Helping
Britain
Prosper
Lloyds Banking Group
Annual Report and Accounts 2022
Our purpose is
Helping Britain
Prosper
We’re creating a more
sustainable and inclusive
future for people and
businesses, shaping finance
as a force for good.
Discover how we’re Helping Britain Prosper on pages 4 to 7
Our performance
Robust financial
performance with
continued business
momentum and good
strategic progress
£5.6bn
Statutory profit after tax down 6 per
cent, with higher net income, more than
offset by higher impairment charges
50.4%
Cost:income ratio remains strong
£3.6bn
Total capital return including an
ordinary dividend of 2.40 pence per
share, up 20 per cent and share
buyback of up to £2 billion
75%Employee engagement index increased,
6 points higher than the UK average
Alternative performance measures
To supplement our statutory results, we
use a number of alternative performance
measures. Unless otherwise stated,
commentary within the strategic report
is given on an underlying basis. Further
information is set out on page 67.
67.7pts
All-channel net promoter score
remained strong
19.8mDigitally active customers continued
to increase as we remain the largest
digital bank in the UK
Inside this report
Strategic report
02
Our unique business model
04
Delivering value for all our stakeholders
08
Chair’s statement
10
Governance in action (section 172(1) statement)
12
Group Chief Executive’s review
16
Our external environment
Our strategy
22
Progress and performance (including key performance indicators) 32
38
Risk overview
44
Viability statement and going concern
45
Non-financial information statement
Our people
See page 15
Risk management
The Group’s approach to risk
Risk governance
Stress testing
Full analysis of risk categories
Financial statements
Independent auditors’ report
Consolidated financial statements
Parent company financial statements
Other information
Shareholder information
Subsidiaries and related undertakings
Forward-looking statements
139
142
144
147
197
210
340
350
352
361
Our strategy
See page 22
Financial results
Results for the full year
Divisional results
Other financial information
Alternative performance measures
Governance – Directors’ report
Chair’s introduction
Corporate governance report
Committee reports
Directors’ remuneration report
Other statutory and regulatory information
Our reporting
Our reporting is designed to facilitate
better communication to a range
of stakeholders.
Our annual report and accounts
provides disclosures relating to our
strategic, financial, operational,
environmental and social performance
and provides detail on our strategy.
It also contains forward-looking
statements relating to the Group’s future
financial condition, performance, results,
strategic initiatives and objectives.
For further details, please refer to our
forward-looking statements disclaimer
on page 361.
47
58
66
67
72
73
92
105
134
Our culture
See page 84
Supplementary information and
disclosures are provided in the following
documents, and referenced throughout
this report.
Environmental sustainability report
Social sustainability report
The 2022 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
Form 20-F
Pillar 3 disclosures
To access more content on a mobile device,
point your camera at the QR codes seen
throughout this report.
See our full reporting
network suite at
www.lloydsbankinggroup.com/
investors.
Robin Budenberg
Chair, Lloyds Banking Group
21 February 2023
Lloyds Banking Group Annual Report and Accounts 2022
01
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Our unique business model
Our purpose is Helping Britain Prosper
We Help Britain Prosper by creating a more
sustainable and inclusive future for people and
businesses, shaping finance as a force for good.
To deliver on our purpose, we have identified
four focus areas where we are best placed to
provide significant positive change, enabling
us to create a more inclusive society and
sustainable future:
• Creating a more inclusive future
• Improving access to quality
housing
• Enabling regional development
• Greening the built environment
View our environmental
sustainability report here.
View our social
sustainability report here.
Our vision
UK customer-focused digital leader and
integrated financial services provider,
capitalising on new opportunities, at scale.
We will achieve our vision through our purpose-driven strategic pillars:
Grow Focus Change
Drive revenue growth
and diversification
Strengthen cost
and capital efficiency
Maximise the potential
of people, technology
and data
See pages 24 to 27
See pages 28 and 29
See pages 30 and 31
Our values
guide how we work
together and make
decisions to deliver
our strategy:
See pages 84 and 85
People-first
We put people
first to go
further for
customers
Bold
We’re bold
and take
action
Inclusive
We’re inclusive
to value
everyone
Sustainable
We champion
sustainability
to care for our
planet
Trust
We trust
each other to
achieve more
together
02
Lloyds Banking Group Annual Report and Accounts 2022
Leading UK customer franchise
with deep customer insight
Our scale and reach across the UK means
that our franchise extends to 26 million
customers with 19.8 million digitally active.
Extensive customer data and analysis
ensures we can meet the needs of these
customers more effectively.
Dedicated colleagues with
strong values
We have a highly engaged, customer-
focused, diverse workforce with
significant expertise and experience.
Operating at scale with cost discipline
Our scale and efficiency enable us to
operate more effectively.
Differentiated business model
A unique customer proposition,
serving all our customers’ banking and
insurance needs in one place through
a comprehensive product range.
All-channel distribution focus with
digital leadership and trusted brands
Operating through a range of distribution
channels ensures our customers can
interact with us when and how they want.
Financial strength and
disciplined risk management
We have a strong capital position and
continue to take a disciplined approach
to risk, as reflected through the quality of
our portfolio and underwriting criteria.
Lloyds Banking Group plc
Retail
Insurance, Pensions
and Investments
Commercial Banking
Consumer
lending
Consumer
relationships
Insurance,
pensions and
investments
Small and
medium
businesses
Corporate and
institutional
banking
• Mortgages
• Credit cards
• Personal
loans
• Motor finance
• Current
accounts
• Savings
accounts
• Mass affluent
proposition
• Home, motor
and protection
insurance
• Pensions
• Investments
• Business
loans
• Lending
• Risk
• Transactional
management
banking
• Working
capital
• Liquidity
• Debt capital
markets
Our competitive
advantages
We have a number of distinct
competitive strengths that collectively
differentiate our proposition.
Our structure
We have three core divisions and, in
line with our new strategy launched
in 2022, we have restructured our
business to optimise synergies
and efficiencies to best serve our
customers’ needs.
See Group structure and ring-fencing
arrangements page 86
Our trusted brands
Our products and services are made
available to our customers through
our trusted brands, which enables
us to address the needs of different
customer segments more effectively.
Our external drivers,
risks and opportunities
We’ve built our business and strategy
to manage the fluctuations in our
external environment and to adapt
to ever-changing stakeholder needs.
This helps ensure the Group remains
sustainable over the longer term
and is able to manage risks and
opportunities as they emerge.
See risk overview pages 38 to 43
We regularly review the associated risk implications to ensure the right
choices are being made for customers, colleagues and the Group.
As a large, UK-focused financial services provider our business model
is influenced by a number of external factors:
Customers
Economy
Technology
and data
Society and
environment
Competitor
Regulation
See external environment pages 16 to 21
Lloyds Banking Group Annual Report and Accounts 2022
03
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report For over 325 years we have
supported Britain through the
good times and the bad. Today
is no different.
During 2022, we have continued
to work hard to Help Britain Prosper.
This is in the best interests of all
our stakeholders.
Delivering value
for all our stakeholders
How
we’re
Helping
Britain
Prosper
We provide
financial
services to
26 million
customers
in the UK
We’re helping our millions of customers – individuals, families
and businesses – to spend, save, borrow and invest.
We support our customers in many ways. Given the
increasing impact of cost of living on our customers, in July
2022 we launched our cost of living hub across our mobile
banking apps and websites. Through the hub customers can
get access to free and independent advice with support to
help them manage their finances. Since the launch of the
app, we’ve seen over 875,000 customers visit the hub.
How we’re supporting
customers through the
cost of living crisis.
04
Lloyds Banking Group Annual Report and Accounts 2022
We have
the largest
shareholder
base in the UK
Given the Group’s performance and strong
capital position, the Board has recommended
a total ordinary dividend of 2.40 pence per share.
This represents an increase of 20 per cent on
2021, in line with our progressive and sustainable
ordinary dividend policy.
We have also announced a further share buyback
of up to £2 billion, marking 2022 as a very strong
year of capital return to shareholders.
most of our employees £3.6bn
2.3mshareholders, including
returned to shareholders
for 2022
We are
listening to
and supporting
over 63,000
colleagues
We have been engaging with colleagues in shaping our journey
and co-creating our new Group values to make sure that every
colleague is motivated and excited by the role they can play
in Helping Britain Prosper.
We have also been conscious of the impact that the increased
cost of living has continued to have on our colleagues. In August
2022, the Group gave the vast majority of colleagues a £1,000
one-off payment to help with the rising cost of bills.
In addition, we made significant changes to our reward approach
which reflect our continued desire to support our colleagues,
particularly those that are lower paid, during these extraordinary
times and over the longer term. The 2023 pay award has a cash
value typically in the range of 8 per cent to 13 per cent for our
lowest paid colleagues.
Lloyds Banking Group Annual Report and Accounts 2022
05
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Delivering value for our all
stakeholders continued
We’ve lent
c£35 billion
to businesses
and proactively
offered support
We’ve proactively contacted more than 550,000
businesses to offer support and through our financial
wellbeing tools, we’re monitoring those clients who
may be at risk of falling into financial difficulty.
We have been working with these clients to offer
bespoke support such as temporary payment plans
and 30-day holds which can stop interest or product
fees continuing to build.
How we’re supporting
British businesses, from
entrepreneurs to SMEs.
Helping UK
society with
ongoing
financial
education
and support
We continue to offer help to children and young adults
across the UK to better understand the value of money and
manage their finances day-to-day as they transition to
financial independence. Our activity is primarily delivered
face-to-face by colleague volunteers in classrooms, but
we also have a range of resources that are available for
download via the Lloyds Bank Academy site.
06
Lloyds Banking Group Annual Report and Accounts 2022
In addition, we donated £22.4 million to our
four Foundations which cover England and
Wales, Scotland, Northern Ireland and the
Channel Islands. They provide an invaluable
contribution by partnering with hundreds of
small and local charities in their area. The
Foundations provide funding and other forms
of support to help people overcome complex
social issues such as mental health, domestic
abuse, addiction and homelessness.
Working with charities and
community groups across
the UK is a key part of our
purpose of Helping Britain
Prosper.
>£22mdonated to our Foundations in 2022,
taking our total donations to over
£110 million since 2018
Read more on our
commitment to reduce our
supply chain emissions.
Working
to reduce
the carbon
footprint in
our supply
chain
Our suppliers and supply chains are integral to how
we fulfil our customers’ needs. We rely on around
2,600 suppliers for important aspects of our operations
and customer service provision.
Recognising the emissions we generate through
the purchase of goods and services and working
collaboratively with our suppliers to reduce the
Group’s supply chain emissions are integral to our
net zero strategy.
In October 2022, we announced our ambition to achieve
a 50 per cent reduction in the carbon emissions we
generate through our supply chain by 2030 on the path
to net zero by 2050 or sooner.
Why our approach to tax
matters to us and our
stakeholders.
£3.9 billion
of cash taxes
paid to the
UK Government
We regularly engage in open discussion with our
regulators and other government authorities (including
HMRC) to ensure the Group operates in line with current
and developing legislation.
Lloyds Banking Group is proud to be one of the UK’s
largest tax payers, helping finance public services.
Lloyds Banking Group Annual Report and Accounts 2022
07
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Chair’s statement
We are
becoming
truly
purpose
driven
Robin Budenberg
Chair
08
Lloyds Banking Group Annual Report and Accounts 2022
Overview
During 2022 the Group has continued to make significant
progress, effectively supporting our customers through what
are clearly uncertain and challenging times, whilst launching a
more purpose-driven strategy, accelerating our investment in
the business and establishing a culture to support long-term
sustainable success.
We are acutely aware that the current environment, and
the increased cost of living in particular, is a challenge for
many of our customers, colleagues and society more widely.
We remain committed to supporting our customers and
colleagues proactively and I am immensely proud of the
role this organisation plays in Helping Britain Prosper.
Against this backdrop, the Group has continued to deliver good
business momentum and robust financial performance, enabling
support for our customers, the investment required for our
strategy as well as a further increase to the ordinary dividend
and excess capital return.
Our purpose and strategy
We are clear that our purpose as a Group is to Help Britain Prosper.
This means not only providing outstanding service to our
customers, but also responding to the UK’s social, environmental
and economic issues which we believe we are well placed to
address. We are enormously proud of this role which includes
helping build a more inclusive society and supporting the UK’s
transition to a low carbon economy.
In February 2022, we announced an ambitious strategy to
transform our business in pursuit of this purpose to generate a
stronger growth trajectory and to deliver higher, more sustainable
returns. While the world has changed significantly since that time,
our strategic focus remains clear and disciplined and we have
made good initial progress with a new organisational structure
and leadership team in place, a new operating model for change
implemented, and increased investment particularly in our
technology capabilities.
We want to be a leader in accelerating the UK’s transition to
a low carbon economy and have continued to expand our
targets and plans to deliver our net zero ambitions in our own
operations, supply chain and financed emissions. With our
full year results, we have published our second dedicated
environmental sustainability report which also includes our first
Group climate transition plan. We also continue to implement
the recommendations of the Financial Stability Board’s Task Force
on Climate-related Financial Disclosures.
We are committed to Helping Britain Prosper by creating a more
sustainable and inclusive future for people and businesses,
shaping finance as a force for good. Further detail on our strategy
can be found on pages 22 to 31.
Remuneration
During the year the Remuneration Committee has carefully
considered how best to support our colleagues in the current
challenging economic conditions, recognising the support and
dedication of our staff and that the increase in living costs is
impacting our lowest paid colleagues the most.
To help with increasing household costs, the Group was one of the
first large UK companies to make a one-off payment (£1,000) to
our colleagues (except senior leaders) in August. This amounted
to a total value of £67 million. In addition, we have now agreed a
pay package for our staff for 2023 which was approved by both
our recognised unions by votes of their members. This was again
focused on our more junior staff with an 8 per cent to 13 per cent
increase for our 43,000 lowest paid colleagues (equivalent to a
c.6.3 per cent increase on the overall pay bill).
The Group is also looking to implement a new remuneration
policy this year to align executive remuneration more closely
with our longer-term strategic objectives. This will include
a return to a long term incentive plan aimed at ensuring
executive remuneration is more closely aligned with our
shareholder interests.
Our culture
The Board and senior management have a vital role to play in
shaping and embedding the right corporate culture in order to
progress our purpose and implement our strategy. Our new Group
values will guide behaviour but also the way we make decisions,
from small everyday choices to big strategic decisions. Further
detail on our new Group values can be found on pages 84 and 85.
Summary
Looking ahead we know that the current outlook is uncertain and,
as with the pandemic, the current challenges around cost of living
will be another crucial test for the banking sector and its ability
to support and to protect its customers. I remain confident that
Lloyds Banking Group will support our customers and make sure
that those who are most at risk of getting into financial difficulty
have access to the help that they need.
Directors
We review the Board’s composition and diversity regularly and
are committed to ensuring we have the right balance of skills
and experience within the Board. Aligned to this I am pleased
to say we meet the Parker Review recommendations, and that
we are aiming to meet all recommendations set out by the
FTSE Women Leaders Review. The Board supports the focus on
improving gender diversity and will give due consideration to this
with future appointments. During 2022, there have been a number
of changes to the Board and further detail can be found in our
governance report on page 72.
I also remain confident that our strategy and commitment to
become a truly purpose-driven business will enhance the long-
term future of the Group and benefit all our stakeholders. We
will continue to ensure that the Group is at the heart of the UK
recovery and of Helping Britain Prosper.
Robin Budenberg
Chair
Back in 2016, our colleagues chose Mental Health UK as the
Group’s official charity partner. Initially, the partnership was
meant to be for two years, with the aim for Lloyds Banking
Group to raise £4 million to help Mental Health UK set up a
service to support people experiencing mental health and
money problems. Six years and £16 million later, the partnership
has revolutionised mental health support and understanding.
For 2023 and 2024, our colleagues voted for our new charity
partner to be Crisis (working alongside Simon Community in
Northern Ireland). By bringing our organisations together we
aim to create the perfect partnership for a housing-led solution
to end homelessness. We will help by increasing access to
affordable housing, supporting more people to rebuild their
lives and become more financially secure and equip the nation
with the solutions to prevent homelessness.
Our charity partner:
Crisis and Simon Community
Together we will provide vital help so that
people can rebuild their lives and are
supported out of homelessness for good.
>220k
families and individuals across the UK
are facing homelessness
Lloyds Banking Group Annual Report and Accounts 2022
09
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Governance in action (section 172(1) statement)
Overview
Given the scale of the Group, significant stakeholder
engagement takes place at all levels within the organisation.
Managing stakeholder interests is an important focus for the
Board, and forms a key part of the Board’s delegation of the
day-to-day management of the business to the Executive.
In addition to the direct engagement of Board members
with stakeholders discussed on pages 82 and 83, the Board
requires stakeholder implications to be considered within
all proposals submitted to it from across the organisation.
Stakeholder interests are identified by the Executive in
proposals, both within the papers and as part of the
accompanying presentations.
Through their regular business updates, and in their other
interactions with the Board both in and outside of the board
room, the Executive routinely provide the Board with details
of stakeholder interaction and feedback from across the
wider Group.
Throughout 2022 the Board’s key stakeholders remained the
same as they were in 2021:
Stakeholder key:
Customers and clients
Society and environment
Shareholders
Suppliers
Colleagues
Regulators and government
Key discussions and decisions
Strategy
See more on pages 22 to 31
The Group announced in February 2022 its ambitious new
strategy. While the external environment has changed
significantly since then, our strategy remains the right one given
its continued focus on customers whilst delivering growth and
diversification. The Board ensures that the necessary resources
are in place for the Group to meet its objectives and measure
performance against them, and the focus of the Board on
supporting the implementation of the strategy remains strong.
Given the fundamental importance of the Group’s delivery of
its strategy, the Board considered aspects of implementation
of the strategy including opportunities and risks to delivery
at its scheduled meetings in 2022.
Additionally, the Board held dedicated sessions in June and
November where progress against the strategy was a primary
focus. In June this included discussion of developments in key
business areas, the Group’s progress on its path to net zero,
and updates on initiatives supporting the implementation of
the strategy, including the mobilisation of the Group’s new
platform-based operating model.
10
Lloyds Banking Group Annual Report and Accounts 2022
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 detail on key stakeholder
interaction is also contained within the directors’ report on
pages 72 to 137.
The directors remain mindful in all their deliberations of the
long-term consequences of their decisions, as well as the
importance of the Group maintaining a reputation for high
standards of business conduct and the Board engaging with,
and taking account of the views of, key stakeholders.
The Board provided valuable feedback to the executive
leadership team, which was considered and acted upon,
with further updates provided at Board meetings later in the
year and at the dedicated session in November.
At its November session, the Board also considered the
impacts on the Group’s strategy of the changing economic
environment, changes in the skills the Group will need as its
strategy develops, the importance of purpose in delivering
on agreed strategic ambitions and how the Group delivers
sustainable long term success.
Stakeholder interest was at the forefront in all these discussions.
This was drawn out by the Executive, including how the
implementation and development of the Group’s strategy
is impacting both customers and colleagues, with the Board
reflecting on feedback received from stakeholders on the
Group’s progress in implementing the strategy.
c£0.9bn
in-year incremental strategic investment
Key discussions and decisions
Culture, values and purpose
See more on pages 84 and 85
The Board continues to recognise the importance of creating
a purpose-driven culture led by values which drive the delivery
of the right outcomes for the Group’s stakeholders. The Board
has to that end continued to oversee the activity commenced
in 2021 to deliver transformation in this area.
The Board considered early in the year the importance of the
Group’s values as a driver of wider cultural change, and in that
regard agreed proposals for re-defining these values and for
providing fuller alignment between the Group’s values and its
purpose, recognising that both of these are key drivers of our
cultural change.
The Board encouraged feedback to be sought from colleagues
on the values proposed, and following this feedback approved
a Group wide re-launch and programme of colleague
engagement.
The purpose remains Helping Britain Prosper and the new five
values are People-first, Bold, Inclusive, Sustainable and Trust.
The Board then considered progress in the embedding of our
purpose and the re-defined values. This included how the
Group’s culture plan would deliver on the ambitions which had
been set, how the Group would know that progress was being
made, and the areas and actions which would take particular
focus during the course of the year, while also ensuring that
simplicity could be maintained in the overall approach.
Later in the year the Board endorsed a new framework to
enable the delivery of further cultural change, including
new initiatives such as the Grow with Purpose leadership
development programme. The Board will continue to review
progress in this area in the year to come.
With colleague support, we are
building a culture in which everyone
feels included, empowered and
inspired to do the right thing for
all our stakeholders.
Robin Budenberg
Chair
Climate and net zero
See more on pages 36 and 37
The Board has overall oversight of environmental, social and
governance matters, with sustainability an integral element of
the Group’s strategy and embedded in business objectives.
The Board maintains its commitment to, and acknowledges
the importance of, the ambitious climate change goals set in
2020, including reducing the emissions the Group finances by
more than 50 per cent by 2030, and achieving net zero by 2050
or sooner.
The Board has devoted considerable time to reviewing the
Group’s progress against these objectives, and during the
year oversaw a number of additional commitments to further
drive the Group’s progress to deliver on our climate ambitions.
Key for 2022 was the release of our net zero activity update
that included sector-specific emission reduction targets for
seven Net-Zero Banking Alliance sectors. In our environmental
sustainability report for 2022 we have also published the
Group’s first climate transition plan, complementing the existing
Scottish Widows climate action plan released in the first part
of 2022.
In October, the Board approved new sector targets for four
high emitting sectors, including UK residential mortgages,
automotive original equipment manufacturers and aviation,
along with an update to power.
These combine with our existing sector targets for thermal
coal, oil and gas, and retail motor, with our seven targets
now covering some of the UK’s hardest to abate and most
material sectors.
As part of the process of determining and setting these sector
targets, the Board reviewed and challenged key strategic levers,
dependencies, risks and opportunities at its offsite meeting
in June, acknowledging the unique factors at play within the
individual sectors.
Alongside sector targets, we released our new supply chain
ambition to reduce the emissions from our suppliers by
50 per cent by 2030 on the path to net zero by 2050 or
sooner, complementing our existing financed emissions
and own operations emissions reduction ambitions. The
Board also approved via its Responsible Business Committee
enhancements to our external sector statement for oil and gas.
Progress against all of these initiatives continues to be closely
monitored by the Board. As the Group’s climate ambitions and
related stakeholder interests have been a key consideration
for the Board during the course of the year, further information
on our progress in meeting climate ambitions and our first
Group transition plan can be found in our supplementary
environmental sustainability report
.
>50%reducing emissions from our suppliers by 50 per cent
by 2030, on the path to net zero
Lloyds Banking Group Annual Report and Accounts 2022
11
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Group Chief
Executive’s review
Continued
business
momentum
with an
opportunity
to do more
The Group delivered a robust
financial performance with
increased capital returns,
whilst continuing to Help
Britain Prosper.
Charlie Nunn
Group Chief Executive
12
Lloyds Banking Group Annual Report and Accounts 2022
Overview
Throughout 2022, we have continued to deliver on our purpose
of Helping Britain Prosper, core to everything we do, whilst
creating a more sustainable and inclusive future for people and
businesses. Last year we announced our ambitious new strategy
with the aim of growing our business and deepening relationships
with our customers, meeting more of their financial needs.
While the operating environment has changed significantly
since then, our purpose-driven strategy is more relevant now
than ever before. Based on significant strategic action we have
made a good start and are seeing early evidence of delivery. We
believe our strategy will create higher more sustainable returns,
as reflected in our enhanced guidance and are excited about
the opportunities ahead.
During the year, the Group delivered a robust financial
performance with continued income growth supported by
higher interest rates and solid business volumes. Costs were
in line with expectations despite ongoing inflationary pressures.
As a result of the Group’s performance and strong pro forma
capital generation of 245 basis points in the year, the Board has
recommended a final ordinary dividend of 1.60 pence per share,
resulting in a total dividend for the year of 2.40 pence, an increase
of 20 per cent on prior year and in line with our progressive and
sustainable ordinary dividend policy. In addition, the Group has
announced a share buyback programme of up to £2 billion,
resulting in total capital returns of up to £3.6 billion, equivalent to
more than 10 per cent of the Group’s market capitalisation value.
We know that the current environment continues to be challenging
for many people and have mobilised the organisation to further
support our customers. We are committed to maintaining
support for our customers, clients and colleagues in the current
environment and have invested in deep capabilities to facilitate
this. This includes training more than 4,600 colleagues to provide
financial assistance to individuals and businesses, build financial
resilience to face cost of living challenges and support customers
with tailored products if needed. We also saw over 5 million
registrations for our Your Credit Score tool, leveraging our digital
strengths to help customers take greater control of their own
finances. For our colleagues, we provided additional payments
in August and December 2022 and designed a new pay deal for
2023, focused on our lower paid colleagues, to provide greater
protection and certainty.
Robust financial performance with
ongoing strength in our customer franchise
In 2022, we delivered a robust financial performance, with
statutory profit before tax of £6.9 billion. Underlying profit before
impairment of £9.0 billion was up 46 per cent on 2021, including
net income of £18.0 billion, driven by increased average interest-
earning assets, a strengthened banking net interest margin,
continued recovery in other income and lower operating lease
depreciation. Cost discipline was sustained, with operating
costs of £8.8 billion, up 6 per cent and in line with guidance,
reflecting stable business-as-usual costs and higher planned
strategic investment and new businesses. We saw strong
observed asset quality with sustained low levels of new to
arrears and very modest deterioration in observed credit metrics.
Underlying asset quality remains strong, despite the weaker
macroeconomic environment.
The Group also benefitted from continued balance sheet growth
during the year. Loans and advances to customers were up
£6.3 billion at £454.9 billion. This included continued growth
of £6.3 billion in the open mortgage book (£1.2 billion of which
was in the fourth quarter) alongside higher retail unsecured
loan and credit card balances. Commercial Banking balances
increased by £1.2 billion during the year due to attractive growth
opportunities in the Corporate and Institutional Banking portfolio,
partly offset by repayments of government-backed lending. The
Group also saw growth in its open book investments, with over
£8 billion net new money in the period, despite difficult market
conditions. Customer deposits decreased by £1.0 billion from the
end of 2021 to £475.3 billion, with Retail deposits up £2.4 billion in
the period, including current account balances up £2.5 billion,
more than offset by reductions in Commercial Banking deposits.
Group deposits are up c.£65 billion since the end of 2019.
Significant progress on serving all
stakeholders, with a good start to our
new strategy
We have a purpose-driven strategy. Core to this is our focus
on building an inclusive society and supporting the transition
to a low carbon economy, while creating new opportunities for
our future growth. To build a more inclusive society we have
supported £2.1 billion of funding to the social housing sector
and lent £14.3 billion to first time buyers in the year. We have
also helped around 185,000 small businesses boost their digital
capability and technology adoption in the year. Importantly,
we are also on track to reach our gender and ethnic diversity
ambitions by 2025 supported by delivering a race education
programme to our workforce in 2022.
How we’re Helping Britain Prosper
by supporting the UK’s vital
social housing sector
Throughout the UK, social housing is an integral part of the
housing landscape with millions of people benefitting from
stable and genuinely affordable homes.
That’s why I am proud that the Group is the biggest supporter
of social housing in the UK. Since 2018, we’ve supported around
£15 billion of funding to the sector and we currently work with
over 200 housing associations of all sizes.
Improving access to quality housing is central to building an
inclusive society and Helping Britain Prosper.
Read more in our social sustainability report
c£15bn
of funding supported to the social housing
sector since 2018
Lloyds Banking Group Annual Report and Accounts 2022
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Group Chief Executive’s
review continued
To support the transition to a low carbon economy we have
funded over £13 billion of green and sustainable financing in
2022 and made around £12 billion of discretionary investments
in climate-aware strategies through Scottish Widows. We have
also created a new partnership with Octopus Energy to support
in retrofitting the UK housing stock and launched our first Group
climate transition plan which you can find in our environmental
sustainability report.
Despite external developments and challenges, our strategy
remains the right one. It is more important than ever to deliver
against our purpose-driven outcomes that benefit all our
stakeholders. We are responding to the economic environment
by increasing support to customers and colleagues, whilst
accelerating our efficiency actions to offset the significant
inflationary pressures in the business. During 2022, the Group
invested £0.9 billion of incremental strategic investment,
delivering gross cost savings of £0.3 billion so far. We have
extended our ambition for saving even further, increasing our
2024 gross cost savings target by an additional £0.2 billion.
Driving revenue growth and diversification
We have made good progress on building deeper customer
relationships, as well as innovating and broadening our product
offerings and improving the ease with which our customers
can access them. We remain the UK’s largest digital bank and
have continued to invest in personalisation and digitisation,
resulting in a 15 per cent increase in daily logons and growing
our digitally active users by 8 per cent to 19.8 million. We have
also expanded our presence in areas where we are under-
represented. For example, we grew our protection market share
by around 1 percentage point. In our new mass affluent business,
we saw an increase in banking balances of over 5 per cent and
launched new, tailored banking products, including packaged
bank accounts and credit cards, as well as enhanced direct to
consumer investments. We are building capability as we look to
launch our differentiated, digital first model in earnest later this
year. In February 2023, the Group announced the acquisition of
Tusker, a vehicle management and leasing company focused on
electric and low emissions vehicles. This will further develop the
Group’s Motor business in a way that is clearly aligned with the
organisation’s purpose and sustainability ambitions.
In SME, we continue to digitise and diversify our business,
with positive early momentum demonstrated by a more than
20 per cent growth in new merchant services clients. We are
also broadening our product capabilities with strategic fintech
partnerships where appropriate. Alongside, our targeted
Corporate and Institutional offering delivered c.£8 billion of
green and sustainable financing, driven by purpose-driven
growth with businesses transitioning to net zero. We are meeting
more needs for existing clients and growing non-lending income,
supported by investment in product capabilities. This is reflected
in a c.20 per cent growth in our percentage share of wallet for
foreign exchange trading.
Investing in enablers to improve delivery
Maintaining discipline with regards to cost and capital efficiency
is critical to our strategy. To this end, increased customer
engagement and continued investment in digital propositions
enable us to optimise the cost-to-serve to customers by, for
example, streamlining our branch network, whilst reducing
our office footprint by c.12 per cent. We remain committed to
identifying further efficiencies to minimise the net cost impact
from inflationary pressures and create the necessary capacity
for investment. With regards to capital efficiency, we have
demonstrated RWA discipline during the year whilst pursuing
growth in capital-lite and fee generating businesses.
In order to deliver our strategy, we are focused on maximising the
potential of our people, technology and data, the key enablers.
For our people, efforts in 2022 have focused on positioning
the organisation for future success. We have established an
experienced, new leadership team with significant capabilities
in strategic and digital delivery, alongside a flatter executive
structure aligned with our strategic priorities.
14
Lloyds Banking Group Annual Report and Accounts 2022
The strengthening of our senior leadership team is also
delivering on our inclusion and diversity objectives. In addition,
we restructured our business and technology teams to set up
a new platform-based operating model that brings together
expertise in cross cutting, multi-functional teams to now drive
greater accountability and collaboration and help to effect more
quickly and efficiently. Finally, we have continued to invest in the
talent, skills and capabilities needed to deliver our long-term
growth strategy with our approach extending to consideration
of international in-sourcing opportunities and how we work with
third parties.
We are investing in modernising our technology estate,
improving resilience and operational agility. During 2022 we
decommissioned 5 per cent of our legacy applications, in line
with our target of a greater than 15 per cent reduction by the
end of 2024. As part of our effort to grow the role of data in our
business, we reduced our data centre estate by 10 per cent in
2022. We also successfully ingested the first significant tranche
of data onto Google’s public cloud platform and continue
to target 20 per cent of our applications to be on public and
private cloud in 2024. Our experience in 2022 has enhanced
our conviction in the fundamental importance of our technology
and data transformation programme for the long-term success
of the Group.
Through our purpose-driven strategy we will continue to drive
revenue growth and diversification across our main businesses,
unlocking opportunities through our consumer and commercial
franchises. This growth will in turn leverage the Group’s cost and
capital efficiency, building on our strong foundations. Critical
to this is our intention to maximise the potential of our people,
technology and data in supporting our ambitions.
Outlook
Although the macroeconomic outlook remains uncertain, our
people, business model and financial strength ensure that we
can continue to support our customers and Help Britain Prosper.
Our purpose-driven strategy is more relevant now than ever
before and our experience in the last year reinforces our belief
that successful strategic delivery will create a more sustainable
business and deliver increased shareholder returns in the
medium to longer-term. Based on our current macroeconomic
assumptions the Group expects:
2023 guidance
• Banking net interest margin to be greater than 305 basis points
• Operating costs to be c.£9.1 billion
• Asset quality ratio to be c.30 basis points
• Return on tangible equity to be c.13 per cent
• Capital generation to be c.175 basis points
2024 and 2026 guidance
• Operating costs now expected to be c.£9.2 billion in 2024,
with a cost:income ratio of less than 50 per cent by 2026
• Asset quality ratio now expected to be c.30 basis points in 2024
• Return on tangible equity now expected to be c.13 per cent
in 2024 and greater than 15 per cent by 2026
• Additional revenues from strategic initiatives of c.£0.7 billion
by 2024 and c.£1.5 billion by 2026
• Risk-weighted assets to be between £220 billion and £225
billion at the end of 2024
• Capital generation now expected to be c.175 basis points
in 2024, increasing to greater than 200 basis points by 2026
• The Group will maintain its progressive and sustainable
ordinary dividend policy, whilst the Board expects to pay down
to its target CET1 ratio by the end of 2024
Charlie Nunn
Group Chief Executive
The importance of
our people and culture
Our people make all the difference. We
are committed to building a fully inclusive
environment that is reflective of the society
we serve. A place that encourages and
values the unique differences our people
bring with them to work every day, and where
everyone can reach their full potential.
Our purpose of Helping Britain Prosper is as important as ever,
but in order for us to grow our business in a way that delivers
great outcomes for customers, communities and colleagues,
we need to put our purpose at the front and centre of every
decision we make.
To ensure we’re all supported to make that change, we’ve
evolved our values so that they clearly align with our purpose:
People-first, Bold, Inclusive, Sustainable and Trust. They’ll guide
not only how we work, but also how we make decisions. We’ve
introduced a new value helping us to champion sustainability,
recognising its important role in delivering on our purpose and
supporting Britain’s transition to a net zero economy. Further
detail on our new values can be found on pages 84 and 85.
Our leaders are critical to our cultural change. We’re bringing
them together in a different, and more intimate way to accelerate
the change, in a programme called Grow with Purpose. Over three
days, they are exploring our purpose, strategy and organisational
shifts, before making commitments about what they’ll do
differently. Charlie Nunn, Group Chief Executive, is spending time
with the top 300 leaders at Grow with Purpose, as well as the Group
Executive Committee who are attending the three days in full.
To help drive change through the rest of the organisation, we’re
launching our Catalyst programme, involving 10 per cent of the
organisation. They will inspire everyone across the Group to think
and act differently, unblocking problems and igniting change whilst
role modelling our purpose and values.
We recognise that the world of work is changing, technology is
advancing, and skills needed today will be obsolete in the future. As
the UK faces challenges with skills shortages, we are investing in our
colleagues to be the key to our future success. We are developing
the deep technical skills we need now, and in the future, and have
developed a reskilling proposition, so we can nurture and retain
talent by providing opportunities for second, third and even fourth
careers, allowing colleagues to move freely around the Group.
Amongst our top 300 population, we are building skills and
diversity, including 32 internal promotions to executive and
28 external executive hires of which 46 per cent were women and
21 per cent were from an ethnic minority background.
We know the success of our business is dependent on our colleagues
and we aim to look for ways to help them feel more supported, in
control and confident about their future. We have also launched
several changes for the colleague proposition including a one-off
payment of £1,000 to the vast majority of colleagues; improved
workplace facilities; increased year-end get together allowance;
and more accessible and easier to use technology in offices. As we
accelerate our purpose-driven ambition, one of the critical outcomes
will be to become a place where more people are both passionate
about, and want to advocate for, working at Lloyds Banking Group,
making this a key measure of our success going forward. In response
to the increasing cost of living, recruitment and colleague sentiment
challenges, we have announced a wide-ranging pay deal, with a
focus on lower paid colleagues.
Looking forward, with Helping Britain Prosper as our north star and
working closely with our colleagues, we will enable the cultural
transformation of the Group.
92%
of our colleagues believe in our
purpose of Helping Britain Prosper
Lloyds Banking Group Annual Report and Accounts 2022
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Our external environment
The Group continues to adapt
to evolving market trends
Customers
• Customers value convenience and relevance for
their financial needs; our strategy seeks to meet
this through investment in our business
• Cost of living is forefront in the minds of our
customers; we are proactively supporting them
in a challenging period
Market dynamics
2022 has been a challenging year for many of our customers. Whilst
the social and economic consequences of COVID-19 continue to
be felt, the Russian invasion of Ukraine in February added to the
economic headwinds from nearly two years of disruption.
New working patterns continue and worsening health outcomes
are reducing labour force participation. Supply chain disruption,
in addition to global fiscal and monetary stimulus has contributed
to inflationary pressure as customers revert to pre-COVID-19
norms. The digital acceleration experienced over the last two
years as COVID-19 forced new behaviours has stabilised, with
customer activity still strongly skewed towards digital channels.
Consequently, customer expectations of convenient, personalised
experiences through digital channels remain high.
Rising interest rates in the UK, worsening following the market
dislocation resulting from the September mini-budget, had
a significant impact on customer and client borrowing costs.
Rising mortgage costs have been an unexpected shock for many
and the full consequences of this are likely to be felt over the
coming years as our customers come to the end of their fixed
rate products. Inflationary pressure on real incomes will also have
knock-on impacts on longer-term challenges our customers face,
such as saving for retirement. Businesses face a combination of
rising input costs, higher borrowing costs, a tight labour market
and lower consumer demand. Whilst government intervention in
energy markets has softened the blow on customer finances in
the short term, rising taxation on both consumers and businesses
presents a challenging outlook.
Change in channel usage versus 2017
Average visits per user (%)1
150
100
50
0
2017
2018
2019
2020
2021
Digital
Branch
First part of 2021 includes effects of national lockdown.
Lloyds Banking Group Annual Report and Accounts 2022
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2022
Link to principal risks
Conduct, Credit, Data,
Operational resilience, People
Our response
The Group continues to adapt to customer trends. In the longer
term, to meet customer expectations for seamless, personalised
experiences, we continue to invest in our data and technology
capabilities. The benefits of this can be seen in our cost of living
support hub; our customers have visited this over 875,000 times
and received personalised support with debt repayments,
subscription management to help control spending and links
to independent advice and support services. The cost of living
challenges increase the need to execute on our strategy,
deepening relationships with customers to support their financial
needs and creating a digital mass affluent proposition. For
commercial clients, digitising our SME business and focusing
our corporate and institutional business on meeting their core
cash management, debt and risk management needs remains
our focus.
We have increased our support to customers during 2022. Cost of
living pressures are affecting our customers in different ways and
there are increasing expectations for financial service providers
to do more to support them. We are tailoring our support to
meet our customers individual changing circumstances and
have trained more than 4,600 colleagues to provide financial
assistance to individuals and businesses to help them build
financial resilience and provide access to tailored products if
needed. To support customers with potential financial stress, we
have offered over 200,000 mortgage customers support in the
face of higher interest rates and provided 220,000 customers a
£500 interest-free overdraft buffer. We’ve also communicated to
more than 550,000 businesses to provide support and options
in managing their finances, for example sustainable financing
options to reduce energy costs. Our digital strength is also
supporting customers to take greater control of their finances,
with over 5 million registrations for our Your Credit Score tool.
Economy
• Given our focus on UK customers, the Group’s
prospects are closely linked to developments
in the UK economy
• The UK outlook deteriorated in the second half of
2022, heavily influenced by the invasion of Ukraine
and central banks’ response to high inflation
• High inflation and rising interest rates create
a challenging UK economic outlook for 2023
Link to principal risks
Capital, Conduct, Credit,
Market
Market dynamics
After starting 2022 with economic activity constrained by
COVID-19, UK GDP recovered almost to its pre-pandemic level
by mid-year. Further recovery was limited by rising numbers of
workers with long-term sickness and weak productivity growth.
House prices and commercial real estate (CRE) prices continued
to rise through the first half of 2022. During the second half of the
year, however, Russia’s invasion of Ukraine began to have a large
impact on global and UK economies.
Higher energy and food prices exacerbated greater supply chain
costs, pushing UK CPI inflation to a 41 year high of 11 per cent
during the fourth quarter. Although the UK Government capped
energy prices and provided further support to lower income
households and pensioners, households’ spending power fell by
around 2 per cent in 2022, the largest single-year decline since
the 1950s.
Policy support to counter cost of living pressures is constrained.
UK Government finances are increasingly stretched, entering the
third economic ‘crisis’ since 2008. Spending plans for the next
five years have been pared back, taxes raised and the energy
price cap reduced from April 2023. In response to inflation rising
well above target, the Bank of England raised UK Bank Rate from
0.25 per cent at the start of 2022 to 3.5 per cent by year end, the
highest level since 2008.
Although inflation will begin to fall from early 2023, this is expected
to be gradual, causing a further decline in households’ spending
power, dragging down UK GDP by 1.2 per cent. With UK Bank Rate
expected to be 4 per cent through most of the year, house prices
are forecast to fall by 7 per cent across 2023 with mortgage
affordability for new buyers at its tightest since pre-2009. Higher
interest rates are reducing CRE prices even more significantly.
There are significant risks to these forecasts in both directions
– the impact of rising interest rates could weaken the global
or UK economy more than expected; conversely, the cost of
living squeeze may be not as deep as assumed if recent falls
in wholesale-market forward energy prices persist.
Developments in our markets across 2022 reflected the recovery
in economic activity from pandemic-restricted levels of 2020/21,
the end of government schemes that had supported companies’
borrowing during the pandemic, and the rise in inflation.
Consumer credit market balances rose by 5 per cent as spending
recovered, although have still regained only half of their fall during
the pandemic. Mortgage market balances rose by a healthy
4 per cent, supported by the 18 per cent rise in house prices
over the three years since the start of the pandemic. Growth in
households’ deposits slowed to a more normal 4 per cent in 2022
after having grown by 17 per cent in total over 2020 and 2021 when
spending opportunities were constrained. Business lending grew
slightly, but this masks a bigger rise in lending to large companies
and a fall of over 5 per cent in lending to SMEs as businesses
began to pay down COVID-19 scheme borrowing.
A mild recession and falling property prices are expected to
reduce growth in most of our markets in 2023. Mortgages are
expected to slow the most, as higher interest rates drive down
housing transactions. Consumer credit growth is expected to slow
less, with further ground to make up to the pre-pandemic level
of balances, and with elevated inflation supporting the nominal
value of spending. Household deposits growth is expected to slow
to its weakest since 2009 as the cost of living squeeze intensifies.
SMEs are expected to continue reducing their elevated borrowing.
Our response
Given our UK focus, the Group’s prospects are closely linked to the
performance of the UK economy. Despite this, our business model
and strategy, in particular the strength of our customer franchise,
balance sheet and prudent approach to risk, position us well.
In line with our purpose of Helping Britain Prosper and a clear
customer focus, we are providing support to those most affected
by changes to the economic environment. In addition to the
near-term revenue benefits from rising interest rates, our strategy
will deliver growth and diversification even in a more challenging
macroeconomic environment, improving the sustainability
of returns. At the same time, we are accelerating efficiency
measures to offset inflationary pressures on our cost base,
consistent with our ongoing discipline in this area.
Lloyds Banking Group Annual Report and Accounts 2022
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Our external environment
continued
Society and
environment
• Stakeholders expect UK companies to play their
role in supporting the country and its people
in the current uncertain environment
• Building an inclusive society and supporting the
transition to a low carbon economy are core to
our strategy and our purpose of Helping
Britain Prosper
• This focus positions us well to support our
customers, colleagues and communities,
and create value for all stakeholders
Market dynamics
We are faced with political and economic uncertainty both
at home and globally. Rising inflation and interest rates, and
government spending cuts and tax rises, engender a cost of
living squeeze on many people and businesses in the UK.
The focus on climate change remains, with the emphasis
now on companies’ tangible short and medium-term plans
and implementation of these plans to support the transition
of the economy towards net zero. There is also an emerging
focus on nature and biodiversity, the need to protect them and
to better understand their inter-linkages with climate. At the
same time, increasing regulatory focus on climate risks and
evolving sustainability reporting standards put pressure on UK
companies to continually enhance their climate capabilities
and sustainability reporting.
Our response
Core to our purpose, Helping Britain Prosper, and strategy is our
focus on creating a more inclusive and sustainable future for
people and businesses. This focus positions us well to support
our customers and the broader UK society during challenging
times, whilst continuing to support the transition required to
reach net zero.
In 2022, we contacted over 200,000 mortgage customers to
provide support in context of rising rates and more than 550,000
commercial clients to offer support in maintaining financial
resilience through the cost of living challenges.
>200k
mortgage customers
contacted to provide support
>£13bn
of green and sustainable
finance provided to
businesses and households
to help them on their net
zero journey
18
Lloyds Banking Group Annual Report and Accounts 2022
Link to principal risks
Climate, Conduct, Credit
We have also supported our colleagues by providing one-off
payments in August and December 2022, and designed a new
pay deal for 2023 to provide protection and certainty to our lower
paid colleagues into the new year.
We have provided access to quality housing by supporting
£2.1 billion of funding to the social housing sector and lending
£14.3 billion to first time buyers in the year. We have partnered with
the UK Urban Futures Commission and supported local, green
infrastructure projects to support regional development across
the country.
To support the transition to a low carbon economy, we have
provided over £13 billion of green and sustainable finance
to businesses and households to help them on their net zero
journey and invested around £12 billion in climate-aware
strategies through Scottish Widows during 2022. We have also
created a new partnership with Octopus Energy to support
retrofitting of the UK housing stock and developed our first Group
climate transition plan which highlights the progress against our
net zero ambitions and the actions we will take towards transition.
This plan is included in our dedicated environmental sustainability
report as we continue to enhance our reporting on environmental
risks and opportunities.
Tax is also one of the ways in which businesses contribute to the
societies in which they operate, and we are proud to be one of the
UK’s largest tax payers, helping finance public services.
We will continue to work hard to deliver on our purpose, Helping
Britain Prosper, by creating a more sustainable and inclusive
future for people and businesses, as we believe that it is only by
doing right by our customers, colleagues and communities that
we can create value for all stakeholders.
Technology
and data
• We operate in an increasingly digital market,
with potential for new business models and
changes to financial services infrastructure
• Technology investment remains important to
improve customer experience, unlock efficiency
savings and utilise the full potential of data
Market dynamics
Recent years have seen an increase in customer digital usage
as COVID-19 restrictions have accelerated existing trends. Whilst
there has been some rebound, with cash usage increasing in
2022 and the share of consumer spend online declining from
lockdown peaks, the long-term trend towards increasingly
digital-first financial services remains. Reflecting this reduced
customer demand, the number of bank branches continued
to reduce during 2022.
We operate in a highly innovative market with business model
innovation enabled through new digital technologies such as
cloud hosting and API connectivity. Across many markets, there
is potential for embedding lending, payments and insurance
services within digital, non-financial services settings to disrupt
traditional business models. Other areas of innovation such
as cryptocurrencies experienced high volatility over the year.
Nonetheless, the consequences of digital innovation in payments
may be longer term, with central bank experimentation with their
own digital currencies gaining pace. This has spurred industry
exploration of the potential of technologies like blockchain
in areas such as international payments, trade finance and
market infrastructure.
As customers increasingly use digital channels within financial
services and lead more of their lives online, the potential for
fraud increases. However, the first half of 2022 saw a reduction
in total fraud volume, following rises in recent years. Technology
investment in capability to detect and prevent fraud, in addition
to regulation such as secure customer authentication, is
beginning to tackle this important issue for customers.
More broadly, the potential of new technologies to simplify legacy
systems remains for banks. This includes reduced run and change
costs, and improved services provided to customers enabled
through real time and fully contextual data insights.
Link to principal risks
Change/execution, Conduct, Data,
Operational, Operational resilience
Our response
The Group continues to see significant value in its all-channel
distribution model, maintaining a wide branch footprint alongside
digital capabilities, which are critical to driving revenue growth
and diversification for the business. Experience in 2022 has only
enhanced our conviction of the importance of our technology
transformation program for the long term health of the business.
In 2022 we have increased digitally active customers by 8 per
cent to 19.8 million and continued to invest in simplifying our
technology estate, making good progress in re-platforming
our businesses and achieving a 5 per cent reduction in legacy
applications. This unlocks customer benefits, such as faster, more
seamless digital journeys, and business benefits through a lower
cost to run and enhanced technology estate.
Our investment to maximise the potential of people, technology
and data continues. During 2022 we reorganised our teams to
bring business and technology ownership closer together through
a new platform-based operating model. Our investment in data
continues to mature, supporting better customer and business
outcomes, in addition to enabling the deep customer insights
required to comply with the upcoming Consumer Duty regulation.
We continued to make good progress in transforming our
technology and reduced our data centre footprint by 10 per cent.
Customers are using the digital channel for most product needs
Customers are using the digital channel for most product needs
% volume of products originated digtally
% volume of products originated digitally
2022
2020
2018
2016
2014
84
85
73
61
40
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Our external environment
continued
Competitor
• We continue to largely operate in mature, highly
competitive markets
• Fintechs are challenged by rising interest rates
impacting funding availability
• Technology companies and international
banks continue to expand financial services
participation in the UK
Link to principal risks
Capital, Change/execution,
Conduct
Market dynamics
The UK financial services sector is a highly competitive market,
attracting new entrants in recent years from international firms
and new start-ups backed by private capital. Our traditional
peers have been strengthened by rising interest rates, albeit the
uncertainty over the economic outlook presents downside risks.
Notwithstanding, improved financial strength positions incumbent
banks well to compete with new entrants.
2022 saw continued market entry from international peers with
the launching of digital-only brands and acquisition of existing
wealth management firms. These new direct competitors are
expected to broaden their offerings over time in a bid to reach
profitability and scale. Other new entrants pared back growth
ambitions in the UK, reflecting the need to focus on their core
franchise. In addition, technology companies’ extension into
financial services has continued. Provision of financial services
embedded into platforms, often beginning with payment
services, and then extending into working capital or consumer
loans and deposits, is a key development. Differing approaches
are being adopted by these platforms, from building out their
own financial services offerings to partnering with existing
banks to provide financial services.
For some UK fintech entrants 2022 was a more difficult year.
Following global interest rate rises, increasing funding costs
are challenging models that are better suited to more benign
economic environments. Valuations and private capital funding
have fallen over the year, as expectations of future growth
have tempered, and funding costs increased. Nevertheless,
the digital experience for customers and speed of execution
continue to raise customer expectations across the board,
requiring ongoing investment to keep pace, and fintechs
remain significant competitors.
Our response
We are well positioned to continue our market leading position
across multiple markets and deliver on our ambition to grow. We
have a strong customer franchise and core capabilities including
credit decisioning and market leading efficiency, which is
increasingly important given inflationary pressures. Our financial
strength allows us to support our customers and our clear
purpose and mission drive focus throughout the organisation
to achieving our strategic goals.
We have strong customer relationships, meeting the needs of
26 million customers. We will continue to drive strong customer
engagement through our multi-channel model and deepen
customer relationships through a comprehensive offering. We
are increasing our focus on customer segments, building out a
compelling mass affluent proposition over time, supported by the
acquisition of Embark that completed in early 2022. Our multi-
brand strategy allows us to compete effectively in intermediary-
driven markets, where we have headroom to grow as we improve
our capability with technology investment, particularly in our
pensions and protection businesses.
We continue to invest in front-to-back digitisation of our SME bank,
responding to changing client needs and enabling us to meet
more of their needs beyond banking.
We have also increased our focus on collaborating with fintechs
during the year to broaden our product capabilities, for example
a partnership to enable digital invoice financing and factoring
for our SME bank clients.
Finally, within corporate and institutional business we are focusing
on our core strengths in cash, debt and risk management
products for our UK clients. We will continue to invest in these
strengths and scale our originate to distribute capabilities to
support clients’ long-term needs and increase our balance
sheet efficiency.
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Lloyds Banking Group Annual Report and Accounts 2022
Regulation
• The UK financial services sector is expected
to remain highly regulated
• High volumes of new regulation and market
reviews continue to be issued, with further
regulatory changes anticipated
Link to principal risks
Capital, Climate, Conduct, Market,
Regulatory and legal
Market dynamics
The UK financial services sector remains highly regulated with
significant regulatory reform anticipated in 2023, including the
implementation of the Edinburgh Reforms, the Financial Services
and Markets Bill and reforms to Solvency II. 2023 will see a number
of consultations and calls for evidence across the different areas
of reform. We will analyse the proposals and work closely with the
regulators and the government as and when the different areas
of reform are consulted on. Key areas of focus for 2023 are below:
Financial Services and Markets Bill: This Bill is designed to map
out the future of the UK’s financial services sector following the
decision to leave the EU. By tailoring regulation to the UK market,
its intention is to increase the UK’s competitiveness as a global
financial centre whilst maintaining high regulatory standards to
protect customers. The Bill is a wide-ranging piece of legislation
that covers multiple areas including reforms to capital markets
and addressing customer challenges related to access to cash
and fraudulent activity.
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Customer treatment: Fair treatment of customers remains
a priority for the FCA, and the introduction of the Consumer
Duty in 2023 will require a more outcomes focused approach
to prioritise customers’ needs. Customers are facing increased
cost of living pressures and we recognise the need to do
more to support all customers, including those who may
be in vulnerable circumstances.
Ring-fencing: Since 2019, the Group has been structured
into sub-groups to comply with the ring-fencing rules. The UK
legislation was passed after the financial crisis to better protect
customers and the day-to-day banking services they rely on.
We await government’s consultation on near-term reforms of
ring-fencing, and will continue to work closely with the regulator
on the matter.
Capital regulation: The Group complies with capital regulations
covering the assessment and measurement of capital resources
and requirements, including risk-weighted assets. In November
2022, the PRA published a consultation on its proposals to
implement the final Basel III reforms. This included a number
of significant changes to the calculation of risk-weighted assets.
We are continuing to work closely with the industry and regulators
to understand the implications.
ESG: Engagement continues with all key stakeholders, including
customers, government, regulators and the market, to help create
a more sustainable and inclusive future for all. We continue to
enhance our sustainability reporting, including aligning to the
recommendations of the Task Force for Climate-related Financial
Disclosures, closely following the evolving sustainability reporting
standards and requirements, and will further embed climate risk
into risk frameworks and policies.
Solvency II: The Solvency II regime which regulates the insurance
capital required for insurance entities is currently being reviewed/
is under consultation by the PRA.
Edinburgh Reforms: On 9 December 2022, the government
launched the Edinburgh Reforms. The reforms focus on reviewing,
updating or reforming a number of areas of financial services
regulation, ranging from ring-fencing, consumer credit and the
Senior Managers and Certification Regime, to repealing areas of
EU regulation now that the UK has left the EU.
Other: A number of other regulatory initiatives are in progress
which seek to address, amongst other things: access to cash,
mortgages and green financing, culture, operational resilience,
completion of IBOR transition, financial crime and accounting
(e.g. IFRS 17).
Our response
As a Group we always seek to comply with all applicable
regulation and engage with regulators on all aspects to improve
outcomes. 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 they have
on the industry, its customers and other stakeholders.
Lloyds Banking Group Annual Report and Accounts 2022
21
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Financial resultsGovernanceStrategic report
Our strategy
Our purpose is
Helping Britain Prosper
Our strategic vision
supports our purpose
To become the UK’s
customer-focused, digital
leader and integrated
financial services provider,
capitalising on new
opportunities, at scale.
We’re creating a more
sustainable and inclusive
society for people and
businesses, shaping
finance as a force
for good.
To deliver on our purpose, we have
identified four focus areas where we are
best placed to provide significant positive
change, enabling us to create a more
inclusive society and sustainable future:
• Creating a more inclusive future
• Improving access to quality housing
• Enabling regional development
• Greening the built environment
View our environmental
sustainability report here.
View our social
sustainability report here.
22
Lloyds Banking Group Annual Report and Accounts 2022
Significant strategic
action, with early
evidence of delivery
Creating higher, more
sustainable, returns
In 2024
c.13% RoTE
c.£0.7bn additional revenues
from strategic initiatives
c.£9.2bn operating costs
c.175bps capital generation
By 2026
>15% RoTE
c.£1.5bn additional revenues
from strategic initiatives
<50% cost:income ratio
>200bps capital generation
Grow
Drive revenue growth
and diversification
Investing in growth
£0.9 billion in-year incremental strategic
investment weighted towards growth. Delivered
early stages of targeted additional 2024 revenues
Focus
Strengthen cost
and capital efficiency
Accelerating efficiency initiatives
Cost discipline in an inflationary environment.
Delivered £0.3 billion or around 25 per cent of
increased 2024 gross cost savings target
Change
Maximise the potential of
people, technology and data
Mobilising for change
New operating model implemented
to deliver change more effectively
Refreshing the team
New organisational structure and
leadership team
Lloyds Banking Group Annual Report and Accounts 2022
23
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Our strategy in action
w
o
r
G
Drive revenue
growth and
diversification
Growth is a core focus of our strategy. Around two thirds
of our £3 billion strategic investment over the first three
years is aligned to growing and diversifying revenue. We
have carefully prioritised opportunities across each of our
businesses to ensure we generate value in the near term
as well as creating new revenue streams which deliver
over the longer term.
We aim to deepen and innovate in Consumer to
bring more of our products and services to our existing
customers, as well as broaden our product offerings and
make it easier for customers to access them through our
intermediary partners. We aim to digitise and diversify
our SME business, growing revenues in products and
sectors where we have lower market share today. In
addition, we are creating a new mass affluent offering to
grow in this attractive and underserved market segment
across banking, protection and simple wealth. Finally, we
are targeting our Corporate and Institutional offering
to deliver disciplined growth.
Deepen and
innovate in Consumer
Progress in 2022
• Within Consumer, we have invested in driving
improved levels of personalisation and digitisation,
resulting in a 15 per cent increase in daily logons. We
remain the UK’s largest digital bank and in 2022 grew
our digitally active users by 8 per cent to 19.8 million,
set to exceed our 20 million ambition by 2024
• We have increased our protection market share
by around 1 percentage point1, with growth in both
our relationship and intermediary channels, and
particularly strong performance in our new digital
direct to consumer proposition. This will be further
supported by the recent acquisition of Cavendish
Online which will enable us to meet more of our
franchise customers’ protection needs
• We continue to build on our strong position in
workplace pensions, with net workplace pension
flows of £6 billion in 2022 from over 4 million
workplace customers as we secured a 16 per cent
market share of assets under administration
• Our intermediary businesses are important in our
support of the UK’s net zero transition needs. We have
completed £3.5 billion1 of green mortgage lending,
progressing well against our £10 billion objective
by 2024. We have also completed over £2 billion of
financing for battery electric and plug-in hybrid
electric vehicles, against our target of £8 billion by 2024
24
Lloyds Banking Group Annual Report and Accounts 2022
1 Nine months to 30 September 2022.
2023 implementation
We will continue to personalise and digitise our
Consumer offering, supporting our ambition to meet
more of our existing customers’ needs.
Our intermediary participation will be broadened
with the launch of a new intermediary protection
proposition that supports our aim to be a top three
player by 2025.
We will expand our motor offering with innovative new
solutions such as a market leading digital vehicle
leasing offer and customer pre-approval capabilities.
Personalisation capability that has been developed
will be further deployed, for example by scaling our
HomeHub ecosystem to improve mortgage acquisition
and retention rates.
Selected 2024 outcomes
>5%
Increase in depth of relationship1 through
meeting more needs of existing customers
Grow
Credit card spend market share
>£55bn
New assets under administration investment
and retirement open book net flows2
£20bn–
25bn
Invested in climate-aware strategies3
through Scottish Widows by 2025
£8bn
Financing and leasing for electric vehicles
and plug-in hybrid electric vehicles
1
2
Product holdings across brands for franchise customers with
active relationship.
Includes long-term savings and excludes Embark day one
contribution of around £37 billion, longstanding, unbundled
investment only pensions, Cazenove and legacy private
banking trusts.
3 Pre-defined funds that have an in-built bias or tilt towards
companies that are transitioning their business models to be
less carbon intensive and/or developing climate solutions.
Lloyds Banking Group Annual Report and Accounts 2022
25
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Our strategy in action continued
Digitise and diversify
our SME business
Progress in 2022
• Our multi-year journey to build a front-to-back
digital SME business has progressed, with positive
early momentum shown including more than 20 per
cent growth in new merchant services clients and
a proven new digital onboarding capability
• We are focused on building out products which are
important relationship anchors, such as asset finance,
invoice discounting and trade finance. In 2022, we
grew income by around 5 per cent in mid-sized SME
transaction banking and working capital, as we
pursue our target of 15 per cent income growth by 2024
• Our vision to broaden our relationships with one
million small business clients has been supported by
broadening our product capabilities with strategic
fintech partnerships. For example, our invoice
discounting partnership provides a solution that
allows clients to better manage cashflows
2023 implementation
Investment in technology and data capability will
continue in 2023 to create a digitally led, SME bank with
diversified income and broader customer relationships
over time.
We will deliver a mobile first onboarding proposition
for clients and launch an end-to-end digital origination
for asset finance, as we look to ensure we meet the full
range of our clients’ needs.
Continued investment in data capabilities is a critical
enabler for our digital SME bank, ensuring we are
better able to support client needs such as cash
flow management.
26
Lloyds Banking Group Annual Report and Accounts 2022
2024 outcomes
>50%
Share of products originated and
fulfilled digitally
>15%
Income growth in mid-sized SME transaction
banking and working capital
20% p.a.
Growth in new merchant services clients
Create a new mass
affluent offering
Progress in 2022
•
In our new mass affluent business we saw an
increase in banking balances1 of over 5 per cent
and are building capability as we look to launch
integrated and digitally led banking, insurance
and investments propositions
• We have launched new, tailored banking products
including packaged bank account and credit card
products to provide personalised mass affluent
banking propositions
• Our direct to consumer investments capability
has been enhanced, aided by the completion of the
acquisition of Embark. This was previously a gap in
our product capability
2023 implementation
Further significant elements of our mass affluent offering
will be launched in 2023, with customers experiencing
a differentiated, digital-first model.
We will expand our mass affluent banking offering, with
tiered savings, higher credit limits and bespoke benefits.
In addition, we will launch ready-made and direct to
consumer investment options.
Target our Corporate
and Institutional offering
Progress in 2022
• We have delivered around £8 billion of sustainable
financing2 to our clients and launched carbon emission
allowance transactions3. These milestones have been
supported by our purpose-driven growth within loan
origination and businesses transitioning to net zero
• We are investing in product capabilities that support
our cash, debt and risk management offering. We have
seen early benefits from this investment, including around
20 per cent growth in our FX trading percentage share of wallet
• Finally, we have strengthened our originate to distribute
capabilities, delivering a milestone first strategic co-
investment partnership. These strengthened capabilities
further improve the Group’s capital efficiency
2023 implementation
In 2023 we will build on these foundations by meeting more
needs of purpose aligned clients in key growth industries.
We will improve our capabilities across our core business
lines in debt capital markets, foreign exchange and financial
institutions, including investing in our US and EU debt capital
market capabilities. We will increase our balance sheet
efficiency as we scale our strengthened originate to
distribute capabilities to serve more clients.
2024 outcomes
>£5bn
Incremental total banking balances1 for mass
affluent increasing to between £10 billion and
£15 billion by 2026
>£7bn
Incremental net flows into investment
proposition increasing to £25 billion by 2026
Grow
Number of mass affluent personal
account customers
2024 outcomes
£15bn
Sustainable financing2
Top 5
GBP interest rate swaps ranking; deepen FX
share of wallet
>20%
Growth in Corporate and Institutional other
operating income
<£3bn
Net risk-weighted asset growth
1
Banking balances calculated as the absolute total of
retail PCA, savings, overdrafts, credit card, mortgage
and loan balances plus private banking PCA and
savings balances.
Includes clean growth finance initiative, commercial
real estate green lending, renewable energy financing,
sustainability linked loans and green and social bond
facilitation. New cumulative to 2024.
3 Under the UK Emissions Trading Scheme.
2
Lloyds Banking Group Annual Report and Accounts 2022
27
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Strengthen
cost and capital
efficiency
As we invest to grow and diversify our revenue, it is
essential to maintain our disciplined cost management
approach.
We will also look to further improve our capital efficiency as
we maintain our strong balance sheet with a disciplined
risk approach, pursuing growth in capital-lite, fee
generating businesses.
Progress in 2022
• Cost discipline has been a key strength for the Group
and remains a key focus in enabling capacity for
investment in growth initiatives as well as offsetting
inflationary pressures. Around 25 per cent of our
increased 2024 gross cost savings target has been
delivered. Lowering the cost of technology through
simplification of our legacy technology estate is
critical to enabling the change the business requires
for growth
• We further refined our service model, resulting in
the closure of around 200 branches, alongside our
continued investment in digital propositions
• We have also continued to reduce our office footprint
as we adapt to new ways of working, with a 12 per
cent reduction in the year, as we target a reduction
of more than 30 per cent by 2024
• With regard to capital efficiency, we continue to
demonstrate risk-weighted asset discipline as
we pursue our growth initiatives in capital-lite, fee
generating businesses. In addition, we successfully
completed a securitisation transaction for a portfolio
of legacy Retail mortgage loans, with much of the risk
placed in the market
Our strategy in action continued
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Lloyds Banking Group Annual Report and Accounts 2022
Strengthen
cost and capital
efficiency
2024 outcomes
>10%
Increase in customers served
per distribution FTE
>30%
Reduction in office footprint
2023 implementation
Our investment in technology will deliver further
improvements in self-service capabilities and end-
to-end journey digitisation. In line with our ambition
to embrace hybrid ways of working and transform
workplaces, we will continue to modernise our office
footprint as we work towards a significant reduction
in our portfolio by 2024.
In response to the inflationary environment, we will
continue to focus on generating further efficiencies to
minimise the net cost impact and create the necessary
capacity for investment.
Our capital efficiency will also be supported by
our growth initiatives in capital-lite, fee generating
businesses, as we optimise and recycle risk weighted
assets into higher returning businesses. In 2023 we
expect to also conclude the triennial pension review,
which will demonstrate the significant advances we
have made.
Lloyds Banking Group Annual Report and Accounts 2022
29
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Maximise
the potential
of people,
technology
and data
Delivering this strategy requires the Group to
accelerate the pace at which it uses digital
technologies and data to support customers. We seek
to emulate our success in building the largest UK Retail
digital bank on a larger scale across the Group. Our
prior investments in technology and data provide a
strong foundation for delivering on our strategy.
Progress in 2022
People
•
In 2022 we have been focused on setting up our
people and organisation for success in delivering
our strategy and change more effectively. We have
established an experienced, new leadership team
with significant capabilities in strategic and digital
delivery, alongside a flattened executive structure.
Within our existing three core divisions we have
reorganised around five new customer-facing
business areas that are more closely aligned to
our strategic priorities
• Beyond the executive level, we restructured our
business and technology teams to set up a new
operating model for more than 20,000 employees
that brings together expertise in cross-cutting, multi-
functional teams that drive greater accountability
and collaboration and help to deliver change more
quickly and efficiently
• We have enhanced our leadership in key skills areas,
such as bringing in new Chief Information Officer
hires who will support the transformation of our ways
of working and culture. In strengthening our senior
leadership team, we have remained true to our
inclusion and diversity objectives
Our strategy in action continued
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Lloyds Banking Group Annual Report and Accounts 2022
Technology and data
• We have progressed on our plans to transform
our technology and data capabilities. Alongside
improved resilience, this will over time enable an agile
technology model that can provide a highly efficient,
scalable technology infrastructure and ultimately
drive business value
• During 2022 we decommissioned 5 per cent of our
legacy applications, a pace we expect to maintain
over the next two years
• We have reduced our data centre footprint by 10
per cent and continue to increase the pace at which
we migrate data to the cloud. Over time, further
actions such as this will enable full unlocking of the
potential of our data as we target 20 per cent of our
applications on cloud in 2024
•
Our transformed data capabilities will provide data-
driven insights to support our business strategies
across multiple use cases, including delivering
automated processes to enhance the customer
service experience
2023 implementation
People
We are committed to building a fully inclusive
environment that is reflective of the society we serve.
As part of this we are making progress towards the
targets that we have set, including 50 per cent women,
13 per cent Black, Asian and Ethnic Minority colleagues
and 3 per cent Black Heritage representation at senior
management levels by 2025. We continue to commit
ourselves to stretching targets, always challenging
ourselves to go further. Bringing in new senior talent,
particularly in technology and data, is supporting
our effort to alleviate resource constraints for high
in demand skills, reducing our reliance on third-
party support.
Finally, we will further modernise and enhance our
office estate with one third of our colleagues in
transformed, modern workplaces by the end of 2023
as part of a compelling proposition for top talent.
Technology and data
With our organisational foundations now in place,
investment in transforming technology and data will
be scaled in 2023.
Building on progress already made, we will further
mature our data and machine learning capabilities that
can then be leveraged across the business with multiple
use cases. Complementing this, continued migrations
of data to public cloud will support our modernisation
and simplification efforts. We will continue executing
on our plan, including decommissioning around 10
per cent of legacy applications, as we target a further
5 per cent reduction by 2024. Alongside other activity,
this will support a gross reduction in run and change
technology costs of around 10 per cent.
2024 outcomes
>15%
Reduction in legacy applications
15%
Gross reduction in run and change
technology costs
Improve
Employee engagement index
20%
Applications on cloud (private and public)
60%
Business new lending decisions automated
Lloyds Banking Group Annual Report and Accounts 2022
31
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Progress and
performance
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 and 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.
The key performance indicators shown here directly
impact the remuneration awarded to executive
directors, which is heavily weighted towards the
delivery of long-term, sustainable performance.
The implementation of our simplified balanced
scorecard provides greater transparency to
substantiate how our performance directly
aligns with remuneration outcomes.
Our 2022 balanced scorecard
Financial (50 per cent)
Statutory profit after tax (20 per cent)
Return on tangible equity (20 per cent)
Operating costs (10 per cent)
Strategic (50 per cent)
Customers
Group customer dashboard (25 per cent)
Colleagues
Employee engagement (7.5 per cent)
Gender and ethnic representation in senior roles
(7.5 per cent)
Climate
Operational carbon emissions (5 per cent)
Sustainable financing and investment (5 per cent)
R Key performance indicators that are directly linked
to our remuneration balanced scorecard are marked
with this symbol. See page 110.
A We use a number of alternative performance
measures in the description of our business
performance and financial position. These measures
are labelled with this symbol. See page 67.
32
Lloyds Banking Group Annual Report and Accounts 2022
Financial
Statutory profit after tax
£m
R
2022
2021
2020
2019
20181
5,555
5,555
5,885
1,387
3,006
4,506
Statutory profit after tax slightly lower, with higher income offset
by impairment charges as a result of the revised economic
outlook (compared to a credit in the prior year). 2021 also
included the benefit of a deferred tax remeasurement.
1
Restated to reflect amendments to IAS 12.
Underlying profit A
£m
2022
20211
20201
20191
20181
7,448
7,448
7,536
1,742
7,172
7,588
Underlying profit before tax slightly lower with income growth
offset by an increased impairment charge (compared to
a credit in the prior year).
1
Restated to reflect the new costs basis. See page 67.
Ordinary dividend
p per share
2022
2021
2020
2019
2018
2.40
2.40
2.00
0.57
1.12
3.21
Total ordinary dividend of 2.40 pence per share, up 20 per cent,
reflecting our progressive and sustainable ordinary dividend
policy. Includes both interim and final dividends.
Return on tangible equity A
%
R
2022
2021
20201
20191
20181
13.5
13.5
13.8
2.3
6.6
10.6
Return on tangible equity in 2022 reflects the Group’s robust
financial performance.
2023 guidance: Return on tangible equity of c.13 per cent.
1
From 2021, to aid comparability with peers, we began reporting return
on tangible equity without adding back the post-tax amortisation of
intangible assets. Pre-2021 comparatives have been restated.
Common equity tier 1 ratio A (CET1)
%
14.1
Non-financial
Customers
Customer satisfaction
All-channel net promoter score
R
20221
20211
2020
20191
20181
14.1
16.3
16.2
13.8
13.9
2022
2021
2020
2019
2018
67.7
67.7
69.3
68.8
66.0
63.4
CET1 ratio remains strong at 14.1 per cent after capital
distributions and pension contributions, remaining ahead
of the ongoing target of c.12.5 per cent, plus a management
buffer of c.1 per cent.
Our all-channel net promoter score measures the customer
perception of day-to-day services across our channels
and remained strong in 2022 despite a decline since 2021
(which was an all-time high).
1
Reported on a pro forma basis, reflecting the dividend paid up by the
Insurance business and declared share buybacks.
Operating costs A
£m
R
8,835
Digitally active customers
m
R
2022
20211
20201
20191
20181
8,835
8,312
8,202
8,316
8,710
2022
2021
2020
2019
2018
19.8
19.8
18.3
17.4
16.4
15.7
Operating costs increased, in line with guidance, given planned
investment and new businesses, with business-as-usual costs
stable.
2023 guidance: Operating costs of c.£9.1 billion.
Our digitally active customers increased in the year to
19.8 million, reflecting the pace of digital adoption, with
customers logging in over 5 billion times during 2022,
up 8 per cent on prior year.
1
Restated to reflect the new costs basis. See page 67.
Economic profit A
£m
2022
2021
20201
20191
20181
Statutory profit after tax
£m
Customer complaints
FCA reportable complaints
per 1,000 accounts
R
2,782
2,782
3,063
(1,257)
428
1,858
H1 2022
H2 2021
H1 20211
H2 20201
H1 20201
2.70
2.70
2.77
2.76
2.89
2.62
Economic profit reflected higher net income and a higher
impairment charge. Economic profit is a measure of profit
taking into account a charge for equity utilisation.
1
In 2021 the basis was amended in line with reward scheme performance
measures. Comparatives have been restated.
Our customer complaints reduced further and are amongst the
lowest in the industry. We always want to provide our customers
with the best possible service and our colleagues work tirelessly
to understand the concerns of those who contact us.
H2 2022 data not available at time of publishing.
Total shareholder return
%
2022
2021
2020
2019
2018
Statutory profit after tax
£m
Group customer dashboard
% of customer experience metrics
achieving target (November YTD)
R
2022
2021
2020
2019
2018
0
0
35
(42)
27
(20)
80
80
79
74
65
72
Total in-year shareholder return was flat in the year. The share
price was 5 per cent lower with capital return of 5 per cent.
In 2022, 80 per cent of Group customer dashboard measures
achieved target. This positive overall result is underpinned by
strong performance relative to competitors, with average rank
position further improved year on year.
Lloyds Banking Group Annual Report and Accounts 2022
33
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Progress and performance continued
Non-financial
Colleagues
Employee engagement index
% favourable
R
2022
2021
2020
2019
2018
75
75
72
81
74
73
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 surveys. In 2022, we refreshed how
we listen to our colleagues to provide a more regular and complete
picture of sentiment. This included redesigning our annual survey
and running monthly pulse surveys to capture timely feedback,
which is shared with leaders to take swift action.
Our new monthly pulse surveys launched in September and
have allowed us to monitor advocacy, through a newly launched
employee net promoter score, alongside mood. We also use
these surveys to delve into relevant and timely topics, including
our values and the transition to hybrid working.
We heard from around 60 per cent of colleagues in our spring
census survey, with the response rate in line with 2021’s spring
survey but below our 2021 autumn survey participation. We
found that engagement, confidence, trust and mood remained
at similar levels to 2020, despite high levels of change. Most
colleagues were also aware of and understood our new strategy.
Our annual autumn survey was completed by 80 per cent of
the Group and gave us a complete view on our progress with
purpose, strategy and culture. Overall engagement improved
2 points compared to 2021, and has returned to pre-pandemic
levels. We have seen an increase in overall mood linked to
feeling more supported and connected.
During the year the Group communicated directly with colleagues
detailing Group performance, changes in the economic and
regulatory environment and updates on key strategic initiatives.
Meetings were held throughout the year between the Group and
our recognised unions. Please see page 82 for further examples of
how the Board engages with the Group’s workforce and why the
Board considers those arrangements to be effective. For 2022, the
Remuneration Committee approved Group Performance Share
awards for colleagues, and 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 105 in the Directors’
Remuneration Report.
2022 inclusion and diversity performance
The Group aims to create a more inclusive future for our
customers, colleagues and communities. We will continue to
create a fully inclusive organisation that is representative of
modern-day Britain, where differences are embraced, and
everyone can reach their potential.
We’re proud to have been the first FTSE 100 company to set targets
to increase both gender and ethnic diversity at senior levels and
we continue to commit ourselves to stretching targets, always
challenging ourselves to go further.
Ethnic diversity
Our aspirations
13%Black, Asian and Minority
Ethnic representation in
senior roles by 20251
3%Black heritage
representation in senior
roles by 20251
During 2022, we have increased the representation of Black,
Asian and Ethnic Minority colleagues in senior roles from 8.8 to
10.2 per cent and increased the representation of Black heritage
colleagues in senior roles by 0.4 to 1.4 per cent.
The Board continues to meet the Parker Review recommendation
of at least one Black, Asian or Ethnic Minority Board member.
As a Group we have continued to meet our commitment to
and our race advisory
publish our ethnicity pay gap report
panel continues to play a critical role in helping us to shape
our initiatives.
Gender diversity
Our aspirations
50%Women in senior roles by 20251
During 2022, we have seen an increase in women in senior roles to
39.4 per cent, showing our progress towards meeting our 2025 target.
We are committed to maintaining at least four women on the
Board and, over time, will aim to reach gender parity, matching
the Group’s ambition to have 50 per cent of senior roles filled by
women. Reflecting these aspirations, the Board will aim to meet
the recommendations set out by the FTSE Women Leaders Review.
Further information on the diversity of our Board can be found
on page 73.
Disability
Our aim is to create an inclusive and accessible working
environment where everyone is supported to reach their full
potential. The Group continues to hold the Business Disability
Forum Gold Standard accreditation and Disability Confident
status from the Department for Work and Pensions.
We offer bespoke training, career development and adjustments
for colleagues and applicants with disabilities, including those
who became disabled while employed.
Sexual orientation and gender identity
We are proud to have created an inclusive and open working
environment for our LGBT+ colleagues. Our LGBT+ colleague
network, Rainbow, continues to play a role in our approach to
supporting our LGBT+ colleagues, and has over 5,000 members
and supporters.
Detailed progress on our inclusion and diversity focus areas, our
progress on our race action plan and how we support our colleagues
can be found in our social sustainability report
.
34
Lloyds Banking Group Annual Report and Accounts 2022
1
From a 2021 baseline year, excludes Embark.
Our 2022 inclusion and diversity performance
Gender1
Board members
Ethnicity
GEC
GEC and GEC direct reports
Senior managers
All colleagues
Board members ethnicity2
White British or other White
Asian
Other Ethnic Group
GEC ethnicity3
White British or other White
Asian
Men
Women
Men
Women
Men
Women
Men
Women
Men
Women
Senior managers from an Ethnic Minority background
Senior managers from a Black Heritage background
All colleagues from an Ethnic Minority background
Disability
Colleagues who disclose that they have a disability
Sexual orientation
Colleagues who disclose their sexual orientation
Number
2022
6
5
8
7
70
50
4,492
2,919
27,888
37,441
9
1
1
14
1
742
101
8,675
4,221
44,284
%
2022
54.5
45.5
53.3
46.7
58.3
41.7
60.6
39.4√
42.7
57.3
81.8
9.1
9.1
93
7
10.2 √
1.4
13.4 √
6.5
68.6
%
2021
60.0
40.0
80.0
20.0
65.0
35.0
62.3
37.7
42.2
57.8
NR
NR
NR
NR
NR
8.8
1
11.3
3.7
59.7
•
• Gender data includes international, those on parental/maternity leave,
absent without leave and long-term sick and excludes contractors,
Group non-executive directors, temporary and agency staff
The Group Executive Committee (GEC) assists the Group Chief Executive in
strategic, cross-business or Group-wide matters and inputs to Board. GEC
includes the Group Chief Executive and excludes colleagues who report to
a member or attendee of the GEC, including administrative or executive
support roles (personal assistant, executive assistant). GEC and GEC direct
reports includes the Group Chief Executive and colleagues who report to
a member or attendee of the GEC, including administrative or executive
support roles (personal assistant, executive assistant)
• Senior managers: Grades F, G and Executive (F being the lowest)
• 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,
Isle of Man, Jersey and Gibraltar). Excludes leavers, Group non-executive
directors, contractors, temps and agency staff
• Diversity calculations are based on headcount, not full-time employee value
and excludes Embark for the FY 2022 reporting period
1 Data is collated and reported in compliance with the provisions of section
2
3
414C(8)(c) Companies Act 2006
In the current year there is no reported data for the categories of Black/
African/Caribbean/Black British, Mixed/Multiple Ethnic groups and Not
specified/prefer not to say.
In the current year there is no reported data for the categories of Mixed/
Multiple Ethnic Groups, Black/African/Caribbean/Black British, Other ethnic
group including Arab and Not specified/prefer not to say.
NR This data was not reported in 2021 and is a new disclosure in 2022.
Indicator is subject to Limited ISAE 3000 (revised) assurance by Deloitte LLP for
the 2022 Annual Responsible Business Reporting. Deloitte’s 2022 assurance
statement and the 2022 Reporting Criteria are available online at www.
lloydsbankinggroup.com/who-we-are/responsible-business/downloads.
Methodology and definitions:
• Data is sourced from the HR system (Workday) containing all permanent
colleague details
• All data as at 31 December 2022
• All diversity information for ethnicity, disability and sexual orientation is based
on voluntary self-declaration by colleagues. Our systems do not record
diversity data of colleagues who have not declared this information and is for
UK payroll only
Building our internal talent
The focus on progressing our race action plan ambitions
has continued, with significant effort in supporting our Black
heritage colleagues looking to progress their career.
Our senior leadership programme, which helps us identify
our next senior leaders, continued and following its success,
in May 2022, we launched a similar programme for Black
Heritage colleagues in middle management looking to develop
their career. The programme runs for 12 months, supporting
colleagues with the tools they might need to develop themselves
and their career. It provides face-to-face networking and
workshops, mentoring circles, upskilling sessions on writing CVs,
pen portraits and interviews with talks from hiring managers
and the support to find a sponsor.
Close to 100 colleagues enrolled in the programme in 2022, and
by the end of 2022, over a quarter of the colleagues enrolled on
the programme had either been promoted or taken a lateral
move to progress their career.
Lloyds Banking Group Annual Report and Accounts 2022
35
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Progress and performance continued
Own operations6
Non-financial
Climate
Operational carbon emissions
tCO2e
R
2021/22
2020/211
2019/201
2018/191
115,965
115,965
112,424
114,722
174,629
1
Restated all prior periods data to improve the accuracy of reporting, using
actual data to replace estimates, historical emissions associated with Embark
Group’s properties, and improved escaped refrigerant related emissions.
This year, our overall market-based carbon emissions were 115,965
tonnes CO2e, 33.6 per cent lower since 2018/19 and a 3.1 per cent
increase since 2020/21, mainly driven by higher business travel
and commuting related carbon emissions post COVID-19.
Sustainable lending and investment targets2
£bn
R
Commercial Banking
We are here
2024 target
£7.9bn
Progress (£bn lending)
£15bn
Motor
£2.1bn
We are here
2024 target
Progress (£bn lending)
£8bn
Scottish Widows
We are here
2025 target
£17.5bn
Progress (£bn investment)
£20–25bn
Green mortgage lending
We are here
c. £3.5bn
2024 target
Progress (£bn lending)
£10bn
2
Further details on the scope of these sustainable lending and investment
targets is included within the environmental sustainability report on page 10.
Our net zero ambitions
Financed emissions
Bank
• Work 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 sooner3
Scottish Widows
• Target halving the carbon footprint4 of all of our
investments by 2030 on the path to net zero by 20505
36
Lloyds Banking Group Annual Report and Accounts 2022
• Net zero carbon operations by 2030
• Reduce total energy consumption by 50 per cent by 2030
• Maintain travel carbon emissions below 50 per cent of
pre-COVID-19 levels
Supply chain
• Reduce the carbon emissions we generate through our
supply chain by 50 per cent by 2030 on the path to net zero
by 2050 or sooner7
Our climate approach
Tackling the climate crisis through supporting the transition to
a low carbon economy is core to our Group strategy and our
purpose. As a Group that supports many sectors of our economy
through our lending, investments, products and services, we
recognise our role in helping to enable the transition.
Our approach is a core part of our business strategy, with key
sustainability objectives aligned to our priorities of Grow, Focus
and Change. We plan to grow our business by capitalising on the
opportunities, through green lending, investment and products.
In 2021, we highlighted four sustainable lending targets which
together with our operational carbon emissions ambition form
part of our Group balance scorecard. We are focused on our
climate-related risks and we continue to expand our targets and
plans to deliver our net zero ambitions in our own operations,
supply chain and financed emissions. We plan to change how
we operate, educating our people to support us to deliver on
our climate ambition. Transitioning to net zero is a universal
endeavour and will depend on government, industry and
wider society acting together, alongside significant technology
advancements in high emitting sectors.
provides details of how as
We will actively manage our climate risks and hold ourselves to
account to do all we can in how we run our own business. Our
environmental sustainability report
a Group we will deliver against those ambitions and priorities,
including climate-related financial disclosures consistent with
the Task Force on Climate-related Financial Disclosures (TCFD)
recommendations and recommended disclosures. We have
launched our Group climate transition plan which covers activity
across the Group, building on the climate action plan released
by Scottish Widows in 2022. Further detail can be found in our
environmental sustainability report, our separate supplement
which allows for a more comprehensive response to the TCFD
framework, covering material activity across the Group.
Progress against TCFD recommendations
We comply with the FCA’s Listing Rule 9.8.6R(8) and set out in the
following table our climate-related financial disclosures consistent
with the 2021 TCFD recommendations and recommended
disclosures across all four of the TCFD pillars: strategy; governance;
risk management; and metrics and targets.
We will continue to assess and develop our disclosures against
the TCFD recommendations and recommended disclosures in
2023, considering relevant TCFD guidance and materials along
with evolving best practice. The following table also provides an
overview of our disclosure progress and priorities for 2023.
From a 2018 baseline.
3
4 Carbon footprint is a measure of carbon intensity calculated as absolute value
of emissions applicable to an investment divided by value of investment.
5 From a 2019 baseline.
6 All from a 2018/19 baseline. The reporting period is October to September.
7 From a 2021/22 baseline. The reporting period is October to September.
Progress against TCFD recommendations
Pillar
Recommended disclosure
Environmental
sustainability
report
Summary of progress
Strategy
Disclose the actual
and potential
impacts of climate-
related risks and
opportunities on
the organisation’s
business, strategy
and financial
planning where
such information
is material.
A
B
Describe the climate-related
risks and opportunities the
organisation has identified
over the short, medium
and long term.
Describe the impact of
climate-related risks
and opportunities on the
organisation’s business,
strategy and financial
planning.
C
Describe the resilience of
the organisation’s strategy,
taking into consideration
different climate-related
scenarios, including a 2°C
or lower scenario.
Governance
A
Describe the Board’s
oversight of climate-related
risks and opportunities.
Pages 13 to 20
• Key climate-related risks and opportunities defined with the potential time horizons
over which these may arise identified
In 2023, we will look to further quantify risks and opportunities in relation to climate risk
•
Pages 13 to 20
•
Financial statements consider the impact of climate-related risks on our financial
position and performance
• Continue to embed climate risk into financial planning process. Climate
•
•
•
consideration factored into the economic base case and financed emission
ambitions considered as part of the forecasting process
In 2023, in line with our Group climate transition plan, net zero targets and strategies
will be developed for some remaining high emitting sectors
Expand the balance sheet assets covered by the forecasting process, and
Partnership for Carbon Accounting Framework (PCAF) methodology updates
Embed monitoring of sector targets as reported in our Group climate transition
plan into reporting process so that climate considerations form part of the Group’s
regular decision making
Page 14
• Climate scenario analysis performed for some of our businesses most exposed to
Pages 63 to 67
•
climate risk such as mortgage flood risk and transition risk for commercial portfolios
The insights from this scenario analysis activity have been used to support the
Group’s measurement of Expected Credit Loss (ECL) and Internal Capital Adequacy
Assessment Process (ICAAP)
• Continue to monitor our exposure to high-risk sectors and proposed actions to
support transition
• Scottish Widows Group (SWG) developing scenario analysis model to inform
•
business decisions. Output to be published in the 2022 SWG TCFD report
In 2023, scenario analysis will be used to support forecasts and plans. We will
compare scenario modelling outputs generated to inform strategic approach.
Specific areas of development are understanding the impacts on some of our
highest emitting sectors such as agriculture and integrating scenario analysis
into the credit decision making process
Pages 50 to 53
• Governance structure provides clear oversight and ownership of Group’s
environmental sustainability strategy and management of climate risk at Board
and executive levels
The Board is engaged on a regular basis on our sustainability agenda
In 2023, the Board will consider our response to nature along with approval of sector
targets for some of our remaining sectors. Continue to monitor progress against
our targets and ambitions
•
•
•
Disclose the
organisation’s
governance
around climate-
related risks and
opportunities.
B
Describe management’s role
in assessing and managing
climate-related risks and
opportunities.
Pages 50 to 53
Page 55
The Group Net Zero Committee provides direction and oversight of the Group’s
environmental sustainability strategy, supported by climate and sustainability
steering groups or committees
The Group Risk Committee provides oversight of climate risk
•
• Key committee oversight includes development of our 2022 sector targets and
supply chain ambitions
Risk
management
A
Describe the organisation’s
processes for identifying and
assessing climate-related
risks.
Pages 16 to 17
• Assessment of climate risk has been undertaken, to understand the key risks across
the Group
• Ongoing development of climate risk assessment tools and methodologies,
including qualitative climate risk assessment tool for commercial clients
In 2023, we will look at the incorporation of scenario analysis to inform climate risk
assessment, alongside further refinement to evolving assessment processes
•
Disclose how
the organisation
identifies, assesses,
and manages
climate-related
risks.
B
Describe the organisation’s
processes for managing
climate-related risks.
Pages 57 to 62
• Consideration of climate risk incorporated within our existing risk management
processes, embedding relevant controls to mitigate these risks
• Key risks which incorporate climate include credit risk, insurance underwriting risk,
•
conduct risk and operational resilience
In 2023, we will look at further embedding controls across identified climate-related
risks and enhancement of risk appetite to mitigate key climate risks across the Group
C
A
B
C
Describe how processes for
identifying, assessing, and
managing climate-related
risks are integrated into the
organisation’s overall risk
management.
Disclose the metrics used
by the organisation to
assess climate-related risks
and opportunities in line
with its strategy and risk
management process.
Disclose Scope 1, Scope 2,
and, if appropriate, Scope
3 greenhouse gas (GHG)
emissions, and the related
risks.
Describe the targets used
by the organisation to
manage climate-related
risks and opportunities and
performance against targets.
Metrics and
targets
Disclose the
metrics and targets
used to assess
and manage
relevant climate-
related risks and
opportunities where
such information
is material.
Pages 16 to 17
Pages 57 to 62
• Climate risk is embedded into our Enterprise Risk Management Framework, through
consideration of climate risk as its own principal risk, and integration into other
principal risks materially impacted
The Group climate risk policy provides an overarching framework for the
management of climate risks across the Group
In 2023, there will be further enhancement to climate risk reporting
•
•
Pages 9 to 12
• Progress monitored against our net zero ambitions, including measures related
Pages 24 to 48
to our financed emissions, own operation emissions, supply chain emissions and
sustainable finance
• 2023 plan to enhance metrics to monitor our progress against our targets and
ambitions and explore methodology in relation to nature
Pages 11 to 12
• Disclosed Scope 1, 2 and 3 emissions for our own operations and supply chain,
Pages 28 to 48
continue to develop our approach to calculating financed emissions now updated
to period ended 2020
• Scottish Widows 2022 reporting will include product level TCFD reporting
•
In 2023, we will extend our asset coverage from a financed emissions perspective
to cover additional business areas
Page 9 to 12
• Our environmental sustainability report 2022 provides an update on how we are
Pages 28 to 48
progressing against emission pathway for the targets we released in October 2022
In 2023, we will develop targets for other high carbon sectors for release in 2024
•
In addition to the compliance above, entities within our Insurance Pensions and Investment business which are incorporated as part
of Scottish Widows Group are required to report in compliance with FCA ESG Sourcebook (set via FCA PS21/24) reporting requirements
for the period ended 31 December 2022. This additional compliance will be met through the publication of a separate Scottish Widows
TCFD report, which is due to be published by 30 June 2023.
Lloyds Banking Group Annual Report and Accounts 2022
37
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Risk overview
Effective risk management
and control
Our approach to risk
Risk management is at the heart of the Group’s purpose of
Helping Britain Prosper. A strong risk management culture is
crucial for sustainable growth, supporting the transition to
a low carbon economy and building an inclusive society.
A prudent approach to risk is fundamental to the Group’s business
model and drives our participation choices, whilst protecting
customers, colleagues and the Group.
The risk management section from pages 139 to 195 provides
an in-depth picture of how risk is managed within the Group,
including the approach to risk appetite, risk governance, stress
testing and detailed analysis of the principal risk categories,
including the framework by which these risks are identified,
managed, mitigated and monitored.
Our enterprise risk management framework
The Group’s comprehensive enterprise risk management
framework, that applies to all legal entities across the Group,
is the foundation for the delivery of effective and consistent risk
control. It enables proactive identification, active management
and monitoring of the Group’s risks, which is supported by our
One Risk and Control Self-Assessment approach.
The Group’s risk appetite, principles, policies, procedures, controls
and reporting are regularly reviewed and updated to ensure they
remain fully in line with regulation, law, corporate governance and
industry good practice.
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.
The Board is responsible for approving the Group’s Board
risk appetite statement annually. Board-level risk appetite
metrics are augmented further by sub-Board level metrics
and cascaded into more detailed business metrics and limits.
Regular close monitoring and comprehensive reporting to all
levels of management and the Board ensure 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 Board engagement and
decision making.
More information on the Board’s responsibilities can be found
on page 91 and our Risk committees on pages 142 to 143.
Risk culture and the customer
The Board and senior management play a vital role in shaping
and embedding a healthy corporate culture.
Our responsible, inclusive and diverse culture supports colleagues
to consistently do the right thing for customers. The Group’s Code
of Responsibility and refreshed values reinforce colleagues’
accountability for the risks they take and their responsibility
to prioritise customers’ needs.
As a Group, we are open, honest and transparent with
colleagues working in collaboration with business units 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
The Group aims to maintain a strong focus on building and
sustaining long-term relationships with customers through
the economic cycle.
Risk profile and performance
The Group has continued to maintain support for its customers
amid the backdrop of supply chain pressures, cost of living
increases and global and domestic economic uncertainty.
Observed credit performance remains strong, with very modest
evidence of deterioration. The Group’s loan portfolio continues
to be well positioned and heightened monitoring is in place
to identify signs of affordability stress.
The Group’s strategy will see ongoing investment in technology,
driving the evolution of processes and further strengthening of
the Group’s operational resilience, amid continuously evolving
threats, such as cyber risk.
Climate change remains a key consideration for the Group, with
positive progress in 2022 and a commitment to continued focus
in 2023.
Overall, key risks continue to be managed effectively and the
Group is well positioned to safely progress its strategic ambitions.
Enterprise risk management framework
1 The Board delegates executive authorities to ensure
there is effective oversight of risk management.
2
3
4
5
6
The appropriate culture ensures performance,
risk and reward are aligned.
The framework ensures our risks are managed
in line with our risk appetite.
The identification, measurement and control of our risks form
an integral part of our One Risk and Control Self Assessment.
The governance framework supports a consistent approach
to enterprise-wide behaviour and decision making.
The robust approach to monitoring oversight and assurance
ensures effective risk management across the Group.
38
Lloyds Banking Group Annual Report and Accounts 2022
Role
of the
Board
and senior
management
Risk culture
and the customer
Risk appetite
Risk and control self
assessment
Risk governance
Three lines of defence
Principal risks
Principal risks are the Board-approved enterprise-wide risk
categories, used to monitor and report the risk exposures posing
the greatest impact to the Group.
The Group is in the process of conducting a detailed review of
the enterprise risk management framework, which may result in
a reclassification of our principal risks in 2023. Page 147 contains
a summary of our principal and secondary risks.
All of the Group’s principal risks, which are outlined in this section,
are reported regularly to the Board Risk Committee and the Board.
The Board Risk Committee report from pages 99 to 103 outlines
its activities during the year, as well as its purpose, responsibilities
and composition.
The risk management section from pages 139 to 195 provides
a more in-depth picture of how each principal risk is managed
within the Group.
Risk trends
Stable risk
Decreased risk
Increased risk
Principal risks
Principal risk category
Risk performance
Risk appetite
Key mitigating actions
Capital risk
The Group maintained its strong capital
position in 2022 with a CET1 ratio of 14.1
per cent on a pro forma basis, having
also absorbed significant regulatory
headwinds on 1st January 2022. This
is significantly ahead of regulatory
requirements and in excess of the
Group’s ongoing target of around 12.5
per cent, plus a management buffer of
around 1 per cent. Downside risks from
economic and regulatory headwinds
are being closely monitored.
The Group maintains
capital levels
commensurate with
a prudent level of
solvency to achieve
financial resilience and
market confidence.
• Capital management framework that
includes the setting of capital risk
appetite, capital planning and stress
testing activities
• Monitoring of early warning indicators
and maintenance of a Capital
Contingency Framework, designed to
identify and act on emerging capital
concerns at an early stage
Change/
execution risk
The Group’s inherent change/execution
risk heightened in 2022, driven by the
scale and increased complexity of some
of the changes being delivered. The
Group continues to strengthen its change
capability and controls in response,
to support the Group’s business and
technology transformation plans.
The Group has
limited appetite for
negative impacts
on customers,
colleagues, or the
Group as a result of
change activity.
Climate risk
2022 has seen significant progress in
embedding climate risk, with a consistent
framework and clear responsibilities
that will enhance understanding of
the Group’s climate risks and their
management, in line with regulatory
requirements. Progress continues in key
areas, including developing climate
data and scenario analysis capabilities;
enhancing risk appetite measures; as
well progressing the Group’s ambitions
for reducing emissions.
The Group takes
action to support
the Group’s and its
customers’ transition
to net zero, and
maintain its resilience
against the risks
relating to climate
change.
• Continued evolution and enhancement
of the Group change policy, method and
control environment
• Measurement and reporting of change/
execution risk to appropriate bodies,
including on critical elements of the
change portfolio
• Providing sufficient skilled resources to
safely deliver and embed change and
support future transformation plans
• Climate risk policy in place, embedded
across the Group
• Regular updates to the Board and further
development of climate risk reporting
• Consideration of key climate risks as part
of the Group’s financial planning process
Conduct risk
Conduct risk remained stable in 2022,
with the Group’s focus on supporting
customers impacted by the rising cost of
living; implementing and embedding the
FCA’s new Consumer Duty requirements;
and ensuring good customer outcomes
amid the transformation of its business
and technology.
The Group delivers
good outcomes for
its customers.
• Robust conduct risk framework in place
to support delivery of good customer
outcomes, market integrity and
competition requirements
• Active engagement with regulatory
bodies and key stakeholders to ensure
that the Group’s strategic conduct focus
continues to meet evolving stakeholder
expectations
Lloyds Banking Group Annual Report and Accounts 2022
39
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Risk overview continued
Principal risks
Principal risk category
Risk performance
Risk appetite
Key mitigating actions
Credit risk
Data risk
Funding and
liquidity risk
Insurance
underwriting
risk
Market risk
The Group’s credit portfolio continued
to be well positioned with high levels of
security, but a more challenging outlook,
driven by interest rate rises and cost
of living pressures, saw an increase in
credit risk. Evidence of deterioration
was very modest, with assets flowing
into arrears, defaults and write-offs
remaining low. Impairment was a net
charge of £1,510 million, compared to a
net credit of £1,385 million for 2021. The
Group’s expected credit loss allowances
have increased to £5,222 million
(2021: £4,477 million).
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.
• Extensive and thorough credit processes,
strategies and controls to ensure
effective risk identification, management
and oversight
• Significant monitoring in place, including
early warning indicators to remain close
to any signs of portfolio deterioration,
accompanied by a playbook of
mitigating actions
• Pre-emptive credit tightening ahead of
macroeconomic deterioration, including
updates to affordability lending controls
for forward look costs
Data risk remained stable in 2022, with
significant ongoing investment in the
maturity of data risk management,
data capabilities and end-to-end
management of data risk. Launch of the
Group’s new data strategy will support
in managing risk and achieving the
Group’s growth objectives.
The Group maintained its strong funding
and liquidity position in 2022. The loan
to deposit ratio increased to 96 per cent
(2021: 94 per cent), largely driven by
increased customer lending. The Group’s
liquid assets continue to exceed the
regulatory minimum and internal risk
appetite, with a liquidity coverage ratio
(based on monthly rolling average from
the previous 12 months) of 144 per cent
(2021: 135 per cent).
Insurance underwriting risk remained
broadly stable. Life and Pensions
present value of new business premium
increased to £21.7 billion (2021: £17.3
billion), with ongoing risks to short-
term persistency driven by economic
uncertainty and cost of living pressures.
Total gross written premium decreased
to £486 million (2021: £655 million) mainly
due to difficult trading conditions and
the renewal pricing impacts following
the FCA GI Pricing Practices Market Study.
Market volatility in 2022 created an
environment of increased market
risk. The Group remains well hedged,
ensuring near-term interest rate
exposure is managed, while benefitting
from rising interest rates. The Group’s
structural hedge increased to £255
billion (2021: £240 billion) mostly due to
the continued growth in stable customer
deposits. The Group’s pension funds had
sufficient liquidity to withstand market
volatility but saw a slight reduction in the
IAS 19 accounting surplus to £3.7 billion
(2021: £4.3 billion)
The Group has zero
appetite for data-
related regulatory
fines or enforcement
actions.
• Delivering against the data strategy and
uplifting capability in data management
and privacy, oversight of the data supply
chain and data controls and processes
• Data by design and data ethics principles
embedded into the data science lifecycle
The Group maintains
a prudent liquidity
profile and a balance
sheet structure that
limits its reliance on
potentially volatile
sources of funding.
• Management and monitoring of liquidity
risks and ensuring that management
systems and arrangements are
adequate with regard to the internal risk
appetite, Group strategy and regulatory
requirements
• Significant customer deposit base, driven
by inflows to trusted brands
The Insurance Group
has an appetite to
take on insurance
underwriting risks
where they fit with our
strategic objectives.
• Significant reinsurance of mortality,
morbidity and General Insurance
catastrophe risk
• Robust processes for underwriting,
reinsurance, claims management,
pricing, product design and product
management
Management through diversification
and pooling of risks
•
The Group has
effective controls in
place to identify and
manage the market
risk inherent in our
customer and client
focused activities.
• Structural hedge programmes
implemented to stabilise earnings
• Close monitoring of market risks and,
where appropriate, undertaking of asset
and liability matching and hedging
• Monitoring of the credit allocation in the
defined benefit pension schemes, as well
as the hedges in place against adverse
movements in nominal rates, inflation
and longevity
40
Lloyds Banking Group Annual Report and Accounts 2022
Principal risks
Principal risk category
Risk performance
Risk appetite
Key mitigating actions
Model risk
Model risk has increased in 2022. The
pandemic-related government-led
support schemes weakened the
relationships between model inputs
and outputs, and the current economic
conditions remain outside those used
to build the models, placing reliance on
judgemental overlays. The Group’s models
are being managed to reduce this need
for overlays. The control environment for
model risk is being strengthened to meet
revised regulatory requirements.
Operational risk Operational risk remained stable in 2022
with operational losses reducing versus
2021. Security, technology and supplier
management continue to be the most
material operational risk areas.
Operational
resilience risk
Operational resilience remains a key
focus, with continued enhancement
to the Group’s resilience for serving
customers better and addressing
regulatory priorities. Technology
resilience remains a focus area, with
dedicated programmes to address
key risks.
People risk
Regulatory
and legal risk
Strategic risk
People risk has increased in 2022,
aligning with the challenges of the
Group’s transformation agenda. The
strategic focus of the new leadership
team, together with the Group’s revised
pay offering, aims to enable colleagues
to enhance their skills and capabilities,
provide progression opportunities
and support colleagues facing cost
of living pressures.
The regulatory and legal risk profile has
remained stable thanks to proactive
engagement on emerging focus areas
including strategic transformation, cost
of living pressures and Consumer Duty.
Legal risk continued to be impacted by
the evolving UK legal and regulatory
landscape, other changing regulatory
standards and uncertainty arising
from the current and future litigation
landscape.
Strategic risk is stable, with further
integration into business planning
having been a key focus in 2022.
Maturation of the Group’s strategic
risk framework will strengthen the
Group’s ability to achieve its strategic
transformation ambitions.
Material models are
performing in line with
expectations.
• Robust model risk management
framework for managing and mitigating
model risk within the Group
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.
The Group has
limited appetite
for disruption to
services to customers
and stakeholders
from significant
unexpected events.
The Group leads
responsibly and
proficiently, manages
people resource
effectively, supports
and develops
colleague skills and
talent, creates and
nurtures the right
culture and meets
legal and regulatory
obligations related
to its people.
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.
• Review and investment in the Group’s
control environment, with a particular
focus on automation, to ensure the
Group addresses the inherent risks faced
• Deployment of a range of risk
management strategies, including:
avoidance, mitigation, transfer
(including insurance) and acceptance
• Operational resilience programme in
place to deliver against new regulation
and improve the Group’s ability to
respond to incidents while delivering
key services to customers
Investment in technology improvements,
including enhancements to the resilience
of systems that support critical business
processes
•
• Delivery of strategies to attract, retain
and develop high-calibre people with
the required capabilities, together with
the management of rigorous succession
planning for our senior leaders
• Continued focus on the Group’s culture
by developing and delivering initiatives
that reinforce appropriate behaviours
•
• Policies and procedures setting out the
principles and key controls that should
apply across the business which are
aligned to the Group risk appetite
Identification, assessment and
implementation of policy and regulatory
requirements by business units and
the establishment of local controls,
processes, procedures and resources
to ensure appropriate governance
and compliance
n/a
• Considering and addressing the strategic
implications of emerging trends
• Embedding of strategic risk into business
planning process and day-to-day risk
management
Lloyds Banking Group Annual Report and Accounts 2022
41
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Risk overview continued
Strategic risk
Connectivity of risks and our strategic
risk management framework
The Group’s strategic choices and their resulting consequences
can present a material risk to the Group’s customers, colleagues
and shareholders.
This is acknowledged by the Group’s Board, with strategic risk
recognised as a principal risk within the Group’s enterprise risk
management framework.
The unprecedented events resulting from the COVID-19 pandemic
demonstrated how individual risks in aggregate can place
significant pressure on the Group’s strategy, business model
and performance. This further highlighted the importance
of the connectivity of strategic risks with wider principal and
emerging risks.
Significant work has been undertaken since 2019 to clarify the
relationships between principal, emerging and strategic risks.
This activity has evolved the understanding of the Group’s
key strategic risks and risk connectivity, as well as creating
more explicit definitions of each of the risk types, which can
be defined as:
Strategic risk themes
Understanding the potential risk implications of our
strategy is an important area of focus. Using both
quantitative and qualitative analysis, key strategic risk
themes have been identified and assessed (see below).
These risks are aligned to the key areas of focus in
the Group’s strategy and can result in impacts on the
Group’s wider principal risks:
Organisational purpose
An organisational purpose with a clear mission and
values will enable us to help Britain prosper and build a
more sustainable and inclusive business, creating value
for the Group’s stakeholders. Risks may arise from:
• Conflicting interpretation of the Group’s mission
and values
•
Inability to inspire the culture and galvanise the
organisation to support a progressive strategy
• The stated purpose failing to resonate with our
stakeholders due to conflicting objectives
Customer proposition
Risk of adverse impact on reputation, customer
attraction, customer retention and income generation,
arising from:
Principal: The Board-approved enterprise-wide risk categories
used to monitor and report the risk exposures posing the greatest
impact to the Group.
•
•
Inappropriate products and services
Inability to respond to changing customer profiles
and needs
Strategic: 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
•
•
Emerging: 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.
• Failure to maintain trust and deepen relationships
Talent attraction and retention
Inability to meet the Group’s customer, colleague and
transformation goals due to:
• Competition for specialist skills in a challenging
labour market
• Failure to attract, develop and retain talent and
capabilities for delivering the Group’s agenda
Progress on strategic risk in 2022
Further progress has been made this year towards embedding
strategic risk into the Group’s planning processes and local
risk management.
A re-evaluation of the strategic risk themes was undertaken
following the announcement of the new Group strategy in
the first quarter, which concluded that the themes remain
appropriate. In addition, the Group’s Strategic Risk Policy was
published in August, to support the Group’s businesses in
developing their medium-term and strategic plans.
Building on this year’s preparation for supporting the ongoing
management of strategic risks, the Group will further strengthen
its strategic risk insights and management in 2023.
Climate change
Failure to:
• Adapt to shifting consumer and colleague expectations
• Achieve regulatory and external climate commitments
• Support the transition to a low carbon economy
as both a lender and employer
Technology advances
Potential for greater operational costs, reduced resilience
and uncompetitive or inappropriate customer offering,
driven by:
• Failure to keep pace with advances in technology
•
Inability to effectively leverage data, while ensuring
strong data ethics
• Misalignment of technology versus customer appetite
42
Lloyds Banking Group Annual Report and Accounts 2022
Emerging risks
Emerging risks methodology
Emerging risks are a key component of the Group’s
strategic risk framework.
Threat
The Group’s horizon scanning activity enables identification
of the most pertinent internal and external operating trends.
This insight informs the Group’s strategy, which in turn
impacts the Group’s risk profile.
Evolution of the Group’s methodology for
assessing and prioritising emerging risks
In 2022, the Group has invested in evolving its approach
for understanding and assessing emerging risks. Embracing
a more rigorous evaluation methodology, the Group has
introduced a wider range of variables for assessing and
prioritising risks (see opposite). These include factors associated
with the threat of a risk, the Group’s specific vulnerability to
a risk and the preparation and protection the Group has
in place to manage or mitigate impacts.
The activity has resulted in a more focused list of the
Group’s key emerging risks, enabling greater management
concentration on developing the appropriate responses.
Vulnerability
Factors associated
with the threat presented
by emerging risks
Factors associated
with the Group’s
specific vulnerability
to emerging risks
Preparation
and protection
The preparation and
protection the Group has
in place to manage or
mitigate impacts
Emerging risk
landscape
A focused list of the
Group’s key emerging
risks from both internal
and external sources,
for management review
and development of the
Group’s response
Emerging risks
Emerging risk theme
Concerns for the Group and key considerations
Climate-related
responsibilities
The risks and resulting public perception of the Group’s ability and choices to support the UK’s transition
to a low carbon economy.
Customer propositions
and societal expectations
Failure to manage and evolve the customer proposition appropriately, amidst a constantly changing
demographic of consumers.
Data ethics/ethical AI
Digital currencies
Employee proposition
The consequences of handling customer data unethically in relation to emerging technology, growing
regulation, and how this may manifest across the Group’s different entities.
Failure to accurately understand and manage the usage of digital currencies by the public or the
government, and how this may affect the Group’s operations and future strategy.
Inability of the Group to anticipate and hire for future skills aligned to evolving industry needs, or provide
an attractive colleague proposition against the changing competition landscape.
Futureproof
technology strategy
The rate at which the Group is able to adapt, invest and protect itself in relation to fast paced technology
growth, alongside rising external expectations.
Global economic
and political environment
Increasing strain on the UK economy resulting from continued geopolitical and economic tensions, impacting
the Group’s customers, partners and suppliers.
Operational and
infrastructure blackouts
Service impacts to the Group’s customers and colleagues due to economic, financial, biological, climate,
technological or social challenges.
Potential breakup
of the UK
UK economic
environment
Failure to adequately prepare and assess the policy, operational and financial impacts to the Group as
a result of countries in the UK becoming independent.
Inability to balance the long-term social, regulatory and financial impacts of sustained poor economic
activity within the UK, and consequent unattractiveness of the UK for external investors.
The individual emerging risks detailed above have been taken to key executive level committees throughout 2022, such as the Board
Risk Committee, with actions assigned to monitor more closely their manifestation and potential opportunities. For further information
on the Board Risk Committee’s Chair Report, see pages 99 to 103.
Many emerging risk topics are reviewed on a recurring basis, alongside ongoing activity addressing their present impacts. However,
it is acknowledged that these challenges will drive future trends in the long term which the Group will need to prepare for. For further
information on how the Group is managing key emerging risks through its strategy, see pages 145 to 146.
The manifestation of other emerging risks is more unknown. As a result, the Group will continue to explore how these challenges may
impact its future strategy, and how it can continue to best protect its customers, colleagues and shareholders.
Lloyds Banking Group Annual Report and Accounts 2022
43
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Viability statement
and going concern
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 2022 Strategic Review which sets out the Group’s customer
and business strategy for the period from 2022 to 2026
• The Group’s operating plan which comprises detailed financial,
capital and funding projections together with an assessment of
relevant risk factors for the period from 2022 to 2025 inclusive
In particular, the assessment included consideration of the
ongoing impact of, and subsequent recovery from, the pandemic;
the current and expected future impact of the UK’s exit from the
EU on the UK economy and regulatory agenda; and climate-
related matters.
Group, legal entities and divisional 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 agrees 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, 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 the
Risk division over the alignment of the plan with Group strategy
and the Board’s risk appetite. This assessment performed by
the 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. The Group conducts internal stress
testing and completes the PRA regulatory exercises. In 2022,
stress tests have considered a range of economic conditions
particularly relevant to the prevailing outlook, including high
inflation and rising interest rates. Group stress results are
segmented to provide insight, inform risk appetite, and allow
for development of mitigating actions. 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 pages 139 to 195, is taken
into account. Further information on stress testing and reverse
stress testing is provided on page 144
• 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. The directors have also reviewed a less
detailed high level forecast for 2026; this high level forecast
contains no information which would cause different conclusions
to be reached over the longer-term viability of the Company and
Group. Information relevant to the assessment can be found in
the following sections of the annual report and accounts:
• The Group’s principal activities, business and operating
models and strategic direction are described in the strategic
report on pages 2 to 45
• Emerging risks are disclosed on page 43
• 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 139 to 195
• The Group’s approach to stress testing and reverse stress
testing, including both regulatory and internal stresses,
is described on page 144
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 2025.
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.
The directors have 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 40 and pages 179 to 184 and capital position
on pages 148 to 155. Additionally, the directors have considered
the capital and funding projections of the Company.
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 reviewed the
Group’s operating plan and its funding and capital positions,
including a consideration of the implications of climate change.
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.
44
Lloyds Banking Group Annual Report and Accounts 2022
Non-financial information statement
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 to relevant content.
Reporting
requirement
Stakeholders
Policies and standards
which govern our approach
Information necessary to understand our
Group and its impact, policies due, diligence and outcomes
• Annual materiality assessment1
• Code of supplier responsibility
• Third party supplier policies
ESG performance review
Environmental sustainability report
• Delivering value for our stakeholders, pages 4 to 7
• Governance in action, pages 10 and 11
•
•
• Code of supplier responsibility
• Third party supplier policies are available at: www.lloydsbankinggroup.
com/who-we-are/working-with-suppliers/policy-compliance.html
Environmental
matters
• Environmental (TCFD) statement
• Governance in action, pages 10 and 11
• Our external environment, page 18
• Progress and performance, climate, pages 36 and 37
• Climate risk, page 156
•
Environmental sustainability report
Employees
Respect for
human rights
• Colleague policy1
• Code of ethics and responsibility
• Health and safety policy1
• Governance in action, pages 10 and 11
• Progress and performance, colleagues, pages 34 and 35
•
• Code of ethics and responsibility
ESG performance review
• Human rights policy statement
• Colleague policy1
• Pre-employment vetting
standards1
• Data privacy policy1
• Modern slavery and human
•
trafficking statement
Information and cyber security
policy1
• Progress and performance, colleagues, pages 34 and 35
• The Group are guided by the International Bill of Human Rights, the
International Labour Organization’s (ILO) Core Labour Standards and
its Tripartite Declaration of Principles, the Organisation for Economic
Co-operation and Development (OECD) Guidelines for Multinational
Enterprises, and the UN’s Guiding Principles on Business and Human
Rights. 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. Pursuant to the UK Modern Slavery Act, we produce
a modern slavery statement
• Modern slavery and human trafficking statement
• Human rights policy statement
• Social sustainability report
All documents available at: www.lloydsbankinggroup.com/who-we-
are/responsible-business/downloads
Social matters
• Volunteering standards1
• Matched giving guidelines1
• Colleague policy1
• Our unique business model, pages 2 and 3
• Delivering value for our stakeholders, pages 4 to 7
• Our external environment, page 18
• Progress and performance, colleagues, pages 34 and 35
• Social sustainability report
Anti-corruption
and anti-bribery
• Anti-bribery policy1
• Anti-bribery policy statement
• Anti-money laundering and
counter terrorist financing
policy1
• Fraud risk management policy1
• Risk management, pages 191 and 192
•
ESG performance review
• Anti-bribery policy statement
Description of principal risks and impact of business activity • Risk overview, pages 38 to 43
Description of the business model
Non-financial key performance indicators
• Our unique business model, pages 2 and 3
• Our strategy in action, pages 24 to 31
• Progress and performance, pages 32 to 37
•
•
•
ESG performance review
ESG reporting framework index
ESG reporting criteria
All documents available at:
www.lloydsbankinggroup.com/
who-weare/responsible-business/
downloads.
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 2022.
Lloyds Banking Group Annual Report and Accounts 2022
45
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Financial results
In this section
Result for the full year
Divisional results
Other financial information
Alternative performance measures
47
58
66
67
Financial
education
support for
students
Making Money Meaningful campaign
Working in partnership with the Money and
Pensions Service, we’re helping to support
the UK’s strategy for financial wellbeing
goal by helping two million or more
children receive a meaningful financial
education by 2030. In October, we
launched our month-long Making Money
Meaningful campaign where over 300
colleagues delivered financial education
sessions to 1,700 students who are
beginning to make the transition into
higher education or employment.
Our newly launched suite
of financial capability
resources.
46
Lloyds Banking Group Annual Report and Accounts 2022
Income statement – underlying basisA
Underlying net interest income
Underlying other income
Operating lease depreciation
Net income
Operating costs1
Remediation
Total costs
Underlying profit before impairment
Underlying impairment (charge) credit1
Underlying profit
Restructuring1
Volatility and other items
Statutory profit before tax
Tax expense
Statutory profit after tax
Earnings per share
Dividends per share – ordinary
Share buyback value
Banking net interest marginA
Average interest-earning banking assetsA
Cost:income ratioA,1
Asset quality ratioA,1
Return on tangible equityA
A See page 67.
1
2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
Key balance sheet metrics
Loans and advances to customers
Customer deposits
Loan to deposit ratioA
CET1 ratio
Pro forma CET1 ratioA,1
Total capital ratio
MREL ratio
UK leverage ratio
Risk-weighted assets
Wholesale funding2
Liquidity coverage ratio2
Tangible net assets per shareA
2022
£m
13,172
5,249
(373)
18,048
(8,835)
(255)
(9,090)
8,958
(1,510)
7,448
(80)
(440)
6,928
(1,373)
5,555
7.3p
2.40p
2021
£m
11,163
5,060
(460)
15,763
(8,312)
(1,300)
(9,612)
6,151
1,385
7,536
(452)
(182)
6,902
(1,017)
5,885
7.5p
2.00p
Change
%
18
4
19
14
(6)
80
5
46
(1)
82
(35)
(6)
(0.2)p
0.40p
£2.0bn
£2.0bn
2.94%
2.54%
40bp
£452.0bn
£444.6bn
2
50.4%
0.32%
13.5%
61.0%
(10.6)pp
(0.31)%
13.8%
(0.3)pp
At 31 Dec
2022
At 31 Dec
2021
Change
%
£454.9bn
£448.6bn
1
£475.3bn
£476.3bn
96%
15.1%
14.1%
19.7%
31.7%
5.6%
94%
17.3%
16.3%
23.6%
37.2%
5.8%
£210.9bn
£196.0bn
£100.3bn
£93.1bn
144%
51.9p
135%
57.5p
2pp
(2.2)pp
(2.2)pp
(3.9)pp
(5.5)pp
(0.2)pp
8
8
9pp
(5.6)p
1
31 December 2022 reflects the dividend received from Insurance in February 2023 and the full impact of the announced share buyback, but excludes the impact of
the phased unwind of IFRS 9 relief on 1 January 2023. The 31 December 2021 comparative reflects the dividend received from Insurance in February 2022 and the full
impact of the share buyback in respect of 2021 that completed in 2022, but excludes the impact of regulatory changes that came into effect on 1 January 2022.
2 Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative
has been presented on a consistent basis. The liquidity coverage ratio is calculated as a simple average of month-end observations over the previous 12 months.
