SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
20
February 2020
LLOYDS BANKING GROUP
plc
(Translation of registrant's name into
English)
5th Floor
25 Gresham Street
London
EC2V 7HN
United Kingdom
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F..X.. Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes
No ..X..
If
"Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule
12g3-2(b):
82- ________
Index
to Exhibits
Item
No.
1 Regulatory News Service Announcement, dated 20 February
2020
re: 2019
Annual Report and Accounts
20
February 2020
LLOYDS BANKING GROUP PLC – ANNUAL REPORT AND
ACCOUNTS
FOR THE YEAR ENDED 31 DECEMBER 2019
In
accordance with Listing Rule 9.6.1, Lloyds Banking Group plc has
submitted today the following document to the National Storage
Mechanism.
●
Annual Report and
Accounts 2019
This
document will shortly be available for inspection at
http://www.morningstar.co.uk/uk/NSM
A copy
of the Annual Report and Accounts 2019 is available through the
‘Investors & Performance’ section of our website
www.lloydsbankinggroup.com
This
announcement also contains additional information for the purposes
of compliance with the Disclosure Guidance and Transparency Rules,
including principal risk factors, details of related party
transactions and a responsibility statement. This information is
extracted, in full unedited text, from the Annual Report and
Accounts 2019 (the ‘Annual
Report’). References to page numbers and notes to the
accounts made in the following Appendices, refer to page numbers
and notes to the accounts in the Annual Report. The 2019 Results
News Release made on 20 February 2019 contained a condensed set of
financial statements, the Group Chief Executive’s statement
and the Chief Financial Officer’s review.
-END-
For
further information:
Investor Relations
Douglas
Radcliffe
+44 (0)20 7356
1571
Group
Investor Relations Director
Corporate Affairs
Matt
Smith
+44 (0)20 7356
3522
Head of
Media Relations
FORWARD LOOKING STATEMENTS
This
document contains certain forward looking statements within the
meaning of Section 21E of the US Securities Exchange Act of 1934,
as amended, and section 27A of the US Securities Act of 1933, as
amended, with respect to the business, strategy, plans and/or
results of Lloyds Banking Group plc together with its subsidiaries
(the Group) and its current goals and expectations relating to its
future financial condition and performance. Statements that are not
historical facts, including statements about the Group's or its
directors' and/or management's beliefs and expectations, are
forward looking statements. Words such as ‘believes’,
‘anticipates’, ‘estimates’,
‘expects’, ‘intends’, ‘aims’,
‘potential’, ‘will’, ‘would’,
‘could’, ‘considered’,
‘likely’, ‘estimate’ and variations of
these words and similar future or conditional expressions are
intended to identify forward looking statements but are not the
exclusive means of identifying such statements. Examples of such
forward looking statements include, but are not limited to:
projections or expectations of the Group’s future financial
position including profit attributable to shareholders, provisions,
economic profit, dividends, capital structure, portfolios, net
interest margin, capital ratios, liquidity, risk-weighted assets
(RWAs), expenditures or any other financial items or ratios;
litigation, regulatory and governmental investigations; the
Group’s future financial performance; the level and extent of
future impairments and write-downs; statements of plans, objectives
or goals of the Group or its management including in respect of
statements about the future business and economic environments in
the UK and elsewhere including, but not limited to, future trends
in interest rates, foreign exchange rates, credit and equity market
levels and demographic developments; statements about competition,
regulation, disposals and consolidation or technological
developments in the financial services industry; and statements of
assumptions underlying such statements. By their nature, forward
looking statements involve risk and uncertainty because they relate
to events and depend upon circumstances that will or may occur in
the future. Factors that could cause actual business, strategy,
plans and/or results (including but not limited to the payment of
dividends) to differ materially from forward looking statements
made by the Group or on its behalf include, but are not limited to:
general economic and business conditions in the UK and
internationally; market related trends and developments;
fluctuations in interest rates, inflation, exchange rates, stock
markets and currencies; any impact of the transition from IBORs to
alternative reference rates; the ability to access sufficient
sources of capital, liquidity and funding when required; changes to
the Group’s credit ratings; the ability to derive cost
savings and other benefits including, but without limitation as a
result of any acquisitions, disposals and other strategic
transactions; the ability to achieve strategic objectives; changing
customer behaviour including consumer spending, saving and
borrowing habits; changes to borrower or counterparty credit
quality; concentration of financial exposure; management and
monitoring of conduct risk; instability in the global financial
markets, including Eurozone instability, instability as a result of
uncertainty surrounding the exit by the UK from the European Union
(EU) and as a result of such exit and the potential for other
countries to exit the EU or the Eurozone and the impact of any
