TIDMLLOY
RNS Number : 5708F
Lloyds Banking Group PLC
21 February 2018
21 February 2018
LLOYDS BANKING GROUP PLC - ANNUAL REPORT AND ACCOUNTS
FOR THE YEARED 31 DECEMBER 2017
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 2017
This document will shortly be available for inspection at
www.hemscott.com/nsm.do
A copy of the Annual Report and Accounts 2017 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 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 2017 (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
2017 Results News Release made on 21 February 2018 contained a
condensed set of financial statements, the Group Chief Executive's
statement and the Chief Financial Officer's review.
--
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 Corporate Media
matt.smith@lloydsbanking.com
FORWARD LOOKING STATEMENTS
This Annual Report contains certain forward looking statements
with respect to the business, strategy, plans and/or results of
Lloyds Banking Group and its current goals and expectations
relating to its future financial condition and performance.
Statements that are not historical facts, including statements
about Lloyds Banking 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. 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. 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 Lloyds Banking 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. 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; 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; changing
customer behaviour including consumer spending, saving and
borrowing habits; changes to borrower or counterparty credit
quality; instability in the global financial markets, including
Eurozone instability, instability as a result of the exit by the UK
from the European Union (EU) 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;
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; changes in laws,
regulations, 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 on Form 20-F
filed with the US Securities and Exchange Commission for a
discussion of certain factors 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 Annual Report are made as of the date hereof, and
Lloyds Banking Group expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any
forward looking statements contained in this Annual Report to
reflect any change in Lloyds Banking 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 Annual Report 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 - Risk Factors
The principal risks and uncertainties relating to Lloyds Banking
Group plc are set out on pages 34-37 of the Annual Report. The
following is extracted in full and unedited form from the Annual
Report.
The most significant risks which could impact the delivery of
our long-term strategic objectives and our approach to each risk,
are detailed below.
As part of the Group's ongoing assessment of the potential
implications of the UK leaving the European Union, the Group
continues to consider the impact to its customers, colleagues and
products - as well as legal, regulatory, tax, financial and capital
implications.
There remains continued uncertainty around both the UK and
global political and macroeconomic environment. The potential
impacts of external factors have been considered in all principal
risks to ensure any material uncertainties continue to be monitored
and are appropriately mitigated.
Principal risks and uncertainties are reviewed and reported
regularly. This year we have added a new principal risk, model
risk, to reflect the Group's increasing use of analytics and models
to make decisions.
Credit
The risk that parties with whom we have contracted, fail to meet
their financial obligations (both on and off balance sheet).
Example:
-- Adverse impact on profitability due to an increase in
impairment losses, write downs and/or decrease in asset valuations
which can occur for a number of reasons, including adverse changes
in the economic, geopolitical and market environment. For example,
low interest rates have helped customer affordability, but there is
a risk of increased defaults as interest rates rise.
Key mitigating actions
-- Credit policy, incorporating prudent lending criteria,
aligned with Board approved risk appetite, to effectively manage
risk.
-- Robust risk assessment and credit sanctioning to ensure we
lend appropriately and responsibly.
-- Extensive and thorough credit processes and controls to
ensure effective risk identification, management and oversight.
-- Effective, well-established governance process supported by
independent credit risk assurance.
-- Early identification of signs of stress leading to prompt action in engaging the customer.
Regulatory and legal
The risks of changing legislation, regulation, policies,
voluntary codes of practice and their interpretation in the markets
in which we operate may have a significant impact on the Group's
operations, business prospects, structure, costs and/or capital
requirements and ability to enforce contractual obligations.
Examples:
-- Increased regulatory oversight and prudential regulatory requirements.
-- Increased legislative requirements, such as ring-fencing
legislation, Payment Services Directive 2 (PSD2), Open Banking and
General Data Protection Regulation (GDPR).
Key mitigating actions
-- Ensure we develop comprehensive plans for delivery of all
legal and regulatory changes and track their progress.
-- Group-wide projects implemented to address significant impacts.
-- Continued investment in people, processes, training and IT to
assess impact and help meet our legal and regulatory
commitments.
-- Engage with regulatory authorities and industry bodies on
forthcoming regulatory changes, market reviews and
investigations.
Conduct
Conduct risk can arise from a number of areas including selling
products to customers which do not meet their needs; failing to
deal with customers' complaints effectively; not meeting customers'
expectations; failing to promote effective competition in the
interest of customers; and exhibiting behaviours which could impact
on the integrity of the market or undermine wider regulatory
standards.
Example:
-- The most significant conduct cost in recent years has been PPI mis-selling.
Key mitigating actions
-- Conduct risk appetite metrics provide a granular view of how
our products and services are performing for customers.
-- Product approval, continuous product review processes and
customer outcome testing (across products and services) supported
by conduct management information.
-- Learning from past mistakes through root cause analysis and
clear customer accountabilities for colleagues, with rewards driven
by customer-centric metrics.