Lloyds Banking Group Annual Report and Accounts 2022
47
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Quarterly informationA
Underlying net interest income
Underlying other income
Quarter
ended
31 Dec
2022
£m
3,643
1,438
Quarter
ended
30 Sep
2022
£m
3,394
1,282
Quarter
ended
30 Jun
2022
£m
3,190
1,268
Operating lease depreciation
(78)
(82)
(119)
Quarter
ended
31 Mar
2022
£m
2,945
1,261
(94)
4,112
Quarter
ended
31 Dec
2021
£m
2,893
1,307
Quarter
ended
30 Sep
2021
£m
2,852
1,336
Quarter
ended
30 Jun
2021
£m
2,741
1,282
(78)
(111)
(123)
Quarter
ended
31 Mar
2021
£m
2,677
1,135
(148)
4,122
4,077
3,900
3,664
Net income
Operating costs1
Remediation
Total costs
5,003
(2,399)
(166)
(2,565)
4,594
4,339
(2,187)
(2,151)
(2,098)
(2,246)
(2,013)
(2,008)
(2,045)
(10)
(27)
(52)
(775)
(100)
(360)
(2,197)
(2,178)
(2,150)
(3,021)
(2,113)
(2,368)
Underlying profit before impairment
2,438
2,397
Underlying impairment (charge) credit1
Underlying profit
Restructuring1
Volatility and other items
Statutory profit before tax
Tax (expense) credit
Statutory profit after tax
(465)
1,973
(11)
(203)
1,759
(239)
1,520
(668)
1,729
(22)
(199)
1,508
(299)
1,209
2,161
(200)
1,961
(23)
100
2,038
(416)
1,622
1,962
(177)
1,785
(24)
(138)
1,623
(419)
1,204
1,101
532
1,633
(418)
(247)
968
(548)
420
1,964
119
2,083
(24)
(30)
2,029
(429)
1,600
1,532
374
1,906
6
95
2,007
461
2,468
(65)
(2,110)
1,554
360
1,914
(16)
–
1,898
(501)
1,397
Banking net interest marginA
3.22%
2.98%
2.87%
2.68%
2.57%
2.55%
2.51%
2.49%
Average interest-earning banking assetsA
£453.8bn
£454.9bn
£451.2bn
£448.0bn
£449.4bn
£447.2bn
£442.2bn
£439.4bn
Cost:income ratioA,1
Asset quality ratioA,1
Return on tangible equityA
51.3%
0.38%
16.3%
47.8%
0.57%
11.9%
50.2%
0.17%
15.6%
52.3%
0.16%
10.8%
73.3%
51.8%
60.7%
57.6%
(0.46)%
(0.10)%
(0.33)%
(0.33)%
2.9%
14.5%
24.4%
13.9%
Loans and advances to customers
£454.9bn
£456.3bn
£456.1bn
£451.8bn
£448.6bn
£450.5bn
£447.7bn
£443.5bn
Customer deposits
Loan to deposit ratioA
£475.3bn
£484.3bn
£478.2bn
£481.1bn
£476.3bn
£479.1bn
£474.4bn
£462.4bn
96%
94%
95%
94%
94%
94%
94%
96%
Risk-weighted assets
£210.9bn
£210.8bn
£209.6bn
£210.2bn
£196.0bn
£200.7bn
£200.9bn
£198.9bn
Tangible net assets per shareA
51.9p
49.0p
54.8p
56.5p
57.5p
56.6p
55.6p
52.4p
1
2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
48
Lloyds Banking Group Annual Report and Accounts 2022
At 31 Dec
2022
£bn
At 30 Sep
2022
£bn
Change
%
At 30 Jun
2022
£bn
Change
%
Change
%
299.6
298.4
296.6
Balance sheet analysis
Loans and advances to customers
Open mortgage book
Closed mortgage book
Credit cards1
UK Retail unsecured loans
UK Motor Finance
Overdrafts
Retail other2
Wealth1
Small and Medium Businesses1
Corporate and Institutional Banking1
Central items1,3
11.6
14.3
8.7
14.3
1.0
13.8
0.9
37.7
56.0
(3.0)
12.3
14.3
8.8
14.2
1.0
13.0
1.0
39.8
57.6
(4.1)
Loans and advances to customers
454.9
456.3
Customer deposits
Retail current accounts
Retail relationship savings accounts
Retail tactical savings accounts
Wealth1
Commercial Banking deposits
Central items1
Total customer deposits
Total assets
Total liabilities
Ordinary shareholders’ equity
Other equity instruments
Non-controlling interests
Total equity
114.0
166.3
16.1
14.4
163.8
0.7
475.3
877.8
830.3
42.0
5.3
0.2
47.5
115.7
165.7
16.2
14.9
170.2
1.6
484.3
892.9
846.5
40.0
6.2
0.2
46.4
(6)
(1)
1
6
(10)
(5)
(3)
(27)
(1)
(1)
(3)
(4)
(56)
(2)
(2)
(2)
5
(15)
2
13.1
14.2
8.5
14.2
1.0
12.5
1.0
41.1
55.7
(1.8)
456.1
113.4
165.8
16.9
14.9
166.7
0.5
478.2
890.4
840.3
44.4
5.5
0.2
50.1
At 31 Dec
2021
£bn
293.3
14.2
13.8
8.1
14.0
1.0
10.9
1.0
42.5
50.0
(0.2)
448.6
111.5
164.5
16.8
15.6
167.5
0.4
476.3
886.6
833.4
47.1
5.9
0.2
53.2
1
(11)
1
2
1
10
(10)
(8)
1
67
1
(5)
(3)
(2)
40
(1)
(1)
(1)
(5)
(4)
(5)
2
(18)
4
7
2
27
(10)
(11)
12
1
2
1
(4)
(8)
(2)
75
(1)
(11)
(10)
(11)
(6)
Ordinary shares in issue, excluding own shares
66,944m
67,464m
(1)
68,702m
(3)
70,996m
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
2 Primarily Europe.
3
Includes central fair value hedge accounting adjustments.
Lloyds Banking Group Annual Report and Accounts 2022
49
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Group results – statutory basis
The results below are prepared in accordance with the recognition and measurement principles of International Financial Reporting
Standards (IFRSs). The underlying results are shown on page 47. A reconciliation between the statutory and underlying results is shown
on page 68.
Summary income statement
Net interest income
Other income
Total income1
Insurance claims and changes in insurance and investment contract liabilities1
Total income, net of insurance claims and changes in insurance and investment contract liabilities
Operating expenses
Impairment (charge) credit
Profit before tax
Tax expense
Profit for the year
Profit attributable to ordinary shareholders
Profit attributable to other equity holders
Profit attributable to non-controlling interests
Profit for the year
2022
£m
13,957
(8,149)
5,808
12,401
18,209
(9,759)
(1,522)
6,928
(1,373)
5,555
5,021
438
96
5,555
2021
£m
9,366
28,078
37,444
(21,120)
16,324
(10,800)
1,378
6,902
(1,017)
5,885
5,355
429
101
5,885
Ordinary shares in issue (weighted-average – basic)
68,847m
70,937m
Change
%
49
(84)
12
10
(35)
(6)
(6)
2
(5)
(6)
(3)
Basic earnings per share
7.3p
7.5p
(0.2)p
1
Includes income and expense attributable to the policyholders of the Group’s long-term assurance funds that materially offset in arriving at profit before tax. These
can, depending on market movements, lead to significant variances on a statutory basis in total income and insurance claims and changes in insurance and
investment contract liabilities from one period to the next.
Summary balance sheet
Assets
Cash and balances at central banks
Financial assets at fair value through profit or loss
Derivative financial instruments
Financial assets at amortised cost
Financial assets at fair value through other comprehensive income
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost1
Financial liabilities at fair value through profit or loss
Derivative financial instruments
Debt securities in issue
Liabilities arising from insurance and investment contracts
Other liabilities
Subordinated liabilities
Total liabilities
Total equity
Total equity and liabilities
At 31 Dec
2022
£m
At 31 Dec
2021
£m
Change
%
91,388
180,609
24,753
520,322
23,154
37,603
76,420
206,771
22,051
517,156
28,137
35,990
877,829
886,525
7,266
475,331
48,596
17,755
24,042
73,819
7,647
476,344
31,125
23,123
18,060
71,552
149,868
168,463
22,901
10,730
23,951
13,108
830,308
833,373
47,521
53,152
877,829
886,525
20
(13)
12
1
(18)
4
(1)
(5)
56
(23)
33
3
(11)
(4)
(18)
(11)
(1)
1
Repurchase agreements at amortised cost, previously included within other liabilities, are now shown separately; comparatives have been presented on a
consistent basis.
50
Lloyds Banking Group Annual Report and Accounts 2022
Summary of Group results
Statutory results
The Group’s statutory profit before tax for the year was £6,928 million, £26 million higher than 2021. The benefit of higher income and
lower operating expenses was offset by the impact of an impairment charge (compared to a credit in the prior year), in part reflecting
the deterioration in the economic outlook. Statutory profit after tax was £5,555 million (2021: £5,885 million, which included the benefit of
a deferred tax remeasurement). In the fourth quarter of the year, statutory profit before tax was £1,759 million and statutory profit after
tax was £1,520 million, an increase on the third quarter of 17 per cent and 26 per cent respectively, as a result of higher income and a
lower impairment charge, following the deterioration in the macroeconomic outlook recognised during the third quarter.
The Group’s statutory income statement includes income and expenses attributable to the policyholders of the Group’s long-term
assurance funds. These items materially offset in arriving at profit before tax but can, depending on market movements, lead to
significant variances on a statutory basis between total income and insurance claims and changes in insurance and investment
contract liabilities from one period to the next. In 2022, due to deteriorating market conditions, the Group recognised losses on
policyholder investments within total income, which were materially offset by the corresponding reduction in insurance and investment
contract liabilities, recognised as a decrease in insurance claims and changes in insurance and investment contract liabilities expense
and a decrease in the amounts payable to unit holders in the Group’s consolidated open-ended investment companies, recognised
within net interest income.
Total statutory income net of insurance claims and changes in insurance and investment contract liabilities for the year was
£18,209 million, an increase of 12 per cent on 2021, reflecting continued recovery in customer activity and benefits from UK Bank Rate
changes.
The Group maintained its focus on cost management, whilst increasing strategic investment as planned. Operating expenses
decreased due to significantly lower remediation and restructuring costs and a reduced charge for operating lease depreciation.
Remediation costs, principally relating to pre-existing programmes, were significantly lower than in 2021. Restructuring costs in the
year included costs associated with the integration of Embark, whereas the prior year included a significant software write-off as the
Group invested in new technology and systems infrastructure. The reduced operating lease depreciation charge reflected continued
strength in used car prices, combined with the ongoing impact of a reduced, but stabilising, Lex fleet size, given industry-wide supply
constraints in the new car market.
The impairment charge of £1,522 million in 2022, compared to a net credit of £1,378 million in 2021, reflected strong observed credit
performance, but was impacted by a deteriorating economic outlook partly offset by COVID-19 releases.
The Group recognised a tax expense of £1,373 million in the year, compared to a tax expense of £1,017 million in 2021. The tax expense
in 2022 included a £222 million benefit in relation to tax deductibility of provisions made in 2021, and a £53 million expense (2021:
£954 million benefit) arising on the remeasurement of deferred tax assets.
Loans and advances to customers increased by 1 per cent on 31 December 2021 to £454.9 billion, including growth of £6.3 billion in the
open mortgage book, alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by
£1.2 billion due to attractive growth opportunities in the Corporate and Institutional Banking portfolio, partly offset by repayments of
government-backed lending. Customer deposits have decreased by £1.0 billion since the end of 2021, to £475.3 billion. This included
Retail current account growth of £2.5 billion, more than offset by Commercial Banking deposit reductions of £3.7 billion. In 2022, due to
market conditions, a reduction was seen in policyholder investments, primarily within financial assets at fair value through profit or loss.
This was materially offset by a corresponding reduction in the related insurance and investment contract liabilities.
Total equity reduced during the year as the Group’s profits were more than offset by reductions in the cash flow hedging reserve due
to the rising rate environment, the impact of pension scheme remeasurements given market conditions and the impact of in-year
distributions, including the share buyback programme that was announced in February 2022 in respect of 2021. This programme
completed on 11 October 2022, with c.4.5 billion ordinary shares repurchased.
Underlying resultsA
The Group’s underlying profit for the year was £7,448 million, compared to £7,536 million for 2021. Growth in net income and reduced
total costs were offset by an increased impairment charge, largely as a result of a deterioration in the economic outlook for the UK,
versus the underlying impairment credit in 2021. Underlying profit before impairment for the period was up 46 per cent to £8,958 million,
driven by net income growth and lower remediation costs. In the fourth quarter, underlying profit before impairment was £2,438 million,
up 2 per cent on the third quarter.
Net incomeA
Underlying net interest income
Underlying other income
Operating lease depreciation
Net incomeA
Banking net interest marginA
Average interest-earning banking assetsA
2022
£m
13,172
5,249
(373)
18,048
2021
£m
11,163
5,060
(460)
15,763
Change
%
18
4
19
14
2.94%
2.54%
40bp
£452.0bn
£444.6bn
2
Net income of £18,048 million was up 14 per cent on 2021, with higher net interest income and other income as well as a continued low
charge for operating lease depreciation.
Lloyds Banking Group Annual Report and Accounts 2022
51
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Summary of Group results continued
Net interest income of £13,172 million was up 18 per cent, driven by a stronger banking net interest margin of 2.94 per cent (2021: 2.54 per
cent) and higher average interest-earning banking assets. The net interest margin benefitted from UK Bank Rate increases, structural
hedge earnings from the rising rate environment and continued funding and capital optimisation, partly offset by lower mortgage
margins. In the fourth quarter, the net interest margin increased to 3.22 per cent from 2.98 per cent in the third quarter, in part due to
timing benefits from UK Bank Rate rises. Average interest-earning banking assets were up 2 per cent compared to 2021 at £452.0 billion,
supported by continued growth in the open mortgage book. The Group now expects the banking net interest margin for 2023 to be
greater than 305 basis points.
The Group manages the risk to its earnings and capital from movements in interest rates by hedging the net liabilities which are stable
or less sensitive to movements in rates. As at 31 December 2022, the Group’s structural hedge had an approved capacity of £255 billion
(up £15 billion on 31 December 2021). Customer deposits have increased by c.£65 billion since the end of 2019; hedge capacity
increased by £70 billion during the same period, of which c.£45 billion came from deposit growth and c.£25 billion from investment
of existing deposits. The Group continues to review the stability of underlying deposits and their eligibility for the structural hedge.
The nominal balance of the structural hedge was £255 billion at 31 December 2022 (31 December 2021: £240 billion) with a weighted-
average duration of approximately three-and-a-half years (31 December 2021: approximately three-and-a-half years). The Group
generated £2.6 billion of total gross income from structural hedge balances in 2022, representing growth over the prior year (2021:
£2.2 billion).
Underlying other income of £5,249 million was 4 per cent higher compared to £5,060 million in 2021, including £1,438 million in the
fourth quarter, up 12 per cent on the third quarter. This reflected improved performance across Retail and Commercial Banking while
Insurance, Pensions and Investments (previously Insurance and Wealth) benefitted from assumption changes from the annual basis
review.
Within Retail, other income was up 8 per cent on prior year, including improved current account and credit card performance. Retail
other income was up slightly in the fourth quarter. Commercial Banking was up 9 per cent versus the prior year reflecting higher
financial markets activity, also driving growth in the fourth quarter and strong performance in transaction banking, partly offset by
lower levels of corporate financing activity. Insurance, Pensions and Investments other income was 12 per cent higher than the prior
year. This largely reflected the impact of increased workplace pension income and bulk annuity deals along with the inclusion of
Embark income and a benefit from assumption changes. Growth was partly offset by a decrease in the general insurance business
contribution, primarily driven by pricing pressures and severe weather event claims of £108 million (2021: £11 million). Assumption and
methodology changes of £348 million in the year (2021: £111 million), included £229 million in the fourth quarter, relating to updated
longevity assumptions and a significant improvement in persistency assumptions. Other income associated with the Group’s equity
investments businesses, including Lloyds Development Capital, of £468 million was £214 million lower than the previous year after
particularly strong contributions in 2021.
The Group delivered good organic growth in Insurance, Pensions and Investments and Wealth (reported within Retail) assets under
administration (AuA), with combined £9 billion net new money1 in open book AuA over the year. In total, open book AuA stand at
£160 billion.
Looking forward, IFRS 17 will impact the phasing of profit recognition for insurance contracts. From the first quarter of 2023 insurance
new business revenue within other income will be spread over the period the Group provides services to its policyholders (versus
recognised up front under outgoing IFRS 4 accounting standards). Similarly, impacts from assumption changes will be spread over the
life of the relevant contracts.
Operating lease depreciation of £373 million (2021: £460 million), reflected continued strength in used car prices, combined with the
ongoing impact of a reduced, but stabilising, Lex fleet size, given industry-wide supply constraints in the new car market.
1
Excludes market movements and Embark assets transferred on acquisition; includes post acquisition Embark net flows.
Total costsA
Operating costsA,1
Remediation
Total costsA,1
Cost:income ratioA
2022
£m
8,835
255
9,090
2021
£m
8,312
1,300
9,612
Change
%
(6)
80
5
50.4%
61.0%
(10.6)pp
1
2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
Cost discipline remains a core focus for the Group. The Group’s cost:income ratio was 50.4 per cent, compared to 61.0 per cent in 2021.
Total costs of £9,090 million were 5 per cent lower than in 2021 (with £2,565 million in the fourth quarter). Within this, lower remediation
costs (down 80 per cent) were partially offset by increased operating costs of £8,835 million (up 6 per cent), reflecting higher planned
strategic investment and costs in new businesses. Business-as-usual costsA were stable, with ongoing cost discipline in the context
of inflationary pressures and increased staff payments. Operating costs are expected to be higher in 2023 at c.£9.1 billion (2022:
£8.8 billion), given inflationary pressure and the peak of the Group’s planned strategic investment, partially mitigated by continued
cost efficiency.
In 2022 the Group recognised remediation costs of £255 million (£166 million in the fourth quarter). These principally relate to pre-
existing programmes and are significantly lower than 2021 (£1,300 million). Within remediation there was an additional charge of
£50 million relating to HBOS Reading in the fourth quarter. The provision held in respect of HBOS Reading continues to reflect the
Group’s best estimate of its full liability, albeit uncertainties remain.
52
Lloyds Banking Group Annual Report and Accounts 2022
Underlying impairmentA
Charges (credits) pre-updated MES3
Retail
Commercial Banking
Other
Updated economic outlook
Retail
Commercial Banking
Other
Underlying impairment charge (credit)A
Change
%
(15)
2022
£m
773
122
20
915
600
395
(400)
595
1,510
20211,2
£m
672
(357)
(1)
314
(1,120)
(579)
–
(1,699)
(1,385)
Asset quality ratioA
0.32%
(0.31)%
1 Non lending-related fraud costs, previously reported within underlying impairment, are now included within operating costs. Comparatives have been presented
on a consistent basis.
2 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
3
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
Impairment charges excluding the impact from updated economic outlook taken each quarter. Coronavirus impacted restructuring cases, previously disclosed
separately, are now reported within charges pre-updated MES (multiple economic scenarios); comparatives have been presented on a consistent basis.
Asset quality remains strong, with sustained low levels of new to arrears and very modest evidence of deterioration in observed credit
metrics, despite the inflationary pressures on affordability during the latter half of the year. Underlying impairment was a net charge
of £1,510 million (2021: credit of £1,385 million), resulting in an asset quality ratio of 32 basis points. This reflects a more normalised,
but still low, pre-updated multiple economic scenarios (MES) charge of £915 million in the year (2021: £314 million, net of £357 million
release in Commercial Banking largely driven by write-backs), equivalent to an asset quality ratio of 20 basis points. In addition, the
Group recognised a net £595 million MES charge, including £82 million in the fourth quarter (2021: a credit of £1,699 million), as a result
of updates to the Group’s economic outlook and associated scenarios. The updated outlook addresses risks from a higher inflation
and interest rate environment that have emerged over the year. A charge of £1,145 million relating to these risks is partly offset by a
credit of £550 million from the release of COVID-19 judgements, including the £400 million release of the COVID-19 central adjustment.
The fourth quarter saw an impairment charge of £465 million. This included a pre-updated MES charge of £383 million and also
captures a further material charge in Commercial Banking on a pre-existing single case. The fourth quarter pre-updated MES charge
includes additional expected credit loss (ECL) allowance build in Stage 1 as it rolls forward, picking up the elevated defaults expected in
the fourth quarter of 2023, as well as recent observed behaviour. The small observed increase in defaults has been partially offset by
an improvement in observed loss rates, largely within UK mortgages and unsecured portfolios as a result of collections policy changes
and enhanced customer support initiatives.
The Group’s loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to lending with high levels
of security, reflected in strong recovery performance. Observed credit performance remains strong, with very modest evidence of
deterioration and the flow of assets into arrears, defaults and write-offs remaining at low levels and largely below pre-pandemic levels.
The Group’s ECL allowance increased by £0.3 billion in the fourth quarter to £5.3 billion (31 December 2021: £4.5 billion). The ECL
allowance is high by historical standards, £1.1 billion above 31 December 2019 and assumes that a large proportion of expected losses
will crystallise over the next 12 to 18 months, before run rate losses return to around pre-pandemic levels. This uplift in defaults is
forecast given the expected deterioration across a number of macroeconomic measures. The Group’s base case predicts affordability
pressures from inflation peaking at 10.3 per cent in the first quarter of 2023, alongside UK Bank Rate peaking at 4.0 per cent, with
unemployment expected to build to 5.3 per cent in the first quarter of 2025. The economic outlook assumptions remain similar to
those of the third quarter, with some fourth quarter ECL increases driven by models responding to updates to HPI and GDP forecasts,
and additional management judgements raised in the quarter for affordability risks. The ECL uplift in the fourth quarter is also driven
by a material update in the individual assessment of a pre-existing single case in Commercial Banking and model calibrations as
mentioned above.
The ECL allowance continues to reflect a probability-weighted view of future economic scenarios built out from the base case and
its associated conditioning assumptions. A 30 per cent weighting is applied to the base case, upside and downside scenarios and a
10 per cent weighting to the severe downside. All scenarios deteriorated during 2022 following the changes made to the base case
outlook. The probability-weighted ECL is particularly impacted by the significance and non-linearity of losses from the severe downside
scenario. In June 2022, the Group included an adjusted severe downside scenario to incorporate high CPI inflation and UK Bank Rate
profiles and decided to adopt this adjusted scenario to calculate the Group’s ECL. Given the increased severity of this severe downside
scenario, there is a greater proportionate increase in ECL which builds further in the fourth quarter of 2022 due to sensitivity to model
calibrations and new judgements introduced for inflationary and interest rate pressures.
Overall, management judgement adjustments have significantly reduced in the year, reflecting the balance of risks shifting from more
idiosyncratic COVID-19 risks to broader macroeconomic risks from inflationary pressures and rising interest rates within the Group’s
base case and wider economic scenarios. Management judgements in respect of COVID-19 have been removed as the risks have
either dissipated, or are now captured in model calibrations or other wider related judgements. Of the £0.8 billion released since
31 December 2021, £0.6 billion drives a credit to the impairment charge in the year, as prior risks have not emerged, with the remaining
£0.2 billion now captured within ECL portfolio models, where previously distorted data or trends have now normalised. Judgemental
adjustments for risks in relation to inflationary pressures, not deemed to be fully captured by models, are £0.2 billion at 31 December
2022. These are across Retail portfolios where the perceived affordability risks to certain segments are adjusted, largely through default
assumptions, at customer level.
Lloyds Banking Group Annual Report and Accounts 2022
53
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Summary of Group results continued
Observed portfolio performance remains strong, with impact on Stage 2 loans and advances to customers mostly due to the effect
from updated MES or model changes driven by CRD IV regulatory requirements1. As a result, Stage 2 loans and advances to customers
increased to £66 billion (31 December 2021: £42 billion), with 93 per cent up to date (31 December 2021: 86 per cent). Of the £24 billion
increase, £8 billion of the increase was due to changes in credit risk measurement and modelling associated with CRD IV regulatory
requirements1 within UK mortgages in the first half of the year. £15 billion occurred in the third quarter as a result of the updated
economic outlook reflected in the MES, largely in UK mortgages and Commercial Banking (99 per cent of which related to up to date
loans). In the fourth quarter Stage 2 assets increased by £2 billion, all of which are up to date accounts, largely in Retail as a result of
model calibrations and additional management judgements. Stage 3 assets were £11 billion as at 31 December 2022 (31 December
2021: £9 billion) and stable compared to 30 September 2022. The £2 billion increase in Stage 3 assets over the year is primarily driven
by changes in credit risk measurement and modelling associated with CRD IV regulatory requirements1 since the end of 2021 and not
reflective of observed deterioration.
On the basis of the current economic assumptions, the Group expects the asset quality ratio to be c.30 basis points in 2023.
1 As previously outlined, on 1 January 2022 the Group amended its definition of Stage 3 for UK mortgages, maintaining alignment between IFRS 9 and regulatory
definitions of default. For UK mortgages, default was previously deemed to have occurred no later than when a payment was 180 days past due. In line with CRD IV
this definition has now been reduced to 90 days, as well as including end-of-term payments on past due interest-only accounts and any non-performing loans.
Furthermore, additional assets moved to Stage 2 given the consequential change in approach to the prediction and modelling of up to date accounts and their
likelihood of reaching the new broader definition of default in the future. Given the accounts that moved to Stage 2 were up to date with low probability of default,
there was no material ECL impact.
Restructuring, volatility and other items
Underlying profitA
Restructuring1
Volatility and other items
Market volatility and asset sales
Amortisation of purchased intangibles
Fair value unwind
Statutory profit before tax
Tax expense
Statutory profit after tax
Earnings per share
Return on tangible equityA
Tangible net assets per shareA
2022
£m
7,448
(80)
(252)
(70)
(118)
(440)
6,928
(1,373)
5,555
7.3p
13.5%
51.9p
2021
£m
7,536
(452)
87
(70)
(199)
(182)
6,902
(1,017)
5,885
7.5p
13.8%
57.5p
Change
%
(1)
82
41
(35)
(6)
(0.2)p
(0.3)pp
(5.6)p
1
2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
Restructuring costs of £80 million included costs associated with the integration of Embark and were significantly lower than in 2021
(£452 million), which included a software write-off as the Group invested in new technology and systems infrastructure. Since the first
quarter of 2022 all restructuring costs, with the exception of merger, acquisition and integration costs, have been reported as part of
the Group’s operating costs.
Volatility and other items were a net loss of £440 million for the year, comprising £252 million of negative market volatility and
£188 million relating to amortisation of purchased intangibles and fair value unwind. Market volatility included negative insurance
volatility of £148 million due to rising interest rates and wider bond spreads partially offset by inflation (net of hedging), in addition to
negative banking volatility of £46 million. This compares to gains during 2021 of £87 million, including positive insurance and banking
volatility, partly offset by liability management losses and other statutory items. In the fourth quarter, a market volatility loss of
£157 million included £120 million of negative banking volatility, principally from sterling strengthening.
Further information on the reconciliation of underlying to statutory results is included on page 68.
Tax
The Group recognised a tax expense of £1,373 million for the year (2021: £1,017 million), with £239 million in the fourth quarter. The expense
for the year included a £222 million benefit recognised in the fourth quarter in relation to tax deductibility of provisions made in 2021
and a £53 million expense (2021: £954 million benefit) arising primarily on the remeasurement of deferred tax assets following the
substantive enactment of the previously announced reduction in the rate of banking surcharge from 8 per cent to 3 per cent.
The Group expects a medium-term effective tax rate of around 27 per cent, which includes the impact of the reduction in the rate of
banking surcharge and the increase in corporation tax rate from 19 per cent to 25 per cent, both of which come into effect from 1 April
2023. An explanation of the relationship between the tax expense and the Group’s accounting profit for the year is set out in note 14.
Tangible net assets and returnsA
Tangible net assets per share were 51.9 pence, down from 57.5 pence at 31 December 2021. The favourable impact from profits
supported strong distributions, with further benefits from a reduction in shares from the share buyback (3.4 pence) more than offset
by cash flow hedge reserve movements as a result of increased interest rates (7.5 pence). In the fourth quarter, tangible net assets per
share were up 2.9 pence (30 September 2022: 49.0 pence), driven by the favourable impact from profits and cash flow hedge reserve
movements.
The return on tangible equity for 2022 was 13.5 per cent, reflecting the Group’s robust financial performance (2021: 13.8 per cent). The
Group expects the return on tangible equity to be c.13 per cent in 2023. Earnings per share were 7.3 pence (2021: 7.5 pence). In the
comparative period of 2021, both the return on tangible equity and earnings per share benefitted from a net impairment credit and
remeasurement of deferred tax assets.
54
Lloyds Banking Group Annual Report and Accounts 2022
Balance sheet
Loans and advances to customers
Customer deposits
Loan to deposit ratioA
Wholesale funding1
Wholesale funding <1 year maturity
Of which money-market funding <1 year maturity2
Liquidity coverage ratio – eligible assets3
Liquidity coverage ratio4
At 31 Dec
2022
£454.9bn
£475.3bn
96%
£100.3bn
£37.5bn
£24.8bn
At 31 Dec
2021
£448.6bn
£476.3bn
94%
£93.1bn
£30.3bn
£16.1bn
£144.7bn
£140.2bn
Change
%
1
2pp
8
24
54
3
144%
135%
9pp
1 Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative
has been presented on a consistent basis.
Excludes balances relating to margins of £2.6 billion (31 December 2021: £3.8 billion).
Eligible assets are calculated as an average of month end observations over the previous 12 months post any liquidity haircuts.
2
3
4 The liquidity coverage ratio is calculated as a simple average of month-end observations over the previous 12 months.
Loans and advances to customers increased by 1 per cent on 31 December 2021 to £454.9 billion, including growth of £6.3 billion in the
open mortgage book, alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by
£1.2 billion due to attractive growth opportunities in the Corporate and Institutional Banking portfolio, partly offset by repayments of
government-backed lending. Customer deposits have decreased by £1.0 billion since the end of 2021, to £475.3 billion. This included
Retail current account growth of £2.5 billion, more than offset by Commercial Banking deposit reductions of £3.7 billion. Deposits were
down £9.0 billion in the fourth quarter with reductions in Commercial Banking and Retail. Commercial Banking deposits were down
£6.4 billion, as the expected outflows of short term Corporate and Institutional Banking deposits materialised, alongside the seasonality
and the impact of management actions. Retail deposits were down £1.7 billion, with reductions in current accounts, partially offset
by increased savings balances. In January 2023, the Group successfully completed a transaction under which £2.5 billion of legacy
Retail mortgage loans were securitised with much of the risk placed in the market. The transaction results in the derecognition of the
mortgage assets from the Group’s balance sheet, supporting the Group’s capital and risk management.
The Group has maintained its strong funding and liquidity position with a loan to deposit ratio of 96 per cent, stable on 2021, continuing
to provide robust funding and liquidity and potential for growth. The Group’s funding and liquidity position is further discussed on page
179. The Group continued to access wholesale funding across a range of currencies and markets. Issuance volumes in 2022 totalled
£9.3 billion (31 December 2021: £3.4 billion), of which £7.7 billion at 31 December 2022 was issued by Lloyds Banking Group plc across
senior unsecured, T2 and AT1 (31 December 2021: £2.8 billion). Total wholesale funding increased to £100.3 billion at 31 December 2022
(31 December 2021: £93.1 billion) as a result of short term funding which has increased towards more normalised levels and maintains
the Group’s access to diverse sources and tenors of funding. The total outstanding amount of drawings from the Term Funding Scheme
with additional incentives for SMEs (TFSME) has remained stable at £30.0 billion at 31 December 2022 (31 December 2021: £30.0 billion),
with maturities in 2025, 2027 and beyond.
Capital
CET1 ratio
Pro forma CET1 ratioA,1
Total capital ratio
MREL ratio
UK leverage ratio
Risk-weighted assets
At 31 Dec
2022
At 31 Dec
2021
15.1%
14.1%
19.7%
31.7%
5.6%
17.3%
16.3%
23.6%
37.2%
5.8%
£210.9bn
£196.0bn
Change
%
(2.2)pp
(2.2)pp
(3.9)pp
(5.5)pp
(0.2)pp
8
1
31 December 2022 reflects the dividend received from Insurance in February 2023 and the full impact of the announced share buyback, but excludes the impact of
the phased unwind of IFRS 9 relief on 1 January 2023. The 31 December 2021 comparative reflects the dividend received from Insurance in February 2022 and the full
impact of the share buyback in respect of 2021 that completed in 2022, but excludes the impact of regulatory changes that came into effect on 1 January 2022.
Pro forma CET1 ratio as at 31 December 20211
Regulatory change on 1 January 2022 (bps)
Pro forma CET1 ratio as at 1 January 2022
Banking build (including impairment charge) (bps)
Insurance dividend (bps)
Risk-weighted assets (bps)
Fixed pension deficit contributions (bps)
Other movements (bps)
Capital generation (bps)
Ordinary dividends (bps)
Share buyback accrual (bps)
Further variable pension contributions (bps)
Pro forma CET1 ratio as at 31 December 20222
16.3%
(230)
14.0%
230
21
14
(31)
11
245
(81)
(104)
(52)
14.1%
31 December 2021 ratio reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback in respect of 2021 that completed in 2022.
1
2 31 December 2022 ratio reflects the dividend received from Insurance in February 2023 and the full impact of the announced share buyback.
The Group’s pro forma CET1 capital ratio reduced from 16.3 per cent at 31 December 2021 to 14.1 per cent at 31 December 2022. This was
driven by a reduction of 230 basis points on 1 January 2022 for regulatory changes (as previously reported), subsequently offset by
strong pro forma capital generation of 245 basis points during the year. Capital generation reflected banking build of 230 basis points,
including a net impairment impact of 44 basis points which benefitted from IFRS 9 transitional relief as described below. A further
21 basis points reflected the dividends received from the Insurance business in July 2022 (£300 million) and February 2023 (£100 million).
Capital generation further benefitted from a post 1 January 2022 reduction in risk-weighted assets (excluding threshold movements),
after foreign exchange impacts (which are hedged), equivalent to 14 basis points and other movements of 11 basis points. This was offset
in part by 31 basis points relating to the full 2022 fixed pension deficit contributions for the Group’s defined benefit pension schemes.
Lloyds Banking Group Annual Report and Accounts 2022
55
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Summary of Group results continued
Capital generation during the fourth quarter was 54 basis points. Excluding the Insurance dividend received in February 2023 and the
impact of the announced ordinary share buyback programme, the Group’s CET1 capital ratio at 31 December 2022 was 15.1 per cent
(31 December 2021: 17.3 per cent).
The net impairment impact of 44 basis points for the year reflects the impairment charge of 59 basis points, offset by IFRS 9 dynamic
transitional relief of 15 basis points resulting from the increase in Stage 1 and Stage 2 expected credit losses in the second half of
the year. On 1 January 2023 IFRS 9 static transitional relief came to an end and the transitional factor applied to IFRS 9 dynamic relief
reduced by a further 25 per cent, resulting in an overall reduction of 15 basis points. The Group’s pro forma CET1 capital ratio at 31
December 2022 does not include the impact of the reduced relief. In relation to capital usage, the impact of the interim ordinary
dividend paid in September 2022 and the accrual for the recommended final ordinary dividend equates to 81 basis points, with a
further 104 basis points utilised to cover the accrual for the announced ordinary share buyback programme.
During the year, a total of £2.2 billion in pension deficit contributions (both fixed and variable) has been paid into the Group’s three
main defined benefit pension schemes. As previously announced, the fixed contributions for the year of £800 million (equivalent to
31 basis points) were paid in full during the first quarter. Variable contributions of £1,442 million paid during the year cover the full
amount of agreed contributions relating to 30 per cent of in-year shareholder distributions of £1,042 million (in accordance with the
current agreement with the Trustee), plus an additional £400 million paid in December (aggregate variable contributions equivalent
to 52 basis points in total). The additional payment represents an acceleration of future planned contributions, following the strong
capital generation in 2022 and ahead of the triennial renegotiation of pension contributions.
Risk-weighted assets were £196 billion at 31 December 2021 and increased by £16 billion to £212 billion (pro forma) on 1 January 2022,
reflecting regulatory changes which include the anticipated impact of the implementation of new CRD IV models to meet revised
regulatory standards for modelled outputs. The new CRD IV models remain subject to finalisation and approval by the PRA and
therefore the resultant risk-weighted asset impact also remains subject to this. Risk-weighted assets reduced by £1 billion during the
year (subsequent to the 1 January 2022 regulatory changes) to £211 billion at 31 December 2022. This largely reflected optimisation
activity and Retail model reductions from the strong underlying credit performance, partly offset by the growth in balance sheet
lending and the impact of foreign exchange movements. The Group expects risk-weighted assets to be between £220 billion and
£225 billion at the end of 2024.
As previously indicated, capital generation in 2022 was strong at 245 basis points. The Group experienced a number of tailwinds,
including the low charge for operating lease depreciation, transitional relief in relation to impairment, risk-weighted asset reductions
(post 1 January 2022 regulatory changes), high Insurance dividends and the low effective tax rate charge. Looking forward, while these
tailwinds are unlikely to repeat, banking capital generation is nonetheless expected to continue to be strong. The Group now expects
capital generation in 2023 to be c.175 basis points.
The PRA reduced the Group’s Pillar 2A CET1 capital requirement during the fourth quarter to around 1.5 per cent of risk-weighted assets
(previously around 2 per cent of risk-weighted assets). In December 2022 the UK countercyclical capital buffer rate increased to 1 per
cent, increasing the Group’s countercyclical capital buffer (CCyB) to around 0.9 per cent. This increase was partially offset by the
removal of the CCyB related element of the PRA buffer. The planned increase in the UK countercyclical capital buffer rate to 2 per cent
from July 2023 will lead to a further increase in the Group’s CCyB to around 1.8 per cent.
The Financial Policy Committee (FPC) have amended the other systemically important institution (O-SII) buffer framework, changing
the metric for determining the buffer rate from total assets to the leverage exposure measure of the Ring-Fenced Bank sub-group
(RFB). This will apply from the next review point in December 2023 which will refer to the leverage exposure measure as at 31 December
2022, with any changes applying from 1 January 2025. Currently, the RFB’s O-SII buffer is 2.0 per cent of risk-weighted assets, which
equates to 1.7 per cent of risk-weighted assets at Group level. Based on the RFB’s leverage exposure measure as at 31 December 2022,
the O-SII buffer rate will be maintained at 2.0 per cent. The current sum of the Group’s regulatory CET1 capital requirement and capital
buffers remains at around 11 per cent. The Board’s view of the ongoing level of CET1 capital required to grow the business, meet current
and future regulatory requirements and cover uncertainties continues to be around 12.5 per cent, plus a management buffer of around
1 per cent.
Pensions
The Group’s three main defined benefit pension schemes continue to have an actuarial funding deficit, but are in a significantly
stronger financial position than at 31 December 2021, when the deficit was c.£4 billion. During 2022, deficit contributions of £2.2 billion
were paid into these schemes. The Group expects to make a further fixed contribution of £0.8 billion in the first half of 2023, consistent
with 2021 and 2022. The Group has discussed with the Trustee the likelihood that further variable contributions will not be necessary
in 2023 and beyond, dependent upon the outcome of the triennial valuation as at 31 December 2022. The Group expects to have
substantially agreed the triennial valuation with the Trustee by the end of the third quarter of 2023, along with a revised contribution
schedule in respect of any remaining deficit. Trustee agreement will be conditional upon prior feedback from the Pensions Regulator.
The Group also expects that future contributions will become increasingly contingent in nature, such that they are only paid into the
schemes if required. This will be reported on in future periods.
The schemes’ funding position remained robust and did not experience any material impact from the market volatility seen in the
latter part of the year. Asset prices fell in line with the broader market and hedges fell in value as interest rates rose. A similar impact
was experienced on liability valuations which also fell in value given the portfolio was almost fully hedged. The Group’s schemes used
liability-driven investment strategies to achieve this outcome and as the hedging was maintained throughout the crisis, the strategy
performed as expected.
Dividend and share buyback
The Group has a progressive and sustainable ordinary dividend policy whilst maintaining the flexibility to return surplus capital through
buybacks or special dividends. The Board intends to pay down to its capital target within the course of the current plan, by the end of
2024.
The Board has recommended a final ordinary dividend of 1.60 pence per share, which, together with the interim ordinary dividend of
0.80 pence per share totals 2.40 pence per share, an increase of 20 per cent, in line with the Board’s commitment to capital returns.
The Board has also announced its intention to implement an ordinary share buyback of up to £2.0 billion which will commence as
soon as is practicable and is expected to be completed by 31 December 2023. The Board intends to return surplus capital by way of a
further buyback programme given the amount of surplus capital, the growth in ordinary dividends and the flexibility that a buyback
programme offers. Based on the total ordinary dividend and the intended ordinary share buyback the total capital return in respect of
2022 will be up to £3.6 billion.
56
Lloyds Banking Group Annual Report and Accounts 2022
Segmental analysis – underlying basisA
2022
Underlying net interest income
Underlying other income
Operating lease depreciation
Net income
Operating costs
Remediation
Total costs
Underlying profit before impairment
Underlying impairment (charge) credit
Underlying profit
Banking net interest marginA
Average interest-earning banking assetsA
Asset quality ratioA
Loans and advances to customers
Customer deposits
Risk-weighted assets
2021
Underlying net interest income2
Underlying other income
Operating lease depreciation
Net income
Operating costs3
Remediation
Total costs
Underlying profit before impairment
Underlying impairment credit3
Underlying profit
Banking net interest marginA,2
Average interest-earning banking assetsA,2
Asset quality ratioA,3
Loans and advances to customers
Customer deposits
Risk-weighted assets
Commercial
Banking
£m
Insurance,
Pensions
and
Investments
£m
Equity
Investments
and Central
Items
£m
3,447
1,565
(5)
5,007
(101)
1,576
–
1,475
52
377
–
429
Retail
£m
9,774
1,731
(368)
11,137
Group
£m
13,172
5,249
(373)
18,048
(5,175)
(2,496)
(1,042)
(122)
(8,835)
(92)
(133)
(30)
–
(255)
(5,267)
(2,629)
(1,072)
(122)
(9,090)
5,870
(1,373)
4,497
2,378
(517)
1,861
2.76%
3.93%
£362.0bn
£90.0bn
0.38%
0.52%
£364.2bn
£93.7bn
£310.8bn
£163.8bn
403
(12)
391
–
–
–
307
392
699
8,958
(1,510)
7,448
2.94%
–
£452.0bn
0.32%
(£3.0bn) £454.9bn
£0.7bn
£475.3bn
£111.7bn
£74.3bn
£0.1bn
£24.8bn
£210.9bn
Commercial
Banking1
£m
Insurance,
Pensions
and
Investments1
£m
Equity
Investments
and Central
Items
£m
Retail1
£m
8,577
1,597
(442)
9,732
2,602
1,442
(18)
4,026
(4,988)
(2,288)
(360)
(5,348)
4,384
447
4,831
(830)
(3,118)
908
936
1,844
2.50%
2.96%
£353.4bn
£91.2bn
(0.13)%
(0.98)%
£356.3bn
£92.5bn
£308.4bn
£167.5bn
(103)
1,406
–
1,303
(899)
(123)
(1,022)
281
–
281
87
615
–
702
(137)
13
(124)
578
2
580
Group
£m
11,163
5,060
(460)
15,763
(8,312)
(1,300)
(9,612)
6,151
1,385
7,536
2.54%
–
–
–
–
£444.6bn
(0.31)%
(£0.2bn)
£448.6bn
£0.4bn
£476.3bn
£96.4bn
£72.7bn
£0.1bn
£26.8bn
£196.0bn
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
2 During 2022, the Group revised its liquidity transfer pricing methodology. Comparative segmental net interest income has been presented on a consistent basis.
Total Group figures are unaffected by these changes.
3 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
Lloyds Banking Group Annual Report and Accounts 2022
57
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Retail
Retail offers a broad range of financial services products to personal customers, including current accounts, savings, mortgages,
credit cards, unsecured loans, motor finance and leasing solutions. Its aim is to build deep and enduring relationships that meet
more of its customers’ financial needs and improve their financial resilience throughout their lifetime, with personalised products and
services. Retail operates the largest digital bank and branch network in the UK and continues to improve service levels and reduce
conduct risk, whilst working within a prudent risk appetite. Through investment in strategic priority areas, alongside increasing use
of data, Retail will deepen existing consumer relationships and broaden its intermediary offering, to improve customer experience,
operational efficiency and enable increasingly tailored propositions.
Strategic progress
• UK’s largest digital bank, with 19.8 million digitally active users and customers logging in over 5 billion times during 2022, up 15 per
cent on prior year
• Market-leading apps rated ahead of competitors in 20221. Record mobile app releases, including enhanced in-app and chat
integrated search functionality used over 19 million times by customers
• Acquisition of Tusker, a vehicle management and leasing company focused on electric and low emissions vehicles, further
developing the Group’s Motor business and aligned to its sustainability ambitions
•
Tailored mass affluent banking products launched across current accounts and credit cards
• Continued net open mortgage book growth of £6.3 billion and £14.3 billion lending to first time buyers
•
Proactively contacted customers to offer support due to the rising cost of living, including mortgage customers on standard
variable rates who could benefit from a product transfer
• Over 5,000 daily visits2 to the Cost of Living Support Hub. In excess of 5 million customers have registered for the Group’s credit
checking tool, Your Credit Score. In the year 147,000 customers3 have moved out of persistent debt (2021: 128,000)
• £3.5 billion of green mortgage lending4, on track to meet 2024 target. Home retrofit partnership created with Octopus Energy and
over 1 million visits to online Home Ecosystem
• £2.1 billion financing and leasing for battery electric and plug-in hybrid vehicles, on track to meet 2024 target with over 70 per cent
of deliveries in the year by Lex being battery electric or plug-in hybrid cars
Financial performance
• Underlying net interest income 14 per cent higher, benefitting from the rising rate environment in liabilities and higher unsecured
lending balances, partly offset by mortgage margin compression
• Underlying other income 8 per cent higher from improved levels of customer activity across current accounts and credit cards.
Operating lease depreciation decreased 17 per cent, due to the continued strength of used car prices given industry-wide supply
constraints in the new car market
• Operating costs 4 per cent higher reflecting higher planned strategic investment costs and the rebuilding of variable pay, partly
offset by continued benefit from efficiency initiatives. Remediation charges, relating to pre-existing programmes, decreased to
£92 million
• Underlying impairment charge £1,373 million. Portfolio remains resilient with a modest trend towards normalising credit
performance during the second half. Updated economic scenarios, including inflation and interest rate pressures, have contributed
to an increased charge (compared to a credit in the prior year)
• Customer lending increased 2 per cent in the period with continued net open mortgage book growth of £6.3 billion and growth
across credit cards and loans, partially offset by the continued run off of the closed mortgage book
• Customer deposits increased 1 per cent in the period. Overall balances are resilient, in the context of cost of living impacts on
customers and increased competition, with current account balances up by 2 per cent
• Risk-weighted assets up 16 per cent in the period, driven by regulatory changes on 1 January 2022. Excluding these changes, risk-
weighted assets are lower, benefitting from optimisation activity and strong underlying credit performance
1 Across Google Play and App Store, out of 36,000 written reviews, 76 per cent of customers rated the Group’s apps 5-star (84 per cent 4-star and above).
2 Refers to average daily visits since launch in July 2022.
3 Data is 11 months to 30 November 2022. Comparator is 11 months to 30 November 2021.
4 As at 30 September 2022.
58
Lloyds Banking Group Annual Report and Accounts 2022
Retail performance summaryA
Underlying net interest income2
Underlying other income
Operating lease depreciation
Net income
Operating costs3
Remediation
Total costs
Underlying profit before impairment
Underlying impairment (charge) credit3
Underlying profit
Banking net interest marginA,2
Average interest-earning banking assetsA
Asset quality ratioA,3
2022
£m
9,774
1,731
(368)
11,137
20211
£m
8,577
1,597
(442)
9,732
(5,175)
(4,988)
(92)
(360)
(5,267)
(5,348)
5,870
(1,373)
4,497
4,384
447
4,831
Change
%
14
8
17
14
(4)
74
2
34
(7)
2.76%
2.50%
26bp
£362.0bn
£353.4bn
2
0.38%
(0.13)%
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
2 During 2022, the Group revised its liquidity transfer pricing methodology. Comparative segmental net interest income has been presented on a consistent basis.
3 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
Open mortgage book
Closed mortgage book
Credit cards1
UK unsecured loans
UK Motor Finance
Overdrafts
Wealth
Other2
Loans and advances to customers
Operating lease assets
Total customer assets
Current accounts
Relationship savings
Tactical savings
Wealth
Customer deposits
Risk-weighted assets
At 31 Dec
2022
£bn
At 31 Dec
2021
£bn
299.6
293.3
11.6
14.3
8.7
14.3
1.0
0.9
13.8
364.2
4.8
369.0
114.0
166.3
16.1
14.4
310.8
14.2
13.8
8.1
14.0
1.0
1.0
10.9
356.3
4.1
360.4
111.5
164.5
16.8
15.6
308.4
111.7
96.4
Change
%
2
(18)
4
7
2
(10)
27
2
17
2
2
1
(4)
(8)
1
16
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
2 Primarily Europe.
Lloyds Banking Group Annual Report and Accounts 2022
59
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Commercial Banking
Commercial Banking serves small and medium businesses as well as corporate and institutional clients, providing lending,
transactional banking, working capital management, debt financing and risk management services. Through investment in digital
capability and product development, Commercial Banking will deliver an enhanced customer experience via a digital first Business
model and expanded client propositions, generating diversified capital efficient growth and supporting customers on their transition
to net zero.
Strategic progress
•
Proactively contacted more than 550,000 customers to offer support in maintaining financial resilience through the cost of living
challenges; driven by analytically led client engagement utilising financial wellbeing tools
• Digitising business and transforming customer journeys; strengthening invoice finance proposition through a strategic fintech
partnership which will deliver the first end-to-end digital single platform solution offered by a UK bank
•
Exceeded full year target of 20 per cent growth in new merchant services clients, with strong foundations for growth as the Group
continues to invest in products and digital onboarding capabilities
• Delivered c.£8 billion1 of Corporate and Institutional green and sustainable financing in 2022, demonstrating significant progress
towards the £15 billion commitment by the end of 2024. Supported purpose-driven growth within loan origination and businesses
transitioning to net zero
•
•
Increased the number and scale of commodity hedging solution trades to help clients manage their exposure to highly volatile
energy markets, including the launch of carbon emission allowance transactions2
Strengthened originate to distribute capability, including entering into our first strategic co-investment partnership to support
clients’ long term needs and increase balance sheet efficiency for the Group
• Upgraded rates digital product offering and foreign exchange pricing in addition to delivering the first phase of the new foreign
exchange platform
•
Enhancing cash management capabilities in the Islands business, onboarding to the new platform with leading API functionality
• Developing data-driven insights including launch of Lloyds Bank Market Intelligence, a product leveraging the Group’s data and
customer transactions to support clients’ strategic goals
Financial performance
• Underlying net interest income increased 32 per cent to £3,447 million, reflecting the higher rate environment and strong portfolio
management across both assets and liabilities
• Underlying other income of £1,565 million, up 9 per cent on the prior year, driven by higher financial markets activity and strong
performance in transactional banking, partly offset by lower levels of corporate financing activity
• Operating costs 9 per cent higher, reflecting higher planned strategic investment costs and the rebuilding of variable pay, partly
offset by continued benefit from efficiency initiatives
• Remediation charges of £133 million, including a charge related to HBOS Reading in the fourth quarter
• Underlying impairment charge of £517 million (compared to a credit in the prior year) driven by the revised macroeconomic outlook
and a further material charge on a pre-existing single case; the portfolio performance remains strong, with only modest evidence
of deterioration observed in the fourth quarter
• Customer lending 1 per cent higher at £93.7 billion due to attractive growth opportunities and foreign exchange movements in the
Corporate and Institutional portfolio, partly offset by net repayments within Small and Medium Businesses including government-
backed lending
• Customer deposits decreased to £163.8 billion, reflecting pricing decisions based on Group liquidity requirements
• Risk-weighted assets increased 2 per cent to £74.3 billion, driven by the impact of regulatory changes on 1 January 2022, capital
accretive balance sheet growth and foreign exchange movements, partly offset by ongoing optimisation
1
Includes the clean growth finance initiative, Commercial Real Estate green lending, renewable energy financing, sustainability linked loans and green and social
bond facilitation.
2 Under the UK Emissions Trading Scheme.
60
Lloyds Banking Group Annual Report and Accounts 2022
Commercial Banking performance summaryA
Underlying net interest income2
Underlying other income
Operating lease depreciation
Net income
Operating costs3
Remediation
Total costs
Underlying profit before impairment
Underlying impairment (charge) credit3
Underlying profit
Banking net interest marginA,2
Average interest-earning banking assetsA
Asset quality ratioA,3
2022
£m
3,447
1,565
(5)
5,007
(2,496)
(133)
(2,629)
2,378
(517)
1,861
20211
£m
2,602
1,442
(18)
4,026
(2,288)
(830)
(3,118)
908
936
1,844
Change
%
32
9
72
24
(9)
84
16
1
3.93%
£90.0bn
0.52%
2.96%
£91.2bn
(0.98%)
97bp
(1)
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking; comparatives have been
presented on a consistent basis.
2 During 2022, the Group revised its liquidity transfer pricing methodology. Comparative segmental net interest income has been presented on a consistent basis.
3 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
Small and Medium Businesses
Corporate and Institutional Banking
Loans and advances to customers
Customer deposits
Risk-weighted assets
At 31 Dec
2022
£bn
At 31 Dec
20211
£bn
Change
%
37.7
56.0
93.7
42.5
50.0
92.5
163.8
167.5
74.3
72.7
(11)
12
1
(2)
2
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking; comparatives have been
presented on a consistent basis.
Lloyds Banking Group Annual Report and Accounts 2022
61
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Insurance, Pensions and Investments
Insurance, Pensions and Investments supports over 10 million customers with Assets under Administration (AuA) of £197 billion
(excluding Wealth) and annualised annuity payments of over £1.1 billion. The Group continues to invest significantly in the development
of the business, including investment propositions to support the Group’s mass affluent strategy, innovating intermediary propositions
through the Cavendish Online acquisition and Embark, and accelerating the transition to a low carbon economy.
Strategic progress
• Growth in investment and retirement business, with over £8 billion net new open book money1 in the period, despite difficult market
conditions. Open book AuA of £146 billion (23 per cent growth), including Embark
• Workplace Pensions business saw a 12 per cent increase in total regular contributions to pensions administered, with £6.2 billion net
AuA flows and 16 per cent AuA share as at 31 December 2022
• Direct to consumer ready-made investment offering now launched into the mobile banking apps, leveraging capability acquired
with Embark and supporting the development of the Group’s new mass affluent proposition
• On track to meet the target of between £20 billion and £25 billion invested in climate-aware investment strategies through Scottish
Widows by 2025, with £12 billion invested in 2022 in line with the Climate Action Plan
• Deployed new features and enhancements to Individual Annuity products, including increasing the maximum age on Open Market
products and introducing Value Protection, supporting the target of maintaining 15 per cent market share
•
•
Progress towards the goal of being a top three protection provider by 2025, acquiring Cavendish Online and protecting over 25,000
families (up c.50 per cent) through the Group’s direct channels. Grew market share c.1 percentage point2
Investing in the General Insurance business to digitise customer claims and servicing journeys and expand the Group’s brand
presence through MBNA. Supporting profitable growth in the long term through improved customer experience
• Migrated c.3.5 million policies to strategic platforms, and decommissioned over 40 legacy applications. Added drawdown
functionality to core pension products, enhancing the experience for customers when they reach retirement
•
Scottish Widows awarded five stars in the Financial Service Awards across Insurance, Pensions and Investments for the seventh year
in a row
Financial performance
•
Strong net income growth (13 per cent) with increased new business and £348 million assumption changes, reflecting improved
persistency and updated longevity assumptions, though General Insurance net income decreased
•
•
•
•
Life, Pensions and Investments (LP&I) new business income increased by £109 million (34 per cent), with underlying volumes up 8 per
cent
Inclusion of Embark contributes £45 million net income since acquisition, with estimated £3 billion sales volumes
Strengthened the Workplace proposition, with £44 million growth in new business income
Investment in the annuity business supporting 78 per cent new business income growth (£62 million) and £967 million bulk annuities
sales
• Continued to grow the Protection offering, with new business income up 31 per cent
• General Insurance income net of claims decreased £167 million, with £108 million severe weather related claims (including
£52 million from the adverse weather in December) and a reduction in sales volumes, driven by market challenges as insurers have
reacted to pricing reforms
•
Stockbroking income increased 25 per cent to £50 million with interest income benefitting from rate rises
• Operating costs increased by £143 million (16 per cent) reflecting higher planned strategic investment costs, the rebuilding of
variable pay and the inclusion of Embark
• Underlying profit increased by £110 million to £391 million, including a benefit from a reduction in remediation costs
Insurance capital and liquidity
•
Strong capital position supported a final dividend of £100 million paid to Lloyds Banking Group (following £300 million in July 2022),
with an estimated Insurance Solvency II ratio of 163 per cent (159 per cent after proposed dividend)
• Credit asset portfolio remains strong, rated ‘A -’ on average, well diversified, with less than 1 per cent of assets backing annuities
being sub investment grade or unrated. Strong liquidity position with c.£3.5 billion cash and cash like assets
Excludes market movements and Embark assets transferred on acquisition; includes post acquisition Embark net flows.
1
2 ABI data for nine months ended 30 September 2022.
62
Lloyds Banking Group Annual Report and Accounts 2022
Insurance, Pensions and Investments performance summaryA
Underlying net interest income2
Underlying other income
Net income
Operating costs3
Remediation
Total costs
Underlying profit before impairment
Underlying impairment charge3
Underlying profit
Life and pensions sales (PVNBP)4
General insurance underwritten new gross written premiums
General insurance underwritten total gross written premiums
General insurance combined ratio5
Insurance Solvency II ratio (pre-dividend)6
Total customer assets under administration1
2022
£m
(101)
1,576
1,475
(1,042)
(30)
(1,072)
403
(12)
391
20211
£m
(103)
1,406
1,303
(899)
(123)
(1,022)
281
–
281
21,687
17,289
55
486
113%
At 31 Dec
2022
£bn
163%
197.3
87
655
101%
At 31 Dec
2021
£bn
191%
179.2
Change
%
2
12
13
(16)
76
(5)
43
39
25
(37)
(26)
12pp
Change
%
(28)pp
10
1
Reflects the new organisation structure, with Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives
have been presented on a consistent basis.
2 During 2022, the Group revised its liquidity transfer pricing methodology. Comparative segmental net interest income has been presented on a consistent basis.
3 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
4 Present value of new business premiums.
5 General insurance combined ratio for 2022 includes £108 million relating to event weather claims (storm, subsidence and freeze) (2021: £11 million). 2021 also includes
the £91 million regulatory fine relating to the way the Group historically communicated with home insurance customers regarding their renewals. Excluding these
items and reserve releases the ratio was 94 per cent (2021: 87 per cent).
6 Equivalent estimated regulatory view of ratio (including With Profits funds and post-dividend) was 152 per cent (31 December 2021: 169 per cent).
Income by product group
Workplace, planning and retirement
Individual and bulk annuities
Protection
Longstanding
Total LP&I
Life and pensions experience and other items
General insurance
Embark
Stockbroking
Net income
New
business
£m
2022
Existing
business
£m
240
141
42
9
432
130
101
22
303
556
New
business
£m
2021
Existing
business
£m
201
79
32
11
323
110
83
20
286
499
Total
£m
370
242
64
312
988
279
113
45
50
1,475
Total
£m
311
162
52
297
822
161
280
40
1,303
Lloyds Banking Group Annual Report and Accounts 2022
63
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Insurance, Pensions and Investments continued
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 equity hedging arrangements
Total
2022
£m
(735)
236
(499)
351
(148)
2021
£m
503
366
869
(592)
277
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 the 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 during 2022 were largely driven by significant increases in interest rates, equity falls and bond spreads
widening, offset to some extent by inflation increases (net of inflation hedging). 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 managing
the impacts on both capital and earnings volatility, though the extent to which these bases are hedged needs to be balanced. 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.
Changes in insurance assumptions and methodology
The following impacts from assumption changes are included within Insurance, Pensions and Investments underlying other income.
Persistency
Mortality, longevity and morbidity
Expense assumptions
Other
Total assumption changes
Methodology changes
Total assumption and methodology changes
2022
£m
229
112
9
(2)
348
–
348
2021
£m
(15)
149
(94)
3
43
68
111
Key life and pensions assumptions and methodologies are formally updated through the annual basis review in the fourth quarter of
each year. However, assumptions are monitored throughout the year and are updated at half-year where there is a compelling reason
to do so.
The current period assumptions and methodology changes impact of £348 million, includes a benefit from updating to the latest
industry longevity assumptions and a significant improvement in persistency assumptions (including benefit from adding drawdown
functionality to the Group’s core pension products).
64
Lloyds Banking Group Annual Report and Accounts 2022
Implementation of IFRS 17
IFRS 17 is an accounting standard that changes the way profit is recognised for insurance contracts. Rather than recognise the
expected profit for an insurance contract at its inception, IFRS 17 requires that the expected profit for providing insurance contract
services is recognised over the period insurance contract services are provided. The profit is calculated based on discounted best
estimate cash flows and an associated risk adjustment and is recognised by the creation of a contractual service margin (CSM) on
the balance sheet, which is released to the income statement over the contract period. As a result, both new business profit, which is
currently recognised in other income at the outset of the contract, and the impact of certain assumption changes, which is recognised
in other income at the time the assumption is changed, will be recognised in the CSM and subsequently released to the income
statement over the period of contractual service under IFRS 17. Existing business will continue to be recognised in the income statement
over the period of the contract. Losses on groups of onerous contracts and recoveries of such losses, to the extent they are covered
by reinsurance contracts held, are recognised in the income statement immediately. The Group will continue to recognise market
volatility outside of underlying profit.
Whilst IFRS 17 impacts the timing of profit recognition for insurance contracts, it will have no impact on the total profit recognised over
the lifetime of these contracts, Group capital or capital generation, the economic value of the insurance business or its capital position.
The new standard is not expected to impact the ability of the Insurance business to pay dividends within the Group structure, which will
continue to be driven by the Solvency II position.
The Group has adopted IFRS 17 from 1 January 2023 and as required by the standard, will restate its total equity at 1 January 2022 and
its income statement for 2022. The Group’s total equity under IFRS 17 at 1 January 2022 was £51.3 billion, approximately £1.9 billion lower
than under IFRS 4. The reduction in equity is driven by the derecognition of the value in-force asset and the move to best estimate of
contract liabilities, the creation of the new CSM liability (approximately £1.9 billion, net of reinsurance) and the establishment of the risk
adjustment (approximately £1.5 billion, net of reinsurance).
During 2022, on the current IFRS 4 accounting basis, Insurance contributed £1,576 million to the Group’s underlying other income,
including new business income of £432 million and net gains arising from assumption changes of £348 million, both of which will
be largely deferred to the CSM. Including these items, of the total 2022 reported underlying other income in Insurance, Pensions and
Investments of £1,576 million, c.£1,300 million will be subject to a revised treatment under IFRS 17.
Under IFRS 17, income arising from insurance contracts will primarily be recognised through the release of the CSM and the risk
adjustment (for non-financial risks such as mortality and persistency), rather than separately for new business and existing business.
The Group estimates that c.£300 million of the CSM and risk adjustment, gross of reinsurance, held at 1 January 2022 would have been
released to the income statement during 2022 on both a statutory and underlying basis.
During 2022, the Group added a drawdown feature to its existing long-standing and workplace pension business as a significant
customer enhancement. This is a contract modification that results in a substantially different contract boundary. IFRS 17 requires
that the contracts and their associated CSM (approximately £0.4 billion) at the time of the modification are derecognised and the
modified contracts together with a new CSM (approximately £1.7 billion) are recognised as if they were new contracts. These contract
modifications in 2022 are estimated to increase the CSM by approximately £1.3 billion and will result in the Group recognising a charge
to its 2022 restated income statement of approximately £1.3 billion. While there may be contract modifications in the future, they are
unlikely to be of this materiality. Given the scale of this modification and its impact on the 2022 income statement, it will be recognised
outside of underlying profit. The release of the new CSM following modification will be disclosed in the insurance service result given
the expected materiality of the annual release to the income statement. The Group will undertake further work during the first quarter
of 2023 to finalise the financial impact of the contract modification and does not expect the final impact on equity at 31 December
2022 to differ materially from this estimate. This contract modification does not affect the capital position of the insurance business or
the Group. Further information is given in note 55.
Under IFRS 17, the Group’s reported results will continue to be impacted by market and economic factors, albeit the treatment and
basis of estimation of certain items is being modified. Under IFRS 4, both the volatility relating to the Group’s unit-linked business and
policyholder interests volatility on the value in-force asset (VIF) are recognised in the income statement immediately. Under IFRS 17, the
volatility relating to the unit-linked business will be recognised in the CSM and released to the income statement in subsequent years
except where the Group has applied the risk mitigation option. In addition, policyholder interests volatility on the VIF will not exist under
IFRS 17. The removal of these two components together are estimated to adversely impact volatility by c.£0.4 billion in the 2022 income
statement restated for IFRS 17 versus IFRS 4. The consequent increased adverse volatility which remains in the income statement under
IFRS 17 reflects the significant market volatility seen in 2022.
Lloyds Banking Group Annual Report and Accounts 2022
65
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Equity Investments and Central Items
Net income
Operating costs1
Remediation
Total costs
Underlying profit before impairment
Underlying impairment credit
Underlying profit
2022
£m
429
(122)
–
(122)
307
392
699
2021
£m
702
(137)
13
(124)
578
2
580
Change
%
(39)
11
2
(47)
21
1
2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
Equity Investments and Central Items contains the Group’s equity investments businesses, including Lloyds Development Capital (LDC)
and the Group’s share of the Business Growth Fund (BGF), as well as Citra Living. Also included are income and expenses not attributed
to other divisions, including residual underlying net interest income after transfer pricing (which includes 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.
During 2022, the Group’s equity investment businesses contributed net income of £419 million compared to £573 million in 2021. This
is lower given the above run rate gains in LDC in 2021 and charges of c.£40 million in relation to the BGF in 2022. During 2022 LDC has
continued to deliver strong investment performance. The business continues to build its investment portfolio with attractive returns
and opportunities to further integrate with the Group offering.
Underlying impairment for the period was a credit of £392 million compared to £2 million in 2021, relating to the full release of the ECL
central adjustment held at the end of 2021 (31 December 2021: £400 million). This adjustment was not allocated to specific portfolios
and was applied in respect of uncertainty in the economic outlook, relating to the risks of COVID-19.
Other financial information
Number of employees (full-time equivalent)
Retail1
Commercial Banking1
Insurance, Pensions and Investments1
Group functions and services1
Agency staff
Total number of employees
At 31 Dec
2022
At 31 Dec
2021
30,208
30,235
8,671
3,999
17,699
60,577
8,554
4,026
16,290
59,105
(1,223)
(1,150)
59,354
57,955
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
Post-tax return on average assets
Post-tax return on average assets
2022
%
0.62
2021
%
0.67
Share buyback in respect of 2021 results
During 2022, the Group completed a £2 billion share buyback programme, in respect of 2021 results, with c.4.5 billion shares purchased
at an average price of 44.16 pence per share. Through a reduction in the weighted average number of ordinary shares in issue, share
buybacks have the effect of increasing earnings per share and, depending on the average price paid per share, can either increase or
decrease the tangible net assets per share. The 2022 share buyback had the effect of increasing the earnings per share by 0.3 pence
and increasing the tangible net assets per share by 0.5 pence.
66
Lloyds Banking Group Annual Report and Accounts 2022
Alternative performance measures
The statutory results are supplemented with those presented on an underlying basis and also with other alternative performance
measures. This is to enable a comprehensive understanding of the Group and facilitate comparison with peers. The Group Executive
Committee, which is the chief operating decision maker for the Group, reviews the Group’s results on an underlying basis in order to
assess performance and allocate resources. Management uses underlying profit before tax, an alternative performance measure, as
a measure of performance and believes that it provides important information for investors. This is because it allows for a comparable
representation of the Group’s performance by removing the impact of items such as volatility caused by market movements outside
the control of management.
In arriving at underlying profit, statutory profit before tax is adjusted for the items below, to allow a comparison of the Group’s
underlying performance:
• Restructuring costs relating to merger, acquisition and integration activities
• 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 business, the unwind of acquisition-related fair value adjustments and the
amortisation of purchased intangible assets
As announced at the 2021 full-year, in the first quarter of 2022 the Group adopted a new basis for cost reporting, including all
restructuring costs, with the exception of merger, acquisition and integration costs, within operating costs. Non lending-related fraud
costs, previously included within underlying impairment, are also now reported as part of operating costs. This has not impacted the
statutory impairment charge. Comparatives have been presented on a consistent basis.
The analysis of lending and expected credit loss (ECL) allowances is presented on both a statutory and an underlying basis and a
reconciliation between the two is shown on page 163. On a statutory basis, 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. Over time, these POCI assets will run off as the loans
redeem, pay down or losses crystallise. 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. The Group uses the underlying basis to monitor
the creditworthiness of the lending portfolio and related ECL allowances.
The Group calculates a number of metrics that are used throughout the banking and insurance industries on an underlying basis.
These metrics are not necessarily comparable to similarly titled measures presented by other companies and are not any more
authoritative than measures presented in the financial statements, however management believes that they are useful in assessing
the performance of the Group and in drawing comparisons between years. A description of these measures and their calculation, is
given below. Alternative performance measures are used internally in the Group’s Monthly Management Report.
Asset quality ratio
The underlying impairment charge or credit for the period in respect of loans and advances to customers, both drawn and
undrawn, expressed as a percentage of average gross loans and advances to customers for the period. This measure is
useful in assessing the credit quality of the loan book
Banking net interest
margin
Banking net interest income on customer and product balances in the banking businesses as a percentage of average
gross interest-earning banking assets for the period. This measure is useful in assessing the profitability of the banking
business
Business-as-usual
costs
Cost:income ratio
Economic profit
Total operating costs less strategic investment and new businesses, including Embark and Citra Living
Total costs as a percentage of net income calculated on an underlying basis. This measure is useful in assessing the
profitability of the Group’s operations before the effects of the underlying impairment credit or charge
Statutory profit after tax adjusted to apply a charge for equity utilisation and to remove non-controlling interests. This
measure is used as one of the Group’s key performance indicators and is useful in assessing the Group’s profitability whilst
factoring in the cost of equity
Loan to deposit ratio
Loans and advances to customers divided by customer deposits
Operating costs
Operating expenses adjusted to remove the impact of remediation, restructuring costs, operating lease depreciation, the
amortisation of purchased intangibles, the insurance gross up and other statutory items
Pro forma CET1 ratio
CET1 ratio adjusted for the effects of the dividend paid up by the Insurance business in the subsequent quarter period and
the impact of the announced ordinary share buyback programme. December 2021 pro forma CET1 ratios include the impact
of the share buyback programme in respect of 2021, announced in February 2022
Return on tangible
equity
Profit attributable to ordinary shareholders, divided by average tangible net assets. This measure is useful in providing a
consistent basis with which to measure the Group’s performance
Tangible net assets
per share
Net assets excluding intangible assets such as goodwill and acquisition-related intangibles divided by the number of
ordinary shares in issue. This measure is useful in assessing shareholder value
Underlying profit
before impairment
Underlying profit adjusted to remove the underlying impairment credit or charge. This measure is useful in allowing for a
comparable representation of the Group’s performance before the effects of the forward-looking underlying impairment
credit or charge
Underlying profit
Statutory profit before tax adjusted for certain items as detailed above. This measure allows for a comparable
representation of the Group’s performance by removing the impact of certain items including volatility caused by market
movements outside the control of management
Lloyds Banking Group Annual Report and Accounts 2022
67
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Alternative performance measures continued
Reconciliation between statutory and underlying basis financial information
Underlying basisA
Statutory basis
Removal of:
2022
Net interest income
Other income, net of insurance claims
and changes in insurance and investment
contract liabilities
Total income, net of insurance claims and
changes in insurance and investment
contract liabilities
Operating expenses4
Impairment charge
Profit before tax
2021
Net interest income
Volatility and
other items1,2
£m
Insurance
gross up3
£m
226
(1,011)
120
(373)
(27)
535
12
520
877
–
(134)
134
–
–
£m
13,957
4,252
18,209
(9,759)
(1,522)
6,928
£m
13,172
5,249
(373)
18,048
(9,090)
(1,510)
7,448
Underlying net interest income
Underlying other income
Operating lease depreciation
Net income
Total costs4
Underlying impairment charge
Underlying profit
9,366
255
1,542
11,163
Underlying net interest income
Other income, net of insurance claims
and changes in insurance and investment
contract liabilities
Total income, net of insurance claims and
changes in insurance and investment
contract liabilities
Operating expenses4
Impairment credit
Profit before tax
6,958
16,324
(10,800)
1,378
6,902
(139)
(460)
(344)
971
7
634
(1,759)
–
5,060
(460)
Underlying other income
Operating lease depreciation
(217)
217
–
–
15,763
(9,612)
1,385
7,536
Net income
Total costs4,5
Underlying impairment credit5
Underlying profit
1
2
In the year ended 31 December 2022 this comprised the effects of market volatility and asset sales (loss of £252 million); the amortisation of purchased intangibles
(loss of £70 million); restructuring costs (loss of £80 million); and fair value unwind (loss of £118 million).
In the year ended 31 December 2021 this comprised the effects of market volatility and asset sales (gain of £87 million); the amortisation of purchased intangibles
(loss of £70 million); restructuring costs (loss of £452 million); and fair value unwind (loss of £199 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 Statutory operating expenses includes operating lease depreciation. On an underlying basis operating lease depreciation is included in net income.
5 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
Asset quality ratioA
Underlying impairment (charge) credit (£m)
Remove non-customer underlying impairment (£m)
Underlying customer related impairment (charge) credit (£m) (a)
Loans and advances to customers (£bn)
Add back expected credit loss allowance (drawn) (£bn)
Add back acquisition related fair value adjustments (£bn)
Underlying gross loans and advances to customers (£bn)
Averaging (£bn)
Average underlying gross loans and advances to customers (£bn) (b)
Asset quality ratioA = (a) / (b)
68
Lloyds Banking Group Annual Report and Accounts 2022
2022
(1,510)
27
2021
1,385
(7)
(1,483)
1,378
454.9
448.6
4.5
0.4
459.8
(2.9)
3.8
0.4
452.8
(2.4)
456.9
450.4
0.32%
(0.31%)
Banking net interest marginA
Underlying net interest income (£m)
Remove non-banking underlying net interest expense (£m)
Banking underlying net interest income (£m) (a)
Underlying gross loans and advances to customers (£bn)
Adjustment for non-banking and other items:
Fee-based loans and advances (£bn)
Other (£bn)
Interest-earning banking assets (£bn)
Averaging (£bn)
Average interest-earning banking assetsA (£bn) (b)
Banking net interest marginA (%) = (a) / (b)
Cost:income ratioA
Total costs (a)
Net income (b)
Cost:income ratioA = (a) / (b)
Economic profitA
Statutory profit after tax
Remove equity utilisation charge
Remove non-controlling interests
Economic profitA
Loan to deposit ratioA
Loans and advances to customers (a)
Customer deposits (b)
Loan to deposit ratioA = (a) / (b)
Operating costsA
Operating expenses
Adjustment for:
Remediation
Restructuring1
Operating lease depreciation
Amortisation of purchased intangibles
Insurance gross up
Other statutory items1
Operating costsA,1
Remove costs related to strategic initiatives and news businesses
Business-as-usual costsA
1
2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67.
2022
13,172
111
13,283
2021
11,163
108
11,271
459.8
452.8
(8.4)
5.0
(5.1)
1.3
456.4
449.0
(4.4)
(4.4)
452.0
444.6
2.94
2.54
2022
£m
9,090
18,048
50.4%
2022
£m
5,555
(2,677)
(96)
2,782
2021
£m
9,612
15,763
61.0%
2021
£m
5,885
(2,721)
(101)
3,063
At 31 Dec
2022
£bn
454.9
475.3
96%
At 31 Dec
2021
£bn
448.6
476.3
94%
2022
£m
2021
£m
9,759
10,800
(255)
(80)
(373)
(70)
(134)
(12)
8,835
(489)
8,346
(1,300)
(452)
(460)
(70)
(217)
11
8,312
–
8,312
Lloyds Banking Group Annual Report and Accounts 2022
69
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Alternative performance measures continued
Pro forma CET1 ratioA
CET1 ratio
Insurance dividend and share buyback accrual1
Pro forma CET1 ratioA
At 31 Dec
2022
%
At 31 Dec
2021
%
15.1
(1.0)
14.1
17.3
(1.0)
16.3
1 Dividend paid up by the Insurance business in the subsequent first quarter period and the impact of the announced ordinary share buyback programme.
2022
5,021
43.9
(6.7)
37.2
13.5
2021
5,355
45.2
(6.3)
38.9
13.8
At 31 Dec
2022
£m
At 31 Dec
2021
£m
41,980
(2,655)
(4,786)
(175)
396
47,011
(2,320)
(4,196)
(197)
538
34,760
40,836
66,944m 70,996m
51.9p
57.5p
2022
£m
6,928
1,522
508
8,958
2021
£m
6,902
(1,378)
627
6,151
Return on tangible equityA
Profit attributable to ordinary shareholders (£m) (a)
Average shareholders’ equity (£bn)
Average intangible assets (£bn)
Average tangible equity (£bn) (b)
Return on tangible equity (%)A = (a) / (b)
Tangible net assets per shareA
Ordinary shareholders’ equity
Remove goodwill
Remove intangible assets
Remove purchased value of in-force business
Other, including deferred tax effects
Tangible net assets (a)
Ordinary shares in issue, excluding own shares (b)
Tangible net assets per shareA = (a) / (b)
Underlying profit before impairmentA
Statutory profit before tax
Remove impairment charge (credit)
Remove volatility and other items including restructuring
Underlying profit before impairmentA
70
Lloyds Banking Group Annual Report and Accounts 2022
Governance
In this section
Directors’ report
Chair’s introduction
UK Corporate Governance Code
Our Board
Group Executive Committee
Board leadership and company purpose
Division of responsibilities
Composition, succession and evaluation
Audit, risk and internal control
Committee reports
Nomination and Governance Committee report
Audit Committee report
Board Risk Committee report
Responsible Business Committee report
Directors’ remuneration report
Other statutory and regulatory information
72
73
74
76
78
87
88
91
92
95
99
104
105
134
Supporting
SMEs on
their net
zero journey
64 per cent of SMEs have plans
in place to reach net zero by 2050
We are proud to work with smaller businesses
around the UK and have developed a range of
resources to support their sustainability work, in
our From Now to Net Zero practical guide for SMEs
and our Green Buildings Tool.
Our From Now to Net Zero practical guide sets
out a five-step journey for SMEs to reach net zero.
We followed this in 2022 with the release of our Net
Zero Monitor. Almost two thirds, 64 per cent, of SMEs
said they had a plan in place to reach net zero by
2050, with only 5 per cent not acting or considering
acting on net zero. Our activities with SMEs form part
of a range of engagements with our stakeholders
in support of our Board commitment to reduce the
emissions of the Group by more than 50 per cent by
2030 and achieving net zero by 2050 or sooner.
Lloyds Banking Group Annual Report and Accounts 2022
71
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Chair’s introduction
Good corporate governance
underpins the Group’s ability to
support our customers and to meet
the needs of our stakeholders
Inclusion and diversity
Driving inclusion and diversity in the broadest sense throughout
all levels of the organisation remains a priority for the Board. I am
pleased to report that the representation of women at Board and
senior leadership levels continued to increase in 2022 and the
Group embedded further its Race Action Plan to drive change.
More information on the Board’s approach to inclusion and
diversity is set out on page 94.
Tackling climate change
In line with the Group’s commitments as a founding member
of the Net-Zero Banking Alliance and following the approval of
emissions reduction targets for the Group’s own operations
in 2021, the Board approved the publication of an emissions
reduction target for the Group’s supply chains and specific
sectoral emissions reduction targets for the Group’s financed
emissions in many of the most carbon intensive or financially
material sectors. Further details can be found on page 81.
Consumer Duty
Following publication of the FCA’s final rules on Consumer Duty,
the Board approved the Group’s implementation plan. Amanda
Mackenzie, Chair of the Responsible Business Committee, has
been appointed as Group Consumer Duty Champion. Further
details on the Board’s role in overseeing the Group’s approach
to Consumer Duty can be found on page 81.
Board and Committee changes
Scott Wheway joined the Board as a non-executive director and a
member of the Nomination and Governance Committee and the
Board Risk Committee on 1 August 2022. Scott became Chair of
Scottish Widows Group on 12 September 2022. Cathy Turner also
joined the Board as a non-executive director and a member of
the Remuneration Committee on 1 November 2022.
Stuart Sinclair retired as a non-executive director at the
Company’s Annual General Meeting in May 2022. Stuart made
a significant contribution to the Board and left with our sincere
thanks and best wishes. Full details of the Board and Committee
changes during 2022 are set out on page 92.
Ring-fencing governance
Although this is Lloyds Banking Group plc’s corporate governance
report, I would like to thank Nigel Hinshelwood, Sarah Bentley and
Brendan Gilligan for their continued and valued contribution as
non-executive directors of Lloyds Bank plc and Bank of Scotland
plc (the Ring-Fenced Banks), which represent the majority of the
Group’s banking activities. Further details regarding the Group’s
ring-fencing arrangements and the critical role these directors
play in the Group’s overall governance structure are set out on
pages 79 and 86.
Board evaluation
An external evaluation of the Board’s effectiveness was
undertaken by Dr Tracy Long of Boardroom Review Limited in 2022.
Further information on the findings and process can be found on
page 89.
Corporate Governance Code
The Company’s statement of compliance with the UK Corporate
Governance Code 2018 can be found on page 73.
Stakeholder engagement
The Board recognises the importance of engaging with all its
stakeholders. Meeting the Group’s responsibilities and duties
to shareholders and the communities we serve is central to
our purpose. Further details on how the Board takes account
of stakeholder interests are set out on pages 82 to 83.
Robin Budenberg
Chair
Robin Budenberg
Chair
In February 2022, the Group launched an
ambitious new strategy which is aligned
to our purpose of Helping Britain Prosper
and a primary focus of the Board has been
the Group’s strategic transformation and
operational resilience. During the year, the
Board has played a vital governance role
overseeing the changes and planning required
for the delivery of the new strategy.
Good corporate governance underpins the Group’s ability
to support our customers and to meet the needs of our
stakeholders. As I mentioned in last year’s Chair’s Statement, there
are strong links between governance and fostering a culture that
supports long-term sustainable success. This financial year, the
Board continued to promote a healthy, values-led culture that
delivers the right outcomes for our customers. In line with our
customer focus, the Board has overseen the Group’s response
to the increased cost of living.
The Board recognises that the ongoing societal challenges and
macroeconomic uncertainties, including climate change and
the rising cost of living, are concerning for many people. Our
governance arrangements are designed to enable the Group to
respond to external challenges so that we maintain support for
our customers during these challenging times and create a more
sustainable and inclusive future for people and businesses.
I will now highlight some of the key corporate governance
activities that took place during the year.
Board oversight of new strategy
The Board has overseen the changes and planning required
for the delivery of the Group’s new strategy, together with the
finalisation of the formulation of the Group’s purpose, strategy,
values and key performance indicators. Further details can be
found on page 81.
Leading on culture
As I mentioned above, the Board has continued to play a lead role
in fostering a healthy, values-led culture. Further information on
the Board’s role in assessing, monitoring and providing oversight
of the development of the Group’s values-led culture can be
found on pages 84 to 85.
72
Lloyds Banking Group Annual Report and Accounts 2022
UK Corporate Governance Code
Corporate governance headlines at a glance
Compliance statement
The UK Corporate Governance Code 2018 (the Code) applied to
the financial year ended 31 December 2022. The Code is available
at www.frc.org.uk.
The directors’ report is set out in a way that helps shareholders
and investors to evaluate how the Company has applied the
principles and complied with the provisions of the Code during
2022. The table below signposts the most relevant parts of the
Annual Report, in particular where supporting information is
not in the directors’ report.
The Company confirms that it applied the principles and
complied with all the provisions of the Code throughout 2022. An
externally facilitated evaluation of the Board took place in 2022
and further information on the findings and process is on page 89.
Returns of capital
2.40p
Ordinary dividend per share for the financial
year ended 31 December 2022 including interim
and final dividend; in addition, a £2 billion share
buyback programme commenced in February
2022 and completed in October 2022.
Board tenure1
5.
1.
3.
Independence of the Board2
(excluding the Chair)
1.
2.
Principles of the Code
2.
1. Board leadership and company purpose
(pages 78 to 86)
Chair’s introduction
Our Board
Purpose, values and strategy
Culture
Board stakeholder engagement
and decision-making
Key performance indicators
and strategic performance
Risk assessment
Risk management
Rewarding our workforce
2. Division of responsibilities (page 87)
Our Board and governance structure
Independence and time commitments
Page(s)
72
74 to 75
1.
0-2 years
2. 2-4 years
3. 4-6 years
4. 6-8 years
5. 8-9 years
1 As at 31 December 2022.
Board ethnic diversity3
Number (%)
1.
2.
2 to 31 and 81
11, 15 and 84 to 85
10 to 11 and 82 to
83
32 to 37
38 to 44
139 to 195
105 to 133
78
93
4
4
2
0
1
1.
2.
Independent
Executive
8
2
2 Board members as at 31
December 2022 and remains
correct as at the date of
publication of the Annual Report.
Met the Parker Review target
and new FCA Listing Rule for
at least one board member
from a Black, Asian or Minority
Ethnic background throughout
the year1
Committee reports
92 to 106 and 123
Board and Committee meeting attendance
79
1. White
2. Black, Asian or
Minority Ethnic
9 (82%)
2 (18%)
3. Composition, succession and evaluation
(pages 88 to 90)
Our Board
Our Board and governance structure
Board and Committee meeting attendance
74 to 75
78
79
Nomination and Governance Committee report
92 to 94
4. Audit, risk and internal control (page 91)
Audit Committee report
Statement of directors’ responsibilities
Risk management
Principal risks and emerging risks
Board Risk Committee report
Going concern
Viability report
5. Remuneration
Directors’ remuneration report
95 to 98
137
139 to 195
39 to 43
99 to 103
44
44
105 to 133
3 Board members as at 31 December 2022 and remains correct as at the
date of publication of the Annual Report.
Board gender diversity4
Women (%)
2022
2021
2020
2019
2018
45
40
33
31
25
Met the FTSE Women Leaders Review and new FCA Listing
Rule target of at least 40% of the board being women5
4 As at 31 December of the relevant year. The percentage for 2022 remains
correct as at the date of publication of the Annual Report.
5 Please refer to page 93 in relation to the target referred to in the FTSE
Women Leaders Review and the new FCA Listing Rule that at least
one senior board position (Chair, Chief Executive, Senior Independent
Director or Chief Financial Officer) should be held by a woman.
Lloyds Banking Group Annual Report and Accounts 2022
73
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Our Board
Establishing our purpose,
values and strategy
Each of the directors of Lloyds Banking Group plc is also a director of Lloyds Bank
plc and Bank of Scotland plc (the Ring-Fenced Banks). The boards of the Ring-
Fenced Banks have three additional non-executive directors: Nigel Hinshelwood
(Senior Independent Director), Sarah Bentley and Brendan Gilligan. Read their
biographies and about the Ring-Fenced Banks on pages 79 and 86.
Stuart Sinclair was a non-executive director of Lloyds Banking Group plc during
2022 until his retirement on 12 May 2022.
NG
Re
RB
A
BR
NG
Re
RB
A
BR
RB
Robin Budenberg CBE
Chair
Alan Dickinson
Deputy Chair and Senior
Independent Director
Sarah Legg
Independent non-executive director
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.
•
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.
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 executive career in
financial services with almost 30 years at 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 eight years as a
Non-Executive Director on the board of Hang
Seng Bank Limited, a Hong Kong listed bank.
External appointments:
Non-Executive Director of Severn Trent plc,
a Trustee of the Lloyds Bank Foundation for
England and Wales, Board Member of the Audit
Committee Chairs’ Independent Forum and
Chair of the Campaign Advisory Board, King’s
College, Cambridge University.
RB
NG
Re
RB
Lord Lupton CBE
Amanda Mackenzie LVO OBE
Harmeen Mehta
Independent non-executive director and
Chair of Lloyds Bank Corporate Markets plc
Independent non-executive director
Independent non-executive director
Appointed: June 2017 (Board), August 2017 (Chair
of Lloyds Bank Corporate Markets plc)
Skills, experience and contribution:
•
Extensive international corporate experience,
especially in financial markets
Strong board governance experience,
including investor relations
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.
Appointed: October 2018
Skills, experience and contribution:
•
Extensive experience in ESG matters, including
responsible business and sustainability
• Considerable customer engagement
experience
Strong digital technology experience
Significant marketing and brand background
•
•
Amanda was Chief Executive of Business
in the Community, of which King Charles
III is the Royal Founding Patron and which
promotes responsible business and corporate
responsibility. Prior to that role, she was a
member of Aviva’s Group Executive for seven
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:
Chair of The Queen’s Reading Room and trustee
of the charity Cumberland Lodge.
Appointed: November 2021
Skills, experience and contribution:
• Over 25 years’ experience leading digital
•
•
innovation and complex transformation
Experience of building and running
technology-led businesses and creating new
ventures
A wealth of international and financial
services knowledge having lived in 11
countries and worked across 30 countries
in six continents
Harmeen was appointed Chief Digital and
Innovation Officer at BT in April 2021. Prior to
that role, she spent seven years as Global Chief
Information Officer and Head of Cyber Security
and Cloud Business at Bharti Airtel, leading its
cloud and security businesses. Earlier in her
career, Harmeen held CIO positions at BBVA,
HSBC and Bank of America Merrill Lynch.
External appointments:
Chief Digital and Innovation Officer at BT and
Non-Executive Director at Max Healthcare
Institute Ltd.
74
Lloyds Banking Group Annual Report and Accounts 2022
A
Audit Committee member
RB
Responsible Business Committee member
BR
Board Risk Committee member
Committee Chair
NG Nomination and Governance Committee member
N
New to the Board in 2022
Re
Remuneration Committee member
Committee Chairs and members shown
as at 21 February 2023.
N
Re
N
BR
NG
A
BR
Re
Cathy Turner
Independent non-executive director
Scott Wheway
Independent non-executive director and
Chair of Scottish Widows Group
Catherine Woods
Independent non-executive director
Appointed: November 2022
Skills, experience and contribution:
•
Significant executive and non-executive
financial services experience
Knowledge of complex remuneration matters
•
• Communications expertise with a broad
range of stakeholders including investors,
regulators, government, media and unions
Cathy has significant financial services
experience, having worked in senior
executive positions at Barclays plc where her
responsibilities, over time, included human
resources, executive compensation, investor
relations, strategy and brand marketing and at
the Group, where she was responsible for the
human resources, legal, audit, corporate brand
and secretariat functions. Cathy has previously
been a Non-Executive Director and Chair of the
Remuneration Committee of Aldermore Group
plc, Quilter plc and Countrywide plc.
External appointments:
Non-Executive Director and Chair of the
Remuneration Committee of each of Rentokil
Initial plc and Spectris plc. Partner on a part-time
basis at Manchester Square Partners LLP.
•
•
Appointed: August 2022 (Board), September 2022
(Chair of Scottish Widows Group)
Skills, experience and contribution:
•
Significant financial services board and chair
experience
Extensive knowledge and experience of large-
scale banking and insurance businesses
Track record as a non-executive and
executive in customer-centric companies
Scott was appointed Chair of Centrica plc in 2020
where he has served on the board since 2016.
Scott was formerly Chair of AXA UK plc, Chair of
Aviva Insurance Limited, a Non-Executive Director
of Aviva plc and Senior Independent Director of
Santander UK plc. He worked as an executive in
the retail sector for over 25 years where he held
positions including chief executive officer of
Best Buy Europe, managing director of Boots the
Chemist plc and a number of senior executive
positions at Tesco plc.
External appointments:
Chair of Centrica plc.
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 and Deputy Chair of
BlackRock Asset Management Ireland Limited.
Charlie Nunn
Executive director and
Group Chief Executive
William Chalmers
Executive director and
Chief Financial Officer
Kate Cheetham
Chief Legal Officer and
Company Secretary
Appointed: August 2021
Skills, experience and contribution:
•
Extensive financial services experience
including in Chief Executive and other
leadership roles
Strategic planning and implementation
Extensive experience of digital transformation
•
•
Charlie has over 25 years’ experience in the
financial services sector. Prior to joining the
Group, Charlie held a range of leadership
positions at HSBC, including Global Chief
Executive, Wealth and Personal Banking and
Group Head of Wealth Management and Digital,
as well as Global Chief Operating Officer of Retail
Banking and Wealth Management.
Charlie began his career at Accenture, where he
worked for 13 years in the US, France, Switzerland
and the UK before being made a Partner. He then
moved to McKinsey & Co. as a Senior Partner,
leading on projects for five years.
External appointments:
None.
•
Appointed: August 2019 (Chief Financial Officer)
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 joined the Board in August 2019, when
he was appointed Chief Financial Officer and
was Interim Group Chief Executive from May 2021
to August 2021.
Appointed: July 2019
Skills, experience and contribution:
Kate became Group General Counsel (now
Chief Legal Officer) in May 2015 and 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 roles, 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.
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.
Lloyds Banking Group Annual Report and Accounts 2022
75
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Group Executive Committee
Delivering our vision and
day-to-day management
C
M
M
Charlie Nunn
Executive director and
Group Chief Executive
William Chalmers
Executive director and
Chief Financial Officer
Kate Cheetham
Chief Legal Officer and
Company Secretary
Charlie joined the Board as an
executive director and Group Chief
Executive in August 2021.
William joined the Board in August
2019 as an executive director and
the Chief Financial Officer.
Kate became Group General
Counsel (now Chief Legal Officer)
in May 2015 and Company Secretary
in July 2019.
Read his biography on page 75.
Read his biography on page 75.
Read her biography on page 75.
M
M
M
M
Elyn Corfield
Chief Executive Officer,
Business and Commercial
Banking
Sharon Doherty
Chief People and Places
Officer
Jo Harris
Chief Executive Officer, Mass
Affluent
Antonio Lorenzo
Chief Executive Officer, Scottish
Widows and Chief Executive
Officer, Insurance, Pensions
and Investments
Elyn was appointed in July 2022 as
Chief Executive Officer, Business
and Commercial Banking, serving
all micro, small and medium-sized
business customers as they grow
and evolve, providing specialist
sector propositions and supporting
customer needs across all banking
products. Prior to her current role,
Elyn was the Managing Director,
Consumer Finance, responsible
for the Group’s Consumer
and Commercial Credit Card,
Unsecured Personal Loan, Motor
Finance and Leasing portfolios. Prior
to joining the Group in 2017 through
the acquisition of MBNA, Elyn was
the Chief Financial Officer and prior
to that held a number of finance
leadership roles at MBNA. Elyn acted
as the Group’s Ambassador for the
North for three years, and has been
a Trustee of the MBNA Foundation
since 2014.
Sharon joined the Group in June
2022 as Chief People and Places
Officer, with the aim of helping
our colleagues play their part in
Helping Britain Prosper. Sharon is
committed to creating a culture
that attracts and inspires the most
diverse, agile and committed talent
to thrive and grow. Before joining the
Group Sharon was Chief People and
Places Officer at Finastra, a leading
global fintech. Prior to this, she was
Vodafone’s Global HR Director,
Technology where she drove its
award-winning diversity and
digital work programme. Sharon’s
career also spans people and
leadership roles at Laing O’Rourke,
BAA Heathrow’s Terminal 5, GE
Capital, PwC, Kingfisher and Marks
and Spencer. Sharon is an author
and champion of democracy,
diversity, equity and inclusion
across the world.
76
Lloyds Banking Group Annual Report and Accounts 2022
Jo was appointed Chief Executive
Officer, Mass Affluent as well as
interim Chief Executive Officer,
Consumer Relationships in July
2022. Jo joined the Group in 2014
from RBS, where she worked in a
number of different leadership
roles. Since joining the Group, Jo has
worked in a variety of roles including
Managing Director for Business
Banking, Group Customer Services,
and most recently Managing
Director of Lloyds Bank and Bank of
Scotland Community Banks. Jo has
been a Trustee for the Lloyds Bank
Foundation for England and Wales
since 2017.
Antonio joined the Group in 2011
and is currently responsible for
the insurance, pensions and
investments business. 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.
C
Group Executive Committee Chair
M Group Executive Committee Member
A
Group Executive Committee Attendee
A
M
M
M
Laura Needham
Chief Internal Auditor
David Oldfield
Interim Group Chief
Operating Officer
Jayne Opperman
Chief Executive Officer,
Consumer Relationships
Janet Pope
Chief of Staff and Chief
Sustainability Officer
Laura joined the Group in
September 2022 as Chief Internal
Auditor. Before joining the Group,
Laura spent 22 years at PwC in a
number of roles, predominantly
in the UK, but also spent time in
Sydney and New York. Laura’s
expertise is in risk, governance
and control and at PwC Laura
was both an external audit and
internal audit partner working
with most major banks in the UK.
In her career she has held several
people leadership roles, including
being the Head of People for
PwC’s banking audit practice and
was the gender balance network
sponsor. Laura is passionate about
talent development, diversity and
inclusion and has led on cultural
change programmes to improve
employee engagement.
David was appointed as Interim
Group Chief Operating Officer
from January 2022, responsible
for delivering the Group’s Data
and Technology strategy and the
operation of resilient and secure
systems that underpin the Group’s
core functions. Additionally,
David was the Group Director
and CEO, Commercial Banking
from September 2017 through
to September 2022, responsible
for supporting clients from
SMEs through to Corporate and
Institutional clients. David started
his career with Lloyds Bank in 1984
on the graduate programme and
has held key leadership roles across
the Group including in Commercial,
Retail, IT and Central Functions.
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.
Jayne re-joined the Group in
December 2022 as Chief Executive
Officer for Consumer Relationships,
the centre of the Group’s growth
strategy to deepen our consumer
relationships through personalised
experience and outstanding
customer service. Jayne has over
25 years of experience in the
financial sector, leading diverse
teams focused on transforming
businesses, most recently
specialising in customer channels,
operations and technology
and using data as a tool to
support colleagues and drive
personalisation for customers.
Prior to re-joining the Group, Jayne
held roles at several well-known
financial institutions both here and
in Australia and Asia, including Citi,
Westpac, ANZ and most recently
Barclays.
Janet joined the Group 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 Trustee of the Charities
Aid Foundation, a Non-Executive
Director of the Financial Services
Culture Board and is the Group’s
Executive Sponsor for Sexual
Orientation and Gender Identity.
M
M
M
M
Stephen Shelley
Chief Risk Officer
Jasjyot Singh OBE
Chief Executive Officer,
Consumer Lending
Andrew Walton
John Winter
Chief Corporate Affairs Officer
Chief Executive Officer,
Corporate and Institutional
Banking
Stephen was appointed Chief
Risk Officer in September 2017.
Stephen is the Group’s Executive
Sponsor for Gender Diversity and
Equality. 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 at Barclays, Stephen
undertook a variety of roles in the
front office and risk.
Jas is Chief Executive Officer,
Consumer Lending, our centre of
excellence for lending propositions,
both for customers who bank
with us directly and through
intermediaries. Jas has worked
at the Group for 16 years and has
held a number of roles across
the Group’s Consumer and Small
Business businesses. His previous
experience was in consulting roles,
based in the US and across Europe,
with a range of corporate strategy
and digital design consulting
projects across multiple industry
sectors. Jas was awarded an OBE
for his contribution to financial
services during COVID-19.
Andrew joined the Group in
September 2018 as Group Corporate
Affairs Director, with responsibility
for internal and external
communications, reputation
management and public affairs.
Andrew has more than 25 years’
experience in corporate affairs
in the UK and US. Prior to joining
the Group, Andrew was Senior
Managing Director and Global
Head of Financial Services for the
strategic communications segment
of FTI Consulting.
John joined the Group in September
2022 as Chief Executive Officer
for Corporate and Institutional
Banking. John has more than 37
years’ experience in corporate
and investment banking, as well
as in retail banking. John was most
recently at MUFG, where he was
Regional Executive and CEO for
EMEA with responsibility for all of
its Global Markets, Corporate and
Investment Banking businesses
in the region. He spent 15 years
at Barclays, latterly as CEO for
Corporate Banking and previously
as head of its European investment
banking business. John started his
career at Merrill Lynch in 1985 in
NYC and was head of EMEA DCM at
Deutsche Bank from 1996 to 2001.
Lloyds Banking Group Annual Report and Accounts 2022
77
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Board leadership and
company purpose
The role of the Board
The Board is collectively responsible for promoting and assessing
the long-term, sustainable success of the Group, generating
value for shareholders and contributing to wider society.
The Board establishes the Group’s purpose, values and strategy
and seeks to ensure that the Group is Helping Britain Prosper.
The Board approved the Group’s current strategy in February
2022 and you can read more about how the Board has overseen
the changes and planning required for the delivery of the new
strategy by the Group Chief Executive, supported by the wider
executive management team, on page 81.
The Group’s role as a sustainable and inclusive business is central
to its purpose, with the Board’s Responsible Business Committee
overseeing the Group’s ambitions in building a truly purpose-
driven organisation. Read more about the Responsible Business
Committee on page 104.
Our Board and governance structure
The Board is also responsible for ensuring that the Group’s culture
is aligned with its purpose, values and strategy. Read more about
how the Board assesses and monitors the Group’s culture on
pages 84 to 85.
The Board retains ultimate responsibility for ensuring the
necessary resources are in place to meet agreed objectives.
The effective management of risk is central to the Group’s
strategy, supported by the Group’s enterprise risk management
framework, which is discussed in the risk management report
on pages 139 to 195.
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. Read more about how
the Board engages with stakeholders on pages 82 to 83 and the
directors’ statement of compliance with their duties under section
172 of the Companies Act 2006 on pages 10 to 11.
Lloyds Banking Group plc Board
Chair
Robin Budenberg
Executive directors
Non-executive directors
Group Chief
Executive
Charlie Nunn
Chief Financial
Officer
William Chalmers
Deputy Chair and
Senior Independent
Director
Alan Dickinson
Sarah Legg
Lord Lupton
Amanda Mackenzie
Harmeen Mehta
Cathy Turner
Scott Wheway
Catherine Woods
Company
Secretary
Kate Cheetham
Group Chief
Executive
Committees
See pages 142 to 143
Board Committees
Nomination
and Governance
Committee
Audit
Committee
Board Risk
Committee
Remuneration
Committee
Responsible
Business
Committee
See page 92
See page 95
See page 99
See page 105 to 106
See page 104
and 123
The key decisions and matters reserved for the Board’s approval,
such as the Group’s long-term strategy and priorities, are set
out in the Group’s Corporate Governance Framework, which is
reviewed periodically by the Board. The Board is supported by
its Committees which make decisions or recommendations on
matters as delegated to them under the Corporate Governance
Framework, including Board appointments, the effectiveness of
internal controls and the risk management framework, financial
reporting, governance and remuneration policies. This enables
the Board to spend a greater proportion of its time on strategic,
forward-looking matters. Read more about the Corporate
Governance Framework on page 93.
Each Board Committee comprises non-executive directors
only and has an experienced chair. The Committees are
managed on the same basis as the Board. The structure of each
Committee seeks to facilitate open discussion and debate and
ensure adequate time for Committees’ members to consider
all proposals.
78
Lloyds Banking Group Annual Report and Accounts 2022
The executive directors make decisions within the parameters
and principles set out in the Corporate Governance Framework,
which aims to ensure that decisions are made by management
under the correct authority. However, where appropriate, any
activity can be brought to the full Board for consideration, even
if the matter falls within agreed executive parameters.
There are executive committees established to support the Group
Chief Executive (Group Chief Executive Committees), in particular
the Group Executive Committee. Read about the Group Chief
Executive Committees on pages 142 to 143 and the biographies
of the Group Executive Committee members and attendee on
pages 76 to 77.
The terms of reference for the Board Committees and the matters
reserved for the Board can be found at
www.lloydsbankinggroup.com/who-we-are/group-overview/
corporate-governance.
Board meetings in 2022
There were nine Board meetings during 2022. There are separate
boards and board committees of Lloyds Banking Group plc, Lloyds
Bank plc, Bank of Scotland plc and HBOS plc, but most meetings
of these companies are held concurrently and we refer to this
as the ‘Aligned Board Model’. As most of the Group’s business
sits within Lloyds Bank plc and Bank of Scotland plc (together,
the Ring-Fenced Banks), the interests of the Ring-Fenced Banks
and the Group are aligned in most circumstances. This model is
supported by a number of safeguards to enable us to operate in
this way, including the appointment of three Ring-Fenced Bank-
only non-executive directors and a Ring-Fenced Bank risk officer,
all of whose focus is on protecting the interests of the Ring-Fenced
Banks. Read more about the Group’s governance structure and
ring-fencing governance arrangements at the bottom of this
page and on page 86.
Regular updates are provided to the Board by the Committee
Chairs as well as by the Chair, the Group Chief Executive, the Chief
Financial Officer, the Chief Risk Officer, the Group Chief Operating
Officer and the Chairs of the boards of Lloyds Bank Corporate
Markets plc and Scottish Widows Group Limited.
The Group has a comprehensive and continuous forward 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
Company Secretary. The process ensures that sufficient time is
being set aside for strategic discussions and business critical
items. The Chair and the Committee Chairs ensure Board and
Committee meetings are structured to facilitate open discussion,
debate and challenge.
The process of escalating issues and agenda setting is regularly
reviewed 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.
The Chair held a number of meetings with the non-executive
directors without the executive directors present.
Board and Committee composition and attendance at meetings in 20221
Board member
Robin Budenberg
Charlie Nunn
William Chalmers
Alan Dickinson
Sarah Legg
Lord Lupton
Amanda Mackenzie
Harmeen Mehta
Stuart Sinclair2
Cathy Turner3
Scott Wheway4
Catherine Woods
C Chair
Responsible
Business
Committee
Board
Nomination
and Governance
Committee
Audit
Committee
Board Risk
Committee
Remuneration
Committee
9/9 C
6/6 C
7/7
4/4
9/9
9/9
9/9
9/9
8/95
9/9
9/9
4/4
2/2
3/3
9/9
6/6
6/6
2/2
2/2
6/6
6/6 C
10/10
10/10
7/7 C
6/75
2/35
2/2
3/45
6/6
10/10 C
7/7
4/4
4/4
4/4
4/4 C
2/2
1 Where a director is unable to attend a meeting he/she receives papers in advance and has the opportunity to provide comments to the Chair of the Board or to the
relevant Committee Chair.
2 Stuart Sinclair retired from the Board on 12 May 2022.
3 Cathy Turner joined the Board and the Remuneration Committee on 1 November 2022.
4 Scott Wheway joined the Board, the Nomination and Governance Committee and the Board Risk Committee on 1 August 2022.
5 Unable to attend due to a pre-existing commitment.
Focus on the Ring-Fenced Banks
All of the Lloyds Banking Group plc directors sit on the boards
of the Ring-Fenced Banks together with three additional non-
executive directors:
• Nigel Hinshelwood – Senior Independent Director and a
member of the Audit, Remuneration, Board Risk and Nomination
and Governance Committees of the Ring-Fenced Banks
• Sarah Bentley – non-executive director and a member of the
Remuneration Committee of the Ring-Fenced Banks
• Brendan Gilligan – non-executive director and a member of
the Audit and Board Risk Committees of the Ring-Fenced Banks
Since the Ring-Fenced Banks represent the majority of the
banking activities of the Group, Nigel Hinshelwood, Sarah Bentley
and Brendan Gilligan play an important role in the Group’s overall
governance structure. Read their biographies and more about the
Group’s structure and ring-fencing governance arrangements
on page 86.
Lloyds Banking Group Annual Report and Accounts 2022
79
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Board leadership and
company purpose continued
Key focus areas
This page shows some of the key focus areas
of the Board during 2022 and highlights the
stakeholder groups central to those matters
considered and decisions taken.
Stakeholder key:
Customers and clients
Society and environment
Shareholders
Suppliers
Colleagues
Regulators and government
Key focus areas for 2022
Matters approved
Other matters considered/undertaken
Stakeholders
Purpose, culture
and values
• Purpose, culture and values – read
more on pages 11, 15 and 84 to 85
• Operation and effectiveness of the
•
Remuneration Policy
Net-Zero Banking Alliance targets –
read more on pages 11 and 36 to 37
• Modern slavery and human
trafficking statement
• Leadership and culture to align with
the new structure – read more on
page 15
Updates on colleague engagement
including support to colleagues in
light of cost of living increases
•
Customers and
clients
• Group customer dashboard
•
Implementation of Consumer Duty
plan – read more on page 81
• Operational Resilience Self-
• Ongoing support for customers and
clients in light of the increases in the
cost of living – read more on page 83
• Customer experience and customer
Assessment
fair value
Strategy
Financial
• Group’s new strategy and investor
communications – read more on
pages 2 to 37 and 81
• Cost of living priorities
•
Investment in Citra Living
• Strategy day and sessions to discuss
implementation of the Group’s
new strategy, including purpose,
governance and milestones and
metrics – read more on page 81
• New Group Executive operating model
• Competitor analysis
• Four-year budget and operating plan
• Annual Report, Form 20-F, half-
year results and quarterly interim
management statements
• Payment of final dividend for 2021 and
an interim dividend for 2022
• Share buyback programme
• Financial updates from the Chief
Financial Officer including key
financial highlights, performance
against budget and sub-group
business performance
• Economic forecasts
Risk management
and regulatory
• Risk appetite metrics
• Group Speak Up Champion – read
more on page 83
• Group Recovery Plan and PRA
Resolvability Assessment Framework
submission to the PRA
• Risk reports and reports from the
Board Risk Committee
• Model risk
• Regulatory capital in the context of
potential stress events
• FCA Firm Evaluation
• PRA Periodic Summary Letter
Governance
• Non-executive director Board and
• Executive succession plan and
Committee appointments
• Actions arising from the externally
evaluated board effectiveness review
• Board diversity policy
• Corporate Governance Framework
development plan for 2023
• Key themes for Board focus
• Proposed format of the 2022 annual
general meeting
80
Lloyds Banking Group Annual Report and Accounts 2022
Board oversight
How governance contributes to the delivery of our strategy
Our governance arrangements contribute to the development
and delivery of our strategy in various ways, including by
creating accountability and responsibility, information flow and
independent insight from the non-executive directors.
The Board is responsible for establishing the Group’s strategy
and reviewing delivery of that strategy by the Group Chief
Executive, supported by the wider executive management team.
In 2022 the Board approved a new strategy and has overseen
the planning and changes required for its delivery. The timeline
below summarises some of the key strategy-related matters
which the Board discussed or received updates on.
Focus of Board discussion or update
n Finalising our purpose-driven mission statement
a
J
and financial and delivery plan for the strategy
b Approving the strategy, financial plans and
e
F
investor communications
r
p
A
Approach to implementing the strategy
y Plans for strategy mobilisation, in particular
a
design of the target operating model and
M
technology resilience
n
u
J
Board offsite discussing and reviewing strategic
progress and priorities in key business areas,
the path to net zero and mobilisation activity
to support delivery of the strategy
l
u
J
Review of proposed strategy metrics for the Board
p Progress on mobilisation and execution of
e
S
our strategy
v
o
N
Board offsite discussing and reviewing impacts
on the Group’s strategy of the changing economic
environment, strategic delivery progress, selected
strategic priorities and purpose update
c Reviewing the draft four-year financial plan,
e
D
including the impact of the Group’s strategic
investment plan
Our focus on Consumer Duty
The Board is committed to delivering good outcomes for
the Group’s customers and, as we continue to move towards
becoming a truly purpose-driven business, this remains at the
heart of our strategy.
The FCA’s new Consumer Duty sets higher and clearer standards
of consumer protection across financial services, requiring
firms to put their customers’ needs first. As an organisation, we
are already focused on the delivery of good outcomes for our
customers – the Consumer Duty is the next step in the evolution
of how we do this and will drive broader cultural change. There will
be greater focus on the outcomes customers receive – whether
products and services meet customer needs and offer fair value,
if customers understand the information with which they are
being provided and if customers are given the support required
to meet their financial objectives.
The Responsible Business Committee, under delegated authority
from the Board, provides oversight of the implementation, and
ongoing consideration, of Consumer Duty, with the Board Risk
Committee overseeing related risks. The Group has appointed two
Consumer Duty Champions who will help ensure Consumer Duty
is considered in senior strategic discussions. Amanda Mackenzie,
as Chair of the Responsible Business Committee, is the Group
Consumer Duty Champion, with John Reizenstein, non-executive
director of Scottish Widows Group Limited (and Chair of its Risk
Oversight Committee), fulfilling a similar role with the Insurance,
Pensions and Investments business.
Our focus on cyber security and risk
Technological resilience is vital to the provision of a secure
and reliable service to customers. The Board recognises
the importance of cyber security and the Nomination and
Governance Committee therefore made a priority the recruitment
to the Board of additional technology expertise, resulting in
the appointment of Harmeen Mehta. Harmeen is Chief Digital
and Innovation Officer at BT and brings to the Board 25 years’
experience leading digital, engineering, IT and innovation
transformation.
The Group’s Information Technology and Cyber Advisory Forum
(ITCAF) was established in 2018 to enable a smaller group of
Board members, as well as directors of Lloyds Bank plc and Bank
of Scotland plc, to engage in more detailed review of the Group’s
IT-related operational risks. ITCAF considers matters of cyber
security and cyber issues generally as well as a wide range of
technology matters. This helps inform and enhance discussions
at the Board and the Board Risk Committee, to which ITCAF
reports. Cyber risk is considered by the Board Risk Committee
as part of oversight of operational resilience risk.
Our focus on net zero
The Board has overall oversight of environmental, social and
governance (ESG) matters. Sustainability and inclusivity are
integral elements of our Group strategy; supporting the UK’s
transition to net zero is therefore closely aligned with our purpose
of Helping Britain Prosper. Our Board-level Responsible Business
Committee oversees the Group’s performance as a responsible
business, including the delivery of our sustainability strategy.
The Group continues to make good progress against our net
zero ambitions and we have published our first Group climate
transition plan, including seven sector-specific Net-Zero Banking
Alliance targets, in our dedicated environmental sustainability
report. We engage proactively with investors and other key
stakeholders throughout the year on our sustainability priorities
and plans. Given net zero and sustainability are at the heart
of our purpose-driven strategy, with ambitious climate targets
reflected in strategic objectives, the good progress already being
made in this area and the Group’s existing focus on disclosure,
transparency and engagement, the Board does not believe it is
necessary to propose a separate climate vote at the Company’s
2023 annual general meeting at this time. We will continue to
be transparent on our sustainability strategy, targets, plans
and progress. Read more about the Board’s focus on net zero on
page 11 and in the Lloyds Banking Group environmental sustainability
report
Lloyds Banking Group Annual Report and Accounts 2022
81
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Board leadership and
company purpose continued
Stakeholder engagement
As in 2021, the non-executive directors
undertook a tailored engagement programme
which allowed them to hear directly from their
key stakeholders, including customers, clients
and colleagues.
The programme was designed to help the directors better
understand what matters in the lives of customers and
colleagues, the role the Group plays in supporting them and
how the Group is performing in that regard, in turn helping
to inform the directors’ decision making.
A variety of activities took place under the programme, including
meetings with customers and clients and conversations with
colleagues, to understand the matters which are most important
in their lives, both at and outside work, and the challenges these
stakeholders face as the external economic environment continues
to evolve. The non-executive directors found these sessions to be of
great benefit, providing many valuable insights which helped in their
review of the proposals considered by the Board during the year.
Our stakeholders
Customers and clients
The Board has an ongoing commitment to understanding and
addressing customer and client needs, which remains central
to achieving the Group’s strategic ambitions.
Examples of Board engagement with customers and
clients included:
• Dedicated updates from across the organisation, which
identified areas of customer and client concern, covering
a range of internal and external performance measures; in
addition, concerns relevant to customers and clients were
identified for consideration in wider proposals put to the Board
• Regular updates giving insight into the Group’s
performance in delivering on its customer and client related
objectives and commitments, assisting in determining
where further action was required to meet these objectives
• The Chair and the Group Chief Executive attended customer
and client engagement events across all main regions of
the UK, providing an important opportunity for customers
and clients to raise their concerns directly with these
Board members
• Non-executive directors attended special events to provide
a deeper insight into the issues which customers and clients
have faced during the year, which included sessions on
the challenges of buying and owning a home, the practical
issues faced as a consequence of the cost of living crisis,
the challenges customers face in day to day family life
and the issues which our commercial and SME clients are
routinely facing
Colleagues
Colleagues remain a vital part of the delivery of the Group’s
strategic ambitions and the Board continues to recognise this
in its engagement with colleagues, which has again this year
included a variety of sessions across the Group, to discuss
topical issues relating to challenges at and outside work.
Following a review in 2021 of how the Board engages with
the Group’s workforce, the Board’s Responsible Business
Committee has continued to be the designated body for
workforce engagement, providing focus, but with the Board
also retaining a commitment for individual Board members to
continue to engage with colleagues directly throughout the
year. The Board considers these arrangements to be effective
as they enable a broad range of colleague engagement
activities, as described in this section.
82
Lloyds Banking Group Annual Report and Accounts 2022
The Responsible Business Committee reports regularly to
the Board on all of its activities, including on its colleague
engagement agenda. The Board will continue to consider
its arrangements for engaging with the Group’s workforce to
ensure they remain effective and to encourage meaningful
dialogue between the Board and colleagues.
Examples of engagement with colleagues included:
• Regular review by the Responsible Business Committee of
workforce engagement reports, covering key issues raised
by colleagues, trends on people matters and updates on
colleague sentiment
• Review by the Responsible Business Committee of the findings
of surveys of colleague sentiment and views, including annual
and ad hoc surveys and review of the progress being made in
addressing the matters colleagues have previously raised
• A related annual report to the Board, summarising all
colleague engagement activity, key themes and issues
which colleagues have raised during the year
• Non-executive directors attended a number of colleague
focus groups to discuss themes from the annual colleague
survey, the Group’s new strategy and values, pay and
reward and hybrid working. They also attended sessions
where they were able to observe colleagues at work,
including Fraud team colleagues handling customer calls
• The approach to colleague surveys will continue to evolve
in the coming year, with insight from monthly ‘Pulse’ surveys
being used to inform the discussion topics for future non-
executive director/colleague focus groups
• Town Hall sessions were hosted by both the Chair and the
Group Chief Executive, complemented by engagement
sessions led by other senior leaders with feedback shared
with the wider Board. The Group Chief Executive also
held sessions with colleagues from a number of specific
business areas across the Group
• Board members attended a range of other events held for the
Group’s senior leaders and other colleague network events
Shareholders
The Group has one of the largest shareholder bases in the
UK, with more than two million shareholders including most of
our colleagues. The Board is committed to understanding the
needs and expectations of all our shareholders, both private
and institutional.
Examples of Board engagement with shareholders included:
• Regular updates from Investor Relations on market
views and shareholder sentiment, including an annual
presentation from the Group’s corporate brokers on market
dynamics and perception of the Group
• The Board’s Nomination and Governance Committee
considered correspondence received from institutional
shareholders and non-governmental organisations, along
with market feedback
• A number of directors engaged with shareholders, including
the Chair and principally the Group Chief Executive and
Chief Financial Officer, holding over 82 meetings with
institutional shareholders, considering matters including the
Group’s strategy, its purpose and its financial performance
• The Senior Independent Director held sessions with both
institutional shareholders and proxy agencies to help better
understand their views of the Group and to provide updates
on a range of current topics. As Remuneration Committee
Chair, the Senior Independent Director also engaged with
shareholders on matters relevant to remuneration
• Overall, the Group undertook c.300 meetings with
institutional investors, many of which were attended by
management and directors
• A virtual Board Governance Event was also held in
December for institutional shareholders and other key
investor stakeholders, with the opportunity to put questions
to the Chair and the chairs of the Board Committees
Society and environment
The Group is present in almost every community in the
country and the Board therefore places great importance on
engagement and action to help these communities prosper,
while helping to build a more sustainable and inclusive future.
Relevant engagement included:
• Updates on climate, environmental and social matters,
covering all aspects of the Group’s business, where the
Board reviewed progress made against its stated ambitions
in these areas and agreed any further action it considered
was required
• The Board continues to be supported in environmental
matters by its Responsible Business Committee. The
Committee considers stakeholder views on all matters
relating to the Group’s ambition to be a trusted, sustainable,
inclusive and responsible business and the report of the
Committee on its work during the year can be found on
page 104
Regulators and government
The Board continues to maintain strong and open relationships
with the Group’s regulators and with government authorities,
including key stakeholders such as the FCA, the PRA, HM
Treasury and HMRC.
Relevant engagement included:
• The Chair and individual directors, including Chairs of the
Board’s Committees, held continuing discussions with
the FCA and PRA on a number of aspects relevant to the
evolving regulatory agenda
• The Board regularly reviewed updates on wider Group
regulatory interaction, providing a view of key areas
of focus and also progress made in addressing key
regulatory priorities
• A meeting was held between the Board and the PRA in July
to discuss the outcomes and progress of action relevant
to the PRA’s Periodic Summary Meeting letter
Suppliers
The Group has a number of partners it relies on for important
aspects of our operations and customer service provision
and the Board recognises the importance of these supplier
relationships in achieving the Group’s wider ambitions.
