised primarily to reflect the level of
uncertainty in the conditioning assumptions used to
produce the base case.
The outer scenarios are generated and selected through
the use of a statistical model that is conditioned on the
base case. 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 and act as key assumptions for 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 risk modelling
specialists to assist us as we evaluated:
– The appropriateness of the base case economic scenario, focusing on the key UK economic assumptions
(gross domestic product, UK Bank Rate, unemployment rate, house price growth and commercial real
estate price growth);
– The approach to the generation and selection of economic scenarios representing the upside, downside
and severe downside;
– The Group’s internally developed statistical model, including changes implemented during the year and
the Group’s model validation process; and
– The review, challenge and approval of the economic scenarios within 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. Where
control deficiencies were identified, management identified compensating controls which we tested and
were able to place reliance on.
We critically assessed the key 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
key 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.
With respect to the central adjustment of £400m, we evaluated whether the use of a central adjustment
was appropriate, the method for measuring the adjustment, the assumptions used in developing the
estimate, and assessed the appropriateness of disclosures.
Based on the evidence assessed, we found the assumptions to be materially appropriate, and the
economic scenarios adopted to reflect an unbiased, probability weighted view, that appropriately
captures the impact of non-linearity. We considered that the use of a central adjustment was an
appropriate approach.
Retail
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
judgemental adjustments where they believe the model
calculated assumptions and allowances are not
appropriate, either due to emerging trends or model
limitations. An example of this are adjustments to the
impairment model for anticipated increases in account
defaults across the portfolio. There has been an increase
in adjustments to the modelled ECL in the current year
which reflects the fact that the historical data used in the
development of the models does not capture conditions
of the COVID-19 pandemic experienced during 2020.
Our work therefore focused on the appropriateness of
modelling methodologies adopted and significant
judgements made in determining adjustments to the
modelled ECL as well as the measurement of those
adjustments.
We understood management’s process and evaluated and tested key controls relating to the
determination of the allowance for ECL, including controls relating to:
– Appropriateness of modelling methodologies and monitoring of model performance;
– Model review 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 adjustments to modelled ECL applied.
We found key controls that were designed, implemented and operating effectively, and therefore
determined that we could place reliance on these key controls for the purposes of our audit. Where control
deficiencies were identified, management identified compensating controls which we tested and were able
to place reliance on.
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 performed testing over the measurement of the judgemental adjustments to modelled ECLs in place,
focusing on the larger adjustments and those which we considered to represent the greatest level of audit
risk (e.g. judgements relating to calibration adjustments in respect of payment performance experience in
2020, to past term interest-only exposures and adjustments made to assumptions relating to the probability
of accounts defaulting). We assessed the appropriateness of methodologies used to determine and
quantify the adjustments 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 judgemental adjustments proposed by management.
We used credit risk modelling specialists to support the audit team in the performance of these audit
procedures.
Based on the evidence assessed, we found the methodologies, modelled assumptions and data used
within the allowance for ECL assessment to be materially appropriate and in line with the requirements of
IFRS 9.
Lloyds Banking Group Annual Report and Accounts 2020
209
Key audit matter
Commercial Banking
How our audit addressed the key audit matter
Commercial Banking
The allowance for ECL relating to ‘good book’ or non-credit
impaired loans and advances (referred to as being in
Stages 1 and 2) in the Commercial Banking 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 and
valuation of recoveries. Management also apply
judgemental adjustments where they believe the model
calculated assumptions and allowances are not appropriate,
either due to emerging trends or model limitations. An
example of this is adjustments to the impairment model for
anticipated increases to account deterioration across the
portfolio that have been deferred through the impact of
government support schemes. There has been an increase
in the use of judgemental adjustments to modelled ECLs in
the current year which reflects the fact that the historical data
used in the development of the models does not capture all
the conditions of the COVID-19 pandemic experienced
during 2020.
Our work therefore focused on the appropriateness of
modelling methodologies adopted and significant
judgements made in determining adjustments as well as
the measurement of those adjustments.
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.
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 accuracy and timeliness of updates to credit risk ratings, which are applied in assessing whether loans
have suffered a significant increase in credit risk since initial recognition;
– 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, alongside other available credit risk related information within the Group.
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. Where control deficiencies
were identified, management identified compensating controls which we tested and were able to place
reliance on.
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 evaluated the accuracy and timing of the information being used to calculate a borrower’s internal credit
risk rating;
– We assessed whether the most recent internal credit risk rating assessment was performed sufficiently timely
to incorporate the recent economic environment;
– We critically assessed the impact of identified model limitations and the justification for judgemental
adjustments applied by management.
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 specialists to support the audit
team in identifying sectors or types of borrowers with a heightened 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 significant financial difficulty or in breach of covenant) and therefore whether they were
appropriately categorised. Our testing included consideration of events subsequent to the balance sheet
date.
Additionally, we selected a sample of borrowers from management’s ‘watchlist’, identified as requiring close
credit risk monitoring, but not assessed as credit impaired. We critically assessed the latest information
against criteria, as defined by management, for considering whether the borrower is credit impaired, or not.
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, we 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 materially appropriate and in line with the requirements of
IFRS 9.
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210 Lloyds Banking Group Annual Report and Accounts 2020
Key audit matter
How our audit addressed the key audit matter
Insurance actuarial assumptions (Group)
Refer to page 103 (Audit Committee report), page 229
(Note 2: Accounting policies), page 238 (Note 3: Critical
accounting judgments and estimates) and pages 247, 267,
273 and 276 (Notes 10, 23, 30 and 31).
The valuations of the Group’s insurance and participating
investment contracts (“insurance contract liabilities”) and
value of in-force asset are dependent on a number of
subjective and complex assumptions about future
experience and events, both internal and external to the
business. Small changes in some of these assumptions
can result in a material impact on the balances within the
balance sheet and resulting profit in the period.
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 insurance contracts to maturity), credit default
and illiquidity premium (which are adjustments made to
the discount rate used in the valuation of the insurance
contract liabilities and value of in-force asset). The
ongoing COVID-19 pandemic has introduced additional
uncertainty to each of the assumptions outlined above
Defined benefit obligations (Group)
Refer to page 103 (Audit Committee report), page 228
(Note 2: Accounting policies), page 238 (Note 3: Critical
accounting judgements and estimates) and page 277
(Note 34: Retirement benefit obligations).
The valuation of the retirement benefit obligations in the
Group is 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.
Within the pension assets portfolio, the unquoted assets
predominantly comprise of Pooled Investment Vehicles
(PIVs) valued at £13bn which include harder to value assets.
The fair value of these harder to value assets in PIVs is
determined based on pricing provided by investment
managers.
Valuation of certain level 3 financial instruments (Group)
Refer to page 224 (Note 2: Accounting policies), page 239
(Note 3: Critical accounting judgements and estimates)
and pages 253, 298 and 314 (Notes 16, 48 and 51).
Within its portfolio of Level 3 financial instruments, the
Group holds two loan portfolios (£9.0bn in Insurance,
£1.3bn in Commercial Banking) 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 and publicly
available 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 long-term assumptions and associated short term
provisions set by management in light of actual experience and regulatory changes. In particular, we considered
the impact of the ongoing COVID-19 pandemic on the workplace pensions business and the allowance made for
future expected policyholder behaviour.
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. We have
considered the allowance for socio-economic differences within the longevity basis and the potential impact that
the COVID-19 pandemic will have on the future expectation of life on the annuitant portfolio.
For maintenance expenses, we assessed the appropriateness of the judgements in respect of costs that are
required to administer the long-term insurance contracts and the resulting allocation of costs to product types. We
have challenged the treatment of project costs as well as the treatment of Group allocated costs. We assessed the
appropriateness of the future per-policy costs assumptions, which are set with reference to the relevant product
costs and policy volumes.
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
change in approach used to calculate the illiquidity premium is market consistent and in line with relevant internal
and external accounting policies. We also challenged on the allowance made within the calculation of the illiquidity
premium and credit default assumptions for both observed and expected defaults in light of the COVID-19
pandemic.
Based on the evidence obtained, we found that the methodologies, assumptions and data used within the
models and the calculation of the out of model adjustments 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. In particular,
we assessed the reasonableness of the approach taken by management with regard to RPI reform and its
implications on the RPI and CPI inflation assumptions.
We assessed the reasonableness of these 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.
For the valuation of harder to value assets in PIVs, we understood management’s process and evaluated and tested
the key controls around monitoring the valuations provided by the investment managers.
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 obtained pricing confirmations directly from investment managers as primary sources of evidence. We also
performed additional procedures to evaluate whether there was any contradictory evidence suggesting that the
pricing confirmations did not reflect an appropriate valuation as at the balance sheet date. These procedures
included one or more of the following:
– Obtaining third party controls assurance reports and bridging letters on the investment managers’ operations for
the current financial year;
– Reviewing the pricing of transactions taking place close to the balance sheet date;
– Performing back testing of previous valuations provided by investment managers to audited financial statements
of the underlying funds;
– Performing an independent web based search for information suggesting any doubts in the investment
managers’ capability of pricing; or
– Reviewing investment contributions and distributions between the valuation date and the balance sheet date and
obtaining affirmations from investment managers that the price taken is the latest price available to date where
the valuation date is different to the balance sheet date.
Based on the evidence obtained, we found the pricing used by management for the valuation of harder to value
assets in PIVs to be materially appropriate.
We understood management’s process and evaluated and tested the key controls around the financial
instruments’ valuation processes including the independent price verification and valuation governance controls.
We found these key controls were designed, implemented and operated effectively, and therefore determined
that we could place reliance on these key controls for the purposes of our audit.
With the support of our valuations specialists, we performed the following further testing:
– Evaluated the appropriateness of management’s valuation methodologies, including the impact of COVID-19,
and tested their application. For Insurance, this included building an independent model;
– Evaluated and tested key inputs and assumptions, with reference to matters including historic performance,
market information and perspectives, servicer and trustee reports and investment prospectuses in Commercial
Banking, and market information and credit ratings in Insurance; and
– Assessed the reasonableness of the valuations and performed sensitivity analyses over them.
Based on the evidence obtained, we determined the methodologies, inputs and assumptions to be materially
appropriate.
Key audit matter
How our audit addressed the key audit matter
Lloyds Banking Group Annual Report and Accounts 2020
211
We understood and tested key controls over the designation and ongoing management of hedge
accounting relationships, including those over hedge documentation, hedge effectiveness testing and the
recording of hedge accounting adjustments.
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 other 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 monitored all material sources of
ineffectiveness, including any impact of the interest rate benchmark reform;
– Re-performing a sample of hedge effectiveness calculations;
– Re-performing a sample of capacity assessment 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.
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.
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 foundational controls over:
– Approval, recertification and timely removal of access from IT systems;
– The completeness and accuracy of the Access Controls Lists from IT platforms that are used by
downstream IT security processes;
In addition, we tested enhanced controls which act as mitigating controls on any gaps identified in the
foundational controls:
– The onboarding and management of IT privileged accounts through the privileged access ‘break-glass
tool’ (including static IT privileged accounts); and
– The monitoring of security events on IT platforms by the Security Operations Centre.
As part of our review, we identified a number of entitlements that had not been recertified timely 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 IT controls, performed targeted audit procedures and assessed other mitigating
factors (including business mitigating controls) in order to respond to the impact on our overall audit
approach.
Our planning and execution of our audit has given specific consideration to the impact of COVID-19 on the
Group. This has included our materiality decreasing by £60m compared to the previous financial year, due
to the reduced profitability of the Group.
In assessing management’s consideration of the impact of COVID-19 on the financial statements, we have
undertaken the following procedures:
– In areas where management is required to estimate future financial performance of the Group when
preparing the financial statements, we have challenged the forecasts and the extent to which they have
been impacted by COVID-19;
– Performed inquiries with management and the Group’s regulators, the PRA and the FCA;
– Assessed the impact of COVID-19 on estimates and the assumptions that underpin them, for example
related to expected credit losses and actuarial assumptions as detailed above;
– Reviewed management’s going concern assessment, which considered the potential impact of COVID-19
on future profitability;
– Considered the impact of COVID-19 on the Group’s internal control environment through our audit testing
and inquiries of management; and
– Evaluated the adequacy of the disclosures made in the financial statements with respect to the impact of
COVID-19.
As a result of these procedures, we concluded that the impact of COVID-19 has been appropriately
evaluated and reflected in the preparation of the financial statements.
Hedge accounting (Group)
Refer to page 225 (Note 2: Accounting policies) and pages
254 and 314 (Notes 17 and 51).
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.
Whilst there has been automation of hedging accounting
processes in the period, the Group’s application of hedge
accounting in the year still relied upon a significant degree
of manual processing, which increases the risk of
operational errors and hence the risk that financial
reporting is not compliant with IFRS requirements.
Privileged access to IT systems (Group and parent)
The Group’s financial reporting processes are reliant on
automated processes, controls and data managed by IT
systems.
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 a subset of
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 or data from the specific
systems are not reliable.
Impact of COVID-19 (Group and parent)
The global COVID-19 pandemic, and the associated
societal restrictions imposed by the UK Government, have
adversely affected the UK population and economy. The
virus emerged in the UK in January 2020 and spread
quickly, prompting the government to impose
widespread restrictions on the population in March 2020,
including the first national “lockdown”. Restrictions were
eased and re-imposed throughout 2020 and in early 2021,
including two further national lockdowns. At the time of
issuing this report, the UK remains in its third lockdown.
The UK government has deployed a range of support
measures for people and businesses, and the Group has
been active in some of these schemes, for example
providing payment holidays and in issuing government
backed loans.
As at 31 December 2020, two vaccines have received
regulatory approval and have begun to be administered
to priority groups, such as the elderly. These, and the
development of other vaccines, create an expectation
that the restrictions will be eased in the foreseeable future.
However, there remains significant uncertainty over the
successful rollout and efficacy of the vaccines, the future
mutation and spread of the virus, the extent and impact of
government measures and economic outlook.
The Group has kept most branches open throughout the
pandemic, often with reduced hours. The majority of the
Group’s other employees have been working remotely
since March 2020.
Management has considered the impact of COVID-19
when preparing the financial statements and, where
relevant to a key audit matter or other area of this audit
report, we have included our considerations therein.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
212 Lloyds Banking Group Annual Report and Accounts 2020
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 were considered full
scope components. An individually financially significant component was deemed to be one which either represented more than or equal to 10% of the total
assets of the consolidated Group, or represented more than or equal to 10% of the total liabilities of the consolidated Group, or whereby a component had
a significant number of balances exceeding performance materiality. We have used appropriate judgement in determining what constitutes a “significant”
number. We have also performed risk assessments over the significant and elevated risks identified in our audit plan to identify any additional individually
financially significant 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 or more account balances was subject
to specific audit procedures over those specific 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 81 per cent of Group total income.
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
£300m (2019: £360m).
£300m (2019: £360m).
Group financial statements
Parent company financial statements
How we determined it
Rationale for benchmark
applied
5 per cent of the four-year average adjusted profit before
tax for the financial years ended 31 December 2017,
2018, 2019 and 2020, adjusted to remove the effects of
certain items which were considered to have a
disproportionate impact.
Due to the impact of COVID-19 on profit for 2020, our
starting point was 5 per cent of the average adjusted
profit before tax across 2017, 2018, 2019 and 2020. 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 parent company is not
a trading entity. Where the calculated parent company
materiality from total assets exceeds the Group overall
materiality level, the parent company overall materiality
has been restricted to equal the Group overall materiality
level.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality
allocated across components was between £50m and £100m. Certain components were audited to a local statutory audit materiality that was also less than
our overall Group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements
exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of
account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was £220m for the Group and
parent company financial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the
effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £15m (Group and parent company
audit) (2019: £18m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the Group’s and the parent company’s ability to continue to adopt the going concern basis of accounting
included:
– Evaluation of management’s going concern assessment;
– Evaluation and testing of the control environment in place over liquidity and capital forecasting to the extent these are relevant to the going concern
assessments performed by the Group;
Lloyds Banking Group Annual Report and Accounts 2020
213
– Evaluation of stress testing performed by management and consideration of whether the stresses applied are appropriate for assessing going concern;
– Evaluation of the Groups forecast financial performance, liquidity and capital positions over the going concern period including an evaluation of the impact
of COVID-19 on the financial outlook of the Group;
– Review of credit rating agency ratings and actions; and
– Substantiation of certain financial resources available to the Group, for example at the Bank of England.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may
cast significant doubt on the Group’s and the parent company’s ability to continue as a going concern for a period of at least twelve months from when the
financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial
statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Group’s and the parent company’s ability to
continue as a going concern.
In relation to the Group’s and the parent company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to
add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the
going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this 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 our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.
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 2020 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
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.
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.
Corporate governance statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance
statement relating to the parent company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional
responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this
report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement, included
within the Annual Report is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to
add or draw attention to in relation to:
– The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;
– The disclosures in the Annual Report and Accounts that describe those principal risks, what procedures are in place to identify emerging risks and an
explanation of how these are being managed or mitigated;
– The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in
preparing them, and their identification of any material uncertainties to the Group’s and parent company’s ability to continue to do so over a period of at
least twelve months from the date of approval of the financial statements;
– The directors’ explanation as to their assessment of the Group’s and parent company’s prospects, the period this assessment covers and why the period is
appropriate; and
– The directors’ statement as to whether they have a reasonable expectation that the Group and parent company will be able to continue in operation and
meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or
assumptions.
Our review of the directors’ statement regarding the longer-term viability of the Group was substantially less in scope than an audit and only consisted of
making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with the relevant provisions
of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and
understanding of the Group and parent company and their environment obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance
statement is materially consistent with the financial statements and our knowledge obtained during the audit:
– The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information
necessary for the members to assess the Group’s and parent company’s position, performance, business model and strategy;
– The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
– The section of the Annual Report describing the work of the Audit Committee.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
214 Lloyds Banking Group Annual Report and Accounts 2020
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the Group and 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.
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, 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.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it
typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which
the sample is selected.
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.
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 obtained 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 members on 21 December 1995 to audit the financial statements for
the year ended 31 December 1995 and subsequent financial periods. The period of total uninterrupted engagement is 26 years, covering the years ended
31 December 1995 to 31 December 2020. 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
23 February 2021
Consolidated income statement
for the year ended 31 December
Interest income
Interest 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
Impairment
Profit before tax
Tax credit (expense)
Profit for the year
Profit attributable to ordinary shareholders
Profit attributable to other equity holders
Profit attributable to equity holders
Profit attributable to non-controlling interests
Profit for the year
Basic earnings per share
Diluted earnings per share
The accompanying notes are an integral part of the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2020
215
Note
5
6
7
8
9
10
36
11
13
14
15
15
2020
£ million
14,306
(3,557)
10,749
2,308
(1,148)
1,160
7,220
8,615
1,423
18,418
29,167
(14,041)
15,126
(464)
(9,281)
(9,745)
(4,155)
1,226
161
1,387
865
453
1,318
69
1,387
1.2p
1.2p
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)
(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)
(937)
5,960
(1,454)
4,506
3,975
433
4,408
98
4,506
5.5p
5.5p
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
216 Lloyds Banking Group Annual Report and Accounts 2020
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
Income statement transfers in respect of impairment
Tax
Movements in cash flow hedging reserve:
Effective portion of changes in fair value taken to other comprehensive income
Net income statement transfers
Tax
Movements in foreign currency translation reserve:
Currency translation differences (tax: £nil)
Transfers to income statement (tax: £nil)
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Total comprehensive income attributable to ordinary shareholders
Total comprehensive income attributable to other equity holders
Total comprehensive income attributable to equity holders
Total comprehensive income attributable to non-controlling interests
Total comprehensive income for the year
The accompanying notes are an integral part of the consolidated financial statements.
2020
£ million
1,387
2019
£ million
3,006
2018
£ million
4,506
138
(25)
113
(50)
(16)
(66)
(75)
20
(55)
—
46
(149)
5
74
(24)
730
(496)
(109)
125
4
13
17
110
1,497
975
453
1,428
69
1,497
(1,433)
316
(1,117)
—
12
12
(419)
113
(306)
—
(30)
(196)
(1)
71
(156)
1,209
(608)
(148)
453
(12)
—
(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)
—
(8)
(113)
4,393
3,862
433
4,295
98
4,393
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 contracts held with reinsurers
Other assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2020
217
Note
2020
£ million
2019
£ million
73,257
299
55,130
313
171,626
160,189
29,613
10,746
498,843
5,405
514,994
27,603
296
2,320
5,617
4,140
26,369
9,775
494,988
5,544
510,307
25,092
304
2,324
5,558
3,808
11,754
13,104
660
2,741
1,714
20,385
4,250
7
2,666
681
23,567
4,474
871,269
833,893
16
17
18
20
21
22
23
24
25
35
34
26
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
218 Lloyds Banking Group Annual Report and Accounts 2020
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 23 February 2021.
Robin Budenberg
Chair
António Horta-Osório
Group Chief Executive
William Chalmers
Chief Financial Officer
Note
2020
£ million
2019
£ million
27
17
28
30
32
33
34
35
36
37
38
39
40
41
42
31,465
460,068
306
22,646
27,313
1,305
87,397
28,179
421,320
373
21,486
25,779
1,079
97,689
116,060
111,449
38,452
20,347
245
31
45
1,915
14,261
37,459
20,333
257
187
44
3,323
17,130
821,856
786,087
7,084
17,863
13,747
4,584
43,278
5,906
49,184
229
49,413
871,269
7,005
17,751
13,695
3,246
41,697
5,906
47,603
203
47,806
833,893
Lloyds Banking Group Annual Report and Accounts 2020
219
Consolidated statement of changes in equity
for the year ended 31 December
Attributable to ordinary shareholders
Share
capital and
premium
£ million
24,756
Other
reserves
£ million
13,695
Retained
profits
£ million
3,246
Total
£ million
41,697
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
5,906
203
Total
£ million
47,806
865
865
453
69
1,387
At 1 January 2020
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 income1
Transactions with owners
Dividends (note 43)
Distributions on other equity instruments
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
Realised gains and losses on equity shares
held at fair value through other comprehensive
income
—
—
—
—
—
—
—
—
—
—
—
191
—
—
—
—
191
—
—
—
(24)
(66)
—
125
17
52
52
—
—
—
—
—
—
—
—
—
113
113
—
—
(55)
—
—
58
923
—
—
—
293
48
74
—
415
(24)
(66)
(55)
125
17
110
975
—
—
191
293
48
74
—
606
—
—
—
—
—
—
—
—
—
—
—
—
—
—
113
(24)
(66)
(55)
125
17
110
453
69
1,497
—
(453)
—
—
—
—
—
(453)
(41)
—
—
—
—
—
(2)
(43)
—
229
(41)
(453)
191
293
48
74
(2)
110
—
49,413
At 31 December 2020
24,947
13,747
4,584
43,278
5,906
1 Total comprehensive income attributable to owners of the parent was £1,428 million (2019: £1,799 million; 2018: £4,295 million).
—
—
—
Further details of movements in the Group’s share capital, reserves and other equity instruments are provided in notes 38, 39, 40, 41 and 42.
The accompanying notes are an integral part of the consolidated financial statements.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
220 Lloyds Banking Group Annual Report and Accounts 2020
Attributable to ordinary 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
2,459
2,459
466
81
3,006
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 (note 43)
Distributions on other equity instruments
Issue of ordinary shares
Share buyback
Redemption of preference shares
Issue of other equity instruments (note 42)
Redemptions of other equity instruments (note
42)
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Changes in non-controlling interests
—
—
—
—
—
—
—
—
—
—
—
107
(189)
3
—
—
—
—
—
—
—
—
453
(12)
297
297
—
—
—
189
(3)
—
—
—
—
—
—
(1,117)
(1,117)
(156)
12
—
—
—
(306)
—
—
(1,423)
1,036
(156)
12
(306)
453
(12)
(1,126)
1,333
—
—
—
—
—
—
—
—
—
—
—
—
—
—
466
81
(1,117)
(156)
12
(306)
453
(12)
(1,126)
1,880
(2,312)
(2,312)
—
—
—
107
(1,095)
(1,095)
—
(3)
—
(3)
71
165
—
—
(3)
—
(3)
71
165
—
—
(466)
—
—
—
896
(1,481)
—
—
—
—
(138)
(2,450)
—
—
—
—
—
—
—
—
—
(14)
(152)
—
203
(466)
107
(1,095)
—
893
(1,481)
(3)
71
165
(14)
(4,273)
—
47,806
Total transactions with owners
(79)
186
(3,177)
(3,070)
(1,051)
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
The accompanying notes are an integral part of the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2020
221
Consolidated statement of changes in equity
for the year ended 31 December
At 1 January 2018
Comprehensive income
Profit for the year
Other comprehensive income
Post-retirement defined benefit scheme
remeasurements, net of tax
Share of other comprehensive income of
associates and joint ventures
Movements in revaluation reserve in respect of
financial assets held at fair value through other
comprehensive income, net of tax:
Debt securities
Equity shares
Gains and losses attributable to own credit risk,
net of tax
Movements in cash flow hedging reserve, net
of tax
Currency translation differences (tax: £nil)
Total other comprehensive income
Total comprehensive income
Transactions with owners
Dividends (note 43)
Distributions on other equity instruments
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
Attributable to ordinary shareholders
Share
capital and
premium
£ million
24,831
Other
reserves
£ million
13,553
Retained
profits
£ million
3,976
Total
£ million
42,360
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
5,355
237
Total
£ million
47,952
3,975
3,975
433
98
4,506
—
—
—
—
—
—
—
—
—
—
—
—
162
(158)
—
—
—
—
4
—
—
—
—
(193)
(75)
(354)
(8)
(630)
(630)
—
—
—
120
8
—
—
—
—
517
4,492
120
8
(193)
(75)
389
(354)
(8)
(113)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
120
8
(193)
(75)
389
(354)
(8)
(113)
3,862
433
98
4,393
—
389
(2,240)
(2,240)
—
—
—
162
158
(1,005)
(1,005)
—
—
—
—
(5)
40
53
207
(5)
40
53
207
—
(433)
—
—
1,136
—
—
—
(61)
(2,301)
—
—
—
—
—
—
—
(433)
162
(1,005)
1,131
40
53
207
158
(2,950)
(2,788)
703
(61)
(2,146)
129
13,210
(129)
5,389
—
43,434
—
6,491
—
274
—
50,199
At 31 December 2018
24,835
The accompanying notes are an integral part of the consolidated financial statements.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
222 Lloyds Banking Group Annual Report and Accounts 2020
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
The accompanying notes are an integral part of the consolidated financial statements.
Note
52(A)
52(B)
52(C)
52(E)
52(D)
2020
£ million
1,226
2019
£ million
4,393
(18,650)
(11,049)
35,737
9,594
(736)
27,171
(8,589)
6,347
(2,901)
1,146
(3)
—
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
(4,000)
(2,130)
11,921
—
(453)
(41)
(2,312)
(2,240)
(466)
(138)
(433)
(61)
(1,095)
(1,178)
(1,268)
—
—
144
—
(3,874)
—
(5,319)
(196)
17,656
57,811
75,467
—
893
36
(1,095)
(818)
(1,481)
(6,559)
(5)
2,587
55,224
57,811
1,729
1,131
102
(1,005)
(2,256)
—
(4,301)
3
(3,484)
58,708
55,224
Lloyds Banking Group Annual Report and Accounts 2020
223
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) comply with international accounting
standards in conformity with the requirements of the Companies Act 2006. The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS). 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 and its predecessor
body. On adoption of IFRS 9 in 2018, the Group elected to continue applying hedge accounting under IAS 39. The financial statements are also compliant
with IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. 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 113, the directors consider that it is appropriate to continue to adopt the going concern basis in
preparing the financial statements. In reaching this assessment, the directors have considered the implications of the COVID-19 pandemic upon the Group's
performance and projected funding and capital position and have also taken into account the impact of further stress scenarios. On this basis, the directors
are satisfied that the Group will maintain adequate levels of funding and capital for the foreseeable future. Further details of the Group's funding and capital
position are set out on pages 183 to 196.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2020 and which have not been
applied in preparing these financial statements are given in note 53.
In 2019 the Group adopted IFRS 16 and amendments to IAS 12 and early-adopted the hedge accounting amendments Interest Rate Benchmark Reform
issued by the IASB.
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 349 to 354.
(1) Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it has power over the entity, is exposed to, or has rights to, variable
returns from its involvement with the entity, and has the ability to affect those returns through the exercise of its power. This generally accompanies a
shareholding of more than one half of the voting rights although in certain circumstances a holding of less than one half of the voting rights may still result
in the ability of the Group to exercise control. The existence and effect of potential voting rights that are currently exercisable or convertible are considered
when assessing whether the Group controls another entity. The Group reassesses whether or not it controls an entity if facts and circumstances indicate that
there are changes to any of the above elements. Subsidiaries are fully consolidated from the date on which control is transferred to the Group; they are de-
consolidated from the date that control ceases.
The Group consolidates collective investment vehicles if its beneficial ownership interests give it substantive rights to remove the external fund manager over
the investment activities of the fund. Where a subsidiary of the Group is the fund manager of a collective investment vehicle, the Group considers a number
of factors in determining whether it acts as principal, and therefore controls the collective investment vehicle, including: an assessment of the scope of the
Group’s decision making authority over the investment vehicle; the rights held by other parties including substantive removal rights without cause over the
Group acting as fund manager; the remuneration to which the Group is entitled in its capacity as decision maker; and the Group’s exposure to variable returns
from the beneficial interest it holds in the investment vehicle. Consolidation may be appropriate in circumstances where the Group has less than a majority
beneficial interest. Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported in other liabilities and the
movement in these interests in interest expense.
Structured entities are entities that are designed so that their activities are not governed by way of voting rights. In assessing whether the Group has power
over such entities in which it has an interest, the Group considers factors such as the purpose and design of the entity; its practical ability to direct the relevant
activities of the entity; the nature of the relationship with the entity; and the size of its exposure to the variability of returns of the entity.
The treatment of transactions with non-controlling interests depends on whether, as a result of the transaction, the Group loses control of the subsidiary.
Changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions; any difference
between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity
and attributed to the owners of the parent entity. Where the Group loses control of the subsidiary, at the date when control is lost the amount of any non-
controlling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary is remeasured to its fair value; the gain or
loss that is recognised in profit or loss on the partial disposal of the subsidiary includes the gain or loss on the remeasurement of the retained interest.
Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration for the acquisition of a subsidiary is the
fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value of any asset
or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred except those relating to the issuance of
debt instruments (see (E)(4) 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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
224 Lloyds Banking Group Annual Report and Accounts 2020
Note 2: Accounting policies continued
(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 intangible assets.
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 using the effective interest method for all interest-bearing financial instruments, 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. In the case of financial assets that are purchased or originated credit-impaired, the
effective interest rate is the rate that discounts the estimated future cash flows to the amortised cost of the instrument. 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.
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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
225
Note 2: Accounting policies continued
(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, 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.
(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 48(3)
(Financial instruments: Financial assets and liabilities carried at fair value) for details of valuation techniques and significant inputs to valuation models.
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226 Lloyds Banking Group Annual Report and Accounts 2020
Note 2: Accounting policies continued
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.
Where there is uncertainty arising from 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 offset 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 including those arising from fraud. 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. The collective assessment of impairment aggregates financial instruments
with similar risk characteristics such as whether the facility is revolving in nature or secured and the type of security against financial assets.
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. 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. The use of internal credit ratings and qualitative indicators ensure alignment between
the assessment of staging and the Group’s management of credit risk which utilises these internal metrics within distinct retail and commercial portfolio risk
management practices. However, unless identified at an earlier stage, the credit risk of financial assets is deemed to have increased significantly when more
than 30 days past due. The use of a payment holiday in itself has not been judged to indicate a significant increase in credit risk, with the underlying long-term
credit risk deemed to be driven by economic conditions and captured through the use of forward-looking models. These portfolio level models are capturing
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
227
Note 2: Accounting policies continued
the anticipated volume of increased defaults and therefore an appropriate assessment of staging and expected credit loss. 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. Key differences between Stage 3 balances and non-
performing loans relate to the use of 180 days past due for Stage 3 mortgages and to the cure periods applied to forbearance exposures. The use of payment
holidays is not considered to be an automatic trigger of regulatory default and therefore does not automatically trigger Stage 3. Days past due will also not
accumulate on any accounts that have taken a payment holiday including those already past due.
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). On renegotiation the gross carrying amount of the loan is recalculated as the present value of the renegotiated or modified contractual
cash flows, which are discounted at the original effective interest rate. 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 and residual value impairment,
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.
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228 Lloyds Banking Group Annual Report and Accounts 2020
Note 2: Accounting policies continued
(K) Employee benefits
Short-term employee benefits, such as salaries, paid absences, performance-based cash awards and social security costs are recognised over the period in
which the employees provide the related services.
(1) Pension schemes
The Group operates a number of post-retirement benefit schemes for its employees including both defined benefit and defined contribution pension plans.
A defined benefit scheme is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, dependent on one or
more factors such as age, years of service and salary. A defined contribution plan is a pension plan into which the Group pays fixed contributions; there is no
legal or constructive obligation to pay further contributions.
Scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method. The defined
benefit scheme liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high-quality corporate bonds that are
denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. The
Group’s income statement charge includes the current service cost of providing pension benefits, past service costs, net interest expense (income), and plan
administration costs that are not deducted from the return on plan assets. Past service costs, which represents the change in the present value of the defined
benefit obligation resulting from a plan amendment or curtailment, are recognised when the plan amendment or curtailment occurs. Net interest expense
(income) is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset.
Remeasurements, comprising actuarial gains and losses, the return on plan assets (excluding amounts included in net interest expense (income) and net of
the cost of managing the plan assets), and the effect of changes to the asset ceiling (if applicable) are reflected immediately in the balance sheet with a charge
or credit recognised in other comprehensive income in the period in which they occur. Remeasurements recognised in other comprehensive income are
reflected immediately in retained profits and will not subsequently be reclassified to profit or loss.
The Group’s balance sheet includes the net surplus or deficit, being the difference between the fair value of scheme assets and the discounted value of
scheme liabilities at the balance sheet date. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future
or through refunds from the schemes. In assessing whether a surplus is recoverable, the Group considers (i) its current right to obtain a refund or a reduction in
future contributions and (ii) the rights of other parties existing at the balance sheet date. In determining the rights of third parties existing at the balance sheet
date, the Group does not anticipate any future acts by other parties.
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 remeasured 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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
229
Note 2: Accounting policies continued
(M) Insurance
The Group undertakes both life insurance and general insurance business. Insurance and participating investment contracts are accounted for under IFRS 4
Insurance Contracts, which permits (with certain exceptions) the continuation of accounting practices for measuring insurance and participating investment
contracts that applied prior to the adoption of IFRS. The Group, therefore, continues to account for these products using UK GAAP and UK established
practice.
Products sold by the life insurance business are classified into three categories:
– Insurance contracts – these contracts transfer significant insurance risk and may also transfer financial risk. The Group defines significant insurance risk as the
possibility of having to pay benefits on the occurrence of an insured event which are significantly more than the benefits payable if the insured event were
not to occur. These contracts may or may not include discretionary participation features.
– Investment contracts containing a discretionary participation feature (participating investment contracts) – these contracts do not transfer significant
insurance risk, but contain a contractual right which gives the holder the right to receive, in addition to the guaranteed benefits, further additional
discretionary benefits or bonuses that are likely to be a significant proportion of the total contractual benefits and the amount and timing of which is at the
discretion of the Group, within the constraints of the terms and conditions of the instrument and based upon the performance of specified assets.
