REG - Lloyds Banking Group - 2019 Annual Report and Accounts

Lloyds BankingAnnouncement

20/02/2020 07:00

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RNS Number : 5462D  Lloyds Banking Group PLC  20 February 2020

 

 

 

 

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

douglas.radcliffe@.lloydsbanking.com

 

Corporate Affairs

Matt Smith
 
+44 (0)20 7356 3522

Head of Media Relations

matt.smith@lloydsbanking.com

 

 

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    2018  2017

£m
£m
£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        2018      2017

                                                                                 million     million   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        2018      2017

                                                                                 million     million   million
 Share plans
 At 1 January                                                                    84          82        65
 Granted, including certain adjustments (includes entitlements of appointed key  46          39        37
 management personnel)
 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    2018  2017

£m
£m
£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    2018  2017

£m
£m
£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.

 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
 or visit
www.rns.com (http://www.rns.com/)
.   END  ACSURRURRNUUURR