## Helping ## Britain ## Prosper ## Lloyds Banking Group ## Annual Report and Accounts 2022 ## Our purpose is ## Helping Britain ## Prosper ## We’re creating a more ## sustainable and inclusive ## future for people and ## businesses, shaping finance ## as a force for good. ### Discover how we’re Helping Britain Prosper on pages 4 to 7 ## Our performance ## £5.6bn 50.4% ### Robust financial Statutory profit after tax down 6 per Cost: income ratio remains strong ### performance with cent, with higher net income, more than ### continued business offset by higher impairment charges ### momentum and good ### strategic progress | £3.6bn | 75% | | --- | --- | | Total capital return including an | Employee engagement index increased, | | ordinary dividend of 2.40 pence per | 6 points higher than the UK average | share, up 20 per cent and share buyback of up to £2 billion Alternative performance measures To supplement our statutory results, we use a number of alternative performance ## measures. Unless otherwise stated, 67.7pts 19.8m commentary within the strategic report is given on an underlying basis. Further All-channel net promoter score Digitally active customers continued information is set out on pages 67. remained strong to increase as we remain the largest digital bank in the UK ## Inside this report Strategic report Our unique business model 02 Delivering value for all our stakeholders 04 Chair’s statement 08 Governance in action (section 172(1) statement) 10 ## Group Chief Executive’s review 12 Our people Financial results Risk managementGovernance Financial statements Other informationStrategic report Our external environment 16 ## See page 15 Our strategy 22 Progress and performance (including key performance indicators) 32 Risk overview 38 Viability statement and going concern 44 Risk management Non-financial information statement 45 The Group’s approach to risk 139 Risk governance 142 Stress testing 144 Full analysis of risk categories 147 Financial statements Independent auditors’ report 197 Consolidated financial statements 210 Parent company financial statements 340 Other information Shareholder information 350 Subsidiaries and related undertakings 352 Forward-looking statements 361 ## Our strategy ## See page 22 Financial results Results for the full year 47 Divisional results 58 Other financial information 66 Alternative performance measures 67 Governance – Directors’ report Chair’s introduction 72 ## Corporate governance report 73 Our culture Committee reports 92 ## Directors’ remuneration report 105 See page 84 Other statutory and regulatory information 134 Supplementary information and The 2022 annual report and accounts ## Our reporting disclosures are provided in the following incorporates the strategic report and documents, and referenced throughout the consolidated financial statements, this report. both of which have been approved by Our reporting is designed to facilitate the Board of directors . better communication to a range of stakeholders. Environmental sustainability report On behalf of the Board Our annual report and accounts Social sustainability report provides disclosures relating to our Form 20-F strategic, financial, operational, environmental and social performance Pillar 3 disclosures and provides detail on our strategy. Robin Budenberg Chair, Lloyds Banking Group | It also contains forward-looking | To access more content on a mobile device, | 21 February 2023 | | --- | --- | --- | | statements relating to the Group’s future | point your camera at the QR codes seen | | | financial condition, performance, results, | throughout this report. | | strategic initiatives and objectives. See our full reporting For further details, please refer to our network suite at forward-looking statements disclaimer www.lloydsbankinggroup.com/ on page 361. investors. 01Lloyds Banking Group Annual Report and Accounts 2022 ## Our unique business model ## Our purpose is Helping Britain Prosper ## We Help Britain Prosper by creating a more ## sustainable and inclusive future for people and ## businesses, shaping finance as a force for good. ## To deliver on our purpose, we have identified • Creating a more inclusive future ### four focus areas where we are best placed to ## • Improving access to quality ### provide significant positive change, enabling ## us to create a more inclusive society and housing ### sustainable future: ## • Enabling regional development ## • Greening the built environment View our environmental View our social sustainability report here. sustainability report here. ## Our vision ## UK customer-focused digital leader and ## integrated financial services provider, ## capitalising on new opportunities, at scale. ### We will achieve our vision through our purpose-driven strategic pillars: ## Grow Focus Change ### Drive revenue growth Strengthen cost Maximise the potential ### and diversification and capital efficiency of people, technology ### and data See pages 24 to 27 See pages 28 and 29 See pages 30 and 31 ## Our values ### guide how we work ### together and make ### decisions to deliver ### People-first Bold Inclusive Sustainable Trust ### our strategy: | | We put people | | We’re bold | We’re inclusive | | We champion | | | We trust | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | See pages 84 and 85 | | first to go | and take | | to value | sustainability | | each other to | | | | | further for | action | | everyone | to care for our | | achieve more | | | | | customers | | | | | planet | | together | 02 Lloyds Banking Group Annual Report and Accounts 2022 Leading UK customer franchise Differentiated business model ## Our competitive with deep customer insight A unique customer proposition, Our scale and reach across the UK means serving all our customers’ banking and ## advantages that our franchise extends to 26 million insurance needs in one place through customers with 19.8 million digitally active. a comprehensive product range. We have a number of distinct Extensive customer data and analysis competitive strengths that collectively ensures we can meet the needs of these All-channel distribution focus with differentiate our proposition. customers more effectively. digital leadership and trusted brands Operating through a range of distribution Dedicated colleagues with channels ensures our customers can strong values interact with us when and how they want. We have a highly engaged, customer- focused, diverse workforce with Financial strength and significant expertise and experience. Financial results Risk managementGovernance Financial statements Other informationStrategic report disciplined risk management We have a strong capital position and Operating at scale with cost discipline continue to take a disciplined approach Our scale and efficiency enable us to to risk, as reflected through the quality of operate more effectively. our portfolio and underwriting criteria. ## Our structure Lloyds Banking Group plc We have three core divisions and, in line with our new strategy launched | in 2022, we have restructured our | | Insurance, Pensions | | | --- | --- | --- | --- | | | Retail | | Commercial Banking | | business to optimise synergies | | and Investments | | and efficiencies to best serve our customers’ needs. See Group structure and ring-fencing | | | | Insurance, | Small and | Corporate and | | | --- | --- | --- | --- | --- | --- | --- | | arrangements page 86 | Consumer | Consumer | | | | | | | | | pensions and | medium | institutional | | | | lending | relationships | | | | | | | | | investments | businesses | | banking | | | • Mortgages | • Current | • Home, motor | • Business | • Lending | | | | • Credit cards | accounts | and protection | loans | • Risk | | | | • Personal | • Savings | insurance | • Transactional | | management | | | loans | accounts | • Pensions | banking | • Liquidity | | | | • Motor finance | • Mass affluent | • Investments | • Working | • Debt capital | | | | | proposition | | capital | | markets | ## Our trusted brands Our products and services are made available to our customers through our trusted brands, which enables us to address the needs of different customer segments more effectively. We regularly review the associated risk implications to ensure the right ## Our external drivers, choices are being made for customers, colleagues and the Group. As a large, UK-focused financial services provider our business model ## risks and opportunities is influenced by a number of external factors: We’ve built our business and strategy to manage the fluctuations in our external environment and to adapt Technology Customers Economy to ever-changing stakeholder needs. and data This helps ensure the Group remains sustainable over the longer term and is able to manage risks and opportunities as they emerge. Society and Competitor Regulation environment See risk overview pages 38 to 43 See external environment pages 16 to 21 03Lloyds Banking Group Annual Report and Accounts 2022 ## Delivering value For over 325 years we have ### supported Britain through the ## for all our stakeholders ### good times and the bad. Today ### is no different. ### During 2022, we have continued ## How to work hard to Help Britain Prosper. ### This is in the best interests of all ### our stakeholders. ## we’re ## Helping ## Britain ## Prosper ## We provide ## financial ## services to ## 26 million ## customers ## in the UK We’re helping our millions of customers – individuals, families and businesses – to spend, save, borrow and invest. We support our customers in many ways. Given the increasing impact of cost of living on our customers, in July 2022 we launched our cost of living hub across our mobile banking apps and websites. Through the hub customers can get access to free and independent advice with support to help them manage their finances. Since the launch of the How we’re supporting app, we’ve seen over 875,000 customers visit the hub. customers through the cost of living crisis. 04 Lloyds Banking Group Annual Report and Accounts 2022 ## We have ## the largest ## shareholder Financial results Risk managementGovernance Financial statements Other informationStrategic report ## base in the UK Given the Group’s performance and strong capital position, the Board has recommended a total ordinary dividend of 2.40 pence per share. This represents an increase of 20 per cent on 2021, in line with our progressive and sustainable ordinary dividend policy. We have also announced a further share buyback of up to £2 billion, marking 2022 as a very strong year of capital return to shareholders. | 2.3m | £3.6bn | | --- | --- | | shareholders, including | returned to shareholders | | most of our employees | for 2022 | ## We are ## listening to ## and supporting ## over 63,000 ## colleagues We have been engaging with colleagues in shaping our journey and co-creating our new Group values to make sure that every colleague is motivated and excited by the role they can play in Helping Britain Prosper. We have also been conscious of the impact that the increased cost of living has continued to have on our colleagues. In August 2022, the Group gave the vast majority of colleagues a £1,000 one-off payment to help with the rising cost of bills. In addition, we made significant changes to our reward approach which reflect our continued desire to support our colleagues, particularly those that are lower paid, during these extraordinary times and over the longer term. The 2023 pay award has a cash value typically in the range of 8 per cent to 13 per cent for our lowest paid colleagues. 05Lloyds Banking Group Annual Report and Accounts 2022 ### Delivering value for our all ### stakeholders continued ## We’ve lent ## c£35 billion ## to businesses ## and proactively ## offered support We’ve proactively contacted more than 550,000 businesses to offer support and through our financial wellbeing tools, we’re monitoring those clients who may be at risk of falling into financial difficulty. How we’re supporting We have been working with these clients to offer British businesses, from bespoke support such as temporary payment plans entrepreneurs to SMEs. and 30-day holds which can stop interest or product fees continuing to build. In addition, we donated £22.4 million to our four Foundations which cover England and ## Helping UK Wales, Scotland, Northern Ireland and the Channel Islands. They provide an invaluable contribution by partnering with hundreds of small and local charities in their area. The ## society with Foundations provide funding and other forms of support to help people overcome complex social issues such as mental health, domestic abuse, addiction and homelessness. ## ongoing ## financial Working with charities and ## education community groups across the UK is a key part of our purpose of Helping Britain Prosper. ## and support We continue to offer help to children and young adults across the UK to better understand the value of money and manage their finances day-to-day as they transition to financial independence. Our activity is primarily delivered face-to-face by colleague volunteers in classrooms, but we also have a range of resources that are available for download via the Lloyds Bank Academy site. ## >£22m ### donated to our Foundations in 2022, ### taking our total donations to over ### £110 million since 2018 06 Lloyds Banking Group Annual Report and Accounts 2022 ## Working Read more on our commitment to reduce our ## supply chain emissions. to reduce ## the carbon Financial results Risk managementGovernance Financial statements Other informationStrategic report ## footprint in ## our supply ## chain Our suppliers and supply chains are integral to how we fulfil our customers’ needs. We rely on around 2,600 suppliers for important aspects of our operations and customer service provision. Recognising the emissions we generate through the purchase of goods and services and working collaboratively with our suppliers to reduce the Group’s supply chain emissions are integral to our net zero strategy. In October 2022, we announced our ambition to achieve a 50 per cent reduction in the carbon emissions we generate through our supply chain by 2030 on the path to net zero by 2050 or sooner. Why our approach to tax matters to us and our stakeholders. ## £3.9 billion ## of cash taxes ## paid to the ## UK Government We regularly engage in open discussion with our regulators and other government authorities (including HMRC) to ensure the Group operates in line with current and developing legislation. Lloyds Banking Group is proud to be one of the UK’s largest tax payers, helping finance public services. 07Lloyds Banking Group Annual Report and Accounts 2022 ## Chair’s statement ## We are ## becoming ### Overview During 2022 the Group has continued to make significant ## truly progress, effectively supporting our customers through what are clearly uncertain and challenging times, whilst launching a more purpose-driven strategy, accelerating our investment in the business and establishing a culture to support long-term sustainable success. ## purpose We are acutely aware that the current environment, and the increased cost of living in particular, is a challenge for many of our customers, colleagues and society more widely. We remain committed to supporting our customers and colleagues proactively and I am immensely proud of the role this organisation plays in Helping Britain Prosper. ## driven Against this backdrop, the Group has continued to deliver good business momentum and robust financial performance, enabling support for our customers, the investment required for our strategy as well as a further increase to the ordinary dividend ### Robin Budenberg and excess capital return. ### Chair ### Our purpose and strategy We are clear that our purpose as a Group is to Help Britain Prosper. This means not only providing outstanding service to our customers, but also responding to the UK’s social, environmental and economic issues which we believe we are well placed to address. We are enormously proud of this role which includes helping build a more inclusive society and supporting the UK’s transition to a low carbon economy. 08 Lloyds Banking Group Annual Report and Accounts 2022 In February 2022, we announced an ambitious strategy to transform our business in pursuit of this purpose to generate a stronger growth trajectory and to deliver higher, more sustainable returns. While the world has changed significantly since that time, our strategic focus remains clear and disciplined and we have made good initial progress with a new organisational structure and leadership team in place, a new operating model for change implemented, and increased investment particularly in our technology capabilities. We want to be a leader in accelerating the UK's transition to a low carbon economy and have continued to expand our targets and plans to deliver our net zero ambitions in our own operations, supply chain and financed emissions. With our full year results, we have published our second dedicated environmental sustainability report which also includes our first Group climate transition plan. We also continue to implement the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures. We are committed to Helping Britain Prosper by creating a more sustainable and inclusive future for people and businesses, shaping finance as a force for good. Further detail on our strategy can be found on pages 22 to 31. ## Our culture The Board and senior management have a vital role to play in shaping and embedding the right corporate culture in order to progress our purpose and implement our strategy. Our new Group values will guide behaviour but also the way we make decisions, from small everyday choices to big strategic decisions. Further detail on our new Group values can be found on pages 84 and 85. ## Directors We review the Board's composition and diversity regularly and are committed to ensuring we have the right balance of skills and experience within the Board. Aligned to this I am pleased to say we meet the Parker Review recommendations, and that we are aiming to meet all recommendations set out by the FTSE Women Leaders Review. The Board supports the focus on improving gender diversity and will give due consideration to this with future appointments. During 2022, there have been a number of changes to the Board and further detail can be found in our governance report on page 72. ## Remuneration During the year the Remuneration Committee has carefully considered how best to support our colleagues in the current challenging economic conditions, recognising the support and dedication of our staff and that the increase in living costs is impacting our lowest paid colleagues the most. To help with increasing household costs, the Group was one of the first large UK companies to make a one-off payment (£1,000) to our colleagues (except senior leaders) in August. This amounted to a total value of £67 million. In addition, we have now agreed a pay package for our staff for 2023 which was approved by both our recognised unions by votes of their members. This was again focused on our more junior staff with an 8 per cent to 13 per cent increase for our 43,000 lowest paid colleagues (equivalent to a c.6.3 per cent increase on the overall pay bill). The Group is also looking to implement a new remuneration policy this year to align executive remuneration more closely with our longer-term strategic objectives. This will include a return to a long term incentive plan aimed at ensuring executive remuneration is more closely aligned with our shareholder interests. ## Summary Looking ahead we know that the current outlook is uncertain and, as with the pandemic, the current challenges around cost of living will be another crucial test for the banking sector and its ability to support and to protect its customers. I remain confident that Lloyds Banking Group will support our customers and make sure that those who are most at risk of getting into financial difficulty have access to the help that they need. I also remain confident that our strategy and commitment to become a truly purpose-driven business will enhance the long-term future of the Group and benefit all our stakeholders. We will continue to ensure that the Group is at the heart of the UK recovery and of Helping Britain Prosper. Robin Budenberg Chair Back in 2016, our colleagues chose Mental Health UK as the Group's official charity partner. Initially, the partnership was meant to be for two years, with the aim for Lloyds Banking Group to raise £4 million to help Mental Health UK set up a service to support people experiencing mental health and money problems. Six years and £16 million later, the partnership has revolutionised mental health support and understanding. For 2023 and 2024, our colleagues voted for our new charity partner to be Crisis (working alongside Simon Community in Northern Ireland). By bringing our organisations together we aim to create the perfect partnership for a housing-led solution to end homelessness. We will help by increasing access to affordable housing, supporting more people to rebuild their lives and become more financially secure and equip the nation with the solutions to prevent homelessness. >220k families and individuals across the UK are facing homelessness ![img-0.jpeg](img-0.jpeg) Our charity partner: Crisis and Simon Community Together, we will provide vital help so that people can rebuild their lives and are supported out of homelessness for good. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 09 # Governance in action (section 172(1) statement) ## Overview Given the scale of the Group, significant stakeholder engagement takes place at all levels within the organisation. Managing stakeholder interests is an important focus for the Board, and forms a key part of the Board's delegation of the day-to-day management of the business to the Executive. In addition to the direct engagement of Board members with stakeholders discussed on **pages 82 and 83**, the Board requires stakeholder implications to be considered within all proposals submitted to it from across the organisation. Stakeholder interests are identified by the Executive in proposals, both within the papers and as part of the accompanying presentations. Through their regular business updates, and in their other interactions with the Board both in and outside of the board room, the Executive routinely provide the Board with details of stakeholder interaction and feedback from across the wider Group. Throughout 2022 the Board's key stakeholders remained the same as they were in 2021: Stakeholder key: | Customers and clients | Society and environment | | --- | --- | | Shareholders | Suppliers | | Colleagues | Regulators and government | ![img-1.jpeg](img-1.jpeg) ## Section 172(1) Statement In accordance with the Companies Act 2006 (the Act), the directors provide this statement describing how they have had regard to the matters set out in section 172(1) of the Act when performing their duty to promote the success of the Company under section 172. Further detail on key stakeholder interaction is also contained within the directors' report on **pages 72 to 137**. The directors remain mindful in all their deliberations of the long-term consequences of their decisions, as well as the importance of the Group maintaining a reputation for high standards of business conduct and the Board engaging with, and taking account of the views of, key stakeholders. ## Key discussions and decisions ### Strategy ![img-2.jpeg](img-2.jpeg) See more on **pages 22 to 31** The Group announced in February 2022 its ambitious new strategy. While the external environment has changed significantly since then, our strategy remains the right one given its continued focus on customers whilst delivering growth and diversification. The Board ensures that the necessary resources are in place for the Group to meet its objectives and measure performance against them, and the focus of the Board on supporting the implementation of the strategy remains strong. Given the fundamental importance of the Group's delivery of its strategy, the Board considered aspects of implementation of the strategy including opportunities and risks to delivery at its scheduled meetings in 2022. Additionally, the Board held dedicated sessions in June and November where progress against the strategy was a primary focus. In June this included discussion of developments in key business areas, the Group's progress on its path to net zero, and updates on initiatives supporting the implementation of the strategy, including the mobilisation of the Group's new platform-based operating model. The Board provided valuable feedback to the executive leadership team, which was considered and acted upon, with further updates provided at Board meetings later in the year and at the dedicated session in November. At its November session, the Board also considered the impacts on the Group's strategy of the changing economic environment, changes in the skills the Group will need as its strategy develops, the importance of purpose in delivering on agreed strategic ambitions and how the Group delivers sustainable long term success. Stakeholder interest was at the forefront in all these discussions. This was drawn out by the Executive, including how the implementation and development of the Group's strategy is impacting both customers and colleagues, with the Board reflecting on feedback received from stakeholders on the Group's progress in implementing the strategy. c£0.9bn in-year incremental strategic investment 10 Lloyds Banking Group Annual Report and Accounts 2022 Key discussions and decisions The Board then considered progress in the embedding of our ## Culture, values and purpose purpose and the re-defined values. This included how the Group’s culture plan would deliver on the ambitions which had been set, how the Group would know that progress was being made, and the areas and actions which would take particular focus during the course of the year, while also ensuring that simplicity could be maintained in the overall approach. See more on pages 84 and 85 Later in the year the Board endorsed a new framework to enable the delivery of further cultural change, including The Board continues to recognise the importance of creating Financial results Risk managementGovernance Financial statements Other informationStrategic report new initiatives such as the Grow with Purpose leadership a purpose-driven culture led by values which drive the delivery development programme. The Board will continue to review of the right outcomes for the Group’s stakeholders. The Board progress in this area in the year to come. has to that end continued to oversee the activity commenced in 2021 to deliver transformation in this area. The Board considered early in the year the importance of the Group’s values as a driver of wider cultural change, and in that ## With colleague support, we are regard agreed proposals for re-defining these values and for ## providing fuller alignment between the Group’s values and its building a culture in which everyone purpose, recognising that both of these are key drivers of our ## feels included, empowered and cultural change. ## inspired to do the right thing for The Board encouraged feedback to be sought from colleagues ## all our stakeholders. on the values proposed, and following this feedback approved a Group wide re-launch and programme of colleague ### engagement. Robin Budenberg ### Chair The purpose remains Helping Britain Prosper and the new five values are People-first, Bold, Inclusive, Sustainable and Trust. These combine with our existing sector targets for thermal ## Climate and net zero coal, oil and gas, and retail motor, with our seven targets now covering some of the UK’s hardest to abate and most material sectors. As part of the process of determining and setting these sector targets, the Board reviewed and challenged key strategic levers, See more on pages 36 and 37 dependencies, risks and opportunities at its offsite meeting in June, acknowledging the unique factors at play within the individual sectors. The Board has overall oversight of environmental, social and governance matters, with sustainability an integral element of Alongside sector targets, we released our new supply chain the Group’s strategy and embedded in business objectives. ambition to reduce the emissions from our suppliers by 50 per cent by 2030 on the path to net zero by 2050 or The Board maintains its commitment to, and acknowledges sooner, complementing our existing financed emissions the importance of, the ambitious climate change goals set in and own operations emissions reduction ambitions. The 2020, including reducing the emissions the Group finances by Board also approved via its Responsible Business Committee more than 50 per cent by 2030, and achieving net zero by 2050 enhancements to our external sector statement for oil and gas. or sooner. Progress against all of these initiatives continues to be closely The Board has devoted considerable time to reviewing the monitored by the Board. As the Group’s climate ambitions and Group’s progress against these objectives, and during the related stakeholder interests have been a key consideration year oversaw a number of additional commitments to further for the Board during the course of the year, further information drive the Group’s progress to deliver on our climate ambitions. on our progress in meeting climate ambitions and our first Key for 2022 was the release of our net zero activity update Group transition plan can be found in our supplementary that included sector-specific emission reduction targets for environmental sustainability report . seven Net-Zero Banking Alliance sectors. In our environmental sustainability report for 2022 we have also published the Group’s first climate transition plan, complementing the existing Scottish Widows climate action plan released in the first part of 2022. In October, the Board approved new sector targets for four ## high emitting sectors, including UK residential mortgages, >50% automotive original equipment manufacturers and aviation, reducing emissions from our suppliers by 50 per cent along with an update to power. by 2030, on the path to net zero 11Lloyds Banking Group Annual Report and Accounts 2022 ## Group Chief ## Executive’s review ## Continued ## business ## momentum ## with an ## opportunity ## to do more ## The Group delivered a robust ## financial performance with ## increased capital returns, ## whilst continuing to Help ## Britain Prosper. ### Charlie Nunn ### Group Chief Executive 12 Lloyds Banking Group Annual Report and Accounts 2022 ## Overview Throughout 2022, we have continued to deliver on our purpose of Helping Britain Prosper, core to everything we do, whilst creating a more sustainable and inclusive future for people and businesses. Last year we announced our ambitious new strategy with the aim of growing our business and deepening relationships with our customers, meeting more of their financial needs. While the operating environment has changed significantly since then, our purpose-driven strategy is more relevant now than ever before. Based on significant strategic action we have made a good start and are seeing early evidence of delivery. We believe our strategy will create higher more sustainable returns, as reflected in our enhanced guidance and are excited about the opportunities ahead. During the year, the Group delivered a robust financial performance with continued income growth supported by higher interest rates and solid business volumes. Costs were in line with expectations despite ongoing inflationary pressures. As a result of the Group's performance and strong pro forma capital generation of 245 basis points in the year, the Board has recommended a final ordinary dividend of 1.60 pence per share, resulting in a total dividend for the year of 2.40 pence, an increase of 20 per cent on prior year and in line with our progressive and sustainable ordinary dividend policy. In addition, the Group has announced a share buyback programme of up to £2 billion, resulting in total capital returns of up to £3.6 billion, equivalent to more than 10 per cent of the Group's market capitalisation value. We know that the current environment continues to be challenging for many people and have mobilised the organisation to further support our customers. We are committed to maintaining support for our customers, clients and colleagues in the current environment and have invested in deep capabilities to facilitate this. This includes training more than 4,600 colleagues to provide financial assistance to individuals and businesses, build financial resilience to face cost of living challenges and support customers with tailored products if needed. We also saw over 5 million registrations for our Your Credit Score tool, leveraging our digital strengths to help customers take greater control of their own finances. For our colleagues, we provided additional payments in August and December 2022 and designed a new pay deal for 2023, focused on our lower paid colleagues, to provide greater protection and certainty. ## Robust financial performance with ongoing strength in our customer franchise In 2022, we delivered a robust financial performance, with statutory profit before tax of £6.9 billion. Underlying profit before impairment of £9.0 billion was up 46 per cent on 2021, including net income of £18.0 billion, driven by increased average interest-earning assets, a strengthened banking net interest margin, continued recovery in other income and lower operating lease depreciation. Cost discipline was sustained, with operating costs of £8.8 billion, up 6 per cent and in line with guidance, reflecting stable business-as-usual costs and higher planned strategic investment and new businesses. We saw strong observed asset quality with sustained low levels of new to arrears and very modest deterioration in observed credit metrics. Underlying asset quality remains strong, despite the weaker macroeconomic environment. The Group also benefited from continued balance sheet growth during the year. Loans and advances to customers were up £6.3 billion at £454.9 billion. This included continued growth of £6.3 billion in the open mortgage book (£1.2 billion of which was in the fourth quarter) alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by £1.2 billion during the year due to attractive growth opportunities in the Corporate and Institutional Banking portfolio, partly offset by repayments of government-backed lending. The Group also saw growth in its open book investments, with over £8 billion net new money in the period, despite difficult market conditions. Customer deposits decreased by £1.0 billion from the end of 2021 to £475.3 billion, with Retail deposits up £2.4 billion in the period, including current account balances up £2.5 billion, more than offset by reductions in Commercial Banking deposits. Group deposits are up c.£65 billion since the end of 2019. ## Significant progress on serving all stakeholders, with a good start to our new strategy We have a purpose-driven strategy. Core to this is our focus on building an inclusive society and supporting the transition to a low carbon economy, while creating new opportunities for our future growth. To build a more inclusive society we have supported £2.1 billion of funding to the social housing sector and lent £14.3 billion to first time buyers in the year. We have also helped around 185,000 small businesses boost their digital capability and technology adoption in the year. Importantly, we are also on track to reach our gender and ethnic diversity ambitions by 2025 supported by delivering a race education programme to our workforce in 2022. ## How we're Helping Britain Prosper by supporting the UK's vital social housing sector Throughout the UK, social housing is an integral part of the housing landscape with millions of people benefitting from stable and genuinely affordable homes. That's why I am proud that the Group is the biggest supporter of social housing in the UK. Since 2018, we've supported around £15 billion of funding to the sector and we currently work with over 200 housing associations of all sizes. Improving access to quality housing is central to building an inclusive society and Helping Britain Prosper. Read more in our social sustainability report # c£15bn of funding supported to the social housing sector since 2018 ![img-3.jpeg](img-3.jpeg) Lloyds Banking Group Annual Report and Accounts 2022 13 Strategic report Financial results Governance Risk management Financial statements Other information ## Group Chief Executive's review continued To support the transition to a low carbon economy we have funded over £13 billion of green and sustainable financing in 2022 and made around £12 billion of discretionary investments in climate-aware strategies through Scottish Widows. We have also created a new partnership with Octopus Energy to support in retrofitting the UK housing stock and launched our first Group climate transition plan which you can find in our environmental sustainability report. Despite external developments and challenges, our strategy remains the right one. It is more important than ever to deliver against our purpose-driven outcomes that benefit all our stakeholders. We are responding to the economic environment by increasing support to customers and colleagues, whilst accelerating our efficiency actions to offset the significant inflationary pressures in the business. During 2022, the Group invested £0.9 billion of incremental strategic investment, delivering gross cost savings of £0.3 billion so far. We have extended our ambition for saving even further, increasing our 2024 gross cost savings target by an additional £0.2 billion. ### Driving revenue growth and diversification We have made good progress on building deeper customer relationships, as well as innovating and broadening our product offerings and improving the ease with which our customers can access them. We remain the UK's largest digital bank and have continued to invest in personalisation and digitisation, resulting in a 15 per cent increase in daily logons and growing our digitally active users by 8 per cent to 19.8 million. We have also expanded our presence in areas where we are under-represented. For example, we grew our protection market share by around 1 percentage point. In our new mass affluent business, we saw an increase in banking balances of over 5 per cent and launched new, tailored banking products, including packaged bank accounts and credit cards, as well as enhanced direct to consumer investments. We are building capability as we look to launch our differentiated, digital first model in earnest later this year. In February 2023, the Group announced the acquisition of Tusker, a vehicle management and leasing company focused on electric and low emissions vehicles. This will further develop the Group's Motor business in a way that is clearly aligned with the organisation's purpose and sustainability ambitions. In SME, we continue to digitise and diversify our business, with positive early momentum demonstrated by a more than 20 per cent growth in new merchant services clients. We are also broadening our product capabilities with strategic fintech partnerships where appropriate. Alongside, our targeted Corporate and Institutional offering delivered c.