– Non-participating investment contracts – these contracts do not transfer significant insurance risk or contain a discretionary participation feature.
The general insurance business issues only insurance contracts.
(1) Life insurance business
(i) Accounting for insurance and participating investment contracts
Premiums and claims
Premiums received in respect of insurance and participating investment contracts are recognised as revenue when due except for unit-linked contracts on
which premiums are recognised as revenue when received. Claims are recorded as an expense on the earlier of the maturity date or the date on which the
claim is notified.
Liabilities
Changes in the value of liabilities are recognised in the income statement through insurance claims.
– Insurance and participating investment contracts in the Group’s with-profit funds
Liabilities of the Group’s with-profit funds, including guarantees and options embedded within products written by these funds, are stated at their realistic
values in accordance with the Prudential Regulation Authority’s realistic capital regime, except that projected transfers out of the funds into other Group funds
are recorded in the unallocated surplus (see below). Further details on valuation under the realistic capital regime are included in note 30 Liabilities arising from
insurance contracts and participating investment contracts.
– Insurance 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.
Further details on valuation are included in note 30 Liabilities arising from insurance contracts and participating investment contracts.
– 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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
230 Lloyds Banking Group Annual Report and Accounts 2020
Note 2: Accounting policies continued
(iii) Value of in-force business
The Group recognises as an asset the value of in-force business in respect of insurance contracts and participating investment contracts. The asset represents
the present value of the shareholders’ interest in the profits expected to emerge from those contracts written at the balance sheet date. This is determined
after making appropriate assumptions about future economic and operating conditions such as future mortality and persistency rates and includes allowances
for both non-market risk and for the realistic value of financial options and guarantees. Each cash flow is valued using the discount rate consistent with that
applied to such a cash flow in the capital markets. The asset in the consolidated balance sheet is presented gross of attributable tax and movements in the
asset are reflected within other operating income in the income statement.
The Group’s contractual rights to benefits from providing investment management services in relation to non-participating investment contracts acquired in
business combinations and portfolio transfers are measured at fair value at the date of acquisition. The resulting asset is amortised over the estimated lives of
the contracts. At each reporting date an assessment is made to determine if there is any indication of impairment. Where impairment exists, the carrying value
of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement.
(2) General insurance business
The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included in insurance premium
income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred in the
balance sheet within liabilities arising from insurance contracts and participating investment contracts on a basis that reflects the length of time for which
contracts have been in-force and the projected incidence of risk over the term of the contract and only credited to the income statement when earned.
Broking commission is recognised when the underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is made
for the effect of future policy terminations based upon past experience.
The underwriting business makes provision for the estimated cost of claims notified but not settled and claims incurred but not reported at the balance sheet
date. The provision for the cost of claims notified but not settled is based upon a best estimate of the cost of settling the outstanding claims after taking
into account all known facts. In those cases where there is insufficient information to determine the required provision, statistical techniques are used which
take into account the cost of claims that have recently been settled and make assumptions about the future development of the outstanding cases. Similar
statistical techniques are used to determine the provision for claims incurred but not reported at the balance sheet date. Claims liabilities are not discounted.
(3) Liability adequacy test
At each balance sheet date liability adequacy tests are performed to ensure the adequacy of insurance and participating investment contract liabilities net
of related deferred cost assets and value of in-force business. In performing these tests current best estimates of discounted future contractual cash flows
and claims handling and policy administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is
immediately charged to the income statement, initially by writing off the relevant assets and subsequently by establishing a provision for losses arising from
liability adequacy tests.
(4) Reinsurance
Contracts entered into by the Group with reinsurers under which the Group is compensated for benefits payable on one or more contracts issued by the
Group are recognised as assets arising from contracts held with reinsurers. Where the contract transfers significant insurance risk, the contract issued by the
Group is classified as an insurance contract; where the contract transfers financial risk, the contract issued by the Group is recognised at fair value through
profit or loss.
Assets arising from contract held with reinsurers – Insurance risk transferred
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 contract held with reinsurers – Financial risk transferred
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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
231
Note 2: Accounting policies continued
(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.
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
Key judgements: Determining an appropriate definition of default against which a probability of default, exposure at default and loss given default
parameter can be evaluated
The appropriate lifetime of an exposure to credit risk for the assessment of lifetime losses, notably on revolving products
Establishing the criteria for a significant increase in credit risk
The use of management judgement alongside impairment modelling processes to adjust inputs, parameters and outputs to
reflect risks not captured by models
Key estimates:
Base case and Multiple Economic Scenarios (MES) assumptions, including the rate of unemployment and the rate of change of
house prices, required for creation of MES scenarios and forward-looking credit parameters
These judgements and estimates are subject to significant uncertainty.
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
2020 the Group’s expected credit loss allowance was £6,247 million (2019: £3,455 million), of which £5,788 million (2019: £3,278 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 2020, approximately £0.6 billion of UK
mortgages (2019: £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
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. The assessment of SICR and
corresponding lifetime loss, and the PD, of a financial asset deemed to be Stage 2, or Stage 3, is dependent on its expected life.
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. Credit impaired assets are transferred to Stage 3 with a lifetime expected losses
allowance. The Group uses both quantitative and qualitative indicators to determine whether there has been a SICR for an asset. For Retail, the following
tables set out the Retail Master Scale (RMS) grade triggers which result in a SICR for financial assets and the PD boundaries for each RMS grade. Credit
cards SICR triggers have been refined in 2020 following a review of sensitivity to changes in economic assumptions, 2019 triggers were previously aligned
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
232 Lloyds Banking Group Annual Report and Accounts 2020
Note 3: Critical accounting judgements and estimates continued
to Loans and overdrafts. The impact of this has been approximately £1.4 billion of additional assets being classified as Stage 2 at 31 December 2020, with a
corresponding increase in the ECL of £48 million resulting from the transfer to a lifetime expected loss.
SICR Triggers for key Retail portfolios
Origination grade
Mortgages SICR grade
Credit cards SICR grade
Loans and overdrafts SICR grade
RMS grade
1
2
3
4
5
6
7
1
5
4
5
8
2
5
5
6
9
3
6
6
7
4
7
7
8
5
8
8
9
10
11
12
6
9
9
10
13
7
10
10
11
14
PD boundary %
0.10
0.40
0.80
1.20
2.50
4.50
7.50
10.00
14.00
20.00
30.00
45.00
99.99 100.00
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.
The Group uses the internal credit risk classification and watchlist as qualitative indicators to identify a SICR. The Group does not use the low credit risk
exemption in its staging assessments. The use of a payment holiday in and of itself has not been judged to indicate a significant increase in credit risk, nor
forbearance, with the underlying long-term credit risk deemed to be driven by economic conditions and captured through the use of forward-looking
models. These portfolio level models are capturing the anticipated volume of increased defaults and therefore an appropriate assessment of staging and
expected credit loss. During 2020, the Group has granted payment holidays on Retail loans and advances, £6.4 billion remained in place at 31 December
2020, £4.3 billion of these balances were classified as Stage 1. If all of these assets were classified as Stage 2, the Group's ECL would have been less than
£50 million higher.
All financial assets are assumed to have suffered a SICR if they are more than 30 days past due; non-mortgage Retail financial assets are also assumed to have
suffered a SICR if they are in arrears on three or more separate occasions in a rolling twelve month period. Financial assets are classified as credit impaired if
they are 90 days past due except for UK mortgages where a 180 days backstop is used.
A Stage 3 asset that is no longer credit-impaired is transferred back to Stage 2 as no cure period is applied to Stage 3. If an exposure that is classified as Stage
2 no longer meets the SICR criteria, which in some cases include a minimum cure period, it is moved back to Stage 1.
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.
Generation of Multiple Economic Scenarios (MES)
The measurement of expected credit losses is required to reflect an unbiased probability-weighted range of possible future outcomes. The Group considers
the choice of approach used to generate the range of economic outcomes to be judgemental, given several methods can be adopted. In addition to a
defined base case, as used for planning, the Group’s approach relies on model-generated scenarios, reducing scope for bias in the selection of scenarios
and their weightings. The conditioning assumptions underpinning the base case scenario reflect the Group’s best view of future events. Where outcomes
materially diverge from the conditioning assumptions adopted, the base case scenario is updated. The base case is therefore central to the range of
outcomes created as no alternative conditioning assumptions are factored into the model-generated scenarios.
The Group models a full distribution of economic scenarios around this base case, ranking them using estimated relationships with industry-wide historical
loss data. The full distribution is summarised by a practical number of scenarios to run through ECL models representing four sections: an upside, the
base case, and a downside scenario weighted at 30 per cent each, with a severe downside scenario weighted at 10 per cent. With the base case already
pre-defined, the other three scenarios are constructed as averages of constituent modelled scenarios around the 15th, 75th and 95th percentiles of the
distribution. The scenario weights therefore represent the allocation to each summary segment of the distribution and not a subjective view on likelihood.
The inclusion of a severe downside scenario with a smaller weighting but relatively large credit losses, ensures the non-linearity of losses in the tail of the
distribution is captured when ECL based on the weighted result of the four scenarios is calculated.
A committee under the chairmanship of the Chief Economist meets at least quarterly to review and, if appropriate, recommend changes to the method by
which economic scenarios are generated; for approval by the Chief Financial Officer and Chief Risk Officer. In 2020, a change was made to the way in which
the distribution of scenarios is created. This change allows for a greater dispersal of economic outcomes in the early periods of the forecast, to recognise
the increased near-term profile of risks present since the onset of the coronavirus pandemic. This change allows for a wider distribution of losses both on the
upside and downside, although is most evident in the severe downside scenario, given it represents a more adverse segment of the distribution. The change
is estimated to have driven an additional £200 million of ECL resulting from the inclusion of more adverse economic outcomes.
Base Case and MES Economic Assumptions
The Group’s base case economic scenario has continued to be revised in light of the impact of the coronavirus pandemic in the UK and globally. The scenario
reflects judgements of the net effect of government-mandated restrictions on economic activity, large-scale government interventions, and behavioural
changes by households and businesses that may persist beyond the rollout of coronavirus vaccination programmes.
Despite large-scale vaccination efforts commencing in the UK and globally, there remains considerable uncertainty about the pace and eventual extent of
the post-pandemic recovery. The Group’s current base case scenario builds in three key conditioning assumptions. First, the UK vaccine rollout successfully
protects the elderly, key workers and the clinically vulnerable by mid-2021. Second, national lockdowns end by April 2021, allowing a phased return to a tiered
system of restrictions that are progressively eased in the second quarter and second half of 2021, leaving only limited restrictions in place by the end of 2021.
Third, government policy measures including specifically the furlough scheme continue to provide support for the duration of severe economic restrictions,
through to mid-2021.
Conditioned on the above assumptions and despite the recovery in economic activity resuming from the second quarter of 2021, the Group’s base case
outlook assumes a rise in the unemployment rate and weakness in residential and commercial property prices. Risks around this base case economic view lie
in both directions and are partly captured by the MES generated. But uncertainties relating to the key conditioning assumptions, including epidemiological
developments and the efficacy of vaccine rollouts, are not specifically captured by the MES scenarios. These specific risks have been recognised outside the
modelled scenarios published below.
The Group has accommodated the latest available information at the reporting date in defining its base case scenario and generating the MES. The scenarios
include forecasts for key variables in the fourth quarter of 2020, for which actuals may have since emerged prior to publication.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
233
Note 3: Critical accounting judgements and estimates continued
Base case scenario by quarter1
Base case
Gross domestic product
UK Bank Rate
Unemployment rate
House price growth
First
quarter
2020
%
(3.0)
0.10
4.0
2.8
Second
quarter
2020
%
(18.8)
0.10
4.1
2.6
Third
quarter
2020
%
Fourth
quarter
2020
%
First
quarter
2021
%
Second
quarter
2021
%
Third
quarter
2021
%
Fourth
quarter
2021
%
16.0
0.10
4.8
7.2
(1.9)
0.10
5.0
5.9
(3.8)
0.10
5.2
5.5
5.6
0.10
6.5
4.7
3.6
0.10
8.0
(1.6)
(2.2)
1.5
0.10
7.5
(3.8)
(1.7)
Commercial real estate price growth
(5.0)
(7.8)
(7.8)
(7.0)
(6.1)
(2.9)
1 Gross domestic product presented quarter on quarter, house price growth and commercial real estate growth presented year on year - i.e. from the equivalent quarter the previous year. Bank Rate is
presented end quarter.
Scenarios by year
Key annual assumptions made by the Group are shown below. Gross domestic product is presented as an annual change, house price growth and
commercial real estate price growth are presented as the growth in the respective indices within the period. UK Bank Rate and unemployment rate are
averages for the period.
Upside
Gross domestic product
UK Bank Rate
Unemployment rate
House price growth
Commercial real estate price growth
Base case
Gross domestic product
UK Bank Rate
Unemployment rate
House price growth
Commercial real estate price growth
Downside
Gross domestic product
UK Bank Rate
Unemployment rate
House price growth
Commercial real estate price growth
Severe downside
Gross domestic product
UK Bank Rate
Unemployment rate
House price growth
Commercial real estate price growth
2020
%
2021
%
(10.5)
0.10
4.3
6.3
(4.6)
(10.5)
0.10
4.5
5.9
(7.0)
(10.6)
0.10
4.6
5.6
(8.7)
(10.8)
0.10
4.8
5.3
(11.0)
3.7
1.14
5.4
(1.4)
9.3
3.0
0.10
6.8
(3.8)
(1.7)
1.7
0.06
7.9
(8.4)
(10.6)
0.3
0.00
9.9
(11.1)
(21.4)
2022
%
5.7
1.27
5.4
5.2
3.9
6.0
0.10
6.8
0.5
1.6
5.1
0.02
8.4
(6.5)
(3.2)
4.8
0.00
10.7
(12.5)
(9.8)
2023
%
1.7
1.20
5.0
6.0
2.1
1.7
0.21
6.1
1.5
1.1
1.4
0.02
7.8
(4.7)
(0.8)
1.3
0.01
9.8
(10.7)
(3.9)
2024
%
1.5
1.21
4.5
5.0
0.3
1.4
0.25
5.5
1.5
0.6
1.4
0.03
7.0
(3.0)
(0.8)
1.2
0.01
8.7
(7.6)
(0.8)
Economic assumptions - five year average
The key UK economic assumptions made by the Group averaged over a five-year period are shown below. The five-year period reflects movements within
the current reporting year such that 31 December 2020 reflects five years 2020 to 2024. The prior year comparative data has been re-presented to align to the
equivalent period, 2019 to 2023. The inclusion of the reporting year within the five-year period reflects the need to predict variables which remain unpublished
at the reporting date, and recognises that credit models utilise both level and annual change in calculating ECL. The use of calendar years also maintains a
comparability between tables disclosed.
Gross domestic product
UK Bank Rate
Unemployment rate
House price growth
Commercial real estate price growth
At 31 December 2020
At 31 December 2019
Upside
%
Base case Downside
%
%
Severe
downside
%
Upside
%
Base case Downside
%
%
Severe
downside
%
0.3
0.98
5.0
4.2
2.1
0.1
0.15
5.9
1.1
(1.1)
(0.4)
0.05
7.1
(3.5)
(4.9)
(0.8)
0.02
8.8
(7.5)
(9.7)
1.6
1.87
3.9
5.1
1.6
1.3
1.15
4.3
1.4
(0.3)
1.0
0.51
5.5
(2.5)
(3.9)
0.3
0.17
6.7
(7.0)
(7.3)
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
234 Lloyds Banking Group Annual Report and Accounts 2020
Note 3: Critical accounting judgements and estimates continued
Economic assumptions - start to peak
At 31 December 2020
At 31 December 2019
Gross domestic product
UK Bank Rate
Unemployment rate
House price growth
Commercial real estate price growth
Economic assumptions - start to trough
1.4
1.44
6.5
22.6
11.0
Upside
%
Base case Downside
%
%
Severe
downside
%
(3.0)
0.10
11.5
5.3
0.8
0.25
8.0
5.9
(1.7)
0.10
9.3
5.6
(2.7)
(2.7)
(2.7)
Upside
%
Base case Downside
%
%
Severe
downside
%
8.4
2.56
4.4
28.3
8.8
6.6
1.75
4.6
7.1
(0.8)
5.5
0.75
6.9
2.7
(0.8)
1.8
0.75
8.3
2.7
(0.8)
Gross domestic product
UK Bank Rate
Unemployment rate
House price growth
Commercial real estate price growth
At 31 December 2020
At 31 December 2019
Upside
%
Base case Downside
%
%
Severe
downside
%
(21.2)
(21.2)
(21.2)
(21.2)
0.10
4.0
(0.5)
(6.9)
0.10
4.0
(0.5)
(9.0)
0.01
4.0
(16.4)
(22.2)
0.00
4.0
(32.4)
(39.9)
Upside
%
Base case Downside
%
%
0.3
0.75
3.4
1.5
(1.4)
0.3
0.75
3.8
0.0
(2.3)
0.3
0.35
3.8
(12.0)
(17.9)
Severe
downside
%
(2.4)
0.01
3.8
(30.3)
(31.4)
ECL sensitivity to economic assumptions
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. A 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 (LGD). Commercial Banking also reflects movements in the loss given default, whereas for Other
Retail portfolios only the probability of default responds to changes in the economic outlook. ECL applied through individual assessments and post-model
adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated. Judgements applied through changes to inputs
are reflected in the scenario sensitivities.
Impact of multiple economic scenarios
UK mortgages
Other Retail
Commercial Banking
Other
ECL allowance
At 31 December 2020
At 31 December 2019
Base case
£m
Probability-
weighted
£m
Difference
£m
Base case
£m
Probability-
weighted
£m
Difference
£m
804
2,310
2,177
450
5,741
1,027
2,368
2,402
450
6,247
223
58
225
—
506
464
1,492
1,258
50
3,264
569
1,521
1,315
50
3,455
105
29
57
—
191
The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios. 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. ECL applied through individual assessments
and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated. Judgements applied through
changes to inputs are reflected in the scenario sensitivities.
At 31 December 2020
At 31 December 2019
Probability-
weighted
£m
Upside
£m
Base case Downside
£m
£m
Severe
downside
£m
Probability-
weighted
£m
1,027
2,368
2,402
450
614
2,181
1,910
448
804
2,310
2,177
450
1,237
2,487
2,681
450
2,306
2,745
3,718
456
569
1,521
1,315
50
Upside
£m
Base case Downside
£m
£m
317
1,443
1,211
50
464
1,492
1,258
50
653
1,564
1,382
50
Severe
downside
£m
1,389
1,712
1,597
50
UK mortgages
Other Retail
Commercial Banking
Other
ECL allowance
6,247
5,153
5,741
6,855
9,225
3,455
3,021
3,264
3,649
4,748
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
235
Note 3: Critical accounting judgements and estimates continued
The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios, with stage allocation based on each specific
scenario. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on
which they are evaluated. Judgements applied through changes to inputs are reflected in the scenario sensitivities. A probability-weighted scenario is not
shown as this does not reflect the basis on which ECL is reported.
UK mortgages
Other Retail
Commercial Banking
Other
ECL allowance
At 31 December 2020
At 31 December 2019
Upside
£m
Base case Downside
£m
£m
602
2,154
1,892
448
797
2,299
2,157
449
1,269
2,509
2,738
450
Severe
downside
£m
2,578
2,819
4,155
457
Upside
£m
Base case Downside
£m
£m
311
1,435
1,206
49
461
1,486
1,254
50
670
1,570
1,387
50
Severe
downside
£m
1,667
1,740
1,625
51
5,096
5,702
6,966
10,009
3,001
3,251
3,677
5,083
The table below shows the percentage of assets that would be recorded in Stage 2 for the upside, base case, downside and severe downside scenarios, if
stage allocation was based on each specific scenario. Given additional data has been generated to support this new disclosure the prior year comparatives
are not available.
At 31 December 2020
At 31 December 2019
Upside
%
Base case Downside
%
%
Severe
downside
%
Upside
%
Base case Downside
%
%
Severe
downside
%
UK mortgages
Other Retail
Commercial Banking
Other
Percentage of assets in Stage 2
6.9
12.6
8.2
—
7.0
8.9
13.5
10.9
—
8.7
11.8
15.2
17.5
—
11.8
16.7
17.9
24.9
—
16.4
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 gradual changes in
these two critical economic factors. The assessment has been made against the base case with the reported staging unchanged.
The table below shows the impact on the Group’s ECL in respect of UK mortgages resulting from a decrease/increase in loss given default for a 10 percentage
point (pp) increase or decrease in the UK House Price Index (HPI). The increase/decrease is presented based on the adjustment phased evenly over the first
ten quarters of the base case scenario.
ECL impact, £m
At 31 December 2020
At 31 December 2019
10pp increase
in HPI
10pp decrease
in HPI
10pp increase
in HPI
10pp decrease
in HPI
(206)
284
(110)
147
The table below shows the impact on the Group’s ECL resulting from a 1 percentage point (pp) increase or decrease in the UK unemployment rate. The
increase or decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario. An immediate increase or
decrease would drive a more material ECL impact as it would be fully reflected in both 12 month and lifetime PDs.
UK mortgages
Other Retail
Commercial Banking
Other
ECL impact
At 31 December 2020
At 31 December 2019
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
25
54
125
1
205
(23)
(54)
(112)
(1)
(190)
33
39
68
1
141
(34)
(54)
(54)
(1)
(143)
Individual assessments
Stage 3 ECL in Commercial Banking is largely assessed on an individual basis using bespoke assessment of loss for each specific client. These assessments
are carried out by the Business Support Unit based on detailed reviews and expected recovery strategies. While these assessments are based on the
Group’s latest economic view, the use of group-wide multiple economic scenarios and weightings is not considered appropriate for these cases due to their
individual characteristics. In place of this a range of case specific outcomes are considered with any alternative better or worse outcomes that carry a 25 per
cent likelihood taken into account in establishing a probability-weighted ECL. At 31 December 2020 individually assessed provisions for Commercial Banking
were £1,222 million (2019: £890 million) which reflected a range of £982 million to £1,548 million (2019: £515 million to £1,183 million), based on the range of
alternative outcomes considered.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
236 Lloyds Banking Group Annual Report and Accounts 2020
Note 3: Critical accounting judgements and estimates continued
Application of judgement in adjustments to modelled ECL
Impairment models fall within the Group’s Model Risk framework with model monitoring, periodic validation and back testing performed on model
components (i.e. probability of default, exposure at default and loss given default). Limitations in the Group’s impairment models or data inputs, may be
identified through the ongoing 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 that the overall provision adequately reflects all material risks. These adjustments are determined
by considering the particular attributes of exposures which have not been adequately captured by the impairment models and range from changes to model
inputs and parameters, at account level, through to more qualitative post-model overlays.
Judgements are not typically assessed under each distinct economic scenario used to generate ECL, but instead are applied on the basis of final modelled
ECL which reflects the probability weighted view of all scenarios. All adjustments are reviewed quarterly and are subject to internal review and challenge,
including by the Audit Committee, to ensure that amounts are appropriately calculated and that there are specific release criteria within a reasonable
timeframe.
At 31 December 2020 the coronavirus pandemic and the various support measures that have been put in place have resulted in an economic environment
which differs significantly from the historical economic conditions upon which the impairment models have been built. As a result there is a greater need for
management judgements to be applied alongside the use of models. At 31 December 2020 management judgement resulted in additional ECL allowances
totalling £1,383 million (2019: £153 million). This comprises judgements added due to COVID-19 in the year and other judgements not directly linked to
COVID-19 but which have increased in size under the current outlook. The table below analyses total ECL allowance at 31 December 2020 by portfolio,
separately identifying the amounts that have been modelled, those that have been individually assessed and those arising through the application of
management judgement.
At 31 December 2020
UK Mortgages
Other Retail
Commercial Banking
Other
Total
At 31 December 2019
UK Mortgages
Other Retail
Commercial Banking
Other
Total
Modelled
ECL
£m
Individually
assessed
£m
Judgements
due to
COVID-191
£m
Other
judgements
£m
Total ECL
£m
481
2,060
1,051
50
3,642
386
1,531
445
50
2,412
—
—
1,222
—
1,222
—
—
890
—
890
36
321
131
400
888
—
—
—
—
—
510
(13)
(2)
—
495
183
(10)
(20)
—
153
1,027
2,368
2,402
450
6,247
569
1,521
1,315
50
3,455
1 Judgements introduced in 2020 due to the impact that COVID-19 and resulting interventions have had on the Group’s economic outlook and observed loss experience, which have required
additional model limitations to be addressed.
Judgements due to COVID-19
UK mortgages: £36 million
This reflects an adjustment made to reflect an increase in the time assumed between default and repossession as a result of the Group temporarily
suspending the repossession of properties to support customers during the pandemic.
Other Retail: £321 million
These adjustments principally comprise:
Recognition of impact of support measures: £218 million
The use of payment holidays along with subdued levels of consumer spending is judged to have temporarily reduced the flow of accounts into arrears
and default and to have also improved average credit scores across portfolios. Management believes that the resulting position does not fully reflect the
underlying credit risk in the portfolios. Adjustments have therefore been made to increase expected future rates of default and remove the impact of the
observed improvement in average credit scores.
Incorporation of forward-looking LGDs: £86 million
Modelled LGDs in non-mortgage Retail portfolios are predominantly based on observed customer behaviour and resulting incurred losses. Management
believes that this may not be representative of future experience, given the current economic outlook, and consequently an adjustment has been made to
increase forward-looking LGDs to reflect a deterioration in cure and recovery rates. The impact has been estimated by using experience of losses in previous
downturns and management’s view of relative comparability of anticipated economic scenarios.
Commercial Banking: £131 million
This adjustment principally comprises:
Adjustment to economic variables used as inputs to models: £93 million
Management does not believe that the observed corporate insolvency rates used as an input to Commercial default models adequately reflect the current
economic situation and outlook given the temporary government support. As a result, the observed reductions in the rate of insolvencies have been replaced
with an increase proportionate to that seen in unemployment to generate a level of predicted defaults.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
237
Note 3: Critical accounting judgements and estimates continued
Other: £400 million
Central overlay in respect of economic uncertainty: £400 million
An important element of the methodology used to calculate the Group’s ECL allowance is the determination of a base case economic scenario, predicated
on certain conditioning assumptions, from which alternative scenarios are derived using stochastic shocks. The rapid evolution of the pandemic and significant
changes that this has brought about could continue into 2021 and may partially invalidate the conditioning assumptions that underpin the Group’s base
case scenario. Management believes that the risks to the conditioning assumptions around the base case scenario are markedly to the downside, reflecting
notably the potential for a material delay in the vaccination programme or reduction in its effectiveness from further virus mutation and the corresponding
delayed withdrawal of restrictions on social interaction or introduction of further lockdowns. The Group's ECL allowances are required to reflect an unbiased
probability-weighted view of all possible future outcomes and therefore management believes that an adjustment is required to capture these additional risks.
An adjustment of £400 million has been made to increase the Group’s ECL allowances to reflect this increased uncertainty around the conditioning
assumptions. This equates to a 1 percentage point increase in unemployment allied with a 5 per cent lower HPI in 2021, reflecting a more immediate and
therefore greater ECL impact than the gradual increase reflected in the stated univariate sensitivity. It is proportionate to the level of volatility seen in forecasts
as the pandemic has unfolded and is also equivalent to a 10 per cent re-weighting from the upside to the severe downside scenario. The adjustment, which
has not been allocated to a specific portfolio, has been allocated against Stage 1 assets given the downside risks are largely considered to relate to exposures
with currently low default probabilities, the majority of which are in Stage 1. Through 2021 the scale of the uncertainty is expected to diminish and the need for
this adjustment will then be reassessed.
Other judgements
UK mortgages: £510 million (2019: £183 million)
These adjustments principally comprise:
Adjustment to modelled forecast parameters: £193 million (2019: £nil)
Adjustments have been required to the estimated defaults used within the ECL calculation for UK mortgages following the adoption of new default forecast
models. Forecast models which predict quarterly defaults based on several economic variables have been developed using the response from the previous
recession, as per usual modelling best practice. However, management believe further adjustments are necessary when the results of these models have been
benchmarked to observed levels, given the atypical nature of the current economic outlook. These were derived using historical observed default rates under
previous downturn conditions to ensure that the resulting forecast best reflected management’s view given the current economic outlook. The adjustment to
forward-looking parameters prior to their use in ECL calculations ensures that all downstream account level calculations reflect the Group’s best view of credit
losses in respect of the economic scenarios stated. As such this in-model adjustment is reflected within all scenarios, assessment of staging and in subsequent
assessment of all post-model adjustments.
End-of-term interest-only: £179 million (2019: £132 million)
The current definition of default used in the UK mortgages impairment model excludes past term interest-only accounts that continue to make interest
payments but have missed their capital payment upon maturity of the loan. This adjustment therefore mitigates the risk that the model understates the credit
losses associated with interest-only accounts which have missed, or will potentially miss, their final capital payment. For those accounts that have reached end
of term this adjustment manually overwrites PDs to 70 per cent or 100 per cent, thereby moving them into Stage 2, or Stage 3, depending on whether they
are deemed performing, or non-performing respectively. For interest-only accounts with six years or less to maturity an appropriate incremental PD uplift is
made to PDs based on the probability of missing a future capital payment, assessed through segmentation of behaviour score, debt-to-value and worst ever
arrears status. The increase in the judgement in 2020 is primarily driven by an increase in the stock of long-term defaults following COVID-19 related litigation
suspension.
Long-term defaults: £87 million (2019: £33 million)
The Group suspended mortgage litigation activity between late 2014 and mid 2018 as changes were implemented to the treatment of amounts in arrears,
interrupting the natural flow of accounts to possession. An adjustment is made to ensure adequate provision coverage considering the resulting build-up of
accounts in long term default. Coverage is uplifted to the equivalent levels of those accounts already in repossession on an estimated shortfall of balances
expected to flow to possession. A further adjustment is made to mitigate for the risk that credit model provision understates the probability of possession for
accounts which have been in default for more than 24 months, with an arrears balance increase in the last 6 months. These accounts have their probability of
possession set to 95 per cent based on observed historical losses incurred on accounts that were of an equivalent status. The increase in judgement in 2020 is
primarily driven by an increase in the stock of long-term defaults following COVID-19 related litigation suspension.
Other Retail: £(13) million (2019: £(10) million)
These adjustments principally comprise:
Lifetime extension on revolving products: £81 million (2019: £36 million)
Unsecured revolving products use a model lifetime definition of three years based on historic data which shows that substantially all accounts resolve in
this time. An adjustment is made to extend the lifetime used for Stage 2 exposures to six years by adding incremental probability of default through the
extrapolation of the default trajectory observed throughout the three years and beyond. The resulting additional ECL allowance is added to Stage 2 accounts
proportionate to the modelled three year PD. The increase in the judgement in 2020 is driven by growth in Stage 2 assets and their coverage, rather than any
change to the lifetime assumption.
Unsecured non-scored accounts: £(72) million (2019: £nil)
Due to a shortcoming in the models, it is not possible to retrieve relevant credit data for a number of accounts and therefore no PD is available and no
assessment of whether there has been a SICR can be carried out. The model defaults these accounts to Stage 2 and a proxy ECL allowance calculated based
on similar accounts within the portfolio. The deterioration in the economic outlook and growth in the number of accounts subject to this proxy have resulted
in this approach having a more significant effect and an exercise has been carried out to identify and adjust those accounts which should not have been
allocated to Stage 2.
Credit Card LGD alignment: £(55) million (2019: £(22) million)
The MBNA impairment model was developed using historical MBNA data. Following the acquisition of the business and the subsequent migration of this
portfolio to Lloyds Banking Group collections strategies an adjustment is required to reflect the recent improvement in cure rates now evident as collections
strategies harmonise, which are not captured by the original MBNA model development data.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
238 Lloyds Banking Group Annual Report and Accounts 2020
Note 3: Critical accounting judgements and estimates continued
Valuation of assets and liabilities arising from insurance business
Key judgements: Future economic and operating conditions
Key estimates:
Investment returns
Future mortality rates
Future expenses
These judgements and estimates are subject to significant uncertainty.
At 31 December 2020, the Group recognised a value of in-force business asset of £5,396 million (2019: £5,311 million) and an acquired value of in-force
business asset of £221 million (2019: £247 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 2020 are set out in note 23.
At 31 December 2020, the Group carried total liabilities arising from insurance contracts and participating investment contracts of £116,060 million (2019:
£111,449 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 and future expenses. 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 30.
The effect on the Group’s profit before tax and shareholders’ equity of changes in annuitant mortality and other key assumptions used in determining the life
insurance assets and liabilities is set out in note 31. Reducing annuitant mortality rates to 95 per cent of the expected rate would reduce profit before tax by
£333 million (2019: £293 million).
Defined benefit pension scheme obligations
Key estimates:
Discount rate applied to future cash flows
Expected lifetime of the schemes' members
The net asset recognised in the balance sheet at 31 December 2020 in respect of the Group’s defined benefit pension scheme obligations was
£1,578 million comprising an asset of £1,714 million and a liability of £136 million (2019: a net asset of £550 million comprising an asset of £681 million and a
liability of £131 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 of
and with a term consistent with the defined benefit pension schemes’ obligations. The average duration of the schemes’ obligations is approximately 19
years. The market for bonds with a similar duration is limited and, as a result, significant management judgement is required to determine an appropriate yield
curve on which to base the discount rate. Assuming that there is no change in other assumptions or in the value of the schemes' assets, the effect on the net
accounting surplus at 31 December 2020 of a decrease of 10 basis points in the discount rate would be a reduction of £890 million (2019: £784 million). To the
extent that changes in the discount rate arise from changes in gilt yields, rather than credit spreads, the impact is largely mitigated by the schemes' asset-
liability matching strategies.
The cost of the benefits payable by the schemes will also depend upon the life expectancy of the members. The mortality assumptions used by the Group are
based on standard industry tables for both current mortality rates and the rate of future mortality improvement, adjusted in line with the actual experience of
the Group's schemes. Assuming that there is no change in other assumptions or in the value of the schemes' assets, the effect on the net accounting surplus
at 31 December 2020 of an increase in one year in the average life of scheme members would be a reduction of £2,146 million (2019: £1,636 million). The
Group has in place a longevity swap, as described in note 34, to partially mitigate mortality risk.
Further sensitivities and the balance sheet impact of changes in the principal actuarial assumptions are provided in part (v) of note 34.
Recoverability of deferred tax assets and uncertain tax positions
Key judgements: Assessing the likely level of future taxable profits taking into account the Group’s long-term financial and strategic plans
Interpreting tax rules on the Group’s open tax matters
At 31 December 2020 the Group carried deferred tax assets on its balance sheet of £2,741 million (2019: £2,666 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 35 and 46 respectively.
Estimation of income taxes includes the assessment of recoverability of deferred tax assets. Deferred tax assets are only recognised to the extent that they
are considered more likely than not to be recoverable based on existing tax laws and forecasts of future taxable profits against which the underlying tax
deductions can be utilised. The Group has recognised a deferred tax asset of £4,064 million (2019: £3,611 million) in respect of 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 of future UK taxable profits require management judgement, and 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, in order to produce a base
case forecast of future UK taxable profits. Under current law there is no expiry date for UK trading losses not yet utilised, and given the forecast of future
profitability and the Group’s commitment to the UK market, it is more likely than not the value of the losses will be recovered at some point in the future.