-- Further enhancements and embedding of our framework to
support customers in vulnerable circumstances.
Operational
We face significant operational risks which may disrupt services
to customers, cause reputational damage, and result in financial
loss. These include the availability, resilience and security of
our core IT systems, unlawful or inappropriate use of customer
data, theft of sensitive data, fraud and financial crime threats,
and the potential for failings in our customer processes.
Example:
The dynamic threat posed by cyber risk to the confidentiality
and integrity of electronic data or the availability of
systems.
Key mitigating actions
-- Investing in enhanced cyber controls to protect against
external threats to the confidentiality or integrity of electronic
data, or the availability of systems, and to ensure effective third
party assurance.
-- Enhancing the resilience of systems that support critical
business processes with independent verification of progress on an
annual basis.
-- Significant investment in compliance with GDPR and Basel
Committee on Banking Supervision standards.
-- Working with industry bodies and law enforcement agencies to
identify and combat fraud and money laundering.
People
Key people risks include the risk that we fail to maintain
organisational skills, capability, resilience and capacity levels
in response to organisational, political and external market change
and evolving business needs.
Example
Inability to attract or retain colleagues with key skills could
impact the achievement of business objectives.
Key mitigating actions
-- Focused action to attract, retain and develop high calibre
people. Delivering initiatives which reinforce behaviours to
generate the best outcomes for customers and colleagues.
-- Managing organisational capability and capacity to ensure
there are the right skills and resources to meet our customers'
needs.
-- Effective remuneration arrangements to promote appropriate
colleague behaviours and meet regulatory expectations.
Insurance underwriting
Key insurance underwriting risks within the Insurance business
are longevity, persistency and property insurance. Longevity risk
is expected to increase as our presence in the bulk annuity market
increases.
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.
Key mitigating actions
-- Processes for underwriting, claims management, pricing and
product design seek to control exposure. Longevity and bulk pricing
experts support the bulk annuity proposition.
-- The merits of longevity risk transfer and hedging solutions
are regularly reviewed for the Insurance business.
-- Property insurance exposures are mitigated by a broad reinsurance programme.
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.
Key mitigating actions
-- A comprehensive capital management framework that includes
setting of capital risk appetite and dividend policy.
-- Close monitoring of capital and leverage ratios to ensure we
meet regulatory requirements and risk appetite.
-- Comprehensive stress testing analyses to evidence capital
adequacy under various adverse scenarios.
Funding and liquidity
The risk that we have insufficient financial resources to meet
our commitments as they fall due.
Example
-- A deterioration in either the Group's or the UK's credit
rating, or a sudden and significant withdrawal of customer
deposits, would adversely impact our funding and liquidity
position.
Key mitigating actions
-- Holding liquid assets to cover potential cash and collateral outflows and to meet regulatory requirements. In addition, maintaining a further pool of assets that can be used to access central bank liquidity facilities.
-- Undertaking daily monitoring against a number of market and
Group-specific early warning indicators.
-- Maintaining a contingency funding plan detailing actions and
strategies available in stressed conditions.
Governance
Against a background of increased regulatory focus on governance
and risk management, the most significant challenges arise from
meeting the requirements to ring-fence core UK financial services
and activities from January 2019 and further requirements under the
Senior Manager & Certification Regime (SM&CR).
Examples
-- Inadequate or complex governance arrangements to address
ring-fencing requirements could result in a weaker control
environment, delays in decision making and lack of clear
accountability.
-- Non-compliance with or breaches of SM&CR requirements
could result in lack of clear accountability and legal and
regulatory consequences.
Key mitigating actions
-- Leveraging our considerable change experience to meet
ring-fencing requirements before the regulatory deadlines, and the
continuing evolution of SM&CR.
-- Programme in place to address ring-fencing. In close and
regular contact with regulators to develop and deploy our planned
operating and legal structure.
-- Evolving risk and governance arrangements to continue to be
appropriate to comply with regulatory objectives.
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 and credit spreads in the
Insurance business, and credit spreads in the Group's defined
benefit (DB) 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 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.
Key mitigating actions
-- 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 DB pension schemes have increased their credit
allocation and hedged against nominal rate and inflation
movements.
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 financial models
and rating systems.
Examples of the consequences of inadequate models include:
-- Inappropriate levels of capital or impairments.
-- Inappropriate credit or pricing decisions.
-- Adverse impacts on funding or liquidity, or the Group's earnings and profits.
Key mitigating actions
A comprehensive model risk management framework including:
-- Defined roles and responsibilities, with clear ownership and accountability.
-- Principles regarding the requirements of data integrity,
development, validation, implementation and ongoing
maintenance.
-- Regular model monitoring.
-- Independent review of models.
-- Periodic validation and re-approval of models.
Appendix 2 - Related Party Transactions
The following statements regarding related party transactions of
Lloyds Banking Group plc are set out on pages 223 to 224 of the
Annual Report. The following is extracted in full and unedited form
from the Annual Report.
