TIDMLLOY
RNS Number : 5753X
Lloyds Banking Group PLC
22 February 2017
22 February 2017
LLOYDS BANKING GROUP PLC - ANNUAL REPORT AND ACCOUNTS
FOR THE YEARED 31 DECEMBER 2016
In accordance with Listing Rule 9.6.1, Lloyds Banking Group plc
has submitted today the following documents to the National Storage
Mechanism.
-- Annual Report and Accounts 2016
-- Annual Review 2016
These documents will shortly be available for inspection at
www.hemscott.com/nsm.do
A copy of the Annual Report and Accounts 2016 and Annual Review
2016 are 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 2016 (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
2016 Results News Release made on 22 February 2016 contained a
condensed set of financial statements, the Group Chief Executive's
statement and the Chief Financial Officer's review.
--
For further information:
Corporate Affairs
Matt Smith +44 (0)20 7356 3522
Head of Corporate Media
Email: matt.smith@lloydsbanking.com
Investor Relations
Douglas Radcliffe +44 (0)20 7356 1571
Group Investor Relations Director
Email: douglas.radcliffe@finance.lloydsbanking.com
FORWARD LOOKING STATEMENTS
This Annual Report contains certain forward looking statements
with respect to the business, strategy and plans 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 the plans, objectives, expectations,
estimates and intentions expressed in such 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 (including low or negative rates),
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, the exit by the UK from
the European Union (EU) and the potential for one or more 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 cyber security; 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 United States or elsewhere including the implementation and
interpretation of key legislation and regulation; the ability to
attract and retain senior management and other employees;
requirements or limitations on the Group as a result of HM
Treasury's investment in the Group; 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 nonbank 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 page 28-31 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 response, are detailed
below.
The Group has considered many of the potential implications
following the UK's vote to leave the European Union and the impact
to its customers, colleagues and products - as well as legal,
regulatory, tax, finance and capital implications.
Continued uncertainty surrounding the political and
macroeconomic environment remains but the potential impacts of
external factors have been considered in all principal risks and
uncertainties to ensure any material uncertainties continue to be
monitored and are appropriately mitigated.
Principal risks and uncertainties are reviewed and reported
regularly and no new risks have been identified in the year.
Credit risk
The risk that customers and/or other counterparties whom we have
either lent money to or entered into a financial contract with, or
other counterparties with whom we have contracted, fail to meet
their financial obligations, resulting in loss to the Group.
Adverse changes in the economic and market environment we operate
in or the credit quality and/or behaviour of our customers and
counterparties could reduce the value of our assets and potentially
increase our write downs and allowances for impairment losses,
adversely impacting profitability.
Example:
-- Whilst we have a deep understanding of credit risks across
our commercial, mortgage and other portfolios; a changing economic
environment, e.g. interest rate rises, can impact on customer
affordability and therefore our performance.
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 risk
The risks of changing legislation, regulation, policies,
voluntary codes of practice and their interpretation in the markets
in which we operate can 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.
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 risk
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; and exhibiting behaviours which do not meet market or
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 on how
our products and services are performing for customers.
-- Product approval, review processes and outcome testing
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.
-- The development of a refined framework for addressing
thematic issues impacting customers in vulnerable
circumstances.
Operational risk
We face significant operational risks which may result in
financial loss, disruption of services to customers, and damage to
our reputation. These include the availability, resilience and
security of our core IT systems and the potential for failings in
our customer processes.
Examples:
-- A resilient IT environment is critical to providing reliable
services to customers and enabling sustainable growth.
-- The dynamic threat posed by cyber risk on the integrity of
electronic data or the availability of systems.
Key mitigating actions
-- Continual review of our IT environment to ensure that systems
and processes can effectively support customers' requirements.
-- Enhancing the resilience of systems that support critical
business processes with independent verification of progress on an
annual basis.
-- Investing in enhanced cyber controls to protect against
external threats to the confidentiality or integrity of electronic
data, or the availability of systems and responding to findings
from third party industry testing.
People risk
Key people risks include the risk that we fail to maintain
organisational skills, capability, resilience and capacity levels
in response to increasing volumes of organisational, political and
external market change.
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 risk
Key insurance 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.
Longevity is also the key insurance risk in the Group's Defined
Benefit Pension Schemes.
Examples:
-- Increases in life expectancy (longevity) beyond current
assumptions will increase the cost of annuities and pension scheme
benefits.
-- 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 both the Insurance business and the
Group's Defined Benefit Pension Schemes.
-- Property insurance exposures are mitigated by a broad reinsurance programme.
Capital risk
The risk that we have a sub-optimal amount 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 sets and
monitors capital risk appetite, including dividend policy
appropriately.
-- Close monitoring of capital and leverage ratios to ensure we
meet current and future regulatory requirements.
-- Comprehensive stress testing analysis to evidence capital
adequacy under various adverse scenarios.
Funding and liquidity risk
The risk that we have insufficient financial resources to meet
our commitments as they fall due, or can only secure them at
excessive cost.
Example:
-- Our funding and liquidity position is underpinned by a
significant and stable customer deposit base and is supported by
strong relationships with corporate customers and certain wholesale
market segments. 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 meet potential cash and collateral
outflows, regulatory requirements and maintaining a further pool of
secondary 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 risk
Against a background of increased regulatory focus on governance
and risk management, the most significant challenges arise from the
requirement to improve the resolvability of the Group and to
ring-fence core UK financial services and activities from January
2019 and further requirements under the SM&CR which come into
force from March 2017.