sovereign credit rating downgrade or other sovereign financial
issues; political instability including as a result of any UK
general election; technological changes and risks to the security
of IT and operational infrastructure, systems, data and information
resulting from increased threat of cyber and other attacks;
natural, pandemic and other disasters, adverse weather and similar
contingencies outside the Group’s control; inadequate or
failed internal or external processes or systems; acts of war,
other acts of hostility, terrorist acts and responses to those
acts, geopolitical, pandemic or other such events; risks relating
to climate change; changes in laws, regulations, practices and
accounting standards or taxation, including as a result of the exit
by the UK from the EU, or a further possible referendum on Scottish
independence; changes to regulatory capital or liquidity
requirements and similar contingencies outside the Group’s
control; the policies, decisions and actions of governmental or
regulatory authorities or courts in the UK, the EU, the US or
elsewhere including the implementation and interpretation of key
legislation and regulation together with any resulting impact on
the future structure of the Group; the ability to attract and
retain senior management and other employees and meet its diversity
objectives; actions or omissions by the Group's directors,
management or employees including industrial action; changes to the
Group's post-retirement defined benefit scheme obligations; the
extent of any future impairment charges or write-downs caused by,
but not limited to, depressed asset valuations, market disruptions
and illiquid markets; the value and effectiveness of any credit
protection purchased by the Group; the inability to hedge certain
risks economically; the adequacy of loss reserves; the actions of
competitors, including non-bank financial services, lending
companies and digital innovators and disruptive technologies; and
exposure to regulatory or competition scrutiny, legal, regulatory
or competition proceedings, investigations or complaints. Please
refer to the latest Annual Report or Form 20-F filed by Lloyds
Banking Group plc with the US Securities and Exchange Commission
for a discussion of certain factors and risks together with
examples of forward looking statements. Lloyds Banking Group may
also make or disclose written and/or oral forward looking
statements in reports filed with or furnished to the US Securities
and Exchange Commission, Lloyds Banking Group annual reviews,
half-year announcements, proxy statements, offering circulars,
prospectuses, press releases and other written materials and in
oral statements made by the directors, officers or employees of
Lloyds Banking Group to third parties, including financial
analysts. Except as required by any applicable law or regulation,
the forward looking statements contained in this document are made
as of today's date, and the Group expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward looking statements contained in this
document to reflect any change in the Group’s expectations
with regard thereto or any change in events, conditions or
circumstances on which any such statement is based. The
information, statements and opinions contained in this document do
not constitute a public offer under any applicable law or an offer
to sell any securities or financial instruments or any advice or
recommendation with respect to such securities or financial
instruments.
Appendix 1 – Principal risks and uncertainties
Principal Risks and Uncertainties
The
principal risks and uncertainties relating to Lloyds Banking Group
plc are set out on pages 42 – 46 of the Annual Report and
Accounts. The following is extracted in full and unedited from the
report:
Principal risks and uncertainties are reported regularly to the
Board Risk Committee. Change / execution, data and operational
resilience have been elevated from existing risks to principal
risks during 2019, and strategic added as a new principal
risk.
New – Change / Execution
The
risk that, in delivering our change agenda, we fail to ensure
compliance with laws and regulation, maintain effective customer
service and availability, and/or operate within our approved risk
appetite.
Example
Ineffective
change/execution risk management could lead to increased periods of
time where we cannot serve our customers, and could lead to impacts
associated with other risk types such as regulatory
censure
Risk
Appetite
We have
limited appetite for negative impacts on customers, colleagues, or
the Group as a result of change activity.
Mitigation
●
Continued focus on
strengthening the control environment, maturation of the change
policy and associated policies and procedures, which set out the
principles and key controls that apply across the business and are
aligned to the Group risk appetite. Senior Management continue to
drive improvements to Change and Execution Risk metrics, in
particular those affecting customers and colleagues.
●
Businesses assess
the potential impacts of undertaking any change activity on their
ability to execute effectively, and the potential consequences for
the existing risk profiles.
Further
detail on principal risk, including mitigation on page
139.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
We
recognise the importance of delivering the Group’s Strategic
priorities and will continue to invest in the transformation of the
Group to deliver a leading customer experience.