£8 billion of green and sustainable financing, driven by purpose-driven growth with businesses transitioning to net zero. We are meeting more needs for existing clients and growing non-lending income, supported by investment in product capabilities. This is reflected in a c.20 per cent growth in our percentage share of wallet for foreign exchange trading. ### Investing in enablers to improve delivery Maintaining discipline with regards to cost and capital efficiency is critical to our strategy. To this end, increased customer engagement and continued investment in digital propositions enable us to optimise the cost-to-serve to customers by, for example, streamlining our branch network, whilst reducing our office footprint by c.12 per cent. We remain committed to identifying further efficiencies to minimise the net cost impact from inflationary pressures and create the necessary capacity for investment. With regards to capital efficiency, we have demonstrated RWA discipline during the year whilst pursuing growth in capital-lite and fee generating businesses. In order to deliver our strategy, we are focused on maximising the potential of our people, technology and data, the key enablers. For our people, efforts in 2022 have focused on positioning the organisation for future success. We have established an experienced, new leadership team with significant capabilities in strategic and digital delivery, alongside a flatter executive structure aligned with our strategic priorities. The strengthening of our senior leadership team is also delivering on our inclusion and diversity objectives. In addition, we restructured our business and technology teams to set up a new platform-based operating model that brings together expertise in cross-cutting, multi-functional teams to now drive greater accountability and collaboration and help to effect more quickly and efficiently. Finally, we have continued to invest in the talent, skills and capabilities needed to deliver our long-term growth strategy with our approach extending to consideration of international in-sourcing opportunities and how we work with third parties. We are investing in modernising our technology estate, improving resilience and operational agility. During 2022 we decommissioned 5 per cent of our legacy applications, in line with our target of a greater than 15 per cent reduction by the end of 2024. As part of our effort to grow the role of data in our business, we reduced our data centre estate by 10 per cent in 2022. We also successfully ingested the first significant tranche of data onto Google's public cloud platform and continue to target 20 per cent of our applications to be on public and private cloud in 2024. Our experience in 2022 has enhanced our conviction in the fundamental importance of our technology and data transformation programme for the long-term success of the Group. Through our purpose-driven strategy we will continue to drive revenue growth and diversification across our main businesses, unlocking opportunities through our consumer and commercial franchises. This growth will in turn leverage the Group's cost and capital efficiency, building on our strong foundations. Critical to this is our intention to maximise the potential of our people, technology and data in supporting our ambitions. ### Outlook Although the macroeconomic outlook remains uncertain, our people, business model and financial strength ensure that we can continue to support our customers and Help Britain Prosper. Our purpose-driven strategy is more relevant now than ever before and our experience in the last year reinforces our belief that successful strategic delivery will create a more sustainable business and deliver increased shareholder returns in the medium to longer-term. Based on our current macroeconomic assumptions the Group expects: ### 2023 guidance - Banking net interest margin to be greater than 305 basis points - Operating costs to be c.£9.1 billion - Asset quality ratio to be c.30 basis points - Return on tangible equity to be c.13 per cent - Capital generation to be c.175 basis points ### 2024 and 2026 guidance - Operating costs now expected to be c.£9.2 billion in 2024, with a cost income ratio of less than 50 per cent by 2026 - Asset quality ratio now expected to be c.30 basis points in 2024 - Return on tangible equity now expected to be c.13 per cent in 2024 and greater than 15 per cent by 2026 - Additional revenues from strategic initiatives of c.£0.7 billion by 2024 and c.£1.5 billion by 2026 - Risk-weighted assets to be between £220 billion and £225 billion at the end of 2024 - Capital generation now expected to be c.175 basis points in 2024, increasing to greater than 200 basis points by 2026 - The Group will maintain its progressive and sustainable ordinary dividend policy, whilst the Board expects to pay down to its target CET1 ratio by the end of 2024 Charlie Nunn Group Chief Executive 14 Lloyds Banking Group Annual Report and Accounts 2022 To help drive change through the rest of the organisation, we’re ## The importance of launchingourCatalystprogramme,involving10percentofthe ## our people and culture organisation. They will inspire everyone across the Group to think and act differently, unblocking problems and igniting change whilst ### Our people make all the difference. We role modelling our purpose and values. ### are committed to building a fully inclusive We recognise that the world of work is changing, technology is ### environment that is reflective of the society advancing, and skills needed today will be obsolete in the future. As ### we serve. A place that encourages and theUKfaceschallengeswithskillsshortages,weareinvestinginour ### values the unique differences our people colleagues to be the key to our future success. We are developing the deep technical skills we need now, and in the future, and have ### bring with them to work every day, and where developed a reskilling proposition, so we can nurture and retain ### everyone can reach their full potential. talent by providing opportunities for second, third and even fourth careers, allowing colleagues to move freely around the Group. Financial results Risk managementGovernance Financial statements Other informationStrategic report Our purpose of Helping Britain Prosper is as important as ever, but in order for us to grow our business in a way that delivers Amongst our top 300 population, we are building skills and great outcomes for customers, communities and colleagues, diversity,including32internalpromotionstoexecutiveand28 we need to put our purpose at the front and centre of every externalexecutivehiresofwhich46percentwerewomenand decision we make. 21percentwerefromanethnicminoritybackground. To ensure we’re all supported to make that change, we’ve We know the success of our business is dependent on our colleagues evolvedourvaluessothattheyclearlyalignwithourpurpose: and we aim to look for ways to help them feel more supported, in People-first,Bold,Inclusive,SustainableandTrust.They’llguide controlandconfidentabouttheirfuture.Wehavealsolaunched not only how we work, but also how we make decisions. We’ve several changes for the colleague proposition including a one-off introduced a new value helping us to champion sustainability, paymentof£1,000tothevastmajorityofcolleagues;improved recognising its important role in delivering on our purpose and workplacefacilities;increasedyear-endgettogetherallowance; supportingBritain’stransitiontoanetzeroeconomy.Further andmoreaccessibleandeasiertousetechnologyinoffices.Aswe detail on our new values can be found on pages 84 and 85. accelerate our purpose-driven ambition, one of the critical outcomes will be to become a place where more people are both passionate Our leaders are critical to our cultural change. We’re bringing about, and want to advocate for, working at Lloyds Banking Group, them together in a different, and more intimate way to accelerate making this a key measure of our success going forward. In response the change, in a programme called Grow with Purpose. Over three to the increasing cost of living, recruitment and colleague sentiment days,theyareexploringourpurpose,strategyandorganisational challenges, we have announced a wide-ranging pay deal, with a shifts, before making commitments about what they’ll do focus on lower paid colleagues. differently.CharlieNunn,GroupChiefExecutive,isspendingtime with the top 300 leaders at Grow with Purpose, as well as the Group Looking forward, with Helping Britain Prosper as our north star and ExecutiveCommitteewhoareattendingthethreedaysinfull. working closely with our colleagues, we will enable the cultural transformation of the Group. ## 92% ### of our colleagues believe in our ### purpose of Helping Britain Prosper 15Lloyds Banking Group Annual Report and Accounts 2022 ## Our external environment ## The Group continues to adapt ## to evolving market trends ## Customers ### • Customers value convenience and relevance for ### their financial needs; our strategy seeks to meet ### this through investment in our business ### • Cost of living is forefront in the minds of our ### customers; we are proactively supporting them ### in a challenging period Link to principal risks Conduct, Credit, Data, Operational resilience, People Market dynamics Our response 2022 has been a challenging year for many of our customers. Whilst The Group continues to adapt to customer trends. In the longer the social and economic consequences of COVID-19 continue to term, to meet customer expectations for seamless, personalised be felt, the Russian invasion of Ukraine in February added to the experiences, we continue to invest in our data and technology economic headwinds from nearly two years of disruption. capabilities. The benefits of this can be seen in our cost of living support hub; our customers have visited this over 875,000 times New working patterns continue and worsening health outcomes and received personalised support with debt repayments, are reducing labour force participation. Supply chain disruption, subscription management to help control spending and links in addition to global fiscal and monetary stimulus has contributed to independent advice and support services. The cost of living to inflationary pressure as customers revert to pre-COVID-19 challenges increase the need to execute on our strategy, norms. The digital acceleration experienced over the last two deepening relationships with customers to support their financial years as COVID-19 forced new behaviours has stabilised, with needs and creating a digital mass affluent proposition. For customer activity still strongly skewed towards digital channels. commercial clients, digitising our SME business and focusing Consequently, customer expectations of convenient, personalised our corporate and institutional business on meeting their core experiences through digital channels remain high. cash management, debt and risk management needs remains our focus. Rising interest rates in the UK, worsening following the market dislocation resulting from the September mini-budget, had We have increased our support to customers during 2022. Cost of a significant impact on customer and client borrowing costs. living pressures are affecting our customers in different ways and Rising mortgage costs have been an unexpected shock for many there are increasing expectations for financial service providers and the full consequences of this are likely to be felt over the to do more to support them. We are tailoring our support to coming years as our customers come to the end of their fixed meet our customers individual changing circumstances and rate products. Inflationary pressure on real incomes will also have have trained more than 4,600 colleagues to provide financial knock-on impacts on longer-term challenges our customers face, assistance to individuals and businesses to help them build such as saving for retirement. Businesses face a combination of financial resilience and provide access to tailored products if rising input costs, higher borrowing costs, a tight labour market needed. To support customers with potential financial stress, we and lower consumer demand. Whilst government intervention in have offered over 200,000 mortgage customers support in the energy markets has softened the blow on customer finances in face of higher interest rates and provided 220,000 customers a the short term, rising taxation on both consumers and businesses £500 interest-free overdraft buffer. We’ve also communicated to presents a challenging outlook. more than 550,000 businesses to provide support and options in managing their finances, for example sustainable financing options to reduce energy costs. Our digital strength is also 1 supporting customers to take greater control of their finances, with over 5 million registrations for our Your Credit Score tool. Change in channel usage versus 2017 Average visits per user (%) 2017 2018 2019 2020 2021 2022 150 100 1 First part of 2021 includes effects of national lockdown. 50 16 Lloyds Banking Group Annual Report and Accounts 2022 0 Digital Branch # Economy - Given our focus on UK customers, the Group's prospects are closely linked to developments in the UK economy - The UK outlook deteriorated in the second half of 2022, heavily influenced by the invasion of Ukraine and central banks' response to high inflation - High inflation and rising interest rates create a challenging UK economic outlook for 2023 **Link to principal risks** Capital, Conduct, Credit, Market ## Market dynamics After starting 2022 with economic activity constrained by COVID-19, UK GDP recovered almost to its pre-pandemic level by mid-year. Further recovery was limited by rising numbers of workers with long-term sickness and weak productivity growth. House prices and commercial real estate (CRE) prices continued to rise through the first half of 2022. During the second half of the year, however, Russia's invasion of Ukraine began to have a large impact on global and UK economies. Higher energy and food prices exacerbated greater supply chain costs, pushing UK CPI inflation to a 41 year high of 11 per cent during the fourth quarter. Although the UK Government capped energy prices and provided further support to lower income households and pensioners, households' spending power fell by around 2 per cent in 2022, the largest single-year decline since the 1950s. Policy support to counter cost of living pressures is constrained. UK Government finances are increasingly stretched, entering the third economic crisis since 2008. Spending plans for the next five years have been pared back, taxes raised and the energy price cap reduced from April 2023. In response to inflation rising well above target, the Bank of England raised UK Bank Rate from 0.25 per cent at the start of 2022 to 3.5 per cent by year end, the highest level since 2008. Although inflation will begin to fall from early 2023, this is expected to be gradual, causing a further decline in households' spending power, dragging down UK GDP by 1.2 per cent. With UK Bank Rate expected to be 4 per cent through most of the year, house prices are forecast to fall by 7 per cent across 2023 with mortgage affordability for new buyers at its tightest since pre-2009. Higher interest rates are reducing CRE prices even more significantly. There are significant risks to these forecasts in both directions – the impact of rising interest rates could weaken the global or UK economy more than expected; conversely, the cost of living squeeze may be not as deep as assumed if recent falls in wholesale-market forward energy prices persist. Developments in our markets across 2022 reflected the recovery in economic activity from pandemic-restricted levels of 2020/21, the end of government schemes that had supported companies' borrowing during the pandemic, and the rise in inflation. Consumer credit market balances rose by 5 per cent as spending recovered, although have still regained only half of their fall during the pandemic. Mortgage market balances rose by a healthy 4 per cent, supported by the 18 per cent rise in house prices over the three years since the start of the pandemic. Growth in households' deposits slowed to a more normal 4 per cent in 2022 after having grown by 17 per cent in total over 2020 and 2021 when spending opportunities were constrained. Business lending grew slightly, but this masks a bigger rise in lending to large companies and a fall of over 5 per cent in lending to SMEs as businesses began to pay down COVID-19 scheme borrowing. A mild recession and falling property prices are expected to reduce growth in most of our markets in 2023. Mortgages are expected to slow the most, as higher interest rates drive down housing transactions. Consumer credit growth is expected to slow less, with further ground to make up to the pre-pandemic level of balances, and with elevated inflation supporting the nominal value of spending. Household deposits growth is expected to slow to its weakest since 2009 as the cost of living squeeze intensifies. SMEs are expected to continue reducing their elevated borrowing. ## Our response Given our UK focus, the Group's prospects are closely linked to the performance of the UK economy. Despite this, our business model and strategy, in particular the strength of our customer franchise, balance sheet and prudent approach to risk, position us well. In line with our purpose of Helping Britain Prosper and a clear customer focus, we are providing support to those most affected by changes to the economic environment. In addition to the near-term revenue benefits from rising interest rates, our strategy will deliver growth and diversification even in a more challenging macroeconomic environment, improving the sustainability of returns. At the same time, we are accelerating efficiency measures to offset inflationary pressures on our cost base, consistent with our ongoing discipline in this area. Strategies report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 17 ### Our external environment ### continued ## Society and ## environment ### • Stakeholders expect UK companies to play their ### role in supporting the country and its people ### in the current uncertain environment ### • Building an inclusive society and supporting the ### transition to a low carbon economy are core to ### our strategy and our purpose of Helping ### Britain Prosper ### • This focus positions us well to support our ### customers, colleagues and communities, ### and create value for all stakeholders Link to principal risks Climate, Conduct, Credit Market dynamics We have also supported our colleagues by providing one-off We are faced with political and economic uncertainty both payments in August and December 2022, and designed a new at home and globally. Rising inflation and interest rates, and pay deal for 2023 to provide protection and certainty to our lower government spending cuts and tax rises, engender a cost of paid colleagues into the new year. living squeeze on many people and businesses in the UK. We have provided access to quality housing by supporting The focus on climate change remains, with the emphasis £2.1 billion of funding to the social housing sector and lending now on companies’ tangible short and medium-term plans £14.3 billion to first time buyers in the year. We have partnered with and implementation of these plans to support the transition the UK Urban Futures Commission and supported local, green of the economy towards net zero. There is also an emerging infrastructure projects to support regional development across focus on nature and biodiversity, the need to protect them and the country. to better understand their inter-linkages with climate. At the same time, increasing regulatory focus on climate risks and To support the transition to a low carbon economy, we have evolving sustainability reporting standards put pressure on UK provided over £13 billion of green and sustainable finance companies to continually enhance their climate capabilities to businesses and households to help them on their net zero and sustainability reporting. journey and invested around £12 billion in climate-aware strategies through Scottish Widows during 2022. We have also Our response created a new partnership with Octopus Energy to support Core to our purpose, Helping Britain Prosper, and strategy is our retrofitting of the UK housing stock and developed our first Group focus on creating a more inclusive and sustainable future for climate transition plan which highlights the progress against our people and businesses. This focus positions us well to support net zero ambitions and the actions we will take towards transition. our customers and the broader UK society during challenging This plan is included in our dedicated environmental sustainability times, whilst continuing to support the transition required to report as we continue to enhance our reporting on environmental reach net zero. risks and opportunities. In 2022, we contacted over 200,000 mortgage customers to Tax is also one of the ways in which businesses contribute to the provide support in context of rising rates and more than 550,000 societies in which they operate, and we are proud to be one of the commercial clients to offer support in maintaining financial UK’s largest tax payers, helping finance public services. resilience through the cost of living challenges. We will continue to work hard to deliver on our purpose, Helping Britain Prosper, by creating a more sustainable and inclusive future for people and businesses, as we believe that it is only by doing right by our customers, colleagues and communities that we can create value for all stakeholders. | >200k | >£13bn | | --- | --- | | mortgage customers | of green and sustainable | | contacted to provide support | finance provided to | businesses and households to help them on their net zero journey 18 Lloyds Banking Group Annual Report and Accounts 2022 Strategic report ## Technology ## and data ### • We operate in an increasingly digital market, ### with potential for new business models and ### changes to financial services infrastructure ### • Technology investment remains important to ### improve customer experience, unlock efficiency ### savings and utilise the full potential of data GovernanceFinancial results Other informationFinancial statementsRisk management Link to principal risks Change/execution, Conduct, Data, Operational, Operational resilience Market dynamics Our response Recent years have seen an increase in customer digital usage The Group continues to see significant value in its all-channel as COVID-19 restrictions have accelerated existing trends. Whilst distribution model, maintaining a wide branch footprint alongside there has been some rebound, with cash usage increasing in digital capabilities, which are critical to driving revenue growth 2022 and the share of consumer spend online declining from and diversification for the business. Experience in 2022 has only lockdown peaks, the long-term trend towards increasingly enhanced our conviction of the importance of our technology digital-first financial services remains. Reflecting this reduced transformation program for the long term health of the business. customer demand, the number of bank branches continued to reduce during 2022. In 2022 we have increased digitally active customers by 8 per cent to 19.8 million and continued to invest in simplifying our We operate in a highly innovative market with business model technology estate, making good progress in re-platforming innovation enabled through new digital technologies such as our businesses and achieving a 5 per cent reduction in legacy cloud hosting and API connectivity. Across many markets, there applications. This unlocks customer benefits, such as faster, more is potential for embedding lending, payments and insurance seamless digital journeys, and business benefits through a lower services within digital, non-financial services settings to disrupt cost to run and enhanced technology estate. traditional business models. Other areas of innovation such as cryptocurrencies experienced high volatility over the year. Our investment to maximise the potential of people, technology Nonetheless, the consequences of digital innovation in payments and data continues. During 2022 we reorganised our teams to may be longer term, with central bank experimentation with their bring business and technology ownership closer together through own digital currencies gaining pace. This has spurred industry a new platform-based operating model. Our investment in data exploration of the potential of technologies like blockchain continues to mature, supporting better customer and business in areas such as international payments, trade finance and outcomes, in addition to enabling the deep customer insights market infrastructure. required to comply with the upcoming Consumer Duty regulation. We continued to make good progress in transforming our As customers increasingly use digital channels within financial technology and reduced our data centre footprint by 10 per cent. services and lead more of their lives online, the potential for fraud increases. However, the first half of 2022 saw a reduction in total fraud volume, following rises in recent years. Technology investment in capability to detect and prevent fraud, in addition to regulation such as secure customer authentication, is beginning to tackle this important issue for customers. Customers are using the digital channel for most product needs More broadly, the potential of new technologies to simplify legacy % volume of products originated digitally systems remains for banks. This includes reduced run and change 022 costs, and improved services provided to customers enabled through real time and fully contextual data insights. 020 018 016 Customers are using the digital channel for most product needs | % volume of products originated digtally | | 014 | | | --- | --- | --- | --- | | 2 | 84 | | | | 2 | 85 | | | | 2 | 73 | | 19Lloyds Banking Group Annual Report and Accounts 2022 | | 2 | 61 | | | | 2 | 40 | | | ### Our external environment ### continued ## Competitor ### • We continue to largely operate in mature, highly ### competitive markets ### • Fintechs are challenged by rising interest rates ### impacting funding availability ### • Technology companies and international ### banks continue to expand financial services ### participation in the UK Link to principal risks Capital, Change/execution, Conduct Market dynamics Our response The UK financial services sector is a highly competitive market, We are well positioned to continue our market leading position attracting new entrants in recent years from international firms across multiple markets and deliver on our ambition to grow. We and new start-ups backed by private capital. Our traditional have a strong customer franchise and core capabilities including peers have been strengthened by rising interest rates, albeit the credit decisioning and market leading efficiency, which is uncertainty over the economic outlook presents downside risks. increasingly important given inflationary pressures. Our financial Notwithstanding, improved financial strength positions incumbent strength allows us to support our customers and our clear banks well to compete with new entrants. purpose and mission drive focus throughout the organisation to achieving our strategic goals. 2022 saw continued market entry from international peers with the launching of digital-only brands and acquisition of existing We have strong customer relationships, meeting the needs of wealth management firms. These new direct competitors are 26 million customers. We will continue to drive strong customer expected to broaden their offerings over time in a bid to reach engagement through our multi-channel model and deepen profitability and scale. Other new entrants pared back growth customer relationships through a comprehensive offering. We ambitions in the UK, reflecting the need to focus on their core are increasing our focus on customer segments, building out a franchise. In addition, technology companies’ extension into compelling mass affluent proposition over time, supported by the financial services has continued. Provision of financial services acquisition of Embark that completed in early 2022. Our multi- embedded into platforms, often beginning with payment brand strategy allows us to compete effectively in intermediary- services, and then extending into working capital or consumer driven markets, where we have headroom to grow as we improve loans and deposits, is a key development. Differing approaches our capability with technology investment, particularly in our are being adopted by these platforms, from building out their pensions and protection businesses. own financial services offerings to partnering with existing banks to provide financial services. We continue to invest in front-to-back digitisation of our SME bank, responding to changing client needs and enabling us to meet For some UK fintech entrants 2022 was a more difficult year. more of their needs beyond banking. Following global interest rate rises, increasing funding costs are challenging models that are better suited to more benign We have also increased our focus on collaborating with fintechs economic environments. Valuations and private capital funding during the year to broaden our product capabilities, for example have fallen over the year, as expectations of future growth a partnership to enable digital invoice financing and factoring have tempered, and funding costs increased. Nevertheless, for our SME bank clients. the digital experience for customers and speed of execution continue to raise customer expectations across the board, Finally, within corporate and institutional business we are focusing requiring ongoing investment to keep pace, and fintechs on our core strengths in cash, debt and risk management remain significant competitors. products for our UK clients. We will continue to invest in these strengths and scale our originate to distribute capabilities to support clients’ long-term needs and increase our balance sheet efficiency. 20 Lloyds Banking Group Annual Report and Accounts 2022 ## Regulation Financial results GovernanceStrategic report ### • The UK financial services sector is expected ### to remain highly regulated ### • High volumes of new regulation and market ### reviews continue to be issued, with further ### regulatory changes anticipated Link to principal risks Capital, Climate, Conduct, Market, Regulatory and legal Market dynamics Financial Services and Markets Bill: This Bill is designed to map The UK financial services sector remains highly regulated with out the future of the UK’s financial services sector following the significant regulatory reform anticipated in 2023, including the decision to leave the EU. By tailoring regulation to the UK market, implementation of the Edinburgh Reforms, the Financial Services its intention is to increase the UK’s competitiveness as a global and Markets Bill and reforms to Solvency II. 2023 will see a number financial centre whilst maintaining high regulatory standards to of consultations and calls for evidence across the different areas protect customers. The Bill is a wide-ranging piece of legislation of reform. We will analyse the proposals and work closely with the that covers multiple areas including reforms to capital markets regulators and the government as and when the different areas and addressing customer challenges related to access to cash of reform are consulted on. Key areas of focus for 2023 are below: and fraudulent activity. Customer treatment: Fair treatment of customers remains Ring-fencing: Since 2019, the Group has been structured a priority for the FCA, and the introduction of the Consumer into sub-groups to comply with the ring-fencing rules. The UK Duty in 2023 will require a more outcomes focused approach legislation was passed after the financial crisis to better protect to prioritise customers’ needs. Customers are facing increased customers and the day-to-day banking services they rely on. cost of living pressures and we recognise the need to do We await government’s consultation on near-term reforms of more to support all customers, including those who may ring-fencing, and will continue to work closely with the regulator be in vulnerable circumstances. on the matter. Capital regulation: The Group complies with capital regulations Edinburgh Reforms: On 9 December 2022, the government covering the assessment and measurement of capital resources launched the Edinburgh Reforms. The reforms focus on reviewing, and requirements, including risk-weighted assets. In November updating or reforming a number of areas of financial services 2022, the PRA published a consultation on its proposals to regulation, ranging from ring-fencing, consumer credit and the implement the final Basel III reforms. This included a number Senior Managers and Certification Regime, to repealing areas of of significant changes to the calculation of risk-weighted assets. EU regulation now that the UK has left the EU. We are continuing to work closely with the industry and regulators to understand the implications. Other: A number of other regulatory initiatives are in progress which seek to address, amongst other things: access to cash, ESG: Engagement continues with all key stakeholders, including mortgages and green financing, culture, operational resilience, customers, government, regulators and the market, to help create completion of IBOR transition, financial crime and accounting a more sustainable and inclusive future for all. We continue to (e.g. IFRS 17). Other informationFinancial statementsRisk management enhance our sustainability reporting, including aligning to the recommendations of the Task Force for Climate-related Financial Our response Disclosures, closely following the evolving sustainability reporting As a Group we always seek to comply with all applicable standards and requirements, and will further embed climate risk regulation and engage with regulators on all aspects to improve into risk frameworks and policies. outcomes. Given the Group’s customer-focused, sustainable and low risk business model, it is well placed to meet these Solvency II: The Solvency II regime which regulates the insurance requirements and welcomes the positive effect they have capital required for insurance entities is currently being reviewed/ on the industry, its customers and other stakeholders. is under consultation by the PRA. 21Lloyds Banking Group Annual Report and Accounts 2022 ## Our strategy ## Our purpose is Our strategic vision ## Helping Britain Prosper supports our purpose ## We’re creating a more To become the UK’s ## sustainable and inclusive customer-focused, digital ## society for people and leader and integrated ## businesses, shaping financial services provider, ## finance as a force capitalising on new ## for good. opportunities, at scale. ### To deliver on our purpose, we have ### identified four focus areas where we are ### best placed to provide significant positive ### change, enabling us to create a more ### inclusive society and sustainable future: ### • Creating a more inclusive future ### • Improving access to quality housing ### • Enabling regional development ### • Greening the built environment View our environmental View our social sustainability report here. sustainability report here. 22 Lloyds Banking Group Annual Report and Accounts 2022 ## Significant strategic action, with early evidence of delivery # Grow ### Drive revenue growth and diversification #### Investing in growth £0.9 billion in-year incremental strategic investment weighted towards growth. Delivered early stages of targeted additional 2024 revenues # Focus ### Strengthen cost and capital efficiency #### Accelerating efficiency initiatives Cost discipline in an inflationary environment. Delivered £0.3 billion or around 25 per cent of increased 2024 gross cost savings target # Change ### Maximise the potential of people, technology and data #### Mobilising for change New operating model implemented to deliver change more effectively #### Refreshing the team New organisational structure and leadership team ## Creating higher, more sustainable, returns ### In 2024 #### c.13% RoTE c.£0.7bn additional revenues from strategic initiatives c.£9.2bn operating costs c.175bps capital generation ### By 2026 #### >15% RoTE c.