Banking tax 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. These restrictions in utilisation means that the value of the deferred tax asset in respect of tax losses is only expected
to be fully recovered by 2049 (2019: 2039) in the base case forecast. The rate of recovery of the Group’s tax loss asset is not a straight line, being affected by the
relative profitability of the legal entities in future periods, and the relative size of their tax losses carried forward. It is expected in the base case that 60 per cent
of the value will be recovered by 2034, when Bank of Scotland plc will have utilised all of its available tax losses. It is possible that future tax law changes could
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
239
Note 3: Critical accounting judgements and estimates continued
materially affect the timing of recovery and the value of these losses ultimately realised by the Group. The value of the deferred tax asset in respect of tax
losses increased by £420 million in 2020 as a result of the change in UK tax rates (see note 35).
As disclosed in note 46, the Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, where the
final tax position will remain uncertain until the matter is finally determined by judicial process.
Regulatory provisions
Key judgements: Determining the scope of reviews required by regulators
The impact of legal decisions that may be relevant to claims received
Key estimates:
The number of future complaints
The proportion of complaints that will be upheld
The average cost of redress
At 31 December 2020, the Group carried provisions of £642 million (2019: £2,408 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 estimation. 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 decisions
reached by legal and other review processes 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.
Fair value of financial instruments
Key estimates:
Interest rate spreads, earning multiples and interest rate volatility
At 31 December 2020, the carrying value of the Group’s financial instrument assets held at fair value was £248,385 million (2019: £234,467 million), and its
financial instrument liabilities held at fair value was £49,959 million (2019: £47,265 million).
The valuation techniques for 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 48. Details
about sensitivities to market risk arising from trading assets and other treasury positions can be found in the risk management section on page 159.
Recoverability of other intangible assets
Key judgements: Assessing future trading conditions that could affect the Group’s business operations
Assessing whether certain of the Group’s purchased brands have an indefinite life
Key estimates:
The value-in-use calculations require management to estimate future cash flows, appropriate discount rates for those cash flows and
long-term sustainable growth rates
Estimated useful life of internally generated capitalised software
At 31 December 2020, the carrying value of the Group’s other intangible assets was £4,140 million (2019: £3,808 million), including capitalised software
enhancements of £3,309 million (2019: £2,907 million) and brands of £380 million (2019: £380 million).
In determining the estimated useful life of capitalised software enhancements, management consider the product's lifecycle and the Group's technology
strategy; assets are reviewed annually to assess whether there is any indication of impairment and to confirm that the remaining estimated useful life is still
appropriate. For the year ended 31 December 2020, the amortisation charge was £590 million and at 31 December 2020, the weighted-average remaining
estimated useful life of the Group’s capitalised software enhancements was 4.9 years (2019: 4.7 years). If the Group reduced by one year the estimated useful
life of those assets with a remaining estimated useful life of more than two years at 31 December 2020, the 2021 amortisation charge would be approximately
£175 million higher.
Brands arising from the acquisition of Bank of Scotland in 2009 are recognised on the Group's balance sheet and have been determined to have an
indefinite useful life. The carrying value at 31 December 2020 was £380 million (2019: £380 million). The recoverable amount has been based on a value-in-use
calculation. The calculation uses post-tax projections of the income generated by the brands, a discount rate of 9.31 per cent and a future growth rate of 2.5
per cent . Management estimates that if the growth rate were decreased by 1 per cent there would have been an impairment charge of £50 million.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
240 Lloyds Banking Group Annual Report and Accounts 2020
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 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 2020, the Group migrated certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail;
the Group has also revised its approach to internal funding charges, including the adoption of the Sterling Overnight Index Average (SONIA) interest rate
benchmark in place of LIBOR. Comparatives 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.
Income and expenditure not attributed to these financial reporting segments, including the costs of certain central and head office functions and the Group’s
private equity business, Lloyds Development Capital, is disclosed as Other.
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.
Notes to the consolidated financial statements continued Note 4: Segmental analysis continued
Year ended 31 December 2020
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
Underlying profit (loss)
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
Movement in value of in-force business
Defined benefit scheme charges
Non-income statement 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 £127 million.
Lloyds Banking Group Annual Report and Accounts 2020
241
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying
basis total
£m
8,384
1,733
10,117
(856)
9,261
(4,761)
(125)
(4,886)
(2,384)
1,991
11,868
(1,751)
10,117
2,357
1,292
3,649
(28)
3,621
(1,851)
(210)
(2,061)
(1,464)
96
3,246
403
3,649
49
1,250
1,299
—
1,299
(902)
(50)
(952)
(9)
338
1,223
76
1,299
(17)
240
223
—
223
(71)
6
(65)
(390)
(232)
10,773
4,515
15,288
(884)
14,404
(7,585)
(379)
(7,964)
(4,247)
2,193
(1,049)
15,288
1,272
223
358,766
290,206
295,229
142,042
145,596
189,302
183,348
187,113
14,072
10,194
190,771
146,554
498
517
—
—
—
—
62
1,077
(571)
506
1,103
—
—
—
69
147
1,319
(92)
1,733
1,760
—
97
1,684
4
113
231
274
—
5
76
176
875
(222)
653
17
—
—
5
787
349
1,158
(519)
1,292
263
—
30
112
—
4
—
—
146
1
—
204
355
(329)
26
—
191
—
—
—
1,389
1,580
(356)
1,250
159
76
14
125
—
—
—
—
—
—
—
1
1
(26)
(25)
—
—
149
—
204
(1,055)
(702)
967
240
550
—
106
980
292
—
15,288
871,269
460,068
821,856
615
748
274
146
6
76
443
2,308
(1,148)
1,160
1,120
191
149
5
1,060
830
3,355
—
4,515
2,732
76
247
2,901
296
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
242 Lloyds Banking Group Annual Report and Accounts 2020
Note 4: Segmental analysis continued
Year ended 31 December 20191
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
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
Movement in value of in-force business
Defined benefit scheme charges
Non-income statement segment items:
Additions to fixed assets
Investments in joint ventures and associates at end of year
1 Restated, see page 240.
2 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
9,184
2,019
11,203
(946)
10,257
(4,768)
(238)
(5,006)
(1,038)
4,213
13,136
(1,933)
11,203
2,892
1,417
4,309
(21)
4,288
(2,073)
(155)
(2,228)
(306)
1,754
3,508
801
4,309
77
2,021
2,098
—
2,098
(982)
(50)
(1,032)
—
1,066
1,926
172
2,098
224
275
499
—
499
(52)
(2)
(54)
53
498
(461)
960
499
350,850
253,128
261,036
144,795
144,050
182,318
175,869
13,677
182,333
162,379
10,465
160,400
518
652
—
9
—
—
59
1,238
(571)
667
1,225
—
—
—
47
206
1,478
(126)
2,019
1,712
—
108
2,208
4
136
330
248
—
4
103
244
1,065
(321)
744
25
—
(5)
12
812
72
916
(243)
1,417
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
Notes to the consolidated financial statements continued 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
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
Movement in value of in-force business
Defined benefit scheme charges
Non-income statement segment items:
Additions to fixed assets
Investments in joint ventures and associates at end of year
1 Restated, see page 240.
2 Net of profits on disposal of operating lease assets of £60 million.
Lloyds Banking Group Annual Report and Accounts 2020
243
Retail
£m
Commercial
Banking
£m
Insurance
and Wealth
£m
Other
£m
Underlying
basis total
£m
9,431
2,102
11,533
(921)
10,612
(4,904)
(267)
(5,171)
(861)
4,580
13,053
(1,520)
11,533
2,985
1,665
4,650
(35)
4,615
(2,184)
(203)
(2,387)
(71)
2,157
3,837
813
4,650
123
1,865
1,988
—
1,988
(1,021)
(39)
(1,060)
(1)
927
1,860
128
1,988
175
378
553
—
553
(56)
(91)
(147)
(4)
402
(26)
579
553
349,787
253,846
260,816
164,655
147,597
190,649
140,487
14,063
147,673
142,669
2,560
148,261
503
660
—
13
—
—
57
1,233
(601)
632
1,305
—
—
—
71
247
1,623
(153)
2,102
1,573
—
121
2,092
4
142
332
305
—
5
83
248
1,115
(311)
804
38
—
—
7
711
356
1,112
(251)
1,665
278
—
49
208
—
5
1
—
208
92
—
163
469
(418)
51
—
197
—
—
—
2,146
2,343
(529)
1,865
154
(55)
20
223
—
—
—
—
—
—
—
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 managementOther informationFinancial statements
244 Lloyds Banking Group Annual Report and Accounts 2020
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 2020
Net interest income
Other income, net of insurance claims
Total income, net of insurance claims
Operating lease depreciation3
Net income
Operating expenses
Impairment4
Profit before tax
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
Lloyds
Banking
Group
statutory
£m
Removal of:
Volatility
and other
items1
£m
Insurance
gross up2
£m
10,749
4,377
15,126
15,126
(9,745)
(4,155)
1,226
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
174
165
339
(884)
(545)
1,522
(95)
882
(150)
(27)
(177)
—
(177)
174
3
—
Removal of:
Volatility
and other
items5
£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
items6
£m
Insurance
gross up2
£m
152
107
259
(956)
(697)
2,053
—
1,356
(834)
673
(161)
—
(161)
161
—
—
PPI
£m
—
—
—
—
—
85
—
85
PPI
£m
—
—
—
—
—
2,450
—
2,450
Underlying
basis
£m
10,773
4,515
15,288
(884)
14,404
(7,964)
(4,247)
2,193
Underlying
basis
£m
12,377
5,732
18,109
(967)
17,142
(8,320)
(1,291)
7,531
PPI
£m
Underlying
basis
£m
—
—
—
—
—
750
—
750
12,714
6,010
18,724
(956)
17,768
(8,765)
(937)
8,066
1 In the year ended 31 December 2020 this comprises the effects of asset sales (losses of £14 million); volatility and other items (losses of £45 million); the amortisation of purchased intangibles
(£69 million); restructuring (£521 million, including severance costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and
integration costs); and the fair value unwind (losses of £233 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 £127 million (2019: £41 million; 2018: £60 million).
4 Certain derivative valuation adjustments associated with credit-impaired customers are included within the impairment charge on an underlying basis but reported within other income, net of
insurance claims on a statutory basis.
5 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).
6 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 costs
(£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).
Geographical areas
The Group’s operations are predominantly UK-based and as a result an analysis between UK and non-UK activities is not provided.
Notes to the consolidated financial statements continued Note 5: Net interest income
Interest income:
Loans and advances to customers
Loans and advances to banks
Debt securities
Interest income on financial assets held at amortised cost
Financial assets at fair value through other comprehensive income
Total interest income1
Interest 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 expense on liabilities held at amortised cost
Amounts payable to unitholders in consolidated open-ended investment
vehicles3
Total interest expense4
Net interest income
Lloyds Banking Group Annual Report and Accounts 2020
245
Weighted average
effective interest rate
2020
%
2.72
0.24
1.81
2.35
1.10
2.30
2019
%
3.17
0.78
2.23
2.89
1.64
2.83
2018
%
3.17
0.84
1.60
2.87
1.98
2.82
2020
£m
2019
£m
2018
£m
13,704
15,790
15,078
203
97
514
122
565
66
14,004
16,426
15,709
302
435
640
14,306
16,861
16,349
0.84
0.86
1.39
(113)
(96)
(117)
0.32
1.37
6.29
2.39
0.36
0.74
0.59
1.24
6.79
2.49
1.12
0.98
0.53
0.27
7.63
2.46
0.96
0.79
(1,091)
(1,313)
(1,057)
(41)
(117)
(2,015)
(1,204)
(1,201)
(42)
(301)
(1,812)
(234)
(1,388)
(1)
(245)
(3,732)
(4,859)
(3,797)
(1.58)
0.69
13.64
1.31
(6.07)
0.60
175
(3,557)
(1,822)
(6,681)
844
(2,953)
10,749
10,180
13,396
1 Includes £10 million (2019: £26 million; 2018: £31 million) of interest income on liabilities with negative interest rates and £47 million (2019: £45 million; 2018: £46 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 2.28
per cent (2019: 2.57 per cent; 2018: 2.68 per cent).
3 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.
4
Includes £24 million (2019: £119 million; 2018: £10 million) of interest expense on assets with negative interest rates.
Included within interest income is £171 million (2019: £198 million; 2018: £227 million) in respect of credit-impaired financial assets. Net interest income also
includes a credit of £496 million (2019: credit of £608 million; 2018: credit of £701 million) transferred from the cash flow hedging reserve (see note 40).
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
2020
£m
615
748
274
146
6
76
443
2,308
(1,148)
1,160
2019
£m
659
982
248
206
69
103
489
2018
£m
650
993
305
221
97
83
499
2,756
(1,350)
1,406
2,848
(1,386)
1,462
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 2020, the Group held on its balance sheet £243 million (31 December 2019: £293 million) in respect of services provided to customers and
£99 million (31 December 2019: £140 million) in respect of amounts received from customers for services to be provided after the balance sheet date. Current
unsatisfied performance obligations amount to £191 million (31 December 2019: £270 million); the Group expects to receive substantially all of this revenue by
2023.
Income recognised during the year included £22 million (31 December 2019: £54 million) in respect of amounts included in the contract liability balance at the
start of the year and £13 million (31 December 2019: £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 and credit and debit card services.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
246 Lloyds Banking Group Annual Report and Accounts 2020
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.
Note 7: Net trading income
Foreign exchange translation gains (losses)
Gains on foreign exchange trading transactions
Total foreign exchange
Investment property (losses) gains (note 25)
Securities and other gains (losses) (see below)
Net trading income
2020
£m
12
527
539
(209)
6,890
7,220
2019
£m
(255)
677
422
(108)
2018
£m
342
580
922
139
17,974
18,288
(4,937)
(3,876)
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 arising on assets and liabilities designated at fair value through profit or loss
Securities and other gains (losses)
Note 8: Insurance premium income
Life insurance
Gross premiums:
Life and pensions
Annuities
Ceded reinsurance premiums
Net earned premiums
Non-life insurance
Net earned premiums
Total net earned premiums
2020
£m
724
3,554
2,729
7,007
(117)
6,890
2019
£m
120
3,509
14,559
18,188
(214)
17,974
2018
£m
(8)
(26)
(4,747)
(4,781)
(156)
(4,937)
2020
£m
2019
£m
2018
£m
6,941
1,378
8,319
(333)
7,986
629
8,615
6,827
2,483
9,310
(378)
8,932
642
9,574
6,612
2,178
8,790
(271)
8,519
670
9,189
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
247
Note 9: Other operating income
Operating lease rental income
Rental income from investment properties (note 25)
Gains less losses on disposal of financial assets at fair value through other comprehensive income (note 40)
Movement in value of in-force business (note 23)
Liability management
Gain related to establishment of joint venture
Share of results of joint ventures and associates (note 21)
Other
Total other operating income
Note 10: Insurance claims
Insurance claims comprise:
Life insurance and investment contracts
Claims and surrenders
Change in insurance and participating investment contracts (note 30)
Change in non-participating investment contracts
Reinsurers’ share
Change in unallocated surplus
Total life insurance and investment contracts
Non-life insurance
Total non-life insurance claims, net of reinsurance
Total insurance claims
2020
£m
1,120
191
149
76
(145)
—
(13)
45
2019
£m
1,250
191
196
825
5
244
6
191
1,423
2,908
2020
£m
2019
£m
(7,670)
(4,590)
(1,938)
(14,198)
418
(8,684)
(12,633)
(2,664)
(23,981)
290
(13,780)
(23,691)
57
(19)
2018
£m
1,343
197
275
(55)
—
—
9
151
1,920
2018
£m
(8,735)
4,565
628
(3,542)
404
(3,138)
8
(13,723)
(23,710)
(3,130)
(318)
(287)
(14,041)
(23,997)
(335)
(3,465)
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows:
Deaths
Maturities
Surrenders
Annuities
Other
Total life insurance gross claims and surrenders
(694)
(873)
(4,641)
(1,171)
(291)
(7,670)
(674)
(1,122)
(5,523)
(1,104)
(261)
(8,684)
(721)
(1,198)
(5,548)
(1,032)
(236)
(8,735)
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
248 Lloyds Banking Group Annual Report and Accounts 2020
Note 11: Operating expenses
Staff costs:
Salaries
Performance-based compensation
Social security costs
Pensions and other post-retirement benefit schemes (note 34)
Restructuring costs
Other staff costs
Premises and equipment:
Rent and rates
Repairs and maintenance
Other1
Other expenses:
Communications and data processing
Advertising and promotion
Professional fees
UK bank levy
Other
2020
£m
2019
£m
2018
£m
2,568
2,539
2,482
117
287
566
166
131
380
325
532
92
383
509
343
705
249
474
3,835
4,251
4,762
117
174
176
467
93
187
211
491
370
190
169
729
1,013
1,038
1,121
187
189
211
643
170
226
224
715
197
287
225
653
2,243
2,373
2,483
Depreciation and amortisation:
Depreciation of property, plant and equipment (note 25)
Amortisation of acquired value of in-force non-participating investment contracts (note 23)
Amortisation of other intangible assets (note 24)
Goodwill impairment (note 22)
Total operating expenses, excluding regulatory provisions
Regulatory provisions:
Payment protection insurance provision (note 36)
Other regulatory provisions (note 36)
2,046
26
660
2,732
4
9,281
85
379
464
2,064
30
566
2,660
—
9,775
2,450
445
2,895
Total operating expenses
9,745
12,670
1 Net of profits on disposal of operating lease assets of £127 million (2019: £41 million; 2018: £60 million).
1,852
40
513
2,405
—
10,379
750
600
1,350
11,729
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
2020
£m
22
95
117
30
31
61
2019
£m
244
136
380
113
36
149
2018
£m
362
147
509
152
37
189
Performance-based awards expensed in 2020 include cash awards amounting to £12 million (2019: £89 million; 2018: £137 million).
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
249
Note 11: Operating expenses continued
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
2020
67,881
784
68,665
2019
69,321
762
70,083
2018
71,857
769
72,626
2020
£m
1.7
22.4
3.7
27.8
0.5
28.3
—
0.9
0.9
29.2
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
Audit fees payable in respect of the statutory audit of Group entities totalled £24.1 million (2019: £21.7 million; 2018: £20.6 million) and non-audit fees, as
defined by the Financial Reporting Council’s Ethical Guidance totalled £5.1 million (2019: £5.2 million; 2018: £6.1 million).
The following types of services are included in the categories listed above:
Audit fees: This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection with regulatory
filings. Other services supplied pursuant to legislation relate primarily to 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 other assurance services not related to the performance of the audit or review of the financial statements, for
example, the review of controls operated by the Group on behalf of a third party. 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.
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
2020
£m
0.1
0.4
1.4
2019
£m
0.1
0.4
0.2
2018
£m
0.1
0.3
0.4
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
250 Lloyds Banking Group Annual Report and Accounts 2020
Note 13: Impairment
Year ended 31 December 2020
Impact of transfers between stages
Other changes in credit quality
Additions (repayments)
Methodology and model changes
Other items
Total impairment
In respect of:
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Other assets
Impairment charge on drawn balances
Loan commitments and financial guarantees
Financial assets at fair value through other comprehensive income
Total impairment
Year ended 31 December 2019
Impact of transfers between stages
Other changes in credit quality
Additions (repayments)
Methodology and model 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
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
(169)
946
98
(44)
—
1,000
831
5
697
1
703
—
703
123
5
831
940
22
177
170
—
369
1,309
698
1,192
(48)
26
10
1,180
1,878
—
—
1,151
1,865
—
—
1,151
1,865
—
5
1,151
1,870
158
—
8
—
—
167
(30)
—
—
137
137
—
137
—
137
—
137
—
—
1,309
1,878
137
4,155
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£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
Total
£m
1,469
2,327
197
152
10
2,686
4,155
5
3,850
1
3,856
5
3,861
289
5
Total
£m
604
798
(116)
14
(4)
692
1,296
—
1,307
1,307
5
1,312
(15)
(1)
Notes to the consolidated financial statements continued Note 13: Impairment continued
Year ended 31 December 2018
Impact of transfers between stages
Other changes in credit quality
Additions (repayments)
Methodology and model 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
Lloyds Banking Group Annual Report and Accounts 2020
251
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£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
The impairment charge includes £41 million (2019: £134 million; 2018: £29 million) in respect of residual value impairment and voluntary terminations within the
Group’s UK motor finance business.
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 and model 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.
Movements in the Group's impairment allowances are shown in note 18.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
252 Lloyds Banking Group Annual Report and Accounts 2020
Note 14: Tax expense
(A) Analysis of tax credit (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 credit (expense)
Tax credit (expense)
The tax credit (expense) is made up as follows:
Tax credit (expense) attributable to policyholders
Shareholder tax credit (expense)
Tax credit (expense)
2020
£m
(480)
355
(125)
(27)
25
(2)
2019
£m
2018
£m
(1,389)
(1,280)
96
11
(1,293)
(1,269)
(70)
2
(68)
(34)
5
(29)
(127)
(1,361)
(1,298)
611
(323)
288
161
2020
£m
4
157
161
(165)
139
(26)
(127)
(29)
(156)
(1,387)
(1,454)
2019
£m
(148)
(1,239)
(1,387)
2018
£m
14
(1,468)
(1,454)
(B) Factors affecting the tax credit (expense) for the year
The UK corporation tax rate for the year was 19.0 per cent (2019: 19.0 per cent; 2018: 19.0 per cent). An explanation of the relationship between tax credit
(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
Tax losses where no deferred tax recognised
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 credit (expense)
2020
£m
1,226
(233)
(107)
(24)
(38)
(74)
59
86
81
(58)
350
15
(46)
49
104
(3)
161
2019
£m
4,393
(835)
(364)
(370)
(43)
(121)
40
89
102
18
(6)
(14)
(67)
(53)
237
—
2018
£m
5,960
(1,132)
(409)
(101)
(43)
(90)
87
83
124
(9)
32
6
(62)
73
(13)
—
(1,387)
(1,454)
In 2020, the Group submitted claims to HMRC to accelerate tax deductions in respect of certain capitalised software enhancement costs incurred in 2018
and 2019. The Group has recognised a net prior year tax impact of £nil in respect of these claims, being a current tax credit of £215 million in respect of the
reduced cash tax liability for those years, a deferred tax charge of £261 million in respect of the future amortisation of those costs, plus a deferred tax credit
of £46 million in respect of tax losses carried forward. No other items included in the net prior year tax adjustments credit of £104 million were of individual
significance.
Notes to the consolidated financial statements continued Note 15: Earnings per share
Profit attributable to ordinary shareholders – basic and diluted
Weighted-average number of ordinary shares in issue – basic
Adjustment for share options and awards
Weighted-average number of ordinary shares in issue – diluted
Basic earnings per share
Diluted earnings per share
Lloyds Banking Group Annual Report and Accounts 2020
253
2020
£m
865
2020
million
70,606
650
71,256
1.2p
1.2p
2019
£m
2,459
2019
million
70,603
682
71,285
3.5p
3.4p
2018
£m
3,975
2018
million
71,638
641
72,279
5.5p
5.5p
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 28 million (2019: 25 million; 2018: 38 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
annual average 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 647 million anti-dilutive share options and awards excluded from the calculation of diluted earnings per share (2019: 24 million; 2018: none).
Note 16: Financial assets at fair value through profit or loss
These assets are comprised as follows:
2020
Other
financial assets
mandatorily
at fair value
through
profit or loss
£m
11,244
4,238
13,048
2,354
Total
£m
24,009
4,467
20,622
2,354
4,841
4,841
460
261
17,888
38,852
96,449
18
467
265
18,134
46,683
96,449
18
Trading
assets
£m
12,765
229
7,574
—
—
7
4
246
7,831
—
—
2019
Other
financial assets
mandatorily
at fair value
through
profit or loss
£m
10,654
1,886
12,063
2,126
984
462
241
17,983
33,859
95,789
19
Trading
assets
£m
10,422
513
6,791
—
—
6
17
233
7,047
—
—
Total
£m
21,076
2,399
18,854
2,126
984
468
258
18,216
40,906
95,789
19
20,825
150,801
171,626
17,982
142,207
160,189
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
Other financial assets at fair value through profit or loss include assets backing insurance contracts and investment contracts of £145,905 million (31 December
2019: £136,855 million). Included within these assets are investments in unconsolidated structured entities of £55,235 million (31 December 2019:
£38,177 million), see note 47.
For amounts included above which are subject to repurchase and reverse repurchase agreements see note 51.
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254 Lloyds Banking Group Annual Report and Accounts 2020
Note 17: Derivative financial instruments
The fair values and notional amounts of derivative instruments are set out in the following table:
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
49,400
350,882
5,769
7,560
2020
2019
Fair value
assets
£m
Fair value
liabilities
£m
Contract/
notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
882
5,469
428
—
764
6,161
—
489
44,095
349,606
8,310
9,557
413,611
6,779
7,414
411,568
5,669,551
18,577
15,799
5,245,703
633,279
24,087
19,735
275,377
8
3,053
—
6
6
—
2,746
555,742
27,158
23,610
13
199,884
681
3,857
452
—
4,990
17,318
7
2,468
—
17
6,622,029
21,644
18,564
6,052,097
19,810
7,707
10,058
108
266
174
477
16,959
11,414
83
250
616
5,425
—
499
6,540
15,213
13
—
2,216
22
17,464
167
503
Total derivative assets/liabilities – trading and other
7,053,405
28,797
26,629
6,492,038
25,133
24,674
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
36
215,325
215,361
326,386
5,829
332,215
547,576
11
467
478
295
43
338
816
—
256
256
265
163
428
684
34
183,489
183,523
426,740
9,549
436,289
619,812
Total recognised derivative assets/liabilities
7,600,981
29,613
27,313
7,111,850
8
798
806
355
75
430
—
229
229
743
133
876
1,236
26,369
1,105
25,779
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 51 Credit risk.
The Group holds derivatives as part of the following strategies:
– Customer driven, where derivatives are held as part of the provision of risk management products to Group customers;
– To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy adopted
by the Group is to utilise a combination of fair value and cash flow hedge approaches as described in note 51; and
– Derivatives held in policyholder funds as permitted by the investment strategies of those funds.
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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
255
Note 17: Derivative financial instruments continued
Details of the Group’s hedging instruments are set out below:
At 31 December 2020
Fair value hedges
Interest rate
Cross currency swap
Notional
Average fixed interest rate
Average EUR/GBP exchange rate
Interest rate swap
Notional
Average fixed interest rate
Cash flow hedges
Foreign exchange
Currency swap
Notional
Average USD/GBP exchange rate
Interest rate
Interest rate swap
Notional
Average fixed interest rate
At 31 December 2019
Fair value hedges
Interest rate
Cross currency swap
Notional
Average fixed interest rate
Average EUR/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 Over 5 years
£m
£m
Total
£m
Maturity
—
—
—
—
—
—
—
—
—
—
—
—
36
1.28%
1.38
36
6,032
2.01%
6,031
1.69%
39,811
1.42%
136,527
1.26%
26,924
2.36%
215,325
28
1.30
469
1.33
1,274
1.30
1,505
1.32
2,553
1.32
5,829
5,026
1.09%
11,614
1.05%
42,364
1.16%
169,499
1.55%
97,883
2.31%
326,386
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%
34
1.28%
1.38
29,566
2.81%
34
183,489
—
—
—
413
—
1.29
1,611
—
1.30
2,389
1.05
1.31
5,136
1.05
—
9,549
9,675
1.05%
23,589
1.22%
58,447
1.29%
209,108
125,921
426,740
1.47%
2.39%
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
256 Lloyds Banking Group Annual Report and Accounts 2020
Note 17: Derivative financial instruments continued
The carrying amounts of the Group’s hedging instruments are as follows:
At 31 December 2020
Fair value hedges
Interest rate
Currency swaps
Interest rate swaps
Cash flow hedges
Foreign exchange
Currency swaps
Interest rate
Interest rate swaps
At 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
Carrying amount of the hedging instrument
Contract/
notional
amount
£m
36
215,325
5,829
326,386
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Assets
£m
Liabilities
£m
11
467
43
295
—
256
163
265
1
987
(132)
603
Carrying amount of the hedging instrument
Contract/
notional
amount
£m
34
183,489
9,549
426,740
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Assets
£m
Liabilities
£m
8
798
75
355
—
229
133
743
2
1,142
(185)
992
All amounts are held within Derivative financial instruments.
The Group’s hedged items are as follows:
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
£m
Cash flow hedge reserve
Continuing
hedges
£m
Discontinued
hedges
£m
At 31 December 2020
Fair value hedges
Interest rate
Fixed rate mortgages1
125,181
—
—
68,539
24,111
—
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
661
—
1,178
—
4,253
—
355
(1,437)
641
60
74
(510)
(141)
33
(83)
13
1,918
135
(203)
130
(41)
6
270
84
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
257
Note 17: Derivative financial instruments continued
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
£m
Cash flow hedge reserve
Continuing
hedges
£m
Discontinued
hedges
£m
At 31 December 2019
Fair value hedges
Interest rate
Fixed rate mortgages1
83,818
—
—
70,353
21,354
—
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
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.
154
—
660
—
3,058
—
(73)
(1,333)
405
72
116
(680)
(263)
—
(2)
18
1,248
128
(31)
179
(48)
336
163
5
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 £761 million (fixed rate issuance liability of £761 million, fixed rate bonds and mortgages £nil) (2019: liability of £692 million (fixed
rate issuance liability of £721 million, fixed rate bonds asset of £29 million and fixed rate mortgages of £nil)).
Gains and losses arising from hedge accounting are summarised as follows:
At 31 December 2020
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
£m
Hedge
ineffectiveness
recognised in the
income statement1
£m
Hedged
cash flows
will no
longer occur
£m
Hedged
item affected
income
statement
£m
Income
statement
line item
that includes
reclassified
amount
570
(32)
9
—
—
(7)
5
—
(129)
3
285
97
(22)
(6)
(62)
Interest expense
—
—
—
—
5
Interest expense
(377)
Interest income
(79)
Interest income
23
Interest expense
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
258 Lloyds Banking Group Annual Report and Accounts 2020
Note 17: Derivative financial instruments continued
At 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
Amounts reclassified from reserves
to income statement as:
Gain (loss)
recognised
in other
comprehensive
income
£m
Hedge
ineffectiveness
recognised in the
income statement1
£m
Hedged
cash flows
will no
longer occur
£m
Hedged
item affected
income
statement
£m
Income
statement
line item
that includes
reclassified
amount
186
(32)
(11)
—
—
98
36
—
(265)
(22)
651
237
—
(101)
(92)
Interest expense
—
—
—
—
7
Interest expense
(362)
(66)
Interest income
Interest income
6
Interest expense
1 Hedge ineffectiveness is included in the income statement within net trading income.
There was a gain of £6 million (2019: gain of £101 million) 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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
259
Note 18: Financial assets at amortised cost
Year ended 31 December 2020
Gross carrying amount
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Loans and advances to banks
At 1 January 2020
Exchange and other adjustments
Additions (repayments)
Charge to the income statement
At 31 December 2020
Allowance for impairment losses
Net carrying amount
Loans and advances to customers
9,777
50
925
10,752
(6)
10,746
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,777
50
925
10,752
(6)
10,746
At 1 January 2020
449,975
28,543
6,015
13,714 498,247
Exchange and other adjustments1
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
1,308
4,972
(59)
(4,956)
(28,855)
29,467
(1,633)
(2,031)
Impact of transfers between stages
(25,516)
22,480
(422)
(16)
(612)
3,664
3,036
(8)
819
—
—
—
—
Other changes in credit quality
Additions (repayments)
8,176
695
(802)
(1,156)
6,913
2
(1)
—
5
6
675
—
146
(218)
(9)
(85)
(166)
857
50
(44)
697
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
(1)
—
5
6
995
1,447
(1)
(143)
268
(156)
883
852
54
(3)
(50)
165
569
681
142
21
3,259
74
—
—
—
1,367
1,367
2,204
127
152
(16)
1,196
145
170
(38)
26
167
(30)
—
1,151
1,865
137
3,850
Methodology and model changes
Charge to the income statement
Advances written off
Recoveries of advances written
off in previous years
Discount unwind
(1,587)
(39)
(1,626)
(1,587)
(39)
(1,626)
250
—
250
250
(47)
—
—
250
(47)
At 31 December 2020
433,943
51,659
6,490
12,511 504,603
1,372
2,145
1,982
261
5,760
Allowance for impairment losses
(1,372)
(2,145)
(1,982)
(261)
(5,760)
Net carrying amount
432,571
49,514
4,508
12,250 498,843
Debt securities
At 1 January 2020
Exchange and other adjustments
Additions (repayments)
Charge to the income statement
Financial assets that have been
written off during the year
At 31 December 2020
Allowance for impairment losses
Net carrying amount
Total financial assets at
amortised cost
5,544
(21)
(117)
5,406
(1)
5,405
—
—
—
—
—
—
3
—
—
(1)
2
(2)
—
—
—
—
—
—
—
—
5,547
(21)
(117)
(1)
5,408
(3)
5,405
448,722
49,514
4,508
12,250 514,994
—
—
—
1
1
—
—
—
—
—
3
—
—
—
(1)
2
—
—
—
—
—
—
3
—
—
1
(1)
3
1 Exchange and other adjustments includes the impact of movements in exchange rates, derecognising assets as a result of modifications and adjustments in respect of purchased or originated credit-
impaired financial assets.
During the year, the economic outlook deteriorated markedly as a consequence of the COVID-19 pandemic. The Group’s economic assumptions are outlined
in note 3 and these have resulted in a significant increase in the expected credit loss (ECL) allowance.
The total allowance for impairment losses includes £192 million (2019: £201 million) in respect of residual value impairment and voluntary terminations within
the Group’s UK motor finance business.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
260 Lloyds Banking Group Annual Report and Accounts 2020
Note 18: Financial assets at amortised cost continued
Movements in Retail mortgage balances were as follows:
Gross carrying amount
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Retail mortgages
At 1 January 2020
257,043
16,935
1,506
13,714 289,198
Exchange and other adjustments1
—
—
—
(4)
2,418
(2,414)
(16,463)
16,882
(419)
(199)
(974)
1,173
(8)
(8)
—
—
—
—
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
(14,244)
13,494
750
Other changes in credit quality
Additions (repayments)
8,619
(1,411)
(375)
(1,156)
5,677
Methodology and model changes
Charge to the income statement
Advances written off
Recoveries of advances written
off in previous years
Discount unwind
(37)
(39)
(76)
15
—
15
23
—
17
(4)
—
(15)
(2)
63
14
6
81
281
—
(17)
22
(35)
198
168
(26)
(15)
60
187
Total
£m
568
21
—
—
—
249
249
181
(44)
90
476
(76)
15
20
142
21
167
(30)
—
137
(39)
—
—
122
—
—
(18)
35
66
83
(23)
(13)
24
71
(37)
15
20
191
At 31 December 2020
251,418
29,018
1,859
12,511 294,806
104
468
Allowance for impairment losses
(104)
(468)
(191)
(261)
(1,024)
Net carrying amount
251,314
28,550
1,668
12,250 293,782
261
1,024
1 Exchange and other adjustments includes the impact of movements in exchange rates, derecognising assets as a result of modifications and adjustments in respect of purchased or originated credit-
impaired financial assets.