Engagement with suppliers included:
• 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 suppliers, ensuring our approach continued
to meet wider industry standards
• The Board continued to oversee resilience in the supply
chain, ensuring our most important supplier relationships
were not impacted by potential material events
• The Board has an ongoing zero tolerance approach
towards modern slavery in our supply chain and receives
updates on ongoing enhancements to the Group’s supplier
practices, including measures to address the risk of human
trafficking and modern slavery in our wider supply chain
Getting closer to customers
The Board is very conscious of the impact on our customers of
the ongoing increases in the cost of living and the importance
of supporting our customers. During the year the Board has
received updates from management on the impacts on
customers across our businesses, including regular feedback
from the Group Chief Executive. The Board has also had the
opportunity to discuss the impact of the cost of living increase
with our regulators.
Board members have also sought to develop further their
understanding of customers’ needs and how the Group can
support them via customer focus groups and a choice of call
recordings, in each case on a range of topics.
Find out more about how we’re helping customers
in our social sustainability report
Supporting colleagues –
whistleblowing
Speak Up (the Group’s whistleblowing programme) enables
colleagues to raise matters of concern. Alan Dickinson is
the Group’s whistleblowing champion and is responsible for
overseeing the integrity, independence and effectiveness of
the Group’s whistleblowing procedures.
In addition, the Audit Committee reviews reports on
whistleblowing to ensure that there are arrangements in place
which colleagues can use in confidence to report relevant
concerns and reports on its review to the Board.
Lloyds Banking Group Annual Report and Accounts 2022
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Board leadership and
company purpose continued
Our new values
During 2021 and 2022, we embarked on
‘Growing our Culture Together’ – a rigorous
research programme involving thousands
of colleagues across the organisation, to
gather views and insights about our current
and aspirational culture.
Focusing on culture
We listened to our people to understand how it feels to work
here, the role our culture plays and what improvements could be
made. As we have continued to build our purpose into everything
we do throughout 2022, we have taken on board further feedback
and evolved our approach.
Our strategy sets out our plan to become a truly purpose-driven
organisation and our culture is a fundamental enabler of that.
Board members were deeply engaged throughout the ‘Growing
our Culture Together’ programme, participating in some of the
‘culture conversations’, allowing them both to input and hear
directly from colleagues on this subject. These outputs ensured
that the ‘colleague voice’ was central to the creation of a draft set
of values. The draft set of values was then shared with colleagues
to be further refined, with over 12,000 giving feedback to shape the
final set which was launched in May 2022.
We continued to listen to further feedback as well as external
development with the rising importance of sustainability. We
recognised the need to simplify our frameworks and enhanced
our values to guide not only how we act and behave but also
how we make decisions.
We collected
data…
We looked at data and
information from:
• Colleague surveys (26,600 colleagues)
• CultureScope diagnostic tool insights
(8,000 colleagues)
• Financial Services Culture Board survey
(13,435 colleagues)
• Glassdoor scrapes
• External organisations – Egon Zehnder, Boston
Consultancy Group, Deloitte, Harvard Business
Review
• Our organisation’s archives – to understand our
rich and diverse history of over 320 years, which
acted as a stimulus when developing our values
We
listened…
We held ‘culture conversations’
where we spoke to:
• 241 colleagues through focus groups
• 50 colleagues through one-to-one interviews
• 67 People Product Owners, Culture Leads and
Subject Matter Experts
• 7 external suppliers
We shared the themes identified from our
research with over 12,000 colleagues having
their say in how the values should be articulated
26,600
Colleagues contributed
358Colleagues engaged
84
Lloyds Banking Group Annual Report and Accounts 2022
Board engagement in 2022 and beyond
Our non-executive directors continue to engage with colleagues
to deepen their understanding of how colleagues experience
our culture through the Closer to Clients, Customers and
Colleagues programme. Throughout 2022, non-executive
directors attended a range of focus groups where colleagues
discussed key themes from our annual colleague survey,
our new strategy and values, pay and reward to hybrid
working. Non-executive directors have been able to apply
the insights gained from these sessions along with those from
other colleague events across the business to inform their
involvement in Board discussions and strategic direction.
For 2023 our approach continues to evolve, with insight from
our monthly Pulse surveys and other relevant upcoming
Board agenda items informing the discussion topics for
our non-executive director colleague focus groups.
Board monitoring of culture progress
The Board continues to monitor the Group’s progress on culture
and colleague sentiment drawing on insight from various sources
– annual and monthly colleague surveys and the Financial
Services Culture Board survey, as well as quarterly Workforce
Engagement updates.
Collectively, these updates inform the Board of organisational
changes impacting the workforce as well as external issues
impacting colleagues and their wellbeing (such as the rise
in the cost of living).
We have evolved our colleague listening strategy to an ‘always on’
approach, seeking more frequent views from colleagues. This will
provide the Board with more timely and relevant insight to inform
its strategic discussions.
Looking to the future
During 2023, we will build on the work already undertaken on
culture, recognising that this needs to continue evolving to
support the Group’s purpose. We understand the organisational
shifts that we need to make. These have been shared with the
Board, along with the actions needed to support the system,
behaviour and symbolic changes needed to achieve them.
Our Colleague Survey has provided us with a baseline for our
current position and we will continue to leverage our evolved
listening approach to understand the success of our actions
and where further focus may be needed.
We
delivered…
We continued to listen to further feedback, as well as
recognising the rising importance of sustainability. So we
added an additional value, ‘Sustainable’, and refocused
our values to enable colleagues to make the right
decisions every day.
These provide colleagues with a clear and simple
framework to guide their behaviours and approach to
decision making.
Since launching the new values, activities are underway
across the organisation to deepen colleagues’ understanding
and to ensure everyone is living the values day-to-day and
embedding them into decision making – from everyday
choices to big strategic decisions.
People-first
We put people first to go
further for our customers
• We listen and care for people
as individuals
• We go the extra mile to help customers,
colleagues and communities feel more
supported, in control and confident
about their future
Bold
We’re bold and take action
• We innovate and do things differently
to better serve our customers and grow
with purpose
• We challenge things that aren’t right
and take action to change them
Inclusive
We’re inclusive
to value everyone
• We learn about and embrace our
differences and seek out diverse
perspectives
• We shape what we do and what we offer
around the different needs and circumstances
of our customers, colleagues and communities
Sustainable
We champion sustainability
to care for our planet
• We take responsibility for the impact
of our actions on nature and Britain’s
transition to net zero
• We see the bigger picture and think
through the consequences of our decisions
Trust
We trust each other
to achieve more together
• We give each other the space
and support to take things on and
see them through
• We are honest with each other and
explain our decisions
Our approach to
developing our new values
was recognised at the
Business Culture Awards
2022 where we won Best
Brand & Values Initiative.
Lloyds Banking Group Annual Report and Accounts 2022
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Board leadership and
company purpose continued
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 Banks’
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
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
(including Lloyds Development Capital (Holdings) Limited)
The boards of the Ring-Fenced Banks comprise all of the Group
directors plus three additional independent non-executive
directors: 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 their role is to act exclusively in the best interests of
the Ring-Fenced Banks. They 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.
Lloyds Banking Group plc simplified sub-group structure
Aligned boards
Lloyds Bank plc1
HBOS plc
Bank of Scotland plc1
1
Ring-Fenced Banks
Lloyds Bank
Corporate
Markets plc
Scottish
Widows
Group
Limited
LBG Equity
Investments
Limited
Non-Ring-Fenced Bank
Insurance
Equity Investments
Ring-Fenced Bank-only directors
Nigel Hinshelwood
Senior Independent
Director
Lloyds Bank plc and
Bank of Scotland plc
Sarah Bentley
Independent
non-executive director
Lloyds Bank plc and
Bank of Scotland plc
Brendan Gilligan
Independent
non-executive director
Lloyds Bank plc and
Bank of Scotland plc
Appointed: January 2019
Skills, experience and contribution:
•
Extensive experience in the financial
services sector having worked across the UK
and Europe, North and South America, the
Middle East and Asia Pacific
Significant experience of large-scale
transformation, operations and technology
•
Nigel was a partner at Ernst & Young
(subsequently Cap Gemini Ernst & Young) for
many years where he held numerous positions
including Head of Financial Services and Chief
Executive Officer of Southeast Asia.
Before becoming a non-executive, he was the
Head of HSBC UK and Deputy CEO of HSBC Bank
plc. Within the HSBC Group he held a number
of executive appointments including Head
of HSBC Insurance Holdings, Chief Operating
Officer for Europe, Middle East and Africa and
Global Head of Operations. Nigel was formerly
a Non-Executive Director of Lloyd’s of London
Franchise Board.
Appointed: January 2019
Skills, experience and contribution:
•
Extensive digital and digital transformation
experience
Strong customer and marketing skills
•
Sarah is Chief Executive Officer and Executive
Director of Thames Water Utilities Limited and
a Director of Water UK, the trade association
of the water and wastewater industry. Prior to
joining Thames Water in autumn 2020, Sarah
was Chief Customer Officer at Severn Trent plc
and a member of its Executive Committee.
Before joining Severn Trent, Sarah was the
Managing Partner for Accenture’s Digital
business unit in the UK and Ireland. Sarah
previously worked internationally in a number
of roles including Strategy, Marketing &
Propositions for BT’s Global Services division,
CEO of Datapoint and Senior Vice President
of eLoyalty.
Appointed: January 2019
Skills, experience and contribution:
•
Extensive experience in core strategic
finance and controllership roles in the
financial services industry
Significant experience of serving on the
boards of regulated financial services
businesses in the UK, France, Switzerland
and Poland
•
Brendan’s career began in the Public Audit
division of KPMG in Ireland and Canada.
He subsequently worked in commercial and
consumer banking services and financing with
Woodchester Investments plc and, after its
acquisition by General Electric Company, with
GE Capital until his retirement in April 2018.
86
Lloyds Banking Group Annual Report and Accounts 2022
Division of responsibilities
Board responsibilities
As Chair, Robin Budenberg has overall responsibility for the
leadership of the Board and for ensuring its effectiveness in all
aspects of its operation.
The composition of the Board helps ensure that no one individual
or small group of individuals dominates the Board’s decision-
making. The diversity of skills, experience and background on the
Board enables the Board to provide constructive challenge and
strategic guidance and to offer specialist advice.
There is a clear division of responsibilities between the leadership
of the Board and the executive leadership of the Group – please
refer to the role summaries below. The responsibilities of the Chair,
Group Chief Executive, Senior Independent Director, Board and
Committees are agreed by the Board and publicly available on
the Group’s website at www.lloydsbankinggroup.com/who-
we-are/group-overview/corporate-governance. The Chair
periodically refreshes membership of the Committees.
Monitoring independence
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. Robin
Budenberg was independent on appointment when assessed
against the circumstances set out in provision 10 of the Code.
Monitoring time commitments
Non-executive directors are advised of time commitments for the
Board and relevant Committees 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 to the Board and its Committees, must be agreed
with the Chair and prior Board approval must be obtained. During
2022, Sarah Legg was appointed a non-executive director of
Severn Trent plc. The Board considered the time commitment
and potential conflicts involved prior to Sarah accepting the role
and was satisfied that she would continue to have sufficient time
to commit to her Group Board and Committee appointments.
The executive directors do not have any significant external
appointments. Information on directors’ attendance at meetings
can be found on page 79.
The right information and support
The Chair, supported by the Company Secretary, ensures that
Board members receive appropriate and timely information. All
directors have access to the advice of the Company Secretary
and 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.
Non-executive directors
Chair
Robin Budenberg
Deputy Chair and Senior
Independent Director
Alan Dickinson
Robin Budenberg leads the Board and promotes
high 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 seeks to ensure
effective communication with shareholders.
As Deputy Chair, Alan Dickinson supports the Chair in
representing the Board and deputises for the Chair.
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.
Non-executive directors
The independent 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.
Executive directors
Company Secretary
Group Chief Executive
Charlie Nunn
Chief Financial Officer
William Chalmers
Company Secretary
Kate Cheetham
Charlie Nunn 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 Charlie Nunn, William Chalmers designs,
develops and seeks to implement strategic
plans and deals with the day-to-day operations
of the Group.
As Company Secretary, Kate Cheetham advises the
Board on matters relating to governance, ensuring
good information flows and that comprehensive
practical support is provided to directors. Kate
Cheetham is also responsible for maintaining the
Group’s Corporate Governance Framework and
organising directors’ induction and training. Both
the appointment and removal of the Company
Secretary are matters for the Board as a whole.
Lloyds Banking Group Annual Report and Accounts 2022
87
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Composition, succession
and evaluation
Composition
The balance of skills, experience, independence and knowledge
on the Board is the responsibility of the Nomination and
Governance Committee and is reviewed annually or whenever
appointments are considered. The Nomination and Governance
Committee assesses the skills, experience and knowledge of the
non-executive directors on an individual basis and on a collective
basis – please see the table below for the results of the latest
assessment, which was approved on 18 January 2023. Having the
right balance of skills and experience helps to ensure directors
discharge their duties effectively.
The Nomination and Governance Committee leads the process
for Board appointments, 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. Appointments are made on merit and due
consideration is given to diversity in its broadest sense, including
gender, social, regional and ethnic backgrounds and cognitive
and personal strengths.
More details about the processes for the appointments of Scott
Wheway and Cathy Turner as non-executive directors can be
found on page 94.
Succession planning
The Nomination and Governance Committee ensures plans
are in place for orderly succession to both Board and senior
management positions and oversees the development of a
diverse pipeline for succession. More information about the work
of the Nomination and Governance Committee on succession
planning can be found on pages 92 and 93.
All directors intend to seek re-election or election at the
Company’s annual general meeting in 2023. The Board believes
that all directors continue to be effective and committed to
their roles.
Evaluation
An externally facilitated evaluation of the Board’s effectiveness
was undertaken in 2022. Information on findings of that evaluation
can be found on page 89.
Collective view of the skills, experience and knowledge of the
non-executive directors1
Retail/Commercial Banking
Major Change Programmes
Our Board in 20223
Gender diversity
Financial Markets/ Wholesale Banking/
Treasury
ESG: Environment, Sustainability
and Climate Change
Insurance
Audit and Finance
Risk – in Financial Institutions
ESG: Social, Inclusion and Diversity
and Governance
Listed Board Governance, including
Investor Relations and Remuneration
Government/
Regulator Interface
Technology/Digital
Strategic Thinking
Consumer/Marketing/Distribution
1.
1.
2.
Age
3.
Good experience and knowledge
Deep experience – distinctive strength
1 Assessment by the Nomination and Governance Committee as at 18 January 2023.
2.
Tenure of non-executive directors2
2015
2016
2017
2018
2019
2020
2021
2022
Robin Budenberg
Alan Dickinson
Sarah Legg
Lord Lupton
Amanda Mackenzie
Harmeen Mehta
Cathy Turner
Catherine Woods
Scott Wheway
Ethnic diversity
1.
2.
2
8
3
5
4
1
0
2
0
1. Male
2. Female
6
5
1. 44–55
2. 56–65
3. 66–75
4
5
2
1. White
2. Black,
Asian or
Minority
Ethnic
9 (82%)
2 (18%)
Length of current tenure in complete years
2 Non-executive directors in office at the date of publication of the Annual Report.
3 All data as at 31 December 2022. Gender and
ethnicity data remains correct as at the date
of publication of the Annual Report.
88
Lloyds Banking Group Annual Report and Accounts 2022
Board evaluation
The Board is committed to independent evaluation of its own
effectiveness and that of its committees and individual directors
as recommended by the UK Corporate Governance Code
2018. Given the appointment of a new Group Chief Executive
in August 2021 and the Group’s ongoing strategy development
at that time, the Board agreed that the 2021 Board evaluation
would be deferred and that an externally facilitated evaluation
of its effectiveness, together with that of its Committees, would
be conducted in 2022 in order to allow the review to cover the
Board’s effectiveness in overseeing these developments. External
board review specialist Dr Tracy Long of Boardroom Review
Limited conducted that evaluation. Dr Long is an independent
external service provider with no connection to the Group or
any individual directors.
The annual evaluation, which is typically 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 review of the Board’s effectiveness,
which includes a review of its Committees and individual
directors. Performance evaluation of the Chair is conducted
by the non-executive directors, led by the Senior Independent
Director, considering the views of the executive directors.
The previous external evaluation was conducted in 2018, with
internal evaluations having been conducted in 2019 and 2020.
Given the Board’s decision to defer the 2021 annual evaluation
of its effectiveness until 2022, the Chair undertook additional
individual assessments of the non-executive directors in January
2022 and an additional performance evaluation of the Chair
was undertaken by the non-executive directors, led by the Senior
Independent Director, considering the views of the executive
directors also in January 2022.
If directors have concerns about the Group 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 2022 or up to the date of this report.
Key findings from the 2022 review
External Board Effectiveness Review 2022
Stage 1 – June 2022 to August 2022
Dr Long held an initial meeting with the Chair and then
conducted one-to-one interviews with each director. Interviews
with the heads of the Retail, Commercial Banking and
Insurance and Wealth businesses and some of the function
heads were also undertaken as part of the process. The
themes of the interviews included leadership and contribution,
culture and composition and use of time and information.
Stage 2 – July 2022 to September 2022
Dr Long attended the Board and Committee meetings in July
and September. This enabled Dr Long to witness and evaluate
the Board and Committee processes and behaviours.
Stage 3 – October 2022 to November 2022
Individual feedback was provided by Dr Long to each of the
directors in a series of one to one meetings. The findings and
proposed actions were presented to the Nomination and
Governance Committee and Board in November.
External Board Effectiveness Review 2022
The overall feedback from the review includes that:
• The Board is adding value through appropriate engagement
and focus; relationships are based on trust; debates are well
informed, and governance is continuously reviewed;
• Directors are well led and briefed by the Chair, the Committee
Chairs, the Group Chief Executive and the Chief Financial
Officer, with diversity of tenure and experience;
• Meetings are collegiate and supportive;
• There is a shared strategic perspective and regular insights
on performance, customer service and ethics, technology
and transformation;
• There is significant attention to risk and control; and
• The corporate culture is considered an asset.
The Group intends to report back in its next annual report on the
actions taken as a result of the review and the influence on the
Board’s composition.
Theme
Strengths
Areas for further development
Board Leadership
and Contribution
•
The Board has a collegiate, supportive style and an ability to
add value to executive judgement.
• Board agendas are flexible, balancing the priorities between
strategy, performance and governance.
• Non-executive directors are well prepared and papers are
timely and well written.
• Consider further dedicated professional time together outside
•
of Board meetings.
There is an opportunity for issues to be brought to the Board
and Committees earlier to allow more scope for discussion.
• Board refreshment with a range of tenures, skills and diversity
of perspective is critical in quality decision-making.
• Reviews of the composition of the Committees to ensure
sufficient experience to cross-reference matters.
Strategy
•
The Board is focused on purpose and strategy throughout
the year.
• Continued awareness by all directors of the changes and
challenges in the external environment.
• Shareholder communication and feedback to the Board is high
• Consider broadening the customer lens to give an even more
on the agenda, noted by all directors.
holistic view of market changes, opportunities and risks.
Risk and Control
•
The Board and the Committees pay significant attention to risk
and control.
• Delegated committees are used appropriately for detailed
People, Culture
and Environment
•
•
•
review and the oversight of implementation, allowing the Board
to focus on strategy and purpose.
There are extensive and knowledgeable discussions at the
Board and Committees on cyber defence and data protection.
The Chair has set the tone and standard for the Board with
continuous attention to purpose and values.
There is a positive corporate culture with strong focus on
customer needs, collaboration and teamwork.
• Ongoing attention to leadership and talent development.
• Ongoing development of agenda and papers to encourage
broader discussion on priorities.
• Consider a review of the definitions of the three lines of defence.
• Continue focus on learning through presentations of
‘lessons learned’.
• Ongoing commitment from the Group Chief Executive, Group
Executive Committee and the Board to ensure that the culture
of accountability is demonstrated from the top.
• Continued focus on data, cyber, environmental issues and
impact (including net zero) and inclusion and diversity.
Lloyds Banking Group Annual Report and Accounts 2022
89
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Group training modules
Non-executive directors are asked to complete training modules
on a quarterly basis. In 2022, these modules were on:
•
• Anti-bribery: fighting fraud and financial crime
• Conduct Rules
• Speak Up (the Group’s whistleblowing programme)
Information risk and cyber security
Other training
Training sessions have been offered across a range of topics of
particular interest that were chosen to complement the Board
agenda and facilitate advanced discussion. Where training
was offered online, the sessions have been recorded and made
available to all directors. The topics are produced based on the
level of knowledge and experience of Board members. Key topics
during 2022 included:
• Banking Skills Refresh – Commercial and Retail
• Risk Management – Internal Capital Adequacy Assessment
Process and Internal Liquidity Adequacy Assessment Process
• Treasury Insights – Opportunities and Risks
In addition to the above, a board incident management exercise
was undertaken.
Committee specific training is agreed by Committee Chairs as
and when needed such as IFRS 17 training this year for members
of the Audit Committee and training for members of the
Responsible Business Committee by external and internal subject
matter experts on the themes of nature and biodiversity loss.
Directors who take on new roles or change roles during the
year attend induction or handover meetings in respect of those
new roles.
Audit and Risk Committee Forum for non-executive directors
In November 2022 there was an inaugural Audit and Risk
Committee Forum, which was attended by Group, Insurance
and Lloyds Bank Corporate Markets Audit and Board Risk
Committee members as well as colleagues from the business.
The aims of this informal forum were to network and to
have interactive discussion to gain a shared understanding
and appreciation of common areas of interest. The topics
discussed were strategic transformation, data, risk and
controls and climate risk. It is intended that the Forum will
be held on an annual basis going forward.
Composition, succession
and evaluation continued
Board training
The Chair is responsible for leading the development, and
monitoring the effective implementation, of training policies
and procedures for the directors. On appointment, each
director receives a formal and tailored induction. There is
also a programme of ongoing training for directors.
The directors are committed to their own ongoing professional
development and the Chair discusses training with each non-
executive director at least annually. The Company Secretary
oversees a training plan for the non-executive directors, with
the plan for 2022 discussed at the Nomination and Governance
Committee at the start of the year with the non-executive
directors encouraged to suggest training topics of interest.
Induction
New non-executive directors like Scott Wheway and Cathy
Turner receive a tailored induction that focuses on the Group’s
culture and values, stakeholders, strategy, structure, operations
and governance.
The emphasis is on ensuring that 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.
An induction pack is provided 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 are scheduled with the directors, the Company
Secretary, Group Executive Committee members and other senior
managers to discuss aspects such as:
• Group strategy including key priorities and challenges
• Overview of the business and Group operations
• The UK banking regulatory framework, key legal risks and
corporate governance
• Overview of the Board and relevant Committees
• People, culture, values, purpose and remuneration
• Environmental, Social and Governance priorities including
climate and inclusion and diversity
• Cyber security, data protection and operational resilience
•
Introduction to Finance (including meetings with auditors)
• Overview of the Risk function (including the Ring-Fenced Bank
Risk Office) and Audit function
• Capital management and liquidity
• Business and Commercial Banking
• Mass Affluent
• Consumer Relationships
• Corporate and Institutional Banking
• Scottish Widows Group Limited and the Insurance, Pensions
and Investments sub-group
Lloyds Bank Corporate Markets plc and the Non-Ring-Fenced
Bank sub-group
LBG Equity Investments and the Equity sub-group
•
•
I received a comprehensive and thorough induction that
provided clarity on the key issues facing the Group as a
whole, together with specific insight into the insurance
and pensions business. The induction equipped me with
the necessary institutional knowledge to perform my roles
as a non-executive director of Lloyds Banking Group and
as Chair of Scottish Widows Group.
Scott Wheway
Non-executive director of Lloyds Banking
Group plc and Chair of Scottish Widows Group
90
Lloyds Banking Group Annual Report and Accounts 2022
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 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 139 to 195. 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 material controls are recorded and assessed on a regular
basis in response to triggers or at least annually. Control
assessments consider both the adequacy of their 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 aggregated by risk category, reported and
monitored via the monthly Key Risk Insights or Consolidated
Risk Report (CRR). The Key Risk Insights/CRR are 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 sub-
groups. The RCSA System, Key Risk Insights or CRR are the sources
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 at least annually 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, Deloitte 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, Ring-Fenced Banks sub-group and Lloyds
Bank Corporate Markets have achieved full compliance with BCBS
239 risk data aggregation and risk reporting requirements and
actively continue to maintain this status.
Audit, risk and internal control
Audit and risk
There are formal policies and procedures in place designed
to ensure the independence and effectiveness of the internal
and external audit functions. Group Internal Audit is a single
independent internal audit function, reporting to the Audit
Committee. Further detail can be found in the sections
headed ‘Group Internal Audit’ and ‘Auditor independence
and remuneration’ on page 98.
The Board has delegated a number of responsibilities to the
Audit Committee, including monitoring and reviewing financial
reporting, the effectiveness of internal controls and the risk
management framework, whistleblowing, the internal audit
process and the external auditor’s process. The Audit Committee
reports regularly to the Board on its activities, and its report for
2022, confirming how it has discharged its duties, can be found
on pages 95 to 98.
Requirements that the annual report is fair, balanced and
understandable are considered during the drafting and reviewing
process and the Board has concluded that the 2022 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 statement of directors’ responsibilities
can be found on page 137 and the statement of the Auditor’s
responsibilities for the audit of the financial statements can
be found on page 208. Related information on the Company’s
business model and strategy can be found on pages 1 to 44.
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 management
framework, as discussed in the risk management report on pages
139 to 195. The Board Risk Committee assists the Board in fulfilling
its risk governance and oversight responsibilities, including by the
provision of advice to the Board on risk strategy and overseeing
the development, implementation and maintenance of the
Group’s overall risk management framework, strategy, principles
and policies and its risk appetite. The Board Risk Committee
reports regularly to the Board on its activities and its report
for 2022, confirming how it has discharged its duties, can be
found on pages 99 to 103.
Internal control
Board responsibility
The Board is responsible for, and monitors, the Group’s risk
management and internal control systems. These 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.
Lloyds Banking Group Annual Report and Accounts 2022
91
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Nomination and Governance
Committee report
Increasing the diversity of the
Board and executive remains an
ongoing focus for the Committee
Robin Budenberg
Chair, Nomination and Governance Committee
Effective succession planning underpins
the development of strong leadership across
the Board and executive.
Key activities in 2022
• Board and senior executive succession planning
• Board recruitment and appointments
• Board and Committee composition, skills and training
• Outcomes from the externally facilitated Board evaluation
•
Inclusion and diversity
Q&A
Q How has the Nomination and Governance Committee (the
Committee) ensured that the membership of the Board and its
Committees remains appropriate?
A The Committee continually assesses the constitution of the
Board and its Committees bearing in mind the strategic
requirements of the Group and the need to ensure a strong,
diverse and effective Board. The Board also regularly reviews the
skills and experience of Board members, including requirements
for the future. The appointments of Scott Wheway and Cathy
Turner during 2022 helped strengthen the Board’s overall
breadth of experience and knowledge recognising, in particular,
the significant financial services experience they both have.
Q What role did the Committee play in consideration of the senior
executive appointments made during 2022?
A The Committee’s responsibilities include oversight of the
development of a diverse pipeline for succession at both Board
and senior executive level. The Committee is also responsible
for ensuring that senior executives have the right skills, values,
attitude and energy to succeed. The Committee reviews the
Group Chief Executive’s executive succession planning, with this
being given additional focus in 2022, recognising the number
of executive appointments made following the launch of the
Group’s new strategy. See page 93 for more details.
Q What are the key areas of focus for the Committee in 2023?
A Core areas of focus for 2023 will include a continued focus on
succession planning at both Board and executive level, together
with implementation of recommendations arising from this
year’s Board evaluation process. Further enhancing inclusion
and diversity at Board and executive level, and beyond, will
remain an ongoing area of key focus, together with managing
the composition of the Board and its Committees.
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Lloyds Banking Group Annual Report and Accounts 2022
Introduction
As mentioned in my introduction to the governance report on
page 72, the Group launched an ambitious new strategy in
February 2022, following which there have been a number of
senior executive appointments made during the course of the
year. A key area of focus for the Committee has consequently
been consideration of the executive succession planning
arrangements put in place by the Group Chief Executive, together
with ensuring that the policy for the selection and appointment
of senior executives is appropriate. Other key areas of focus for
the Committee, also covered in this report, include succession
planning at Board level, and the outcomes of the externally
facilitated Board evaluation process.
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.
Board and Committee changes
Scott Wheway joined the Board as a non-executive director, and
as a member of the Nomination and Governance Committee
and Board Risk Committee, on 1 August 2022, and Cathy Turner
joined the Board as a non-executive director, and member of
the Remuneration Committee on 1 November 2022. Scott was
also appointed Chair of the Scottish Widows Group with effect
from 12 September 2022. Details of the selection process for these
appointments can be found on page 94. I would like to take this
opportunity to welcome Scott and Cathy, and also to thank Stuart
Sinclair for his service to the Group following his retirement as a
non-executive director at the Company’s annual general meeting
in May 2022.
Succession planning
Consideration has been given to tenure of Board members and
potential future 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 summary of Board and Committee composition and
attendance can be found on page 79.
All changes to the Board and its Committees are overseen
by the Committee. Strong succession planning remains a key
focus to help ensure the continuation of an appropriate mix
of skills, experience and backgrounds. The Committee also
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. Further details
on the Committee’s approach to succession planning can be
found on page 93.
Board effectiveness and training
As discussed in last year’s report, the Board agreed the deferral
of the Board evaluation due in 2021, with a view to an externally
facilitated evaluation taking place during 2022. This was
undertaken by an external board review specialist, Dr Tracy Long
of Boardroom Review Limited, and full details of the review and its
outcomes are provided on page 89. The Committee considered
the outcomes of Dr Long’s review and agreed, and recommended
to the Board for approval, the action plan arising from the review.
The Committee will oversee the implementation of the action
plan during 2023. The Committee subsequently undertook an
annual review of its effectiveness, the findings of which, together
with the outcomes of the Board evaluation process as relevant to
the Committee, were considered by the Committee at its January
2023 meeting; it was considered that the performance of the
Committee continues to be effective.
The Committee also oversees training undertaken by the non-
executive directors. The Chair discusses training with each
non-executive director at least annually and, as set out in the
summary of Board training on page 90, training sessions have
been offered across a range of topics of particular interest,
in addition to mandatory training requirements. 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 2022, the Committee is satisfied
that, throughout the year, all non-executive directors remained
independent1 in character and judgement.
In recommending directors for election and re-election at the
annual general meeting, 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. During the processes leading to the appointment
of Scott Wheway and Cathy Turner consideration was given to
their external roles. In particular, the Committee noted that Cathy
Turner’s role as a partner at Manchester Square Partners was on
a part-time basis and considered broadly equivalent to a non-
executive directorship. Fuller details of any conflicts of interest
can be found on page 134.
The Group’s Corporate Governance
Framework
The most recent annual review of the Corporate Governance
Framework was finalised in May 2022. This review resulted in
a simplified and more accessible framework, while remaining
compliant with relevant obligations and best practice.
As part of its broader governance responsibilities, the Committee
considered regular updates on developments in corporate
governance during the year, including FCA Policy Statements on
Diversity and Inclusion, and Consumer Duty, and the Economic
Crime and Corporate Transparency Bill 2022. The Committee
also considered correspondence with shareholders.
UK Corporate Governance Code
The Company applied the UK Corporate Governance Code 2018
for the year ending 31 December 2022 and complied with all
the provisions. A detailed summary setting out the Company’s
compliance can be found on page 73.
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.
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 and Chair of the Remuneration Committee),
the Chair of the Responsible Business Committee, together with
a further independent non-executive director (who is the Chair
of Scottish Widows Group). The Senior Independent Director of
the Ring-Fenced Banks also attends meetings as an observer in
order to provide insights on matters relevant to the Ring-Fenced
Banks when required and as part of his role in the Group’s overall
governance structure.
The Group Chief Executive attends meetings as appropriate.
Details of Committee membership and meeting attendance
during the year can be found on page 79.
1
The Chair was independent on appointment. Under the Code, thereafter the
test of independence is not appropriate in relation to the Chair.
Succession planning
Succession planning was a key focus for the Committee during
2022 not only at Board level but, in particular, across key senior
management roles following the launch of the Group’s new
strategy in February 2022, which resulted in a number of new
appointments. As part of its regular oversight and review of the
adequacy and effectiveness of succession arrangements for
executive directors and members of the senior executive, the
Committee received and discussed regular updates from the
Group Chief Executive covering the new operating model and
executive succession planning arrangements. The strength
and diversity of the internal and external appointments
achieved was supported by the effectiveness of the Group’s
succession planning.
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.
Effective succession planning assists the Group in delivering
on its strategic objectives over the medium and longer term
by ensuring the desired mix of skills and experience of Board
members and executives, this being of particular relevance
in the context of the Group’s new strategy. The Board remains
committed to developing talent within the executive and
management levels across the Group in order to provide
opportunities to develop a diverse pipeline of 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 nominations to the Board.
This helps ensure continued focus on increasing the overall
diversity of the Board, and capacity for future succession
planning, also bearing in mind tenure of Board members and
potential future retirements from the Board. The appointment
process set out on the following page helps illustrate how
this works in practice, highlighting the particular focus given
to planning for individual roles with specific attributes. Alan
Dickinson, the Deputy Chair and Senior Independent Director,
will have served as a non-executive director for nine years in
September 2023. When considering Alan’s successor as Senior
Independent Director, the Committee will give consideration to
the recommendation of the FTSE Women Leaders Review that
FTSE 350 companies should have at least one woman in the
Chair or Senior Independent Director role, and/or one woman
in the Chief Executive or Finance Director role by the end of
2025, as the Group does not meet this target as at the date
of this report.
The Chair leads an ongoing assessment of the Board’s
collective technical and governance skill set and uses a Board
skills matrix to track the Board’s strengths and to identify
any gaps in the desired collective skills profile of the Board.
Consideration is given to a range of factors such as the
Group’s future strategic direction and helping to ensure that
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
Board evaluation process are also taken into consideration.
Succession planning plays a key role in the recognition
and promotion of diversity across the Board and senior
management, further supported by a range of policies
across the Group which promote the engagement of under-
represented groups within the business in order to help
continue to build a diverse talent pipeline. Further details
can be found on page 34.
Lloyds Banking Group Annual Report and Accounts 2022
93
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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 are reviewed on a regular
basis. On gender diversity, the Board is committed to maintaining
at least four women Board members and over time will aim to
reach 50 per cent representation of men and women on the
Board to match the 50 per cent ambition that the Group has
set for women in senior roles.
Reflecting these aspirations, the Board will also aim to meet the
recommendations set out by the FTSE Women Leaders Review,
noting that these recommendations, together with the Parker
Review recommendations, have now been reflected in the FCA’s
Listing Rules and are effective for financial years commencing on
or after 1 April 2022. The Board supports the focus on improving
gender diversity at the most senior level and, as highlighted on
the previous page, will give this due consideration during the
appointment process for Alan Dickinson’s successor as Senior
Independent Director. The Board does not currently apply the
Policy (which is updated annually and was last updated in
January 2023) to individual Board Committees, but is comfortable
that the diversity of the Board is reflected across Committee
memberships. The representation of women on the Board is
currently 45.5 per cent (based on five directors being women
and six directors being men).
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 will therefore aim to reflect this goal with regard to
Board members. As at 31 December 2022, the Board continues
to meet the recommendation of the Parker Review with two
Black, Asian and Minority Ethnic Board members. As noted, the
Board places high emphasis on ensuring the development of
diversity in the senior management roles within the Group and
supports and oversees the Group’s ambition of achieving 50
per cent of senior roles held by women by 2025, and of 13 per
cent of senior roles held by Black, Asian and Minority Ethnic
colleagues by 2025 (including a minimum of 3 per cent of
senior roles being held by Black Heritage colleagues). This is
underpinned by a range of policies within the Group to help
provide mentoring and development opportunities for women
and Black, Asian and Minority Ethnic colleagues 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 2022, the representation of women within the
Group Executive Committee and their direct reports was 41.7 per
cent in total (with 46.7 per cent for the Group Executive Committee
and 41 per cent for their direct reports). The representation of
women across all senior roles was 39.4 per cent, and Black,
Asian and Minority Ethnic representation in senior roles was 10.2
per cent. The Group’s Race Action Plan, which was launched
during 2020, aims to drive cultural change, recruitment, and
progression across the Group. This includes a goal to increase
Black representation in senior roles from 0.6 per cent to at least 3
per cent by 2025. As at 31 December 2022, we have increased the
representation of Black Heritage colleagues in senior roles to 1.4
per cent. 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 page 34.
A copy of the Policy is available on our website at www.
lloydsbankinggroup.com/who-we-are/responsible-business/
downloads and further information on the Board’s broader
approach to inclusion and diversity as part of its strategic
priorities and continued investment in being a leading inclusive
employer can be found on page 34.
Nomination and Governance
Committee report continued
Appointment process – non-executive directors
In late 2021, following the announcement that Nick Prettejohn
would stand down from the Board, the Board initiated a
search process led by the Chair to identify an additional
independent non-executive director, who would also succeed
Nick as Chair of Scottish Widows Group. Similarly, following
the announcement of Stuart Sinclair’s intention to retire from
the Board at the annual general meeting in 2022, a separate
search process was initiated to identify a further independent
non-executive director who would also serve as a member
of the Remuneration Committee, this search similarly being
led by the Chair. Competitive tender processes led to the
appointment of Egon Zehnder (subsequently joined by Hedley
May) for the former search process, and Russell Reynolds
Associates for the latter. In each case, long lists of candidates
were identified before being narrowed down to shortlists of
preferred candidates who were then taken through interview
processes. Initial interviews were in each case led by the
Chair, supported by the Senior Independent Director and
other non-executive directors, with the preferred candidates
then also undertaking further meetings with certain other
members of the Board and senior executive. Candidates for
the Remuneration Committee related role also met with the
Chief Financial Officer and the Chief People and Places Officer,
while candidates for the Scottish Widows related role met
with, amongst others, the Group Chief Executive and the Chief
Executive Officer of Scottish Widows. The Senior Independent
Director of Scottish Widows Group was also involved
throughout the recruitment process for the Scottish Widows
Group Chair.
During both processes, the Chair kept the Board and the
Committee regularly informed on progress, with discussions
being held throughout. Following the interviews and additional
meetings, formal assessment of the final shortlisted
candidates was undertaken against defined competencies,
leading to Scott Wheway and Cathy Turner being identified as
the preferred candidates for the respective roles, recognising
their depth and breadth of relevant knowledge, skills and
experience. The Committee’s recommendations for each
appointment were subsequently approved by the Board.
Each of these appointments involved a formal, rigorous
and transparent appointment process based on merit and
objective criteria, with due consideration being given to a
broad range of factors such as diversity of gender, social and
ethnic backgrounds, cognitive and personal strengths and the
Group’s future strategic direction. Each of Egon Zehnder, Hedley
May and Russell Reynolds Associates have no connection
with the Group or individual directors other than conducting
external search services and related activity and, in the case
of Russell Reynolds Associates, additional advisory services.
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.
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Lloyds Banking Group Annual Report and Accounts 2022
Audit Committee report
Ensuring oversight of financial and
narrative reporting and the internal
control environment
Sarah Legg
Chair, Audit Committee
Assessing the impact of economic volatility
on the financial statements and ensuring
appropriate disclosure have been key
considerations during the year.
Key activities in 2022
• Reviewing the continuous improvement in financial and
regulatory reporting, and the effectiveness of the internal
controls over financial reporting
• Monitoring the implementation of IFRS 17 and its impact on the
financial statements in relation to insurance contracts
• Oversight of Climate Reporting with respect to the financial
statements, as standards continue to evolve
Q&A
Q How has the Audit Committee (the Committee) prioritised its
agenda in view of economic volatility in 2022?
A As interest rates and inflation increased, particular attention
was paid to areas of judgement and estimate that are sensitive
to economic volatility ensuring that changing economic
conditions have been reflected appropriately and in a timely
manner. Disclosures were reviewed to ensure they support
the understanding of the economic assumptions used. Where
management judgement has been applied the reason for and
impact of the judgements were examined.
Q How has the Committee considered developments in Climate
Reporting during the year?
A Given the importance of this area, time was spent examining
linkages between narrative reporting and the financial
statements disclosures. Progress in the emerging area of
controls over climate data and internal reporting capabilities
were monitored. The Committee supports the commitment
to continuous improvement in Climate Reporting, which will
continue to be of focus in 2023 as external standards evolve.
Q Why is the work of the Committee important in respect of
strategic delivery?
A The Committee provides oversight to the strategic development
of the reporting environments, including longer-term
improvements to processes and capabilities that underpin
external reporting, key to wider stakeholder communication. The
Committee benefits from the insight provided by internal and
external audit, supporting rigorous review of strategic change.
Introduction
I am pleased to report on how the Committee has discharged
its responsibilities during the year and I would like to thank fellow
Committee members for their contributions throughout 2022. The
Committee has also benefitted from the participation of Ring-
Fenced Bank directors, who attend the Committee as observers,
bringing insight on matters relevant to the Ring-Fenced Banks.
Their role forms an important part of the overall governance of
the Group, along with the valuable contributions from the chairs
of the audit committees of Scottish Widows and Lloyds Bank
Corporate Markets. The Audit Committee works closely with other
Board Committees, and in 2022 we initiated a joint Audit and Risk
Committee Forum to discuss governance topics of common
interest. In September 2022, following a rigorous selection process
involving all members of the Audit Committee, we were pleased
to welcome Laura Needham as our Chief Internal Auditor.
Looking forward to 2023, along with the core responsibilities for
the integrity of the financial reporting and control environment,
the Committee will continue to monitor areas of continuous
improvement on an end-to-end basis. Transition to IFRS 17,
impacting insurance contracts, will receive continuing attention.
We will engage on the government’s proposals on audit
reform, monitor developments with respect to climate-related
disclosures, and oversee actions in relation to regulatory reports.
Committee purpose and responsibilities
The purpose of the Committee is to monitor and review the formal
arrangements established by the Board in respect of the integrity
of the financial reporting and narrative reporting of the Group and
the Company, the independence and effectiveness of the internal
and external audit functions, the effectiveness of the internal
controls and the risk management framework and the adequacy
and security of the arrangements for whistleblowing.
This includes 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. 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
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 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 74 to 75. 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 78.
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Audit Committee report continued
The Committee undertook an annual review of its effectiveness,
the findings of which, together with the outcomes of the Board
evaluation process as relevant to the Committee (which, for 2022,
was externally facilitated) were considered by the Committee at
its January 2023 meeting. It was considered that the performance
of the Committee continues to be effective.
While the Committee’s membership comprises the non-executive
directors noted on page 79, 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 79.
Jan
Feb
Apr
Jun
Jul
Oct
Matters considered during 2022
Reporting
Review of external reporting documents
Significant accounting judgements
Going concern assumption/viability statement
Regulatory reporting
Climate related reporting
Activities of subsidiary audit committees
IFRS 17
Audit and corporate governance reforms1
Control environment
Control effectiveness (including Sarbanes-Oxley)
Annual review of risk management framework and control
effectiveness review summary
Group Audit
Reports from Group Internal Audit, including Speak Up
(whistleblowing)
External audit
Reports from the external auditor including external audit plan
Appointment, remuneration, non-audit services and effectiveness
Other
Audit Committee effectiveness review
Finance strategy
1
Review of the government’s response to the consultation ‘Restoring trust in audit and corporate governance’.
Financial reporting
During the year, and in relation to the year ended 31 December 2022, the Committee considered the following issues in relation
to the Group’s financial statements and disclosures, with input from management, the Risk division, Group Internal Audit and the
external auditor.
Key issues
Committee review and conclusion
Allowance for
Impairments on Loans
and Advances
31 December 2022:
£4,903 million
31 December 2021:
£4,042 million
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.
During the year, the Committee has challenged the judgements and estimates used
to calculate the provision for expected credit losses (ECL). Judgemental adjustments
for COVID-19 impacts have been largely released, with inflationary risks an increased
focus area. The Committee has also overseen the Group’s investment to deliver ECL
assessment and sensitivity analysis with improved speed and accuracy, allowing for a
more robust assessment of late-breaking news on the economic outlook and a reduced
need for overlays. Note 19 to the financial statements includes details of the Group’s ECLs
allowances, including those resulting from management judgements (31 December 2022:
£330 million; 31 December 2021: £1,284 million). The Committee has reviewed management’s
rationale for these provisions and has challenged whether the additional provisions
are appropriate.
Conclusion: The Committee was satisfied that the impairment provision and the
disclosures provided in the financial statements were appropriate.
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Lloyds Banking Group Annual Report and Accounts 2022
Going Concern and
Viability Statement
Key issues
Committee review and conclusion
The directors are required to confirm
whether they have a reasonable
expectation that the Company and
the Group will be able to continue to
operate and meet their liabilities as
they fall due for a specified period. The
viability statement must also disclose
the basis for the directors’ conclusions
and explain why the period chosen
is appropriate.
The Committee 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,
funding and capital plans which included consideration of climate-related matters on the
Group’s performance and its projected funding and capital position. The Committee also
took into account the results of the Group’s stress testing activities (page 144), its principal
risks (page 39 to 41) and its emerging risks (page 43).
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 page 44.
Uncertain Tax Positions
The Group has open tax matters
which require it to make judgements
about the most likely outcome for the
purposes of calculating its tax position.
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.
Retirement Benefit
Obligations
31 December 2022:
£28,965 million
31 December 2021:
£47,130 million
The value of the Group’s defined
benefit pension plan obligations,
which has reduced significantly during
the year as a result of the increase in
both gilt yields and corporate bond
credit spreads, is determined using
both financial and demographic
assumptions.
Conclusion: The Committee was satisfied that the provisions and disclosures made
in respect of uncertain tax positions were appropriate.
The Committee reviewed the process used by management to determine appropriate
assumptions to calculate the Group’s defined benefit liabilities. These included the
discount rate, the future rate of inflation and expected mortality rates.
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.
Value-In-Force (VIF)
Asset and Insurance
Liabilities
31 December 2022:
VIF asset: £5,419 million;
insurance liabilities:
£106,893 million
31 December 2021:
VIF asset: £5,514 million;
insurance liabilities:
£123,423 million
Climate-Related
Financial Disclosures
Determining the value of the VIF asset
and insurance liabilities requires
management to make significant
estimates for both economic and non-
economic actuarial assumptions.
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 Committee also noted that no VIF asset is recognised under IFRS 17, which the Group
adopted on 1 January 2023, and that the derecognition of this asset formed part of the
IFRS 17 transition adjustments as at that date.
Whilst the Committee noted that there
has been a significant improvement in
the Group’s climate change reporting
within the annual report and accounts,
it believes that further enhancements
will be possible as the availability of
robust data increases.
During the year, the Committee has discussed with management improvements that can
be made to the Group’s climate-related disclosures within its financial statements. The
Group has included within its 2022 disclosures: an analysis of vehicle types for the Group
finance lease receivables and operating lease assets, the energy performance certificate
(EPC) distribution of the Group’s mortgage book, further detail on the climate-related risks
impacting the Group’s pension schemes and more detailed information on sector-specific
lending. The disclosures were prepared in accordance with the Task-Force on Climate
related Financial Disclosures (TCFD) recommendations.
The Committee also discussed with management its plans for future disclosures, including
the processes being put in place to ensure that the disclosures are robust, granular and
specific to the Group.
Conclusion: Whilst recognising that there is more to be done in future years, the
Committee was satisfied with the Group’s climate-related disclosures in its financial
statements for the year ended 31 December 2022.
The Committee has received regular updates on the Group’s conduct risk matters and the
progress it has made including updates on HBOS Reading.
Conclusion: The Committee has considered management’s assessment of the Group’s
provision for conduct-related matters and was satisfied that the provisions were appropriate.
Conduct risk
provisions
During 2022, the Group made
provisions of £255 million (2021: £1,300
million), including £50 million for
HBOS Reading (2021: £790 million).
Management judgement is used
to determine the expected costs of
remediation and, where appropriate,
the related administration costs.
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 139 to 195. 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 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 (SOX)
• Specifically the Committee continued to closely monitor
the deficiencies identified in respect of privileged and user
access across certain business applications and associated
IT infrastructure and the Group’s plans to address the control
findings identified
• The Committee was also updated on the programme of
continuous improvement across the SOX control environment,
including placing greater emphasis on preventative controls
operated across the business
The Committee was satisfied that internal controls over financial
reporting were appropriately designed and operating effectively.
Lloyds Banking Group Annual Report and Accounts 2022
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Audit Committee report continued
Risk-weighted assets (RWA) and regulatory reporting
The focus on the quality of regulatory reporting continues to be
high on the PRA’s agenda. To date, a number of skilled person
independent reviews have been commissioned across the
industry to review the governance, controls and processes
supporting the regulator reporting framework within firms.
As part of our continued focus on strengthening our control
environment in both financial and regulatory reporting,
management established a Regulatory Reporting Review project
in 2020. Involving first, second and third line, this programme has
continued to review our regulatory reporting activities and where
necessary, enhance our governance and control framework,
with a link to longer-term and strategic initiatives also being
considered. The Committee also commissioned an ongoing
programme of external assurance on regulatory reporting with
the focus of activity to date on risk-weighted assets. Management
have provided regular updates to the Committee over the year
to highlight progress made in improving the reporting control
environment across a number of regulatory reports.
Segmental reporting
During the year the Group considered the impact of a restructure
on its external segmental reporting. The Committee reviewed the
analysis prepared by management which noted that the primary
focus of the Group Executive Committee (GEC), which is the Group’s
chief operating decision maker, remains the Group’s divisional
performance and that this is reflected in the Group’s reporting to
GEC. The Committee agreed with management’s conclusion that its
operating segments are the three divisions and that it is appropriate
for the Group to provide external disclosure on this basis.
IFRS 17
The Committee has been updated on the Group’s IFRS 17
implementation programme throughout 2022 and in prior years
and held a session dedicated to IFRS 17 in October 2022. This
session included a discussion of the financial impacts, which
included the expected adjustment to the Group’s opening
equity at 1 January 2022, the effect that IFRS 17 will have on the
Group’s underlying profit and the one-off impact of modifying
customer contracts to include drawdown benefits during 2022.
The Committee also discussed the Group’s control framework in
relation to both the transition and the business as usual processes
to be adopted in the future.
Restoring trust in audit and corporate governance
During the year the Committee has received updates on the
government’s response to the white paper ‘Restoring trust in audit
and corporate governance’. The Group broadly welcomes the
proposals and the expected implementation approach, which
will be through a combination of primary legislation, secondary
legislation (statutory instruments) and regulation. Whilst this is
likely to lead to an uncertain implementation timetable, it will
allow the proposals to be fine-tuned to achieve the right outcome.
The government has indicated that the primary legislation should
receive Royal Assent in the first half of 2024. The Group has started
to consider the actions that it will need to take as a result of the
expected legislation; these plans will continue to be developed
as the timelines and precise requirements evolve during 2023.
Audit and Risk Committee Forum
It was agreed between the Chairs of the Committee and the
Board Risk Committee to hold during the year a joint forum.
The purpose of the forum was to discuss governance topics of
common interest between the Audit and Board Risk Committee.
The themes reviewed were data, the strategic transformation of
the Group and climate. In addition, the embedding of the Group’s
risk and control framework was considered. Further information
on the forum is contained on page 90.
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Lloyds Banking Group Annual Report and Accounts 2022
Group Internal Audit
In monitoring the activity, role and effectiveness of the internal
audit function and their audit programme the Committee:
• Approved the annual audit plan and budget, including resource
• Reviewed progress against the plan through the year
through updates including quarterly reports on the activities
undertaken and six-monthly reports from the internal audit
Quality Assurance team
• 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 Transition to Net Zero,
Workforce of the Future, Customers in Financial Difficulty, Data
Quality, Supplier Partnerships and Strategic Delivery
• Monitored completion of the enhancements identified by the
third party who assessed the effectiveness of the internal audit
function in 2021
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 and without fear of retaliation, to report concerns
about inappropriate and unacceptable practices, that these
arrangements are well-publicised 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.
Auditor independence and remuneration
The Committee is responsible for establishing the Group’s policies
and procedures designed to protect the independence and
objectivity of the external auditor. In April 2022, the Committee
reviewed its non-audit services policy; no substantive changes
were made to the policy.
The policy details those services that the auditor is permitted to
carry out and pre-approves certain of these services provided
the fee is below a threshold; all other permitted services must be
specifically approved in advance by the Committee. Prior to the
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 2022 and further information on the policy is
disclosed in note 12 to the financial statements.
External auditor
Following an external audit tender in 2018, Deloitte LLP (Deloitte) was
appointed as auditor of the Company and the Group with effect
from the 2021 financial year. Mike Lloyd is the statutory audit partner
for the Group and attends all meetings of the Committee.
The Committee oversees the relationship with the external
auditor including its terms of engagement and remuneration
and monitors its independence and objectivity. During 2022, the
Committee reviewed Deloitte’s audit plan, including the underlying
methodology, and Deloitte’s risk identification processes. In
its assessment of Deloitte’s performance and effectiveness,
the Committee has considered: Deloitte’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 2022. The Committee concluded that it was satisfied with the
auditor’s performance and recommended to the Board a proposal
for the re-appointment of the auditor at the Company’s Annual
General Meeting.
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,
which relates to the frequency and governance of tenders for the
appointment of the external auditor and the setting of a policy on
the provision of non-audit services, for the year to 31 December
2022. There are no plans as at the date of this report to conduct
a tender exercise for external audit services.
Board Risk Committee report
Effective risk management is
core to successful delivery of the
Group’s strategy
Q What are the key areas of focus for the Committee in 2023?
A The Committee will continue to consider the following important
areas:
•
Ensuring that progress continues to be made on climate risk
management and ESG
•
Effective oversight of the Group’s strategic transformation
• Continuing impacts of the rising cost of living, increasing
•
interest rates, macroeconomic uncertainties and
geopolitical risks
Ensuring effective support for customers in financial
difficulty, delivery of Consumer Duty requirements and good
customer outcomes
Effective management of operational resilience risks,
including supplier management, cyber and technology risks
• Management of people risk and progress with delivery of the
•
Catherine Woods
Chair, Board Risk Committee
Challenges resulting from the rising cost
of living and broader macroeconomic
uncertainties have been central to the
Committee’s considerations this year.
Key activities in 2022
• Reviewed progress on the Group’s climate risk framework and
scenario analysis capabilities
• Considered the ongoing effects of the pandemic, the rising cost
of living, increasing interest rates, and other macroeconomic
uncertainties, on both the Group and its customers
• Assessing the management of operational resilience risks,
including cyber, supplier management and technology risks
• Considered the management of change and execution risks in
the delivery of the Group’s strategy
• Overseeing management of economic crime risks
• Reviewing management of the Group’s balance sheet including
structural hedge activity
• Assessment of key emerging risks and oversight of strategic risks
Q&A
Q How has the Board Risk Committee (the Committee)
assessed the impacts of the rising cost of living, and broader
macroeconomic uncertainties, on the Group’s customers?
A These areas, together with ensuring that the Group continues
to focus on supporting its customers, have been key areas of
discussion and debate for the Committee this year. In addition to
these topics featuring within regular reports from the Chief Risk
Officer, the Committee has also considered a number of deep dives
and reports looking at the current and potential credit impacts
across the Group’s commercial and retail customer portfolios,
together with a focus on our capabilities and ability to support
customers and businesses who may get into financial difficulty.
Q How is the Committee considering the risks associated with
implementation of the Group’s new strategy?
A Consideration has been given to a wide range of areas where
implementation of the Group’s new strategy gives rise to
potential risks in relation to the execution of change and impact
on different risk types. This included deep dives and updates
across areas such as change and execution risk, technology
resilience, data risk, people risk and cyber risk. The Committee
also focused on the operational resilience of the Group’s
critical business processes and important business services.
Further information is set out on the following pages, within the
commentary on each risk type.
Group’s strategic and cultural transformation
• Oversight of the continued embedding of the Group’s
operational risk and control framework to deliver proactive
and continuous risk management
Introduction
I am pleased to report on how the Committee has discharged
its responsibilities throughout 2022, a year in which the
potential impacts of a range of external factors have been key
considerations for the Committee. In addition, the Committee
has focused on risks related to delivery of the Group’s strategy
with key areas of focus including the management of change
and execution risk, technology resilience, data, people and
cyber risks, and operational resilience of the Group’s critical
business processes and important business services. Changes
implemented during 2021, to simplify how the Committee
operates have continued in 2022 to help ensure an appropriate
level of focus on key areas of risk.
While the prevalence and some of the more direct impacts of
the pandemic have largely subsided during 2022, the broader
impacts continue to be felt throughout the economy. Together
with other events, such as the situation in Ukraine, these factors
have all contributed to matters such as supply chain issues,
inflation, higher interest rates and, ultimately, the increasing cost
of living which impacts the Group, and its customers. A core
consideration has been how the Group can continue to best
support its customers against this backdrop; these will remain
key areas of focus for the Committee during the year ahead.
Understanding the impacts of climate risk also remains central
to the Committee’s activities.
I would like to take this opportunity to welcome Scott Wheway
as a member of the Committee, following his appointment to the
Board, and the Committee, in August 2022. Scott brings additional
depth and breadth of experience of large-scale banking and
insurance to the Committee’s considerations.
Committee purpose and responsibilities
The Committee assists the 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, including
the extent and categories of risk which the Board considers as
acceptable for the Group to bear. A review and update of the
Committee’s terms of reference was completed during the year,
ensuring alignment with the Risk Coalition principles and broader
best practice standards.
The Committee is responsible for reviewing and reporting its
conclusions to the Board on the Group’s risk management
framework, which captures 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 138
to 195. Full details of the Committee’s responsibilities are set
out in its terms of reference, which can be found at www.
lloydsbankinggroup.com/who-we-are/group-overview/
corporate-governance.
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report continued
Committee composition, skills, experience
and operation
As mentioned in my introduction, we welcomed Scott Wheway
as a member of the Committee during the year, bringing the
current membership up to four non-executive directors. Scott’s
appointment further enhances the Committee’s breadth of
experience, knowledge, and awareness of the importance of
delivering the right outcomes for our customers. Two of the three
designated independent non-executive directors of the Ring-
Fenced Banks also attend meetings as observers in order to
provide insights on matters relevant to the Ring-Fenced Banks
when required and as part of their role in the Group’s overall
governance structure. 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 undertook an annual review of its effectiveness,
the findings of which, together with the outcomes of the Board
evaluation process as relevant to the Committee (which, for 2022,
was externally facilitated), were considered by the Committee at
its January 2023 meeting; it was considered that the performance
of the Committee continues to be effective. Details of the
Board evaluation process can be found on page 89. Details
of Committee membership and meeting attendance can be
found on page 79.
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 help ensure
the appropriate escalation of relevant matters to the Committee
for review and consideration.
Matters considered by the Committee
During 2022, the Committee considered a wide range of risks
facing the Group and its Ring-Fenced Banks, both current and
forward looking, across all key areas of risk management, in
addition to risk culture and risk appetite. Changes implemented
during 2021 which enhanced the way the Committee operates
have continued to support the Committee in focusing on key
risk topics through, for example, the use of deep dives to provide
greater analysis of particular areas.
The following pages provide a summary of the risks considered
by the Committee, with an outline of the material factors
considered, and the conclusions which were ultimately reached.
The Committee continues to be supported by the IT and Cyber
Advisory Forum, which dedicates additional time and resource to
reviewing and challenging risks associated with IT infrastructure,
IT strategy, IT resilience and cyber risks, as highlighted on page
81 in Our focus on cyber security and risk. The Chair and other
members of the Committee attend this Forum.
The Board Risk Committee Chair is a member of the Audit
Committee, in addition to the Audit Committee Chair being
a member of the Board Risk Committee; this close interaction
helps ensure that common issues of interest are addressed
appropriately. During 2022, this was further enhanced through a
Group-wide Audit and Risk Committee Forum being held which
provided an opportunity for in-depth discussion on key areas
of common interest. Further information about this Forum can
be found on page 90. In addition, there is regular interaction
with the Responsible Business Committee, especially on climate
risk, and with the Remuneration Committee on the alignment of
remuneration to risk performance.
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. During 2022, the
Committee also considered deep dives on the Insurance sub-
group and specifically on the recently acquired Embark business.
Activities for the year
Risk type
Key issues
Committee review and conclusion
Conduct risk
Customers in
financial difficulty
The Group’s management
of conduct risks and
issues associated with
customers in financial
difficulty.
During 2022, the Committee noted the continued progress on supporting customers in financial difficulty.
The significant transformation activities delivered in recent years have ensured sustained fair customer
outcomes are being delivered, with enhanced support for the most vulnerable. For Business Banking and
SME customers, the Committee recognised the substantial transformation to support businesses post-
pandemic and noted ongoing investment to improve colleague capability and customer treatments.
The Committee reviewed the emerging trends on conduct risk such as the heightened risks presented
by the cost of living crisis. The work to proactively identify and engage customers most impacted by the
crisis was recognised. The Committee gave support for a continued proactive response to support the
challenges faced by customers.
Conclusion: The Committee recognises the extensive work completed to support both retail and business
customers in financial difficulty. Whilst significant improvements have been made, this will remain an area
of focus for the Committee during 2023. The Committee will continue to monitor the ongoing activity to
support customers and businesses as the cost of living crisis continues.
Rectifications and
complaints
The Group’s management
of customer rectifications;
resolving customer
complaints in a timely and
fair manner, together with
eradicating the causes for
complaints through root
cause analysis.
Throughout 2022, the Committee received updates on the Group’s complaints and rectifications
performance. The Committee was encouraged to see the progress being made in reducing the number
of rectifications throughout the year. The Committee has also been kept informed of progress against
Board risk appetite metrics for complaints, which are within appetite, and have been appraised of the
rollout of the Group’s new complaint management system.
Conclusion: The Committee will continue to focus on customers awaiting remediation and the time taken
to close customer complaints in 2023 along with root cause analysis and read-across activity to ensure
learnings are taken on board to help minimise future events.
100 Lloyds Banking Group Annual Report and Accounts 2022
Risk type
Key issues
Committee review and conclusion
Consumer Duty
Implementation and
embedding of the FCA’s
new Consumer Duty rules
across the Group.
The Committee has received updates on the Consumer Duty Programme throughout 2022. The Group’s
implementation plan was approved by the Responsible Business Committee in October in line with FCA
requirements. As a critical element of Consumer Duty, it is vital that focus remains on the delivery of the
key cultural initiatives, the development of Group MI reporting and third-party requirements. Ongoing
engagement and transparency with regulators will be critical.
Conclusion: The Committee recognises the significance of the embedding of the Consumer Duty
requirements and will monitor as appropriate the ongoing delivery and evolution through the key delivery
dates of July 2023 and July 2024.
Financial risk – covering credit and market risk
Commercial credit
quality
Risks and external threats
to the commercial credit
portfolio, including cost
of living related impacts,
together with sectors
potentially exposed to the
impact of EU exit, Ukraine/
Russia conflict and
climate risks.
The Committee provided oversight of the Commercial Banking portfolio via regular credit quality papers,
sector deep dives, and updates on climate risk and opportunities. Specific consideration is given to topics
adopting a risk-based approach and this year there were spotlights on the Group’s financial sponsors
portfolio, leveraged and project finance exposures and the Commercial Real Estate sector. Discussion was
also held regarding risk-adjusted returns across the portfolio.
The Committee also reviewed the impact of the rising cost of living, increasing interest rates and
emerging risks across a range of sectors, including those considered more vulnerable to the wider
economic backdrop or structural change, those potentially exposed to the impacts of the UK’s exit from
the EU, sectors impacted by supply chain impacts due to the Ukraine/Russia conflict, and those exposed to
increased levels of physical and transitional climate risk.
Conclusion: While recognising the risks in the portfolio, the Committee was satisfied that management
were continuing to take appropriate action to mitigate and address current and horizon risks.
Consumer credit
quality
Risks relating to Consumer
lending, including cost
of living related impacts
and climate-related risks.
Areas such as Consumer
secured lending, buy-
to-let, motor, Business
Banking, and unsecured
portfolios, together with
customer indebtedness.
The Committee reviewed the performance of the Consumer portfolio via regular credit quality updates.
Consideration is given to topics adopting a risk-based approach and this year additional focus was
given to legacy mortgage exposures (originated during the period 2006 to 2008), which continue to run
off, as well as risk-adjusted returns across the portfolio. Enhanced monitoring is in place to provide early
warning of any adverse trends requiring further action and the Group continues to closely monitor and
manage higher risk segments, such as customers with higher indebtedness levels or lower incomes, and
customers impacted by the rising cost of living and increasing interest rates.
Conclusion: The Committee is satisfied that appropriate lending controls and monitoring are in place to
control risks across the Consumer lending portfolios and that there is an effective framework in place for
ongoing risk management.
Balance sheet
management and
structural hedge
Management of the
Group’s balance sheet
and structural hedging
programme, given the
impact of uncertain
customer behaviour
in a rising interest rate
environment.
A key focus for the Group in 2022 has been the management of the balance sheet and resulting market
and liquidity risks through a period of significant increases in interest rates and uncertainty over future
customer behaviour. An update was presented to the Committee providing an overview of deposit trends
as well as the future risks to changes in the volume and mix of deposits. The Committee discussed the
risks associated with the current strategy, the governance framework supporting the decisions and the
implications should customer behaviour not match expectations.
Conclusion: Proactive management and close monitoring of the associated risks continue, with a focus
on the evolving macroeconomic outlook and the implications for customer behaviour. The Committee
was satisfied that management was taking the appropriate actions to monitor and mitigate the risks,
while recognising that this will remain a key priority in 2023.
Model risk
Model risk continues to
be an area of significant
activity and importance,
both internally and
externally.
The Committee received further updates on progress to satisfy new prudential modelling requirements
relating to credit risk capital models (primarily the new Capital Requirements Directive (CRD) IV
regulations) and market risk models within IBOR transition activities, in addition to the model risk
management and governance approach. This included amendments being proposed following both firm
specific and industry-wide regulatory feedback. The Group continues to increase resources available and
to enhance model risk management and governance to meet increasing internal and external demands.
The Committee was also kept abreast of model risk management activity relating to advanced analytics
(such as machine learning/artificial intelligence) models and associated aspects such as data ethics,
and climate, as the Group continues to develop its capability in these areas.
Conclusion: Communication with the PRA, to ensure that CRDIV and IBOR prudential change related
submissions fulfil their requirements, continues. In terms of performance, the models continue to
function adequately within the ongoing uncertain economic environment. Monitoring will continue as the
economy recovers. The Committee is comfortable that the development of new model types is subject to
appropriate risk control.
Climate risk
Climate risk
Climate change,
sustainability, and the
potential impact to the
Group and its customers,
including those from the
transition to net zero and
the Group’s strategic
response.
Climate risk remains a key issue for the Group, with regular updates provided to the Committee on the
Group’s progress to develop climate risk capabilities. This activity supports oversight of how the Group
is meeting external expectations, including those from the PRA on managing the financial risks from
climate change.
The Committee continues to ensure that climate risk management capabilities are developing at pace,
including the quantification and measurement of climate risk, and ensuring an appropriate risk appetite
is established. In 2022, the Committee discussed the approach to developing climate scenario analysis
capabilities, informed by activity from the Bank of England’s Climate Biennial Exploratory Scenario (CBES)
including the second round of the exercise conducted earlier in 2022.
The Committee has also been updated on the Group’s net zero strategy, supported by engagement
through other committees (such as the Responsible Business Committee) to ensure appropriate oversight
of the Group’s net zero ambitions. The Committee provided input on discussions regarding strategic
participation choices, as well as considering potential greenwashing risks.
Conclusion: The Committee has been satisfied with the progress made in climate risk management
during 2022, with the expectation to expand focus in 2023 towards broader ESG themes. The Committee
will continue to closely monitor climate-related risks, including the delivery of climate-related
commitments, data requirements, and development of further Board risk appetite metrics.
Lloyds Banking Group Annual Report and Accounts 2022
101
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report continued
Activities for the year continued
Risk type
Key issues
Committee review and conclusion
Operational risk
One RCSA
implementation
The embedding of One
Risk and Control Self-
Assessment (One RCSA)
as part of the Group’s
risk and control strategy
to deliver a stronger risk
culture and simplified risk
and control environment.
The Group delivered on its One RCSA implementation plan by the end of 2021. Management’s focus for
2022 moved to embedding One RCSA and ensuring that a complete and accurate view of the Group’s risk
and control environment is maintained through a culture of proactive and continuous risk management.
The Committee has been provided with regular progress updates, including a deep dive that provided
practical insights from business units on One RCSA embedding and the business value that has been
realised.
One RCSA also lays the foundations for broader review of the Group’s risk management framework,
to reflect the Group’s new change model and ensure that risk management activities are actively
driving safe delivery of the Group’s strategy. Management will progress this activity in 2023. In 2022, the
Committee also noted good progress in designing and implementing an end-to-end accountability
model that aligns to revised Group structure and strategic ambitions.
Conclusion: In line with expectations, the Group is on track to embed One RCSA by the end of 2023. The
Committee will continue to monitor progress alongside the implementation of end-to-end accountability
and the strengthening of the control environment. Whilst it is currently fit for purpose, the Committee is
supportive of the broader review of the risk management framework and will review the proposals in 2023.
Operational
resilience
(IT resilience,
cyber, supply
chain/supplier
management)
Operational resilience is
one of the Group’s most
important non-financial
risks. Enhancements
continue to be made to
the Group’s resilience to
better serve customers
and to address regulatory
priorities.
During 2022, the Committee received reports on the Group’s identification of important business services
and associated impact tolerances in response to Regulatory Policy Statements on Operational Resilience
published in March 2021. The Committee reviewed two Group-wide self-assessments covering progress
on the enhancements needed to ensure the Group’s important business services can be recovered within
impact tolerance by March 2025. Updates have also been presented on investment and associated risk
impacts. In addition, the Committee reviewed a deep dive on the risks related to the Group’s payments
business.
All security and cloud risks have been appropriately covered. 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 remains focused on the operational resilience of the Group’s critical business
processes and important business services and has drawn valuable insight from the discussions this
year. The Committee considers that governance of operational resilience risk is robust and supports the
Group in meeting new regulatory requirements, and that activities in plan (such as migration to cloud) will
enhance the ongoing resilience of key services to the Group’s customers.
Data risk
Legacy challenges in
the Group’s data control
environment to enable
strategic objectives.
Data risk continues to be an area of significant regulatory and media attention. Quarterly updates have
been provided to the Committee on the development and mobilisation of the data strategy in response
to legacy data risk challenges. Committee members have been supportive of the plans, encouraging
consideration of capability and cultural factors which might inhibit progress. It has been recognised that
activity must be prioritised against a broad transformation agenda. The Committee will continue to be
updated on any trade-offs or delays via regular reporting.
Conclusion: The Committee is supportive of the data strategy and approach, recognising the complex
roadmap of initiatives planned over a number of years. Delivery of the strategy is critical, given data is a
key enabler for the overall Group strategy.
People risk
Ensuring the Group is able
to attract and retain the
right skills and capabilities
with a continued focus on
colleague wellbeing and
sentiment as the Group’s
strategic and cultural
transformation evolves.
People risk remains a key risk and progress is required to deliver the Group’s strategic and cultural
transformation over the next three years via Strategic Workforce Planning. Internal pressures coupled with
a difficult external economic environment have been key considerations and the monitoring of colleague
sentiment and wellbeing around these continues. The Committee considered a deep dive into the people
risk profile where cost of living pressures, colleague attrition and the risk of upward reward pressure were
deemed most material.
Conclusion: The Committee supports the actions being taken to manage people risk and the challenges
faced in the current landscape. Given its continuing importance, people risk will remain a key area of
focus for 2023.
Change and
execution risk
(strategic
transformation
oversight)
Risks associated with the
extensive current and
future Group strategic
change agenda,
recognising challenges
faced in ensuring both
successful delivery and
embedding of change.
In view of the scale of change, the Committee discussed a deep dive on change and execution risk in
2022, which focused on activities already undertaken and how horizon risks are being managed. The
Committee also considers change and execution risk within other linked risk types, such as operational
resilience and supplier risks, and when investment activities are discussed. The focus for 2022 has centred
on establishing the change delivery mechanism to support the Group’s strategic growth ambitions,
bringing a closer relationship between investment funding, business unit change delivery and technology.
Monitoring the safe delivery of the existing portfolio of change activity has been critical and, along with
the continued enhancement of change risks and controls, will remain important through 2023. In addition,
2022 has seen significant focus on change capability to support the Group’s business and technology
transformation plans.
The IT and Cyber Advisory Forum and the Committee have maintained close evaluation of the Group’s
strategic transformation, with dedicated deep dives on data, cyber and resilience, alongside a full review
of how the Board will maintain ongoing effective oversight of the strategic change portfolio.
Conclusion: The Committee will continue its focus on the management of change and execution
risk within appetite and on monitoring progress with enhancement of the change delivery approach,
the execution risk metrics, and the maturity of the new platform-based operating model to support
technology and strategic change activities.
102
Lloyds Banking Group Annual Report and Accounts 2022
Risk type
Fraud
Key issues
Committee review and conclusion
The Group’s management
of fraud risk, while
continuing to minimise
the impact to genuine
customer journeys. A key
focus is on cross-industry
engagement to prevent
and disrupt fraud.
The Committee acknowledged progress made on introducing targeted friction into the payments system,
the direction of travel was supported, and it was noted that customer feedback around increased friction
has generally been positive.
Committee members supported lobbying around the scope of the Online Safety Bill, and would welcome
more activity in this area, including the funding of deterrents and working with the industry on detection
and prevention to minimise risk. Recent discussions have been held with the Payment Services Regulator
(PSR) around a consultation on Authorised Push Payment (APP) fraud reimbursement.
Conclusion: The Committee acknowledged that fraud risk continues to be a challenging area and
supported management on what has been achieved to date. The Committee also supported the next
steps in championing the Fraud Lobbying Strategy messages as part of the Group’s routine and regular
external engagement activity.
Money laundering
and financial
crime
The Group’s management
of financial crime risks and
compliance with the UK’s
anti-money laundering
regime.
The Committee acknowledged the Group’s continued efforts to fight financial crime as set out in the
Money Laundering Reporting Officer’s (MLRO) Report. Committee members sought views on actions
being taken in response to the FCA’s communications on cash-based money laundering through Post
Office counters. The MLRO confirmed that actions had been taken to limit cash deposits for both personal
and business customers with minimal negative impact for customers. The Group has also held regular
engagements with the FCA on Ongoing Know Your Customer remediation and sanctions.
Two financial crime deep dive papers were submitted to the Committee during 2022. Key focus areas were
people risk, diversity of thought, information sharing and lobbying. In conjunction with the lobbying efforts,
the Group continues to engage meaningfully with the UK Government on addressing economic crime and
particularly the Home Office’s Economic Crime Plan 2.0.
Conclusion: The Committee supported the overall direction of travel, in particular the strategic approach
being taken, and encouraged further focus on progressing information sharing. Additionally, the
Committee expressed an appreciation for the work undertaken by the Sanctions Team in response to the
Russia and Ukraine conflict.
Other categories
Regulatory and
legal risk
Managing regulatory
and litigation risk is a key
focus within the Group,
with a significant amount
of highly complex and
interdependent regulatory
interactions managed
during 2022, which will
continue to require
management into 2023.
The Committee has provided effective oversight and ensured effective controls are in place to comply
with existing regulatory obligations, including consideration of these at an individual legal entity level.
The Committee considered regular updates on emerging regulatory and legal risks such as customer
treatment (customers in financial difficulty, Consumer Duty, and access to cash). In addition, the
Committee has continued to closely monitor a number of significant regulatory change and oversight
programmes, such as operational resilience; resolvability; risk-free rates transition; and CRD IV regulations.
Conclusion: The Group places significant focus on complex regulatory changes and litigation risk, 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
in 2023.
Emerging and
strategic risk
Reviewing the Group’s
emerging risk landscape,
evolving the assessment
of strategic risk and
embedding the Group’s
strategic risk framework
into business planning.
The Committee reviewed the Group’s emerging risk landscape and plans to evolve its approach
for assessing emerging risks. Progress made during 2022 has enhanced the analysis of the Group’s
emerging risk profiles, which has enabled the assessment of emerging risks to be refined. The Committee
is supportive of the updated approach and approved the revised emerging risk themes. Separately,
following the launch of the new Group strategy, a review of strategic risk was undertaken, which confirmed
that the current strategic risk themes remain appropriate. The Committee has noted the progress made
in 2022 towards further embedding strategic risk into the Group’s planning processes and local risk
management, with the strategic risk framework fully integrated into the Group’s annual financial planning
cycle.
Conclusion: Understanding the emerging risk landscape and the Group’s preparedness, along with
the impact of risks which may arise from the Group’s strategic choices, is a key activity. In 2023, the
Committee will review key emerging risks and oversee the Group’s assessment of strategic risks,
considering their potential impacts and mitigating actions.
Lloyds Banking Group Annual Report and Accounts 2022
103
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Responsible Business
Committee report
Responsible business
is at the core of our purpose of
Helping Britain Prosper
Amanda Mackenzie
Chair, Responsible Business Committee
There is much to be done, but the strong
foundations which have now been laid will
shape how we do business and create a more
sustainable and inclusive future.
Key activities in 2022
• Purpose and values
• Environmental sustainability oversight
• Nature and biodiversity
• Workforce engagement and culture
•
Inclusion and diversity
Q&A
Q What role does the Committee play in support of the Group’s
purpose?
A The Committee is deeply involved in setting out our ambition
to become a truly purpose-driven organisation. We discussed
which areas we should pursue to drive the most positive impact
for society and how to start embedding purpose into everything
we do. We recognise that this will be a multi-year journey, but I
was pleased to see the progress that has already been made.
Q What are the key areas of focus for the Committee in 2023?
A The Committee will focus on reviewing and seeing the proof that
we are embedding our purpose, our culture and our Consumer
Duty plan. Creating further progress on our inclusion and
diversity aspirations and developing our biodiversity expertise
and plans alongside our net zero targets will also be priorities.
Recognising the vital role our colleagues play, we will continue
to spend time listening to their feedback and input to drive
culture change.
Introduction
I am pleased to report how the Committee has discharged its
responsibilities in 2022, my first full year as Chair. During the year,
in addition to the matters within the Committee’s scope as set out
in this report, we spent time considering our role and reshaping
the focus and agenda to ensure it fits the needs of a purpose-
driven organisation.
104 Lloyds Banking Group Annual Report and Accounts 2022
In 2022, the Committee became the designated body to fulfil the
Board’s responsibility for review and approval of the Consumer Duty
implementation plan and oversight thereafter. I was also appointed
Board champion for the Group and the Ring-Fenced Bank boards
to facilitate the oversight of Consumer Duty. Reflecting our evolving
role, our areas of focus in 2023 will be further embedding purpose,
social and environmental matters, culture, workforce engagement
and duty to customers and stakeholders.
Committee purpose and responsibilities
The purpose of the Committee is to support the Board in
overseeing the Company’s policies, performance and priorities
as a responsible business. The Committee’s terms of reference
can be found at www.lloydsbankinggroup.com/who-we-are/
group-overview/corporate-governance.
Purpose and values
The Committee reviewed the progress we have made so far on
our journey to become a more purpose-driven organisation. We
laid strong foundations to support our purpose and vision in 2022,
and identified key focus areas which support our purpose and
where we can deliver the most material positive impact. Aligned
to this, the Committee oversaw the creation and evolution of the
values for colleagues, guiding them on how to work together as
well as how to make decisions. In our 2022 Colleague Survey, 92%
of colleagues felt that delivering on our purpose will help us grow
the business profitably, and 79% could see how we are becoming
a more purpose-driven organisation. In 2023, we expect to see
further significant progress.
Environmental sustainability oversight
The Committee provided oversight and approval of the
Group’s external reporting and reflected on the environmental
sustainability progress and priorities. Assurance was sought that
targets were ambitious, aligned to our strategy and the impact on
the business was understood.
Nature and biodiversity
The Committee received updates on nature and biodiversity
and supported proposals to prioritise efforts by sector, noting the
challenges and opportunities. We ensured that a collaborative
and joint learning approach was taken, building credibility
through partnerships with experts such as The Soil Association.
Workforce engagement and culture
The Committee is the designated body to fulfil the Board’s
workforce engagement obligations and receives quarterly
updates on engagement activity and culture, reporting to the
Board on key themes and issues. Members were supportive
of the culture change framework with discussion focusing on
the proposals for future colleague listening and the Board’s
involvement, supporting the proposal for more frequent but
shorter pulse surveys. Please refer to page 82 for more details
on how the Board engages with the Group’s workforce.
Inclusion and diversity
The Committee received regular updates on our public
commitments and the strategy. We were pleased to see that
progress continued to be made in increasing the representation
of women and Black, Asian and Minority Ethnic colleagues
in senior roles. We asked the executive to continue the focus
on achieving our commitments as we build an inclusive
organisation.
Committee composition, skills, experience
and operation
The Committee, which met on four occasions in 2022, is
composed of independent non-executive directors and is
attended by the Group Chief Executive. It benefits from a
broad range of perspectives, insight and experience, with
representatives from Group Internal Audit and the Chief Operating
Officer attending meetings as appropriate. Details of Committee
membership and meeting attendance can be found on page 79.
The findings of the externally facilitated annual review of
effectiveness were considered by the Committee at its January
2023 meeting. Based on the evaluation, the feedback was that the
performance of the Committee continues to be effective.
Directors’ remuneration
report
Remuneration Committee
Chair’s statement
Alan Dickinson
Chair, Remuneration Committee
We have supported our people during the
Cost of Living challenges, as we did during
the COVID-19 pandemic. We moved quickly
to provide a £1,000 payment to all 63,000
colleagues1 to assist with living costs in the
summer last year and also worked with our
recognised trade unions, Accord and Unite,
to rapidly agree a pay deal for 2023, to bring
certainty and support to those that needed
it most.
Supporting our colleagues
• Cost of living payment of £1,000 in August 2022 to all 63,000
colleagues1, at a value of £67 million
• 2023 pay increases of between 8 per cent and 13 per cent for
c.43,000 colleagues; overall increase to total pay costs lower
at 6.3 per cent
• £2,000 minimum pay award and an additional £500 cash
payment for lowest paid colleagues in December
• Pay increases capped at £5,000, to direct spend to those that
need it most
• No 2023 annual pay award for executive directors or members
of the Group Executive Committee
Remuneration content
Chair’s statement
Remuneration at a glance
pages 105 to 106
page 108
2022 annual report on remuneration
pages 109 to 124
2023 Directors’ Remuneration Policy
pages 125 to 133
1
Pro rated for reduced hours and excluded Senior Management.
Dear shareholder
On behalf of the Board, I am pleased to present the Directors’
remuneration report for the year ended 31 December 2022.
2022 has been yet another extraordinarily challenging year
as customers and colleagues came through COVID-19 to face
rapidly rising inflation and material increases in household costs
brought on by the Ukraine war. As a result, just as our colleagues
have put tremendous effort into supporting our customers, the
Remuneration Committee (“Committee”) has carefully considered
how best to support our colleagues, recognising that our lowest
paid colleagues were the most adversely affected.
The Group was one of the first large UK companies to make
a £1,000 payment to all 63,000 colleagues1 in August 2022 to
help with living costs. We also made information and resources
available through our Healthy Finances Hub and Employee
Assistance Programme to enable colleagues to support
themselves and we worked closely with our recognised unions
Accord and Unite to rapidly agree the 2023 pay deal, to bring
certainty and support to those that needed it most. This provides
pay increases of between 8 per cent and 13 per cent for around
43,000 colleagues, although the overall increase to our total pay
costs was materially lower at 6.3 per cent, as spend was directed
to our lowest paid colleagues.
2022 variable reward outcomes
As a result of the Group’s strong performance in 2022, the
Committee has approved a Group Performance Share (“GPS”)
pool of £446 million, to reward colleagues for their commitment
and contribution in another challenging year. This is a 12 per cent
increase on the pool for 2021, reflecting also a lower collective
adjustment.
In determining the vesting outcome of the 2020 Executive Group
Ownership Share (“EGOS”), the Committee carefully considered
alignment with shareholder experience and whether adjustments
were required for windfall gains. Despite targets being set before
the onset of COVID-19, the Committee has not applied upward
discretion and concluded a vesting outcome of 43.7 per cent,
which reflects improvements in economic profit during the
vesting period and strong progress against customer measures.
40 per cent of the award was weighted to Shareholder Return,
which has not vested due to share price impacts during the
performance period. Awards were granted at 49.4296 pence,
before the Group’s share price fell due to the onset of COVID-19
(to an average of 31.2 pence over the remainder of 2020) and the
Committee concluded that an adjustment for windfall gains was
therefore not required.
Customers remain central to our core values and our
remuneration policies and practices support the principle of
good customer outcomes, with customer measures embedded
within incentive arrangements. This is an area that we will
continue to review and evolve in light of expectations under the
new Consumer Duty rules and guidance.
Executive directors remuneration outcomes
The Board considers that Charlie Nunn has made a strong start
in his first full year as Group Chief Executive (GCE), establishing a
new growth strategy, leadership team and priorities to transform
the Group’s culture for long term sustainable success. He has
overseen robust financial performance and achievement of
broader Group balanced scorecard targets whilst maintaining
a strong regulatory and risk environment. Likewise William
Chalmers, Group Chief Financial Officer (CFO), has played a
critical role in the development and implementation of the
new strategy, as well as embedding and delivering a strong
commercial and investment discipline across the Group.
The Committee therefore determined that GPS (annual bonus)
awards for the GCE and CFO should be in line with the Group’s
performance as assessed by the Group’s balanced scorecard
as outlined on page 110, with resultant awards of £1,337,821 and
£688,733 respectively.
The Committee has determined to grant 2023 Long Term Share
Plan (LTSP) awards of 150 per cent of salary to the GCE and the
CFO to reflect the Group’s performance in 2022 and other factors
taken into account in the ‘pre-grant test’ as outlined on page 121.
Lloyds Banking Group Annual Report and Accounts 2022
105
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Directors’ remuneration report continued
The normal range for LTSP awards for executive directors is
125 to 150 per cent of salary. In addition to recognition of the
Group’s strong performance in 2022, the level of award for the
GCE acknowledges that prior to joining Charlie Nunn agreed to
voluntarily reduce the maximum opportunity from 200 per cent
of salary under the approved Directors’ Remuneration Policy to
150 per cent.
Recognising the desire to focus on the remuneration of lower
paid colleagues in this exceptional period, no annual pay award
is proposed for executive directors or members of the Group
Executive Committee.
As reported with our results for the half year to June 2022, the
Committee conducted a detailed review to determine whether
further performance adjustments were required in the light of
substantial provisions recognised in the accounts for the year to
December 2021 for compensation to customers of HBoS Reading.
These provisions resulted from the shortcomings identified by Sir
Ross Cranston in the original review undertaken by Professor Griggs.
The Committee carefully considered Sir Ross Cranston’s findings and
the previous actions taken, including:
• voluntary decisions by the former GCE and the former COO to
withdraw from participation in the 2019 GPS awards following
the publication of the Cranston review;
• downwards adjustment made to the 2021 GPS pool
(£83 million) partly as a result of the significant provisions
taken in 2021; and
individual adjustments already made to GPS awards for
current and former Executives
•
Having assessed all the evidence available, the Committee
concluded that an adjustment of 20 per cent of the GPS awards
granted during the full period of the Griggs review (impacting
awards for 2017, 2018 and 2019) was appropriate for the former Group
Chief Executive and former Group Chief Operating Officer. The levels
of GPS forfeited in 2019 exceeded this amount and therefore further
adjustments were not required. The Committee also concluded that
no further adjustment was required for the former CFO who had
limited direct involvement in the Griggs customer review.
Directors’ Remuneration Policy
Our current Policy, approved at the 2020 annual general
meeting (AGM), falls due for review this year and, as a result,
the Committee has undertaken a comprehensive study over
several months to consider whether any changes should be
recommended to shareholders. The 2020 Policy included the
implementation of a restricted share plan (the LTSP) to reflect
the Group’s strategy at the time and our stable long-term
business model.
Following the appointment of Charlie Nunn as our GCE, the Group
launched its new strategy in February 2022, building on our strong
foundations and our purpose of Helping Britain Prosper. As part of
our strategy, we look to deepen relationships with our customers
and meet more of their financial needs. This is setting the Group
on a higher growth trajectory while we retain our strong focus on
cost and capital discipline.
In light of the revised strategy the Committee has conducted a
thorough review of the Policy to ensure it supports the Group’s
strategic priorities and the interests of our shareholders. The
Committee has considered the need to remain competitive to
attract and retain key talent to deliver the strategy and reflect
developments in market practice.
The Committee has concluded that returning to a performance
based long term incentive plan (“LTIP”) would deliver stronger
alignment with our strategic objectives by supporting a more
demanding performance culture and providing the opportunity
to directly link vesting outcomes to delivery of the strategy and
the realisation of its benefits for shareholders. This is consistent
with incentive arrangements for the majority of our peer banks.
We consulted on proposals with a broad range of shareholders
and other key stakeholders, who expressed initial support
for alignment between business strategy, performance and
executive remuneration outcomes.
106 Lloyds Banking Group Annual Report and Accounts 2022
Awards will be weighted not less than 50 per cent to financial
measures, with 35 per cent anticipated for strategic measures
and 15 per cent to environmental measures, reflecting that the
transition to a low carbon economy is at the core of our strategy
and aligns with our purpose to Help Britain Prosper. It is intended
that the financial measures will be Return on Tangible Equity,
Relative Total Shareholder Return and Capital Generation.
Targets will be set for environmental measures, reflecting
the path towards our published 2030 goals (https://www.
lloydsbankinggroup.com/investors/esg-information.html).
The assessment of performance against strategic measures will
be informed by the consideration of quantifiable Board metrics
aligned to each of our four strategic growth pillars:
Deepen and innovate in Consumer – deepen relationships and
innovate intermediary positions, including growing credit card
spend market share, increasing green mortgage lending and
increasing assets under administration
Create a new mass affluent offering – expand in the growing
mass affluent market including increasing the number of mass
affluent banking customers, banking balances and net inflows
into investment propositions
Digitise and diversify our SME business – meet more client
needs with a digital-first model including increasing the number
of products originated and fulfilled digitally, income growth in
mid-sized SME transaction banking and grow new merchant
services clients
Target our Corporate and Institutional offering – strengthen a
core business with focus on UK-linked clients, including increasing
sustainable financing, growing operating income and risk
weighted assets
Target vesting outcomes will remain at 150 per cent of salary,
in line with the current target levels for the LTSP and the previous
EGOS incentive in place until 2020. The maximum proposed
LTIP award will be 300 per cent of salary, lower than the 400 per
cent maximum under the EGOS incentive. Whilst a performance
based long term incentive will provide opportunity to reward
outperformance, underperformance will lead to lower outcomes
than provided under the current restricted share plan (“LTSP”),
where vesting is subject to performance underpins rather than
stretching performance targets. The Committee will also have the
discretion to adjust the outcome for risk and conduct factors.
The first LTIP awards will be granted in 2024, subject to shareholder
approval of the Policy at the 2023 AGM, aligning with the horizon
of our 2024 to 2026 strategic goals and the final LTSP award in 2023
based on performance in 2022.
The Committee also reviewed the remuneration opportunities for
executive directors to ensure they remain reflective of contribution
and aligned to market. Total target compensation for William
Chalmers at £2.9 million is lower than peers and between lower
quartile and median when compared to FTSE30 companies.
Recognising William’s more than three years’ experience with the
Group and his business responsibilities in addition to his CFO role,
the Committee propose to increase the CFO’s GPS (annual bonus)
maximum opportunity to 140 per cent of salary, aligned with the
GCE, bringing total target compensation to £3.2 million. Whilst the
fixed pay elements of the CFO’s package remain lower than peers,
the Committee considered an increase to bonus opportunity to be
more appropriate at this time, reflecting the desired performance
culture across the Group, ensuring increases in compensation
reflect delivery for shareholders.
Together with my Committee members I look forward to hearing
your views on the remuneration arrangements outlined in the
report and we hope the new Policy will receive your support
at the upcoming AGM.
On behalf of the Board
Alan Dickinson
Chair, Remuneration Committee
Revised Policy overview
The below table sets out the revised Directors’ Remuneration Policy which will be put forward to shareholders at the 2023 AGM. The full
policy can be found on pages 125 to 133.
Base
Salary
+
Fixed Share
Award
+
Pension
+
Benefits
+
Short Term
Variable
+
Long
Term
Variable
=
Total
Reward
Current Policy
Proposed changes in Policy and why
Base Salary
Fixed Share
Award
Pension
d
e
x
i
F
Benefits
Short Term
Variable
Long Term
Variable
l
e
b
a
i
r
a
V
• Reflective of individual role, taking account
No Change
of responsibilities, experience and pay in the
wider Group
• Base salaries are typically reviewed annually
with any increases normally taking effect from
1 April for executive directors
• Ensures that total fixed remuneration is
No Change
commensurate with role
• Maximum award is 100 per cent of base salary
• Delivered in shares
• Three year delivery with 33 per cent being
released each year
• Provides cost effective and market competitive
No Change
retirement benefits
• Maximum allowance for executive directors
is 15 per cent of base salary, aligned with that
available to the majority of the workforce
• Flexible benefit allowance of 4 per cent
No Change
of base salary
• Other benefits include medical insurance, car
allowance and transportation
Group Performance Share (GPS)
• Maximum opportunity of 140 per cent of salary
for GCE and 100 per cent of salary for other
executive directors, with normal target level at
50 per cent of maximum opportunity
• Performance adjustment including malus and
clawback provisions apply
• No award can be made if threshold
performance is not met by the Group or the
individual
What:
• Maximum opportunity of 140 per cent of salary
for executive directors
Why:
Total target compensation for the CFO is behind
peers and between lower quartile and median
when compared to FTSE30 companies. Given the
significant value the CFO delivers for the Group,
the Committee propose to increase the CFO’s GPS
maximum opportunity to 140 per cent of salary,
aligned with the GCE.
Long Term Share Plan (LTSP)
• Restricted share plan with an opportunity of 150
per cent of base salary for the GCE and 200 per
cent of base salary for other executive directors
What:
• From 2024, awards will be granted under the
rules of the 2023 LTIP, subject to shareholder
approval at the AGM in May 2023
• Vesting subject to an assessment of underpin
• Awards will be granted in the form of conditional
thresholds being maintained, measured over a
period of three years, or such longer period, as
determined by the Committee
rights to shares in the Group
• The maximum LTIP opportunity is 300 per cent
of base salary for all executive directors
• A minimum of 50 per cent of the award being
dependent on financial measures
Why:
The proposed structure provides greater alignment
to delivery of the revised strategic aims of the Group.
The Group’s approach to shareholding requirements
The Group currently operates a shareholding policy which includes a post-employment shareholding requirement, please see
page 116 for further details.
Lloyds Banking Group Annual Report and Accounts 2022
107
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
2022 Total remuneration (£000)
2022 Remuneration
at a glance
Our remuneration package
The below summarises the different remuneration elements for
executive directors.
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 director’s in building long-term
retirement savings. Executive director’s employer pension
contributions are aligned with those available to the majority
of the workforce.
Benefits
Group Chief Executive – Charlie Nunn
£943
£349
£4,231
2021
2022
£2,429
£1,338
1
Total remuneration is from 16 August to 31 December 2021.
Chief Financial Officer – William Chalmers
£1,638
£705
2021
2022
£1,506
£689
£948
Total
£5,5231
£3,767
£2,343
£3,143
Fixed Pay
Long Term Variable
Short Term Variable
Buy-out
Group Chief Executive
The single total remuneration for the Group Chief Executive
during 2022 was £3.8 million. This is a decrease of 32 per cent
compared to 2021 which included a buy-out award of
£4.2 million.
Chief Financial Officer
The single total remuneration for the Chief Financial Officer
during 2022 was £3.1 million. This is an increase of 34 per cent,
and includes the first vesting EGOS (£948,000).
2022 Group balanced scorecard performance
84.1%
Our Group balanced scorecard
reflects a strong business
performance. Further details
can be found on page 110.
To provide flexible benefits as part of a competitive
remuneration package.
2022 Group Performance Share (GPS) Pool
Short
Term
Variable Group Performance Share (Annual 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
Variable
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.
108 Lloyds Banking Group Annual Report and Accounts 2022
£446m
The Committee determined a
GPS pool for 2022 of £446 million,
reflecting the Group’s strong
financial and overall business
performance.
Long Term Share Plan (LTSP) 2023 Award
2023 Long Term Share Plan awards of 150 per cent of salary
will be made to the Group Chief Executive and the Chief
Financial Officer to reflect the Group’s performance in 2022
and other factors taken into account in the ‘pre-grant test’.
The Remuneration Committee considered the awards to be
appropriate, reflecting Group and individual contribution in
2022 (see page 121).
2020 Executive Group Ownership Share
Total vesting
43.7%
The vesting outcome for the 2020
Executive Group Ownership Share
was 43.7 per cent.
2022 annual report on remuneration
Executive director single total figure of remuneration (audited)
£000
Base salary
Fixed Share Award1
Benefits
Pension
Total Fixed Pay
Group Performance Share2
Long-term incentive3
Total Variable Pay
Other remuneration4
Buy out5
Total remuneration
Less: Performance adjustment
Total remuneration less buy-outs and performance adjustment
Charlie Nunn
William Chalmers
Totals
2022
1,133
1,050
76
170
2,429
1,338
–
1,338
–
–
3,767
–
3,767
2021
426
402
51
64
943
349
–
349
–
4,231
5,523
–
1,292
2022
817
504
62
123
1,506
689
948
1,637
1
–
3,144
–
3,144
2021
901
569
46
122
1,638
705
–
705
–
–
2,343
–
2,343
2022
1,950
1,554
138
293
3,935
2,027
948
2,975
1
–
6,911
–
6,911
2021
1,327
971
97
186
2,581
1,054
–
1,054
–
4,231
7,866
–
3,635
The fixed share award is part of fixed remuneration and is not subject to any performance conditions see page 126.
1
2 Awards for Charlie Nunn and William Chalmers will be made in March 2023 in a combination of cash and shares.
3 The 2020 Group Ownership Share (GOS) vesting (see page 112) at 43.7 per cent was confirmed by the Remuneration Committee at its meeting on 16 February 2023.
The total number of shares vesting will be 2,153,182 for William Chalmers. The average share price between 1 October 2022 and 31 December 2022 44.04 pence
has been used to indicate the value. The shares were awarded in 2020 based on a share price of 49.4296 pence and as such no part of the reported value is
attributable to share price appreciation.
4 Other remuneration payments comprise income from all employee share plans, which arises through employer matching or discounting of employee purchases.
5 Charlie Nunn joined the Group on 16 August 2021 as Group Chief Executive and executive director. He was granted deferred share awards to replace, like for like,
unvested share and cash awards from his previous employer, HSBC, forfeited as a result of joining the Group and lost opportunity bonus for 2020.
2022 pension and benefits (audited)
Pension/Benefits
Pension
Car or car allowance
Flexible benefits payments1
Private medical insurance
Legal Fee2
Transportation3
Subtotal for Total Benefits less pension
Includes flexible benefits allowance and holidays sold through the Group’s flexible benefits plan.
This relates to the tax costs in respect of the legal fees paid in 2021, which were disclosed in the 2021 annual report.
1
2
3 Transportation benefits relate to the 2021/22 tax year.
Defined benefits pension arrangements (audited)
There are no executive directors with defined benefit pension entitlements.
Charlie
Nunn
2022
William
Chalmers
2022
170,016
–
45,000
1,130
29,455
483
122,538
12,000
48,026
1,130
–
399
76,068
61,555
Lloyds Banking Group Annual Report and Accounts 2022
109
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
Our 2022 balanced
scorecard
Our simplified balanced scorecard provides transparency on how
our performance directly aligns with remuneration outcomes for
2022 GPS and 2023 LTSP awards.
Our 2022 balanced scorecard
For 2022, ESG metrics aligned to our public commitments on
climate change and promoting inclusion and diversity accounted
for 17.5 per cent of the scorecard.
As set out in the scorecard assessment table below strong
performance against the financial, customer and ESG measures
have resulted in an overall outcome of 84.1 per cent.
The Committee determined that the scorecard outcome reflected
Group performance and appropriately rewards the executive
directors for their performance within the context of overall
stakeholder experience.
Block
Measure
Weighting
25%
50%
75%
100%
Actual
Outcome
Weighted
outcome
Performance Range
Profit after tax
20%
£3,765m £4,236m £4,706m £5,177m
£5,555m
100%
20%
)
%
0
5
(
l
i
a
c
n
a
n
i
F
Return on Tangible Equity
20%
8.3%
9.3%
10.3%
11.4%
13.5%
100%
20%
Operating Costs (excl. remediation
and in year GPS expense)
10%
£8,482m £8,398m £8,314m
£8,230m £8,342m
66.5%
6.6%
k
s
i
R
Group customer dashboard
25%
Reducing our operational
carbon emissions
Sustainable financing and investment
5%
5%
60%
20%
70%
32%
80%
90%
80%
75%
18.8%
35%
37%
33.0%
50%
2.5%
£9,000m £13,500m £17,000m £21,000m £26,626m1
100%
Increasing our gender and ethnic
representation in senior roles
3.75%
37.7%
38.4%
39.1%
39.9%
39.4%
3.75%
8.8%
9.4%
9.9%
10.5%
10.2%
75%
75%
Culture and colleague engagement
7.50%
≥ 70
(& above
average)
≥ 73
(& ≥ 2 pts
above
average)
Target
≥ 75
(& ≥ 5 pts
above
average)
≥ 76
(& above high
performing
norm)
75
(+6 pts above
average)
75%
5.6%
Total balanced scorecard outcome
84.1%
5.0%
2.8%
2.8%
)
%
0
5
(
l
i
a
c
n
a
n
i
F
-
n
o
N
Key:
A Actual
1
Includes sustainable finance for Commercial and Institutional, and Business and Commercial Banking clients, green mortgage lending (full year estimate
based on September 2022 actual position), financing for EV and plug-in hybrid electric vehicles and Scottish Widows discretionary investment in climate
aware strategies.
Charlie Nunn – Group Chief Executive
William Chalmers – Chief Financial Officer
Maximum award
£1,590,750
Maximum award
Group balanced scorecard outcome
84.1%
Group balanced scorecard outcome
Initial scorecard outcome
£1,337,821
Initial scorecard outcome
Committee discretion
Annual GPS award/
% of maximum
–
Committee discretion
£1,337,821
84.1%
Annual GPS award/
% of maximum
£818,945
84.1%
£688,733
–
£688,733
84.1%
• Successfully re-launched the Group’s purpose and values,
creating a strong framework to embed the new culture
• Strong financial management with all key measures, including
PBT and ROTE, ahead of target
• Announced a new operating model and leadership team which
• Effective balance sheet management with a pro forma CET1
will set us up for success in 2023 and beyond
ratio of 14.1 per cent, ahead of regulatory requirements
• Continued leadership throughout the Cost of Living issues,
ensuring an appropriate Group-wide response to support
customers and colleagues
• Positive engagement with investors and brokers on both Group
performance and strategy
• Played a critical role in the strategic execution of the Group
throughout 2022
110
Lloyds Banking Group Annual Report and Accounts 2022
Non-financial measures (50%) commentary
The scorecard that the Committee used in determining the annual bonus awards for the executive directors, along with the
assessment of performance against the scorecard, is detailed on page 110. The table below outlines the Committee’s assessment
of the non-financial elements of the scorecard.
Measure
Commentary
Group customer dashboard
Our assessment of how effectively we
are serving customers across all brands,
products and services
•
In 2022, 80 per cent of Group customer dashboard measures achieved target,
reflecting strong performance relative to peers, with average rank position further
improved year on year. Continued focus is required to maintain strong position in
market and to further improve absolute scores across customer experience measures
Reducing operational carbon emissions
• A 33 per cent reduction in emissions has been achieved in 2022 from our 2018/19
baseline. Year on year reductions in gas and refrigerants have been delivered,
although increases have been seen in commuting and business travel emissions
as colleagues return to offices
Sustainable financing and investment
• We have exceeded our Sustainable finance and investment metric with strong
performance across all contributing business lines – Commercial Banking, Consumer
Lending Mortgages, Consumer Lending Transport and Scottish Widows Investments
• Demand has increased for sustainable finance supported by a strong housing
market earlier in the year and the increasing take up of electric vehicles. Continued
strengthening of our sustainable finance teams helped us secure more transactions
including a number of Sustainability Linked Loan co-ordinator roles. Investments in
climate-aware strategies were always planned to deliver a greater proportion upfront
towards the overall 2025 strategic outcome, but performance in 2022 also benefitted
from conversion of some investment in property shares to a low carbon tilt and an
earlier than anticipated launch of the BlackRock ESG Credit Insight fund
• We have increased the representation of women within our senior population by 1.7
percentage points since the end of 2021, moving from 37.7 per cent to 39.4 per cent
• We have increased the representation of Black, Asian and Minority Ethnic colleagues
by 1.4 percentage points since the end of 2021, moving from 8.8 per cent to 10.2 per cent
Increasing our gender and ethnic
representation in senior roles
Culture and colleague engagement
Our employee engagement index score
absolute and performance versus UK norm
and high performing norm
• Engagement saw a positive increase to 75 per cent in 2022 which is +6 points higher
than the UK average though 3pts below the UK high performing norm (comparisons
from 2019–2021)
• We also saw an increase in advocacy/eNPS (a new measure introduced in 2022) and
colleague mood, with continued positive perceptions of our line manager capability
Lloyds Banking Group Annual Report and Accounts 2022
111
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
2020 Executive Group Ownership Share
In determining the vesting outcome of the 2020 Executive Group
Ownership Share, the Committee carefully considered alignment
with shareholder experience and whether adjustments were
required for windfall gains. Despite targets being set before
the onset of COVID-19, the Committee has not applied upward
discretion and concluded a vesting outcome of 43.7 per
cent of maximum, which reflects improvements in economic
profit during the vesting period and strong progress against
customer measures.
2020 Executive Group Ownership Share
40 per cent of the award was weighted to Absolute Total
Shareholder Return, which has not vested due to share price
impacts during the performance period. Awards were granted
at 49.4296 pence, before the Group’s share price fell due to the
onset of COVID-19 (to an average of 31.2 pence over the remainder
of 2020) and the Committee concluded that an adjustment for
windfall gains was therefore not required.
Block
Measure
Weighting
Threshold3
Maximum
Actual
Weighted
vesting
Performance Range
Absolute Total Shareholder return (TSR)
40%
8% p.a
16% p.a
(7.1%) p.a
0.0%
)
%
5
6
(
l
i
a
c
n
a
n
i
F
)
%
5
3
(
l
i
a
c
n
a
n
i
F
-
n
o
N
Economic Profit1
15%
£1,965m
£2,948m
£2,782m
12.5%
Cost: Income Ratio2
10%
46.4%
43.9%
46.3
2.7%
FCA reportable complaints per ‘000 accounts
Financial Ombudsman Service (FOS) change rate
Customer satisfaction
Digital net promoter score
Employee engagement index
5%
5%
10%
7.5%
7.5%
2.65
30%
3rd
2.52
25%
1st
2.47
27%
1st
5.0%
3.3%
10.0%
65.3
68.3
69.2
7.5%
+5% vs.
UK Norm
+2% vs.
UK HP Norm
+6% vs.
UK Norm
2.8%
Award (% maximum) vesting
43.7%
1 A measure of profit taking into account a charge for equity utilisation.
2 Cost: Income Ratio adjusted to exclude non mergers and acquisitions restructuring costs (now reported in operating costs as of 2022) to ensure comparability
with original GOS target.
3 Meeting threshold performance will result in 25 per cent vesting of each metric, relative to each weighting.
Payments for loss of office (audited)
No payment for loss of office were made in 2022.
Payments within the reporting year to past Directors (audited)
As disclosed in the 2021 Directors’ remuneration report, Sir António Horta-Osório was provided with tax assistance worth £24,000
(inclusive of VAT) during 2022. There are no other payments made to past directors in 2022.
External appointments
No executive director served as a non-executive director on the Board of another company in 2022.
112
Lloyds Banking Group Annual Report and Accounts 2022
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.
Dividend and share buyback1
£m
Salaries and performance-based compensation2
£m
2022
2021
6%
£3,607
£3,403
2022
2021
8%
£2,969
£2,740
1
2022: Ordinary dividend in respect of the financial year ended 31 December
2022, partly paid in 2022 and partly to be paid in 2023 and intended share
buyback. 2021: Ordinary dividend in respect of the financial year ended 31
December 2021, partly paid in 2021 and partly paid in 2022 and share buyback.
2 Performance-based compensation includes expense for the following
plans: Group Performance Share (2022: £421 million, 2021: £301 million),
Executive Group Ownership Share (2022: £25.3 million, 2021: 22.8 million),
Executive Share Awards (2022: £0.2 million, 2021: £0.2 million) and LDC Assets
under Management Plan (2022: £12 million, 2021: £12 million). For the 2022
performance year, the face value of awards was £446 million for Group
Performance Share and £57.1 million for 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 31st December 2012 (to 31st December 2022)
2
1
0
2
r
e
b
m
e
c
e
D
1
3
n
o
d
e
t
s
e
v
n
i
1
0
0
£
f
o
e
u
a
V
l
200
150
100
50
0
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Dec 2020
Dec 2021
Dec 2022
Lloyds Banking Group
FTSE 100 index
GCE
2013
2014
2015
2016
2017
2018
2019
2020
20214
Sir António Horta-Osório
7,475
11,540
8,704
5,791
6,434
6,544
4,424
3,604
2,444
2022
n/a
GCE single figure
of remuneration
£000
Annual bonus/
GPS payout
(% of maximum
opportunity)
Long-term
incentive vesting
(% of maximum
opportunity)
TSR component
vesting (% of LTIP
maximum)
Charlie Nunn1
William Chalmers2
Sir António Horta-Osório3
Charlie Nunn
William Chalmers
Sir António Horta-Osório
Charlie Nunn
William Chalmers
n/a
n/a
71%
n/a
n/a
54%
n/a
n/a
Sir António Horta-Osório
25.30%
Charlie Nunn
William Chalmers
n/a
n/a
n/a
n/a
54%
n/a
n/a
n/a
n/a
57%
n/a
n/a
n/a
n/a
77%
n/a
n/a
n/a
n/a
n/a
n/a
77%
67.60%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
5,523
3,767
n/a
n/a
819
n/a
57.80%
n/a
57.80%
84.1%
n/a
78.20%
97%
94.18%
55% 66.30%
68.70%
49.70%
33.75%
41.80%
n/a
n/a
30%
n/a
n/a
n/a
n/a
30%
n/a
n/a
n/a
n/a
0%
n/a
n/a
n/a
n/a
0%
n/a
n/a
n/a
n/a
0%
n/a
n/a
n/a
n/a
0%
n/a
n/a
n/a
n/a
0%
n/a
n/a
n/a
n/a
0%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1 Charlie Nunn succeeded Sir António Horta-Osório as Group Chief Executive with effect from 16 August 2021 and the single figure total remuneration for 2021 includes
a one-off buy-out of £4,231 million.
2 William Chalmers was the Interim Group Chief Executive from 1 May 2021 until 15 August 2021, remuneration in the table above is for this period.
3 Sir António Horta-Osório independently requested that he be withdrawn from consideration for a Group Performance Share award in 2019 and 2020. There were no
GPS awards for 2020 performance.
4 2021 single figure of remuneration has been adjusted to reflect the LTIP vesting share price of 45.1038 pence instead of the average share price of 47.993 pence
reported in the 2021 annual report.
Lloyds Banking Group Annual Report and Accounts 2022
113
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Directors’ remuneration report continued
Single total figure of remuneration for Chair and non-executive directors (audited)
Chair and non–executive directors
Robin Budenberg
Alan Dickinson
Sarah Legg
Lord Lupton
Amanda Mackenzie
Harmeen Mehta
Stuart Sinclair1
Cathy Turner2
Scott Wheway3
Catherine Woods
Fees (£000)
Benefits (£000)4
Total (£000)
2022
2021
2022
2021
2022
2021
624
445
224
282
175
98
72
19
189
242
618
397
212
287
164
16
231
–
–
232
1
–
5
–
–
–
–
–
–
10
1
1
2
1
–
–
–
–
–
5
625
445
229
282
175
98
72
19
189
252
619
398
214
288
164
16
231
–
–
237
Stuart Sinclair retired on 12 May 2022.
1
2 Cathy Turner was appointed on 1 November 2022.
3 Scott Wheway was appointed on 1 August 2022.
4 The Chair’s benefits relates to private medical insurance provided since 2021 (with the value in respect of 2021, as disclosed above, restated to correct the omission
in the 2021 annual report). Benefits for the other non-executive directors relates to reimbursement for expenses incurred in the course of duties. 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
Unvested
subject to
continued
employment
Unvested
subject to
performance
Unvested
subject to
continued
employment
Vested
unexercised
Totals at
31 December
20222
Owned outright1
Value
Expected
value at
31 December
2022
(£000s)3
2,632,948
222,415
3,588,3645
6,585,447
6,325,447
449,505
9,060,8234,5
63,494
1,500,000
200,000
200,000
2,250,000
63,567
20,000
362,664
424,113
168,356
107,549
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,029,174
15,899,269
5,920
5,9634
1,500,000
200,000
200,000
2,250,000
63,567
20,000
362,664
424,113
168,356
107,549
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Executive directors
Charlie Nunn
William Chalmers
Non-executive directors
Robin Budenberg
Alan Dickinson
Sarah Legg
Lord Lupton
Amanda Mackenzie
Harmeen Mehta
Stuart Sinclair6
Cathy Turner7
Scott Wheway8
Catherine Woods
Includes holdings of any Person Closely Associated.
There has been no change in shareholdings from 31 December 2022 to 22 February 2023.
Expected values are based on the LBG closing share price of 45.435 pence on 31 December 2022.
1
2
3
4 For awards granted under the 2020 Group Ownership Share (GOS) Plans, as the performance period has completed, the actual outcome of 43.7 per cent has been
applied to the unvested shares to calculate the expected value.
5 For awards granted under the 2021 and 2022 Long Term Share Plan where the three-year underpin period has not completed, 100 per cent has been applied to
calculate the expected value of the LTSP award in line with the applicable Remuneration Policy.
6 Stuart Sinclair retired on 12 May 2022; the number of shares shown is as of 12 May 2022.
7 Cathy Turner was appointed on 1 November 2022.
8 Scott Wheway was appointed on 1 August 2022.
9 Directors are not permitted to enter into any hedging arrangements in relation to share awards. No director uses share holding as collateral.
114
Lloyds Banking Group Annual Report and Accounts 2022
Outstanding share plan interests (audited)
At 1 January
2022
Granted/
awarded
Dividends
awarded
Vested/
released/
exercised
At 31
December
2022
Exercise
Price
Lapsed
Exercise periods
From
To
Notes
3,588,364
370,691
148,276
3,588,364
222,415
859,340
–
16/03/2022
15/03/2027
Charlie Nunn
LTSP 2022 – 2024
Deferred GPS
awarded in 2022
(2021 GPS)
Share Buy-Out
859,340
1,247,548
1,368,990
1,368,990
1,369,012
891,217
339,690
15/03/2023
14/03/2028
12/03/2024
11/03/2029
11/03/2025 10/03/2030
11/03/2026
10/03/2031
11/03/2027
10/03/2032
11/03/2028 10/03/2033
1,247,548
1,368,990
1,368,990
1,369,012
891,217
339,690
4,927,191
1,547,340
2,586,292
–
2,3
4,5
1
1
1
1
1
1
1
2
2,3
2,3
6
4,5
William Chalmers
GOS 2020 – 2022
4,927,191
LTSP 2021 – 2023
1,547,340
LTSP 2022 – 2024
–
2,586,292
79,116
79,116
Deferred GPS
awarded in 2020
(2019 GPS)
Deferred GPS
awarded in 2022
(2021 GPS)
749,173
299,668
449,505
Share Buy-Out
686,085
686,085
–
28/01/2022
27/01/2027
7
2020 Sharesave
2021 Sharesave
46,317
17,177
46,317
24.25p
01/01/2024 30/06/2024
17,177
39.40p
01/01/2025 30/06/2025
1 When Charlie Nunn joined the Group on 16 August 2021 as Group Chief Executive and executive director he was granted deferred share awards and deferred cash
to replace unvested awards from his previous employer, HSBC. Options vested on the 16 March 2022 and were exercised on 23 March 2022. Charlie Nunn retained all
the shares apart from 404,092 shares which were sold at 49.965 pence to meet income tax and National Insurance contributions. The remaining 455,248 shares are
subject to holding periods that mirror the shares replaced from HSBC of no hold, six months and 12 months holds.
2 All GOS and LTSP awards have a three-year performance period ending 31 December. Awards were made in the form of conditional rights to free shares.
3
LTSP awards (in the form of conditional share options) in 2022 were made over shares with a value of 150 per cent of salary for Charlie Nunn (3,588,364 shares
with a face value of £1,687,500) and a value of 150 per cent for William Chalmers (2,586,292 shares with a face value of £1,216,256). Vesting is subject to underpin
thresholds applicable for the first three years from grant as detailed on page 115 of the 2021 Directors’ remuneration report. Each year the Remuneration Committee
will monitor the Group’s progress in relation to the underpins. The share price used to calculate the face value is the average price over the five days prior to grant
(25 February 2022 to 3 March 2022), which was 47.027 pence. The underpins for this award are set out on page 115.
4 Half of GPS is deferred into shares (in the form of conditional rights to free shares). The face value of the shares awarded in respect of GPS granted in March 2022
was £174,325 (370,691 shares) for Charlie Nunn; and £352,314 (749,173 shares) for William Chalmers. As the awards represent deferral of awarded GPS they are not
subject to further performance conditions. The share price used to calculate the face value is the average price over the five days prior to grant (25 February 2022
to 3 March 2022), which was 47.027 pence.
5 The first tranche of the 2021 GPS deferred award vested on 7 March 2022. The closing market price of the Group’s ordinary shares on that date was 41.255 pence.
The award was settled in shares net of tax, with the resulting shares subject to a one year holding period.
6 The final tranche of 2019 GPS award vested on 7 March 2022. The closing market price of the Group’s ordinary shares on that date was 41.255 pence. The award was
settled in shares net of tax. 50 per cent of the final tranche is subject to a one year holding period.
7 When William Chalmers joined the Group on 3 June 2019, he was granted deferred share awards to replace unvested awards from his former employer, Morgan
Stanley. Options vested on 27 January 2022 and were exercised on 7 March 2022. William Chalmers retained all the shares apart from 322,702 shares which were
sold at 41.825 pence to meet income tax and National Insurance contributions. The remaining 363,383 shares are subject to a 12-month holding period from the
date of vesting on 27 January 2022.
Outstanding share plan cash awards interests (audited)
Charlie Nunn
Deferred GPS cash awarded in 2022 (2021 GPS)
William Chalmers
Deferred GPS cash awarded in 2022 (2021 GPS)
At 1 January
2022 (£)
Granted/
awarded (£)
Vested /
released /
exercised (£)
At 31
December
2022 (£)
Notes
–
–
104,594
211,388
–
–
104,594
211,388
1
1
1
From 2022, half of GPS is now deferred into cash (in the form of deferred cash awards, with a face value equal to that of the relevant portion of the GPS award).
As the awards represent deferral of awarded GPS they are not subject to further performance conditions. The awards will be released in two tranches; March 2023
and March 2024.
Lloyds Banking Group Annual Report and Accounts 2022
115
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
Shareholding Requirement
Executives are expected to build and maintain a company shareholding in direct proportion to their remuneration in order to align their
interests to those of shareholders. The minimum shareholding requirements executive directors are expected to meet are as follows:
350 per cent of base salary for the GCE and 250 per cent of base salary for other executive directors. From January 2023 individuals
will have five 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 recognition of the increased variable opportunity offered by the implementation of the LTIP and to further strengthen alignment with
shareholders, from 1 January 2024 the shareholding requirement applicable to the GCE will increase from 350 per cent to 400 per cent
of salary and from 250 per cent to 300 per cent for other executive directors, subject to approval of the Policy at the 2023 AGM.
Post-employment shareholding requirement
Executive directors are contractually bound to a post-employment shareholding requirement of two years at a level equal to the lower
of the shareholding requirements immediately prior to departure or the actual shareholding on departure.
The post-employment requirement will be maintained through self-certification, with the Committee keeping this approach under review.
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.
Shareholding requirement
Charlie Nunn
Shareholding requirement
Actual shareholding1
William Chalmers
Shareholding requirement
Actual shareholding1
350%
106%
250%
354%
1 Calculated using the average share price for the period 1 January 2022 to 31 December 2022 (45.77 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 Person Closely
Associated, as defined by the Companies Act, but broadly meaning spouse or partner and children, may also be included.
The GCE holds 106 per cent of his salary in shares and has until 15 August 2024 to achieve the requirement under the Policy applicable in 2022.
2
116
Lloyds Banking Group Annual Report and Accounts 2022
Chair and non-executive director fees in 2022
Following a detailed review of peer benchmarks, there is a 1 per cent increase to the annual fee for the Chair, capped at £5,000
(£629,400) to align with the maximum pay increase permitted for the broader colleague population. The basic board fee will increase
by 5 per cent (£86,100) and there are no increases to other non-executive directors fees for 2023.
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
IT Forum member
Nomination and Governance Committee member
2023
2022
£86,100
£82,000
£107,000
£107,000
£64,200
£64,200
£75,000
£75,000
£75,000
£75,000
£75,000
£75,000
£42,800
£42,800
£42,800
£42,800
£34,300
£34,300
£34,300
£34,300
£34,300
£34,300
£16,100
£16,100
£16,100
£16,100
£16,100
£16,100
Non-executive directors may receive more than one of the above fees.