£1.5bn additional revenues from strategic initiatives <50% cost:income ratio >200bps capital generation Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 23 ## Our strategy in action ## Drive revenue ## growth and ## diversification Growth is a core focus of our strategy. Around two thirds of our £3 billion strategic investment over the first three years is aligned to growing and diversifying revenue. We have carefully prioritised opportunities across each of our businesses to ensure we generate value in the near term as well as creating new revenue streams which deliver over the longer term. We aim to deepen and innovate in Consumer to bring more of our products and services to our existing customers, as well as broaden our product offerings and make it easier for customers to access them through our intermediary partners. We aim to digitise and diversify our SME business, growing revenues in products and sectors where we have lower market share today. In addition, we are creating a new mass affluent offering to grow in this attractive and underserved market segment across banking, protection and simple wealth. Finally, we are targeting our Corporate and Institutional offering to deliver disciplined growth. ## Deepen and ## innovate in Consumer Progress in 2022 • Within Consumer, we have invested in driving improved levels of personalisation and digitisation, resulting in a 15 per cent increase in daily logons. We remain the UK’s largest digital bank and in 2022 grew our digitally active users by 8 per cent to 19.8 million, set to exceed our 20 million ambition by 2024 • We have increased our protection market share 1 by around 1 percentage point , with growth in both our relationship and intermediary channels, and particularly strong performance in our new digital direct to consumer proposition. This will be further supported by the recent acquisition of Cavendish Online which will enable us to meet more of our franchise customers’ protection needs • We continue to build on our strong position in workplace pensions, with net workplace pension flows of £6 billion in 2022 from over 4 million workplace customers as we secured a 16 per cent market share of assets under administration • Our intermediary businesses are important in our support of the UK’s net zero transition needs. We have 1 completed £3.5 billion of green mortgage lending, progressing well against our £10 billion objective by 2024. We have also completed over £2 billion of financing for battery electric and plug-in hybrid ## Grow electric vehicles, against our target of £8 billion by 2024 24 Lloyds Banking Group Annual Report and Accounts 2022 1 Nine months to 30 September 2022. ### Selected 2024 outcomes 2023 implementation We will continue to personalise and digitise our ## >5% Consumer offering, supporting our ambition to meet 1 more of our existing customers’ needs. Increase in depth of relationship through meeting more needs of existing customers Our intermediary participation will be broadened with the launch of a new intermediary protection proposition that supports our aim to be a top three ## Grow player by 2025. Credit card spend market share Financial results Risk managementGovernance Financial statements Other informationStrategic report We will expand our motor offering with innovative new solutions such as a market leading digital vehicle leasing offer and customer pre-approval capabilities. ## Personalisation capability that has been developed >£55bn will be further deployed, for example by scaling our New assets under administration investment HomeHub ecosystem to improve mortgage acquisition 2 and retirement open book net flows and retention rates. ## £20bn– ## 25bn 3 Invested in climate-aware strategies through Scottish Widows by 2025 ## £8bn Financing and leasing for electric vehicles and plug-in hybrid electric vehicles 1 Product holdings across brands for franchise customers with active relationship. 2 Includes long-term savings and excludes Embark day one contribution of around £37 billion, longstanding, unbundled investment only pensions, Cazenove and legacy private banking trusts. 3 Pre-defined funds that have an in-built bias or tilt towards companies that are transitioning their business models to be less carbon intensive and/or developing climate solutions. 25Lloyds Banking Group Annual Report and Accounts 2022 ### Our strategy in action continued ## Digitise and diversify ## our SME business Progress in 2022 • Our multi-year journey to build a front-to-back digital SME business has progressed, with positive early momentum shown including more than 20 per cent growth in new merchant services clients and a proven new digital onboarding capability • We are focused on building out products which are important relationship anchors, such as asset finance, invoice discounting and trade finance. In 2022, we grew income by around 5 per cent in mid-sized SME transaction banking and working capital, as we pursue our target of 15 per cent income growth by 2024 • Our vision to broaden our relationships with one million small business clients has been supported by broadening our product capabilities with strategic fintech partnerships. For example, our invoice discounting partnership provides a solution that allows clients to better manage cashflows 2023 implementation Investment in technology and data capability will continue in 2023 to create a digitally led, SME bank with diversified income and broader customer relationships over time. We will deliver a mobile first onboarding proposition for clients and launch an end-to-end digital origination for asset finance, as we look to ensure we meet the full range of our clients’ needs. Continued investment in data capabilities is a critical enabler for our digital SME bank, ensuring we are better able to support client needs such as cash flow management. ### 2024 outcomes ## >50% Share of products originated and fulfilled digitally ## >15% Income growth in mid-sized SME transaction banking and working capital ## 20% p.a. Growth in new merchant services clients 26 Lloyds Banking Group Annual Report and Accounts 2022 ## Create a new mass affluent offering Progress in 2022 - In our new mass affluent business we saw an **increase in banking balances**¹ of over 5 per cent and are building capability as we look to launch integrated and digitally led banking, insurance and investments propositions - We have launched new, **tailored banking products** including packaged bank account and credit card products to provide personalised mass affluent banking propositions - Our **direct to consumer investments** capability has been enhanced, aided by the completion of the acquisition of Embark. This was previously a gap in our product capability 2023 implementation Further significant elements of our mass affluent offering will be launched in 2023, with customers experiencing a **differentiated, digital-first model**. We will expand our **mass affluent banking offering**, with tiered savings, higher credit limits and bespoke benefits. In addition, we will launch **ready-made and direct to consumer investment** options. 2024 outcomes >£5bn Incremental total banking balances for mass affluent increasing to between £10 billion and £15 billion by 2026 >£7bn Incremental net flows into investment proposition increasing to £25 billion by 2026 Grow Number of mass affluent personal account customers ## Target our Corporate and Institutional offering Progress in 2022 - We have delivered around **£8 billion of sustainable financing**² to our clients and launched carbon emission allowance transactions³. These milestones have been supported by our purpose-driven growth within loan origination and businesses transitioning to net zero - We are investing in **product capabilities** that support our cash, debt and risk management offering. We have seen early benefits from this investment, including around 20 per cent growth in our FX trading percentage share of wallet - Finally, we have strengthened our **originate to distribute** capabilities, delivering a milestone first strategic co-investment partnership. These strengthened capabilities further improve the Group's capital efficiency 2023 implementation In 2023 we will build on these foundations by meeting more needs of purpose aligned clients in **key growth industries**. We will **improve our capabilities** across our core business lines in debt capital markets, foreign exchange and financial institutions, including investing in our US and EU debt capital market capabilities. We will increase our balance sheet efficiency as we scale our strengthened **originate to distribute** capabilities to serve more clients. 2024 outcomes £15bn Sustainable financing³ Top 5 GBP interest rate swaps ranking; deepen FX share of wallet >20% Growth in Corporate and Institutional other operating income <£3bn Net risk-weighted asset growth 1 Banking balances calculated as the absolute total of retail PCA, savings, overdrafts, credit card, mortgage and loan balances plus private banking PCA and savings balances. 2 Includes clean growth finance initiative, commercial real estate green lending, renewable energy financing, sustainability linked loans and green and social bond facilitation. New cumulative to 2024. 3 Under the UK Emissions Trading Scheme. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 27 ### Our strategy in action continued ## Strengthen ## cost and capital ## efficiency As we invest to grow and diversify our revenue, it is essential to maintain our disciplined cost management approach. We will also look to further improve our capital efficiency as we maintain our strong balance sheet with a disciplined risk approach, pursuing growth in capital-lite, fee generating businesses. Progress in 2022 • Cost discipline has been a key strength for the Group and remains a key focus in enabling capacity for investment in growth initiatives as well as offsetting inflationary pressures. Around 25 per cent of our increased 2024 gross cost savings target has been delivered. Lowering the cost of technology through simplification of our legacy technology estate is critical to enabling the change the business requires for growth • We further refined our service model, resulting in the closure of around 200 branches, alongside our continued investment in digital propositions • We have also continued to reduce our office footprint as we adapt to new ways of working, with a 12 per cent reduction in the year, as we target a reduction of more than 30 per cent by 2024 • With regard to capital efficiency, we continue to demonstrate risk-weighted asset discipline as we pursue our growth initiatives in capital-lite, fee generating businesses. In addition, we successfully completed a securitisation transaction for a portfolio of legacy Retail mortgage loans, with much of the risk placed in the market ## Focus 28 Lloyds Banking Group Annual Report and Accounts 2022 ### 2024 outcomes 2023 implementation ## Strengthen Our investment in technology will deliver further ## >10% improvements in self-service capabilities and end- ## cost and capital to-end journey digitisation. In line with our ambition Increase in customers served to embrace hybrid ways of working and transform per distribution FTE workplaces, we will continue to modernise our office ## efficiency footprint as we work towards a significant reduction in our portfolio by 2024. ## >30% In response to the inflationary environment, we will Reduction in office footprint Financial results Risk managementGovernance Financial statements Other informationStrategic report continue to focus on generating further efficiencies to minimise the net cost impact and create the necessary capacity for investment. Our capital efficiency will also be supported by our growth initiatives in capital-lite, fee generating businesses, as we optimise and recycle risk weighted assets into higher returning businesses. In 2023 we expect to also conclude the triennial pension review, which will demonstrate the significant advances we have made. 29Lloyds Banking Group Annual Report and Accounts 2022 ### Our strategy in action continued ## Maximise ## the potential ## of people, ## technology ## and data Delivering this strategy requires the Group to accelerate the pace at which it uses digital technologies and data to support customers. We seek to emulate our success in building the largest UK Retail digital bank on a larger scale across the Group. Our prior investments in technology and data provide a strong foundation for delivering on our strategy. Progress in 2022 ### People • In 2022 we have been focused on setting up our people and organisation for success in delivering our strategy and change more effectively. We have established an experienced, new leadership team with significant capabilities in strategic and digital delivery, alongside a flattened executive structure. Within our existing three core divisions we have reorganised around five new customer-facing business areas that are more closely aligned to our strategic priorities • Beyond the executive level, we restructured our business and technology teams to set up a new operating model for more than 20,000 employees that brings together expertise in cross-cutting, multi- functional teams that drive greater accountability and collaboration and help to deliver change more quickly and efficiently • We have enhanced our leadership in key skills areas, such as bringing in new Chief Information Officer hires who will support the transformation of our ways of working and culture. In strengthening our senior leadership team, we have remained true to our inclusion and diversity objectives ## Change 30 Lloyds Banking Group Annual Report and Accounts 2022 ### Technology and data • We have progressed on our plans to transform our technology and data capabilities. Alongside improved resilience, this will over time enable an agile technology model that can provide a highly efficient, scalable technology infrastructure and ultimately drive business value • During 2022 we decommissioned 5 per cent of our legacy applications, a pace we expect to maintain over the next two years • We have reduced our data centre footprint by 10 Financial results Risk managementGovernance Financial statements Other informationStrategic report per cent and continue to increase the pace at which we migrate data to the cloud. Over time, further actions such as this will enable full unlocking of the potential of our data as we target 20 per cent of our applications on cloud in 2024 • Our transformed data capabilities will provide data- driven insights to support our business strategies across multiple use cases, including delivering automated processes to enhance the customer service experience 2023 implementation ### People We are committed to building a fully inclusive environment that is reflective of the society we serve. As part of this we are making progress towards the targets that we have set, including 50 per cent women, 13 per cent Black, Asian and Ethnic Minority colleagues and 3 per cent Black Heritage representation at senior management levels by 2025. We continue to commit ourselves to stretching targets, always challenging ourselves to go further. Bringing in new senior talent, ### particularly in technology and data, is supporting 2024 outcomes our effort to alleviate resource constraints for high in demand skills, reducing our reliance on third- party support. ## >15% Finally, we will further modernise and enhance our Reduction in legacy applications office estate with one third of our colleagues in transformed, modern workplaces by the end of 2023 as part of a compelling proposition for top talent. ## 15% ### Technology and data Gross reduction in run and change With our organisational foundations now in place, technology costs investment in transforming technology and data will be scaled in 2023. Building on progress already made, we will further ## Improve mature our data and machine learning capabilities that can then be leveraged across the business with multiple Employee engagement index use cases. Complementing this, continued migrations of data to public cloud will support our modernisation and simplification efforts. We will continue executing ## on our plan, including decommissioning around 10 20% per cent of legacy applications, as we target a further Applications on cloud (private and public) 5 per cent reduction by 2024. Alongside other activity, this will support a gross reduction in run and change technology costs of around 10 per cent. ## 60% Business new lending decisions automated 31Lloyds Banking Group Annual Report and Accounts 2022 ## Progress and ## Financial ## performance R ## Key performance indicators are regularly 5,555 ### reviewed by the Board and the Group 022 5,555 ### Executive Committee, to evidence | | 021 | 5,885 | | --- | --- | --- | | performance against the Group’s | 020 | 1,387 | | most important priorities. | 019 | 3,006 | | | 018 1 | 4,506 | These include measures for assessing financial and non-financial performance and balancing Statutory profit after tax slightly lower, with higher income offset the interests of various stakeholders including by impairment charges as a result of the revised economic customers, shareholders and colleagues. outlook (compared to a credit in the prior year). 2021 also included the benefit of a deferred tax remeasurement. To ensure colleagues act in the best interests of 1 Restated to reflect amendments to IAS 12. customers and shareholders, variable remuneration at all levels across the Group is aligned to these priorities and takes into account the Group’s financial performance and specific conduct and risk management controls. ## 7,448 The key performance indicators shown here directly impact the remuneration awarded to executive 022 7,448 directors, which is heavily weighted towards the 021 1 7,536 delivery of long-term, sustainable performance. | | 020 | 1 | 1,742 | | --- | --- | --- | --- | | The implementation of our simplified balanced | 019 | 1 | 7,172 | | scorecard provides greater transparency to | 018 | 1 | 7,588 | substantiate how our performance directly aligns with remuneration outcomes. Underlying profit before tax slightly lower with income growth offset by an increased impairment charge (compared to ### Our 2022 balanced scorecard a credit in the prior year). 1 Restated to reflect the new costs basis. See page 67. Financial (50 per cent) Statutory profit after tax (20 per cent) Return on tangible equity (20 per cent) Operating costs (10 per cent) Strategic (50 per cent) Customers ## 2.40 Group customer dashboard (25 per cent) 022 2.40 Colleagues 021 2.00 Employee engagement (7.5 per cent) 020 0.57 Gender and ethnic representation in senior roles 019 1.12 (7.5 per cent) 018 3.21 Climate Operational carbon emissions (5 per cent) Total ordinary dividend of 2.40 pence per share, up 20 per cent, Sustainable financing and investment (5 per cent) reflecting our progressive and sustainable ordinary dividend policy. Includes both interim and final dividends. R ## 13.5 | | | 022 | | 13.5 | | --- | --- | --- | --- | --- | | | | 021 | | 13.8 | | | | 020 | 1 | 2.3 | | | | 019 | 1 | 6.6 | | | | 018 | 1 | 10.6 | | R | Key performance indicators that are directly linked | | | | to our remuneration balanced scorecard are marked Return on tangible equity in 2022 reflects the Group’s robust with this symbol. See page 110. financial performance. 2023 guidance: Return on tangible equity of c.13 per cent. | | A | We use a number of alternative performance | A | A | | | | --- | --- | --- | --- | --- | --- | --- | | Statutory profit after tax Ordinary dividend Return on tangible equity Underlying profit | | | | | | | | £m % £m p per share | | measures in the description of our business | | | 1 From 2021, to aid comparability with peers, we began reporting return | | | | | performance and financial position. These measures | | | | on tangible equity without adding back the post-tax amortisation of | | 2 2 2 2 | | are labelled with this symbol. See page 67. | | | | intangible assets. Pre-2021 comparatives have been restated. | | 2 2 2 2 | | | | | | | | 2 2 2 2 | 32 Lloyds Banking Group Annual Report and Accounts 2022 | | | | | | | 2 2 2 2 | | | | | | | | 2 2 2 2 | | | | | | | Non-financial ## Customers R ## 14.1 67.7 | 022 1 | 022 | 67.7 | | --- | --- | --- | | 021 1 | 021 | 69.3 | | 020 | 020 | 68.8 | | 019 1 | 019 | 66.0 | | 018 1 | 018 | 63.4 | Financial results Risk managementGovernance Financial statements Other informationStrategic report CET1 ratio remains strong at 14.1 per cent after capital Our all-channel net promoter score measures the customer distributions and pension contributions, remaining ahead perception of day-to-day services across our channels of the ongoing target of c.12.5 per cent, plus a management and remained strong in 2022 despite a decline since 2021 buffer of c.1 per cent. (which was an all-time high). 1 Reported on a pro forma basis, reflecting the dividend paid up by the Insurance business and declared share buybacks. R R ## 8,835 19.8 | 022 | 022 | 19.8 | | --- | --- | --- | | 021 1 | 021 | 18.3 | | 020 1 | 020 | 17.4 | | 019 1 | 019 | 16.4 | | 018 1 | 018 | 15.7 | | Operating costs increased, in line with guidance, given planned | Our digitally active customers increased in the year to | | | investment and new businesses, with business-as-usual costs | 19.8 million, reflecting the pace of digital adoption, with | | | stable. | customers logging in over 5 billion times during 2022, | | | 2023 guidance: Operating costs of c.£9.1 billion. | up 8 per cent on prior year. | | 1 Restated to reflect the new costs basis. See page 67. R ## 2,782 2.70 | 022 | | 022 | | 2.70 | | --- | --- | --- | --- | --- | | 021 | | 021 | | 2.77 | | 020 1 | | 021 | 1 | 2.76 | | 019 1 | | 020 | 1 | 2.89 | | 018 1 | | 020 | 1 | 2.62 | | Economic profit reflected higher net income and a higher | Our customer complaints reduced further and are amongst the | | | | | impairment charge. Economic profit is a measure of profit | lowest in the industry. We always want to provide our customers | | | | | taking into account a charge for equity utilisation. | with the best possible service and our colleagues work tirelessly | | | | to understand the concerns of those who contact us. 1 In 2021 the basis was amended in line with reward scheme performance H2 2022 data not available at time of publishing. measures. Comparatives have been restated. R ## 0 80 | | 022 | | | | | 022 | 80 | | --- | --- | --- | --- | --- | --- | --- | --- | | | 021 | | | | | 021 | 79 | | | 020 | | | | | 020 | 74 | | | 019 | | | | | 019 | 65 | | | 018 | | | | | 018 | 72 | | Statutory profit after tax Statutory profit after tax | | | | | | | | | | Total in-year shareholder return was flat in the year. The share | | | | | In 2022, 80 per cent of Group customer dashboard measures | | | £m £m | | | | | | | | | | price was 5 per cent lower with capital return of 5 per cent. | | | | | achieved target. This positive overall result is underpinned by | | | Group customer dashboard Customer complaints | | | | | | strong performance relative to competitors, with average rank | | | | | A A | A | | | | | | % of customer experience metrics FCA reportable complaints Common equity tier 1 ratio Customer satisfaction Economic profit Total shareholder return Operating costs Digitally active customers | | | (CET1) | | | position further improved year on year. | | | achieving target (November YTD) per 1,000 accounts % All-channel net promoter score £m £m % m | | | | | | | | | 2 2 2 2 2 2 2 H1 2 | | | | 8,835 2,782 | 14.1 0 | | | | 2 2 2 2 2 2 2 H2 2 | | | | 3,063 8,312 16.3 | 35 | | | | 2 2 2 2 2 2 2 H1 2 | | | | (1,257) 8,202 (42) 16.2 | | | 33Lloyds Banking Group Annual Report and Accounts 2022 | | 2 2 2 2 2 2 2 H2 2 | | | | 8,316 13.8 428 | 27 | | | | 2 2 2 2 2 2 2 H1 2 | | | | 1,858 8,710 (20) 13.9 | | | | 2022 inclusion and diversity performance ### Progress and performance continued The Group aims to create a more inclusive future for our customers, colleagues and communities. We will continue to Non-financial create a fully inclusive organisation that is representative of modern-day Britain, where differences are embraced, and ## Colleagues everyone can reach their potential. We’re proud to have been the first FTSE 100 company to set targets to increase both gender and ethnic diversity at senior levels and R we continue to commit ourselves to stretching targets, always ## 75 challenging ourselves to go further. 022 021 Ethnic diversity 020 Our aspirations 019 018 | 13% | 3% | | --- | --- | | Black, Asian and Minority | Black heritage | | Ethnic representation in | representation in senior | Colleague engagement 1 1 senior roles by 2025 roles by 2025 The Group understands that engagement is a two-way process, so each year we ask colleagues to share their views via our During 2022, we have increased the representation of Black, independently run colleague surveys. In 2022, we refreshed how Asian and Ethnic Minority colleagues in senior roles from 8.8 to we listen to our colleagues to provide a more regular and complete 10.2 per cent and increased the representation of Black heritage picture of sentiment. This included redesigning our annual survey colleagues in senior roles by 0.4 to 1.4 per cent. and running monthly pulse surveys to capture timely feedback, which is shared with leaders to take swift action. The Board continues to meet the Parker Review recommendation of at least one Black, Asian or Ethnic Minority Board member. Our new monthly pulse surveys launched in September and have allowed us to monitor advocacy, through a newly launched As a Group we have continued to meet our commitment to employee net promoter score, alongside mood. We also use publish our ethnicity pay gap report and our race advisory these surveys to delve into relevant and timely topics, including panel continues to play a critical role in helping us to shape our values and the transition to hybrid working. our initiatives. We heard from around 60 per cent of colleagues in our spring Gender diversity census survey, with the response rate in line with 2021’s spring survey but below our 2021 autumn survey participation. We Our aspirations found that engagement, confidence, trust and mood remained at similar levels to 2020, despite high levels of change. Most ## 50% colleagues were also aware of and understood our new strategy. 1 Women in senior roles by 2025 Our annual autumn survey was completed by 80 per cent of the Group and gave us a complete view on our progress with During 2022, we have seen an increase in women in senior roles to purpose, strategy and culture. Overall engagement improved 39.4 per cent, showing our progress towards meeting our 2025 target. 2 points compared to 2021, and has returned to pre-pandemic levels. We have seen an increase in overall mood linked to We are committed to maintaining at least four women on the feeling more supported and connected. Board and, over time, will aim to reach gender parity, matching the Group’s ambition to have 50 per cent of senior roles filled by During the year the Group communicated directly with colleagues women. Reflecting these aspirations, the Board will aim to meet detailing Group performance, changes in the economic and the recommendations set out by the FTSE Women Leaders Review. regulatory environment and updates on key strategic initiatives. Meetings were held throughout the year between the Group and Further information on the diversity of our Board can be found our recognised unions. Please see page 82 for further examples of on page 73. how the Board engages with the Group’s workforce and why the Board considers those arrangements to be effective. For 2022, the Disability Remuneration Committee approved Group Performance Share Our aim is to create an inclusive and accessible working awards for colleagues, and colleagues are eligible to participate environment where everyone is supported to reach their full in HMRC-approved share plans which promote share ownership potential. The Group continues to hold the Business Disability by giving employees an opportunity to invest in Group shares. Forum Gold Standard accreditation and Disability Confident Further information can be found on page 105 in the Directors’ status from the Department for Work and Pensions. Remuneration Report. We offer bespoke training, career development and adjustments for colleagues and applicants with disabilities, including those who became disabled while employed. Sexual orientation and gender identity We are proud to have created an inclusive and open working environment for our LGBT+ colleagues. Our LGBT+ colleague network, Rainbow, continues to play a role in our approach to supporting our LGBT+ colleagues, and has over 5,000 members and supporters. Detailed progress on our inclusion and diversity focus areas, our progress on our race action plan and how we support our colleagues can be found in our social sustainability report . Employee engagement index % favourable | 2 | | 75 | 1 From a 2021 baseline year, excludes Embark. | | --- | --- | --- | --- | | 2 | | 72 | | | 2 | 34 Lloyds Banking Group Annual Report and Accounts 2022 | 81 | | | 2 | | 74 | | | 2 | | 73 | | Our 2022 inclusion and diversity performance | | | | Number | | | | % | % | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | 2022 | | 2022 | | 2021 | | 1 | Board members | Men | | | 6 54.5 60.0 | | | | Gender | | Women | | 5 45.5 40.0 | | --- | --- | --- | --- | | GEC | Men | | 8 53.3 80.0 | | | Women | | 7 46.7 20.0 | | GEC and GEC direct reports | Men | | 70 58.3 65.0 | | | Women | | 50 41.7 35.0 | | Senior managers | Men | 4,492 60.6 62.3 | | Financial results Risk managementGovernance Financial statements Other informationStrategic report | | Women | | | √ | | | --- | --- | --- | --- | --- | --- | | | | 2,919 | 39.4 | | 37.7 | | All colleagues | Men | 27,888 42.7 42.2 | | | | | | Women | 37,441 57.3 57.8 | | | | 2 Ethnicity Board members ethnicity White British or other White 9 81.8 NR Asian 1 9.1 NR Other Ethnic Group 1 9.1 NR 3 GEC ethnicity White British or other White 14 93 NR Asian 1 7 NR √ Senior managers from an Ethnic Minority background 742 10.2 8.8 Senior managers from a Black Heritage background 101 1.4 1 √ All colleagues from an Ethnic Minority background 8,675 13.4 11.3 Disability Colleagues who disclose that they have a disability 4,221 6.5 3.7 Sexual orientation Colleagues who disclose their sexual orientation 44,284 68.6 59.7 1 Data is collated and reported in compliance with the provisions of section • Gender data includes international, those on parental/maternity leave, 414C(8)(c) Companies Act 2006 absent without leave and long-term sick and excludes contractors, 2 In the current year there is no reported data for the categories of Black/ Group non-executive directors, temporary and agency staff African/Caribbean/Black British, Mixed/Multiple Ethnic groups and Not • The Group Executive Committee (GEC) assists the Group Chief Executive in specified/prefer not to say. strategic, cross-business or Group-wide matters and inputs to Board. GEC 3 In the current year there is no reported data for the categories of Mixed/ includes the Group Chief Executive and excludes colleagues who report to Multiple Ethnic Groups, Black/African/Caribbean/Black British, Other ethnic a member or attendee of the GEC, including administrative or executive group including Arab and Not specified/prefer not to say. support roles (personal assistant, executive assistant). GEC and GEC direct NR This data was not reported in 2021 and is a new disclosure in 2022. reports includes the Group Chief Executive and colleagues who report to Indicator is subject to Limited ISAE 3000 (revised) assurance by Deloitte LLP for a member or attendee of the GEC, including administrative or executive the 2022 Annual Responsible Business Reporting. Deloitte’s 2022 assurance support roles (personal assistant, executive assistant) statement and the 2022 Reporting Criteria are available online at www. • Senior managers: Grades F, G and Executive (F being the lowest) lloydsbankinggroup.com/who-we-are/responsible-business/downloads. • A colleague is an individual who is paid via the Group’s payroll and employed on a permanent or fixed term contract (employed for a limited Methodology and definitions: period). Includes parental leavers and internationals (UK includes Guernsey, • Data is sourced from the HR system (Workday) containing all permanent Isle of Man, Jersey and Gibraltar). Excludes leavers, Group non-executive colleague details directors, contractors, temps and agency staff • All data as at 31 December 2022 • Diversity calculations are based on headcount, not full-time employee value • All diversity information for ethnicity, disability and sexual orientation is based and excludes Embark for the FY 2022 reporting period on voluntary self-declaration by colleagues. Our systems do not record diversity data of colleagues who have not declared this information and is for UK payroll only Building our internal talent The focus on progressing our race action plan ambitions has continued, with significant effort in supporting our Black heritage colleagues looking to progress their career. Our senior leadership programme, which helps us identify our next senior leaders, continued and following its success, in May 2022, we launched a similar programme for Black Heritage colleagues in middle management looking to develop their career. The programme runs for 12 months, supporting colleagues with the tools they might need to develop themselves and their career. It provides face-to-face networking and workshops, mentoring circles, upskilling sessions on writing CVs, pen portraits and interviews with talks from hiring managers and the support to find a sponsor. Close to 100 colleagues enrolled in the programme in 2022, and by the end of 2022, over a quarter of the colleagues enrolled on the programme had either been promoted or taken a lateral move to progress their career. 35Lloyds Banking Group Annual Report and Accounts 2022 ### Progress and performance continued 6 ### Own operations Non-financial • Net zero carbon operations by 2030 ## Climate • Reduce total energy consumption by 50 per cent by 2030 • Maintain travel carbon emissions below 50 per cent of pre-COVID-19 levels R ## e 115,965 2 22 ### Supply chain 1 1 1 • Reduce the carbon emissions we generate through our supply chain by 50 per cent by 2030 on the path to net zero 1 Restated all prior periods data to improve the accuracy of reporting, using 7 by 2050 or sooner actual data to replace estimates, historical emissions associated with Embark Group’s properties, and improved escaped refrigerant related emissions. Our climate approach This year, our overall market-based carbon emissions were 115,965 Tackling the climate crisis through supporting the transition to tonnes CO 2 e, 33.6 per cent lower since 2018/19 and a 3.1 per cent a low carbon economy is core to our Group strategy and our increase since 2020/21, mainly driven by higher business travel purpose. As a Group that supports many sectors of our economy and commuting related carbon emissions post COVID-19. through our lending, investments, products and services, we recognise our role in helping to enable the transition. 2 R Sustainable lending and investment targets Our approach is a core part of our business strategy, with key £bn sustainability objectives aligned to our priorities of Grow, Focus and Change. We plan to grow our business by capitalising on the Commercial Banking opportunities, through green lending, investment and products. We are here 2024 target In 2021, we highlighted four sustainable lending targets which £7.9bn together with our operational carbon emissions ambition form part of our Group balance scorecard. We are focused on our Progress (£bn lending) £15bn climate-related risks and we continue to expand our targets and Motor plans to deliver our net zero ambitions in our own operations, supply chain and financed emissions. We plan to change how We are here 2024 target we operate, educating our people to support us to deliver on our climate ambition. Transitioning to net zero is a universal £2.1bn endeavour and will depend on government, industry and Progress (£bn lending) £8bn wider society acting together, alongside significant technology advancements in high emitting sectors. Scottish Widows We will actively manage our climate risks and hold ourselves to account to do all we can in how we run our own business. Our We are here 2025 target environmental sustainability report provides details of how as £17.5bn a Group we will deliver against those ambitions and priorities, including climate-related financial disclosures consistent with Progress (£bn investment) £20–25bn the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and recommended disclosures. We have Green mortgage lending launched our Group climate transition plan which covers activity across the Group, building on the climate action plan released We are here 2024 target by Scottish Widows in 2022. Further detail can be found in our environmental sustainability report, our separate supplement c. £3.5bn which allows for a more comprehensive response to the TCFD Progress (£bn lending) £10bn framework, covering material activity across the Group. 2 Further details on the scope of these sustainable lending and investment Progress against TCFD recommendations targets is included within the environmental sustainability report on page 10. We comply with the FCA’s Listing Rule 9.8.6R(8) and set out in the following table our climate-related financial disclosures consistent with the 2021 TCFD recommendations and recommended disclosures across all four of the TCFD pillars: strategy; governance; risk management; and metrics and targets. Our net zero ambitions We will continue to assess and develop our disclosures against the TCFD recommendations and recommended disclosures in ### Financed emissions 2023, considering relevant TCFD guidance and materials along with evolving best practice. The following table also provides an overview of our disclosure progress and priorities for 2023. Bank • Work with customers, government and the market to help reduce the carbon emissions we finance by more than 50 per cent by 2030 on the path to net zero by 3 2050 or sooner 3 From a 2018 baseline. Scottish Widows 4 Carbon footprint is a measure of carbon intensity calculated as absolute value 4 • Target halving the carbon footprint of all of our of emissions applicable to an investment divided by value of investment. Operational carbon emissions 5 5 From a 2019 baseline. investments by 2030 on the path to net zero by 2050 tCO 6 All from a 2018/19 baseline. The reporting period is October to September. 