New
principal risk
Change
and Execution risk was elevated from a secondary risk to a
principal risk in recognition of the significant volumes of complex
change the Group is currently undertaking to deliver its strategy.
This includes key change initiatives, digitising the Group and
transforming ways of working which will help to future-proof
against the heightened risks associated with the use of new
technologies and manage regulatory requirements and expectations.
The decision aligns with the Group’s progress in developing
and embedding its change and execution risk management
capabilities.
New – Data
The
risk that we fail to effectively govern, manage, and control our
data (including data processed by third party suppliers) leading to
unethical decisions, poor customer outcomes, loss of value to us
and mistrust
Example
The
loss of trust from customers, colleagues, business partners or
regulators arising from a failure to manage and control our
data.
Risk
Appetite
We have
limited appetite for material events or losses that occur due to
the inappropriate use of data.
Mitigation
●
Significant
investment has been made to enhance the maturity of data risk
management in recent years.
●
In addition to the
General Data Protection programme which delivered the necessary
infrastructure to achieve compliance with the new regulations in
May 2018, a number of other large investments have been
made.
Further
detail on principal risk, including mitigation on page
139.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
●
The quality of the
data that the Group holds and the choices we make in how it is used
is a key strategic enabler to future business growth, delivering a
leading customer experience and Helping Britain
Prosper.
●
We recognise that
lawful, fair and transparent collection and appropriate use of
data, is critical to delivering a leading customer experience and
maintaining trust across the wider industry.
●
Internal programmes
ensure that data is used correctly, and the control environment is
regularly assessed through both internal and third-party
testing.
New
principal risk
Data
was elevated from a secondary risk to a principal risk as one of
our most valuable assets. It is critical to our business and is the
subject of significant regulatory oversight and media focus. Our
Group is trusted with large volumes of data, and we must ensure
that the information we hold is accurate, secure and managed
appropriately.
New – Operational Resilience
The
risk that we fail to design resilience into business operations,
underlying infrastructure and controls (people, process,
technology) so that it is able to withstand external or internal
events which could impact the continuation of operations, and fails
to respond in a way which meets customer and stakeholder
expectations and needs when the continuity of operations is
compromised.
Example
Ineffective
risk management could lead to vital services not being available to
customers and stakeholders.
Risk
Appetite
We have
a limited appetite for disruption to services to customers and
stakeholders from significant unexpected events.
Mitigation
The
Group has increased its focus on operational resilience and has
updated its strategy to reflect changing priorities of both
customers and regulators.
Further
detail on principal risk, including mitigation on page
140.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
●
End-to-end
resilience of our critical processes is a key strategic priority
and the Group operational resilience programmes continue to invest
in improving our control environment and resilience. We continue to
exercise, test and improve our resilience through scenario testing
as well as learning from real events (those impacting ourselves but
also those impacting others) through understanding the root
cause.
●
We recognise the
importance of the Group’s operational resilience to our
customers, markets and the wider financial sector.
New
principal risk
Operational
resilience was elevated from a secondary risk to a principal risk
as our ability to continue operations when subject to internal or
external incidents, safeguarding our most critical processes and
assets, protecting our colleagues, continuing to service our
customers and minimising any impact on the banking systems is
crucial.
New – Strategic
The
risks which result from strategic plans which do not adequately
reflect trends in external factors, ineffective business strategy
execution, or failure to respond in a timely manner to external
environments or changes in stakeholder behaviours and
expectations.
Example
●
The financial
services sector operates in evolving regulatory and competitive
environment with an increased pace, scale and complexity of change
which creates a risk to the Group’s strategic
plans.
●
Shareholder
expectations continue to evolve potentially impacting the
Group’s role in society.
●
Greater competition
for specialist skill sets (such as data science and engineering),
alongside demographic challenges in the working population, may
result in a skills shortage impacting delivery of key strategic
initiatives.
Risk
Appetite
We have
business plans that are responsive to internal and external factors
including changes to the regulatory, macroeconomic and competitive
environments.
Mitigation
Continued
digitisation of customer journeys, thereby enabling the delivery of
market leading customer experiences that are seamless, accessible
and personal. Robust operating and contingency planning to ensure
potential impacts of strategic initiatives and external drivers are
mitigated.
Further
detail on principal risk, including mitigation on page
141.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
The
Group’s forward looking approach to managing strategic risk
will help the Group identify new risks and opportunities, and allow
the Group to be better prepared to respond to changes in the
regulatory and competitive environments.