Percentage change in remuneration levels
The table below sets out the change in the directors’ base salary/fees, taxable benefits and annual bonus compared with the change
in our UK-based colleagues’ pay. Lloyds Banking Group plc is not an employing entity, and therefore the disclosure below is made on
a voluntary basis to compare any change with all employees of the wider Group based in the UK. This population has been chosen
as the majority of our workforce are based in the UK and is considered to be the most appropriate group of employees. The same
population is used for the purposes of the Chief Executive Officer pay ratio disclosure on page 118 of the report.
% change in base salary/fees
% change in GPS
% change in benefits
2019 to 2020
2020 to 2021
2021 to 2022
2019 to 2020
2020 to 20214 2021 to 2022
2019 to 2020
2020 to 2021
2021 to 2022
All employees1
Executive directors
Charlie Nunn2
William Chalmers3
Non-executive directors5,6
Robin Budenberg
Alan Dickinson
Sarah Legg
Lord Lupton
Amanda Mackenzie
Harmeen Mehta
Stuart Sinclair
Cathy Turner
Scott Wheway
Catherine Woods
4
4
n/a
2
n/a
45
131
0
6
n/a
21
n/a
n/a
n/a
n/a
12
243
14
28
(8)
(1)
n/a
(9)
n/a
n/a
43
6
1
(9)
1
12
6
(2)
7
2
(25)
n/a
n/a
4
(100)
n/a
12
(32)
1
n/a
(100)
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
47
(2)
n/a
(1)
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
2
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
5
4
35
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Lloyds Banking Group is not a contracting entity but considers this population to be appropriate for purposes of an ‘All employees’ calculation.
1
2 Charlie Nunn became the Group Chief Executive in August 2021. Figures for 2021 have been annualised based on the single total figure table.
3 William Chalmers was the Interim Group Chief Executive from May to August 2021 and received a deputisation payment for this period.
4 No Group Performance Share (bonus) was paid for 2020 performance.
5
In some instances, non-executive directors may change membership or become the Chair of a Committee during the year, resulting in large year-on-year
percentage changes in fees.
6 Some non-executive directors have received other benefits that relate to reimbursement for expenses incurred in the course of duties. Reimbursements of these
expenses do not provide an accurate comparison to benefits received by colleagues and are therefore not included.
Lloyds Banking Group Annual Report and Accounts 2022
117
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
Gender pay
Ethnicity pay
Our work to improve gender equality continues to be
recognised externally: in 2022, Lloyds Banking Group was listed
in The Times Top 50 Employers for Women list for the eleventh
year running. We were also included in the Bloomberg Gender
Equality Index for a fourth consecutive year running.
While we have further reduced the mean pay gap to
29.3 per cent, from 32.8 per cent in 2017, it is still larger than we
would like and our progress has been too slow. Through our
actions over the past few years, we’ve learned a lot about what
works and what doesn’t. What’s clear is that our focus needs to
be on creating an organisation that is more agile and reflects
the social and demographic changes we are seeing.
Further information is available at https://www.
lloydsbankinggroup.com/assets/pdfs/who-we-are/
responsible-business/downloads/2022-reporting/lbg-
gender-pay-gap-report-2022.pdf
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.
Broadly, the Group has made progress in improving Black,
Asian and Minority Ethnic representation at senior levels.
Senior Black, Asian and Minority Ethnic representation has
increased by 3.7 per cent from 5.6 per cent in January 2018
(when our representation goals were set) to 9.3 per cent in April
2022 (based on all colleague data). However, our data shows
us that under-representation is seen at its highest amongst
our Black Heritage colleagues and needs additional focus
to progress.
Further information is available at https://www.
lloydsbankinggroup.com/assets/pdfs/who-we-are/
responsible-business/downloads/2022-reporting/lbg-
ethnicity-pay-gap-report-2022.pdf
Mean pay gap
%
2022
2021
Mean pay gap
%
29.3%
29.9%
2022
2021
4.6%
5.3%
Bonus data has been excluded, as this year’s bonus data cannot be compared
like-for-like with the equivalent data for last year. This is because no bonuses
were awarded for the 2020 performance year, which would normally have been
paid during 2021, and therefore impacted the bonus data for the 2021 and 2022
Gender Pay Gap reporting periods.
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 GCE’s total remuneration to the remuneration of colleagues since 2017.
The change in the pay ratios for 2022 is explained in more detail on page 119.
Year
2022
2021
2020
2019
2018
2017
Y-o-Y (2021 v 2022)
Total compensation
Fixed pay
Methodology
P25 (Lower
Quartile)
P50
(Median)
P75 (Upper
Quartile)
P25 (Lower
Quartile)
P50
(Median)
P75 (Upper
Quartile)
A
A
A
A
A
A
120:1
316:1
132:1
179:1
237:1
245:1
86:1
225:1
95:1
128:1
169:1
177:1
(62)%
48:1
120:1
54:1
71:1
93:1
97:1
81:1
93:1
103:1
114:1
113:1
113:1
59:1
66:1
75:1
82:1
81:1
82:1
(11)%
35:1
38:1
42:1
47:1
48:1
48:1
118
Lloyds Banking Group Annual Report and Accounts 2022
Notes to the table:
• The 2022 total remuneration for the colleagues identified at P25, P50 and P75 are as follows: £31,421, £43,760, £78,833.
• The 2022 base salary for the colleagues identified at P25, P50 and P75 are as follows: £25,344, £34,086, £55,489.
• The P25, P50 and P75 colleagues were determined on 31 December 2022 based on calculating total remuneration for all UK
employees for the 2022 financial year. Payroll data from 1 January 2022 to 31 December 2022.
• 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 58,113 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 2022 and 31 December 2022 44.04 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 GCE.
• 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 GCE.
•
In 2021 the median ratio was calculated for all three individuals undertaking the role of GCE and increased by 137 per cent
year-on-year. This increase can be attributed to the one-off buy out awards granted to Charlie Nunn, an increase in the vesting
LTIP and the payment of Group Performance Share (Annual Bonus), which were not awarded for 2020.
Our ratios have been calculated using Methodology option A on the basis that it provided the most accurate means of identifying
the median, lower and upper quartile colleagues. The ratio has been calculated taking into account the pay and benefits of 58,113 UK
employees, other than the individual performing the role of GCE.
The change in total remuneration ratios since 2017 is largely driven by the more volatile nature of variable pay for the CEO. The reduction
in 2020 can be attributed to the decision not to make awards under the Group Performance Share Plan; reduced performance in the
vesting of the 2018 Group Ownership plan compared to 2017 and the reduction in the former GCE’s pension allowance from 33 per cent
to 15 per cent of salary.
The GCE pay ratios decreased by 62 per cent between 2021 and 2022, due to two factors. Firstly, Charlie Nunn’s remuneration for 2022
did not include any value in respect of Long Term Incentive Plans, as no 2020 EGOS award was granted to him given that he was not
an executive director at the time of grant. Secondly, the 2021 ratio included the one-off buy out awards granted to Charlie Nunn. In
addition the 2021 ratio was calculated for all three individuals undertaking the role of GCE. Over the same time period, employee total
compensation increased by 12 percent at the lower quartile, 11 per cent at the median and by 7 per cent at the upper quartile, also
contributing to the decrease in pay ratios.
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 an increased bonus pool for 2022. 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.
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.
Lloyds Banking Group Annual Report and Accounts 2022
119
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
Implementation of the policy in 2023
The 2023 Directors’ Remuneration Policy is subject to approval at the Annual General Meeting in May 2023. We propose to implement
the Policy in the following ways subject to shareholder approval. A final 2023 Long Term Share Plan award will be granted under the
existing Remuneration Policy prior to the AGM when the 2023 Remuneration Policy is intended to come into effect.
Base Salary
Pay deal for wider workforce reflects a 6.3 per cent budget. The
approach focuses on lower paid colleagues and colleagues
lower in their pay range. However, no salary increases are
proposed for the GCE and CFO.
Salaries will therefore remain as follows:
• GCE: £1,136,250
• CFO: £818,945
Fixed Share Award
Awards remain unchanged from 2022 as follows:
• GCE: £1,050,000
• CFO: £504,000
Pension
Shares will be released in equal tranches over three years.
(See page 126 for further details).
Pension allowances for all executive directors are set at 15 per
cent of base salary. Any new executive director appointments
in 2023 will also attract a maximum allowance of 15 per cent
of base salary.
In addition to the DC arrangement, the Group currently has
almost 11,000 active members in defined benefit plans, with the
effective cost of employer contributions into these arrangements
being 40 per cent of salary.
Over 52,000 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.
Benefits
Benefits remain unchanged from 2022. Executive directors
receive a flexible benefit allowance of 4 per cent of base salary.
Other benefits include transportation and private medical cover.
The CFO also receives a car allowance.
This can be used to select benefits including life assurance
and critical illness cover.
Group Performance Share (Bonus)
The performance measures for determining any individual
2023 GPS awards for executive directors are outlined in the 2023
balanced scorecard on page 122.
Subject to shareholder approval at the 2023 AGM individual
maximum opportunities for executive directors for 2023 are
140 per cent of base salary for the GCE and the CFO.
Individual awards as a percentage of maximum will directly
correlate to the overall performance assessment outcome.
For the 2023 performance year, any GPS opportunity will be
awarded in March 2024 in a combination of cash (up to
50 per cent) and shares.
120 Lloyds Banking Group Annual Report and Accounts 2022
Historically, the Group has applied deferral to the GPS in excess of
both regulatory and Policy requirements, inhibiting the attraction
and retention of the talent necessary to deliver the Group’s new
strategy. From 1 January 2023 the Group will apply deferral in
line with minimum regulatory requirements as set out in the
Policy and consistent with the approach taken by its peers. After
this change at least 60 per cent of total variable remuneration
awarded to the GCE will remain deferred over a period up to 7
years maintaining strong alignment to shareholders.
Long Term Share Plan
A Long Term Share Plan award will be granted in relation to 2022
performance under the terms of the current Remuneration
Policy. On the basis of the new Long Term Incentive Plan being
approved by shareholders at the 2023 AGM, no further Long Term
Share Plan awards would then be made to executive directors.
Underpins
The underpins that will apply to the 2023 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 underpin 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 will also 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
four 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.
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). This is not however
a mechanical outturn and, as with GPS, the Remuneration
Committee may exercise its judgement.
Pre-grant test
The decision to award Long Term Share Plan awards for 2023 is
based on the performance assessment from the 2022 balanced
scorecard provided on page 110.
To ensure that the GCE and CFO are aligned to the long-term
success of the Group and motivated to deliver the next phase of
the Group’s strategy and sustainable returns, the Remuneration
Committee has awarded 2023 Long Term Share Plan awards
of 150 per cent of salary to the GCE and the CFO to reflect the
Group’s performance in 2022 and other factors taken into
account in the ‘pre-grant test’.
The normal range for awards for executive directors is 125 per
cent to 150 per cent of salary. Consistent with the awards for
2021 performance granted in March 2022, these 2023 awards
are subject to underpins for the first three years which align the
vesting outcomes to longer-term shareholder experience and
are deferred for up to seven years.
In deciding the award size, the Committee considered the
balanced scorecard, Group’s share price, as well as the following
four questions:
• Has the bank lived up to its ambition to be the Best Bank for
Customers?
• Do the Group’s financial results and capital position
adequately reflect risk, conduct and any other non-financial
considerations, including ESG?
• Has the Group made meaningful progress in supporting the
UK’s transition to net zero?
• Has the Group suffered a serious conduct event or has severe
reputational damage arisen from the Group not living its values?
The Committee concluded that the Group’s strong financial and
overall business performance supported the making of awards.
Balanced scorecard outcomes and LTSP award range
Scorecard performance outcome
All LTSP grant (up to % of base salary)
0%—50%
0%—125%
50%—100%
125%—150%1
1 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 Charlie Nunn who agreed to cap his maximum award at 150 per cent of salary.
Lloyds Banking Group Annual Report and Accounts 2022
121
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
2023 Group Performance Scorecard
The performance measures for determining any 2023 GPS
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.
For 2023 the Remuneration Committee has reduced the
weighting of the customer measure to 20 per cent, and uplifted
Profit after tax to 25 per cent, to provide a more appropriate
balance within the scorecard. Quantitative financial measures
make up 55 per cent of the scorecard, with the remaining
45 per cent made up of non-financial 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.
Measures and weightings
Targets
k
s
i
R
)
%
5
5
(
l
i
a
c
n
a
n
i
F
)
%
5
4
(
l
i
a
c
n
a
n
i
F
-
n
o
N
Profit after tax
ROTE
Operating costs (excl. remediation and in-year GPS expense)
Customer
Our assessment of how effectively we are serving customers across
all brands, products and services
Colleague
•
Increasing our gender and ethnic representation in senior roles
• Culture and colleague engagement
Climate
• Reducing our operational carbon emissions
• Sustainable financing and investment1
25%
20%
10%
20%
7.5%
7.5%
5.0%
5.0%
Targets will be disclosed retrospectively
in the 2023 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 financial and non-financial
performance have been agreed by the
Remuneration Committee to evaluate
performance during 2023.
1
The sustainable financing and investment
criteria for the Group Balanced Scorecard
details the financing and investment activities
that are eligible for inclusion towards this
measure. Further information is available at:
www.lloydsbankinggroup.com/assets/pdfs/
who-we-are/financing-a-green-future/
objective- framework.pdf
122
Lloyds Banking Group Annual Report and Accounts 2022
Advisers
Over the course of 2022, advice was provided to the Committee
by Mercer and PwC.
Mercer was appointed by the Committee following a competitive
tender process in 2016 and was retained for part of 2022.
The broader Mercer company provided unrelated advice on
accounting and investments during the year. Fees payable for
the provision of services in 2022 were £600 excluding VAT.
The Committee conducted a competitive tender process during
the year and appointed PricewaterhouseCoopers (PwC) as
independent adviser to the Committee in May 2022. PwC also
provided professional services to the Group in the ordinary course
of business including tax, assurance and advisory services. Fees
paid to PwC for advising the Committee are based partly on a
fixed fee and partly on a time and materials basis. During the
year, the total fees paid to PwC for services related to directors’
remuneration amounted to £279,633 excluding VAT.
Mercer and PwC have no other connections with the Group’s
directors that may impair their independence as advisers to the
Committee. PwC are members of the Remuneration Consultants
Group and signatories to its Code of Conduct and the Committee
is therefore satisfied that the advice they provided was objective
and independent.
Jan
Feb
May
Sep
Nov
Remuneration Committee
The Committee comprises of five non-executive directors from
a wide background to provide a balanced and independent
view on remuneration matters. Two of the three designated
independent non-executive directors of the Ring-Fenced Banks
also attend meetings of the Committee as observers in order
to provide insights on matters relevant to the Ring-Fenced
Banks and as part of their role in the Group’s overall governance
structure. For further details of Committee membership and
attendance at meetings, please see page 79.
During the year, Charlie Nunn as the GCE provided regular
briefings to the Committee. In addition, the Committee
engaged with and received updates from the Chief People and
Places Officer, Total Reward Director, Chief of Staff and Chief
Sustainability Officer and the Chief Risk Officer.
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.
Committee activities in the year
Executive directors’ remuneration
Executive director remuneration policy implementation, balance
scorecards and pay proposals
Group Performance Share, Long Term Share Plan and individual
assessment
Remuneration for other senior executives
Directors’ remuneration report
Directors’ remuneration policy design
All employee remuneration
Group Performance Pool, balanced scorecard performance and 2023
pay proposals
Group-wide reward, gender and ethnic pay gap
Remuneration aspects of the workforce engagement
Reward governance
Consideration of Policy, risk, control and conduct matters
Statement of voting at Annual General Meeting
The table below sets out the voting outcome at the Annual General Meeting in May 2022 in relation to the annual report on
remuneration and the Remuneration Policy, last voted on in 2020.
Votes cast
in favour
Votes
cast against
Number
of shares
(millions)
Percentage
of votes cast
Number
of shares
(millions)
Percentage
of votes cast
2021 annual report on remuneration (advisory vote)
42,141
96.07%
1,723
3.93%
Directors’ Remuneration Policy (binding vote in 2020)1
29,212
63.82%
16,562
36.18%
Votes
withheld
Number
of shares
(millions)
801
858
1 During 2020 we engaged with shareholders and responded to feedback on the Directors’ Remuneration Policy, for more detail see page 118 of the 2020 Directors’
remuneration report.
Lloyds Banking Group Annual Report and Accounts 2022
123
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Directors’ remuneration report continued
Policy alignment to Provision 40 of the Corporate Governance Code.
A summary of how the proposed Remuneration Policy addresses the principles set out in the UK Corporate Governance Code is
detailed below.
Clarity
Proportionality
• The Committee regularly consults with key shareholders
to ensure transparency on our policy and remuneration
outcomes
• Targets are aligned to the Group’s strategy and purpose,
providing clarity to shareholders and stakeholders on
the relationship between delivery of the strategy and
remuneration outcomes
• During the year the Group communicated directly with
colleagues detailing Group performance, changes in the
economic and regulatory environment and updates on key
strategic initiatives. Meetings were held throughout the year
between the Group and our recognised unions
• Non-executive directors attended a number of colleague
focus groups to discuss themes from the annual colleague
survey, the Group’s new strategy and values, pay and reward
and hybrid working
• There is clear alignment between the performance of
the Group, the business strategy, and the reward paid to
executive directors
• The Committee has the discretion to reduce the annual
bonus, LTIP and LTSP awards, if it considers the pay-out does
not appropriately reflect the performance of the Group
during the performance period
Simplicity
Risk
• The Remuneration Policy has been designed so that it is
• The Remuneration Policy supports the Group’s risk
easy to understand and transparent, while complying with
all regulatory requirements and meeting the expectations
of our shareholders. The purpose of each remuneration
element is explained in the policy and the amount paid in
respect of each element is clearly set out
management framework
• Risk and conduct considerations are taken into account
in setting the annual bonus pool
• The annual bonus, deferred bonus, LTIP and LTSP incorporate
malus and clawback provisions, and overarching
Committee discretion to adjust formulaic outcomes
Predictability
Alignment to culture
• The Remuneration Policy on pages 125 to 133 describes
the purpose, operation and maximum potential for each
remuneration element and illustrates a range of potential
outcomes for executive directors
• Annual and long term variable remuneration are designed
to drive behaviours consistent with the Groups strategy,
purpose and values
• When considering individual executive directors’
performance, the Committee takes account of the
Group’s values
124 Lloyds Banking Group Annual Report and Accounts 2022
2023 Directors’ Remuneration Policy
(Proposed)
Approval for this Directors’ Remuneration Policy (“Policy”) will be
sought at the AGM on 18 May 2023 and, if approved, it will take
effect from that date.
While colleagues were not formally consulted on the Directors’
Remuneration Policy, the Committee ensured that the pay and
reward proposition of all colleagues were taken into account
in the process of developing the Policy. The remuneration of
executive directors, senior management and all colleagues has
been considered in the development of the Policy.
It is intended that approval of the Policy will be sought at three-
year intervals, unless amendments to the Policy are required,
in which case further shareholder approval will be sought.
Information on how the Policy will be implemented in 2023 is
included in the annual report on remuneration.
No executive director will be involved in the determination of their
own remuneration. To manage conflicts of interests effectively,
executive directors were asked to step out of committee meetings
and relevant papers were also redacted for individuals if required.
2023 Policy Changes
Over the course of 2022, the Committee performed a thorough
review of the Policy to inform changes for 2023; input was sought
from a range of stakeholders including institutional shareholders,
the main proxy advisory agencies, the Group’s main regulators
the Prudential Regulation Authority (“PRA”) and Financial Conduct
Authority (“FCA”), executive management and the Committee’s
external advisers to ensure alignment with market practice and
compliance with applicable regulations and codes of practice.
The Chair of the Committee and members of senior management
engaged directly with a significant number of the Group’s largest
shareholders both in one on one dialogue and as part of the
biennial Board Governance event and ensured the full range of
those views were represented and carefully considered by the
Committee as part of its discussions of changes to the Policy.
Stakeholders were supportive of the proposal to align executive
reward more closely with the delivery of the Group’s new strategy
by returning to a performance based long term incentive plan.
Shareholder expectations that targets should be stretching will be
given full consideration when making the first LTIP grants in 2024
(subject to Policy approval at the 2023 AGM).
Performance measures and link to strategy
The performance measures selected for the GPS and LTIP will be
set annually by the Committee taking account of the Group’s
strategic priorities and its most important financial measures.
Performance measures are selected to ensure an appropriate
balance between short and long-term strategic goals and to
align executive director and shareholder interests. In determining
the appropriate set of measures and targets for annual bonus
and LTIP awards, the Committee has discretion to vary the
performance measures, or to substitute the metrics, over the
life of the Directors’ Remuneration Policy taking into account
the Group’s strategic plan or emerging best practice.
Directors’ Remuneration Policy and Group Remuneration
Policy alignment
The only significant difference between the Policy for executive
directors and colleagues outside the Group Executive Committee
is participation in the LTIP which is restricted to those most directly
accountable for the successful delivery of the Group’s strategy.
The table below summarises how the Policy applies across
the Group.
Directors’ Remuneration Policy and Group Remuneration Policy alignment
Executive
directors
Group
Executive
Committee
Other
material
risk takers
Other
employees
Fixed
Base salary
Fixed share award / Role based allowance
Pension and benefits
Variable
Short term incentive
Long term incentive
Lloyds Banking Group Annual Report and Accounts 2022
125
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Directors’ remuneration report continued
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:
• 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.
Fixed Share Award
Purpose and link to strategy
To ensure that total fixed remuneration is commensurate with
role and to provide a competitive reward package for executive
directors with an appropriate balance of fixed and variable
remuneration, in line with regulatory requirements.
Operation
The fixed share award will 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. Fixed share
awards are preferred to be delivered in shares to create further
alignment with shareholders over time. However, the Committee
has discretion to deliver some or all of the awards in cash.
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
as a percentage of salary.
An individual may elect to receive some or all of their pension
allowance as cash in lieu of pension contribution.
Maximum potential
The Committee will make no increase which it believes is
inconsistent with the two parameters. Increases will normally
be no more than the increase awarded to the overall
employee population. However, a greater salary increase
may be appropriate in certain circumstances, such as a new
appointment made on a salary below a market competitive
level, where phased increases are planned, or where there
has been an increase in the responsibilities of an individual.
Where increases are awarded in excess of the wider employee
population, the Committee will provide an explanation in the
relevant annual report on remuneration.
Performance measures
N/A
Changes
No change to policy
Maximum potential
The maximum award is 100 per cent of base salary.
Performance measures
N/A
Changes
No change to Policy
Maximum potential
The maximum allowance for all executive directors is set at 15
per cent of base salary in line with the majority of the workforce.
Performance measures
N/A
Changes
No change to Policy
126 Lloyds Banking Group Annual Report and Accounts 2022
Benefits
Purpose and link to strategy
To provide flexible benefits as part of a competitive
remuneration package.
Operation
Benefits may include those currently provided and disclosed
in the annual report on remuneration. Core benefits include a
company car or car allowance, private medical insurance, life
insurance and other benefits that may be selected through the
Group’s flexible benefits plan.
Additional benefits may be provided to individuals in certain
circumstances such as relocation. This may include benefits
such as accommodation, relocation, and travel. The Committee
retains the right to provide additional benefits depending on
individual circumstances.
When determining and reviewing the level of benefits provided,
the Committee ensures that decisions are made within the
following two parameters:
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
Group Performance Share
• 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 which does not currently exceed 4 per cent
of base salary.
Performance measures
N/A
Changes
No change to policy
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
Changes
No change to policy
Purpose and link to strategy
To incentivise and reward the achievement of the Group’s annual
financial and strategic targets whilst supporting the delivery of
long-term superior and sustainable returns.
Maximum potential
The maximum GPS opportunity is 140 per cent of salary for the
executive directors.
Operation
Measures and targets are set annually and awards are
determined by the Committee after the year end based on
performance against the targets set. The GPS 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 to reflect the fact that the directors are
not eligible for dividends on unvested deferred awards.
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.
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
measures will not vest if a 25 per cent threshold performance
is not met. The normal ‘target’ level of the GPS is 50 per cent
of maximum opportunity. The Committee is committed to
providing transparency in its decision making in respect of
GPS awards and will disclose historic measures and target
information together with information relating to how the Group
has performed against those targets in the annual report on
remuneration for the relevant year except to the extent that this
information is deemed to be commercially sensitive, in which
case it will be disclosed once it is deemed not to be sensitive.
Changes
The maximum Group Performance Share for the CFO has
been increased from 100 per cent to 140 per cent of salary.
Total target compensation for the CFO is behind peers and
between lower quartile and median when compared to FTSE30
companies. Given the significant value the CFO delivers for
the Group, the Committee propose to increase the CFO’s GPS
(annual bonus) maximum opportunity to 140 per cent of salary,
aligned with the GCE.
Lloyds Banking Group Annual Report and Accounts 2022
127
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
Long Term Incentive Plan
Purpose and link to strategy
To incentivise performance linked to the Group’s strategy and
aligned to shareholder interests.
Operation
From 2024, awards will be granted under the rules of the 2023
Long Term Incentive Plan, subject to shareholder approval at the
AGM in 2023; awards will be granted in the form of conditional
rights to shares in the Group.
The grant price of shares to be awarded may be discounted
to reflect that the directors are not eligible for dividends on
unvested awards.
Maximum potential
The maximum Long Term Incentive Plan opportunity is 300 per
cent of base salary for annual awards to all executive directors.
The actual award level granted will be determined with reference
to a pre-grant test based on an assessment of performance by
the Committee.
Performance measures
Awards will be subject to forward looking performance measures
based on financial and other strategic and environmental
measures set out in the annual report on remuneration each
year; performance will be measured over a period of not less
than 3 years as determined by the Committee.
Awards shall vest in five equal annual instalments which will not
start before the third anniversary of grant; each vesting will be
subject to a further holding period as required by regulation.
The Committee has the discretion to change the measures
or their weightings subject to a minimum of 50 per cent of the
award being dependent on financial measures.
The Committee retains full discretion to amend the vesting
levels should the outcome not reflect business and/or individual
performance including risk and conduct outcomes. 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.
No more than 25 per cent of the award will vest for threshold
performance. 100 per cent of the award will vest for achieving
the maximum performance. Where performance falls between
threshold, target and maximum levels, an intermediate number
of awards will vest.
Changes
The Long Term Incentive Plan replaces the Long Term Share Plan.
The proposed structure provides greater alignment to delivery
of the revised strategic aims of the Group.
Deferral of variable remuneration and holding periods
Operation
The GPS and LTIP are both considered variable remuneration for
the purpose of regulatory payment and deferral requirements.
Changes
No change in deferral requirements.
The payment of variable remuneration and deferral levels are
determined at the time of award in compliance with regulatory
requirements which currently require that at least 60 per cent
of the aggregate variable remuneration (GPS + LTIP) is deferred
up to seven years with pro rata vesting between the third
and seventh year, and at least 50 per cent of total variable
remuneration is delivered in shares or other equity linked
instruments subject to a minimum one year holding period.
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, a report is submitted to 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.
• 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.
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
•
•
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.
•
128 Lloyds Banking Group Annual Report and Accounts 2022
Discretion in relation to variable rewards
The Committee retains discretion with regards to all variable
rewards plans. This relates to:
• The timing, size and type of awards and holding periods,
subject to policy maxima, regulatory requirements and the
annual setting of targets
• Where qualitative performance measures are used and
performance against those measures is not commensurate
with the Group’s overall financial or strategic performance
over the performance period
• Adjustment of targets and measures if events occur which
cause it to determine that it is appropriate to do so. The
Committee also retains the right to change performance
measures and the weighting of measures, including following
feedback from regulators, shareholders and/or other
stakeholders; and amending the plan rules in accordance with
their terms and or amending the basis of operation (including
but not limited to the approach in respect of dividend
equivalents) including in light of any change to regulatory
requirements or guidance or feedback from regulators
• To exercise discretion in accordance with the rules, including
in relation to whether or not malus or clawback provisions
would apply, in connection with recruitment, or terminations
of employment, or corporate events affecting the Company
• Adjustments required in certain circumstances (e.g. rights
issues, corporate restructuring events and special dividends)
• The exercise of the Committee’s discretion will be disclosed in
accordance with regulatory requirements
Legacy awards and restrictions on payments
Awards in respect of the GPS and under the Long Term Share
Plan will be granted in 2023 under the terms of the Directors’
remuneration policy approved by shareholders on 21 May 2020
(the “2020 Policy”). No further awards would be made under the
Long Term Share Plan unless the new Long Term Incentive Plan
is not approved by shareholders.
The Committee reserves the right to make any remuneration
payments/awards and any payments/awards for loss of office,
notwithstanding that they are not in line with the policy set out
above where the terms of the payment/award were agreed
(i) before the 2020 policy came into effect; (ii) pursuant to the
2020 policy; or (iii) at a time when the relevant individual was
not a director of the Group and, in the opinion of the Committee,
the payment/award was not in consideration for the individual
becoming a director of the Group. Such payments/awards will
have been set out in the annual report on remuneration for the
relevant year and include awards and payments made under
previous approved remuneration policies.
Illustration of application of remuneration policy
The charts below illustrate possible remuneration outcomes under the following four scenarios:
1. The maximum that may be paid, assuming full GPS payout and full vesting under the new LTIP. For the LTIP, an indication of the
maximum remuneration receivable assumes a share price appreciation of 50 per cent during the period in which the award is
subject to performance measures. The basis of the calculation of the share price appreciation is that the share price embedded
in the calculation for the ‘maximum’ bar chart is assumed to increase by 50 per cent across the performance period.
2. The expected value of remuneration for performance midway between threshold and maximum, assuming 50 per cent of
maximum GPS opportunity and 50 per cent vesting of maximum LTIP opportunity.
3. The minimum that may be paid, where only the fixed element is paid (base salary, benefits, pension and the fixed share award).
Amounts are based on base salaries as at 1 January 2023, 15 per cent pension allowance, benefits include 4 per cent flexible benefits
allowance, private medical cover and a car allowance for CFO. Implementation of the Policy in 2023 is set out in the annual report
on remuneration.
Charlie Nunn (GCE)
Value of package (£’000)
William Chalmers (CFO)
Value of package (£’000)
Maximum –
with share price
appreciation
Maximum
12% 12%
17%
37%
19%
2%
15% 14%
21%
46%
3%
23% 21% 16%
35%
£9,107
Maximum –
with share price
appreciation
£7,402
Maximum
13% 3%
18%
39%
19%
8%
16% 3%
23%
48%
Mid-performance
£4,902
Mid-performance
Minimum
4%
47% 44%
9%
£2,403
Minimum
10%
25% 5%
37%
15%
17%
55% 11%
34%
£6,324
£5,095
£3,293
£1,492
0
2,500
5,000
7,500
10,000
0
1,000 2,000 3,000 4,000 5,000 6,000 7,000
Salary
Fixed share
awards
Pension
and Benefits
Group
Performance Share
Long Term
Incentive Plan
Share price
appreciation
Lloyds Banking Group Annual Report and Accounts 2022
129
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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. The Chair’s engagement may be terminated on six
months’ notice by either party.
Notice to be given
by the Group
Date of service
agreement
Robin Budenberg
6 months
04 July 2020
Charlie Nunn
12 months
29 November 2020
William Chalmers
12 months
15 March 2019
The service contracts and letters of appointment are available for
inspection at the Company’s registered office.
Notice periods
Newly-appointed executive directors will be employed on
contracts that include the following provisions:
• The individual will be required to give six months’ notice if
they wish to leave and the Group will give 12 months’ notice
other than for material misconduct or neglect or other
circumstances where the individual may be summarily
dismissed by written notice. In exceptional circumstances, new
joiners will be offered a longer notice period (typically reducing
to 12 months within two years of joining)
In the event of long-term incapacity, if the executive director
does not perform their duties for a period of at least 26 weeks
(in aggregate over a 12 month period), the Group shall be
entitled to terminate the executive’s employment by giving
three months’ notice
• At any time after notice to terminate is given by either the Group
or the executive director, the Group may require the executive
director to take leave for some or all of the notice period
• At any time, at its absolute discretion, the Group may elect
to terminate the individual’s employment by paying to the
executive director, in lieu of the notice period, an amount
equivalent to base salary, subject to mitigation as described
more fully in the termination payments section of this report
Directors’ remuneration report continued
Approach to recruitment
and appointment to the Board
In determining appropriate remuneration arrangements on
hiring a new executive director, the Committee will take into
account all relevant factors. This may include the experience
and calibre of the individual, local market practice, the existing
remuneration arrangements for other executives and the
business circumstances. The Committee will seek to ensure that
arrangements are in the best interests of both the Group and its
shareholders and will seek not to pay more than is necessary.
The Committee may make awards on hiring an external
candidate to ‘buy-out’ remuneration arrangements forfeited, or
opportunities lost on leaving a previous employer. In doing so the
Committee will take account of relevant factors including any
performance conditions attached to these awards, the form in
which they were granted (e.g. cash or shares), the currency of the
awards, and the timeframe of awards. Any such award made will
be made in accordance with the PRA’s Rulebook and made on
a comparable basis to those forfeited and subject to malus and
clawback at the request of the previous employer as required by
the PRA rules.
The package will normally be aligned with the remuneration
policy as described in the policy report. However, the Committee
retains the discretion to make appropriate remuneration
decisions outside the standard policy to facilitate the recruitment
of an individual of the calibre required and in exceptional cases.
•
This may, for example, include the following circumstances:
• An interim recruit, appointed to fill an executive director role on
a short-term basis
• Exceptional circumstances requiring the Chair to take on an
executive function on a short-term basis
• An executive director recruited from a business or location
where benefits are provided that do not fall into the definition
of ‘variable remuneration forfeited’ but where the Committee
considers it reasonable to buy-out these benefits, or where
the form of remuneration to be bought out requires a
differentiated approach
• Transitional arrangements for overseas hires, which might
include relocation expenses and accommodation
Variable remuneration awarded to a new executive director may
not exceed the multiple of annualised fixed pay specified by the
Group’s regulators or other such multiple approved by the Group’s
shareholders or determined by the Remuneration Committee.
In making any such remuneration decisions, the Committee will
apply any appropriate performance measures in line with those
applied to other executive directors.
A full explanation will be provided of any buy-out award or
discretionary payment.
130 Lloyds Banking Group Annual Report and Accounts 2022
Chair and non-executive director fees and benefits
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.
NEDs are paid a basic fee plus additional fees for the chair/
membership of committees and for membership of Group
company boards, non-board level committees and / or other
specific responsibilities.
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 GCE and the Chair are responsible for evaluating and
making recommendations to the Board in relation to the fees
of the Non-executive directors (NEDs).
When determining and reviewing fee and benefit levels,
the Committee ensures that decisions are made within the
following parameters:
• The individual’s skills and experience.
• An objective assessment of the individual’s responsibilities
and the size and scope of their role, using objective sizing
methodologies.
• Fees and benefits for comparable roles in comparable
publicly listed financial services groups of a similar size.
The Chair receives an all-inclusive fee, which is reviewed
periodically plus benefits including life insurance, medical
insurance and transportation. The Committee retains
the right to provide additional benefits depending on
individual circumstances.
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 NEDs 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 variable remuneration arrangements, all-employee
share plan or pension arrangements.
NEDs are reimbursed for expenses incurred in the course of
their duties, such as travel and accommodation expenses, on
a grossed-up basis (where applicable).
Maximum potential
Any increase in fees or benefits currently provided will be
consistent with the parameters above.
Performance metrics
N/A
Changes
No change to policy.
Letters of appointment
The non-executive directors all have letters of appointment and are appointed for an initial term of three years after which their
appointment may continue subject to an annual review. Non-executive directors may have their appointment terminated, in
accordance with statute, regulation and the articles of association, at any time with immediate effect and without compensation.
Date of letter of appointment
NED
Date of letter of appointment
Robin Budenberg1
Alan Dickinson
Sarah Legg
Lord Lupton
Amanda Mackenzie
Harmeen Mehta
Cathy Turner
Scott Wheway
4 July 2020
26 June 2014
21 October 2019
2 March 2017
17 April 2018
5 October 2021
11 October 2022
26 July 2022
Catherine Woods
22 October 2019
1 Chair is subject to a 6 month notice period.
All directors are subject to annual re-election by shareholders.
Date of appointment
1 October 2020
8 September 2014
1 December 2019
1 June 2017
1 October 2018
1 November 2021
1 November 2022
1 August 2022
1 March 2020
The service contracts and letters of appointments are available for inspection at the Company’s registered office.
Lloyds Banking Group Annual Report and Accounts 2022
131
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Directors’ remuneration report continued
Termination payments
It is the Group’s policy that where notice pay continues to be
payable after termination, it should be paid on a phased basis,
mitigated in the event that alternative employment is secured
in line with executive directors service contracts. Where it is
appropriate to make a GPS award to the individual, this should
relate to the period of actual service, rather than the full notice
period. Any GPS payment will be determined on the basis of
performance as for all continuing employees and will remain
subject to performance adjustment (malus and clawback)
and deferral.
Generally, on termination of employment, unvested GPS awards,
Group Ownership Share awards, Long Term Share Plan awards,
Long Term Incentive awards and other rights to payments will
lapse except where termination falls within one of the reasons
set out below. In the event of redundancy, the individual may
receive a payment in line with statutory entitlements at that time.
If an executive director is dismissed for gross misconduct, the
executive director will receive normal contractual entitlements
until the date of termination and all deferred GPS, Group
Ownership Share, Long Term Share Plan and Long Term
Incentive Plan awards will lapse.
Termination payments
Base salary
Fixed share award
Pension, benefits and other
fixed remuneration
Resignation
Entitlement to base salary continues
for full notice period. If employment is
terminated prior to end of notice period,
balance of notice pay is paid in monthly
instalments, offset by earnings from any
new employment during this period. If
resignation to take up a new employment,
base salary would continue during any
period of garden leave but may then
cease if early release date agreed.
Outstanding awards continue and are
released at the normal time and the
number of shares subject to the award in
the current year will be reduced to reflect
the date of termination.
Paid until date of termination including
any period of leave required by the
Group (subject to individual benefit
scheme rules).
Redundancy
or termination by
mutual agreement
Entitlement to base salary continues
for full notice period. If employment is
terminated prior to end of notice period,
balance of notice pay is paid in monthly
instalments, offset by earnings from any
new employment during this period.
Outstanding awards will normally continue
and be released at the normal time and
the number of shares subject to the
award in the current year will be reduced
to reflect the date of termination unless,
in the case of mutual agreement, the
Committee determines that exceptional
circumstances apply in which case shares
may be released on termination.
Paid until date of termination including
any period of leave required by the
Group (subject to individual benefit
scheme rules).
Retirement/ill health,
injury, permanent
disability/death
Paid until date of retirement/death. For ill
health, injury or permanent disability which
results in the loss of employment, paid for
the applicable notice period (including any
period of leave required by the Group).
Outstanding awards will normally continue
and be released at the normal time and
the number of shares subject to the award
in the current year will be reduced to reflect
the date of termination except for (i) death
where shares are released on the date of
termination; or (ii) in the case of permanent
disability the Committee determines that
exceptional circumstances apply in which
case shares may be released on the date
of termination.
Paid until date of death/ retirement
(subject to individual benefit scheme
rules). For ill health, injury, permanent
disability, paid for the notice period
including any period of leave required by
the Group (subject to individual benefit
scheme rules).
Change of control
or merger
N/A
N/A
Outstanding awards will be payable on
the date of the Change of Control and the
number of shares subject to the award will
be reduced to reflect the shorter accrual
period. The Committee may decide that
vested awards will be exchanged for (and
future awards made over) shares in the
acquiring company or other relevant
company.
Other reason where the
Committee determines
that the executive
should be treated
as a good leaver
Entitlement to base salary continues
for full notice period. If employment is
terminated prior to end of notice period,
balance of notice pay is paid in monthly
instalments, offset by earnings from any
new employment during this period.
Outstanding awards continue and are
released at the normal time and the
number of shares subject to the award in
the current year will be reduced to reflect
the date of termination.
Paid until date of termination including
any period of leave required by the
Group (subject to individual benefit
scheme rules).
132
Lloyds Banking Group Annual Report and Accounts 2022
Termination payments
Group Performance Share
(Annual bonus plan)1,2,7
Long Term Incentive Plan
(Long term variable reward plan)2,6,7
Chair and
Non-executive director fees3
Resignation
Unvested deferred GPS awards and
entitlement to be considered for in-year
award are forfeited on resignation5.
Paid until date of leaving Board.
Unvested awards lapse on date of
leaving (or on notice of leaving) unless
the Committee determines otherwise
in exceptional circumstances that they
will vest on the original vesting date (or
exceptionally on the date of leaving).
Where the award is to vest it will be subject
to the original performance conditions and
time pro-rating (for months worked in the
performance period). Malus and clawback
will apply.
Redundancy or
termination by
mutual agreement
Retirement/ill health,
injury, permanent
disability
Death
Change of control
or merger2
For cases of redundancy, unvested
deferred GPS awards are retained and in-
year GPS awards are accrued until the date
of termination (or the commencement
of garden leave if earlier). Such awards
would be subject to deferral, malus
and clawback.
Awards vest on the original vesting date
(or exceptionally on the date of leaving).
Vesting is subject to the performance
conditions and time pro-rating (for months
worked in the performance period).
Malus and clawback provisions will
continue to apply.
Unvested deferred GPS awards are
retained and in-year GPS awards are
accrued until the date of termination (or
the commencement of garden leave if
earlier). Such awards would be subject
to deferral, malus and clawback.
Awards vest on the original vesting date
(or exceptionally on the date of leaving).
Vesting is subject to the performance
conditions and time pro-rating (for months
worked in the performance period).
Malus and clawback provisions will
continue to apply.
Unvested deferred GPS awards are
retained and in-year GPS awards are
accrued until the date of death. Deferred
GPS awards vest on death in cash, unless
the Committee determines otherwise.
Awards vest in full on the date of death
unless in exceptional circumstances the
Remuneration Committee determines that
the performance against targets set do
not support full vesting.
In-year GPS accrued up until date of
change of control or merger (current
year). Where there is a Corporate Event,
deferred GPS awards vest to the extent
and timing determined by the Committee
in its absolute discretion.
Awards vest on date of event. Vesting is
subject to the performance conditions
and time pro-rating (for months worked
in the performance period unless
determined otherwise). The Committee
may decide not to time pro-rate in its
absolute discretion. Malus and clawback
provisions will continue to apply. Instead
of vesting, awards may be exchanged for
equivalent awards over the shares of the
acquiring company or another company
or equivalent cash based awards.
Awards vest on the original vesting date
(or exceptionally on the date of leaving).
Vesting is subject to the performance
conditions and time pro-rating (for months
worked in the performance period).
Malus and clawback provisions will
continue to apply.
Other reason where the
Committee determines
that the executive
should be treated
as a good leaver
Unvested deferred GPS awards retained
and in-year GPS awards are accrued
until the date of termination (or the
commencement of garden leave if earlier).
Deferred GPS awards vest in line with
normal timeframes and are subject to
malus and clawback. The Committee may
allow awards to vest early if it considers
it appropriate.
Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
Paid until date of leaving Board.
1
If any GPS is to be paid to the executive director for the current year, this will be determined on the basis of performance for the period of actual service, rather than
the full notice period (and so excluding any period of leave required by the Group).
2 Reference to change of control or merger includes a compromise or arrangement under section 899 of the Companies Act 2006 or equivalent. Fixed share awards
may also be released/ exchanged in the event of a resolution for the voluntary winding up of the Company; a demerger, delisting, distribution (other than an
ordinary dividend) or other transaction, which, in the opinion of the Committee, might affect the current or future value of any award; or a reverse takeover, merger
by way of a dual listed company or other significant corporate event, as determined by the Committee. In the event of a demerger, special dividend or other
transaction which would in the Committee’s opinion affect the value of awards, the Committee may allow a deferred Group Performance Share award or a long
term incentive award to vest to the extent relevant performance conditions are met to that date and if the Committee so determined, on a time pro-rated basis
(unless determined otherwise) to reflect the number of months of the performance period worked.
3 The Chair is entitled to six months’ notice.
4 The terms applicable on a cessation of employment to GOS Awards are as shown on page 97 of the 2017 Remuneration Policy. The terms applicable on a cessation
of employment to LTSP awards as shown on page 122 of the 2020 Remuneration Policy.
5 Clarifies that entitlement to consideration for in-year GPS award is forfeit on resignation.
6
In the event that performance conditions are required to be assessed prior to the normal vesting date in connection with the leaver event, the Committee retains
discretion to make such an assessment on such basis as it considers appropriate.
7 Any awards which vest pursuant to a good leaver event will remain subject to any applicable post-vesting holding period.
On termination, the executive director will be entitled to payment for any accrued holiday not taken as part of any period of garden
leave calculated by reference to base salary and fixed share award.
The cost of legal, tax or other advice incurred by an executive director in connection with the termination of their employment and/or
the cost of support in seeking alternative employment may be met up to a maximum of £100,000 (excl VAT). Additional payments may
be made where required to settle legal disputes, or as consideration for new or amended post-employment restrictions.
Where an executive director is in receipt of expatriate or relocation expenses at the time of termination (as at the date of the AGM no
current executive directors are in receipt of such expenses), the cost of actual expenses incurred or benefits provided may continue
to be reimbursed for up to 12 months after termination or, at the Group’s discretion, a one-off payment may be made to cover the costs
of premature cancellation. The cost of repatriation may also be covered.
Lloyds Banking Group Annual Report and Accounts 2022
133
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Other statutory and
regulatory information
This directors’ report on pages 72 to 137
is our directors’ report for the purposes
of the Companies Act 2006 and fulfils the
requirements of the corporate governance
statement for the purposes 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 2022 of £6,928 million
(2021: £6,902 million).
The directors have recommended a final dividend for 2022, which
is subject to approval by the shareholders at the annual general
meeting (AGM), of 1.60 pence per share, which together with
the interim dividend of 0.80 pence per share represents a total
dividend for the year of 2.40 pence per share, equivalent to £1.6
billion. If approved by shareholders, the final dividend will be paid
on 23 May 2023.
A final dividend of 1.33 pence per share totalling £930 million in
respect of 2021 was paid on 19 May 2022, and an interim dividend
of 0.80 pence per share totalling £545 million was paid on
12 September 2022. Further information on dividends is shown in
note 44 on page 294 and is incorporated into this directors’ report
by reference.
The Board continues to give due consideration at each year end
to the return of any surplus capital to shareholders and for 2022,
the Board intends to return up to £2.0 billion through a share
buyback programme in respect of the Company’s ordinary
shares. This represents the return of capital over and above the
Board’s view of the current level of capital required to grow the
business, meet regulatory requirements and cover uncertainties.
The share buyback programme is intended to commence as
soon as is practicable and is expected to be completed, subject
to continued authority from the PRA, by 29 December 2023. Given
the total ordinary dividend of 2.40 pence per share and the
intended share buyback, the total capital return for 2022 will be
up to 5.40 pence per share, an increase of 12 per cent on the prior
year, equivalent to up to £3.6 billion.
The Company intends to use the authority for the repurchase of
ordinary shares granted to it at the 2022 AGM to implement the
proposed share buyback. Details of this existing authority are set
out under ‘Power of directors in relation to shares’. Shareholders
will be asked to renew this authority at the 2023 AGM, in line with
common practice.
Appointment and retirement of directors
The appointment and retirement of directors is governed by the
Company’s articles of association, the UK Corporate Governance
Code and the Companies Act 2006. The Company’s articles of
association may only be amended by a special resolution of the
shareholders in a general meeting.
Scott Wheway and Cathy Turner were appointed to the Board
on 1 August 2022 and 1 November 2022 respectively. Both will
therefore stand for election at the forthcoming AGM. In the
interests of good governance and in accordance with the
provisions of the UK Corporate Governance Code, all other
directors will retire, and those wishing to serve again will submit
themselves for re-election at the forthcoming AGM. Biographies of
the current directors are set out on pages 74 to 75. Details of the
directors seeking election or re-election at the AGM are set out in
the Notice of Meeting.
134 Lloyds Banking Group Annual Report and Accounts 2022
Board composition changes
Changes to the composition of the Board since 1 January 2022 up
to the date of this report are shown in the table below:
Stuart Sinclair
Scott Wheway
Cathy Turner
Joined the Board
Left the Board
12 May 2022
1 August 2022
1 November 2022
Directors’ and Officers’ liability insurance
Throughout 2022 the Group had appropriate insurance cover
in place to protect directors, including the directors who retired
during the year, from liabilities that may arise against them
personally in connection with the performance of their role.
As well as insurance cover, the Group agrees to indemnify the
directors to the maximum extent permitted by law. Further
information on the Group’s indemnity arrangements is provided
in the directors’ indemnities section.
Directors’ indemnities
The directors of the Company, including the former directors who
retired during the year, have entered into individual deeds of
indemnity with the Company which constituted ‘qualifying third-
party indemnity provisions’ for the purposes of the Companies
Act 2006. The deeds indemnify the directors to the maximum
extent permitted by law and remain in force. The deeds were in
force during the whole of the financial year or from the date of
appointment in respect of the directors appointed during 2022.
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 2022 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.
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 Company
Secretary as soon as they become aware of actual or potential
conflict situations. Any changes to the commitments of directors
are reported to the Nomination and Governance Committee
and the Board, and a register of directors’ interests is regularly
reviewed and authorised by the Board to ensure the authorisation
status remains appropriate.
Lord Lupton is a senior adviser 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 authorised the potential conflicts
and requires Lord Lupton to recuse himself from discussions,
should the need arise.
Share capital
Detail of the rights and obligations attaching to the Company’s
issued share capital may be found in note 39 to the financial
statements.
Power of directors in relation to shares
The Board manages the business of the Company under the
powers set out in the articles of association, which include the
directors’ ability to issue or buy back shares. The directors were
granted authorities to issue and allot shares and to buy back
shares at the 2022 AGM. Shareholders will be asked to renew these
authorities at the 2023 AGM.
Substantial shareholders
Major shareholders do not have different voting rights from other
holders of ordinary shares. Information provided to the Company
by substantial shareholders pursuant to the DTR is published via
a Regulatory Information Service. As at 31 December 2022, the
Company had been notified by its substantial shareholders under
Rule 5 of the DTR of the following interests in the Company’s shares:
The authority in respect of purchase of the Company’s ordinary
shares, as granted at the 2021 AGM, was limited to 7,088,402,568
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 2021 AGM circular. Such authority was
used during the year under review in connection with the share
buyback programme described below, and as at 31 December
2022 and the date of this report, a total of 4,528,731,591 ordinary
shares had been repurchased.
The Company undertook an ordinary share buyback programme,
which was launched on 25 February 2022, and ended on
11 October 2022. The programme repurchased in aggregate
4,528,731,591 ordinary shares, each with a nominal value of
10 pence, for an aggregate consideration of c.£2.0 billion
(aggregate nominal value of the ordinary shares £452,873,159.10)
as a means by which to return surplus capital to shareholders. All
of the repurchased ordinary shares were cancelled, and together
represented 6.73 per cent of the called up share capital of the
Company at completion of the programme. Further information
in relation to the 2022 ordinary share buyback programme is
provided on page 66.
The authority in respect of purchase of the Company’s ordinary
shares, as granted at the 2022 AGM, was limited to 7,047,917,092
ordinary shares, none of which was utilised as at 31 December
2022 and the date of this report.
Branches
The Group provides a wide range of banking and financial
services through branches and offices in the UK and overseas.
BlackRock Inc.
Harris Associates L.P.
Interest in shares
3,668,756,7652
3,546,216,7873
% of issued share
capital with rights
to vote in all
circumstances at
general meetings1
5.14%
4.99%
1
2
Percentage provided was correct at the date of notification.
The most recent notification provided by BlackRock Inc. under Rule 5 of the
DTR identifies (i) an indirect holding of 3,599,451,380 shares in the Company
representing 5.04 per cent of the voting rights in the Company, and (ii) a
holding of 69,305,385 in other financial instruments in respect of the Company
representing 0.09 per cent of the voting rights of the Company. BlackRock
Inc.’s holding most recently notified to the Company under Rule 5 of the DTR
varies from the holding disclosed in BlackRock Inc.’s Schedule 13-G filing
with the US Securities and Exchange Commission dated 24 January 2023,
which identifies beneficial ownership of 6,256,206,661 shares in the Company
representing 9.3 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.
Information incorporated by reference
Content
Pages
Group results
Summary of Group Results
51 to 54
Ordinary dividends
Dividends on ordinary shares 294
Directors’ emoluments Directors’ remuneration report 105 to 133
Research and development activities
During the ordinary course of business, the Group develops new
products and services within the business units.
Internal control
and financial risk
management
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 resulting from a
takeover, except for the Company’s employee share plans which
contain provisions relating to a change of control set out on
page 290.
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.
Post balance sheet events
Details of events since the date of the balance sheet are provided
in note 54 on page 337.
Financial reporting risk
141
Risk management
Financial instruments
38 to 43
139 to 195
301 to 312
315 to 335
1 to 44
34
Information included
in the strategic report
Future developments
Supporting disability
Engagement with colleagues 82
Engagement with customers,
suppliers and others
82 to 83
Disclosures required
under Listing Rule 9.8.4R
Significant contracts
297 to 298
Dividend waivers
294
Principal risks
and uncertainties
Funding and liquidity
Capital position
40
179 to 184
39
148 to 155
Viability statement
Risk overview
Going concern
statement
Share capital
and control
Risk overview
Share capital and restrictions
on the transfer of shares or
voting rights
Employee share schemes
– exercise voting rights
Rights and obligations
attaching to the Company’s
issued share capital
Post balance
sheet events
Events since the date
of the balance
44
44
290
290
290
337
Lloyds Banking Group Annual Report and Accounts 2022
135
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Other statutory and regulatory
information continued
Scope 1, 2 and 3 emissions reporting for our
own operations
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 and the Large and Medium
Sized Companies and Groups (Accounts and Reports) Regulations
2008 (as amended) (i.e. Streamlined Energy and Carbon
Reporting (‘SECR’). 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. 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. Energy consumption is calculated according to
guidance set out by the UK Government’s department for
business, energy & industrial strategy. The reporting period is
1 October 2021 to 30 September 2022, which is different to that of
our directors’ report (January to December 2022). This is in line
with the regulations in that most of the emissions reporting year
falls within the period of the directors’ report.
Emissions are reported based on the operational control
approach. 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 (category 6) and commuting (category
7) undertaken by colleagues, emissions from colleagues working
from home (category 7), operational waste (category 5) and
the extraction and distribution of each of our energy sources
– electricity, gas and oil (category 3). Scope 3 emissions do
not include purchased good and services, capital goods and
upstream transportation and distribution (category 1, 2 and 4)
and investments (category 15), but these figures are disclosed
in the Environmental Sustainability Report 2022
which can
be found at www.lloydsbankinggroup.com/who-we-are/
responsible-business/downloads.html.
This year, our overall location-based carbon emissions* were
175,411 tonnes CO2e; an 4.7 per cent decrease since 2020/21. While
our overall market-based carbon emissions** were 115,964 tonnes
CO2e; an 3.1 per cent increase since 2020/21 mainly driven by
higher business travel and commuting related carbon emission.
Group energy consumption, electricity and gas, has reduced in
line with extensive investment on energy efficiency across our
buildings and established hybrid workstyle.
*
Include Scope 1, 2 emissions and Scope 3 category 3, 5, 6 and 7. Scope 3
category 1, 2, 4 and 15 are excluded.
** Since January 2019, our Scope 2 market-based emissions figure is zero
tCO2e, as we have procured renewable electricity mainly through our Power
Purchase Agreement (PPA) and Green Tariff, and renewable certificates equal
to the remainder to make up the total electricity consumption in each of the
markets in which we operate.
Carbon emissions (tonnes CO2e)
Oct 2021 –
Sept 2022
Oct 2020 –
Sept 2021
Oct 2019 –
Sept 2020
Oct 2018 –
Sept 2019
115,964.48
112,423.64
114,722.02
174,629.23
Total CO2e (market
based1#
Total CO2e
(location based)1#
175,411.00
184,103.25 202,346.53
281,772.27
Total Scope 1 and 2
(location based)1#
– of which UK
Scope 1 and 2
(location based)1
Total Scope 1 and 2
(market based)1#
– of which UK
Scope 1 and 2
(market based)1
86,944.94
103,618.21
121,333.09
150,108.22
86,079.33
102,593.96
120,031.65
147,726.36
27,498.42
31,938.60
33,708.58
42,965.18
27,238.09
31,623.28
33,407.46
42,278.76
Total Scope 11#
27,498.42
31,938.60
33,708.58
42,578.56
Total Scope 2
(market based)#
Total Scope 2
(location based)1#
Total Scope 3
operational
emissions 1#
Category 3:
Upstream Fuel
and Energy
Category 5: Waste
generated in
operations
–
–
–
386.61
59,446.52
71,679.61
87,624.51
107,529.65
88,466.06
80,485.04
81,013.44
131,664.05
25,497.78
28,322.39
24,881.51
31,278.87
201.38
246.60
389.60
2,324.83
Intensity ratio
Legacy
GHG emissions
(CO2e) per £m of
underlying
income (Location
Based)1
GHG emissions
(CO2e) per £m of
underlying
income (Market
Based)1
Oct 2021 –
Sept 2022
Oct 2020 –
Sept 2021
Oct 2019 –
Sept 2020
Oct 2018 –
Sept 2019
Category 6:
Business travel
6,213.28
1,266.28
11,015.96
31,423.39
9.52
11.35
13.24
15.56
Category 7:
Employee
Communicating
and Teleworking
56,553.62
50,649.77
44,726.36
66,636.96
6.30
6.93
7.50
9.64
Further information on our Scope 3 emissions is available in our
ESG Performance Review 2022 at www.lloydsbankinggroup.com/
who-we-are/responsible-business/downloads.html.
1
Intensities have been restated for 2018/2019, 2019/20 and 2020/21 emissions
data to improve the accuracy of reporting, using actual data to replace
estimates, account for the historical impacts of acquired Embark Group
locations and improvements to fugitive gas calculations. Underlying income
figures for those years have not changed.
136 Lloyds Banking Group Annual Report and Accounts 2022
Global energy use (kWhs)
This confirmation is given and should be interpreted in
accordance with the provisions of the Companies Act 2006.
Oct 2021 –
Sept 2022
Oct 2020 –
Sept 2021
Oct 2019 –
Sept 2020
Oct 2018 –
Sept 2019
Total global
energy use1# 424,263,067
474,372,492
520,801,595 593,841,934
– of which UK
energy use1
Total building
energy1
Total company
owned vehicle
energy1
Total grey fleet
vehicle
energy2
419,784,408
469,399,610
515,546,891 587,624,076
412,888,764
468,602,439
500,486,321 554,278,919
7,367,288
2,796,073
14,436,436 29,987,906
4,007,015
2,973,980
5,878,838
9,575,109
1
Restated 2018/2019, 2019/20 and 2020/21 data to improve the accuracy of
reporting, using actual data to replace estimates, historical emissions
associated with Embark Group’s properties, and improved escaped
refrigerant related emissions.
2 Grey fleet refers to colleague and hired road vehicles being used for a
#
business purpose.
Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte
LLP for the 2022 Annual Responsible Business Reporting. Deloitte’s 2022
assurance statement and the 2022 Reporting Criteria are available online
at www.lloydsbankinggroup.com/who-we-are/responsible-business/
downloads.html.
• Scope 1 emissions are emissions from activities for which the Group is
responsible, including mobile and stationary combustion of fuel and
operation of facilities
• Scope 2 emissions are emissions from the purchase of electricity by the
Group for its own use and have been calculated in accordance with GHG
Protocol guidelines, in both location and market-based methodologies
• Scope 3 emissions include business travel (category 6) and commuting
(category 7) undertaken by colleagues, emissions from colleagues working
from home (category 7), operational waste (category 5) and the extraction
and distribution of each of our energy sources – electricity, gas and oil
(category 3). Scope 3 emissions do not include purchased good and services,
capital goods and upstream transportation and distribution (category 1, 2 and
4) and investments (category 15)
The methodology to derive reported Scope 1, 2 and 3 emissions is provided
in the Lloyds Banking Group Reporting Criteria statement available online
at www.lloydsbankinggroup.com/who-we-are/responsible-business/
downloads.html.
•
Energy efficiency
Our ongoing energy optimisation programme, has resulted in
89 GWh cumulative energy savings in 2022. This workstream
includes onsite optimisation and strategic alterations of building
management and control systems to match the run hours of
plant to core operating hours and ensures temperature settings
are aligned with Group comfort guidelines. In 2022, 54 deep dives,
54 onsite optimisations, 16 remote optimisations and 529 bank
holiday programmes were completed. Together with the energy
optimisation programme, we have also delivered a significant LED
lighting and Building Management System upgrade throughout
our estate, leading to an estimated annualised 2,169 MWh
electricity saving. These were the principal measures taken in
2022 to increase the Group’s energy efficiency.
Omissions
Emissions associated with our supply chain, joint ventures and
investments are not included in this disclosure as they fall outside
the scope of our operational boundary. Further information on
these sources can be found in the Environmental Sustainability
available at www.lloydsbankinggroup.com/who-
Report 2022
we-are/responsible-business/downloads.html. The Group does
not have any emissions associated with the purchase of heat,
steam or cooling for its own use and is not aware of any other
material sources of omissions from our reporting.
Independent auditor and audit information
Each person who is a director at the date of approval of this report
confirms that, so far as the director is aware, there is no relevant
audit information of which the Company’s auditor is unaware
and each director has taken all the steps that he or she ought to
have taken as a director to make himself or herself aware of any
relevant audit information and to establish that the Company’s
auditor is aware of that information.
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
are required to prepare the Group and parent Company financial
statements in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006.
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 properly select and apply accounting policies;
present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information; provide additional disclosures when compliance with
the specific requirements in international accounting standards in
conformity with the requirements of the Companies Act 2006 are
insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity’s financial
position and financial performance; and make an assessment of
the company’s ability to continue as a going concern.
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. They
are also responsible for safeguarding the assets of the Company
and the Group and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
A copy of the financial statements is placed on our website at
www.lloydsbankinggroup.com/investors/financial-downloads.
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 74 to 75
of this annual report, confirm that, to the best of his or her knowledge:
• The Group 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
Group and the Company together with a description of the
principal risks and uncertainties they face
• The annual report and accounts, taken as a whole, are 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
21 February 2023
Lloyds Banking Group plc
Registered in Scotland, No. SC095000
Lloyds Banking Group Annual Report and Accounts 2022
137
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Risk management
In this section
The Group’s approach to risk
Risk governance
Stress testing
Emerging risks
Full analysis of risk categories
139
142
144
145
147
Household
decarbonisation
partnership
£1,000 cashback1 for Halifax mortgage customers
who use borrowing to fund installation of a
air-source heat pump
We’ve agreed a strategic partnership with Octopus
Energy to provide energy efficiency home
improvements to our customers.
The first scheme of the partnership will offer lower
cost air-source heat pumps to UK households.
The move is designed to support the decarbonisation
of domestic heating and encourage the retrofit of
existing UK properties. The pilot has launched through
our Halifax brand as part of our Green Living Reward
scheme. Customers using mortgage borrowing to
fund the switch to an air-source heat pump will
benefit from £1,000 cashback on completion of
the installation.
Read more about our
strategic partnership.
1
Terms and conditions apply.
138 Lloyds Banking Group Annual Report and Accounts 2022
Risk management
Risk management is at the heart of Helping
Britain Prosper and creating a more
sustainable and inclusive future for people
and businesses.
Our mission is to protect our customers,
shareholders, colleagues and the Group,
while enabling sustainable growth. This is
achieved through informed risk decisions
and robust risk management, supported
by a consistent risk-focused culture.
The risk overview (pages 38 to 44) provides a summary of risk
management within the Group and the key focus areas for 2022,
including maintaining support for customers. The risk overview
also highlights the importance of the connectivity of principal,
emerging and strategic risks and how they are embedded into
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 147 to 195), 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 comply with UK specific ring-fencing requirements, core
banking services are ring-fenced from other activities within
the overall Group. The Group’s enterprise risk management
framework (ERMF) and risk appetite apply across the Group. These
are supplemented by sub-group specific risk management
frameworks and risk appetites which 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, within the Ring-Fenced Bank sub-group and supplementary
corporate governance frameworks are in place to address the
specific requirements of the other sub-groups (Non-Ring-Fenced
Bank, Insurance and 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.
Role of the Board and senior management
Key responsibilities of the Board and senior management include:
Risk appetite
The Group’s approach to setting, governing, embedding and
monitoring risk appetite is detailed in the risk appetite framework,
a key component of the ERMF.
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.
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. Group risk appetite is regularly reviewed and
refreshed to ensure appropriate coverage across our principal
risks and any emerging risks, and to align with internal or external
change.
The Board is responsible for approving the Group’s Board risk
appetite statement annually. Group Board-level metrics are
augmented by further sub-Board-level metrics and cascaded
into more detailed business appetite metrics and limits.
The following areas are currently included in the Group Board risk
appetite:
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
Climate: the Group takes action to support the transition to net
zero, through our activities and our customers, and to maintain
our resilience against the risks relating to climate change
Conduct: the Group delivers fair outcomes for its customers
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
Data: the Group has zero appetite for data related regulatory
fines or enforcement actions
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
Insurance underwriting: the Insurance Group has an appetite to
take on insurance underwriting risks where they fit with our
strategic objectives
Market: the Group has effective controls in place to identify and
manage the market risk inherent in our customer and client
focused activities
Model: material models are performing in line with expectations
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
Operational resilience: the Group has limited appetite for
disruption to services to customers and stakeholders from
significant unexpected events
People: the Group leads responsibly and proficiently, manages
people resource effectively, supports and develops colleague
skills and talent, creates and nurtures the right culture and meets
legal and regulatory obligations related to its people
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
• 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
•
Lloyds Banking Group Annual Report and Accounts 2022
139
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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 Group Audit Committee, and the Board
or Board Audit Committees of the sub-groups, subsidiaries and
legal entities where applicable.
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 and accurate risk reporting. The
risk and control cycle sets out how this should be approached.
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 regular basis 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 are aggregated by risk category and
reported and monitored via the monthly Key Risk Insights Report
or Consolidated Risk Report (CRR). The Key Risk Insights Report
and CRR are 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. During 2022, there has
been significant effort to embed One RCSA. This will continue into
2023 as risk practices, data quality, culture and capability mature.
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.
Governance frameworks
The Group’s approach to risk is based 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 142.
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 centralised, headed by the Chief Risk
Officer, providing oversight and 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
140 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued 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 good 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.
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,
including the Key Risk Insights Report and CRR, 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.
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 95 to 98.
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 (RWAs),
which are prepared in line with PRA prudential requirements. There are a number of risks that are not captured in RWAs including
pension risk, interest rate risk, concentration risk and some RWA calculations, such as operational risk RWAs are being updated as part
of the Basel 3.1 proposals. Furthermore the risk relating to Scottish Widows activities is not included in this table as Scottish Widows are
subject to a different set of prudential rules (Solvency 2 regime). Details of the business activities for each division are provided in the
Financial Performance Overview on pages 58 to 66.
At 31 December 2022
Risk-weighted assets (RWAs)
Credit risk
Counterparty credit risk3
Market risk
Operational risk
Total (excluding threshold)
Threshold4
Total
Retail
£bn
Commercial
Banking
£bn
Insurance,
Pensions and
Investments1
£bn
Central
Items2
£bn
93.8
–
–
17.9
111.7
–
111.7
59.6
5.8
3.2
5.7
74.3
–
74.3
0.1
–
–
–
0.1
–
0.1
11.5
0.8
–
0.6
12.9
11.9
24.8
Group
£bn
165.0
6.6
3.2
24.2
199.0
11.9
210.9
1 As a separate regulated business, the Insurance business 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 banking regulatory capital calculations. However, in
accordance with banking 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 includes 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.
Exposures relating to the default fund of a central counterparty and credit valuation adjustment risk are included in counterparty credit risk.
3
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.
Lloyds Banking Group Annual Report and Accounts 2022
141
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Risk governance
The risk governance structure below is integral to effective risk management across the Group. To meet ring-fencing requirements the
Boards and Board Committees of the Group and the Ring-Fenced Banks as well as relevant Committees of the Group and the Ring-
Fenced Banks will sit concurrently and we refer to this as the Aligned Board Model. Please see page 78 for further information on the
Aligned Board Model and the Group’s approach to ring-fencing. The 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 the Risk division to the Group Executive Committee and Board. Conversely, strategic direction and
guidance is cascaded down from the Board and Group Executive Committee.
The 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
Audit
Committee
Board
Board Risk
Committee
Reporting
Reporting
Group Chief Executive
Aggregation,
Escalation
Independent
Challenge
Independent
Challenge
e
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e
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G
Group and Ring
Fenced Banks Risk
Committee
Primary Escalation
Business area
Principal enterprise
Risk committees
Aggregation,
Escalation
Independent
Challenge
Independent
Challenge
Reporting
First line of defence
- Risk management
Reporting
Risk
division
committees
and
governance
t
h
g
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S
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 Economic Crime Prevention Committee
• Group and Ring-Fenced Banks Asset and Liability Committees (GALCO)
• Group Financial Risk Committee
• Group and Ring-Fenced Banks Cost Management Committees
• Group Capital Risk Committee
• Group and Ring-Fenced Banks Contentious Regulatory Committees
• Group Model Governance Committee
• Group and Ring-Fenced Banks Strategic Delivery Committees
• Group and Ring-Fenced Banks Net Zero Committees
• Group and Ring-Fenced Banks Conduct Investigations Committees
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 73 to 91, for further information on Board Committees.
The sub-group, divisional and functional risk committees review and recommend sub-group, divisional and functional risk appetite
and monitor local risk profile and adherence to appetite.
142
Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued
Executive and Risk Committees
The Group Chief Executive is supported by the following:
Committees
Risk focus1
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, control environment 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 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 Contentious
Regulatory Committees
Responsible for providing senior management oversight, challenge and accountability in
connection with the Group’s engagement with contentious regulatory matters as agreed by the
Group Chief Executive.
Group and Ring-Fenced Banks Strategic
Delivery Committees
Group and Ring-Fenced Banks Net Zero
Committees
Group and Ring-Fenced Banks Conduct
Investigations Committee
Responsible for driving execution of the Group’s investment portfolio and strategic transformation
agenda as agreed by the Group Chief Executive, including monitoring execution performance and
progress against strategic objectives. To act as a clearing house to resolve issues on individual
project areas and prioritisation across divisional and legal entity issues. Engaging in resolution of
challenges that require cross-Group support to resolve, ensuring funding and project performance
provides value for money for the Group, and autonomy is maintained alongside accountability for
projects and platforms.
Responsible for providing direction and oversight of the Group’s environmental sustainability
strategy, including particular focus on the net-zero transition and natural capital (biodiversity)
strategy. Oversight of the Group’s approach to meeting external environmental commitments
and targets, including but not limited to, progress in relation to the requirements of the Net-Zero
Banking Alliance (NZBA). Recommending all external material commitments and targets in relation
to environmental sustainability.
Responsible for protecting and promoting the Group’s conduct, values and behaviours by taking
action to rectify the most serious cases of misconduct within the Group, identifying themes and
ensuring lessons are shared with the business. The Committee shall do this by making outcome
decisions and recommendations (including sanctions) on investigations which have been referred
to the Committee from the triage process, including the Independent Triage Panel and overseeing
regular reviews of thematic outcomes and lessons learned.
The Group Risk Committee is supported through escalation and ongoing reporting by divisional risk committees, cross-divisional unit
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
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.
Group Economic Crime Prevention Committee Brings together accountable stakeholders and subject matter experts to ensure that the
Group Financial Risk Committee
Group Capital Risk Committee
Group Model Governance Committee
development and application of economic crime risk management complies with the Group’s
strategic aims, Group corporate responsibility, Group risk appetite and Group economic crime
prevention (fraud, anti-money laundering, anti-bribery and sanctions) policy. It provides direction
and appropriate focus on priorities to enhance the Group’s economic 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) 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 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.
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.
1
Reference to Group within the risk focus of each committee relates to the Group and the Ring-Fenced Banks.
Lloyds Banking Group Annual Report and Accounts 2022
143
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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
key legal entities as a key activity in medium-term planning, and
senior management is actively involved in stress testing activities
via the governance process.
Scenario stress testing is used to:
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 148 to 155) 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 and resolution
planning process of the Group and its legal entities
Regulatory stress tests
Following two years of COVID-19 pandemic crisis related stress
testing, in 2022 the PRA returned to the annual cyclical scenario
(ACS) stress test framework. The launch of the stress test was
postponed from March 2022 to September 2022 following Russia’s
invasion in Ukraine. The 2022 ACS included submissions for both
the Group and Ring-Fenced Bank (RFB). The 2022 stress test
objective was to assess the resilience of the UK banking system
to deep simultaneous recessions in the UK and global economy,
large falls in asset prices and higher global interest rates. The
submission was made to the PRA in January and results will be
published in Q3 2023.
Internal stress tests
On at least an annual basis, the Group conducts macroeconomic
stress tests 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. The 2022 internal
stress scenario focussed on assessing vulnerabilities to inflation
and rising energy prices.
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 147 to 195 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
participated in Part 1 of 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
risk management and stress testing activities.
Methodology
The stress tests at all levels must comply with all regulatory
requirements, achieved through comprehensive 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, has primary responsibility
for overseeing the development and execution of the Group’s
and Ring-Fenced Bank’s stress tests. The Lloyds Bank Corporate
Markets plc (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 sign-off. The outputs are then presented to GFRC
and the Board Risk Committee for review and challenge. With
all regulatory exercises being approved by the Board. There is
a similar process within LBCM for the governance of the LBCM-
specific results.
144 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Emerging risks
01
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.
01
Emerging risks
02
Principal risks
Impact on other existing
principal risks
02
Principal risk
The Board-approved enterprise-wide risk
categories used to monitor and report the risk
exposures posing the greatest impact to the
Group.
Strategic
risks
03
03
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
Background and framework
Understanding emerging risks is an essential component of
the Group’s risk management approach, enabling the Group to
identify the most pertinent risks and opportunities, and to respond
through strategic planning and appropriate risk mitigation.
Although emerging risk is not a principal risk, if left undetected
emerging risks have the potential to adversely impact the Group
or result in missed opportunities.
Impacts from emerging risks on the Group’s principal risks can
materialise via two different routes:
•
Emerging risks can impact the Group’s principal risks directly in
the absence of an appropriate strategic response
• Alternatively, emerging risks can be a source of new strategic
risks, dependent on our chosen response and the underlying
assumptions on how given emerging risks may manifest
Where an emerging risk is considered material enough in its own
right, the Group may choose to recognise the risk as a principal
risk. Recent examples of this include climate risk and strategic risk.
Such elevations are considered and approved through the Board
as part of the annual refresh of the enterprise risk management
framework.
Risk identification
The basis for risk identification is founded on collaboration
between functions across the Group. The activity incorporates
internal horizon scanning and engagement with external experts
to gain an external context, ensuring broad coverage.
This activity is inherently linked with and builds upon the annual
strategic planning cycle and is used to identify key external
trends, risks and opportunities for the Group. The Group continues
to evolve its approach for the identification and prioritisation of
emerging risks. During 2022, the Group enhanced its emerging risk
methodology, introducing a broader range of factors to provide
enriched insight.
Under the revised methodology, key factors considered in the
assessment of emerging risks include:
•
•
•
The threat presented by a risk
The Group’s specific vulnerability to the risk
The preparation and protection the Group has in place to
manage or mitigate impacts
The enhanced approach has delivered a more focused list of the
Group’s key emerging risks, as detailed below, enabling greater
management concentration on developing the appropriate
responses.
Notable emerging risks and their implications
The Group considers the emerging risk themes detailed in the
risk overview section on page 43 as having the potential to
increase in significance and affect the performance of the Group.
These risks can align to one or more of the Group’s strategic risk
themes and are considered alongside the Group’s operating plan.
Risk mitigation
Emerging risks are managed through the Group’s strategic risk
framework, detailed on page 195.
The individual emerging risks detailed above have been taken
to executive level committees throughout 2022 with actions
assigned to closely monitor their manifestation and potential
opportunities.
Pertinent emerging risks are considered as part of the Group’s
strategic and business planning processes and primarily
addressed through the Group’s strategy.
Key initiatives to tackle the emerging challenges and capitalise on
opportunities as part of the Group’s strategy include the following:
Purpose: At the heart of the Group’s purpose are the themes of
inclusion, sustainability and being people-first. As such, the
Group’s strategy aims to fully embed a purpose that supports a
more inclusive and sustainable future for the Group’s customers,
colleagues and shareholders.
Outcomes will see products, services and activities, aligning to
societal and regulatory expectations, which drive impacts across
housing, financial wellbeing, businesses and jobs, communities,
regions, and sustainability.
Customer proposition: As part of its strategy, the Group aims to
enhance its proposition, better aligning to its purpose, while
supporting transition to a low carbon economy and adapting to
the changing demographic of both its customer base and that of
the UK.
Key components include:
• Creating better engagement, improving customer journeys
and enhancing experiences and tools to drive greater financial
resilience and wellbeing for customers
• Democratising access to wealth advice, as well as creating
a step change in how the Group engages with affluent
customers to meet their holistic needs
Supporting customers and businesses in respect of making
their homes, vehicles, properties and activities more
sustainable
•
• Capitalising on the Group’s existing asset and product
capabilities for corporate and institutional clients to play a
leading role in the transition to Net Zero, addressing regional
inequalities and supporting UK prosperity by helping
corporates trade internationally
Talent: The Group is firmly committed to being diverse, employing
new ways of working, where colleagues are supported in having a
growth mindset and empowered to make decisions at pace.
The strategy places focus on a colleague proposition that can
attract and retain the best people, while leveraging talent pools
across the UK and exploring in-house skills growth strategies,
alongside partnerships with universities and businesses, to
supplement scarce skill sets.
For the long term, the Group intends to use its strategic workforce
planning capability for understanding and meeting the evolving
demand of skills from its businesses and functions. This will also
act as the bedrock for key strategic decisions and interventions
in respect of important elements of the Group’s talent strategy in
the future.
Lloyds Banking Group Annual Report and Accounts 2022
145
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Technology: Simplification of the Group’s estate and leveraging
contemporary technologies are core components of the Group’s
strategy.
The Group aims to manage the challenges of a rapidly evolving
landscape by employing technology that is aligned to industry
best practice refresh rates, while promoting autonomy and
empowerment within teams by streamlining governance.
This will be supplemented with an aligned business and
technology vision and a rationalised hybrid cloud technology
estate and modern engineering standards.
Data: Being data-driven is central to the Group’s transformation
activity. More than one third of the benefits from the Group’s
business strategies are reliant on the ability to successfully
leverage data. As such, managing data risk and employing strong
data ethics are key considerations for the strategy.
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 improve
its ability to deliver a data-first culture. The Group has also
invested in data ethics framework and strong governance for its
advanced analytics and cloud programmes.
In addition to the strategic actions detailed above, the Group
works closely with regulatory authorities and industry bodies to
ensure that the Group can monitor external developments and
identify and respond to the evolving landscape, particularly in
relation to regulatory and legal risk.
146 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued 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 148 to 195.
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. No changes were made to the
risk categories in 2022.
Risk categories
Principal risk categories
Secondary risk categories
Capital risk
Page 148
– Capital
Change/execution risk
Page 155
– Change/execution
Climate risk
Page 156
Conduct risk
Page 156
Credit risk
Page 158
Data risk
Page 179
– Climate
– Conduct
– Retail credit
– Commercial credit
– Data
Funding and liquidity risk
Page 179
– Funding and liquidity
Insurance underwriting risk
Page 185
– Insurance underwriting
Market risk
Page 186
Model risk
Page 191
Operational risk
Page 191
– Trading book
– Banking book
– Pensions
– Insurance
– Model
– Business process
– Financial reporting
– Security
– Economic crime financial
– Governance
– Sourcing and supply chain management
– Economic crime fraud
– Internal service provision
– External service provision
– IT systems
Operational resilience risk
Page 193
– Operational resilience
People risk
Page 194
– People
– Health and safety
Regulatory and legal risk
Page 195
– Regulatory compliance
– Legal
Strategic risk
Page 195
– 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.
Lloyds Banking Group Annual Report and Accounts 2022
147
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report The Group’s Pillar 2A capital requirement includes a reduction
linked to the setting of a 2 per cent UK countercyclical capital
buffer (CCyB) rate under normal conditions, as defined by the
Bank of England’s Financial Policy Committee (FPC). Following a
prior PRA announcement this reduction had been temporarily
offset through the PRA Buffer, with the offset subsequently
removed in December 2022 following the increase in the UK CCyB
rate.
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), it has been classified
as an ‘other’ systemically important institution (O-SII) by the
PRA
The O-SII 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. This 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 FPC amended the O-SII buffer framework during
2022, changing the metric for determining the buffer rate from
total assets to the UK leverage exposure measure. This will
apply from the next review point in December 2023 which will
refer to the RFB sub-group’s leverage exposure measure as at
31 December 2022, with any changes applying from 1 January
2025. Based on the RFB sub group’s leverage exposure
measure as at 31 December 2022, the O-SII buffer rate will be
maintained at 2.0 per cent
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
published by the FPC for the individual countries where the Group
has relevant credit exposures. The FPC also sets the UK CCyB rate
which is currently set at 1 per cent and will increase to 2 per cent
in July 2023.
Given the Group’s UK focused business model, the Group’s CCyB
at 31 December 2022 was around 0.9 per cent of risk-weighted
assets. The increase in the UK CCyB rate to 2 per cent would
represent an equivalent increase in the Group’s CCyB to around
1.8 per cent from July 2023.
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 recent 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 the current Annual
Cyclical Scenario stress test exercise will be adjusted to recognise
the additional resilience provided by the earlier provisions taken
under IFRS 9. The BoE is continuing to work on a more enduring
treatment of IFRS 9 for the purposes of future stress tests.
Capital risk
Definition
Capital risk is defined as the risk that an insufficient quantity or
quality of capital is held to meet regulatory requirements or to
support business strategy, an inefficient level of capital is held or
that capital is inefficiently deployed across the Group.
Exposures
A capital risk event 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 assesses both its regulatory capital requirements and
the quantity and quality of capital resources it holds to meet
those requirements through applying the regulatory capital
framework set out under the Capital Requirements Directive and
Regulation (CRD IV), as amended by subsequent revisions to the
Directive (CRD V) and to the Regulation (CRR II), the latter applying
in full from 1 January 2022 following the UK implementation
of the remaining provisions of CRR II. The requirements are
supplemented through additional regulation under the PRA
Rulebook and associated statements of policy, supervisory
statements and other regulatory guidance.
Further details of the regulatory capital and leverage frameworks
to which the Group is subject, including the means by which its
capital and leverage requirements and capital resources are
calculated, are provided in the Group’s Pillar 3 disclosures.
The minimum amount of total capital, under Pillar 1 of the
regulatory capital 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 met with common equity tier 1 (CET1) capital
and at least 6 per cent of risk-weighted assets are required
to be met with tier 1 capital. Minimum Pillar 1 requirements are
supplemented by additional minimum requirements under Pillar
2A of the regulatory capital 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 capital 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 pension
obligation risk and interest rate risk in the banking book (IRRBB).
During the year the PRA reverted to setting a variable amount for
Pillar 2A (being a set percentage of risk-weighted assets), with
fixed add-ons for certain risk types. The Group’s Pillar 2A capital
requirement has been reduced to the equivalent of around 2.7 per
cent of risk-weighted assets, of which the minimum amount to
be met by CET1 capital is the equivalent of around 1.5 per cent of
risk-weighted assets.
148 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued 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. The PRA has previously
communicated its expectation that banks’ capital and liquidity
buffers can be drawn down as necessary to support the real
economy through a shock and that sufficient time would 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 Framework. The leverage ratio is calculated
by dividing 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 Tier 1 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)
requirement which is determined by multiplying the Group’s
CCyB rate by 35 per cent. As at 31 December 2022 the CCLB for
the Group was 0.3 per cent. Following the planned increase in the
UK CCyB rate, the Group’s CCLB would be expected to increase
to 0.6 per cent in Q3 2023. An additional leverage ratio buffer
(ALRB) requirement of 0.7 per cent applies to the RFB sub-group
and is determined by multiplying the RFB sub-group O-SII buffer
by 35 per cent. At Group level an equivalent buffer of 0.6 per cent
applies.
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.
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. 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 Banks Asset and Liability Committees (GALCO),
Group and Ring-Fenced Banks Risk Committees (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 is provided in the
Group’s Pillar 3 disclosures. 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 current and future
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 considerations:
•
•
•
•
•
•
•
The minimum Pillar 1 CET1 capital requirement of 4.5 per cent of
risk-weighted assets
The Group’s Pillar 2A capital requirement set by the PRA.
During the year the PRA reduced the requirement, of which the
minimum amount to be met by CET1 capital is the equivalent of
around 1.5 per cent of risk-weighted assets
The Group’s current CCyB requirement which is around 0.9 per
cent of risk-weighted assets
The CCB requirement of 2.5 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
The desire to maintain a progressive and sustainable ordinary
dividend policy in the context of year to year earnings
movements
Capital returns
The Group has in place a progressive and sustainable ordinary
dividend policy which allows for flexibility to return surplus capital
to shareholders through share buybacks or special dividends.
Surplus capital represents capital over and above the amount
management wish to retain to grow the business, meet current
and future 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.
Given the Group’s robust financial performance and strong
capital position at the year end, the Board has recommended a
final ordinary dividend of 1.60 pence per share. This is in addition
to the interim ordinary dividend of 0.80 pence per share that
was announced as part of the 2022 half year results and paid
in September 2022. The total ordinary dividend for the year
is therefore 2.40 pence per share. The Group also intends to
implement a share buyback programme of up to £2.0 billion
which will commence as soon as is practicable and is expected
to be completed by 31 December 2023.
The Board remains committed to future capital returns. Going
forward, the Board intends to maintain its progressive and
sustainable ordinary dividend policy alongside further returns of
surplus capital at the end of the year as appropriate. The Board
will continue to give due consideration at year end to the size
of the final dividend payment and to the return of any surplus
capital based upon the circumstances at the time.
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.
Lloyds Banking Group Annual Report and Accounts 2022
149
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Distributable reserves are determined as required by the
Companies Act 2006 by reference to a company’s individual
financial statements. At 31 December 2022 Lloyds Banking Group
plc (‘the Company’) had accumulated distributable reserves
of approximately £10 billion. Substantially all of the Company’s
merger reserve is available for distribution under UK company
law as a result of transactions undertaken to recapitalise the
Company in 2009.
Lloyds Banking Group plc acts as a holding company which also
issues capital and other securities to capitalise and fund the
activities of the Group. The profitability of the holding company,
and its ability to sustain dividend payments, is therefore
dependent upon the continued receipt of dividends 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 2022, had a consolidated CET1 capital ratio that
exceeded minimum regulatory requirements and internal risk
appetite levels. 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)
Global systemically important banks (G-SIBs) are subject to an
international standard on total loss absorbing capacity (TLAC).
The standard 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.
In the UK, the Bank of England has implemented the requirements
of the international TLAC standard through the establishment of a
framework which sets out minimum requirements for own funds
and eligible liabilities (MREL). 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).
Although the Group is not classified as a G-SIB it is subject to
the Bank of England’s MREL framework, including the statement
of policy on MREL (the ‘MREL SoP’) which requires the Group to
maintain a minimum level of MREL resources.
Under the requirements of the framework, the Group operates a
single point of entry (SPE) resolution strategy, with Lloyds Banking
Group plc as the designated resolution entity.
Applying the MREL SoP to minimum capital requirements at
31 December 2022, the Group’s MREL requirement, excluding
regulatory capital and leverage buffers, is the higher of 2 times
Pillar 1 plus 2 times Pillar 2A, equivalent to 21.4 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.
Internal minimum requirements for own funds and eligible
liabilities (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 CET1 capital position
The Group’s pro forma CET1 capital ratio reduced by 222 basis
points from 16.3 per cent at 31 December 2021 to 14.1 per cent at
31 December 2022.
150 Lloyds Banking Group Annual Report and Accounts 2022
This initially reflected a reduction of 230 basis points on 1 January
2022 for regulatory changes which included an increase in risk-
weighted assets, in addition to other related modelled impacts on
CET1 capital, following:
•
•
The anticipated impact of the implementation of new CRD IV
mortgage, retail unsecured and commercial banking models
to meet revised regulatory standards for modelled outputs
The UK implementation of the remainder of CRR 2 which
included a new standardised approach for measuring
counterparty credit risk (SA-CCR)
This was in addition to the reinstatement of the full deduction
treatment for intangible software assets and phased reductions
in IFRS 9 transitional relief.
The new CRD IV models remain subject to finalisation and
approval by the PRA and therefore uncertainty over the final
impact remains.
The impact of the regulatory changes on 1 January 2022 was
subsequently offset by strong pro forma capital generation of 245
basis points during the year which reflected the following:
• Banking profitability of 230 basis points, including a net
impairment charge of 44 basis points reflecting the impact
of the impairment charge for the year (59 basis points) net of
IFRS 9 dynamic relief (15 basis points) following the increase in
Stage 1 and Stage 2 expected credit losses in the second half
of the year
21 basis points for both the £300 million dividend received
from the Insurance business in July 2022 and the £100 million
dividend received in February 2023
•
• A reduction in risk-weighted assets (excluding threshold
movements), post 1 January 2022 regulatory changes,
generating an increase equivalent to 14 basis points and other
movements of 11 basis points
• Offset in part by 31 basis points related to the full 2022 fixed
contributions to the Group’s three main defined benefit
pension schemes
Capital usage resulted in a further reduction of 237 basis points
on a pro forma basis, reflecting:
•
• 81 basis points in total for the interim ordinary dividend of 0.80
pence per share paid in September 2022 and the accrual
for the recommended final ordinary dividend for 2022 of 1.60
pence per share
104 basis points to cover the accrual for the full amount of the
announced £2.0 billion ordinary share buyback programme
• 52 basis points for variable pension contributions made to the
main defined benefit pension schemes, including £400 million
of additional contributions paid in December, representing an
acceleration of future planned contributions, ahead of the
triennial pension fund renegotiation
The ordinary share buyback will commence as soon as is
practicable and the full impact will be accrued for through the
Group’s actual capital position during the first quarter of 2023.
Excluding the pro forma Insurance dividend received in
February 2023 and the full impact of the announced ordinary
share buyback programme, the Group’s CET1 capital ratio at
31 December 2022 was 15.1 per cent (31 December 2021: 17.3 per
cent).
As at 31 December 2022, static relief under the IFRS 9 transitional
arrangements amounted to £232 million (31 December 2021:
£353 million) and dynamic relief amounted to £358 million
(31 December 2021: £428 million) through CET1 capital. On 1 January
2023 IFRS 9 static relief came to an end and the transitional factor
applied to IFRS 9 dynamic relief reduced by a further 25 per cent,
resulting in an overall reduction of 15 basis points. The Group’s pro
forma CET1 capital ratio at 31 December 2022 does not include the
impact of the reduced relief.
Total capital requirement
The Group’s total capital requirement (TCR) as at 31 December
2022, being the aggregate of the Group’s Pillar 1 and current Pillar
2A capital requirements, was £22,550 million (31 December 2021:
22,986 million).
Capital resources
An analysis of the Group’s actual capital position as at
31 December 2022 is presented in the following section. The
capital position reflects the application of the transitional
arrangements for IFRS 9.
Risk management continued Capital resources (audited)
The table below summarises the consolidated capital position of the Group. The Group’s Pillar 3 disclosures 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
Cash flow hedging reserve
Other adjustments
less: deductions from common equity tier 1
Goodwill and other intangible assets
Prudent valuation adjustment
Removal of defined benefit pension surplus
Significant investments1
Deferred tax assets
Common equity tier 1 capital
Additional tier 1
Other equity instruments
Preference shares and preferred securities2
Regulatory adjustments3
less: deductions from tier 1
Significant investments1
Total tier 1 capital
Tier 2
Other subordinated liabilities2,3
Deconsolidation of instruments issued by insurance entities1
Regulatory adjustments3
less: deductions from tier 2
Significant investments1
Total capital resources3
Risk-weighted assets (unaudited)
Common equity tier 1 capital ratio (unaudited)
Tier 1 capital ratio (unaudited)
Total capital ratio (unaudited)
At 31 Dec
2022
£m
At 31 Dec
2021
£m
41,980
(1,062)
3,058
5,476
(80)
47,011
(947)
2,486
457
547
49,372
49,554
(4,982)
(434)
(2,803)
(4,843)
(4,445)
31,865
5,271
470
(470)
5,271
(1,100)
36,036
10,260
(1,430)
(2,323)
6,507
(3,026)
(457)
(3,200)
(4,573)
(4,483)
33,815
5,879
2,149
(1,598)
6,430
(1,100)
39,145
10,959
(1,753)
(1,056)
8,150
(963)
(961)
41,580
46,334
210,859
195,967
15.1%
17.1%
19.7%
17.3%
20.0%
23.6%
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 reported as subordinated liabilities in the balance sheet.
3
Following the completion of the transition to end-point eligibility rules on 1 January 2022, legacy tier 1 and tier 2 capital instruments subject to the original CRR
transitional rules have now been fully removed from regulatory capital. Included in other subordinated liabilities is a single legacy tier 2 capital instrument of
£5 million that remains eligible under the extended transitional rules of CRR 2. Excluding this instrument, total capital resources at 31 December 2022 are
£41,575 million and the total capital ratio is 19.7 per cent.
Lloyds Banking Group Annual Report and Accounts 2022
151
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Movements in capital resources
The key movements are set out in the table below.
At 31 December 2021
Banking business profits1
Movement in foreseeable dividend accrual2
Final 2021 dividend paid out on ordinary shares during the period
Interim 2022 dividend paid out on ordinary shares during the period
Share buyback reflected through retained profits
Dividends received from the Insurance business3
IFRS 9 transitional adjustment to retained earnings
Pension deficit contributions
Goodwill and other intangible assets
Significant investments
Movement in treasury shares and employee share schemes
Movements in other equity, subordinated liabilities, other tier 2 items and related
adjustments
Distributions on other equity instruments
Other movements
At 31 December 2022
Common
equity
tier 1
£m
Additional
tier 1
£m
33,815
5,330
5,511
(115)
(930)
(545)
(2,013)
600
(181)
(1,611)
(1,956)
(270)
204
–
–
–
–
–
–
–
–
–
–
–
Tier 2
£m
7,189
–
–
–
–
–
–
–
–
–
(2)
–
Total
capital
£m
46,334
5,511
(115)
(930)
(545)
(2,013)
600
(181)
(1,611)
(1,956)
(272)
204
–
(1,159)
(1,643)
(2,802)
(438)
(206)
–
–
–
–
(438)
(206)
31,865
4,171
5,544
41,580
1 Under the regulatory capital 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 reversal of the brought forward accrual for the final 2021 ordinary dividend, net of the accrual for the final 2022 ordinary dividend.
3 Received in February 2022 and July 2022.
CET1 capital resources have reduced by £2.0 billion over the year, primarily reflecting:
•
•
•
•
•
The reduction on 1 January 2022 for regulatory changes including the reinstatement of the full deduction treatment for intangible
software assets in addition to phased and other reductions in IFRS 9 transitional relief
The ordinary share buyback programme announced as part of the Group’s 2021 year end results that completed during 2022
The interim ordinary dividend paid in September 2022, the accrual for the final 2022 ordinary dividend and distributions on other
equity instruments
Pension deficit contributions (fixed and variable) paid into the Group’s three main defined benefit pension schemes
Partially offset by banking business profits for the year and the receipt of dividends paid up by the Insurance business during the
year
AT1 capital resources have reduced by £1.2 billion and Tier 2 capital resources have reduced by £1.6 billion over the year. The reductions
primarily reflect the derecognition of legacy AT1 and Tier 2 capital instruments following the completion of the transition to end-
point eligibility rules for regulatory capital on 1 January 2022, instrument repurchases and the impact of interest rate increases and
regulatory amortisation on eligible Tier 2 capital instruments. This was partially offset by the issuance of new AT1 and Tier 2 capital
instruments, the impact of sterling depreciation and an increase in eligible provisions recognised through Tier 2 capital.
Minimum requirement for own funds and eligible liabilities (MREL)
An analysis of the Group’s current MREL resources is provided in the table below.
Total capital resources
Ineligible AT1 and tier 2 instruments1
Amortised portion of eligible tier 2 instruments issued by Lloyds Banking Group plc
Other eligible liabilities issued by Lloyds Banking Group plc2
Total MREL resources
Risk-weighted assets
MREL ratio
Leverage exposure measure
MREL leverage ratio
At 31 Dec
2022
£m
At 31 Dec
2021
£m
41,580
46,334
(181)
1,346
24,085
66,830
(163)
713
26,070
72,954
210,859
195,967
31.7%
37.2%
638,815
664,362
10.5%
11.0%
1
2
Instruments with less than or equal to one year to maturity or instruments not issued out of the holding company.
Includes senior unsecured debt.
During the year the Group issued externally £6.1 billion (sterling equivalent at point of issuance) of senior unsecured debt from Lloyds
Banking Group plc which, while not included in total capital, is eligible to meet MREL.
Total MREL resources reduced by £6.1 billion, driven by the reduction in total capital resources and a net reduction in other eligible
liabilities. The latter largely reflected the derecognition of senior unsecured debt instruments with less than one year to maturity, calls
and interest rate increases, partially offset by the new issuances and sterling depreciation.
152
Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Risk-weighted assets
Foundation Internal Ratings Based (IRB) Approach
Retail IRB Approach
Other IRB Approach1
IRB Approach
Standardised (STA) Approach1
Credit risk
Securitisation1
Counterparty credit risk
Credit valuation adjustment risk
Operational risk
Market risk
Risk-weighted assets
Of which threshold risk-weighted assets2
At 31 Dec
2022
£m
46,500
81,091
19,764
147,355
23,119
At 31 Dec
2021
£m
47,255
65,450
22,572
135,277
21,628
170,474
156,905
6,397
5,911
621
24,241
3,215
210,859
11,883
5,945
5,261
678
24,025
3,153
195,967
12,359
1
2
Threshold risk-weighted assets are now included within Other IRB Approach and Standardised (STA) Approach. In addition securitisation risk-weighted assets are
now shown separately. Comparatives have been presented on a consistent basis.
Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being
deducted from CET1 capital. Significant investments primarily arise from investment in the Group’s Insurance business.
Risk-weighted assets have increased by £15 billion in the year, primarily reflecting:
•
The £16 billion increase on 1 January 2022, reflecting regulatory changes which include the anticipated impact of the
implementation of new CRD IV models to meet revised regulatory standards for modelled outputs. The new CRD IV models remain
subject to finalisation and approval by the PRA and therefore the resultant risk-weighted asset impact also remains subject to this
• Risk-weighted assets reduced by £1 billion during the year (subsequent to the 1 January 2022 regulatory changes) to £211 billion
at 31 December 2022. This largely reflected optimisation activity and Retail model reductions from the strong underlying credit
performance, partly offset by the growth in balance sheet lending and the impact of foreign exchange movements
Lloyds Banking Group Annual Report and Accounts 2022
153
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Leverage ratio
The table below summarises the component parts of the Group’s leverage ratio.
Total tier 1 capital (fully loaded)
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
Loans and advances and other assets
Total deconsolidation adjustments
Derivatives adjustments
Securities financing transactions adjustments
Off-balance sheet items
Amounts already deducted from tier 1 capital
Other regulatory adjustments2
Total exposure measure
Average exposure measure3
UK leverage ratio
Average UK leverage ratio3
Leverage exposure measure (including central bank claims)
Leverage ratio (including central bank claims)
At 31 Dec
2022
£m
36,036
At 31 Dec
2021
£m
38,594
24,753
56,646
796,430
877,829
22,051
69,673
794,801
886,525
(91,125)
(72,741)
712
(166)
(168,531)
(186,965)
(167,819)
(7,414)
2,645
42,463
(12,033)
(5,731)
638,815
658,435
5.6%
5.5%
(187,131)
(3,506)
1,946
57,496
(10,324)
(7,903)
664,362
5.8%
729,940
4.9%
737,103
5.2%
1 Deconsolidation adjustments relate to the deconsolidation of certain Group entities that fall outside the scope of the Group’s regulatory capital consolidation,
primarily the Group’s Insurance business.
Includes adjustments to exclude lending under the UK Government’s Bounce Back Loan Scheme (BBLS).
2
3 The average UK leverage ratio is based on the average of the month end tier 1 capital position and average exposure measure over the quarter (1 October 2022 to
31 December 2022). The average of 5.5 per cent compares to 5.3 per cent at the start and 5.6 per cent at the end of the quarter.
Analysis of leverage movements
The Group’s UK leverage ratio has reduced to 5.6 per cent, primarily reflecting the reduction in the total tier 1 capital position. This was
partially offset by the £25.5 billion reduction in the leverage exposure measure which largely reflected reductions in securities financing
transactions and the measure for off-balance sheet items.
The securities financing transactions (SFT) exposure measure, representing the aggregate of SFT assets per the balance sheet and SFT
adjustments, reduced by £12.3 billion during the year, reflecting a reduction in volumes.
Off-balance sheet items reduced by £15.0 billion during the year, largely reflecting optimisation activity which has resulted in a
reduction in the credit conversion factor applied to residential mortgage offers.
The average UK leverage ratio was 5.5 per cent over the fourth quarter, reflecting an increase in the ratio across the quarter as the
exposure measure reduced, largely driven by decreasing SFT volumes.
154 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued
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
2022
31,275
35,446
41,480
210,573
14.9
16.8
19.7
At 31 Dec
2021
33,033
38,363
46,336
195,874
16.9
19.6
23.7
638,225
663,580
5.6
5.7
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 2022, static relief under the transitional
arrangements amounted to £232 million (31 December 2021:
£353 million) and dynamic relief amounted to £358 million
(31 December 2021: £428 million) through CET1 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 has participated in the
delayed 2022 Annual Cyclical Scenario stress test run by the Bank
of England, which was submitted to the regulator during January
2023. This assesses the Group’s resilience to a severe economic
shock where the House Price Index (HPI) falls by 31 per cent,
Commercial Real Estate (CRE) falls by 45 per cent, unemployment
peaks at 8.5 per cent and the Base Rate peaks at 6 per cent. The
results of this exercise will be published by the Bank of England
in the third quarter of 2023. In 2022 the Group also internally
assessed vulnerabilities to inflation and rising energy prices.
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 2022 Basel G-SIBs annual
exercise will be disclosed from April 2023 and the results are
expected to be made available by the Basel Committee later this
year.
Insurance business
The business transacted by the insurance companies within the
Group comprises of both life insurance business and general
insurance business. Life insurance comprises of unit-linked, non-
profit 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. Insurance is required to calculate
solvency capital requirements and available capital on a risk-
based approach. Insurance calculates regulatory capital on the
basis of an internal model, which has been approved by the PRA.
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.
Change/execution 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 operate 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/or
internal drivers including business process changes, technology
upgrades and strategic business or technology transformation.
Measurement
The Group currently measures change/execution risk against
defined risk appetite metrics which are a combination of leading,
quality and delivery indicators across the investment portfolio.
These indicators are reported through internal governance
structures and monthly execution risk metrics; which forms part of
the Board risk appetite metrics, and are under ongoing evolution
and enhancement to ensure ongoing support of the Group’s
change and transformation agenda.
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, on
customers and colleagues and on 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 enterprise risk management framework
Events and incidents related to change activities are escalated
and managed appropriately in line with risk framework guidance
Ensuring there are sufficient, appropriately skilled resources to
support the safe delivery of the Group’s current and future
change portfolio
•
•
•
Monitoring
Change/execution risks are monitored and reported through to
the Board and Group Governance Committees in accordance
with the Group’s enterprise risk management framework. Risk
exposures are assessed monthly through established governance
in the Group’s functional and divisional risk committees with
escalation to Executive Committees where required. Material
change/execution related risk events or incidents are escalated
in accordance with the Group operational risk policy and change
policy. In addition there is oversight, challenge and reporting at
Risk division level to support overall management of risks and
ongoing effectiveness of controls.
Lloyds Banking Group Annual Report and Accounts 2022
155
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Climate risk
Definition
Climate risk is defined as the risk that the Group experiences
losses and/or reputational damage, either from the impacts of
climate change and the transition to net zero, or as a result of the
Group’s responses to tackling climate change.
Exposures
Climate risk can arise from:
•
•
Physical risks – changes in climate or weather patterns which
are acute, event driven (e.g. flood or storms), or chronic, longer-
term shifts (e.g. rising sea levels or droughts)
Transition risks – changes associated with the move towards
net zero, including changes to policy, legislation and
regulation, technology and changes to customer preferences;
or legal risks from failing to manage these changes
The Group has identified loans and advances to customers in
sectors at increased risk from the impacts of climate change,
see page 73 in the 2022 Lloyds Banking Group environmental
sustainability report.
This has informed an analysis of the main climate risks facing
the Group, including how these may impact across the different
principal risks within the Group’s enterprise risk management
framework. For further information see pages 14 to 17 in the 2022
Lloyds Banking Group environmental sustainability report.
Measurement
The Group considers how climate risks are incorporated into
the measurement of expected credit losses. An assessment
was performed of the Group’s internally generated economic
scenarios used in the measurement of expected credit losses
against external scenarios published by the Network for Greening
the Financial System (NGFS). This was supplemented by an
assessment of the behavioural lifetime of assets against the
expected time horizons of when climate risks may materialise.
Given the extended timelines related to climate risks compared
to the tenor of the Group’s lending portfolios and insights
produced by the Group’s climate risk experts, no adjustments
have been required to the expected credit losses measured as at
31 December 2022.
The Group continues to enhance its internal climate risk
assessment methodologies and tools to assess the physical
and transition risks which could impact clients and customers.
One example is the qualitative ESG risk assessment tool for
commercial clients. From a climate risk perspective, this is
designed to generate a score for individual clients based on their
transition readiness and response to managing climate risks and
opportunities.
The Group also continues to evolve its climate scenario analysis
capabilities to assist in the identification, measurement and
ongoing assessment of the climate risks that pose threats to
its strategic objectives. It is a fast-evolving discipline, requiring
new skill sets and investment in data. The Group has established
a centre of excellence to bring together the expertise and
resources to further develop scenario analysis capabilities,
building on the experience gained in participating in the Bank of
England’s Climate Biennial Exploratory Scenario (CBES) exercise
and other internal assessments. The 2022 Lloyds Banking Group
environmental sustainability report (pages 63 to 67) provides
further information on the climate scenario analysis undertaken
and next steps as the Group continues to develop its climate
scenario analysis approach.
Climate considerations also form part of the Group’s planning
and forecasting activities, with a forecast of the Group’s financed
emissions included within the Group’s four-year financial plan,
alongside a qualitative assessment of the climate risks and
opportunities for certain material sectors.
Mitigation
The Group’s climate risk policy provides an overarching
framework for the management of climate risks, intended to
support appropriate consideration of climate risks across key
activities.
156 Lloyds Banking Group Annual Report and Accounts 2022
The policy also supports the Group’s climate-related external
ambitions and progress against the relevant regulatory
requirements, including the Task Force on Climate-related
Financial Disclosures (TCFD) recommendations.
The 2022 Lloyds Banking Group environmental sustainability
report (pages 56 to 62) provides further detail on the key
processes to address some of the most material climate risks
facing the Group, particularly focusing on credit risk.
The Group’s risk appetite for managing climate risk from its
lending activities is outlined in its fourteen external sector
statements, which form one of the ways for managing and
controlling climate risk. These sector statements outline what
types of activities the Group will and will not support. The Group’s
external sector statements are publicly available on the Group
Responsible Business Download Centre.
The Group continues to embed climate risk, as well as wider
ESG considerations, into its credit risk framework, policies and
processes. As climate risk is embedded into the credit risk
management framework, the Group is continuing to assess
how climate risk is reflected in its credit risk policies and sector
appetites over the short, medium and long term. The Group
currently looks to ensure that climate and broader ESG risks are
considered for all commercial customers that bank with the
Group, with specific commentary in new and renewal applications
where total aggregated hard limits exceed £500,000 (excluding
automated decisioning processes for smaller counterparties). The
Group’s retail credit risk policies require due regard to be paid to
energy efficiency, Energy Performance Certificate (EPC) controls,
and physical risks, such as flood assessments, in the mortgages
business, and transition risks, pace and growth of electric
vehicles, within the motor portfolio.
In Scottish Widows, the investment portfolio is exposed to market
risk via potential investment losses and stranded assets of
counterparties. There are stewardship and exclusions policies in
place, along with strategic asset allocation, to seek to manage
transition risks. Given the short-term nature of home insurance
policies in the General Insurance business, the Group is able
to review the risks regularly, and change its approach as risks
develop to mitigate long-term exposure of climate risk.
Monitoring
Climate risk is considered each month through the Group’s
risk reporting to the Board, while more detailed updates are
provided half-yearly to the Board Risk Committee. This ensures
Board oversight of the Group’s overall climate risk profile, plans to
develop capabilities supporting climate risk management and
development of climate-related risk appetite.
The integration of climate risk into credit decisioning (for
example, EPC and flood risk data in Homes) has supported the
development of metrics which highlight the levels of physical
and transition risk in key portfolios, and allows the Group to
differentiate its lending strategy. The Group is continuing to
develop its approach to measuring and monitoring climate risk
and will enhance reporting going forward as understanding
and capabilities increase, which will also be used to set further
quantitative and qualitative risk appetite metrics as appropriate.
Conduct risk
Definition
Conduct risk is defined as the risk of customer detriment across
the customer lifecycle including: failures in product management,
distribution and servicing activities; from other risks materialising,
or other activities which could undermine the integrity of the
market or distort competition, leading to unfair customer
outcomes, regulatory censure, reputational damage or financial
loss.
Customer harm or detriment is defined as consumer loss, distress
or inconvenience to customers due to breaches of regulatory
or internal requirements or our wider duty to act fairly and
reasonably.
Exposures
The Group faces significant conduct risks, which affect all
aspects of the Group’s operations and all types of customers.
The introduction of Consumer Duty has increased regulatory
expectations in relation to customer outcomes, including how the
Group demonstrates and measures them.
Risk management continued 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, fair
value assessment and responsible lending criteria) and post-
sales service (including the management of customers in
financial difficulties)
Actions to encourage good conduct include:
• Conduct risk appetite established at Group and divisional
•
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 good customer outcomes, and support market integrity
and competition requirements
• Customer needs considered through divisional customer
plans, with integral conduct lens
• Unclear, unfair, misleading or untimely customer
• Cultural transformation: achieving a values-led culture
communications
• A culture that is not sufficiently customer-centric
•
Poor governance of colleagues’ incentives and rewards and
approval of schemes which lead to behaviours that drive
unfair customer outcomes
Ineffective identification, 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 Group is also exposed to the risk of engaging in activities 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,
and action has been taken to move to risk-free rates following the
ending of the majority of London Inter-bank Offered Rate (LIBOR)
measures on 1st January 2022.
There is a high level of scrutiny from regulatory bodies, the media,
politicians, and consumer groups regarding financial institutions’
treatment of customers, especially those with characteristics
of vulnerability. The Group continues to apply significant focus
to its treatment of all customers, in particular those in financial
difficulties and those with characteristics of vulnerability, to
ensure good outcomes.
The Group continuously adapts to market developments that
could pose heightened conduct risk, and actively monitors for
early signs of financial difficulties driven by pressures from a rising
cost of living, rising interest rates and continuing impacts from
COVID-19.
Other key areas of focus include transparency and fairness
of pricing communications; ensuring victims of Authorised
Push Payment Fraud receive good outcomes; and increased
expectations regarding customer outcomes due to the
introduction of the FCA’s Consumer Duty Regulation.
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.
CRAMs have been designed for services and products 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, to include 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 our
values-led culture with customers at the heart, strengthening links
between actions to support conduct, culture and customer and
enabling more effective control management.
through a consistent 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
• Development and continued oversight of the implementation
of the vulnerability strategy continues through the Group
Customer Inclusion Forum to monitor vulnerable outcomes,
provide strategic direction and ensure consistency across the
Group
• Robust product governance framework to ensure products
•
continue to offer customers fair value, and consistently meet
their needs throughout their product lifecycle
Effective complaints management through 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 good outcomes for customers throughout
the product and service lifecycle, and make continuous
improvements to products, services and processes
• Continued focus on market conduct; member of the Fixed
Income, Currencies and Commodities Markets Standard Board;
and committed to conducting its market activities consistent
with the principles of the UK Money Markets code, the Global
Precious Metals Code and the FX Global Code
• 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 strategy
• 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
• Creation of tools and additional support for customers
impacted by the rising cost of living, including Cost-of-Living
Hub and interest-free overdraft buffer
• A programme of work is underway to deliver the enhanced
expectations of Consumer Duty
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 Risk Reporting. The risk
exposures are reported, discussed and challenged at divisional
risk committees. Remedial action is recommended, if required. All
material conduct risk events are escalated in accordance with
the Group Operational Risk Policy.
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
• Oversight and assurance activities across the three lines of
defence
• Horizon scanning
Lloyds Banking Group Annual Report and Accounts 2022
157
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Credit risk
Definition
Credit risk is defined as the risk that parties with whom the Group
has contracted fail to meet their financial obligations (both on
and off-balance sheet).
Exposures
The principal sources of credit risk within the Group arise from
loans and advances, contingent liabilities, commitments, debt
securities and derivatives to customers, financial institutions and
sovereigns. The credit risk exposures of the Group are set out in
note 52 on page 317.
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
2022 is shown on page 173. The notional principal amount does
not, however, represent the Group’s credit risk exposure, which is
limited to the current cost of replacing contracts with a positive
value to the Group. Such amounts are reflected in note 52 on
page 317.
Additionally, credit risk arises from leasing arrangements where
the Group is the lessor. Note 2(J) on page 223 provides details on
the Group’s approach to the treatment of leases.
Credit risk exposures in the Insurance, Pensions and Investments
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 35 on page
280 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 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 exposure.
158 Lloyds Banking Group Annual Report and Accounts 2022
Key metrics, which may include 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.
The Group has also continued to strengthen its capabilities and
abilities for identifying, assessing and managing climate-related
risks and opportunities, recognising that climate change is likely
to result in changes in the risk profile and outlook for the Group’s
customers, the sectors the Group operates in and collateral/asset
valuations. For further information, please refer to the 2022 Lloyds
Banking Group environmental sustainability report.
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
and calibration of credit risk appetite, where appropriate.
As part of the ‘three lines of defence’ model, the Risk division is
the second line of defence providing oversight and independent
challenge to key risk decisions taken by business management.
The 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 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 191.
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, appetite statements and mandates are aligned to the
Group’s risk appetite and restrict exposure to higher risk countries
and potentially vulnerable sectors and asset classes. Note 52 on
page 317 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 Group 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.
Risk management continued 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
144.
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 includes 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 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.
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. The
Risk division has the necessary discretion to extend this rule to
other cases where there is significant correlation. Countries with a
rating equivalent to AA- or better may be considered to have no
adverse correlation between the counterparty domiciled in that
country and the country of risk (issuer of securities).
Refer to note 52 on page 317 for further information on collateral.
Additional mitigation for Retail customers
The Group uses a variety of lending criteria when assessing
applications for mortgages and unsecured lending. The general
approval process uses credit acceptance scorecards and
involves a review of an applicant’s previous credit history using
internal data and information held by Credit Reference Agencies
(CRA).
The Group also assesses the affordability and sustainability of
lending for each borrower. For secured lending this includes use
of an appropriate stressed interest rate scenario. Affordability
assessments for all lending are compliant with relevant regulatory
and conduct guidelines. The Group takes reasonable steps to
validate information used in the assessment of a customer’s
income and expenditure.
In addition, the Group has in place quantitative limits such as
maximum limits for individual customer products, the level of
borrowing to income and the ratio of borrowing to collateral.
Some of these limits relate to internal approval levels and others
are policy limits above which the Group will typically reject
borrowing applications. The Group also applies certain criteria
that are applicable to specific products, for example applications
for buy-to-let mortgages.
For UK mortgages, the Group’s policy permits owner occupier
applications with a maximum LTV of 95 per cent. This can
increase to 100 per cent for specific products where additional
security is provided by a supporter of the applicant and held on
deposit by the Group. Applications with an LTV above 90 per cent
are subject to enhanced underwriting criteria, including higher
scorecard cut-offs and loan size restrictions.
Buy-to-let mortgages within Retail are limited to a maximum loan
size of £1,000,000 and 75 per cent LTV. Buy-to-let applications
must pass a minimum rental cover ratio of 125 per cent under
stressed interest rates, after applicable tax liabilities. Portfolio
landlords (customers with four or more mortgaged buy-to-let
properties) are subject to additional controls including evaluation
of overall portfolio resilience.
The Group’s policy is to reject any application for a lending
product where a customer is registered as bankrupt or insolvent,
or has a recent County Court Judgment or financial default
registered at a CRA used by the Group above de minimis
thresholds. In addition, the Group typically rejects applicants
where total unsecured debt, debt-to-income ratios, or other
indicators of financial difficulty exceed policy limits.
Where credit acceptance scorecards are used, new models,
model changes and monitoring of model effectiveness are
independently reviewed and approved in accordance with the
governance framework set by the Group Model Governance
Committee.
Lloyds Banking Group Annual Report and Accounts 2022
159
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Additional mitigation for Commercial customers
Individual credit assessment and independent sanction of
customer and bank limits: with the exception of small exposures
to small to medium-sized enterprises (SME) customers where
certain relationship managers have limited delegated credit
approval authority, credit risk in commercial customer portfolios
is subject to approval 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 credit
authority delegations and risk-based credit limit guidances per
client group for larger exposures. 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
approved by the 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 Group’s own hedging activities, which
may also include clearing trades with Central Counterparties
(CCPs).
Any exceptions must be approved by the appropriate credit
approver. Master netting agreements do not generally result in
an offset of balance sheet assets and liabilities for accounting
purposes, as transactions are usually settled on a gross basis.
However, within relevant jurisdictions and for appropriate
counterparty types, master netting agreements do reduce the
credit risk to the extent that, if an event of default occurs, all
trades with the counterparty may be terminated and settled on a
net basis. The Group’s overall exposure to credit risk on derivative
instruments subject to master netting agreements can change
substantially within a short period, since this is the net position of
all trades under the master netting agreement.
Other credit risk transfers
The Group also undertakes asset sales, credit derivative based
transactions, 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.
160 Lloyds Banking Group Annual Report and Accounts 2022
Monitoring
In conjunction with the 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. The 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 senior officers,
the divisional credit risk 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 191.
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.
Balances in default or classified as Stage 3 are always considered
to be non-performing. Balances may be non-performing but not
in default or Stage 3, where for example they are within their 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 222.
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 Prudent risk appetite and risk management
•
The Group continues to take a prudent and proactive
approach to credit risk management and credit risk appetite,
whilst working closely with customers to help them through
cost of living pressures and any deterioration in broader
economic conditions
Sector, asset and product concentrations within the portfolios
are closely monitored and controlled, with mitigating actions
taken where appropriate. Sector and product risk appetite
parameters help manage exposure to certain higher risk and
cyclical sectors, segments and asset classes
The Group’s effective risk management seeks to ensure
early identification and management of customers and
counterparties who may be showing signs of distress
The Group will continue to work closely with its customers
to ensure that they receive the appropriate level of support,
including where repayments under the UK Government
scheme lending fall due
•
•
•
The Group credit risk portfolio in 2022
Overview
The Group’s portfolios are well-positioned and the Group retains
a prudent approach to credit risk appetite and risk management,
with strong credit origination criteria and robust LTVs in the
secured portfolios.
Observed credit performance remains strong, despite the
continued economic uncertainty with very modest evidence of
deterioration and sustained low levels of new to arrears. Looking
forward there are risks from a higher inflation and interest rate
environment as modelled in the Group’s expected credit loss (ECL)
allowance via the multiple economic scenarios (MES). The Group
continues to monitor the economic environment carefully through
a suite of early warning indicators and governance arrangements
that ensure risk mitigating action plans are in place to support
customers and protect the Group’s positions.
The underlying impairment charge in 2022 was £1,510 million,
compared to a release of £1,385 million in 2021, reflecting a more
normalised, but still low, pre-updated MES charge of £915 million
(2021: a charge of £314 million) and a £595 million charge from
economic outlook revisions (2021: a credit of £1,699 million). The
latter includes a £400 million release from the Group’s central
adjustment which addressed downside risk outside of the base
case conditioning assumptions in relation to COVID-19.
This reporting period also coincided with the implementation
of CRD IV regulatory requirements, which resulted in updates to
credit risk measurement and modelling to maintain alignment
between IFRS 9 and regulatory definitions of default. Most notably
for UK mortgages, default was previously deemed to have
occurred no later than when a payment was 180 days past due; in
line with CRD IV this has now been reduced to 90 days. In addition,
other indicators of mortgage default are added including end-
of-term payments on past due interest-only accounts and loans
considered non-performing due to recent arrears or forbearance.
The Group’s underlying ECL allowance on loans and advances to
customers increased in the period to £5,222 million (31 December
2021: £4,477 million), largely due to the impact of the updated MES.
Changes related to CRD IV default definitions have resulted in
material movements between stages, although these have not
materially impacted total ECL as management judgements were
previously held in lieu of anticipated changes.