Example:
-- Non-compliance with or breaches of ring-fencing, resolution
and SM&CR requirements will result in legal and regulatory
consequences.
Key mitigating actions
-- Leveraging our considerable change experience to meet
ring-fencing and resolution planning requirements and the
continuing evolution of SM&CR.
-- Programme in place to address ring-fencing and resolution
planning. In close and regular contact with regulators to develop
plans for our anticipated operating and legal structure.
-- Evolving risk and governance arrangements that continue to be
appropriate to comply with regulatory objectives.
Market risk
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 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
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. Credit spreads
affect the value of the Group's Defined Benefit Pension Schemes'
liabilities.
Key mitigating actions
-- Structural hedge programmes implemented to manage liability
margins and margin compression, and the Group's exposure to Bank
Base Rate.
-- Equity and credit spread risks are closely monitored and,
where appropriate, asset liability matching is undertaken to
mitigate risk.
-- The Group's Defined Benefit Pension Schemes have increased
their credit allocation and hedged against nominal rate/inflation
movements.
-- Stress and scenario testing of Group risk exposures.
Appendix 2 - Related Party Transactions
The following statements regarding related party transactions of
Lloyds Banking Group plc are set out on pages 241 to 242 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:
2016 2015 2014
GBPm GBPm GBPm
---------------------------------------- ------ ------ ------
Compensation
Salaries and other short-term benefits 17 14 15
Post-employment benefits - - 1
Share-based payments 23 18 17
---------------------------------------- ------ ------ ------
Total compensation 40 32 33
---------------------------------------- ------ ------ ------
Aggregate contributions in respect of key management personnel
to defined contribution pension schemes were GBP0.1 million (2015:
GBP0.1 million; 2014: GBP0.1 million).
2016 2015 2014
million million million
----------------------------------------- --------- --------- ---------
Share option plans
At 1 January 9 13 14
Granted, including certain adjustments
(includes entitlements of appointed
key management personnel) 3 3 -
Exercised/lapsed (includes entitlements
of former key management personnel) (9) (7) (1)
----------------------------------------- --------- --------- ---------
At 31 December 3 9 13
----------------------------------------- --------- --------- ---------
2016 2015 2014
million million million
----------------------------------------- --------- --------- ---------
Share plans
At 1 January 82 102 105
Granted, including certain adjustments
(includes entitlements of appointed
key management personnel) 29 37 19
Exercised/lapsed (includes entitlements
of former key management personnel) (46) (57) (22)
----------------------------------------- --------- --------- ---------
At 31 December 65 82 102
----------------------------------------- --------- --------- ---------
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:
2016 2015 2014
GBPm GBPm GBPm
--------------------------------------- ------ ------ ------
Loans
At 1 January 5 3 2
Advanced (includes loans of appointed
key management personnel) 3 4 2
Repayments (includes loans of former
key management personnel) (4) (2) (1)
--------------------------------------- ------ ------ ------
At 31 December 4 5 3
--------------------------------------- ------ ------ ------
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 2.49 per cent and 23.95 per cent in 2016 (2015: 3.99 per
cent and 23.95 per cent; 2014: 0.5 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).
2016 2015 2014
GBPm GBPm GBPm
---------------------------------------- ------ ------ ------
Deposits
At 1 January 13 16 13
Placed (includes deposits of appointed
key management personnel) 41 58 32
Withdrawn (includes deposits of former
key management personnel) (42) (61) (29)
---------------------------------------- ------ ------ ------
At 31 December 12 13 16
---------------------------------------- ------ ------ ------
Deposits placed by key management personnel attracted interest
rates of up to 4.0 per cent (2015: 4.7 per cent; 2014: 4.7 per
cent).
At 31 December 2016, the Group did not provide any guarantees in
respect of key management personnel (2015 and 2014: none).
At 31 December 2016, 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 GBP0.4 million with five directors
and two connected persons (2015: GBP1 million with four directors
and six connected persons; 2014: GBP1 million with six directors
and six connected persons).
Subsidiaries
Details of the Group's subsidiaries and related undertakings are
provided on pages 293 to 300. 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 2016,
customer deposits of GBP171 million (2015: GBP145 million) and
investment and insurance contract liabilities of GBP406 million
(2015: GBP694 million) related to the Group's pension funds.
Collective investment vehicles
The Group manages 139 (2015: 168) collective investment
vehicles, such as Open Ended Investment Companies (OEICs) and of
these 83 (2015: 95) are consolidated. The Group invested GBP265
million (2015: GBP818 million) and redeemed GBP826 million (2015:
GBP616 million) in the unconsolidated collective investment
vehicles during the year and had investments, at fair value, of
GBP2,405 million (2015: GBP2,129 million) at 31 December. The Group
earned fees of GBP192 million from the unconsolidated collective
investment vehicles during 2016 (2015: GBP187 million).
Joint ventures and associates
At 31 December 2016 there were loans and advances to customers
of GBP173 million (2015: GBP225 million) outstanding and balances
within customer deposits of GBP15 million (2015: GBP8 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
2016, these companies had total assets of approximately GBP4,712
million (2015: GBP3,911 million), total liabilities of
approximately GBP5,033 million (2015: GBP4,104 million) and for the
year ended 31 December 2016 had turnover of approximately GBP4,401
million (2015: GBP4,660 million) and made a loss of approximately
GBP27 million (2015: net loss of GBP181 million). In addition, the
Group has provided GBP1,550 million (2015: GBP1,710 million) of
financing to these companies on which it received GBP127 million
(2015: GBP125 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 2016 Results News Release dated 22 February
2016.
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 to 57
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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