New
principal risk
Strategic
risk is a new principal risk in acknowledgment of the increasing
rate of change in customer expectations, regulatory and competitive
environments along with the demands for specialist skills to meet
these evolving needs. This aligns with our strategic priorities to
deliver a leading customer experience by digitising the Group,
maximising Group capabilities and transforming ways of
working
Credit
The
risk that parties with whom we have contracted, fail to meet their
financial obligations (both on and off balance sheet).
Example
Observed
or anticipated changes in the economic environment could impact
profitability due to an increase in delinquency, defaults,
write-downs and/or expected credit losses.
Risk
Appetite
We have
a conservative and well balanced credit portfolio through the
economic cycle, generating an appropriate return on equity, in line
with our target return on equity in aggregate.
Mitigation
●
Prudent, through
the cycle credit principles, risk policies and appetite
statements.
●
Robust models and
controls.
Further
detail on principal risk, including mitigation on page
142.
Alignment
to strategic priorities and future focus:
Maximising
Group capabilities
●
We seek to support
sustainable growth in our targeted segments. We have a conservative
and well-balanced credit portfolio, managed through the economic
cycle and supported by strong credit portfolio
management.
●
We are committed to
better addressing our customers’ banking needs through
consistent, fair and responsible credit risk decisions, aligned to
customers’ circumstances, whilst staying within prudent risk
appetite.
●
Portfolios have
benefitted from relatively favourable economic conditions and a
prolonged period of low interest rates. Underlying impairments
remain below long-term level, but are expected to increase as
impairments normalise.
Key
risk indicators
£1,291m
Impairment
charge
2018:
£937m
1.8%
Stage 3
loans and advances as a % of total
2018:
1.9%
Regulatory and Legal
The
risk of financial penalties, regulatory censure, criminal or civil
enforcement action or customer detriment as a result of failure to
identify, assess, correctly interpret, comply with, or manage
regulatory and/or legal requirements.
Example
Failure
to deliver key regulatory changes or to comply with ongoing
requirements.
Risk
Appetite
We
interpret and comply with all relevant regulation and all
applicable laws (including codes of conduct which could have legal
implications) and/or legal obligations.
Mitigation
●
Group policies and
procedures set out the principles and key controls that should
apply across the business which are aligned to the Group risk
appetite.
●
Business units
identify, assess and implement policy and regulatory requirements
and establish local controls, processes, procedures and resources
to ensure appropriate governance and compliance.
Further
detail on principal risk, including mitigation on page
162.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
●
We are committed to
operating sustainably and responsibly, and commit significant
resource and expense to ensure we meet our legal and regulatory
obligations.
●
We respond as
appropriate to impending legislation, regulation and associated
consultations and participate in industry bodies. We continue to be
proactive in responding to significant ongoing and new legislation,
regulation and court proceedings.
Conduct
The
risk of customer detriment across the customer lifecycle including:
failures in product management, distribution and servicing
activities; from other risks materialising, or other activities
which could undermine the integrity of the market or distort
competition, leading to unfair customer outcomes, regulatory
censure, reputational damage or financial loss.
Example
The
most significant conduct cost in recent years has been PPI
mis-selling.
Risk
Appetite
We
deliver fair outcomes for our customers.
Mitigation
●
Simplified and
enhanced conduct policies and procedures in place to ensure
appropriate controls and processes that deliver fair customer
outcomes, and support market integrity and competition
requirements.
●
Active engagement
with regulatory bodies and other stakeholders to develop
understanding of concerns related to customer treatment, effective
competition and market integrity, to ensure that the Group’s
strategic conduct focus continues to meet evolving stakeholder
expectations.
Further
detail on principal risk, including mitigation on page
163.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
●
As we transform our
business, minimising conduct risk is critical to achieving our
strategic goals and meeting regulatory standards.
●
We have senior
committees that ensure our focus on embedding a customer-centric
culture and delivering fair outcomes across the Group. Our conduct
risk framework continues to support this through robust and
effective management. This supports our vision of being the best
bank for customers, enabling the delivery of a leading customer
experience through effective root cause analysis and learning from
customer feedback.
Operational
The
risk of loss from inadequate or failed internal processes, people
and systems, or from external events.
Example
Ineffective
risk management could lead to adverse customer impact, reputational
damage and financial loss, across all of our principal
risks.
Risk
Appetite
We have
robust controls in place to manage operational losses, reputational
events and regulatory breaches. We identify and assess emerging
risks and act to mitigate these.
Mitigation
●
The Group continues
to review and invest in its control environment to ensure it
addresses the inherent risks faced.