Predominantly as a result of the CRD IV definition changes
and updated MES, Stage 2 loans and advances to customers
increased from £41,710 million to £65,728 million and as a
percentage of total lending increased by 5.1 percentage points to
14.3 per cent (31 December 2021: 9.2 per cent). Of the total Group
Stage 2 loans and advances, 92.7 per cent are up to date (31
December 2021: 86.5 per cent) with sustained low levels of new to
arrears. Stage 2 coverage reduced to 3.2 per cent (31 December
2021: 3.5 per cent).
Similarly, Stage 3 loans and advances increased in the period
to £10,753 million (31 December 2021: £8,694 million), and as
a percentage of total lending increased to 2.3 per cent (31
December 2021: 1.9 per cent). Stage 3 coverage decreased by
2.1 percentage points to 22.6 per cent (31 December 2021: 24.7
per cent) largely driven by comparatively better quality assets
moving into Stage 3 through these CRD IV changes. In the period
since the CRD IV changes, Stage 3 loans and advances have
been stable.
Lloyds Banking Group Annual Report and Accounts 2022
161
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Statutory impairment charge (credit) by division
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
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail
Small and Medium Businesses
Corporate and Institutional
Banking
Commercial Banking
Insurance, Pensions and
Investments
Equity Investments and Central
Items
Total impairment charge (credit)
295
556
452
(2)
10
1,311
190
249
439
–
(399)
1,351
–
–
–
–
–
–
–
12
12
2
–
14
–
–
–
–
–
–
–
6
6
–
1
7
–
–
–
–
–
–
–
–
–
–
6
6
–
–
–
–
–
–
–
–
–
22
–
22
–
15
47
–
–
62
(2)
62
60
–
–
122
2022
£m
295
571
499
(2)
10
1,373
188
329
517
24
(392)
1,522
20211
£m
(273)
(52)
39
(151)
(10)
(447)
(340)
(591)
(931)
2
(2)
(1,378)
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
Underlying impairment charge (credit)A by division
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
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail
Small and Medium Businesses
Corporate and Institutional
Banking
Commercial Banking
Insurance, Pensions and
Investments
Equity Investments and Central
Items
Total underlying impairment
charge (credit)A
Asset quality ratioA
295
556
452
(2)
10
1,311
190
249
439
–
(399)
1,351
–
–
–
–
–
–
–
12
12
2
–
14
–
–
–
–
–
–
–
6
6
–
1
7
–
–
–
–
–
–
–
–
–
–
6
6
–
–
–
–
–
–
–
–
–
10
–
10
–
15
47
–
–
62
(2)
62
60
–
–
122
2022
£m
295
571
499
(2)
10
1,373
188
329
517
12
(392)
1,510
0.32%
20211,2
£m
(273)
(52)
39
(151)
(10)
(447)
(346)
(590)
(936)
–
(2)
(1,385)
(0.31%)
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
2 Non lending-related fraud costs, previously reported within underlying impairment, are now included within operating costs. Comparatives have been presented
on a consistent basis.
162
Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued 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 balance sheet basis of presentation
The balance sheet 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. A reconciliation
between the two bases has 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 expected credit loss (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 as loans
are written off.
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.
Total expected credit loss allowance
Customer related balances
Drawn
Undrawn
Loans and advances to banks
Debt securities
Other assets
Statutory basis
Underlying basisA
At 31 Dec
2022
£m
At 31 Dec
2021
£m
At 31 Dec
2022
£m
At 31 Dec
2021
£m
4,518
323
4,841
15
9
38
3,820
200
4,020
1
3
18
4,899
323
5,222
15
9
38
4,277
200
4,477
1
3
18
Total expected credit loss allowance
4,903
4,042
5,284
4,499
Reconciliation between statutory and underlying bases of gross loans and advances to customers and expected credit
loss allowance on drawn balances
Gross loans and advances to customers
Expected credit loss allowance 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
At 31 December 2022
Underlying basisA
383,317
65,728
10,753
–
459,798
700
POCI assets
(2,326)
(4,564)
(3,113)
10,003
–
Acquisition fair
value adjustment
–
–
–
(381)
Statutory basis
380,991
61,164
7,640
(2,326)
(4,564)
(3,113)
9,622
9,622
(381)
(381)
459,417
700
1,808
1,936
(128)
–
(128)
–
–
–
At 31 December 2021
Underlying basisA
402,415
41,710
8,694
–
452,819
POCI assets
(2,392)
(6,781)
(2,251)
11,424
–
Acquisition fair
value adjustment
13
2
–
(447)
(2,379)
(6,779)
(2,251)
10,977
(432)
(432)
Statutory basis
400,036
34,931
6,443
10,977
452,387
919
(1)
(3)
(4)
915
1,377
(259)
(4)
(263)
1,114
2,263
(506)
–
(506)
1,757
1,981
(397)
–
634
(381)
253
253
–
657
(3)
(447)
(400)
1,581
210
210
4,899
–
(381)
(381)
4,518
4,277
–
(457)
(457)
3,820
Lloyds Banking Group Annual Report and Accounts 2022
163
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Movements in total expected credit loss allowance (statutory basis)
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail
Small and Medium Businesses
Corporate and Institutional Banking
Commercial Banking
Insurance, Pensions and Investments
Equity Investments and Central Items
Total3
Opening ECL
at 31 Dec 20211
£m
Write-offs
and other2
£m
Income
statement
charge
(credit)
£m
Net ECL
increase
(decrease)
£m
Closing ECL at
31 Dec 2022
£m
837
521
445
298
82
2,183
459
974
1,433
18
408
4,042
77
(329)
(266)
(44)
(6)
(568)
(98)
17
(81)
(2)
(10)
(661)
295
571
499
(2)
10
1,373
188
329
517
24
(392)
1,522
372
242
233
(46)
4
805
90
346
436
22
(402)
861
1,209
763
678
252
86
2,988
549
1,320
1,869
40
6
4,903
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
2 Contains adjustments in respect of purchased or originated credit-impaired financial assets.
3 Total ECL includes £62 million relating to other non customer-related assets (31 December 2021: £22 million).
Movements in total expected credit loss allowance (underlying basis)A
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail
Small and Medium Businesses
Corporate and Institutional Banking
Commercial Banking
Insurance, Pensions and Investments
Equity Investments and Central Items
Total2
Opening ECL
at 31 Dec 20211
£m
Write-offs
and other
£m
Income
statement
charge
(credit)
£m
Net ECL
increase
(decrease)
£m
Closing ECL at
31 Dec 2022
£m
1,284
531
445
298
82
2,640
459
974
1,433
18
408
4,499
11
(339)
(266)
(44)
(6)
(644)
(98)
17
(81)
10
(10)
(725)
295
571
499
(2)
10
1,373
188
329
517
12
(392)
1,510
306
232
233
(46)
4
729
90
346
436
22
(402)
785
1,590
763
678
252
86
3,369
549
1,320
1,869
40
6
5,284
1
2
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
Total ECL includes £62 million relating to other non customer-related assets (31 December 2021: £22 million).
164 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Loans and advances to customers and expected credit loss allowance (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
%
13.4
21.9
16.6
15.4
4.3
13.5
14.8
10.2
12.1
13.3
1.1
1.9
2.4
1.1
1.1
1.2
4.6
2.8
3.5
1.7
257,517
41,783
3,416
9,622
312,338
At 31 December 2022
Loans and advances to customers
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail
Small and Medium Businesses
Corporate and Institutional Banking
Commercial Banking
Equity Investments and Central Items1
Total gross lending
ECL allowance on drawn balances
11,416
8,357
12,174
13,990
303,454
30,781
49,728
80,509
(2,972)
380,991
(700)
3,287
1,713
2,245
643
49,671
5,654
5,839
11,493
–
61,164
(1,808)
Net balance sheet carrying value
380,291
59,356
Customer related ECL allowance (drawn and undrawn)
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance2
Other
Retail
Small and Medium Businesses
Corporate and Institutional Banking
Commercial Banking
Equity Investments and Central Items
Total
92
173
185
95
16
561
129
144
273
–
834
553
477
367
76
18
1,491
271
231
502
–
1,993
289
247
154
157
4,263
1,760
1,611
3,371
6
7,640
(1,757)
5,883
311
113
126
81
52
683
149
925
1,074
4
1,761
–
–
–
–
14,992
10,317
14,573
14,790
9,622
367,010
–
–
–
–
9,622
(253)
38,195
57,178
95,373
(2,966)
459,417
(4,518)
9,369
454,899
253
1,209
–
–
–
–
253
–
–
–
–
253
763
678
252
86
2,988
549
1,300
1,849
4
4,841
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers3
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail
Small and Medium Businesses
Corporate and Institutional Banking
Commercial Banking
Equity Investments and Central Items
Total
–
1.5
2.2
0.8
0.1
0.2
0.4
0.3
0.3
0.2
1.3
14.5
21.4
3.4
2.8
3.0
4.8
4.0
4.4
–
3.3
9.1
50.9
64.6
52.6
33.1
16.5
12.9
57.5
38.9
66.7
25.5
2.6
–
–
–
–
2.6
–
–
–
–
2.6
0.4
5.1
6.6
1.7
0.6
0.8
1.5
2.3
2.0
1.1
1 Contains centralised fair value hedge accounting adjustments.
2 UK Motor Finance for Stages 1 and 2 include £92 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 exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £52 million,
Small and Medium Businesses of £607 million and Corporate and Institutional Banking of £1 million.
Lloyds Banking Group Annual Report and Accounts 2022
165
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
7.1
14.5
11.6
12.8
5.0
7.6
11.6
5.0
8.0
–
7.7
0.6
2.0
2.8
1.4
1.4
0.8
4.1
3.6
3.8
4.6
1.4
At 31 December 2021
Loans and advances to customers
UK mortgages
Credit cards1
Loans and overdrafts
UK Motor Finance
Other1
Retail
Small and Medium Businesses1
Corporate and Institutional Banking1
Commercial Banking
Equity Investments and Central Items2
Total gross lending
ECL allowance on drawn balances
Net balance sheet carrying value
273,629
11,918
8,181
12,247
11,198
317,173
36,134
46,585
82,719
144
400,036
(915)
399,121
Customer related ECL allowance (drawn and undrawn)
UK mortgages
Credit cards1
Loans and overdrafts
UK Motor Finance3
Other1
Retail
Small and Medium Businesses1
Corporate and Institutional Banking1
Commercial Banking
Equity Investments and Central Items
Total
49
144
136
108
15
452
104
68
172
400
1,024
21,798
2,077
1,105
1,828
593
27,401
4,992
2,538
7,530
–
34,931
(1,114)
33,817
394
249
170
74
15
902
176
122
298
–
1,940
10,977
308,344
292
271
201
169
2,873
1,747
1,816
3,563
7
6,443
(1,581)
4,862
184
128
139
116
52
619
179
782
961
6
–
–
–
–
14,287
9,557
14,276
11,960
10,977
358,424
–
–
–
–
42,873
50,939
93,812
151
10,977
452,387
(210)
(3,820)
10,767
448,567
210
–
–
–
–
210
–
–
–
–
837
521
445
298
82
2,183
459
972
1,431
406
1,200
1,586
210
4,020
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers4
UK mortgages
Credit cards1
Loans and overdrafts
UK Motor Finance
Other1
Retail
Small and Medium Businesses1
Corporate and Institutional Banking1
Commercial Banking
Equity Investments and Central Items5
Total
–
1.2
1.7
0.9
0.1
0.1
0.3
0.1
0.2
–
0.3
1.8
12.0
15.4
4.0
2.5
3.3
3.5
4.8
4.0
–
3.4
9.5
56.9
67.5
57.7
30.8
22.6
14.5
43.1
31.6
85.7
27.4
1.9
–
–
–
–
1.9
–
–
–
–
1.9
0.3
3.7
4.7
2.1
0.7
0.6
1.1
1.9
1.5
4.0
0.9
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail.
2 Contains centralised fair value hedge accounting adjustments.
3 UK Motor Finance for Stages 1 and 2 include £95 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 exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £65 million,
Small and Medium Businesses of £515 million and Corporate and Institutional Banking of £3 million.
5 Equity Investments and Central Items excludes the £400 million ECL central adjustment.
166 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued
Loans and advances to customers and expected credit loss allowance (underlying basis)A
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
14.8
21.9
16.6
15.4
4.3
14.8
14.8
10.2
12.1
14.3
2.1
1.9
2.4
1.1
1.1
2.0
4.6
2.8
3.5
2.3
At 31 December 2022
Loans and advances to customers
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail1
Small and Medium Businesses
Corporate and Institutional Banking
Commercial Banking
Equity Investments and Central Items2
Total gross lending
ECL allowance on drawn balances
Net balance sheet carrying value
Customer related ECL allowance (drawn and undrawn)
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance3
Other
Retail1
Small and Medium Businesses
Corporate and Institutional Banking
Commercial Banking
Equity Investments and Central Items
Total
259,843
46,347
6,529
312,719
11,416
8,357
12,174
13,990
3,287
1,713
2,245
643
305,780
54,235
30,781
49,728
80,509
(2,972)
383,317
(700)
382,617
92
173
185
95
16
561
129
144
273
–
834
5,654
5,839
11,493
–
65,728
(1,936)
63,792
681
477
367
76
18
1,619
271
231
502
–
2,121
289
247
154
157
7,376
1,760
1,611
3,371
6
10,753
(2,263)
14,992
10,317
14,573
14,790
367,391
38,195
57,178
95,373
(2,966)
459,798
(4,899)
8,490
454,899
817
113
126
81
52
1,189
149
925
1,074
4
2,267
1,590
763
678
252
86
3,369
549
1,300
1,849
4
5,222
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers4
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail1
Small and Medium Businesses
Corporate and Institutional Banking
Commercial Banking
Equity Investments and Central Items
Total
–
1.5
2.2
0.8
0.1
0.2
0.4
0.3
0.3
0.2
1.5
14.5
21.4
3.4
2.8
3.0
4.8
4.0
4.4
–
3.2
12.5
50.9
64.6
52.6
33.1
16.4
12.9
57.5
38.9
66.7
22.6
0.5
5.1
6.6
1.7
0.6
0.9
1.5
2.3
2.0
1.1
Retail balances exclude the impact of the HBOS acquisition-related adjustments.
1
2 Contains centralised fair value hedge accounting adjustments.
3 UK Motor Finance for Stages 1 and 2 include £92 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 exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £52 million,
Small and Medium Businesses of £607 million and Corporate and Institutional Banking of £1 million.
Lloyds Banking Group Annual Report and Accounts 2022
167
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 2
as % of
total
%
Stage 3
as % of
total
%
At 31 December 2021
Loans and advances to customers
UK mortgages
Credit cards1
Loans and overdrafts
UK Motor Finance
Other1
Retail2
Small and Medium Businesses1
Corporate and Institutional Banking1
Commercial Banking
Equity Investments and Central Items3
Total gross lending
ECL allowance on drawn balances
276,021
28,579
11,905
8,181
12,247
11,198
319,552
36,134
46,585
82,719
144
402,415
(919)
2,075
1,105
1,828
593
34,180
4,992
2,538
7,530
–
41,710
(1,377)
Net balance sheet carrying value
401,496
40,333
Customer related ECL allowance (drawn and undrawn)
UK mortgages
Credit cards1
Loans and overdrafts
UK Motor Finance4
Other1
Retail2
Small and Medium Businesses1
Corporate and Institutional Banking1
Commercial Banking
Equity Investments and Central Items
Total
50
147
136
108
15
456
104
68
172
400
1,028
653
253
170
74
15
1,165
176
122
298
–
9.3
14.5
11.6
12.8
5.0
9.5
11.6
5.0
8.0
–
9.2
1.4
2.0
2.8
1.4
1.4
1.4
4.1
3.6
3.8
4.6
1.9
4,191
292
271
201
169
5,124
1,747
1,816
3,563
7
308,791
14,272
9,557
14,276
11,960
358,856
42,873
50,939
93,812
151
8,694
452,819
(1,981)
6,713
(4,277)
448,542
581
131
139
116
52
1,019
179
782
961
6
1,284
531
445
298
82
2,640
459
972
1,431
406
1,463
1,986
4,477
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers5
UK mortgages
Credit cards1
Loans and overdrafts
UK Motor Finance
Other1
Retail1
Small and Medium Businesses1
Corporate and Institutional Banking1
Commercial Banking
Equity Investments and Central Items6
Total
–
1.2
1.7
0.9
0.1
0.1
0.3
0.1
0.2
–
0.3
2.3
12.2
15.4
4.0
2.5
3.4
3.5
4.8
4.0
–
3.5
13.9
58.2
67.5
57.7
30.8
20.4
14.5
43.1
31.6
85.7
24.7
0.4
3.7
4.7
2.1
0.7
0.7
1.1
1.9
1.5
4.0
1.0
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail.
2 Retail balances exclude the impact of the HBOS and MBNA acquisition-related adjustments.
3 Contains centralised fair value hedge accounting adjustments.
4 UK Motor Finance for Stages 1 and 2 include £95 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 exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £65 million,
Small and Medium Businesses of £515 million and Corporate and Institutional Banking of £3 million.
6 Equity Investments and Central Items excludes the £400 million ECL central adjustment.
168 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued
Stage 2 loans and advances to customers and expected credit loss allowance (statutory basis)
Up to date
PD movements
Other1
1–30 days past due2
Over 30 days past due
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
As % of
gross
lending
%
Gross
lending
£m
4,081
223
5.5
1,060
Gross
lending
£m
29,718
3,023
1,311
1,047
160
35,259
ECL3
£m
263
386
249
28
5
931
5,728
9,809
229
452
45,068
1,383
At 31 December 2022
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail
Small and Medium
Businesses
Corporate and
Institutional Banking
Commercial Banking
Total
At 31 December 2021
UK mortgages
14,845
Credit cards4
Loans and overdrafts
UK Motor Finance
Other4
Retail
1,755
505
581
194
17,880
132
176
82
20
4
414
Small and Medium
Businesses4
Corporate and
Institutional Banking4
Commercial Banking
Total
3,570
153
2,479
6,049
23,929
119
272
686
0.9
12.8
19.0
2.7
3.1
2.6
9,613
160
136
234
1,045
384
46
53
23
7
11,412
289
27
–
27
27
1,087
12,499
316
4,133
155
210
448
1,089
306
6,186
936
25
961
42
43
26
7
273
14
3
17
7,147
290
4.0
4.6
3.1
0.9
10.0
16.2
3.4
2.1
2.3
4.3
4.8
4.5
2.9
1.7
33.8
22.6
2.2
1.8
2.5
2.5
–
2.5
2.5
3.8
20.0
9.6
2.4
2.3
4.4
1.5
12.0
1.8
4.1
ECL3
£m
67
30
45
18
4
1,633
98
125
122
54
2,032
164
339
30
369
13
1
14
2,401
178
1,433
86
113
124
44
38
20
30
19
2
1,800
109
297
6
303
2,103
6
–
6
115
4.1
30.6
36.0
14.8
7.4
8.1
3.8
3.3
3.8
7.4
2.7
23.3
26.5
15.3
4.5
6.1
2.0
–
2.0
5.5
ECL3
£m
63
15
20
7
2
819
30
43
31
45
968
107
174
54
228
1,196
1,387
26
39
34
49
8
1
9
116
69
11
15
9
2
1,535
106
189
28
217
3
–
3
1,752
109
As % of
gross
lending
%
7.7
50.0
46.5
22.6
4.4
11.1
4.6
1.9
3.9
9.7
5.0
42.3
38.5
26.5
4.1
6.9
1.6
–
1.4
6.2
1
Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments. As of 31 December 2022, interest-only mortgage
customers at risk of not meeting their final term payment are now directly classified as Stage 2 up to date “Other”, driving movement of gross lending from the
category of Stage 2 up to date “PD movement” into “Other”.
Includes assets that have triggered PD movements, or other rules, given that being 1–29 days in arrears in and of itself is not a Stage 2 trigger.
Expected credit loss allowance on loans and advances to customers (drawn and undrawn).
2
3
4 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
Lloyds Banking Group Annual Report and Accounts 2022
169
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 4,081
223
5.5
1,060
Stage 2 loans and advances to customers and expected credit loss allowance (underlying basis)A
Up to date
PD movements
Other1
1–30 days past due2
Over 30 days past due
As % of
gross
lending
%
Gross
lending
£m
ECL3
£m
As % of
gross
lending
%
Gross
lending
£m
As % of
gross
lending
%
Gross
lending
£m
At 31 December 2022
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Other
Retail
Small and Medium
Businesses
Corporate and
Institutional Banking
Commercial Banking
Total
At 31 December 2021
UK mortgages
Credit cards4
Loans and overdrafts
UK Motor Finance
Other4
Retail
Gross
lending
£m
31,908
3,023
1,311
1,047
160
ECL3
£m
301
386
249
28
5
37,449
969
5,728
9,809
229
452
47,258
1,421
17,917
1,754
505
581
194
20,951
226
179
82
20
4
511
Small and Medium
Businesses4
Corporate and
Institutional Banking4
Commercial Banking
Total
3,570
153
2,479
6,049
27,000
119
272
783
ECL3
£m
93
30
45
18
4
2,379
98
125
122
54
2,778
190
339
30
369
13
1
14
3,147
204
2,270
86
113
124
44
73
21
30
19
2
2,637
145
6
–
6
6
303
2,940
151
3.9
30.6
36.0
14.8
7.4
6.8
3.8
3.3
3.8
6.5
3.2
24.4
26.5
15.3
4.5
5.5
2.0
–
2.0
5.1
ECL3
£m
89
15
20
7
2
1,260
30
43
31
45
1,409
133
174
54
228
8
1
9
1,637
142
2,339
132
26
39
34
49
12
15
9
2
2,487
170
189
28
217
3
–
3
2,704
173
As % of
gross
lending
%
7.1
50.0
46.5
22.6
4.4
9.4
4.6
1.9
3.9
8.7
5.6
46.2
38.5
26.5
4.1
6.8
1.6
–
1.4
6.4
1.5
297
0.9
12.8
19.0
2.7
3.1
2.6
10,800
198
136
234
1,045
384
46
53
23
7
12,599
327
27
–
27
27
1,087
13,686
354
6,053
222
209
448
1,089
306
8,105
936
25
961
41
43
26
7
339
14
3
17
9,066
356
4.0
4.6
3.0
1.3
10.2
16.2
3.4
2.1
2.4
4.3
4.8
4.5
2.9
1.8
33.8
22.6
2.2
1.8
2.6
2.5
–
2.5
2.6
3.7
19.6
9.6
2.4
2.3
4.2
12.0
1.8
3.9
1
Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments. As of 31 December 2022, interest-only mortgage
customers at risk of not meeting their final term payment are now directly classified as Stage 2 up to date “Other”, driving movement of gross lending from the
category of Stage 2 up to date “PD movement” into “Other”.
Includes assets that have triggered PD movements, or other rules, given that being 1–29 days in arrears in and of itself is not a Stage 2 trigger.
Expected credit loss allowance on loans and advances to customers (drawn and undrawn).
2
3
4 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
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.
170 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued 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. If the base case moves adversely, it generates a new, more adverse downside and severe downside which are
then incorporated into the ECL. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is
weighted at 10 per cent.
The table below shows the Group’s ECL for the probability-weighted, upside, base case, downside and severe downside scenarios, with
the severe downside scenario incorporating adjustments made to CPI inflation and UK Bank Rate paths. The stage allocation for an
asset is based on the overall scenario probability-weighted PD and hence the staging of assets is constant across all the scenarios. In
each economic scenario the ECL for individual assessments and post-model adjustments is typically held constant reflecting the basis
on which they are evaluated. For 31 December 2022, however, post-model adjustments in Commercial Banking have been apportioned
across the scenarios to better reflect the sensitivity of these adjustments to each scenario. Judgements applied through changes
to model inputs are reflected in the scenario ECL sensitivities. The probability-weighted view shows the extent to which a higher ECL
allowance has been recognised to take account of multiple economic scenarios relative to the base case; the uplift being £692 million
compared to £223 million at 31 December 2021.
Statutory basis
UK mortgages
Credit cards
Other Retail
Commercial Banking
Other
At 31 December 2022
UK mortgages
Credit cards1
Other Retail1
Commercial Banking1
Other1
At 31 December 2021
Underlying basisA
UK mortgages
Credit cards
Other Retail
Commercial Banking
Other
At 31 December 2022
UK mortgages
Credit cards1
Other Retail1
Commercial Banking1
Other1
At 31 December 2021
Probability-
weighted
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
1,209
763
1,016
1,869
46
4,903
837
521
825
1,433
426
4,042
514
596
907
1,459
46
3,522
637
442
760
1,295
426
3,560
790
727
992
1,656
46
4,211
723
500
811
1,358
427
3,819
1,434
828
1,056
2,027
47
5,392
967
569
863
1,505
426
4,330
3,874
1,180
1,290
3,261
47
9,652
1,386
672
950
1,859
424
5,291
Probability-
weighted
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
1,590
763
1,016
1,869
46
5,284
1,284
531
825
1,433
426
4,499
895
596
907
1,459
46
3,903
1,084
453
760
1,295
426
4,018
1,172
727
992
1,656
46
4,593
1,170
511
811
1,358
427
4,277
1,815
828
1,056
2,027
47
5,773
1,414
579
863
1,505
426
4,787
4,254
1,180
1,290
3,261
47
10,032
1,833
682
950
1,859
424
5,748
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
Lloyds Banking Group Annual Report and Accounts 2022
171
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios, with staging of assets
based on each specific scenario probability of default. ECL applied through individual assessments and the majority of post-model
adjustments are 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. Comparing the probability-weighted ECL
in the table above to the base case ECL with base case scenario specific staging, as shown in the table below, results in an uplift of
£820 million compared to £230 million at 31 December 2021.
At 31 December 2022
At 31 December 20211
Upside
£m
Base case
£m
Downside
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
Statutory basis
UK mortgages
Credit cards
Other Retail
Commercial Banking
Other
Total
Underlying basisA
UK mortgages
Credit cards
Other Retail
Commercial Banking
Other
Total
469
563
886
1,425
46
3,389
851
563
886
1,425
46
3,771
734
719
984
1,600
46
4,083
1,115
719
984
1,600
46
4,464
Severe
downside
£m
7,848
1,320
1,449
5,190
47
1,344
842
1,059
2,142
47
5,434
15,854
1,726
842
1,059
2,142
47
5,816
8,230
1,320
1,449
5,190
47
16,236
636
434
754
1,290
425
3,539
1,083
444
754
1,290
425
3,996
722
500
808
1,357
425
3,812
1,169
510
808
1,357
425
973
583
867
1,518
425
1,448
707
972
2,116
425
4,366
5,668
1,420
593
868
1,517
425
1,895
717
973
2,115
425
6,125
4,269
4,823
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
The impact of changes in the UK unemployment rate and House Price Index (HPI) have 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 and is assessed through the direct impact on modelled ECL only, including management
judgements applied through changes to model inputs. The change in univariate ECL sensitivity in the period is a result of the change
in definition of default and associated model changes, and the deterioration in the base case on which the assessment has been
performed.
The table below shows the impact on the Group’s ECL in respect of UK mortgages of an increase or decrease in loss given default for
a 10 percentage point (pp) increase or decrease in the UK House Price Index (HPI). The increase or 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 2022
At 31 December 2021
10pp increase
in HPI
10pp decrease
in HPI
10pp increase
in HPI
10pp decrease
in HPI
(225)
370
(112)
162
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
Credit cards
Other Retail
Commercial Banking
ECL impact
At 31 December 2022
At 31 December 20211
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
26
41
25
100
192
(21)
(41)
(25)
(91)
(178)
23
20
12
52
107
(18)
(20)
(12)
(45)
(95)
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
172
Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Group derivative credit risk exposures
Derivative credit risk exposure
2022
Traded over the counter
2021
Traded over the counter
Traded on
recognised
exchanges
£m
Settled
by central
counterparties
£m
Not settled
by central
counterparties
£m
Traded on
recognised
exchanges
£m
Settled
by central
counterparties
£m
Not settled
by central
counterparties
£m
Total
£m
Total
£m
–
–
465,800
465,800
–
–
393,154
393,154
31,393
6,422,514
206,006
6,659,913
214,821
3,695,218
212,825
4,122,864
4,670
–
–
286
11,820
6,403
16,490
6,689
4,783
–
–
397
7,756
6,343
12,539
6,740
36,063
6,422,800
690,029
7,148,892
219,604
3,695,615
620,078
4,535,297
1,033
23,643
(1,850)
(22,153)
(817)
1,490
890
(888)
2
21,113
(17,109)
4,004
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 2022 and 31 December 2021 is shown in the
table above. The notional principal amount does not, however,
represent the Group’s credit risk exposure, which is limited to the
current cost of replacing contracts with a positive value to the
Group. Such amounts are reflected in note 52 on page 317.
Retail
•
The Retail portfolio has remained resilient and well-positioned
despite pressure on consumer disposable incomes from
rising interest rates, inflation and a higher cost of living. Risk
management has been enhanced since the last financial
crisis, with strong affordability and indebtedness controls for
new lending and a prudent risk appetite approach
• Despite external pressures, only very modest signs of
•
•
•
deterioration are evident across the portfolios, arrears rates
remain low and generally below pre-pandemic levels. New
lending credit quality remains strong and performance is
broadly stable
The Group is closely monitoring the impacts of the rising cost
of living on consumers to ensure we remain close to any signs
of deterioration. Lending controls are under continuous review
and we have taken proactive risk actions calibrated to the
latest Group macroeconomic outlook. Precautionary expected
credit loss (ECL) judgements have also been raised to cover
potential future deterioration from cost of living risks
The Retail impairment charge in 2022 was £1,373 million,
compared to a release of £447 million for 2021 with updated
macroeconomic assumptions within the ECL model driving
a £600 million charge compared to a credit of £1,120 million
last year. There was also a charge in relation to underlying
performance of £773 million (2021: a charge of £672 million)
Existing IFRS 9 staging rules and triggers have been maintained
across Retail from the 2021 year end with the exception of
mortgages. The change maintains alignment between IFRS 9
Stage 3 and new regulatory definitions of default. Default
continues to be considered to have occurred when there is
evidence that the customer is experiencing financial difficulty
which is likely to significantly affect their ability to repay the
amount due. For mortgages, this was previously deemed to
have occurred no later than when a payment was 180 days
past due; in line with CRD IV this has now been reduced to 90
days, as well as including end-of-term payments on past due
interest-only accounts and all non-performing loans. Overall
ECL is not materially impacted as management judgements
were previously held in lieu of these known changes. However,
material movements between stages were observed, with an
additional £2.8 billion of assets in Stage 3 and £6.1 billion in
Stage 2 at the point of implementation, both as a result of the
broader definition of default
• As a result of updated macroeconomic assumptions within
the ECL model, Retail customer related ECL allowance as
a percentage of drawn loans and advances (coverage)
increased to 0.9 per cent (31 December 2021: 0.7 per cent). As at
31 December 2022 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)
Stage 2 loans and advances now comprises 14.8 per cent of
the Retail portfolio (31 December 2021: 9.5 per cent), of which
92.3 per cent are up to date, performing loans (31 December
2021: 85.0 per cent)
The CRD IV changes have increased the proportion of UK
mortgage accounts reaching the broader definition of default
and has resulted in a slight decrease in Stage 2 ECL coverage
to 3.0 per cent (31 December 2021: 3.4 per cent)
•
•
• As a result of updated macroeconomic assumptions within the
ECL model, Stage 3 loans and advances have increased to 2.0
per cent of total loans and advances (31 December 2021: 1.4 per
cent) while Stage 3 ECL coverage decreased to 16.4 per cent
(31 December 2021: 20.4 per cent) due to a higher proportion of
mortgages triggering 90 days past due, with lower coverage
on average. Underlying credit deterioration remains relatively
limited outside of definition of default changes
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, while the balances of
higher risk portfolios originated prior to 2008 have continued to
reduce
• Arrears rates remain broadly stable with slight increases
•
observed on variable rate products following UK Bank Rate
rises exacerbated by attrition from customers refinancing to
fixed rates
Total loans and advances increased to £312.7 billion
(31 December 2021: £308.8 billion), with a small reduction in
average LTV to 41.6 per cent (31 December 2021: 42.1 per cent).
The proportion of balances with a LTV greater than 90 per
cent increased to 1.4 per cent (31 December 2021: 0.5 per cent).
The average LTV of new business decreased to 61.7 per cent
(31 December 2021: 63.3 per cent)
• Updated macroeconomic assumptions within the ECL model,
including a forecast reduction in house prices, resulted in a
net impairment charge of £295 million for 2022 compared to a
credit of £273 million for 2021. Total ECL coverage increased to
0.5 per cent (31 December 2021: 0.4 per cent)
• As a result of updated macroeconomic assumptions within
the ECL model, Stage 2 loans and advances increased to
14.8 per cent of the portfolio (31 December 2021: 9.3 per cent),
while Stage 2 ECL coverage has decreased to 1.5 per cent
(31 December 2021: 2.3 per cent) due to a higher proportion of
mortgage accounts reaching the broader CRD IV definition of
default
Lloyds Banking Group Annual Report and Accounts 2022
173
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report UK Motor Finance
•
The UK Motor Finance portfolio increased from £14.3 billion
for 2021 to £14.6 billion for 2022, with ongoing new car supply
constraints being offset by continued strong demand for used
vehicles
There was a net impairment credit of £2 million for
2022, reflecting continued low levels of losses given resilient
used car prices. This compares to a credit of £151 million for
2021, which benefitted from ECL releases as used car prices
materially outperformed expectations set earlier in the
pandemic. However, used car prices have begun to fall from
recent high levels with this trend expected to continue. ECL
coverage decreased to 1.7 per cent (31 December 2021: 2.1 per
cent)
• Updates to Residual Value (RV) and Voluntary Termination
(VT) risk held against Personal Contract Purchase (PCP) and
Hire Purchase (HP) lending are included within the impairment
charge. Continued resilience in used car prices and disposal
experience, partially driven by global supply issues, offset by
underperformance in some segments, has resulted in broadly
flat RV and VT ECL of £92 million as at 31 December 2022
(31 December 2021: £95 million)
Stable credit performance and continued resilience in used
car prices has resulted in Stage 2 ECL coverage reducing
slightly to 3.4 per cent (31 December 2021: 4.0 per cent) and
Stage 3 ECL reducing to 52.6 per cent (31 December 2021: 57.7
per cent)
•
Other
• Other loans and advances increased slightly to £14.8 billion
•
•
(31 December 2021: £12.0 billion)
Stage 3 loans and advances remain stable at 1.1 per cent
(31 December 2021: 1.4 per cent) and Stage 3 coverage at 33.1
per cent (31 December 2021: 30.8 per cent)
There was a net impairment charge of £10 million for 2022
compared to a credit of £10 million for 2021
•
Stage 3 loans and advances has increased to 2.1 per cent of
the portfolio (31 December 2021: 1.4 per cent) and due to a
higher proportion of mortgage accounts reaching the broader
CRD IV definition of default, Stage 3 ECL coverage decreased to
12.5 per cent (31 December 2021: 13.9 per cent)
•
Credit cards
• Credit cards balances increased to £15.0 billion (31 December
•
2021 £14.3 billion) due to recovery in customer spend
The credit card portfolio is a prime book with low levels
of arrears and strong repayment rates despite recent
affordability pressures
•
• Updated macroeconomic assumptions within the ECL model
and forward looking judgements for the increased risk from
inflation and a higher cost of living resulted in an impairment
charge of £571 million for 2022, compared to a credit of
£52 million in 2021. Total ECL coverage increased to 5.1 per cent
(31 December 2021: 3.7 per cent)
This is reflected in Stage 2 loans and advances which
increased to 21.9 per cent of the portfolio (31 December
2021: 14.5 per cent) and Stage 2 ECL coverage which has
increased to 14.5 per cent (31 December 2021: 12.2 per cent)
Stage 3 loans and advances remained broadly stable at 1.9
per cent of the portfolio (31 December 2021: 2.0 per cent), while
Stage 3 ECL coverage has reduced to 50.9 per cent
(31 December 2021: 58.2 per cent)
•
Loans and overdrafts
•
Loans and advances for personal current account and
the personal loans portfolios increased to £10.3 billion
(31 December 2021: £9.6 billion) with continued recovery in
customer spend and demand for credit
• Updated macroeconomic assumptions within the ECL model
and forward looking judgements for the increased risk from
inflation and a higher cost of living resulted in an impairment
charge of £499 million for the full year 2022 compared to a
charge of £39 million for 2021
Stage 2 ECL coverage increased to 21.4 per cent (31 December
2021: 15.4 per cent) and overall ECL coverage to 6.6 per cent
(31 December 2021: 4.7 per cent)
Stage 3 ECL coverage reduced slightly to 64.6 per cent
(31 December 2021: 67.5 per cent)
•
•
Retail UK mortgages loans and advances to customers (statutory basis)1
Mainstream
Buy-to-let
Specialist
Total
At 31 Dec
2022
£m
253,283
51,529
7,526
At 31 Dec
2021
£m
248,013
51,111
9,220
312,338
308,344
1
Balances include the impact of HBOS-related acquisition adjustments.
Mortgages greater than three months in arrears (excluding repossessions, underlying basis)A
At 31 December
Mainstream
Buy-to-let
Specialist
Total
Number of cases
Total mortgage accounts
Value of loans1
Total mortgage balances
2022
Cases
19,719
3,478
4,323
27,520
2021
Cases
22,128
4,171
5,491
31,790
2022
%
1.1
0.8
7.0
1.2
2021
%
1.2
1.0
7.5
1.4
2022
£m
2,213
473
722
3,408
2021
£m
2,481
537
892
3,910
2022
%
0.9
0.9
9.3
1.1
2021
%
1.0
1.0
9.4
1.3
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 increased to 807 cases at 31 December 2022, compared to 346 cases at 31 December 2021, due to the
resumption of litigation action that had been suspended at the onset of the coronavirus pandemic.
174 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Period end and average LTVs across the Retail mortgage portfolios (underlying basis)A
At 31 December 2022
At 31 December 2021
Mainstream
%
Buy-to-let
%
Specialist
%
60.3
19.1
13.2
5.7
1.6
0.1
71.6
20.3
7.7
0.2
0.1
0.1
86.0
7.9
2.5
1.2
1.0
1.4
Total
%
62.8
19.0
12.1
4.7
1.3
0.1
Mainstream
%
Buy-to-let
%
Specialist
%
58.1
19.6
16.8
5.0
0.4
0.1
69.3
23.8
6.4
0.2
0.1
0.2
80.6
11.8
3.5
1.3
0.9
1.9
Total
%
60.7
20.1
14.6
4.1
0.3
0.2
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Less than 60 per cent
60 per cent to 70 per cent
70 per cent to 80 per cent
80 per cent to 90 per cent
90 per cent to 100 per cent
Greater than 100 per cent
Total
Average loan to value1:
Stock of residential mortgages
New residential lending
40.9
62.3
46.8
58.1
35.0
n/a
41.6
61.7
41.3
63.7
47.7
60.4
37.5
n/a
42.1
63.3
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.
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 2022, owner occupier interest-only balances as a proportion of total owner occupier balances had reduced to 16.4 per
cent (31 December 2021: 18.7 per cent). The average indexed loan to value remained low at 35.5 per cent (31 December 2021: 36.8 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
Within 1 year
2 to 5 years
6 to 10 years
Greater than 10 years
Past term interest-only balances (£m)1
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Purchased or originated credit-impaired (%)
Average loan to value (%)
Negative equity (%)
At 31 Dec
2022
42,697
At 31 Dec
2021
48,128
58.5
25.3
3.7
12.6
35.5
1,931
1,453
8,832
16,726
13,755
1,906
0.2
11.9
45.6
42.3
33.2
2.0
70.7
17.1
2.8
9.4
36.8
1,803
1,834
8,889
17,882
17,720
1,790
0.7
33.0
29.6
36.7
33.0
1.8
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.
Lloyds Banking Group Annual Report and Accounts 2022
175
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
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 reduced by £1.2 billion to £4.5 billion. This is driven by a reduction
in customers with a historical capitalisation treatment (where arrears were reset and added to the loan balance) and, following the
implementation of new regulatory requirements, the removal of past term interest-only mortgages as a forbearance event where a
forbearance treatment has not been granted. On a statutory basis the equivalent total forbearance position improved by £1.1 billion to
£4.3 billion.
The main customer treatments included are: repair, where arrears are added to the loan balance and the arrears position cancelled;
instances where there are suspensions of interest and/or capital repayments; and refinance personal loans.
As a percentage of loans and advances, forbearance loans decreased to 1.2 per cent at 31 December 2022 (31 December 2021: 1.6 per
cent).
As at 31 December 2022, 96.5 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 2021: 97.3 per cent).
Total expected credit losses (ECL) as a proportion of loans and advances which are forborne has increased to 12.1 per cent
(31 December 2021: 10.8 per cent).
Retail forborne loans and advances (statutory basis) (audited)
At 31 December 2022
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Total
At 31 December 2021
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Total
Of which
Stage 2
£m
Of which
Stage 3
£m
Of which
POCI
£m
Total
£m
3,655
260
308
77
4,300
684
90
125
32
931
4,725
1,216
288
312
102
90
99
38
951
125
117
42
1,995
–
–
–
1,235
1,995
901
141
131
62
2,600
–
–
–
Expected
credit losses
as a % of total
loans and
advances
which are
forborne1
%
4.4
31.6
36.3
32.4
8.8
3.2
32.9
33.8
37.0
7.2
5,427
1,443
1,235
2,600
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 2022: £80 million; 31 December 2021: £87 million).
Retail forborne loans and advances (underlying basis)A
At 31 December 20222
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Total
At 31 December 20212
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Total
Total
£m
Of which
Stage 2
£m
Of which
Stage 3
£m
3,813
1,229
2,542
260
308
77
90
125
32
125
117
42
4,458
1,476
2,826
4,942
2,721
2,209
288
312
102
90
99
38
142
131
62
5,644
2,948
2,544
Expected
credit losses
as a % of total
loans and
advances
which are
forborne1
%
8.4
31.6
36.3
32.4
12.1
7.5
32.9
33.8
37.0
10.8
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 2022: £80 million; 31 December 2021: £87 million).
2 Balances exclude the impact of HBOS and MBNA acquisition-related adjustments.
176
Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Commercial Banking
Portfolio overview
•
•
•
•
•
•
The Commercial portfolio credit quality remains resilient
overall, with a focused approach to credit underwriting and
monitoring standards and proactively managing exposures to
higher risk and vulnerable sectors. While some of the Group’s
metrics indicate very modest deterioration, especially in
consumer-led sectors, these are not considered to be material
The Group has reduced overall exposure to cyclical sectors
since 2019 and continues to closely monitor credit quality,
sector and single name concentrations. Sector and credit risk
appetite continue to be proactively managed to ensure the
Group is protected and clients are supported in the right way
The Group continues to carefully monitor the level of arrears on
lending under the UK Government support schemes, including
the Bounce Back Loan Scheme and the Coronavirus Business
Interruption Loan Scheme, where UK Government guarantees
are in place at 100 per cent and 80 per cent respectively. The
Group will continue to review customer trends and take early
risk mitigating actions as appropriate, including actions to
review and manage refinancing risk
The Group continues to provide early support to its more
vulnerable customers through focused risk management via
its Watchlist and Business Support framework. The Group will
continue to balance prudent risk appetite with ensuring
support for financially viable clients on their road to recovery
Impairments
•
There was a net impairment charge of £517 million in 2022,
compared to a net impairment credit of £936 million in 2021.
This was driven by a £395 million charge from economic
outlook revisions. The remaining £122 million charge was
largely driven by a further material charge in the fourth quarter
on a pre-existing single case
ECL allowances increased by £418 million to £1,849 million at
31 December 2022 (31 December 2021: £1,431 million). The ECL
provision at 31 December 2022 includes the capture of the
impact of inflationary pressures and supply chain constraints
and assumes additional losses will emerge as a result of these
and other emerging risks, through the multiple economic
scenarios
• As a result of the deterioration in the Group’s forward-
looking modelled economic assumptions, Stage 2 loans
and advances increased by £3,963 million to £11,493 million
(31 December 2021: £7,530 million), with 94.8 per cent of Stage 2
balances up to date. Stage 2 as a proportion of total loans and
advances to customers increased to 12.1 per cent (31 December
2021: 8.0 per cent). Stage 2 ECL coverage was higher at 4.4
per cent (31 December 2021: 4.0 per cent) with the increase
in coverage a direct result of the change in the multiple
economic scenarios
Stage 3 loans and advances reduced to £3,371 million
(31 December 2021: £3,563 million) and as a proportion of total
loans and advances to customers, reduced to 3.5 per cent
(31 December 2021: 3.8 per cent), largely as a result of net
repayments and write-offs in the Corporate and Institutional
Banking portfolio. Stage 3 ECL coverage increased to 38.9 per
cent (31 December 2021: 31.6 per cent) predominantly driven by
a further material charge on a pre-existing single case
•
Commercial Banking UK Direct Real Estate
• Commercial Banking UK Direct Real Estate gross lending
•
stood at £11.0 billion at 31 December 2022 (net of exposures
subject to protection through Significant Risk Transfer (SRT)
securitisations)
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 £5.6 billion to social housing
providers are also excluded
• Recognising this is a cyclical sector, total quantum (gross and
net) and asset type quantum caps are in place to control
origination and exposure. Focus remains on the UK market
and new business has been written in line with a prudent risk
appetite with conservative LTVs, strong quality of income and
proven management teams. During 2022, the Group increased
the reporting granularity of underlying LTV data as detailed in
the LTV – UK Direct Real Estate table
• Overall performance has remained resilient and although the
Group saw some increase in cases on its closer monitoring
Watchlist category, these are predominantly purely
precautionary, and levels of this remain significantly below that
seen during the pandemic. Transfers to the Group’s Business
Support Unit have been limited
• Rent collection has largely recovered and stabilised following
the coronavirus pandemic, although challenges remain in
some sectors. Despite some material headwinds, including
the inflationary environment and the impact of rising interest
rates, which impacts debt servicing and refinance capacity,
the portfolio is well-positioned and proactively managed,
with conservative LTVs, good levels of interest cover, and
appropriate risk mitigants in place:
– CRE exposures continue to be heavily weighted towards
investment real estate (c.90 per cent) rather than
development. Of these investment exposures, over 89 per
cent have an LTV of less than 60 per cent, with an average
LTV of 40.6 per cent
– c.90 per cent of CRE exposures 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 47 per cent of exposures relate to
commercial real estate (with no speculative development
lending) with the remainder predominantly related to
residential real estate. The underlying sub sector split is
diversified with more limited exposure to higher risk sub
sectors (.c.13 per cent of exposures secured by Retail assets,
with appetite tightened since 2018)
– Use of SRT securitisations also acts as a risk mitigant in this
portfolio, with run-off of these carefully managed and
sequenced
– 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
Lloyds Banking Group Annual Report and Accounts 2022
177
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report LTV – UK Direct Real Estate
Investment exposures
Less than 60 per cent
60 per cent to 70 per cent
70 per cent to 80 per cent
80 per cent to 100 per cent
100 per cent to 120 per cent
120 per cent to 140 per cent
Greater than 140 per cent
Unsecured4
Subtotal
Other5
Total investment
Development
UK Government Supported Lending6
Total
At 31 December 20221,2,3
At 31 December 20211,2,3
Stage 1 and 2
£m
Stage 3
£m
Total
£m
Total
%
Stage 1 and 2
£m
Stage 3
£m
Total
£m
Total
%
7,821
503
58
17
8
1
13
225
8,646
346
8,992
900
278
10,170
47
9
–
13
23
–
54
–
146
13
159
7
5
171
7,868
512
58
30
31
1
67
225
8,792
359
9,151
907
283
10,341
89.4
6,527
5.8
0.7
0.3
0.4
–
0.8
2.6
100.0
617
129
84
6
4
12
397
7,776
1,460
9,236
1,233
362
10,831
52
5
13
2
102
–
46
–
220
27
247
17
5
269
6,579
622
142
86
108
4
58
397
7,996
1,487
9,483
1,250
367
11,100
82.1
7.8
1.8
1.1
1.4
0.1
0.7
5.0
100.0
Excludes Commercial Banking UK Direct Real Estate exposures subject to protection through Significant Risk Transfer transactions.
Excludes £0.6 billion in Business Banking (31 December 2021: £0.7 billion).
1
2
3 Year on year increase in less than 60 per cent driven by improved data coverage with clients moving from ‘Other’.
4 Predominantly Investment grade corporate CRE lending where the Group is relying on the corporate covenant.
5 Mainly lower value transactions where LTV not recorded on Commercial Banking UK Direct Real Estate monitoring system. Year on year decrease driven by improved
data coverage with clients now reported in LTV band.
6 Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) lending to real estate clients, where government guarantees are in
place at 100 per cent and 80 per cent, respectively.
Commercial Banking forbearance
Commercial Banking forborne loans and advances (audited)
Type of forbearance
Refinancing
Modification
Total
At 31 December 20221
At 31 December 2021
Total
£m
13
3,484
3,497
Of which
Stage 3
£m
11
2,908
2,919
Total
£m
14
3,655
3,669
Of which
Stage 3
£m
11
2,881
2,892
1
Includes £279 million (of which £254 million are guaranteed through the UK Government Bounce Back Loan Scheme) in Business Banking reported for the first time,
£210 million of which is Stage 3.
178
Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued 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 managed in a way that complies
with General Data Protection Regulations (GDPR) and other
data privacy regulatory obligations
• When data quality issues are not identified and managed
appropriately
• When data records are not created, retained, protected,
destroyed, or retrieved appropriately
• When data governance fails to provide robust oversight
of data decision-making, controls and actions to ensure
strategies are implemented effectively
• When data standards are not maintained, data-related issues
are not remediated, and incomplete data that is not available
at the right time, to the right people, to enable business
decisions to be made, and regulatory reporting requirements
to be fulfilled
• When critical data mapping and data information standards
are not followed, impacting compliance, traceability and
understanding of data
Measurement
Data risk covers data governance, data management and
data privacy and ethics and is measured through a series of
quantitative and qualitative metrics.
Mitigation
Mitigation strategies are adopted to reduce data governance,
management, privacy and ethical risks. Control assessments are
logged and tracked on One Risk and Control Self-Assessment
system with supporting metrics. Investment continues to be made
to reduce data risk exposure to within appetite. Examples include:
• Delivering a data strategy
•
•
Enhancing data quality and capability
Embedding data by design and ethics
Monitoring
The Group continues to monitor and respond to data related
regulatory initiatives i.e. new Digital Protection and Digital
Information Bill expected spring 2023 and political developments
i.e. potential divergence of legal and regulatory requirements
following EU exit.
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 and One RCSA frameworks.
A number of activities support the close monitoring of data risk
including:
• Design and monitoring of data risk appetite metrics, including
key risk indicators and key performance indicators
• Monitoring of significant data related issues, complaints,
events and breaches in accordance with Group Operational
Risk and Data policies
Identification and mitigation of data risk when planning and
implementing transformation or business change
•
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 52 on page 315 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 paying regard to its internal risk appetite,
Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio
(NSFR) as required by the PRA, the Capital Requirements Directive
(CRD IV) and the Capital Requirements Regulation (CRR) 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.
Lloyds Banking Group Annual Report and Accounts 2022
179
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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 2022 liquidity stress testing
results refer to page 183.
The Group maintains a Liquidity Contingency 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. The
Liquidity Contingency Framework has a foundation of robust and
regular monitoring and reporting of key performance indicators,
early warning indicators and Risk Appetite by both Group
Corporate Treasury (GCT) and Risk up to and including Board
level. Where movements in any of these metrics and indicator
suites point to a potential issue, SME teams and their directors will
escalate this information as appropriate.
Funding and liquidity management in 2022
The Group has maintained its strong funding and liquidity position
with a loan to deposit ratio of 96 per cent as at 31 December 2022
(94 per cent as at 31 December 2021), largely driven by increased
customer lending. Overall total wholesale funding has increased
to £100.3 billion as at 31 December 2022 (31 December 2021:
£93.1 billion) as a result of short term funding which has increased
towards more normalised levels and maintains the Group’s
access to diverse sources and tenors of funding.
The Group’s liquid assets continue to exceed the regulatory
minimum and internal risk appetite, with a liquidity coverage ratio
(LCR) of 144 per cent (based on a monthly rolling average over
the previous 12 months) as at 31 December 2022 (31 December
2021: 135 per cent) calculated on a Group consolidated basis
based on the EU Delegated Act. The increase in LCR is explained
primarily by an increase in liquid assets from the Bank of England
Term Funding Scheme with additional incentives for SMEs (TFSME)
drawdowns in 2021. 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 Net Stable Funding Ratio (NSFR) was implemented on 1
January 2022. The Group monitors this metric monthly and is
significantly in excess of the regulatory requirement of 100 per
cent.
During 2022, the Group accessed wholesale funding across a
range of currencies and markets with term issuance volumes
totalling £9.3 billion. The total outstanding amount of drawings
from the TFSME has remained stable at £30.0 billion at
31 December 2022 (31 December 2021: £30.0 billion), with maturities
in 2025, 2027 and beyond. In 2023, the Group expects to have a
term wholesale issuance requirement of around £15 billion.
The Group’s credit ratings continue to reflect the strength of the
Group’s business model and balance sheet. Over the course
of the year, Fitch and S&P affirmed the Group’s ratings. In July,
Moody’s downgraded the senior and subordinated ratings for
Lloyds Banking Group plc by one notch based on their Loss Given
Failure methodology. This was a technical and methodological
change that puts the Group in line with peer issuers. The rating
agencies continue to monitor the impact of cost of living
increases and rising rates for the UK banking sector. The Group’s
strong management, franchise and financial performance, along
with the robust capital and funding position, are reflected in the
Group’s strong ratings.
180 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Group funding requirements and sources
Group funding position
Cash and balances at central banks
Loans and advances to banks1
Loans and advances to customers
Reverse repurchase agreements – non-trading
Debt securities at amortised cost
Financial assets at fair value through other comprehensive income
Other assets2
Total Group assets
Less other liabilities2,3
Funding requirements
Wholesale funding3,4
Customer deposits
Repurchase agreements – non-trading
Term Funding Scheme with additional incentives for SMEs (TFSME)
Total equity
Funding sources
At 31 Dec
2022
£bn
At 31 Dec
2021
£bn
Change
%
91.4
10.6
454.9
44.9
9.9
23.2
242.9
877.8
(206.1)
671.7
100.3
475.3
18.6
30.0
47.5
671.7
76.4
6.9
448.6
54.8
6.8
28.1
264.9
886.5
(232.8)
653.7
93.1
476.3
1.1
30.0
53.2
653.7
20
54
1
(18)
46
(17)
(8)
(1)
(11)
3
8
(11)
3
Excludes £0.2 billion (31 December 2021: £0.1 billion) of loans and advances to banks within the Insurance business.
1
2 Other assets and other liabilities primarily include balances in the Group’s Insurance business and the fair value of derivative assets and liabilities.
3 Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion), previously
included in other liabilities; both comparatives have been presented on a consistent basis.
4 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. Excludes balances relating to margins of £2.6 billion (31 December 2021: £3.8 billion).
Reconciliation of Group funding to the balance sheet (audited)
At 31 December 2022
Deposits from banks
Debt securities in issue3
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
At 31 December 2021
Deposits from banks
Debt securities in issue3
Subordinated liabilities
Total wholesale funding
Customer deposits
Total
Included in
funding
analysis
£bn
Cash
collateral
received1
£bn
Fair value
and other
accounting
methods2
£bn
Balance
sheet
£bn
5.1
82.3
12.9
100.3
475.3
575.6
3.3
76.4
13.4
93.1
476.3
569.4
2.7
–
–
2.7
–
2.7
4.3
–
–
4.3
–
4.3
(0.5)
(8.5)
(2.2)
–
–
(4.8)
(0.3)
7.3
73.8
10.7
475.3
7.6
71.6
13.1
–
476.3
1
2
Repurchase agreements, previously reported within deposits from banks and customer deposits, are excluded; comparatives have been restated.
Includes the unamortised HBOS acquisition adjustments on subordinated liabilities, the fair value movements on liabilities held at fair value through profit or loss,
and hedge accounting adjustments that impact the accounting carrying value of the liabilities.
3 Debt securities in issue included in funding analysis includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December
2021: £1.7 billion); the comparative has been presented on a consistent basis.
Lloyds Banking Group Annual Report and Accounts 2022
181
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Analysis of 2022 total wholesale funding by residual maturity
Deposits from banks
Debt securities in issue:
Certificates of deposit
Commercial paper
Medium-term notes
Covered bonds
Securitisation1
Subordinated liabilities
Total wholesale funding2
Up to 1
month
£bn
1–3
months
£bn
3–6
months
£bn
6–9
months
£bn
9–12
months
£bn
3.8
0.9
2.7
1.3
0.9
0.2
6.0
–
9.8
0.5
2.1
5.6
0.5
1.7
0.3
10.2
–
10.7
0.3
2.0
3.1
2.3
0.9
–
8.3
1.1
9.7
0.1
0.4
1.6
0.8
1.6
–
–
4.0
0.7
4.8
0.4
0.5
1.2
–
–
2.1
–
2.5
1–2
years
£bn
–
0.2
–
7.7
2.7
0.2
10.8
0.9
11.7
2–5
years
£bn
Over
five years
£bn
–
–
–
18.7
5.7
1.3
25.7
3.8
29.5
–
–
–
12.0
2.2
1.0
15.2
6.4
21.6
Total
at 31 Dec
2022
£bn
Total
at 31 Dec
2021
£bn
5.1
3.3
7.2
12.7
45.3
14.1
3.0
82.3
12.9
100.3
4.4
8.7
42.5
17.0
3.8
76.4
13.4
93.1
1
2
Securitisation includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative has
been presented on a consistent basis.
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 £2.6 billion (31 December 2021: £3.8 billion).
Total wholesale funding by currency (audited)
At 31 December 2022
At 31 December 2021
Sterling1
£bn
US Dollar
£bn
23.4
23.9
43.4
36.8
Euro
£bn
25.8
25.6
Other
currencies
£bn
7.7
6.8
Total
£bn
100.3
93.1
1 Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative
has been presented on a consistent basis.
Analysis of 2022 term issuance (audited)
Securitisation1
Covered bonds
Senior unsecured notes
Subordinated liabilities
Additional tier 1
Total issuance
1
Includes significant risk transfer securitisations.
Sterling
£bn
US Dollar
£bn
Euro
£bn
Other
currencies
£bn
0.2
1.0
0.5
–
0.8
2.5
–
–
3.7
0.8
–
4.5
–
–
1.0
–
–
1.0
–
–
1.3
–
–
1.3
Total
£bn
0.2
1.0
6.5
0.8
0.8
9.3
182
Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Liquidity portfolio
At 31 December 2022, the Group had £144.7 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 2021: £140.2 billion), of which £140.4 billion is LCR level 1
eligible (31 December 2021: £138.6 billion) and £4.3 billion is LCR level 2 eligible (31 December 2021: £1.6 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
Cash and central bank reserves
High quality government/MDB/agency bonds2
High quality covered bonds
Level 1
Level 23
Total LCR eligible assets
Average
20221
£bn
84.7
53.6
2.1
140.4
4.3
144.7
20211
£bn
71.0
65.2
2.4
138.6
1.6
140.2
Change
%
19
(18)
(13)
1
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.
2 Designated multilateral development bank (MDB).
3
Includes Level 2A and Level 2B.
LCR eligible assets by currency
At 31 December 2022
Level 1
Level 2
Total1
At 31 December 2021
Level 1
Level 2
Total1
Sterling
£bn
US Dollar
£bn
Euro
£bn
Other
currencies
£bn
103.0
1.2
104.2
107.9
0.7
108.6
16.3
1.5
17.8
14.4
0.4
14.8
21.0
0.5
21.5
16.3
0.1
16.4
0.1
1.1
1.2
–
0.4
0.4
Total
£bn
140.4
4.3
144.7
138.6
1.6
140.2
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.
The Group also has a significant amount of non-LCR eligible liquid assets which are eligible for use in a range of central bank or similar
facilities. Future use of such facilities will be based on prudent liquidity management and economic considerations, having regard for
external market conditions.
Stress testing results
Internal liquidity stress testing results at 31 December 2022 (calculated as an average of month end observations over the previous
12 months) showed that the Group had liquidity resources representing 147 per cent of modelled outflows over a three month period
from all wholesale funding sources, retail and corporate deposits, off-balance sheet requirements, 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.
Lloyds Banking Group Annual Report and Accounts 2022
183
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Encumbered assets
This disclosure provides further detail on the availability of assets that could be used to support potential future funding requirements
of the Group.
The disclosure is not designed to identify assets that would be available in the event of a resolution or bankruptcy.
The Group Asset and Liability Committee (GALCO) monitor and manage total balance sheet encumbrance, including via a defined
risk appetite. At 31 December 2022, the Group had £35.5 billion (31 December 2021: £36.9 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 £710.3 billion (31 December 2021: £694.3 billion) of unencumbered on-balance
sheet assets, and £132.0 billion (31 December 2021: £155.4 billion) of pre-positioned and encumbered assets held with central banks, the
decrease in the latter is driven by amortisation in the existing collateral pool. Primarily, the Group encumbers mortgages, unsecured
lending, credit card receivables and car loans through the issuance programmes and tradable securities through securities financing
activity. The Group mainly pre-positions mortgage assets at central banks.
On balance sheet encumbered and unencumbered assets
Encumbered with
counterparties other
than central banks
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 2022
Cash and balances at central banks
Financial assets at fair value through
profit or loss4
Derivative financial instruments
Loans and advances to banks
–
38
–
–
–
–
–
85,305
2,516
2,554
–
–
–
–
–
–
918
–
–
–
–
6,083
91,388
91,388
177,137
178,055
180,609
24,753
24,753
24,753
1,800
6,819
2,013
10,632
10,632
Loans and advances to customers
16,472
2,790
19,262
132,012
13,419
217,963
72,243
303,625
454,899
Reverse repurchase agreements
Debt securities
–
–
Financial assets at amortised cost
16,472
–
1,025
3,815
–
1,025
20,287
–
–
–
5,692
–
–
44,865
44,865
44,865
3,209
8,901
9,926
132,012
20,911
224,782
122,330
368,023
520,322
Financial assets at fair value through
other comprehensive income
Other5
Total assets
At 31 December 2021
–
–
12,657
12,657
–
–
–
–
10,045
–
–
421
452
10,497
23,154
37,182
37,603
37,603
16,510
18,988
35,498
132,012
117,179
225,203
367,937
710,319
877,829
Cash and balances at central banks
Financial assets at fair value through
profit or loss4
Derivative financial instruments
Loans and advances to banks
–
42
–
–
–
–
4,344
4,386
–
–
–
–
–
–
–
–
70,275
1,975
–
–
–
–
6,145
76,420
76,420
200,410
202,385
206,771
22,051
22,051
22,051
1,419
4,784
798
7,001
7,001
Loans and advances to customers
20,952
2,319
23,271
155,405
10,177
176,344
83,370
269,891
448,567
Reverse repurchase agreements
Debt securities
–
–
–
1,114
–
1,114
–
–
3,999
–
–
54,753
54,753
54,753
1,722
5,721
6,835
Financial assets at amortised cost
20,952
3,433
24,385
155,405
15,595
181,128
140,643
337,366
517,156
Financial assets at fair value through
other comprehensive income
Other5
Total assets
–
–
8,085
8,085
–
–
–
–
19,812
–
240
20,052
28,137
–
500
35,490
35,990
35,990
20,994
15,862
36,856
155,405
107,657
181,628
404,979
694,264
886,525
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 Contains assets measured at fair value through profit or loss arising from contracts held with reinsurers, previously included within other assets; comparatives have
been restated.
5 Other comprises: items in the course of collection from banks; investment properties; goodwill; value of in-force business; other intangible assets; tangible fixed
assets; current tax recoverable; deferred tax assets; retirement benefit assets; investments in joint ventures and associates and other assets; comparatives have
been restated.
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.
184 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Monitoring
Insurance underwriting risks 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 are monitored against
risk appetite with persistency, expenses and GI claims also
analysed monthly. The Insurance business monitors experiences
against expectations, for example business volumes and mix,
claims, expenses 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.
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 and in
expense costs, leading to reductions in earnings and/or value.
Exposures
The major source of insurance underwriting risk within the Group
arises from 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. Customer behaviour may result in increased
cancellations or cessation of contributions, giving rise to the
persistency exposure.
The Group’s defined benefit pension schemes also expose the
Group to longevity risk. For further information please refer to the
defined benefit pension schemes component of the market risk
section and note 35 to the financial statements.
Property insurance risk is a key risk within the General Insurance
business, arising from home insurance. Exposures can arise, for
example, from extreme weather conditions such as flooding,
when property damage claims are higher than expected.
Expenses are incurred in writing insurance business, with the risk
of costs being higher than expected managed through regular
cost initiatives and operating model reviews.
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 across a range of stresses with 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 32 to the financial
statements.
Mitigation
Insurance underwriting risk is mitigated in a number of ways:
• Risks are identified, measured, managed, monitored and
•
reported using the Risk and Control Self-Assessment process
Embedded insurance processes for underwriting, claims and
expense management, pricing and product design
• Annual review and setting of demographic and expense best
•
•
estimate assumptions
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
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
• General Insurance exposure to accumulations of risk and
possible catastrophes is mitigated by reinsurance
arrangements spread over numerous reinsurers. Detailed
modelling, including that of the potential losses under various
catastrophe scenarios, supports the choice of reinsurance
arrangements
Lloyds Banking Group Annual Report and Accounts 2022
185
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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, credit spreads and equity prices.
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
2022
Assets
Banking
Total
£m
Trading
book1
£m
Non-
trading
£m
Insurance
£m Primary market risk factor
Cash and balances at central banks
91,388
–
91,388
– 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
Reverse repurchase agreements
Debt securities
Financial assets at amortised cost
Financial assets at fair value through other
comprehensive income
Value of in-force business
Other assets
Total assets
Liabilities
Deposit from banks
Customer deposits
Repurchase agreements at amortised
cost
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
180,609
24,753
14,216
21,817
4,775
2,143
161,618
Interest rate, foreign exchange, credit spread,
equity
793
Interest rate, foreign exchange, credit spread
10,632
454,899
44,865
9,926
520,322
23,154
5,419
32,184
–
–
–
–
–
–
–
–
10,528
454,899
44,865
9,926
520,218
23,154
–
25,118
104
Interest rate
– Interest rate
– Interest rate
– Interest rate, credit spread
104
– Interest rate, foreign exchange, credit spread
5,419
Interest rate, equity
7,066
Interest rate
877,829
36,033
666,796
175,000
7,266
475,331
48,596
17,755
24,042
73,819
149,868
10,730
22,901
–
–
–
12,577
17,533
–
–
–
–
7,266
475,331
– Interest rate
– Interest rate
48,596
– Interest rate
5,158
4,682
73,819
20
Interest rate, foreign exchange
1,827
Interest rate, foreign exchange, credit spread
– Interest rate, credit spread
–
149,868 Credit spread
9,300
9,254
1,430
Interest rate, foreign exchange
13,647
Interest rate
830,308
30,110
633,406
166,792
1 Assets and liabilities are 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 35 on page 280 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 190.
Derivative assets and liabilities are held by the Group for three
main purposes: to provide risk management solutions for clients,
to manage portfolio risks arising from client business and to
manage and hedge the Group’s own risks. Insurance business
assets and liabilities relate to policyholder funds, as well as
shareholder invested assets, including annuity funds. The Group
recognises the value of in-force business in respect of Insurance’s
long-term life assurance contracts as an asset in the balance
sheet (see note 24, page 270).
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. Further information on these balances
can be found under funding and liquidity risk on page 179.
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 187).
186 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued
Measurement
Group risk appetite is calibrated primarily to a number of 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 a market rate,
e.g. SONIA, and the spread between these two rates widens or
tightens.
Optionality risk arises predominantly from embedded optionality
within assets, liabilities or off-balance sheet items where either
the Group or the customer can affect the size or timing of cash
flows. One example of this is mortgage prepayment risk where
the customer owns an option allowing them to prepay when
it is economical to do so. This can result in customer balances
amortising more quickly or slowly than anticipated due to
customers’ response to changes in economic conditions.
Foreign exchange risk
Economic foreign exchange exposure arises from the Group’s
investment in its overseas operations (net investment exposures
are disclosed in note 52 on page 315). 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
risk-weighted assets.
Equity risk
Equity risk arises primarily from three different sources:
•
The Group’s private equity exposure from investments held by
Lloyds Development Capital and its stake in BGF, both within
the Equities sub-group
• A small number of legacy strategic equity holdings, for
example Visa Inc Preference Shares, and recent minority
fintech stakes, all held in the Equities sub-group
• A small exposure to Lloyds Banking Group share price through
deferred shares and deferred options granted to employees as
part of their benefits package
Credit spread risk
Credit spread risk arises largely from: (i) the liquid asset portfolio
held in the management of Group liquidity, comprising of
government, supranational and other eligible assets; (ii) the
Credit Valuation Adjustment (CVA) and Debit Valuation
Adjustment (DVA) sensitivity to credit spreads; (iii) a number of
the Group’s structured medium-term notes where 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. Sterling interest rates
are modelled with a floor below zero per cent, with negative rate
floors also modelled for non-Sterling 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 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 Group economic scenarios.
Sterling interest rates are modelled with a floor below zero per
cent, with negative rate floors also modelled for non-Sterling
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.
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.
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.
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.
Lloyds Banking Group Annual Report and Accounts 2022
187
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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
2.6
0.6
(1.6)
0.1
1.7
2022
Down
25bps
£m
(3.3)
(0.6)
(0.4)
(0.1)
(4.4)
Up
100bps
£m
6.5
2.7
(6.0)
0.3
3.5
Down
100bps
£m
(18.0)
(2.1)
(1.6)
(0.3)
(22.0)
Up
25bps
£m
42.3
(2.3)
(4.7)
(0.1)
35.2
2021
Down
25bps
£m
(43.9)
2.5
(3.3)
0.1
Up
100bps
£m
161.9
(8.8)
(17.8)
(0.3)
Down
100bps
£m
(192.7)
9.5
(11.8)
–
(44.6)
135.0
(195.0)
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 to an up 100 basis points shock has decreased due to rates being higher than at year end 2021, which
directly impacts expected mortgage prepayments, aligning more closely to our hedging strategy.
The table below shows supplementary value sensitivity to a steepening and flattening (c.100 basis points around the three-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
2022
2021
Steepener
£m
Flattener
£m
Steepener
£m
65.4
(11.5)
(8.9)
0.1
45.1
(75.8)
11.5
4.1
(0.1)
(60.3)
98.2
(8.0)
(14.1)
0.3
76.4
Flattener
£m
(126.9)
7.4
(6.2)
(0.3)
(126.0)
The table below shows the banking book net interest income sensitivity on a one to three year forward-looking basis to an
instantaneous parallel up 25, down 25 and up 50 basis points change to all interest rates.
Group Banking activities: three year net interest income sensitivity (audited)
Client-facing activity and associated hedges
2022
2021
Down 25bps
Up 25bps
Up 50bps
Year 1
£m
Year 2
£m
Year 3
£m
Year 1
£m
Year 2
£m
(181.1)
(261.0)
(377.7)
148.6
259.4
(419.8)
(519.6)
(647.3)
187.9
273.0
Year 3
£m
377.6
401.1
Year 1
£m
Year 2
£m
Year 3
£m
297.9
519.8
756.4
368.5
536.2
792.8
188 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Year 1 net interest income sensitivity, to down 25 basis points,
has decreased year-on-year due to reduced modelled margin
compression following a significant increase in interest rates in
2022. The decrease in risk sensitivity year-on-year in the upwards
rate shock, is driven by structural hedge activity.
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.
The three year net interest income sensitivity to an up 25 basis
points and 50 basis points shock is largely due to reinvestment of
structural hedge maturities in years two and three.
The sensitivities are illustrative and do not reflect new business
margin implications and/or pricing actions, other than as
outlined.
The following assumptions have been applied:
•
Instantaneous parallel shift in interest rate curve, including
bank base rate
• Balance sheet remains constant
•
Illustrative 50 per cent deposit pass-through
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 while 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 Group Corporate Treasury (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.
While the Group 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 risk-weighted assets. 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 risk-weighted assets equals the CET1 ratio.
Continually evaluating this structural open currency position
against evolving non-Sterling-denominated risk-weighted assets
mitigates volatility in the Group’s CET1 ratio.
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. Increases to pensions in
deferment and in payment expose the Group to inflation risk.
For further information on defined benefit pension scheme assets
and liabilities please refer to note 35 on page 280.
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
longevity swaps 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 a specialist pension committee.
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 business
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 24 on page 270). 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 moves
differently to the liabilities they back. This exposure arises from
credit downgrades and defaults
Interest rate risk arises through credit and interest assets which
are mainly held to cover the annuity and general insurance
liabilities
Inflation exposure arises from inflation-linked policyholder
benefits and future expenses
•
•
Lloyds Banking Group Annual Report and Accounts 2022
189
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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 for the Insurance
business’ regulatory capital assessments and other supporting
measures where appropriate, including those set out in note 32
on page 279.
Mitigation
Equity and credit spread risks are closely monitored. Asset liability
matching, hedging and unit matching are all used to reduce the
sensitivity of equity movements.
Interest rate risk in the annuity book is monitored and mitigated
by investing in assets whose cash flows closely match those on
the projected future liabilities. It is not possible to eliminate the risk
completely as the timing of insured events is uncertain and bonds
are not available for all required maturities.
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.
The costs and benefits of market risk mitigation are considered
in strategy and business planning decisions, with consideration
given to the impacts to various metrics.
Monitoring
Market risks in the Insurance business are monitored by Insurance
senior executive committees and ultimately the Insurance Board.
Monitoring includes the progression of market risk capital against
risk appetite limits, as well as the sensitivity of profit before tax
to combined market risk stress scenarios and in-year market
movements. Asset and liability matching positions and hedges in
place are actively monitored and if necessary rebalanced to be
within agreed tolerances. In addition, market risk is controlled via
approved investment policies and mandates.
Trading portfolios
Exposures
The Group’s trading activity is small relative to its peers. The
Group’s trading activity is undertaken primarily 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 £1.5 million for 31 December 2022 compared to
£1.0 million for 31 December 2021.
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 2022 and
year end 2021.
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 plc 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)
Interest rate risk
Foreign exchange risk
Equity risk
Credit spread risk
Inflation risk
All risk factors before diversification
Portfolio diversification
Total VaR
At 31 December 2022
At 31 December 2021
Close
£m
Average
£m
Maximum
£m
Minimum
£m
Close
£m
Average
£m
Maximum
£m
Minimum
£m
1.3
0.2
–
0.1
0.6
2.2
(0.5)
1.7
1.4
0.1
–
0.1
0.4
2.0
(0.5)
1.5
4.0
0.4
–
0.3
1.1
5.1
4.0
0.5
–
–
–
0.2
0.9
0.6
0.8
–
–
0.1
0.2
1.1
(0.2)
0.9
0.9
0.1
–
0.1
0.3
1.4
(0.4)
1.0
1.7
0.4
–
0.2
0.8
2.5
2.1
0.6
–
–
–
0.2
1.0
0.6
The market risk for the trading book continues to be low relative 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.
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 plc can be found in the Group’s Pillar 3 disclosures.
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.
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.
190 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Model risk
Definition
Model risk is defined as the risk of financial loss, regulatory
censure, reputational damage or customer detriment, as a
result of deficiencies in the development, application or ongoing
operation of models and rating systems.
Models are defined as quantitative methods that process input
data into quantitative outputs, or qualitative outputs (including
ordinal letter output) which have a quantitative measure
associated with them. Model governance policy is restricted to
specific categories of application of models, principally financial
risk, treasury and valuation, with certain exclusions, such as
prescribed calculations and project appraisal calculations.
Exposures
The Group makes extensive use of models. They perform a variety
of functions including:
• Capital calculation
• Credit decisioning, including fraud
•
•
•
• Market risk measurement
Pricing models
Impairment calculation
Stress testing and forecasting
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 increased in 2022. The pandemic related government-
led support schemes weakened the relationships between model
inputs and outputs, and the current economic conditions remain
outside those used to build the models, placing reliance on
judgemental overlays. The Group’s models are being managed
to reduce this need for overlays. The control environment for
model risk is being strengthened to meet revised regulatory
requirements.
In addition, in common with the rest of the industry, changes
required to capital models following new regulations will create
a temporary increase in the risk relating to these models during
the period of transition. Further information on capital impacts are
detailed in the capital risk section on pages 148 to 155.
•
•
• 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 the Group and Board Risk
Committees monthly, with more detailed papers as necessary to
focus on key issues.
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 economic 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
Measurement
The Board risk appetite metric is the key component for
measuring the Group’s most material models; performance is
reported monthly to the Group and Board Risk Committees.
Mitigation
The model risk management framework, established by and
with continued oversight from an independent team in the Risk
division, provides the foundation for managing and mitigating
model risk within the Group. Accountability is cascaded from
the Board and senior management via the Group enterprise risk
management framework.
This provides the basis for the Group’s model governance policy,
which defines the mandatory requirements for models across the
Group, including:
The scope of models covered by the policy
•
• Model materiality
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, risk and control
indicators, risk appetite setting, a robust operational loss event
management and escalation process, and a scenario analysis
and operational loss forecasting 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 2022 the
highest frequency of events occurred in external fraud 83.04 per
cent. Execution, delivery and process management accounted
for 55.72 per cent of losses by value.
Operational risk events by risk category (losses greater than or equal to £10,000)1
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
2022
0.43
5.01
–
0.11
11.27
83.04
0.14
2021
0.74
7.39
0.07
0.03
13.76
77.62
0.39
2022
0.78
15.90
–
0.07
55.72
27.53
–
2021
1.33
40.41
0.01
0.01
45.47
12.44
0.33
100.00
100.00
100.00
100.00
1
Excludes losses related to PPI and provisions, the latter are outlined in note 37. 2021 breakdowns have been restated both to reflect the exclusion of provisions and
due to the nature of the risk events which can evolve over time.
Lloyds Banking Group Annual Report and Accounts 2022
191
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report The Group economic crime prevention 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 Group economic
crime prevention policy also sets out a framework of controls
for compliance with legal and regulatory sanctions
In addition to its efforts internally, the Group also contributes to
economic crime prevention by supporting and championing
industry-level activity, including:
–
Improving customer outcomes related to Authorised Push
Payment (APP) fraud, incorporating recommendations from
the Lending Standards Board into our APP fraud strategy.
The Group remains a signatory to the industry code for APP
fraud, which has improved customer protection and the
reimbursement of funds to victims
– Representing large retail banks at the National Economic
Crime Centre (NECC) led Public Private Operating Board
(PPOB); co-chairing the Public Private Threat Group leading
the UK’s response to Money Laundering; chairing the Joint
Money Laundering Intelligence Taskforce (JMLIT) senior
management team and providing expert resource to the
NECC’s operational threat cells
– Collaborating with a peer bank to pioneer the concept of
–
data fusion (large scale information sharing and analysis)
with the National Crime Agency (NCA)
In 2021 we undertook a bilateral data sharing exercise with a
different peer bank to understand the fraud prevention
benefit for receiving and sending banks. This identified
opportunities to improve real/near time identification of
money mules, improving the efficiency and effectiveness of
alerts. The analysis has helped to influence a wider data
sharing exercise led by UK Finance across seven firms
– Being an active member of UK Finance where we chair or
have representation on every economic crime committee.
This includes chairing the UK Finance Fraud Panel, which is
the industry’s primary model for considering fraud issues of
mutual interest. We also chair the Anti-Bribery & Corruption
Panel; focused on key ABC issues that members are dealing
with. This Panel also interacts with key guidance bodies
such as the Organisation for Economic Cooperation and
Development (OECD) and Wolfsberg Group
– Helping fund the Dedicated Card and Payment Crime Unit
(DCPCU) to investigate fraud cases, target and where
appropriate arrest and gain prosecution of offenders
– Being a member of Cifas, the largest cross sector fraud
sharing organisation, where we share and receive internal
and first party fraud data to detect, deter and prevent
criminals exploiting our banking facilities
– Engagement with Europol and International Law
Enforcement to share fraud and financial crime intelligence
– Maintaining relationships with key partners such as City of
London Police, United for Wildlife and the North East Business
Resilience Centre, for which the Money Laundering
Reporting Officer (MLRO) chairs the advisory board
– The Group is a member of Stop Scams UK (SSUK), which
brings together partnerships from various industry sectors
to stop scams at source. The Group is involved in a new
SSUK pilot, Project 159, which aims to provide consumers
with a secure connection to their bank
Operational resilience risk, on page 193, provides further
information on the mitigating actions for cyber and IT resilience.
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. Risks are reported and discussed at local governance
forums and escalated to executive management and the
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 within appetite / tolerance. 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 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 law enforcement
agencies in identifying and combatting fraud
The Group adopts a risk-based approach to mitigate cyber
risks it faces. The effective operation of the Group’s estate is
supported by an IT and Cyber Security Governance framework,
guided by a threat-based strategy which underpins
investment decisions. The ongoing protection of the estate
and confidentiality of material information is ensured through
adherence to the Group Security Policy which has been
aligned to industry good practice including the NIST Cyber
Security Framework; and material laws and regulations
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.
192
Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued
Monitoring
Monitoring and reporting of operational risk is undertaken at
Board, Group, entity and divisional committees. Each committee
monitors key risks, control effectiveness, key risk and control
indicators, events, operational losses, risk appetite metrics and
the results of independent testing conducted by Risk 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.
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 important 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, monitor and test important business services and
critical business processes from a customer, Group and systemic
perspective. The failure to adequately build resilience into an
important business service or critical business process may occur
in a variety of ways, including:
•
•
•
The Group being overly reliant on one location to deliver a
critical business process
The Group not having an adequate succession plan in place
for designated subject matter experts
The Group being overly reliant on a supplier which fails to
provide a service
• A shortcoming in the Group’s ability to respond and/or recover
•
in a timely manner following a cyber incident
The Group failing to upgrade its IT systems and leaving them
vulnerable to failure
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.
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 or identify further future emerging regulation
• Operational risk: being unable to safely provide customers with
business services
• Conduct risk: an operational resilience failure may render the
Group liable to fines from the FCA for poor conduct
• Market risk: the Group being unable to provide key services
could have ramifications for the wider market and could
impact share price
Measurement
Operational resilience risk is managed across the Group
through the Group’s enterprise risk management framework
and operational risk policy and associated standards. Board risk
appetite metrics for operational resilience are in place and are
well understood. These specific measures are subject to ongoing
monitoring and reporting, including a mandatory review of
metrics and 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 important 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. Furthermore, the Group
is in the process of responding to the publication of regulatory
policy statements. Focus has been given to ensure compliance,
and existing frameworks have been adapted to consider important
business services and impact tolerances. At the core of its
approach to operational resilience are the Group’s important
business services and critical business processes which drive
activity, including further mapping of the processes to identify
any additional resilience requirements such as customer 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.
The Group’s strategy considers the evolving risk management
requirements, adapting the change delivery model to be more
agile and develop the people skills and capabilities needed. 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 the Board as appropriate. The Group employs
a range of risk management strategies, including: avoidance,
mitigation, transfer (including insurance) and acceptance. Where
there is a reliance on third-party suppliers to provide services, the
Group’s sourcing policy ensures that outsourcing initiatives follow
a defined process including due diligence, risk evaluation and
ongoing assurance.
Mitigating actions to the principal operational resilience risk are:
Cyber: the threat landscape associated with cyber risk continues to
evolve and there is significant regulatory attention on this subject.
The Board continues to invest heavily to protect the Group from
cyber-attacks. Investment continues to focus on improving the
Group’s approach to identity and access management, improving
capability to detect, respond and recover from cyber-attacks and
improved ability to manage vulnerabilities across the estate.
IT resilience: the Group continues to optimise its approach to IT
and operational resilience by investing in technology
improvements and enhancing the resilience of systems that
support the Group’s critical business processes and important
business services, primarily through the Technology Resilience
and Security Change programme. The Board optimises the role
that resilient technology plays 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, for
example, the right number of colleagues are capable of
supporting critical technology components. Key controls and
processes are regularly reported to committee(s) and alignment
with the Group’s strategy is closely monitored.
Property: the Group’s property portfolio remains a key focus in
ensuring targeted resilience requirements are appropriately
maintained, including energy resilience. Processes are in place to
identify key buildings where an important business service or
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.
Lloyds Banking Group Annual Report and Accounts 2022
193
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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, diversity, 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 management 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
Ensuring colleague wellbeing strategies and support are in
place to meet colleague needs, alongside skills and capability
growth required to maximise the potential of our people
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’s operational risk policy.
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 important business services and critical
business processes which could cause significant harm to the
Group’s customers. The Group segments its suppliers by criticality
and has processes in place to support ongoing supplier
management.
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 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.
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 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 a diverse workforce, with
the appropriate mix and required level of skills and capabilities
to meet the current and future needs of the Group
• Non-inclusive culture, ineffective leadership, poor
•
•
•
•
•
communication, weak performance, inappropriate
remuneration policies and poor colleague conduct
Ineffective management of succession planning or failure to
identify appropriate talent pipeline
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
Inadequately designed people processes that are not resilient
to withstand unexpected events
The increasing digitisation of the business is changing the
capability mix required and may impact the Group’s ability to
attract and retain talent
• Colleague engagement may be challenged by a number of
factors ranging from the adjustment to hybrid working,
dissatisfaction with reward, cost of living pressures, refreshed
values and purpose of the business including changes to
culture and ethical considerations
194 Lloyds Banking Group Annual Report and Accounts 2022
Risk management continued Regulatory and legal risk
Definition
Regulatory and legal risk is defined as the risk of financial
penalties, regulatory censure, criminal or civil enforcement action
or customer detriment as a result of failure to identify, assess,
correctly interpret, comply with, or manage regulatory and/or
legal requirements.
Exposures
The Group has a zero risk appetite for material legal or regulatory
breaches. The Group remains exposed to the evolving UK legal
and regulatory landscape, such as changes to the regulatory
framework and other changing regulatory standards as well
as uncertainty arising from the current and future litigation
landscape.
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 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
• Divisions identify, assess and implement policy and regulatory
requirements and establish local controls, processes,
procedures and resources to ensure appropriate governance
and compliance
• Divisions regularly produce management information to assist
in the identification of issues and test management controls
are working effectively
• Risk and Legal functions provide oversight, proactive support
and constructive challenge to the business in identifying and
managing regulatory and legal issues
• Risk division conducts thematic reviews to provide oversight of
regulatory compliance
• Horizon scanning is conducted 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 due to cost of living pressures and continues to
engage with regulatory authorities
Monitoring
Material risks are managed through the relevant business
committees, with review and escalation through Group-level
committees where appropriate, including the escalation of any
material regulatory breaches or material legal incidents.
Strategic risk
Definition
Strategic risk is defined as the risk which results from:
•
•
•
Incorrect assumptions about internal or external operating
environments
Failure to understand the potential impact of strategic
responses and business plans on existing risk types
Failure to respond or the inappropriate strategic response to
material changes in the external or internal operating
environments
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.
Customer, shareholder and employee expectations continue
to evolve, together with societal trends amid the recovery post
COVID-19 and cost of living pressures.
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 has invested in implementing a robust framework for
the identification, assessment and quantification of strategic
risks and their incorporation into business planning and strategic
investment decisions. With Board support, in 2022 the Group
continued to invest in evolving the strategic risk management
framework and embedding it 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 38 and 44.
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.
2021 saw development of the Group’s quantitative risk assessment
approach, assessing the:
• Connectivity of inherent risks, which can magnify their impact
•
and severity
Time horizons in respect of the crystallisation of impacts,
should risks manifest
Mitigation
The range of mitigating actions includes the following:
• Horizon scanning is conducted across the Group to identify
•
•
potential threats, risks, emerging issues and opportunities and
to explore future trends
The Group’s business planning processes include formal
assessment of the strategic risk implications of new business,
product entries and other strategic initiatives
The Group’s governance framework mandates individuals’ and
committees’ responsibilities and decision-making rights, to
ensure that strategic risks are appropriately reported and
escalated
Monitoring
A review of the Group’s strategic risks 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.
Lloyds Banking Group Annual Report and Accounts 2022
195
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 36.
Deferred tax
37.
38.
39.
40.
41.
Other provisions
Subordinated liabilities
Share capital
Share premium account
Other reserves
42.
Retained profits
43. Other equity instruments
44. Dividends on ordinary shares
45.
46.
47.
Share-based payments
Related party transactions
Contingent liabilities, commitments and guarantees
48.
Structured entities
49.
50.
51.
Financial instruments
Transfers of financial assets
Offsetting of financial assets and liabilities
52.
Financial risk management
53. Cash flow statement
54.
55.
Events since the balance sheet date
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.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Basis of preparation and accounting policies
Financial assets at fair value through profit or loss
Amounts due from subsidiaries
Deferred tax
Financial liabilities at fair value through profit or loss
Debt securities in issue
Subordinated liabilities
Share capital, share premium account and other equity
instruments
Merger reserve and capital redemption reserve
Retained profits
Related party transactions
Financial instruments
Financial risk management
Other information
286
288
289
290
291
291
293
293
294
294
297
298
300
301
312
313
315
335
337
337
340
341
342
343
343
343
343
343
343
343
344
344
344
345
345
346
347
348
The Group has adopted the UK Finance Code for Financial Reporting
Disclosure and these 2022 financial statements have been prepared
in compliance with its principles.
Financial statements
In this section
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.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Basis of preparation
Accounting policies
Critical accounting judgements and key sources of
estimation uncertainty
Segmental analysis
Net interest income
Net fee and commission income
Net trading income
Insurance premium income
Other operating income
Insurance claims and changes in insurance and
investment contract liabilities
Operating expenses
Auditors’ remuneration
Impairment
Tax expense
Earnings per share
Financial assets at fair value through profit or loss
Derivative financial instruments
Financial assets at amortised cost
Allowance for expected credit losses
20.
Finance lease and hire purchase receivables
21.
Financial assets at fair value through other
comprehensive income
22.
Investments in joint ventures and associates
23. Goodwill
24.
Value of in-force business
25. Other intangible assets
26. Other assets
27.
28.
29.
30.
31.
32.
33.
Lessee disclosures
Financial liabilities at fair value through profit or loss
Debt securities in issue
Securitisations and covered bonds
Liabilities arising from insurance contracts and
participating investment contracts
Life insurance sensitivity analysis
Liabilities arising from non-participating investment
contracts
34. Other liabilities
35.
Retirement benefit obligations
196 Lloyds Banking Group Annual Report and Accounts 2022
197
210
211
212
214
217
218
218
218
227
230
238
238
239
239
240
240
241
242
243
245
246
246
247
252
260
268
269
269
270
270
272
272
273
274
274
274
275
279
280
280
280
Independent auditors’ report
to the Members of Lloyds Banking Group plc
Report on the audit of the financial statements
1. Opinion
In our opinion:
•
the financial statements of Lloyds Banking Group plc (the ‘Parent company’) and its subsidiaries (the ‘Group’ or ‘LBG’) give a true and
fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December 2022 and of the Group’s profit for the year
then ended;
the Group financial statements have been properly prepared in accordance with United Kingdom adopted international
accounting standards and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards
Board (IASB);
the Parent company financial statements have been properly prepared in accordance with United Kingdom adopted international
accounting standards and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
•
•
•
We have audited the financial statements which comprise the:
Group
Parent company
• Consolidated balance sheet as at 31 December 2022;
• Consolidated income statement for the year then ended;
• Consolidated statement of comprehensive income for the
year then ended;
• Balance sheet as at 31 December 2022;
• Statement of changes in equity for the year then ended;
• Cash flow statement for the year then ended; and
• Notes 1 to 14 to the financial statements, which include the
• Consolidated statement of changes in equity for the year then
accounting principles and policies.
ended;
• Consolidated cash flow statement for the year then ended;
and
• Notes 1 to 55 to the financial statements, which include the
accounting principles and policies.
The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom adopted
international accounting standards, and as regards the Parent company financial statements, as applied in accordance with the
provisions of the Companies Act 2006.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditors’ responsibilities for the audit of the financial statements section of our
report.
We are independent of the Group and the Parent company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services
provided to the Group and Parent company for the year are disclosed in note 12 to the financial statements. We confirm that we have
not provided any non-audit services prohibited by the FRC’s Ethical Standard to the Group or the Parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
Insurance actuarial assumptions (Group)
The key audit matters that we identified in the current year were:
• Expected credit losses (Group)
•
• Valuation of certain complex and illiquid financial instruments held at fair value (Group)
• Regulatory and litigation matters (Group)
• Defined benefit obligations (Group)
•
IT systems that impact financial reporting (Group and Parent company)
Our assessment of the level of risk for each of these areas have remained consistent with the prior year.
Materiality
Overall materiality used for the Group consolidated financial statements was £318 million, which was
determined on the basis of profit before tax and net assets.
Overall materiality used for the Parent company financial statements was £318 million, which was determined
on the basis of net assets and capped at Group materiality.
Scoping
Our audit scope covers 88% of the Group’s revenue, 91% of the Group’s profit before tax, 97% of the Group’s total
assets and 94% of the Group’s total liabilities.
Lloyds Banking Group Annual Report and Accounts 2022
197
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Our audit approach
Our audit approach is risk focused and structured to reflect the Group’s organisation. It can be summarised into the following key
activities that we used to obtain sufficient audit evidence required to form our opinion on the Group and Parent company financial
statements:
• Audit planning and risk assessment
We considered the macroeconomic factors affecting the Group during the year and assessed the impact of the war in Ukraine, the
current economic environment and changes to UK fiscal policy on the Group’s key judgements and sources of estimation uncertainty.
The partners for the Group’s two components and those partners leading areas requiring significant audit judgement including;
expected credit losses, insurance actuarial assumptions, provisions for regulatory and litigation matters, defined benefit obligations
and the valuation of certain complex and illiquid financial instruments were required to consider these factors in their assessment of
risk and to design testing procedures to adequately address the assessed risk. These partners also met regularly with management
to understand business strategy, the Group’s accounting judgements and estimations as well as other matters which arose during
the year, which could have impacted the Group’s financial reporting. Our risk assessments were further informed by detailed analytics
as well as other quantitative and qualitative audit procedures, including consideration of matters such as the impact of cost of living
pressures in the UK and climate change on the account balances, disclosures and company practices;
• Audit work executed at component level
We have identified components based on the Group’s operating segments, and two components were subject to audit procedures;
UK Banking and UK Insurance. On the basis of materiality, we have removed the US component from our scope. The Group audit team
was in active dialogue throughout the audit with the component audit teams responsible for the audit work. This included determining
whether the work was planned and performed in accordance with the overall Group audit strategy and the requirements of our Group
audit instructions to the components. We were able to satisfy ourselves that our oversight and supervision was appropriate through in-
person meetings, video conferencing, and direct reviews of work completed. Furthermore, we have continued to attend the planning
and clearance meetings that our components have held with the Group to engage with divisional management;
• Audit procedures undertaken at both Group and Parent company level
In addition to the above, we also performed audit work on the Group and Parent company financial statements including the
consolidation of the Group’s results, the preparation of the financial statements, certain disclosures within the directors’ remuneration
report, litigation provisions and exposures, as well as the Group’s entity level and oversight controls relevant to financial reporting.
The components not covered by our audit scope are subject to analytical procedures to confirm our conclusion that there were no
significant risks of material misstatement in the aggregated financial information;
Internal controls testing approach
•
Our internal controls testing approach was informed by our scoping and risk assessment activities. We have assessed the Group’s
end-to-end financial reporting processes supporting all in-scope financial statement balances and identified relevant controls to test
for these balances. This included the testing of general IT controls, process level controls and entity level controls at the Group level;
and
• The impact of climate change on our audit
In planning our audit, we have considered the impact of climate change on the Group’s operations and any subsequent impact on
its financial statements. The Group sets out its assessment of the potential impact on page 156 of the Risk Management section of the
Annual Report.
In conjunction with our climate risk specialists, we have held discussions with the Group to understand their:
– process for identifying affected operations including the governance and controls over this process, and the subsequent effect
–
on financial reporting for the Group; and
long-term strategy to respond to climate change risks and how this is factored into the Group’s forecasts, considering publicly
announced climate change commitments and any costs associated with the Group’s net zero targets.
Our audit work has involved:
– evaluating climate as a factor in risk assessments for potentially affected balances;
– challenging the completeness of the physical and transition risks identified and considered in the Group’s climate risk
assessment and the conclusion that there continues to be no material impact of climate change risk on financial reporting;
– reviewing the Group’s qualitative loan portfolio analysis, and challenging the key assumptions used by the Group with reference
to our own understanding of the portfolios and publicly available documentation; and
– assessing disclosures in the Annual Report, and challenging the consistency between the financial statements and the
remainder of the Annual Report.
We have not been engaged to provide assurance over the accuracy of climate change disclosures set out at pages 136 to 137 in
the Annual Report. As part of our audit procedures we are required to read and consider these disclosures to consider whether they
are materially inconsistent with the financial statements or knowledge obtained in the audit and we did not identify any material
inconsistencies as a result of these procedures.
198 Lloyds Banking Group Annual Report and Accounts 2022
Independent auditors’ report continuedto the Members of Lloyds Banking Group plc
4. Conclusions relating to going concern
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.
Our evaluation of the directors’ assessment of the Group’s and Parent company’s ability to continue to adopt the going concern basis
of accounting included:
• using our knowledge of the Group and Parent company, the financial services industry, the financial services regulatory
environment and the general economic environment, including macroeconomic pressures affecting the Group’s operations, to
identify inherent risks in the business model and how such risks might affect the financial resources or ability to continue operations
over the going concern period;
• making inquiries of Group management about the assumptions, including climate risk considerations, used in their going concern
models, and assessing the reasonableness of those assumptions and historical forecasting accuracy;
• evaluating the Group’s strategic plans in light of the changing macroeconomic environment, short and longer term financial
budgets, funding, liquidity and capital adequacy plans including internal stress tests;
• considering the Group’s operational resilience;
•
reading analyst reports, industry data, Bank of England reports and other external information to determine if it provided
corroborative or contradictory evidence in relation to the Group’s assumptions;
reviewing correspondence and meeting with prudential and conduct regulators to assess whether there are any matters that may
impact the going concern assessment;
testing the underlying data generated to prepare the forecast scenarios and determined whether there was adequate support for
the assumptions underlying the forecasts; and
•
•
• evaluating the Group’s disclosures on going concern against the requirements of IAS 1.
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 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 relation to the reporting on how the Group has 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.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our 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) that we identified. These matters included 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 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.
How the scope of our audit responded to the key audit matter
Expected credit losses (Group)
Key audit matter description
Refer to notes 2, 3, 13, 19 and 52 in the financial statements
The Group has recognised £4.9 billion of expected credit losses
(“ECL”) as at 31 December 2022. The determination of ECL consists
of a number of assumptions that require a high degree of
complex and subjective auditor judgement, specialised skills and
knowledge, complex impairment modelling and a high degree
of estimation uncertainty. Specifically, the impact of the war in
Ukraine, residual economic impact of the COVID-19 pandemic,
as well as the economic impact of the rising cost of living on
the ECL have been particularly judgemental given the inherent
uncertainty in the current economic environment.
The key areas we identified as having the most significant level of
management judgement were in respect of:
• Multiple Economic Scenarios (“MES”);
• Retail ECL; and
• Commercial ECL.
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Key audit matter description
How the scope of our audit responded to the key audit matter
We performed the following procedures:
• Tested the controls over the generation of the multiple
economic scenarios including those over the Group’s
governance processes to determine the base case, different
scenarios and the weightings applied to each scenario;
• Working with our internal economic specialists:
– challenged and evaluated economic forecasts in the base
scenario such as the unemployment rate, House Price Index,
inflation and forecasted interest rates, and Gross Domestic
Product through comparison to independent economic
outlooks, external analysts and market data;
– challenged the appropriateness of management’s change in
methodology in determining the severe downside scenario;
– challenged and evaluated the appropriateness of
the methodology applied to generate alternative
macroeconomic scenarios, and including associated
weightings and assumptions within;
independently replicated the multiple economic scenario
model and compared the outputs of our independent model
to the Group’s output to re-test scenario generation;
–
• Tested the completeness and accuracy of the data used by the
model;
• Performed a stand back assessment of the appropriateness
of the weightings applied to each of the scenarios based on
publicly available data; and
• Evaluated the adequacy of disclosures in respect of significant
judgements and sources of estimation uncertainty including
macroeconomic scenarios.
Multiple economic scenarios
The measurement of expected credit losses is required to reflect
an unbiased probability-weighted range of possible future
outcomes.
The Group’s economics team develops the future economic
scenarios. Firstly, a base case forecast is produced based on a
set of conditioning assumptions, which are designed to reflect the
Group’s best view of future events. A full distribution of economic
scenarios around this base case is produced using a Monte Carlo
simulation and scenarios within that distribution are ranked using
estimated relationships with industry wide historical loss data.
Three scenarios are derived from the distribution as averages of
constituent modelled scenarios around the 15th, 75th and 95th
percentiles of the distribution which corresponds to an upside,
a downside and a severe downside, respectively. The severe
downside is then adjusted to incorporate non-modelled paths for
inflation and interest rate assumptions. The upside, the base case
and the downside scenarios are weighted at 30% and the severe
downside at 10%.
These four scenarios are then used as key assumptions in the
determination of the ECL allowance.
The development of these multiple economic scenarios is
inherently uncertain, highly complex, and requires significant
judgement.
The principal consideration for our determination that the
multiple economic scenarios is a critical audit matter was
the high degree of management judgement which required
specialised auditor knowledge and a high degree of audit effort
in areas such as evaluating the forward-looking information used
by management, and the weighting applied.
This key audit matter is discussed in the Audit Committee’s report
on page 96.
200 Lloyds Banking Group Annual Report and Accounts 2022
Independent auditors’ report continuedto the Members of Lloyds Banking Group plc
Key audit matter description
How the scope of our audit responded to the key audit matter
Retail ECL
The ECL for the Retail division is determined on a collective basis
using impairment models to calculate a probability weighted
estimate by applying a probability of default, exposure at default
and a loss given default, taking account of collateral held or other
loss mitigants, discounted using the effective interest rate.
The key judgements and estimates in determining the ECL for the
Retail division include:
• Modelling approach, modelling simplifications and
judgements, and selection of modelling data;
• Behavioural lives; and
• The appropriate allocation of assets into the correct IFRS 9
stage through the assessment of significant deterioration in
credit risk since origination.
Model adjustments
Adjustments are made to models to address known model
and data limitations, and emerging or non-modelled risks.
The current economic environment continues to be uncertain
and differs from recent experience which is characterised
by elevated inflation and increasing cost, increased cost of
living and increasing costs of financing, which affects the debt
servicing capability for borrowers. As a result, the judgements
around if and when the Group have recognised adjustments in
the model to account for the impacts of the current economic
environment and potential model weaknesses in coping with
the current economic outlook are highly judgemental and
inherently uncertain. These adjustments require specialist auditor
judgement when evaluating the completeness of adjustments,
and the methodology, models and inputs to the adjustments.
This key audit matter is discussed in the Audit Committee’s report
on page 96.
We tested controls across the process to determine the ECL
provisions including:
• Model governance including model validation and monitoring;
• Model assumptions;
• The allocation of assets into stages; and
• Data accuracy and completeness.
Working with our internal modelling specialists, our audit
procedures over the key areas of estimation covered the following:
• Model estimations, where we:
– evaluated the appropriateness of the modelling approach
–
and assumptions used;
independently replicated the models for all material
portfolios and compared the outputs of our independent
models to the Group’s outputs;
– assessed model performance by evaluating variations
between observed data and model predictions;
– developed an understanding and assessed model
limitations and remedial actions; and
– tested the completeness and accuracy of the data used in
model execution and calibration.
• Allocation of assets into stages, where we:
– evaluated the appropriateness of quantitative and
qualitative criteria used for allocation into IFRS 9 stages;
– tested the appropriateness of the stage allocation for a
sample of exposures; and
– tested the data used by models in assigning IFRS 9 stages
and evaluated the appropriateness of the model logic used.
Model adjustments
In respect of the adjustment to models, we performed the following
procedures in conjunction with our specialists:
• Tested the controls over the adjustments to the models;
• Evaluated the methodology, approach and assumptions
in developing the adjustments, and evaluated the Group’s
selection of approach;
• Tested the completeness and accuracy of the data used;
• Performed a recalculation of the adjustments;
• Evaluated the completeness of adjustments based on our
understanding of model and data limitations, including those
related to cost of living pressures; and
• Evaluated whether duplication exists between different model
adjustments and between model adjustments and core
models.
We have assessed the adequacy of whether the disclosures
appropriately address the uncertainty which exists in determining
the ECL.
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Key audit matter description
How the scope of our audit responded to the key audit matter
Commercial ECL
The ECL in the Commercial Banking division is calculated on a
collective basis for performing loans, being those in stage 1 and 2,
and on an individual basis for larger impaired loans in stage 3.
The collective provision is determined using impairment models.
The models use a number of significant judgements to calculate
a probability weighted ECL estimate applying an appropriate
probability of default, estimated exposure at default and taking
account of collateral held or other loss mitigants, discounted
using the effective interest rate. The key driver of the probability
of default and, therefore, the staging of Commercial banking
exposures is the credit risk rating. The determination of these
credit risk ratings is performed on a counterparty basis for larger
exposures by a credit officer and involves a high degree of
judgement and consideration of multiple sources of information.
Complex models and significant judgements are used to develop
the probability of default, loss given default and exposure at
default as well as applying the staging criteria under IFRS 9.
For individual provision assessments of larger exposures in stage
3, the significant judgements in determining provisions are the:
• completeness and appropriateness of the potential workout
scenarios identified;
• probability assigned to each identified potential workout
scenarios; and
• valuation assumptions used in determining the expected
recovery strategies.
Complex and subjective auditor judgement including specialised
knowledge is required in evaluating the methodology, models
and inputs that are inherently uncertain.
This key audit matter is discussed in the Audit Committee’s report
on page 96.
We tested the controls across the process to determine the ECL
provisions including:
• Model governance and arithmetical accuracy of provision
calculations;
• Data accuracy and completeness; and
• Recognition and calculation of post-model adjustments.
We performed the following audit procedures over:
• Expected credit losses determined through impairment models:
independently assessed the credit rating and tested whether
the exposure was in the correct stage classification against
IFRS 9 criteria;
–
– assessed and challenged the model methodologies,
approach and assumptions, including those used in
developing the IMAs and PMAs;
– tested the completeness and accuracy of data used; and
– performed a recalculation of the IFRS 9 collective provision.
• Expected credit losses assessed individually:
– assessed the exposures to determine if they met the
definition of credit impaired with a stage 3 classification;
– performed independent assessments to determine the
appropriateness of recovery scenarios and associated cash
flows, including considerations of climate risks on recoveries;
– evaluated valuations, including the use of internal specialists
–
for business valuations; and
independently assessed and challenged the completeness
of workout scenarios identified and weightings applied.
We have assessed the adequacy of whether the disclosures
appropriately address the uncertainty which exists in determining
the ECL.
Key observations communicated to the Audit Committee
We are satisfied that the ECL provisions are reasonable and recognised in accordance with the requirements of IFRS 9. The
calculations are based on appropriate methodologies using reasonable modelled assumptions, including IMAs and PMAs addressing
model shortcomings. Where control deficiencies were identified, particularly in data linkage to models, compensating controls were
identified and operated effectively. Overall, we are comfortable with the Group’s conclusions in respect of ECL.
202 Lloyds Banking Group Annual Report and Accounts 2022
Independent auditors’ report continuedto the Members of Lloyds Banking Group plc Insurance actuarial assumptions (Group)
Key audit matter description
How the scope of our audit responded to the key audit matter
Refer to notes 2, 3, 10, 24, 31 and 32 in the financial statements
The valuation of the Group’s liabilities arising from insurance
contracts and participating investment contracts (“insurance
contract liabilities”) and value of in-force asset (“VIF”) involves
complex and subjective judgements about future events, both
internal and external to the business, which are inherently
uncertain.
The Group’s insurance contract liabilities and value of in-force
asset were £106.9 billion and £5.4 billion respectively. As such,
small changes in these assumptions can, individually and in
combination, result in a material impact to the valuation of these
balances and therefore, a material impact to the Group’s profit
for the period.
In particular, the following key judgements and estimations are
significant to the valuation of the Group’s insurance contract
liabilities and VIF:
• Base mortality rates and mortality improvements used for
annuities, reflecting the expectation of how long an annuity
policyholder will live, including how this may be affected by the
current economic environment on health and the provision of
healthcare;
• Maintenance expense assumptions and associated provisions,
reflecting the expected cost of maintaining policies until
maturity;
We tested controls over the Group’s processes over the insurance
actuarial assumptions including:
• Each key assumption;
• Data underlying each key assumption; and
• Modelling methodologies used.
We utilised our actuarial specialists to support our testing of the
following key assumptions as set out below.
• Base mortality rates and mortality improvements used for
annuities where we:
– tested the data used in the assumption setting process;
– challenged base mortality assumptions and tested
underlying experience investigations, including independent
replication of a sample of experience studies;
– challenged the approach to setting long term rates of
mortality improvement through benchmarking against
peers, taking into account specific features of the Group’s
annuity policyholders (including any adjustments for socio-
economic groups); and
– challenged expert judgements made, including choice of
model parameterisation and judgements made regarding
experience over the COVID-19 pandemic, including the
impact of the macroeconomic environment on policyholder
health.
• Persistency assumptions and provisions, reflecting the
• Maintenance expenses and persistency assumptions and
expected retention of policies over time for the Workplace
Pensions business;
provisions, where we:
– tested the data used in the assumption setting process,
• Credit default assumptions, used in the Valuation Interest Rate
re-performing key calculations; and
•
for annuities; and
Illiquidity Premium, used in the calculation of the risk-discount
rate for the VIF on annuities.
This key audit matter is discussed in the Audit Committee’s report
on page 97.
– challenged the expert judgements used in setting these
assumptions and provisions, including the treatment of
expenses associated with the Group’s cost allocation
process and future administration system migrations.
• Credit default adjustment and Illiquidity Premium, where we:
– assessed the appropriateness of the methodology used to
set these assumptions;
– tested the implementation of this methodology, through the
development of our own replication tool; and
– tested the data and assumptions used in the calculations of
the assumptions.
Key observations communicated to the Audit Committee
We identified control deficiencies over the extraction of policyholder data, which impacted the controls over data used in the
experience studies for the setting of the mortality and persistency assumptions set out above. These controls were remediated
during the year and our testing of the remediated controls concluded that they were appropriately designed and implemented by
the year-end.
We are satisfied that the actuarial assumptions are individually reasonable, and the aggregate impact of these judgements on the
overall valuation of the insurance contract liabilities and VIF is reasonable.
Lloyds Banking Group Annual Report and Accounts 2022
203
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Valuation of certain complex and illiquid financial instruments held at fair value (Group)
Key audit matter description
How the scope of our audit responded to the key audit matter
Refer to notes 2, 3, 16, 49 and 52 in the financial statements
Financial instruments are classified as level 1, 2 or 3 in accordance
with IFRS 13 ‘Fair value measurement’.
We tested the controls over the valuation of financial instruments,
including controls over assumptions used in the valuation of these
financial assets, and model review controls.
The fair value of complex and illiquid financial instruments,
involves significant judgement. The extent of judgement applied
by the Group in valuing the Group’s financial investments varies
with the nature of assets held, the markets in which they are
traded, and the valuation methodology applied.
We utilised our valuation specialists in our audit of the valuation
of the level 3 portfolio loans and we performed the following
procedures:
• Challenged the appropriateness of loan valuation
methodologies;
The Group holds several portfolios of level 3 illiquid investments
totalling £7.9 billion, the largest of which is held within the
Insurance, Pensions and Investments division, and includes loans
in commercial real estate, social housing, infrastructure, and
education sectors. The valuation of these loans uses complex
valuation models as they are without readily determinable
market values and were valued using significant unobservable
inputs, such as loan to bond premium and calibration spread
that involved considerable judgement by management.
We also consider these judgements to be at risk of management
bias.
• Calculated a range of comparable values for a sample of
modelled illiquid financial instruments using an independent
valuation model and considered reasonable alternative key
assumptions based on comparable securities and compared
results;
• Challenged the appropriateness of the internal credit ratings
methodology and tested the appropriateness for a sample of
credit files;
• Evaluated the consistency and appropriateness of inputs and
assumptions over time, challenging both significant movements
and non-movements where we expected change; and
• Assessed the adequacy of disclosures and sensitivity analysis.
Key observations communicated to the Audit Committee
We are satisfied that the valuation of these certain complex and illiquid financial instruments is reasonable and in accordance with
IFRS 13.
Regulatory and litigation matters (Group)
Key audit matter description
How the scope of our audit responded to the key audit matter
Refer to notes 2, 3 and 37 in the financial statements.
The Group operates in an environment where it is subject to
regulatory investigations, litigation and customer remediation
including allegations of fraud and misconduct. The Group is
currently exposed to a number of regulatory and litigation
matters. The Group’s provision for these matters is £0.8 billion
at 31 December 2022, the most significant of which is the HBOS
Reading matter.
Significant judgement is required by the Group in determining
whether, under IAS 37 Provisions, Contingent Liabilities and
Contingent Assets:
• based on the information available to the Group, the amount
recorded is representative of the Group’s best estimate to
settle the obligation; and
• any contingent liabilities and underlying significant estimation
uncertainties are adequately disclosed.
This key audit matter is discussed in the Audit Committee’s report
on page 97.
We performed the following audit procedures:
• Tested the Group’s controls over the completeness of provisions,
the review of the assessment of the provision against the
requirements of IAS 37, the review of the appropriateness of
judgements used to determined a ‘best estimate’ and the
completeness and accuracy of data used in the process;
• Evaluated the assessment of the provisions, associated
probabilities, and potential outcomes in accordance with IAS 37;
• Verified and challenged whether the methodology, data and
significant judgements and assumptions used in the valuation
of the provisions are appropriate in the context of the applicable
financial reporting framework;
In respect of HBOS Reading, we inspected information available
including outcomes for the awards made by the Foskett panel
and tested the methodology applied to determine the provision;
Inspected correspondence and, where appropriate, made
direct inquiry with the Group’s regulators and internal and
external legal counsel;
•
•
• Where no provision was made, we critically assessed and
challenged the conclusion in the context of the requirements of
IAS 37 Provisions, Contingent Liabilities and Contingent Assets;
and
• Evaluated whether the disclosures made in the financial
statements appropriately reflect the facts and key sources of
estimation uncertainty.
Key observations communicated to the Audit Committee
While there is significant judgement required in estimating the timing and value of future settlements, particularly in relation to the
HBOS Reading matter, we are satisfied that the approach to the estimation of these provisions is consistent with the requirements of
IAS 37.
204 Lloyds Banking Group Annual Report and Accounts 2022
Independent auditors’ report continuedto the Members of Lloyds Banking Group plc Defined benefit obligations (Group)
Key audit matter description
How the scope of our audit responded to the key audit matter
Refer to notes 2, 3 and 35 in the financial statements
The Group operates a number of defined benefit retirement
schemes, the obligations for which totalled £29.0 billion at
31 December 2022. Their valuation is determined with reference
to key actuarial assumptions including mortality assumptions,
discount rates and inflation rates. Due to the size of these
schemes, small changes in these assumptions can have a
material impact on the value of the defined benefit obligation
and therefore, the assessment of these assumptions are a key
judgement.
This key audit matter is discussed in the Audit Committee’s report
on page 97.
We performed the following audit procedures:
• Tested the Group’s controls over the valuation of the defined
benefit obligations, including controls over the assumptions
setting process; and
• Challenged the key actuarial assumptions used by comparing
against ranges and expectations determined by our internal
actuarial experts, which are calculated with reference to the
central assumptions adopted by the actuarial firms for whom
we have reviewed and accepted their methodologies.
Key observations communicated to the Audit Committee
We are satisfied that the Group’s judgements in relation to the actuarial assumptions are reasonable.
IT systems that impact financial reporting (Group and Parent company)
Key audit matter description
How the scope of our audit responded to the key audit matter
The Group’s IT environment is inherently complex due to the
number of systems it operates and its reliance on automated
and IT dependent manual controls. Together, these support a
broad range of banking and insurance products as well as the
processing of the Group’s significant volume of transactions,
which impact all account balances.
As such, IT systems within the Group form a critical component
of the Group’s financial reporting activities. Due to the significant
reliance on IT systems, effective General IT Controls (GITCs) are
critical to allow reliance to be placed on the completeness and
accuracy of financial data and the integrity of automated system
functionality, such as system calculations.
We identified the IT systems that impact financial reporting as a
key audit matter because of the:
• Pervasive reliance on complex technology that is integral
to the operation of key business processes and financial
reporting;
• Reliance on technology which continues to develop in line
•
with the business strategy, such as the increase in the use of
automation across the Group and increasing reliance on third
parties; and
Importance of the IT controls in maintaining an effective
control environment. A key interdependency exists between
the ability to rely on IT controls and the ability to rely on
financial data, system configured automated controls and
system reports.
IT controls, in the context of our audit scope, primarily relate to
privileged access at the infrastructure level, user access security
at the application level and change control.
IT systems which impact financial reporting are discussed in the
Audit Committee report on page 97.
Our IT audit scope tested the Group’s IT controls over information
systems deemed relevant to the audit based on the financial data,
system configured automated controls and/or key financial reports
that reside within it.
We used IT specialists to support our evaluation of the risks
associated with IT in the following areas:
• General IT Controls, including user access and change
management controls;
• Key financial reports and system configured automated
controls; and
• Cyber security risk assessment.
Where deficiencies in the IT control environment were identified,
our risk assessment procedures included an assessment of those
deficiencies to determine the impact on our audit plan. Where
relevant, the audit plan was adjusted to mitigate the unaddressed
IT risk.
Where we were able to identify and test appropriate mitigating
controls over affected financial statement line items, our testing
approach remained unchanged.
In a limited number of areas, we adopted a non-controls reliance
approach and we therefore performed additional substantive
procedures.
Key observations communicated to the Audit Committee
IT control deficiencies were identified in respect of privileged user access to IT infrastructure and in application user access
management. The existence of these deficiencies in the year resulted in an increased risk in relation to data, reports and automated
system functionality from the affected systems.
However, overall, in combination with business mitigating controls, we are satisfied that the Group’s overall IT control environment
appropriately supports the financial reporting process.
Lloyds Banking Group Annual Report and Accounts 2022
205
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
6. Our application of materiality
6.1 Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of
our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
£318 million (2021: £345 million)
£318 million (2021: £345 million)
Group financial statements
Parent company financial statements
Basis for determining
materiality
Rationale for the
benchmark applied
In determining our benchmark for materiality, we
have considered the metrics used by investors and
other users of the financial statements. We have
determined the following benchmarks to be the
most relevant to users of the financial statements:
• Pre-tax profit; and
• Net assets
The determined materiality represents 5% of pre-tax
profit and 0.6% of net assets.
Given the importance of these measures to investors
and users of the financial statements, we have used
forecasted pre-tax profit as the primary benchmark
for our determination of materiality, and net assets
as a supporting benchmark.
Component materiality allocated across both
components range between £115 million and
£172 million. In 2021, the range of component
materialities was between £126 million and
£189 million.
Parent company materiality represents 0.7% of net
assets, and is capped at Group materiality.
The Parent company holds the Group’s investments
and is not profit driven. The balance sheet is the
key measure of financial health that is important to
shareholders since the primary concern for the Parent
company is the receipt and payment of dividends.
However, given the size of the entity’s balance sheet,
we have capped materiality the Group’s materiality.
6.2 Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial statements as a whole.
Group financial statements
Parent company financial statements
Performance
materiality
70% of Group materiality at £191 million
(2021: 60% at £210 million)
70% of Parent company materiality at £191 million (2021:
60% at £210 million)
Basis and rationale
for determining
performance
materiality
In determining performance materiality, we considered the following factors:
a. The quality of the control environment and whether we were able to rely on controls;
b. Degree of centralisation and commonality of controls and processes;
c. The uncertain economic environment;
d. The nature, volume and size of uncorrected misstatements arising in the previous audit; and
e. The nature, volume and size of uncorrected misstatements that remain uncorrected in the current
period.
In the prior year, performance materiality was set at 60% reflecting amongst other factors that it was
Deloitte LLP’s first year auditing the Group and Parent financial statements.
6.3 Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £16 million (2021:
£17 million), as well as any differences below this threshold, which in our view, warranted reporting on qualitative grounds. We also
report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial
statements.
206 Lloyds Banking Group Annual Report and Accounts 2022
Independent auditors’ report continuedto the Members of Lloyds Banking Group plc 7. Other information
The other information comprises the information included in the Annual Report, other than the financial
statements and our auditors’ report thereon. The Directors are responsible for the other information
contained within the Annual Report. Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated in our report, we do not express any form
of assurance conclusion thereon.
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 course of the
audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to
determine whether this gives rise to a material misstatement in the financial statements themselves. 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
in this regard.
We summarise below our work in relation to areas of the other information including those areas upon which we are specifically
required to report:
Our responsibility
Our report
Matters we are specifically required to report
As set out in the section “Corporate governance
statement”, we have nothing material to report, add or
draw attention to in respect of these matters.
As set out in the section “Opinions on other matters
prescribed by the Companies Act 2006”, in our opinion,
the part of the directors’ remuneration report to be
audited has been prepared in accordance with the
Companies Act 2006.
As set out in the section “Opinions on other matters
prescribed by the Companies Act 2006”, in our opinion,
based on the work undertaken in the course of the audit,
the information in these reports is consistent with the
audited financial statements and has been prepared in
accordance with applicable legal requirements.