7 From a 2021/22 baseline. The reporting period is October to September. 2021/ 115,965 36 Lloyds Banking Group Annual Report and Accounts 2022 | 2020/21 | 112,424 | | --- | --- | | 2019/20 | 114,722 | | 2018/19 | 174,629 | Progress against TCFD recommendations Environmental sustainability | Pillar Recommended disclosure | | | report Summary of progress | | | --- | --- | --- | --- | --- | | | | Describe the climate-related | Pages 13 to 20 | • Key climate-related risks and opportunities defined with the potential time horizons | | Strategy | A | | | | | | | risks and opportunities the | | over which these may arise identified | | | | organisation has identified | | • In 2023, we will look to further quantify risks and opportunities in relation to climate risk | over the short, medium and long term. Describe the impact of Pages 13 to 20 • Financial statements consider the impact of climate-related risks on our financial B Disclose the actual climate-related risks position and performance and potential and opportunities on the • Continue to embed climate risk into financial planning process. Climate impacts of climate- organisation’s business, consideration factored into the economic base case and financed emission Financial results Risk managementGovernance Financial statements Other informationStrategic report related risks and strategy and financial ambitions considered as part of the forecasting process opportunities on planning. • In 2023, in line with our Group climate transition plan, net zero targets and strategies the organisation’s will be developed for some remaining high emitting sectors business, strategy • Expand the balance sheet assets covered by the forecasting process, and and financial Partnership for Carbon Accounting Framework (PCAF) methodology updates planning where • Embed monitoring of sector targets as reported in our Group climate transition such information plan into reporting process so that climate considerations form part of the Group’s is material. regular decision making Describe the resilience of Page 14 • Climate scenario analysis performed for some of our businesses most exposed to C the organisation’s strategy, climate risk such as mortgage flood risk and transition risk for commercial portfolios taking into consideration Pages 63 to 67 • The insights from this scenario analysis activity have been used to support the different climate-related Group’s measurement of Expected Credit Loss (ECL) and Internal Capital Adequacy scenarios, including a 2°C Assessment Process (ICAAP) or lower scenario. • Continue to monitor our exposure to high-risk sectors and proposed actions to support transition • Scottish Widows Group (SWG) developing scenario analysis model to inform business decisions. Output to be published in the 2022 SWG TCFD report • In 2023, scenario analysis will be used to support forecasts and plans. We will compare scenario modelling outputs generated to inform strategic approach. Specific areas of development are understanding the impacts on some of our highest emitting sectors such as agriculture and integrating scenario analysis into the credit decision making process Describe the Board’s Pages 50 to 53 • Governance structure provides clear oversight and ownership of Group’s Governance A oversight of climate-related environmental sustainability strategy and management of climate risk at Board risks and opportunities. and executive levels • The Board is engaged on a regular basis on our sustainability agenda • In 2023, the Board will consider our response to nature along with approval of sector targets for some of our remaining sectors. Continue to monitor progress against our targets and ambitions Disclose the organisation’s Describe management’s role Pages 50 to 53 • The Group Net Zero Committee provides direction and oversight of the Group’s B governance in assessing and managing environmental sustainability strategy, supported by climate and sustainability climate-related risks and Page 55 steering groups or committees around climate- related risks and opportunities. • The Group Risk Committee provides oversight of climate risk opportunities. • Key committee oversight includes development of our 2022 sector targets and supply chain ambitions Describe the organisation’s Pages 16 to 17 • Assessment of climate risk has been undertaken, to understand the key risks across Risk A processes for identifying and the Group management assessing climate-related • Ongoing development of climate risk assessment tools and methodologies, risks. including qualitative climate risk assessment tool for commercial clients • In 2023, we will look at the incorporation of scenario analysis to inform climate risk assessment, alongside further refinement to evolving assessment processes Disclose how Describe the organisation’s Pages 57 to 62 • Consideration of climate risk incorporated within our existing risk management B the organisation processes for managing processes, embedding relevant controls to mitigate these risks identifies, assesses, climate-related risks. • Key risks which incorporate climate include credit risk, insurance underwriting risk, and manages conduct risk and operational resilience climate-related • In 2023, we will look at further embedding controls across identified climate-related risks. risks and enhancement of risk appetite to mitigate key climate risks across the Group Describe how processes for Pages 16 to 17 • Climate risk is embedded into our Enterprise Risk Management Framework, through C identifying, assessing, and consideration of climate risk as its own principal risk, and integration into other managing climate-related Pages 57 to 62 principal risks materially impacted risks are integrated into the • The Group climate risk policy provides an overarching framework for the organisation’s overall risk management of climate risks across the Group management. • In 2023, there will be further enhancement to climate risk reporting | | | Disclose the metrics used | Pages 9 to 12 | • Progress monitored against our net zero ambitions, including measures related | | --- | --- | --- | --- | --- | | Metrics and | A | | | | | | | by the organisation to | | to our financed emissions, own operation emissions, supply chain emissions and | | targets | | assess climate-related risks | Pages 24 to 48 | sustainable finance | | | | and opportunities in line | | • 2023 plan to enhance metrics to monitor our progress against our targets and | | | | with its strategy and risk | | ambitions and explore methodology in relation to nature | management process. Disclose the Disclose Scope 1, Scope 2, Pages 11 to 12 • Disclosed Scope 1, 2 and 3 emissions for our own operations and supply chain, B metrics and targets and, if appropriate, Scope continue to develop our approach to calculating financed emissions now updated used to assess 3 greenhouse gas (GHG) to period ended 2020 emissions, and the related Pages 28 to 48 • Scottish Widows 2022 reporting will include product level TCFD reporting and manage relevant climate- risks. • In 2023, we will extend our asset coverage from a financed emissions perspective related risks and to cover additional business areas opportunities where such information Describe the targets used Page 9 to 12 • Our environmental sustainability report 2022 provides an update on how we are C is material. by the organisation to progressing against emission pathway for the targets we released in October 2022 manage climate-related Pages 28 to 48 • In 2023, we will develop targets for other high carbon sectors for release in 2024 risks and opportunities and performance against targets. In addition to the compliance above, entities within our Insurance Pensions and Investment business which are incorporated as part of Scottish Widows Group are required to report in compliance with FCA ESG Sourcebook (set via FCA PS21/24) reporting requirements for the period ended 31 December 2022. This additional compliance will be met through the publication of a separate Scottish Widows TCFD report, which is due to be published by 30 June 2023. 37Lloyds Banking Group Annual Report and Accounts 2022 Governance is maintained through delegation of authority from ## Risk overview the Board down to individuals. Senior executives are supported by a committee-based structure which is designed to ensure ## Effective risk management open challenge and enable effective Board engagement and decision making. ## and control More information on the Board’s responsibilities can be found on page 91 and our Risk committees on pages 142 to 143. ### Our approach to risk Risk management is at the heart of the Group’s purpose of ### Helping Britain Prosper. A strong risk management culture is Risk culture and the customer crucial for sustainable growth, supporting the transition to The Board and senior management play a vital role in shaping a low carbon economy and building an inclusive society. and embedding a healthy corporate culture. A prudent approach to risk is fundamental to the Group’s business Our responsible, inclusive and diverse culture supports colleagues model and drives our participation choices, whilst protecting to consistently do the right thing for customers. The Group’s Code customers, colleagues and the Group. of Responsibility and refreshed values reinforce colleagues’ accountability for the risks they take and their responsibility The risk management section from pages 139 to 195 provides to prioritise customers’ needs. an in-depth picture of how risk is managed within the Group, including the approach to risk appetite, risk governance, stress As a Group, we are open, honest and transparent with testing and detailed analysis of the principal risk categories, colleagues working in collaboration with business units to: including the framework by which these risks are identified, • Support effective risk management and provide managed, mitigated and monitored. constructive challenge • Share lessons learned and understand root causes when things go wrong ### Our enterprise risk management framework • Consider horizon risks and opportunities The Group’s comprehensive enterprise risk management framework, that applies to all legal entities across the Group, The Group aims to maintain a strong focus on building and is the foundation for the delivery of effective and consistent risk sustaining long-term relationships with customers through control. It enables proactive identification, active management the economic cycle. and monitoring of the Group’s risks, which is supported by our One Risk and Control Self-Assessment approach. ### Risk profile and performance The Group’s risk appetite, principles, policies, procedures, controls The Group has continued to maintain support for its customers and reporting are regularly reviewed and updated to ensure they amid the backdrop of supply chain pressures, cost of living remain fully in line with regulation, law, corporate governance and increases and global and domestic economic uncertainty. industry good practice. Observed credit performance remains strong, with very modest Risk appetite is defined within the Group as the amount and type evidence of deterioration. The Group’s loan portfolio continues of risk that the Group is prepared to seek, accept or tolerate in to be well positioned and heightened monitoring is in place delivering its strategy. to identify signs of affordability stress. The Board is responsible for approving the Group’s Board The Group’s strategy will see ongoing investment in technology, risk appetite statement annually. Board-level risk appetite driving the evolution of processes and further strengthening of metrics are augmented further by sub-Board level metrics the Group’s operational resilience, amid continuously evolving and cascaded into more detailed business metrics and limits. threats, such as cyber risk. Regular close monitoring and comprehensive reporting to all levels of management and the Board ensure appetite limits Climate change remains a key consideration for the Group, with are maintained and subject to stress analysis at a risk type positive progress in 2022 and a commitment to continued focus and portfolio level, as appropriate. in 2023. Overall, key risks continue to be managed effectively and the Group is well positioned to safely progress its strategic ambitions. Enterprise risk management framework Role of the 1 The Board delegates executive authorities to ensure Board and there is effective oversight of risk management. senior management 2 The appropriate culture ensures performance, Risk culture | | risk and reward are aligned. | and the customer | | --- | --- | --- | | 3 | The framework ensures our risks are managed | | | | in line with our risk appetite. | Risk appetite | 4 The identification, measurement and control of our risks form Risk and control self an integral part of our One Risk and Control Self Assessment. assessment 5 The governance framework supports a consistent approach to enterprise-wide behaviour and decision making. Risk governance 6 The robust approach to monitoring oversight and assurance Three lines of defence ensures effective risk management across the Group. 38 Lloyds Banking Group Annual Report and Accounts 2022 ## Principal risks The Group is in the process of conducting a detailed review of Principal risks are the Board-approved enterprise-wide risk the enterprise risk management framework, which may result in categories, used to monitor and report the risk exposures posing a reclassification of our principal risks in 2023. Page 147 contains the greatest impact to the Group. a summary of our principal and secondary risks. All of the Group’s principal risks, which are outlined in this section, The risk management section from pages 139 to 195 provides are reported regularly to the Board Risk Committee and the Board. a more in-depth picture of how each principal risk is managed The Board Risk Committee report from pages 99 to 103 outlines within the Group. its activities during the year, as well as its purpose, responsibilities and composition. Financial results Risk managementGovernance Financial statements Other informationStrategic report Risk trends Stable risk Increased risk Decreased risk Principal risks Principal risk category Risk performance Risk appetite Key mitigating actions | Capital risk | The Group maintained its strong capital | The Group maintains | • Capital management framework that | | --- | --- | --- | --- | | | position in 2022 with a CET1 ratio of 14.1 | capital levels | includes the setting of capital risk | | | per cent on a pro forma basis, having | commensurate with | appetite, capital planning and stress | | | also absorbed significant regulatory | a prudent level of | testing activities | | | headwinds on 1st January 2022. This | solvency to achieve | • Monitoring of early warning indicators | | | is significantly ahead of regulatory | financial resilience and | and maintenance of a Capital | | | requirements and in excess of the | market confidence. | Contingency Framework, designed to | | | Group’s ongoing target of around 12.5 | | identify and act on emerging capital | | | per cent, plus a management buffer of | | concerns at an early stage | around 1 per cent. Downside risks from economic and regulatory headwinds are being closely monitored. ### Change/ The Group’s inherent change/execution The Group has • Continued evolution and enhancement risk heightened in 2022, driven by the limited appetite for of the Group change policy, method and ### execution risk scale and increased complexity of some negative impacts control environment of the changes being delivered. The on customers, • Measurement and reporting of change/ Group continues to strengthen its change colleagues, or the execution risk to appropriate bodies, capability and controls in response, Group as a result of including on critical elements of the to support the Group’s business and change activity. change portfolio technology transformation plans. • Providing sufficient skilled resources to safely deliver and embed change and support future transformation plans | Climate risk | 2022 has seen significant progress in | The Group takes | • Climate risk policy in place, embedded | | --- | --- | --- | --- | | | embedding climate risk, with a consistent | action to support | across the Group | | | framework and clear responsibilities | the Group’s and its | • Regular updates to the Board and further | | | that will enhance understanding of | customers’ transition | development of climate risk reporting | | | the Group’s climate risks and their | to net zero, and | • Consideration of key climate risks as part | | | management, in line with regulatory | maintain its resilience | of the Group’s financial planning process | | | requirements. Progress continues in key | against the risks | | | | areas, including developing climate | relating to climate | | | | data and scenario analysis capabilities; | change. | | enhancing risk appetite measures; as well progressing the Group’s ambitions for reducing emissions. | Conduct risk | Conduct risk remained stable in 2022, | The Group delivers | • Robust conduct risk framework in place | | --- | --- | --- | --- | | | with the Group’s focus on supporting | good outcomes for | to support delivery of good customer | | | customers impacted by the rising cost of | its customers. | outcomes, market integrity and | | | living; implementing and embedding the | | competition requirements | | | FCA’s new Consumer Duty requirements; | | • Active engagement with regulatory | | | and ensuring good customer outcomes | | bodies and key stakeholders to ensure | | | amid the transformation of its business | | that the Group’s strategic conduct focus | | | and technology. | | continues to meet evolving stakeholder | expectations 39Lloyds Banking Group Annual Report and Accounts 2022 ### Risk overview continued Principal risks Principal risk category Risk performance Risk appetite Key mitigating actions | Credit risk | The Group’s credit portfolio continued | The Group has a | • Extensive and thorough credit processes, | | --- | --- | --- | --- | | | to be well positioned with high levels of | conservative and | strategies and controls to ensure | | | security, but a more challenging outlook, | well-balanced credit | effective risk identification, management | | | driven by interest rate rises and cost | portfolio through | and oversight | | | of living pressures, saw an increase in | the economic cycle, | • Significant monitoring in place, including | | | credit risk. Evidence of deterioration | generating an | early warning indicators to remain close | | | was very modest, with assets flowing | appropriate return | to any signs of portfolio deterioration, | | | into arrears, defaults and write-offs | on equity, in line with | accompanied by a playbook of | | | remaining low. Impairment was a net | the Group’s target | mitigating actions | | | charge of £1,510 million, compared to a | return on equity | • Pre-emptive credit tightening ahead of | | | net credit of £1,385 million for 2021. The | in aggregate. | macroeconomic deterioration, including | | | Group’s expected credit loss allowances | | updates to affordability lending controls | | | have increased to £5,222 million | | for forward look costs | (2021: £4,477 million). | Data risk | Data risk remained stable in 2022, with | The Group has zero | • Delivering against the data strategy and | | --- | --- | --- | --- | | | significant ongoing investment in the | appetite for data- | uplifting capability in data management | | | maturity of data risk management, | related regulatory | and privacy, oversight of the data supply | | | data capabilities and end-to-end | fines or enforcement | chain and data controls and processes | | | management of data risk. Launch of the | actions. | • Data by design and data ethics principles | | | Group’s new data strategy will support | | embedded into the data science lifecycle | in managing risk and achieving the Group’s growth objectives. ### Funding and The Group maintained its strong funding The Group maintains • Management and monitoring of liquidity and liquidity position in 2022. The loan a prudent liquidity risks and ensuring that management ### liquidity risk | to deposit ratio increased to 96 per cent | profile and a balance | systems and arrangements are | | --- | --- | --- | | (2021: 94 per cent), largely driven by | sheet structure that | adequate with regard to the internal risk | | increased customer lending. The Group’s | limits its reliance on | appetite, Group strategy and regulatory | | liquid assets continue to exceed the | potentially volatile | requirements | | regulatory minimum and internal risk | sources of funding. | • Significant customer deposit base, driven | | appetite, with a liquidity coverage ratio | | by inflows to trusted brands | (based on monthly rolling average from the previous 12 months) of 144 per cent (2021: 135 per cent). ### Insurance Insurance underwriting risk remained The Insurance Group • Significant reinsurance of mortality, broadly stable. Life and Pensions has an appetite to morbidity and General Insurance ### underwriting present value of new business premium take on insurance catastrophe risk ### risk | increased to £21.7 billion (2021: £17.3 | underwriting risks | • Robust processes for underwriting, | | --- | --- | --- | | billion), with ongoing risks to short- | where they fit with our | reinsurance, claims management, | | term persistency driven by economic | strategic objectives. | pricing, product design and product | | uncertainty and cost of living pressures. | | management | | Total gross written premium decreased | | • Management through diversification | | to £486 million (2021: £655 million) mainly | | and pooling of risks | due to difficult trading conditions and the renewal pricing impacts following the FCA GI Pricing Practices Market Study. | Market risk | Market volatility in 2022 created an | The Group has | • Structural hedge programmes | | --- | --- | --- | --- | | | environment of increased market | effective controls in | implemented to stabilise earnings | | | risk. The Group remains well hedged, | place to identify and | • Close monitoring of market risks and, | | | ensuring near-term interest rate | manage the market | where appropriate, undertaking of asset | | | exposure is managed, while benefitting | risk inherent in our | and liability matching and hedging | | | from rising interest rates. The Group’s | customer and client | • Monitoring of the credit allocation in the | | | structural hedge increased to £255 | focused activities. | defined benefit pension schemes, as well | | | billion (2021: £240 billion) mostly due to | | as the hedges in place against adverse | | | the continued growth in stable customer | | movements in nominal rates, inflation | | | deposits. The Group’s pension funds had | | and longevity | sufficient liquidity to withstand market volatility but saw a slight reduction in the IAS 19 accounting surplus to £3.7 billion (2021: £4.3 billion) 40 Lloyds Banking Group Annual Report and Accounts 2022 Principal risks Principal risk category Risk performance Risk appetite Key mitigating actions | Model risk | Model risk has increased in 2022. The | Material models are | • Robust model risk management | | --- | --- | --- | --- | | | pandemic-related government-led | performing in line with | framework for managing and mitigating | | | support schemes weakened the | expectations. | model risk within the Group | relationships between model inputs and outputs, and the current economic conditions remain outside those used to build the models, placing reliance on judgemental overlays. The Group’s models are being managed to reduce this need Financial results Risk managementGovernance Financial statements Other informationStrategic report for overlays. The control environment for model risk is being strengthened to meet revised regulatory requirements. | Operational risk | Operational risk remained stable in 2022 | The Group has robust | • Review and investment in the Group’s | | --- | --- | --- | --- | | | with operational losses reducing versus | controls in place to | control environment, with a particular | | | 2021. Security, technology and supplier | manage operational | focus on automation, to ensure the | | | management continue to be the most | losses, reputational | Group addresses the inherent risks | | | material operational risk areas. | events and regulatory | faced Deployment of a range of risk | | | | breaches. It identifies | management strategies, including: | | | | and assesses | avoidance, mitigation, transfer | | | | emerging risks and | (including insurance) and acceptance | acts to mitigate these. ### Operational Operational resilience remains a key The Group has • Operational resilience programme in focus, with continued enhancement limited appetite place to deliver against new regulation ### resilience risk to the Group’s resilience for serving for disruption to and improve the Group’s ability to customers better and addressing services to customers respond to incidents while delivering regulatory priorities. Technology and stakeholders key services to customers resilience remains a focus area, with from significant • Investment in technology improvements, dedicated programmes to address unexpected events. including enhancements to the resilience key risks. of systems that support critical business processes | People risk | People risk has increased in 2022, | The Group leads | • Delivery of strategies to attract, retain | | --- | --- | --- | --- | | | aligning with the challenges of the | responsibly and | and develop high-calibre people with | | | Group’s transformation agenda. The | proficiently, manages | the required capabilities, together with | | | strategic focus of the new leadership | people resource | the management of rigorous succession | | | team, together with the Group’s revised | effectively, supports | planning for our senior leaders | | | pay offering, aims to enable colleagues | and develops | • Continued focus on the Group’s culture | | | to enhance their skills and capabilities, | colleague skills and | by developing and delivering initiatives | | | provide progression opportunities | talent, creates and | that reinforce appropriate behaviours | | | and support colleagues facing cost | nurtures the right | | | | of living pressures. | culture and meets | | legal and regulatory obligations related to its people. ### Regulatory The regulatory and legal risk profile has The Group interprets • Policies and procedures setting out the remained stable thanks to proactive and complies with all principles and key controls that should ### and legal risk engagement on emerging focus areas relevant regulation apply across the business which are including strategic transformation, cost and all applicable aligned to the Group risk appetite of living pressures and Consumer Duty. laws (including codes • Identification, assessment and Legal risk continued to be impacted by of conduct which implementation of policy and regulatory the evolving UK legal and regulatory could have legal requirements by business units and landscape, other changing regulatory implications) and/or the establishment of local controls, standards and uncertainty arising legal obligations. processes, procedures and resources from the current and future litigation to ensure appropriate governance landscape. and compliance | Strategic risk | Strategic risk is stable, with further | n/a • Considering and addressing the strategic | | | --- | --- | --- | --- | | | integration into business planning | | implications of emerging trends | | | having been a key focus in 2022. | | • Embedding of strategic risk into business | | | Maturation of the Group’s strategic | | planning process and day-to-day risk | | | risk framework will strengthen the | | management | Group’s ability to achieve its strategic transformation ambitions. 41Lloyds Banking Group Annual Report and Accounts 2022 ### Risk overview continued ## Strategic risk themes Understanding the potential risk implications of our ## Strategic risk strategy is an important area of focus. Using both quantitative and qualitative analysis, key strategic risk ### Connectivity of risks and our strategic themes have been identified and assessed (see below). ### risk management framework These risks are aligned to the key areas of focus in the Group’s strategy and can result in impacts on the The Group’s strategic choices and their resulting consequences Group’s wider principal risks: can present a material risk to the Group’s customers, colleagues and shareholders. ### Organisational purpose This is acknowledged by the Group’s Board, with strategic risk recognised as a principal risk within the Group’s enterprise risk An organisational purpose with a clear mission and management framework. values will enable us to help Britain prosper and build a more sustainable and inclusive business, creating value The unprecedented events resulting from the COVID-19 pandemic for the Group’s stakeholders. Risks may arise from: demonstrated how individual risks in aggregate can place • Conflicting interpretation of the Group’s mission significant pressure on the Group’s strategy, business model and values and performance. This further highlighted the importance of the connectivity of strategic risks with wider principal and • Inability to inspire the culture and galvanise the emerging risks. organisation to support a progressive strategy • The stated purpose failing to resonate with our Significant work has been undertaken since 2019 to clarify the stakeholders due to conflicting objectives relationships between principal, emerging and strategic risks. ### This activity has evolved the understanding of the Group’s Customer proposition key strategic risks and risk connectivity, as well as creating Risk of adverse impact on reputation, customer more explicit definitions of each of the risk types, which can attraction, customer retention and income generation, be defined as: arising from: Principal: The Board-approved enterprise-wide risk categories • Inappropriate products and services used to monitor and report the risk exposures posing the greatest • Inability to respond to changing customer profiles impact to the Group. and needs • Failure to maintain trust and deepen relationships Strategic: A principal risk arising from: • A failure to understand the potential impact of strategic responses on existing risk types ### Talent attraction and retention • Incorrect assumptions about internal or external operating Inability to meet the Group’s customer, colleague and environments transformation goals due to: • Inappropriate strategic responses and business plans • Competition for specialist skills in a challenging Emerging: A future internal or external event or trend, which could labour market have a material positive or adverse impact on the Group and our • Failure to attract, develop and retain talent and customers, but where the probability, timescale and/or materiality capabilities for delivering the Group’s agenda may be difficult to accurately assess. ### Progress on strategic risk in 2022 Climate change Further progress has been made this year towards embedding Failure to: strategic risk into the Group’s planning processes and local • Adapt to shifting consumer and colleague expectations risk management. • Achieve regulatory and external climate commitments A re-evaluation of the strategic risk themes was undertaken • Support the transition to a low carbon economy following the announcement of the new Group strategy in as both a lender and employer the first quarter, which concluded that the themes remain appropriate. In addition, the Group’s Strategic Risk Policy was ### published in August, to support the Group’s businesses in Technology advances developing their medium-term and strategic plans. Potential for greater operational costs, reduced resilience and uncompetitive or inappropriate customer offering, Building on this year’s preparation for supporting the ongoing driven by: management of strategic risks, the Group will further strengthen its strategic risk insights and management in 2023. • Failure to keep pace with advances in technology • Inability to effectively leverage data, while ensuring strong data ethics • Misalignment of technology versus customer appetite 42 Lloyds Banking Group Annual Report and Accounts 2022 ## Emerging risks Emerging risks methodology ### Emerging risks are a key component of the Group’s Factors associated ## Threat ### strategic risk framework. with the threat presented ### by emerging risks The Group’s horizon scanning activity enables identification of the most pertinent internal and external operating trends. This insight informs the Group’s strategy, which in turn impacts the Group’s risk profile. ### Factors associated ## Vulnerability ### with the Group’s ### Evolution of the Group’s methodology for ### specific vulnerability assessing and prioritising emerging risks Financial results Risk managementGovernance Financial statements Other informationStrategic report ### to emerging risks In 2022, the Group has invested in evolving its approach for understanding and assessing emerging risks. Embracing a more rigorous evaluation methodology, the Group has ### introduced a wider range of variables for assessing and The preparation and ## Preparation prioritising risks (see opposite). These include factors associated ### protection the Group has ## with the threat of a risk, the Group’s specific vulnerability to and protection ### in place to manage or a risk and the preparation and protection the Group has ### in place to manage or mitigate impacts. mitigate impacts The activity has resulted in a more focused list of the Group’s key emerging risks, enabling greater management concentration on developing the appropriate responses. ## Emerging risk A focused list of the ## landscape Group’s key emerging ### risks from both internal ### and external sources, ### for management review ### and development of the ### Group’s response Emerging risks Emerging risk theme Concerns for the Group and key considerations Climate-related The risks and resulting public perception of the Group’s ability and choices to support the UK’s transition responsibilities to a low carbon economy. Customer propositions Failure to manage and evolve the customer proposition appropriately, amidst a constantly changing and societal expectations demographic of consumers. Data ethics/ethical AI The consequences of handling customer data unethically in relation to emerging technology, growing regulation, and how this may manifest across the Group’s different entities. Digital currencies Failure to accurately understand and manage the usage of digital currencies by the public or the government, and how this may affect the Group’s operations and future strategy. Employee proposition Inability of the Group to anticipate and hire for future skills aligned to evolving industry needs, or provide an attractive colleague proposition against the changing competition landscape. Futureproof The rate at which the Group is able to adapt, invest and protect itself in relation to fast paced technology technology strategy growth, alongside rising external expectations. Global economic Increasing strain on the UK economy resulting from continued geopolitical and economic tensions, impacting and political environment the Group’s customers, partners and suppliers. Operational and Service impacts to the Group’s customers and colleagues due to economic, financial, biological, climate, infrastructure blackouts technological or social challenges. Potential breakup Failure to adequately prepare and assess the policy, operational and financial impacts to the Group as of the UK a result of countries in the UK becoming independent. UK economic Inability to balance the long-term social, regulatory and financial impacts of sustained poor economic environment activity within the UK, and consequent unattractiveness of the UK for external investors. The individual emerging risks detailed above have been taken to key executive level committees throughout 2022, such as the Board Risk Committee, with actions assigned to monitor more closely their manifestation and potential opportunities. For further information on the Board Risk Committee’s Chair Report, see pages 99 to 103. Many emerging risk topics are reviewed on a recurring basis, alongside ongoing activity addressing their present impacts. However, it is acknowledged that these challenges will drive future trends in the long term which the Group will need to prepare for. For further information on how the Group is managing key emerging risks through its strategy, see pages 145 to 146. The manifestation of other emerging risks is more unknown. As a result, the Group will continue to explore how these challenges may impact its future strategy, and how it can continue to best protect its customers, colleagues and shareholders. 