Movements in allowance for expected credit losses in respect of undrawn balances were as follows:
Undrawn balances
At 1 January 2020
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
At 31 December 2020
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
95
(6)
19
(11)
(1)
(10)
(3)
126
123
212
77
(1)
(19)
11
(6)
102
88
70
158
234
5
—
—
—
7
10
17
(9)
8
13
—
—
—
—
—
177
(7)
—
—
—
102
102
187
289
459
Notes to the consolidated financial statements continued Note 18: Financial assets at amortised cost continued
The Group's total impairment allowances were as follows:
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 as fair value through other
comprehensive income (memorandum item)
Lloyds Banking Group Annual Report and Accounts 2020
261
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
6
—
—
—
6
104
1,268
1,372
1
468
1,677
2,145
—
191
1,791
1,982
2
261
—
261
—
1,024
4,736
5,760
3
1,379
2,145
1,984
261
5,769
—
212
—
234
19
13
—
—
19
459
1,591
2,379
2,016
261
6,247
—
—
—
—
—
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
262 Lloyds Banking Group Annual Report and Accounts 2020
Note 18: Financial assets at amortised cost continued
Year ended 31 December 2019
Gross carrying amount
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Loans and advances to banks
At 1 January 2019
Exchange and other adjustments
Additions (repayments)
At 31 December 2019
Allowance for impairment losses
Net carrying amount
Loans and advances to customers
6,282
(218)
3,713
9,777
(2)
9,775
3
—
(3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,285
(218)
3,710
9,777
(2)
9,775
At 1 January 2019
441,531
25,345
5,741
15,391
488,008
Exchange and other adjustments1
Acquisition of portfolios
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
(498)
3,694
6,318
(34)
—
(6,286)
(13,084)
13,516
(1,540)
(8,306)
(1,440)
5,790
47
—
(32)
(432)
2,980
2,516
283
—
(202)
3,694
—
—
—
—
Other changes in credit quality
Additions (repayments)
13,554
(2,558)
(858)
(1,934)
8,204
Methodology and model changes
Charge to the income statement
Advances written off
Recoveries of advances written
off in previous years
Discount unwind
(1,828)
(54)
(1,882)
397
28
425
2
—
—
2
525
11
229
(53)
(15)
(175)
(14)
29
91
33
139
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
2
994
(9)
1,553
27
78
283
3,150
312
(222)
92
(140)
353
83
—
(46)
(27)
10
(7)
(39)
155
420
529
911
(97)
8
—
—
—
598
598
834
(139)
14
(106)
(87)
—
1,351
(1,828)
(193)
1,307
(54)
(1,882)
397
(53)
28
—
425
(53)
At 31 December 2019
449,975
28,543
6,015
13,714
498,247
675
995
1,447
142
3,259
Allowance for impairment losses
(675)
(995)
(1,447)
(142)
(3,259)
Net carrying amount
449,300
27,548
4,568
13,572
494,988
Debt securities
At 1 January 2019
Exchange and other adjustments
Additions (repayments)
Financial assets that have been
written off during the year
At 31 December 2019
Allowance for impairment losses
Net carrying amount
Total financial assets at
amortised cost
5,238
(94)
400
5,544
—
5,544
—
—
—
—
—
—
6
(2)
—
(1)
3
(3)
—
—
—
—
—
—
—
—
5,244
(96)
400
(1)
5,547
(3)
5,544
464,619
27,548
4,568
13,572
510,307
—
—
—
—
—
—
—
—
6
(2)
—
(1)
3
—
—
—
—
—
6
(2)
—
(1)
3
1 Exchange and other adjustments includes the impact of movements in exchange rates, derecognising assets as a result of modifications and adjustments in respect of purchased or originated credit-
impaired financial assets.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
263
Note 18: Financial assets at amortised cost continued
Movements in Retail mortgage balances were as follows:
Gross carrying amount
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Retail mortgages
At 1 January 2019
Exchange and other adjustments1
Acquisition of portfolios
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
257,797
13,654
1,393
15,391
288,235
(1)
3,694
3,060
—
—
(3,057)
(7,879)
8,242
(427)
(472)
2
—
(3)
(363)
899
533
283
—
284
3,694
—
—
—
—
Impact of transfers between stages
(5,246)
4,713
Other changes in credit quality
Additions (repayments)
799
(1,432)
(416)
(1,934)
(2,983)
Methodology and model changes
Charge to the income statement
Advances written off
Recoveries of advances written
off in previous years
Discount unwind
(35)
(54)
(89)
29
28
57
37
—
17
(13)
(5)
(15)
(16)
6
(4)
—
(14)
226
—
(17)
33
(21)
104
99
10
(20)
(34)
55
At 31 December 2019
257,043
16,935
1,506
13,714
289,198
23
281
Allowance for impairment losses
(23)
(281)
(122)
(142)
(568)
Net carrying amount
257,020
16,654
1,384
13,572
288,630
118
—
—
(20)
26
39
45
(33)
(16)
(10)
(14)
(35)
29
24
122
78
283
(106)
(87)
—
(193)
(54)
28
—
142
Total
£m
459
283
—
—
—
128
128
(123)
(127)
(44)
(166)
(89)
57
24
568
1 Exchange and other adjustments includes the impact of movements in exchange rates, derecognising assets as a result of modifications and adjustments in respect of purchased or originated credit-
impaired financial assets.
Movements in allowance for expected credit losses in respect of undrawn balances were as follows:
Undrawn 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
At 31 December 2019
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
123
—
19
(4)
(1)
(17)
(3)
(25)
(28)
95
64
(1)
(19)
4
(3)
24
6
8
14
77
6
—
—
—
4
(1)
3
(4)
(1)
5
—
—
—
—
—
193
(1)
—
—
—
6
6
(21)
(15)
177
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
264 Lloyds Banking Group Annual Report and Accounts 2020
Note 18: Financial assets at amortised cost continued
The Group's total impairment allowances were as follows:
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 as fair value through other
comprehensive income (memorandum item)
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
2
—
—
—
2
23
652
675
—
677
—
95
281
714
995
—
995
—
77
122
1,325
1,447
3
1,450
14
5
142
—
142
—
142
—
—
568
2,691
3,259
3
3,264
14
177
772
1,072
1,469
142
3,455
—
—
—
—
—
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 transferable.
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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
265
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
2020
£m
314
187
150
199
118
758
1,726
(526)
(18)
1,182
2020
£m
235
135
105
160
88
459
2019
£m
490
347
181
145
208
883
2,254
(563)
(20)
1,671
2019
£m
406
326
130
103
171
535
1,182
1,671
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 £22 million
(2019: £12 million).
Note 20: Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Treasury and other bills
Equity shares
2020
£m
2019
£m
14,286
13,098
—
180
12,935
27,401
36
166
121
60
11,051
24,330
535
227
Total financial assets at fair value through other comprehensive income
27,603
25,092
All assets were assessed at Stage 1 at 31 December 2019 and 2020.
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266 Lloyds Banking Group Annual Report and Accounts 2020
Note 21: 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
(Loss) profit 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
Acquisitions
Establishment of joint venture
Additional investments
Repayment of capital
Share of post-tax results
Share of other comprehensive income
Dividends paid
Share of net assets at 31 December
Joint ventures
Associates
2020
£m
2019
£m
2018
£m
2020
£m
2019
£m
2018
£m
2020
£m
Total
2019
£m
2018
£m
8
1
—
9
—
9
8
17
8
1
—
9
—
9
8
17
72
(78)
—
(6)
—
(6)
—
(6)
437
158
(148)
(168)
279
293
—
—
3
(11)
(6)
—
—
279
66
(59)
—
7
—
7
—
7
347
158
(35)
(177)
293
79
1
208
—
—
7
—
(2)
293
4
(11)
—
(7)
—
(7)
—
(7)
12
7
(2)
—
17
11
—
—
13
—
(7)
—
—
17
(1)
—
—
(1)
—
(1)
—
(1)
5
6
—
—
11
12
—
—
—
—
(1)
—
—
11
—
—
—
—
—
—
—
—
76
(89)
—
(13)
—
(13)
—
(13)
449
165
(150)
(168)
296
304
—
—
16
(11)
(13)
—
—
296
65
(59)
—
6
—
6
—
6
352
164
(35)
(177)
304
91
1
208
—
—
6
—
(2)
304
The Group's unrecognised share of losses of associates for the year was £nil (2019: £nil; 2018; £4 million). 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 £2 million (2019: £17 million; 2018 £17 million) and of joint ventures is £5 million (2019: £3 million; 2018: £3 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 22: Goodwill
At 1 January
Acquisition of businesses
Impairment charged to the income statement
At 31 December
Cost1
Accumulated impairment losses
At 31 December
2020
£m
2,324
—
(4)
2,320
2,664
(344)
2,320
2019
£m
2,310
14
—
2,324
2,664
(340)
2,324
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 £2,320 million (2019: £2,324 million), £1,836 million, or 79 per cent (2019: £1,836 million, 79 per
cent) has been allocated to Scottish Widows in the Group’s Insurance and Wealth division; £302 million, or 13 per cent (2019: £302 million, or 13 per cent) has
been allocated to the credit card business in the Group’s Retail division; and £166 million, or 7 per cent (2019: £170 million, 7 per cent) 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 10 per cent. The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes,
product mix and margins having regard to expected market conditions and competitor activity. The discount rate is determined with reference to internal
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
267
Note 22: Goodwill continued
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 the goodwill relating to 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 the goodwill relating to Motor Finance to fall below the balance sheet carrying value. The impairment charge of £4 million related to the goodwill
arising on a small, separable acquisition a number of years ago.
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 13 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 goodwill relating to the Cards business to fall below the balance sheet carrying value.
Note 23: 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 31.
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 30.
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 77 basis points at
31 December 2020 (31 December 2019: 91 basis points).
The risk-free rate is derived from the relevant swap curve with a deduction for credit risk.
The table below shows the resulting range of yields and other key assumptions at 31 December:
Risk-free rate (value of in-force non-annuity business)1
Risk-free rate (value of in-force annuity business)1
Risk-free rate (financial options and guarantees)1
Retail price inflation
Expense inflation
1 All risk-free rates are quoted as the range of rates implied by the relevant forward swap curve.
2020
%
2019
%
(0.36) to 3.75
0.00 to 3.90
0.41 to 4.53
0.91 to 4.81
(0.36) to 3.75
0.00 to 3.90
3.00
3.30
3.11
3.41
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 30 and the effect of changes in key assumptions is given in
note 31.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
268 Lloyds Banking Group Annual Report and Accounts 2020
Note 23: Value of in-force business continued
The gross value of in-force business asset in the consolidated balance sheet is as follows:
Acquired value of in-force non-participating investment contracts
Value of in-force insurance and participating investment contracts
Total value of in-force business
The movement in the acquired value of in-force non-participating investment contracts over the year is as follows:
At 1 January
Acquisition of business
Amortisation (note 11)
At 31 December
2020
£m
221
5,396
5,617
2020
£m
247
—
(26)
221
The acquired value of in-force non-participating investment contracts includes £134 million (2019: £150 million) in relation to OEIC business.
Movement in value of in-force business
The movement in the value of in-force insurance and participating investment contracts over the year is as follows:
At 1 January
Exchange and other adjustments
Movements in the year:
New business
Existing business:
Expected return
Experience variances
Assumption changes
Economic variance
Movement in the value of in-force business (note 9)
At 31 December
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 of the relevant businesses, including the effects of changes in
assumptions used to value the liabilities. 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.
2019
£m
247
5,311
5,558
2019
£m
271
6
(30)
247
2019
£m
4,491
(5)
2020
£m
5,311
9
361
696
(297)
(82)
141
(47)
76
(274)
(43)
102
344
825
5,396
5,311
Notes to the consolidated financial statements continued Note 24: Other intangible assets
Cost:
At 1 January 2019
Exchange and other adjustments
Additions
Disposals
At 31 December 2019
Exchange and other adjustments
Additions
Disposals
At 31 December 2020
Accumulated amortisation:
At 1 January 2019
Exchange and other adjustments
Charge for the year (note 11)
Disposals
At 31 December 2019
Exchange and other adjustments
Charge for the year (note 11)
Disposals
At 31 December 2020
Balance sheet amount at 31 December 2020
Balance sheet amount at 31 December 2019
Lloyds Banking Group Annual Report and Accounts 2020
269
Brands
£m
Core deposit
intangible
£m
Purchased
credit card
relationships
£m
Customer-
related
intangibles
£m
Capitalised
software
enhancements
£m
596
2,770
1,002
538
—
—
—
—
—
—
—
—
—
—
—
—
596
2,770
1,002
538
—
—
—
—
—
—
—
—
—
—
—
—
3,931
4
1,033
(10)
4,958
—
991
(55)
Total
£m
8,837
4
1,033
(10)
9,864
—
991
(55)
596
2,770
1,002
538
5,894
10,800
216
2,770
—
—
—
—
—
—
216
2,770
—
—
—
216
380
380
—
—
—
2,770
—
—
411
—
70
—
481
—
70
—
551
451
521
538
1,555
5,490
—
—
—
4
496
(4)
4
566
(4)
538
2,051
6,056
—
—
—
538
—
—
(1)
590
(55)
2,585
3,309
2,907
(1)
660
(55)
6,660
4,140
3,808
Brands arising from the acquisition of Bank of Scotland in 2009 are recognised on the Group's balance sheet and have been determined to have an indefinite
useful life. The carrying value at 31 December 2020 was £380 million (2019: £380 million). The Bank of Scotland name has been in existence for over 300 years
and there are no indications that the brand should not have an indefinite useful life. The recoverable amount has been based on a value-in-use calculation.
The calculation uses post-tax projections of the income generated by the brands, a discount rate of 9.31 per cent and a future growth rate of 2.5 per cent.
Management estimates that if the growth rate were decreased by 1 per cent there would have been an impairment charge of £50 million.
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270 Lloyds Banking Group Annual Report and Accounts 2020
Note 25: Property, plant and equipment
Cost or valuation:
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
Exchange and other adjustments
Additions
Expenditure on investment properties (see below)
Change in fair value of investment properties (note 7)
Disposals
At 31 December 2020
Accumulated depreciation and impairment:
At 1 January 2019
Exchange and other adjustments
Depreciation charge for the year (note 11)
Disposals
At 31 December 2019
Exchange and other adjustments
Depreciation charge for the year (note 11)
Disposals
At 31 December 2020
Balance sheet amount at 31 December 2020
Balance sheet amount at 31 December 2019
3,347
3,553
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
3,770
16
—
73
(108)
(198)
3,553
—
—
82
(209)
(79)
3,347
—
—
—
—
—
—
—
—
—
1,216
3
121
—
—
(245)
1,095
1
76
—
—
(189)
983
216
—
125
(225)
116
(2)
127
(143)
98
885
979
5,007
5
522
—
—
(238)
5,296
—
316
—
—
(505)
5,107
2,298
(1)
715
(180)
2,832
2
680
(469)
3,045
2,062
2,464
6,754
(4)
1,693
—
—
(1,694)
6,749
(3)
1,436
—
—
(1,917)
6,265
1,933
(36)
1,008
(595)
2,310
(3)
1,011
(1,013)
2,305
3,960
4,439
1,716
—
196
—
—
(27)
1,885
(2)
142
—
—
(125)
1,900
—
1
216
(1)
216
(1)
228
(43)
400
1,500
1,669
2020
£m
61
21
82
Total
£m
18,463
20
2,532
73
(108)
(2,402)
18,578
(4)
1,970
82
(209)
(2,815)
17,602
4,447
(36)
2,064
(1,001)
5,474
(4)
2,046
(1,668)
5,848
11,754
13,104
2019
£m
21
52
73
Rental income of £191 million (2019: £191 million) and direct operating expenses of £32 million (2019: £32 million) arising from properties that generate rental
income 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 £38 million (2019:
£7 million).
The table above analyses movements in investment properties, all of which are categorised as level 3. See note 48 for details of levels in the fair value
hierarchy.
At 31 December the future minimum rentals receivable under non-cancellable operating leases were as follows:
Receivable within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
2020
£m
864
548
274
78
7
—
2019
£m
978
620
312
102
12
2
Total future minimum rentals receivable
1,771
2,026
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
271
Note 26: Other assets
Deferred acquisition and origination costs
Settlement balances
Other assets and prepayments
Total other assets
Note 27: Financial liabilities at fair value through profit or loss
Liabilities designated at fair value through profit or loss: debt securities in issue
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Other deposits
Short positions in securities
Total financial liabilities at fair value through profit or loss
2020
£m
74
1,389
2,787
4,250
2020
£m
6,828
2019
£m
83
654
3,737
4,474
2019
£m
7,531
14,996
11,048
6
816
15,818
22,646
98
2,809
13,955
21,486
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 2020 was £11,503 million, which
was £4,675 million higher than the balance sheet carrying value (2019: £14,365 million, which was £6,834 million higher than the balance sheet carrying
value). At 31 December 2020 there was a cumulative £109 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
£75 million arose in 2020 and an increase of £419 million arose in 2019.
For the fair value of collateral pledged in respect of repurchase agreements see note 51.
Note 28: Debt securities in issue
Medium-term notes issued
Covered bonds (note 29)
Certificates of deposit issued
Securitisation notes (note 29)
Commercial paper
Total debt securities in issue
2020
£m
42,621
23,980
7,998
4,406
8,392
87,397
2019
£m
41,291
29,821
10,598
7,288
8,691
97,689
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272 Lloyds Banking Group Annual Report and Accounts 2020
Note 29: Securitisations and covered bonds
Securitisation programmes
Loans and advances to customers 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 28.
Securitisation programmes
UK residential mortgages
Commercial loans
Credit card receivables
Motor vehicle finance
Less held by the Group
Total securitisation programmes (notes 27 and 28)1
Covered bond programmes
Residential mortgage-backed
Social housing loan-backed
Less held by the Group
Total covered bond programmes (note 28)
Total securitisation and covered bond programmes
2020
2019
Loans and
advances
securitised
£m
Notes
in issue
£m
Loans and
advances
securitised
£m
Notes
in issue
£m
23,984
21,640
25,815
23,505
2,884
5,890
1,826
4,004
4,340
1,915
5,116
8,164
3,450
34,584
31,899
42,545
(27,448)
4,451
33,980
23,480
980
600
34,960
24,080
37,579
1,552
39,131
(100)
23,980
28,431
6,037
5,767
3,462
38,771
(31,436)
7,335
29,321
600
29,921
(100)
29,821
37,156
1 Includes £45 million (2019: £47 million) of securitisation notes held at fair value through profit or loss.
Cash deposits of £3,930 million (2019: £4,703 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 has certain contractual arrangements to provide liquidity facilities to some of
these structured entities. At 31 December 2020 these obligations had not been triggered; the maximum exposure under these facilities was £52 million (2019:
£56 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 or as otherwise required by the transaction documents.
The Group has not provided financial or other support by voluntarily offering to repurchase assets from any of its public securitisation programmes during
2020 (2019: none).
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
273
Note 30: Liabilities arising from insurance contracts and participating investment contracts
Insurance contract and participating investment contract liabilities are comprised as follows:
Life insurance (see (1) below):
Insurance contracts
Participating investment contracts
Non-life insurance contracts (see (2) below):
Unearned premiums
Claims outstanding
Total
1 Reinsurance balances are reported within assets.
2020
2019
Gross
£m
Reinsurance1
£m
Net
£m
Gross
£m
Reinsurance1
£m
Net
£m
102,424
13,041
115,465
330
265
595
116,060
(820)
101,604
—
13,041
96,812
14,063
(820)
114,645
110,875
(14)
—
(14)
(834)
316
265
581
333
241
574
115,226
111,449
(715)
—
(715)
(14)
—
(14)
(729)
96,097
14,063
110,160
319
241
560
110,720
(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 2019
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2019
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2020
Insurance
contracts
£m
84,366
5,684
6,798
12,482
(36)
96,812
3,780
1,832
5,612
—
Participating
investment
contracts
£m
13,912
37
114
151
—
Gross
£m
98,278
5,721
6,912
12,633
(36)
14,063
110,875
28
(1,050)
(1,022)
—
3,808
782
4,590
—
Reinsurance
£m
(716)
(45)
46
1
—
(715)
(100)
(5)
(105)
—
Net
£m
97,562
5,676
6,958
12,634
(36)
110,160
3,708
777
4,485
—
102,424
13,041
115,465
(820)
114,645
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 realistic liabilities
With-profit
fund
£m
2020
Non-profit
fund
£m
Total
£m
7,824
6,475
94,600
102,424
6,566
13,041
14,299
101,166
115,465
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
(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 managementOther informationFinancial statements
274 Lloyds Banking Group Annual Report and Accounts 2020
Note 30: Liabilities arising from insurance contracts and participating investment contracts continued
(iii) Assumptions
Key assumptions used in the calculation of with-profit liabilities, which reflect the impacts of COVID-19 (in particular in relation to persistency and mortality
assumptions) that has also increased the level of uncertainty, 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 2020 of £2.5 billion (2019: £2.6 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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
275
Note 30: Liabilities arising from insurance contracts and participating investment contracts continued
(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. In calculating the value of non-
profit fund liabilities, the impacts of COVID-19 that has also increased the level of uncertainty have been considered, in particular in relation to persistency and
mortality. The key assumptions used in the measurement of non-profit fund liabilities are:
Interest rates
The rates of interest used are determined by reference to a number of factors including the redemption yields on fixed interest assets at the valuation date.
Margins for risk are allowed for in the assumed interest rates, 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 2020 resulted in a net loss of £151 million (2019: net gain of £336 million). The following were the key impacts
on profit before tax:
– Change in persistency assumptions (£74 million decrease (2019: £67 million decrease)).
– Change in the assumption in respect of current and future mortality and morbidity rates (£52 million increase (2019: £164 million increase)).
– Change in expenses assumptions (£124 million decrease (2019: £208 million increase)).
These amounts include the impacts of movements in liabilities and value of the in-force business in respect of insurance contracts and participating investment
contracts.
(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 (for example 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
£65 million (2019: £64 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
2020
£m
333
655
(658)
(3)
330
(14)
316
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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
276 Lloyds Banking Group Annual Report and Accounts 2020
Note 30: Liabilities arising from insurance contracts and participating investment contracts continued
Claims outstanding
Gross claims outstanding at 1 January
Cash paid for claims settled in the year
Increase in liabilities charged to the income statement1
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
2020
£m
241
(294)
318
24
265
—
265
141
124
265
2019
£m
254
(300)
287
(13)
241
—
241
128
113
241
1 Of which an increase of £362 million (2019: increase of £335 million) was in respect of current year claims and a decrease of £44 million (2019: decrease of £48 million) was in respect of prior year claims.
Note 31: 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 spreads8
Increase in illiquidity premia9
2020
2019
Increase
(reduction)
in profit
before tax
£m
Increase
(reduction)
in equity
£m
Increase
(reduction)
in profit
before tax
£m
Increase
(reduction)
in equity
£m
16
(333)
70
332
37
(2)
(2)
(467)
219
13
(270)
57
269
30
(1)
(2)
(378)
178
19
(293)
107
299
33
(1)
(2)
(424)
191
16
(243)
89
248
28
(1)
(1)
(352)
159
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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
277
Note 32: 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
New business
Changes in existing business
At 31 December
2020
£m
37,459
—
2,113
(1,120)
38,452
2019
£m
13,853
20,981
1,810
815
37,459
The balances above are shown gross of reinsurance. As at 31 December 2020, related reinsurance balances were £8 million (2019: £21 million); reinsurance
balances are reported within assets. Liabilities arising from non-participating investment contracts are categorised as level 2. See note 48 for details of levels in
the fair value hierarchy.
Note 33: Other liabilities
Settlement balances
Unitholders’ interest in consolidated 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.
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
Note 34: 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
2020
£m
1,191
11,784
343
1,672
5,357
2019
£m
760
11,928
400
1,844
5,401
20,347
20,333
2020
£m
234
197
180
147
123
791
2019
£m
241
222
207
170
145
859
1,672
1,844
2019
£m
241
4
245
287
532
2020
£m
1,714
(245)
1,469
2018
£m
401
4
405
300
705
2019
£m
681
(257)
424
2020
£m
244
3
247
319
566
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
278 Lloyds Banking Group Annual Report and Accounts 2020
Note 34: Retirement benefit obligations continued
The total amounts recognised in the balance sheet relate to:
Defined benefit pension schemes
Other post-retirement benefit schemes
Total amounts recognised in the balance sheet
Pension schemes
Defined benefit schemes
2020
£m
1,578
(109)
1,469
2019
£m
550
(126)
424
(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 sections of the Lloyds Bank Pension Scheme No. 1, the Lloyds Bank Pension Scheme No. 2 and the HBOS Final Salary
Pension Scheme. At 31 December 2020, these schemes represented 94 per cent of the Group’s total gross defined benefit pension assets (2019: 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 2020 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.
Terms have now been agreed in principle with the Trustee in respect of the most recent triennial funding valuations of the Group's three main defined benefit
pension schemes. The valuations showed an aggregate ongoing funding deficit of approximately £7.3 billion as at 31 December 2019 (a funding level of
85.7 per cent) compared to a £7.3 billion deficit at 31 December 2016 (a funding level of 85.9 per cent). The revised deficit now includes an allowance for the
impact of RPI reform announced by the Chancellor of the Exchequer in November 2020. Under the old recovery plan deficit contributions of approximately
£0.8 billion were paid in 2020 and £1.3 billion was committed from 2021 to 2024. Under the new recovery plan, £0.8 billion plus a further 30 per cent of in-year
capital distributions to ordinary shareholders, up to a limit on total deficit contributions of £2.0 billion per annum, is payable from 2021 until this deficit has
been removed. 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 expects to pay contributions of at least £1.1 billion to its defined benefit schemes in 2021.
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 2020, 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 2020 these held
assets of approximately £4.7 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 2020.
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 2020 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 was recognised in 2019. A further hearing was held during 2020 which confirmed the extent of
the Trustee's obligation to revisit past transfers out of the Schemes. The amount of any additional liability as a result of this judgment is still being reviewed but
is not considered likely to be material.
(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
2020
£m
2019
£m
(49,549)
51,127
1,578
(45,241)
45,791
550
Notes to the consolidated financial statements continued Note 34: Retirement benefit obligations continued
Lloyds Banking Group Annual Report and Accounts 2020
279
Net amount recognised in the balance sheet
At 1 January
Net defined benefit pension charge
Actuarial 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 gains (losses) – experience
Actuarial (losses) gains – demographic assumptions
Actuarial losses – financial assumptions
Benefits paid
Past service cost
Settlements
Exchange and other adjustments
At 31 December
Analysis of the defined benefit obligation:
Active members
Deferred members
Pensioners
Dependants
Changes in the fair value of scheme assets
At 1 January
Return on plan assets excluding amounts included in interest income
Interest income
Employer contributions
Benefits paid
Settlements
Administrative costs paid
Exchange and other adjustments
At 31 December
2020
£m
2019
£m
550
(244)
(5,443)
5,565
1,149
1
1,578
2020
£m
1,146
(241)
(4,958)
3,531
1,062
10
550
2019
£m
(45,241)
(41,092)
(206)
(914)
493
(218)
(5,718)
2,254
(5)
20
(14)
(201)
(1,172)
(29)
471
(5,400)
2,174
(44)
17
35
(49,549)
(45,241)
2020
£m
2019
£m
(6,550)
(17,647)
(23,409)
(1,943)
(49,549)
(6,413)
(16,058)
(21,032)
(1,738)
(45,241)
2020
£m
2019
£m
45,791
42,238
5,565
937
1,149
3,531
1,220
1,062
(2,254)
(2,174)
(22)
(54)
15
(18)
(43)
(25)
51,127
45,791
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
280 Lloyds Banking Group Annual Report and Accounts 2020
Note 34: Retirement benefit obligations continued
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
Quoted
£m
616
11,328
21,058
12,736
—
45,122
—
650
812
47,200
2020
Unquoted
£m
45
—
—
—
—
—
136
Total
£m
661
11,328
21,058
12,736
—
45,122
136
13,022
13,672
(9,276)
3,927
(8,464)
51,127
1 Of the total debt instruments, £39,439 million (2019: £33,134 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
Alternative credit funds
Property funds
Infrastructure funds
Liquidity funds
Bond and debt funds
Other
At 31 December
2020
£m
206
(23)
—
2
5
54
244
Quoted
£m
555
8,893
18,207
10,588
—
37,688
—
4,773
204
43,220
2019
£m
201
(48)
—
1
44
43
241
2019
Unquoted
£m
39
—
—
—
—
—
158
10,585
(8,211)
2,571
2020
£m
3,169
2,181
4,072
1,551
1,405
847
396
51
2018
£m
261
(22)
12
1
108
41
401
Total
£m
594
8,893
18,207
10,588
—
37,688
158
15,358
(8,007)
45,791
2019
£m
2,429
2,886
4,716
1,536
1,648
1,126
971
46
13,672
15,358
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.
(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 Price Index (RPI)
Consumer Price Index (CPI)
Rate of salary increases
Weighted-average rate of increase for pensions in payment
2020
%
1.44
2.80
2.41
0.00
2.61
2019
%
2.05
2.94
1.99
0.00
2.57
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
281
Note 34: Retirement benefit obligations continued
On 25 November 2020 the Chancellor of the Exchequer announced the outcome of a consultation into a reform of the calculation of RPI. It is now expected
that from 2030 RPI will be aligned with CPIH (the Consumer Price Index including owner-occupiers' housing costs). To determine the RPI assumption a term-
dependent inflation curve has been used adjusting for an assumed inflation risk premium. In the period to 2030 a gap of 100 basis points has been assumed
between RPI and CPI; thereafter no gap has been assumed.
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
2020
Years
27.0
29.0
28.1
30.2
2019
Years
27.5
29.2
28.5
30.3
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 2020 is assumed to live
for, on average, 27.0 years for a male and 29.0 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. The Group has considered the
impact of COVID-19 and whilst a higher number of deaths have been experienced in 2020, this does not have a material impact on the defined benefit
obligation.
(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.
Inflation (including pension increases)1:
Increase of 0.1 per cent
Decrease of 0.1 per cent
Discount rate2:
Increase of 0.1 per cent
Decrease of 0.1 per cent
Expected life expectancy of members:
Increase of one year
Decrease of one year
Effect of reasonably possible alternative assumptions
Increase (decrease) in the income
statement charge
2020
£m
2019
£m
11
(11)
(20)
19
39
(37)
12
(12)
(20)
21
40
(39)
(Increase) decrease in the net
defined benefit pension scheme
surplus
2020
£m
531
(522)
(866)
890
2019
£m
467
(460)
(763)
784
2,146
(2,052)
1,636
(1,575)
1 At 31 December 2020, the assumed rate of RPI inflation is 2.80 per cent and CPI inflation 2.41 per cent (2019: RPI 2.94 per cent and CPI 1.99 per cent).
2 At 31 December 2020, the assumed discount rate is 1.44 per cent (2019: 2.05 per cent).
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
282 Lloyds Banking Group Annual Report and Accounts 2020
Note 34: Retirement benefit obligations continued
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 Price Index (CPI) and the Retail Price Index (RPI), and
includes 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 forms 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. The valuation of the swap was nil at inception and whilst there has been a slightly higher than expected number of
deaths in the population covered by the arrangement, this has not had a material impact on the value of the swap.
At 31 December 2020 the asset-liability matching strategy mitigated around 105 per cent of the liability sensitivity to interest rate movements and around 100
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 obligation 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
2020
Years
19
2020
£m
1,293
1,350
4,347
8,301
9,093
17,485
13,479
7,162
2,287
2019
Years
18
2019
£m
1,274
1,373
4,455
8,426
9,229
17,400
13,999
8,291
3,160
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 2020 the charge to the income statement in respect of defined contribution schemes was £319 million (2019:
£287 million; 2018: £300 million), representing the contributions payable by the employer in accordance with each scheme’s rules.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
283
Note 34: Retirement benefit obligations continued
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 2020 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
6.40 per cent (2019: 6.54 per cent).
Movements in the other post-retirement benefits obligation:
At 1 January
Actuarial gains (losses)
Insurance premiums paid
Charge for the year
Exchange and other adjustments
At 31 December
Note 35: Deferred tax
The Group’s deferred tax assets and liabilities are as follows:
Statutory position
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
2020
£m
2,741
(45)
2,696
2019
£m Tax disclosure
2,666 Deferred tax assets
(44) Deferred tax liabilities
2,622 Asset at 31 December
2020
£m
(126)
16
4
(3)
—
2019
£m
(124)
(6)
7
(4)
1
(109)
(126)
2020
£m
5,527
(2,831)
2,696
2019
£m
4,938
(2,316)
2,622
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 had been expected to 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 so at 31 December 2019 substantially
all of its deferred tax was measured using the 17 per cent tax rate. During the December 2019 election campaign, however, the UK Government stated its
intention to maintain the corporation tax rate at 19 per cent, and this tax rate was substantively enacted on 17 March 2020. The Group therefore remeasured
its deferred tax assets and liabilities at 19 per cent. The deferred tax impact of this remeasurement in 2020 is a credit of £350 million in the income statement
and a charge of £51 million in other comprehensive income.
On 29 October 2018, the UK Government announced its intention to restrict the use of capital tax losses to 50 per cent of any future gains arising. This
restriction was substantively enacted on 2 July 2020 and as a result the Group recognised additional deferred tax liabilities of £63 million, with an impact of
£47 million as a prior year charge in the income statement and £16 million in other comprehensive income, in respect of unrealised gains at that date.
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:
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
284 Lloyds Banking Group Annual Report and Accounts 2020
Note 35: Deferred tax continued
Property,
plant and
equipment
£m
Pension
liabilities
£m
Tax losses
£m
Share-
based
Provisions
£m
payments Derivatives
£m
£m
Asset
revaluations1
£m
Other
temporary
differences
£m
Deferred tax assets
At 1 January 2019
(Charge) credit to the income
statement
Credit to other comprehensive income
Other credit to equity
At 31 December 2019
(Charge) credit to the income
statement
(Charge) credit to other
comprehensive income
Other charge to equity
At 31 December 2020
3,778
679
(167)
(16)
—
—
—
—
3,611
663
453
—
—
5
—
—
4,064
668
62
(83)
74
—
53
6
(3)
—
56
197
(87)
116
—
226
6
22
—
254
40
4
—
7
51
(4)
—
(18)
29
—
149
—
—
149
10
—
—
159
—
—
—
—
—
29
—
—
29
Capitalised
software
enhancements
£m
Long-term
assurance
business
£m
Acquisition
fair value
£m
Pension
assets Derivatives
£m
£m
Asset
revaluations1
£m
Other
temporary
differences
£m
Deferred tax liabilities
At 1 January 2019
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Exchange and other adjustments
At 31 December 2019
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Exchange and other adjustments
At 31 December 2020
(36)
15
—
—
(21)
(207)
—
—
(637)
(193)
—
—
(830)
(13)
—
—
(737)
221
—
—
(516)
144
—
—
(273)
59
64
—
(150)
(77)
(165)
—
(405)
(48)
(148)
—
(601)
(46)
(109)
—
(228)
(843)
(372)
(392)
(756)
(99)
(19)
83
—
(35)
(25)
60
—
—
Total
£m
4,767
(26)
190
7
11
174
—
—
185
4,938
83
588
—
—
19
(18)
268
5,527
Total
£m
(2,314)
—
(1)
(1)
(2,316)
(300)
(214)
(1)
(127)
(35)
—
(1)
(163)
(76)
—
(1)
(240)
(2,831)
1 Financial assets at fair value through other comprehensive income.
Deferred tax not recognised
Deferred tax assets of £85 million (2019: £24 million) have been recognised in respect of the future tax benefit of certain expenses of the life assurance business
carried forward. The deferred tax asset not recognised in respect of the remaining expenses is approximately £414 million (2019: £254 million), and these
expenses can be carried forward indefinitely. The unrecognised deferred tax asset has increased in 2020 because, as UK markets performed poorly, there was
a significant increase in the amount of expenses to carry forward.
Deferred tax assets of approximately £114 million (2019: £48 million) have not been recognised in respect of £582 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 (2019: £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, £41 million (2019: £35 million) relates to losses that will expire if not used within 20 years, and £48 million (2019: £45 million) relates
to losses with no expiry date.