In our opinion:
•
•
•
the use, calculation and disclosure of APMs is
consistent with the Group’s published definitions and
policies;
the use of APMs in the Group’s reporting results is
consistent with the guidelines produced by ESMA and
FRC; and
there is an appropriate balance between the use
of statutory metrics and APMs, together with clear
definitions and reconciliation for APMs used in
financial reporting.
Principal risks
and viability
statement
Review the confirmation and description in the light
of the knowledge gathered during the audit, such as
through considering the directors’ processes to support
the statements made, challenging the Group’s key
judgements and estimates, consideration of historical
forecasting accuracy and evaluating macro-economic
assumptions.
Consider if the statements are aligned with the relevant
provisions of the Code.
Directors’
Remuneration
report
Report whether the part of the directors’ remuneration
report to be audited is properly prepared and the
disclosures specified by the Companies Act have been
made.
Strategic report
and directors’
report
Report whether they are consistent with the audited
financial statements and are prepared in accordance
with applicable legal requirements.
Report if we have identified any material misstatements
in either report in the light of the knowledge and
understanding of the Group and of the Parent company
and their environment obtained in the course of the
audit.
Other reporting on other information
Alternative
Performance
Measures (APMs)
APMs are measures that are not defined by generally
accepted accounting practice (GAAP) and therefore
are not typically included in the financial statement
part of the Annual Report. The Group use APMs, such
as adjusted profit, and banking net interest margin
in its quarterly and annual reporting of financial
performance.
We have reviewed and assessed the Group’s
calculation and reporting of these metrics to assess
consistency with the Group’s published definitions and
policies for these items.
We have also considered and assessed whether the
use of APMs in the Group’s reporting results is consistent
with the guidelines produced by regulators such as
the European Securities and Markets Authority (“ESMA”)
guidelines on the use of APMs and the FRC Alternative
Performance Measures Thematic Review.
We also considered whether there was an appropriate
balance between the use of statutory metrics and
APMs, in addition to whether clear definitions and
reconciliation for APMs used in financial reporting have
been provided.
Dividends and
distribution
policy
Consider whether the dividends policy is transparent
and the dividends paid are consistent with the policy,
as outlined in the strategic report on page 13.
In our opinion the dividends policy is appropriately
disclosed and dividends paid are consistent with the
policy.
Lloyds Banking Group Annual Report and Accounts 2022
207
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 8. Responsibilities of Directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors 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.
9. Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.
10. Extent to which the audit was considered capable of 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 above, 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.
Identifying and assessing potential risks related to irregularities
In identifying and assessing the risks of material misstatement in respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
•
the nature of the industry and sector, control environment and business performance including the design of the Group’s
remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets;
the Group’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was discussed by the
Audit Committee on 20 February 2023;
•
• enquiring of management, in-house legal counsel, internal audit and the Audit Committee, including obtaining and reviewing
supporting documentation, concerning the Group’s policies and procedures relating to:
–
identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-
compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; and
– the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations;
• discussing among the engagement team including significant component audit teams and involving relevant internal specialists,
including tax, valuations, pensions, IT and industry specialists regarding how and where fraud might occur in the financial
statements and any potential indicators of fraud; and
• obtaining an understanding of the legal and regulatory frameworks that the Group operates in, focusing on those laws and
regulations that had a direct effect on the financial statements, such as provisions of the UK Companies Act, pensions legislation
and tax legislation or that had a fundamental effect on the operations of the Group, including regulation and supervisory
requirements of the Prudential Regulation Authority, Financial Reporting Council and Financial Conduct Authority.
Audit response to risks identified
As a result of performing the above, we identified the Group’s determination of “Expected credit losses” and “valuation of certain
complex and illiquid financial instruments held at fair value” as key audit matters related to the potential risk of fraud. The key audit
matters section of our report explains the matter in more detail and also describes the specific procedures in response to those key
audit matters. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of
management override.
In addition to the above, our procedures to respond to risks identified included the following:
•
reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect on the financial statements;
inquiring of management, the Audit Committee and in-house and external legal counsel concerning actual and potential litigation
and claims;
•
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material
•
•
misstatement due to fraud;
reading minutes of meetings of those charged with governance, reviewing internal audit reports and correspondence with
regulators; and
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including
specialists, and component audit teams, and remained alert to any indications of fraud or non-compliance with laws and regulations
throughout the audit.
208 Lloyds Banking Group Annual Report and Accounts 2022
Independent auditors’ report continuedto the Members of Lloyds Banking Group plc Report on other legal and regulatory requirements
11. Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• The information given in the strategic report and the directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
• The strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and of the Parent company and their environment obtained in the course
of the audit, we have not identified any material misstatements in the strategic report or the directors’ report.
12. Corporate Governance Statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of
the corporate governance statement relating to the Group’s compliance with the provisions of the UK corporate governance code
specified for our review.
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 with regards to the appropriateness of adopting the going concern basis of accounting and any material
uncertainties identified set out on page 218;
the directors’ explanation as to its assessment of the Group’s prospects, the period this assessment covers and why the period is
appropriate is set out on page 44;
the directors’ statement on fair, balanced and understandable is set out on page 137;
the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 91;
the section of the Annual Report that describes the review of effectiveness of risk management and internal control systems set out
on page 97; and
the section describing the work of the Audit Committee set out on page 95 to 98.
•
•
•
•
•
13. Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• We have not received all the information and explanations we require for our audit; or
• Adequate accounting records have not been kept by the Parent company, or returns adequate for our
audit have not been received from branches not visited by us; or
• The Parent company financial statements are not in agreement with the accounting records and
returns.
We have nothing to
report in respect of these
matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of
directors’ remuneration have not been made or the part of the directors’ remuneration report to be
audited is not in agreement with the accounting records and returns.
We have nothing to
report in respect of these
matters.
14. Other matters which we are required to address
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by shareholders at its annual general meeting on 12 May
2022 to audit the financial statements of Lloyds Banking Group plc for the year ended 31 December 2022 and subsequent financial
periods. The period of total uninterrupted engagement of the firm is accordingly two years.
Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs
(UK).
15. Use of our report
This report is made solely to the Parent company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the Parent company’s members those matters we are required
to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Parent company and the Parent company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these financial
statements form part of the European Single Electronic Format (‘ESEF’) prepared Annual Financial Report filed on the National Storage
Mechanism of the UK FCA in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no
assurance over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS.
Michael Lloyd (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
21 February 2023
Lloyds Banking Group Annual Report and Accounts 2022
209
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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 and changes in insurance and investment contract liabilities
Total income, net of insurance claims and changes in insurance and investment contract
liabilities
Operating expenses
Impairment (charge) credit
Profit before tax
Tax (expense) credit
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.
Note
2022
£ million
2021
£ million
2020
£ million
17,645
(3,688)
13,957
2,835
(1,332)
1,503
(19,987)
9,059
1,276
(8,149)
5,808
12,401
18,209
(9,759)
(1,522)
6,928
(1,373)
5,555
5,021
438
5,459
96
5,555
7.3p
7.2p
13,258
(3,892)
9,366
2,608
(1,185)
1,423
17,200
8,283
1,172
28,078
37,444
14,306
(3,557)
10,749
2,308
(1,148)
1,160
7,220
8,615
1,423
18,418
29,167
(21,120)
(14,041)
16,324
(10,800)
1,378
6,902
(1,017)
5,885
5,355
429
5,784
101
5,885
7.5p
7.5p
15,126
(9,745)
(4,155)
1,226
161
1,387
865
453
1,318
69
1,387
1.2p
1.2p
5
6
7
8
9
10
11
13
14
15
15
210 Lloyds Banking Group Annual Report and Accounts 2022
Consolidated statement of comprehensive income
for the year ended 31 December
Profit for the year
Other comprehensive income
Items that will not subsequently be reclassified to profit or loss:
Post-retirement defined benefit scheme remeasurements:
Remeasurements before tax
Tax
Movements in revaluation reserve in respect of equity shares held at fair value through other
comprehensive income:
Change in fair value
Tax
Gains and losses attributable to own credit risk:
Gains (losses) before tax
Tax
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)
Total other comprehensive (loss) income for the year, net of tax
Total comprehensive (loss) income for the year
Total comprehensive (loss) income attributable to ordinary shareholders
Total comprehensive income attributable to other equity holders
Total comprehensive (loss) income attributable to equity holders
Total comprehensive income attributable to non-controlling interests
Total comprehensive (loss) income for the year
The accompanying notes are an integral part of the consolidated financial statements.
2022
£ million
5,555
2021
£ million
5,885
2020
£ million
1,387
(3,012)
860
(2,152)
1,720
(658)
1,062
44
3
47
519
(155)
364
(133)
(92)
6
62
(157)
61
(4)
57
(86)
34
(52)
133
2
(2)
(25)
108
(6,990)
(2,279)
43
1,928
(621)
814
(5,019)
(2,086)
138
(25)
113
(50)
(16)
(66)
(75)
20
(55)
46
(149)
5
74
(24)
730
(496)
(109)
125
4
13
17
110
119
(31)
88
(6,829)
(1,274)
(1,808)
438
(1,370)
96
(1,274)
(39)
–
(39)
(950)
4,935
1,497
4,405
429
4,834
101
4,935
975
453
1,428
69
1,497
Lloyds Banking Group Annual Report and Accounts 2022
211
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
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
Reverse repurchase agreements
Debt securities
Financial assets at amortised cost
Financial assets at fair value through other comprehensive income
Reinsurance assets1
Investments in joint ventures and associates
Goodwill
Value of in-force business
Other intangible assets
Current tax recoverable
Deferred tax assets
Retirement benefit assets
Other assets1
Total assets
1
See note 1 regarding changes to presentation.
The accompanying notes are an integral part of the consolidated financial statements.
Note
2022
£ million
2021
£ million
91,388
242
76,420
147
180,609
206,771
24,753
10,632
22,051
7,001
454,899
448,567
44,865
9,926
520,322
23,154
616
385
2,655
5,419
4,786
612
5,228
3,823
13,837
54,753
6,835
517,156
28,137
759
352
2,320
5,514
4,196
363
3,118
4,531
14,690
877,829
886,525
16
17
18
21
22
23
24
25
36
35
26
212
Lloyds Banking Group Annual Report and Accounts 2022
Liabilities
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Items in the 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
Ordinary shareholders’ equity
Other equity instruments
Total equity excluding non-controlling interests
Non-controlling interests
Total equity
Total equity and liabilities
The accompanying notes are an integral part of the consolidated financial statements.
The directors approved the consolidated financial statements on 21 February 2023.
Note
2022
£ million
2021
£ million
28
17
29
31
33
34
35
36
37
38
39
40
41
42
43
7,266
475,331
48,596
372
17,755
24,042
1,280
73,819
106,893
42,975
19,090
126
8
216
1,809
10,730
7,647
476,344
31,125
316
23,123
18,060
1,321
71,552
123,423
45,040
19,947
230
6
39
2,092
13,108
830,308
833,373
6,729
18,504
6,602
10,145
41,980
5,297
47,277
244
47,521
7,102
18,479
11,189
10,241
47,011
5,906
52,917
235
53,152
877,829
886,525
Robin Budenberg
Chair
Charlie Nunn
Group Chief Executive
William Chalmers
Chief Financial Officer
Lloyds Banking Group Annual Report and Accounts 2022
213
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Consolidated statement of changes in equity
for the year ended 31 December
At 1 January 2022
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
Movements in foreign currency translation
reserve, net of tax
Total other comprehensive loss
Total comprehensive (loss) income1
Transactions with owners
Dividends (note 44)
Distributions on other equity instruments
Issue of ordinary shares
Share buyback (note 41)
Issue of other equity instruments (note 43)
Repurchases and redemptions of other equity
instruments (note 43)
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Changes in non-controlling interests
Attributable to ordinary shareholders
Share
capital and
premium
£ million
Other
reserves
£ million
Retained
profits
£ million
Total
£ million
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
Total
£ million
25,581
11,189
10,241
47,011
5,906
235
53,152
–
–
–
–
–
–
–
–
–
–
–
105
(453)
–
–
–
–
–
–
–
–
(157)
47
–
(5,019)
88
(5,041)
(5,041)
5,021
5,021
438
96
5,555
(2,152)
(2,152)
–
–
(157)
47
364
364
–
–
(1,788)
3,233
(5,019)
88
(6,829)
(1,808)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
438
96
(2,152)
(157)
47
364
(5,019)
88
(6,829)
(1,274)
–
–
–
(1,475)
(1,475)
–
–
–
105
453
(2,013)
(2,013)
–
–
–
–
–
–
(5)
(36)
(20)
41
183
(3)
(5)
(36)
(20)
41
183
(3)
–
(438)
–
–
750
(1,359)
–
–
–
–
(92)
(1,567)
–
–
–
–
–
–
–
–
5
(438)
105
(2,013)
745
(1,395)
(20)
41
183
2
Total transactions with owners
(348)
453
(3,328)
(3,223)
(1,047)
(87)
(4,357)
Realised gains and losses on equity shares
held at fair value through other comprehensive
income
–
1
(1)
–
At 31 December 2022
25,233
6,602
10,145
41,980
–
5,297
–
244
–
47,521
1
Total comprehensive income attributable to owners of the parent was a deficit of £1,370 million (2021: surplus of £4,834 million; 2020: surplus of £1,428 million).
Further details of movements in the Group’s share capital, reserves and other equity instruments are provided in notes 39, 40, 41, 42 and
43.
The accompanying notes are an integral part of the consolidated financial statements.
214 Lloyds Banking Group Annual Report and Accounts 2022
Attributable to ordinary shareholders
Share
capital and
premium
£ million
Other
reserves
£ million
Retained
profits
£ million
Total
£ million
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
Total
£ million
24,947
13,747
4,584
43,278
5,906
229
49,413
5,355
5,355
429
101
5,885
At 1 January 2021
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
Movements in foreign currency translation
reserve, net of tax
Total other comprehensive (loss) income
Total comprehensive (loss) income
Transactions with owners
Dividends (note 44)
Distributions on other equity instruments
Issue of ordinary shares
Redemption of preference shares
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Changes in non-controlling interests
–
–
–
–
–
–
–
–
–
–
–
37
597
–
–
–
–
–
–
108
57
–
(2,086)
(39)
(1,960)
(1,960)
–
–
–
(597)
–
–
–
–
1,062
1,062
–
–
108
57
(52)
(52)
–
–
1,010
6,365
(2,086)
(39)
(950)
4,405
(877)
(877)
–
–
–
(13)
51
131
(1)
–
37
–
(13)
51
131
(1)
Total transactions with owners
634
(597)
(709)
(672)
(429)
Realised gains and losses on equity shares
held at fair value through other comprehensive
income
At 31 December 2021
–
(1)
1
25,581
11,189
10,241
–
47,011
–
5,906
The accompanying notes are an integral part of the consolidated financial statements.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,062
108
57
(52)
(2,086)
(39)
(950)
429
101
4,935
–
(429)
–
–
–
–
–
–
(93)
–
–
–
–
–
–
(2)
(95)
–
235
(970)
(429)
37
–
(13)
51
131
(3)
(1,196)
–
53,152
Lloyds Banking Group Annual Report and Accounts 2022
215
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Attributable to ordinary shareholders
Share
capital and
premium
£ million
Other
reserves
£ million
Retained
profits
£ million
Total
£ million
Other
equity
instruments
£ million
Non-
controlling
interests
£ million
Total
£ million
24,756
13,695
3,246
41,697
5,906
203
47,806
865
865
453
69
1,387
Consolidated statement of changes in equity continued
for the year ended 31 December
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
Movements in foreign currency translation
reserve, net of tax
Total other comprehensive income
Total comprehensive income
Transactions with owners
Dividends (note 44)
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
The accompanying notes are an integral part of the consolidated financial statements.
216 Lloyds Banking Group Annual Report and Accounts 2022
Consolidated cash flow statement
for the year ended 31 December
Cash flows from operating activities
Profit before tax
Adjustments for:
Change in operating assets
Change in operating liabilities
Non-cash and other items
Tax paid (net)
Net cash provided by operating activities
Cash flows from investing activities
Purchase of financial assets
Proceeds from sale and maturity of financial assets
Purchase of fixed assets
Proceeds from sale of fixed assets
Repayment of capital by joint ventures and associates
Acquisition of businesses, net of cash acquired
Net cash provided by (used in) investing activities
Cash flows from financing activities
Dividends paid to ordinary shareholders
Distributions on other equity instruments
Dividends paid to non-controlling interests
Interest paid on subordinated liabilities
Proceeds from issue of subordinated liabilities
Proceeds from issue of other equity instruments
Proceeds from issue of ordinary shares
Share buyback
Repayment of subordinated liabilities
Repurchases and redemptions of other equity instruments
Change in stake of non-controlling interests
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
1
Restated, see page 218.
The accompanying notes are an integral part of the consolidated financial statements.
Note
2022
£ million
20211
£ million
20201
£ million
6,928
6,902
1,226
53(A)
53(B)
53(C)
53(D)
17,037
15,593
(16,804)
(743)
22,011
(7,984)
11,172
(3,855)
1,550
36
(409)
510
44
(1,475)
(438)
(92)
(603)
838
745
31
(2,013)
(2,216)
(1,395)
5
(10,365)
(17,668)
4,954
6,063
(796)
6,758
35,737
9,594
(736)
28,153
(8,984)
(8,589)
8,287
(3,228)
1,437
–
(57)
6,347
(2,901)
1,146
–
(3)
(2,545)
(4,000)
(877)
(429)
(93)
–
(453)
(41)
(1,303)
(1,095)
499
–
25
–
–
–
144
–
(1,056)
(3,874)
–
–
–
–
(5,319)
(196)
18,638
59,507
78,145
(6,613)
(3,234)
727
16,635
79,194
95,829
70
1,049
78,145
79,194
53(E)
Lloyds Banking Group Annual Report and Accounts 2022
217
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Notes to the consolidated financial statements
for the year ended 31 December
Note 1: Basis of preparation
The consolidated financial statements of Lloyds Banking Group plc and its subsidiary undertakings (the Group) have been prepared
in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The financial
statements have also been prepared in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board (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. 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 impact of climate change upon the Group’s performance and projected funding and capital position. The directors
have also taken into account the results from stress testing scenarios.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2022 and which
have not been applied in preparing these financial statements are given in note 55.
In April 2022, the IFRS Interpretations Committee was asked to consider whether an entity includes a demand deposit as a component
of cash and cash equivalents in the statement of cash flows when the demand deposit is subject to contractual restrictions on use
agreed with a third party. It concluded that such amounts should be included within cash and cash equivalents. Accordingly, the
Group includes mandatory reserve deposits with central banks that are held in demand accounts within cash and cash equivalents
disclosed in the cash flow statement. This change has increased the Group’s cash and cash equivalents at 1 January 2020 by
£1,696 million (to £59,507 million) and decreased the adjustment for the change in operating assets in 2020 by £982 million (to a
reduction of £17,668 million) resulting in an increase in the Group’s cash and cash equivalents at 31 December 2020 of £2,678 million
(to £78,145 million); and decreased the adjustment for the change in operating assets in 2021 by £137 million (to a reduction
of £10,365 million) and, as a result, the Group’s cash and cash equivalents at 31 December 2021 increased by £2,815 million (to
£79,194 million). The change had no impact on profit after tax, total equity or the Group’s earnings per share.
In 2021, the Group adopted the Interest Rate Benchmark Reform Phase 2 amendments issued by the IASB. These amendments require
that changes to expected future cash flows that both arise as a direct result of IBOR Reform and are economically equivalent to the
previous cash flows are accounted for as a change to the effective interest rate with no adjustment to the asset’s or liability’s carrying
value; no immediate gain or loss is recognised. The requirements also provide relief from the requirements to discontinue hedge
accounting as a result of amending hedge documentation if the changes are required solely as a result of IBOR Reform.
The following change has been made to the presentation of the Group’s assets on the face of the balance sheet:
• Reinsurance assets are shown separately from other assets
There has been no change in the basis of accounting for any of the underlying transactions. Comparatives have been presented on a
consistent basis.
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 352 to 360.
Subsidiaries
(1)
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 have been 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 of 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 that 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 those 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.
218 Lloyds Banking Group Annual Report and Accounts 2022
Note 2: Accounting policies continued
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.
Joint ventures and associates
(2)
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 on initial recognition at fair value through profit or loss.
Otherwise, the Group’s investments in joint ventures and associates are accounted for using 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. For impairment testing, goodwill is allocated
to the cash generating unit (CGU) or groups of CGUs that are expected to benefit from the business combination. The Group’s CGUs
are largely product based for its Retail and Insurance businesses and client based for its Commercial Banking business. An impairment
loss is recognised if the carrying amount of a CGU is determined to be greater than its recoverable amount. The recoverable amount
of a CGU is the higher of its fair value less costs to sell and its value in use. If an impairment is identified the carrying value of the
goodwill is written down immediately through the income statement and this 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 assessed annually to determine whether the asset is impaired
and to reconfirm that an indefinite useful life remains appropriate. In the event that an indefinite life is inappropriate, a finite life is
determined and a further 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, other fees, 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.
Fee and commission income and expense
(2)
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 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 the lending expected to be drawn.
Incremental costs incurred to generate fee and commission income are charged to fee and commission 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; those relating to life insurance and general
insurance business are detailed below (see (M) below); and those relating to leases are set out in (J)(1) below.
Lloyds Banking Group Annual Report and Accounts 2022
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Financial assets and liabilities
Note 2: Accounting policies continued
(E)
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 those financial assets and whether
the resultant 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 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.
Financial instruments measured at amortised cost
(1)
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, reverse repurchase agreements and certain debt securities used by the Group to manage its liquidity. Loans and advances and
reverse repurchase agreements 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.
Where changes are made to the contractual cash flows of a financial asset or financial liability that are economically equivalent and
arise as a direct consequence of interest rate benchmark reform, the Group updates the effective interest rate and does not recognise
an immediate gain or loss.
Financial assets measured at fair value through other comprehensive income
(2)
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, and this is reflected in other comprehensive income.
Financial instruments measured at fair value through profit or loss
(3)
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, other than those in effective cash flow and
net investment hedging relationships. Derivatives are carried on the balance sheet as assets when their fair value is positive and as
liabilities when their fair value is negative. Refer to note 49(3) (Financial instruments: Financial assets and liabilities carried at fair value)
for details of valuation techniques and significant inputs to valuation models.
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.
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.
220 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 2: Accounting policies continued
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 in the case of financial liabilities designated at fair value through profit or loss where 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, which include
the expected effects of potential changes to laws and regulations, risks associated with climate change and other factors. 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, repurchase agreements, 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 instrument 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 for repos carried at fair value are included within 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 measured at amortised cost or at fair value. Those measured at fair value are recognised within 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) Hedge accounting
As permitted by IFRS 9, the Group continues to apply the requirements of IAS 39 to its hedging relationships.
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.
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.
Where the contractual terms of a financial asset, financial liability or derivative are amended, on an economically equivalent basis,
as a direct consequence of interest rate benchmark reform, the uncertainty arising from the reform is no longer present. In these
circumstances, the Group amends the hedge documentation to reflect the changes required by the reform; these changes to the
documentation do not in and of themselves result in the discontinuation of hedge accounting or require the designation of a new
hedge relationship.
Fair value hedges
(1)
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.
Lloyds Banking Group Annual Report and Accounts 2022
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Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 2: Accounting policies continued
(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 instruments 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.
Impairment of financial assets
(H)
The impairment charge in the income statement reflects the change in expected credit losses, 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 (other than equity investments) 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 held 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 ensures 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 and of 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 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 which the Group now uses for all its products following changes to the definition of default for UK Mortgages on 1 January
2022. In addition, other indicators of mortgage default are added including end-of-term payments on past due interest-only accounts
and loans considered non-performing due to recent arrears or forbearance. 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.
222 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 2: Accounting policies continued
A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising
any available security have been received or there is no realistic prospect of recovery and the amount of the loss has been
determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the
income statement. For both secured and unsecured retail balances, the write-off takes place only once an extensive set of collections
processes has been completed, or the status of the account reaches a point where policy dictates that 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.
Property, plant and equipment
(I)
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, if appropriate, revised 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 assessing the recoverable amount of assets the Group considers the effects of potential or actual changes in
legislation, customer behaviour, climate-related risks and other factors on the asset’s CGU. In the event that an asset’s CGU carrying
amount is determined to be greater than its recoverable amount the asset is written down immediately.
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.
Leases
(J)
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 of 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 lease. Unguaranteed residual values are reviewed regularly to identify any
impairment.
Operating lease assets are included within other assets at cost and depreciated over their estimated useful lives. The depreciation
charge is based on the asset’s residual value and the life of the lease. 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, and the liability recognised within other liabilities.
Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period
so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is
depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in
profit or loss. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise IT equipment and
small items of office furniture.
(K) Employee benefits
Short-term employee benefits, such as salaries, paid absences, performance-based cash awards and social security costs, are
recognised over the period in which the employees provide the related services.
Pension schemes
(1)
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 pensionable service and pensionable salary. A
defined contribution plan is a pension plan into which the Group pays fixed contributions; there is no legal or constructive obligation to
pay further contributions.
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Note 2: Accounting policies continued
(i)
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.
(ii) Defined contribution schemes
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.
Taxation
(L)
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 His 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.
224 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Insurance
Note 2: Accounting policies continued
(M)
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
For certain investment contracts, the contract can be partly invested in units which contain a discretionary participation feature (DPF)
and partly in units without. Where switching levels for similar contracts are deemed to be significant, new investment contracts which
contain an option to switch into investment contracts with DPF have been classified as participating investment contracts. Where the
switching levels are not deemed to be significant, a new contract is split, with units containing a DPF being allocated as a participating
investment contract and the units without a DPF as a non-participating investment contract.
The general insurance business issues only insurance contracts.
Life insurance business
Accounting for insurance and participating investment contracts
(1)
(i)
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 and changes in insurance and
investment contract liabilities.
•
•
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 31 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 31 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
and changes in insurance and investment contract liabilities. 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.
Accounting for non-participating investment contracts
(ii)
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 and changes in insurance and investment contract liabilities.
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.
Lloyds Banking Group Annual Report and Accounts 2022
225
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 2: Accounting policies continued
Costs which are directly attributable and incremental to securing new non-participating investment contracts are deferred. This asset
is subsequently amortised over the period of the provision of investment management services and its recoverability is reviewed
in circumstances where its carrying amount may not be recoverable. If the asset is greater than its recoverable amount it is written
down immediately through fee and commission expense in the income statement. All other costs are recognised as expenses when
incurred.
(iii) Value of in-force business
The Group recognises as an asset the value of in-force business in respect of insurance contracts and participating investment
contracts. The asset represents the present value of the shareholders’ interest in the profits expected to emerge from those contracts
written at the balance sheet date. This is determined after making appropriate assumptions about future economic and operating
conditions such as future mortality and persistency rates and includes allowances for both non-market risk and for the realistic value
of financial options and guarantees. Each cash flow is valued using the discount rate consistent with that applied to such a cash flow
in the capital markets. The asset in the consolidated balance sheet is presented gross of attributable tax and movements in the asset
are reflected within other operating income in the income statement.
The Group’s contractual rights to benefits from providing investment management services in relation to non-participating investment
contracts acquired in business combinations and portfolio transfers are measured at fair value at the date of acquisition. The resulting
asset is amortised over the estimated lives of the contracts. At each reporting date an assessment is made to determine if there is
any indication of impairment. Where impairment exists, the carrying value of the asset is reduced to its recoverable amount and the
impairment loss recognised in the income statement.
(2) General insurance business
The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included
in insurance premium income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received
relating to future periods are deferred in the balance sheet within liabilities arising from insurance contracts and participating
investment contracts on a basis that reflects the length of time for which contracts have been in-force and the projected incidence of
risk over the term of the contract and only credited to the income statement when earned. Broking commission is recognised when the
underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is made for the effect of future
policy terminations based upon past experience.
The underwriting business makes provision for the estimated cost of claims notified but not settled and claims incurred but not
reported at the balance sheet date. The provision for the cost of claims notified but not settled is based upon a best estimate of the
cost of settling the outstanding claims after taking into account all known facts. In those cases where there is insufficient information
to determine the required provision, statistical techniques are used which take into account the cost of claims that have recently been
settled and make assumptions about the future development of the outstanding cases. Similar statistical techniques are used to
determine the provision for claims incurred but not reported at the balance sheet date. Claims liabilities are not discounted.
Liability adequacy test
(3)
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
The presentation of contracts entered into by the Group with reinsurers under which the Group is compensated for amounts payable
on one or more other contracts issued by the Group is dependent on whether the contract with the reinsurer transfers significant
insurance risk to the reinsurer. Where the reinsurance contract transfers significant insurance risk, it is classified as an insurance
contract and the asset is recognised separately on the balance sheet. Where the reinsurance contract does not transfer significant
insurance risk to the reinsurer, the assets arising from contracts held with reinsurers are presented within financial assets at fair value
through profit or loss.
Contracts with reinsurers that transfer significant insurance risk
(i)
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 and changes in insurance and investment
contract liabilities.
(ii) Contracts with reinsurers that do not transfer significant insurance risk
Contracts that do not transfer significant insurance risk to the reinsurer are recognised within financial assets at fair value through
profit or loss as they are within a portfolio of financial assets that is managed, and whose performance is evaluated, on a fair value
basis. These contracts, while legally reinsurance contracts, do not meet the definition of a reinsurance contract under IFRS. Investment
returns (including movements in fair value and investment income) allocated to these contracts are recognised in insurance claims
and changes in insurance and investment contract liabilities.
(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.
226 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 2: Accounting policies continued
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 is reclassified from equity and included in
determining the profit or loss arising on disposal or liquidation.
(O) Provisions and contingent liabilities
Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will
be required to settle the obligations and they can be reliably estimated.
Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those present
obligations where the outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in
the financial statements but are disclosed unless they are remote.
Provision is made for expected credit losses in respect of irrevocable undrawn loan commitments and financial guarantee contracts
(see (H) above).
(P) Share capital
Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a
deduction, net of tax, from the proceeds. Dividends paid on the Group’s ordinary shares are recognised as a reduction in equity in the
period in which they are paid.
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 deposits held with central
banks, mandatory deposits held with central banks in demand accounts and amounts due from banks with an original maturity of less
than three months that are available to finance the Group’s day-to-day operations.
Note 3: Critical accounting judgements and key sources of estimation uncertainty
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. In preparing the
financial statements, the Group has considered the impact of climate-related risks on its financial position and performance. While
the effects of climate change represent a source of uncertainty, the Group does not consider there to be a material impact on its
judgements and estimates from the physical, transition and other climate-related risks in the short term.
The significant judgements, apart from those involving estimation, made by management in applying the Group’s accounting policies
in these financial statements (critical judgements) and the key sources of estimation uncertainty that may have a significant risk of
causing a material adjustment to the carrying amount of assets and liabilities within the next financial year (key sources of estimation
uncertainty), which together are considered critical to the Group’s results and financial position, are as follows:
Allowance for expected credit losses
Critical judgements:
Determining an appropriate definition of default against which a probability of default, exposure at
default and loss given default parameter can be evaluated
Key source of estimation uncertainty:
Establishing the criteria for a significant increase in credit risk (SICR)
The use of management judgement alongside impairment modelling processes to adjust inputs,
parameters and outputs to reflect risks not captured by models
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
The Group recognises an allowance for expected credit losses (ECLs) for loans and advances to customers and banks, other financial
assets held at amortised cost, financial assets (other than equity investments) measured at fair value through other comprehensive
income and certain loan commitment and financial guarantee contracts. At 31 December 2022, the Group’s expected credit loss
allowance was £4,903 million (2021: £4,042 million), of which £4,580 million (2021: £3,842 million) was in respect of drawn balances.
The calculation of the Group’s expected credit loss allowances and provisions against loan commitments and guarantees under
IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. Further information on the critical accounting
judgements and key sources of estimation uncertainty (see above) and other significant judgements and estimates is set out in note
19.
Lloyds Banking Group Annual Report and Accounts 2022
227
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 3: Critical accounting judgements and key sources of estimation uncertainty
continued
Valuation of assets and liabilities arising from insurance business
Critical judgement:
Future economic and operating conditions
Key sources of estimation uncertainty:
Future investment returns
Future mortality rates
Future expenses
These judgements and estimates are subject to significant uncertainty.
At 31 December 2022, the Group recognised a value of in-force business asset of £5,244 million (2021: £5,317 million) and an acquired
value of in-force business asset of £175 million (2021: £197 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 judgements to be made about future
economic and operating conditions which are inherently uncertain and changes could significantly affect the value attributed to this
asset. These judgements are used to determine appropriate assumptions for the asset’s valuation including the appropriate risk-free
rate, retail price inflation and expense inflation. 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 2022 are set out in note 24.
At 31 December 2022, the Group carried total liabilities arising from insurance contracts and participating investment contracts of
£106,893 million (2021: £123,423 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 31.
The effect of changes to critical estimates used by management to determine the life insurance assets and liabilities is set out in
note 32, which presents the impact of changes to the estimates made on the Group’s profit before tax and shareholders’ equity as
management believes that this analysis best presents these sensitivities in a manner that helps the user of the financial statements to
understand the judgements made by management and the level of estimation uncertainty.
Defined benefit pension scheme obligations
Critical judgement:
Determination of an appropriate yield curve
Key sources of estimation uncertainty: Discount rate applied to future cash flows
Expected lifetime of the schemes’ members
Expected rate of future inflationary increases
The net asset recognised in the balance sheet at 31 December 2022 in respect of the Group’s defined benefit pension scheme
obligations was £3,732 million comprising an asset of £3,823 million and a liability of £91 million (2021: a net asset of £4,404 million
comprising an asset of £4,531 million and a liability of £127 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 sources of estimation uncertainty are the discount rate applied to future cash flows, the expected lifetime of the
schemes’ members and the expected rate of future inflationary increases.
Income statement and balance sheet sensitivities to changes in the critical accounting estimates and other actuarial assumptions
are provided in part (v) of note 35.
Uncertain tax positions
Critical judgement:
Interpreting tax rules on the Group’s open tax matters
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 2023. 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 £875 million (including interest) and a reduction in the Group’s deferred tax asset of
approximately £295 million. The Group, having taken appropriate advice, does not consider that this is a case where additional tax will
ultimately fall due.
The Group makes other estimates in relation to tax which do not require significant judgements, see further discussion in note 36.
228 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 3: Critical accounting judgements and key sources of estimation uncertainty
continued
Regulatory and legal provisions
Critical judgements:
Determining the scope of reviews required by regulators
The impact of legal decisions that may be relevant to claims received
Determining whether a reliable estimate is available for obligations arising from past events
Key sources of estimation uncertainty:
The number of future complaints
The proportion of complaints that will be upheld
The average cost of redress
At 31 December 2022, the Group carried provisions of £803 million (2021: £1,156 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.
Management has applied significant judgement in determining the provision required for HBOS Reading; further details are provided in
note 37.
Fair value of financial instruments
Key source of estimation uncertainty:
Interest rate spreads, earnings multiples and interest rate volatility
At 31 December 2022, the carrying value of the Group’s financial instrument assets held at fair value was £228,516 million (2021:
£256,959 million), and its financial instrument liabilities held at fair value was £84,772 million (2021: £86,223 million).
The Group’s valuation control framework and a description of level 1, 2 and 3 financial assets and liabilities is set out in note 49(2). 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 49. A quantitative analysis of the sensitivities to market risk arising from the Group’s
trading portfolios is set out in the tables marked audited on page 188.
Capitalised software enhancements
Critical judgement:
Assessing future trading conditions that could affect the Group’s business operations
Key source of estimation uncertainty:
Estimated useful life of internally generated capitalised software
At 31 December 2022, the carrying value of the Group’s capitalised software enhancements was £4,060 million (2021: £3,435 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 2022, the amortisation charge was £833 million
(2021: £892 million), and at 31 December 2022, the weighted-average remaining estimated useful life of the Group’s capitalised
software enhancements was 4.5 years (2021: 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 2022, the 2023 amortisation charge would be approximately
£200 million higher.
Consideration of climate change
Financial statement preparation includes the consideration of the impact of climate change on the Group’s financial statements.
There has been no material impact identified on the financial reporting judgement and estimates. In particular, the directors
considered the impact of climate change in respect of the:
• Going concern of the Group for a period of at least 12 months from the date of approval of the financial statements
• Assessment of impairment of non-financial assets including goodwill
• Carrying value and useful economic lives of property, plant and equipment
•
Fair value of financial assets and liabilities. These are generally based on market indicators which include the market’s assessment
of climate risk
Economic scenarios used for measurement of expected credit losses and the behavioural lifetime of assets against the expected
time horizons of when climate risks may materialise
Forecasting of the Group’s future UK taxable profits, which impacts deferred tax recognition
•
•
Whilst there is currently no material short-term impact of climate change expected, the Group acknowledges the long-term nature of
climate risk and continues to monitor and assess climate risks highlighted in the risk management section on page 156.
Lloyds Banking Group Annual Report and Accounts 2022
229
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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, as defined by IFRS 8 Operating
Segments, 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. They consider
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 (pre-tax), the basis reviewed by the chief operating
decision-maker. The underlying basis is derived from the recognition and measurement principles of IFRS with the effects of the
following excluded in arriving at underlying profit:
• Restructuring costs relating to merger, acquisition and integration activities
• 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, the unwind of acquisition-related fair value adjustments and the
amortisation of purchased intangible assets
Payment protection insurance remediation provisions, excluding litigation costs
•
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 the year ended 31 December 2022, there were changes as a result of the Group restructure effective from 1 July 2022 and other
methodology changes (comparatives have been restated accordingly):
• Business Banking and Commercial Cards moved from Retail to Commercial Banking. Wealth moved from Insurance and Wealth to
•
•
•
Retail
Insurance and Wealth was renamed Insurance, Pensions and Investments
The Group reviewed and updated its methodology for liquidity transfer pricing between segments
The Group revised the treatment of restructuring costs and all such costs other than those relating to merger, acquisition and
integration activities are now reported within operating costs in arriving at underlying profit
• Non lending-related fraud costs, previously included within underlying impairment, are now reported as part of operating costs
(this has not impacted the statutory impairment charge)
Following the restructure, the Group completed a review and determined that it had three operating and reportable segments: Retail;
Commercial Banking; and Insurance, Pensions and Investments:
• Retail offers a broad range of financial services products to personal customers, including current accounts, savings, mortgages,
credit cards, unsecured loans, motor finance and leasing solutions
• Commercial Banking serves small and medium businesses as well as corporate and institutional clients, providing lending,
transactional banking, working capital management, debt financing and risk management services
Insurance, Pensions and Investments offers insurance, investment and pension management products and services
•
Other comprises income and expenditure not attributed to the Group’s operating segments. These amounts include those arising
from the Group’s equities business, residual net interest income after transfer pricing (including the central recovery of the Group’s
distributions on other equity instruments) and certain gains from gilt sales.
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 branch network and other distribution channels 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.
230 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 4: Segmental analysis continued
Year ended 31 December 2022
Net interest income
Other income, net of insurance claims and changes in insurance and
investment contract liabilities
Total underlying income, net of insurance claims and changes in insurance
and investment contract liabilities
Operating lease depreciation1
Net income
Operating costs
Remediation
Total costs
Underlying impairment (charge) credit
Underlying profit before tax
External income
Inter-segment (expense) income
Retail
£m
Commercial
Banking
£m
Insurance,
Pensions and
Investments
£m
Other
£m
Underlying
basis total
£m
9,774
3,447
(101)
1,731
1,565
1,576
11,505
(368)
11,137
5,012
(5)
5,007
1,475
–
1,475
(5,175)
(2,496)
(1,042)
(92)
(133)
(30)
52
377
429
–
429
(122)
–
13,172
5,249
18,421
(373)
18,048
(8,835)
(255)
(5,267)
(2,629)
(1,072)
(122)
(9,090)
(1,373)
4,497
12,055
(550)
(517)
1,861
4,330
682
(12)
391
1,526
(51)
392
699
510
(81)
(1,510)
7,448
18,421
–
Segment underlying income, net of insurance claims and changes in
insurance and investment contract liabilities
11,505
5,012
1,475
429
18,421
Segment external assets
Segment customer deposits
Segment external liabilities
1 Net of profits on disposal of operating lease assets of £197 million.
372,485
147,477
175,212
182,655
877,829
310,765
163,828
–
738
475,331
314,091
202,070
169,182
144,965
830,308
Lloyds Banking Group Annual Report and Accounts 2022
231
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Note 4: Segmental analysis continued
Year ended 31 December 2022
Analysis of segment underlying other income, net of insurance claims and
changes in insurance and investment contract liabilities:
Fee and commission income:
Current accounts
Credit and debit card fees
Commercial banking and treasury fees
Unit trust and insurance broking
Factoring
Other fees and commissions
Total fee and commission income
Fee and commission expense
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
Trading income
Insurance and other, net of insurance claims and changes in insurance and
investment contract liabilities
Other external income, net of insurance claims and changes in insurance and
investment contract liabilities
Inter-segment other income
Retail
£m
Commercial
Banking
£m
Insurance,
Pensions and
Investments
£m
Other
£m
Underlying
basis total
£m
421
735
–
–
–
64
1,220
(665)
555
1,065
–
–
69
225
460
310
–
79
169
1,243
(315)
928
12
–
–
(793)
–
–
85
–
271
356
(334)
22
–
144
–
–
–
–
1
–
–
15
16
(18)
(2)
–
1
92
1,320
646
1,195
311
85
79
519
2,835
(1,332)
1,503
1,077
145
92
596
227
28
2,771
(1,190)
1,836
1,361
(185)
(753)
1,390
2,915
(1,361)
Segment other income, net of insurance claims and changes in insurance
and investment contract liabilities
1,731
1,565
1,576
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
1,216
–
72
2,146
4
207
–
28
101
–
142
(80)
7
151
–
232 Lloyds Banking Group Annual Report and Accounts 2022
223
156
377
831
–
18
1,457
381
3,746
–
5,249
2,396
(80)
125
3,855
385
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 4: Segmental analysis continued
Year ended 31 December 20211
Net interest income
Other income, net of insurance claims and changes in insurance and
investment contract liabilities
Total underlying income, net of insurance claims and changes in insurance
and investment contract liabilities
Operating lease depreciation2
Net income
Operating costs
Remediation
Total costs
Underlying impairment credit
Underlying profit before tax
External income
Inter-segment (expense) income
Retail
£m
Commercial
Banking
£m
Insurance,
Pensions and
Investments
£m
Other
£m
Underlying
basis total
£m
8,577
2,602
(103)
1,597
1,442
1,406
10,174
(442)
9,732
4,044
(18)
4,026
(4,987)
(2,288)
(360)
(5,347)
447
4,832
11,260
(1,086)
(830)
(3,118)
936
1,844
3,883
161
1,303
–
1,303
(899)
(123)
(1,022)
–
281
1,323
(20)
87
615
702
–
702
(138)
13
(125)
2
579
(243)
945
11,163
5,060
16,223
(460)
15,763
(8,312)
(1,300)
(9,612)
1,385
7,536
16,223
–
Segment underlying income, net of insurance claims and changes in
insurance and investment contract liabilities
10,174
4,044
1,303
702
16,223
Segment external assets
Segment customer deposits
Segment external liabilities
Restated, see page 230.
1
2 Net of profits on disposal of operating lease assets of £249 million.
364,179
308,412
312,594
144,390
195,039
182,917
886,525
167,530
204,641
–
402
476,344
188,372
127,766
833,373
Lloyds Banking Group Annual Report and Accounts 2022
233
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Note 4: Segmental analysis continued
Year ended 31 December 20211
Analysis of segment underlying other income, net of insurance claims and
changes in insurance and investment contract liabilities:
Fee and commission income:
Current accounts
Credit and debit card fees
Commercial banking and treasury fees
Unit trust and insurance broking
Factoring
Other fees and commissions
Total fee and commission income
Fee and commission expense
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
Trading income
Insurance and other, net of insurance claims and changes in insurance and
investment contract liabilities
Other external income, net of insurance claims and changes in insurance and
investment contract liabilities
Inter-segment other income
Retail
£m
Commercial
Banking
£m
Insurance,
Pensions and
Investments
£m
Other
£m
Underlying
basis total
£m
425
533
–
–
–
65
1,023
(571)
452
1,046
–
–
52
136
213
350
376
–
76
183
1,198
(271)
927
13
–
(5)
926
–
–
–
113
–
213
326
(313)
13
–
186
–
–
–
–
37
–
–
24
61
(30)
31
–
–
3
345
638
883
413
113
76
485
2,608
(1,185)
1,423
1,059
186
(2)
1,323
119
1,766
(950)
1,071
1,234
(89)
1,053
(538)
1,952
(559)
(602)
1,186
3,637
–
Segment other income, net of insurance claims and changes in insurance
and investment contract liabilities
1,597
1,442
1,406
615
5,060
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 230.
1,525
–
91
1,921
6
283
–
30
179
–
170
(70)
9
117
–
847
–
106
1,011
346
2,825
(70)
236
3,228
352
234 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 4: Segmental analysis continued
Year ended 31 December 20201
Net interest income
Other income, net of insurance claims and changes in insurance and
investment contract liabilities
Total underlying income, net of insurance claims and changes in insurance
and investment contract liabilities
Operating lease depreciation2
Net income
Operating costs
Remediation
Total costs
Underlying impairment charge
Underlying profit (loss) before tax
External income
Inter-segment (expense) income
Retail
£m
Commercial
Banking
£m
Insurance,
Pensions and
Investments
£m
Other
£m
Underlying
basis total
£m
8,380
2,528
(118)
(17)
10,773
1,606
1,428
1,241
240
4,515
9,986
(856)
9,130
(4,967)
(125)
(5,092)
(2,128)
1,910
11,499
(1,513)
3,956
(28)
3,928
(2,281)
(210)
(2,491)
(1,561)
(124)
3,600
356
1,123
–
1,123
(832)
(50)
(882)
(2)
239
1,238
(115)
223
–
223
(122)
6
(116)
(390)
(283)
15,288
(884)
14,404
(8,202)
(379)
(8,581)
(4,081)
1,742
(1,049)
15,288
1,272
–
Segment underlying income, net of insurance claims and changes in
insurance and investment contract liabilities
9,986
3,956
1,123
223
15,288
Segment external assets
Segment customer deposits
Segment external liabilities
Restated, see page 230.
1
2 Net of profits on disposal of operating lease assets of £127 million.
350,779
279,610
284,634
151,093
170,262
214,022
182,284
–
187,113
779
176,646
146,554
871,269
450,651
821,856
Lloyds Banking Group Annual Report and Accounts 2022
235
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Note 4: Segmental analysis continued
Year ended 31 December 20201
Analysis of segment underlying other income, net of insurance claims and
changes in insurance and investment contract liabilities:
Fee and commission income:
Current accounts
Credit and debit card fees
Commercial banking and treasury fees
Unit trust and insurance broking
Factoring
Other fees and commissions
Total fee and commission income
Fee and commission expense
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 and changes in insurance and
investment contract liabilities
Other external income, net of insurance claims and changes in insurance and
investment contract liabilities
Inter-segment other income
Retail
£m
Commercial
Banking
£m
Insurance,
Pensions and
Investments
£m
Other
£m
Underlying
basis total
£m
429
447
–
–
–
71
947
(585)
362
1,103
–
–
–
64
198
1,365
(121)
186
301
274
–
76
183
1,020
(234)
786
17
–
–
5
792
349
1,163
(521)
–
–
–
146
–
194
340
(303)
37
–
191
–
–
–
–
–
–
–
–
1
1
(26)
(25)
–
–
149
–
204
615
748
274
146
76
449
2,308
(1,148)
1,160
1,120
191
149
5
1,060
1,338
(1,055)
830
1,529
(325)
(702)
967
3,355
–
Segment other income, net of insurance claims and changes in insurance
and investment contract liabilities
1,606
1,428
1,241
240
4,515
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 230.
1,760
–
100
1,684
4
263
–
32
112
–
159
76
9
125
–
550
–
106
980
292
2,732
76
247
2,901
296
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.
236 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
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 2022
Net interest income
Other income, net of insurance claims and changes in insurance and
investment contract liabilities
Operating lease depreciation3
Total income, net of insurance claims and changes in insurance and
investment contract liabilities / Net income
Operating expenses
Impairment charge
Profit before tax
Year ended 31 December 2021
Net interest income
Other income, net of insurance claims and changes in insurance and
investment contract liabilities
Operating lease depreciation3
Total income, net of insurance claims and changes in insurance and
investment contract liabilities / Net income
Operating expenses
Impairment credit
Profit before tax
Year ended 31 December 2020
Net interest income
Other income, net of insurance claims and changes in insurance and
investment contract liabilities
Operating lease depreciation3
Total income, net of insurance claims and changes in insurance and
investment contract liabilities / Net income
Operating expenses
Impairment (charge) credit
Profit before tax
Removal of:
Lloyds Banking
Group statutory
£m
Volatility,
restructuring
and other
items1
£m
Insurance
gross up2
£m
PPI
remediation
£m
Underlying
basis
£m
13,957
226
(1,011)
4,252
18,209
(9,759)
(1,522)
6,928
120
(373)
(27)
535
12
520
877
–
(134)
134
–
–
Removal of:
–
–
–
–
–
–
–
13,172
5,249
(373)
18,048
(9,090)
(1,510)
7,448
Lloyds Banking
Group statutory
£m
Volatility,
restructuring
and other
items4
£m
Insurance
gross up2
£m
PPI
remediation
£m
Underlying
basis
£m
9,366
255
1,542
6,958
16,324
(10,800)
1,378
6,902
(139)
(460)
(344)
971
7
634
(1,759)
–
(217)
217
–
–
Removal of:
–
–
–
–
–
–
–
11,163
5,060
(460)
15,763
(9,612)
1,385
7,536
Lloyds Banking
Group statutory
£m
Volatility,
restructuring
and other
items5
£m
Insurance
gross up2
£m
PPI
remediation
£m
Underlying
basis
£m
10,749
174
(150)
4,377
15,126
(9,745)
(4,155)
1,226
165
(884)
(545)
905
71
431
(27)
–
(177)
174
3
–
–
–
–
–
85
–
85
10,773
4,515
(884)
14,404
(8,581)
(4,081)
1,742
1
2
In the year ended 31 December 2022 this comprises the effects of market volatility and asset sales (losses of £252 million); the amortisation of purchased
intangibles (£70 million); restructuring (£80 million of merger, acquisition and integration costs); and the fair value unwind (losses of £118 million).
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 £197 million (2021: £249 million; 2020: £127 million).
4 Comprises the effects of market volatility and asset sales (gain of £87 million); the amortisation of purchased intangibles (£70 million); restructuring (£452 million,
including a software write-off as a result of investment in new technology and systems infrastructure together with merger, acquisition and integration costs); and
the fair value unwind (losses of £199 million).
5 Comprises the effects of market volatility and asset sales (losses of £59 million); the amortisation of purchased intangibles (£69 million); restructuring (£70 million of
merger, acquisition and integration costs); and the fair value unwind (losses of £233 million).
Lloyds Banking Group Annual Report and Accounts 2022
237
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 5: Net interest income
Weighted average effective interest rate
Interest income:
Loans and advances to banks and reverse repurchase
agreements
Loans and advances to customers and reverse repurchase
agreements
Debt securities
Financial assets held at amortised cost
Financial assets at fair value through other comprehensive
income
Total interest income1
Interest expense:
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Debt securities in issue2
Lease liabilities
Subordinated liabilities
Liabilities held at amortised cost
Amounts payable to unitholders in consolidated open-ended
investment vehicles3
Total interest expense4
Net interest income
2022
%
1.29
3.00
1.85
2.70
3.97
2.75
1.87
0.40
1.82
2.21
2.19
6.39
0.97
(9.47)
0.74
2021
%
0.12
2.51
1.46
2.15
1.67
2.13
0.75
0.12
0.10
1.13
2.12
6.92
0.50
12.53
0.80
2020
%
0.24
2.72
1.81
2.35
1.10
2.30
0.84
0.32
0.36
1.37
2.39
6.29
0.74
(1.58)
0.69
2022
£m
2021
£m
2020
£m
1,313
104
203
15,217
168
16,698
947
17,645
(148)
(1,387)
(842)
(1,636)
(29)
(681)
12,633
80
12,817
441
13,258
(74)
(426)
(22)
(900)
(32)
(932)
(4,723)
(2,386)
1,035
(3,688)
13,957
(1,506)
(3,892)
9,366
13,704
97
14,004
302
14,306
(113)
(1,091)
(117)
(1,313)
(41)
(1,057)
(3,732)
175
(3,557)
10,749
1
2
Includes £21 million (2021: £10 million; 2020: £10 million) of interest income on liabilities with negative interest rates, £37 million (2021: £47 million; 2020: £47 million) in
respect of interest income on finance leases and £687 million (2021: £701 million) in respect of hire purchase receivables.
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 3.67 per cent (2021: 1.77 per cent; 2020: 2.28 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.
Includes £23 million (2021: £2 million; 2020: £24 million) of interest expense on assets with negative interest rates.
4
Included within interest income is £272 million (2021: £174 million; 2020: £171 million) in respect of credit-impaired financial assets. Net
interest income also includes a debit of £43 million (2021: credit of £621 million; 2020: credit of £496 million) transferred from the cash
flow hedging reserve (see note 41).
Note 6: Net fee and commission income
Fee and commission income:
Current accounts
Credit and debit card fees
Commercial banking and treasury fees
Unit trust and insurance broking
Factoring
Other fees and commissions
Total fee and commission income
Fee and commission expense
Net fee and commission income
2022
£m
646
1,195
311
85
79
519
2,835
(1,332)
1,503
2021
£m
638
883
413
113
76
485
2,608
(1,185)
1,423
2020
£m
615
748
274
146
76
449
2,308
(1,148)
1,160
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.
In determining the disaggregation of fees and commissions the Group has considered how the nature, amount, timing and
uncertainty of revenue and cash flows are affected by economic factors, including those that are impacted by climate-related factors.
It has determined that the above disaggregation by product type provides useful information that does not aggregate items that have
substantially different characteristics and is not too detailed.
238 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 6: Net fee and commission income continued
At 31 December 2022, the Group held on its balance sheet £173 million (31 December 2021: £201 million) in respect of services provided to
customers and £74 million (31 December 2021: £84 million) in respect of amounts received from customers for services to be provided
after the balance sheet date. Current unsatisfied performance obligations amount to £149 million (31 December 2021: £157 million); the
Group expects to receive substantially all of this revenue by 2024.
Income recognised during the year included £8 million (2021: £16 million) in respect of amounts included in the contract liability
balance at the start of the year and £1 million (2021: £2 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.
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 (losses) gains
Gains on foreign exchange trading transactions
Total foreign exchange
Investment property (losses) gains (note 26)
Securities and other (losses) gains (see below)
Net trading income
2022
£m
(1,318)
255
(1,063)
(511)
(18,413)
(19,987)
2021
£m
212
394
606
575
16,019
17,200
2020
£m
12
527
539
(209)
6,890
7,220
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 trading1
(1,049)
141
724
Other financial instruments mandatorily held at fair value through profit or loss:
2022
£m
2021
£m
2020
£m
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 (losses) gains
(7,677)
(9,533)
(18,259)
(154)
(18,413)
(1,153)
17,096
16,084
(65)
3,554
2,729
7,007
(117)
16,019
6,890
1
Includes hedge ineffectiveness in respect of fair value hedges (2022: loss of £41 million, 2021: gain of £177 million; 2020: gain of £547 million) and cash flow hedges
(2022: loss of £10 million, 2021: loss of £69 million; 2020: loss of £2 million).
Note 8: Insurance premium income
Life insurance
Gross premiums:
Life and pensions, excluding annuities
Annuities
Ceded reinsurance premiums
Net earned premiums
Non-life insurance
Net earned premiums
Total insurance premium income
2022
£m
2021
£m
2020
£m
7,711
1,190
8,901
(369)
8,532
527
9,059
7,515
531
8,046
(376)
7,670
613
8,283
6,941
1,378
8,319
(333)
7,986
629
8,615
Lloyds Banking Group Annual Report and Accounts 2022
239
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 9: Other operating income
Operating lease rental income
Rental income from investment properties (note 26)
Gains less losses on disposal of financial assets at fair value through other comprehensive income (note 41)
Movement in value of in-force business (note 24)
Liability management
Share of results of joint ventures and associates (note 22)
Other
Total other operating income
2022
£m
1,077
145
92
(80)
(31)
10
63
1,276
2021
£m
1,059
186
(2)
(70)
(22)
2
19
1,172
2020
£m
1,120
191
149
76
(145)
(13)
45
1,423
Note 10: Insurance claims and changes in insurance and investment contract liabilities
Life insurance and participating investment contracts
Claims and surrenders
Change in insurance and participating investment contracts (note 31)
Non-participating investment contracts
Change in non-participating investment contracts
Reinsurers’ share1
Change in unallocated surplus
Total life insurance and investment contracts
Non-life insurance
Total non-life insurance claims, net of reinsurance
Total insurance claims and changes in insurance and investment contract liabilities
2022
£m
2021
£m
2020
£m
(8,270)
16,624
8,354
4,166
12,520
234
12,754
60
12,814
(9,063)
(7,474)
(7,670)
(4,590)
(16,537)
(12,260)
(4,581)
(21,118)
285
(1,938)
(14,198)
418
(20,833)
(13,780)
35
57
(20,798)
(13,723)
(413)
12,401
(322)
(318)
(21,120)
(14,041)
1
Reinsurers’ share compromises a credit of £nil (2021: charge of £5 million) in respect of contracts classified as financial assets at fair value through profit or loss and
a credit of £234 million (2021: credit of £290 million) in respect of contracts classified as reinsurance contracts.
Total non-life insurance claims, net of reinsurance, in 2022 included weather-related claims of £116 million (2021: £30 million). Of this,
£108 million (2021: £11 million) was related to severe weather events.
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows:
Deaths
Maturities including surrenders
Annuities
Other
2022
£m
(731)
(6,161)
(1,213)
(165)
2021
£m
(790)
(6,915)
(1,194)
(164)
2020
£m
(694)
(5,514)
(1,171)
(291)
Total life insurance gross claims and surrenders
(8,270)
(9,063)
(7,670)
240 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 11: Operating expenses
Staff costs:
Salaries
Performance-based compensation (see below)
Social security costs
Pensions and other post-retirement benefit schemes (note 35)
Restructuring costs
Other staff costs
Premises and equipment costs:
Rent and rates
Repairs and maintenance
Other1
Other expenses:
Communications and data processing
Advertising and promotion
Professional fees
UK bank levy
Regulatory and legal provisions (note 37)
Other
Depreciation and amortisation:
Depreciation of property, plant and equipment2
Amortisation of acquired value of in-force non-participating investment contracts (note 24)
Amortisation of other intangible assets (note 25)
Goodwill impairment (note 23)
Total operating expenses
2022
£m
2,511
458
341
455
50
257
2021
£m
2020
£m
2,405
2,568
335
308
538
92
207
117
287
566
166
131
4,072
3,885
3,835
100
137
95
332
1,438
170
265
148
255
683
2,959
1,471
22
903
2,396
–
9,759
118
169
(26)
261
1,181
161
210
132
1,300
845
3,829
1,839
24
962
2,825
–
10,800
117
174
176
467
1,013
187
189
211
464
643
2,707
2,046
26
660
2,732
4
9,745
1 Net of profits on disposal of operating lease assets of £197 million (2021: £249 million; 2020: £127 million).
2 Comprising depreciation in respect of premises £114 million (2021: £123 million; 2020: £127 million), equipment £561 million (2021: £779 million; 2020: £680 million),
operating lease assets £570 million (2021: £709 million; 2020: £1,011 million) and right-of-use assets £226 million (2021: £228 million; 2020: £228 million).
Performance-based compensation
The tables below analyse 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
2022
£m
349
109
458
2022
£m
128
20
148
2021
£m
313
22
335
2021
£m
110
22
132
2020
£m
22
95
117
2020
£m
30
31
61
Performance-based awards expensed in 2022 include cash awards amounting to £144 million (2021: £134 million; 2020: £12 million).
Average headcount
The average number of persons on a headcount basis employed by the Group during the year was as follows:
UK
Overseas
Total
2022
2021
62,587
64,250
826
785
63,372
2020
67,881
784
65,076
68,665
Lloyds Banking Group Annual Report and Accounts 2022
241
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Note 12: Auditors’ remuneration
Fees payable to the Company’s auditors1 by the Group are as follows:
Fees payable for the:
– audit of the Company’s current year annual report
– audits of the Company’s subsidiaries
– total audit fees in respect of the statutory audit of Group entities2
– services normally provided in connection with statutory and regulatory filings or engagements
Total audit fees3
Other audit-related fees3
All other fees3
Total non-audit services4
Total fees payable to the Company’s auditors by the Group
2022
£m
1.9
29.5
31.4
6.3
37.7
1.5
5.0
6.5
44.2
2021
£m
1.8
23.7
25.5
4.8
30.3
0.5
1.2
1.7
32.0
2020
£m
1.7
22.4
24.1
3.7
27.8
0.5
0.9
1.4
29.2
1 Deloitte LLP became the Group’s statutory auditor in 2021. PricewaterhouseCoopers LLP was the statutory auditor during 2020.
2 As defined by the Financial Reporting Council (FRC).
3 As defined by the Securities and Exchange Commission (SEC).
4 As defined by the SEC. Total non-audit services as defined by the FRC include all fees other than audit fees in respect of the statutory audit of Group entities. These
fees totalled £12.8 million in 2022 (2021: £6.5 million; 2020: £5.1 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 (including work related to the
adoption of new accounting standards) 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.
Other 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.
All other 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 only 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 auditors1 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
2022
£m
0.4
0.2
–
2021
£m
0.4
0.3
0.3
2020
£m
0.1
0.4
1.4
1 Deloitte LLP became the Group’s statutory auditor in 2021. PricewaterhouseCoopers LLP was the statutory auditor during 2020.
242 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 13: Impairment
Year ended 31 December 2022
Impact of transfers between stages
Other changes in credit quality
Additions and repayments
Methodology and model changes
Other items
Total impairment (credit) charge
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 (credit) charge
Year ended 31 December 2021
Impact of transfers between stages
Other changes in credit quality
Additions and repayments
Methodology and model changes
Other items
Total impairment (credit) charge
In respect of:
Loans and advances to banks
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Other assets
Impairment (credit) charge on drawn balances
Loan commitments and financial guarantees
Financial assets at fair value through other comprehensive income
Total impairment (credit) charge
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
(24)
(278)
132
2
–
(144)
(168)
12
(217)
7
(198)
–
(198)
24
6
(168)
581
90
113
11
–
214
795
2
694
–
696
–
696
99
–
795
357
663
(69)
(47)
–
547
904
–
883
–
883
22
905
(1)
–
904
–
78
(58)
(29)
–
(9)
(9)
–
(9)
–
(9)
–
(9)
–
–
(9)
Total
£m
914
553
118
(63)
–
608
1,522
14
1,351
7
1,372
22
1,394
122
6
1,522
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
75
(331)
(246)
(63)
2
(638)
(563)
(5)
(454)
–
(481)
(320)
(389)
15
4
(690)
(1,171)
–
(1,025)
–
(459)
(1,025)
–
(459)
(102)
(2)
(563)
–
(1,025)
(146)
–
(1,171)
339
252
(96)
6
(10)
152
491
–
498
–
498
2
500
(9)
–
491
–
(48)
(87)
–
–
(135)
(135)
–
(135)
–
(135)
–
(135)
–
–
(67)
(447)
(818)
(42)
(4)
(1,311)
(1,378)
(5)
(1,116)
–
(1,121)
2
(1,119)
(257)
(2)
(135)
(1,378)
Lloyds Banking Group Annual Report and Accounts 2022
243
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Note 13: Impairment continued
Year ended 31 December 2020
Impact of transfers between stages
Other changes in credit quality
Additions and repayments
Methodology and model changes
Other items
Total impairment charge
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 charge
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
(169)
946
98
(44)
–
1,000
831
5
697
1
703
–
703
123
5
831
940
22
177
170
–
369
1,309
–
1,151
–
1,151
–
1,151
158
–
698
1,192
(48)
26
10
1,180
1,878
–
1,865
–
1,865
5
1,870
8
–
1,309
1,878
–
167
(30)
–
–
137
137
–
137
–
137
–
137
–
–
137
1,469
2,327
197
152
10
2,686
4,155
5
3,850
1
3,856
5
3,861
289
5
4,155
The impairment charge contained no release (2021: release of £77 million; 2020: charge of £41 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:
Impact of 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 and 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 resulting from the repayments of outstanding balances that have been provided against.
Methodology and model changes
Increase or decrease in impairment charge as a result of adjustments to the models used for expected credit loss calculations; as
changes to either the model inputs or 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.
244 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 14: Tax expense
(A) Analysis of tax (expense) credit for the year
UK corporation tax:
Current tax on profit for the year
Adjustments in respect of prior years
Foreign tax:
Current tax on profit for the year
Adjustments in respect of prior years
Current tax expense
Deferred tax:
Current year
Adjustments in respect of prior years
Deferred tax (expense) credit
Tax (expense) credit
The tax (expense) credit is made up as follows:
Tax (expense) credit attributable to policyholders
Shareholder tax (expense) credit
Tax (expense) credit
2022
£m
2021
£m
(1,152)
31
(1,121)
(74)
(9)
(83)
(1,472)
94
(1,378)
(51)
21
(30)
(1,204)
(1,408)
(390)
221
(169)
(1,373)
2022
£m
(40)
(1,333)
(1,373)
546
(155)
391
(1,017)
2021
£m
(163)
(854)
(1,017)
2020
£m
(480)
355
(125)
(27)
25
(2)
(127)
611
(323)
288
161
2020
£m
4
157
161
(B) Factors affecting the tax (expense) credit for the year
The UK corporation tax rate for the year was 19.0 per cent (2021: 19.0 per cent; 2020: 19.0 per cent). An explanation of the relationship
between tax (expense) credit 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 (expense) credit
2022
£m
6,928
(1,316)
(339)
(5)
(28)
(72)
134
83
67
11
(53)
(63)
(65)
33
243
(3)
2021
£m
6,902
(1,311)
(439)
(185)
(22)
(83)
40
81
140
(1)
954
(19)
(63)
(69)
(40)
–
(1,373)
(1,017)
2020
£m
1,226
(233)
(107)
(24)
(38)
(74)
59
86
81
(58)
350
15
(46)
49
104
(3)
161
On 17 November 2022 the UK Government confirmed its intention to implement the G20-OECD Inclusive Framework Pillar 2 rules in
the UK, including a Qualified Domestic Minimum Top-Up Tax rule. This legislation, which is expected to be enacted in 2023, will seek
to ensure that UK-headquartered multinational enterprises pay a minimum tax rate of 15 per cent on UK and overseas profits arising
after 31 December 2023. As the UK rate of corporation tax in 2024 will be 25 per cent, and the Group’s business is primarily in the UK, the
impact of these rules on the Group is not expected to be material.
Lloyds Banking Group Annual Report and Accounts 2022
245
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 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
2022
£m
5,021
2022
million
68,847
835
69,682
7.3p
7.2p
2021
£m
5,355
2021
million
70,937
848
71,785
7.5p
7.5p
2020
£m
865
2020
million
70,606
650
71,256
1.2p
1.2p
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 198 million (2021: 19 million; 2020: 28 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 63 million anti-dilutive share options and awards excluded from the calculation of diluted earnings per share (2021:
143 million; 2020: 647 million).
Note 16: Financial assets at fair value through profit or loss
These assets are comprised as follows:
2022
Other
financial
assets
mandatorily
at fair value
through
profit or loss
£m
3,329
9,761
7,872
2,516
7,133
228
171
17,693
35,613
62
10,906
106,722
166,393
Trading
assets
£m
16
11,766
2,185
–
–
7
14
228
2,434
–
–
–
14,216
Total
£m
3,345
21,527
10,057
2,516
7,133
235
185
17,921
38,047
62
10,906
106,722
180,609
2021
Other
financial
assets
mandatorily
at fair value
through
profit or loss
£m
3,684
10,933
11,101
2,731
6,297
421
272
19,557
40,379
19
12,371
117,625
185,011
Trading
assets
£m
486
14,435
6,579
–
–
12
3
245
6,839
–
–
–
21,760
Total
£m
4,170
25,368
17,680
2,731
6,297
433
275
19,802
47,218
19
12,371
117,625
206,771
Loans and advances to banks
Loans and advances to customers
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
Contracts held with reinsurers
Equity shares
Total
Other financial assets mandatorily at fair value through profit or loss include assets backing insurance contracts and investment
contracts of £161,618 million (31 December 2021: £179,988 million). Included within these assets are investments in unconsolidated
structured entities of £68,913 million (31 December 2021: £74,916 million), see note 48.
For amounts included above which are subject to repurchase and reverse repurchase agreements see note 52.
246 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December 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
2022
2021
Contract/
notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
Contract/
notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
75,619
373,735
7,820
7,049
1,135
7,181
417
–
1,266
7,480
–
470
60,638
319,882
5,045
5,660
611
3,451
371
–
663
3,171
–
428
464,223
8,733
9,216
391,225
4,433
4,262
6,108,594
14,073
12,308
3,582,028
75,499
18,875
23,245
31,335
3
864
–
26
4
–
986
34
6,437
19,145
18,483
214,983
14,775
1
1,907
–
19
6,257,548
14,966
13,332
3,841,076
16,702
6,689
16,490
134
845
118
849
6,740
12,539
95
735
10,814
1
–
1,590
13
12,418
175
878
Total derivative assets/liabilities – trading and other
6,744,950
24,678
23,515
4,251,580
21,965
17,733
Hedging
Derivatives designated as fair value hedges:
Interest rate and other swaps
Currency swaps
Derivatives designated as cash flow hedges:
Interest rate swaps
Exchange rate forward rate agreements
Total derivative assets/liabilities – hedging
152,662
35
152,697
249,703
1,542
251,245
403,942
10
1
11
1
63
64
75
503
–
503
3
21
24
527
172,695
34
172,729
109,093
1,895
110,988
283,717
46
7
53
6
27
33
86
308
–
308
1
18
19
327
Total recognised derivative assets/liabilities
7,148,892
24,753
24,042
4,535,297
22,051
18,060
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 52 Credit risk.
The Group holds derivatives as part of the following strategies:
• Customer driven, where derivatives are held as part of the provision of risk management products to Group customers
•
To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge
accounting strategy adopted by the Group is to utilise a combination of fair value and cash flow hedge approaches as described in
note 52
• Derivatives held in policyholder funds as permitted by the investment strategies of those funds
The principal derivatives used by the Group are as follows:
•
•
Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an
agreement between two parties to exchange fixed and floating interest payments, based upon interest rates defined in the
contract, without the exchange of the underlying principal amounts. Forward rate agreements are contracts for the payment of the
difference between a specified rate of interest and a reference rate, applied to a notional principal amount at a specific date in the
future. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of interest on
a future loan or deposit, for a specified period and commencing on a specified future date
Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign
exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed
rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; the
exchange of principal can be notional or actual. A currency option gives the buyer, on payment of a premium, the right, but not the
obligation, to sell specified amounts of currency at agreed rates of exchange on or before a specified future date
• Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own
exposure to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in
consideration for guaranteeing to make a specific payment should a negative credit event take place
Equity derivatives are also used by the Group as part of its equity-based retail product activity to eliminate the Group’s exposure to
fluctuations in various international stock exchange indices. Index-linked equity options are purchased which give the Group the
right, but not the obligation, to buy or sell a specified amount of equities, or basket of equities, in the form of published indices on or
before a specified future date
•
Lloyds Banking Group Annual Report and Accounts 2022
247
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 17: Derivative financial instruments continued
Details of the Group’s hedging instruments are set out below:
At 31 December 2022
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
At 31 December 2021
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
Up to 1 month
£m
1–3 months
£m
3–12 months
£m
1–5 years
£m
Over 5 years
£m
Total
£m
Maturity
–
–
–
–
–
–
–
–
–
–
–
–
1,904
1.51%
12,765
0.17%
37,488
0.72%
64,307
1.92%
35
1.28%
1.38
36,198
1.94%
–
–
–
–
–
–
509
1.15
1.24
1,004
1.10
1.25
29
1.04
–
35
152,662
1,542
4,741
3.01%
6,472
1.18%
26,175
2.36%
161,391
2.40%
50,924
1.60%
249,703
Up to 1 month
£m
1–3 months
£m
3–12 months
£m
1–5 years
£m
Over 5 years
£m
Total
£m
Maturity
–
–
–
–
–
–
–
–
–
–
–
–
34
1.28%
1.38
34
1,396
2.84%
2,784
1.31%
18,568
0.95%
121,878
0.68%
28,069
1.94%
172,695
46
1.36
200
1.36
821
1.36
828
1.35
–
1.27
1,895
1,000
0.00%
625
0.23%
10,428
0.55%
58,896
0.81%
38,144
0.65%
109,093
248 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 17: Derivative financial instruments continued
The carrying amounts of the Group’s hedging instruments are as follows:
At 31 December 2022
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 2021
Fair value hedges
Interest rate
Currency swaps
Interest rate swaps
Cash flow hedges
Foreign exchange
Currency swaps
Interest rate
Interest rate swaps
All amounts are held within derivative financial instruments.
Carrying amount of the hedging instrument
Contract/
notional
amount
£m
35
152,662
1,542
249,703
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Assets
£m
Liabilities
£m
1
10
63
1
–
503
21
3
(2)
1,286
198
(6,990)
Carrying amount of the hedging instrument
Contract/
notional
amount
£m
34
172,695
1,895
109,093
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Assets
£m
Liabilities
£m
7
46
27
6
–
308
18
1
(2)
946
(6)
(2,642)
Lloyds Banking Group Annual Report and Accounts 2022
249
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 17: Derivative financial instruments continued
The Group’s hedged items are as follows:
At 31 December 2022
Fair value hedges
Interest rate
Fixed rate mortgages1
Fixed rate issuance2
Fixed rate bonds3
Cash flow hedges
Foreign exchange
Foreign currency issuance2
Customer deposits4
Interest rate
Customer loans1
Central bank balances5
Customer deposits4
At 31 December 2021
Fair value hedges
Interest rate
Fixed rate mortgages1
Fixed rate issuance2
Fixed rate bonds3
Cash flow hedges
Foreign exchange
Foreign currency issuance2
Customer deposits4
Interest rate
Customer loans1
Central bank balances5
Customer deposits4
Carrying amount of
the hedged item
Accumulated amount of
fair value adjustment on
the hedged item
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Change in fair
value of hedged
item for
ineffectiveness
assessment
£m
Cash flow hedging reserve
Continuing
hedges
£m
Discontinued
hedges
£m
73,282
–
(2,602)
–
52,190
–
19,259
–
(1,549)
–
2,392
–
(3,198)
4,223
(2,350)
(198)
–
5,636
2,703
(1,295)
134
–
(5,587)
(2,130)
1,781
90
3
(868)
(965)
(76)
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 hedging reserve
Continuing
hedges
£m
Discontinued
hedges
£m
88,791
–
–
58,648
25,019
–
(872)
–
342
–
1,967
–
(2,080)
2,071
(758)
(15)
21
1,873
767
(110)
(28)
–
(742)
(212)
43
76
–
378
(78)
(109)
1
2
3
4
5
Included within loans and advances to customers.
Included within debt securities in issue.
Included within financial assets at fair value through other comprehensive income.
Included within customer deposits.
Included within cash and balances at central banks.
The accumulated amount of fair value hedge adjustments remaining in the balance sheet for hedged items that have ceased to be
adjusted for hedging gains and losses is a liability of £1,988 million relating to fixed rate issuances of £760 million and mortgages of
£1,228 million (2021: liability of £1,071 million relating to fixed rate issuances of £793 million and mortgages of £278 million).
250 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 17: Derivative financial instruments continued
Gains and losses arising from hedge accounting are summarised as follows:
At 31 December 2022
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
At 31 December 2021
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
22
(49)
(14)
–
–
(30)
–
20
198
3
(6,145)
(2,831)
1,785
–
–
–
–
–
(22)
Interest expense
–
Interest expense
53
26
Interest income
Interest income
(14)
Interest expense
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
207
(23)
(7)
–
–
(43)
(27)
1
16
28
(1,830)
(515)
22
3
–
–
–
–
(18)
Interest expense
–
Interest expense
(456)
Interest income
(180)
Interest income
30
Interest expense
1 Hedge ineffectiveness is included in the income statement within net trading income.
In 2021 there was a loss of £3 million (2022: £nil) reclassified from the cash flow hedging reserve for which hedge accounting had
previously been used but for which the hedged future cash flows are no longer expected to occur.
Lloyds Banking Group Annual Report and Accounts 2022
251
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 18: Financial assets at amortised cost
Year ended 31 December 2022
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 2022
Exchange and other adjustments
Transfers to Stage 2
Impact of transfers between stages
7,002
558
(3)
(3)
–
–
3
3
Other changes in credit quality
Additions and repayments
3,063
24
Charge to the income statement
At 31 December 2022
Allowance for impairment losses
Net carrying amount
10,620
(13)
10,607
27
(2)
25
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,002
558
–
–
3,087
10,647
(15)
10,632
Loans and advances to customers
At 1 January 2022
400,036
34,931
6,443
10,977
452,387
Exchange and other adjustments1
(393)
15
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
(27,966)
24,663
8,330
(8,257)
(35,046)
35,448
(402)
(1,250)
(2,528)
(23)
(73)
3,778
3,303
12
(389)
–
–
–
–
Other changes in credit quality
Additions and repayments
9,314
1,555
(1,337)
(1,354)
8,178
Methodology and model changes
(Credit) charge to the income
statement
Advances written off
Recoveries of advances written off in
previous years
(217)
694
(928)
(13)
(941)
182
–
182
At 31 December 2022
380,991
61,164
7,640
9,622
459,417
700
1,808
Allowance for impairment losses
(700)
(1,808)
(1,757)
(253)
(4,518)
Net carrying amount
380,291
59,356
5,883
9,369
454,899
Drawn ECL coverage2 (%)
0.2
3.0
23.0
2.6
1.0
Reverse repurchase agreements
At 31 December 2022
Allowance for impairment losses
Net carrying amount
44,865
–
44,865
–
–
–
–
–
–
–
–
–
44,865
–
44,865
1
–
–
–
–
7
5
12
13
915
2
176
(66)
(8)
(120)
(18)
(311)
110
2
–
–
–
–
–
–
2
2
2
–
–
–
–
–
–
–
–
–
1,114
1,581
–
(167)
135
(158)
701
511
74
98
11
39
(9)
(69)
166
268
356
665
(91)
(47)
883
(928)
182
1,757
–
–
–
–
–
–
1
–
–
–
–
7
7
14
15
210
65
3,820
106
–
–
–
849
849
506
59
(63)
1,351
(941)
182
4,518
78
(58)
(29)
(9)
(13)
–
253
1
Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind, derecognising assets as a result of modifications and
adjustments in respect of purchased or originated credit-impaired financial assets (POCI). Where a POCI asset’s expected credit loss is less than its expected credit
loss on purchase or origination, the increase in its carrying value is recognised within gross loans, rather than as a negative impairment allowance.
2 Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers.
252 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 18: Financial assets at amortised cost continued
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
Debt securities
At 1 January 2022
Exchange and other adjustments
Transfers to Stage 1
Impact of transfers between stages
6,827
408
9
9
Other changes in credit quality
Additions and repayments
2,690
Charge to the income statement
At 31 December 2022
Allowance for impairment losses
Net carrying amount
Total financial assets at amortised
cost
9,934
(8)
9,926
9
–
(9)
(9)
–
–
–
–
2
(1)
–
–
–
1
(1)
–
–
–
–
–
–
–
6,838
407
–
–
2,690
9,935
(9)
9,926
1
–
–
–
–
3
4
7
8
–
–
–
–
–
–
–
–
–
2
(1)
–
–
–
–
–
–
1
–
–
–
–
–
–
3
(1)
–
–
–
3
4
7
9
445,689
59,381
5,883
9,369
520,322
The total allowance for impairment losses includes £92 million (2021: £95 million) in respect of residual value impairment and voluntary
terminations within the Group’s UK motor finance business.
Movements in Retail UK 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
Total
£m
Retail – UK mortgages
At 1 January 2022
273,629
21,798
1,940
10,977
308,344
Exchange and other adjustments1
–
–
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
5,107
(5,096)
(26,043)
26,204
(444)
(1,793)
Impact of transfers between stages
(21,380)
19,315
12
–
(11)
(161)
2,237
2,065
12
–
–
–
–
Other changes in credit quality
Additions and repayments
5,268
670
(585)
(1,354)
3,999
Methodology and model changes
Charge (credit) to the income
statement
Advances written off
Recoveries of advances written off in
previous years
(28)
(13)
(41)
24
–
24
48
–
28
(14)
–
(25)
(11)
36
18
–
43
394
–
(27)
25
(63)
254
189
(9)
(10)
(12)
158
At 31 December 2022
257,517
41,783
3,416
9,622
312,338
91
552
Allowance for impairment losses
(91)
(552)
(311)
(253)
(1,207)
Net carrying amount
257,426
41,231
3,105
9,369
311,131
Drawn ECL coverage (%)
–
1.3
9.1
2.6
0.4
184
28
(1)
(11)
63
98
149
54
(45)
(55)
103
(28)
24
311
210
65
78
(58)
(29)
(9)
(13)
–
253
836
93
–
–
–
327
327
159
(95)
(96)
295
(41)
24
1,207
1
Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind, derecognising assets as a result of modifications and
adjustments in respect of purchased or originated credit-impaired financial assets (POCI). Where a POCI asset’s expected credit loss is less than its expected credit
loss on purchase or origination, the increase in its carrying value is recognised within gross loans, rather than as a negative impairment allowance.
Lloyds Banking Group Annual Report and Accounts 2022
253
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 18: Financial assets at amortised cost continued
Movements in Retail credit cards were as follows:
Retail – credit cards
At 1 January 2022
Exchange and other adjustments
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
Other changes in credit quality
Additions and repayments
Methodology and model changes
Charge to the income statement
Advances written off
Recoveries of advances written off in previous years
At 31 December 2022
Allowance for impairment losses
Net carrying amount
Drawn ECL coverage (%)
Gross carrying amount
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
11,918
2,077
292
14,287
(13)
569
(2)
(566)
(1,319)
1,358
(184)
(934)
(191)
601
–
(3)
(39)
375
333
(15)
–
–
–
–
445
611
(14)
1,042
96
4
48
(16)
(3)
(26)
3
15
(1)
3
20
218
2
(47)
36
(43)
185
131
22
33
27
213
(413)
(413)
11,416
3,287
(120)
(433)
11,296
2,854
1.1
13.2
91
289
(113)
176
39.1
91
14,992
120
433
(666)
14,326
4.4
128
(16)
(1)
(20)
46
73
98
227
(5)
3
323
(413)
91
113
442
(10)
–
–
–
232
232
264
27
33
556
(413)
91
666
Movements in Commercial Banking lending were as follows:
Commercial Banking
At 1 January 2022
Exchange and other adjustments
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
Other changes in credit quality
Additions and repayments
Methodology and model changes
Charge to the income statement
Advances written off
Recoveries of advances written off in previous years
Gross carrying amount
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
82,719
7,530
3,563
93,812
748
1,723
6
(1,676)
(5,807)
5,950
(404)
(326)
(4,488)
3,948
(20)
(47)
(143)
730
540
734
–
–
–
–
1,530
9
(587)
952
(127)
(127)
2
2
125
4
55
(11)
(2)
(44)
(2)
35
59
(7)
85
260
(2)
(55)
19
(14)
131
81
36
57
(18)
156
956
41
–
(8)
16
7
15
192
(9)
–
198
(127)
2
1,341
43
–
–
–
94
94
263
107
(25)
439
(127)
2
At 31 December 2022
80,509
11,493
3,371
95,373
214
414
1,070
1,698
Allowance for impairment losses
(214)
(414)
(1,070)
(1,698)
Net carrying amount
Drawn ECL coverage (%)
80,295
11,079
2,301
93,675
0.3
3.6
31.7
1.8
254 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 18: Financial assets at amortised cost continued
Movements in the allowance for expected credit losses in respect of undrawn balances were as follows:
Undrawn balances
At 1 January 2022
Exchange and other adjustments
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
Other items taken to the income statement
Charge (credit) to the income statement
At 31 December 2022
The Group’s total impairment allowances were as follows:
In respect of:
Loans and advances to banks
UK mortgages
Credit cards
Other
Retail
Commercial Banking
Other
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Other assets
Provisions in relation to loan commitments and financial guarantees
Total
Expected credit loss in respect of financial assets at fair value through other
comprehensive income (memorandum item)
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
109
1
19
(9)
(1)
(15)
(6)
30
24
134
86
–
(19)
10
(2)
81
70
29
99
185
5
–
–
(1)
3
(1)
1
(2)
(1)
4
–
–
–
–
–
200
1
–
–
–
65
65
57
122
323
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
13
91
120
275
486
214
–
2
552
433
409
1,394
414
–
–
311
113
259
683
1,070
4
700
1,808
1,757
–
1
–
253
–
–
253
–
–
253
–
15
1,207
666
943
2,816
1,698
4
4,518
9
1,810
1,758
253
4,542
–
185
38
4
–
–
38
323
1,995
1,800
253
4,903
8
721
–
134
855
9
–
–
–
9
Lloyds Banking Group Annual Report and Accounts 2022
255
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 18: Financial assets at amortised cost continued
Year ended 31 December 2021
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 2021
Exchange and other adjustments
Other changes in credit quality
8,066
(11)
Additions and repayments
(1,053)
Credit to the income statement
At 31 December 2021
Allowance for impairment losses
Net carrying amount
7,002
(1)
7,001
Loans and advances to customers
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,066
(11)
(1,053)
7,002
(1)
7,001
6
–
(5)
–
(5)
1
–
–
–
–
–
–
–
–
–
–
–
–
At 1 January 2021
375,300
51,659
6,490
12,511
445,960
1,372
2,145
1,982
Exchange and other adjustments1
(2,686)
(39)
68
(2,738)
(3)
(6)
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
18,705
(18,665)
(12,009)
12,724
(872)
(1,822)
2,694
(81)
(40)
(715)
Impact of transfers between stages
5,824
(7,763)
1,939
–
–
–
–
564
(553)
(48)
(13)
(428)
75
(245)
(221)
(63)
155
(220)
195
(423)
(271)
(346)
15
(1)
(11)
(107)
233
221
336
255
(99)
6
Other changes in credit quality
Additions and repayments
21,598
(8,926)
(1,007)
(1,565)
10,100
–
–
–
–
–
–
261
121
(48)
(87)
–
6
–
(5)
–
(5)
1
5,760
111
–
–
–
(12)
(12)
(309)
(753)
(42)
Methodology and model changes
(Credit) charge to the income
statement
Advances written off
Recoveries of advances written off in
previous years
(1,058)
(37)
(1,095)
(1,058)
(37)
(1,095)
(454)
(1,025)
498
(135)
(1,116)
160
–
160
160
1,581
–
210
160
3,820
At 31 December 2021
400,036
34,931
6,443
10,977
452,387
915
1,114
Allowance for impairment losses
(915)
(1,114)
(1,581)
(210)
(3,820)
Net carrying amount
399,121
33,817
4,862
10,767
448,567
Drawn ECL coverage (%)
0.2
3.2
24.5
1.9
0.8
Reverse repurchase agreements
At 31 December 2021
Allowance for impairment losses
Net carrying amount
54,753
–
54,753
–
–
–
–
–
–
–
–
–
54,753
–
54,753
1
Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind, derecognising assets as a result of modifications and
adjustments in respect of purchased or originated credit-impaired financial assets (POCI). Where a POCI asset’s expected credit loss is less than its expected credit
loss on purchase or origination, the increase in its carrying value is recognised within gross loans, rather than as a negative impairment allowance.
256 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 18: Financial assets at amortised cost continued
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
Debt securities
At 1 January 2021
Exchange and other adjustments
Transfers to Stage 2
Impact of transfers between stages
5,406
(20)
(6)
(6)
Additions and repayments
1,447
Charge to the income statement
At 31 December 2021
Allowance for impairment losses
Net carrying amount
Total financial assets at
amortised cost
6,827
(1)
6,826
–
–
6
6
3
9
–
9
2
–
–
–
–
2
(2)
–
–
–
–
–
–
–
5,408
(20)
–
–
1,450
6,838
(3)
6,835
1
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
2
–
–
–
–
–
3
–
–
–
–
–
–
3
467,701
33,826
4,862
10,767
517,156
Movements in Retail UK 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
Total
£m
Retail – UK mortgages
At 1 January 2021
251,418
29,018
1,859
12,511
294,806
Exchange and other adjustments1
–
–
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
3,032
(3,622)
10,109
(10,105)
(6,930)
7,425
(495)
(147)
(942)
–
(4)
1,089
590
68
68
–
–
–
–
Other changes in credit quality
Additions and repayments
19,179
(3,598)
(490)
(1,565)
13,526
Methodology and model changes
Credit to the income statement
Advances written off
Recoveries of advances written off in
previous years
(28)
(37)
(65)
9
–
9
104
–
66
(5)
–
(58)
3
(14)
8
(53)
(56)
468
–
(66)
37
(35)
84
20
(32)
(52)
(10)
(74)
At 31 December 2021
273,629
21,798
1,940
10,977
308,344
48
394
Allowance for impairment losses
(48)
(394)
(184)
(210)
(836)
Net carrying amount
273,581
21,404
1,756
10,767
307,508
Drawn ECL coverage (%)
–
1.8
9.5
1.9
0.3
191
18
–
(32)
35
48
51
(30)
(33)
6
(6)
(28)
9
184
261
121
1,024
139
–
–
–
74
74
(124)
(164)
(57)
(271)
(65)
9
836
(48)
(87)
–
(135)
(37)
–
210
1
Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind, derecognising assets as a result of modifications and
adjustments in respect of purchased or originated credit-impaired financial assets (POCI). Where a POCI asset’s expected credit loss is less than its expected credit
loss on purchase or origination, the increase in its carrying value is recognised within gross loans, rather than as a negative impairment allowance.
Lloyds Banking Group Annual Report and Accounts 2022
257
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 18: Financial assets at amortised cost continued
Movements in Retail credit cards were as follows:
Retail – credit cards
At 1 January 2021
Exchange and other adjustments
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
Other changes in credit quality
Additions and repayments
Methodology and model changes
(Credit) charge to the income statement
Advances written off
Gross carrying amount
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
11,301
3,273
340
14,914
(29)
(7)
1,610
(1,605)
(513)
(137)
960
558
(259)
(1,306)
(1)
(5)
(45)
396
346
(37)
–
–
–
–
(314)
117
(35)
(232)
155
7
190
(10)
(4)
(115)
61
(65)
(62)
–
458
13
(188)
34
(77)
46
(185)
(50)
(18)
–
153
(13)
(2)
(24)
81
71
126
230
(10)
–
(66)
(253)
346
766
7
–
–
–
2
2
115
(90)
–
27
(444)
(444)
86
292
86
14,287
(444)
(444)
86
128
86
442
96
218
Recoveries of advances written off in previous years
At 31 December 2021
11,918
2,077
Allowance for impairment losses
(96)
(218)
(128)
(442)
Net carrying amount
Drawn ECL coverage (%)
11,822
0.8
1,859
10.5
164
43.8
13,845
3.1
Movements in Commercial Banking lending were as follows:
Commercial Banking
At 1 January 2021
Exchange and other adjustments
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
Other changes in credit quality
Additions and repayments
Methodology and model changes
Credit to the income statement
Advances written off
Recoveries of advances written off in previous years
Gross carrying amount
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
78,868
15,058
3,576
97,502
299
733
1,290
2,322
151
(1)
5,744
(5,729)
(3,146)
3,273
(335)
(284)
2,263
(2,740)
(77)
(15)
(127)
619
477
73
–
–
–
–
1,437
(4,787)
(215)
(3,565)
(200)
(200)
2
2
(3)
192
(19)
(2)
(176)
(5)
(101)
(65)
–
(5)
(191)
48
(29)
40
(132)
(133)
(203)
–
(171)
(468)
18
(1)
(29)
31
6
7
(159)
(2)
–
(154)
(200)
2
956
10
–
–
–
(130)
(130)
(393)
(270)
–
(793)
(200)
2
1,341
At 31 December 2021
82,719
7,530
3,563
93,812
125
260
Allowance for impairment losses
(125)
(260)
(956)
(1,341)
Net carrying amount
Drawn ECL coverage (%)
82,594
7,270
2,607
92,471
0.2
3.5
26.8
1.4
258 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 18: Financial assets at amortised cost continued
Movements in the allowance for expected credit losses in respect of undrawn balances were as follows:
Undrawn balances
At 1 January 2021
Exchange and other adjustments
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Impact of transfers between stages
Other items taken to the income statement
Credit to the income statement
At 31 December 2021
The Group’s total impairment allowances were as follows:
In respect of:
Loans and advances to banks
UK mortgages
Credit cards
Other
Retail
Commercial Banking
Other
Loans and advances to customers
Debt securities
Financial assets at amortised cost
Other assets
Provisions in relation to loan commitments and financial guarantees
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
212
(1)
78
(8)
(1)
(69)
–
(102)
(102)
109
234
(2)
(78)
8
(6)
18
(58)
(88)
(146)
86
13
1
–
–
7
(4)
3
(12)
(9)
5
–
–
–
–
–
459
(2)
–
–
–
(55)
(55)
(202)
(257)
200
Allowance for expected credit losses
Stage 1
£m
Stage 2
£m
Stage 3
£m
POCI
£m
Total
£m
1
48
96
246
390
125
400
915
1
917
–
109
–
394
218
242
854
260
–
1,114
–
1,114
–
86
–
184
128
307
619
956
6
1,581
2
1,583
18
5
–
210
–
–
1
836
442
795
210
2,073
–
–
210
–
210
–
–
1,341
406
3,820
3
3,824
18
200
Total
1,026
1,200
1,606
210
4,042
Expected credit loss in respect of financial assets at fair value through other
comprehensive income (memorandum item)
3
–
–
–
3
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 and 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.
Lloyds Banking Group Annual Report and Accounts 2022
259
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 19: Allowance for expected credit losses
The calculation of the Group’s expected credit loss allowances and provisions against loan commitments and guarantees, which are
set out in note 18, 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. IFRS 9 contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due
which the Group now uses for all its products following changes to the definition of default for UK mortgages on 1 January 2022. In
addition, other indicators of mortgage default were added including end-of-term payments on past due interest-only accounts and
loans considered non-performing due to recent arrears or forbearance, aligning the definition of Stage 3 credit-impaired for IFRS 9 to
the CRD IV prudential regulatory definition of default. This change in definition of default contributes to the £1.5 billion increase in Stage
3 UK mortgages during the period.
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, extensions 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 revolving retail 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 designated as 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.
SICR triggers for key Retail portfolios
Origination grade
Mortgages SICR grade
Credit cards, loans and overdrafts SICR grade
RMS grade
1
2
3
4
5
6
7
1
5
4
8
2
5
5
9
3
6
6
10
4
7
7
11
5
8
8
12
6
9
9
13
7
10
10
14
PD boundary %1
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
1
Probability-weighted annualised lifetime probability of default.
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.
All financial assets are assumed to have suffered a SICR if they are more than 30 days past due; credit cards, loans and overdrafts
financial assets are also assumed to have suffered a SICR if they are in arrears on three or more separate occasions in a rolling
12-month period. Financial assets are classified as credit-impaired if they are 90 days past due.
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. UK mortgages
is an exception to this rule where a probation period is enforced for non-performing, forborne and defaulted exposures in accordance
with prudential regulation. If an exposure that is classified as Stage 2 no longer meets the SICR criteria, which in some cases capture
customer behaviour in previous periods, 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.
260 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 19: Allowance for expected credit losses continued
Generation of multiple economic scenarios
The estimate of expected credit losses is required to be based on an unbiased expectation of future economic scenarios. The
approach used to generate the range of future economic scenarios depends on the methodology and judgements adopted. The
Group’s approach is to start from a defined base case scenario, used for planning purposes, and to generate alternative economic
scenarios around this base case. The base case scenario is a conditional forecast underpinned by a number of conditioning
assumptions that reflect the Group’s best view of key future developments. If circumstances appear likely to materially deviate from
the conditioning assumptions, then the base case scenario is updated.
The base case scenario is central to a range of future economic scenarios generated by simulation of an economic model, for
which the same conditioning assumptions apply as in the base case scenario. These scenarios are ranked by using estimated
relationships with industry-wide historical loss data. With the base case already pre-defined, three other scenarios are identified as
averages of constituent scenarios located around the 15th, 75th and 95th percentiles of the distribution. The full distribution is therefore
summarised by a practical number of scenarios to run through ECL models representing an upside, the base case, and a downside
scenario weighted at 30 per cent each, together with a severe downside scenario weighted at 10 per cent. The scenario weights
represent the distribution of economic scenarios and not subjective views on likelihood. The inclusion of a severe downside scenario
with a smaller weighting ensures that the non-linearity of losses in the tail of the distribution is adequately captured. Macroeconomic
projections may employ reversionary techniques to adjust the paths of economic drivers towards long-run equilibria after a
reasonable forecast horizon. The Group does not use such techniques to force the MES scenarios to revert to the base case planning
view. Utilising such techniques would be expected to be immaterial for expected credit losses since loss sensitivity is highest over the
initial five years of the projections. Most assets are expected to have matured, or reached the end of their behavioural life before the
five-year horizon.
A forum 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 June 2022,
the Group judged it appropriate to include an adjusted severe downside scenario to incorporate a high CPI inflation and UK Bank Rate
profiles and to adopt this adjusted severe downside scenario to calculate the Group’s ECL. This is because the historic macroeconomic
and loan loss data upon which the scenario model is calibrated imply an association of downside economic outcomes with easier
monetary policy, and therefore low interest rates. The adjustment is considered to better reflect the risks around the Group’s base case
view in an economic environment where supply shocks are the principal concern. The Group has continued to include a non-modelled
severe downside scenario for Group ECL calculations for 31 December 2022 reporting.
Base case and MES economic assumptions
The Group’s base case economic scenario has been revised in light of the ongoing war in Ukraine, reversals in UK fiscal policy, and
a continuing global shift towards a more restrictive monetary policy stance against a backdrop of elevated inflation pressures. The
Group’s updated base case scenario has three conditioning assumptions: first, the war in Ukraine remains ‘local’, i.e. without overtly
involving neighbouring countries, NATO or China; second, the UK labour market participation rate remains below pre-pandemic levels,
impeding the economy’s supply capacity; and third, the Bank of England accommodates above-target inflation in the medium term,
recognising the economic costs that might arise from a rapid return to the two per cent target.
Based on these assumptions and incorporating the economic data published in the fourth quarter, the Group’s base case scenario is
for a contraction in economic activity and a rise in the unemployment rate alongside declines in residential and commercial property
prices, following increases in UK Bank Rate in response to persistent inflationary pressures. Risks around this base case economic view
lie in both directions and are largely captured by the generation of alternative economic scenarios.
The Group has accommodated the latest available information at the reporting date in defining its base case scenario and
generating alternative economic scenarios. The scenarios include forecasts for key variables in the fourth quarter of 2022, for which
actuals may have since emerged prior to publication.
Scenarios by year
The key UK economic assumptions made by the Group are shown in the following tables across a number of measures explained
below.
Annual assumptions
Gross domestic product (GDP) and Consumer Price Index (CPI) inflation are presented as an annual change, house price growth and
commercial real estate price growth are presented as the growth in the respective indices over each year. Unemployment rate and UK
Bank Rate are averages over the year.
Five-year average
The five-year average reflects the average annual growth rate, or level, over the five-year period. It includes movements within the
current reporting year, such that the position as of 31 December 2022 covers the five years 2022 to 2026. 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 changes. The use of calendar years maintains a comparability between the annual
assumptions presented.
Five-year start to peak and trough
The peak or trough for any metric may occur intra year and therefore not be identifiable from the annual assumptions, therefore they
are also disclosed. For GDP, house price growth and commercial real estate price growth, the peak, or trough, reflects the highest, or
lowest cumulative quarterly position reached relative to the start of the five-year period, which as of 31 December 2022 is 1 January
2022. Given these metrics may exhibit increases followed by greater falls, the start to trough movements quoted may be smaller than
the equivalent ‘peak to trough’ movement (and vice versa for start to peak). Unemployment, UK Bank Rate and CPI Inflation reflect the
highest, or lowest, quarterly level reached in the five-year period.
Lloyds Banking Group Annual Report and Accounts 2022
261
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 19: Allowance for expected credit losses continued
At 31 December 2022
Upside
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation
Base case
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation
Downside
Gross domestic product
Unemployment rate
House price growth
2022
%
4.1
3.5
2.4
(9.4)
1.94
9.0
4.0
3.7
2.0
(11.8)
1.94
9.0
3.9
3.8
1.6
2023
%
0.1
2.8
(2.8)
8.5
4.95
8.3
(1.2)
4.5
(6.9)
(3.3)
4.00
8.3
(3.0)
6.3
(11.1)
Commercial real estate price growth
(13.9)
(15.0)
UK Bank Rate
CPI inflation
Severe downside
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate – modelled
UK Bank Rate – adjusted2
CPI inflation – modelled
CPI inflation – adjusted2
Probability-weighted
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate – modelled
UK Bank Rate – adjusted2
CPI inflation – modelled
CPI inflation – adjusted2
1.94
9.0
3.7
4.1
1.1
(17.3)
1.94
2.44
9.0
9.7
4.0
3.7
1.9
(12.3)
1.94
1.99
9.0
9.1
2.93
8.2
(5.2)
9.0
(14.8)
(28.8)
1.41
7.00
8.2
14.3
(1.8)
5.0
(7.7)
(5.8)
3.70
4.26
8.3
8.9
2024
%
1.1
3.0
6.5
3.5
4.98
4.2
0.5
5.1
(1.2)
0.9
3.38
3.7
(0.5)
7.5
(9.8)
(3.7)
1.39
3.3
(1.0)
10.7
(18.0)
(9.9)
0.20
4.88
2.6
9.0
0.2
5.8
(3.2)
(0.8)
2.94
3.41
3.6
4.3
2025
%
1.7
3.3
9.0
2.6
4.63
3.3
1.6
5.3
2.9
2.8
3.00
2.3
1.4
7.6
(5.6)
0.4
0.98
1.3
1.3
10.4
(11.5)
(1.3)
0.13
3.31
(0.1)
4.1
1.5
5.9
0.7
1.6
2.59
2.91
2.1
2.5
2022 to 2026
average
%
2026
%
Start to
peak1
%
Start to
trough1
%
2.1
3.4
8.0
2.3
4.58
3.0
2.1
5.1
4.4
3.1
3.00
1.7
2.1
7.2
(1.5)
1.4
1.04
0.3
2.1
9.7
(4.2)
3.2
0.14
3.25
(1.6)
1.6
2.1
5.7
2.9
2.3
2.60
2.91
1.4
1.7
1.8
3.2
4.5
1.3
4.22
5.5
1.4
4.8
0.2
(1.8)
3.06
5.0
0.8
6.5
(5.4)
(6.4)
1.65
4.4
0.1
8.8
(9.8)
(11.6)
0.76
4.18
3.6
7.7
1.2
5.2
(1.2)
(3.1)
2.76
3.10
4.9
5.3
6.5
3.8
24.8
7.2
5.39
10.7
4.3
5.3
6.4
7.2
4.00
10.7
1.2
7.7
6.4
7.2
3.62
10.7
0.7
10.7
6.4
7.2
3.50
7.00
10.7
14.8
3.4
5.9
6.4
7.2
3.89
4.31
10.7
11.0
0.4
2.8
(1.1)
(9.4)
0.75
2.9
(1.1)
3.6
(6.3)
(14.8)
0.75
1.6
(3.6)
3.6
(24.3)
(29.6)
0.75
0.2
(6.4)
3.6
(40.1)
(47.8)
0.12
0.75
(1.7)
1.5
(1.8)
3.6
(9.5)
(18.6)
0.75
0.75
1.3
1.6
1
2
Since the level of property prices peaked during 2022, peak to trough declines for house price growth and commercial real estate price growth are larger than the
start to trough declines over the period shown.
The adjustment to UK Bank Rate and CPI inflation in the severe downside is considered to better reflect the risks around the Group’s base case view in an economic
environment where supply shocks are the principal concern.
Base case scenario by quarter1
At 31 December 2022
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation
First
quarter
2022
%
Second
quarter
2022
%
Third
quarter
2022
%
Fourth
quarter
2022
%
First
quarter
2023
%
Second
quarter
2023
%
Third
quarter
2023
%
Fourth
quarter
2023
%
0.6
3.7
11.1
18.0
0.75
6.2
0.1
3.8
12.5
18.0
1.25
9.2
(0.3)
(0.4)
3.6
9.8
8.4
2.25
10.0
3.7
2.0
(11.8)
3.50
10.7
(0.4)
4.0
(3.0)
(16.9)
4.00
10.0
(0.4)
4.4
(8.4)
(19.8)
4.00
8.9
(0.2)
4.7
(9.8)
(15.9)
4.00
8.0
(0.1)
4.9
(6.9)
(3.3)
4.00
6.1
1 Gross domestic product is presented quarter-on-quarter. House price growth, commercial real estate growth and CPI inflation are presented year-on-year, i.e. from
the equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter.
262 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 19: Allowance for expected credit losses continued
At 31 December 2021
Upside
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation1
Base case
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation1
Downside
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation1
Severe downside
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation1
Probability-weighted
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation1
2021
%
7.1
4.4
10.1
12.4
0.14
2.6
7.1
4.5
9.8
10.2
0.14
2.6
7.1
4.7
9.2
8.6
0.14
2.6
6.8
4.9
9.1
5.8
0.14
2.6
7.0
4.6
9.6
9.9
0.14
2.6
2022
%
4.0
3.3
2.6
5.8
1.44
5.9
3.7
4.3
0.0
(2.2)
0.81
5.9
3.4
5.6
(4.9)
(10.1)
0.45
5.8
0.9
7.7
(7.3)
(19.6)
0.04
5.8
3.4
4.7
(1.4)
(3.9)
0.82
5.9
2023
%
2024
%
2021 to 2025
average
%
2025
%
Start to
peak
%
Start to
trough
%
1.4
3.4
4.9
0.7
1.74
3.3
1.5
4.4
0.0
(1.9)
1.00
3.0
1.3
5.9
(7.8)
(7.0)
0.52
2.8
0.4
8.5
(13.9)
(12.1)
0.06
2.3
1.3
5.0
(2.3)
(3.7)
0.99
2.9
1.3
3.5
4.7
1.0
1.82
2.6
1.3
4.4
0.5
0.1
1.06
1.6
1.1
5.8
(6.6)
(3.4)
0.55
1.3
1.0
8.1
(12.5)
(5.3)
0.08
0.5
1.2
5.0
(1.7)
(1.2)
1.04
1.7
1.4
3.7
3.6
(0.6)
2.03
3.3
1.3
4.5
0.7
0.6
1.25
2.0
1.2
5.7
(4.7)
(0.3)
0.69
1.6
1.4
7.6
(8.4)
(0.5)
0.09
0.9
1.3
4.9
(1.0)
(0.1)
1.20
2.2
3.0
3.7
5.1
3.7
1.43
3.5
2.9
4.4
2.1
1.2
0.85
3.0
2.8
5.6
(3.1)
(2.6)
0.47
2.8
2.1
7.3
(6.9)
(6.8)
0.08
2.4
2.8
4.8
0.6
0.1
0.83
3.1
12.6
4.9
28.5
20.9
2.04
6.5
12.3
4.9
11.0
10.2
1.25
6.5
11.4
6.0
9.2
8.6
0.71
6.4
7.6
8.5
9.1
6.9
0.25
6.5
11.6
5.0
9.6
9.9
1.20
6.5
(1.3)
3.2
1.2
0.8
0.10
0.6
(1.3)
4.3
1.2
0.8
0.10
0.6
(1.3)
4.3
(14.8)
(12.8)
0.10
0.6
(1.3)
4.3
(30.2)
(30.0)
0.02
0.4
(1.3)
4.3
1.2
(0.3)
0.10
0.6
1
For 31 December 2021 scenarios, CPI numbers were translations of modelled Retail Price Index excluding mortgage interest payments (RPIX) estimates.
Base case scenario by quarter1
At 31 December 2021
Gross domestic product
Unemployment rate
House price growth
Commercial real estate price growth
UK Bank Rate
CPI inflation
First
quarter
2021
%
Second
quarter
2021
%
Third
quarter
2021
%
Fourth
quarter
2021
%
First
quarter
2022
%
Second
quarter
2022
%
Third
quarter
2022
%
Fourth
quarter
2022
%
(1.3)
4.9
6.5
(2.9)
0.10
0.6
5.4
4.7
8.7
3.4
0.10
2.1
1.1
4.3
7.4
7.5
0.10
2.8
0.4
4.3
9.8
10.2
0.25
4.9
0.1
4.4
8.4
8.4
0.50
5.3
1.5
4.3
6.1
5.2
0.75
6.5
0.5
4.3
3.2
0.9
1.00
6.3
0.3
4.3
0.0
(2.2)
1.00
5.3
1 Gross domestic product is presented quarter-on-quarter. House price growth, commercial real estate growth and CPI inflation are presented year-on-year, i.e. from
the equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter.
Lloyds Banking Group Annual Report and Accounts 2022
263
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 19: Allowance for expected credit losses continued
ECL sensitivity to economic assumptions
The table below shows the Group’s ECL for the probability-weighted, upside, base case, downside and severe downside scenarios, with
the severe downside scenario incorporating adjustments made to CPI inflation and UK Bank Rate paths. The stage allocation for an
asset is based on the overall scenario probability-weighted PD and hence the staging of assets is constant across all the scenarios. In
each economic scenario the ECL for individual assessments and post-model adjustments is typically held constant reflecting the basis
on which they are evaluated. For 31 December 2022, however, post-model adjustments in Commercial Banking have been apportioned
across the scenarios to better reflect the sensitivity of these adjustments to each scenario. Judgements applied through changes
to model inputs are reflected in the scenario ECL sensitivities. The probability-weighted view shows the extent to which a higher ECL
allowance has been recognised to take account of multiple economic scenarios relative to the base case; the uplift being £692 million
compared to £223 million at 31 December 2021.
At 31 December 2022
At 31 December 20211
Probability-
weighted
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
Probability-
weighted
£m
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
UK mortgages
Credit cards
Other Retail
Commercial Banking
Other
1,209
763
1,016
1,869
46
514
596
907
1,459
46
ECL allowance
4,903
3,522
790
727
992
1,656
46
4,211
1,434
828
1,056
2,027
47
3,874
1,180
1,290
3,261
47
837
521
825
1,433
426
637
442
760
1,295
426
5,392
9,652
4,042
3,560
723
500
811
1,358
427
3,819
967
569
863
1,505
426
4,330
1,386
672
950
1,859
424
5,291
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios, with staging of assets
based on each specific scenario probability of default. ECL applied through individual assessments and the majority of post-model
adjustments are 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. Comparing the probability-weighted ECL
in the table above to the base case ECL with base case scenario specific staging, as shown in the table below, results in an uplift of
£820 million compared to £230 million at 31 December 2021.
UK mortgages
Credit cards
Other Retail
Commercial Banking
Other
ECL allowance
At 31 December 2022
At 31 December 20211
Upside
£m
Base case
£m
Downside
£m
469
563
886
734
719
984
1,425
1,600
46
46
1,344
842
1,059
2,142
47
Severe
downside
£m
7,848
1,320
1,449
5,190
47
3,389
4,083
5,434
15,854
Upside
£m
Base case
£m
Downside
£m
Severe
downside
£m
636
434
754
1,290
425
3,539
722
500
808
1,357
425
3,812
973
583
867
1,518
425
1,448
707
972
2,116
425
4,366
5,668
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
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.
UK mortgages
Credit cards
Other Retail
Commercial Banking
Percentage of assets in Stage 2
At 31 December 2022
At 31 December 20211
Upside
%
Base case
%
Downside
%
Severe
downside
%
Upside
%
Base case
%
Downside
%
Severe
downside
%
8.5
16.2
9.1
6.1
8.2
11.3
20.8
10.7
6.9
10.5
12.7
24.0
12.1
17.2
14.2
59.9
37.7
21.7
49.9
55.1
6.6
11.9
9.3
7.5
6.5
6.8
13.7
9.6
7.7
6.6
7.9
16.4
10.5
9.3
7.7
10.1
20.0
13.0
20.1
11.6
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
264 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 19: Allowance for expected credit losses continued
The impact of changes in the UK unemployment rate and House Price Index (HPI) have 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 and is assessed through the direct impact on modelled ECL only, including management
judgements applied through changes to model inputs. The change in univariate ECL sensitivity in the period is a result of the change
in definition of default and associated model changes, and the deterioration in the base case on which the assessment has been
performed.
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
Credit cards
Other Retail
Commercial Banking
ECL impact
At 31 December 2022
At 31 December 20211
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
1pp increase in
unemployment
£m
1pp decrease in
unemployment
£m
26
41
25
100
192
(21)
(41)
(25)
(91)
(178)
23
20
12
52
107
(18)
(20)
(12)
(45)
(95)
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
The table below shows the impact on the Group’s ECL in respect of UK mortgages of an increase or decrease in loss given default for
a 10 percentage point (pp) increase or decrease in the UK House Price Index (HPI). The increase or 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 2022
At 31 December 2021
10pp increase
in HPI
10pp decrease
in HPI
10pp increase
in HPI
10pp decrease
in HPI
(225)
370
(112)
162
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 2022, individually assessed provisions for Commercial Banking were
£1,008 million (2021: £905 million) which reflected a range of £908 million to £1,140 million (2021: £741 million to £1,024 million), based on
the range of alternative outcomes considered.
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 adjustments. Post-model adjustments are not
typically calculated under each distinct economic scenario used to generate ECL, but on final modelled ECL. 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 identified.
The coronavirus pandemic and the various support measures resulted in an economic environment which differed significantly
from the historical economic conditions upon which the impairment models had been built. As a result there was a greater need
for management judgements to be applied alongside the use of models at 31 December 2021. During 2022 the direct impact of the
pandemic on both economic and credit performance has reduced, resulting in the release of all material judgements required
specifically to capture COVID-19 risks. Conversely, the intensifying inflationary pressures alongside rising interest rates within the
Group’s outlook have created further risks not deemed to be fully captured by ECL models. This has required judgements to be added
to capture affordability risks from inflationary and rising interest rate pressures. At 31 December 2022 management judgement resulted
in additional ECL allowances totalling £330 million (2021: £1,284 million).
Lloyds Banking Group Annual Report and Accounts 2022
265
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 19: Allowance for expected credit losses continued
The table below analyses total ECL allowance 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 2022
UK mortgages
Credit cards
Other Retail
Commercial Banking
Other
Total
At 31 December 2021
UK mortgages
Credit cards
Other Retail2
Commercial Banking2
Other2
Total
Modelled
ECL
£m
Individually
assessed
£m
COVID-191
£m
Inflationary
risk
£m
Other
£m
Judgements due to:
946
698
903
972
46
3,565
292
436
757
342
26
1,853
–
–
–
1,008
–
1,008
–
–
–
905
–
905
–
–
1
–
–
1
67
94
18
200
400
779
49
93
53
–
–
195
52
–
–
–
–
52
214
(28)
59
(111)
–
134
426
(9)
50
(14)
–
453
Total
ECL
£m
1,209
763
1,016
1,869
46
4,903
837
521
825
1,433
426
4,042
1
Judgements introduced to address 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. In 2021, there was a £400 million other COVID-19 judgement to recognise the risk that the
conditioning assumptions assumed in the base case economic scenario were invalidated by future events.
2 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
Judgements due to inflationary risk
UK mortgages: £49 million (2021: £52 million)
These adjustments comprise:
Inflationary and interest rate pressures: £49 million (2021: £52 million)
There has been only modest evidence of credit deterioration in the UK mortgages portfolio through 2022 despite the high levels of
inflation and the rising interest rate environment. Mortgage ECL models use bank base rate as a driver of predicted defaults and
that has contributed to the elevated levels of ECL at 31 December 2022. However, there remains a potential risk to affordability from
continued inflationary pressures combined with higher interest rates, and that this may not be fully captured by the Group’s ECL
models. This risk is to customers maturing from low fixed rate deals, the building impact on variable rate holders and lower levels of
real household income.
The level of risk is somewhat mitigated from stressed affordability assessments applied at loan origination which means most
customers are anticipated to be able to absorb payment shocks. A judgemental uplift in ECL has therefore been taken in specific
segments of the mortgages portfolio, either where inflation is expected to present a more material risk, or where segments within the
model do not use bank base rate as a material driver of predicted defaults.
At 31 December 2021 additional judgemental ECL was taken in UK mortgages to recognise the heightened risk of interest rates
increasing rapidly compared to the base case outlook. This judgement quantified incremental losses from adopting an alternative
severe downside scenario with a 4 per cent interest rate peak. This judgement is no longer required given the Group’s base case
outlook, and modelled ECL, now captures an equivalent interest rate view within the base case alongside an adjusted severe scenario
with a 7 per cent interest rate peak.
Credit cards: £93 million (2021: £nil) and Other Retail: £53 million (2021: £nil)
These adjustments comprise:
Inflationary risk on Retail segments: Credit Cards: £93 million (2021: £nil) and Other Retail: £53 million (2021: £nil)
The Group’s ECL models for credit cards and personal loan portfolios use predictions of wage growth to account for future affordability
stress. As rapidly increasing inflation erodes nominal wage growth, adjustments have been made to the econometric models to
account for real, rather than nominal, income to produce adjusted predicted defaults. These adjustments include the specific risk to
affordability from increased housing costs, not captured by CPI. As these adjustments are made within predicted default models, they
are calculated under each economic scenario and impact the staging of assets through increased PDs.
Alongside these portfolio-wide adjustments management have also made an additional uplift to ECL for customers with lower income
levels and higher indebtedness deemed most vulnerable to inflationary pressures and interest rate rises. Although this segment of
customers has not exhibited any greater stress to date, uplifts have been applied to recognise continued inflation and interest rates
pose a greater proportionate risk in future periods. Management believe that this is an appropriate way to account for the aggregate
inflationary risk in these unsecured portfolios and will continue to monitor both actual economic and customer outcomes to ensure
that this adjustment remains reasonable and appropriate.
266 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 19: Allowance for expected credit losses continued
Other judgements
UK mortgages: £214 million (2021: £426 million)
These adjustments principally comprise:
Increase in time to repossession: £118 million (2021: £87 million)
Due to the Group suspending mortgage litigation activity between late-2014 and mid-2018 due to policy changes for the treatment
of arrears, and as collections strategy normalises post COVID-19 pandemic, the Group’s experience of possessions data on which
our models rely on is limited. This reflects an adjustment made to allow for an increase in the time assumed between default and
repossession.
Provision 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 accounts which have been in default for more than 24 months, with
an arrears balance increase in the last six months. These accounts have their probability of possession set to 70 per cent based on
observed historical losses incurred on accounts that were of an equivalent status. The increase in the judgement reflects a lower
modelled coverage that requires a larger adjustment to reach the required levels.
Asset recovery values: £69 million (2021: £21 million)
Due to low repossession volumes, sales data informing the estimated level of discount in the event of repossessions has been
limited, impacting the ability to update model parameters. Despite these low volumes, since 2020 the observed asset recovery sale
values have remained broadly the same on the limited volumes seen, however the indexed valuation within the model has shown an
increasing trend due to HPI increases, therefore management consider it appropriate to uplift ECL to reflect expected recovery values.
Adjustment for specific segments: £25 million (2021: £54 million)
The Group monitors risks across specific segments of its portfolios which may not be fully captured through wider collective models.
Judgemental increases applied to probability of default on forborne accounts (31 December 2021: £18 million) have been removed
as models now include forborne accounts in Stage 3 assets. The judgement for fire safety and cladding uncertainty has reduced to
£25 million (31 December 2021: £36 million). Though experience remains limited the risk is considered sufficiently material to address
through judgement, given that there is evidence of assessed cases having defective cladding, or other fire safety issues, but this risk
has reduced throughout the year.
Credit cards: £(28) million (2021: £(9) million) and Other Retail: £59 million (2021: £50 million)
These adjustments principally comprise:
Lifetime extension on revolving products: Credit cards: £82 million (2021: £41 million) and Other Retail: £14 million (2021: £5 million)
An adjustment is required to extend the lifetime used for Stage 2 exposures on Retail revolving products from a three year modelled
lifetime, which reflected the outcome data available when the model was developed. Previously this was deemed to be six years by
increasing default probabilities through the extrapolation of the default trajectory observed throughout the three years and beyond.
During 2022, work was undertaken to reassess the expected lifetime for these assets, which concluded in an extension of the expected
lifetime from six to ten years, resulting in an increase to this adjustment.
Adjustments to loss given defaults (LGDs): Credit cards: £(96) million (2021: £(37) million) and Other Retail: £13 million (2021:
£24 million)
A number of adjustments have been made to the loss given default assumptions used within unsecured and motor credit models.
These include judgements held previously, notably in relation to the alignment of MBNA credit card cure rates as collection strategies
harmonise. Alongside this, new adjustments have also been raised to capture recent improvements in observed cure rates offset by
updates to recovery cost assumptions. These adjustments will be released once incorporated into models through future recalibration
which is pending model development.
Motor default suppression: Other Retail: £13 million (2021: £nil)
Used car prices have continued to rise through 2022 with lower actual defaults materialising than anticipated. Management consider it
appropriate to uplift ECL to account for the risk that prices return back to more normalised levels.