43Lloyds Banking Group Annual Report and Accounts 2022 ## Viability statement and going concern ### Viability statement The directors have an obligation under the UK Corporate Governance Code to state whether they believe the Company and the Group will be able to continue in operation and meet their liabilities as they fall due over a specified period determined by the directors, taking account of the current position and the principal risks of the Company and the Group. In making this assessment, the directors have considered a wide range of information, including: - The principal and emerging risks which could impact the performance of the Group - The 2022 Strategic Review which sets out the Group's customer and business strategy for the period from 2022 to 2026 - The Group's operating plan which comprises detailed financial, capital and funding projections together with an assessment of relevant risk factors for the period from 2022 to 2025 inclusive In particular, the assessment included consideration of the ongoing impact of, and subsequent recovery from, the pandemic; the current and expected future impact of the UK's exit from the EU on the UK economy and regulatory agenda; and climate-related matters. Group, legal entities and divisional operating plans are produced and subject to rigorous stress testing on an annual basis. The planning process takes account of the Group's business objectives, the risks taken to seek to meet those objectives and the controls in place to mitigate those risks to remain within the Group's overall risk appetite. The Group's annual planning process comprises the following key stages: - The Board reviews and agrees the Group's strategy, risk appetite and objectives in the context of the operating environment and external market commitments - The divisional teams develop their operating plans, ensuring that they are in line with the Group's strategy and risk appetite - The financial projections and the underlying assumptions in respect of expected market and business changes, and future expected legal, accounting and regulatory changes, are subject to rigorous review and challenge from both divisional and Group executives - In addition, the Board obtains independent assurance from the Risk division over the alignment of the plan with Group strategy and the Board's risk appetite. This assessment performed by the Risk division also identifies the key risks to delivery of the Group's operating plan - The planning process is also underpinned by a robust capital and funding stress testing framework. This framework allows the Group to assess compliance of the operating plan with the Group's risk appetite - The scenarios used for stress testing are designed to be severe but plausible, and take account of the availability and likely effectiveness of mitigating actions that could be taken by management to avoid or reduce the impact or occurrence of the underlying risks. The Group conducts internal stress testing and completes the PRA regulatory exercises. In 2022, stress tests have considered a range of economic conditions particularly relevant to the prevailing outlook, including high inflation and rising interest rates. Group stress results are segmented to provide insight, inform risk appetite, and allow for development of mitigating actions. In considering the likely effectiveness of such actions, the conclusions of the Board's regular monitoring and review of risk and internal control systems, as discussed on pages 139 to 195, is taken into account. Further information on stress testing and reverse stress testing is provided on page 144 - The final operating plan, Risk division assessment and the results of the stress testing are presented to the Board for approval. Once approved, the operating plan drives detailed divisional and Group targets for the following year The directors have specifically assessed the prospects of the Company and the Group over the current plan period. The Board considers that a three-year period continues to present a reasonable degree of confidence over expected events and macroeconomic assumptions, while still providing an appropriate longer-term outlook. The directors have also reviewed a less detailed high level forecast for 2026; this high level forecast contains no information which would cause different conclusions to be reached over the longer-term viability of the Company and Group. Information relevant to the assessment can be found in the following sections of the annual report and accounts: - The Group's principal activities, business and operating models and strategic direction are described in the strategic report on pages 2 to 45 - Emerging risks are disclosed on page 43 - The principal risks, including the Group's objectives, policies and processes for managing credit, capital, liquidity and funding, are provided in the risk management section on pages 139 to 195 - The Group's approach to stress testing and reverse stress testing, including both regulatory and internal stresses, is described on page 144 Based upon this assessment, the directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years to 31 December 2025. ### Going concern The going concern of the Company and the Group is dependent on successfully funding their respective balance sheets and maintaining adequate levels of capital. In order to satisfy themselves that the Company and the Group have adequate resources to continue to operate for the foreseeable future, the directors have reviewed the Group's operating plan and its funding and capital positions, including a consideration of the implications of climate change. The directors have also taken into account the impact of further stress scenarios as well as a number of other key dependencies which are set out in the risk management section under principal risks and uncertainties: funding and liquidity on page 40 and pages 179 to 184 and capital position on pages 148 to 155. Additionally, the directors have considered the capital and funding projections of the Company. Accordingly, the directors conclude that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months from the date of the approval of the financial statements and therefore it is appropriate to continue to adopt the going concern basis in preparing the accounts. 44 Lloyds Banking Group Annual Report and Accounts 2022 ## Non-financial information statement This section of the strategic report constitutes Lloyds Banking Group’s Non-Financial Information Statement, produced to comply with sections 414CA and 414CB of the Companies Act. The information listed is incorporated by cross-reference to relevant content. | Reporting | Policies and standards | | Information necessary to understand our | | --- | --- | --- | --- | | requirement | which govern our approach | | Group and its impact, policies due, diligence and outcomes | | Stakeholders | | 1 | | | | • Annual materiality assessment | | • Delivering value for our stakeholders, pages 4 to 7 | | | • Code of supplier responsibility | | • Governance in action, pages 10 and 11 | | | • Third party supplier policies | | • ESG performance review | • Environmental sustainability report • Code of supplier responsibility Financial results Risk managementGovernance Financial statements Other informationStrategic report • Third party supplier policies are available at: www.lloydsbankinggroup. com/who-we-are/working-with-suppliers/policy-compliance.html Environmental • Environmental (TCFD) statement • Governance in action, pages 10 and 11 matters • Our external environment, page 18 • Progress and performance, climate, pages 36 and 37 • Climate risk, page 156 • Environmental sustainability report | Employees | | 1 | | | --- | --- | --- | --- | | | • Colleague policy | | • Governance in action, pages 10 and 11 | | | • Code of ethics and responsibility | | • Progress and performance, colleagues, pages 34 and 35 | 1 • Health and safety policy • ESG performance review • Code of ethics and responsibility Respect for • Human rights policy statement • Progress and performance, colleagues, pages 34 and 35 human rights 1 • Colleague policy • The Group are guided by the International Bill of Human Rights, the • Pre-employment vetting International Labour Organization’s (ILO) Core Labour Standards and 1 standards its Tripartite Declaration of Principles, the Organisation for Economic 1 • Data privacy policy Co-operation and Development (OECD) Guidelines for Multinational • Modern slavery and human Enterprises, and the UN’s Guiding Principles on Business and Human trafficking statement Rights. As signatories to the United Nations (UN) Global Compact, we are • Information and cyber security aligned with its human rights and labour standards and report on our 1 policy progress annually. Pursuant to the UK Modern Slavery Act, we produce a modern slavery statement • Modern slavery and human trafficking statement • Human rights policy statement • Social sustainability report All documents available at: www.lloydsbankinggroup.com/who-we- are/responsible-business/downloads Social matters 1 • Volunteering standards • Our unique business model, pages 2 and 3 1 • Matched giving guidelines • Delivering value for our stakeholders, pages 4 to 7 1 • Colleague policy • Our external environment, page 18 • Progress and performance, colleagues, pages 34 and 35 • Social sustainability report | Anti-corruption | | 1 | | | --- | --- | --- | --- | | | • Anti-bribery policy | | • Risk management, pages 191 and 192 | | and anti-bribery | • Anti-bribery policy statement | | • ESG performance review | | | • Anti-money laundering and | | • Anti-bribery policy statement | counter terrorist financing 1 policy 1 • Fraud risk management policy Description of principal risks and impact of business activity • Risk overview, pages 38 to 43 Description of the business model • Our unique business model, pages 2 and 3 • Our strategy in action, pages 24 to 31 Non-financial key performance indicators • Progress and performance, pages 32 to 37 • ESG performance review • ESG reporting framework index • ESG reporting criteria All documents available at: 1 Certain Group policies, internal standards and guidelines are not published externally. www.lloydsbankinggroup.com/ The policies mentioned above form part of the Group’s policy framework which is founded who-weare/responsible-business/ on key risk management principles. The policies which underpin the principles define downloads. mandatory requirements for risk management. Robust processes and controls to identify and report policy outcomes are in place and were followed in 2022. 45Lloyds Banking Group Annual Report and Accounts 2022 ## Financial results In this section Result for the full year 47 Divisional results 58 Other financial information 66 Alternative performance measures 67 ## Financial ## education ## support for ## students ### Making Money Meaningful campaign ### Working in partnership with the Money and ### Pensions Service, we’re helping to support ### the UK’s strategy for financial wellbeing ### goal by helping two million or more ### children receive a meaningful financial ### education by 2030. In October, we ### launched our month-long Making Money ### Meaningful campaign where over 300 ### colleagues delivered financial education ### sessions to 1,700 students who are ### beginning to make the transition into ### higher education or employment. Our newly launched suite of financial capability resources. 46 Lloyds Banking Group Annual Report and Accounts 2022 ## Income statement – underlying basis$^{A}$ | | 2022 £m | 2021 £m | Change % | | --- | --- | --- | --- | | Underlying net interest income | 13,172 | 11,163 | 18 | | Underlying other income | 5,249 | 5,060 | 4 | | Operating lease depreciation | (373) | (460) | 19 | | **Net income** | **18,048** | **15,763** | **14** | | Operating costs^{1} | (8,835) | (8,312) | (6) | | Remediation | (255) | (1,300) | 80 | | **Total costs** | **(9,090)** | **(9,612)** | **5** | | **Underlying profit before impairment** | **8,958** | **6,151** | **46** | | Underlying impairment (charge) credit^{1} | (1,510) | 1,385 | | | **Underlying profit** | **7,448** | **7,536** | **(1)** | | Restructuring^{1} | (80) | (452) | 82 | | Volatility and other items | (440) | (182) | | | **Statutory profit before tax** | **6,928** | **6,902** | | | Tax expense | (1,373) | (1,017) | (35) | | **Statutory profit after tax** | **5,555** | **5,885** | **(6)** | | Earnings per share | 7.3p | 7.5p | (0.2)p | | Dividends per share – ordinary | 2.40p | 2.00p | 0.40p | | Share buyback value | £2.0bn | £2.0bn | | | Banking net interest margin^{A} | 2.94% | 2.54% | 40bp | | Average interest-earning banking assets^{A} | £452.0bn | £444.6bn | 2 | | Cost income ratio^{A1} | 50.4% | 61.0% | (10.6)pp | | Asset quality ratio^{A1} | 0.32% | (0.31)% | | | Return on tangible equity^{A} | 13.5% | 13.8% | (0.3)pp | $^{A}$ See page 67. $^{1}$ 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67. ## Key balance sheet metrics | | At 31 Dec 2022 | At 31 Dec 2021 | Change % | | --- | --- | --- | --- | | Loans and advances to customers | £454.9bn | £448.6bn | 1 | | Customer deposits | £475.3bn | £476.3bn | | | Loan to deposit ratio^{A} | 96% | 94% | 2pp | | CET1 ratio | 15.1% | 17.3% | (2.2)pp | | Pro forma CET1 ratio^{A1} | 14.1% | 16.3% | (2.2)pp | | Total capital ratio | 19.7% | 23.6% | (3.9)pp | | MREL ratio | 31.7% | 37.2% | (5.5)pp | | UK leverage ratio | 5.6% | 5.8% | (0.2)pp | | Risk-weighted assets | £210.9bn | £196.0bn | 8 | | Wholesale funding^{2} | £100.3bn | £93.1bn | 8 | | Liquidity coverage ratio^{2} | 144% | 135% | 9pp | | Tangible net assets per share^{A} | 51.9p | 57.5p | (5.6)p | $^{1}$ 31 December 2022 reflects the dividend received from insurance in February 2023 and the full impact of the announced share buyback, but excludes the impact of the phased unwind of IFRS 9 relief on 1 January 2023. The 31 December 2021 comparative reflects the dividend received from insurance in February 2022 and the full impact of the share buyback in respect of 2021 that completed in 2022, but excludes the impact of regulatory changes that came into effect on 1 January 2022. $^{2}$ Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative has been presented on a consistent basis. The liquidity coverage ratio is calculated as a simple average of month-end observations over the previous 12 months. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 47 A ## Quarterly information | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | ended | | ended | | ended | | ended | | ended | | ended | | ended | | ended | | | 31 Dec | | 30Sep | | 30Jun | | | 31 Mar | | 31 Dec | 30Sep | | 30Jun | | | 31 Mar | | | 2022 | | 2022 | 2022 | | | 2022 | | 2021 | | 2021 | | 2021 | | 2021 | | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | Underlying net interest income 3,643 3,394 3,190 2,945 2,893 2,852 2,741 2,677 Underlying other income 1,438 1,282 1,268 1,261 1,307 1,336 1,282 1,135 Operating lease depreciation (78) (82) (119) (94) (78) (111) (123) (148) Net income 5,003 4,594 4,339 4,112 4,122 4,077 3,900 3,664 1 Operating costs (2,399) (2,187) (2,151) (2,098) (2,246) (2,013) (2,008) (2,045) Remediation (166) (10) (27) (52) (775) (100) (360) (65) Total costs (2,565) (2,197) (2,178) (2,150) (3,021) (2,113) (2,368) (2,110) Underlying profit before impairment 2,438 2,397 2,161 1,962 1,101 1,964 1,532 1,554 1 Underlying impairment (charge) credit (465) (668) (200) (177) 532 119 374 360 Underlying profit 1,973 1,729 1,961 1,785 1,633 2,083 1,906 1,914 1 Restructuring (11) (22) (23) (24) (418) (24) 6 (16) Volatility and other items (203) (199) 100 (138) (247) (30) 95 – Statutory profit before tax 1,759 1,508 2,038 1,623 968 2,029 2,007 1,898 Tax(expense)credit (239) (299) (416) (419) (548) (429) 461 (501) Statutory profit after tax 1,520 1,209 1,622 1,204 420 1,600 2,468 1,397 A Banking net interest margin 3.22% 2.98% 2.87% 2.68% 2.57% 2.55% 2.51% 2.49% A Average interest-earning banking assets £453.8bn £454.9bn £451.2bn £448.0bn £449.4bn £447.2bn £442.2bn £439.4bn A,1 Cost:incomeratio 51.3% 47.8% 50.2% 52.3% 73.3% 51.8% 60.7% 57.6% A,1 Asset quality ratio 0.38% 0.57% 0.17% 0.16% (0.46)% (0.10)% (0.33)% (0.33)% A Return on tangible equity 16.3% 11.9% 15.6% 10.8% 2.9% 14.5% 24.4% 13.9% Loans and advances to customers £454.9bn £456.3bn £456.1bn £451.8bn £448.6bn £450.5bn £447.7bn £443.5bn Customer deposits £475.3bn £484.3bn £478.2bn £481.1bn £476.3bn £479.1bn £474.4bn £462.4bn A Loan to deposit ratio 96% 94% 95% 94% 94% 94% 94% 96% Risk-weighted assets £210.9bn £210.8bn £209.6bn £210.2bn £196.0bn £200.7bn £200.9bn £198.9bn A Tangible net assets per share 51.9p 49.0p 54.8p 56.5p 57.5p 56.6p 55.6p 52.4p 1 2021comparativeshavebeenpresentedtoreflectthenewcostbasis,consistentwiththecurrentperiod.Seepage67. 48 Lloyds Banking Group Annual Report and Accounts 2022 ## Balance sheet analysis | At 31 Dec | | At30Sep | | | | At30Jun | | | | At 31 Dec | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2022 | | 2022 | Change | | | 2022 | Change | | | 2021 | Change | | | | £bn | | £bn | | % | | £bn | | % | | £bn | | % | Loans and advances to customers Open mortgage book 299.6 298.4 296.6 1 293.3 2 Closed mortgage book 11.6 12.3 (6) 13.1 (11) 14.2 (18) 1 Credit cards 14.3 14.3 14.2 1 13.8 4 UK Retail unsecured loans 8.7 8.8 (1) 8.5 2 8.1 7 Financial results Risk managementGovernance Financial statements Other informationStrategic report UKMotorFinance 14.3 14.2 1 14.2 1 14.0 2 Overdrafts 1.0 1.0 1.0 1.0 2 Retail other 13.8 13.0 6 12.5 10 10.9 27 1 Wealth 0.9 1.0 (10) 1.0 (10) 1.0 (10) 1 SmallandMediumBusinesses 37.7 39.8 (5) 41.1 (8) 42.5 (11) 1 CorporateandInstitutionalBanking 56.0 57.6 (3) 55.7 1 50.0 12 1,3 Central items (3.0) (4.1) (27) (1.8) 67 (0.2) Loans and advances to customers 454.9 456.3 456.1 448.6 1 Customer deposits Retail current accounts 114.0 115.7 (1) 113.4 1 111.5 2 Retail relationship savings accounts 166.3 165.7 165.8 164.5 1 Retail tactical savings accounts 16.1 16.2 (1) 16.9 (5) 16.8 (4) 1 Wealth 14.4 14.9 (3) 14.9 (3) 15.6 (8) Commercial Banking deposits 163.8 170.2 (4) 166.7 (2) 167.5 (2) 1 Central items 0.7 1.6 (56) 0.5 40 0.4 75 Total customer deposits 475.3 484.3 (2) 478.2 (1) 476.3 Total assets 877.8 892.9 (2) 890.4 (1) 886.6 (1) Total liabilities 830.3 846.5 (2) 840.3 (1) 833.4 Ordinary shareholders’ equity 42.0 40.0 5 44.4 (5) 47.1 (11) Other equity instruments 5.3 6.2 (15) 5.5 (4) 5.9 (10) Non-controlling interests 0.2 0.2 0.2 0.2 Total equity 47.5 46.4 2 50.1 (5) 53.2 (11) Ordinarysharesinissue,excludingownshares 66,944m 67,464m (1) 68,702m (3) 70,996m (6) 1 Reflectstheneworganisationstructure,withBusinessBankingandCommercialCardsmovingfromRetailtoCommercialBankingandWealth moving from Insurance,PensionsandInvestments(previouslyInsuranceandWealth)toRetail;comparativeshavebeenpresentedonaconsistentbasis. 2 Primarily Europe. 3 Includescentralfairvaluehedgeaccountingadjustments. 49Lloyds Banking Group Annual Report and Accounts 2022 ## Group results – statutory basis TheresultsbelowarepreparedinaccordancewiththerecognitionandmeasurementprinciplesofInternationalFinancialReporting Standards(IFRSs).Theunderlyingresultsareshownonpage 47. A reconciliation between the statutory and underlying results is shown on page 68. ### Summary income statement 2022 2021 Change £m £m % Net interest income 13,957 9,366 49 Other income (8,149) 28,078 1 Total income 5,808 37,444 (84) 1 Insuranceclaimsandchangesininsuranceandinvestmentcontractliabilities 12,401 (21,120) Total income, net of insurance claims and changes in insurance and investment contract liabilities 18,209 16,324 12 Operatingexpenses (9,759) (10,800) 10 Impairment(charge)credit (1,522) 1,378 Profit before tax 6,928 6,902 Taxexpense (1,373) (1,017) (35) Profit for the year 5,555 5,885 (6) Profitattributabletoordinaryshareholders 5,021 5,355 (6) Profitattributabletootherequityholders 438 429 2 Profitattributabletonon-controllinginterests 96 101 (5) Profit for the year 5,555 5,885 (6) Ordinary shares in issue (weighted-average – basic) 68,847m 70,937m (3) Basic earnings per share 7.3p 7.5p (0.2)p 1 IncludesincomeandexpenseattributabletothepolicyholdersoftheGroup’slong-termassurancefundsthatmateriallyoffsetinarrivingatprofitbeforetax.These can,dependingonmarketmovements,leadtosignificantvariancesonastatutorybasisintotalincomeandinsuranceclaims and changes in insurance and investmentcontractliabilitiesfromoneperiodtothenext. ### Summary balance sheet | At 31 Dec | | At 31 Dec | | | | | --- | --- | --- | --- | --- | --- | | | 2022 | | 2021 | Change | | | | £m | | £m | | % | Assets Cash and balances at central banks 91,388 76,420 20 Financialassetsatfairvaluethroughprofitorloss 180,609 206,771 (13) Derivativefinancialinstruments 24,753 22,051 12 Financialassetsatamortisedcost 520,322 517,156 1 Financialassetsatfairvaluethroughothercomprehensiveincome 23,154 28,137 (18) Other assets 37,603 35,990 4 Total assets 877,829 886,525 (1) Liabilities Deposits from banks 7,266 7,647 (5) Customer deposits 475,331 476,344 1 Repurchase agreements at amortised cost 48,596 31,125 56 Financialliabilitiesatfairvaluethroughprofitorloss 17,755 23,123 (23) Derivativefinancialinstruments 24,042 18,060 33 Debt securities in issue 73,819 71,552 3 Liabilities arising from insurance and investment contracts 149,868 168,463 (11) Other liabilities 22,901 23,951 (4) Subordinatedliabilities 10,730 13,108 (18) Total liabilities 830,308 833,373 Total equity 47,521 53,152 (11) Total equity and liabilities 877,829 886,525 (1) 1 Repurchaseagreementsatamortisedcost,previouslyincludedwithinotherliabilities,arenowshownseparately;comparativeshavebeenpresentedona consistent basis. 50 Lloyds Banking Group Annual Report and Accounts 2022 # Summary of Group results ## Statutory results The Group's statutory profit before tax for the year was £6,928 million, £26 million higher than 2021. The benefit of higher income and lower operating expenses was offset by the impact of an impairment charge (compared to a credit in the prior year), in part reflecting the deterioration in the economic outlook. Statutory profit after tax was £5,555 million (2021: £5,885 million, which included the benefit of a deferred tax remeasurement). In the fourth quarter of the year, statutory profit before tax was £1,759 million and statutory profit after tax was £1,520 million, an increase on the third quarter of 17 per cent and 26 per cent respectively, as a result of higher income and a lower impairment charge, following the deterioration in the macroeconomic outlook recognised during the third quarter. The Group's statutory income statement includes income and expenses attributable to the policyholders of the Group's long-term assurance funds. These items materially offset in arriving at profit before tax but can, depending on market movements, lead to significant variances on a statutory basis between total income and insurance claims and changes in insurance and investment contract liabilities from one period to the next. In 2022, due to deteriorating market conditions, the Group recognised losses on policyholder investments within total income, which were materially offset by the corresponding reduction in insurance and investment contract liabilities, recognised as a decrease in insurance claims and changes in insurance and investment contract liabilities expense and a decrease in the amounts payable to unit holders in the Group's consolidated open-ended investment companies, recognised within net interest income. Total statutory income net of insurance claims and changes in insurance and investment contract liabilities for the year was £18,209 million, an increase of 12 per cent on 2021, reflecting continued recovery in customer activity and benefits from UK Bank Rate changes. The Group maintained its focus on cost management, whilst increasing strategic investment as planned. Operating expenses decreased due to significantly lower remediation and restructuring costs and a reduced charge for operating lease depreciation. Remediation costs, principally relating to pre-existing programmes, were significantly lower than in 2021. Restructuring costs in the year included costs associated with the integration of Embark, whereas the prior year included a significant software write-off as the Group invested in new technology and systems infrastructure. The reduced operating lease depreciation charge reflected continued strength in used car prices, combined with the ongoing impact of a reduced, but stabilising, Lex fleet size, given industry-wide supply constraints in the new car market. The impairment charge of £1,522 million in 2022, compared to a net credit of £1,378 million in 2021, reflected strong observed credit performance, but was impacted by a deteriorating economic outlook partly offset by COVID-19 releases. The Group recognised a tax expense of £1,373 million in the year, compared to a tax expense of £1,017 million in 2021. The tax expense in 2022 included a £222 million benefit in relation to tax deductibility of provisions made in 2021, and a £53 million expense (2021: £954 million benefit) arising on the remeasurement of deferred tax assets. Loans and advances to customers increased by 1 per cent on 31 December 2021 to £454.9 billion, including growth of £6.3 billion in the open mortgage book, alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by £1.2 billion due to attractive growth opportunities in the Corporate and Institutional Banking portfolio, partly offset by repayments of government-backed lending. Customer deposits have decreased by £1.0 billion since the end of 2021, to £475.3 billion. This included Retail current account growth of £2.5 billion, more than offset by Commercial Banking deposit reductions of £3.7 billion. In 2022, due to market conditions, a reduction was seen in policyholder investments, primarily within financial assets at fair value through profit or loss. This was materially offset by a corresponding reduction in the related insurance and investment contract liabilities. Total equity reduced during the year as the Group's profits were more than offset by reductions in the cash flow hedging reserve due to the rising rate environment, the impact of pension scheme remeasurements given market conditions and the impact of in-year distributions, including the share buyback programme that was announced in February 2022 in respect of 2021. This programme completed on 11 October 2022, with c.4.5 billion ordinary shares repurchased. ## Underlying results$^{A}$ The Group's underlying profit for the year was £7,448 million, compared to £7,536 million for 2021. Growth in net income and reduced total costs were offset by an increased impairment charge, largely as a result of a deterioration in the economic outlook for the UK, versus the underlying impairment credit in 2021. Underlying profit before impairment for the period was up 46 per cent to £8,958 million, driven by net income growth and lower remediation costs. In the fourth quarter, underlying profit before impairment was £2,438 million, up 2 per cent on the third quarter. ### Net income$^{A}$ | | 2022 £m | 2021 £m | Change % | | --- | --- | --- | --- | | Underlying net interest income | 13,172 | 11,163 | 18 | | Underlying other income | 5,249 | 5,060 | 4 | | Operating lease depreciation | (373) | (460) | 19 | | **Net income^{A}** | **18,048** | **15,763** | **14** | | Banking net interest margin^{A} | 2.94% | 2.54% | 40bp | | Average interest-earning banking assets^{A} | £452.0bn | £444.6bn | 2 | Net income of £18,048 million was up 14 per cent on 2021, with higher net interest income and other income as well as a continued low charge for operating lease depreciation. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 51 ## Summary of Group results continued Net interest income of £13,172 million was up 18 per cent, driven by a stronger banking net interest margin of 2.94 per cent (2021: 2.54 per cent) and higher average interest-earning banking assets. The net interest margin benefitted from UK Bank Rate increases, structural hedge earnings from the rising rate environment and continued funding and capital optimisation, partly offset by lower mortgage margins. In the fourth quarter, the net interest margin increased to 3.22 per cent from 2.98 per cent in the third quarter, in part due to timing benefits from UK Bank Rate rises. Average interest-earning banking assets were up 2 per cent compared to 2021 at £452.0 billion, supported by continued growth in the open mortgage book. The Group now expects the banking net interest margin for 2023 to be greater than 305 basis points. The Group manages the risk to its earnings and capital from movements in interest rates by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 31 December 2022, the Group's structural hedge had an approved capacity of £255 billion (up £15 billion on 31 December 2021). Customer deposits have increased by c.£65 billion since the end of 2019; hedge capacity increased by £70 billion during the same period, of which c.£45 billion came from deposit growth and c.£25 billion from investment of existing deposits. The Group continues to review the stability of underlying deposits and their eligibility for the structural hedge. The nominal balance of the structural hedge was £255 billion at 31 December 2022 (31 December 2021: £240 billion) with a weighted-average duration of approximately three-and-a-half years (31 December 2021: approximately three-and-a-half years). The Group generated £2.6 billion of total gross income from structural hedge balances in 2022, representing growth over the prior year (2021: £2.2 billion). Underlying other income of £5,249 million was 4 per cent higher compared to £5,060 million in 2021, including £1,438 million in the fourth quarter, up 12 per cent on the third quarter. This reflected improved performance across Retail and Commercial Banking while Insurance, Pensions and Investments (previously Insurance and Wealth) benefitted from assumption changes from the annual basis review. Within Retail, other income was up 8 per cent on prior year, including improved current account and credit card performance. Retail other income was up slightly in the fourth quarter. Commercial Banking was up 9 per cent versus the prior year reflecting higher financial markets activity, also driving growth in the fourth quarter and strong performance in transaction banking, partly offset by lower levels of corporate financing activity. Insurance, Pensions and Investments other income was 12 per cent higher than the prior year. This largely reflected the impact of increased workplace pension income and bulk annuity deals along with the inclusion of Embark income and a benefit from assumption changes. Growth was partly offset by a decrease in the general insurance business contribution, primarily driven by pricing pressures and severe weather event claims of £108 million (2021: £11 million). Assumption and methodology changes of £348 million in the year (2021: £11 million), included £229 million in the fourth quarter, relating to updated longevity assumptions and a significant improvement in persistency assumptions. Other income associated with the Group's equity investments businesses, including Lloyds Development Capital, of £468 million was £214 million lower than the previous year after particularly strong contributions in 2021. The Group delivered good organic growth in Insurance, Pensions and Investments and Wealth (reported within Retail) assets under administration (AuA), with combined £9 billion net new money$^{1}$ in open book AuA over the year. In total, open book AuA stand at £160 billion. Looking forward, IFRS 17 will impact the phasing of profit recognition for insurance contracts. From the first quarter of 2023 insurance new business revenue within other income will be spread over the period the Group provides services to its policyholders (versus recognised up front under outgoing IFRS 4 accounting standards). Similarly, impacts from assumption changes will be spread over the life of the relevant contracts. Operating lease depreciation of £373 million (2021: £460 million), reflected continued strength in used car prices, combined with the ongoing impact of a reduced, but stabilising, Lex fleet size, given industry-wide supply constraints in the new car market. 1 Excludes market movements and Embark assets transferred on acquisition; includes post acquisition Embark net flows. ### Total costs$^{A}$ | | 2022 £m | 2021 £m | Change % | | --- | --- | --- | --- | | Operating costs^{A} | 8,835 | 8,312 | (6) | | Remediation | 255 | 1,300 | 80 | | **Total costs^{A}** | **9,090** | **9,612** | **5** | | Cost:income ratio^{A} | **50.4%** | **61.0%** | **(10.6)pp** | 1 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67. Cost discipline remains a core focus for the Group. The Group's cost:income ratio was 50.4 per cent, compared to 61.0 per cent in 2021. Total costs of £9,090 million were 5 per cent lower than in 2021 (with £2,565 million in the fourth quarter). Within this, lower remediation costs (down 80 per cent) were partially offset by increased operating costs of £8,835 million (up 6 per cent), reflecting higher planned strategic investment and costs in new businesses. Business-as-usual costs$^{A}$ were stable, with ongoing cost discipline in the context of inflationary pressures and increased staff payments. Operating costs are expected to be higher in 2023 at c.£9.1 billion (2022: £8.8 billion), given inflationary pressure and the peak of the Group's planned strategic investment, partially mitigated by continued cost efficiency. In 2022 the Group recognised remediation costs of £255 million (£166 million in the fourth quarter). These principally relate to pre-existing programmes and are significantly lower than 2021 (£1,300 million). Within remediation there was an additional charge of £50 million relating to HBOS Reading in the fourth quarter. The provision held in respect of HBOS Reading continues to reflect the Group's best estimate of its full liability, albeit uncertainties remain. 52 Lloyds Banking Group Annual Report and Accounts 2022 ## Underlying impairment$^{a}$ | | 2022 £m | 2021^{2} £m | Change % | | --- | --- | --- | --- | | Charges (credits) pre-updated MES^{a} | | | | | Retail | 773 | 672 | (15) | | Commercial Banking | 122 | (357) | | | Other | 20 | (1) | | | | 915 | 314 | | | Updated economic outlook | | | | | Retail | 600 | (1,120) | | | Commercial Banking | 395 | (579) | | | Other | (400) | – | | | | 595 | (1,699) | | | **Underlying impairment charge (credit)^{a}** | **1,510** | **(1,385)** | | | **Asset quality ratio^{a}** | **0.32%** | **(0.31)%** | | 1 Non lending-related fraud costs, previously reported within underlying impairment, are now included within operating costs. Comparatives have been presented on a consistent basis. 2 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 3 Impairment charges excluding the impact from updated economic outlook taken each quarter. Coronavirus impacted restructuring cases, previously disclosed separately, are now reported within charges pre-updated MES (multiple economic scenarios); comparatives have been presented on a consistent basis. Asset quality remains strong, with sustained low levels of new to arrears and very modest evidence of deterioration in observed credit metrics, despite the inflationary pressures on affordability during the latter half of the year. Underlying impairment was a net charge of £1,510 million (2021: credit of £1,385 million), resulting in an asset quality ratio of 32 basis points. This reflects a more normalised, but still low, pre-updated multiple economic scenarios (MES) charge of £915 million in the year (2021: £314 million, net of £357 million release in Commercial Banking largely driven by write-backs), equivalent to an asset quality ratio of 20 basis points. In addition, the Group recognised a net £595 million MES charge, including £82 million in the fourth quarter (2021: a credit of £1,699 million), as a result of updates to the Group's economic outlook and associated scenarios. The updated outlook addresses risks from a higher inflation and interest rate environment that have emerged over the year. A charge of £1,145 million relating to these risks is partly offset by a credit of £550 million from the release of COVID-19 judgements, including the £400 million release of the COVID-19 central adjustment. The fourth quarter saw an impairment charge of £465 million. This included a pre-updated MES charge of £383 million and also captures a further material charge in Commercial Banking on a pre-existing single case. The fourth quarter pre-updated MES charge includes additional expected credit loss (ECL) allowance build in Stage 1 as it rolls forward, picking up the elevated defaults expected in the fourth quarter of 2023, as well as recent observed behaviour. The small observed increase in defaults has been partially offset by an improvement in observed loss rates, largely within UK mortgages and unsecured portfolios as a result of collections policy changes and enhanced customer support initiatives. The Group's loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to lending with high levels of security, reflected in strong recovery performance. Observed credit performance remains strong, with very modest evidence of deterioration and the flow of assets into arrears, defaults and write-offs remaining at low levels and largely below pre-pandemic levels. The Group's ECL allowance increased by £0.3 billion in the fourth quarter to £5.3 billion (31 December 2021: £4.5 billion). The ECL allowance is high by historical standards, £1.1 billion above 31 December 2019 and assumes that a large proportion of expected losses will crystallise over the next 12 to 18 months, before run rate losses return to around pre-pandemic levels. This uplift in defaults is forecast given the expected deterioration across a number of macroeconomic measures. The Group's base case predicts affordability pressures from inflation peaking at 10.3 per cent in the first quarter of 2023, alongside UK Bank Rate peaking at 4.0 per cent, with unemployment expected to build to 5.3 per cent in the first quarter of 2025. The economic outlook assumptions remain similar to those of the third quarter, with some fourth quarter ECL increases driven by models responding to updates to HPI and GDP forecasts, and additional management judgements raised in the quarter for affordability risks. The ECL uplift in the fourth quarter is also driven by a material update in the individual assessment of a pre-existing single case in Commercial Banking and model calibrations as mentioned above. The ECL allowance continues to reflect a probability-weighted view of future economic scenarios built out from the base case and its associated conditioning assumptions. A 30 per cent weighting is applied to the base case, upside and downside scenarios and a 10 per cent weighting to the severe downside. All scenarios deteriorated during 2022 following the changes made to the base case outlook. The probability-weighted ECL is particularly impacted by the significance and non-linearity of losses from the severe downside scenario. In June 2022, the Group included an adjusted severe downside scenario to incorporate high CPI inflation and UK Bank Rate profiles and decided to adopt this adjusted scenario to calculate the Group's ECL. Given the increased severity of this severe downside scenario, there is a greater proportionate increase in ECL which builds further in the fourth quarter of 2022 due to sensitivity to model calibrations and new judgements introduced for inflationary and interest rate pressures. Overall, management judgement adjustments have significantly reduced in the year, reflecting the balance of risks shifting from more idiosyncratic COVID-19 risks to broader macroeconomic risks from inflationary pressures and rising interest rates within the Group's base case and wider economic scenarios. Management judgements in respect of COVID-19 have been removed as the risks have either dissipated, or are now captured in model calibrations or other wider related judgements. Of the £0.8 billion released since 31 December 2021, £0.6 billion driven a credit to the impairment charge in the year, as prior risks have not emerged, with the remaining £0.2 billion now captured within ECL portfolio models, where previously distorted data or trends have now normalised. Judgemental adjustments for risks in relation to inflationary pressures, not deemed to be fully captured by models, are £0.2 billion at 31 December 2022. These are across Retail portfolios where the perceived affordability risks to certain segments are adjusted, largely through default assumptions, at customer level. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 53 ## Summary of Group results continued Observed portfolio performance remains strong, with impact on Stage 2 loans and advances to customers mostly due to the effect from updated MES or model changes driven by CRD IV regulatory requirements$^{1}$. As a result, Stage 2 loans and advances to customers increased to £66 billion (31 December 2021: £42 billion), with 93 per cent up to date (31 December 2021: 86 per cent). Of the £24 billion increase, £8 billion of the increase was due to changes in credit risk measurement and modelling associated with CRD IV regulatory requirements$^{1}$ within UK mortgages in the first half of the year. £15 billion occurred in the third quarter as a result of the updated economic outlook reflected in the MES, largely in UK mortgages and Commercial Banking (99 per cent of which related to up to date loans). In the fourth quarter Stage 2 assets increased by £2 billion, all of which are up to date accounts, largely in Retail as a result of model calibrations and additional management judgements. Stage 3 assets were £11 billion as at 31 December 2022 (31 December 2021: £9 billion) and stable compared to 30 September 2022. The £2 billion increase in Stage 3 assets over the year is primarily driven by changes in credit risk measurement and modelling associated with CRD IV regulatory requirements$^{1}$ since the end of 2021 and not reflective of observed deterioration. On the basis of the current economic assumptions, the Group expects the asset quality ratio to be c.30 basis points in 2023. 1 As previously outlined, on 1 January 2022 the Group amended its definition of Stage 3 for UK mortgages, maintaining alignment between IFRS 6 and regulatory definitions of default. For UK mortgages, default was previously deemed to have occurred no later than when a payment was 180 days past due. In line with CRD IV this definition has now been reduced to 90 days, as well as including end-of-term payments on past due interest-only accounts and any non-performing loans. Furthermore, additional assets moved to Stage 2 given the consequential change in approach to the prediction and modelling of up to date accounts and their likelihood of reaching the new broader definition of default in the future. Given the accounts that moved to Stage 2 were up to date with low probability of default, there was no material ECL impact. ### Restructuring, volatility and other items | | 2022 £m | 2021 £m | Change % | | --- | --- | --- | --- | | **Underlying profit^{2}** | **7,448** | 7,536 | (1) | | Restructuring^{3} | (80) | (452) | 82 | | Volatility and other items | | | | | Market volatility and asset sales | (252) | 87 | | | Amortisation of purchased intangibles | (70) | (70) | | | Fair value unwind | (118) | (199) | 41 | | | **(440)** | **(182)** | | | **Statutory profit before tax** | **6,928** | 6,902 | | | Tax expense | (1,373) | (1,017) | (35) | | **Statutory profit after tax** | **5,555** | 5,885 | (6) | | Earnings per share | 7.3p | 7.5p | (0.2)p | | Return on tangible equity^{4} | 13.5% | 13.8% | (0.3)pp | | Tangible net assets per share^{4} | 51.9p | 57.5p | (5.6)p | 1 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67. Restructuring costs of £80 million included costs associated with the integration of Embark and were significantly lower than in 2021 (£452 million), which included a software write-off as the Group invested in new technology and systems infrastructure. Since the first quarter of 2022 all restructuring costs, with the exception of merger, acquisition and integration costs, have been reported as part of the Group's operating costs. Volatility and other items were a net loss of £440 million for the year, comprising £252 million of negative market volatility and £188 million relating to amortisation of purchased intangibles and fair value unwind. Market volatility included negative insurance volatility of £148 million due to rising interest rates and wider bond spreads partially offset by inflation (net of hedging), in addition to negative banking volatility of £46 million. This compares to gains during 2021 of £87 million, including positive insurance and banking volatility, partly offset by liability management losses and other statutory items. In the fourth quarter, a market volatility loss of £157 million included £120 million of negative banking volatility, principally from sterling strengthening. Further information on the reconciliation of underlying to statutory results is included on page 68. ### Tax The Group recognised a tax expense of £1,373 million for the year (2021: £1,017 million), with £239 million in the fourth quarter. The expense for the year included a £222 million benefit recognised in the fourth quarter in relation to tax deductibility of provisions made in 2021 and a £53 million expense (2021: £954 million benefit) arising primarily on the remeasurement of deferred tax assets following the substantive enactment of the previously announced reduction in the rate of banking surcharge from 8 per cent to 3 per cent. The Group expects a medium-term effective tax rate of around 27 per cent, which includes the impact of the reduction in the rate of banking surcharge and the increase in corporation tax rate from 19 per cent to 25 per cent, both of which come into effect from 1 April 2023. An explanation of the relationship between the tax expense and the Group's accounting profit for the year is set out in note 14. ### Tangible net assets and returns$^{4}$ Tangible net assets per share were 51.9 pence, down from 57.5 pence at 31 December 2021. The favourable impact from profits supported strong distributions, with further benefits from a reduction in shares from the share buyback (3.4 pence) more than offset by cash flow hedge reserve movements as a result of increased interest rates (7.5 pence). In the fourth quarter, tangible net assets per share were up 2.9 pence (30 September 2022: 49.0 pence), driven by the favourable impact from profits and cash flow hedge reserve movements. The return on tangible equity for 2022 was 13.5 per cent, reflecting the Group's robust financial performance (2021: 13.8 per cent). The Group expects the return on tangible equity to be c.13 per cent in 2023. Earnings per share were 7.3 pence (2021: 7.5 pence). In the comparative period of 2021, both the return on tangible equity and earnings per share benefited from a net impairment credit and remeasurement of deferred tax assets. 54 Lloyds Banking Group Annual Report and Accounts 2022 ## Balance sheet | | At 31 Dec 2022 | At 31 Dec 2021 | Change % | | --- | --- | --- | --- | | Loans and advances to customers | £454.9bn | £448.6bn | 1 | | Customer deposits | £475.3bn | £478.3bn | | | Loan to deposit ratio^{4} | 96% | 94% | 2pp | | Wholesale funding^{1} | £100.3bn | £93.1bn | 8 | | Wholesale funding <1 year maturity | £37.5bn | £30.3bn | 24 | | Of which money-market funding <1 year maturity^{2} | £24.8bn | £16.1bn | 54 | | Liquidity coverage ratio – eligible assets^{3} | £144.7bn | £140.2bn | 3 | | Liquidity coverage ratio^{4} | 144% | 135% | 9pp | 1 Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative has been presented on a consistent basis. 2 Excludes balances relating to margins of £2.6 billion (31 December 2021: £3.8 billion). 3 Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. 4 The liquidity coverage ratio is calculated as a simple average of month-end observations over the previous 12 months. Loans and advances to customers increased by 1 per cent on 31 December 2021 to £454.9 billion, including growth of £6.3 billion in the open mortgage book, alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by £1.2 billion due to attractive growth opportunities in the Corporate and Institutional Banking portfolio, partly offset by repayments of government-backed lending. Customer deposits have decreased by £1.0 billion since the end of 2021, to £475.3 billion. This included Retail current account growth of £2.5 billion, more than offset by Commercial Banking deposit reductions of £3.7 billion. Deposits were down £9.0 billion in the fourth quarter with reductions in Commercial Banking and Retail. Commercial Banking deposits were down £6.4 billion, as the expected outflows of short term Corporate and Institutional Banking deposits materialised, alongside the seasonality and the impact of management actions. Retail deposits were down £1.7 billion, with reductions in current accounts, partially offset by increased savings balances. In January 2023, the Group successfully completed a transaction under which £2.5 billion of legacy Retail mortgage loans were securitised with much of the risk placed in the market. The transaction results in the derecognition of the mortgage assets from the Group's balance sheet, supporting the Group's capital and risk management. The Group has maintained its strong funding and liquidity position with a loan to deposit ratio of 96 per cent, stable on 2021, continuing to provide robust funding and liquidity and potential for growth. The Group's funding and liquidity position is further discussed on page 179. The Group continued to access wholesale funding across a range of currencies and markets. Issuance volumes in 2022 totalled £9.3 billion (31 December 2021: £3.4 billion), of which £7.7 billion at 31 December 2022 was issued by Lloyds Banking Group plc across senior unsecured, 12 and ATI (31 December 2021: £2.6 billion). Total wholesale funding increased to £100.3 billion at 31 December 2022 (31 December 2021: £93.1 billion) as a result of short term funding which has increased towards more normalised levels and maintains the Group's access to diverse sources and tenors of funding. The total outstanding amount of drawings from the Term Funding Scheme with additional incentives for SMEs (TFSME) has remained stable at £30.0 billion at 31 December 2022 (31 December 2021: £30.0 billion), with maturities in 2025, 2027 and beyond. ## Capital | | At 31 Dec 2022 | At 31 Dec 2021 | Change % | | --- | --- | --- | --- | | CETI ratio | 15.1% | 17.3% | (2.2)pp | | Pro forma CETI ratio^{4} | 14.1% | 16.3% | (2.2)pp | | Total capital ratio | 19.7% | 23.6% | (3.9)pp | | MREL ratio | 31.7% | 37.2% | (5.5)pp | | UK leverage ratio | 5.6% | 5.8% | (0.2)pp | | Risk-weighted assets | £210.9bn | £196.0bn | 8 | 1 31 December 2022 reflects the dividend received from Insurance in February 2023 and the full impact of the announced share buyback, but excludes the impact of the phased unwind of IFRS 9 relief on 1 January 2023. The 31 December 2021 comparative reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback in respect of 2021 that completed in 2022, but excludes the impact of regulatory changes that came into effect on 1 January 2022. | **Pro forma CETI ratio as at 31 December 2021** | **16.3%** | | --- | --- | | Regulatory change on 1 January 2022 (bps) | (230) | | **Pro forma CETI ratio as at 1 January 2022** | **14.0%** | | Banking build (including impairment charge) (bps) | 230 | | Insurance dividend (bps) | 21 | | Risk-weighted assets (bps) | 14 | | Fixed pension deficit contributions (bps) | (31) | | Other movements (bps) | 11 | | **Capital generation (bps)** | **245** | | Ordinary dividends (bps) | (81) | | Share buyback accrual (bps) | (104) | | Further variable pension contributions (bps) | (52) | | **Pro forma CETI ratio as at 31 December 2022** | **14.1%** | 1 31 December 2021 ratio reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback in respect of 2021 that completed in 2022. 2 31 December 2022 ratio reflects the dividend received from Insurance in February 2023 and the full impact of the announced share buyback. The Group's pro forma CETI capital ratio reduced from 16.3 per cent at 31 December 2021 to 14.1 per cent at 31 December 2022. This was driven by a reduction of 230 basis points on 1 January 2022 for regulatory changes (as previously reported), subsequently offset by strong pro forma capital generation of 245 basis points during the year. Capital generation reflected banking build of 230 basis points, including a net impairment impact of 44 basis points which benefited from IFRS 9 transitional relief as described below. A further 21 basis points reflected the dividends received from the Insurance business in July 2022 (£300 million) and February 2023 (£100 million). Capital generation further benefited from a post 1 January 2022 reduction in risk-weighted assets (excluding threshold movements), after foreign exchange impacts (which are hedged), equivalent to 14 basis points and other movements of 11 basis points. This was offset in part by 31 basis points relating to the full 2022 fixed pension deficit contributions for the Group's defined benefit pension schemes. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 55 ## Summary of Group results continued Capital generation during the fourth quarter was 54 basis points. Excluding the insurance dividend received in February 2023 and the impact of the announced ordinary share buyback programme, the Group's CET1 capital ratio at 31 December 2022 was 15.1 per cent (31 December 2021: 17.3 per cent). The net impairment impact of 44 basis points for the year reflects the impairment charge of 59 basis points, offset by IFRS 9 dynamic transitional relief of 15 basis points resulting from the increase in Stage 1 and Stage 2 expected credit losses in the second half of the year. On 1 January 2023 IFRS 9 static transitional relief came to an end and the transitional factor applied to IFRS 9 dynamic relief reduced by a further 25 per cent, resulting in an overall reduction of 15 basis points. The Group's pro forma CET1 capital ratio at 31 December 2022 does not include the impact of the reduced relief. In relation to capital usage, the impact of the interim ordinary dividend paid in September 2022 and the accrual for the recommended final ordinary dividend equates to 81 basis points, with a further 104 basis points utilised to cover the accrual for the announced ordinary share buyback programme. During the year, a total of £2.2 billion in pension deficit contributions (both fixed and variable) has been paid into the Group's three main defined benefit pension schemes. As previously announced, the fixed contributions for the year of £800 million (equivalent to 31 basis points) were paid in full during the first quarter. Variable contributions of £1,442 million paid during the year cover the full amount of agreed contributions relating to 30 per cent of in-year shareholder distributions of £1,042 million (in accordance with the current agreement with the Trustee), plus an additional £400 million paid in December (aggregate variable contributions equivalent to 52 basis points in total). The additional payment represents an acceleration of future planned contributions, following the strong capital generation in 2022 and ahead of the triennial renegotiation of pension contributions. Risk-weighted assets were £196 billion at 31 December 2021 and increased by £16 billion to £212 billion (pro forma) on 1 January 2022, reflecting regulatory changes which include the anticipated impact of the implementation of new CRD IV models to meet revised regulatory standards for modelled outputs. The new CRD IV models remain subject to finalisation and approval by the PRA and therefore the resultant risk-weighted asset impact also remains subject to this. Risk-weighted assets reduced by £1 billion during the year (subsequent to the 1 January 2022 regulatory changes) to £211 billion at 31 December 2022. This largely reflected optimisation activity and Retail model reductions from the strong underlying credit performance, partly offset by the growth in balance sheet lending and the impact of foreign exchange movements. The Group expects risk-weighted assets to be between £220 billion and £225 billion at the end of 2024. As previously indicated, capital generation in 2022 was strong at 245 basis points. The Group experienced a number of tailwinds, including the low charge for operating lease depreciation, transitional relief in relation to impairment, risk-weighted asset reductions (post 1 January 2022 regulatory changes), high insurance dividends and the low effective tax rate charge. Looking forward, while these tailwinds are unlikely to repeat, banking capital generation is nonetheless expected to continue to be strong. The Group now expects capital generation in 2023 to be c.175 basis points. The PRA reduced the Group's Pillar 2A CET1 capital requirement during the fourth quarter to around 1.5 per cent of risk-weighted assets (previously around 2 per cent of risk-weighted assets). In December 2022 the UK countercyclical capital buffer rate increased to 1 per cent, increasing the Group's countercyclical capital buffer (CCyB) to around 0.9 per cent. This increase was partially offset by the removal of the CCyB related element of the PRA buffer. The planned increase in the UK countercyclical capital buffer rate to 2 per cent from July 2023 will lead to a further increase in the Group's CCyB to around 1.8 per cent. The Financial Policy Committee (FPC) have amended the other systemically important institution (O-SII) buffer framework, changing the metric for determining the buffer rate from total assets to the leverage exposure measure of the Ring-Fenced Bank sub-group (RFB). This will apply from the next review point in December 2023 which will refer to the leverage exposure measure as at 31 December 2022, with any changes applying from 1 January 2025. Currently, the RFB's O-SII buffer is 2.0 per cent of risk-weighted assets, which equates to 1.7 per cent of risk-weighted assets at Group level. Based on the RFB's leverage exposure measure as at 31 December 2022, the O-SII buffer rate will be maintained at 2.0 per cent. The current sum of the Group's regulatory CET1 capital requirement and capital buffers remains at around 11 per cent. The Board's view of the ongoing level of CET1 capital required to grow the business, meet current and future regulatory requirements and cover uncertainties continues to be around 12.5 per cent, plus a management buffer of around 1 per cent. ## Pensions The Group's three main defined benefit pension schemes continue to have an actuarial funding deficit, but are in a significantly stronger financial position than at 31 December 2021, when the deficit was c.£4 billion. During 2022, deficit contributions of £2.2 billion were paid into these schemes. The Group expects to make a further fixed contribution of £0.8 billion in the first half of 2023, consistent with 2021 and 2022. The Group has discussed with the Trustee the likelihood that further variable contributions will not be necessary in 2023 and beyond, dependent upon the outcome of the triennial valuation as at 31 December 2022. The Group expects to have substantially agreed the triennial valuation with the Trustee by the end of the third quarter of 2023, along with a revised contribution schedule in respect of any remaining deficit. Trustee agreement will be conditional upon prior feedback from the Pensions Regulator. The Group also expects that future contributions will become increasingly contingent in nature, such that they are only paid into the schemes if required. This will be reported on in future periods. The schemes' funding position remained robust and did not experience any material impact from the market volatility seen in the latter part of the year. Asset prices fell in line with the broader market and hedges fell in value as interest rates rose. A similar impact was experienced on liability valuations which also fell in value given the portfolio was almost fully hedged. The Group's schemes used liability-driven investment strategies to achieve this outcome and as the hedging was maintained throughout the crisis, the strategy performed as expected. ## Dividend and share buyback The Group has a progressive and sustainable ordinary dividend policy whilst maintaining the flexibility to return surplus capital through buybacks or special dividends. The Board intends to pay down to its capital target within the course of the current plan, by the end of 2024. The Board has recommended a final ordinary dividend of 1.60 pence per share, which, together with the interim ordinary dividend of 0.80 pence per share totals 2.40 pence per share, an increase of 20 per cent, in line with the Board's commitment to capital returns. The Board has also announced its intention to implement an ordinary share buyback of up to £2.0 billion which will commence as soon as is practicable and is expected to be completed by 31 December 2023. The Board intends to return surplus capital by way of a further buyback programme given the amount of surplus capital, the growth in ordinary dividends and the flexibility that a buyback programme offers. Based on the total ordinary dividend and the intended ordinary share buyback the total capital return in respect of 2022 will be up to £3.6 billion. 56 Lloyds Banking Group Annual Report and Accounts 2022 A ## Segmental analysis – underlying basis | | | | | | Insurance, | | | Equity | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | Pensions | | Investments | | | | | | | Commercial | | | | and | and Central | | | | | | Retail | | Banking | | Investments | | | Items | | Group | | 2022 | £m | | | £m | | £m | | | £m | £m | Underlying net interest income 9,774 3,447 (101) 52 13,172 Underlying other income 1,731 1,565 1,576 377 5,249 Operating lease depreciation (368) (5) – – (373) Net income 11,137 5,007 1,475 429 18,048 Financial results Risk managementGovernance Financial statements Other informationStrategic report Operating costs (5,175) (2,496) (1,042) (122) (8,835) Remediation (92) (133) (30) – (255) Total costs (5,267) (2,629) (1,072) (122) (9,090) Underlying profit before impairment 5,870 2,378 403 307 8,958 Underlying impairment (charge) credit (1,373) (517) (12) 392 (1,510) Underlying profit 4,497 1,861 391 699 7,448 A Banking net interest margin 2.76% 3.93% 2.94% A Average interest-earning banking assets £362.0bn £90.0bn – – £452.0bn A Asset quality ratio 0.38% 0.52% 0.32% Loans and advances to customers £364.2bn £93.7bn – (£3.0bn) £454.9bn Customer deposits £310.8bn £163.8bn – £0.7bn £475.3bn Risk-weighted assets £111.7bn £74.3bn £0.1bn £24.8bn £210.9bn | | | | | | | Insurance, | | | | Equity | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | Pensions | | | Investments | | | | | | | | Commercial | | | | and | | and Central | | | | | | Retail | 1 | | Banking | 1 | Investments | | 1 | | Items | | Group | | 2021 | £m | | | | £m | | £m | | | | £m | £m | 2 Underlying net interest income 8,577 2,602 (103) 87 11,163 Underlying other income 1,597 1,442 1,406 615 5,060 Operating lease depreciation (442) (18) – – (460) Net income 9,732 4,026 1,303 702 15,763 3 Operating costs (4,988) (2,288) (899) (137) (8,312) Remediation (360) (830) (123) 13 (1,300) Total costs (5,348) (3,118) (1,022) (124) (9,612) Underlyingprofitbeforeimpairment 4,384 908 281 578 6,151 3 Underlying impairment credit 447 936 – 2 1,385 Underlyingprofit 4,831 1,844 281 580 7,536 A,2 Banking net interest margin 2.50% 2.96% 2.54% A,2 Average interest-earning banking assets £353.4bn £91.2bn – – £444.6bn A,3 Asset quality ratio (0.13)% (0.98)% (0.31)% Loans and advances to customers £356.3bn £92.5bn – (£0.2bn) £448.6bn Customer deposits £308.4bn £167.5bn – £0.4bn £476.3bn Risk-weighted assets £96.4bn £72.7bn £0.1bn £26.8bn £196.0bn 1 Reflectstheneworganisationstructure,withBusinessBankingandCommercialCardsmovingfromRetailtoCommercialBankingandWealthmovingfrom Insurance,PensionsandInvestments(previouslyInsuranceandWealth)toRetail;comparativeshavebeenpresentedonaconsistentbasis. 2  During2022,theGroupreviseditsliquiditytransferpricingmethodology.Comparativesegmentalnetinterestincomehasbeenpresentedonaconsistentbasis. TotalGroupfiguresareunaffectedbythesechanges. 3 2021comparativeshavebeenpresentedtoreflectthenewcostbasis,consistentwiththecurrentperiod.Seepage67. 57Lloyds Banking Group Annual Report and Accounts 2022 ## Retail Retailoffersabroadrangeoffinancialservicesproductstopersonalcustomers,includingcurrentaccounts,savings,mortgages, creditcards,unsecuredloans,motorfinanceandleasingsolutions.Itsaimistobuilddeepandenduringrelationshipsthatmeet moreofitscustomers’financialneedsandimprovetheirfinancialresiliencethroughouttheirlifetime,withpersonalisedproductsand services. Retail operates the largest digital bank and branch network in the UK and continues to improve service levels and reduce conductrisk,whilstworkingwithinaprudentriskappetite.Throughinvestmentinstrategicpriorityareas,alongsideincreasinguse ofdata,Retailwilldeepenexistingconsumerrelationshipsandbroadenitsintermediaryoffering,toimprovecustomerexperience, operationalefficiencyandenableincreasinglytailoredpropositions. Strategic progress • UK’slargestdigitalbank,with19.8milliondigitallyactiveusersandcustomerslogginginover5billiontimesduring2022,up15per cent on prior year 1 • Market-leading apps rated ahead of competitors in 2022 .Recordmobileappreleases,includingenhancedin-appandchat integrated search functionality used over 19 million times by customers • AcquisitionofTusker,avehiclemanagementandleasingcompanyfocusedonelectricandlowemissionsvehicles,further developingtheGroup’sMotorbusinessandalignedtoitssustainabilityambitions • Tailoredmassaffluentbankingproductslaunchedacrosscurrentaccountsandcreditcards • Continuednetopenmortgagebookgrowthof£6.3billionand£14.3billionlendingtofirsttimebuyers • Proactivelycontactedcustomerstooffersupportduetotherisingcostofliving,includingmortgagecustomersonstandard variablerateswhocouldbenefitfromaproducttransfer 2 • Over5,000dailyvisits totheCostofLivingSupportHub.Inexcessof5millioncustomershaveregisteredfortheGroup’scredit 3 checkingtool,YourCreditScore.Intheyear147,000customers havemovedoutofpersistentdebt(2021:128,000) 4 • £3.5 billion of green mortgage lending ,ontracktomeet2024target.HomeretrofitpartnershipcreatedwithOctopusEnergyand over 1 million visits to online Home Ecosystem • £2.1billionfinancingandleasingforbatteryelectricandplug-inhybridvehicles,ontracktomeet2024targetwithover70percent ofdeliveriesintheyearbyLexbeingbatteryelectricorplug-inhybridcars Financial performance • Underlyingnetinterestincome14percenthigher,benefittingfromtherisingrateenvironmentinliabilitiesandhigherunsecured lendingbalances,partlyoffsetbymortgagemargincompression • Underlying other income 8 per cent higher from improved levels of customer activity across current accounts and credit cards. Operatingleasedepreciationdecreased17percent,duetothecontinuedstrengthofusedcarpricesgiven industry-wide supply constraints in the new car market • Operatingcosts4percenthigherreflectinghigherplannedstrategicinvestmentcostsandtherebuildingofvariablepay,partly offsetbycontinuedbenefitfromefficiencyinitiatives.Remediationcharges,relatingtopre-existingprogrammes,decreasedto £92 million • Underlyingimpairmentcharge£1,373million.Portfolioremainsresilientwithamodesttrendtowardsnormalisingcredit performanceduringthesecondhalf.Updatedeconomicscenarios,includinginflationandinterestratepressures,havecontributed to an increased charge (compared to a credit in the prior year) • Customer lending increased 2 per cent in the period with continued net open mortgage book growth of £6.3 billion and growth acrosscreditcardsandloans,partiallyoffsetbythecontinuedrunoffoftheclosedmortgagebook • Customerdepositsincreased1percentintheperiod.Overallbalancesareresilient,inthecontextofcostoflivingimpactson customersandincreasedcompetition,withcurrentaccountbalancesupby2percent • Risk-weightedassetsup16percentintheperiod,drivenbyregulatorychangeson1January2022.Excludingthesechanges,risk- weightedassetsarelower,benefittingfromoptimisationactivityandstrongunderlyingcreditperformance 1 AcrossGooglePlayandAppStore,outof36,000writtenreviews,76percentofcustomersratedtheGroup’sapps5-star(84percent4-starandabove). 2 ReferstoaveragedailyvisitssincelaunchinJuly2022. 3 Data is 11 months to 30 November 2022. Comparator is 11 months to 30 November 2021. 4 Asat30September2022. 58 Lloyds Banking Group Annual Report and Accounts 2022 A ### Retail performance summary 2022 2021 1 Change £m £m % 2 Underlying net interest income 9,774 8,577 14 Underlying other income 1,731 1,597 8 Operating lease depreciation (368) (442) 17 Net income 11,137 9,732 14 3 Operating costs (5,175) (4,988) (4) Remediation (92) (360) 74 Total costs (5,267) (5,348) 2 Financial results Risk managementGovernance Financial statements Other informationStrategic report Underlying profit before impairment 5,870 4,384 34 3 Underlying impairment (charge) credit (1,373) 447 Underlying profit 4,497 4,831 (7) A,2 Banking net interest margin 2.76% 2.50% 26bp A Average interest-earning banking assets £362.0bn £353.4bn 2 A,3 Asset quality ratio 0.38% (0.13)% 1 Reflectstheneworganisationstructure,withBusinessBankingandCommercialCardsmovingfromRetailtoCommercialBankingandWealthmovingfrom Insurance,PensionsandInvestments(previouslyInsuranceandWealth)toRetail;comparativeshavebeenpresentedonaconsistentbasis. 2 During2022,theGroupreviseditsliquiditytransferpricingmethodology.Comparativesegmentalnetinterestincomehasbeenpresentedonaconsistentbasis. 3 2021comparativeshavebeenpresentedtoreflectthenewcostbasis,consistentwiththecurrentperiod.Seepage67. | At 31 Dec | | At 31 Dec | | | | | --- | --- | --- | --- | --- | --- | | | 2022 | | 2021 | Change | | | | £bn | | £bn | | % | Open mortgage book 299.6 293.3 2 Closed mortgage book 11.6 14.2 (18) 1 Credit cards 14.3 13.8 4 UK unsecured loans 8.7 8.1 7 UKMotorFinance 14.3 14.0 2 Overdrafts 1.0 1.0 Wealth 0.9 1.0 (10) 2 Other 13.8 10.9 27 Loans and advances to customers 364.2 356.3 2 Operating lease assets 4.8 4.1 17 Total customer assets 369.0 360.4 2 Current accounts 114.0 111.5 2 Relationship savings 166.3 164.5 1 Tactical savings 16.1 16.8 (4) Wealth 14.4 15.6 (8) Customer deposits 310.8 308.4 1 Risk-weighted assets 111.7 96.4 16 1 Reflectstheneworganisationstructure,withBusinessBankingandCommercialCardsmovingfromRetailtoCommercialBankingandWealthmovingfrom Insurance,PensionsandInvestments(previouslyInsuranceandWealth)toRetail;comparativeshavebeenpresentedonaconsistentbasis. 2 Primarily Europe. 59Lloyds Banking Group Annual Report and Accounts 2022 ## Commercial Banking CommercialBankingservessmallandmediumbusinessesaswellascorporateandinstitutionalclients,providinglending, transactionalbanking,workingcapitalmanagement,debtfinancingandriskmanagementservices.Throughinvestmentindigital capabilityandproductdevelopment,CommercialBankingwilldeliveranenhancedcustomerexperienceviaadigitalfirstBusiness modelandexpandedclientpropositions,generatingdiversifiedcapitalefficientgrowthandsupportingcustomersontheirtransition tonetzero. Strategic progress • Proactivelycontactedmorethan550,000customerstooffersupportinmaintainingfinancialresiliencethroughthecostofliving challenges;drivenbyanalyticallyledclientengagementutilisingfinancialwellbeingtools • Digitisingbusinessandtransformingcustomerjourneys;strengtheninginvoicefinancepropositionthroughastrategicfintech partnershipwhichwilldeliverthefirstend-to-enddigitalsingleplatformsolutionofferedbyaUKbank • Exceededfullyeartargetof20percentgrowthinnewmerchantservicesclients,withstrongfoundationsforgrowthastheGroup continues to invest in products and digital onboarding capabilities 1 • Delivered c.£8 billion ofCorporateandInstitutionalgreenandsustainablefinancingin2022,demonstratingsignificantprogress towardsthe£15billioncommitmentbytheendof2024.Supportedpurpose-drivengrowthwithinloanoriginationandbusinesses transitioningtonetzero • Increasedthenumberandscaleofcommodityhedgingsolutiontradestohelpclientsmanagetheirexposuretohighlyvolatile 2 energymarkets,includingthelaunchofcarbonemissionallowancetransactions • Strengthenedoriginatetodistributecapability,includingenteringintoourfirststrategicco-investmentpartnershiptosupport clients’longtermneedsandincreasebalancesheetefficiencyfortheGroup • Upgradedratesdigitalproductofferingandforeignexchangepricinginadditiontodeliveringthefirstphaseofthenewforeign exchangeplatform • EnhancingcashmanagementcapabilitiesintheIslandsbusiness,onboardingtothenewplatformwithleadingAPIfunctionality • Developingdata-driveninsightsincludinglaunchofLloydsBankMarketIntelligence,aproductleveragingtheGroup’sdataand customer transactions to support clients’ strategic goals Financial performance • Underlyingnetinterestincomeincreased32percentto£3,447million,reflectingthehigherrateenvironmentandstrongportfolio management across both assets and liabilities • Underlyingotherincomeof£1,565million,up9percentontheprioryear,drivenbyhigherfinancialmarketsactivityandstrong performanceintransactionalbanking,partlyoffsetbylowerlevelsofcorporatefinancingactivity • Operatingcosts9percenthigher,reflectinghigherplannedstrategicinvestmentcostsandtherebuildingofvariablepay,partly offsetbycontinuedbenefitfromefficiencyinitiatives • Remediationchargesof£133million,includingachargerelatedtoHBOSReadinginthefourthquarter • Underlying impairment charge of £517 million (compared to a credit in the prior year) driven by the revised macroeconomic outlook andafurthermaterialchargeonapre-existingsinglecase;theportfolioperformanceremainsstrong,withonlymodestevidence of deterioration observed in the fourth quarter • Customerlending1percenthigherat£93.7billionduetoattractivegrowthopportunitiesandforeignexchangemovementsinthe CorporateandInstitutionalportfolio,partlyoffsetbynetrepaymentswithinSmallandMediumBusinessesincludinggovernment- backed lending • Customerdepositsdecreasedto£163.8billion,reflectingpricingdecisionsbasedonGroupliquidityrequirements • Risk-weightedassetsincreased2percentto£74.3billion,drivenbytheimpactofregulatorychangeson1January2022,capital accretivebalancesheetgrowthandforeignexchangemovements,partlyoffsetbyongoingoptimisation 1 Includesthecleangrowthfinanceinitiative,CommercialRealEstategreenlending,renewableenergyfinancing,sustainabilitylinkedloansandgreenandsocial bond facilitation. 2 UndertheUKEmissionsTradingScheme. 60 Lloyds Banking Group Annual Report and Accounts 2022 A ### Commercial Banking performance summary 2022 2021 1 Change £m £m % 2 Underlying net interest income 3,447 2,602 32 Underlying other income 1,565 1,442 9 Operating lease depreciation (5) (18) 72 Net income 5,007 4,026 24 3 Operating costs (2,496) (2,288) (9) Remediation (133) (830) 84 Total costs (2,629) (3,118) 16 Financial results Risk managementGovernance Financial statements Other informationStrategic report Underlying profit before impairment 2,378 908 3 Underlying impairment (charge) credit (517) 936 Underlying profit 1,861 1,844 1 A,2 Banking net interest margin 3.93% 2.96% 97bp A Average interest-earning banking assets £90.0bn £91.2bn (1) A,3 Asset quality ratio 0.52% (0.98%) 1 Reflectstheneworganisationstructure,withBusinessBankingandCommercialCardsmovingfromRetailtoCommercialBanking;comparativeshavebeen presented on a consistent basis. 2 During2022,theGroupreviseditsliquiditytransferpricingmethodology.Comparativesegmentalnetinterestincomehasbeenpresentedonaconsistentbasis. 3 2021comparativeshavebeenpresentedtoreflectthenewcostbasis,consistentwiththecurrentperiod.Seepage67. | At 31 Dec | | At 31 Dec | | | | | | --- | --- | --- | --- | --- | --- | --- | | | 2022 | | 2021 | 1 | Change | | | | £bn | | £bn | | | % | SmallandMediumBusinesses 37.7 42.5 (11) CorporateandInstitutionalBanking 56.0 50.0 12 Loans and advances to customers 93.7 92.5 1 Customer deposits 163.8 167.5 (2) Risk-weighted assets 74.3 72.7 2 1 Reflectstheneworganisationstructure,withBusinessBankingandCommercialCardsmovingfromRetailtoCommercialBanking;comparativeshavebeen presented on a consistent basis. 