As a result of parent company exemptions on dividends from subsidiaries and on capital gains on disposal there are no significant taxable temporary
differences associated with investments in subsidiaries, branches, associates and joint arrangements.
Note 36: Other provisions
At 1 January 2020
Exchange and other adjustments
Provisions applied
Charge for the year
At 31 December 2020
Provisions
for financial
commitments
and guarantees
£m
Payment
protection
insurance
£m
Other
regulatory
provisions
£m
177
1,880
(7)
—
289
459
—
(1,703)
85
262
528
11
(538)
379
380
Other
£m
738
(9)
(198)
283
814
Total
£m
3,323
(5)
(2,439)
1,036
1,915
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
285
Note 36: Other provisions continued
Provisions for financial commitments and guarantees
Provisions are recognised for expected credit losses on undrawn loan commitments and financial guarantees. See also note 18.
Payment protection insurance (excluding MBNA)
The Group has made provisions for PPI costs totalling £21,960 million; of which £85 million was recognised in the final quarter of the year ended 31 December
2020. Of the approximately six million enquiries received pre-deadline, more than 99 per cent have now been processed. The £85 million charge in the fourth
quarter was driven by the impact of coronavirus delaying operational activities during 2020, the final stages of work to ensure operational completeness ahead
of an orderly programme close and final validation of information requests and complaints with third parties that resulted in a limited number of additional
complaints to be handled. A small part of the costs incurred during the year also reflect the costs associated with litigation activity to date.
At 31 December 2020, a provision of £201 million remained unutilised relating to complaints and associated administration costs excluding amounts relating
to MBNA. Total cash payments were £1,462 million during the year ended 31 December 2020.
Payment protection insurance (MBNA)
As announced in December 2016, the Group's exposure continues to remain capped at £240 million under the terms of the MBNA sale and purchase
agreement. No additional charge has been made by MBNA to its PPI provision in the year ended 31 December 2020; total cash payments in the year were
£241 million and the remaining provision at 31 December 2020 was £61 million (31 December 2019: £302 million).
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 2020 the Group charged a further £379 million in respect of legal actions and other regulatory matters, and the unutilised balance at 31 December
2020 was £380 million (31 December 2019: £528 million). The most significant items are as follows.
HBOS Reading – review
The Group completed its compensation assessment for those within the Customer Review in 2019 with more than £109 million of compensation paid, in
addition to £15 million for ex-gratia payments and £6 million for the reimbursement of legal fees. The Group is applying the recommendations from Sir Ross
Cranston’s review, issued in December 2019, including a reassessment of direct and consequential losses by an independent panel, an extension of debt
relief and a wider definition of de facto directors. Further details of the panel were announced on 3 April 2020 and the panel's full scope and methodology
was published on 7 July 2020. The panel’s stated objective is to consider cases via a non-legalistic and fair process, and to make their decisions in a
generous, fair and common-sense manner. Details of an appeal process for the further assessments of debt relief and de facto director status have also been
announced. The Group continues to make progress on its assessment of claims for further debt relief and de facto director status, completing preliminary
assessments for 98 per cent of claims on both debt relief and de facto directors. As part of these activities the Group has recorded charges in relation to
compensation payments and associated costs (projected to the fourth quarter of 2021) in 2020 in applying the recommendations, in respect of debt relief
and de facto director status. During 2021, decisions from the independent panel re-review on direct and consequential losses will start to be issued, which
is likely to result in further charges but it is not possible to estimate the potential impact at this stage. The Group is committed to implementing Sir Ross'
recommendations in full.
The Dame Linda Dobbs review, which is considering the Group’s handling of HBOS Reading between January 2009 and January 2017, is now expected to
complete towards the end of 2021. The cost of undertaking the review is included in the revised provision.
The 2020 charge of £159 million, and lifetime cost of £435 million, includes both compensation payments and operational costs.
Arrears handling related activities
The Group has provided an additional £35 million in the year ended 31 December 2020 for arrears handling related activities, bringing the total provided to
date to £1,016 million; the unutilised balance at 31 December 2020 was £62 million.
Customer claims in relation to insurance branch business in Germany
The Group continues to receive claims from customers in Germany relating to policies issued by Clerical Medical Investment Group Limited (subsequently
renamed Scottish Widows Limited), with smaller numbers of claims received from customers in Austria and Italy. The German industry-wide issue regarding
notification of contractual 'cooling off' periods continued to lead to a similar number of claims in 2020 as 2019. The total provision made to 31 December
2020 was £674 million (31 December 2019: £656 million); utilisation of the provision was £28 million in the year ended 31 December 2020 (2019: £28 million);
the remaining unutilised provision as at 31 December 2020 was £93 million (31 December 2019: £101 million). The ultimate financial effect, which could be
significantly different from the current provision, will be known only once all relevant claims have been resolved.
Other
Following the sale of TSB Banking Group plc, the Group raised a provision of £665 million in relation to various ongoing commitments; £111 million of this
provision remained unutilised at 31 December 2020.
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 2020 provisions of £198 million (31 December 2019: £129 million) were held.
The Group carries provisions of £112 million (2019: £118 million) for indemnities and other matters relating to legacy business disposals in prior years.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
286 Lloyds Banking Group Annual Report and Accounts 2020
Note 37: Subordinated liabilities
The movement in subordinated liabilities during the year was as follows:
At 1 January 2019
Repurchases and redemptions during the year1
Foreign exchange movements
Other movements (all non-cash)
At 31 December 2019
Issued during the year
Repurchases and redemptions during the year1
Foreign exchange movements
Other movements (all non-cash)
At 31 December 2020
Preference
shares
£m
803
(3)
(12)
114
902
—
—
(22)
82
962
Preferred
securities
£m
3,205
(49)
(83)
152
3,225
—
(1,609)
(59)
186
1,743
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
Total
£m
588
(53)
(36)
18
517
—
—
15
(23)
509
13,060
17,656
(713)
(402)
541
12,486
1,010
(3,125)
84
592
(818)
(533)
825
17,130
1,010
(4,734)
18
837
11,047
14,261
1 The repurchases and redemptions resulted in cash outflows of £3,874 million (2019: £818 million).
Issued during 2020
Dated subordinated liabilities
4.50% Fixed Rate Step-up Subordinated Notes due 2030 (€309 million)
2.707% Fixed Rate Dated Subordinated Reset Notes due 2035 (£1,309 million)
Repurchases and redemptions during 2020
Preferred securities
12% Fixed to Floating Rate Perpetual Tier 1 Capital Securities callable 2024 (US$2,000 million)
13% Sterling Step-up Perpetual Capital Securities callable 2029 (£700 million)
7.281% Perpetual Regulatory Tier One Securities (Series B) (£150 million)
6.85% Non-cumulative Perpetual Preferred Securities (US$1,000 million)
7.881% Guaranteed Non-voting Non-cumulative Preferred Securities (£245 million)
Dated subordinated liabilities
6.5% Dated Subordinated Notes 2020 (€1,500 million)
4.50% Fixed Rate Step-up Subordinated Notes due 2030 (€309 million)
5.75% Subordinated Fixed to Floating Rate Notes 2025 callable 2020 (£350 million)
6.50% Subordinated Fixed Rate Notes 2020 (US$2,000 million)
Subordinated Floating Rate Notes 2020 (€100 million)
9.625% Subordinated Bonds 2023 (£300 million)
7.375% Dated Subordinated Notes 2020
£m
275
735
1,010
£m
119
515
111
580
284
1,609
£m
1,464
284
370
674
90
239
4
3,125
Certain of the above securities were issued or redeemed under exchange offers, which did not result in an extinguishment of the original financial liability for
accounting purposes.
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
£m
3
£m
49
£m
1
52
53
£m
135
328
250
713
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
287
Note 37: Subordinated liabilities continued
These securities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer, other than
creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination of specific subordinated
liabilities is determined in respect of the issuer and any guarantors of that liability. The claims of holders of preference shares and preferred securities are
generally junior to those of the holders of undated subordinated liabilities, which in turn are junior to the claims of holders of the dated subordinated liabilities.
The Group has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during 2020 (2019: none).
Note 38: Share capital
(1) Authorised share capital
As permitted by the Companies Act 2006, the Company removed references to authorised share capital from its articles of association at the annual general
meeting on 5 June 2009. This change took effect from 1 October 2009.
(2) Issued and fully paid share capital
Ordinary shares of 10p (formerly 25p) each
At 1 January
70,052,557,838
71,163,592,264
71,972,949,589
7,005
7,116
7,197
2020
Number of shares
2019
Number of shares
2018
Number of shares
2020
£m
2019
£m
2018
£m
Issued under employee share schemes
786,648,222
775,882,951
768,551,098
—
(1,886,917,377)
(1,577,908,423)
79
—
78
(189)
77
(158)
70,839,206,060
70,052,557,838
71,163,592,264
7,084
7,005
7,116
Share buyback programme
At 31 December
Share issuances
In 2020, 787 million shares (2019: 776 million shares; 2018: 769 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 112.
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 21 May 2020. 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 2020, 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.
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
37.
Note 39: Share premium account
At 1 January
Issued under employee share schemes
Redemption of preference shares1
At 31 December
2020
£m
2019
£m
2018
£m
17,751
17,719
17,634
112
—
29
3
85
—
17,863
17,751
17,719
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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
288 Lloyds Banking Group Annual Report and Accounts 2020
Note 40: 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
Cash flow hedging reserve
Foreign currency translation reserve
At 31 December
2020
£m
2019
£m
2018
£m
7,763
4,462
99
(47)
1,629
(159)
13,747
7,763
4,462
123
19
1,504
(176)
13,695
7,766
4,273
279
5
1,051
(164)
13,210
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 reserves 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.
Movements in other reserves were as follows:
Merger reserve
At 1 January
Redemption of preference shares (note 39)
At 31 December
Capital redemption reserve
At 1 January
Shares cancelled under share buyback programmes
At 31 December
Revaluation reserve in respect of debt securities held at fair value through other
comprehensive income
At 1 January
Change in fair value
Deferred tax
Current tax
Income statement transfers in respect of disposals (note 9)
Deferred tax
Impairment recognised in the income statement
At 31 December
2020
£m
7,763
—
7,763
2020
£m
4,462
—
4,462
2020
£m
2019
£m
7,766
(3)
7,763
2019
£m
4,273
189
4,462
2019
£m
2018
£m
7,766
—
7,766
2018
£m
4,115
158
4,273
2018
£m
123
279
472
46
29
(2)
73
(149)
47
(102)
5
99
(30)
10
—
(20)
(196)
61
(135)
(1)
123
(37)
35
—
(2)
(275)
84
(191)
—
279
Notes to the consolidated financial statements continued Note 40: Other reserves continued
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
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
Income statement transfers
At 31 December
Lloyds Banking Group Annual Report and Accounts 2020
289
2020
£m
2019
£m
2018
£m
19
(50)
(16)
(66)
(16)
16
—
(47)
2020
£m
1,504
730
(244)
486
(496)
135
(361)
5
—
12
12
14
(12)
2
19
2019
£m
1,051
1,209
(303)
906
(608)
155
(453)
(49)
(97)
22
(75)
151
(22)
129
5
2018
£m
1,405
234
(69)
165
(701)
182
(519)
1,629
1,504
1,051
2020
£m
(176)
4
13
(159)
2019
£m
(164)
(12)
—
(176)
2018
£m
(156)
(8)
—
(164)
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
290 Lloyds Banking Group Annual Report and Accounts 2020
Note 41: Retained profits
At 1 January
Profit for the year
Dividends paid
Issue costs of other equity instruments (net of tax) (note 42)
Share buyback programmes (note 40)
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)1
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
At 31 December
2020
£m
3,246
865
—
—
—
—
113
—
(55)
293
48
74
4,584
2019
£m
5,389
2,459
2018
£m
3,976
3,975
(2,312)
(2,240)
(3)
(5)
(1,095)
(1,005)
(2)
(1,117)
—
(306)
(3)
71
165
3,246
(129)
120
8
389
40
53
207
5,389
1 During 2020 the Group derecognised, on redemption, financial liabilities on which cumulative fair value movements relating to own credit of £1 million net of tax (2019: £nil; 2018: £nil), had been
recognised directly in retained profits.
Retained profits are stated after deducting £230 million (2019: £575 million; 2018: £499 million) representing 592 million (2019: 902 million; 2018: 909 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 189.
Note 42: 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
Profit for the year attributable to other equity holders
Distributions on other equity instruments
At 31 December
2020
£m
5,906
—
—
—
—
453
(453)
5,906
2019
£m
6,491
—
396
500
(1,481)
466
(466)
5,906
2018
£m
5,355
1,136
—
—
—
433
(433)
6,491
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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
291
Note 43: 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 0.57 pence per share
representing a total dividend of £404 million, the maximum allowable under PRA guidelines, which will be paid on 25 May 2021.
At the time of approving the Group’s results for the year ended 31 December 2019, the directors recommended a final dividend of 2.25 pence per share (2018:
2.14 pence per share) representing a total dividend of £1,586 million (2018: £1,523 million), which was to be paid on 27 May 2020. However, on 31 March 2020
the Group announced the cancellation of its final 2019 ordinary dividend. This decision was taken by the Board at the specific request of the regulator, the
PRA, in line with all other major UK listed banks, as a result of the developing coronavirus crisis.
The financial statements do not reflect recommended dividends.
Dividends paid during the year were as follows:
Final dividend recommended by directors at previous year end
Interim dividend paid in the year
2020
pence
per share
2019
pence
per share
2018
pence
per share
—
—
—
2.14
1.12
3.26
2.05
1.07
3.12
2020
£m
—
—
—
2019
£m
1,523
789
2,312
2018
£m
1,475
765
2,240
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
2020: 3,990,862 shares, 31 December 2019: 6,508,529 shares, waived rights to all dividends), the HBOS Share Incentive Plan Trust (holding at 31 December
2020: nil, 31 December 2019: 445,625 shares, waived rights to all dividends), the Lloyds Banking Group Employee Share Ownership Trust (holding at 31
December 2020: 20,540,083 shares, 31 December 2019: 11,656,155 shares, waived rights to all dividends).
Note 44: 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
2020
£m
81
13
62
75
16
24
40
2019
£m
261
16
59
75
17
20
37
2018
£m
325
14
71
85
16
17
33
Total charge to the income statement
196
373
443
During the year ended 31 December 2020 the Group operated the following share-based payment schemes, all of which are equity settled.
Group Performance Share plan
The Group operates a Group Performance Share plan that is equity settled. No award has been made in respect of 2020; the charge in the year relates to prior
year awards for which the deferral period has completed.
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 (90 per cent for the 2020 plan) 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
2020
2019
Number
of options
1,068,094,073
779,229,797
(255,706,663)
(6,938,102)
(389,767,675)
(74,772,515)
1,120,138,915
792,741
Weighted
average
exercise price
(pence)
44.55
24.25
47.51
43.30
42.24
47.26
30.39
47.49
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
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
292 Lloyds Banking Group Annual Report and Accounts 2020
Note 44: Share-based payments continued
The weighted average share price at the time that the options were exercised during 2020 was £0.61 (2019: £0.59). The weighted average remaining
contractual life of options outstanding at the end of the year was 2.98 years (2019: 2.22 years).
The weighted average fair value of SAYE options granted during 2020 was £0.05 (2019: £0.10). 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
2020
2019
Number
of options
7,634,638
1,990,449
(2,122,302)
(47,337)
(111,100)
(677,976)
6,666,372
3,150,407
Weighted
average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
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
The weighted average fair value of options granted in the year was £0.33 (2019: £0.59). 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 2020 was £0.36 (2019: £0.60). The
weighted average remaining contractual life of options outstanding at the end of the year was 4.1 years (2019: 3.8 years).
Other share plans
Lloyds Banking Group Executive Group Ownership Share 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 2017 grant, the targets had not been fully met and therefore these awards vested in 2020 at a rate of 49.7 per
cent.
Outstanding at 1 January
Granted
Vested
Forfeited
Dividend award
Outstanding at 31 December
2020
Number
of shares
2019
Number
of shares
459,904,745
417,385,636
211,214,605
174,490,843
(47,775,806)
(88,318,950)
(96,015,542)
(55,029,439)
6,659,525
11,376,655
533,987,527
459,904,745
Awards in respect of the 2018 grant vested in 2021 at a rate of 33.75 per cent. In previous years participants were entitled to any dividends paid in the vesting
period. However, following a regulatory change prohibiting the payment of dividend equivalents on awards, the number of shares subject to award was
determined by applying an adjustment factor to the share price on grant. 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 £0.28 (2019: £0.45).
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
293
Note 44: Share-based payments continued
Chief Financial Officer 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
2020
Number
of shares
3,268,460
2019
Number
of shares
—
—
4,086,632
(1,457,748)
(818,172)
1,810,712
3,268,460
The weighted average fair value of awards granted in 2019 was £0.55.
The fair value calculations at 31 December 2020 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
Executive
Share Plan
2003
SAYE
Executive
Group
Ownership
Share Plan
(0.03%)
(0.01%)
0.18%
3.2 years
1.2 years
3.6 years
32%
5.3%
£0.28
£0.24
42%
5.3%
£0.35
Nil
23%
5.3%
£0.47
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 20 May 2020, the Group made an award of £200 (2019: £200) of shares to all eligible employees. The number of shares awarded was 45,612,424 (2019:
22,422,337), with an average fair value of £0.30 (2019: £0.62) 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.
The number of shares awarded relating to matching shares in 2020 was 62,262,140 (2019: 37,346,812), with an average fair value of £0.34 (2019: £0.56), 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. From June 2020, the fixed share awards are released over three years with one third being released each year following the year of award. The number
of shares purchased in 2020 was 13,975,993 (2019: 8,239,332).
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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
294 Lloyds Banking Group Annual Report and Accounts 2020
Note 45: 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
2020
£m
2019
£m
2018
£m
13
—
13
26
15
—
15
30
14
—
18
32
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £nil (2019: £nil; 2018: £nil).
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
2020
million
2019
million
2018
million
—
—
—
—
—
—
—
—
1
—
(1)
—
2020
million
2019
million
2018
million
101
46
(30)
117
84
46
(29)
101
82
39
(37)
84
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
2020
£m
2019
£m
2018
£m
2
—
—
2
2
1
(1)
2
2
1
(1)
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 0.39 per cent and
24.20 per cent in 2020 (2019: 6.45 per cent and 24.20 per cent; 2018: 6.70 per cent and 24.20 per cent).
No provisions have been recognised in respect of loans given to key management personnel (2019 and 2018: £nil).
Deposits
At 1 January
Placed (includes deposits of appointed key management personnel)
Withdrawn (includes deposits of former key management personnel)
At 31 December
2020
£m
23
25
(38)
10
2019
£m
20
44
(41)
23
2018
£m
20
33
(33)
20
Deposits placed by key management personnel attracted interest rates of up to 2.0 per cent (2019: 3.0 per cent; 2018: 3.5 per cent).
At 31 December 2020, the Group did not provide any guarantees in respect of key management personnel (2019 and 2018: none).
At 31 December 2020, 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 (2019: £0.6 million
with four directors and two connected persons; 2018: £0.5 million with three directors and three connected persons).
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
295
Note 45: Related party transactions continued
Subsidiaries
Details of the Group’s subsidiaries and related undertakings are given on pages 349 to 354. 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 2020, customer deposits of
£151 million (2019: £169 million) and investment and insurance contract liabilities of £152 million (2019: £127 million) related to the Group’s pension funds. As
disclosed in note 34, the Group’s main pension funds have entered into a longevity insurance arrangement that was structured as a pass-through involving
Scottish Widows.
Collective investment vehicles
The Group manages 137 (2019: 141) collective investment vehicles, such as Open Ended Investment Companies (OEICs) and of these 76 (2019: 75) are
consolidated. The Group invested £659 million (2019: £804 million) and redeemed £1,159 million (2019: £1,771 million) in the unconsolidated collective
investment vehicles during the year and had investments, at fair value, of £2,234 million (2019: £3,417 million) at 31 December. The Group earned fees of
£93 million from the unconsolidated collective investment vehicles during 2020 (2019: £127 million).
Joint ventures and associates
At 31 December 2020 there were loans and advances to customers of £28 million (2019: £75 million) outstanding and balances within customer deposits of
£73 million (2019: £5 million) relating to joint ventures and associates.
During the year the Group paid fees of £7 million (2019: £2 million) to its Schroders Personal Wealth joint venture and also made a payment of £20 million
under the terms of an Operating Margin Guarantee put in place as part of the agreements for the establishment of the joint venture.
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 2020, these companies had total assets of approximately £4,387 million (2019: £4,761 million), total liabilities of approximately
£4,928 million (2019: £5,322 million) and for the year ended 31 December 2020 had turnover of approximately £3,857 million (2019: £4,286 million) and made
a net loss of approximately £435 million (2019: net loss of £190 million). In addition, the Group has provided £1,295 million (2019: £1,266 million) of financing to
these companies on which it received £91 million (2019: £86 million) of interest income in the year.
Note 46: Contingent liabilities, commitments and guarantees
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group is not involved in the ongoing litigation which involves card schemes such as Visa and
Mastercard (as described below). 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 a judgment of the Supreme Court in June 2020
upholding the Court of Appeal's finding in 2018 that historic interchange arrangements of Mastercard and Visa infringed competition law); and
– litigation brought on behalf of UK consumers in the English Courts against Mastercard, which the Supreme Court has now confirmed can proceed.
Any impact on the Group of the litigation against Visa and Mastercard remains uncertain at this time, such that it is not practicable for the Group to provide
an estimate of any potential financial effect. 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. In 2016, the Group received Visa preference stock as part of the consideration
for the sale of its shares in Visa Europe. In 2020, some of these Visa preference shares were converted into Visa Inc Class A common stock (in accordance with
the provisions of the Visa Europe sale documentation) and they were subsequently sold by the Group. The sale had no impact on this contingent liability.
LIBOR and other trading rates
Certain Group companies, together with other panel banks, have 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 London Interbank Offered Rate and the
Australian BBSW reference rate. Certain of the plaintiffs' claims have been dismissed by the US Federal Court for the 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.
Furthermore, the Swiss Competition Commission concluded its investigation against Lloyds Bank plc in June 2019. However, the Group continues to respond
to litigation arising out of the investigations into submissions made by panel members to the bodies that set LIBOR and various other interbank offered rates.
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. As such, it is not practicable to provide an estimate of any potential financial effect.
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 its interpretation of the UK rules means that the group relief is not available. In 2020, HMRC
concluded their enquiry into the matter and issued a closure notice. The Group's interpretation of the UK rules has not changed and hence it has appealed
to the First Tier Tax Tribunal, with a hearing expected in early 2022. If the final determination of the matter by the judicial process is that HMRC’s position is
correct, management estimate that this would result in an increase in current tax liabilities of approximately £810 million (including interest) and a reduction
in the Group’s deferred tax asset of approximately £270 million. The Group, having taken appropriate advice, does not consider that this is a case where
additional tax will ultimately fall due.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
296 Lloyds Banking Group Annual Report and Accounts 2020
Note 46: Contingent liabilities, commitments and guarantees continued
There are a number of other open matters on which the Group is in discussions 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.
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 material such 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, including letters of credit, and other transaction-related contingencies
Total contingent liabilities
2020
£m
131
317
2,105
2,422
2,553
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
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £73,962 million (2019:
£63,504 million) was irrevocable.
Capital commitments
Excluding commitments in respect of investment property (note 25), capital expenditure contracted but not provided for at 31 December 2020 amounted
to £501 million (2019: £405 million). Of this amount, £501 million (2019: £400 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.
2019
£m
74
366
2,454
2,820
2,894
2019
£m
—
189
2020
£m
1
127
20,179
89,269
109,448
38,299
12,684
85,735
98,419
34,945
147,875
133,553
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
297
Note 47: Structured entities
The Group’s interests in structured entities are both consolidated and unconsolidated. Details of the Group’s interests in consolidated structured entities are
set out in note 29 for securitisations and covered bond vehicles, note 34 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 29, 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 2020
was £2,490 million (2019: £3,735 million), comprising £1,695 million of loans and advances (2019: £3,670 million) and £795 million of debt securities (2019:
£65 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 2020 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 2020, the total carrying value of these consolidated collective investment vehicle assets and liabilities held by the Group was
£57,430 million (2019: £68,724 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 £55,235 million at 31 December 2020 (2019: £38,177 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 2020, the total asset value of these unconsolidated structured entities, including the portion in which the Group has no interest,
was £2,473 billion (2019: £2,363 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, markets products associated with the structured entity in its own name and/or provides 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 2020, are reported in note 6.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
298 Lloyds Banking Group Annual Report and Accounts 2020
Note 48: Financial instruments
(1) Measurement basis of financial assets and liabilities
The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and expenses, including fair value
gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance sheet
heading.
Derivatives
designated
as hedging
instruments
£m
Mandatorily held at
fair value through
profit or loss
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
related
contracts
£m
At 31 December 2020
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
—
—
—
—
—
—
—
20,825
150,801
Derivative financial instruments
816
28,797
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 contracts held
with reinsurers
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19,543
816
49,622
170,344
—
—
—
—
—
—
—
—
—
—
—
—
—
15,818
26,629
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Derivative financial instruments
684
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,828
—
—
—
—
—
—
—
6,828
Total
£m
73,257
299
171,626
29,613
10,746
498,843
5,405
514,994
27,603
—
—
—
—
—
—
—
—
—
842
842
20,385
837,777
—
—
—
—
—
—
—
31,465
460,068
306
22,646
27,313
1,305
87,397
116,060
116,060
38,452
38,452
343
2,015
—
14,261
—
—
—
—
—
—
—
—
73,257
299
—
—
10,746
498,843
5,405
514,994
27,603
—
—
—
27,603
588,550
31,465
460,068
306
—
—
1,305
87,397
—
—
1,672
14,261
—
—
—
—
—
—
—
—
—
—
—
—
684
42,447
596,474
154,855
801,288
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
299
Note 48: Financial instruments continued
Derivatives
designated
as hedging
instruments
£m
Mandatorily held at
fair value through
profit or loss
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
related
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
1,236
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 contracts held
with reinsurers
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
—
—
17,982
25,133
—
—
—
—
—
—
—
—
142,207
—
—
—
—
—
—
22,817
1,236
43,115
165,024
—
—
—
13,955
24,674
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,531
—
—
—
—
—
—
—
7,531
—
—
—
—
—
—
—
—
25,092
—
55,130
313
—
—
9,775
494,988
5,544
510,307
—
—
25,092
565,750
28,179
421,320
373
—
—
1,079
97,689
—
—
1,844
17,130
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
55,130
313
160,189
26,369
9,775
494,988
5,544
510,307
25,092
750
750
23,567
800,967
—
—
—
—
—
—
—
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
1,105
38,629
567,614
149,308
764,187
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
300 Lloyds Banking Group Annual Report and Accounts 2020
Note 48: 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, items in course of transmission to banks, notes in circulation and liabilities arising from non-participating investment contracts. Fair
values have not been disclosed for discretionary participating investment contracts. There is currently no agreed definition of fair valuation for discretionary
participation features applied under IFRS and therefore the range of possible fair values of these contracts cannot be measured reliably.
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 brands and acquired credit card relationships; premises and equipment;
and shareholders’ equity. These items are material and accordingly the Group believes that any fair value information presented would 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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
301
Note 48: Financial instruments continued
(3) Financial assets and liabilities carried at fair value
(A) Financial assets, excluding derivatives
Valuation hierarchy
At 31 December 2020, the Group’s financial assets carried at fair value, excluding derivatives, totalled £218,772 million (2019: £208,098 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 300). 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 2020
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
Financial assets at fair value through profit or loss
Assets arising from contracts held with reinsurers
Total financial assets at fair value through profit or loss
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
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
—
—
12,508
4,467
20,332
—
44
—
—
—
20,376
18
94,687
115,081
—
115,081
14,286
—
—
498
14,784
36
—
14,820
129,901
290
2,289
4,797
467
265
16,245
24,353
—
171
41,499
19,543
61,042
—
—
—
12,437
12,437
—
—
12,437
73,479
11,501
—
—
65
—
—
—
1,889
1,954
—
24,009
4,467
20,622
2,354
4,841
467
265
18,134
46,683
18
1,591
96,449
15,046
171,626
—
19,543
15,046
191,169
—
—
180
—
180
—
166
346
14,286
—
180
12,935
27,401
36
166
27,603
15,392
218,772
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
302 Lloyds Banking Group Annual Report and Accounts 2020
Note 48: Financial instruments continued
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
Financial assets at fair value through profit or loss
Assets arising from contracts held with reinsurers
Total financial assets at fair value through profit or loss
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
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
18,618
—
52
—
—
—
18,670
19
93,766
112,473
—
112,473
10,164
2,381
236
2,071
932
468
158
16,381
20,246
—
17
32,808
22,817
55,625
10,912
—
—
55
—
—
100
1,835
1,990
—
2,006
14,908
—
14,908
21,076
2,399
18,854
2,126
984
468
258
18,216
40,906
19
95,789
160,189
22,817
183,006
12,860
238
—
13,098
—
—
16
12,876
535
—
13,411
125,884
—
—
11,035
11,273
—
—
11,273
66,898
121
60
—
181
—
227
408
15,316
121
60
11,051
24,330
535
227
25,092
208,098
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
303
Note 48: Financial instruments continued
Movements in Level 3 portfolio
The table below analyses movements in level 3 financial assets, excluding derivatives, carried at fair value (recurring measurement).
2020
2019
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
14,908
408
15,316
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
94
836
—
1,756
(2,316)
167
(399)
15,046
9
—
(48)
8
(31)
—
—
103
836
(48)
1,764
(2,347)
167
(399)
13,917
(85)
794
—
2,579
(2,807)
644
(134)
346
15,392
14,908
267
(10)
—
12
207
(87)
19
—
408
14,184
(95)
794
12
2,786
(2,894)
663
(134)
15,316
109
—
109
269
—
269
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/repayments of customer loans
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
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 is 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 the 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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
304 Lloyds Banking Group Annual Report and Accounts 2020
Note 48: Financial instruments continued
(B) Financial liabilities, excluding derivatives
Valuation hierarchy
At 31 December 2020, the Group’s financial liabilities carried at fair value, excluding derivatives, comprised its financial liabilities at fair value through profit
or loss and totalled £22,646 million (2019: £21,486 million). The table below analyses these financial liabilities by balance sheet classification and valuation
methodology (level 1, 2 or 3, as described on page 300). The fair value measurement approach is recurring in nature. There were no significant transfers
between level 1 and 2 during the year.
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
6,783
45
6,828
At 31 December 2020
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 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
—
—
—
778
778
778
—
—
—
2,781
2,781
2,781
14,996
6
38
15,040
21,823
7,483
11,048
98
28
11,174
18,657
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
—
—
—
—
45
48
—
—
—
—
48
2020
£m
48
1
(4)
—
—
45
—
14,996
6
816
15,818
22,646
7,531
11,048
98
2,809
13,955
21,486
2019
£m
11
—
(5)
52
(10)
48
—
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 2020, the own credit adjustment arising from the fair valuation of £6,828 million (2019: £7,531 million) of the Group’s debt securities in issue
designated at fair value through profit or loss resulted in a loss of £75 million (2019: loss of £419 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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
305
Note 48: Financial instruments continued
(C) Derivatives
All of the Group’s derivative assets and liabilities are carried at fair value. At 31 December 2020, such assets totalled £29,613 million (2019: £26,369 million)
and liabilities totalled £27,313 million (2019: £25,779 million). The table below analyses these derivative balances by valuation methodology (level 1, 2 or 3, as
described on page 300). 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
60
(56)
2020
Level 2
£m
28,572
Level 3
£m
Total
£m
981
29,613
(25,883)
(1,374)
(27,313)
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)
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 inputs to the valuation are significant 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.
The table below analyses movements in level 3 derivative assets and liabilities carried at fair value.
2020
2019
Derivative
assets
£m
Derivative
liabilities
£m
Derivative
assets
£m
Derivative
liabilities
£m
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
863
(1,367)
16
84
61
(85)
41
1
981
(17)
(112)
(6)
19
(51)
160
(1,374)
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
99
(131)
927
(27)
81
4
(19)
415
(518)
863
(14)
(716)
4
(75)
(4)
47
(959)
336
(1,367)
18
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
The following table summarises the movement on this valuation adjustment account during 2019 and 2020:
At 1 January
Income statement charge (credit)
Transfers
At 31 December
2020
£m
423
70
(19)
474
2019
£m
562
(134)
(5)
423
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306 Lloyds Banking Group Annual Report and Accounts 2020
Note 48: Financial instruments continued
Represented by:
Credit Valuation Adjustment
Debit Valuation Adjustment
Funding Valuation Adjustment
2020
£m
358
(35)
151
474
2019
£m
278
(27)
172
423
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 strong 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.
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
£83 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 2020).
The DVA is sensitive to:
– the current size of the mark-to-market position on the uncollateralised liability;
– expectations of future market volatility of the underlying liability; and
– the Group’s own CDS spread.
A one per cent rise in the CDS spread would lead to an increase in the DVA of £101 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 £83 million fall in the overall valuation adjustment to £240 million. The CVA model used by the Group does not assume any
correlation between the level of interest rates and default rates.
The Group has also recognised a Funding Valuation Adjustment to adjust for the net cost of funding uncollateralised derivative positions. This adjustment is
calculated on the expected future exposure discounted at a suitable cost of funds. A ten basis points increase in the cost of funds will increase the funding
valuation adjustment by approximately £26 million.
(ii) Market liquidity
The Group includes mid to bid-offer valuation adjustments against the expected cost of closing out the net market risk in the Group’s trading positions
within a timeframe that is consistent with historical trading activity and spreads that the trading desks have accessed historically during the ordinary course of
business in normal market conditions.
At 31 December 2020, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £83 million (2019: £80 million).
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
307
Note 48: Financial instruments continued
(D) Sensitivity of level 3 valuations
At 31 December 2020
At 31 December 2019
Effect of reasonably possible
alternative assumptions2
Effect of reasonably possible
alternative assumptions2
Valuation techniques
Significant
unobservable
inputs1
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
11,501
528
(651)
10,912
401
(384)
Financial assets at fair value through profit or loss
Loans and
advances to
customers
Discounted cash
flows
Interest rate spreads
(-50bps/+215bps)4
Debt securities Discounted cash
flows
Market approach
Equity and
venture capital
investments
Credit spreads (+/-
5%)5
Earnings multiple
(1.0/15.2)6
Underlying asset/
net asset value (incl.
property prices)3
n/a
n/a
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
226
1,905
634
780
15,046
Financial assets at fair value through other comprehensive income
Asset-backed
securities
Lead manager
or broker quote/
consensus pricing
n/a
Equity and
venture capital
investments
Underlying asset/
net asset value (incl.
property prices)3
n/a
Derivative financial assets
Interest rate
derivatives
Option pricing
model
Interest rate volatility
(13%/128%)7
Level 3 financial assets carried at fair value
Financial
liabilities at fair
value through
profit or loss
Discounted cash
flows
Interest rate spreads
(+/– 50bps)8
Derivative financial liabilities
Interest rate
derivatives
Option pricing
model
Interest rate volatility
(13%/128%)7
Level 3 financial liabilities carried at fair value
180
166
346
981
981
16,373
45
1,374
1,374
1,419
10
72
91
6
6
6
8
1
—
(10)
61
(72)
1,948
(121)
935
1
89
89
(1)
(89)
(113)
(34)
1,052
14,908
19
(41)
(6)
(6)
(6)
(1)
—
181
227
408
863
863
16,179
48
1,367
1,367
1,415
6
7
5
1
—
(6)
(6)
(6)
(1)
—
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.