Commercial Banking: £(111) million (2021: £(14) million)
These adjustments principally comprise:
Adjustments to loss given defaults (LGDs): £(105) million (2021: £(25) million)
The modelling approach for loss given default for commercial exposures has been reviewed. Management deem ECL should be
adjusted to mitigate limitations identified in the approach which are causing loss given defaults to be inflated. These include the
benefit from amortisation of exposures relative to collateral values at default and a move to an exposure-weighted approach being
adopted. These temporary adjustments will be addressed through future model development.
Corporate insolvency rates: £(35) million (2021: £nil)
During 2022, the volume of UK corporate insolvencies showed an increasing trend to above December 2019 levels, revealing a marked
dislocation between observed UK corporate insolvencies and the Group’s credit performance. This dislocation gives rise to uncertainty
over the drivers of observed trends and the appropriateness of the Group’s Commercial Banking model response which uses observed
UK corporate insolvencies data. Given the Group’s asset quality remains strong with very low new defaults, a negative adjustment was
deemed appropriate by management to address potential overstatement of Commercial Banking ECL.
Climate risk
The Group considers how climate risks are incorporated into the measurement of expected credit losses. An assessment was
performed of the Group’s internally generated economic scenarios used in the measurement of expected credit losses against
external scenarios published by the Network for Greening the Financial System (NGFS). This was supplemented by an assessment
of the behavioural lifetime of assets against the expected time horizons of when climate risks may materialise. Given the extended
timelines related to climate risks compared to the tenor of the Group’s lending portfolios and insights produced by the Group’s climate
risk experts, no adjustments have been required to the expected credit losses measured as at 31 December 2022.
Lloyds Banking Group Annual Report and Accounts 2022
267
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 20: Finance lease and hire purchase receivables
The Group’s finance lease and hire purchase receivables are classified as loans and advances to customers and accounted for at
amortised cost. These balances are analysed 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
Gross investment
Unearned future finance income
Rentals received in advance
Net investment
The net investment 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
Finance leases
Hire purchase
2022
£m
223
223
119
54
40
299
958
(181)
(11)
766
2021
£m
346
143
230
118
54
337
1,228
(232)
(14)
982
2022
£m
6,339
3,896
3,725
2,975
388
275
17,598
(1,458)
(111)
16,029
Finance leases
Hire purchase
2022
£m
177
192
96
38
27
236
766
2021
£m
277
110
200
96
38
261
982
2022
£m
5,646
3,468
3,456
2,856
358
245
16,029
2021
£m
4,752
4,541
3,998
2,828
816
374
17,309
(1,359)
(89)
15,861
2021
£m
4,032
4,172
3,781
2,754
767
355
15,861
Equipment leased to customers under finance leases and hire purchase receivables relates to financing transactions to fund the
purchase of aircraft, ships, motor vehicles and other items. There was an allowance for uncollectable finance lease receivables
included in the allowance for impairment losses of £14 million (2021: £18 million) and for hire purchase receivables of £238 million (2021:
£275 million).
The Group’s finance lease and hire purchase assets are comprised as follows:
Electric vehicles
Internal combustion engine vehicles
Hybrid vehicles
Other
Net investment
Finance leases
Hire purchase
2022
£m
8
176
5
577
766
2021
£m
3
142
3
834
982
2022
£m
578
10,817
741
3,893
16,029
2021
£m
430
10,713
524
4,194
15,861
268 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 21: Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
Asset-backed securities
Corporate and other debt securities
Treasury and other bills
Equity shares
2022
£m
11,211
146
11,514
22,871
–
283
2021
£m
14,613
70
13,134
27,817
85
235
Total financial assets at fair value through other comprehensive income
23,154
28,137
All assets were assessed at Stage 1 at 31 December 2021 and 2022.
Note 22: Investments in joint ventures and associates
The Group’s share of results of, and investments in, equity accounted joint ventures and associates comprises:
Share of income statement amounts:
Income
Expenses
Impairment
Profit (loss) before tax
Tax
Share of post-tax results
Share of other comprehensive income
Share of total comprehensive income
Share of balance sheet amounts:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Share of net assets at 31 December
Movement in investments over the year:
At 1 January
Exchange and other adjustments
Additional investments
Repayment of capital
Share of post-tax results
Dividends paid
Share of net assets at 31 December
2020
£m
76
(89)
–
(13)
–
(13)
–
(13)
Joint ventures
Associates
2022
£m
2021
£m
2020
£m
2022
£m
2021
£m
2020
£m
4
(11)
–
(7)
–
(7)
–
(7)
72
(78)
–
(6)
–
(6)
–
(6)
108
(85)
–
23
–
23
–
23
324
227
(97)
(119)
335
322
(17)
56
(36)
23
(13)
335
90
(80)
–
10
(1)
9
–
9
421
169
(142)
(126)
322
279
–
34
–
9
–
322
7
(20)
–
(13)
–
(13)
–
(13)
58
3
(11)
–
50
30
(6)
39
–
(13)
–
50
4
(11)
–
(7)
–
(7)
–
(7)
23
12
(5)
–
30
17
–
20
–
(7)
–
30
Total
2021
£m
94
(91)
–
3
(1)
2
–
2
444
181
(147)
(126)
352
296
–
54
–
2
–
352
2022
£m
115
(105)
–
10
–
10
–
10
382
230
(108)
(119)
385
352
(23)
95
(36)
10
(13)
385
The Group’s unrecognised share of losses of associates for the year was £nil (2021: £nil; 2020: £nil). For entities making losses,
subsequent profits earned are not recognised until previously unrecognised losses are extinguished. The Group’s unrecognised share
of losses net of unrecognised profits on a cumulative basis of associates is £2 million (2021: £2 million; 2020: £2 million) and of joint
ventures is £5 million (2021: £5 million; 2020: £5 million).
Where entities have statutory accounts drawn up to a date other than 31 December, management accounts are used for Group
reporting.
Included within the investment in joint ventures at 31 December 2022 is £68 million (2021: £73 million) of lending carried at amortised
cost.
Lloyds Banking Group Annual Report and Accounts 2022
269
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
Note 23: Goodwill
At 1 January
Acquisition of businesses (see below)
At 31 December
Cost1
Accumulated impairment losses
At 31 December
2022
£m
2,320
335
2,655
2,999
(344)
2,655
2021
£m
2,320
–
2,320
2,664
(344)
2,320
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.
On 31 January 2022, the Group completed the acquisition of 100 per cent of the share capital of Embark Group Limited (Embark), which
together with its subsidiaries operates an investment and retirement platform business, enhancing the Group’s Wealth business
capabilities, and has been consolidated into the Group’s results from that date. The total fair value of the purchase consideration was
£377 million, settled in cash, and goodwill of £324 million has been recognised on the transaction. None of the goodwill recognised
is deductible for tax purposes. Acquisition-related costs of £4 million have been included in operating expenses for the year ended
31 December 2022. The revenue included in the consolidated statement of comprehensive income since 31 January 2022 contributed
by Embark was £81 million, with net loss after tax of £9 million over the same period. Had Embark been consolidated from 1 January
2022, the consolidated statement of comprehensive income would have included revenue of £87 million and a net loss after tax of
£12 million. The goodwill relating to the acquisition of Embark has been allocated to the Group’s Life and pensions business as it is
expected to benefit from the synergies of the acquisition.
In addition, goodwill of £11 million arose on the Group’s acquisition of Cavendish Online during the year.
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 £2,655 million (2021: £2,320 million), £2,171 million,
or 82 per cent (2021: £1,836 million, 79 per cent), including the £324 million arising on the acquisition of Embark in the year, has been
allocated to the Life and pensions cash generating unit; £302 million, or 11 per cent (2021: £302 million, 13 per cent) has been allocated
to the Credit card cash generating unit in the Group’s Retail division; and £166 million, or 6 per cent (2021: £166 million, 7 per cent) to the
Motor business cash generating unit.
The recoverable amount of the goodwill relating to Scottish Widows is 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 four-year period, the
related run-off of existing business in-force and a discount rate (pre-tax) of 11.2 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 (which will reflect current and future risks, such as climate and expected economic activity conditions)
and competitor activity. The discount rate is determined with reference to internal measures and available industry information. New
business cash flows beyond the four-year period have been extrapolated using a reducing balance growth rate that falls from 3.5
per cent down to 2.0 percent after 20 years, 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 the Motor business is based on a value-in-use calculation using post-tax cash
flow projections based on financial budgets and plans approved by management covering a four-year period and a discount rate
(post-tax) of 10 per cent, based on the Group’s cost of equity. The cash flows beyond the four-year period are extrapolated using a
growth rate of 3.5 per cent which does not exceed the long-term average growth rates for the markets in which the Motor business
participates. Management believes that any reasonably possible change in the key assumptions, including from the impacts of
climate change or climate-related legislation, would not cause the recoverable amount of the goodwill relating to the Motor business
to fall below the balance sheet carrying value.
The recoverable amount of the goodwill relating to Credit cards has been based on a value-in-use calculation using post-tax cash
flow projections based on financial budgets and plans approved by management covering a four-year period and a discount rate
(post-tax) of 10 per cent, based on the Group’s cost of equity. The cash flows beyond the four-year period assume 3.5 per cent growth.
Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount
of the goodwill relating to Credit cards to fall below the balance sheet carrying value.
Note 24: Value of in-force business
Key assumptions
The impacts of reasonably possible changes in the key assumptions made in respect of the Group’s life insurance business, which
include the impact on the value of in-force business, are disclosed in note 32.
The principal features of the methodology and process used for determining key assumptions used in the calculation of the value of
in-force business are set out below:
Economic assumptions
Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. In practice, to
achieve the same result, where the cash flows are either independent of or move linearly with market movements, a method has been
applied known as the ‘certainty equivalent’ approach whereby it is assumed that all assets earn a risk-free rate and all cash flows are
discounted at a risk-free rate. The certainty equivalent approach covers all investment assets relating to insurance and participating
investment contracts, other than the annuity business (where an illiquidity premium is included, see below).
A market-consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option
pricing technique calibrated to be consistent with the market price of relevant options at each valuation date. Further information on
options and guarantees can be found in note 31.
270 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 24: Value of in-force business continued
The liabilities in respect of the Group’s UK annuity business are matched by a portfolio of fixed interest securities, including a large
proportion of corporate bonds and illiquid loan assets. The value of the in-force business asset for UK annuity business has been
calculated after taking into account an estimate of the market premium for illiquidity in respect of corporate bond holdings and
relevant illiquid loan assets. In determining the market premium for illiquidity, a range of inputs are considered which reflect actual
asset allocation and relevant observable market data. The illiquidity premium is estimated to be 160 basis points at 31 December 2022
(31 December 2021: 88 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
2022
%
2021
%
1.94 to 4.55
(0.16) to 3.60
3.54 to 6.15
0.72 to 4.49
1.94 to 4.55
(0.16) to 3.60
3.70
4.00
3.28
3.58
1 All risk-free rates are quoted as the range of rates implied by the relevant forward swap curve.
Non-market risk
An allowance for non-market risk is made through the choice of best estimate assumptions based upon experience, which generally
will give the mean expected financial outcome for shareholders and hence no further allowance for non-market risk is required.
However, in the case of operational risk, reinsurer default and the with-profit funds these can be asymmetric in the range of potential
outcomes for which an explicit allowance is made.
Non-economic assumptions
Future mortality, morbidity, expenses, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of
past experience and on management’s view of future experience. Further information on these assumptions is given in note 31 and the
effect of changes in key assumptions is given in note 32.
The value of in-force business asset in the consolidated balance sheet is comprised as follows:
Acquired value of in-force non-participating investment contracts
Value of in-force insurance and participating investment contracts
Total value of in-force business
The movement in the acquired value of in-force non-participating investment contracts over the year is as follows:
At 1 January
Amortisation (note 11)
At 31 December
2022
£m
175
5,244
5,419
2022
£m
197
(22)
175
2021
£m
197
5,317
5,514
2021
£m
221
(24)
197
The acquired value of in-force non-participating investment contracts includes £106 million (2021: £119 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
2022
£m
5,317
7
2021
£m
5,396
(9)
416
321
(360)
18
247
(401)
(80)
5,244
(355)
84
(465)
345
(70)
5,317
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.
Lloyds Banking Group Annual Report and Accounts 2022
271
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 25: Other intangible assets
Brands
£m
Core deposit
intangible
£m
Purchased
credit card
relationships
£m
Customer-
related
intangibles
£m
Capitalised
software
enhancements
£m
Total
£m
2,770
1,002
538
5,894
10,800
Cost:
At 1 January 2021
Additions and acquisitions
Disposals and write-offs
At 31 December 2021
Exchange and other adjustments
Additions and acquisitions
Disposals and write-offs
At 31 December 2022
Accumulated amortisation:
At 1 January 2021
Exchange and other adjustments
Charge for the year (note 11)
Disposals and write-offs
At 31 December 2021
Exchange and other adjustments
Charge for the year (note 11)
Disposals and write-offs
At 31 December 2022
Balance sheet amount at 31 December 2022
Balance sheet amount at 31 December 2021
596
–
–
596
–
5
(12)
589
–
–
–
–
2,770
1,002
–
–
–
–
–
–
2,770
1,002
216
2,770
–
–
–
216
–
–
(12)
204
385
380
–
–
–
2,770
–
–
–
2,770
–
–
551
–
70
–
621
1
70
–
692
310
381
–
–
538
–
34
–
572
1,017
(460)
6,451
(1)
1,452
(186)
7,716
1,017
(460)
11,357
(1)
1,491
(198)
12,649
538
2,585
6,660
–
–
–
538
3
–
–
541
31
–
(1)
892
(460)
3,016
(7)
833
(186)
3,656
4,060
3,435
(1)
962
(460)
7,161
(3)
903
(198)
7,863
4,786
4,196
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 2022 was £380 million (2021: £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 for a
four-year period of the income generated by the Bank of Scotland cost generating unit, a discount rate of 10 per cent and a future
growth rate of 3.5 per cent. Management believes that any reasonably possible change in the key assumptions would not cause the
recoverable amount of the Bank of Scotland brand to fall below its balance sheet carrying value.
Note 26: Other assets
Property, plant and equipment:
Investment properties (see below)
Premises
Equipment
Operating lease assets (see below)
Right-of-use assets (note 27)
Settlement balances
Prepayments
Deferred acquisition and origination costs
Other assets
Total other assets
272
Lloyds Banking Group Annual Report and Accounts 2022
2022
£m
2,532
871
1,285
4,816
1,156
10,660
416
1,224
54
1,483
13,837
2021
£m
3,612
817
1,634
4,196
1,318
11,577
434
1,022
64
1,593
14,690
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 26: Other assets continued
Investment properties
The Group’s investments properties are predominantly held by the Insurance, Pensions and Investments business where they back
policyholder liabilities. They are valued by external Chartered Surveyors using industry standard techniques based on guidance
from the Royal Institute of Chartered Surveyors. The valuation methodology includes an assessment of general market conditions
and sector level transactions and takes account of expectations of occupancy rates, rental income and growth. Property valuations
undergo individual scrutiny using cash flow analysis to factor in the timing of rental reviews, capital expenditure, lease incentives,
dilapidation and operating expenses; these reviews utilise both observable and unobservable inputs. Within the fair value hierarchy,
all of the Group’s investment properties are categorised as level 3 (see note 49 for details of levels in the fair value hierarchy). The table
below analyses movements in level 3 investment properties, which are carried at fair value.
At 1 January
Acquisition of new properties
Additional expenditure on existing properties
Change in fair value (note 7)
Disposals
At 31 December
2022
£m
3,612
60
50
(511)
(679)
2,532
2021
£m
3,347
18
68
575
(396)
3,612
Rental income of £145 million (2021: £186 million) and direct operating expenses of £32 million (2021: £25 million) arising from investment
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 £119 million (2021: £78 million).
Operating lease assets where the Group is lessor
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. At 31 December the
future minimum rentals receivable under non-cancellable operating leases were as follows:
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total future minimum rentals receivable
2022
£m
912
620
322
102
11
–
1,967
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. Operating lease
assets are comprised as follows:
Electric vehicles
Internal combustion engine vehicles
Hybrid vehicles
Other
Total operating lease assets
2022
£m
1,610
2,042
1,159
5
4,816
Note 27: Lessee disclosures
The table below sets out the movement in the Group’s right-of-use assets, which are primarily in respect of premises, and are
recognised within other assets (note 26).
At 1 January
Exchange and other adjustments
Additions
Disposals
Depreciation charge for the year
At 31 December
2022
£m
1,318
3
98
(37)
(226)
1,156
2021
£m
848
561
288
86
8
–
1,791
2021
£m
728
2,531
928
9
4,196
2021
£m
1,500
(9)
73
(18)
(228)
1,318
The Group’s lease liabilities are recognised within other liabilities (note 34). The maturity analysis of the Group’s lease liabilities on an
undiscounted basis is set out in the liquidity risk section of note 52.
The total cash outflow for leases in the year ended 31 December 2022 was £210 million (2021: £256 million). The amount recognised
within interest expense in respect of lease liabilities is disclosed in note 5.
Lloyds Banking Group Annual Report and Accounts 2022
273
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 28: Financial liabilities at fair value through profit or loss
Liabilities designated at fair value through profit or loss:
Debt securities in issue
Other
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Short positions in securities
Total financial liabilities at fair value through profit or loss
2022
£m
5,159
19
5,178
11,037
1,540
12,577
17,755
2021
£m
6,537
4
6,541
14,962
1,620
16,582
23,123
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 2022 was
£11,195 million, which was £6,036 million higher than the balance sheet carrying value (2021: £10,558 million, which was £4,021 million
higher than the balance sheet carrying value). At 31 December 2022 there was a cumulative £324 million decrease in the fair value
of these liabilities attributable to changes in credit spread risk; this is determined by reference to the quoted credit spreads of Lloyds
Bank plc, the issuing entity within the Group. Of the cumulative amount, a decrease of £519 million arose in 2022 and an increase of
£86 million arose in 2021.
For the fair value of collateral pledged in respect of repurchase agreements see note 52.
In addition to the liabilities above, the Group’s non-participating investment contracts (see note 33) are held at fair value through profit
or loss.
Note 29: Debt securities in issue
Senior unsecured notes issued
Covered bonds (note 30)
Certificates of deposit issued
Securitisation notes (note 30)
Commercial paper
Total debt securities in issue
2022
£m
36,819
14,242
7,225
2,780
12,753
73,819
2021
£m
37,354
17,409
4,454
3,672
8,663
71,552
Note 30: 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.
274 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 30: Securitisations and covered bonds continued
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 externally held notes in issue at 31 December, are listed below. Notes in issue, previously
reported gross of internal holdings, are presented net; comparatives have been presented on a consistent basis. The notes in issue are
reported in note 29.
Securitisation programmes
UK residential mortgages and commercial loans
Credit card receivables
Motor vehicle finance
Dutch residential mortgages
2022
2021
Loans and
advances
securitised1
£m
Externally
held notes
in issue
£m
Loans and
advances
securitised1
£m
Externally
held notes
in issue
£m
15,805
12,776
401
402
2,035
223
149
399
19,129
11,615
235
427
2,543
595
141
426
Total securitisation programmes (notes 28 and 29)2
29,384
2,806
31,406
3,705
Covered bond programmes
Residential mortgage-backed
Social housing loan-backed
Total covered bond programmes (note 29)
Total securitisation and covered bond programmes
27,400
831
28,231
13,742
500
14,242
17,048
35,896
833
36,729
16,909
500
17,409
21,114
1
2
Including assets backing notes held internally within the Group.
Includes £26 million (2021: £33 million) of securitisation notes held at fair value through profit or loss.
Cash deposits of £3,896 million (2021: £3,558 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 2022 these obligations had not been
triggered; the maximum exposure under these facilities was £25 million (2021: £52 million).
The Group has two 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 2022 (2021: none).
Note 31: Liabilities arising from insurance contracts and participating investment
contracts
Insurance contract and participating investment contract liabilities are comprised as follows:
Life insurance (see (1) below):
Insurance contracts
Participating investment contracts
Non-life insurance contracts (see (2) below):
Unearned premiums
Claims outstanding
2022
2021
Gross
£m
Reinsurance1
£m
Net
£m
Gross
£m
Reinsurance1
£m
Net
£m
95,745
10,541
106,286
246
361
607
(595)
–
95,150
10,541
(595)
105,691
109,200
13,623
122,823
(740)
108,460
–
13,623
(740)
122,083
(17)
(2)
(19)
229
359
588
312
288
600
(16)
–
(16)
296
288
584
Total
106,893
(614)
106,279
123,423
(756)
122,667
1
Reinsurance balances are reported within assets.
Lloyds Banking Group Annual Report and Accounts 2022
275
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 31: Liabilities arising from insurance contracts and participating investment
contracts continued
(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 2021
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2021
New business
Changes in existing business
Insurance
contracts
£m
Participating
investment
contracts
£m
Gross
£m
Reinsurance
£m
Net
£m
102,424
13,041
115,465
(820)
114,645
3,427
3,437
6,864
(88)
40
570
610
(28)
3,467
4,007
7,474
(116)
109,200
13,623
122,823
4,151
18
4,169
(17,693)
(3,100)
(20,793)
(110)
190
80
–
(740)
(98)
243
145
–
3,357
4,197
7,554
(116)
122,083
4,071
(20,550)
(16,479)
87
Change in liabilities charged to the income statement (note 10)
(13,542)
(3,082)
(16,624)
Exchange and other adjustments
At 31 December 2022
87
–
87
95,745
10,541
106,286
(595)
105,691
Liabilities for insurance contracts and participating investment contracts can be split into with-profit fund liabilities, accounted for
using the PRA’s realistic capital regime (realistic liabilities), and non-profit fund liabilities, accounted for using a prospective actuarial
discounted cash flow methodology, as follows:
Insurance contracts
Participating investment contracts
Total
With-profit
fund
£m
5,778
5,435
11,213
2022
Non-profit
fund
£m
89,967
5,106
With-profit
fund
£m
2021
Non-profit
fund
£m
Total
£m
7,232
6,641
101,968
109,200
6,982
13,623
Total
£m
95,745
10,541
95,073
106,286
13,873
108,950
122,823
Business description
With-profit fund realistic liabilities
(i)
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. Pay-outs may be subject to a guaranteed minimum pay-out 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-profit benefit reserve
Impact of the smoothing policy
(iii) Assumptions
Key assumptions used in the calculation of with-profit liabilities, which reflect the impacts of COVID-19 that has also increased the level
of uncertainty (in particular in relation to persistency and mortality assumptions) 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.
276 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 31: Liabilities arising from insurance contracts and participating investment
contracts continued
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 for the main classes of business are set with regard to recent Group experience and general industry
trends, all of which are adjusted for smoker status and age/gender specific factors. The mortality tables used in the valuation are
summarised below:
Annuities
94% Bespoke tables
CMI2021_{M/F}_(7.25)_ {3.0/2.8}%_{0.0/0.2}A_2013
94% Bespoke tables
CMI2020_{M/F}_(7.25)_ {3.0/2.8}%_{0.3/0.4}A_2013
2022
2021
Whole of life assurance
Bespoke tables
Term assurance
88%–111% of TxxL08 tables
Pensions
Savings
64%–77% of TxxL08 tables
62%–74% of AxC00 tables
Bespoke tables
88%–111% of TxxL08 tables
64%–77% of TxxL08 tables
55%–80% of AxC00 tables
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 demutualisation 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 2022 of £1.9 billion (2021: £2.5 billion). The eventual cost of providing benefits on policies written both pre and
post demutualisation is dependent upon a large number of variables, including future interest rates and equity values, demographic
factors, such as mortality, and the proportion of policyholders who seek to exercise their options. The ultimate cost will therefore not be
known for many years.
As noted above, the liabilities of the With-Profit Funds are valued using a market-consistent stochastic simulation model which places
a value on the options and guarantees capturing both their intrinsic value and time value.
The most significant economic assumptions included in the model are risk-free yield and investment volatility.
Non-profit fund liabilities
(i)
Business description
The Group principally writes the following types of life insurance contracts within its non-profit funds. Shareholder profits on these types
of business arise from management fees and other policy charges.
Unit-linked business
This includes unit-linked pensions and unit-linked bonds, the primary purpose of which is to provide an investment vehicle where the
policyholder is also insured against death.
Life insurance
The policyholder is insured against death or permanent disability, usually for predetermined amounts. Such business includes whole of
life and term assurance and long-term creditor policies.
Annuities
The policyholder is entitled to payments for the duration of their life and is therefore insured against surviving longer than expected.
(ii) Method of calculation of liabilities
The non-profit fund liabilities are determined on the basis of recognised actuarial methods and involve estimating future policy
cash flows over the duration of the in-force book of policies, and discounting the cash flows back to the valuation date allowing for
probabilities of occurrence.
(iii) Assumptions
Generally, assumptions used to value non-profit fund liabilities are prudent in nature and therefore contain a margin for adverse
deviation. This margin for adverse deviation is based on management’s judgement and reflects management’s views on the
inherent level of uncertainty. In calculating the value of non-profit fund liabilities, the impacts of COVID-19, which have 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:
Lloyds Banking Group Annual Report and Accounts 2022
277
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 31: Liabilities arising from insurance contracts and participating investment
contracts continued
Interest rates
The rates of interest used are determined by reference to a number of factors including the redemption yields on fixed interest assets
at the valuation date.
Margins for risk are allowed for in the assumed interest rates, 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 assumptions for the main classes of business are as follows:
Annuities
94% Bespoke tables
CMI2021_{M/F}_(7.25)_ {3.0/2.8}%_{0.0/0.2}A_2013
94% Bespoke tables
CMI2020_{M/F}_(7.25)_ {3.0/2.8}%_{0.3/0.4}A_2013
2022
2021
Whole of life assurance
Bespoke tables
Term assurance
88%–111% of TxxL08 tables
Pensions
Savings
64%–77% of TxxL08 tables
62%–74% of AxC00 tables
Bespoke tables
88%–111% of TxxL08 tables
64%–77% of TxxL08 tables
55%–80% of AxC00 tables
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 demographic and expense assumptions in 2022 resulted in a net gain of £348 million (2021: net gain of
£43 million). The following were the key impacts on profit before tax:
• Change in persistency assumptions (£229 million increase (2021: £15 million decrease))
• Change in the assumption in respect of current and future mortality and morbidity rates (£112 million increase (2021: £149 million
increase))
• Change in expense assumptions (£9 million increase (2021: £94 million decrease))
These amounts include the impacts of movements in liabilities and value of the in-force business in respect of insurance contracts
and participating investment contracts.
(iv) Options and guarantees outside the With-Profit Funds
A number of typical guarantees are provided outside the With-Profit Funds such as guaranteed payments on death (for example
term assurance) or guaranteed income for life (for example annuities). Caps and floors on inflation-linked increases to benefits
and premiums across the annuities and protection business form additional guarantees within the Group’s insurance business.
Key assumptions affecting the time value of these guarantees are inflation, inflation volatility and interest rates. At 31 December
2022, additional reserves of £74 million were held to cover the time value of these guarantees. 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 £30 million (2021: £61 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 represent the Group’s estimates
of the most likely or expected outcome, with a margin added for uncertainty reserves. 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 (credited) to income statement
Gross provision at 31 December
Reinsurers’ share
Net provision at 31 December
2022
£m
312
494
(560)
(66)
246
(17)
229
2021
£m
330
624
(642)
(18)
312
(16)
296
These provisions represent the liability for short-term insurance contracts for which the Group’s obligations are not expired at the year
end.
278 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 31: 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
2022
£m
288
(342)
415
73
361
(2)
359
208
151
359
2021
£m
265
(305)
328
23
288
–
288
177
111
288
1 Of which an increase of £402 million (2021: increase of £367 million) was in respect of current year claims and an increase of £13 million (2021: decrease of
£39 million) was in respect of prior year claims.
These claims liabilities are not discounted because they are typically settled within three years.
Note 32: Life insurance sensitivity analysis
The following table demonstrates the effect of reasonably possible changes in key assumptions on profit before tax and equity
disclosed in these financial statements assuming that the other assumptions remain unchanged. In practice this is unlikely to occur,
and changes in some assumptions may be correlated. These amounts include movements in assets, liabilities and the value of the in-
force business in respect of insurance contracts and participating investment contracts. The impact is shown in one direction but can
be assumed to be reasonably symmetrical.
Critical accounting estimates
Annuitant mortality1
Future maintenance and investment expenses2
Widening of credit default spreads3
Increase in illiquidity premia4
Other accounting estimates
Non-annuitant mortality and morbidity5
Lapse rates6
Risk-free rate7
Guaranteed annuity option take up8
Equity investment volatility9
2022
2021
Increase
(reduction)
in profit
before tax
£m
Increase
(reduction)
in equity
£m
Increase
(reduction)
in profit
before tax
£m
Increase
(reduction)
in equity
£m
(188)
309
(284)
114
22
122
44
(2)
(2)
(152)
250
(230)
92
18
99
35
(2)
(1)
(301)
355
(433)
190
13
88
44
(2)
(2)
(244)
288
(351)
154
11
71
35
(2)
(1)
Change in variable
5% reduction
10% reduction
0.25% addition
0.10% addition
5% reduction
10% reduction
0.25% reduction
5% addition
1% addition
This sensitivity shows the impact on the annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate.
This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate.
1
2
3 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.
4 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.
5 This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate.
6 This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate.
7
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.
8 This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.
9 This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.
Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving
bases.
Lloyds Banking Group Annual Report and Accounts 2022
279
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 33: Liabilities arising from non-participating investment contracts
The movement in liabilities arising from non-participating investment contracts may be analysed as follows:
At 1 January
New business
Changes in existing business
At 31 December
2022
£m
2021
£m
45,040
38,452
3,148
(5,213)
4,187
2,401
42,975
45,040
The balances above are shown gross of reinsurance. As at 31 December 2022, related reinsurance balances were £2 million (2021:
£3 million); reinsurance balances are reported within assets. Liabilities arising from non-participating investment contracts are
categorised as level 2. See note 49 for details of levels in the fair value hierarchy.
Note 34: Other liabilities
Settlement balances
Unitholders’ interest in consolidated Open-Ended Investment Companies1
Unallocated surplus within insurance businesses
Lease liabilities
Other creditors and accruals
Total other liabilities
2022
£m
1,125
10,413
248
1,317
5,987
19,090
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 analysis of the Group’s lease liabilities on an undiscounted basis is set out in the liquidity risk section of note 52.
Note 35: Retirement benefit obligations
2022
£m
123
2
125
330
455
2021
£m
234
2
236
302
538
2022
£m
3,823
(126)
3,697
2022
£m
3,732
(35)
3,697
Charge to the income statement
Defined benefit pension schemes
Other post-retirement benefit schemes
Total defined benefit schemes
Defined contribution pension schemes
Total charge to the income statement (note 11)
Amounts recognised in the balance sheet
Retirement benefit assets
Retirement benefit obligations
Total amounts recognised in the balance sheet
The total amounts recognised in the balance sheet relate to:
Defined benefit pension schemes
Other post-retirement benefit schemes
Total amounts recognised in the balance sheet
280 Lloyds Banking Group Annual Report and Accounts 2022
2021
£m
541
12,080
308
1,475
5,543
19,947
2020
£m
244
3
247
319
566
2021
£m
4,531
(230)
4,301
2021
£m
4,404
(103)
4,301
Notes to the consolidated financial statements continuedfor the year ended 31 December Characteristics of and risks associated with the Group’s schemes
Note 35: Retirement benefit obligations continued
Pension schemes
Defined benefit schemes
(i)
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 2022, these schemes represented 94 per cent of the Group’s
total gross defined benefit pension assets (2021: 94 per cent). These schemes provide retirement benefits calculated as a proportion
of final pensionable salary depending upon the length of pensionable service; the minimum retirement age under the rules of the
schemes at 31 December 2022 is generally 55, although certain categories of member are deemed to have a protected 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 scheme membership along
with a combination of independent and employer appointed trustees to comply with legislation and scheme rules.
A valuation to determine the funding status of each scheme is carried out at least every three years, whereby scheme assets are
measured at market value and liabilities (technical provisions) are measured using prudent assumptions. If a deficit is identified a
recovery plan is agreed between the employer and the scheme Trustee and sent to the Pensions Regulator for review. The Group
has not provided for these deficit contributions as the future economic benefits arising from these contributions are expected to be
available to the Group. The Group’s overseas defined benefit pension schemes are subject to local regulatory arrangements.
The most recent triennial funding valuations of the Group’s three main defined benefit pension schemes showed an aggregate
ongoing funding deficit of £7.3 billion as at 31 December 2019 (a funding level of 85.7 per cent). Under the agreed 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 until the 2019 deficit has been removed.
These schemes continue to have a funding deficit, but are in a significantly stronger financial position than at 31 December 2021, when
the deficit was c.£4.0 billion. During 2022, deficit contributions of £2.2 billion were paid into these schemes and the Group expects to
make a further fixed contribution of £0.8 billion in the first half of 2023, consistent with 2021 and 2022.
The Group expects to have substantially agreed the triennial valuation with the Trustee by the end of the third quarter of 2023, along
with a revised contribution schedule in respect of any remaining deficit. Trustee agreement will be conditional upon prior feedback
from the Pensions Regulator. The Group also expects that future contributions will become increasingly contingent in nature, such that
they are only paid into the schemes if required.
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 schemes. The Group expects to pay contributions of at least £1.1 billion to its defined benefit schemes in 2023.
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 2022, the limited liability partnerships held assets of £6.3 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 2022 these held assets of £4.5 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 2022.
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 2022, 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 and
inflation assumptions than the IAS 19 valuations.
In a judgment in 2018, the High Court confirmed the requirement to equalise the Guaranteed Minimum Pension (GMP) benefits
of men and women accruing between 1990 and 1997 from contracting out of the State Earnings Related Pension Scheme. 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.
Lloyds Banking Group Annual Report and Accounts 2022
281
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 35: Retirement benefit obligations continued
(ii)
Amounts in the financial statements
Amount included in the balance sheet
Present value of funded obligations
Fair value of scheme assets
Net amount recognised in the balance sheet
Net amount recognised in the balance sheet
At 1 January
Net defined benefit pension charge
Actuarial gains on defined benefit obligation
Return on plan assets
Employer contributions
Exchange and other adjustments
At 31 December
Movements in the defined benefit obligation
At 1 January
Current service cost
Interest expense
Remeasurements:
Actuarial losses – experience
Actuarial gains (losses) – demographic assumptions
Actuarial gains – 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
At 31 December
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
282 Lloyds Banking Group Annual Report and Accounts 2022
2022
£m
2021
£m
(28,965)
(47,130)
32,697
3,732
2022
£m
4,404
(123)
17,222
(20,302)
2,530
1
3,732
2022
£m
51,534
4,404
2021
£m
1,578
(234)
1,267
449
1,344
–
4,404
2021
£m
(47,130)
(49,549)
(180)
(902)
(1,186)
288
18,120
2,048
(4)
13
(32)
(213)
(704)
(426)
(146)
1,839
2,034
(11)
22
24
(28,965)
(47,130)
2022
£m
2021
£m
(3,088)
(8,515)
(16,013)
(1,349)
(5,837)
(16,167)
(23,171)
(1,955)
(28,965)
(47,130)
2022
£m
51,534
(20,302)
997
2,530
2021
£m
51,127
449
733
1,344
(2,048)
(2,034)
(13)
(34)
33
(23)
(38)
(24)
32,697
51,534
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 35: Retirement benefit obligations continued
The expense recognised in the income statement for the year ended 31 December comprises:
Current service cost
Net interest amount
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
Property
Pooled investment vehicles
2022
£m
180
(95)
–
4
34
123
2021
£m
213
(29)
1
11
38
234
2021
Total
£m
54
Quoted
£m
Unquoted
£m
617
36
2020
£m
206
(23)
2
5
54
244
Total
£m
653
3,007
15,497
3,978
22,482
116
10,512
23,969
13,399
47,880
–
1,192
–
–
–
–
139
10,512
23,969
13,399
47,880
139
13,346
14,538
2022
Quoted
£m
Unquoted
£m
7
3,007
15,497
3,978
22,482
–
47
–
–
–
–
116
2,730
15,863
18,593
Money market instruments, cash, derivatives and other assets
and liabilities
At 31 December
1,069
26,288
(9,617)
6,409
(8,548)
32,697
319
(11,995)
50,008
1,526
(11,676)
51,534
1 Of the total debt instruments, £20,369 million (2021: £42,568 million) were investment grade (credit ratings equal to or better than ‘BBB’).
The assets of all of 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
2022
£m
1,421
240
2,222
1,604
1,193
11,527
354
32
2021
£m
3,696
1,407
3,884
1,541
1,389
2,031
561
29
18,593
14,538
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.
Climate change is one of the risks the schemes manage given its potential financial impact on valuation of assets.
(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
2022
%
4.93
3.13
2.69
0.00
2.84
2021
%
1.94
3.21
2.92
0.00
2.88
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 a 10 basis point gap has been
assumed.
Lloyds Banking Group Annual Report and Accounts 2022
283
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 35: Retirement benefit obligations continued
Life expectancy for member aged 60, on the valuation date
Life expectancy for member aged 60, 15 years after the valuation date
Men
Women
2022
Years
26.7
27.8
2021
Years
27.1
28.1
2022
Years
28.8
30.0
2021
Years
29.1
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 2022 is assumed to live for, on average, 26.7 years for a male and 28.8 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 uses the CMI
mortality projections model and in line with actuarial industry recommendations has placed no weight on 2020 and 2021 mortality
experience. The persistence of excess deaths during 2022 has highlighted the potential longer term impacts of COVID-19 and the
Group has applied a 4 per cent scaling factor to its base mortality tables at December 2022 to allow for this impact on member
mortality. This led to a c.1 per cent reduction in the defined benefit obligation.
(v) Amount, timing and uncertainty of future cash flows
Risk exposure of the defined benefit schemes
While 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.
In addition, the schemes themselves are exposed to liquidity risk with the need to ensure that liquid assets held are sufficient to meet
benefit payments as they fall due and there is sufficient collateral available to support their hedging activity.
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
(Increase) decrease in the
net defined benefit
pension scheme surplus
2022
£m
13
(13)
(25)
24
38
(39)
2021
£m
12
(12)
(24)
23
44
(42)
2022
£m
251
(245)
(379)
388
745
(762)
2021
£m
481
(475)
(774)
795
1,934
(1,852)
1 At 31 December 2022, the assumed rate of RPI inflation is 3.13 per cent and CPI inflation 2.69 per cent (2021: RPI 3.21 per cent and CPI 2.92 per cent).
2 At 31 December 2022, the assumed discount rate is 4.93 per cent (2021: 1.94 per cent).
284 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 35: 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. While differences in the underlying liability profiles for the remainder of
the Group’s pension arrangements mean that 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 the assumed rate of increase in both 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. While 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. Whilst c.50 per cent are held to generate the long-term returns
required to support the funding position of the schemes, the remainder is invested in liability-driven investment (LDI) strategies which
hedge the material risk exposures of the schemes. The investment strategy is not static and will evolve to reflect the structure of
liabilities within the schemes. Specific 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 strategies adopted by the 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. The assets in these LDI strategies represented 48 per
cent of scheme assets at 31 December 2022.
These investments are structured to take into account the profile of scheme liabilities and actively managed to reflect both changing
market conditions and changes to the liability profile. At 31 December 2022 the asset-liability matching strategy mitigated around 119
per cent of the liability sensitivity to interest rate movements and around 123 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. The higher level of
hedging provides greater protection to the funding position of the schemes.
The schemes’ funding position remained robust and did not experience any material impact from the market volatility seen in the
latter part of last year. Asset prices fell in line with the broader market and hedges fell in value as interest rates rose, and a similar
impact was experienced on liability valuations which also fell in value given the portfolio was almost fully hedged. The Group’s
schemes use LDI strategies to achieve this outcome and, as the hedging was maintained throughout the crisis, the strategy performed
as expected. All collateral requirements in respect of the LDI strategies were met, with no support required from the Group beyond
payment of scheduled contributions.
On 28 January 2020, the main schemes entered into a £10 billion longevity insurance arrangement to hedge part 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 was structured as a
pass-through with Scottish Widows as the insurer, and onwards reinsurance to Pacific Life Re Limited.
On 28 January 2022, the Lloyds Bank Pension Scheme No. 1 entered into an additional £5.5 billion longevity insurance arrangement. The
transaction is structured as a pass-through with Scottish Widows as the insurer, and onwards reinsurance to SCOR SE – UK Branch.
At 31 December 2022 the value of scheme assets included £(100) million representing the value of the longevity swaps (after allowing
for the impact on the IAS 19 liabilities of the revisions to the base mortality assumptions).
In total the schemes have now hedged around 32 per cent of their longevity risk exposure.
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
2022
Years
15
2022
£m
1,409
1,464
4,678
8,930
9,296
17,479
12,720
6,138
1,685
2021
Years
17
2021
£m
1,352
1,450
4,651
8,993
9,668
18,671
13,846
6,987
2,116
Lloyds Banking Group Annual Report and Accounts 2022
285
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 35: Retirement benefit obligations continued
Maturity analysis method and assumptions
The projected benefit payments are based on the assumptions underlying the assessment of the obligations, including allowance for
expected future inflation. They are shown in their undiscounted form and therefore appear large relative to the discounted assessment
of the defined benefit obligations recognised in the Group’s balance sheet. They are in respect of benefits that have been accrued
prior to the respective year-end date only and make no allowance for any benefits that may have been accrued subsequently.
Defined contribution schemes
The Group operates a number of defined contribution pension schemes in the UK and overseas, principally Your Tomorrow and the
defined contribution sections of the Lloyds Bank Pension Scheme No. 1.
During the year ended 31 December 2022 the charge to the income statement in respect of defined contribution schemes was
£330 million (2021: £302 million; 2020: £319 million), representing the contributions payable by the employer in accordance with each
scheme’s rules.
Other post-retirement benefit schemes
The Group operates a number of schemes which provide post-retirement healthcare benefits to certain employees, retired employees
and their dependants. The principal scheme relates to former Lloyds Bank staff and under this scheme the Group has undertaken to
meet the cost of post-retirement healthcare for all eligible former employees (and their dependants) who retired prior to 1 January
1996. The Group has entered into an insurance contract to provide these benefits and a provision has been made for the estimated
cost of future insurance premiums payable.
For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 31 December
2022 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 6.74 per cent (2021: 6.82 per cent).
Movements in the other post-retirement benefits obligation:
At 1 January
Actuarial gains
Insurance premiums paid
Charge for the year
Exchange and other adjustments
At 31 December
Note 36: Deferred tax
The Group’s deferred tax assets and liabilities are as follows:
Statutory position
Deferred tax assets
Deferred tax liabilities
Asset at 31 December
2022
£m
5,228
(216)
5,012
2021
£m Tax disclosure
3,118
Deferred tax assets
(39) Deferred tax liabilities
3,079
Asset at 31 December
2022
£m
(103)
68
3
(2)
(1)
(35)
2021
£m
(109)
4
3
(2)
1
(103)
2022
£m
8,627
(3,615)
5,012
2021
£m
7,095
(4,016)
3,079
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.
Movements in deferred tax assets and liabilities (before taking into consideration the offsetting of balances within the same taxing
jurisdiction) can be summarised as follows:
Property,
plant and
equipment
£m
Share-
based
payments
£m
Provisions
£m
Pension
liabilities
£m
Derivatives
£m
Asset
revaluations
£m
Other
temporary
differences
£m
Deferred tax assets
At 1 January 2021
Credit (charge) to the income statement
Credit (charge) to other comprehensive
income
Other credit to equity
At 31 December 2021
Credit (charge) to the income statement
Credit (charge) to other comprehensive
income
Acquisitions
Other credit to equity
At 31 December 2022
Tax
losses
£m
4,064
959
–
–
5,023
39
–
4
–
668
76
–
–
744
(238)
–
–
–
254
12
36
–
302
113
(155)
–
–
29
(8)
–
17
38
(5)
–
–
3
36
56
15
(2)
–
69
159
541
–
–
700
(22)
(205)
–
–
–
1,928
–
–
47
2,423
Total
£m
5,527
1,517
34
17
7,095
(248)
1,773
4
3
29
(29)
268
(49)
–
–
219
62
–
–
–
–
–
–
8
–
–
–
8
5,066
506
260
281
8,627
286 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 36: Deferred tax continued
Capitalised
software
enhancements
£m
Long-term
assurance
business
£m
Acquisition
fair value
£m
Pension
assets
£m
Derivatives
£m
Asset
revaluations1
£m
Other
temporary
differences
£m
Total
£m
Deferred tax liabilities
At 1 January 2021
(Charge) credit to the income statement
(Charge) credit to other comprehensive income
Exchange and other adjustments
(228)
(47)
–
–
(843)
(319)
–
–
(372)
20
–
–
(392)
(93)
(846)
–
At 31 December 2021
(275)
(1,162)
(352)
(1,331)
(Charge) credit to the income statement
Credit to other comprehensive income
Acquisitions
Exchange and other adjustments
118
–
(5)
–
107
–
–
–
21
–
(1)
–
29
283
–
–
(756)
(567)
814
–
(509)
(32)
–
–
–
At 31 December 2022
(162)
(1,055)
(332)
(1,019)
(541)
1
Financial assets at fair value through other comprehensive income.
–
(27)
(29)
–
(56)
–
56
–
–
–
(240)
(2,831)
(93)
(1,126)
–
2
(61)
2
(331)
(4,016)
(164)
–
–
(11)
79
339
(6)
(11)
(506)
(3,615)
At 31 December 2022 the Group carried net deferred tax assets on its balance sheet of £5,228 million (2021: £3,118 million) principally
relating to tax losses carried forward.
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 £5,066 million
(2021: £5,023 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, climate-related and other 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, in management’s judgement it is more likely than not that the value of
the losses will be recovered by the Group while still operating as a going concern. 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 mean that the value of the deferred tax asset in respect of tax losses is only expected to
be fully recovered by 2036 (2021: 2047) 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 different legal entities in future periods, and the relative size of their tax losses carried
forward. It is expected in the base case that 90 per cent of the value will be recovered by 2032, when Bank of Scotland plc will have
utilised all of its available tax losses. It is possible that future tax law changes could materially affect the timing of recovery and the
value of these losses ultimately realised by the Group.
Deferred tax not recognised
A deferred tax asset of £46 million (2021: £5 million) has been recognised in respect of the future tax benefit of certain expenses of the
life assurance business. The increase is mainly due to investment market falls in 2022, which have increased the amount of unutilised
expenses carried forward and expected to be offset against taxable investment returns in the medium term. The deferred tax asset
not recognised in respect of the remaining expenses is £125 million (2021: £226 million), and these expenses can be carried forward
indefinitely. The unrecognised deferred tax asset has decreased in 2022 mainly due to higher expected investment returns in the long
term projections for the life insurance business driven by interest rate rises. This has reduced the net amount of unutilised expenses in
the long term.
Deferred tax assets of £156 million (2021: £167 million) have not been recognised in respect of £619 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.
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, £53 million (2021: £41 million) relates to losses that will expire if not used within 20
years, and £9 million (2021: £7 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.
Lloyds Banking Group Annual Report and Accounts 2022
287
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 37: Other provisions
At 1 January 2022
Exchange and other adjustments
Provisions applied
Charge for the year
At 31 December 2022
Provisions
for financial
commitments
and guarantees
£m
Regulatory
and legal
provisions
£m
200
1
–
122
323
1,156
17
(625)
255
803
Other
£m
736
27
Total
£m
2,092
45
(413)
(1,038)
333
683
710
1,809
Provisions for financial commitments and guarantees
Provisions are recognised for expected credit losses on undrawn loan commitments and financial guarantees. See also note 18.
Regulatory and legal provisions
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 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 2022 the Group charged a further
£255 million in respect of legal actions and other regulatory matters and the unutilised balance at 31 December 2022 was £803 million
(31 December 2021: £1,156 million). The most significant items are as follows.
HBOS Reading – review
The Group continues to apply the recommendations from Sir Ross Cranston’s review, issued in December 2019, including a
reassessment of direct and consequential losses by an independent panel (the Foskett Panel), an extension of debt relief and a wider
definition of de facto directors. The Foskett Panel’s full scope and methodology was published on 7 July 2020. The Foskett 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, assessing claims against an expanded definition of the fraud and on a lower evidential basis.
Following the emergence of the first outcomes of the Foskett Panel through 2021, the Group charged a further £790 million in the year
ended 31 December 2021. This included operational costs in relation to Dame Linda Dobbs’s review, which is considering whether the
issues relating to HBOS Reading were investigated and appropriately reported by the Group during the period from January 2009
to January 2017, and other programme costs. A significant proportion of the charge related to the estimated future awards from
the Foskett Panel. The Foskett Panel had shared outcomes on a limited subset of the total population which covers a wide range
of businesses and different claim characteristics. The estimated awards provision recognised at 31 December 2021 was therefore
materially dependent on the assumption that the limited number of awards to date were representative of the full population of cases.
In June 2022, the Foskett Panel announced an alternative option, in the form of a fixed sum award which could be accepted as an
alternative to participation in the full re-review process, to support earlier resolution of claims for those deemed by the Foskett Panel to
be victims of the fraud. Around half the population have now had outcomes via this new process. Extrapolating the Group’s experience
to date resulted in an increase to the provision of £50 million in the year (all in the fourth quarter). Notwithstanding the settled claims
and the increase in coverage which builds confidence in the full estimated cost, uncertainties remain and the final outcome could
be different from the current provision once the re-review is concluded by the Foskett Panel. There is no confirmed timeline for the
completion of the Foskett Panel re-review process nor the review by Dame Linda Dobbs. The Group is committed to implementing Sir
Ross’s recommendations in full.
Payment protection insurance
The Group has incurred costs for PPI over a number of years totalling £21,960 million. The Group continues to challenge PPI litigation
cases, with mainly legal fees and operational costs associated with litigation activity recognised within regulatory and legal provisions,
including a charge in the fourth quarter. PPI litigation remains inherently uncertain, with a number of key court judgments due to be
delivered in 2023.
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 total provision made to 31 December 2022, was £709 million (31 December 2021: £695 million) with £11 million utilisation of the
provision during the year, leaving an unutilised provision at 31 December 2022 of £88 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
in respect of the divestment. At 31 December 2022, a provision of £22 million remained unutilised; the Group expects the majority of the
remaining provision to be utilised in the next twelve months and the provision to be fully utilised by 31 December 2024.
The Group carries provisions of £112 million (2021: £114 million) in respect of dilapidations, rent reviews and other property-related
matters.
Provisions are also 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 2022 provisions of £112 million (31 December 2021: £189 million) were held.
The Group carries provisions of £86 million (2021: £94 million) for indemnities and other matters relating to legacy business disposals
in prior years. Whilst there remains significant uncertainty as to the timing of the utilisation of the provisions, the Group expects the
majority of the remaining provisions to have been utilised by 31 December 2026.
288 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 38: Subordinated liabilities
The movement in subordinated liabilities during the year was as follows:
At 1 January 2021
Issued during the year1:
1.985% Fixed Rate Reset Dated Subordinated Tier 2 Notes due 2031
(£500 million)
3.369% Fixed Rate Reset Dated Subordinated Notes due 2041 (US$1,175 million)
Repurchases and redemptions during the year1:
6.475% Non-cumulative Preference Shares callable 2024 (£186 million)
6.413% Non-cumulative Fixed to Floating Rate Preference Shares callable 2035
(US$750 million)
6.657% Non-cumulative Fixed to Floating Rate Preference Shares callable 2037
(US$750 million)
9.25% Non-cumulative Irredeemable Preference Shares (£300 million)
9.75% Non-cumulative Irredeemable Preference Shares (£100 million)
7.754% Non-cumulative Perpetual Preferred Securities (Class B) (£150 million)
Series 2 (US$500 million)
Series 3 (US$600 million)
Floating Rate Primary Capital Notes (US$250 million)
Series 1 (US$750 million)
9.375% Subordinated Bonds 2021 (£500 million)
5.374% Subordinated Fixed Rate Notes 2021 (€160 million)
6% Subordinated Notes 2033 (US$750 million)
Foreign exchange movements
Other movements (cash and non-cash)2
At 31 December 2021
Issued during the year1:
7.953% Fixed Rate Reset Dated Subordinated notes 2033 (US$1,000 million)
Repurchases and redemptions during the year1:
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)
7.881% Guaranteed Non-voting Non-cumulative Preferred Securities
(£245 million)
12% Perpetual Subordinated Bonds (£100 million)
5.75% Undated Subordinated Step-up Notes (£600 million)
7.625% Dated Subordinated Notes 2025 (£750 million)
Foreign exchange movements
Other movements (cash and non-cash)2
At 31 December 2022
Preference
shares
£m
Preferred
securities
£m
Undated
£m
962
1,743
509
–
–
–
(8)
(182)
(157)
(79)
(14)
–
–
–
–
–
–
–
–
(440)
15
(49)
488
–
–
–
–
–
–
–
–
–
8
(26)
470
–
–
–
–
–
–
–
–
(156)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(94)
(121)
(24)
(96)
–
–
–
(156)
(335)
17
57
1,661
–
(1,399)
(221)
(22)
(12)
–
–
–
(1,654)
(6)
(1)
–
–
–
174
–
–
–
–
–
(22)
(4)
–
(26)
–
2
150
Dated
£m
11,047
500
380
880
–
–
–
–
–
–
–
–
–
–
(200)
(145)
(141)
(486)
(56)
(600)
Total
£m
14,261
500
380
880
(8)
(182)
(157)
(79)
(14)
(156)
(94)
(121)
(24)
(96)
(200)
(145)
(141)
(1,417)
(24)
(592)
10,785
13,108
838
838
–
–
–
–
–
–
(502)
(502)
699
(1,710)
10,110
(1,399)
(221)
(22)
(12)
(22)
(4)
(502)
(2,182)
701
(1,735)
10,730
1
Issuances in the year generated cash inflows of £838 million (2021: £499 million); the repurchases and redemptions resulted in cash outflows of £2,216 million (2021:
£1,056 million).
2 Other movements include cash payments in respect of interest on subordinated liabilities in the year amounted to £603 million (2021: £1,303 million) offset by the
interest expense in respect of subordinated liabilities of £681 million (2021: £932 million).
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.
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 or interest or other breaches with respect to its subordinated liabilities during 2022 (2021: none).
The Company has in issue various classes of preference shares which are all classified as liabilities under accounting standards.
Lloyds Banking Group Annual Report and Accounts 2022
289
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 38: Subordinated liabilities continued
Preference shares
6% Non-Cumulative Redeemable Preference
shares of GBP0.25
6.475% Non-Cumulative Preference shares of
GBP0.25
9.25% Non-Cumulative Irredeemable Preference
shares of GBP0.25
9.75% Non-Cumulative Irredeemable Preference
shares of GBP0.25
6.413% Non-Cumulative Fixed/Floating Rate
Callable Preference shares of USD0.25
6.657% Non-Cumulative Fixed/Floating Rate
Callable Preference shares of USD0.25
2022
Number
of shares
2021
Number
of shares
2020
Number
of shares
400
400
400
47,273,816
47,273,816
56,472,211
2022
% of
share
capital
–
0.07
£m
–
12
252,510,147
252,510,147
299,987,729
63
0.37
43,630,285
43,630,285
55,740,886
48,990
48,990
374,810
37,627
37,627
434,350
11
–
–
0.06
–
–
2021
£m
2020
£m
–
12
63
11
–
–
–
14
75
14
–
–
The rights and obligations attaching to these shares are set out in the Company’s articles of association, a copy of which can be
obtained from Companies House or from our website (www.lloydsbankinggroup.com/who-we-are/group-overview/corporate-
governance.html) and, in respect of the 6% Non-Cumulative Redeemable Preference shares, in Companies House form 128(1) filed at
Companies House on 12 January 2005, a copy of which is available from Companies House (www.companieshouse.gov.uk), and, in
respect of the other classes of preference shares, in the prospectus dated 20 November 2008 and published on the National Storage
Mechanism on that date, a copy of which prospectus is available on the National Storage Mechanism (www.data.fca.org.uk/#/nsm/
nationalstoragemechanism).
Note 39: Share capital
Issued and fully paid ordinary share capital
Ordinary shares of 10p (formerly 25p) each
2022
Number
of shares
2021
Number
of shares
2020
Number
of shares
At 1 January
71,022,593,135
70,839,206,060
70,052,557,838
Issued under employee share schemes
793,990,660
183,387,075
786,648,222
2022
% of
share
capital
£m
7,102
80
Share buyback programme (note 41)
(4,528,731,591)
–
–
(453)
2021
£m
2020
£m
7,084
7,005
18
–
79
–
At 31 December
67,287,852,204
71,022,593,135
70,839,206,060
6,729
99.50
7,102
7,084
Ordinary shares
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. 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
•
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.
All of the Company’s issued ordinary share capital is listed and none of the shares have any multiple or unequal voting rights, each
share carries one vote. 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.
The directors have authority to allot and issue ordinary and preference shares and to make market purchases of ordinary and
preference shares as granted at the annual general meeting on 12 May 2022. 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.
The holders of ordinary shares, who held 100 per cent of the total ordinary share capital at 31 December 2022, 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.
The rights and obligations attached to the Company’s ordinary shares are set out in the Company’s articles of association, a copy of
which can be found at www.lloydsbankinggroup.com/who-we-are/group-overview/corporate-governance.html.
Preference shares
The Company has in issue various classes of preference shares which are all classified as liabilities under accounting standards and
which are included in note 38.
290 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 40: Share premium account
At 1 January
Issued under employee share schemes
Redemption of preference shares1
At 31 December
2022
£m
2021
£m
18,479
17,863
25
–
19
597
2020
£m
17,751
112
–
18,504
18,479
17,863
1 During the year ended 31 December 2021, the Company redeemed certain tranches of its preference shares, which had been accounted for as subordinated
liabilities. On redemption an amount of £17 million was transferred from the distributable merger reserve to the capital redemption reserve and £597 million was
transferred from the distributable merger reserve to the share premium account, with these amounts representing the nominal value of the shares redeemed and
premium upon original issuance respectively.
Note 41: Other reserves
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
2022
£m
7,149
4,932
50
57
(5,476)
(110)
6,602
2021
£m
7,149
4,479
207
9
(457)
(198)
11,189
2020
£m
7,763
4,462
99
(47)
1,629
(159)
13,747
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 40)
At 31 December
Capital redemption reserve
At 1 January
Redemption of preference shares (note 40)
Shares cancelled under share buyback programme (see below)
At 31 December
2022
£m
7,149
–
7,149
2022
£m
4,479
–
453
4,932
2021
£m
7,763
(614)
7,149
2021
£m
4,462
17
–
2020
£m
7,763
–
7,763
2020
£m
4,462
–
–
4,479
4,462
On 25 February 2022 the Group commenced a share buyback programme to repurchase outstanding ordinary shares; the Group
bought back and cancelled 4,529 million shares under the programme, which completed in October 2022, for a total consideration,
including expenses, of £2,013 million. Upon cancellation £453 million, being the nominal value of the shares repurchased, was
transferred to the capital redemption reserve.
Lloyds Banking Group Annual Report and Accounts 2022
291
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 2022
£m
207
(133)
31
8
(94)
(92)
23
(69)
6
50
2022
£m
9
44
3
47
–
1
1
57
2022
£m
(457)
(6,990)
1,940
(5,050)
43
(12)
31
(5,476)
2022
£m
(198)
119
(31)
(110)
2021
£m
99
133
(45)
–
88
2
20
22
(2)
207
2021
£m
(47)
61
(4)
57
–
(1)
(1)
9
2021
£m
1,629
(2,279)
646
(1,633)
(621)
168
(453)
(457)
2021
£m
(159)
(39)
–
(198)
2020
£m
123
46
29
(2)
73
(149)
47
(102)
5
99
2020
£m
19
(50)
(16)
(66)
(16)
16
–
(47)
2020
£m
1,504
730
(244)
486
(496)
135
(361)
1,629
2020
£m
(176)
4
13
(159)
Note 41: Other reserves continued
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
At 1 January
Change in fair value
Deferred tax
Current tax
Income statement transfers in respect of disposals (note 9)
Deferred tax
Impairment recognised in the income statement
At 31 December
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
At 1 January
Change in fair value
Deferred tax
Realised gains and losses transferred to retained profits
Deferred tax
At 31 December
Cash flow hedging reserve
At 1 January
Change in fair value of hedging derivatives
Deferred tax
Net 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
292 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 42: Retained profits
At 1 January
Profit attributable to ordinary shareholders
Post-retirement defined benefit scheme remeasurements
Gains and losses attributable to own credit risk (net of tax)1
Dividends paid (note 44)
Share buyback programme (note 41)
Issue costs of other equity instruments (net of tax)
Repurchase and redemption costs of other equity instruments
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Change in non-controlling interests
Realised gains and losses on equity shares held at fair value through other comprehensive income
2022
£m
10,241
5,021
(2,152)
364
(1,475)
(2,013)
(5)
(36)
(20)
41
183
(3)
(1)
2021
£m
4,584
5,355
1,062
(52)
(877)
–
–
–
2020
£m
3,246
865
113
(55)
–
–
–
–
(13)
293
51
131
(1)
1
48
74
–
–
At 31 December
10,145
10,241
4,584
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
(2022: £nil; 2021: £nil), had been recognised directly in retained profits.
Retained profits are stated after deducting £196 million (2021: £205 million; 2020: £230 million) representing 688 million (2021: 434 million;
2020: 592 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. 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 Ring-Fenced Bank sub-group, against approved risk appetite levels.
Note 43: Other equity instruments
At 1 January
Issued during the year:
£750 million Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Contingent Convertible Securities
Repurchases and redemptions during the year
Profit for the year attributable to other equity holders
Distributions on other equity instruments
At 31 December
2022
£m
5,906
750
750
(1,359)
438
(438)
5,297
2021
£m
5,906
–
–
–
429
(429)
2020
£m
5,906
–
–
–
453
(453)
5,906
5,906
During the year ended 31 December 2022 the Group issued £750 million of 8.5 per cent Fixed Rate Reset Additional Tier 1 (AT1) securities
and repurchased £1,359 million of 7.625 per cent Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Contingent Convertible
Securities.
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 reset date. After the first reset date or any reset date thereafter, 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 Common Equity Tier 1
ratio of the Group fall below 7.0 per cent
Lloyds Banking Group Annual Report and Accounts 2022
293
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 44: Dividends on ordinary shares
The directors have recommended a final dividend, which is subject to approval by the shareholders at the annual general meeting on
18 May 2023, of 1.60 pence per ordinary share (2021: 1.33 pence per ordinary share), equivalent to £1,062 million, before the impact of any
cancellations of shares under the Group’s announced buyback programme (2021: £930 million, following cancellations of shares under
the Group’s 2022 buyback programme up to the record date), which will be paid on 23 May 2023. These financial statements do not
reflect the recommended dividend.
Dividends paid during the year were as follows:
Final dividend recommended by directors at previous year end
Interim dividend paid in the year
2022
pence per
share
2021
pence per
share
2020
pence per
share
1.33
0.80
2.13
0.57
0.67
1.24
–
–
–
2022
£m
930
545
1,475
2021
£m
404
473
877
2020
£m
–
–
–
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 2022: 32,377,089 shares, 31 December 2021: 16,514,487 shares, waived rights to all dividends)
and the Lloyds Banking Group Employee Share Ownership Trust (holding at 31 December 2022: 311,540,740 shares, 31 December 2021:
9,998,474 shares, waived rights to all dividends).
Note 45: Share-based payments
Charge to the income statement
The charge to the income statement is set out below:
Deferred bonus plan
Executive and SAYE plans:
Options granted in the year
Options granted in prior years
Share plans:
Shares granted in the year
Shares granted in prior years
2022
£m
289
10
42
52
9
26
35
2021
£m
179
10
37
47
18
24
42
Total charge to the income statement
376
268
2020
£m
81
13
62
75
16
24
40
196
During the year ended 31 December 2022 the Group operated the following share-based payment schemes, all of which are mainly
equity settled.
Group Performance Share plan
The Group operates a Group Performance Share plan that is part equity settled. Bonuses in respect of employee service in 2022 have
been recognised in the charge in line with the proportion of the deferral period 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 90 per cent of the market price at the start of the invitation period.
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
2022
2021
Number
of options
1,180,563,291
217,611,519
(23,359,526)
(20,961,259)
(47,687,607)
(49,248,343)
1,256,918,075
263,302
Weighted
average
exercise price
(pence)
30.63
39.38
37.75
29.20
33.88
46.29
31.30
47.92
Number
of options
1,120,138,915
236,923,744
(6,924,434)
(22,815,078)
(51,479,310)
(95,280,546)
1,180,563,291
336,561
Weighted
average
exercise price
(pence)
30.39
39.40
30.57
28.78
32.57
49.03
30.63
51.03
The weighted average share price at the time that the options were exercised during 2022 was £0.49 (2021: £0.47). The weighted
average remaining contractual life of options outstanding at the end of the year was 1.88 years (2021: 2.46 years).
The weighted average fair value of SAYE options granted during 2022 was £0.07 (2021: £0.09). The fair values of the SAYE options have
been determined using a standard Black-Scholes model.
294 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 45: Share-based payments continued
Other share option plans
Executive Share Plans – buyout and retention awards
Share options may be granted to senior employees under the Lloyds Banking Group Executive Share Plan 2003, Lloyds Banking Group
Executive Group Ownership Share Plan and the Deferred Bonus Scheme 2021 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
2022
2021
Number
of options
14,032,762
10,278,224
(3,333,322)
–
(33,409)
(477,784)
20,466,471
1,638,202
Weighted
average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Number
of options
8,477,084
13,610,204
(7,110,663)
–
(385,184)
(558,679)
14,032,762
708,939
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 £0.44 (2021: £0.42). 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 2022 was £0.46 (2021: £0.43). The weighted average remaining contractual life of options outstanding at the end of the year was
6.0 years (2021: 6.3 years).
Included in the above are awards to the Chief Financial Officer and the Group Chief Executive.
William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019. 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
Exercised
Outstanding at 31 December
2022
Number
of shares
2021
Number
of shares
686,085
1,810,712
(686,085)
(1,124,627)
–
686,085
Charlie Nunn joined the Group on 16 August 2021 as Group Chief Executive. He was granted deferred share awards over 8,301,708 shares
to replace unvested awards from his former employer, HSBC, that were forfeited as a result of him joining the Group.
Outstanding at 1 January
Granted
Exercised
Outstanding at 31 December
2022
Number
of shares
7,444,787
2021
Number
of shares
–
–
8,301,708
(859,340)
(856,921)
6,585,447
7,444,787
The weighted average fair value of awards granted in 2021 was £0.40.
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 2019 grant, the targets had not been fully met and therefore these awards vested in 2022
at a rate of 41.80 per cent.
Outstanding at 1 January
Granted
Vested
Forfeited
Dividend award
Outstanding at 31 December
2022
Number
of shares
2021
Number
of shares
350,873,627
533,987,527
–
–
(50,703,778)
(39,621,415)
(98,741,356)
(144,437,243)
966,016
944,758
202,394,509
350,873,627
Lloyds Banking Group Annual Report and Accounts 2022
295
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 45: Share-based payments continued
Awards in respect of the 2020 grant are due to vest in 2023 at a rate of 43.70 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 dividends on such awards,
the number of shares awarded has been determined by applying a discount factor to the share price on award to exclude the value of
estimated future dividends. Details of the performance conditions for the plan are provided in the Directors’ remuneration report.
Lloyds Banking Group Long Term Share Plan
The plan, introduced in 2021, replaced the Executive Group Ownership Share Plan and is intended to provide alignment to the Group’s
aim of delivering sustainable returns to shareholders, supported by its values and behaviours.
Outstanding at 1 January
Granted
Vested
Forfeited
Dividend award
Outstanding at 31 December
2022
Number
of shares
77,883,068
2021
Number
of shares
–
108,513,202
83,456,304
–
–
(14,448,527)
(5,573,236)
–
–
171,947,743
77,883,068
The weighted average fair value of awards granted in the year was £0.36 (2021: £0.36).
Assumptions at 31 December 2022
The fair value calculations at 31 December 2022 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
SAYE
4.33%
Executive
Share Plans
Long Term
Share Plan
3.20%
1.01%
3.3 years
1.2 years
3.6 years
28%
5.3%
£0.42
£0.39
27%
5.3%
£0.47
Nil
33%
5.3%
£0.43
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 Plans
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.
No award was made in 2022.
On 25 March 2021, the Group made an award of 1,017 shares to all eligible employees. The number of shares awarded was 67,658,976,
with an average fair value of £0.42 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 2022 was 43,378,504 (2021: 46,621,026), with an average fair value of £0.45
(2021: £0.44), 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 plc shares, and were
initially 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 relation to fixed share awards in 2022 was 7,261,080 (2021: 8,320,948) with an average fair value of £0.47 (2021: £0.45) based
on market prices at the date of the award.
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.
296 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 46: Related party transactions
Key management personnel
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities
of an entity; the Group’s key management personnel are the members of the Lloyds Banking Group plc Group Executive Committee
together with its non-executive directors.
The table below details, on an aggregated basis, key management personnel compensation:
Compensation
Salaries and other short-term benefits
Post-employment benefits
Share-based payments
Total compensation
2022
£m
12
–
16
28
2021
£m
10
–
15
25
2020
£m
13
–
13
26
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £nil (2021: £nil; 2020:
£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
2022
million
2021
million
2020
million
–
–
–
–
–
–
–
–
–
–
–
–
2022
million
2021
million
2020
million
74
29
(31)
72
117
19
(62)
74
101
46
(30)
117
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 to appointed key management personnel)
Repayments (includes loans to former key management personnel)
At 31 December
2022
£m
2021
£m
2020
£m
3
1
(2)
2
2
1
–
3
2
–
–
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 1.01 per cent and 30.15 per cent in 2022 (2021: 0.39 per cent and 22.93 per cent; 2020: 0.39 per cent and 24.20 per cent).
No provisions have been recognised in respect of loans given to key management personnel (2021 and 2020: £nil).
Deposits
At 1 January
Placed (includes deposits of appointed key management personnel)
Withdrawn (includes deposits of former key management personnel)
At 31 December
2022
£m
11
37
(38)
10
2021
£m
10
26
(25)
11
2020
£m
23
25
(38)
10
Deposits placed by key management personnel attracted interest rates of up to 5.0 per cent (2021: 1.0 per cent; 2020: 2.0 per cent).
Lloyds Banking Group Annual Report and Accounts 2022
297
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 46: Related party transactions continued
At 31 December 2022, the Group did not provide any guarantees in respect of key management personnel (2021 and 2020: none).
At 31 December 2022, 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 £2.0 thousand with two directors
and no connected persons (2021: £0.9 million with two directors and one connected person; 2020: £0.6 million with four directors and
two connected persons).
Subsidiaries
Details of the Group’s subsidiaries and related undertakings are given on pages 352 to 360. 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 2022,
customer deposits of £155 million (2021: £480 million) related to the Group’s pension funds. As disclosed in note 35, 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 125 (2021: 145) collective investment vehicles, such as Open-Ended Investment Companies (OEICs) and of these
73 (2021: 73) are consolidated. The Group invested £196 million (2021: £427 million) and redeemed £486 million (2021: £820 million) in the
unconsolidated collective investment vehicles during the year and had investments, at fair value, of £1,491 million (2021: £1,965 million)
at 31 December. The Group earned fees of £80 million from the unconsolidated collective investment vehicles during 2022 (2021:
£96 million).
Joint ventures and associates
At 31 December 2022 there were loans and advances to customers of £21 million (2021: £14 million) outstanding and balances within
customer deposits of £58 million (2021: £22 million) relating to joint ventures and associates.
During the year the Group paid fees of £5 million (2021: £7 million) to its Schroders Personal Wealth joint venture and also made
payments of £18 million (2021: £10 million) under the terms of agreements put in place on 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 2022, these companies had total assets of £4,709 million (2021: £3,889 million),
total liabilities of £5,557 million (2021: £4,412 million) and for the year ended 31 December 2022 had turnover of £4,196 million (2021:
£3,686 million) and made a net loss of £228 million (2021: net loss of £187 million). In addition, the Group has provided £1,466 million (2021:
£1,265 million) of financing to these companies on which it received £98 million (2021: £86 million) of interest income in the year.
Note 47: Contingent liabilities, commitments and guarantees
Interchange fees
With respect to multi-lateral interchange fees (MIFs), the Group is not a party in the ongoing or threatened litigation which involves the
card schemes 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 or on behalf of retailers against both Visa and Mastercard in the English Courts, in which retailers are seeking
damages on grounds that Visa and Mastercard’s MIFs breached competition law (this includes a judgment of the Supreme Court
in June 2020 upholding the Court of Appeal’s finding in 2018 that certain historic interchange arrangements of Mastercard and Visa
infringed competition law)
Litigation brought on behalf of UK consumers in the English Courts against Mastercard
Any impact on the Group of the litigation against Visa and Mastercard remains uncertain at this time, 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 shares as part of the consideration for the sale
of its shares in Visa Europe. A release assessment is carried out by Visa on certain anniversaries of the sale (in line with the Visa Europe
sale documentation) and as a result, some Visa preference shares may be converted into Visa Inc Class A common stock. Any such
release and any subsequent sale of Visa common stock does not impact the contingent liability.
LIBOR and other trading rates
Certain Group companies, together with other panel banks, have been named as defendants in ongoing 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 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 claims against the Group in the UK relating to the alleged mis-sale of interest rate hedging
products also include allegations of LIBOR manipulation.
It is currently not possible to predict the scope and ultimate outcome on the Group of 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.
298 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 47: Contingent liabilities, commitments and guarantees continued
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 2023. 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 £875 million (including interest) and a reduction in the Group’s deferred tax asset of
approximately £295 million. The Group, having taken appropriate advice, does not consider that this is a case where additional tax will
ultimately fall due.
There are a number of other open matters on which the Group is in 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.
Motor commission review
Following the FCA’s Motor Market review, the Group has received a number of complaints, some of which are with the Financial
Ombudsman Service, in respect of commission arrangements. It is currently not possible to predict the ultimate outcome of the
complaints, including the financial impact or the scope or nature of remediation requirements, if any, or any related challenges to the
interpretation or validity of any of the Group’s historical motor commission arrangements.
Other legal actions and regulatory matters
In addition, in the course of its 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, which could relate to a number
of issues, including financial, environmental or other regulatory matters, both in the UK and overseas. Where 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 based on 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 to assess
properly 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. Where there is a contingent liability
related to an existing provision the relevant disclosures are included within note 37.
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
2022
£m
58
781
2,147
2,928
2,986
2021
£m
191
510
2,043
2,553
2,744
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
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
2022
£m
39
17,144
79,925
97,069
46,687
143,795
2021
£m
61
17,807
88,454
106,261
36,411
142,733
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend,
£74,692 million (2021: £71,158 million) was irrevocable.
Capital commitments
Excluding commitments in respect of investment property (note 26), capital expenditure contracted but not provided for at
31 December 2022 amounted to £1,663 million (2021: £1,034 million). Of this amount, £1,663 million (2021: £1,034 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.
Lloyds Banking Group Annual Report and Accounts 2022
299
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 48: 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 30 for securitisations and covered bond vehicles, note 35 for structured entities associated with
the Group’s pension schemes, and below in part (A) and (B). Details of the Group’s interests in unconsolidated structured entities are
included below in part (C).
(A) Asset-backed conduits
In addition to the structured entities discussed in note 30, which are used for securitisation and covered bond programmes, the Group
sponsors an active asset-backed conduit, Cancara, which invests in client receivables and debt securities. The total consolidated
exposure of Cancara at 31 December 2022 was £2,357 million (2021: £1,745 million), comprising £1,464 million of loans and advances
(2021: £889 million), £850 million of debt securities (2021: £780 million) and £43 million of financial assets at fair value through profit or
loss (2021: £76 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 2022
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 2022, the total carrying value of these consolidated collective
investment vehicle assets and liabilities held by the Group was £54,749 million (2021: £60,352 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 £68,913 million at 31 December 2022 (2021:
£74,916 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 2022, the total asset value of these
unconsolidated structured entities, including the portion in which the Group has no interest, was £2,176 billion (2021: £2,597 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 2022, are reported in note 6.
300 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 49: Financial instruments
(1) Measurement basis of financial assets and liabilities
The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and
expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial
assets and liabilities by category and by balance sheet heading.
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 2022
Financial assets
Cash and balances at central banks
Items in the course of collection from
banks
Financial assets at fair value through profit
or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements
Debt securities
Financial assets at amortised cost
Financial assets at fair value through
other comprehensive income
Reinsurance assets
Total financial assets
Financial liabilities
Deposits from banks
Customer deposits
Repurchase agreements at amortised
cost
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
–
–
–
75
–
–
–
–
–
–
–
–
–
–
–
14,216
166,393
24,678
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
75
38,894
166,393
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12,577
23,515
–
–
–
–
–
–
527
36,092
–
–
–
–
–
–
–
–
–
–
–
–
–
Derivative financial instruments
527
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,178
–
–
–
–
42,975
–
–
48,153
–
–
–
–
–
–
–
–
–
91,388
242
–
–
10,632
454,899
44,865
9,926
520,322
23,154
–
–
–
23,154
611,952
–
–
–
–
–
–
–
–
–
–
–
–
–
7,266
475,331
48,596
372
–
–
1,280
73,819
–
–
1,317
10,730
618,711
–
–
–
–
–
–
–
–
–
–
616
616
–
–
–
–
–
–
–
–
91,388
242
180,609
24,753
10,632
454,899
44,865
9,926
520,322
23,154
616
841,084
7,266
475,331
48,596
372
17,755
24,042
1,280
73,819
106,893
106,893
–
248
–
42,975
1,565
10,730
107,141
810,624
Lloyds Banking Group Annual Report and Accounts 2022
301
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 49: 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 2021
Financial assets
Cash and balances at central banks
Items in the course of collection from
banks
Financial assets at fair value through profit
or loss
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements
Debt securities
Financial assets at amortised cost
Financial assets at fair value through
other comprehensive income
Reinsurance assets
Total financial assets
Financial liabilities
Deposits from banks
Customer deposits
Repurchase agreements at amortised
cost
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
327
–
–
–
86
–
–
–
–
–
–
–
–
–
21,760
21,965
–
–
–
–
–
–
–
–
–
185,011
–
–
–
–
–
–
–
–
86
43,725
185,011
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,582
17,733
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,541
–
–
–
–
45,040
–
–
51,581
–
–
–
–
–
–
–
–
–
76,420
147
–
–
7,001
448,567
54,753
6,835
517,156
28,137
–
–
–
28,137
593,723
7,647
476,344
31,125
316
–
–
1,321
71,552
–
–
1,475
13,108
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
759
759
–
–
–
–
–
–
–
–
76,420
147
206,771
22,051
7,001
448,567
54,753
6,835
517,156
28,137
759
851,441
7,647
476,344
31,125
316
23,123
18,060
1,321
71,552
123,423
123,423
–
308
–
45,040
1,783
13,108
327
34,315
602,888
123,731
812,842
302 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Fair value measurement
Note 49: Financial instruments continued
(2)
Fair value is the price that would be received on sale of 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
to those 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 and notes in circulation. Liabilities
arising from non-participating investment contracts are carried at fair value. 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 lifecycle. 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), funding valuation adjustment (FVA) and other valuation adjustments.
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 listed 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, loans and advances
recognised at fair value and derivatives are also classified as level 3.
Transfers out of the level 3 portfolio arise when inputs that could have a significant impact on the instrument’s valuation become
market observable after previously having been non-market observable. In the case of asset-backed securities this can arise if more
than one consistent independent source of data becomes available. Conversely, transfers into the portfolio arise when consistent
sources of data cease to be available.
Lloyds Banking Group Annual Report and Accounts 2022
303
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 49: Financial instruments continued
(3)
Financial assets and liabilities carried at fair value
(A) Financial assets, excluding derivatives
Valuation hierarchy
At 31 December 2022, the Group’s financial assets carried at fair value, excluding derivatives, totalled £203,763 million (2021:
£234,908 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 303). 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
–
–
3,345
13,644
–
7,883
7
2,516
7,133
235
122
16,105
26,118
–
10,906
–
–
–
–
63
1,739
1,802
–
–
3,345
21,527
10,057
2,516
7,133
235
185
17,921
38,047
62
10,906
–
1,619
106,722
54,013
11,304
180,609
357
87
10,978
11,422
–
–
11,422
65,435
–
59
–
59
–
283
342
11,211
146
11,514
22,871
–
283
23,154
11,646
203,763
10,050
–
–
–
–
77
10,127
62
–
105,103
115,292
10,854
–
536
11,390
–
–
11,390
126,682
At 31 December 2022
Financial assets at fair value through profit or loss
Loans and advances to banks
Loans and advances to customers
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
Contracts held with reinsurers
Equity shares
Total financial assets at fair value through profit or loss
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
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
304 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 49: Financial instruments continued
At 31 December 2021
Financial assets at fair value through profit or loss
Loans and advances to banks
Loans and advances to customers
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
Contracts held with reinsurers
Equity shares
Total financial assets at fair value through profit or loss
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
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
–
–
17,668
–
–
–
–
–
17,668
19
–
115,882
133,569
14,613
–
644
15,257
85
–
15,342
148,911
4,170
15,575
12
2,731
6,297
433
177
18,123
27,773
–
12,371
–
59,889
–
–
12,490
12,490
–
–
12,490
72,379
–
4,170
9,793
25,368
–
–
–
–
98
1,679
1,777
–
–
1,743
13,313
–
70
–
70
–
235
305
17,680
2,731
6,297
433
275
19,802
47,218
19
12,371
117,625
206,771
14,613
70
13,134
27,817
85
235
28,137
13,618
234,908
Movements in level 3 portfolio
The table below analyses movements in level 3 financial assets, excluding derivatives, carried at fair value (recurring measurement).
2022
Financial
assets at
fair value
through other
comprehensive
income
£m
Total level 3
assets carried
at fair value,
excluding
derivatives
(recurring
basis)
£m
305
3
13,618
18
Financial
assets at fair
value through
profit or loss
£m
13,313
15
(1,609)
(2)
(1,611)
–
959
(1,320)
197
(251)
11,304
44
3
(11)
–
–
342
44
962
(1,331)
197
(251)
11,646
2021
Financial
assets at
fair value
through other
comprehensive
income
£m
Total level 3
assets carried
at fair value,
excluding
derivatives
(recurring
basis)
£m
Financial
assets at fair
value through
profit or loss
£m
15,046
4
183
–
1,709
(2,765)
171
(1,035)
13,313
346
(11)
–
69
8
15,392
(7)
183
69
1,717
(107)
(2,872)
–
–
305
171
(1,035)
13,618
(1,596)
–
(1,596)
(71)
–
(71)
At 1 January
Exchange and other adjustments
(Losses) gains recognised in the income statement
within other income
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
Losses recognised in the income statement, within
other income, relating to the change in fair value of
those assets held at 31 December
Lloyds Banking Group Annual Report and Accounts 2022
305
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 49: Financial instruments continued
Valuation methodology for financial assets, excluding derivatives
Loans and advances to customers and banks
The fair value of these assets is determined using discounted cash flow techniques. The discount rates are derived from market
observable interest rates, a risk margin that reflects loan credit ratings and an incremental illiquidity premium based on historical
spreads at origination on similar loans.
Debt securities
Debt securities measured at fair value and classified as level 2 are valued by discounting expected cash flows using an observable
credit spread applicable to the particular instrument.
Where there is limited trading activity in debt securities, the Group uses valuation models, consensus pricing information from third-
party pricing services and broker or lead manager quotes to determine an appropriate valuation. Debt securities are classified as level
3 if there is a significant valuation input that cannot be corroborated through market sources or where there are materially inconsistent
values for an input. Asset classes classified as level 3 mainly comprise venture capital investments.
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 size and 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.
(B) Financial liabilities, excluding derivatives
Valuation hierarchy
At 31 December 2022, the Group’s financial liabilities carried at fair value, excluding derivatives, comprised its financial liabilities at
fair value through profit or loss and totalled £17,755 million (2021: £23,123 million). The table below analyses these financial liabilities
by balance sheet classification and valuation methodology (level 1, 2 or 3, as described on page 303). The fair value measurement
approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
At 31 December 2022
Financial liabilities at fair value through profit or loss
Debt securities and other liabilities designated at fair value through profit or loss
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Short positions in securities
Total financial liabilities carried at fair value, excluding derivatives
At 31 December 2021
Financial liabilities at fair value through profit or loss
Debt securities in issue designated at fair value through profit or loss
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Short positions in securities
Total financial liabilities carried at fair value, excluding derivatives
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
–
1,505
1,505
1,505
–
–
1,569
1,569
1,569
5,133
11,037
35
11,072
16,205
6,504
14,962
51
15,013
21,517
45
–
–
–
45
37
–
–
–
37
5,178
11,037
1,540
12,577
17,755
6,541
14,962
1,620
16,582
23,123
The Group’s non-participating investment contracts (see note 33) were all categorised as level 2.
306 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 49: Financial instruments continued
Movements in level 3 portfolio
The table below analyses movements in the level 3 financial liabilities portfolio, excluding derivatives.
At 1 January
Gains recognised in the income statement within other income
Additions
Redemptions
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
2022
£m
37
(4)
33
(3)
(18)
45
(4)
2021
£m
45
(5)
4
(7)
–
37
(4)
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.
In the year ended 31 December 2022, the own credit adjustment arising from the fair valuation of £5,178 million (2021: £6,541 million)
of the Group’s debt securities in issue designated at fair value through profit or loss resulted in a gain of £519 million (2021: loss of
£86 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
repurchase agreement rate curves specific to the type of security sold under the repurchase agreement.
(C) Derivatives
Valuation hierarchy
All of the Group’s derivative assets and liabilities are carried at fair value. At 31 December 2022, such assets totalled £24,753 million
(2021: £22,051 million) and liabilities totalled £24,042 million (2021: £18,060 million). The table below analyses these derivative balances by
valuation methodology (level 1, 2 or 3, as described on page 303). 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
78
(39)
2022
Level 2
£m
24,122
Level 3
£m
Total
£m
553
24,753
(23,395)
(608)
(24,042)
Level 1
£m
44
(62)
2021
Level 2
£m
21,114
(17,054)
Level 3
£m
893
(944)
Total
£m
22,051
(18,060)
Movements in level 3 portfolio
The table below analyses movements in level 3 derivative assets and liabilities carried at fair value.
At 1 January
Exchange and other adjustments
Gains (losses) recognised in the income statement within other income
Purchases (additions)
(Sales) redemptions
Transfers out of the level 3 portfolio
At 31 December
2022
2021
Derivative
assets
£m
Derivative
liabilities
£m
Derivative
assets
£m
Derivative
liabilities
£m
893
47
72
48
(21)
(486)
553
(944)
(37)
204
(46)
38
177
(608)
981
(4)
(182)
214
(116)
–
893
(1,374)
4
292
(328)
462
–
(944)
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
222
125
(219)
324
Valuation methodology for derivatives
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
Lloyds Banking Group Annual Report and Accounts 2022
307
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 49: Financial instruments continued
Complex interest rate and foreign exchange products where inputs to the valuation are significant, 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.
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.
Uncollateralised derivative valuation adjustments
(i)
The following table summarises the movement on this valuation adjustment account during 2021 and 2022:
At 1 January
Income statement credit
At 31 December
Represented by:
Credit Valuation Adjustment
Debit Valuation Adjustment
Funding Valuation Adjustment
2022
£m
456
(75)
381
2022
£m
294
(55)
142
381
2021
£m
474
(18)
456
2021
£m
306
(26)
176
456
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
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 £73 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 2022).
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
The Group’s own CDS spread
A one per cent rise in the CDS spread would lead to an increase in the DVA of £109 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 £51 million fall in the overall valuation adjustment to £188 million.
The CVA model used by the Group does not assume any correlation between the level of interest rates and default rates.
The Group has also recognised a Funding Valuation Adjustment to adjust for the net cost of funding uncollateralised derivative
positions. This adjustment is calculated on the expected future exposure discounted at a suitable cost of funds. A ten basis points
increase in the cost of funds will increase the funding valuation adjustment by £13 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 time frame 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 2022, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £61 million (2021:
£63 million).
308 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 49: Financial instruments continued
(D) Sensitivity of level 3 valuations
Valuation techniques
Significant
unobservable inputs2
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
2022
2021
Effect of reasonably possible
alternative assumptions1
Effect of reasonably possible
alternative assumptions1
7,883
356
(385)
9,793
502
(460)
Financial assets at fair value through profit or loss
Loans and
advances to
customers
Debt securities
Equity and
venture capital
investments
Discounted cash
flows
Interest rate spreads
(-50bps/+289bps)4
Discounted cash
flows
Credit spreads (+/-
6%)5
Market approach
Earnings multiple
(1.9/15.2)6
Underlying asset/
net asset value (incl.
property prices)3
n/a
n/a
Underlying asset/
net asset value (incl.
property prices),
broker quotes or
discounted cash
flows3
Unlisted equities,
debt securities
and property
partnerships in
the life funds
162
1,907
771
581
11,304
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 (17%/105%)7
Level 3 financial assets carried at fair value
Financial liabilities at fair value through profit or loss
Securitisation
notes and other
Discounted cash
flows
Interest rate spreads
(+/– 50bps)8
Derivative financial liabilities
Interest rate
derivatives
Option pricing
model
Interest rate
volatility (17%/105%)7
Level 3 financial liabilities carried at fair value
59
283
342
553
12,199
45
608
653
9
84
81
(9)
191
(84)
1,692
13
191
(13)
(191)
(88)
892
123
(131)
2
(33)
745
13,313
22
(16)
–
15
9
1
–
–
70
(15)
(7)
(1)
–
235
305
893
14,511
37
944
981
4
14
10
1
–
(4)
(14)
(23)
(1)
–
1 Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
2 Ranges are shown where appropriate and represent the highest and lowest inputs used in the level 3 valuations.
3 Underlying asset/net asset values represent fair value.
4 2021: -50bps/213bps.
5 2021: +/-7%.
6 2021: 3.5/14.9.
7 2021: 13%/168%.
8 2021: +/-50bps.
Lloyds Banking Group Annual Report and Accounts 2022
309
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 49: Financial instruments continued
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows:
•
Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives
depends on the behaviour of those underlying references through time
• Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality;
higher spreads lead to a lower fair value
• Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of possible
•
outcomes
Earnings multiples are used to value certain unlisted equity investments. The earnings multiples used are derived from those of
listed entities operating in the same sector with adjustments made for factors such as the size of the company and the quality of its
earnings. The majority of the Group’s venture capital investments are valued using an estimate of the company’s maintainable
earnings before interest, tax, depreciation and amortisation and in accordance with the International Private Equity and Venture
Capital Valuation Guidelines. 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 investments 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 17 per cent
to 105 per cent (2021: 13 per cent to 168 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
In line with International Private Equity and Venture Capital Guidelines, the values of underlying investments in fund investment
portfolios
Financial assets and liabilities carried at amortised cost
(4)
(A) Financial assets
Valuation hierarchy
The table below analyses the fair values of those financial assets of the Group which are carried at amortised cost by valuation
methodology (level 1, 2 or 3, as described on page 303). 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 2022
Loans and advances to banks
Loans and advances to customers:
Stage 1
Stage 2
Stage 3
Purchased or originated credit-impaired
Reverse repurchase agreements
Debt securities
Financial assets at amortised cost
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 1
£m
Level 2
£m
Level 3
£m
10,632
10,632
380,291
376,056
59,356
58,672
5,883
9,369
5,974
9,369
454,899
450,071
44,865
44,865
9,926
9,930
520,322
515,498
–
–
–
–
–
–
–
167
167
–
–
–
–
–
–
44,865
9,647
10,632
376,056
58,672
5,974
9,369
450,071
–
116
54,512
460,819
310 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 49: Financial instruments continued
At 31 December 2021
Loans and advances to banks
Loans and advances to customers:
Stage 1
Stage 2
Stage 3
Purchased or originated credit-impaired
Reverse repurchase agreements
Debt securities
Financial assets at amortised cost
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 1
£m
Level 2
£m
Level 3
£m
7,001
6,997
399,121
401,537
33,817
4,862
10,767
448,567
54,753
6,835
34,617
4,851
10,767
451,772
54,753
6,876
517,156
520,398
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
54,753
6,739
6,997
401,537
34,617
4,851
10,767
451,772
–
137
61,492
458,906
Valuation methodology
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 other 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.
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 variable rate loans and balances 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 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.
Reverse repurchase agreements
The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments.
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.
(B) Financial liabilities
Valuation hierarchy
The table below analyses the fair values of those financial liabilities of the Group which are carried at amortised cost by valuation
methodology (level 1, 2 or 3, as described on page 303).
At 31 December 2022
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Debt securities in issue
Subordinated liabilities
At 31 December 2021
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Debt securities in issue
Subordinated liabilities
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 1
£m
Level 2
£m
Level 3
£m
7,266
475,331
48,596
73,819
10,730
7,268
475,147
48,596
71,975
10,065
7,647
7,647
476,344
476,506
31,125
71,552
13,108
31,125
74,665
14,804
–
–
–
–
–
–
–
–
–
–
7,268
475,147
48,596
71,975
10,065
7,647
476,506
31,125
74,665
14,804
–
–
–
–
–
–
–
–
–
–
Lloyds Banking Group Annual Report and Accounts 2022
311
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 49: Financial instruments continued
Valuation methodology
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.
Repurchase agreements
The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments.
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
in issue 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.
(5) Reclassifications of financial assets
There have been no reclassifications of financial assets in 2021 or 2022.
Note 50: Transfers of financial assets
There were no significant transferred financial assets which were derecognised in their entirety, but with ongoing exposure. Details of
transferred financial assets that continue to be recognised in full are as follows.
The Group enters into repurchase and securities lending transactions in the normal course of business that do not result in
derecognition of the financial assets as substantially all of the risks and rewards, including credit, interest rate, prepayment and other
price risks are retained by the Group. In all cases, the transferee has the right to sell or repledge the assets concerned.
As set out in note 30, included within financial assets measured at amortised cost are loans transferred under the Group’s
securitisation and covered bond programmes. As the Group retains all 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 while the assets are within the
programmes. However, the Group retains the right to remove loans from the covered bond programmes where they are in excess of
the programme’s requirements. In addition, where the Group has retained some of the notes issued by securitisation and covered
bond programmes, the Group has the ability to sell or pledge these retained notes.
The table below sets out the carrying values of the transferred assets and the associated liabilities. For repurchase and securities
lending transactions, the associated liabilities represent the Group’s obligation to repurchase the transferred assets. For securitisation
programmes, the associated liabilities represent the external notes in issue (note 30). The liabilities shown in the table below have
recourse 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
2022
2021
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
Carrying
value of
transferred
assets
£m
Carrying
value of
associated
liabilities
£m
6,370
8,803
1,483
6,990
4,345
8,085
2,030
6,244
29,384
2,806
31,406
3,705
1
The carrying value of associated liabilities excludes securitisation notes held by the Group of £22,343 million (31 December 2021: £24,010 million).
312
Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 51: Offsetting of financial assets and liabilities
The following information relates to financial assets and liabilities which have been offset in the balance sheet and those which
have not been offset but for which the Group has enforceable master netting agreements or collateral arrangements in place with
counterparties.
Gross
amounts of
assets and
liabilities2
£m
Amount
offset in
the balance
sheet3
£m
Net amounts
presented in
the balance
sheet
£m
Related amounts where
set off in the balance
sheet not permitted1
Cash
collateral
received/
pledged
£m
Non-cash
collateral
received/
pledged
£m
Potential
net amounts
if offset
of related
amounts
permitted
£m
At 31 December 2022
Financial assets
Financial assets at fair value through profit or loss:
Excluding reverse repurchase agreements
168,828
–
168,828
Reverse repurchase agreements
Derivative financial instruments
Financial assets at amortised cost:
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements
Debt securities
32,064
(20,283)
11,781
200,892
(20,283)
180,609
76,437
(51,684)
24,753
(3,951)
(15,839)
(1,127)
167,701
–
(87)
(87)
(11,694)
(12,821)
–
167,701
4,963
10,632
–
10,632
(2,823)
–
7,809
458,229
(3,330)
454,899
(907)
(2,171)
451,821
55,675
9,926
(10,810)
44,865
–
9,926
–
–
(44,865)
–
–
9,926
534,462
(14,140)
520,322
(3,730)
(47,036)
469,556
Financial assets at fair value through other comprehensive
income
Financial liabilities
Deposits from banks
Customer deposits
23,154
7,266
476,255
–
–
23,154
–
(6,202)
16,952
7,266
(924)
475,331
(2,169)
(1,869)
–
5,097
(2,171)
471,291
Repurchase agreements at amortised cost
59,406
(10,810)
48,596
Financial liabilities at fair value through profit or loss:
Excluding repurchase agreements
Repurchase agreements
6,718
31,320
38,038
–
(20,283)
(20,283)
6,718
11,037
17,755
–
–
–
–
(48,596)
–
–
(11,037)
(11,037)
6,718
–
6,718
5,821
Derivative financial instruments
78,132
(54,090)
24,042
(3,731)
(14,490)
1
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.
2 Net of impairment allowances.
3 The amounts offset in the balance sheet as shown above mainly represent derivatives and repurchase agreements with central clearing houses which meet the
criteria for offsetting under IAS 32.
The effects of over-collateralisation have not been taken into account in the above table.
Lloyds Banking Group Annual Report and Accounts 2022
313
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 51: Offsetting of financial assets and liabilities continued
Gross
amounts of
assets and
liabilities2
£m
Amount
offset in
the balance
sheet3
£m
Net amounts
presented in
the balance
sheet
£m
Related amounts where
set off in the balance
sheet not permitted1
Cash
collateral
received/
pledged
£m
Non-cash
collateral
received/
pledged
£m
Potential
net amounts
if offset
of related
amounts
permitted
£m
191,850
33,834
225,684
–
(18,913)
(18,913)
50,205
(28,154)
191,850
14,921
206,771
22,051
–
(20)
(20)
(2,456)
189,394
(14,901)
–
(17,357)
189,394
(5,658)
(12,645)
3,748
At 31 December 2021
Financial assets
Financial assets at fair value through profit or loss:
Excluding reverse repurchase agreements
Reverse repurchase agreements
Derivative financial instruments
Financial assets at amortised cost:
Loans and advances to banks
Loans and advances to customers
449,732
(1,165)
448,567
Reverse repurchase agreements
Debt securities
64,474
6,835
(9,721)
–
528,042
(10,886)
54,753
6,835
517,156
7,001
–
7,001
(1,731)
(798)
–
–
–
5,270
(1,506)
446,263
(54,753)
–
(267)
6,568
(2,529)
(56,526)
458,101
Financial assets at fair value through other comprehensive
income
Financial liabilities
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Financial liabilities at fair value through profit or loss:
Excluding repurchase agreements
Repurchase agreements
Derivative financial instruments
28,137
7,647
477,509
40,846
8,161
33,875
42,036
46,214
–
–
28,137
–
(4,981)
23,156
7,647
(5,678)
–
1,969
(1,165)
(9,721)
476,344
31,125
–
(18,913)
(18,913)
(28,154)
8,161
14,962
23,123
18,060
–
–
–
–
–
(1,506)
474,838
(31,125)
–
–
(14,962)
(14,962)
8,161
–
8,161
468
(2,529)
(15,063)
1
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.
2 Net of impairment allowances.
3 The amounts offset in the balance sheet as shown above mainly represent derivatives and repurchase agreements with central clearing houses which meet the
criteria for offsetting under IAS 32.
The effects of over-collateralisation have not been taken into account in the above table.
314 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 52: Financial risk management
As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with
financial instruments represent a significant component of the risks faced by the Group.
The primary risks affecting the Group through its use of financial instruments are: market risk, which includes interest rate risk and
foreign exchange risk; credit risk; liquidity risk; capital risk; and insurance risk. The following disclosures provide quantitative and
qualitative information about the Group’s exposure to these risks.
Interest rate risk
Market risk
(A)
Interest rate risk arises from the different repricing characteristics of the Group’s assets and liabilities. Liabilities are generally 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 liabilities 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. Interest rate sensitivity analysis relating to the Group’s Banking activities is set out in the tables marked audited on
page 188.
The Group’s risk management policy is to optimise reward while 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.
The Group establishes hedge accounting relationships for interest rate risk components 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 2022 the aggregate notional principal of interest rate and other swaps (predominantly interest rate) designated as fair
value hedges was £152,662 million (2021: £172,695 million) with a net fair value liability of £493 million (2021: liability of £262 million) (note
17). The gains on the hedging instruments were £1,284 million (2021: gains of £944 million). The losses on the hedged items attributable
to the hedged risk were £1,325 million (2021: losses of £767 million). The gains and losses relating to the fair value hedges are recorded in
net trading income.
The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2022 was £249,703 million (2021:
£109,093 million) with a net fair value liability of £2 million (2021: asset of £5 million) (note 17). In 2022, ineffectiveness recognised in the
income statement that arises from cash flow hedges was a loss of £10 million (2021: loss of £69 million).
Interest rate benchmark reform
The Group continues to manage the transition to alternative benchmark rates under its Group-wide IBOR transition programme. The
Group has transitioned substantially all of its non-USD LIBOR products and continues to work with customers to transition a small
number of remaining contracts that either have yet to transition or have defaulted to the relevant synthetic LIBOR benchmark in the
interim. USD LIBOR transition is expected to complete by 30 June 2023.
While the volume of outstanding transactions impacted by IBOR benchmark reforms continues to reduce, the Group does not expect
material changes to its risk management approach.
The material risks identified include the following:
Conduct and litigation risk. The Group may be exposed to conduct and litigation charges as a direct result of inappropriate or
negligent actions taken during IBOR transition resulting in detriment to the customer. The Group is working closely with its
counterparties to avoid this outcome.
Market risk. IBOR transition is expected to lead to changes in the Group’s market risk profile which will continue to be monitored and
managed within the appropriate risk appetites. The key change is expected to be on the management of basis risk profile during the
period when alternative benchmark rates are referenced in contracts up to the cessation of the in-scope IBOR index.
Credit risk. Clients may wish to renegotiate the terms of existing transactions as a consequence of IBOR reform. This could lead to a
change in the credit risk exposure of the client depending on the outcome of the negotiations. The Group will continue to monitor and
manage changes within the appropriate risk appetites.
Accounting risk. If IBOR transition is finalised in a manner that does not permit the application of the reliefs introduced in the IFRS Phase
2 amendments, the financial instrument may be required to be derecognised and a new instrument recognised. In addition, where
instruments used in hedge accounting relationships are transitioned either at different times or to different benchmarks, this may
result in additional volatility to the income statement either through hedge accounting ineffectiveness or failure of the hedge
accounting relationships.
Operational risk. Additional operational risks may arise due to the IBOR transition programme impacting all businesses and functions
within the Group and leading to the implementation of changes to technology, operations, client communication and the valuation of
in-scope financial instruments.
Lloyds Banking Group Annual Report and Accounts 2022
315
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
The majority of the Group’s USD LIBOR exposures are expected to transition through industry-led transition programmes managed by
the London Clearing House and Futures exchanges, or through the International Swaps and Derivatives Association (ISDA) protocol.
Other contracts (primarily loans) maturing after June 2023 are being managed through the Group’s existing processes, either
transitioning to an alternative benchmark rate or allowed to fallback under existing contract protocols or through US legislation.
At 31 December 2022, the Group had the following significant exposures impacted by interest rate benchmark reform which had yet to
transition to the replacement benchmark rate:
Non-derivative financial assets
Financial assets at fair value through profit or loss
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
Non-derivative financial liabilities
Customer deposits
Financial liabilities at fair value through profit or
loss
Debt securities in issue
Derivative notional/contract amount
Interest rate
Cross currency
At 31 December 2022
At 31 December 2021
GBP
LIBOR
£m
USD
LIBOR
£m
Other1
£m
Total
£m
GBP
LIBOR
£m
USD
LIBOR
£m
Other
£m
Total
£m
106
–
762
–
762
–
868
–
–
–
–
36
67
1,077
–
1,144
–
1,180
84
100
52
236
–
–
43
–
43
–
43
–
–
–
–
142
67
1,882
–
1,949
–
2,091
84
100
52
236
1,753
–
3,542
126
3,668
268
4,106
5,975
–
10,081
16
–
5,437
10,349
–
–
–
–
74
100
54
228
840
193,228
–
29,452
1,223
1,124
195,291
30,576
12,734
286,921
–
42,229
840
222,680
2,347
225,867
12,734
329,150
–
–
–
–
–
–
–
–
3
26
29
–
–
–
2,021
4,106
9,517
126
13,749
16
15,786
74
103
80
257
299,655
42,229
341,884
1
Balances within Other include Canadian Dollar Offered Rate for which a cessation announcement, effective after 28 June 2024, was published on 16 May 2022.
As at 31 December 2022, the IBOR balances in the above table relate to contracts that have not transitioned to an alternative
benchmark rate. In the case of Sterling LIBOR, these are contracts that have cash flows determined on a synthetic LIBOR basis.
Of the £222,680 million of USD derivative notional balances as at 31 December 2022, £55,973 million relate to contracts with their final
LIBOR fixing prior to LIBOR cessation and £129,442 million relate to exchange traded futures or contracts settled through the London
Clearing House. Of the remaining £37,265 million, £36,872 million are fallback-eligible.
In respect of the Group’s hedge accounting relationships, 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
• An accounting hedging relationship should be discontinued because of a failure of the retrospective effectiveness test
the Group considers 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.
By 31 December 2022, the Group had transitioned its Sterling, Euro, Japanese Yen and Swiss Franc LIBOR hedge accounting models
to risk-free rates. The Group plans to complete the transition of its USD LIBOR hedge accounting models ahead of the 30 June 2023
cessation date.
The Group’s most significant remaining IBOR hedge accounting relationship in relation to benchmark reform is USD LIBOR, of which:
•
•
The notional amount 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 £1,771 million (2021: £3,258 million). These are principally loans and advances to customers in
Commercial Banking.
The interest rate benchmark reforms also affect assets and liabilities designated in fair value hedges. At 31 December 2022, these
assets had a notional value of £1,864 million and liabilities had a notional value of £17,540 million. At 31 December 2021, such assets
had a notional value of £3,370 million and liabilities had a notional value of £22,437 million. These fair value hedges principally relate
to debt securities in issue.
• At 31 December 2022, the notional amount of the hedging instruments in hedging relationships to which these amendments apply
was £19,755 million, of which £17,926 million relates to fair value hedges and £1,829 million relates to cash flow hedges. At
31 December 2021, the notional amount of the hedging instruments in hedging relationships to which these amendments applied
was £27,873 million, of which £24,615 million related to fair value hedges and £3,258 million related to cash flow hedges.
316 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 52: Financial risk management continued
(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 managed centrally within allocated exposure limits. Trading book exposures
in the authorised trading centres 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 in the
tables marked audited on page 190.
The Group manages foreign currency accounting exposure via cash flow hedge accounting, utilising currency swaps and forward
foreign exchange trades.
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 hedge accounting of the currency translation risk
of the net investment in foreign operations in 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:
Foreign currency of Group operations
Exposure
2022
US Dollar
£m
209
Other
non-Sterling
£m
5
Euro
£m
1,843
2021
US Dollar
£m
134
Other
non-Sterling
£m
7
Euro
£m
115
Credit risk
The Group’s credit risk exposure arises in respect of the instruments below and predominantly in the United Kingdom. Credit risk
appetite is set at Board level and is described and reported through a suite of metrics devised from a combination of accounting and
credit portfolio performance measures, which include the use of various credit risk rating systems as inputs and assess credit risk at
a counterparty level using three components: (i) the probability of default by the counterparty on its contractual obligations; (ii) the
current exposures to the counterparty and their likely future development, from which the Group derives the exposure at default; and
(iii) the likely loss ratio on the defaulted obligations, the loss given default. The Group uses a range of approaches to mitigate credit risk,
including internal control policies, obtaining collateral, using master netting agreements and other credit risk transfers, such as asset
sales and credit derivatives based transactions.
(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.
Financial assets at fair value through profit or loss2,3:
Loans and advances
Debt securities, treasury and other bills
Contracts held with reinsurers
Derivative financial instruments
Financial assets at amortised cost, net4:
Loans and advances to banks, net4
Loans and advances to customers, net4
Reverse repurchase agreements, net4
Debt securities, net4
Financial assets at fair value through other comprehensive
income2
Reinsurance assets
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
24,872
38,109
10,906
73,887
24,753
10,632
454,899
44,865
9,926
520,322
22,871
616
58
781
2,147
74,692
77,678
Maximum
exposure
£m
2022
Offset1
£m
Net
exposure
£m
Maximum
exposure
£m
–
–
–
–
(12,330)
24,872
38,109
10,906
73,887
12,423
29,538
47,237
12,371
89,146
22,051
2021
Offset1
£m
–
–
–
–
(11,600)
Net
exposure
£m
29,538
47,237
12,371
89,146
10,451
–
10,632
7,001
–
7,001
(2,171)
452,728
448,567
(1,506)
447,061
–
–
44,865
9,926
(2,171)
518,151
–
–
–
–
–
–
–
22,871
616
58
781
2,147
74,692
77,678
54,753
6,835
517,156
27,902
759
191
510
2,043
71,158
73,902
730,916
–
–
54,753
6,835
(1,506)
515,650
–
–
–
–
–
–
–
(13,106)
27,902
759
191
510
2,043
71,158
73,902
717,810
720,127
(14,501)
705,626
1 Offset items comprise deposit amounts available for offset and amounts available for offset under master netting arrangements that do not meet the criteria
2
3
under IAS 32 to enable loans and advances and derivative assets respectively to be presented net of these balances in the financial statements.
Excluding equity shares.
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.
4 Amounts shown net of related impairment allowances.
Lloyds Banking Group Annual Report and Accounts 2022
317
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
(B) Concentrations of exposure
The Group’s management of concentration risk includes portfolio controls on certain industries, sectors and products to reflect risk
appetite as well as individual, customer and bank limit risk tolerances. Credit policies and appetite statements are aligned to the
Group’s risk appetite and restrict exposure to higher risk countries and potentially vulnerable sectors and asset classes. Exposures are
monitored to prevent both an excessive concentration of risk and single name concentrations. The Group’s largest credit limits are
regularly monitored by the Board Risk Committee and reported in accordance with regulatory requirements. As part of its credit risk
policy, the Group considers sustainability risk (which incorporates Environmental (including climate), Social and Governance) in the
assessment of Commercial Banking facilities.
At 31 December 2022 the most significant concentrations of exposure were in mortgages (comprising 71 per cent of total loans and
advances to customers) and to financial, business and other services (comprising 8 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.
2022
£m
7,447
2,552
3,619
4,066
13,170
2,526
21,499
37,666
323,923
26,154
766
16,029
2021
£m
7,729
1,978
4,110
4,440
13,463
2,109
23,923
33,533
319,655
24,604
982
15,861
459,417
452,387
(4,518)
(3,820)
454,899
448,567
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
Commercial
IFRS 9 PD range
Quality classification
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
0.00–0.80%
CMS 1–5
0.81–4.50%
CMS 6–10
4.51–14.00%
CMS 11–14
14.01–20.00%
CMS 15–18
20.01–99.99%
CMS 19
100.00%
CMS 20–23
IFRS 9 PD range
0.000–0.100%
0.101–0.500%
0.501–3.000%
3.001–20.000%
20.001–99.999%
100.000%
Stage 3 assets include balances of £727 million (2021: £650 million) (with outstanding amounts due of £1,360 million (2021: £1,279 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 £126 million (2021: £1,546 million) were modified during the year. No material gain
or loss was recognised by the Group.
As at 31 December 2022 assets that had been previously modified while classified as Stage 2 or Stage 3 and were classified as Stage 1
amounted to £5,279 million (2021: £6,658 million).
318 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 52: Financial risk management continued
Drawn exposures
Expected credit loss allowance
Gross drawn exposures and expected
credit loss allowance
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
At 31 December 2022
Loans and advances to banks
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Loans and advances to customers
Retail – UK mortgages
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – credit cards
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – loans and overdrafts
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – UK Motor Finance
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – other
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
1,223
9,366
28
3
–
–
10,620
–
–
27
–
–
–
27
250,937
24,844
6,557
23
–
–
–
11,388
2,443
734
2,374
–
257,517
41,783
3,587
6,497
1,332
–
–
–
5
1,441
1,246
227
368
–
11,416
3,287
659
5,902
1,724
53
19
–
1
451
657
199
405
–
8,357
1,713
8,969
2,778
425
–
2
–
743
930
325
99
148
–
12,174
2,245
12,588
1,311
–
–
91
–
328
213
90
5
7
–
13,990
643
–
11
–
2
–
–
13
81
10
–
–
–
–
91
7
66
47
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,223
9,366
55
3
–
–
10,647
275,781
17,945
2,466
734
2,374
3,416
3,416
9,622
13,038
9,622
312,338
–
–
–
–
–
289
289
–
–
–
–
–
247
247
–
–
–
–
–
154
154
–
–
–
–
–
157
157
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,592
7,938
2,578
227
368
289
14,992
120
660
6,353
2,381
252
424
247
2
90
69
5
3
–
10,317
169
9,712
3,708
750
99
150
154
66
25
2
–
–
–
14,573
93
12,916
1,524
90
5
98
157
14,790
9
4
–
–
–
–
13
486
–
–
2
–
–
–
2
180
140
72
24
136
–
552
–
70
167
52
144
–
433
–
24
83
45
163
–
315
9
20
13
8
26
–
76
4
11
3
–
–
–
18
–
–
–
–
–
–
–
–
–
–
–
–
311
311
–
–
–
–
–
113
113
–
–
–
–
–
126
126
–
–
–
–
–
81
81
–
–
–
–
–
52
52
–
–
–
–
–
–
–
–
–
–
–
–
253
253
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11
2
2
–
–
15
261
150
72
24
136
564
1,207
7
136
214
52
144
113
666
2
114
152
50
166
126
610
75
45
15
8
26
81
250
13
15
3
–
–
52
83
1,394
683
253
2,816
Lloyds Banking Group Annual Report and Accounts 2022
319
Total Retail
303,454
49,671
4,263
9,622
367,010
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
Drawn exposures
Expected credit loss allowance
Gross drawn exposures and expected
credit loss allowance 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
At 31 December 2022
Commercial Banking
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Other1
Total loans and advances to
customers
In respect of:
Retail
Commercial Banking
Other1
Total loans and advances to
customers
13,573
32,070
31,591
3,275
–
–
33
512
5,627
4,508
813
–
80,509
11,493
(2,972)
–
–
–
–
–
–
3,371
3,371
6
–
–
–
–
–
–
–
–
13,606
32,582
37,218
7,783
813
3,371
95,373
(2,966)
2
37
128
47
–
–
214
–
–
3
93
244
74
–
414
–
–
–
–
–
–
1,070
1,070
4
–
–
–
–
–
–
–
–
2
40
221
291
74
1,070
1,698
4
380,991
61,164
7,640
9,622
459,417
700
1,808
1,757
253
4,518
303,454
49,671
80,509
11,493
(2,972)
–
4,263
3,371
6
9,622
367,010
–
–
95,373
(2,966)
486
214
–
1,394
414
–
683
1,070
4
253
–
–
2,816
1,698
4
380,991
61,164
7,640
9,622
459,417
700
1,808
1,757
253
4,518
1 Drawn exposures include centralised fair value hedge accounting adjustments.
Reverse repurchase agreements
Banks
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Customers
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Total reverse repurchase
agreements
3,292
494
–
–
–
–
3,786
9,094
31,985
–
–
–
–
41,079
44,865
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,292
494
–
–
–
–
3,786
9,094
31,985
–
–
–
–
41,079
44,865
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
320 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 52: Financial risk management continued
Undrawn exposures
Expected credit loss allowance
Gross undrawn exposures and expected
credit loss allowance
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
At 31 December 2022
Retail – UK mortgages
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – credit cards
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – loans and overdrafts
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – UK Motor Finance
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – other
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
16,003
159
83
–
–
–
–
62
25
7
21
–
16,086
274
39,384
30
14,355
2,975
580
422
–
–
–
46
76
–
54,319
3,549
4,174
1,618
253
6
–
–
2
386
159
36
61
–
6,051
644
318
1,259
347
–
–
–
1,924
702
198
–
–
–
–
900
–
–
1
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
17
17
–
–
–
–
–
45
45
–
–
–
–
–
17
17
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
67
67
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,162
145
25
7
21
84
16,444
39,414
17,330
1,002
46
76
45
–
1
–
–
–
–
1
16
32
5
–
–
–
–
–
–
–
1
–
1
–
28
8
2
6
–
57,913
53
44
4,176
2,004
412
42
61
17
6,712
318
1,259
348
–
–
–
1,925
702
198
–
–
–
–
900
4
6
6
–
–
–
16
–
2
–
–
–
–
2
–
3
–
–
–
–
3
–
12
18
7
15
–
52
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total Retail
79,280
4,468
79
67
83,894
75
97
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
1
–
2
16
60
13
2
6
–
97
4
18
24
7
15
–
68
–
2
–
–
–
–
2
–
3
–
–
–
–
3
172
Lloyds Banking Group Annual Report and Accounts 2022
321
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
Undrawn exposures
Expected credit loss allowance
Gross undrawn exposures and expected
credit loss allowance 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
At 31 December 2022
Commercial Banking
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Other
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
17,047
29,141
9,808
779
–
–
–
135
1,647
800
85
–
56,775
2,667
121
–
279
–
–
–
400
–
–
–
–
–
–
–
–
–
–
–
–
48
48
–
–
–
–
–
11
11
–
–
–
–
–
–
–
–
–
–
–
–
–
–
17,047
29,276
11,455
1,579
85
48
59,490
121
–
279
–
–
11
411
2
21
28
8
–
–
59
–
–
–
–
–
–
–
–
2
33
43
10
–
88
–
–
–
–
–
–
–
Total
136,455
7,135
138
67
143,795
134
185
In respect of:
Retail
Commercial Banking
Other
Total
79,280
4,468
56,775
2,667
400
–
136,455
7,135
79
48
11
138
67
83,894
–
–
59,490
411
67
143,795
75
59
–
134
97
88
–
185
–
–
–
–
–
4
4
–
–
–
–
–
–
–
4
–
4
–
4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
23
61
51
10
4
151
–
–
–
–
–
–
–
323
172
151
–
323
322 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 52: Financial risk management continued
Gross drawn exposures and expected
credit loss allowance
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 2021
Loans and advances to banks
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Loans and advances to customers
Retail – UK mortgages
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – credit cards1
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – loans and overdrafts
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – UK Motor Finance
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – other1
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
5,161
1,780
61
–
–
–
7,002
–
–
–
–
–
–
–
270,649
2,971
9
–
–
–
9,785
8,288
2,258
355
1,112
–
273,629
21,798
5,076
6,023
819
–
–
–
15
1,092
623
112
235
–
11,918
2,077
1,426
5,794
938
18
5
–
2
499
286
74
244
–
8,181
1,105
8,758
2,904
583
–
2
–
465
844
298
69
152
–
12,247
1,828
9,715
1,386
–
–
97
–
228
265
88
2
10
–
11,198
593
–
–
–
–
–
–
–
–
–
–
–
–
1,940
1,940
–
–
–
–
–
292
292
–
–
–
–
–
271
271
–
–
–
–
–
201
201
–
–
–
–
–
169
169
10,977
12,917
10,977
308,344
48
394
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,161
1,780
61
–
–
–
7,002
1
–
–
–
–
–
1
280,434
48
11,259
2,267
355
1,112
–
–
–
–
–
3
11
–
–
–
–
5,091
7,115
1,442
112
235
292
14,287
1,428
6,293
1,224
92
249
271
9
58
29
–
–
–
96
5
79
39
2
1
–
–
43
71
22
82
–
218
–
23
33
14
83
–
9,557
126
153
9,223
3,748
881
69
154
201
79
22
5
–
–
–
14,276
106
9,943
1,651
88
2
107
169
11,960
–
–
–
–
–
–
–
146
104
64
15
65
–
6
19
15
7
27
–
74
4
8
3
–
–
–
Total Retail
317,173
27,401
2,873
10,977
358,424
14
390
15
854
–
–
–
–
–
–
–
–
–
–
–
–
184
184
–
–
–
–
–
128
128
–
–
–
–
–
139
139
–
–
–
–
–
116
116
–
–
–
–
–
52
52
619
–
–
–
–
–
–
–
–
–
–
–
–
210
210
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
1
194
104
64
15
65
394
836
9
101
100
22
82
128
442
5
102
72
16
84
139
418
85
41
20
7
27
116
296
7
19
3
–
–
52
81
210
2,073
Lloyds Banking Group Annual Report and Accounts 2022
323
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
Drawn exposures
Expected credit loss allowance
Gross drawn exposures and expected credit
loss allowance 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
At 31 December 2021
Commercial Banking1
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Other2
Total loans and advances to
customers
In respect of:
Retail
Commercial Banking
Other2
Total loans and advances to
customers
21,950
26,073
32,512
2,184
–
–
39
310
3,466
2,858
857
–
82,719
7,530
144
–
–
–
–
–
–
3,563
3,563
7
–
–
–
–
–
–
–
–
21,989
26,383
35,978
5,042
857
3,563
93,812
151
4
23
84
14
–
–
125
400
–
–
76
145
39
–
260
–
–
–
–
–
–
956
956
6
–
–
–
–
–
–
–
–
4
23
160
159
39
956
1,341
406
400,036
34,931
6,443
10,977
452,387
915
1,114
1,581
210
3,820
317,173
82,719
144
27,401
7,530
–
2,873
3,563
7
10,977
358,424
–
–
93,812
151
390
125
400
854
260
–
619
956
6
210
2,073
–
–
1,341
406
400,036
34,931
6,443
10,977
452,387
915
1,114
1,581
210
3,820
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
2 Drawn exposures include centralised fair value hedge accounting adjustments and expected credit loss allowance includes a central adjustment of £400 million
that was applied in respect of uncertainty in the economic outlook.