61Lloyds Banking Group Annual Report and Accounts 2022 # Insurance, Pensions and Investments Insurance, Pensions and Investments supports over 10 million customers with Assets under Administration (AuA) of £197 billion (excluding Wealth) and annualised annuity payments of over £1.1 billion. The Group continues to invest significantly in the development of the business, including investment propositions to support the Group's mass affluent strategy, innovating intermediary propositions through the Cavendish Online acquisition and Embark, and accelerating the transition to a low carbon economy. ## Strategic progress - Growth in investment and retirement business, with over £8 billion net new open book money¹ in the period, despite difficult market conditions. Open book AuA of £146 billion (23 per cent growth), including Embark - Workplace Pensions business saw a 12 per cent increase in total regular contributions to pensions administered, with £6.2 billion net AuA flows and 16 per cent AuA share as at 31 December 2022 - Direct to consumer ready-made investment offering now launched into the mobile banking apps, leveraging capability acquired with Embark and supporting the development of the Group's new mass affluent proposition - On track to meet the target of between £20 billion and £25 billion invested in climate-aware investment strategies through Scottish Widows by 2025, with £12 billion invested in 2022 in line with the Climate Action Plan - Deployed new features and enhancements to Individual Annuity products, including increasing the maximum age on Open Market products and introducing Value Protection, supporting the target of maintaining 15 per cent market share - Progress towards the goal of being a top three protection provider by 2025, acquiring Cavendish Online and protecting over 25,000 families (up c.50 per cent) through the Group's direct channels. Grew market share c.1 percentage point² - Investing in the General Insurance business to digitise customer claims and servicing journeys and expand the Group's brand presence through MBNA. Supporting profitable growth in the long term through improved customer experience - Migrated c.3.5 million policies to strategic platforms, and decommissioned over 40 legacy applications. Added drawdown functionality to core pension products, enhancing the experience for customers when they reach retirement - Scottish Widows awarded five stars in the Financial Service Awards across Insurance, Pensions and Investments for the seventh year in a row ## Financial performance - Strong net income growth (13 per cent) with increased new business and £348 million assumption changes, reflecting improved persistency and updated longevity assumptions, though General Insurance net income decreased - Life, Pensions and Investments (LP&I) new business income increased by £109 million (34 per cent), with underlying volumes up 8 per cent - Inclusion of Embark contributes £45 million net income since acquisition, with estimated £3 billion sales volumes - Strengthened the Workplace proposition, with £44 million growth in new business income - Investment in the annuity business supporting 78 per cent new business income growth (£62 million) and £967 million bulk annuities sales - Continued to grow the Protection offering, with new business income up 31 per cent - General Insurance income net of claims decreased £167 million, with £108 million severe weather related claims (including £52 million from the adverse weather in December) and a reduction in sales volumes, driven by market challenges as insurers have reacted to pricing reforms - Stockbroking income increased 25 per cent to £50 million with interest income benefitting from rate rises - Operating costs increased by £143 million (16 per cent) reflecting higher planned strategic investment costs, the rebuilding of variable pay and the inclusion of Embark - Underlying profit increased by £110 million to £391 million, including a benefit from a reduction in remediation costs ## Insurance capital and liquidity - Strong capital position supported a final dividend of £100 million paid to Lloyds Banking Group (following £300 million in July 2022), with an estimated Insurance Solvency II ratio of 163 per cent (159 per cent after proposed dividend) - Credit asset portfolio remains strong, rated 'A' - on average, well diversified, with less than 1 per cent of assets backing annuities being sub investment grade or unrated. Strong liquidity position with c.£3.5 billion cash and cash like assets ¹ Excludes market movements and Embark assets transferred on acquisition; includes post acquisition Embark net flows. ² ABI data for nine months ended 30 September 2022. 62 Lloyds Banking Group Annual Report and Accounts 2022 A ### Insurance, Pensions and Investments performance summary 2022 2021 1 Change £m £m % 2 Underlying net interest income (101) (103) 2 Underlying other income 1,576 1,406 12 Net income 1,475 1,303 13 3 Operating costs (1,042) (899) (16) Remediation (30) (123) 76 Total costs (1,072) (1,022) (5) Underlying profit before impairment 403 281 43 Financial results Risk managementGovernance Financial statements Other informationStrategic report 3 Underlying impairment charge (12) – Underlying profit 391 281 39 4 Life and pensions sales (PVNBP) 21,687 17,289 25 Generalinsuranceunderwrittennewgrosswrittenpremiums 55 87 (37) Generalinsuranceunderwrittentotalgrosswrittenpremiums 486 655 (26) 5 | Generalinsurancecombinedratio | | 113% 101% 12pp | | | | | | --- | --- | --- | --- | --- | --- | --- | | | At 31 Dec | | At 31 Dec | | | | | | | 2022 | | 2021 | Change | | | | | £bn | | £bn | | % | 6 InsuranceSolvencyIIratio(pre-dividend) 163% 191% (28)pp 1 Total customer assets under administration 197.3 179.2 10 1 Reflectstheneworganisationstructure,withWealthmovingfromInsurance,PensionsandInvestments(previouslyInsuranceandWealth)toRetail;comparatives have been presented on a consistent basis. 2 During2022,theGroupreviseditsliquiditytransferpricingmethodology.Comparativesegmentalnetinterestincomehasbeenpresentedonaconsistentbasis. 3 2021comparativeshavebeenpresentedtoreflectthenewcostbasis,consistentwiththecurrentperiod.Seepage67. 4 Present value of new business premiums. 5 Generalinsurancecombinedratiofor2022includes£108millionrelatingtoeventweatherclaims(storm,subsidenceandfreeze)(2021:£11million).2021alsoincludes the£91millionregulatoryfinerelatingtothewaytheGrouphistoricallycommunicatedwithhomeinsurancecustomersregardingtheirrenewals.Excludingthese itemsandreservereleasestheratiowas94percent(2021:87percent). 6 Equivalentestimatedregulatoryviewofratio(includingWithProfitsfundsandpost-dividend)was152percent(31December2021:169percent). ### Income by product group 2022 2021 New Existing New Existing business business Total business business Total £m £m £m £m £m £m Workplace,planningandretirement 240 130 370 201 110 311 Individualandbulkannuities 141 101 242 79 83 162 Protection 42 22 64 32 20 52 Longstanding 9 303 312 11 286 297 Total LP&I 432 556 988 323 499 822 Lifeandpensionsexperienceandotheritems 279 161 Generalinsurance 113 280 Embark 45 Stockbroking 50 40 Net income 1,475 1,303 63Lloyds Banking Group Annual Report and Accounts 2022 Insurance, Pensions and Investments continued ## Volatility arising in the insurance business Volatility included in the Group's statutory results before tax comprises the following: | | 2022 £m | 2021 £m | | --- | --- | --- | | Insurance volatility | (735) | 503 | | Policyholder interests volatility | 236 | 366 | | **Total volatility** | **(499)** | **869** | | Insurance equity hedging arrangements | 351 | (592) | | **Total** | **(148)** | **277** | The Group's insurance business has policyholder liabilities that are supported by substantial holdings of investments. IFRS requires that the changes in both the value of the liabilities and the investments are reflected within the income statement. The value of the liabilities does not move exactly in line with changes in the value of the investments. As the investments are substantial, movements in their value can have a significant impact on the profitability of the Group. Management believes that it is appropriate to disclose the division's results on the basis of an expected return. The impact of the actual return on these investments differing from the expected return is included within insurance volatility. Insurance volatility movements during 2022 were largely driven by significant increases in interest rates, equity falls and bond spreads widening, offset to some extent by inflation increases (net of inflation hedging). Although the Group manages its exposures to equity, interest rate, foreign currency exchange rate, inflation and market movements within the insurance division, it does so by managing the impacts on both capital and earnings volatility, though the extent to which these bases are hedged needs to be balanced. For example, equity market movements are hedged within insurance on a Solvency II capital basis and whilst this also reduces the IFRS earnings exposure to equity market movements, the hedge works to a lesser extent from an IFRS earnings perspective. ## Changes in insurance assumptions and methodology The following impacts from assumption changes are included within insurance, Pensions and Investments underlying other income. | | 2022 £m | 2021 £m | | --- | --- | --- | | Persistence | 229 | (15) | | Mortality, longevity and morbidity | 112 | 149 | | Expense assumptions | 9 | (94) | | Other | (2) | 3 | | **Total assumption changes** | **348** | **43** | | Methodology changes | – | 68 | | **Total assumption and methodology changes** | **348** | **111** | Key life and pensions assumptions and methodologies are formally updated through the annual basis review in the fourth quarter of each year. However, assumptions are monitored throughout the year and are updated at half-year where there is a compelling reason to do so. The current period assumptions and methodology changes impact of £348 million, includes a benefit from updating to the latest industry longevity assumptions and a significant improvement in persistency assumptions (including benefit from adding drawdown functionality to the Group's core pension products). 64 Lloyds Banking Group Annual Report and Accounts 2022 ## Implementation of IFRS 17 IFRS 17 is an accounting standard that changes the way profit is recognised for insurance contracts. Rather than recognise the expected profit for an insurance contract at its inception, IFRS 17 requires that the expected profit for providing insurance contract services is recognised over the period insurance contract services are provided. The profit is calculated based on discounted best estimate cash flows and an associated risk adjustment and is recognised by the creation of a contractual service margin (CSM) on the balance sheet, which is released to the income statement over the contract period. As a result, both new business profit, which is currently recognised in other income at the outset of the contract, and the impact of certain assumption changes, which is recognised in other income at the time the assumption is changed, will be recognised in the CSM and subsequently released to the income statement over the period of contractual service under IFRS 17. Existing business will continue to be recognised in the income statement over the period of the contract. Losses on groups of onerous contracts and recoveries of such losses, to the extent they are covered by reinsurance contracts held, are recognised in the income statement immediately. The Group will continue to recognise market volatility outside of underlying profit. Whilst IFRS 17 impacts the timing of profit recognition for insurance contracts, it will have no impact on the total profit recognised over the lifetime of these contracts, Group capital or capital generation, the economic value of the insurance business or its capital position. The new standard is not expected to impact the ability of the Insurance business to pay dividends within the Group structure, which will continue to be driven by the Solvency II position. The Group has adopted IFRS 17 from 1 January 2023 and as required by the standard, will restate its total equity at 1 January 2022 and its income statement for 2022. The Group's total equity under IFRS 17 at 1 January 2022 was £51.3 billion, approximately £1.9 billion lower than under IFRS 4. The reduction in equity is driven by the derecognition of the value in-force asset and the move to best estimate of contract liabilities, the creation of the new CSM liability (approximately £1.9 billion, net of reinsurance) and the establishment of the risk adjustment (approximately £1.5 billion, net of reinsurance). During 2022, on the current IFRS 4 accounting basis, Insurance contributed £1,576 million to the Group's underlying other income, including new business income of £432 million and net gains arising from assumption changes of £348 million, both of which will be largely deferred to the CSM. Including these items, of the total 2022 reported underlying other income in Insurance, Pensions and Investments of £1,576 million, c.£1,300 million will be subject to a revised treatment under IFRS 17. Under IFRS 17, income arising from insurance contracts will primarily be recognised through the release of the CSM and the risk adjustment (for non-financial risks such as mortality and persistency), rather than separately for new business and existing business. The Group estimates that c.£300 million of the CSM and risk adjustment, gross of reinsurance, held at 1 January 2022 would have been released to the income statement during 2022 on both a statutory and underlying basis. During 2022, the Group added a drawdown feature to its existing long-standing and workplace pension business as a significant customer enhancement. This is a contract modification that results in a substantially different contract boundary. IFRS 17 requires that the contracts and their associated CSM (approximately £0.4 billion) at the time of the modification are derecognised and the modified contracts together with a new CSM (approximately £1.7 billion) are recognised as if they were new contracts. These contract modifications in 2022 are estimated to increase the CSM by approximately £1.3 billion and will result in the Group recognising a charge to its 2022 restated income statement of approximately £1.3 billion. While there may be contract modifications in the future, they are unlikely to be of this materiality. Given the scale of this modification and its impact on the 2022 income statement, it will be recognised outside of underlying profit. The release of the new CSM following modification will be disclosed in the insurance service result given the expected materiality of the annual release to the income statement. The Group will undertake further work during the first quarter of 2023 to finalise the financial impact of the contract modification and does not expect the final impact on equity at 31 December 2022 to differ materially from this estimate. This contract modification does not affect the capital position of the insurance business or the Group. Further information is given in note 55. Under IFRS 17, the Group's reported results will continue to be impacted by market and economic factors, albeit the treatment and basis of estimation of certain items is being modified. Under IFRS 4, both the volatility relating to the Group's unit-linked business and policyholder interests volatility on the value in-force asset (VIF) are recognised in the income statement immediately. Under IFRS 17, the volatility relating to the unit-linked business will be recognised in the CSM and released to the income statement in subsequent years except where the Group has applied the risk mitigation option. In addition, policyholder interests volatility on the VIF will not exist under IFRS 17. The removal of these two components together are estimated to adversely impact volatility by c.£0.4 billion in the 2022 income statement restated for IFRS 17 versus IFRS 4. The consequent increased adverse volatility which remains in the income statement under IFRS 17 reflects the significant market volatility seen in 2022. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 65 ## Equity Investments and Central Items | | 2022 £m | 2021 £m | Change % | | --- | --- | --- | --- | | Net income | 429 | 702 | (39) | | Operating costs^{1} | (122) | (137) | 11 | | Remediation | – | 13 | | | **Total costs** | **(122)** | **(124)** | **2** | | **Underlying profit before impairment** | **307** | **578** | **(47)** | | Underlying impairment credit | 392 | 2 | | | **Underlying profit** | **699** | **580** | **21** | 1 2021 comparatives have been presented to reflect the new cost basis, consistent with the current period. See page 67. Equity Investments and Central Items contains the Group's equity investments businesses, including Lloyds Development Capital (LDC) and the Group's share of the Business Growth Fund (BGF), as well as Citra Living. Also included are income and expenses not attributed to other divisions, including residual underlying net interest income after transfer pricing (which includes the central recovery of the Group's distributions on other equity instruments), in period gains from gilt sales and the unwind of associated hedging costs. During 2022, the Group's equity investment businesses contributed net income of £419 million compared to £573 million in 2021. This is lower given the above run rate gains in LDC in 2021 and charges of c.£40 million in relation to the BGF in 2022. During 2022 LDC has continued to deliver strong investment performance. The business continues to build its investment portfolio with attractive returns and opportunities to further integrate with the Group offering. Underlying impairment for the period was a credit of £392 million compared to £2 million in 2021, relating to the full release of the ECL central adjustment held at the end of 2021 (31 December 2021: £400 million). This adjustment was not allocated to specific portfolios and was applied in respect of uncertainty in the economic outlook, relating to the risks of COVID-19. ## Other financial information ### Number of employees (full-time equivalent) | | At 31 Dec 2022 | At 31 Dec 2021 | | --- | --- | --- | | Retail^{1} | 30,208 | 30,235 | | Commercial Banking^{1} | 8,671 | 8,554 | | Insurance, Pensions and Investments^{1} | 3,999 | 4,026 | | Group functions and services^{1} | 17,699 | 16,290 | | | 60,577 | 59,105 | | Agency staff | (1,223) | (1,150) | | **Total number of employees** | **59,354** | **57,955** | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. ### Post-tax return on average assets | | 2022 % | 2021 % | | --- | --- | --- | | **Post-tax return on average assets** | **0.62** | **0.67** | ### Share buyback in respect of 2021 results During 2022, the Group completed a £2 billion share buyback programme, in respect of 2021 results, with c.4.5 billion shares purchased at an average price of 44.16 pence per share. Through a reduction in the weighted average number of ordinary shares in issue, share buybacks have the effect of increasing earnings per share and, depending on the average price paid per share, can either increase or decrease the tangible net assets per share. The 2022 share buyback had the effect of increasing the earnings per share by 0.3 pence and increasing the tangible net assets per share by 0.5 pence. 66 Lloyds Banking Group Annual Report and Accounts 2022 ## Alternative performance measures The statutory results are supplemented with those presented on an underlying basis and also with other alternative performance measures.ThisistoenableacomprehensiveunderstandingoftheGroupandfacilitatecomparisonwithpeers.TheGroupExecutive Committee,whichisthechiefoperatingdecisionmakerfortheGroup,reviewstheGroup’sresultsonanunderlyingbasisinorderto assessperformanceandallocateresources.Managementusesunderlyingprofitbeforetax,analternativeperformancemeasure,as a measure of performance and believes that it provides important information for investors. This is because it allows for a comparable representationoftheGroup’sperformancebyremovingtheimpactofitemssuchasvolatilitycausedbymarketmovementsoutside the control of management. Inarrivingatunderlyingprofit,statutoryprofitbeforetaxisadjustedfortheitemsbelow,toallowacomparisonoftheGroup’s underlyingperformance: • Restructuringcostsrelatingtomerger,acquisitionandintegrationactivities Financial results Risk managementGovernance Financial statements Other informationStrategic report • Volatilityandotheritems,whichincludestheeffectsofcertainassetsales,thevolatilityrelatingtotheGroup’shedging arrangementsandthatarisingintheinsurancebusiness,theunwindofacquisition-relatedfairvalueadjustmentsandthe amortisation of purchased intangible assets Asannouncedatthe2021full-year,inthefirstquarterof2022theGroupadoptedanewbasisforcostreporting,includingall restructuringcosts,withtheexceptionofmerger,acquisitionandintegrationcosts,withinoperatingcosts.Nonlending-relatedfraud costs,previouslyincludedwithinunderlyingimpairment,arealsonowreportedaspartofoperatingcosts.Thishasnotimpactedthe statutory impairment charge. Comparatives have been presented on a consistent basis. Theanalysisoflendingandexpectedcreditloss(ECL)allowancesispresentedonbothastatutoryandanunderlyingbasisanda reconciliation between the two is shown on page 163.Onastatutorybasis,purchasedororiginatedcredit-impaired(POCI)assets includeafixedpoolofmortgagesthatwerepurchasedaspartoftheHBOSacquisitionatadeepdiscounttofacevaluereflecting creditlossesincurredfromthepointoforiginationtothedateofacquisition.Overtime,thesePOCIassetswillrunoffastheloans redeem,paydownorlossescrystallise.Theunderlyingbasisassumesthatthelendingassetsacquiredaspartofabusiness combinationwereoriginatedbytheGroupandareclassifiedaseitherStage1,2or3accordingtothechangeincreditriskoverthe periodsinceorigination.UnderlyingECLallowanceshavebeencalculatedaccordingly.TheGroupusestheunderlyingbasistomonitor the creditworthiness of the lending portfolio and related ECL allowances. TheGroupcalculatesanumberofmetricsthatareusedthroughoutthebankingandinsuranceindustriesonanunderlyingbasis. These metrics are not necessarily comparable to similarly titled measures presented by other companies and are not any more authoritativethanmeasurespresentedinthefinancialstatements,howevermanagementbelievesthattheyareusefulinassessing theperformanceoftheGroupandindrawingcomparisonsbetweenyears.Adescriptionofthesemeasuresandtheircalculation,is givenbelow.AlternativeperformancemeasuresareusedinternallyintheGroup’sMonthlyManagementReport. Asset quality ratio Theunderlyingimpairmentchargeorcreditfortheperiodinrespectofloansandadvancestocustomers,bothdrawnand undrawn,expressedasapercentageofaveragegrossloansandadvancestocustomersfortheperiod.Thismeasureis useful in assessing the credit quality of the loan book Banking net interest Banking net interest income on customer and product balances in the banking businesses as a percentage of average margin grossinterest-earningbankingassetsfortheperiod.Thismeasureisusefulinassessingtheprofitabilityofthebanking business Business-as-usual Totaloperatingcostslessstrategicinvestmentandnewbusinesses,includingEmbarkandCitraLiving costs Cost:incomeratio Total costs as a percentage of net income calculated on an underlying basis. This measure is useful in assessing the profitabilityoftheGroup’soperationsbeforetheeffectsoftheunderlyingimpairmentcreditorcharge Economicprofit Statutoryprofitaftertaxadjustedtoapplyachargeforequityutilisationandtoremovenon-controllinginterests.This measureisusedasoneoftheGroup’skeyperformanceindicatorsandisusefulinassessingtheGroup’sprofitabilitywhilst factoring in the cost of equity Loan to deposit ratio Loans and advances to customers divided by customer deposits Operating costs Operatingexpensesadjustedtoremovetheimpactofremediation,restructuringcosts,operatingleasedepreciation,the amortisationofpurchasedintangibles,theinsurancegrossupandotherstatutoryitems Pro forma CET1 ratio CET1ratioadjustedfortheeffectsofthedividendpaidupbytheInsurancebusinessinthesubsequentquarterperiodand the impact of the announced ordinary share buyback programme. December 2021 pro forma CET1 ratios include the impact ofthesharebuybackprogrammeinrespectof2021,announcedinFebruary2022 Return on tangible Profitattributabletoordinaryshareholders,dividedbyaveragetangiblenetassets.Thismeasureisusefulinprovidinga equity consistentbasiswithwhichtomeasuretheGroup’sperformance Tangible net assets Netassetsexcludingintangibleassetssuchasgoodwillandacquisition-relatedintangiblesdividedbythenumberof per share ordinary shares in issue. This measure is useful in assessing shareholder value Underlyingprofit Underlyingprofitadjustedtoremovetheunderlyingimpairmentcreditorcharge.Thismeasureisusefulinallowingfora before impairment comparablerepresentationoftheGroup’sperformancebeforetheeffectsoftheforward-lookingunderlyingimpairment credit or charge Underlyingprofit Statutoryprofitbeforetaxadjustedforcertainitemsasdetailedabove.Thismeasureallowsforacomparable representationoftheGroup’sperformancebyremovingtheimpactofcertainitemsincludingvolatilitycausedbymarket movements outside the control of management 67Lloyds Banking Group Annual Report and Accounts 2022 ### Alternative performance measures continued ### Reconciliation between statutory and underlying basis financial information | | Statutory basis Removal of: Underlying basis | | | | | A | | --- | --- | --- | --- | --- | --- | --- | | | | Volatility and | | Insurance | | | | | | other items | 1,2 | gross up | 3 | | | 2022 £m | | | £m | | £m £m | | Net interest income 13,957 226 (1,011) 13,172 Underlying net interest income Otherincome,netofinsuranceclaims and changes in insurance and investment contract liabilities 4,252 120 877 5,249 Underlying other income (373) – (373) Operating lease depreciation Total income, net of insurance claims and changes in insurance and investment | contract liabilities 18,209 (27) (134) 18,048 | | | Net income | | | --- | --- | --- | --- | --- | | | 4 | | | 4 | | Operatingexpenses | | (9,759) 535 134 (9,090) Total costs | | | Impairmentcharge (1,522) 12 – (1,510) Underlying impairment charge Profit before tax 6,928 520 – 7,448 Underlying profit 2021 Net interest income 9,366 255 1,542 11,163 Underlying net interest income Otherincome,netofinsuranceclaims and changes in insurance and investment contract liabilities 6,958 (139) (1,759) 5,060 Underlying other income (460) – (460) Operating lease depreciation Total income, net of insurance claims and changes in insurance and investment | contract liabilities 16,324 (344) (217) 15,763 | | | Net income | | | --- | --- | --- | --- | --- | | | 4 | | | 4,5 | | Operatingexpenses | | (10,800) 971 217 (9,612) Total costs | | | 5 Impairmentcredit 1,378 7 – 1,385 Underlying impairment credit Profit before tax 6,902 634 – 7,536 Underlying profit 1 Intheyearended31December2022thiscomprisedtheeffectsofmarketvolatilityandassetsales(lossof£252million);theamortisationofpurchasedintangibles (lossof£70million);restructuringcosts(lossof£80million);andfairvalueunwind(lossof£118million). 2 Intheyearended31December2021thiscomprisedtheeffectsofmarketvolatilityandassetsales(gainof£87million);theamortisationofpurchasedintangibles (lossof£70million);restructuringcosts(lossof£452million);andfairvalueunwind(lossof£199million). 3 TheGroup’sinsurancebusinesses’incomestatementsincludeincomeandexpenseattributabletothepolicyholdersoftheGroup’slong-termassurancefunds. Theseitemshavenoimpactintotaluponprofitattributabletoequityshareholdersand,toprovideaclearerrepresentationoftheunderlyingtrendswithinthe business,theseitemsareshownnetwithintheunderlyingresults. 4 Statutoryoperatingexpensesincludesoperatingleasedepreciation.Onanunderlyingbasisoperatingleasedepreciationisincludedinnetincome. 5 2021comparativeshavebeenpresentedtoreflectthenewcostbasis,consistentwiththecurrentperiod.Seepage67. A ### Asset quality ratio 2022 2021 Underlying impairment (charge) credit (£m) (1,510) 1,385 Remove non-customer underlying impairment (£m) 27 (7) Underlying customer related impairment (charge) credit (£m) (a) (1,483) 1,378 Loans and advances to customers (£bn) 454.9 448.6 Addbackexpectedcreditlossallowance(drawn)(£bn) 4.5 3.8 Addbackacquisitionrelatedfairvalueadjustments(£bn) 0.4 0.4 Underlying gross loans and advances to customers (£bn) 459.8 452.8 Averaging (£bn) (2.9) (2.4) Average underlying gross loans and advances to customers (£bn) (b) 456.9 450.4 A Asset quality ratio = (a) / (b) 0.32% (0.31%) 68 Lloyds Banking Group Annual Report and Accounts 2022 A ### Banking net interest margin 2022 2021 Underlying net interest income (£m) 13,172 11,163 Removenon-bankingunderlyingnetinterestexpense(£m) 111 108 Banking underlying net interest income (£m) (a) 13,283 11,271 Underlying gross loans and advances to customers (£bn) 459.8 452.8 Adjustmentfornon-bankingandotheritems: Fee-basedloansandadvances(£bn) (8.4) (5.1) Other (£bn) 5.0 1.3 Financial results Risk managementGovernance Financial statements Other informationStrategic report Interest-earningbankingassets(£bn) 456.4 449.0 Averaging (£bn) (4.4) (4.4) A Average interest-earning banking assets (£bn) (b) 452.0 444.6 A Banking net interest margin (%) = (a) / (b) 2.94 2.54 A ### Cost:income ratio 2022 2021 £m £m Total costs (a) 9,090 9,612 Net income (b) 18,048 15,763 A Cost:income ratio = (a) / (b) 50.4% 61.0% A ### Economic profit 2022 2021 £m £m Statutoryprofitaftertax 5,555 5,885 Remove equity utilisation charge (2,677) (2,721) Remove non-controlling interests (96) (101) A Economic profit 2,782 3,063 A ### Loan to deposit ratio | At 31 Dec | | At 31 Dec | | | --- | --- | --- | --- | | | 2022 | | 2021 | | | £bn | | £bn | Loans and advances to customers (a) 454.9 448.6 Customer deposits (b) 475.3 476.3 A Loan to deposit ratio = (a) / (b) 96% 94% A ### Operating costs 2022 2021 £m £m Operatingexpenses 9,759 10,800 Adjustmentfor: Remediation (255) (1,300) 1 Restructuring (80) (452) Operating lease depreciation (373) (460) Amortisation of purchased intangibles (70) (70) Insurancegrossup (134) (217) 1 Other statutory items (12) 11 A,1 Operating costs 8,835 8,312 Remove costs related to strategic initiatives and news businesses (489) – A Business-as-usual costs 8,346 8,312 1 2021comparativeshavebeenpresentedtoreflectthenewcostbasis,consistentwiththecurrentperiod.Seepage67. 69Lloyds Banking Group Annual Report and Accounts 2022 ### Alternative performance measures continued A ### Pro forma CET1 ratio | At 31 Dec | | | At 31 Dec | | | --- | --- | --- | --- | --- | | | 2022 | | | 2021 | | | | % | | % | CET1 ratio 15.1 17.3 1 Insurancedividendandsharebuybackaccrual (1.0) (1.0) A Pro forma CET1 ratio 14.1 16.3 1 DividendpaidupbytheInsurancebusinessinthesubsequentfirstquarterperiodandtheimpactoftheannouncedordinarysharebuybackprogramme. A ### Return on tangible equity 2022 2021 Profit attributable to ordinary shareholders (£m) (a) 5,021 5,355 Average shareholders’ equity (£bn) 43.9 45.2 Average intangible assets (£bn) (6.7) (6.3) Average tangible equity (£bn) (b) 37.2 38.9 A Return on tangible equity (%) = (a) / (b) 13.5 13.8 A ### Tangible net assets per share | At 31 Dec | | At 31 Dec | | | --- | --- | --- | --- | | | 2022 | | 2021 | | | £m | | £m | Ordinary shareholders’ equity 41,980 47,011 Remove goodwill (2,655) (2,320) Remove intangible assets (4,786) (4,196) Remove purchased value of in-force business (175) (197) Other,includingdeferredtaxeffects 396 538 Tangible net assets (a) 34,760 40,836 Ordinary shares in issue, excluding own shares (b) 66,944m 70,996m A Tangible net assets per share = (a) / (b) 51.9p 57.5p A ### Underlying profit before impairment 2022 2021 £m £m Statutoryprofitbeforetax 6,928 6,902 Remove impairment charge (credit) 1,522 (1,378) Remove volatility and other items including restructuring 508 627 A Underlying profit before impairment 8,958 6,151 70 Lloyds Banking Group Annual Report and Accounts 2022 ## Governance In this section Directors’ report Chair’s introduction 72 UK Corporate Governance Code 73 Our Board 74 Group Executive Committee 76 Board leadership and company purpose 78 Division of responsibilities 87 Financial results Risk managementGovernance Financial statements Other informationStrategic report Composition, succession and evaluation 88 Audit, risk and internal control 91 Committee reports Nomination and Governance Committee report 92 Audit Committee report 95 Board Risk Committee report 99 Responsible Business Committee report 104 Directors’ remuneration report 105 Other statutory and regulatory information 134 ## Supporting ## SMEs on ## their net ## zero journey ### 64 per cent of SMEs have plans ### in place to reach net zero by 2050 ### We are proud to work with smaller businesses ### around the UK and have developed a range of ### resources to support their sustainability work, in ### our From Now to Net Zero practical guide for SMEs ### and our Green Buildings Tool. ### Our From Now to Net Zero practical guide sets ### out a five-step journey for SMEs to reach net zero. ### We followed this in 2022 with the release of our Net ### Zero Monitor. Almost two thirds, 64 per cent, of SMEs ### said they had a plan in place to reach net zero by ### 2050, with only 5 per cent not acting or considering ### acting on net zero. Our activities with SMEs form part ### of a range of engagements with our stakeholders ### in support of our Board commitment to reduce the ### emissions of the Group by more than 50 per cent by ### 2030 and achieving net zero by 2050 or sooner. 71Lloyds Banking Group Annual Report and Accounts 2022 ## Chair's introduction Good corporate governance underpins the Group's ability to support our customers and to meet the needs of our stakeholders ![img-4.jpeg](img-4.jpeg) **Robin Budenberg** Chair In February 2022, the Group launched an ambitious new strategy which is aligned to our purpose of Helping Britain Prosper and a primary focus of the Board has been the Group's strategic transformation and operational resilience. During the year, the Board has played a vital governance role overseeing the changes and planning required for the delivery of the new strategy. Good corporate governance underpins the Group's ability to support our customers and to meet the needs of our stakeholders. As I mentioned in last year's Chair's Statement, there are strong links between governance and fostering a culture that supports long-term sustainable success. This financial year, the Board continued to promote a healthy, values-led culture that delivers the right outcomes for our customers. In line with our customer focus, the Board has overseen the Group's response to the increased cost of living. The Board recognises that the ongoing societal challenges and macroeconomic uncertainties, including climate change and the rising cost of living, are concerning for many people. Our governance arrangements are designed to enable the Group to respond to external challenges so that we maintain support for our customers during these challenging times and create a more sustainable and inclusive future for people and businesses. I will now highlight some of the key corporate governance activities that took place during the year. ### Board oversight of new strategy The Board has overseen the changes and planning required for the delivery of the Group's new strategy, together with the finalisation of the formulation of the Group's purpose, strategy, values and key performance indicators. Further details can be found on page 81. ### Leading on culture As I mentioned above, the Board has continued to play a lead role in fostering a healthy, values-led culture. Further information on the Board's role in assessing, monitoring and providing oversight of the development of the Group's values-led culture can be found on pages 84 to 85. ### Inclusion and diversity Driving inclusion and diversity in the broadest sense throughout all levels of the organisation remains a priority for the Board. I am pleased to report that the representation of women at Board and senior leadership levels continued to increase in 2022 and the Group embedded further its Race Action Plan to drive change. More information on the Board's approach to inclusion and diversity is set out on page 94. ### Tackling climate change In line with the Group's commitments as a founding member of the Net-Zero Banking Alliance and following the approval of emissions reduction targets for the Group's own operations in 2021, the Board approved the publication of an emissions reduction target for the Group's supply chains and specific sectoral emissions reduction targets for the Group's financed emissions in many of the most carbon intensive or financially material sectors. Further details can be found on page 81. ### Consumer Duty Following publication of the FCA's final rules on Consumer Duty, the Board approved the Group's implementation plan. Amanda Mackenzie, Chair of the Responsible Business Committee, has been appointed as Group Consumer Duty Champion. Further details on the Board's role in overseeing the Group's approach to Consumer Duty can be found on page 81. ### Board and Committee changes Scott Wheway joined the Board as a non-executive director and a member of the Nomination and Governance Committee and the Board Risk Committee on 1 August 2022. Scott became Chair of Scottish Widows Group on 12 September 2022. Cathy Turner also joined the Board as a non-executive director and a member of the Remuneration Committee on 1 November 2022. Stuart Sinclair retired as a non-executive director at the Company's Annual General Meeting in May 2022. Stuart made a significant contribution to the Board and left with our sincere thanks and best wishes. Full details of the Board and Committee changes during 2022 are set out on page 92. ### Ring-fencing governance Although this is Lloyds Banking Group plc's corporate governance report, I would like to thank Nigel Hinshelwood, Sarah Bentley and Brendan Gilligan for their continued and valued contribution as non-executive directors of Lloyds Bank plc and Bank of Scotland plc (the Ring-Fenced Banks), which represent the majority of the Group's banking activities. Further details regarding the Group's ring-fencing arrangements and the critical role these directors play in the Group's overall governance structure are set out on pages 79 and 86. ### Board evaluation An external evaluation of the Board's effectiveness was undertaken by Dr Tracy Long of Boardroom Review Limited in 2022. Further information on the findings and process can be found on page 89. ### Corporate Governance Code The Company's statement of compliance with the UK Corporate Governance Code 2018 can be found on page 73. ### Stakeholder engagement The Board recognises the importance of engaging with all its stakeholders. Meeting the Group's responsibilities and duties to shareholders and the communities we serve is central to our purpose. Further details on how the Board takes account of stakeholder interests are set out on pages 82 to 83. **Robin Budenberg** Chair 72 Lloyds Banking Group Annual Report and Accounts 2022 ## UK Corporate Governance Code Corporate governance headlines at a glance ### Compliance statement Returns of capital The UK Corporate Governance Code 2018 (the Code) applied to the financial year ended 31 December 2022. The Code is available ## at www.frc.org.uk. 2.40p The directors’ report is set out in a way that helps shareholders Ordinary dividend per share for the financial and investors to evaluate how the Company has applied the year ended 31 December 2022 including interim principles and complied with the provisions of the Code during and final dividend; in addition, a £2 billion share 2022. The table below signposts the most relevant parts of the buyback programme commenced in February Annual Report, in particular where supporting information is 2022 and completed in October 2022. Financial results Risk managementGovernance Financial statements Other informationStrategic report not in the directors’ report. The Company confirms that it applied the principles and complied with all the provisions of the Code throughout 2022. An externally facilitated evaluation of the Board took place in 2022 and further information on the findings and process is on page 89. 