4 2019: 47bps/108bps
5 2019: 1bp/2bps
6 2019: 1.5/15.4
7 2019: 14%/115%
8 2019: +/-50bps
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
308 Lloyds Banking Group Annual Report and Accounts 2020
Note 48: Financial instruments continued
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows:
– Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives depends on the behaviour of
those underlying references through time.
– Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality; higher spreads lead to a
lower fair value.
– Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of possible outcomes.
– Earnings multiples are used to value certain unlisted equity investments; a higher earnings multiple will result in a higher fair value.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group’s level 3 instruments often involve the use of two or more inputs whose relationship is interdependent. The
calculation of the effect of reasonably possible alternative assumptions included in the table above reflects such relationships.
Debt securities
Reasonably possible alternative assumptions have been determined in respect of the Group’s structured credit investment by flexing credit spreads.
Derivatives
Reasonably possible alternative assumptions have been determined in respect of swaptions in the Group’s derivative portfolios which are priced using industry
standard option pricing models. Such models require interest rate volatilities which may be unobservable at longer maturities. To derive reasonably possible
alternative valuations these volatilities have been flexed within a range of 13 per cent to 128 per cent (2019: 10 per cent to 128 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 investment portfolios.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
309
Note 48: Financial instruments continued
(4) Financial assets and liabilities carried at amortised cost
(A) Financial assets
Valuation hierarchy
The table below analyses the fair values of the financial assets of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3, as
described on page 300). Financial assets carried at amortised cost are mainly classified as level 3 due to significant unobservable inputs used in the valuation
models. Where inputs are observable, debt securities are classified as level 1 or 2.
At 31 December 2020
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: POCI
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 2019
Financial assets at amortised cost:
Loans and advances to customers: Stage 11
Loans and advances to customers: Stage 2
Loans and advances to customers: Stage 31
Loans and advances to customers: POCI
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
1 Revised presentation of fair values.
Valuation methodology
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Valuation hierarchy
432,571
431,395
49,514
4,508
12,250
50,198
4,412
12,250
498,843
498,255
10,746
5,405
58,643
2,686
10,745
5,398
58,643
2,686
449,300
449,477
27,548
4,568
13,572
28,259
4,496
13,572
494,988
495,804
9,775
5,544
54,600
1,555
9,773
5,537
54,600
1,555
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
58,643
372,752
—
—
—
50,198
4,412
12,250
58,643
439,612
2,686
5,387
58,643
2,686
8,059
11
—
—
54,600
394,877
—
—
—
28,259
4,496
13,572
54,600
441,204
1,555
5,526
54,600
1,555
8,218
11
—
—
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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
310 Lloyds Banking Group Annual Report and Accounts 2020
Note 48: Financial instruments continued
(B) Financial liabilities
Valuation hierarchy
The table below analyses the fair values of the financial liabilities of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3, as
described on page 300).
At 31 December 2020
Deposits from banks
Customer deposits
Debt securities in issue
Subordinated liabilities
Repos included in above amounts:
Deposits from banks
Customer deposits
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
Valuation methodology
Carrying value
£m
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
Valuation hierarchy
31,465
31,468
460,068
460,338
87,397
14,261
18,767
9,417
28,179
421,320
97,689
17,130
93,152
16,410
18,767
9,417
28,079
421,728
100,443
19,783
18,105
9,530
18,105
9,530
—
—
—
—
—
—
—
—
—
—
—
—
31,468
453,261
93,152
16,410
18,767
9,417
28,079
416,493
100,443
19,783
18,105
9,530
—
7,077
—
—
—
—
—
5,235
—
—
—
—
Deposits from banks and customer deposits
The fair value of bank and customer deposits repayable on demand is assumed to be equal to their carrying value.
The fair value for all other deposits is estimated using discounted cash flows applying either market rates, where applicable, or current rates for deposits of
similar remaining maturities.
Debt securities in issue
The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities is calculated based on
quoted market prices where available. Where quoted market prices are not available, fair value is estimated using discounted cash flow techniques at a rate
which reflects market rates of interest and the Group’s own credit spread.
Subordinated liabilities
The fair value of subordinated liabilities is determined by reference to quoted market prices where available or by reference to quoted market prices of similar
instruments. Subordinated liabilities are classified as level 2, since the inputs used to determine their fair value are largely observable.
Repurchase agreements
The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments.
(5) Reclassifications of financial assets
There have been no reclassifications of financial assets in 2019 or 2020.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
311
Note 49: Transfers of financial assets
There were no significant transferred financial assets which were derecognised in their entirety, but with ongoing exposure. Details of transferred financial
assets that continue to be recognised in full are as follows.
The Group enters into repurchase and securities lending transactions in the normal course of business that do not result in derecognition of the financial
assets 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 29, 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 or 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 29). 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
2020
2019
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
5,791
6,025
2,512
5,105
9,186
7,897
3,364
5,875
34,584
4,451
42,545
7,335
1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £27,448 million (31 December 2019: £31,436 million).
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
312 Lloyds Banking Group Annual Report and Accounts 2020
Note 50: Offsetting of financial assets and liabilities
The following information relates to financial assets and liabilities which have been offset in the balance sheet and those which have not been offset but for
which the Group has enforceable master netting agreements or collateral arrangements in place with counterparties.
At 31 December 2020
Financial assets
Financial assets at fair value through profit
or loss:
Excluding reverse repos
Reverse repos
Derivative financial instruments
Loans and advances to banks:
Excluding reverse repos
Reverse repos
Loans and advances to customers:
Excluding reverse repos
Reverse repos
Debt securities
Financial assets at fair value through other
comprehensive income
Financial liabilities
Deposits from banks:
Excluding repos
Repos
Customer deposits:
Excluding repos
Repos
Financial liabilities at fair value through profit
or loss:
Excluding repos
Repos
Derivative financial instruments
Related amounts where set off in
the balance sheet not permitted3
Gross amounts
of assets and
liabilities1
£m
Amount 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
158,633
27,904
186,537
88,700
8,060
2,694
10,754
440,200
64,052
504,252
5,405
27,603
12,698
18,775
31,473
450,651
14,826
465,477
7,650
29,907
37,557
85,088
—
(14,911)
(14,911)
(59,087)
—
(8)
(8)
—
(5,409)
(5,409)
—
—
—
(8)
(8)
158,633
12,993
171,626
29,613
8,060
2,686
10,746
440,200
58,643
498,843
5,405
27,603
12,698
18,767
31,465
—
450,651
(5,409)
(5,409)
9,417
460,068
—
(24)
(24)
(8,715)
(3,105)
—
(3,105)
(2,567)
156,066
(12,969)
(15,536)
(16,747)
—
(2,686)
(2,686)
—
156,066
4,151
4,955
—
4,955
(2,094)
(2,762)
435,344
—
(2,094)
—
—
(8,739)
—
(8,739)
(1,862)
—
(58,643)
(61,405)
—
—
435,344
5,405
(5,132)
22,471
—
(18,767)
(18,767)
3,959
—
3,959
(2,762)
(9,417)
446,027
—
(1,862)
(12,179)
446,027
—
(14,911)
(14,911)
(57,775)
7,650
14,996
22,646
27,313
—
—
—
(5,199)
—
(14,996)
(14,996)
(20,156)
7,650
—
7,650
1,958
Notes to the consolidated financial statements continued Note 50: Offsetting of financial assets and liabilities continued
Lloyds Banking Group Annual Report and Accounts 2020
313
Related amounts where set off in
the balance sheet not permitted3
Gross amounts
of assets and
liabilities1
£m
Amount 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
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
Financial liabilities at fair value through profit
or loss:
Excluding repos
Repos
Derivative financial instruments
1 After impairment allowance.
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
10,438
28,303
38,741
77,276
—
(12,896)
(12,896)
(53,366)
—
—
—
—
(4,359)
(4,359)
—
—
—
—
—
(1,869)
—
(1,869)
—
(17,255)
(17,255)
(51,497)
148,920
11,269
160,189
26,369
8,220
1,555
9,775
440,388
54,600
494,988
5,544
25,092
10,074
18,105
28,179
411,790
9,530
421,320
10,438
11,048
21,486
25,779
—
(366)
(366)
(7,650)
(3,377)
—
(3,377)
(2,392)
—
(2,392)
—
—
(8,016)
—
(8,016)
(1,850)
—
(1,850)
—
—
—
(5,770)
Potential
net amounts
if offset
of related
amounts
permitted
£m
146,095
—
146,095
4,827
4,843
—
4,843
435,873
—
435,873
5,333
(2,825)
(10,903)
(13,728)
(13,892)
—
(1,555)
(1,555)
(2,123)
(54,600)
(56,723)
(211)
(5,859)
19,233
—
(18,105)
(18,105)
(2,123)
(9,530)
(11,653)
2,058
—
2,058
407,817
—
407,817
—
10,438
(11,048)
(11,048)
(16,364)
—
10,438
3,645
2 The amounts offset 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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
314 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management
As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments
represent a significant component of the risks faced by the Group.
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign exchange
risk; liquidity risk; capital risk; and insurance risk. Information about the Group’s exposure to each of the above risks and its capital can be found on pages 144
to 204. The following additional disclosures, which provide its 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 UK Bank Rate, set by the Bank of England. 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 155.
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 2020 the aggregate notional principal of interest rate swaps designated as fair value hedges was £215,325 million (2019: £183,489 million)
with a net fair value asset of £211 million (2019: asset of £569 million) (note 17). The gains on the hedging instruments were £988 million (2019: gains of
£1,144 million). The losses on the hedged items attributable to the hedged risk were £441 million (2019: losses of £1,001 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 2020 was £326,386 million (2019: £426,740 million) with a net fair
value asset of £30 million (2019: liability of £388 million) (note 17). In 2020, ineffectiveness recognised in the income statement that arises from cash flow hedges
was a loss of £2 million (2019: gain of £134 million).
Interest Rate Benchmark Reform
For the purposes of determining whether:
– a forecast transaction is highly probable;
– hedged future cash flows are expected to occur;
– a hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk; and
– an accounting hedging relationship should be discontinued because of a failure of the retrospective effectiveness test
the Group assumes 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 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 EURIBOR.
At 31 December 2020, the Group expects that EURIBOR will continue to exist as a benchmark rate for the foreseeable future and, as a result does not
anticipate changing the hedged risk to a different benchmark. Accordingly, the Group does not consider its fair value or cash flow hedges of the EURIBOR
benchmark interest rate to be directly affected by interest rate benchmark reform.
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 £20,243 million (2019: £29,202 million), of which £16,523 million (2019: £25,438 million) relates to Sterling LIBOR and £3,720 million (2019:
£1,350 million) relates to US Dollar LIBOR. These are principally loans and advances to customers in Commercial Banking.
The interest rate benchmark reforms also affect assets designated in fair value hedges with a notional of £107,340 million (2019: £102,969 million), of which
£103,438 million (2019: £98,278 million) is in respect of Sterling LIBOR, and liabilities designated in fair value hedges with a notional of £35,360 million (2019:
£62,295 million), of which £10,518 million (2019: £9,186 million) is in respect of Sterling LIBOR. These fair value hedges principally relate to mortgages in Retail
and debt securities in issue.
At 31 December 2020, the notional amount of the hedging instruments in hedging relationships to which these amendments apply was £464,744 million
(2019: £604,602 million), of which £116,498 million (2019: £117,076 million) relates to Sterling LIBOR fair value hedges and £302,707 million
(2019: £400,439 million) relates to Sterling LIBOR cash flow hedges.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
315
Note 51: Financial risk management continued
The Group is managing the process to transition to alternative benchmark rates under its Group-wide IBOR Transition Programme. This programme has
developed an implementation plan for new products and a transition plan for legacy products. The programme also encompasses the associated impacts
on systems, processes, accounting and reporting and includes dealing with the impact on hedge accounting relationships of the transition to alternative
reference rates.
(B) Foreign exchange risk
The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign exchange
exposures in the non-trading book are transferred to the trading area where they are monitored and controlled. These risks reside in the authorised trading
centres who are allocated exposure limits. The limits are monitored daily by the local centres and reported to the market and liquidity risk function in London.
Associated VaR and the closing, average, maximum and minimum are disclosed on page 159. The Group also manages foreign currency risk via cash flow
hedge accounting, utilising currency swaps.
Risk arises from the Group’s investments in its overseas operations. The Group’s structural foreign currency exposure is represented by the net asset value of
the foreign currency equity and subordinated debt investments in its subsidiaries and branches. Gains or losses on structural foreign currency exposures are
taken to reserves.
The Group ceased all hedging of the currency translation risk of the net investment in foreign operations on 1 January 2018.
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
2020
Euro
£m
113
US Dollar
£m
Other
non-sterling
£m
95
12
2019
US Dollar
£m
93
Other
non-sterling
£m
48
Euro
£m
63
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 160 to 182.
(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, net2
Loans and advances to customers, net2
Debt securities, net2
Maximum
exposure
£m
10,746
498,843
5,405
2020
Offset1
£m
Net
exposure
£m
Maximum
exposure
£m
2019
Offset1
£m
Net
exposure
£m
—
10,746
9,775
—
9,775
(2,762)
496,081
494,988
(2,792)
492,196
—
5,405
5,544
—
5,544
Financial assets at amortised cost
514,994
(2,762)
512,232
510,307
(2,792)
507,515
Financial assets at fair value through other comprehensive
income3
Financial assets at fair value through profit or loss3,4
Loans and advances
Debt securities, treasury and other bills
Derivative assets
Assets arising from contracts held with reinsurers
Off-balance sheet items:
Acceptances and endorsements
Other items serving as direct credit substitutes
Performance bonds, including letters of credit, and other
transaction-related contingencies
Irrevocable commitments and guarantees
27,437
28,476
46,701
75,177
29,613
20,385
131
317
2,105
73,962
76,515
—
—
—
—
(15,866)
—
—
—
—
—
—
27,437
24,865
28,476
46,701
75,177
13,747
20,385
131
317
2,105
73,962
76,515
23,475
40,925
64,400
26,369
23,567
74
366
2,454
63,504
66,398
—
—
—
—
(14,696)
—
—
—
—
—
—
24,865
23,475
40,925
64,400
11,673
23,567
74
366
2,454
63,504
66,398
744,121
(18,628)
725,493
715,906
(17,488)
698,418
1 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.
2 Amounts shown net of related impairment allowances.
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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
316 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
(B) Concentrations of exposure
The Group’s management of concentration risk includes single name, industry sector and country limits as well as controls over the Group’s overall exposure
to certain products. Further information on the Group’s management of this risk is included within Credit risk mitigation, Risk management on page 160.
At 31 December 2020 the most significant concentrations of exposure were in mortgages (comprising 62 per cent of total loans and advances to customers)
and to financial, business and other services (comprising 19 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.
2020
£m
7,836
1,313
4,956
5,096
14,341
2,665
26,061
92,555
2019
£m
7,558
1,432
6,093
4,285
13,016
1,923
27,596
89,763
307,087
299,141
25,363
1,182
16,148
29,272
1,671
16,497
504,603
498,247
(5,760)
(3,259)
498,843
494,988
The Group’s operations are predominantly UK-based and as a result an analysis of credit risk exposures by geographical region is not provided.
(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.
Retail
Quality classification
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Commercial
IFRS 9 PD range
Quality classification
0.00-4.50% CMS 1-10
4.51-14.00% CMS 11-14
14.01-20.00% CMS 15-18
20.01-99.99% CMS 19
100% CMS 20-23
IFRS 9 PD range
0.00-0.50%
0.51-3.00%
3.01-20.00%
20.01-99.99%
100%
Stage 3 assets include balances of £179 million (2019: £205 million) (with outstanding amounts due of £732 million (2019: £1,700 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 £22,200 million (2019: £219 million) were modified during the year. No material gain or loss was
recognised by the Group.
As at 31 December 2020 and 2019, assets that had been previously modified whilst classified as Stage 2 or Stage 3 and were classified as Stage 1 were not
material.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
317
Note 51: Financial risk management continued
Gross drawn exposures and expected
credit loss allowances
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Drawn exposures
Expected credit loss allowance
At 31 December 2020
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 - credit cards
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - loans and overdrafts
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
10,670
82
—
—
—
10,752
—
—
—
—
—
—
251,372
21,010
46
4,030
—
—
—
907
3,071
—
251,418
29,018
9,619
1,603
274
—
—
1,284
1,137
343
509
—
11,496
3,273
5,559
1,990
116
45
—
291
580
181
467
—
7,710
1,519
12,035
1,396
738
—
13
—
456
171
193
—
12,786
2,216
14,952
2,418
—
509
—
482
334
21
467
—
17,879
1,304
—
—
—
—
—
—
—
—
—
—
1,859
1,859
—
—
—
—
340
340
—
—
—
—
307
307
—
—
—
—
199
199
—
—
—
—
184
184
—
—
—
—
—
—
10,670
82
—
—
—
10,752
6
—
—
—
—
6
— 272,382
103
—
—
—
4,076
907
3,071
12,511
14,370
1
—
—
—
12,511 294,806
104
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
191
191
261
261
—
—
—
—
—
—
247
66
25
130
—
468
57
138
70
193
—
458
15
66
36
178
—
295
46
33
30
62
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,903
2,740
617
509
340
75
66
14
—
—
15,109
155
5,850
2,570
297
512
307
80
99
13
9
—
9,536
201
13,431
1,194
171
206
199
187
7
—
—
—
15,201
194
171
15,434
2,752
21
976
184
19,367
19
11
—
—
—
30
684
19
39
1
40
—
99
1,491
—
—
—
—
153
153
—
—
—
—
147
147
—
—
—
—
133
133
—
—
—
—
59
59
683
6
—
—
—
—
6
350
67
25
130
452
1,024
132
204
84
193
153
766
95
165
49
187
147
643
233
40
30
62
133
498
38
50
1
40
59
188
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total Retail
301,289
37,330
2,889
12,511 354,019
261
3,119
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
318 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
Gross drawn exposures and expected
credit loss allowances continued
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Drawn exposures
Expected credit loss allowance
At 31 December 2020
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
Central overlay
Total loans and advances to
customers
In respect of:
Retail
Commercial
Other1
Total loans and advances to
customers
35,072
30,821
4,665
—
—
191
6,971
6,469
685
—
70,558
14,316
871
13
—
—
—
—
871
60,985
238
—
2
—
61,225
—
—
—
—
—
13
—
—
—
—
—
—
—
—
—
—
—
3,524
3,524
—
—
—
—
67
67
—
—
—
—
10
10
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
35,263
37,792
11,134
685
3,524
42
141
96
—
—
88,398
279
2
109
398
144
—
653
—
—
—
—
1,282
1,282
884
—
—
—
67
951
60,985
238
—
2
10
61,235
9
—
—
—
—
9
—
—
—
—
—
—
—
400
1
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
17
17
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
44
250
494
144
1,282
2,214
10
—
—
—
17
27
—
—
—
—
—
—
400
433,943
51,659
6,490
12,511 504,603
1,372
2,145
1,982
261
5,760
301,289
37,330
2,889
12,511 354,019
70,558
14,316
3,524
62,096
13
77
—
—
88,398
62,186
684
279
409
1,491
683
261
653
1,282
1
17
—
—
3,119
2,214
427
433,943
51,659
6,490
12,511 504,603
1,372
2,145
1,982
261
5,760
1 Principally comprises reverse repurchase agreement balances.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
319
Note 51: Financial risk management continued
Gross undrawn exposures and expected
credit loss allowances
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Undrawn exposures
Expected credit loss allowance
At 31 December 2020
Loans and advances to customers:
Retail - mortgages
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - credit cards
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - loans and overdrafts
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
19,347
109
1
—
—
—
6
2
1
—
19,348
118
54,694
3,044
772
602
—
—
463
282
85
—
56,068
3,874
6,070
269
13
3
—
315
139
35
69
—
6,355
558
1,275
381
—
1
—
1,657
1,672
140
—
—
—
1,812
—
3
—
—
—
3
23
36
—
10
—
69
—
—
—
—
10
10
—
—
—
—
56
56
—
—
—
—
18
18
—
—
—
—
—
—
—
—
—
—
1
1
—
—
—
—
74
74
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19,456
7
2
1
84
19,550
57,738
1,235
884
85
56
59,998
6,385
408
48
72
18
3
—
—
—
—
3
67
11
7
—
—
85
14
8
1
—
—
6,931
23
1,275
384
—
1
—
1,660
1,695
176
—
10
1
1,882
2
1
—
—
—
3
7
9
—
—
—
16
130
—
—
—
—
—
—
46
8
11
7
—
72
7
14
7
21
—
49
—
—
—
—
—
—
5
13
—
7
—
25
146
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
3
113
19
18
7
—
157
21
22
8
21
—
72
2
1
—
—
—
3
12
22
—
7
—
41
276
Total Retail
85,240
4,622
85
74
90,021
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
320 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
Gross undrawn exposures and expected
credit loss allowances continued
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Undrawn exposures
Expected credit loss allowance
At 31 December 2020
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
42,071
10,122
934
—
—
—
2,412
1,315
92
—
53,127
3,819
299
—
—
—
—
299
239
170
—
—
—
409
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
195
195
—
—
—
—
—
—
—
—
—
—
5
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
42,071
12,534
2,249
92
195
57,141
299
—
—
—
—
299
239
170
—
—
5
414
32
32
16
—
—
80
2
—
—
—
—
2
—
—
—
—
—
—
—
27
49
12
—
88
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13
13
—
—
—
—
—
—
—
—
—
—
—
—
Total loans and advances to
customers
139,075
8,441
285
74 147,875
212
234
13
In respect of:
Retail
Commercial
Other
85,240
53,127
708
4,622
3,819
—
85
195
5
74
90,021
—
—
57,141
713
130
80
2
146
88
—
Total loans and advances to
customers
139,075
8,441
285
74 147,875
212
234
—
13
—
13
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
32
59
65
12
13
181
2
—
—
—
—
2
—
—
—
—
—
—
459
276
181
2
459
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
321
Note 51: Financial risk management continued
Gross drawn exposures and expected
credit loss allowances
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Drawn exposures
Expected credit loss allowance
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 - credit cards
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - loans and overdrafts
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
9,777
—
—
—
—
9,777
—
—
—
—
—
—
257,028
13,494
15
2,052
—
—
—
414
975
—
257,043
16,935
14,744
1,355
32
1
—
729
556
105
291
—
16,132
1,681
7,406
1,321
44
17
—
368
363
85
315
—
8,788
1,131
13,568
1,297
314
—
2
—
368
99
178
—
13,884
1,942
9,762
8
—
134
—
9,904
395
420
7
23
—
845
—
—
—
—
—
—
—
—
—
—
1,506
1,506
—
—
—
—
385
385
—
—
—
—
293
293
—
—
—
—
150
150
—
—
—
—
150
150
—
—
—
—
—
—
—
—
—
—
9,777
—
—
—
—
9,777
270,522
2,067
414
975
13,714
15,220
2
—
—
—
—
2
—
—
—
—
—
—
23
183
—
—
—
—
39
13
46
—
13,714
289,198
23
281
15,473
1,911
137
292
385
103
49
3
—
—
25
54
19
91
—
18,198
155
189
7,774
1,684
129
332
293
84
55
4
3
—
10,212
146
14,865
682
99
180
150
203
10
—
1
—
15,976
214
10,157
25
428
7
157
150
10,899
—
—
—
—
25
563
17
38
15
102
—
172
30
15
10
32
—
87
10
26
—
1
—
37
766
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
122
122
—
—
—
—
125
125
—
—
—
—
108
108
—
—
—
—
84
84
—
—
—
—
51
51
490
—
—
—
—
—
—
—
—
—
—
142
142
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
—
—
2
206
39
13
46
264
568
128
103
22
91
125
469
101
93
19
105
108
426
233
25
10
33
84
385
35
26
—
1
51
113
142
1,961
Total Retail
305,751
22,534
2,484
13,714
344,483
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
322 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
Gross drawn exposures and expected
credit loss allowances continued
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Drawn exposures
Expected credit loss allowance
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
59,708
25,569
1,797
—
—
379
2,318
3,111
169
—
87,074
5,977
—
—
—
—
3,447
3,447
754
40
—
—
—
794
56,356
—
—
—
—
56,356
32
—
—
—
—
32
—
—
—
—
—
—
—
—
—
—
84
84
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
60,087
27,887
4,908
169
3,447
96,498
786
40
—
—
84
910
33
50
13
—
—
96
6
—
—
—
—
6
56,356
10
—
—
—
—
—
—
—
—
56,356
10
1
37
174
16
—
228
1
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
941
941
—
—
—
—
16
16
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
34
87
187
16
941
1,265
7
—
—
—
16
23
10
—
—
—
—
10
Total loans and advances to
customers
449,975
28,543
6,015
13,714
498,247
675
995
1,447
142
3,259
In respect of:
Retail
Commercial
Other1
305,751
22,534
87,074
57,150
5,977
32
2,484
3,447
84
13,714
344,483
—
—
96,498
57,266
Total loans and advances to
customers
449,975
28,543
6,015
13,714
498,247
1 Principally comprises reverse repurchase agreement balances.
563
96
16
675
766
228
1
490
941
16
142
—
—
1,961
1,265
33
995
1,447
142
3,259
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
323
Note 51: Financial risk management continued
Gross undrawn exposures and expected
credit loss allowances
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Undrawn exposures
Expected credit loss allowance
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 - credit cards
RMS 1-6
RMS 7-9
RMS 10
RMS 11-13
RMS 14
Retail - loans and overdrafts
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
12,242
1
—
—
—
12,243
54,216
293
3
1
—
62
1
—
—
—
63
1,762
162
28
44
—
54,513
1,996
6,437
96
2
—
—
224
56
11
29
—
6,535
320
1,181
193
—
—
—
1,374
1,240
—
—
—
—
—
4
—
—
—
4
—
62
—
—
—
1,240
75,905
62
2,445
—
—
—
—
8
8
—
—
—
—
75
75
—
—
—
—
8
8
—
—
—
—
—
—
—
—
—
—
3
3
—
—
—
—
79
79
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12,304
2
—
—
87
12,393
55,978
455
31
45
75
56,584
6,661
152
13
29
8
6,863
1,181
197
—
—
—
1,378
1,240
62
—
—
3
1,305
94
79
78,523
1
—
—
—
—
1
—
—
—
—
—
—
44
21
4
—
—
—
48
12
2
—
—
—
14
2
—
—
—
—
2
11
—
—
—
—
11
76
3
1
4
—
29
3
5
2
11
—
21
—
—
—
—
—
—
—
3
—
—
—
3
53
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
1
65
7
1
4
—
77
15
7
2
11
—
35
2
—
—
—
—
2
11
3
—
—
—
14
129
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
324 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
Gross undrawn exposures and expected
credit loss allowances continued
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Undrawn exposures
Expected credit loss allowance
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
47,707
5,134
258
—
—
76
850
327
43
—
53,099
1,296
239
—
—
—
—
239
391
—
—
—
—
391
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
47,783
5,984
585
43
5
54,400
239
—
—
—
—
239
391
—
—
—
—
391
11
7
1
—
—
19
—
—
—
—
—
—
—
—
—
—
—
—
—
9
13
2
—
24
—
—
—
—
—
—
—
—
—
—
—
—
Total loans and advances to
customers
129,634
3,741
99
79
133,553
95
77
In respect of:
Retail
Commercial
Other
Total loans and advances to
customers
75,905
53,099
630
2,445
1,296
—
129,634
3,741
94
5
—
99
79
—
—
78,523
54,400
630
79
133,553
76
19
—
95
53
24
—
77
—
—
—
—
5
5
—
—
—
—
—
—
—
—
—
—
—
—
5
—
5
—
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11
16
14
2
5
48
—
—
—
—
—
—
—
—
—
—
—
—
177
129
48
—
177
Average PD grade
The table below shows the average Probability of Default for the major portfolios used in the calculation of ECL and therefore Stage 2 Average PD reflects
the lifetime value. These reflect the forward-looking view under the Group’s base case scenario prior to the application of MES and post-model adjustments
which further impact ECL.
Retail
Mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Commercial Banking
2020
2019
Stage 1
Average PD
%
Stage 2
Average PD
%
Stage 1
Average PD
%
Stage 2
Average PD
%
0.47
2.61
3.75
0.69
15.02
21.53
32.31
15.91
0.13
1.95
2.76
0.69
15.47
20.85
29.64
14.46
Loans and advances to customers
1.05
13.92
0.45
18.88
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
325
Note 51: 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’.
Investment
grade1
£m
2020
Other2
£m
Total
£m
Investment
grade1
£m
2019
Other2
£m
2,046
1,593
3,639
1,721
5,360
—
20
20
28
48
3,007
876
3,883
1,650
5,533
—
—
—
14
14
2,046
1,613
3,659
1,749
5,408
(3)
5,405
Total
£m
3,007
876
3,883
1,664
5,547
(3)
5,544
2 Other comprises sub-investment grade (2020: £8 million; 2019: £nil) and not rated (2020: £40 million; 2019: £14 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 20. The credit quality of the Group’s financial
assets at fair value through other comprehensive income (excluding equity shares) is set out below:
Debt securities:
Government securities
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’.
Investment
grade1
£m
2020
Other2
£m
2019
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
14,267
—
115
115
12,786
27,168
36
19
—
65
65
149
233
—
14,286
13,084
—
180
180
12,935
27,401
36
121
—
121
11,036
24,241
535
27,204
233
27,437
24,776
14
—
60
60
15
89
—
89
13,098
121
60
181
11,051
24,330
535
24,865
2 Other comprises sub-investment grade (2020: £92 million; 2019: £89 million) and not rated (2020: £141 million; 2019: £nil).
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
326 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
Debt securities, treasury and other bills held at fair value through profit or loss
An analysis of the Group’s financial assets at fair value through profit or loss is included in note 16. Substantially all of the loans and advances to customers and
banks recognised at fair value through profit or loss have a good quality rating. 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:
Investment
grade1
£m
2020
Other2
£m
2019
Total
£m
Investment
grade1
£m
Other2
£m
Total
£m
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’.
7,574
4
—
4
225
7,803
13,048
2,347
4,841
457
261
718
15,743
36,697
18
36,715
44,518
—
3
4
7
21
28
—
7
—
3
—
3
2,145
2,155
—
2,155
2,183
7,574
6,791
7
4
11
246
7,831
13,048
2,354
4,841
460
261
721
17,888
38,852
18
38,870
46,701
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
6
17
23
233
7,047
12,063
2,126
984
462
241
703
17,983
33,859
19
33,878
40,925
2 Other comprises sub-investment grade (2020: £344 million; 2019: £251 million) and not rated (2020: £1,839 million; 2019: £1,846 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 £13,747 million (2019: £11,673 million), cash
collateral of £8,715 million (2019: £7,650 million) was held and a further £454 million was due from OECD banks (2019: £274 million).
Trading and other
Hedging
Total derivative financial instruments
1 Credit ratings equal to or better than ‘BBB’.
Investment
grade1
£m
26,782
810
27,592
2020
Other2
£m
2,015
6
Total
£m
28,797
816
2,021
29,613
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
2 Other comprises sub-investment grade (2020: £1,499 million; 2019: £1,555 million) and not rated (2020: £522 million; 2019: £645 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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
327
Note 51: Financial risk management continued
(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 161. 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.
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
£2,686 million (2019: £1,555 million), against which the Group held collateral with a fair value of £2,682 million (2019: £1,516 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.
Drawn balances
Expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
gross
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
At 31 December 2020
Less than 70 per cent
185,548
24,330
1,547
10,051
221,476
70 per cent to 80 per cent
80 per cent to 90 per cent
90 per cent to 100 per cent
Greater than 100 per cent
43,656
21,508
555
151
3,364
1,009
126
189
187
1,303
48,510
74
21
30
470
190
497
23,061
892
867
42
29
28
3
2
202
136
79
16
35
77
46
31
11
26
88
58
34
19
62
Total
gross
£m
409
269
172
49
125
Total
251,418
29,018
1,859
12,511
294,806
104
468
191
261
1,024
Drawn balances
Expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
gross
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
At 31 December 2019
Less than 70 per cent
179,566
13,147
1,174
10,728
204,615
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
44,384
27,056
5,663
374
2,343
1,057
199
189
181
1,751
86
34
31
677
207
351
48,659
28,876
6,103
945
6
7
7
2
1
104
75
58
17
27
41
29
25
12
15
44
38
23
10
27
Total
257,043
16,935
1,506
13,714
289,198
23
281
122
142
Total
gross
£m
195
149
113
41
70
568
Other
The majority of non-mortgage retail lending is unsecured. At 31 December 2020, Stage 3 non-mortgage lending amounted to £538 million, net of an
impairment allowance of £492 million (2019: £610 million, net of an impairment allowance of £368 million).
Stage 1 and Stage 2 non-mortgage retail lending amounted to £58,183 million (2019: £54,307 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's 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 2020 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of £58,643 million
(2019: £54,600 million), against which the Group held collateral with a fair value of £59,157 million (2019: £52,982 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 (2019: £nil).
These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
328 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
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 2020, Stage 3 secured commercial lending amounted to £739 million, net of an impairment allowance of £294 million (2019: £966 million, net
of an impairment allowance of £243 million). The fair value of the collateral held in respect of impaired secured commercial lending was £753 million (2019:
£744 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation. For the purposes of determining
the total collateral held by the Group in respect of impaired secured commercial lending, the value of collateral for each loan has been limited to the principal
amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s
exposure.
Stage 3 secured commercial lending and associated collateral relates to lending to property companies and to customers in the financial, business and other
services; transport, distribution and hotels; and construction industries.
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
£12,993 million (2019: £11,269 million). Collateral is held with a fair value of £13,169 million (2019: £11,081 million), all of which the Group is able to repledge. At
31 December 2020, £10,049 million had been repledged (2019: £9,605 million).
In addition, securities held as collateral in the form of stock borrowed amounted to £54,232 million (2019: £32,888 million). Of this amount, £52,887 million
(2019: £30,594 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 £13,747 million (2019: £11,673 million), cash collateral of
£8,715 million (2019: £7,650 million) was held.
Irrevocable loan commitments and other credit-related contingencies
At 31 December 2020, the Group held irrevocable loan commitments and other credit-related contingencies of £76,515 million (2019: £66,398 million).
Collateral is held as security, in the event that lending is drawn down, on £19,548 million (2019: £12,391 million) of these balances.
Collateral repossessed
During the year, £125 million of collateral was repossessed (2019: £413 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.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
329
Note 51: Financial risk management continued
(E) Collateral pledged as security
The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted under terms that are usual
and customary for standard securitised borrowing contracts.
Repurchase transactions
Deposits from banks
Included in deposits from banks are balances arising from repurchase transactions of £18,767 million (2019: £18,105 million); the fair value of the collateral
provided under these agreements at 31 December 2020 was £18,874 million (2019: £17,545 million).
Customer deposits
Included in customer deposits are balances arising from repurchase transactions of £9,417 million (2019: £9,530 million); the fair value of the collateral provided
under these agreements at 31 December 2020 was £8,087 million (2019: £9,221 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 £12,608 million (2019: £8,324 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
2020
£m
3,224
894
4,118
2019
£m
5,857
2,020
7,877
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 29.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
330 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
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.