●
The Group employs a
range of risk management strategies, including: avoidance,
mitigation, transfer (including insurance) and
acceptance.
Further
detail on principal risk, including mitigation on page
164.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
The
Group continues to manage operational risk within the appetite
articulated by the Board and in compliance with legal &
regulatory requirements to ensure a robust control environment and
a positive customer experience.
People
The
risk that we fail to provide an appropriate colleague and
customer-centric culture, supported by robust reward and wellbeing
policies and processes; effective leadership to manage colleague
resources; effective talent and succession management; and robust
control to ensure all colleague-related requirements are
met.
Example
Inability
to attract or retain colleagues with key skills could impact the
achievement of business objectives.
Risk
Appetite
We lead
responsibly and proficiently, manage people resource effectively,
support and develop colleague talent, and meet legal and regulatory
obligations related to our people.
Mitigation
●
Focusing on
leadership and colleague engagement, through delivery of strategies
to attract, retain and develop high calibre people together with
implementation of rigorous succession planning.
●
Continued focus on
the Group’s culture by developing and delivering initiatives
that reinforce the appropriate behaviours which generate the best
possible long-term outcomes for customers and
colleagues.
Further
detail on principal risk, including mitigation on page
165.
Alignment
to strategic priorities and future focus:
Transforming
ways of working
Regulatory
requirements relating to personal accountability and remuneration
rules could affect our ability to attract and retain the calibre of
colleagues required to meet changing customer needs. We recognise
the challenges in delivering the Group’s strategic priorities
and we will continue to invest in the development of colleague
capabilities and agile working practices. This investment will
deliver a leading customer experience and allow the Group to
respond quickly to customers’ rapidly changing
decision-making in a digital era.
Insurance Underwriting
The
risk of adverse developments in the timing, frequency and severity
of claims for insured / underwritten events and in customer
behaviour, leading to reductions in earnings and / or
value.
Example
Uncertain
property insurance claims impact Insurance earnings and capital,
e.g. extreme weather conditions, such as flooding, can result in
high property damage claims.
Risk
Appetite
We have
robust controls in place to manage the insurance underwriting risk
inherent in the products our Insurance business offers to meet
customer needs.
Mitigation
●
General Insurance
exposure to accumulations of risk and possible catastrophes is
mitigated by reinsurance arrangements broadly spread over different
reinsurers.
●
Insurance processes
on underwriting, claims management, pricing and product
design.
Further
detail on principal risk, including mitigation on page
166.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
●
We are committed to
meeting the changing needs of customers by working to provide a
range of insurance products via multiple channels. The focus is on
delivering a leading customer experience by helping customers
protect themselves today whilst preparing for a secure financial
future.
●
Strategic growth
initiatives within Insurance are developed and managed in line with
a defined risk appetite, aligned to the Group risk appetite and
strategy.
Key
risk indicators
£17,515m
Insurance
(Life and pensions present value of new business
premiums)
2018:
£14,384m
£671m
General
insurance underwritten total gross written premiums
2018:
£690m
Capital
The
risk that we have a sub-optimal quantity or quality of capital or
that capital is inefficiently deployed across the
Group.
Example
●
A worsening
macroeconomic environment could lead to adverse financial
performance, which could deplete capital resources and/ or increase
capital requirements due to a deterioration in customers’
creditworthiness.
●
Alternatively a
shortage of capital could arise from an increase in the amount of
capital that needs to be held.
Risk
Appetite
We
maintain capital levels commensurate with a prudent level of
solvency and aim to deliver consistent and high quality returns to
shareholders.
Mitigation
●
The Group has a
capital management framework that includes the setting of capital
risk appetite.
●
The Group maintains
a recovery plan which sets out a range of potential mitigating
actions that could be taken in response to a stress.
Further
detail on principal risk, including mitigation on page
167.
Alignment
to strategic priorities and future focus:
Maximising
the Group’s capabilities
Ensuring
we hold an appropriate level of capital to maintain financial
resilience and market confidence underpins our strategic objectives
of supporting the UK economy, and growth in targeted segments
through the cycle.
Key
risk indicators
13.8%1
CET 1
ratio
2018:
13.9%1,
2
5.2%1
UK
leverage ratio
2018:
5.6%1
1 Proforma basis
2 Incorporates the effects of the share buyback announced in
February 2019.
Funding and Liquidity
Funding
risk is the risk that we do not have sufficiently stable and
diverse sources of funding or the funding structure is inefficient.