Note 46: Related party transactions
Key management personnel
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the
activities of an entity; the Group's key management personnel are
the members of the Lloyds Banking Group plc Group Executive
Committee together with its Non--Executive Directors.
The table below details, on an aggregated basis, key management
personnel compensation:
2017 2016 2015
GBPm GBPm GBPm
---------------------------------------- ------ ------ ------
Compensation
Salaries and other short-term benefits 13 17 14
Post-employment benefits - - -
Share-based payments 22 23 18
---------------------------------------- ------ ------ ------
Total compensation 35 40 32
---------------------------------------- ------ ------ ------
Aggregate contributions in respect of key management personnel
to defined contribution pension schemes were GBP0.05 million (2016:
GBP0.1 million; 2015: GBP0.1 million).
2017 2016 2015
million million million
----------------------------------------- --------- --------- ---------
Share option plans
At 1 January 3 9 13
Granted, including certain adjustments
(includes entitlements of appointed
key management personnel) - 3 3
Exercised/lapsed (includes entitlements
of former key management personnel) (2) (9) (7)
----------------------------------------- --------- --------- ---------
At 31 December 1 3 9
----------------------------------------- --------- --------- ---------
2017 2016 2015
million million million
----------------------------------------- --------- --------- ---------
Share plans
At 1 January 65 82 102
Granted, including certain adjustments
(includes entitlements of appointed
key management personnel) 37 29 37
Exercised/lapsed (includes entitlements
of former key management personnel) (20) (46) (57)
----------------------------------------- --------- --------- ---------
At 31 December 82 65 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:
2017 2016 2015
GBPm GBPm GBPm
--------------------------------------- ------ ------ ------
Loans
At 1 January 4 5 3
Advanced (includes loans of appointed
key management personnel) 1 3 4
Repayments (includes loans of former
key management personnel) (3) (4) (2)
--------------------------------------- ------ ------ ------
At 31 December 2 4 5
--------------------------------------- ------ ------ ------
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 23.95 per cent in 2017 (2016: 2.49 per
cent and 23.95 per cent; 2015: 3.99 per cent and 23.95 per
cent).
No provisions have been recognised in respect of loans given to
key management personnel (2016 and 2015: GBPnil).
2017 2016 2015
GBPm GBPm GBPm
---------------------------------------- ------ ------ ------
Deposits
At 1 January 12 13 16
Placed (includes deposits of appointed
key management personnel) 41 41 58
Withdrawn (includes deposits of former
key management personnel) (33) (42) (61)
---------------------------------------- ------ ------ ------
At 31 December 20 12 13
---------------------------------------- ------ ------ ------
Deposits placed by key management personnel attracted interest
rates of up to 4.0 per cent (2016: 4.0 per cent; 2015: 4.7per
cent).
At 31 December 2017, the Group did not provide any guarantees in
respect of key management personnel (2016 and 2015: none).
At 31 December 2017, 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 GBP0.01 million with 3 directors
and 2 connected persons (2016: GBP0.4 million with five directors
and two connected persons; 2015: GBP1 million with four directors
and six connected persons).
Subsidiaries
Details of the Group's subsidiaries and related undertakings are
provided on pages 268-274. 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 2017,
customer deposits of GBP337 million (2016: GBP171 million) and
investment and insurance contract liabilities of GBP307 million
(2016: GBP406 million) related to the Group's pension funds.
Collective investment vehicles
The Group manages 134 (2016: 139) collective investment
vehicles, such as Open Ended Investment Companies (OEICs) and of
these 83 (2016: 83) are consolidated. The Group invested GBP418
million (2016: GBP265 million) and redeemed GBP616 million (2016:
GBP826 million) in the unconsolidated collective investment
vehicles during the year and had investments, at fair value, of
GBP2,328 million (2016: GBP2,405 million) at 31 December. The Group
earned fees of GBP133 million from the unconsolidated collective
investment vehicles during 2017 (2016: GBP192 million).
Joint ventures and associates
At 31 December 2017 there were loans and advances to customers
of GBP123 million (2016: GBP173 million) outstanding and balances
within customer deposits of GBP9 million (2016: GBP15 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
2017, these companies had total assets of approximately GBP4,661
million (2016: GBP4,712 million), total liabilities of
approximately GBP5,228 million (2016: GBP5,033 million) and for the
year ended 31 December 2017 had turnover of approximately GBP4,601
million (2016: GBP4,401 million) and made a loss of approximately
GBP87 million (2016: net loss of GBP27 million). In addition, the
Group has provided GBP1,226 million (2016: GBP1,550 million) of
financing to these companies on which it received GBP81 million
(2016: GBP127 million) of interest income in the year.
Appendix 3 - Directors' Responsibility Statement
The following statement is extracted from page 83 of 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 2017 Results News Release dated 21 February
2018.
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. 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
54-55 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
Group, together with a description of the principal risks and
uncertainties that 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 company news service from the London Stock Exchange
END
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