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 2020
Assets
Cash and balances at central banks
Financial assets at fair value through profit or loss
Derivative financial instruments
Loans and advances to banks
73,256
8,085
1,332
5,372
1
8,168
1,028
1,391
—
7,446
1,092
1,170
—
—
1,428
1,132
504
217
374
50
—
2,420
1,068
—
—
73,257
5,193 137,754 171,626
3,021
21,194
29,613
—
2,544
2
10,746
Loans and advances to customers
27,200
23,432
27,322
16,092
12,088
30,342
73,562 288,805 498,843
Debt securities held at amortised cost
118
18
—
—
—
1,651
1,089
2,529
5,405
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 2019
Assets
51
1,810
272
901
569
433
349
153
255
418
3,423
11,289
11,395
27,603
653
1,010
48,798
54,176
117,224
35,211
38,032
18,743
14,317
39,557
97,708 510,477 871,269
8,590
2,500
384
104
—
278
19,362
247
31,465
431,235
13,354
3,368
2,328
1,825
3,909
3,341
708 460,068
5,099
6,565
1,321
5,644
—
8,182
6,489
1,763
1,821
—
4,666
6,881
1,529
4,655
324
1,728
4,541
23,890
49,959
3,435
12,001
29,867
17,504
87,397
2,573
2,542
3,159
9,488
27,132 106,534 154,512
453
587
439
—
728
648
845
13,616
24,194
—
1,528
4,929
7,217
14,261
458,454
34,109
18,912
11,597
9,471
29,580
90,017 169,716 821,856
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 as at amortised cost
Financial assets at fair value through other
comprehensive income
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
131
111
19
179
2,224
1,155
—
729
533
—
102
160
—
74
3,085
2,235
5,544
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
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
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
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
331
Note 51: Financial risk management continued
The above tables are provided on a contractual basis. The Group’s assets and liabilities may be repaid or otherwise mature earlier or later than implied by their
contractual terms and readers are, therefore, advised to use caution when using 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.
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 2020
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
Up to 1
month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
Over 5
years
£m
Total
£m
8,584
2,429
550
23,451
495
35,509
428,634
13,659
3,904
6,339
38,450
10
105
7,117
6,599
—
53
66
8,387
5,096
8,049
2,139
16,612
45,666
—
182
—
663
1,528
460,257
10,513
19,583
—
857
28,769
94,799
38,450
1,765
1,165
8,303
11,829
21,468
Total non-derivative financial liabilities
486,026
29,923
31,992
88,271
44,805
681,017
Derivative financial liabilities:
Gross settled derivatives – outflows
Gross settled derivatives – inflows
Gross settled derivatives – net flows
Net settled derivative liabilities
Total derivative financial liabilities
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 derivative liabilities
Total derivative financial liabilities
45,151
36,737
32,437
50,646
20,556
185,527
(42,851)
(34,519)
(31,248)
(49,866)
(21,393)
(179,877)
2,300
16,132
18,432
5,009
385,864
4,370
5,335
37,459
2
942
438,981
2,218
98
2,316
2,564
14,433
5,543
9,858
—
61
1,462
33,921
1,189
243
1,432
762
14,327
2,255
19,205
—
190
1,918
38,657
780
933
1,713
20,066
10,661
2,690
54,638
—
803
7,837
96,695
(837)
2,428
1,591
5,650
19,834
25,484
317
28,718
1,393
426,678
14,653
36,321
—
946
14,857
68,487
29,511
125,357
37,459
2,002
27,016
676,741
43,118
44,379
34,012
36,012
18,238
175,759
(40,829)
(42,954)
(32,966)
(34,758)
(17,753)
(169,260)
2,289
23,648
25,937
1,425
48
1,473
1,046
122
1,168
1,254
700
1,954
485
2,201
2,686
6,499
26,719
33,218
The majority of the Group’s non-participating investment contract liabilities are unit-linked. These unit-linked products are invested in accordance with unit
fund mandates. Clauses are included in policyholder contracts to permit the deferral of sales, where necessary, so that linked assets can be realised without
being a forced seller.
The principal amount for undated subordinated liabilities with no redemption option is included within the over five years column; interest of approximately
£24 million (2019: £29 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.
Further information on the Group’s liquidity exposures is provided on pages 183 to 187.
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:
At 31 December 2020
At 31 December 2019
Up to 1
month
£m
1,476
1,340
1-3
months
£m
1,323
1,240
3-12
months
£m
5,879
5,378
1-5
years
£m
27,468
25,349
Over 5
years
£m
Total
£m
79,914
116,060
78,142
111,449
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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
332 Lloyds Banking Group Annual Report and Accounts 2020
Note 51: Financial risk management continued
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 2020
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
1-3
years
£m
3-5
years
£m
Over 5
years
£m
80
327
407
10
551
561
41
164
205
—
175
175
—
212
212
—
340
340
—
70
70
—
583
583
Total
£m
131
2,422
2,553
Lending commitments and guarantees
72,916
4,890
22,288
3,981
5,374
23,048
11,411
3,839
147,747
Other commitments
—
—
—
—
4
44
16
64
128
Total commitments and guarantees
72,916
4,890
22,288
3,981
5,378
23,092
11,427
3,903
147,875
Total contingents, commitments and
guarantees
At 31 December 2019
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
73,323
5,451
22,493
4,156
5,590
23,432
11,497
4,486
150,428
25
381
406
24
409
433
4
387
391
—
177
177
21
207
228
—
475
475
—
101
101
—
683
683
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
69,044
3,116
15,704
4,819
7,595
17,912
14,258
3,999
136,447
Note 52: 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 financial liabilities at fair value through profit or loss
Change in investment contract liabilities
Change in other operating liabilities1
Change in operating liabilities
1 Includes a decrease of £172 million (2019: increase of £82 million; 2018: increase of £27 million) in respect of lease liabilities.
2020
£m
2019
£m
(7,634)
(12,423)
(14,315)
3,299
3,887
(2,513)
(18,650)
(11,049)
2020
£m
3,287
38,805
(10,142)
2,619
993
175
35,737
2019
£m
(2,140)
3,248
6,631
(5,078)
2,625
(1,644)
3,642
2018
£m
(27,038)
22,046
520
(4,472)
2018
£m
515
(322)
18,579
(24,606)
(1,594)
(1,245)
(8,673)
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
333
Note 52: Consolidated cash flow statement continued
(C) Non-cash and other items
Depreciation and amortisation
Revaluation of investment properties
Allowance for loan losses
Write-off of allowance for loan losses, net of recoveries
Impairment charge relating to undrawn balances
Impairment of financial assets at fair value through other comprehensive income
Change in insurance contract liabilities
Payment protection insurance provision
Other regulatory provisions
Other provision movements
Net charge 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
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
2020
£m
2,732
209
3,856
(1,377)
289
5
4,554
85
379
85
247
(47)
865
1,080
(149)
280
122
293
(82)
13
—
(496)
(81)
9
12,871
(1,153)
(1,703)
(538)
117
(3,277)
9,594
2019
£m
2,660
108
1,312
(1,458)
(15)
(1)
12,593
2,450
445
(165)
245
(53)
533
1,228
(196)
440
236
(3)
445
(6)
(244)
(608)
(32)
(35)
19,879
(1,069)
(2,461)
(778)
2
(4,306)
15,573
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
2020
£m
73,257
(4,553)
68,704
10,746
(3,983)
6,763
75,467
2019
£m
55,130
(3,289)
51,841
9,775
(3,805)
5,970
2018
£m
2,405
(139)
1,024
(1,025)
(73)
(14)
(4,547)
750
600
(518)
405
(44)
191
1,388
(275)
(429)
260
40
1,947
(9)
—
(701)
(104)
(34)
1,098
(868)
(2,104)
(1,032)
14
(3,990)
(2,892)
2018
£m
54,663
(2,553)
52,110
6,283
(3,169)
3,114
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 2020 is £84 million (2019: £49 million; 2018: £40 million) held within the Group's long-term insurance
and investments businesses, which is not immediately available for use in the business.
57,811
55,224
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
334 Lloyds Banking Group Annual Report and Accounts 2020
Note 52: Consolidated cash flow statement continued
(E) Acquisition of group undertakings and businesses
Net assets acquired:
Financial assets at fair value through profit or loss
Assets arising from contracts held with reinsurers
Intangible assets
Other assets
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 (inflow) outflow from acquisitions in the year
2020
£m
2019
£m
2018
£m
—
—
—
—
—
—
—
—
—
—
(3)
(3)
7,350
13,616
—
29
(20,981)
(8)
14
20
—
20
1
21
—
—
21
6
—
(1)
—
26
—
26
23
49
Note 53: Future accounting developments
The following pronouncements are not applicable for the year ending 31 December 2020 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 23 February 2021 these pronouncements have been endorsed
for use in the United Kingdom.
IFRS 17 Insurance Contracts
IFRS 17 replaces IFRS 4 Insurance Contracts and is effective for annual periods beginning on or after 1 January 2023.
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 focused 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.
Interest Rate Benchmark Reform
The IASB’s Phase 2 amendments in response to issues arising from the replacement of interest rate benchmarks in a number of jurisdictions are effective for
annual periods beginning on or after 1 January 2021.
Under these amendments, an immediate gain or loss is not recognised in the income statement where the contractual cash flows of a financial asset or
financial liability are amended as a direct consequence of the rate reform and the revised contractual terms are economically equivalent to the previous terms.
In addition, hedge accounting is continued for relationships that are directly affected by the reform.
These amendments are not expected to have a significant impact on the Group.
Minor amendments to other accounting standards
The IASB has issued a number of minor amendments to IFRSs effective 1 January 2021 and in later years (including IFRS 9 Financial Instruments and IAS 37
Provisions, Contingent Liabilities and Contingent Assets). These amendments are not expected to have a significant impact on the Group.
Notes to the consolidated financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
335
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 £1,302 million (2019: £5,415 million).
The accompanying notes are an integral part of the parent company financial statements.
The directors approved the parent company financial statements on 23 February 2021.
Robin Budenberg
Chair
António Horta-Osório
Group Chief Executive
William Chalmers
Chief Financial Officer
Note
2020
£ million
2019
£ million
10
10
49,903
20,107
10
48,597
14,660
—
70,020
63,257
2
3
4
4
5
5
6
4
7
8
9
1,832
14,362
982
27
7
16
17,226
87,246
7,084
17,863
7,420
4,462
4,869
41,698
5,906
47,604
20,545
7,760
—
760
12,516
983
27
29
1
14,316
77,573
7,005
17,751
7,420
4,462
3,950
40,588
5,906
46,494
20,018
5,961
2
28,305
25,981
803
8,635
1,899
11,337
39,642
87,246
438
3,464
1,196
5,098
31,079
77,573
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
336 Lloyds Banking Group Annual Report and Accounts 2020
Parent company statement of changes in equity
for the year ended 31 December
Attributable to ordinary shareholders
At 1 January 2018
Total comprehensive income1
Dividends
Distributions on other equity instruments
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
At 31 December 2018
Total comprehensive income1
Dividends
Distributions on other equity instruments
Issue of ordinary shares
Share buyback
Redemption of preference shares
Issue of other equity instruments
Redemption of other equity instruments
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
At 31 December 2019
Total comprehensive income1
Distributions on other equity instruments
Issue of ordinary shares
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Share
capital and
premium
£ million
24,831
Merger
reserve
£ million
7,423
Capital
redemption
reserve
£ million
4,115
Retained
profits
£ million
1,498
3,671
(2,240)
—
—
Total
£ million
37,867
3,671
(2,240)
—
162
158
(1,005)
(1,005)
24,835
7,423
4,273
—
—
—
162
(158)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
107
(189)
3
—
—
—
—
—
—
—
—
—
—
(3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
24,756
7,420
4,462
—
—
191
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
189
(1,095)
(1,095)
(7)
(74)
53
207
2,103
4,949
(2,312)
—
—
(7)
(74)
53
207
38,634
4,949
(2,312)
—
107
—
(5)
—
74
71
165
3,950
849
—
—
(52)
48
74
—
(5)
—
74
71
165
40,588
849
—
191
(52)
48
74
Other
equity
instruments
Total
equity
£ million
£ million
5,355
433
—
(433)
—
—
1,136
—
—
—
6,491
466
—
(466)
—
—
—
896
(1,481)
—
—
—
5,906
453
(453)
—
—
—
—
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
46,494
1,302
(453)
191
(52)
48
74
At 31 December 2020
24,947
7,420
4,462
4,869
41,698
5,906
47,604
1 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.
Lloyds Banking Group Annual Report and Accounts 2020
337
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 received
2020
£ million
1,257
(512)
(1,815)
6,401
(1,135)
(492)
—
2019
£ million
5,439
(166)
(11,975)
3,151
(5,150)
(366)
70
Net cash provided by (used in) operating activities
3,704
(8,997)
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 by subsidiaries
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
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
Redemptions of other equity instruments
Net cash used in financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of the parent company financial statements.
2018
£ million
4,102
(715)
(572)
7,538
(4,000)
(324)
660
6,689
9
4,000
324
(12,753)
11,114
(21,577)
12,602
370
(5,911)
4
1,135
492
(1,170)
—
(5,827)
2,004
261
5
5,150
366
(1,648)
—
(1,812)
11,257
395
(3,101)
13,713
—
(453)
(316)
—
—
144
—
—
—
(625)
(22)
29
7
(2,312)
(2,240)
(466)
(314)
—
891
36
(433)
(275)
1,729
1,129
102
(1,095)
(1,005)
(3)
(1,481)
(4,744)
(28)
57
29
—
—
(993)
(215)
272
57
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
338 Lloyds Banking Group Annual Report and Accounts 2020
Notes to the parent company financial statements
for the year ended 31 December
Note 1: Basis of preparation and accounting policies
The financial statements of Lloyds Banking Group plc comply with international accounting standards in conformity with the requirements of the Companies
Act 2006. The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). 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 and its predecessor body. On adoption of IFRS 9 in 2018, the Group elected to continue
applying hedge accounting under IAS 39.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities at fair
value through profit or loss and all derivative contracts.
The accounting policies of the Company are the same as those of the Group which are set out in note 2 to the consolidated financial statements. 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
2020
£m
2019
£m
14,362
12,516
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 2020: £3 million; 31 December 2019: £1 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 account and other equity instruments
Details of the Company’s share capital, share premium account and other equity instruments are as set out in notes 38, 39 and 42 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
2020
£m
7,420
—
7,420
2019
£m
7,423
(3)
7,420
2018
£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
2020
£m
4,462
—
4,462
2019
£m
4,273
189
4,462
2018
£m
4,115
158
4,273
Note 6: Retained profits
At 1 January
Profit for the year
Dividends paid1
Issue costs of other equity instruments (net of tax)
Share buyback programmes
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
At 31 December
Lloyds Banking Group Annual Report and Accounts 2020
339
2020
£m
3,950
849
—
—
—
(52)
48
74
4,869
2019
£m
2,103
4,949
2018
£m
1,498
3,671
(2,312)
(2,240)
(5)
(1,095)
74
71
165
3,950
(7)
(1,005)
(74)
53
207
2,103
1 Details of the Company’s dividends are as set out in note 43 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.
At 1 January 2019
Redemption:
6.3673% Non-cumulative Fixed to Floating Rate Preference Shares callable 2019
Foreign exchange and other movements
At 31 December 2019
Issued in the year:
4.50% Fixed Rate Step-up Subordinated Notes due 2030 (€309 million)
2.707% Fixed Rate Dated Subordinated Reset Notes due 2035 (£1,309 million)
Foreign exchange and other movements
At 31 December 2020
1 The redemption in 2019 resulted in cash outflows of £3 million.
Preference
shares
£m
Undated
subordinated
liabilities
£m
Dated
subordinated
liabilities
£m
554
(3)
91
642
—
—
81
723
10
—
—
10
—
—
—
10
5,479
—
(170)
5,309
280
1,309
129
7,027
Total
£m
6,043
(3)
(79)
5,961
280
1,309
210
7,760
Note 9: Financial liabilities at fair value through profit or loss
Financial liabilities designated at fair value through profit or loss 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 2020 was £8,060 million, which
was £575 million lower than the balance sheet carrying value (2019: £3,393 million which was £71 million lower than the balance sheet carrying value). At
31 December 2020 there was a cumulative £541 million increase in the fair value of these liabilities attributable to changes in credit risk (2019: increase of
£101 million), of which £440 million arose in 2020 and £101 million arose in 2019; this is determined by reference to the quoted credit spreads of the Company.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
340 Lloyds Banking Group Annual Report and Accounts 2020
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 45 to the consolidated financial
statements.
The Company has no employees (2019: 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 costs of providing those benefits are treated as capital contributions to the employing companies in
the Group.
Investment in subsidiaries
At 1 January
Additions and capital injections
Capital contributions
Return of capital contributions
At 31 December
Ordinary share capital
Other capital instruments
Total
2020
£m
2019
£m
41,940
41,716
—
140
(4)
—
229
(5)
2020
£m
6,657
1,170
—
—
2019
£m
5,009
1,648
—
—
2020
£m
48,597
1,170
140
(4)
2019
£m
46,725
1,648
229
(5)
42,076
41,940
7,827
6,657
49,903
48,597
Details of the subsidiaries and related undertakings are given on pages 349 to 354 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
2020
£m
2019
£m
14,660
24,211
35
7,416
(2,004)
20,107
(106)
1,812
(11,257)
14,660
In addition the Company carries out banking activities through its subsidiary, Lloyds Bank plc. At 31 December 2020, the Company held deposits of £7 million
with Lloyds Bank plc (2019: £29 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 £805 million (2019: £105 million) due to subsidiary undertakings. In addition, at 31 December 2020 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
£49,388 million and a net positive fair value of £1,029 million (2019: notional principal amount of £37,555 million and a net positive fair value of £338 million).
Of this amount an aggregate notional principal amount of £19,909 million and a net positive fair value of £1,418 million (2019: notional principal amount
of £21,164 million and a net positive fair value of £707 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 45 to the consolidated financial statements.
Notes to the parent company financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
341
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.
Derivatives
designated
as hedging
instruments
£m
Mandatorily held at fair value
through profit or loss
Held for
trading
£m
Other
£m
Designated
at fair value
through profit
or loss
£m
Held at
amortised
cost
£m
At 31 December 2020
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 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
—
1,449
—
—
—
—
383
—
—
—
—
—
14,362
—
—
1,449
383
14,362
—
31
—
—
31
—
706
—
—
—
706
—
43
—
—
43
—
772
—
—
772
—
54
—
—
—
54
—
395
—
—
395
—
—
—
—
—
—
—
12,516
—
—
12,516
—
—
—
—
—
—
—
—
—
—
—
8,635
—
—
—
8,635
—
—
—
—
—
—
3,464
—
—
—
3,464
Total
£m
7
1,832
14,362
20,107
27
7
—
—
20,107
27
20,141
36,335
—
—
20,545
7,760
28,305
29
—
—
14,660
27
8,635
803
20,545
7,760
37,743
29
760
12,516
14,660
27
14,716
27,992
—
—
20,018
5,961
25,979
3,464
438
20,018
5,961
29,881
Note 48 to the consolidated financial statements outlines the valuation hierarchy into which financial instruments measured at fair value are categorised.
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.
Strategic reportFinancial resultsGovernanceRisk managementOther informationFinancial statements
342 Lloyds Banking Group Annual Report and Accounts 2020
Note 11: Financial instruments continued
At 31 December 2020
Financial liabilities at fair value through profit or loss
Debt securities in issue
Subordinated liabilities
Total financial instrument liabilities
At 31 December 2019
Financial liabilities at fair value through profit or loss
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
35
55
24
114
30
55
25
110
39
91
40
127
8,614
2,333
13,051
282
4,055
—
7,299
8,423
170
2,742
25,720
15,722
31
126
28
185
41
415
252
708
3,554
16,679
2,660
22,893
—
9,008
8,112
17,120
Total
£m
8,815
22,829
12,824
44,468
3,656
26,283
11,077
41,016
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately
£1 million (2019: £1 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years.
Fair values of financial assets and liabilities
The valuation techniques for the Company’s financial instruments are as discussed in note 48 to the consolidated financial statements.
Valuation hierarchy
The table below analyses the assets and liabilities of the Company. With the exception of derivatives all assets and liabilities are held at amortised cost. They
are categorised into levels 1 to 3 based on the degree to which their fair value is observable. No assets or liabilities were categorised as level 1 (2019: none).
Fair value of financial assets and liabilities
Valuation hierarchy
Valuation hierarchy
Derivative financial instruments
2020
Carrying
value
£m
Fair
value
£m
1,832
1,832
Financial assets at fair value through profit or loss
14,362
14,362
Loans to subsidiaries
Amounts due from subsidiaries
Total financial assets
20,107
20,107
27
27
36,328
36,328
36,328
Financial liabilities at fair value through profit or loss
8,635
8,635
Derivative financial instruments
803
803
8,635
803
Debt securities in issue
Subordinated liabilities
Total financial liabilities
20,545
21,887
21,887
7,760
8,966
8,966
37,743
40,291
40,291
Level 2
£m
1,832
14,362
20,107
27
Level 3
£m
—
—
—
—
—
—
—
—
—
—
2019
Fair
value
£m
760
12,516
14,660
27
Carrying
value
£m
760
12,516
14,660
27
Level 2
£m
760
12,516
14,660
27
27,963
27,963
27,963
3,464
438
3,464
438
20,018
20,621
5,961
7,204
29,881
31,727
3,464
438
20,621
7,204
31,727
Level 3
£m
—
—
—
—
—
—
—
—
—
—
The carrying amount of cash and cash equivalents (2020: £7 million; 2019: £29 million) is a reasonable approximation of fair value.
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.
Notes to the parent company financial statements continued Lloyds Banking Group Annual Report and Accounts 2020
343
Other information
Shareholder information
Five year financial summary
Forward-looking statements
Abbreviations
Alternative performance measures
Subsidiaries and related undertakings
344
346
347
348
348
349
2020 CAPTURED BY LLOYDS BANKING GROUP COLLEAGUES
Jonathan Rookes
Steven Cachia
Laura Millington
Siobhan Devlin
Karl Wilson
Connie Garrad
Joanna Spackman
Paul Coombes
Matthew Perrins
Sarah Gill
Helen Nelson
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
344 Lloyds Banking Group Annual Report and Accounts 2020
Shareholder information
Annual general meeting (AGM)
The health and wellbeing of the Group's shareholders, customers and employees are of paramount importance and the Board is constantly reviewing the
impacts of the COVID-19 pandemic. The Board is considering the format of this year’s AGM to ensure that shareholders have the opportunity to suitably
engage with the Board. Details will be made available in the Notice of AGM, which will be published towards the end of March and will be available 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 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 2021 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
Q3 interim management statement
Month
Feb
Mar/Aug
Mar
Mar
Mar
Apr
Jul
Jul
Oct
1 To be published on the Group’s website by 29 July 2021 in accordance with the Capital Requirements (Country-by-Country Reporting) 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 9.00 pm, Monday to Friday. To open a share dealing account with any of these services,
you must be 18 years of age or over and be resident in the UK, Jersey, Guernsey or the Isle of Man.
Share dealing for the Lloyds Banking Group Shareholder Account
Share dealing services for the Lloyds Banking Group Shareholder Account are provided by Equiniti Shareview Dealing, operated by Equiniti
Financial Services Limited. Details of the services provided can be found either on the Shareholder information page of our website at
www.lloydsbankinggroup.com or by contacting Equiniti using the contact details provided on the next page.
Share price information
Shareholders can access both the latest and historical share prices via our website at www.lloydsbankinggroup.com as well as listings in most national
newspapers. For a real time buying or selling price, you will need to contact a stockbroker, or you can contact the share dealing providers detailed above.
Individual Savings Accounts (ISAs)
There are a number of options for investing in Lloyds Banking Group shares through an ISA. For details of services and products provided by the Group
please contact Bank of Scotland Share Dealing, Halifax Share Dealing or Lloyds Bank Direct Investments using the contact details above.
Lloyds Banking Group Annual Report and Accounts 2020
345
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
1,899,324
376,675
60,365
2,818
494
168
264
66
87
16
11
Percentage
of Holders
Total
Number
of Shares
Percentage
Issued capital
81.17%
561,620,817
16.10% 1,000,548,882
2.58% 1,539,535,930
0.12%
648,639,025
0.02% 1,156,565,765
0.01% 1,204,302,388
0.00% 6,165,686,982
0.00% 4,519,794,943
0.00% 17,869,577,046
0.00% 11,275,125,755
0.00% 25,326,602,153
0.79%
1.40%
2.16%
0.91%
1.62%
1.69%
8.65%
6.34%
25.07%
15.83%
35.54%
2,340,288
100.00% 71,267,999,686
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.
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
346 Lloyds Banking Group Annual Report and Accounts 2020
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
Impairment
Profit before tax
Profit after tax for the year
Profit for the year attributable to ordinary shareholders
Balance sheet data (£m)
Share capital
Shareholders’ equity
Other equity instruments
Customer deposits
Subordinated liabilities
Loans and advances to customers
Total assets
Share information
Basic earnings per ordinary share
Diluted earnings per ordinary share
Net asset value per ordinary share
Dividends per ordinary share4, 5, 6
Market price (year end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions) 7
Financial ratios (%) 8
Dividend payout ratio5,9
Post-tax return on average shareholders’ equity
Post-tax return on average assets2
Cost:income ratio10
Capital ratios (%)
Total capital
Tier 1 capital
Common equity tier 1 capital
2020
2019
20181,2
20171,2,3
20161,2,3
15,126
(9,745)
(4,155)
1,226
1,387
865
18,359
(12,670)
(1,296)
4,393
3,006
2,459
18,626
(11,729)
18,659
(12,696)
17,267
(12,277)
(937)
5,960
4,506
3,975
(688)
5,275
3,649
3,144
(752)
4,238
2,605
2,092
31 December
2020
31 December
2019
31 December
2018
31 December
2017
31 December
2016
7,084
43,278
5,906
460,068
14,261
498,843
871,269
7,005
41,697
5,906
421,320
17,130
494,988
833,893
7,116
43,434
6,491
418,066
17,656
484,858
797,598
7,197
43,551
5,355
418,124
17,922
472,498
812,109
7,146
43,020
5,355
415,460
19,831
457,958
817,793
2020
2019
2018
2017
2016
1.2p
1.2p
61.1p
0.57p
36.4p
2,340
3.5p
3.4p
59.5p
1.12p
62.5p
2,361
5.5p
5.5p
61.0p
3.21p
51.9p
2,404
4.4p
4.3p
60.5p
3.05p
68.1p
2,450
2.9p
2.9p
60.2p
3.05p
62.5p
2,510
70,839
70,053
71,164
71,973
71,374
2020
2019
2018
2017
2016
46.7
2.0
0.16
64.4
32.1
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
31 December
2020
31 December
2019
31 December
2018
31 December
2017
31 December
2016
23.3
19.1
16.2
21.3
16.7
13.6
22.9
18.2
14.6
21.2
17.2
14.1
21.4
17.0
13.6
1 The Group adopted IFRS 16 Leases with effect from 1 January 2019, in accordance with the transition requirements of the standard, comparative information was not restated.
2 The Group 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 were 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 At the time of approving the Group’s results for the year ended 31 December 2019, the directors recommended a final dividend of 2.25 pence per share representing a total dividend of
£1,586 million, which was to be paid on 27 May 2020. However, on 31 March 2020 the Group announced the cancellation of its final 2019 ordinary dividend. This decision was taken by the
Board at the specific request of the regulator, the PRA, in line with all other major UK listed banks, as a result of the developing coronavirus crisis.
6 Dividends per ordinary share in 2016 included a recommended special dividend of 0.5 pence.
7 For 2016, 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.
8 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
9 Total dividend for the year divided by earnings attributable to ordinary shareholders adjusted for tax relief on distributions to other equity holders.
10 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims).
Lloyds Banking Group Annual Report and Accounts 2020
347
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 and any further possible referendum on Scottish
independence; 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 (including
but not limited to the COVID-19 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, or other such events;
geopolitical unpredictability; risks relating to climate change; changes
in laws, regulations, practices and accounting standards or taxation,
including as a result of the UK’s exit from the EU; changes to regulatory
capital or liquidity requirements (including regulatory measures to restrict
distributions to address potential capital and liquidity stress) 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 laws, legislation and regulation together with any resulting impact
on the future structure of the Group; the ability to attract and retain senior
management and other employees and meet its diversity objectives;
actions or omissions by the Group's directors, management or employees
including industrial action; changes to the Group's post-retirement defined
benefit scheme obligations; the extent of any future impairment charges
or write-downs caused by, but not limited to, depressed asset valuations,
market disruptions and illiquid markets; the value and effectiveness of
any credit protection purchased by the Group; the inability to hedge
certain risks economically; the adequacy of loss reserves; the actions of
competitors, including non-bank financial services, lending companies and
digital innovators and disruptive technologies; and exposure to regulatory
or competition scrutiny, legal, regulatory or competition proceedings,
investigations or complaints. Please refer to the latest Annual Report on
Form 20-F filed by Lloyds Banking Group plc with the US Securities and
Exchange Commission for a discussion of certain factors and risks.
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.
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’, ‘achieves’, ‘anticipates’, ‘estimates’, ‘expects’,
‘targets’, ‘should’, ‘intends’, ‘aims’, ‘projects’, ‘plans’, ‘potential’, ‘will’,
‘would’, ‘could’, ‘considered’, ‘likely’, ‘may’, ‘seek’, ‘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, statements or guidance relating 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; the Group’s ESG targets and/or commitments;
changing customer behaviour including consumer spending, saving
and borrowing habits; changes to borrower or counterparty credit
quality impacting the recoverability and value of balance sheet assets;
concentration of financial exposure; management and monitoring of
conduct risk; exposure to counterparty risk (including but not limited to
third parties conducting illegal activities without the Group’s knowledge);
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), the EU-UK Trade and Cooperation Agreement, and
as a result of such exit and the potential for other countries to exit the EU
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
348 Lloyds Banking Group Annual Report and Accounts 2020
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 3
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 72, 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
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.
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 - existing basis
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.
Return on tangible equity - new basis
Statutory profit after tax adjusted to deduct profit attributable to non-controlling interests and other equity holders, divided
by average tangible net assets
Tangible net assets per share
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 72.
Lloyds Banking Group Annual Report and Accounts 2020
349
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 2020. 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 or a majority of voting
rights (including where the undertaking
does not have share capital as indicated)
in the following undertakings. All material
subsidiary undertakings are consolidated by
Lloyds Banking Group.
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
– applied for strike off
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 London Nominees Ltd – applied
for strike off
Bank of Scotland Nominees (Unit Trusts) Ltd –
applied for strike off
Bank of Scotland P.E.P. Nominees Ltd – applied
for strike off
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 (in liquidation)
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 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 Mistral Ltd
BOSSAF Rail Ltd
BOS Personal Lending Ltd
British Linen Leasing (London) Ltd
British Linen Leasing Ltd
British Linen Shipping Ltd
Capital 1945 Ltd
Capital Bank Leasing 3 Ltd (in liquidation)
Capital Bank Leasing 5 Ltd
Capital Bank Leasing 12 Ltd
Capital Bank Property Investments (3) Ltd
Capital Personal Finance Ltd
Notes
50 iii #
1 i
1 i
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9 i
9 i
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+ *
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5 *
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5 *
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4 i
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1 i
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4 # i
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11 xiv
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5 i
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47 i
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47 i
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47 i
4 i
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 (in liquidation)
CF Asset Finance Ltd (in liquidation)
Cheltenham & Gloucester plc
Clerical Medical Finance plc
Clerical Medical Financial Services Ltd
Clerical Medical International Holdings B.V.
Clerical Medical Investment Fund Managers Ltd
Clerical Medical Non Sterling Property Company
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 (in liquidation)
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 (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 – applied for strike off
Halifax Pension Nominees Ltd
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
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 Share Schemes Trustees Ltd
LBCF Ltd
LBG Brasil Administração LTDA
LBG Capital Holdings Ltd
LBG Equity Investments Ltd
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 IX LP
LDC V LP
LDC VI LP
LDC VII LP
LDC VIII LP
Legacy Renewal Company Ltd
1 # ^ iii xxx
13 viii ix #
9 i
1 i
1 i
53 i
13 i
13 i
13 i
12 i
20 i
20 i
21 i
4 i
22 i
56 i
56 i
23 i v
1 v xxviii
1 ii iii
13 i
24 i
1 i
9 i
4 i
47 i
28 i
1 i
20 i
1 i
1 i
13 ii iii viii
4 i
4 i
4 i
4 i
4 i
13 i
1 i
1 i
4 i
4 i
4 i
4 i
4 i
29 i
4 i
4 i
4 *
5 i
20 i
20 i
20 i
4 ii
5 i xxx xxxii
47 *
5 i
1 i
1 i
1 v xxxi
1 i
4 i
5 i
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1 * #
1 ii iii
1 i
4 i
2 i
50 ii iii
47 i
13 ii #
4 i
4 i
2 ii #
35 *
39 i
1 i
1 i
9 i
38 i
1 i ^
1 i ^
1 i
40 i
40 i
40 i
41 *
41 *
41 *
41 *
41 *
40 i
40 *
41 *
41 *
41 *
40 *
5 i
Lex Autolease (CH) Ltd
Lex Autolease (VC) Ltd
Lex Autolease Carselect Ltd
Lex Autolease Ltd
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 (in liquidation)
Lloyds Bank (Fountainbridge 2) Ltd (in liquidation)
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 (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.16) Ltd (in
liquidation)
Lloyds Bank Maritime Leasing (No. 17) Ltd (in
liquidation)
Lloyds Bank MTCH Ltd
Lloyds Bank Nominees Ltd
Lloyds Bank Offshore Pension Trust Ltd
Lloyds Bank Pension ABCS (No. 1) LLP
Lloyds Bank Pension ABCS (No. 2) LLP
Lloyds Bank Pension Trust (No. 1) Ltd
Lloyds Bank Pension Trust (No. 2) Ltd
Lloyds Bank Pensions Property (Guernsey) Ltd
Lloyds Bank plc
Lloyds Bank 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 Corporate Services (Jersey) Ltd
Lloyds Development Capital (Holdings) Ltd
Lloyds Engine Capital (No.1) U.S LLC
Lloyds Far East S.A.R.L.
Lloyds General Leasing 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 Securities No.5 Ltd
Lloyds Leasing (North Sea Transport) Ltd
Lloyds Leasing Developments Ltd
Lloyds Offshore Global Services Private Ltd
Lloyds Plant Leasing Ltd
Lloyds Portfolio Leasing Ltd
Lloyds Project Leasing Ltd
Lloyds Property Investment Company No. 3 Ltd
(in liquidation)
Lloyds Property Investment Company No. 4 Ltd
Lloyds Property Investment Company No.5 Ltd
(in liquidation)
Lloyds Secretaries Ltd
Lloyds Securities Inc.
Lloyds TSB Pacific Ltd
1 i
1 i
1 i
1 i
13 ii iii xi
13 i
13 i
1 i xi
1 i
1 i
11 i
1 i
13 i
1 i
65 i
65 i
1 i
58 i
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1 i
9 i
43 i
1 i
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17 i
26 *
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45 i
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59 i
13 i
1 i
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1 i
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1 *
1 *
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34 ii iii
1 ^ i vii
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11 *
56 i
1 i
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37 i
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1 i
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48 i
1 i
1 i
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51 i
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
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 (applied for strike
off)
Sandown 2012-2 plc (in liquidation)
Sandown Gold 2012-1 Holdings Ltd (applied for
strike off)
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
Syon Securities 2020 DAC
Syon Securities 2020-2 DAC
Thistle Investments (AMC) Ltd
Thistle Investments (ERM) Ltd
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 •
54
63
54
42
26
26
26
26
26
26
26
26
26
26
26
26
26
26
26
26
26
26
26
36
61
61
42
26
6
44
6
62
62
62
62
62
62
62
61
42
42
42
26
26
55
42
61
52
15
52
5
47
• A charitable foundation funded but not owned by
Lloyds Banking Group
350 Lloyds Banking Group Annual Report and Accounts 2020
Subsidiaries and related undertakings continued
Lloyds UDT Asset Rentals 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 –
applied for strike off
Lotus Finance Ltd
LTGP Limited Partnership Incorporated
Mainsearch Company Ltd (in liquidation)
Maritime Leasing (No. 19) Ltd
MBNA Direct Ltd (in liquidation)
MBNA Europe Finance Ltd
MBNA Europe Holdings Ltd
MBNA Global Services Ltd (in liquidation)
MBNA Ltd
MBNA R & L S.A.R.L.