Liquidity risk is the risk that we do not have sufficient financial
resources to meet our commitments when they fall due, or can only
secure them at excessive cost.
Example
A
deterioration in either our or the UK’s credit rating, or a
sudden and significant withdrawal of customer deposits, would
adversely impact our funding and liquidity position.
Risk
Appetite
We
maintain a prudent liquidity profile and a balance sheet structure
that limits our reliance on potentially volatile sources of
funding.
Mitigation
●
The Group manages
and monitors liquidity risks and ensures that liquidity risk
management systems and arrangements are adequate with regard to the
internal risk appetite, Group strategy and regulatory
requirements.
●
The Group’s
funding and liquidity position is underpinned by its significant
customer deposit base, and is supported by strong relationships
across customer segments.
Further
detail on principal risk, including mitigation on page
175.
Alignment
to strategic priorities and future focus:
Maximising
the Group’s capabilities
●
We maintain a
strong funding position in line with our low risk strategy, and the
loan to deposit ratio remains within our target range.
●
Our funding
position allows us to grow targeted business segments, and better
address our customers’ needs
Key
risk indicators
£118bn
LCR
eligible assets
2018:
£129bn
107%
Loan to
deposit ratio
1 Jan
2018: 107%
Governance
The
risk that our organisational infrastructure fails to provide robust
oversight of decision making and the control mechanisms to ensure
strategies and management instructions are implemented
effectively.
Examples
●
Inadequate or
complex governance arrangements to address ring-fencing
requirements and the potential impact of EU exit could result in a
weaker control environment, delays in decision making and lack of
clear accountability.
●
Non-compliance
with, or breaches of SMCR requirements could result in lack of
clear accountability, and legal and regulatory
consequences.
Risk
Appetite
We have
governance arrangements that support the effective long-term
operation of the business, maximise shareholder value and meet
regulatory and societal expectations.
Mitigation
●
Defining individual
and collective accountabilities for risk management, risk oversight
and risk assurance through a three lines of defence model which
supports the discharge of responsibilities to customers,
shareholders and regulators.
●
Outlining
governance arrangements which articulate the enterprise-wide
approach to risk management.
Further
detail on principal risk, including mitigation on page
181.
Alignment
to strategic priorities and future focus:
Delivering
a leading customer experience
●
Ring-fencing
ensures that we are safer and continue to deliver a leading
customer experience by providing further protection to core retail
and SME deposits, increasing transparency of our operations and
facilitating the options available in resolution.
●
Our governance
framework and strong culture of ownership and accountability
enabled effective, on time, compliance with the SMCR requirements
and enable us to demonstrate clear accountability for
decisions.
Market
The
risk that our capital or earnings profile is affected by adverse
market rates, in particular interest rates and credit spreads in
the banking business, equity, credit spreads and interest rates in
the Insurance business, and credit spreads in the Group’s
defined benefit pension schemes.
Examples
●
Earnings are
impacted by our ability to forecast and model customer behaviour
accurately and establish appropriate hedging
strategies.
●
The Insurance
business is exposed indirectly to equity risk through the value of
future management charges on policyholder funds. Credit spread and
interest rate risk within the Insurance business primarily arises
from bonds and loans used to back annuities.
●
Narrowing credit
spreads will increase the cost of pension scheme
benefits.
Risk
Appetite
We have
robust controls in place to manage our inherent market risk and do
not engage in any proprietary trading, reflecting the customer
focused nature of the Group’s activities.
Mitigation
●
Structural hedge
programmes implemented to manage liability margins and margin
compression.
●
Equity and credit
spread risks are closely monitored and, where appropriate, asset
and liability matching is undertaken.
●
The Group’s
defined benefit pension schemes continue to monitor their credit
allocation as well as the hedges in place against nominal rate and
inflation movements.
Further
detail on principal risk, including mitigation on page
183.
Alignment
to strategic priorities and future focus:
Maximising
the Group’s capabilities
●
We actively manage
our exposure to movements in market rates, to drive lower
volatility earnings and offer a comprehensive customer proposition
with hedging strategies to support strategic aims. Mitigating
actions are implemented to reduce the impact of market movements,
resulting in a more stable capital position.
●
Effective interest
rate and inflation hedging has kept volatility in the Group’s
defined benefit pension schemes low. This combined with improved
market conditions has helped keep the schemes in IAS 19 surplus in
2019. This allows us to more efficiently utilise available capital
resources.