Reverse repurchase agreements
Banks
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Customers
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Total reverse repurchase
agreements
2,901
631
–
–
–
–
3,532
13,364
37,807
50
–
–
–
51,221
54,753
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,901
631
–
–
–
–
3,532
13,364
37,807
50
–
–
–
51,221
54,753
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
324 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 52: Financial risk management continued
Undrawn exposures
Expected credit loss allowance
Gross undrawn exposures and expected
credit loss allowance
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
At 31 December 2021
Retail – UK mortgages
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – credit cards1
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – loans and overdrafts
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – UK Motor Finance
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
Retail – other1
RMS 1–3
RMS 4–6
RMS 7–9
RMS 10
RMS 11–13
RMS 14
16,947
24
–
–
–
–
67
25
3
–
–
–
16,971
95
47,427
8,811
242
–
–
–
81
2,160
172
31
58
–
56,480
2,502
5,123
1,180
97
1
–
–
6,401
277
1,180
527
–
1
–
1,985
598
298
–
–
–
–
896
3
228
48
11
29
–
319
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13
13
–
–
–
–
–
55
55
–
–
–
–
–
18
18
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
72
72
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
17,014
49
3
–
–
85
17,151
47,508
10,971
414
31
58
55
1
–
–
–
–
–
1
23
22
3
–
–
–
59,037
48
5,126
1,408
145
12
29
18
6,738
277
1,180
527
–
1
–
1,985
598
298
–
–
–
–
896
4
5
1
–
–
–
10
–
2
–
–
–
–
2
–
1
–
–
–
–
1
–
–
–
–
–
–
–
2
22
3
1
3
–
31
–
4
5
2
6
–
17
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total Retail
82,733
2,916
86
72
85,807
62
48
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
1
25
44
6
1
3
–
79
4
9
6
2
6
–
27
–
2
–
–
–
–
2
–
1
–
–
–
–
1
110
Lloyds Banking Group Annual Report and Accounts 2022
325
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
Undrawn exposures
Expected credit loss allowance
Gross undrawn exposures and expected
credit loss allowance 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
At 31 December 2021
Commercial Banking1
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Other
CMS 1–5
CMS 6–10
CMS 11–14
CMS 15–18
CMS 19
CMS 20–23
Total
26,935
19,455
7,926
453
–
–
1
47
1,212
347
33
–
54,769
1,640
102
144
193
–
–
–
439
–
–
–
–
–
–
–
–
–
–
–
–
67
67
–
–
–
–
–
11
11
–
–
–
–
–
–
–
–
–
–
–
–
–
–
26,936
19,502
9,138
800
33
67
56,476
102
144
193
–
–
11
450
2
15
24
6
–
–
47
–
–
–
–
–
–
–
–
–
18
17
3
–
38
–
–
–
–
–
–
–
137,941
4,556
164
72
142,733
109
86
In respect of:
Retail
Commercial Banking
Other
Total
82,733
54,769
439
2,916
1,640
–
137,941
4,556
86
67
11
164
72
–
–
85,807
56,476
450
72
142,733
62
47
–
109
48
38
–
86
–
–
–
–
–
5
5
–
–
–
–
–
–
–
5
–
5
–
5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
15
42
23
3
5
90
–
–
–
–
–
–
–
200
110
90
–
200
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
Average PD grade
The table below shows the average PD 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
UK mortgages
Credit cards
Loans and overdrafts
UK Motor Finance
Commercial Banking
2022
20211
Stage 1
average PD
%
Stage 2
average PD
%
Stage 1
average PD
%
Stage 2
average PD
%
0.26
2.06
3.36
0.71
15.48
20.89
29.75
11.24
0.17
1.58
2.42
0.81
12.44
17.82
23.57
12.00
Loans and advances to customers
0.88
18.50
0.95
22.32
1
Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from
Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis.
326 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December
Note 52: Financial risk management continued
Cash and balances at central banks
Significantly all of the Group’s cash and balances at central banks of £91,388 million (2021: £76,420 million) are due from the Bank of
England, the Federal Reserve Bank of New York or the Deutsche Bundesbank.
Debt securities held at amortised cost
An analysis by credit rating of the Group’s debt securities held at amortised cost is provided below:
Government securities
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
Investment
grade1
£m
268
3,712
1,946
5,658
3,993
9,919
2022
Other2
£m
–
–
2
2
14
16
2021
Other2
£m
–
–
18
18
13
31
Investment
grade1
£m
202
1,457
1,590
3,047
3,558
6,807
Total
£m
268
3,712
1,948
5,660
4,007
9,935
(9)
9,926
Total
£m
202
1,457
1,608
3,065
3,571
6,838
(3)
6,835
1 Credit ratings equal to or better than ‘BBB’.
2 Other comprises sub-investment grade (2022: £nil; 2021: £18 million) and not rated (2022: £16 million; 2021: £13 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 21. 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
Corporate and other debt securities
Treasury and other bills
Total financial assets at fair value through other
comprehensive income
Investment
grade1
£m
2022
Other2
£m
11,196
95
11,470
22,761
–
22,761
15
51
44
110
–
110
Total
£m
Investment
grade1
£m
11,211
146
11,514
22,871
–
14,600
15
13,088
27,703
85
22,871
27,788
2021
Other2
£m
13
55
46
114
–
114
Total
£m
14,613
70
13,134
27,817
85
27,902
1 Credit ratings equal to or better than ‘BBB’.
2 Other comprises sub-investment grade (2022: £71 million; 2021: £72 million) and not rated (2022: £39 million; 2021: £42 million).
Lloyds Banking Group Annual Report and Accounts 2022
327
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
Debt securities, treasury and other bills, and contracts held with reinsurers 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 an investment grade rating. The credit quality of
the Group’s debt securities, treasury and other bills, and contracts held with reinsurers held at fair value through profit or loss is set out
below:
Trading assets:
Debt securities:
Government securities
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Total trading assets
Other financial assets mandatorily at fair value through profit or
loss:
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
Contracts held with reinsurers
Total other financial assets mandatorily at fair value through
profit or loss
Total held at fair value through profit or loss
Investment
grade1
£m
2022
Other2
£m
Total
£m
Investment
grade1
£m
2021
Other2
£m
2,185
7
14
21
216
2,422
7,871
2,510
7,129
228
171
399
14,932
32,841
62
10,822
43,725
46,147
–
–
–
–
12
12
1
6
4
–
–
–
2,761
2,772
–
84
2,856
2,868
2,185
6,579
7
14
21
228
2,434
7,872
2,516
7,133
228
171
399
17,693
35,613
62
10,906
46,581
49,015
12
3
15
245
6,839
11,097
2,722
6,294
421
272
693
16,692
37,498
19
12,371
49,888
56,727
–
–
–
–
–
–
4
9
3
–
–
–
2,865
2,881
–
–
2,881
2,881
Total
£m
6,579
12
3
15
245
6,839
11,101
2,731
6,297
421
272
693
19,557
40,379
19
12,371
52,769
59,608
1 Credit ratings equal to or better than ‘BBB’.
2 Other comprises sub-investment grade (2022: £1,256 million; 2021: £1,491 million) and not rated (2022: £1,612 million; 2021: £1,390 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 £12,423 million (2021: £10,451 million), cash collateral of £3,951 million (2021: £5,658 million) was held and a further £36 million was due
from OECD banks (2021: £253 million).
Trading and other
Hedging
Total derivative financial instruments
Investment
grade1
£m
23,326
53
23,379
2022
Other2
£m
1,352
22
1,374
Total
£m
Investment
grade1
£m
24,678
20,193
75
81
24,753
20,274
2021
Other2
£m
1,772
5
1,777
Total
£m
21,965
86
22,051
1 Credit ratings equal to or better than ‘BBB’.
2 Other comprises sub-investment grade (2022: £1,031 million; 2021: £1,471 million) and not rated (2022: £343 million; 2021: £306 million).
328 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 52: Financial risk management continued
Financial guarantees and irrevocable loan commitments
Financial guarantees represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to
do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees
or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments,
however, the likely amount of loss is expected to be significantly less. Most commitments to extend credit are contingent upon
customers maintaining specific credit standards.
(D) Collateral held as security for financial assets
The principal types of collateral accepted by the Group include: residential and commercial properties; charges over business assets
such as premises, inventory and accounts receivable; financial instruments, cash and guarantees from third-parties. The terms and
conditions associated with the use of the collateral are varied and are dependent on the type of agreement and the counterparty.
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 £3,786 million (2021: £3,532 million), against which the Group held collateral with a fair value of £247 million (2021:
£620 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. The market takes into account
many factors, including environmental considerations such as flood risk and energy efficient additions, in arriving at the value of a
home.
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 loss allowance
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 2022
Less than 70 per cent
210,457
33,205
3,161
8,845
255,668
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
31,788
11,942
3,319
11
5,264
2,604
606
104
170
48
13
24
359
149
113
156
37,581
14,743
4,051
295
Total
257,517
41,783
3,416
9,622
312,338
At 31 December 2021
Less than 70 per cent
217,830
19,766
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
42,808
12,087
779
125
1,632
253
46
101
1,717
134
52
14
23
9,872
249,185
572
184
135
214
45,146
12,576
974
463
51
25
12
3
–
91
31
11
5
–
1
330
124
59
18
21
552
247
80
28
10
29
Total
273,629
21,798
1,940
10,977
308,344
48
394
210
55
20
7
19
311
98
38
23
7
18
184
Total
gross
£m
708
246
110
46
97
117
42
19
18
57
253
1,207
110
26
16
16
42
210
486
155
72
33
90
836
Lloyds Banking Group Annual Report and Accounts 2022
329
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
The energy performance certificate (EPC) profile of the security associated with the Group’s UK mortgage portfolio is shown below:
EPC profile
A
B
C
D
E
F
G
Unrated properties
Total
2022
2021
£m
731
37,075
60,086
93,010
35,015
6,990
1,519
77,912
312,338
%
0.2
11.9
19.2
29.8
11.2
2.2
0.5
25.0
100.0
£m
563
34,070
54,636
88,752
35,086
7,258
1,546
86,433
308,344
%
0.2
11.0
17.7
28.8
11.4
2.4
0.5
28.0
100.0
The above data is sourced using the latest available government EPC information as at the relevant balance sheet date. The Group
has no EPC data available for 25.0 per cent (2021: 28.0 per cent) of the UK mortgage portfolio, these are classified as unrated properties.
EPC ratings are not considered to be a material credit risk factor,and do not form part of the Group’s credit risk calculations.
Other
The majority of non-mortgage retail lending is unsecured. At 31 December 2022, Stage 3 non-mortgage lending amounted to
£475 million, net of an impairment allowance of £372 million (2021: £498 million, net of an impairment allowance of £435 million).
Stage 1 and Stage 2 non-mortgage retail lending amounted to £53,825 million (2021: £49,147 million). Lending decisions are
predominantly based on an obligor’s ability to repay rather than reliance on the disposal of any security provided. Where the lending
is secured, 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 show 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 2022 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying
value of £41,079 million (2021: £51,221 million), against which the Group held collateral with a fair value of £33,468 million (2021:
£52,690 million), all of which the Group was able to repledge. These transactions were generally conducted under terms that are usual
and customary for standard secured lending activities.
Stage 3 secured lending
The value of collateral is re-evaluated and its legal soundness re-assessed if there is observable evidence of distress of the borrower;
this evaluation is used to determine potential loss allowances and management’s strategy to try to either repair the business or
recover the debt.
At 31 December 2022, Stage 3 secured commercial lending amounted to £410 million, net of an impairment allowance of £160 million
(2021: £636 million, net of an impairment allowance of £198 million). The fair value of the collateral held in respect of impaired secured
commercial lending was £484 million (2021: £693 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.
330 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 52: Financial risk management continued
Financial assets at fair value through profit or loss (excluding equity shares)
Included in financial assets at fair value through profit or loss are reverse repurchase agreements treated as collateralised loans with a
carrying value of £11,781 million (2021: £14,921 million). Collateral is held with a fair value of £9,598 million (2021: £15,640 million), all of which
the Group is able to repledge. At 31 December 2022, £5,232 million had been repledged (2021: £7,251 million).
In addition, securities held as collateral in the form of stock borrowed amounted to £26,368 million (2021: £14,100 million). Of this amount,
£14,375 million (2021: £6,538 million) had been resold or repledged as collateral for the Group’s own transactions.
These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Derivative assets, after offsetting of amounts under master netting arrangements
The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or
highly liquid securities. In respect of the net derivative assets after offsetting of amounts under master netting arrangements of
£12,423 million (2021: £10,451 million), cash collateral of £3,951 million (2021: £5,658 million) was held.
Irrevocable loan commitments and other credit-related contingencies
At 31 December 2022, the Group held irrevocable loan commitments and other credit-related contingencies of £77,678 million (2021:
£73,902 million). Collateral is held as security, in the event that lending is drawn down, on £16,442 million (2021: £17,149 million) of these
balances.
Collateral repossessed
During the year, £219 million of collateral was repossessed (2021: £86 million), consisting primarily of residential property.
In respect of retail portfolios, the Group does not take physical possession of properties or other assets held as collateral and uses
external agents to realise the value as soon as practicable, generally at auction, to settle indebtedness. Any surplus funds are returned
to the borrower or are otherwise dealt with in accordance with appropriate insolvency regulations. In certain circumstances the Group
takes physical possession of assets held as collateral against commercial lending. In such cases, the assets are carried on the Group’s
balance sheet and are classified according to the Group’s accounting policies.
(E) Collateral pledged as security
The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted
under terms that are usual and customary for standard securitised borrowing contracts.
Repurchase transactions
Amortised cost
There are balances arising from repurchase transactions with banks of £33,009 million (2021: £30,085 million), which include amounts
due under the Bank of England’s Term Funding Scheme with additional incentives for SMEs (TFSME); the fair value of the collateral
provided under these agreements at 31 December 2022 was £40,366 million (2021: £39,918 million).
There are balances arising from repurchase transactions with customers of £15,587 million (2021: £1,040 million); the fair value of the
collateral provided under these agreements at 31 December 2022 was £13,461 million (2021: £903 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 £10,427 million (2021: £14,350 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
Total
2022
£m
1,463
5,429
6,892
2021
£m
2,348
1,918
4,266
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 30.
Lloyds Banking Group Annual Report and Accounts 2022
331
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: 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, other than liabilities arising from insurance and investment contracts, 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. Liabilities arising from insurance and investment contracts are analysed on a behavioural basis.
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 2022
Assets
Cash and balances at central banks
91,388
Financial assets at fair value through profit or loss
12,019
Derivative financial instruments
Loans and advances to banks
2,896
4,756
–
8,108
1,823
763
–
3,269
1,069
896
Loans and advances to customers
17,535
7,628
10,337
Reverse repurchase agreements
14,530
10,908
11,600
Debt securities
7
219
73
–
2,186
656
700
8,849
4,035
275
–
858
637
352
–
2,827
1,424
–
–
91,388
7,565
143,777
180,609
2,828
13,420
24,753
78
3,084
3
10,632
9,952
33,886
78,857
287,855
454,899
285
77
2,924
583
–
44,865
874
6,475
1,926
9,926
Financial assets at amortised cost
36,828
19,518
22,906
13,859
10,666
37,762
88,999
289,784
520,322
Financial assets at fair value through other
comprehensive income
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Financial liabilities at fair value through profit or
loss
Derivative financial instruments
Debt securities in issue
Liabilities arising from insurance and investment
contracts
Other liabilities
Subordinated liabilities
Total liabilities
310
1,683
273
1,071
391
189
456
700
665
211
2,324
9,334
9,401
23,154
357
922
32,470
37,603
145,124
30,793
27,824
17,857
13,037
44,694
109,648
488,852
877,829
3,988
446,311
12,203
5,245
3,197
5,562
1,288
6,137
–
364
8,074
6,183
2,363
1,647
9,761
1,828
1,246
–
141
139
408
4
5,628
2,953
4,695
3,887
2,222
3,402
–
7,266
381
475,331
–
–
–
–
30,210
–
48,596
1,526
942
1,431
739
665
779
615
1,476
4,434
17,755
2,030
3,850
10,858
24,042
8,646
3,940
2,114
10,124
23,964
9,708
73,819
2,598
393
541
2,434
1,486
662
2,324
9,172
27,618
102,606
149,868
521
–
523
915
753
11,842
22,901
3,770
4,842
10,730
483,931
31,466
20,415
13,784
11,506
27,270
97,265
144,671
830,308
332 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 52: Financial risk management continued
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 2021
Assets
Cash and balances at central banks
76,420
–
–
–
Financial assets at fair value through profit or loss
10,706
8,280
6,093
2,840
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements
Debt securities
1,607
4,350
15,279
13,678
19
804
332
633
327
304
11
–
878
309
32
–
–
–
76,420
1,784
7,553
168,637
206,771
947
29
1,997
1,918
15,450
22,051
2
7,001
8,624
9,792
10,949
11,107
32,096
77,714
283,006
448,567
15,111
1,217
16,651
5,107
2,526
19
71
305
762
220
918
–
54,753
2,735
2,249
6,835
Financial assets at amortised cost
33,326
25,284
26,789
16,138
13,970
33,107
83,285
285,257
517,156
Financial assets at fair value through other
comprehensive income
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Financial liabilities at fair value through profit or
loss
Derivative financial instruments
341
1,509
598
1,200
122
185
322
528
1,552
3,029
8,861
13,312
28,137
147
515
948
30,958
35,990
123,909
36,166
33,822
20,132
16,856
39,382
102,644
513,614
886,525
2,313
456,077
1,011
5,711
1,674
376
6,177
92
4,921
826
353
3,165
10
2,439
470
177
2,053
3
1,969
341
223
1,296
–
224
352
353
4,883
3,774
2,327
78
7,647
366
476,344
–
30,009
–
31,125
212
1,105
1,748
1,962
5,899
23,123
11,330
18,060
Debt securities in issue
4,020
5,555
5,476
6,320
4,129
10,152
22,496
13,404
71,552
Liabilities arising from insurance and investment
contracts
Other liabilities
Subordinated liabilities
Total liabilities
1,532
3,721
21
2,076
2,876
–
2,921
631
96
2,894
1,024
–
3,312
10,606
30,663
114,459
168,463
778
–
567
1,307
743
13,611
23,951
6,464
5,220
13,108
476,080
22,899
15,561
14,781
10,314
29,185
100,186
164,367
833,373
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 2022
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Financial liabilities at fair value through profit or loss
Debt securities in issue
Liabilities arising from non-participating investment contracts
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
3,925
449,801
12,501
5,297
6,108
42,975
13
27
369
6,717
6,188
2,397
12,625
–
54
113
714
11,635
904
3,725
15,517
–
166
1,648
2,227
7,417
33,054
2,293
39,527
–
582
6,741
135
382
38
4,747
11,623
–
700
12,384
Total
£m
7,370
475,952
52,685
18,459
85,400
42,975
1,515
20,913
Total non-derivative financial liabilities
520,647
28,463
34,309
91,841
30,009
705,269
Derivative financial liabilities
Gross settled derivatives – outflows
Gross settled derivatives – inflows
Gross settled derivatives – net flows
Net settled derivative liabilities
Total derivative financial liabilities
55,671
43,380
40,826
34,808
20,677
195,362
(52,383)
(41,255)
(39,132)
(34,015)
(20,130)
(186,915)
3,288
13,078
16,366
2,125
82
2,207
1,694
130
1,824
793
752
1,545
547
1,501
2,048
8,447
15,543
23,990
Lloyds Banking Group Annual Report and Accounts 2022
333
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 52: Financial risk management continued
Up to 1
month
£m
1–3
months
£m
3–12
months
£m
1–5
years
£m
Over 5
years
£m
Total
£m
At 31 December 2021
Deposits from banks
Customer deposits
Repurchase agreements at amortised cost
Financial liabilities at fair value through profit or loss
Debt securities in issue
Liabilities arising from non-participating investment contracts
Lease liabilities
Subordinated liabilities
2,318
456,306
1,419
6,371
5,804
45,040
2
54
358
6,161
492
5,037
5,722
–
64
78
789
6,540
243
4,071
4,213
7,255
30,987
2,130
16,728
34,562
–
167
677
–
605
9,558
89,310
233
676
7
5,826
10,606
–
927
9,114
7,911
476,938
33,148
23,435
73,422
45,040
1,765
19,481
27,389
681,140
Total non-derivative financial liabilities
517,314
17,912
29,215
Derivative financial liabilities
Gross settled derivatives – outflows
Gross settled derivatives – inflows
Gross settled derivatives – net flows
Net settled derivative liabilities
Total derivative financial liabilities
39,184
30,271
32,267
39,429
21,709
162,860
(38,231)
(29,283)
(31,453)
(38,137)
(19,834)
(156,938)
953
12,099
13,052
988
60
1,048
814
52
866
1,292
429
1,721
1,875
1,350
3,225
5,922
13,990
19,912
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 5 years column; interest
of £17 million (2021: £20 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.
An analysis of the Group’s total wholesale funding by residual maturity and by currency is set out on page 182.
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4,
as follows:
At 31 December 2022
At 31 December 2021
Up to 1
month
£m
826
1,101
1–3
months
£m
1,288
1,603
3–12
months
£m
4,967
6,108
1–5
years
£m
22,967
26,928
Over 5
years
£m
Total
£m
76,845
106,893
87,683
123,423
For insurance contracts which are neither unit-linked nor in the Group’s with-profit funds, in particular annuity liabilities, the aim is to
invest in assets such that the cash flows on investments match those on the projected future liabilities.
The following tables set out the amounts and residual maturities of the Group’s off-balance sheet contingent liabilities, commitments
and guarantees.
At 31 December 2022
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
47
355
402
11
744
755
–
263
263
–
240
240
–
144
144
–
554
554
–
181
181
–
447
447
Total
£m
58
2,928
2,986
Lending commitments and guarantees
68,984
2,419
17,641
1,586
6,439
12,787
14,329
19,571
143,756
Other commitments
–
–
–
Total commitments and guarantees
68,984
2,419
17,641
Total contingents, commitments and guarantees
69,386
3,174
17,904
At 31 December 2021
Acceptances and endorsements
Other contingent liabilities
Total contingent liabilities
11
219
230
180
658
838
–
328
328
–
1,586
1,826
–
184
184
–
–
10
29
39
6,439
12,787
14,339
19,600
143,795
6,583
13,341
14,520
20,047
146,781
–
154
154
–
295
295
–
258
258
–
457
457
191
2,553
2,744
Lending commitments and guarantees
70,437
4,269
20,021
3,662
7,872
20,060
11,595
4,756
142,672
Other commitments
–
–
–
–
–
17
–
44
61
Total commitments and guarantees
70,437
4,269
20,021
3,662
7,872
20,077
11,595
4,800
142,733
Total contingents, commitments and guarantees
70,667
5,107
20,349
3,846
8,026
20,372
11,853
5,257
145,477
334 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 52: Financial risk management continued
Capital risk
Capital is actively managed on an ongoing basis for both the Group and its regulated banking subsidiaries, with associated capital
policies and procedures subjected to regular review. The Group assesses both its regulatory capital requirements and the quantity and
quality of capital resources it holds to meet those requirements through applying the capital directives and regulations implemented
in the UK by the Prudential Regulation Authority (PRA) and supplemented through additional regulation under the PRA Rulebook and
associated statements of policy, supervisory statements and other regulatory guidance. Regulatory capital ratios are considered a
key part of the budgeting and planning processes and forecast ratios are reviewed by the Group Asset and Liability Committee. Target
capital levels take account of current and future regulatory requirements, capacity for growth and to cover uncertainties. Details of the
Group’s capital resources are provided in the table marked audited on page 151.
Each insurance company within the Group is regulated by the PRA. The insurance businesses are required to calculate solvency capital
requirements and available capital in accordance with Solvency II. 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 capital position of the Group’s insurance businesses is reviewed on a regular basis by the Insurance,
Pensions and Investments Executive Committee.
Insurance risk
Insurance underwriting risk is 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 and arises within the Group’s Insurance business.
Insurance underwriting risk is 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’s regulatory capital assessments
and other supporting measures where appropriate. The Group also mitigates insurance underwriting risk via the use of reinsurance
arrangements.
Note 53: Cash flow statement
(A) Change in operating assets
Change in financial assets held at amortised cost
Change in financial assets at fair value through profit or loss
Change in derivative financial instruments
Change in other operating assets
Change in operating assets
1
Restated, see page 218.
(B) Change in operating liabilities
Change in deposits from banks and repurchase agreements
Change in customer deposits and repurchase agreements
Change in financial liabilities at fair value through profit or loss
Change in derivative financial instruments
Change in debt securities in issue
Change in investment contract liabilities
Change in other operating liabilities1
Change in operating liabilities
2022
£m
(1,639)
26,179
(7,704)
201
17,037
2022
£m
2,536
13,340
(4,849)
5,982
1,651
(2,065)
(1,002)
15,593
20211
£m
(2,379)
(15,565)
6,132
1,447
20201
£m
(6,652)
(8,147)
(2,894)
25
(10,365)
(17,668)
2021
£m
6,266
17,295
391
(9,258)
2020
£m
3,287
38,805
1,085
1,534
(15,896)
(10,142)
6,588
(432)
4,954
993
175
35,737
1
Includes a decrease of £158 million (2021: decrease of £197 million; 2020: decrease of £172 million) in respect of lease liabilities.
Lloyds Banking Group Annual Report and Accounts 2022
335
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 53: 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 (credit) relating to undrawn balances
Impairment of financial assets at fair value through other comprehensive income
Change in insurance contract liabilities
Regulatory and legal provisions
Other provision movements
Net charge in respect of defined benefit schemes
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
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 regulatory and legal provisions
Other
Total other items
Non-cash and other items
2022
£m
2,396
511
1,372
(759)
122
6
(16,590)
255
(80)
125
(291)
697
(92)
(1,871)
224
(20)
462
(10)
43
(121)
(38)
(13,659)
(2,533)
(625)
13
(3,145)
(16,804)
2021
£m
2,825
(575)
(1,121)
(935)
(257)
(2)
7,328
1,300
(66)
236
140
1,320
2
(781)
182
(13)
(306)
(2)
(621)
(268)
(159)
8,227
(1,347)
(817)
–
(2,164)
6,063
2020
£m
2,732
209
3,856
(1,377)
289
5
4,554
464
85
247
865
1,080
(149)
280
122
293
(82)
13
(496)
(81)
(38)
12,871
(1,153)
(2,241)
117
(3,277)
9,594
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) Acquisition of Group undertakings and businesses
Net assets acquired:
Intangible assets
Other assets
Other liabilities
Goodwill arising on acquisition
Cash consideration
Less cash and cash equivalents acquired
Net cash outflow arising from acquisition of subsidiaries and businesses
Acquisition of and additional investment in joint ventures
Net cash outflow from acquisitions in the year
2022
£m
68
131
(146)
335
388
(74)
314
95
409
2021
£m
2020
£m
–
3
–
–
3
–
3
54
57
–
–
–
–
–
–
–
3
3
336 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 53: Cash flow statement continued
(E) Analysis of cash and cash equivalents as shown in the balance sheet
Cash and balances at central banks
Less mandatory reserve deposits2
Loans and advances to banks and reverse repurchase agreements
Less amounts with a maturity of three months or more
Total cash and cash equivalents
2022
£m
91,388
(2,111)
89,277
14,418
(7,866)
6,552
95,829
20211
£m
76,420
(2,178)
74,242
10,533
20201
£m
73,257
(1,875)
71,382
10,746
(5,581)
(3,983)
4,952
79,194
6,763
78,145
Restated, see page 218.
1
2 Mandatory reserve deposits are held with local central banks in accordance with statutory requirements. Where these deposits are not held in demand accounts
and are not available to finance the Group’s day-to-day operations they are excluded from cash and cash equivalents.
Included within cash and cash equivalents at 31 December 2022 is £37 million (2021: £76 million; 2020: £84 million) of restricted cash and
cash equivalents is held within the Group’s long-term insurance and investments operations, which is not immediately available for
use in the business.
Note 54: Events since the balance sheet date
Acquisition of Tusker
On 21 February 2023, Lloyds Bank Asset Finance Limited, a wholly-owned subsidiary of the Group, acquired 100 per cent of the ordinary
share capital of Hamsard 3352 Limited (“Tusker”), which together with its subsidiaries operates a vehicle management and leasing
business. The acquisition will enable the Group to expand its salary sacrifice proposition within motor finance. Cash consideration
was approximately £300 million1. As a result of the limited time available between the acquisition and the approval of these financial
statements, the Group is still in the process of finalising the fair value of the individual assets and liabilities acquired including the
associated identifiable intangible assets and goodwill.
1
Subject to customary adjustments.
Share buyback
The Board has announced its intention to implement an ordinary share buyback of up to £2.0 billion. This represents the return
to shareholders of capital surplus to that required to provide capacity to grow the business, meet current and future regulatory
requirements and cover uncertainties. The share buyback programme will commence as soon as is practicable and is expected to be
completed, subject to continued authority from the PRA, by 31 December 2023.
Note 55: Future accounting developments
The following pronouncements are not applicable for the year ending 31 December 2022 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 the minor amendments detailed below, as at 21 February 2023 these pronouncements have been endorsed for
use in the United Kingdom.
IFRS 17 Insurance Contracts
IFRS 17 Insurance Contracts replaces IFRS 4 Insurance Contracts and is effective for annual periods beginning on or after 1 January
2023. The Group’s initial application date was 1 January 2023 and its transition date was 1 January 2022. On transition, the Group will use
the full retrospective approach for business written since 1 January 2016 using Solvency II modelling tools developed when Solvency II
was implemented, which are only available to support the calculation of IFRS 17 results from that date. The fair value approach will be
used for business written prior to 1 January 2016 and valuations supporting Solvency II at the transition date will be used to support the
fair value calculation for transition for that business.
Comparative information
As permitted by IFRS 17, the Group’s financial statements at and for the year ended 31 December 2023 will include restated
comparatives for the year ended 31 December 2022 only. Comparative information for the year ended 31 December 2021 will be
presented in accordance with IFRS 4.
IFRS 17 recognition and measurement
IFRS 17 requires insurance contracts, including reinsurance contracts, and investment contracts with discretionary participation
features to be recognised on the balance sheet as the total of the fulfilment cash flows and the contractual service margin:
•
•
The fulfilment cash flows consist of the present value of future cash flows calculated using best estimate assumptions, together with
an explicit risk adjustment for non-financial risk and are required to be remeasured at each reporting date
The contractual service margin (CSM) represents the unearned profit on the insurance contracts and investment contracts with
discretionary participation features
Changes to estimates of fulfilment cash flows which relate to future service are taken to the CSM, except where onerous contracts
are identified or where the Group takes advantage of the risk mitigation options available under IFRS 17. The Group calculates the risk
adjustment by applying margins to best estimate cashflows relating to non-financial risks (such as mortality or persistency). The risk
adjustment will be released to the income statement as risk expires. For reinsurance contracts held, the CSM represents the net cost
or net gain of purchasing reinsurance and the risk adjustment represents the amount of risk transferred from the underlying contracts
held.
Lloyds Banking Group Annual Report and Accounts 2022
337
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 55: Future accounting developments continued
Expected impact: comparison with IFRS 4
Under IFRS 4, the Group recognises a value in-force asset and the expected profit of an insurance contract at its inception. Under
IFRS 17, the expected profit for providing insurance contract services will be recognised in the CSM and released to the income
statement throughout the contract period over which the insurance contract services are provided. The risk adjustment is released
commensurate with the expiry of non-financial risk associated with the valuation of best estimate cash flows. The value in-force asset
recognised by the Group at 31 December 2021 will be derecognised on transition.
IFRS 17 will impact the timing of profit recognition for the insurance contracts and investment contracts with discretionary participation
features issued by the Group. However, it will not change the total profit recognised over the lifetime of these contracts as compared
to IFRS 4, or the capital position or cash flows of the Group and its insurance companies. The change in the measurement basis of the
Group’s liabilities, the derecognition of the VIF and the recognition, within the CSM, of a proportion of the previously recognised profits
from insurance contracts will result in a reduction to the Group’s retained earnings on transition.
Establishing cash flows within the boundary of an insurance contract
IFRS 17 requires cash flows to be included within the boundary of an insurance contract if they arise from substantive rights and
obligations that exist during the reporting period where the Group can compel a policyholder to pay premiums or where the Group
has a substantive obligation to provide the policyholder with services. The Group has assessed the contract boundary for insurance
contracts it sells and has established relevant fulfilment cash flows accordingly, and the assumption framework which applies
to determining the best estimate of those cash flows on an on-going basis. In particular, this includes the assumptions around
increments on pensions business which are expected within the contract boundary and the extent to which the contract boundary is
substantially changed upon contact modification as a result of new product features being added.
Level of aggregation of insurance contracts
IFRS 17 requires identification of portfolios of insurance contracts that have similar risks and that are managed together. In determining
the appropriate level of aggregation, the Group has considered the relative risks and how these are managed within the business, in
addition to factors such as geography, sales channel and product taxation basis. CSM is measured on initial recognition for cohorts
of insurance contracts within these portfolios that are issued not more than a year apart. These cohorts are further disaggregated
into CSM groups according to a profitability assessment and other product characteristics. As a result, the Group has identified the
following portfolios: individual annuities, bulk annuities, protection products and workplace and other pensions. Within these portfolios,
the Group expects to have approximately 25 CSM groups during 2023, in addition to those established at transition to IFRS 17.
Separating components of contracts
IFRS 17 also requires certain components of insurance contracts to be separated, including investment components. Investment
components reflect amounts due to policy holders, akin to deposits, so are not recognised in the income statement.
Disaggregation of insurance finance income or expenses
Insurance finance income or expenses comprise changes in the carrying amount of a group of insurance contracts arising from the
effect of the time value of money and the effects of financial risk. IFRS 17 provides an accounting policy choice between:
including insurance finance income or expenses for the period in the income statement; or
•
• disaggregating insurance finance income and expenses for the period to include in the income statement an amount determined
by a systematic allocation, and the residual amount in other comprehensive income (OCI).
The Group has elected to recognise total insurance finance income or expenses in profit or loss in the period in which they arise. This
decision is based on IFRS 9 Financial Instruments. Under IFRS 9, the Group measures assets backing insurance contracts at fair value
through profit or loss (FVTPL).
Accounting for the Group’s principal insurance businesses
Annuity and protection business: The general measurement model will be used for the Group’s annuity and protection business. The
discount rates are locked in at the inception of the contract in determining the value of the CSM. The subsequent effects of changes in
discount rates on the best estimate of the insurance contract liabilities will be recognised in the income statement in the period in
which they arise, as an accounting policy choice. The Group will use discount rates based on the liquidity of the associated liabilities
and, accordingly, will apply illiquidity premia to its annuity and whole of life businesses. For immediate annuity contracts, the CSM will
be recognised in income over the life of the contracts based on the maximum claim payable for each period and for protection
contracts, CSM will be recognised in the income statement commensurate with the sum assured.
Unit-linked and with-profits business: There is an adaptation of the general measurement model for contracts with direct
participation features, the variable fee approach, which results in changes in variable fees, including those arising from changes in
economic assumptions, being taken to the CSM. The expected profit will be recognised within the CSM and released to the income
statement over the coverage period.
General insurance business: The Group has applied the option available under IFRS 17 to use the simplified approach (the premium
allocation approach), mainly for short duration contracts. The insurance revenue recognised in the income statement in the period
reflects the expected premium receipts allocated to the period, after adjusting for the time value of money and the effect of financial
risk. The amortisation of insurance acquisition cash flows is taken to the income statement on the basis of the passage of time.
Balance sheet impact at 1 January 2022
On restatement, the reduction in the Group’s total equity as of 1 January 2022 was approximately £1.9 billion, driven by the
derecognition of the value in-force asset, the move to best estimate of contract liabilities, the creation of the new CSM liability and
the establishment of the risk adjustment. The CSM of all insurance contracts issued and net of reinsurance contracts held at 1 January
2022 was approximately £1.9 billion and the risk adjustment, net of reinsurance, recognised at that date was approximately £1.5 billion.
The Group expects that approximately £300 million of the CSM and risk adjustment, gross of reinsurance, held at 1 January 2022 will be
released and recognised in the income statement during the year ended 31 December 2022. These amounts will be finalised during the
first quarter of 2023 following the completion of further work being undertaken by the Group.
338 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the consolidated financial statements continuedfor the year ended 31 December Note 55: Future accounting developments continued
Equity impact at 31 December 2022
During 2022, the Group has added a drawdown feature to its existing longstanding and workplace pension business. This is a contract
modification that results in a substantially different contract boundary, and IFRS 17 requires that the contracts and associated CSM
(approximately £0.4 billion) at the time of the modification are derecognised and the modified contracts together with a new CSM
(approximately £1.7 billion) are recognised as if they were new contracts.
The Group estimates these contract modifications will increase the CSM by approximately £1.3 billion and reduce its equity by
approximately £1.3 billion (before the impact of IFRS 17 tax transitional adjustments) given the charge recognised in the income
statement in 2022 on an IFRS 17 basis. The estimate has been prepared assuming these contract modifications occurred on the
1 January 2022. As these contract modifications occurred throughout 2022, the Group will undertake further work during the first quarter
of 2023 to finalise the financial impact of the contract modifications using the actual dates these contract modifications occurred
during 2022.
Income statement impact
Whilst IFRS 17 does not change the total profit recognised over the life of an insurance contract or investment contract with
discretionary participation features, it does change both the phasing of profit recognition and the amounts recognised within
individual income statement line items, including other income and operating expenses. Under IFRS 17, the Group is required to defer
substantially all of the expected profit through the recognition of a CSM on the balance sheet (losses on groups of onerous contracts
and recoveries of such losses, to the extent they are covered by reinsurance contracts held, are recognised in the income statement
immediately); the CSM is subsequently released to the income statement over the coverage period of the product. The expected profit
includes estimated future premiums and claims together with administration costs such as claims handling costs, costs incurred to
provide contractual policyholder benefits and policy administration and maintenance costs. As a result, a reduction is expected in the
amounts to be disclosed as other income, operating income and operating expenses under IFRS 17, in respect of the relevant IFRS 17
income statement line items that will be presented from 2023.
The Group continues to refine and finalise the new accounting processes and models and has not, therefore, presented the impact
of IFRS 17 for the year ended 31 December 2022 including impacts on financial metrics such as earnings per share. Further work will be
undertaken during the first quarter of 2023 to finalise the impact of IFRS 17 on the Group’s income statement and earnings per share for
the year ended 31 December 2022 and on its balance sheet at 31 December 2022.
Minor amendments to other accounting standards
The IASB has issued a number of minor amendments to IFRSs effective 1 January 2023 (including IAS 1 Presentation of Financial
Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). These amendments are not expected to have
a significant impact on the Group.
Lloyds Banking Group Annual Report and Accounts 2022
339
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Parent company balance sheet
at 31 December
Assets
Cash and cash equivalents
Financial assets at fair value through profit or loss
Derivative financial instruments
Amounts due from subsidiaries
Debt securities
Loans to subsidiaries
Investment in subsidiaries
Current tax recoverable
Deferred tax assets
Other assets
Total assets
Liabilities
Due to subsidiaries1
Financial liabilities at fair value through profit or loss
Derivative financial instruments
Debt securities in issue
Other liabilities1
Subordinated liabilities
Total liabilities
Equity
Share capital
Share premium account
Merger reserve
Capital redemption reserve
Retained profits2
Shareholders’ equity
Other equity instruments
Total equity
Total equity and liabilities
Note
2022
£ million
2021
£ million
2
3
11
11
4
5
6
7
8
8
9
9
10
8
48
50
20,292
20,362
1,197
–
2,279
14,119
49,609
4
93
–
793
–
2,033
14,238
49,142
28
26
2
87,641
86,674
27
13,865
1,550
15,366
125
9,218
40,151
6,729
18,504
6,806
4,932
5,222
42,193
5,297
47,490
87,641
200
9,748
414
17,748
61
8,105
36,276
7,102
18,479
6,806
4,479
7,626
44,492
5,906
50,398
86,674
1 Due to subsidiaries, previously reported within other liabilities, is shown separately. Comparatives have been presented on a consistent basis.
2
The parent company recorded a profit after tax for the year of £1,399 million (2021: £3,905 million).
The accompanying notes are an integral part of the parent company financial statements.
The directors approved the parent company financial statements on 21 February 2023.
Robin Budenberg
Chair
Charlie Nunn
Group Chief Executive
William Chalmers
Chief Financial Officer
340 Lloyds Banking Group Annual Report and Accounts 2022
Parent company statement of changes in equity
for the year ended 31 December
Attributable to ordinary shareholders
At 1 January 2020
Total comprehensive income1
Transactions with owners
Dividends
Distributions on other equity instruments
Issue of ordinary shares
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Total transactions with owners
At 31 December 2020
Total comprehensive income1
Transactions with owners
Dividends
Distributions on other equity instruments
Issue of ordinary shares
Redemption of preference shares
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Total transactions with owners
At 31 December 2021
Total comprehensive income1
Transactions with owners
Dividends
Distributions on other equity instruments
Issue of ordinary shares
Share buyback
Issue of other equity instruments
Repurchase and redemptions of other equity
instruments
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
Share
capital and
premium
£ million
Merger
reserve
£ million
Capital
redemption
reserve
£ million
24,756
7,420
4,462
–
–
–
191
–
–
–
191
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24,947
7,420
4,462
–
–
–
37
597
–
–
–
–
–
–
–
(614)
–
–
–
634
25,581
(614)
6,806
–
–
–
105
(453)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Retained
profits
£ million
3,950
849
Total
£ million
40,588
849
–
–
–
(52)
48
74
70
–
–
191
(52)
48
74
261
4,869
3,476
41,698
3,476
(877)
(877)
–
–
–
–
37
–
(24)
(24)
Other
equity
instruments
£ million
5,906
453
–
(453)
–
–
–
–
(453)
5,906
429
–
(429)
–
–
–
–
–
Total
£ million
46,494
1,302
–
(453)
191
(52)
48
74
(192)
47,604
3,905
(877)
(429)
37
–
(24)
51
131
(1,111)
51
131
51
131
(719)
7,626
961
(682)
(429)
44,492
961
5,906
438
50,398
1,399
(1,475)
(1,475)
–
(1,475)
–
–
–
105
453
(2,013)
(2,013)
–
–
–
–
–
(5)
(37)
(59)
41
183
(5)
(37)
(59)
41
183
(438)
–
–
750
(438)
105
(2,013)
745
(1,359)
(1,396)
–
–
–
(59)
41
183
–
–
–
–
17
–
–
–
17
4,479
–
–
–
–
Total transactions with owners
(348)
At 31 December 2022
25,233
6,806
453
4,932
(3,365)
(3,260)
(1,047)
(4,307)
5,222
42,193
5,297
47,490
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 2022
341
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report 2022
£ million
2021
£ million
2020
£ million
1,331
3,893
1,257
1,134
(7,028)
(3,322)
(3,600)
(423)
2
(512)
(1,815)
6,401
(1,135)
(492)
–
(9,344)
3,704
21
(177)
1,626
(1,120)
(338)
27
1,370
4
1,120
338
4
3,600
423
(250)
(3,209)
–
(3,148)
4,234
408
2,706
(1,475)
(438)
(370)
838
745
31
(2,013)
–
(1,396)
(4,078)
(2)
50
48
4,130
(974)
6,727
461
11,162
(877)
(429)
(793)
499
–
25
–
(200)
–
(1,775)
43
7
50
4
1,135
492
(1,170)
–
(5,827)
2,004
261
(3,101)
–
(453)
(316)
–
–
144
–
–
–
(625)
(22)
29
7
Parent company cash flow statement
for the year ended 31 December
Cash flows from operating activities
Profit before tax
Adjustments for:
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
Net cash provided (used in) by operating activities
Cash flows from investing activities
Return of capital contribution
Dividends received
Distributions on other equity instruments received
Acquisitions of and capital injections to subsidiaries
Return of capital by subsidiaries
Amounts advanced to subsidiaries
Repayment of loans to subsidiaries
Interest received on loans to subsidiaries
Net cash provided by (used in) 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
Repurchase and 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.
342 Lloyds Banking Group Annual Report and Accounts 2022
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 have been prepared in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006. The financial statements have also been prepared in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB).
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
2022
£m
2021
£m
20,292
20,362
The assets held at fair value through profit or loss represent holdings of debt securities issued by subsidiaries. The contractual terms
of such instruments contain certain write-down and conversion features and so are not considered 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 2022: £16 million; 31 December 2021: £3 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: Deferred tax
As at 31 December 2022 the Company carried a deferred tax asset of £93 million (2021: £26 million); there was no deferred tax liability at
31 December 2022 or 31 December 2021. The movement in the deferred tax asset during 2022 primarily related to financial liabilities at
fair value through profit and loss (giving rise to a £62 million credit to the income statement).
Note 5: 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 2022 was
£14,433 million, which was £568 million higher than the balance sheet carrying value (2021: £9,388 million which was £360 million lower
than the balance sheet carrying value). At 31 December 2022 there was a cumulative £425 million increase in the fair value of these
liabilities attributable to changes in credit risk (2021: increase of £542 million), of which a £117 million decrease arose in 2022 and a
£1 million increase arose in 2021; this is determined by reference to the quoted credit spreads of the Company.
Note 6: Debt securities in issue
These comprise notes issued by the Company in a number of currencies, although predominantly Euros and US Dollars, with maturity
dates ranging up to 2038.
Lloyds Banking Group Annual Report and Accounts 2022
343
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 7: Subordinated liabilities
These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of
the issuer. Any repayments of subordinated liabilities require the consent of the Prudential Regulation Authority.
At 1 January 2021
Issued in the year1:
1.985% Fixed Rate Reset Dated Subordinated Tier 2 Notes due 2031
3.369% Fixed Rate Reset Dated Subordinated Notes due 2041 (US$1,175 million)
Repurchases and redemptions during the year1:
6.475% Non-cumulative Preference Shares callable 2024 (£186 million)
6.413% Non-cumulative Fixed to Floating Rate Preference Shares callable 2035
(US$750 million)
6.657% Non-cumulative Fixed to Floating Rate Preference Shares callable 2037
(US$750 million)
9.25% Non-cumulative Irredeemable Preference Shares (£300 million)
9.75% Non-cumulative Irredeemable Preference Shares (£100 million)
Foreign exchange and other movements (cash and non-cash)
At 31 December 2021
Issued in the year1:
7.953% Fixed Rate Reset Dated Subordinated notes 2033 (US$1,000 million)
Foreign exchange and other movements (cash and non-cash)
At 31 December 2022
Preference
shares
£m
Undated
£m
723
10
–
–
–
(8)
(140)
(143)
(41)
(14)
(346)
(37)
340
–
–
(15)
325
–
–
–
–
–
–
–
–
–
–
10
–
–
–
10
Dated
£m
7,027
499
352
851
–
–
–
–
–
–
(123)
7,755
838
838
290
Total
£m
7,760
499
352
851
(8)
(140)
(143)
(41)
(14)
(346)
(160)
8,105
838
838
275
8,883
9,218
1
Issuances in the year generated cash inflows of £838 million (2021: £499 million); the repurchases and redemptions resulted in cash outflows of £nil (2021:
£200 million). Cash payments in respect of interest on subordinated liabilities in the year amounted to £370 million (2021: £793 million).
Note 8: 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 39, 40 and 43 to
the consolidated financial statements.
Note 9: Merger reserve and capital redemption reserve
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
2022
£m
6,806
–
6,806
2021
£m
7,420
(614)
6,806
2020
£m
7,420
–
7,420
1 During the year ended 31 December 2021, the Company redeemed certain tranches of its preference shares, which had been accounted for as subordinated
liabilities. On redemption an amount of £17 million was transferred from the distributable merger reserve to the capital redemption reserve and £597 million was
transferred from the distributable merger reserve to the share premium account, with these amounts representing the nominal value of the shares redeemed and
premium upon original issuance respectively.
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
Redemption of preference shares
Shares cancelled under share buyback programme1
At 31 December
1
See note 41 to the consolidated financial statements.
344 Lloyds Banking Group Annual Report and Accounts 2022
2022
£m
4,479
–
453
4,932
2021
£m
4,462
17
–
2020
£m
4,462
–
–
4,479
4,462
Notes to the parent company financial statements continuedfor the year ended 31 December Note 10: Retained profits
At 1 January
Profit attributable to ordinary shareholders
Dividends paid1
Issue costs of other equity instruments (net of tax)
Repurchase and redemption costs of other equity instruments
Share buyback programme
Movement in treasury shares
Value of employee services:
Share option schemes
Other employee award schemes
At 31 December
2022
£m
7,626
961
(1,475)
(5)
(37)
(2,013)
(59)
41
183
2021
£m
4,869
3,476
(877)
–
–
–
2020
£m
3,950
849
–
–
–
–
(24)
(52)
51
131
48
74
5,222
7,626
4,869
1 Details of the Company’s dividends are as set out in note 44 to the consolidated financial statements.
Note 11: Related party transactions
Key management personnel
The key management personnel of the Group and the Company are the same. The relevant disclosures are given in note 46 to the
consolidated financial statements.
The Company has no employees (2021: 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
Capital repayments and redemptions
Ordinary share capital
Other capital instruments
Total
2022
£m
2021
£m
42,993
42,076
250
221
(4)
–
660
164
(4)
97
2022
£m
6,149
–
–
–
–
2021
£m
7,827
2,549
–
–
(4,227)
6,149
2022
£m
49,142
250
221
(4)
–
49,609
2021
£m
49,903
3,209
164
(4)
(4,130)
49,142
At 31 December
43,460
42,993
6,149
Details of the subsidiaries and related undertakings are given on pages 352 to 360 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 the ability of
those subsidiaries to make distributions.
Loans to subsidiaries
At 1 January
Exchange and other adjustments
New advances
Repayments
At 31 December
2022
£m
14,238
967
3,148
(4,234)
14,119
2021
£m
20,107
(116)
974
(6,727)
14,238
At 31 December 2022, the Company had £27 million (2021: £200 million) which was due to subsidiaries. In addition, at 31 December
2022 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 £58,982 million and a net negative fair value of £353 million (2021: notional principal amount of
£49,320 million and a net positive fair value of £379 million). Of this amount an aggregate notional principal amount of £13,788 million
and a net negative fair value of £646 million (2021: notional principal amount of £15,642 million and a net positive fair value of
£379 million) were designated as fair value hedges to manage the Company’s issuance of subordinated liabilities.
Guarantees
As part of the Group’s participation in the Bank of England’s Sterling Monetary Framework, the Company guarantees certain of its
subsidiaries’ liabilities to the Bank of England.
Other related party transactions
Related party information in respect of other related party transactions is given in note 46 to the consolidated financial statements.
Lloyds Banking Group Annual Report and Accounts 2022
345
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 12: 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 2022
Financial assets
Cash and cash equivalents
Financial assets at fair value through profit or loss
Derivative financial instruments
Amounts due from subsidiaries
Debt securities
Loans to subsidiaries
Total financial assets
Financial liabilities
Due to subsidiaries
Financial liabilities at fair value through profit or loss
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
At 31 December 2021
Financial assets
Cash and cash equivalents
Financial assets at fair value through profit or loss
Derivative financial instruments
Amounts due from subsidiaries
Debt securities
Loans to subsidiaries
Total financial assets
Financial liabilities
Due to subsidiaries
Financial liabilities at fair value through profit or loss
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
–
–
47
–
–
–
47
–
–
693
–
–
693
–
–
392
–
–
–
–
–
1,150
–
–
–
–
20,292
–
–
–
–
1,150
20,292
–
–
857
–
–
857
–
–
401
–
–
–
–
–
–
–
–
–
–
20,362
–
–
–
–
392
401
20,362
–
–
13
–
–
13
–
–
401
–
–
401
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13,865
–
–
–
13,865
–
–
–
–
–
–
–
–
9,748
–
–
–
Total
£m
48
20,292
1,197
–
2,279
14,119
48
–
–
–
2,279
14,119
16,446
37,935
27
–
–
15,366
9,218
24,611
50
–
–
–
2,033
14,238
16,321
200
–
–
17,748
8,105
27
13,865
1,550
15,366
9,218
40,026
50
20,362
793
–
2,033
14,238
37,476
200
9,748
414
17,748
8,105
9,748
26,053
36,215
Note 49 to the consolidated financial statements outlines the valuation hierarchy into which financial instruments measured at fair
value are categorised.
346 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the parent company financial statements continuedfor the year ended 31 December Note 12: Financial instruments continued
Fair values of financial assets and liabilities
The valuation techniques for the Company’s financial instruments are as discussed in note 49 to the consolidated financial
statements.
Valuation hierarchy
The table below analyses the assets and liabilities of the Company. With the exception of derivatives and those financial assets and
liabilities carried at fair value through profit or loss, 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 (2021: none).
2022
2021
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 2
£m
Level 3
£m
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 2
£m
Level 3
£m
Financial assets at fair value through profit or loss
20,292
20,292
20,292
Derivative financial instruments
Amounts due from subsidiaries
Debt securities
Loans to subsidiaries
Total financial assets
Due to subsidiaries
1,197
–
2,279
14,119
1,197
–
2,279
14,119
1,197
–
2,279
14,119
37,887
37,887
37,887
27
27
27
Financial liabilities at fair value through profit or loss
13,865
13,865
13,865
Derivative financial instruments
Debt securities in issue
Subordinated liabilities
Total financial liabilities
1,550
1,550
1,550
15,366
14,663
14,663
9,218
8,221
8,221
40,026
38,326
38,326
–
–
–
–
–
–
–
–
–
–
–
–
20,362
20,362
20,362
793
–
793
–
2,033
2,019
14,238
14,238
37,426
37,412
200
9,748
414
17,748
8,105
200
9,748
414
18,520
8,946
36,215
37,828
793
–
2,019
14,238
37,412
200
9,748
414
18,520
8,946
37,828
–
–
–
–
–
–
–
–
–
–
–
–
The carrying amount of cash and cash equivalents (2022: £48 million; 2021: £50 million) is a reasonable approximation of fair value.
Note 13: Financial risk management
Market 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 11, 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, principally Lloyds Bank plc.
Liquidity risk
The table below analyses financial instrument liabilities of the Company, on an undiscounted future cash flow basis according to
contractual maturity, into relevant maturity groupings based on the remaining period at the balance sheet date; balances with no
fixed maturity are included in the over 5 years category.
At 31 December 2022
Financial liabilities at fair value through profit or loss
Debt securities in issue
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
Up to 1
month
£m
1–3
months
£m
3–12
months
£m
1–5
years
£m
Over
5 years
£m
38
1,175
27
1,240
108
2,503
43
2,654
1,099
3,500
1,036
5,635
2,457
3,359
6,228
(2,343)
(3,263)
(6,028)
114
456
570
96
36
132
200
193
393
12,436
9,918
5,395
27,749
–
–
–
384
384
2,419
3,683
8,780
14,882
–
–
–
183
183
Total
£m
16,100
20,779
15,281
52,160
12,044
(11,634)
410
1,252
1,662
Lloyds Banking Group Annual Report and Accounts 2022
347
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Note 13: Financial risk management continued
Up to 1
month
£m
1–3
months
£m
3–12
months
£m
1–5
years
£m
Over
5 years
£m
At 31 December 2021
Financial liabilities at fair value through profit or loss
Debt securities in issue
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
36
1,235
24
1,295
1,834
(1,756)
78
45
123
1,153
91
39
1,283
1,153
(1,120)
33
6
39
862
1,972
282
3,116
3,635
(3,558)
77
(8)
69
7,942
8,608
5,486
22,036
2,014
(1,915)
99
10
109
–
6,158
7,233
13,391
577
(538)
39
–
39
Total
£m
9,993
18,064
13,064
41,121
9,213
(8,887)
326
53
379
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column;
interest of £1 million (2021: £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.
Note 14: 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 SC095000. 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.
348 Lloyds Banking Group Annual Report and Accounts 2022
Notes to the parent company financial statements continuedfor the year ended 31 December Other information
In this section
Shareholder information
Subsidiaries and related undertakings
Forward-looking statements
350
352
361
Energy
efficient
branches
Reduce energy consumption of our branches
by 3.7 GWh per annum when fully implemented
We have worked in partnership with Mitie to
develop our energy optimisation capabilities for
smaller buildings, and rolled out remote energy
management solutions at scale alongside other
energy efficiency and carbon saving measures
such as LED lighting and heating, ventilation,
and air conditioning (HVAC) retrofit.
Our connected branches project will help us in
reducing energy consumption by 3.7 GWh per
annum when fully rolled out.
Following a successful pilot in 101 branches in 2021,
we have now expanded the rollout to an additional
450 branches, investing over £3.9 million in remote
connectivity and building controls.
Read more on our
sustainability strategy.
Lloyds Banking Group Annual Report and Accounts 2022
349
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report Shareholder information
Annual general meeting (AGM)
The annual general meeting will be held at the SEC Armadillo, Exhibition Way, Glasgow, G3 8YW on Thursday 18 May 2023 at 11am. Further
details about the meeting, including the proposed resolutions and where shareholders can stream the meeting live, can be found in
our Notice of AGM which will be available shortly on our website at www.lloydsbankinggroup.com.
Reports and communications
The Group issues regulatory announcements through the Regulatory News Service (RNS); shareholders can subscribe for free via the
Investors 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 2023 is set out below:
Report/Communication
Month
Online
Email
RNS
Paper
Available format
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
Feb
Mar/Aug
Mar
Mar
Mar
May
Jul
Jul
Oct
1
To be published on the Group’s website by 26 July 2023 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
Telephone Dealing
Internet Dealing
Bank of Scotland Share Dealing
Halifax Share Dealing
Lloyds Bank Direct Investments
IWeb Share Dealing
0345 606 1188
03457 22 55 25
0345 60 60 560
03450 707 129
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
Note:
All internet services are available 24/7. Telephone dealing services are available between 8am and 9pm, Monday to Friday, excluding English and Welsh public
holidays. 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 Saving 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.
Key dates
13 April 2023
14 April 2023
2 May 2023
3 May 2023
18 May 2023
23 May 2023
26 July 2023
Shares quoted ex-dividend
Record Date
Final date for joining or leaving the dividend reinvestment plan
Q1 interim management statement
Annual general meeting
Dividend paid
Half year results
25 October 2023
Q3 interim management statement
350 Lloyds Banking Group Annual Report and Accounts 2022
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
1,000,000,000–99,999,999,999
Totals
Total
number
of holdings
Percentage
of holders
Total
number
of shares
Percentage
issued capital
1,837,395
81.55%
541,289,528
356,315
55,953
2,457
459
161
270
80
84
16
9
15.81%
2.48%
0.11%
0.02%
0.01%
0.01%
945,527,402
1,433,572,451
571,592,456
1,117,726,619
1,124,602,350
6,161,045,946
0.00%
5,684,064,973
0.00%
16,670,996,249
0.00%
0.00%
12,565,279,567
20,472,154,663
0.80%
1.41%
2.13%
0.85%
1.66%
1.67%
9.16%
8.45%
24.78%
18.67%
30.42%
2,253,199
100.00%
67,287,852,204
100.00%
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, 150 Royall St., Suite 101 Canton, MA 02021. Telephone: 1-866-259-0336 (US toll free), international callers:
+1 201-680-6825. Alternatively visit www.adrbnymellon.com or email shrrelations@cpushareownerservices.com.
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
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 8.30am to 5.30pm
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.
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
Scan me here
Lloyds Banking Group Annual Report and Accounts 2022
351
Financial resultsRisk managementGovernanceFinancial statementsOther informationStrategic report
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 2022. The list includes each undertaking’s
registered office and the percentage of the class(es) of shares
held by the Group. All shares held are ordinary shares unless
indicated otherwise in the notes.
Subsidiary undertakings
The Group directly or indirectly holds 100% of the share class and
a majority of voting rights (including where the undertaking does
not have share capital as indicated) in the following undertakings.
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
Alpha Trustees Ltd
Amberdate Ltd
Anglo Scottish Utilities Partnership 1
Aquilus Ltd
Automobile Association Personal Finance Ltd
Avalon Investment Services (Nominees) Ltd
Avalon SIPP Trustees Ltd
Bank of Scotland (B G S) Nominees Ltd
Bank of Scotland Branch Nominees Ltd
Bank of Scotland Central Nominees Ltd
Bank of Scotland Edinburgh Nominees Ltd
Bank of Scotland Equipment Finance Ltd
Bank of Scotland plc
Bank of Scotland Structured Asset Finance Ltd
Bank of Scotland Transport Finance 1 Ltd
Bank of Wales Ltd
Barents Leasing Ltd
Birchcrown Finance Ltd
Birmingham Midshires Financial Services Ltd
Birmingham Midshires Mortgage Services Ltd
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
Boltro Nominees Ltd
BOS (Ireland) Property Services Ltd
BOS (Ireland) Property Services 2 Ltd
BOS (Shared Appreciation Mortgages (Scotland)) Ltd
BOS (Shared Appreciation Mortgages (Scotland) No. 2) Ltd
BOS (Shared Appreciation Mortgages (Scotland) No. 3) 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
BOS Personal Lending Ltd
BOSSAF Rail Ltd
British Linen Leasing (London) Ltd
British Linen Leasing Ltd
British Linen Shipping Ltd
Capital 1945 Ltd
Capital Bank Leasing 3 Ltd
Capital Bank Leasing 5 Ltd
Capital Bank Leasing 12 Ltd
Capital Bank Property Investments (3) Ltd
Capital Personal Finance Ltd
Cardnet Merchant Services Ltd
Cashfriday Ltd
Caveminster Ltd
352 Lloyds Banking Group Annual Report and Accounts 2022
Notes
50 ii iii
1 i
1 i
8 i
9 i
9 i
14 i
1 i v
+ *
13 i ‡
4 i
14 i
14 i
5 *
5 i
5 *
5 *
13 i ‡
5 i v
1 i
13 i ‡
47 i
1 i
1 v xiii
4 i ‡
13 i ‡
1 i
1 ii ix
1 i
1 i v
1 i
7 i
1 i
52 i ‡
16 i
4 i
4 i
4 i
4 # i
4 # i
4 # i
4 # i
4 i
4 i
11 xiv
11 i
1 i
4 ii iii
1 i
5 i
5 i
5 i
47 i
13 i ‡
47 i
5 i
47 i
4 i
1 # ^ iii vi
9 i
1 i
Name of undertaking
Cavendish Online Ltd
Cedar Holdings Ltd
CF Asset Finance Ltd
Charterhall Nominees Ltd
Cheltenham & Gloucester plc
Citra Development Company (No. 1) Ltd
Citra Living Ltd
Citra Living Properties (No. 1) Ltd
Clerical Medical Finance plc
Clerical Medical Financial Services Ltd
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
Dalkeith Corporation
Dunstan Investments (UK) Ltd
E.B.S. Pensioneer Trustees Ltd
EBS Pensions Ltd
EBS Self-Administered Personal Pension Plan Trustees Ltd
Embark Corporate Services Ltd
Embark Digital Studio Ltd
Embark Group Ltd
Embark Investment Services Ltd
Embark Investment Services Nominees Ltd
Embark Investments Ltd
Embark Pensions Trustees Ltd
Embark Services Ltd
Embark Trustees 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 Financial Brokers Ltd
Halifax Financial Services (Holdings) Ltd
Halifax Financial Services Ltd
Halifax General Insurance Services Ltd
Halifax Group Ltd
Halifax Leasing (March No.2) Ltd
Halifax Leasing (September) Ltd
Halifax Life Ltd
Halifax Ltd
Halifax Loans Ltd
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 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
Hornbuckle Mitchell Trustees Ltd
Housing Growth Partnership III GP LLP
Housing Growth Partnership III LP
Housing Growth Partnership Manager Ltd
HSDL Nominees Ltd
HVF Ltd
Hyundai Car Finance Ltd
IBOS Finance Ltd
Intelligent Finance Software Ltd
International Motors Finance Ltd
Kanaalstraat Funding C.V.
Katrine Leasing Ltd
LB Healthcare Trustee Ltd
LB Share Schemes Trustees Ltd
Notes
21 ii iii viii
xxii xxiii
xxiv xxv
xxvi xxvii
xxviii
13 i ‡
13 i ‡
14 i
12 i
1 i
1 i
1 i
20 i
20 i
4 i
22 xiii
56 i
56 i
23 i v ‡
1 v xiii
1 ii iii
24 i
1 i
14 i
14 i
14 i
14 ii
14 i
14 ii #
14 i
14 i
14 i
14 i
14 i
14 i
9 i
4 i
47 i
28 i
1 i
20 i #
1 i
1 i
4 i
4 i
4 i
4 i
4 i
1 i
1 i
4 i
4 i
4 i
1 i
4 i
4 i
4 *
5 i
20 i
20 i
4 ii
5 i iv vi
47 *
5 i
1 i
1 i
1 v xx
1 i
4 i
5 i
14 i
1 *
1 *
1 i
4 i
1 i
50 ii iii
47 i
4 i ‡
50 ii #
35 *
39 i ‡
1 i
1 i ‡
Name of undertaking
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 V LP
LDC VI LP
LDC VII LP
LDC VIII LP
LDC IX LP
LDC X LP
LDC XI LP
LDC XII LP
LDC Parallel XII LP
LDC Parallel (Nominees) Ltd
Legacy Renewal Company Ltd
Lex Autolease (CH) Ltd
Lex Autolease (VC) Ltd
Lex Autolease Carselect Ltd
Lex Autolease Ltd
Lex Vehicle Leasing (Holdings) Ltd
Lex Vehicle Leasing Ltd
Lime Street (Funding) Ltd
Lloyds (Gresham) Ltd
Lloyds (Nimrod) Specialist Finance Ltd
Lloyds America Securities Corporation
Lloyds Asset Leasing Ltd
Lloyds Bank (Colonial & Foreign) Nominees Ltd
Lloyds Bank (I.D.) Nominees Ltd
Lloyds Bank (International Services) Ltd
Lloyds Bank Asset Finance Ltd
Lloyds Bank Commercial Finance Ltd
Lloyds Bank Commercial Finance Scotland Ltd
Lloyds Bank Corporate Asset Finance (HP) Ltd
Lloyds Bank Corporate Asset Finance (No.1) Ltd
Lloyds Bank Corporate Asset Finance (No.2) Ltd
Lloyds Bank Corporate Asset Finance (No.3) Ltd
Lloyds Bank Corporate Asset Finance (No.4) Ltd
Lloyds Bank Corporate Markets plc
Lloyds Bank Corporate Markets Wertpapierhandelsbank GmbH
Lloyds Bank Covered Bonds LLP
Lloyds Bank Covered Bonds (LM) Ltd
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
Lloyds Bank General Leasing (No. 11) Ltd
Lloyds Bank General Leasing (No. 17) Ltd
Lloyds Bank GmbH
Lloyds Bank Insurance Services Ltd
Lloyds Bank Leasing (No. 6) Ltd
Lloyds Bank Leasing Ltd
Lloyds Bank Maritime Leasing (No. 10) Ltd
Lloyds Bank Maritime Leasing (No. 17) Ltd
Lloyds Bank MTCH Ltd
Lloyds Bank Nominees Ltd
Lloyds Bank Offshore Pension Trust Ltd
Lloyds Bank Pension ABCS (No 1) LLP
Lloyds Bank Pension ABCS (No 2) LLP
Lloyds Bank Pension Trust (No. 1) Ltd
Lloyds Bank Pension Trust (No. 2) Ltd
Lloyds Bank Pensions Property (Guernsey) Ltd
Lloyds Bank plc
Lloyds Bank 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 Corporate Services (Jersey) Ltd
Lloyds Development Capital (Holdings) Ltd
Notes
9 i
38 i
1 i ^
1 i ^
1 i
40 i
40 i
40 i
41 *
41 *
41 *
41 *
41 *
41 *
41 *
41 *
40 *
40 *
40 *
40 *
40 *
40 *
40 i
5 i
1 i
1 i
1 i
1 i
13 ii iii xi ‡
13 i ‡
13 i ‡
1 i xi
1 i
11 i
1 i
1 i
1 i
7 i
1 i
9 i
43 i
1 i
1 i
1 i
1 i
1 i
1 i ^
17 i
26 *
26 i
1 i
1 i
1 i
1 i v
1 i
1 i
1 i
13 i ‡
1 i
13 i ‡
29 i
1 i
1 i
1 i
1 i
13 i ‡
1 i
1 i
33 i
1 *
1 *
1 i
1 i
34 ii iii
1 ^ i vii
1 i
1 i
1 i
1 i
1 i
10 i
7 i
40 i
Name of undertaking
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 Management Services (Jersey) Ltd
Lloyds International Pty Ltd
Lloyds Investment Bonds Ltd
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. 4 Ltd
Lloyds Secretaries Ltd
Lloyds Securities Inc.
Lloyds TSB Pacific Ltd
Lloyds UDT Asset Rentals Ltd
Lloyds UDT Leasing Ltd
Lloyds UDT Ltd
Lloyds Your Tomorrow Trustee Ltd
Loans.co.uk Ltd
London Taxi Finance Ltd
Lotus Finance Ltd
LTGP Limited Partnership Incorporated
Maritime Leasing (No. 19) Ltd
MBNA Europe Finance Ltd
MBNA Europe Holdings Ltd
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
NWS Trust Ltd
Pacific Leasing Ltd
Pensions Management (S.W.F.) Ltd
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
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
Sterling ISA Managers (Nominees) Ltd
Notes
11 *
56 i
1 i
7 i
37 i
1 i
7 i
8 i
13 i ‡
1 i
1 i
1 i
48 i
1 i
1 i
1 i
1 i
1 i
11 i
51 i
13 i ‡
1 i
13 i ‡
1 i
47 i
1 ii iii
50 ii iii
34 *
1 i
46 i
47 i
47 i
53 i
32 i
4 i
56 i
47 ii viii #
7 i
13 i ‡
5 i
1 i
25 *
1 i
1 ii iii
5 i
50 ii iii
9 i
1 i
1 i
28 i
28 i
28 i
28 i
1 i
35 i
25 i
1 i
1 i
27 i
3 i
25 *
3 ii ^
18 i
1 i
3 i
31 i ‡
1 i
1 i
1 ii #
3 i
25 i
3 i
1 i
1 i
1 i
4 i
50 ii iii
20 i
20 i
20 i
1 i
5 ii #
14 i
Lloyds Banking Group Annual Report and Accounts 2022
353
Financial resultsRisk managementGovernaanceFinancial statementsOther informationStrategic report Name of undertaking
Gresham Receivables (No. 30) UK Ltd
Gresham Receivables (No. 31) UK Ltd
Gresham Receivables (No. 32) UK Ltd
Gresham Receivables (No. 33) UK Ltd
Gresham Receivables (No. 34) UK Ltd
Gresham Receivables (No.35) Ltd
Gresham Receivables (No.36) UK Ltd
Gresham Receivables (No.37) UK Ltd
Gresham Receivables (No.38) UK Ltd
Gresham Receivables (No.39) UK Ltd
Gresham Receivables (No.40) UK Ltd
Gresham Receivables (No.41) UK Ltd
Gresham Receivables (No.44) UK Ltd
Gresham Receivables (No.45) UK Ltd
Gresham Receivables (No.46) UK Ltd
Gresham Receivables (No.47) UK Ltd
Gresham Receivables (No.48) UK Ltd
Guildhall Asset Purchasing Company (No.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
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
SARL Hiram
SAS Compagnie Fonciere De France
SCI De L’Horloge
SCI Rambuteau CFF
Stichting Holding Candide Financing
Stichting Security Trustee Candide 2021-1 B.V.
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
Wilmington Cards 2021-1 plc
Wilmington Cards Holdings Ltd
Wilmington Receivables Trustee Ltd
Bank of Scotland Foundation •
Lloyds Bank Foundation for England & Wales •
Lloyds Bank Foundation for the Channel Islands •
MBNA General Foundation •
The Halifax Foundation for Northern Ireland •
Notes
49 ‡
49 ‡
54
49 ‡
54
32
54
54
54
54
54
54
54
54
54
54
54
54
42
2 ‡
26
6 ‡
26
26
26
26
26
26
26
26
26
26
26
26
26
26
26
36
36
36
42
44
44
44
44
19
19
42
42
42
26
26
55
42
36
26
26
26
5
57
57
47
15
• A charitable foundation funded but not owned or controlled by Lloyds Banking
Group
Subsidiaries and related
undertakings continued
Name of undertaking
Sterling ISA Managers Ltd
Sussex County Homes Ltd
Suzuki Financial Services Ltd
SW Funding plc
SW No.1 Ltd
The Adviser Centre Ltd
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 Trading Ltd
Uberior Ventures Australia Pty Ltd
Uberior Ventures Ltd
UDT Budget Leasing Ltd
United Dominions Leasing Ltd
United Dominions Trust Ltd
Upsaala Ltd
Vine Street XII LP
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
Notes
14 i
4 i
50 ii #
3 i #
3 i
14 i
45 i
5 i
4 i
+ *
47 i #
47 i #
1 i
5 i
5 i
5 i
5 i
5 i
5 i
5 i
1 i
5 i
5 i
8 i
5 i
13 i ‡
1 i
1 i
52 i ‡
41 *
1 i
1 i
1 i
24 i
24 i
1 ii iii
5 i
1 i
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
Addison Social Housing Holdings Ltd
Cancara Asset Securitisation Ltd
Candide Financing 2021-1 B.V.
Cardiff Auto Receivables Securitisation 2018-1 plc
Cardiff Auto Receivables Securitisation 2019-1 plc
Cardiff Auto Receivables Securitisation 2022-1 plc
Cardiff Auto Receivables Securitisation Holdings Ltd
Celsius European Lux 2 S.A.R.L.
Cheltenham Securities 2017 Ltd
Deva Financing Holdings Ltd
Deva Financing plc
Edgbaston RMBS 2010-1 plc
Edgbaston RMBS Holdings Ltd
Elland RMBS 2018 plc
Elland RMBS Holdings Ltd
Fontwell II Securities 2020 DAC
Fontwell Securities 2016 Ltd
Gresham Receivables (No. 3) Ltd
Gresham Receivables (No. 10) Ltd
Gresham Receivables (No.11) UK 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. 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
354 Lloyds Banking Group Annual Report and Accounts 2022
Notes
36
32
19
6 ‡
26
26
26
30
36
26
6 ‡
6 ‡
26
26
26
42
36
32
32
49 ‡
54
49 ‡
54
54
49 ‡
32
32
49 ‡
49 ‡
54
32
32
Associated undertakings
The Group has a participating interest in the following undertakings.
% of share class
held by immediate
parent company
(or by the Group
where this varies) Registered office address
50%
Name of undertaking
239 Kingsway Hove Ltd
4755AS Ltd
Addison Social Housing Ltd
Airline Services And Components Group Ltd
Albany Bidco Ltd
Aldreth Developments Ltd
Alfred Investments LLP
Alfred Homes Properties LLP
Alfred Investments Properties Ltd
Allan Water Homes (Chryston) Ltd
Alphabet Bidco Ltd
Angus International Safety Group Ltd
Antler Amberley LLP
Aquavista Watersides Topco Ltd
Ashtons Group Holdings Ltd
Aspire Technology Enterprise Ltd
Bacchus Newco Ltd
Backhouse (Westbury) JV Ltd
Backhouse (Castle Cary) JV Ltd
BCIS Holdings Ltd
Beckstones (Rheda Park) Ltd
Bergamot Ventures Ltd
BH Stoke Golding Property LLP
Biozone Scientific Group Ltd
Blue Bay Travel Group Ltd
BoS Mezzanine Partners Fund LP
Bowbridge Homes (Frisby) Ltd
Bowbridge Homes (Raunds) Ltd
Bowland Fold (Halton) Ltd
Bramble Foods Group Ltd
Briar Homes (Darnley) Ltd
Briar Homes (Dealston) Ltd
Briar Homes (Investments) 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 Ltd
City & General Securities Ltd
Cleanslate Ashford Ltd
Columbus UK Holdings Ltd
Connect Health Group Ltd
Connery Ltd
Couple Holdco Ltd
Crossco (1462) Ltd
Croud Holdings Ltd
Cruden Homes (Aberlady) Ltd
Cruden Homes (Barton Avenue) Ltd
Cruden Homes (Longniddry) Ltd
Cruden Homes (West Craigs) Ltd
Cruden Ventures Ltd
D.U.K.E. Real Estate Ltd
Devonshire Homes (Ilfracombe) Ltd
Devonshire Homes (St Austell) Ltd
Duchy Homes (Bowgreave) Ltd
Duchy Homes (Chapelgarth) Ltd
Duchy Homes (Elwick) Ltd
Duchy Homes (North Cave) Ltd
Duchy Homes (RGI) Ltd
50%
20%
94.45%
75.32%
50%
n/a
n/a
50%
50%
99.25%
88.93%
88.93%
n/a
92.69%
99%
99.25%
89.25%
50%
50%
99.25%
50%
100%
n/a
99.25%
99.17%
n/a
50%
50%
25%
99.25%
50%
50%
100%
50%
50%
50%
50%
50%
89.25%
99%
100%
50%
99%
99%
99%
20%
26.70%
99.25%
99%
50%
50%
50%
50%
100%
100%
100%
50%
50%
50%
50%
50%
50%
Cayuga House 2a, Addison Road, Hove, East Sussex, United Kingdom,
BN3 1TN
Kingsnorth House, Blenheim Way, Birmingham, West Midlands, England, B44 8LS
1 Bartholomew Lane, London, EC2N 2AX
Squire Patton Boggs (UK) LLP (Ref: Csu), Rutland House, 148 Edmund Street,
Birmingham, B3 2JR
Acora House, Albert Drive, Burgess Hill, West Sussex, United Kingdom, RH15 9TN
No 1 Railshead Road, St Margarets, Isleworth, Middlesex, United Kingdom, TW7
7EP
64 Parchment Street, Winchester, England, SO23 8AT
64 Parchment Street, Winchester, England, SO23 8AT
64 Parchment Street, Winchester, England, SO23 8AT
24B Kenilworth Road, Bridge Of Allan, Stirling, Scotland, FK9 4DU
Phoenix House Smeaton Close, Rabans Lane, Industrial Area, Aylesbury,
Buckinghamshire, United Kingdom, HP19 8UW
Station Road, High Bentham, Near Lancaster, LA2 7NA
Portland House, Park Street, Bagshot, England, GU19 5AQ
Sawley Marina, Long Eaton, Nottinghamshire, United Kingdom, NG10 3AE
Unit 4 74 Dyke Road Mews, Brighton, BN1 3JD
Pipewell Quay, Pipewellgate, Gateshead, Tyne And Wear, United Kingdom, NE8
2BJ
Park Lane Industrial Estates, Park Lane Off Wigan Road, Ashton in Makerfield,
Wigan, WN4 0BZ, United Kingdom
C/O DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United
Kingdom
C/O DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United
Kingdom
Atlas House, 1 King Street, London, England, EC2V 8AU
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
6th Floor, 25 Farringdon Street, London, EC4A 4AB
Grovelands Business Park, West Haddon Road, East Haddon, Northampton, NN6
8FB
Browne Jacobson Llp (Cs) 1st Floor, The Mount, 72 Paris Street, Exeter, EX1 2JY
A4 Bellringer Road, Trentham Business Quarter, Stoke-On-Trent, ST4 8GB
Fourth Floor, 7 Castle Street, Edinburgh, EH2 3AH
Unit 4 Shieling Court, Corby, England, NN18 9QD
Unit 4 Shieling Court, Corby, England, NN18 9QD
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
Crosby Road, Market Harborough, Leicestershire, England, LE16 9EE
Radleigh House, 1 Golf Road, Clarkston, Glasgow, G76 7HU
Radleigh House, 1 Golf Road, Clarkston, Glasgow, G76 7HU
Radleigh House, 1 Golf Road, Clarkston, Glasgow, G76 7HU
25 Gresham Street, London, EC2V 7HN
Weir House, Hurst Road, East Molesey, Surrey, KT8 9AY
C/O Azets Wynyard Park House, Wynyard Avenue, Wynyard, United Kingdom,
TS22 5TB
C/O Azets Wynyard Park House, Wynyard Avenue, Wynyard, United Kingdom,
TS22 5TB
C/O Azets Holdings Ltd Wynyard Park House, Wynyard Avenue, Wynyard, United
Kingdom, TS22 5TB
5 The Marquis Business Centre, Royston Road, Baldock, SG7 6XL
Troy Mills Troy Road, Horsforth, Leeds, England, LS18 5GN
10 Upper Berkeley Street, London, W1H 7PE
Chobham Farm, Sandpit Hall Road, Chobham, Surrey, GU24 8HA
1 Fore Street Avenue, Moorgate, London, United Kingdom, EC2Y 9DT
The Light Box, Quorum Business Park, Benton Lane, Newcastle Upon Tyne, United
Kingdom, NE12 8EU
44 Esplanade, St. Helier, Jersey, JE4 9WG
353 Buckingham Avenue, Slough, England, SL1 4PF
23a Falcon Court, Preston Farm Industrial Estate, Stockton-On-Tees,
United Kingdom, TS18 3TX
Cannon Place, 78 Cannon Street, London, England, EC4N 6AF
16 Walker Street, Edinburgh, EH3 7LP
16 Walker Street, Edinburgh, EH3 7LP
16 Walker Street, Edinburgh, EH3 7LP
16 Walker Street, Edinburgh, EH3 7LP
16 Walker Street, Edinburgh, EH3 7LP
Cromwell Property Group Spaces, Lochrin Square, 1 Lochrin Square, 92-98
Fountainbridge, Edinburgh, United Kingdom, EH3 9QA
Devonshire House, Lowman Green, Tiverton, United Kingdom, EX16 4LA
Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA, United Kingdom
Middleton House, Westland Road, Leeds, LS11 5UH
Park House, Westland Road, Leeds, West Yorkshire, United Kingdom, LS11 5UH
Middleton House, Westland Road, Leeds, United Kingdom, LS11 5UH
Middleton House, Westland Road, Leeds, LS11 5UH
Park House, Westland Road, Leeds, West Yorkshire, United Kingdom, LS11 5UH
Notes
ii
ii
i
ii &
ii &
ii
*
*
i
ii
xviii &
xvii &
xviii
*
ii &
ii &
ii &
ii &
ii
ii
ii &
ii
iii ~
*
ii &
xviii &
*
ii
ii
i
ii &
ii
ii
ii
i
ii
ii
ii
ii
xviii &
ii &
iii &
ii
ii &
ii
xviii &
i &
ii &
ii &
ii &
ii
i
ii
i
ii
iii ~
ii
ii
ii
ii
ii
ii
ii
Lloyds Banking Group Annual Report and Accounts 2022
355
Financial resultsRisk managementGovernaanceFinancial statementsOther informationStrategic report Subsidiaries and related undertakings continued
% of share class
held by immediate
parent company
(or by the Group
where this varies) Registered office address
50%
89.25%
50%
25%
25%
Name of undertaking
Duchy Homes (Winterley) Ltd
Duncan and Todd Holdings Ltd
Durkan Growth Ltd
Durkan (Onslow) Ltd
Eamont Chase (Penrith) Ltd
Ediston Homes Sauchie Ltd
Eiger Bidco Ltd
Ensco 997 Ltd
Ensco 1314 Ltd
Ensco 1322 Ltd
Ensco 1327 Ltd
Ensco 1337 Ltd
Ensco 1375 Ltd
Ensek Holdings Ltd
Erris Homes (Almondbury) Ltd
Eudoros Bidco Ltd
Europa Property Company (Northern) Ltd
Eutopia Exeter Gateway Ltd
Evolution Funding Group Ltd
Express Engineering (Group) Ltd
Farries Field (Stainburn) Ltd
FDL Salterns Ltd
FHR European Ventures LLP
FSP Corporate Ltd
Generate Topco Ltd
Ginger Acquisition Company Ltd
Global Autocare Holding Ltd
Hamsard 3667 Ltd
Hazel Newco Ltd
HB Developments (NW) Ltd
Hedge End Place (Durkan) LLP
Hedge End Place Hold Co Ltd
Hercules Topco Ltd
Highlands Bidco Ltd
Hollins Homes (Aston) Ltd
Hollins Homes (Bartle) Ltd
Hollins Homes (Galgates) Ltd
Hollins Homes (Loveclough) Ltd
Hollins Homes (Newton) Ltd
Hollins Homes RGI Ltd
Hollins Homes (Utopia) Ltd
Hollins Homes (Wingates) Ltd
Homes By Carlton (MSTG1) Ltd
Horse Health Wessex Holdings Ltd
Housing Growth Partnership II GP LLP
Housing Growth Partnership II LP
Housing Growth Partnership GP LLP
Housing Growth Partnership Ltd
Housing Growth Partnership LP
Iglufastnet Ltd
IEG Group Ltd
James Taylor Homes (Investment) Ltd
James Taylor Homes (Kingston) Ltd
James Taylor Homes (Newton Longville) Ltd
James Taylor Homes (Verulamium) Ltd
Kenmore Capital 2 Ltd
Kenmore Capital 3 Ltd
Kenmore Capital Ltd
KERV Group Ltd
KHL 2017 Ltd
Kier HGP Holdings LLP
50%
99.25%
30.76%
32.74%
99%
99%
99%
99%
99%
99%
99.17%
50%
99.25%
100%
50%
99%
99%
99%
99%
99.35%
50%
50%
n/a
99%
98.02%
89.25%
99%
99.25%
99.25%
50%
n/a
100%
99.25%
99%
50%
25%
25%
50%
50%
50%
50%
50%
50%
99.25%
n/a
n/a
n/a
50%
n/a
89.25%
59.55%
99.25%
50%
50%
50%
25%
100%
100%
100%
99%
84.4%
84.4%
n/a
356 Lloyds Banking Group Annual Report and Accounts 2022
Notes
ii
ii &
ii
i
i
Middleton House, Westland Road, Leeds, LS11 5UH
6 Queens Road, Aberdeen, AB15 4ZT
Unit 4 Elstree Way, Borehamwood, England, WD6 1JD
Unit 4 Elstree Way, Borehamwood, England, WD6 1JD
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
39/1 George Street, Edinburgh, EH2 2HN
ii
4 Webster Court, Carina Park, Westbrook, Warrington, United Kingdom, WA5 8WD ii &
The Yard, Dodd Lane, Westhoughton, Bolton, BL5 3NU
34 Bow Street, London, United Kingdom, WC2E 7AU
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
Westgate House, 9 Holborn, London, United Kingdom, EC1N 2LL
Hounds Gate, 30-34 Hounds Gate, Nottingham, NG1 7AB
Howard House, Limewood Approach, Leeds, England, LS14 1NG
5 Soho Street, London, England, W1D 3DG
Europa House, 20 Esplanade, Scarborough, North Yorkshire, YO11 2AQ
The Stables, Little Coldharbour Farm, Tong Lane, Lamberhurst, Tunbridge Wells,
Kent, England, TN3 8AD
Thompson Close, Whittington Moor, Chesterfield, S41 9AZ
Kingsway North, Team Valley Trading Estate, Gateshead, NE11 0EG
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
2 Poole Road, Bournemouth, BH2 5QY
C/O CMS Cameron Mckenna LLP, 78 Cannon Street, London, EC4N 6AF
Now Building Here & Now, Thames Valley Park, Reading, Berkshire, England, RG6
1WG
Diplocks Yard, 73 North Road, Brighton, East Sussex, United Kingdom, BN1 1YD
Tudno Mill, Smith Street, Ashton-Under-Lyne, OL7 0DB, United Kingdom
The Hub, Gelderd Lane, Leeds, England, LS12 6AL
Park House, Clifton Park, York, North Yorkshire, YO30 5PB
Bradwood Court, St Crispin Way, Haslingden, Rossendale, Lancashire, United
Kingdom, BB4 4PW
V&R Accountancy Services Crompton House, Three Tuns Lane, Formby, Liverpool,
England, L37 4AQ
4 Elstree Gate, Elstree Way, Borehamwood, Hertfordshire, WD6 1JD
25 Gresham Street, London, EC2V 7HN
5th Floor, The Grange, 100 High Street, Southgate, London, England, N14 6BN
Unit 4 Queen Anne Drive, Newbridge, Scotland, EH28 8LN
Suite 4, No. 1 King Street, Manchester, M2 6AW, United Kingdom
Suite 4, 1 King Street, Manchester, M2 6AW, United Kingdom
1 King Street, Manchester, M2 6AW, United Kingdom
Suite 4, 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
Suite 4, 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
Copied Hall Farm Winsor Road, Winsor, Southampton, Hampshire,
United Kingdom, SO40 2HE
25 Gresham Street, London, EC2V 7HN
25 Gresham Street, London, EC2V 7HN
25 Gresham Street, London, EC2V 7HN
25 Gresham Street, London, EC2V 7HN
25 Gresham Street, London, EC2V 7HN
2nd Floor, 165 The Broadway, Wimbledon, London, United Kingdom, SW19 1NE
Queens Court, Wilmslow Road, Alderley Edge, England, SK9 7RR
James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom
James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom
James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom
James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX
Unit 1b, 1 Finsbury Avenue, London, United Kingdom, EC2M 2PG
C/O Rsm Uk Restructuring Advisory Llp 5th Floor, Central Square, 29 Wellington
Street, Leeds, LS1 4DL
2nd Floor, Optimum House, Clippers Quay, Salford, England, M50 3XP
x
xv &
ii
xxii &
ii &
ii &
ii &
ii &
xviii &
ii
xviii &
viii
ii
ii &
ii
xvii
xviii &
xxi
ii
ii
*
ii &
xviii &
ii &
ii &
ii &
xviii &
ii
* §
i
ii &
ii &
ii
i
i
ii
ii
ii
ii
ii
ii
ii &
*
*
*
ii iii
*
ii
xxiii &
ii &
ii
ii
ii
i
iii ~ ‡
iii ~ ∞
iii ~ ‡
ii &
ii
iii & ‡
*
% of share class
held by immediate
parent company
(or by the Group
where this varies) Registered office address
99.25%
Name of undertaking
Kingswood Mobility Group Ltd
Kruger Bidco Ltd
Lonsdale Park (Hackthorpe) Ltd
Lucida Broking Holdings Ltd
Mableford Ltd
Mansion House Group (Sandbach) Ltd
Meadow Rigg (Burneside Road) Ltd
Measured Identity Hub Ltd
MFS Groupco Ltd
M&GP (No. 2) Ltd
Motability Operations Group plc
Neilson Active Holidays Group Ltd
North Kensington Gate HGP Ltd
Northern Edge Ltd
Oakfield Park (Kirkby Londsdale) LLP
Odyssey Bidco Ltd
Omnium Leasing Company
Onapp (Topco) II Ltd
Onapp (Topco) Ltd
Origin (Topco) Ltd
Osprey Aviation Services (UK) Ltd
PAM Healthcare Ltd
Panther Partners Ltd
Park Bidco Ltd
Pennine View (Calthwaite) Ltd
Pertemps Network Group Ltd
PG Somerset Legion Ltd
PIHL Equity Administration Ltd
PL & HGP Ltd
PPCE Holdings Ltd
Project Airscope Bidco Ltd
Project Avatar Ltd
Project Balloon Bidco Ltd
Project Bridgerton Bidco Ltd
Project Fusion Bidco Ltd
Project Galaxy UK Topco Ltd
Project Sketch Ltd
Project Sutton Bidco Ltd
Quantum (Flimwell) Ltd
Quentin Park (Cumwhinton) Ltd
Ramco Acquisition Ltd
RDIL 2021 Ltd
Rocket Science Holdings Ltd
Sanders Brow (Armathwaite) Ltd
Satago Financial Solutions Ltd
ScarlettAbbott (Topco) Ltd
Scenic Topco Ltd
Scotia (Brechin) Ltd
Seahawk Bidco Ltd
SGI Holdings Ltd
Shaken Udder Group Ltd
SOLO Topco Ltd
Southwark Estates (One) Ltd
SSP Topco Ltd
Stancliffe Homes (Bentley) Ltd
Stewart Milne (Glasgow) Ltd
Stewart Milne (West) Ltd
Stratus (Holdings) Ltd
99%
50%
89.25%
50%
50%
25%
97.92%
99%
50%
39.98%
40%
89.25%
100%
39.4%
n/a
99%
n/a
82.5%
100%
82.5%
82.5%
50%
89.25%
89.25%
99.25%
89%
89%
99%
25%
93.83%
50%
100%
50%
89.25%
99.25%
99.25%
79.16%
99.22%
99.25%
28.22%
88.30%
99.25%
50%
50%
88.74%
88.74%
0.17%
99.25%
99.17%
50%
100%
99.25%
89.25%
100%
89.25%
99%
99.25%
99%
100%
89.25%
50%
100%
100%
82.5%
82.5%
Browne Jacobson Llp (Cs) Mowbray House, Castle Meadow Road, Nottingham,
England, NG2 1BJ
Rhino House, Deans Road, Ellesmere Port, United Kingdom, CH65 4DR
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
St James House, 27-43 Eastern Road, Romford, Essex, United Kingdom, RM1 3NH
Lindum Business Park, Station Road, North Hykeham, Lincoln, LN6 3QX, United
Kingdom
8-10 Old Market Place, Altrincham, Cheshire, United Kingdom, WA14 4DF
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
3 Long Acres, Willow Farm, Castle Donington, Derbyshire, DE74 2UG
York House, Wetherby Road, Long Marston, YO26 7NH
6 Lancaster Way, Ermine Business Park, Huntingdon, Cambridgeshire, United
Kingdom, PE29 6XU
City Gate House, 22 Southwark Bridge Road, London, SE1 9HB
Locksview, Brighton Marina, Brighton, BN2 5HA
124 Finchley Road, London, United Kingdom, NW3 5JS
Titanium 1 King’s Inch Place, Renfrew, Glasgow, PA4 8WF
4 Cowper Road, Gilwilly Industrial Estate, Penrith, CA11 9BN
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
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU
Holly House, 73-75 Sankey Street, Warrington, WA1 1SL
16 Kirby Street, London, EC1N 8TS
Liliput Road, Brackmills Industrial Estate, Northampton, United Kingdom, NN4 7DT
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
Meriden Hall, Main Road, Meriden, Coventry, CV7 7PT
C/O Pg Group Office, 1 Number One Bristol, Lewins Mead, Bristol, United Kingdom,
BS1 2NJ
Cavendish House, 18 Cavendish Square, London, W1G 0PJ
3rd Floor Tower House, 10 Southampton Street, London, United Kingdom, WC2E
7HA
Suite 3 Regency House, 91 Western Road, Brighton, BN1 2NW
Express Networks 2, 3 George Leigh Street, Manchester, United Kingdom, M4 5DL
Unit 2 And 3 Jessop Court, Waterwells Business Park, Quedgeley, Gloucester,
United Kingdom, GL2 2AP
First Floor, 85 Great Portland Street, London, W1W 7LT
33 Charlotte Street, London, England, W1T 1RR
46 - 48 Queen Charlotte Street, Bristol, BS1 4HX
3rd Floor Q5 Quorum Business Park, Benton Lane, Newcastle Upon Tyne, United
Kingdom, NE12 8BS
11 Vantage Way, Erdington, Birmingham, B24 9GZ
Chawston House, Chawston Lane, Chawston, Bedford, Bedfordshire, United
Kingdom, MK44 3BH
Kings Parade, Lower Coombe Street, Croydon, CR0 1AA
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
Brodies House, 31-33 Union Grove, Aberdeen, AB10 6SD
Old Printers Yard, 156 South Street, Dorking, Surrey, United Kingdom, RH4 2HF
Unit 2, Origin Business Park, Rainsford Road, Park Royal, London, NW10 7FW
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
4th Floor, 120 Regent Street, London, United Kingdom, W1B 5FE
The Old Chapel, 27a Main Street, Fulford, York, North Yorkshire, United Kingdom,
YO10 4PJ
Unit 1B, Pentwyn Business Centre, Wharfedale Road, Cardiff, Wales, CF23 7HB
Ca’D’Oro Building, 45 Gordon Street, Glasgow, Scotland, G1 3PE
Unit 2 Springfield Court, Summerfield Road, Bolton, BL3 2NT, United Kingdom
Alton House, Alton Business Park, Alton Road, Ross-on-Wye, HR9 5BP
Heathwell Farm, Simpsons Lane, Tiptree, Colchester, United Kingdom, CO5 0PP
Onecom House, 4400 Parkway, Whiteley, Fareham, Hampshire, PO15 7FJ
51 Welbeck Street, London, England, W1G 9HL
Fourth Floor D Mill, Dean Clough, Halifax, United Kingdom, HX3 5AX
Office 3 Markham Lane, Markham Vale, Chesterfield, England, S44 5HY
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
Notes
ii &
ii &
ii
ii &
ii
ii
i
ii &
ii &
ii
i
v
ii &
ii
iii &
*
ii &
+ *
ii &
v
xvii &
xviii
ii
xvii &
xviii
ii &
xvii
xviii &
ii &
i
iii &
ii
iii
ii
xviii & ‡
xviii &
xviii &
ii &
ii &
xviii &
ii &
ii &
ii &
ii
ii
xii
xvi &
xix
xviii &
xviii &
ii
iii
ii &
ii &
ii
xviii &
ii &
ii &
ii &
ii
ii &
ii
ii ~
ii ~
xvii
xviii &
Lloyds Banking Group Annual Report and Accounts 2022
357
Financial resultsRisk managementGovernaanceFinancial statementsOther informationStrategic report Subsidiaries and related undertakings continued
% of share class
held by immediate
parent company
(or by the Group
where this varies) Registered office address
25%
Name of undertaking
Stonewood Partnerships (Pudding Pie) Ltd
Stonewood Partnerships (RGI) Ltd
Teviot Developments Holdings Ltd
The Edwin Group Ltd
The EMS Group Ltd
The Exceed Partnership LP
The Orchards (Burgh by Sands) Ltd
The Power Industrial Group Ltd
The Woodlands (Carlisle) Ltd
Timec 1667 Ltd
Tolia Bidco Ltd
Topco Coffee Ltd
Topsmiths Ltd
United House Group Holdings Ltd
Verde Bidco Ltd
Wakefield Gardens (Lazonby) Ltd
Walnut Newco Ltd
WCCTV Group Ltd
Whiteburn Viewforth Development Ltd
Whittington Facilities Ltd
ZWPV Ltd
50%
100%
99%
99.25%
n/a
50%
82.5%
82.5%
25%
99%
99.25%
99.25%
99.25%
81.5%
99.25%
25%
99.25%
99.25%
100%
100%
89.25%
The Stonewood Office, West Yatton Lane, Castle Combe, Chippenham, United
Kingdom, SN14 7EY
The Stonewood Office, West Yatton Lane, Castle Combe, Chippenham, United
Kingdom, SN14 7EY
1/1, 15 North Claremont Street, Glasgow, United Kingdom, G3 7NR
First Floor (South) Cathedral Buildings, Dean Street, Newcastle Upon Tyne,
United Kingdom, NE1 1PG
The Refinery, South Road, Ellesmere Port, United Kingdom, CH65 4LE
C/O Spencer Gardner Dickins 3 Coventry Innovation Village, Cheetah Road,
Coventry, CV1 2TL
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
C/O TENEO FINANCIAL ADVISORY LIMITED, 156 Great Charles Street Queensway,
Birmingham, B3 3HN
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
Floor 6 Arden House, Regent Centre, Gosforth, Newcastle Upon Tyne, Tyne And
Wear, United Kingdom, NE3 3LU
Suite 1, 7th Floor 50 Broadway, London, United Kingdom, SW1H 0DB
Lodge Farm Barn, Elvetham Park Estate, Hartley Wintney, Hampshire,
United Kingdom, RG27 8AS
6 Kingsland Trading Estate, St. Philips Road, Bristol, Somerset, England, BS2 0JZ
26 Kings Hill Avenue, Kings Hill, West Malling, Kent, ME19 4AE
Cannon Green, 1 Suffolk Lane, London, England, EC4R 0AX
4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11
9BN
C/O Roxburgh Milkins Limited Merchants House North, Wapping Road, Bristol,
United Kingdom, BS1 4RW
Charles Babbage House, Kingsway Business Park, Rochdale, United Kingdom,
OL16 4NW
1 Jackson’s Entry, Edinburgh, Scotland, EH8 8PJ
C/O Teneo Restructuring Limited 156 Great Charles Street, Queensway,
Birmingham, West Midlands, B3 3HN
Zip World Base Camp, Denbigh Street, Llanrwst, LL26 0LL
Collective Investment Vehicles
The following comprises a list of the Group’s and other external
collective investment vehicles (CIV), where the shareholding is
greater than or equal to 20% of the nominal value of any class of
shares, or a book value greater than 20% of the CIV’s assets.
% of fund held by
immediate parent
(or by the Group
where this varies)
Notes
Name of undertaking
% of fund held by
immediate parent
(or by the Group
where this varies)
Name of undertaking
ABRDN OEIC I
abrdn European Real Estate Share Fund
abrdn Sterling Bond Fund
38.84%
77.29%
ABRDN OEIC IV
abrdn Global Corporate Bond Tracker Fund
abrdn UK Equity Enhanced Index Fund
93.85%
88.08%
ABRDN OEIC VI
abrdn Emerging Markets Equity Enhanced
Index Fund
59.80%
AGFE UK REAL ESTATE SENIOR DEBT FUND LP
74.64%
ARTEMIS INSTITUTIONAL FUNDS
Artemis SmartGARP Paris-Aligned Global
Equity Fund
45.79%
BLACKROCK AUTHORISED CONTRACTUAL SCHEME 1
ACS 60:40 Global Equity Tracker Fund
ACS Climate Transition World Equity Fund
ACS Japan Equity Tracker Fund
ACS UK Equity Tracker Fund
ACS World Multifactor Equity Tracker Fund
BlackRock ACS US Equity Tracker Fund
BLACKROCK COLLECTIVE INVESTMENT FUNDS
BlackRock Global Corporate ESG Insights
Bond Fund
iShares Global Property Securities Equity
Index Fund
40.64%
95.60%
75.84%
62.25%
58.30%
72.11%
78.93%
44.73%
358 Lloyds Banking Group Annual Report and Accounts 2022
8
8
8
22
3
9
9
BLACKROCK FIXED INCOME DUBLIN FUNDS
iShares Emerging Markets Government Bond
Index Fund (IE)
iShares Emerging Markets Local Government
Bond Index Fund (IE)
61.52%
79.78%
BNY MELLON INVESTMENT FUNDS
78.79%
BNY Mellon Global Absolute Return Fund
31.26%
BNY Mellon Global Equity Fund
41.08%
BNY Mellon Global Multi-Strategy Fund
BNY Mellon Multi Asset Growth Fund
21.65%
BNY Mellon Sustainable UK Opportunities Fund60.11%
BNY Mellon UK Income Fund
BNY Mellon US Opportunities Fund
25.65%
35.16%
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
93.69%
79.62%
55.04%
94.59%
95.53%
51.98%
50.64%
81.43%
39.36%
63.60%
Notes
i
ii
ii
ii &
xviii &
*
ii
ii & ‡
xviii
i
ii &
ii &
xviii &
ii &
ii &
xviii &
i
ii &
ii &
ii
xv Δ
ii &
Notes
9
10
1
1
1
1
18
18
18
11
16
5
14
12
7
9
15
19
19
2
2
Name of undertaking
Special Situations Fund
HBOS UK INVESTMENT FUNDS ICVC
UK Equity Income Fund
UK Equity Tracker Fund
UK Growth Fund
% of fund held by
immediate parent
(or by the Group
where this varies)
49.64%
57.20%
59.73%
59.57%
HLE ACTIVE MANAGED PORTFOLIO AUSGEWOGEN
55.16%
HLE ACTIVE MANAGED PORTFOLIO DYNAMISCH
41.80%
HLE ACTIVE MANAGED PORTFOLIO KONSERVATIV
39.12%
INVESCO AMERICAN INVESTMENT SERIES
Invesco US Equity Fund
31.31%
LAZARD INVESTMENT FUNDS
Lazard Developing Markets Fund
91.78%
LEGG MASON GLOBAL FUNDS
Legg Mason Western Asset Multi-Asset Credit
Fund
40.85%
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
Mercer Passive Sustainable Global Equity
Feeder Fund
MORGAN STANLEY INVESTMENT FUNDS
Global Credit Fund
NORDEA 1, SICAV
71.64%
31.95%
65.69%
61.05%
65.44%
67.64%
44.92%
Nordea 1 – GBP Diversified Return Fund
26.69%
RETAIL AUTHORISED UNIT TRUSTS
BlackRock Balanced Growth Portfolio Fund
38.65%
SCHRODER FUNDS ICAV
Schroder Sterling Liquidity Fund
Schroder Sterling Short Duration Bond Fund
93.10%
95.45%
SCHRODER INTERNATIONAL SELECTION FUND
Emerging Market Bond
Global Climate Leaders
Multi Asset Total Return
Sustainable Emerging Markets Synergy
SCHRODER MATCHING PLUS
Schroder Matching Plus Bespoke
Investment Fund 10
SCOTTISH WIDOWS INCOME AND GROWTH FUNDS
ICVC
Adventurous Growth Fund
Balanced Growth Fund
Corporate Bond 1 Fund
Corporate Bond PPF Fund
ESG Sterling Corporate Bond Tracker Fund
Global Tactical Asset Allocation 1 Fund
Progressive Growth Fund
UK Index Linked Gilt Fund
SCOTTISH WIDOWS INVESTMENT SOLUTIONS FUNDS
ICVC
Corporate Bond Fund
70.54%
27.08%
20.50%
99.26%
98.68%
44.12%
30.23%
85.25%
100%
100%
84.28%
45.32%
100%
72.07%
98.30%
Developed Asia Pacific (ex Japan ex Korea)
Equity Tracker Fund
Developed Europe (ex UK) Equity Tracker Fund 95.07%
90.75%
Fundamental Index Emerging Markets Equity
Fund
Fundamental Index Global Equity Fund
Fundamental Index UK Equity Fund
Fundamental Low Volatility Index Emerging
Markets Equity Fund
Fundamental Low Volatility Index Global
Equity Fund
Fundamental Low Volatility Index UK Equity
Fund
Gilt Fund
94.19%
88.78%
93.15%
97.55%
85.38%
High Income Bond Fund
International Bond Fund
Japan Equity Fund
Strategic Income Fund
US Equity Fund
95.47%
61.17%
76.61%
93.21%
65.97%
90.21%
Notes
Name of undertaking
Balanced Growth Portfolio
Cash Fund
International Equity Tracker Fund
Progressive Growth Portfolio 1
SCOTTISH WIDOWS OVERSEAS GROWTH
INVESTMENT FUNDS ICVC
American Growth Fund
European Growth Fund
Global Growth Fund
Global Select Growth Fund
Japan Growth Fund
Pacific Growth Fund
% of fund held by
immediate parent
(or by the Group
where this varies)
24.17%
99.51%
60.30%
44.35%
Notes
78.64%
87.35%
58.90%
51.32%
97.73%
68.49%
2
2
2
2
13
20
20
4
21
17
6
SCOTTISH WIDOWS PROPERTY AUTHORISED
CONTRACTUAL SCHEME
Scottish Widows Pooled Property ACS Fund 1
100%
Scottish Widows Pooled Property ACS Fund 2 100%
SCOTTISH WIDOWS TRACKER AND SPECIALIST
INVESTMENT FUNDS ICVC
Emerging Markets Fund
UK Equity Tracker Fund
UK Fixed Interest Tracker Fund
UK Index-Linked Tracker Fund
UK Tracker Fund
SCOTTISH WIDOWS UK AND INCOME INVESTMENT
FUNDS ICVC
Environmental Investor Fund
Ethical Fund
UK Equity Income Fund
UK Growth Fund
81.51%
89.20%
95.32%
99.03%
45.04%
76.47%
84.55%
24.69%
57.67%
SEI GLOBAL MASTER FUND PLC
The SEI Moderate Fund
35.27%
The SEI Factor Allocation Global Equity Fund 52.76%
51.21%
The SEI Defensive Fund
32.88%
The SEI Growth Fund
SPW INVESTMENT PORTFOLIO ICVC
SPW IPS Growth Portfolio
SPW IPS Income Portfolio
SPW MULTI MANAGER ICVC
44.12%
42.46%
SPW Multi-Manager UK Equity Income Fund
23.54%
SSGA
State Street AUT Asia Pacific ex Japan Screened
(ex Controversies and CW) Index Equity Fund
State Street AUT Emerging Market Screened (ex
Controversies and CW) Index Equity Fund
State Street AUT Europe ex UK Screened (ex
Controversies and CW) Index Equity Fund
96.77%
100%
96.72%
THE SVS LEVITAS FUNDS
TM Levitas A Fund
TM Levitas B Fund
UBS INVESTMENT FUNDS ICVC
UBS Global Optimal Fund
UNIVERSE, THE CMI GLOBAL NETWORK
CMIG Access 80%
CMIG Focus Euro Bond
CMIG GA 70 Flexible
CMIG GA 80 Flexible
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
65.00%
62.51%
29.00%
100%
99.91%
100%
100%
100%
97.95%
61.97%
90.58%
95.78%
100%
97.84%
77.79%
83.61%
90.38%
65.91%
89.05%
37.80%
SCOTTISH WIDOWS MANAGED INVESTMENT FUNDS
ICVC
2
Lloyds Banking Group Annual Report and Accounts 2022
359
Financial resultsRisk managementGovernaanceFinancial statementsOther informationStrategic report
(9)
(10)
(11)
Registered office addresses
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
25 Gresham Street, London, EC2V 7HN
13-18 City Quay, Dublin, D02 ED70
69 Morrison Street, Edinburgh, EH3 8YF
Trinity Road, Halifax, West Yorkshire, HX1 2RG
The Mound, Edinburgh, EH1 1YZ
40a Station Road, Upminster, Essex, RM14 2TR
9 Broad Street, St Helier, Jersey, JE2 3RR
Minter Ellison, Governor Macquarie Tower, Level 40, 1 Farrer Place, Sydney,
NSW 2000, Australia
1 Brookhill Way, Banbury, Oxon, OX16 3EL
6th Floor, 125 London Wall, London, EC2Y 5AS
The Corporation Trust Company, Corporation Trust Center, 1209 Orange
Street, Wilmington, Delaware 19801
Barnett Way, Gloucester, GL4 3RL
1 More London Place, London, SE1 2AF
100 Cannon Street, London, EC4N 6EU
2 North Queen Street, Belfast, Northern Ireland, BT15 1ES
Suite 6, Rineanna House, Shannon Free Zone, Co. Clare, Ireland
Thurn-Und-Taxis-Platz 6, 60313, Frankfurt am Main, Germany
Hoogoorddreef, 151101BA, Amsterdam, Netherlands
Basisweg 10, Amsterdam, 1043AP, Netherlands
33 Old Broad Street, London, EC2N 1HZ
20 Cathedral Yard, Exeter, EX1 1HB
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22) Citco REIF Services (Luxembourg) S.A., Carré Bonn, 20, Rue de la Poste,
L-2346 Luxembourg
51-59 Circular Road, Douglas, IM1 1AZ, Isle of Man
(23)
(24) Corporation Service Company, 251 Little Falls Drive, Wilmington, DE 19808,
USA
69 Morrison Street, Edinburgh, United Kingdom, EH3 8BW
1 Bartholomew Lane, London, EC2N 2AX, United Kingdom
1, Avenue du Bois, L–1251 Luxembourg
SAB Formalities, 23 Rue de Roule, Paris, 75001, France
Karl-Liebknecht-STR. 5, D-10178 Berlin, Germany
20 Rue de la Poste, L-2346 Luxembourg
Atria One, 144 Morrison Street, Edinburgh, EH3 8EX
26 New Street, St. Helier, Jersey, JE2 3RA
3rd Floor, IFC5, Castle Street, St Helier, JE2 3BY, Jersey
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(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
44 Esplanade, St. Helier, Jersey, JE4 9WG
(36)
Fascinatio Boulevard 1302, 2909VA Capelle aan den IJssel, Netherlands
(37)
Avenida Dr. Chucri Zaidan, n° 296, cj 231 e 51, Bairro Vila Cordeiro, Cidade
(38)
de São Paulo, Estado de São Paulo, Cep 04583-110 Brazil
2nd Floor, Liberation House, Castle Street, St. Helier, JE1 1EY, Jersey
(39)
1 Vine Street, London, W1J 0AH
(40)
50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ
(41)
5th Floor, The Exchange, George’s Dock, IFSC, Dublin 1, Ireland
(42)
110 St. Vincent Street, Glasgow, G2 4QR
(43)
8 Avenue Hoche, 75008, Paris, France
(44)
(45)
Keens House, Anton Mill Road, Andover, Hampshire, SP10 2NQ
(46) Glategny Court, Glategny Esplanade, St. Peter Port, GY1 1WR, Guernsey
(47) Cawley House, Chester Business Park, Chester, CH4 9FB, United Kingdom
6/12, Primrose Road, Bangalore, 560025, India
(48)
(49)
7th Floor 21 Lombard Street London, EC3V 9AH
(50) St William House, Tresillian Terrace, Cardiff, CFl0 5BH
(51)
18th Floor, United Centre, 95 Queensway, Hong Kong
(52) McStay Luby, Dargan House, 21-23 Fenian Street, Dublin 2, Ireland
(53)
(54) Wilmington Trust SP Services (London) Limited, Third Floor, 1 King’s Arms
1A Heienhaff, Senningerberg, L-1736 Luxembourg
Yard, London, EC2R 7AF
1-2 Victoria Buildings, Haddington Road, Dublin 4, Ireland
17 Boulevard F.W. Raiffeisen, L-2411 Luxembourg
Society Building, 8 All Saints Street, London, England, N1 9RL
(55)
(56)
(57)
Subsidiaries and related
undertakings continued
Principal place of business for Collective Investment Vehicles
(1)
(2)
(3)
(4)
(5)
Trinity Road, Halifax, West Yorkshire, HX1 2RG
69 Morrison Street, Edinburgh, United Kingdom, EH3 8BW
Cassini House, 57 St James’s Street, London, SW1A 1LD
20 Churchill Place, Canary Wharf, London, E14 5HJ
Riverside Two Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2,
Ireland
Lemanik Asset Management S.A, 106 route d’Arlon, L-8210, Mamer,
Luxembourg
562, Rue de Neudorf, L-2220, Luxembourg
Abrdn Fund Managers Ltd, 280 Bishopsgate, London, EC2M 4AG
BlackRock Fund Managers Ltd, 12 Throgmorton Avenue, London, EC2N 2DL
BNY Mellon Investment Funds, BNY Mellon Centre, 160 Queen Victoria Street,
London, EC4V 4LA
Invesco Fund Managers Ltd, Perpetual Park, Perpetual Park Drive, Henley-
on-Thames, Oxfordshire, RG9 1HH
(6)
(7)
(8)
(9)
(10)
(11)
(12) MSIM Fund Management (Ireland) Ltd, The Observatory, 7-11 Sir John
(13)
(14)
(15)
Rogerson’s Quay, Dublin 2, DO2 VC42, Ireland
SEI Investments Global Ltd, Styne House, Upper Hatch Street, Dublin 2,
Ireland
70 Sir John Rogerson’s Quay, Dublin 2, Ireland
Schroder Investment Management Ltd, Ten Earlsfort Terrace, Dublin 2, DO2
T380
50 Stratton Street, London, W1J 8LL
UBS Asset Management (UK) Ltd, 5 Broadgate, London, EC2M 2QS
(16)
(17)
(18) Oppenheim Asset Management Services S.à r.l., 2, Boulevard Konrad
Adenauer, L-1115 Luxembourg
5, Rue Hohenhof, L-1736, Senningerberg, Luxembourg
Schroder Personal Wealth (ACD), 25 Gresham Street, London, EC2V 7HN
Thesis Unit Trust Management Ltd, Exchange Building, St. John’s Street,
Chichester, West Sussex, PO19 1UP
3rd Floor South, 55 Baker Street, London, W1U 8EW
(19)
(20)
(21)
(22)
*
+
#
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%
The undertaking is in liquidation
The undertaking is in Administrative Receivership
The undertaking is in Administration
The undertaking has applied for Strike Off
Ordinary Shares
A Ordinary Shares
B Ordinary Shares
Non-Voting Preference Shares
Preference Shares
Non-Voting Deferred Shares
Redeemable Non-voting Shares
^
&
~
‡
∞
Δ
§
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii) C Ordinary Shares
B Ordinary Non-Voting Shares
(ix)
Preferred A Ordinary Shares
(x)
Redeemable Preference Shares
(xi)
(xii)
A4 Ordinary Shares
(xiii) Ordinary Non-Voting Shares
(xiv) Common Stock
(xv)
(xvi) A3 Ordinary Shares
(xvii) A2 Ordinary Shares
(xviii) A1 Ordinary Shares
(xix)
(xx) Ordinary Limited Voting Shares
(xxi)
LN Deferred Shares
(xxii) D Ordinary Shares
(xxiii) E Ordinary Shares
(xxiv) F Ordinary Shares
(xxv) G Ordinary Shares
(xxvi) H Ordinary Shares
(xxvii) I Ordinary Shares
(xxviii) J Ordinary Shares
Preferred B Ordinary Shares
Z Ordinary Shares
360 Lloyds Banking Group Annual Report and Accounts 2022
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. Statements that are not historical or current
facts, including statements about the Group’s or its directors’
and/or management’s beliefs and expectations, are forward
looking statements. Words such as, without limitation, ‘believes’,
‘achieves’, ‘anticipates’, ‘estimates’, ‘expects’, ‘targets’, ‘should’,
‘intends’, ‘aims’, ‘projects’, ‘plans’, ‘potential’, ‘will’, ‘would’, ‘could’,
‘considered’, ‘likely’, ‘may’, ‘seek’, ‘estimate’, ‘probability’, ‘goal’,
‘objective’, ‘deliver’, ‘endeavour’, ‘prospects’, ‘optimistic’ and similar
expressions or variations on these expressions are intended to
identify forward looking statements. These statements concern or
may affect future matters, including but not limited to: projections
or expectations of the Group’s future financial position, including
profit attributable to shareholders, provisions, economic profit,
dividends, capital structure, portfolios, net interest margin,
capital ratios, liquidity, risk-weighted assets (RWAs), expenditures
or any other financial items or ratios; litigation, regulatory
and governmental investigations; the Group’s future financial
performance; the level and extent of future impairments and
write-downs; the Group’s ESG targets and/or commitments;
statements of plans, objectives or goals of the Group or its
management and other statements that are not historical fact;
expectations about the impact of COVID-19; 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 include, but are not limited to: general economic
and business conditions in the UK and internationally; political
instability including as a result of any UK general election and any
further possible referendum on Scottish independence; acts of
hostility or terrorism and responses to those acts, or other such
events; geopolitical unpredictability; the war between Russia and
Ukraine; the tensions between China and Taiwan; market related
risks, trends and developments; exposure to counterparty risk;
instability in the global financial markets, including within the
Eurozone, and as a result of the exit by the UK from the European
Union (EU) and the effects of the EU-UK Trade and Cooperation
Agreement; the ability to access sufficient sources of capital,
liquidity and funding when required; changes to the Group’s
credit ratings; fluctuations in interest rates, inflation, exchange
rates, stock markets and currencies; volatility in credit markets;
volatility in the price of the Group’s securities; tightening of
monetary policy in jurisdictions in which the Group operates;
natural pandemic (including but not limited to the COVID-19
pandemic) and other disasters; risks concerning borrower and
counterparty credit quality; risks affecting insurance business
and defined benefit pension schemes; risks related to the
uncertainty surrounding the integrity and continued existence
of reference rates; changes in laws, regulations, practices and
accounting standards or taxation; changes to regulatory capital
or liquidity requirements and similar contingencies; the policies
and actions of governmental or regulatory authorities or courts
together with any resulting impact on the future structure of
the Group; risks associated with the Group’s compliance with
a wide range of laws and regulations; assessment related to
resolution planning requirements; risks related to regulatory
actions which may be taken in the event of a bank or Group
failure; exposure to legal, regulatory or competition proceedings,
investigations or complaints; failure to comply with anti-money
laundering, counter terrorist financing, anti-bribery and sanctions
regulations; failure to prevent or detect any illegal or improper
activities; operational risks; conduct risk; 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; technological failure; inadequate or
failed internal or external processes or systems; risks relating to
ESG matters, such as climate change (and achieving climate
change ambitions), including the Group’s ability along with the
government and other stakeholders to measure, manage and
mitigate the impacts of climate change effectively, and human
rights issues; the impact of competitive conditions; failure to
attract, retain and develop high calibre talent; the ability to
achieve strategic objectives; the ability to derive cost savings and
other benefits including, but without limitation, as a result of any
acquisitions, disposals and other strategic transactions; inability
to capture accurately the expected value from acquisitions;
assumptions and estimates that form the basis of the Group’s
financial statements; and potential changes in dividend policy.
A number of these influences and factors are beyond the Group’s
control. Please refer to the latest Annual Report on Form 20-F filed
by Lloyds Banking Group plc with the US Securities and Exchange
Commission (the SEC), which is available on the SEC’s website at
www.sec.gov, for a discussion of certain factors and risks. Lloyds
Banking Group plc may also make or disclose written and/or
oral forward-looking statements in other written materials and
in oral statements made by the directors, officers or employees
of Lloyds Banking Group plc 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 whether as a result of new information, future
events or otherwise. 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.
This report is printed on Amadeus Silk paper and board, Forest
Stewardship Council® (FSC®) certified and sourced from well
managed forests and other controlled sources. The paper is
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The inks used are vegetable oil based and 100% of the dry waste
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Printed in the UK by Pureprint Group, CarbonNeutral®, ISO 14001 and
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Lloyds Banking Group Annual Report and Accounts 2022
361
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