MBNA Receivables Ltd
Membership Services Finance Ltd
Mitre Street Funding S.A.R.L.
NFU Mutual Finance Ltd
Nominees (Jersey) Ltd
Nordic Leasing Ltd (in liquidation)
NWS Trust Ltd
Pacific Leasing Ltd
Pensions Management (S.W.F.) Ltd
Peony Eastern Leasing Ltd (in liquidation)
Peony Leasing Ltd (in liquidation)
Peony Western Leasing Ltd (in liquidation)
Perry Nominees Ltd
PIPS Asset Investments Ltd
Prestonfield Investments Ltd
Proton Finance Ltd
R.F. Spencer and Company Ltd
Ranelagh Nominees Ltd
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 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
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)
The Agricultural Mortgage Corporation plc
The British Linen Company Ltd
The Mortgage Business plc
Thistle Leasing
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 – applied for strike off
Uberior Trading Ltd
Uberior Trustees Ltd – applied for strike off
Uberior Ventures Australia Pty Ltd
Uberior Ventures Ltd
UDT Budget Leasing Ltd (in liquidation)
United Dominions Leasing Ltd
13 i
1 i
13 i
1 i
47 i
1 ii iii
5 *
50 ii #
34 *
13 i
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47 i
13 i
47 i
53 i
63 i
4 i
56 i
47 ii viii #
58 i
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13 i
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5 i
50 iii #
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3 ii iii xi
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13 v vii xxviii
20 i
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57 i #
4 i
50 ii #
3 i #
3 i
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+ *
47 i #
47 i #
1 i
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5 i
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13 i
1 i
United Dominions Trust Ltd
Universe, The CMI Global Network Fund
Upsaala Ltd
Ward Nominees (Abingdon) Ltd
Ward Nominees (Birmingham) Ltd
Ward Nominees (Bristol) Ltd
Waverley – Fund II Investor LLC
Waverley – Fund III Investor LLC
Waymark Asset Investments Ltd
West Craigs Ltd
Wood Street Leasing Ltd
1 i
49 *
16 i
1 i
1 i
1 i
24 i
24 i
1 ii iii
5 i
1 i
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
Fontwell II Securities 2020 DAC
Chepstow Blue Holdings Ltd
Chepstow Blue plc
Chester Asset Options No.2 Ltd (in liquidation)
Chester Asset Option No.3 Ltd (applied for strike
off)
Chester Asset Receivables Dealings Issuer Ltd (in
liquidation)
Chester Asset Securitisation Holdings Ltd (in
liquidation)
Chester Asset Securitisation Holdings No.2 Ltd
(in liquidation)
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
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
61
63
26
26
26
30
61
42
26
26
19
66
19
19
19
7
64
7
64
63
26
26
63
63
63
26
26
26
26
61
63
63
63
54
63
54
54
54
54
54
63
63
63
63
63
54
54
54
63
63
54
54
54
54
54
63
54
54
54
54
54
54
54
54
54
54
Lloyds Banking Group Annual Report and Accounts 2020
351
Associated undertakings
The Group has a participating interest in the following undertakings.
Name of undertaking
Addo Food Group (Holdings) Ltd
Addison Social Housing Ltd
Archer Topco Ltd
Aghoco 1472 Ltd
Airline Services And Components Group Ltd
Allan Water Homes (Chryston) Ltd
Allan Water Homes (Heartlands) Ltd
Angus International Safety Group Ltd
Applied Composites Group Ltd (in liquidation)
Aqualisa Holdings (International) Ltd
Ashtons Group Holdings Ltd
Asset Solutions Group Ltd
Bacchus Newco Ltd
Backhouse (Westbury) JV Ltd
Backhouse (Castle Cary) JV Ltd
Beckstones (Rheda Park) Ltd
Bergamot Ventures Ltd
Blue Bay Travel Group Ltd
BoS Mezzanine Partners Fund LP
Bowbridge Homes (Raunds) Ltd
Briar Homes (Darnley) Ltd
Brington North Holdco Ltd
Burnham SPV Ltd
Caedmon Homes (St Johns Mews) Ltd
Caedmon Homes Ltd
Caedmon Homes Kirby Hill Ltd
Cardel Group Ltd
Chianti Holdings Limited
City & General Securities Ltd
City Living (Midlands) Ltd
Citysprint (UK) Holdings Ltd
Cleanslate Ashford Ltd
Columbus UK Holdings Ltd
Connect Health Group Ltd
Connery Ltd
Couple Holdco Ltd
Croud Holdings Ltd
Cruden Homes (Aberlady) Ltd
Cruden Homes (Longniddry) Ltd
D.U.K.E Real Estate Ltd
Delancey Arnold UK Ltd (in liquidation)
Delancey Rolls UK Ltd (in liquidation)
Devonshire Homes (Cullompton) Ltd
Devonshire Homes (Landkey) Ltd
Devonshire Homes (St Austell) 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
Ensco 997 Ltd
Ensco 1314 Ltd
Ensco 1322 Ltd
Ensco 1327 Ltd
Ensco 1337 Ltd
Ensco 1366 Ltd
Ensco 1375 Ltd
Ensek Holdings Ltd
Erris Homes (Almondbury) Ltd
Escapade Bidco Ltd
Europa Property Company (Northern) Ltd
Evolution Funding Group Ltd
Express Engineering (Group) Ltd
FDL Salterns Ltd
FHR European Ventures LLP
Ginger Acquisition Company Ltd
Global Autocare Holding Ltd
Great Wigmore Property Ltd
Hamsard 3468 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
Hollins Homes (Wingates) Ltd
Homes By Carlton (MSTG1) Ltd
Iglufastnet Ltd
James Taylor Homes (Kingston) Ltd
James Taylor Homes (Newton Longville) Ltd
Jupiter Bidco Ltd
Kenmore Capital 2 Ltd (in liquidation)
Kenmore Capital 3 Ltd (in receivership)
Kenmore Capital Ltd (in liquidation)
% of share class
held by immediate
parent company (or
by the Group
where this varies)
76.85%
20%
99%
89.25%
94.45%
50%
50%
88.93%
88.93%
85.76%
76.12%
89.25%
99%
89.25%
89.25%
50%
50%
50%
50%
99.17%
n/a
50%
50%
50%
50%
50%
50%
50%
89.25%
99%
100%
50%
82.03%
91.22%
50%
99%
99%
20%
26.70%
99%
50%
50%
50%
50%
50%
50%
50%
50%
89.25%
85.32%
50%
50%
50%
50%
50%
89.25%
50%
85.86%
30.76%
32.74%
99%
99%
99%
99%
99%
99%
99%
99.17%
50%
99%
99%
100%
99%
99%
99%
99%
99.35%
50%
n/a
89.25%
99%
50%
89.25%
89.25%
n/a
50%
99%
50%
50%
50%
50%
50%
89.25%
55.49%
50%
50%
78.29%
50%
50%
50%
Registered office address (UK unless stated otherwise)
Queens Drive, Nottingham, NG2 1LU
1 Bartholomew Lane, London, EC2N 2AX
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
24B Kenilworth Road, Bridge Of Allan, Stirling, Scotland, FK9 4DU
Station Road, High Bentham, Near Lancaster, LA2 7NA
1 Bridgewater Place, Water Lane, Leeds, West Yorkshire LS11 5QR
Westerham Trade Centre, The Flyers Way, Westerham, TN16 1DE
ii &
Unit 4 74 Dyke Road Mews, Brighton, BN1 3JD
Osprey House, Crayfields Business Park, New Mills Road, Orpington, Kent, BR5 3QJ,
United Kingdom
Park Lane Industrial Estates, Park Lane Off Wigan Road, Ashton in Makerfield, Wigan, WN4 0BZ,
United Kingdom
ii
DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United Kingdom
ii
DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United Kingdom
ii
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 9BN
iii
6th Floor, 25 Farringdon Street, London, EC4A 4AB
xviii &
A4 Bellringer Road, Trentham Business Quarter, Stoke-On-Trent, ST4 8GB
*
7 Melville Crescent, Edinburgh, EH3 7JA
ii
Unit 4 Shieling Court, Corby, England, NN18 9QD
ii
Radleigh House 1 Golf Road, Clarkston, Glasgow, G76 7HU
~
25 Gresham Street, London, EC2V 7HN
ii
Weir House, Hurst Road, East Molesey, Surrey, KT8 9AY
ii
Baldwins Wynyard Park House, Wynyard Avenue, Wynyard, TS22 5TB, United Kingdom
Baldwins Wynyard Park House, Wynyard Avenue, Wynyard, TS22 5TB, United Kingdom
ii
C/O Azets Holdings Ltd Wynyard Park House, Wynyard Avenue, Wynyard, United Kingdom, TS22 5TB ii
5 The Marquis Business Centre, Royston Road, Baldock, SG7 6XL
c/o Freeths Llp, Floor 3, 100 Wellington Street, Leeds, United Kingdom, LS1 4LT
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 8HA
1 Fore Street Avenue, Moorgate, London UK, EC2Y 6DT
The Light Box Quorum Business Park, Benton Lane, Newcastle Upon Tyne, United Kingdom, NE12 8EU ii
&
44 Esplanade, St. Helier, Jersey, JE4 9WG
ii &
353 Buckingham Avenue, Slough, England, SL1 4PF
ii &
First Floor, 39 Tabernacle Street, London EC2A 4AA
ii
16 Walker Street, Edinburgh EH3 7LP
ii
16 Walker Street, Edinburgh EH3 7LP
iii ~
Cromwell Property Group Spaces, Lochrin Square, 1 Lochrin Square, 92-98
Fountainbridge, Edinburgh, United Kingdom, EH3 9QA
4th Floor, 4 Victoria Street, St Albans, Hertfordshire, AL1 3TF
4th Floor, 4 Victoria Street, St Albans, Hertfordshire, AL1 3TF
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
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
The Yard, Dodd Lane, Westhoughton, Bolton, BL5 3NU
90 Tottenham Court Road, London W1T 4TJ
Newbury House, 20 Kings Road West, Newbury, Berkshire, RG14 5XR
First Floor, 65 Gresham Street, London, England, EC2V 7NQ
Cotton Tree Lane, Colne, BB8 7BH
25a Market Street, Bicester, Oxfordshire, OX26 6AD
25 Southampton Buildings, London, England, WC2A 1AL
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
Europa House, 20 Esplanade, Scarborough, North Yorkshire, YO11 2AQ
Thompson Close, Whittington Moor, Chesterfield, S41 9AZ
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
Tudno Mill, Smith Street, Ashton-Under-Lyne, OL7 0DB, United Kingdom
The Hub, Gelderd Lane, Leeds, England, LS12 6AL
33 Cavendish Square, London, W1G 0PW
Sterling House, Grimbald Crag Close, Knaresborough, England, HG5 8PJ
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
Suite 4 1 King Street, Manchester, M2 6AW, United Kingdom
Carlton House, 15 Parsons Court, Welbury Way, Newton Aycliffe, County Durham, DL5 6ZE
2nd Floor, 165 The Broadway, Wimbledon, London, SW19 1NE
James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom
James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom
The Light House, Brooks Lane, Middlewich, England, CW10 0JG
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Notes
ii &
i
xvii &
ii &
ii &
ii
ii
xviii
xvii &
xviii &
xvii
xviii &
ii &
xviii &
xviii &
ii &
iii &
ii
xvii
xviii &
ii
ii &
iii
iii
ii
ii
ii
ii &
xx
ii
ii
ii
ii
ii
ii &
iii
ii &
x
xv &
ii
xxii &
ii &
ii &
ii &
ii &
ii &
xviii &
ii
xviii
xvii &
viii &
ii &
ii
xviii
xvii
xxi &
ii
*
ii &
ii &
&
xviii
xvi &
*
~
ii &
ii
ii
ii
ii
ii
ii &
xxiii
ii
ii
ii &
iii ~
iii ~
iii ~
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
352 Lloyds Banking Group Annual Report and Accounts 2020
Subsidiaries and related undertakings continued
KERV Group Ltd
KHL 2017 Ltd
Kruger Bidco Ltd
LF (Holdco) Ltd
London Topco Ltd
Mableford Ltd
Magicard Holdings Ltd
Mandata Group Ltd
Mansion House Group (Sandbach) Ltd
Measured Identity Hub Ltd
MFS Groupco Ltd
Motability Operations Group plc
Neilson Active Holidays Group Ltd
Northern Edge Ltd
Odyssey Bidco Limited
Omnium Leasing Company
Onapp (Topco) II Ltd
Onapp (Topco) Ltd
Osprey Aviation Services (UK) Ltd
Paladone Holdings Ltd
Panther Partners Ltd
PPCE Holdings Ltd
Park Bidco Ltd
Pertemps Network Group Ltd
Personal Touch Holdings Ltd (in liquidation)
PIHL Equity Administration Ltd
PIMCO (Holdings) Ltd (in liquidation)
Prestbury 1 Limited Partnership
Project Belize Ltd
Project Bolt Newco 1 Ltd
Project Bronze Ltd
Project TC Ltd
Project Chicago Newco Ltd
Project Polka 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
Seahawk Bidco Ltd
SGI Holdings Ltd
SHOO 802AA Ltd
Sigmat Group Ltd
Solid Solutions 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 Orchards (Burgh by Sands) Ltd
The Power Industrial Group Ltd (in liquidation)
Thistlerow Ltd
Timec 1667 Ltd
United House Group Holdings Ltd
Whittington Facilities Ltd (in administration)
Williams Topco Ltd
ZWPV Ltd
99%
84.4%
84.4%
99%
99%
62.82%
50%
89.25%
89.25%
89.25%
50%
97.92%
99%
40%
40%
89.25%
39.4%
99%
39%
82.5%
100%
82.5%
82.5%
89.25%
89.25%
89.25%
89%
89%
89.25%
99%
93.83%
100%
100%
100%
100%
100%
35%
82.5%
42.8%
30.6%
n/a
89.25%
89.25%
99%
99%
89.25%
89.25%
88.30%
50%
50%
88.74%
88.74%
0.17%
89.25%
99.17%
50%
50%
89.25%
89.25%
99%
89.25%
89.25%
89.25%
89.25%
99%
99%
82.5%
82.5%
82.5%
89.25%
100%
100%
82.5%
82.5%
98.89 %
50%
89.25%
n/a
50%
50%
50%
82.5%
82.5%
50%
99%
82.5%
100%
89.25%
89.25%
1st Floor 16 St. Clare Street, London, England, EC3N 1LQ
One Eleven, Edmund Street, Birmingham, England, B3 2HJ
Rhino House, Deans Road, Ellesmere Port, United Kingdom, CH65 4DR
Price House, 37 Stoney Street, Nottingham NG1 1LS
Uk Head Office, Gloucester Road, Cheltenham, Gloucestershire, GL51 8NR, United Kingdom
Lindum Business Park, Station Road, North Hykeham, Lincoln, LN6 3QX, United Kingdom
Waverley House, Hampshire Road, Granby Industrial Estate, Weymouth, DT4 9XD
3rd Floor Q5 Quorum Business Park, Benton Lane, Longbenton, Newcastle Upon Tyne,
Tyne And Wear, United Kingdom, NE12 8BS
8-10 Old Market Place, Altrincham, Cheshire, United Kingdom, WA14 4DF
3 Long Acres, Willow Farm, Castle Donington, Derbyshire DE74 2UG
York House, Wetherby Road, Long Marston YO26 7NH
City Gate House, 22 Southwark Bridge Road, London, SE1 9HB
Locksview, Brighton Marina, Brighton, BN2 5HA
The Beacon, 176 St. Vincent Street, Glasgow, G2 5SG
Hjp Audley House, Northbridge Road, Berkhamsted, Hertfordshire, United Kingdom, HP4 1EH
N/A
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
Apex House, Dolphin Way, Shoreham-by-Sea, West Sussex, BN43 6NZ, United Kingdom
16 Kirby Street, London, EC1N 8TS
40 St. Pauls Square, Birmingham, United Kingdom, B3 1FQ
Liliput Road, Brackmills Industrial Estate, Northampton, United Kingdom NN4 7DT
Meriden Hall, Main Road, Meriden, Coventry CV7 7PT
Two Snowhill, Snow Hill Queensway, Birmingham, West Midlands, B4 6GA
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
Four Brindleyplace, Birmingham, B1 2HZ, United Kingdom
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
Sawley Marina, Long Eaton, Nottinghamshire, NG10 3AE
Ground Floor Redcentral, 60 High Street, Redhill, Surrey, United Kingdom, RH1 1SH
Fifth Floor, 55 King Street, Manchester M4 4LQ
Browne Jacobson Llp (Cs) Mowbray House, Castle Meadow Road, Nottingham NG2 1BJ
Church Lane, Church Lane, Norton, Worcester, WR5 2PR
Roundhouse Road, Faverdale Industrial Estate, Darlington, County Durham, DL3 0UR,
United Kingdom
11 Vantage Way, Erdington, Birmingham, B24 9GZ
Kings Parade, Lower Coombe Street, Croydon, CR0 1AA
4 Cowper Road, Gilwilly Industrial Estate, Penrith CA11 9BN
6 Queens Road, Aberdeen, Scotland, AB15 4ZT
St James House, 27-43 Eastern Road, Romford, Essex, United Kingdom, RM1 3NH
Unit 2, Origin Business Park, Rainsford Road, Park Royal, London NW10 7FW
4th Floor , 4 Victoria Square, St Albans, 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
Unit 2 Springfield Court, Summerfield Road, Bolton, BL3 2NT, United Kingdom
Alton House, Alton Business Park, Alton Road, Ross-on-Wye, HR9 5BP
Burleighfield House, London Road, Loudwater, Bucks. HP10 9RF
Unit 2 Acorn Business Park Airedale Business Centre, Keighley Road, Skipton, North
Yorkshire, England, BD23 2UE
Building 500 Abbey Park, Stareton, Kenilworth, Warwickshire, CV8 2LY
Onecom House, 4400 Parkway, Whiteley, Fareham, Hampshire, PO15 7FJ
7 Bradford Business Park, Kingsgate, Bradford, BD1 4SJ
Fourth Floor D Mill, Dean Clough, Halifax, United Kingdom, HX3 5AX
The Mound, Edinburgh, EH1 1YZ, United Kingdom
The Mound, Edinburgh, EH1 1YZ, United Kingdom
3MC Middlemarch Business Park, Siskin Drive, Coventry, West Midlands, England, CV3 4FJ
Unit 4, Pioneer Way, Castleford, West Yorkshire, WF10 5QU
The Stonewood Office West Yatton Lane, Castle Combe, Chippenham, Wiltshire, 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
4 Cowper Road, Gilwilly Industrial Estate, Penrith CA11 9BN
Deloitte LLP, 1 City Square, Leeds, LS1 2AL
Radleigh House 1 Golf Road, Clarkston, Glasgow, G76 7HU
Unit 7 & 8 Diamond Court, Newcastle Upon Tyne, NE3 2EN
26 Kings Hill Avenue, Kings Hill, West Malling, Kent, ME19 4AE
c/o Deloitte LLP, Four Brindley Place, Birmingham B1 2HZ
The Old Post Office, St. Nicholas Street, Newcastle Upon Tyne, United Kingdom, NE1 1RH
Zip World Base Camp, Denbigh Street, Llanrwst, LL26 0LL
ii &
ii
iii &
ii &
ii &
ii &
ii
xviii &
xvii
xviii &
ii
ii &
ii &
i
v
ii &
iii &
ii &
+
ii &
v
ii
iii &
xviii &
xvii
ii &
xviii &
xvii
xviii &
ii &
iii &
ii &
xxiv
xxv
xxvi
xxvii
iii
ii
iii
viii &
* &
ii &
xviii &
ii &
ii &
ii &
iii &
ii &
ii
ii
xvi
xii
xix &
ii &
xviii &
iii
ii
ii &
xviii &
ii &
xviii &
i &
xviii
xvii
ii &
ii &
xviii
xvii
v &
ii &
ii ~
ii ~
xvii
xviii &
xviii &
ii
ii &
*
ii
iii
ii
ii &
xviii
ii
ii &
ii &
vi
ii &
ii &
Lloyds Banking Group Annual Report and Accounts 2020
353
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.
LAZARD INVESTMENT FUNDS
Lazard Developing Markets Fund
MGI FUNDS PLC
Mercer Diversified Retirement Fund
Mercer Multi Asset Defensive Fund
Mercer Multi Asset Growth Fund
Mercer Multi Asset High Growth Fund
Mercer Multi Asset Moderate Growth Fund
MULTI MANAGER ICVC
Multi Manager UK Equity Growth Fund
Multi Manager UK Equity Income Fund
Notes
PAN EUROPEAN URBAN RETAIL FUND
Pan European Urban Retail Fund
90.17%
69.42%
58.01%
64.05%
80.19%
82.02%
83.73%
39.42%
22%
Name of undertaking
% of fund held by
immediate parent
(or by the Group
where this varies
ABERDEEN LIQUIDITY FUND (LUX)
Aberdeen Liquidity Fund (Lux) - Ultra Short Duration
Sterling Fund
ABERDEEN STANDARD OEIC I
Aberdeen European Property Share Fund
Aberdeen Sterling Bond Fund
70.67%
32.06%
78.65%
ABERDEEN STANDARD OEIC IV
Aberdeen Global Corporate Bond Tracker Fund
ASI UK Equity Index Managed Fund
98.30%
82.67%
ABERDEEN STANDARD OEIC VI
Aberdeen Global Emerging Markets Quantitative
Equity Fund
ACS POOLED PROPERTY
Scottish Widows Pooled Property ACS Fund
Scottish Widows Pooled Property ACS Fund 2
AGFE UK REAL ESTATE SENIOR DEBT FUND LP
AgFe UK Real Estate Senior Debt Fund LP
62.10%
100%
100%
78%
ARTEMIS INSTITUTIONAL FUNDS
Artemis Institutional Global Capital Fund
43.67%
BAILLIE GIFFORD INVESTMENT FUNDS ICVC
Baillie Gifford Multi Asset Growth Fund
BLACKROCK AUTHORISED CONTRACTUAL SCHEME 1
ACS Climate Transition World Equity Fund
ACS World Multifactor Equity Tracker Fund
BlackRock ACS Japan Equity Tracker Fund
BlackRock ACS UK Equity Tracker Fund
BlackRock ACS US Equity Tracker Fund
23.10%
68.79%
45.12%
76.85%
91.87%
77.18%
BLACKROCK COLLECTIVE INVESTMENT FUNDS
iShares Global Property Securities Equity Index Fund
39.47%
BLACKROCK FIXED INCOME DUBLIN FUNDS
iShares Emerging Markets Government Bond Index
Fund (IE)
iShares Emerging Markets Local Government Bond
Index Fund (IE)
BNY MELLON INVESTMENTS FUNDS
BNY Mellon Global Balanced Fund
BNY Mellon Global Equity Fund
BNY Mellon US Opportunities Fund
Insight Global Absolute Return Fund
Insight Global Multi-Strategy Fund
Newton Multi-Asset Growth Fund
Newton UK Income Fund
Newton UK Opportunities Fund
BNY MELLON MANAGED FUNDS II
Insight Absolute Fund of Funds
FIDELITY ACTIVE STRATEGY
FAST-UK Fund
HBOS ACTIVELY MANAGED PORTFOLIO FUNDS ICVC
Absolute Return Fund
Diversified Return Fund
Dynamic Return Fund
HBOS INTERNATIONAL INVESTMENT FUNDS ICVC
European Fund
Far Eastern Fund
International Growth Fund
Japanese Fund
North American Fund
HBOS PROPERTY INVESTMENT FUNDS ICVC
UK Property 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 FTSE All-Share Index Tracking Fund
UK Growth Fund
44.04%
70.52%
20.64%
25.41%
38.85%
77.48%
42.37%
25.43%
27.65%
52.95%
84.02%
29.52%
94.59%
94.22%
96.62%
93.42%
80.45%
52.44%
94.72%
95.26%
50.07%
51.68%
81.73%
40.08%
65.10%
50.41%
61.53%
56.88%
62.92%
HLE ACTIVE MANAGED PORTFOLIO AUSGEWOGEN
48.09%
HLE ACTIVE MANAGED PORTFOLIO DYNAMISCH
37.37%
HLE ACTIVE MANAGED PORTFOLIO KONSERVATIV
36.25%
INVESCO PERPETUAL FAR EASTERN INVESTMENT
SERIES
Invesco Perpetual Asian Equity Income Fund
26.50%
INVESTMENT PORTFOLIO ICVC
IPS Growth Portfolio
IPS Income Portfolio
28.33%
24.99%
7
8
8
8
2
26
3
13
11
9
5
10
10
20
1
1
1
1
1
18
18
18
12
22
PEMBERTON DEBT FUND SCS
Pemberton European Mid-Market Debt Fund II
100%
RETAIL AUTHORISED UNIT TRUSTS
BlackRock Balanced Growth Portfolio Fund
36.73%
RUSSELL INVESTMENT COMPANY PLC
Russell Asia Pacific Fund
Russell Euro Fixed Income Fund
Russell Investments US Bond Fund
Russell Sterling Bond Fund
SCHRODER FUNDS ICAV
Schroder Sterling Liquidity Fund
Schroder Sterling Short Duration Bond Fund
SCHRODER INTERNATIONAL SELECTION FUND
Emerging Market Bond Fund
Multi Asset Total Return
33.08%
32.46%
51.67%
44.26%
85.92%
91.37%
65.36%
20.71%
SCHRODER MATCHING PLUS
Schroder Matching Plus Bespoke Investment Fund 10 100%
SCOTTISH WIDOWS INCOME AND GROWTH FUNDS
ICVC
Adventurous Growth Fund
Balanced Growth Fund
Corporate Bond 1 Fund
Corporate Bond PPF Fund
Progressive Growth Fund
Scottish Widows GTAA 1
SW Corporate Bond Tracker
UK Index Linked Gilt Fund
44.62%
30.95%
96.10%
100%
46.94%
83.54%
100%
100%
SCOTTISH WIDOWS INVESTMENT SOLUTIONS FUNDS
ICVC
Asia Pacific (ex Japan) Equity Fund
European (ex UK) Equity Fund
Fundamental Index Emerging Markets Equity Fund
Fundamental Index Global Equity Fund
Fundamental Index UK Equity Fund
Japan Equities Fund
Scottish Widows Corporate Bond Fund
Scottish Widows Gilt Fund
Scottish Widows High Income Bond Fund
Scottish Widows International Bond Fund
Scottish Widows Strategic Income Fund
Fundamental Low Volatility Index Emerging Markets
Equity Fund
95.24%
91.30%
Fundamental Low Volatility Index UK Equity Fund
Fundamental Low Volatility Index Global Equity Fund 98.13%
US Equities Fund
98.63%
95.99%
95.11%
95.61%
86.44%
88.67%
67.34%
96.14%
28.92%
69.82%
64.53%
100%
SCOTTISH WIDOWS MANAGED INVESTMENT FUNDS
ICVC
Balanced Portfolio Fund
Cash Fund
Cautious Portfolio Fund
International Equity Tracker Fund
Opportunities Portfolio Fund
Progressive Portfolio Fund
SCOTTISH WIDOWS OVERSEAS GROWTH
INVESTMENT FUNDS ICVC
American Growth Fund
European Growth Fund
Global Growth Fund
Japan Growth Fund
Pacific Growth Fund
SCOTTISH WIDOWS TRACKER AND SPECIALIST
INVESTMENT FUNDS ICVC
Emerging Markets Fund
UK All Share Tracker Fund
UK Fixed Interest Tracker Fund
UK Index-Linked Tracker Fund
UK Smaller Companies Fund
UK Tracker Fund
SCOTTISH WIDOWS UK AND INCOME INVESTMENT
FUNDS ICVC
Environmental Investor Fund
Ethical Fund
UK Growth Fund
SSGA ASIA PACIFIC TRACKER FUND
SSGA EUROPE (EX UK)
THE TM LEVITAS FUNDS
TM Levitas A Fund
TM Levitas B Fund
UBS INVESTMENT FUNDS ICVC
UBS Global Optimal Fund
82.72%
98.94%
61.79%
80.95%
91.60%
72.11%
83.51%
89%
55.13%
93.23%
75.29%
87.89%
91.06%
96.49%
39.08%
20.27%
45.74%
73.54%
80.07%
62.36%
93.66%
95.98%
52.60%
47.11%
30.94%
16
14
22
24
25
9
15
23
19
19
2
2
2
2
2
2
4
4
21
17
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
Registered office addresses
(1) 25 Gresham Street, London, EC2V 7HN
(2) Charterhall House, Charterhall Drive, Chester, CH88 3AN
(3) 69 Morrison Street, Edinburgh, EH3 8YF
(4) Trinity Road, Halifax, West Yorkshire HX1 2RG
(5) The Mound, Edinburgh, EH1 1YZ
(6) 40a Station Road, Upminster, Essex, RM14 2TR
(7) Naritaweg 165, 1043 BW, Amsterdam, Netherlands
(8) Minter Ellison, Governor Macquarie Tower, Level 40, 1 Farrer Place, Sydney, NSW 2000,
Australia
(9) 1 Brookhill Way, Banbury, Oxon, OX16 3EL
(10) 6th Floor, 125 London Wall, London EC2Y 5AS
(11) The 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) 2 North Queen Street, Belfast, Northern Ireland, BT15 1ES
(16) Suite 6, Rineanna House, Shannon Free Zone, Co. Clare, Ireland
(17) 60313 Frankfurt AM Main, Thurn-Und, Taxis-Platz 6, Germany
(18) Hoogoorddreef, 151101BA, Amsterdam, Netherlands
(19) The Shard, 32 London Bridge Street, London SE1 9SG
(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) International House, Cooil Road, Douglas, Isle of Man, IM2 2SP
(24) Corporation Service Company, 251 Little Falls Drive, Wilmington, DE 19808, USA
(25) 69 Morrison Street, Edinburgh, United Kingdom, EH3 8BW
(26) 1 Bartholomew Lane, London EC2N 2AX, United Kingdom
(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 4HP, Guernsey
(35) De Entrée 254, 1101 EE, Amsterdam, Netherlands
(36) 47 Esplanade, St. Helier, Jersey, JE1 0BD
(37) Fascinatio Boulevard 1302, 2909VA Capelle aan den IJssel, Netherlands
(38) Avenida Dr. Chucri Zaidan, n° 296, cj 231 e 51, Bairro Vila Cordeiro, Cidade de São Paulo,
Estado de São Paulo, Cep 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, Ireland
(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 1WR, Guernsey
(47) Cawley House, Chester Business Park, Chester, CH4 9FB, United Kingdom
(48) 6/12, Primrose Road, Bangalore, 560025, India
(49) 106 Route d'Arlon, Mamer, L-8210, Luxembourg
(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) Wilmington Trust SP Services (London) Limited, Third Floor, 1 King’s Arms Yard, London,
EC2R 7AF
(55) 1-2 Victoria Buildings, Haddington Road, Dublin 4, Ireland
(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) 11-12 Esplanade, St. Helier, Jesey JE4 8ZU
(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) Calle Pinar 7, 50 Izquierda, 28006, Madrid, Spain
(65) Atria One, 144 Morrison Street, Edinburgh, EH3 8EX
(66) Fifth Floor, 100 Wood Street, London, EC2V 7EX, United Kingdom
354 Lloyds Banking Group Annual Report and Accounts 2020
Subsidiaries and related undertakings continued
UNIVERSE, THE CMI GLOBAL NETWORK
6
CMIG Access 80%
CMIG Focus Euro Bond
CMIG GA 70 Flexible
CMIG GA 80 Flexible
UNIVERSE, THE CMI GLOBAL NETWORK (Continued)
CMIG GA 90 Flexible
Continental Euro Equity
Euro Bond
Euro Cautious
Euro Currency Reserve
European Enhanced Equity
Japan Enhanced Equity
Pacific Enhanced Basin
UK Equity
US Bond
US Currency Reserve
US Enhanced Equity
US Tracker
100%
99.93%
100%
100%
100%
97.39%
59.66%
89.14%
98.63%
100%
93.17%
79.33%
77.55%
94.14%
75.98%
86.92%
28.92%
Principal place of business for collective investment vehicles
(1) Trinity Road, Halifax, West Yorkshire, HX1 2RG
(2) 15 Dalkeith Road, Edinburgh, EH16 5WL
(3) Cassini House, 57 St James’s Street, London SW1A 1LD
(4) 20 Churchill Place, Canary Wharf, London E14 5HJ
(5) 200 Capital Dock, 79 Sir John Rogerson's Quay, Dublin 2, Ireland
(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) Aztec Group House, 11-15 Seaton Place, St Helier, Jersey, Channel Islands, JE4 0QH
(12) Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH
(13) Calton Square, 1 Greenside Row, Edinburgh EH1 3AN
(14) 70 Sir John Rogerson’s Quay, Dublin 2, Ireland
(15) 78 Sir John Rogerson’s Quay, Dublin 2, Ireland
(16) 50 Stratton Street, London, W1J 8LL
(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) 5, Rue Hohenhof, L-1736, Senningerberg, Luxembourg
(20) 2a, Rue Albert Borschette, BP 2174, L-1021, Luxembourg
(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 Investment Management (Ireland) Limited, Georges Court, 54-62 Townsend
Street, Dubin 2, DO2 R156
(24) Jackson House, 18 Saville Row, London, W1S 3PW
(25) 2 - 4, Rue Eugène Ruppert, L-2453, Luxembourg
(26) 3rd Floor South, 55 Baker Street, London, W1U 8EW
* 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) Ordinary Shares
(ii) A Ordinary Shares
(iii) B Ordinary Shares
(iv) Deferred Shares
(v) Preference Shares
(vi) Preferred Ordinary Shares
(vii) Redeemable Non-voting Shares
(viii) C Ordinary Shares
(ix) N Ordinary Shares
(x) Preferred A Ordinary Shares
(xi) Redeemable Preference Shares
(xii) A4 Ordinary Shares
(xiii) Redeemable Ordinary Shares
(xiv) Common Stock
(xv) Preferred B Ordinary Shares
(xvi) A3 Ordinary Shares
(xvii) A2 Ordinary Shares
(xviii) A1 Ordinary Shares
(xix) Z Ordinary Shares
(xx) B1 Ordinary Shares
(xxi) LN Deferred Shares
(xxii) D Ordinary Shares
(xxiii) E Ordinary Shares
(xxiv) W Ordinary Shares
(xxv) X Ordinary Shares
(xxvi) Y Ordinary Shares
(xxvii) Z1 Ordinary Shares
(xxviii) Ordinary Non-Voting Shares
(xxix) B Ordinary Non-Voting Shares
(xxx) Non-Voting Deferred Shares
(xxxi) Ordinary Limited Voting Shares
(xxxii) Non-Voting Preference
Lloyds Banking Group Annual Report and Accounts 2020
355
INTENTIONAL BLANK PAGE
Strategic reportFinancial resultsGovernanceRisk managementFinancial statementsOther information
356 Lloyds Banking Group Annual Report and Accounts 2020
INTENTIONAL BLANK PAGE
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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