Key
risk indicators
£550m
IAS 19
Pension surplus
2018:
£1,146m
Model
The
risk of financial loss, regulatory censure, reputational damage or
customer detriment, as a result of deficiencies in the development,
application and ongoing operation of Models and Rating
Systems.
Example:
The
consequences of inadequate models could include: inappropriate
levels of capital or impairments; inappropriate credit or pricing
decisions; and adverse impacts on funding or liquidity, or the
Group’s earnings and profits.
Risk
Appetite
Material
models are performing in line with expectations.
Mitigation
The
model risk management framework, established by and with continued
oversight from an independent team in the Risk division, provides
the foundation for managing and mitigating model risk within the
Group.
Further
detail on principal risk, including mitigation on page
187.
Alignment
to strategic priorities and future focus:
Digitising
the Group
Our
models play a vital role in supporting our Group strategy to ensure
profitable growth in targeted segments and the drive toward
automation and digital solutions to enhance customer outcomes.
Model risk management helps ensure these models are implemented in
a controlled and safe manner for both ourselves and
customers.
Appendix 2 – Related Party Transactions
The
following statements regarding related party transactions of Lloyds
Banking Group plc are set out on pages 271 to 272 of the Annual
Report. The following is extracted in full and unedited form from
the Annual Report.
Note 47: Related party transactions
Key management personnel
Key
management personnel are those persons having authority and
responsibility for planning, directing and controlling the
activities of an entity; the Group’s key management personnel
are the members of the Lloyds Banking Group plc Group Executive
Committee together with its Non‑Executive
Directors.
The
table below details, on an aggregated basis, key management
personnel compensation:
|
2019
£m
|
2018
£m
|
2017
£m
|
Compensation
|
|
|
|
Salaries
and other short-term benefits
|
15
|
14
|
13
|
Post-employment
benefits
|
–
|
–
|
–
|
Share-based
payments
|
15
|
18
|
22
|
Total compensation
|
30
|
32
|
35
|
Aggregate
contributions in respect of key management personnel to defined
contribution pension schemes were £nil (2018: £nil; 2017:
£0.05 million) .
|
2019
million
|
2018
million
|
2017
million
|
Share option plans
|
|
|
|
At 1
January
|
–
|
1
|
3
|
Granted,
including certain adjustments (includes
entitlements of appointed key management personnel)
|
–
|
–
|
–
|
Exercised/lapsed
(includes entitlements of former key management
personnel)
|
–
|
(1)
|
(2)
|
At 31 December
|
–
|
–
|
1
|
|
2019
million
|
2018
million
|
2017
million
|
Share plans
|
|
|
|
At 1
January
|
84
|
82
|
65
|
Granted,
including certain adjustments (includes entitlements of appointed
key management personnel)
|
46
|
39
|
37
|
Exercised/lapsed
(includes entitlements of former key management
personnel)
|
(29)
|
(37)
|
(20)
|
At 31 December
|
101
|
84
|
82
|
The
tables below detail, on an aggregated basis, balances outstanding
at the year end and related income and expense, together with
information relating to other transactions between the Group and
its key management personnel:
|
2019
£m
|
2018
£m
|
2017
£m
|
Loans
|
|
|
|
At 1
January
|
2
|
2
|
4
|
Advanced
(includes loans of appointed key management personnel)
|
1
|
1
|
1
|
Repayments
(includes loans of former key management personnel)
|
(1)
|
(1)
|
(3)
|
At 31 December
|
2
|
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
6.45 per cent and 24.20 per cent in 2019 (2018: 6.70 per cent and
24.20 per cent; 2017: 6.45 per cent and 23.95 per cent)
.
No
provisions have been recognised in respect of loans given to key
management personnel (2018 and 2017: £nil) .
|
2019
£m
|
2018
£m
|
2017
£m
|
Deposits
|
|
|
|
At 1
January
|
20
|
20
|
12
|
Placed
(includes deposits of appointed key management
personnel)
|
44
|
33
|
41
|
Withdrawn
(includes deposits of former key management personnel)
|
(41)
|
(33)
|
(33)
|
At 31 December
|
23
|
20
|
20
|
Deposits
placed by key management personnel attracted interest rates of up
to 3.0 per cent (2018: 3.5 per cent; 2017: 4.0 per cent)
.
At 31
December 2019, the Group did not provide any guarantees in respect
of key management personnel (2018 and 2017: none) .
At 31
December 2019, transactions, arrangements and agreements entered
into by the Group’s banking subsidiaries with directors and
connected persons included amounts outstanding in respect of loans
and credit card transactions of £0.6 million with four
directors and two connected persons (2018: £0.5 million with
three directors and three connected persons; 2017: £0.01
million with three directors and two connected persons)
.
Subsidiaries
Details
of the Group’s subsidiaries and related undertakings are
provided on pages 332 to 337. In accordance with IFRS 10
Consolidated financial statements, transactions and balances with
subsidiaries have been eliminated on consolidation.
Pension funds
The
Group provides banking and some investment management services to
certain of its pension funds. At 31 December 2019, customer
deposits of £169 million (2018: £225 million) and
investment and insurance contract liabilities of £127 million
(2018: £79 million) related to the Group’s pension
funds.
Collective investment vehicles
The
Group manages 141 (2018: 131) collective investment vehicles, such
as Open Ended Investment Companies (OEICs) and of these 75 (2018:
82) are consolidated. The Group invested £804 million (2018:
£620 million) and redeemed £1,771 million (2018:
£404 million) in the unconsolidated collective investment
vehicles during the year and had investments, at fair value, of
£3,417 million (2018: £2,513 million) at 31 December. The
Group earned fees of £127 million from the unconsolidated
collective investment vehicles during 2019 (2018: £128
million) .
Joint ventures and associates
At 31
December 2019 there were loans and advances to customers of
£75 million (2018: £57 million) outstanding and balances
within customer deposits of £5 million (2018: £2 million)
relating to joint ventures and associates.
In
addition to the above balances, the Group has a number of other
associates held by its venture capital business that it accounts
for at fair value through profit or loss. At 31 December 2019,
these companies had total assets of approximately £4,761
million (2018: £4,091 million) , total liabilities of
approximately £5,322 million (2018: £4,616 million) and
for the year ended 31 December 2019 had turnover of approximately
£4,286 million (2018: £4,522 million) and made a loss of
approximately £190 million (2018: net loss of £125
million). In addition, the Group has provided £1,266 million
(2018: £1,141 million) of financing to these companies on
which it received £86 million (2018: £49 million) of
interest income in the year.
As
discussed in note 23, in October 2019, the Group established a
wealth management joint venture with Schroders. The Group
subsequently transferred approximately £12 billion of managed
assets at fair value.
Appendix 3 – Directors’ Responsibility
Statement
The
following statement is extracted from page 97 of the Annual Report.
The following is extracted in full and unedited form from the
Annual Report. This statement relates solely to the Annual Report
and is not connected to the extracted information set out in this
announcement or the 2019 Results News Release dated 20 February
2020.
Statement of directors’ responsibilities
The
Directors are responsible for preparing the annual report, the
Directors’ remuneration report and the financial statements
in accordance with applicable law and regulations. Company law
requires the Directors to prepare financial statements for each
financial year. Under that law, the Directors have prepared the
Group and parent Company financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union. Under company law, the Directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the Group
and the Company and of the profit or loss of the Company and Group
for that period. In preparing these financial statements, the
Directors are required to: select suitable accounting policies and
then apply them consistently; make judgements and accounting
estimates that are reasonable and prudent; and state whether
applicable IFRSs as adopted by the European Union have been
followed.
The
Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company
and the
Group and enable them to ensure that the financial statements and
the Directors’ remuneration report comply with the Companies
Act 2006 and, as regards the Group financial statements, Article 4
of the IAS Regulation. They are also responsible for safeguarding
the assets of the Company and the Group and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
A copy
of the financial statements is placed on our website at
www.lloydsbankinggroup.com/investors/financial-performance. The
Directors are responsible for the maintenance and integrity of the
Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Each of
the current Directors who are in office as at the date of this
report, and whose names and functions are listed on pages 66 to 67
of this annual report, confirm that, to the best of his or her
knowledge:
●
the Group financial
statements, which have been prepared in accordance with IFRSs as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and Group; and;
●
the management
report contained in the strategic report and the Directors’
report includes a fair review of the development and performance of
the business and the position of the Company and the Group together
with a description of the principal risks and uncertainties they
face.
The
Directors consider that the annual report and accounts, taken as a
whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the
Company’s position and performance, business model and
strategy. The Directors have also separately reviewed and approved
the strategic report.
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LLOYDS
BANKING GROUP plc
(Registrant)
By: Douglas
Radcliffe
Name: Douglas
Radcliffe
Title: Group
Investor Relations Director
Date: 20
February 2020