1. 1. 5. 2. 3. | Principles of the Code | | | 2. | | | --- | --- | --- | --- | --- | | 1. Board leadership and company purpose | | 1. 0-2 years 4 | | 8 | | (pages 78 to 86) | Page(s) | 2. 2-4 years 4 | | 2 | 3. 4-6 years 2 Chair’s introduction 72 2 Board members as at 31 4. 6-8 years 0 December 2022 and remains Our Board 74 to 75 5. 8-9 years 1 correct as at the date of | Purpose, values and strategy | | 2 to 31 and 81 | | | publication of the Annual Report. | | --- | --- | --- | --- | --- | --- | | Culture | 11, 15 and 84 to 85 | | | | | | Board stakeholder engagement | 10 to 11 and 82 to | | | | | | and decision-making | | | | 83 | | | Key performance indicators | | | 32 to 37 | | | and strategic performance 1. Risk assessment 38 to 44 Met the Parker Review target Risk management 139 to 195 2. and new FCA Listing Rule for Rewarding our workforce 105 to 133 at least one board member from a Black, Asian or Minority 2. Division of responsibilities (page 87) Ethnic background throughout Our Board and governance structure 78 1 the year Independence and time commitments 93 Committee reports 92 to 106 and 123 1. White 9 (82%) Board and Committee meeting attendance 79 2. Black, Asian or Minority Ethnic 2 (18%) 3. Composition, succession and evaluation 3 Board members as at 31 December 2022 and remains correct as at the (pages 88 to 90) date of publication of the Annual Report. Our Board 74 to 75 Our Board and governance structure 78 4 Board and Committee meeting attendance 79 Board gender diversity Women (%) Nomination and Governance Committee report 92 to 94 022 4. Audit, risk and internal control (page 91) 021 Audit Committee report 95 to 98 020 | Statement of directors’ responsibilities | | 137 | 019 | | --- | --- | --- | --- | | Risk management | 139 to 195 | | 018 | | Principal risks and emerging risks | 39 to 43 | | | | 1 | | | Met the FTSE Women Leaders Review and new FCA Listing | Board tenure 5 | | Board Risk Committee report | | | 99 to 103 | | Rule target of at least 40% of the board being women | | | --- | --- | --- | --- | --- | --- | --- | --- | | | Going concern | 3 | | | 44 | | | | Board ethnic diversity | | | | | | 4 As at 31 December of the relevant year. The percentage for 2022 remains | | | | | | 2 | | | | correct as at the date of publication of the Annual Report. | | Independence of the Board Number (%) | Viability report 44 | | | | | | | | (excluding the Chair) | | | | | | 5 Please refer to page 93 in relation to the target referred to in the FTSE | | | | 5. Remuneration | | | | | | Women Leaders Review and the new FCA Listing Rule that at least | one senior board position (Chair, Chief Executive, Senior Independent Directors’ remuneration report 105 to 133 Director or Chief Financial Officer) should be held by a woman. | 2 | 45 | | | --- | --- | --- | | 2 | 40 | | | 2 | 33 | 73Lloyds Banking Group Annual Report and Accounts 2022 | | 2 1. Independent | 31 | | | 2. Executive 2 | 25 | | 1 As at 31 December 2022. Each of the directors of Lloyds Banking Group plc is also a director of Lloyds Bank ## Our Board plc and Bank of Scotland plc (the Ring-Fenced Banks). The boards of the Ring- Fenced Banks have three additional non-executive directors: Nigel Hinshelwood ## Establishing our purpose, (Senior Independent Director), Sarah Bentley and Brendan Gilligan. Read their biographies and about the Ring-Fenced Banks on pages 79 and 86. ## values and strategy Stuart Sinclair was a non-executive director of Lloyds Banking Group plc during 2022 until his retirement on 12 May 2022. A BR NG NG A Re Re BR RB RB RB Robin Budenberg CBE Alan Dickinson Sarah Legg Chair Deputy Chair and Senior Independent non-executive director Independent Director | Appointed: October 2020 (Board), January 2021 | | Appointed: September 2014 (Board), December | | Appointed: December 2019 | | | --- | --- | --- | --- | --- | --- | | (Chair) | | 2019 (Senior Independent Director), May 2020 | | Skills, experience and contribution: | | | Skills, experience and contribution: | | (Deputy Chair) | | • Strong financial leadership and regulatory | | | • Extensive financial services and investment | | Skills, experience and contribution: | | | reporting skills | | | banking experience | • Highly regarded retail and commercial | | • Significant audit and risk experience in | | | • Strong governance and strategic advisory | | | banker | | financial leadership | | | skills to companies and government | • Strong strategic, risk management and core | | • Strong transformation programme | | | • Regulatory, public policy and stakeholder | | | banking experience | | experience | | | management experience | • Regulatory and public policy experience | | Sarah has spent her entire executive career in | | | Robin spent 25 years advising UK companies | | Alan has 37 years’ experience with the Royal Bank | | financial services with almost 30 years at HSBC | | | and the UK Government while working for | | of Scotland, most notably as Chief Executive | | in finance leadership roles. She was the Group | | | S.G.Warburg/UBS Investment Bank and was | | of RBS UK. Alan was formerly Chairman of | | Financial Controller, a Group General Manager | | | formerly Chief Executive and Chairman of UK | | Urban&Civic plc and of Brown, Shipley & Co. | | and also Chief Financial Officer for HSBC’s Asia | | | Financial Investments (UKFI), managing the | | Limited, a Non-Executive Director and Chairman | | Pacific region. She also spent eight years as a | | | Government’s investments in UK banks following | | of the Risk Committee of the Nationwide Building | | Non-Executive Director on the board of Hang | | | the 2008 financial crisis. He was awarded a | | Society and of Willis Limited and a Governor | | Seng Bank Limited, a Hong Kong listed bank. | | | CBE in 2015 for services to the taxpayer and | | of Motability. Alan is a Fellow of the Chartered | | External appointments: | | | the economy and is a qualified Chartered | | Institute of Bankers and the Royal Statistical | | Non-Executive Director of Severn Trent plc, | | | Accountant. | | Society. | | a Trustee of the Lloyds Bank Foundation for | | | External appointments: | | External appointments: | | England and Wales, Board Member of the Audit | | | Chairman of The Crown Estate. | | Non-Executive Director of the England and Wales | | Committee Chairs’ Independent Forum and | | | | | Cricket Board. | | Chair of the Campaign Advisory Board, King’s | | College, Cambridge University. NG Re RB RB Lord Lupton CBE Amanda Mackenzie LVO OBE Harmeen Mehta Independent non-executive director and Independent non-executive director Independent non-executive director Chair of Lloyds Bank Corporate Markets plc | Appointed: June 2017 (Board), August 2017 (Chair | | Appointed: October 2018 | | Appointed: November 2021 | | | --- | --- | --- | --- | --- | --- | | of Lloyds Bank Corporate Markets plc) | | Skills, experience and contribution: | | Skills, experience and contribution: | | | Skills, experience and contribution: | | • Extensive experience in ESG matters, including | | • Over 25 years’ experience leading digital | | | • Extensive international corporate experience, | | | responsible business and sustainability | | innovation and complex transformation | | | especially in financial markets | • Considerable customer engagement | | • Experience of building and running | | | • Strong board governance experience, | | | experience | | technology-led businesses and creating new | | | including investor relations | • Strong digital technology experience | | | ventures | | • Regulatory and public policy experience | | • Significant marketing and brand background | | • A wealth of international and financial | | | • Significant experience in strategic planning | | Amanda was Chief Executive of Business | | | services knowledge having lived in 11 | | | and implementation | in the Community, of which King Charles | | | countries and worked across 30 countries | | Lord Lupton was Deputy Chairman of Baring | | III is the Royal Founding Patron and which | | | in six continents | | Brothers, co-founded the London office of | | promotes responsible business and corporate | | Harmeen was appointed Chief Digital and | | | Greenhill & Co. and was Chairman of Greenhill | | responsibility. Prior to that role, she was a | | Innovation Officer at BT in April 2021. Prior to | | | Europe. He is a former Treasurer of the | | member of Aviva’s Group Executive for seven | | that role, she spent seven years as Global Chief | | | Conservative Party and became a Life Peer in | | years as Chief Marketing and Communications | | Information Officer and Head of Cyber Security | | | October 2015, serving on the House of Lords | | Officer and was seconded to help launch the | | and Cloud Business at Bharti Airtel, leading its | | | Select Committee on Charities. | | United Nation’s Sustainable Development Goals. | | cloud and security businesses. Earlier in her | | | External appointments: | | She is also a former Director of British Airways | | career, Harmeen held CIO positions at BBVA, | | | Senior Advisor to Greenhill Europe, a Trustee of | | AirMiles, BT, Hewlett Packard Inc and British Gas. | | HSBC and Bank of America Merrill Lynch. | | | The Lovington Foundation and Chairman of the | | External appointments: | | External appointments: | | | Board of Visitors of the Ashmolean Museum. | | Chair of The Queen’s Reading Room and trustee | | Chief Digital and Innovation Officer at BT and | | | | | of the charity Cumberland Lodge. | | Non-Executive Director at Max Healthcare | | Institute Ltd. 74 Lloyds Banking Group Annual Report and Accounts 2022 | A | Audit Committee member | RB | Responsible Business Committee member | | --- | --- | --- | --- | | BR | Board Risk Committee member | | Committee Chair | | NG | Nomination and Governance Committee member | N | New to the Board in 2022 | | Re | Remuneration Committee member | Committee Chairs and members shown | | as at 21 February 2023. N A Financial results Risk managementGovernance Financial statements Other informationStrategic report N BR BR Re NG Re Cathy Turner Scott Wheway Catherine Woods Independent non-executive director Independent non-executive director and Independent non-executive director Chair of Scottish Widows Group Appointed: November 2022 | Skills, experience and contribution: | | Appointed: August 2022 (Board), September 2022 | | Appointed: March 2020 | | | --- | --- | --- | --- | --- | --- | | • Significant executive and non-executive | | (Chair of Scottish Widows Group) | | Skills, experience and contribution: | | | | financial services experience | Skills, experience and contribution: | | • Extensive executive experience of | | | • Knowledge of complex remuneration matters | | • Significant financial services board and chair | | | international financial institutions | | • Communications expertise with a broad | | | experience | • Deep experience of risk and transformation | | | | range of stakeholders including investors, | • Extensive knowledge and experience of large- | | | oversight | | | regulators, government, media and unions | | scale banking and insurance businesses | • Strong focus on culture and corporate | | | Cathy has significant financial services | | • Track record as a non-executive and | | | governance | | experience, having worked in senior | | | executive in customer-centric companies | Catherine is a former Deputy Chair and Senior | | | executive positions at Barclays plc where her | | Scott was appointed Chair of Centrica plc in 2020 | | Independent Director of AIB Group plc where | | | responsibilities, over time, included human | | where he has served on the board since 2016. | | she also chaired the Board Audit Committee. In | | | resources, executive compensation, investor | | Scott was formerly Chair of AXA UK plc, Chair of | | her executive career with J.P. Morgan Securities, | | | relations, strategy and brand marketing and at | | Aviva Insurance Limited, a Non-Executive Director | | she was Vice President, European Financial | | | the Group, where she was responsible for the | | of Aviva plc and Senior Independent Director of | | Institutions, Mergers and Acquisitions and Vice | | | human resources, legal, audit, corporate brand | | Santander UK plc. He worked as an executive in | | President Equity Research Department, forming | | | and secretariat functions. Cathy has previously | | the retail sector for over 25 years where he held | | the European Banks Team. | | | been a Non-Executive Director and Chair of the | | positions including chief executive officer of | | External appointments: | | | Remuneration Committee of Aldermore Group | | Best Buy Europe, managing director of Boots the | | Non-Executive Director and Deputy Chair of | | | plc, Quilter plc and Countrywide plc. | | Chemist plc and a number of senior executive | | BlackRock Asset Management Ireland Limited. | | | External appointments: | | positions at Tesco plc. | | | | | Non-Executive Director and Chair of the | | External appointments: | | | | | Remuneration Committee of each of Rentokil | | Chair of Centrica plc. | | | | Initial plc and Spectris plc. Partner on a part-time basis at Manchester Square Partners LLP. | Charlie Nunn | William Chalmers | Kate Cheetham | | --- | --- | --- | | Executive director and | Executive director and | Chief Legal Officer and | | Group Chief Executive | Chief Financial Officer | Company Secretary | | Appointed: August 2021 | Appointed: August 2019 (Chief Financial Officer) | Appointed: July 2019 | | Skills, experience and contribution: | Skills, experience and contribution: | Skills, experience and contribution: | | • Extensive financial services experience | • Significant board-level strategic and financial | Kate became Group General Counsel (now | | including in Chief Executive and other | leadership experience | Chief Legal Officer) in May 2015 and Company | | leadership roles | • Strategic planning and development, | Secretary in July 2019. Kate joined the Group in | | • Strategic planning and implementation | mergers and acquisitions, equity and debt | 2005 from Linklaters, where she was a corporate | | • Extensive experience of digital transformation | capital structuring and risk management | lawyer specialising in mergers and acquisitions | | Charlie has over 25 years’ experience in the | William joined the Board in August 2019, when | transactions. Before her current roles, Kate held | | financial services sector. Prior to joining the | he was appointed Chief Financial Officer and | a number of senior positions including Deputy | | Group, Charlie held a range of leadership | was Interim Group Chief Executive from May 2021 | Group General Counsel and General Counsel for | | positions at HSBC, including Global Chief | to August 2021. | Group Legal. Kate is a trustee of the Lloyds Bank | | Executive, Wealth and Personal Banking and | | Foundation for England and Wales. | | Group Head of Wealth Management and Digital, | William has worked in financial services for over | | | as well as Global Chief Operating Officer of Retail | 25 years and previously held a number of senior | | | Banking and Wealth Management. | roles at Morgan Stanley, including Co-Head | | of the Global Financial Institutions Group and Charlie began his career at Accenture, where he Head of EMEA Financial Institutions Group. Before | worked for 13 years in the US, France, Switzerland | joining Morgan Stanley, William worked for JP | | --- | --- | | and the UK before being made a Partner. He then | Morgan, again in the Financial Institutions Group. | | moved to McKinsey & Co. as a Senior Partner, | External appointments: | | leading on projects for five years. | None. | External appointments: None. 75Lloyds Banking Group Annual Report and Accounts 2022 ## Group Executive Committee ## Delivering our vision and ## day-to-day management | C | M M | | | --- | --- | --- | | Charlie Nunn | William Chalmers | Kate Cheetham | | Executive director and | Executive director and | Chief Legal Officer and | | Group Chief Executive | Chief Financial Officer | Company Secretary | | Charlie joined the Board as an | William joined the Board in August | Kate became Group General | | executive director and Group Chief | 2019 as an executive director and | Counsel (now Chief Legal Officer) | | Executive in August 2021. | the Chief Financial Officer. | in May 2015 and Company Secretary | in July 2019. Read his biography on page 75. Read his biography on page 75. Read her biography on page 75. M MM M  ElynCorfield Sharon Doherty Jo Harris Antonio Lorenzo Chief Executive Officer, Chief People and Places Chief Executive Officer, Mass Chief Executive Officer, Scottish Business and Commercial Officer Affluent Widows and Chief Executive Banking Officer, Insurance, Pensions and Investments | Elyn was appointed in July 2022 as | Sharon joined the Group in June | Jo was appointed Chief Executive | Antonio joined the Group in 2011 | | --- | --- | --- | --- | | Chief Executive Officer, Business | 2022 as Chief People and Places | Officer, Mass Affluent as well as | and is currently responsible for | | and Commercial Banking, serving | Officer, with the aim of helping | interim Chief Executive Officer, | the insurance, pensions and | | all micro, small and medium-sized | our colleagues play their part in | Consumer Relationships in July | investments business. Antonio | | business customers as they grow | Helping Britain Prosper. Sharon is | 2022. Jo joined the Group in 2014 | is also Chairman of Schroders | | and evolve, providing specialist | committed to creating a culture | from RBS, where she worked in a | Personal Wealth and a Board | | sector propositions and supporting | that attracts and inspires the most | number of different leadership | member of the Association of | | customer needs across all banking | diverse, agile and committed talent | roles. Since joining the Group, Jo has | British Insurers. Prior to his current | | products. Prior to her current role, | to thrive and grow. Before joining the | worked in a variety of roles including | role, Antonio led Group Corporate | | Elyn was the Managing Director, | Group Sharon was Chief People and | Managing Director for Business | Development, Group Strategy and | | Consumer Finance, responsible | Places Officer at Finastra, a leading | Banking, Group Customer Services, | the former Consumer Finance | | for the Group’s Consumer | global fintech. Prior to this, she was | and most recently Managing | Division. Antonio also led the | | and Commercial Credit Card, | Vodafone’s Global HR Director, | Director of Lloyds Bank and Bank of | IPO and divestment of TSB and | | Unsecured Personal Loan, Motor | Technology where she drove its | Scotland Community Banks. Jo has | reshaped the Group’s international | | Finance and Leasing portfolios. Prior | award-winning diversity and | been a Trustee for the Lloyds Bank | presence. Before joining the Group, | | to joining the Group in 2017 through | digital work programme. Sharon’s | Foundation for England and Wales | Antonio was Chief Financial Officer | | the acquisition of MBNA, Elyn was | career also spans people and | since 2017. | of Santander UK. | | the Chief Financial Officer and prior | leadership roles at Laing O’Rourke, | | | | to that held a number of finance | BAA Heathrow’s Terminal 5, GE | | | | leadership roles at MBNA. Elyn acted | Capital, PwC, Kingfisher and Marks | | | | as the Group’s Ambassador for the | and Spencer. Sharon is an author | | | | North for three years, and has been | and champion of democracy, | | | | a Trustee of the MBNA Foundation | diversity, equity and inclusion | | | | since 2014. | across the world. | | | 76 Lloyds Banking Group Annual Report and Accounts 2022 C Group Executive Committee Chair M Group Executive Committee Member A Group Executive Committee Attendee A M M M Financial results Risk managementGovernance Financial statements Other informationStrategic report | Laura Needham |  DavidOldfield | Jayne Opperman | Janet Pope | | --- | --- | --- | --- | | Chief Internal Auditor | Interim Group Chief | Chief Executive Officer, | Chief of Staff and Chief | | | Operating Officer | Consumer Relationships | Sustainability Officer | | Laura joined the Group in | David was appointed as Interim | Jayne re-joined the Group in | Janet joined the Group in 2008 | | September 2022 as Chief Internal | Group Chief Operating Officer | December 2022 as Chief Executive | to run the Group’s Savings | | Auditor. Before joining the Group, | from January 2022, responsible | Officer for Consumer Relationships, | business. Janet was previously | | Laura spent 22 years at PwC in a | for delivering the Group’s Data | the centre of the Group’s growth | Chief Executive at Alliance Trust | | number of roles, predominantly | and Technology strategy and the | strategy to deepen our consumer | Savings and EVP Global Strategy | | in the UK, but also spent time in | operation of resilient and secure | relationships through personalised | at Visa. Janet held a variety of | | Sydney and New York. Laura’s | systems that underpin the Group’s | experience and outstanding | roles at Standard Chartered Bank | | expertise is in risk, governance | core functions. Additionally, | customer service. Jayne has over | including Retail Banking MD for | | and control and at PwC Laura | David was the Group Director | 25 years of experience in the | Africa and Non-Executive Director | | was both an external audit and | and CEO, Commercial Banking | financial sector, leading diverse | positions at Standard Chartered | | internal audit partner working | from September 2017 through | teams focused on transforming | Bank Zimbabwe, Kenya, Zambia | | with most major banks in the UK. | to September 2022, responsible | businesses, most recently | and Botswana. Janet is Chair | | In her career she has held several | for supporting clients from | specialising in customer channels, | of the Charities Aid Foundation | | people leadership roles, including | SMEs through to Corporate and | operations and technology | Bank, a Trustee of the Charities | | being the Head of People for | Institutional clients. David started | and using data as a tool to | Aid Foundation, a Non-Executive | | PwC’s banking audit practice and | his career with Lloyds Bank in 1984 | support colleagues and drive | Director of the Financial Services | | was the gender balance network | on the graduate programme and | personalisation for customers. | Culture Board and is the Group’s | | sponsor. Laura is passionate about | has held key leadership roles across | Prior to re-joining the Group, Jayne | Executive Sponsor for Sexual | | talent development, diversity and | the Group including in Commercial, | held roles at several well-known | Orientation and Gender Identity. | | inclusion and has led on cultural | Retail, IT and Central Functions. | financial institutions both here and | | | change programmes to improve | David is a Fellow of the Chartered | in Australia and Asia, including Citi, | | | employee engagement. | Institute of Bankers, Group executive | Westpac, ANZ and most recently | | | | sponsor for disability and chairs | Barclays. | | the wellbeing leadership group for Business in The Community. M M M M Stephen Shelley Jasjyot Singh OBE Andrew Walton John Winter Chief Risk Officer Chief Executive Officer, Chief Corporate Affairs Officer Chief Executive Officer, Consumer Lending Corporate and Institutional Banking | Stephen was appointed Chief | Jas is Chief Executive Officer, | Andrew joined the Group in | John joined the Group in September | | --- | --- | --- | --- | | Risk Officer in September 2017. | Consumer Lending, our centre of | September 2018 as Group Corporate | 2022 as Chief Executive Officer | | Stephen is the Group’s Executive | excellence for lending propositions, | Affairs Director, with responsibility | for Corporate and Institutional | | Sponsor for Gender Diversity and | both for customers who bank | for internal and external | Banking. John has more than 37 | | Equality. Stephen joined the Group | with us directly and through | communications, reputation | years’ experience in corporate | | in May 2011 as Chief Credit Officer | intermediaries. Jas has worked | management and public affairs. | and investment banking, as well | | for Wholesale and International. | at the Group for 16 years and has | Andrew has more than 25 years’ | as in retail banking. John was most | | In October 2012 he became Risk | held a number of roles across | experience in corporate affairs | recently at MUFG, where he was | | Director, Commercial Banking Risk. | the Group’s Consumer and Small | in the UK and US. Prior to joining | Regional Executive and CEO for | | Previously, Stephen was Chief Risk | Business businesses. His previous | the Group, Andrew was Senior | EMEA with responsibility for all of | | Officer at Barclays Corporate and, | experience was in consulting roles, | Managing Director and Global | its Global Markets, Corporate and | | prior to that, Chief Credit Officer | based in the US and across Europe, | Head of Financial Services for the | Investment Banking businesses | | UK Retail and Corporate. In his 21 | with a range of corporate strategy | strategic communications segment | in the region. He spent 15 years | | year career at Barclays, Stephen | and digital design consulting | of FTI Consulting. | at Barclays, latterly as CEO for | | undertook a variety of roles in the | projects across multiple industry | | Corporate Banking and previously | | front office and risk. | sectors. Jas was awarded an OBE | | as head of its European investment | | | for his contribution to financial | | banking business. John started his | | | services during COVID-19. | | career at Merrill Lynch in 1985 in | NYC and was head of EMEA DCM at Deutsche Bank from 1996 to 2001. 77Lloyds Banking Group Annual Report and Accounts 2022 # Board leadership and company purpose ## The role of the Board The Board is collectively responsible for promoting and assessing the long-term, sustainable success of the Group, generating value for shareholders and contributing to wider society. The Board establishes the Group's purpose, values and strategy and seeks to ensure that the Group is Helping Britain Prosper. The Board approved the Group's current strategy in February 2022 and you can read more about how the Board has overseen the changes and planning required for the delivery of the new strategy by the Group Chief Executive, supported by the wider executive management team, on page 81. The Group's role as a sustainable and inclusive business is central to its purpose, with the Board's Responsible Business Committee overseeing the Group's ambitions in building a truly purpose-driven organisation. Read more about the Responsible Business Committee on page 104. The Board is also responsible for ensuring that the Group's culture is aligned with its purpose, values and strategy. Read more about how the Board assesses and monitors the Group's culture on pages 84 to 85. The Board retains ultimate responsibility for ensuring the necessary resources are in place to meet agreed objectives. The effective management of risk is central to the Group's strategy, supported by the Group's enterprise risk management framework, which is discussed in the risk management report on pages 139 to 195. The Board recognises that engaging with, and acting on the needs of, the Group's stakeholders is key to achieving the strategy and long-term objectives of the Company. Read more about how the Board engages with stakeholders on pages 82 to 83 and the directors' statement of compliance with their duties under section 172 of the Companies Act 2006 on pages 10 to 11. ![img-5.jpeg](img-5.jpeg) The key decisions and matters reserved for the Board's approval, such as the Group's long-term strategy and priorities, are set out in the Group's Corporate Governance Framework, which is reviewed periodically by the Board. The Board is supported by its Committees which make decisions or recommendations on matters as delegated to them under the Corporate Governance Framework, including Board appointments, the effectiveness of internal controls and the risk management framework, financial reporting, governance and remuneration policies. This enables the Board to spend a greater proportion of its time on strategic, forward-looking matters. Read more about the Corporate Governance Framework on page 93. Each Board Committee comprises non-executive directors only and has an experienced chair. The Committees are managed on the same basis as the Board. The structure of each Committee seeks to facilitate open discussion and debate and ensure adequate time for Committees' members to consider all proposals. The executive directors make decisions within the parameters and principles set out in the Corporate Governance Framework, which aims to ensure that decisions are made by management under the correct authority. However, where appropriate, any activity can be brought to the full Board for consideration, even if the matter falls within agreed executive parameters. There are executive committees established to support the Group Chief Executive (Group Chief Executive Committees), in particular the Group Executive Committee. Read about the Group Chief Executive Committees on pages 142 to 143 and the biographies of the Group Executive Committee members and attendee on pages 76 to 77. The terms of reference for the Board Committees and the matters reserved for the Board can be found at www.loydsbankinggroup.com/who-we-are/group-overview/corporate-governance. 78 Lloyds Banking Group Annual Report and Accounts 2022 The Group has a comprehensive and continuous forward agenda ### Board meetings in 2022 setting and escalation process in place to ensure that the Board There were nine Board meetings during 2022. There are separate has the right information at the right time and in the right format boards and board committees of Lloyds Banking Group plc, Lloyds to enable the directors to make the right decisions. The Chair Bank plc, Bank of Scotland plc and HBOS plc, but most meetings leads the process, assisted by the Group Chief Executive and of these companies are held concurrently and we refer to this Company Secretary. The process ensures that sufficient time is as the ‘Aligned Board Model’. As most of the Group’s business being set aside for strategic discussions and business critical sits within Lloyds Bank plc and Bank of Scotland plc (together, items. The Chair and the Committee Chairs ensure Board and the Ring-Fenced Banks), the interests of the Ring-Fenced Banks Committee meetings are structured to facilitate open discussion, and the Group are aligned in most circumstances. This model is debate and challenge. supported by a number of safeguards to enable us to operate in this way, including the appointment of three Ring-Fenced Bank- The process of escalating issues and agenda setting is regularly only non-executive directors and a Ring-Fenced Bank risk officer, reviewed as part of the Board evaluation with enhancements made all of whose focus is on protecting the interests of the Ring-Fenced to the process, where necessary, to ensure it remains effective. Financial results Risk managementGovernance Financial statements Other informationStrategic report Banks. Read more about the Group’s governance structure and ring-fencing governance arrangements at the bottom of this The non-executive directors also receive regular updates from page and on page 86. management to give context to current issues. Regular updates are provided to the Board by the Committee The Chair held a number of meetings with the non-executive Chairs as well as by the Chair, the Group Chief Executive, the Chief directors without the executive directors present. Financial Officer, the Chief Risk Officer, the Group Chief Operating Officer and the Chairs of the boards of Lloyds Bank Corporate Markets plc and Scottish Widows Group Limited. | | | | | | 1 | | | | C | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Board and Committee composition and attendance at meetings in 2022 | | | | | | | | | Chair | | | | | Nomination | | | | | Responsible | | | | | | and Governance | | Audit | Board Risk | Remuneration | Business | | | Board member Board | | | Committee | | Committee | Committee | Committee | Committee | | | Robin Budenberg | 9/9 | C | 6/6 | C | | | 7/7 4/4 | | | Charlie Nunn 9/9 William Chalmers 9/9 Alan Dickinson 9/9 6/6 6/6 10/10 7/7 C 4/4 Sarah Legg 9/9 6/6 C 10/10 4/4 5 | Lord Lupton | 8/9 | | 4/4 | | | --- | --- | --- | --- | --- | | | | 5 | | C | | Amanda Mackenzie 9/9 6/6 6/7 | | | 4/4 | | Harmeen Mehta 9/9 2 5 Stuart Sinclair 4/4 2/2 2/3 2/2 3 | Cathy Turner | | 2/2 2/2 | | | | | --- | --- | --- | --- | --- | --- | | | 4 | | 5 | | | | Scott Wheway | | 3/3 2/2 3/4 | | | | | Catherine Woods 9/9 6/6 10/10 | | | | C | 7/7 | 1 Where a director is unable to attend a meeting he/she receives papers in advance and has the opportunity to provide comments to the Chair of the Board or to the relevant Committee Chair. 2 Stuart Sinclair retired from the Board on 12 May 2022. 3 Cathy Turner joined the Board and the Remuneration Committee on 1 November 2022. 4 Scott Wheway joined the Board, the Nomination and Governance Committee and the Board Risk Committee on 1 August 2022. 5 Unable to attend due to a pre-existing commitment. Focus on the Ring-Fenced Banks All of the Lloyds Banking Group plc directors sit on the boards Since the Ring-Fenced Banks represent the majority of the of the Ring-Fenced Banks together with three additional non- banking activities of the Group, Nigel Hinshelwood, Sarah Bentley executive directors: and Brendan Gilligan play an important role in the Group’s overall • Nigel Hinshelwood – Senior Independent Director and a governance structure. Read their biographies and more about the member of the Audit, Remuneration, Board Risk and Nomination Group’s structure and ring-fencing governance arrangements and Governance Committees of the Ring-Fenced Banks on page 86. • Sarah Bentley – non-executive director and a member of the Remuneration Committee of the Ring-Fenced Banks • Brendan Gilligan – non-executive director and a member of the Audit and Board Risk Committees of the Ring-Fenced Banks 79Lloyds Banking Group Annual Report and Accounts 2022 Stakeholder key: ### Board leadership and ### company purpose continued Customers and clients Society and environment ### Key focus areas Shareholders Suppliers ### This page shows some of the key focus areas Colleagues Regulators and government ### of the Board during 2022 and highlights the ### stakeholder groups central to those matters ### considered and decisions taken. Key focus areas for 2022 Matters approved Other matters considered/undertaken Stakeholders | Purpose, culture | • Purpose, culture and values – read | • Leadership and culture to align with | | --- | --- | --- | | and values | more on pages 11, 15 and 84 to 85 | the new structure – read more on | | | • Operation and effectiveness of the | page 15 | | | Remuneration Policy | • Updates on colleague engagement | | | • Net-Zero Banking Alliance targets – | including support to colleagues in | | | read more on pages 11 and 36 to 37 | light of cost of living increases | • Modern slavery and human trafficking statement | Customers and | • Group customer dashboard | • Ongoing support for customers and | | --- | --- | --- | | clients | • Implementation of Consumer Duty | clients in light of the increases in the | | | plan – read more on page 81 | cost of living – read more on page 83 | | | • Operational Resilience Self- | • Customer experience and customer | | | Assessment | fair value | | Strategy | • Group’s new strategy and investor | • Strategy day and sessions to discuss | | --- | --- | --- | | | communications – read more on | implementation of the Group’s | | | pages 2 to 37 and 81 | new strategy, including purpose, | | | • Cost of living priorities | governance and milestones and | | | • Investment in Citra Living | metrics – read more on page 81 | • New Group Executive operating model • Competitor analysis | Financial | • Four-year budget and operating plan | • Financial updates from the Chief | | --- | --- | --- | | | • Annual Report, Form 20-F, half- | Financial Officer including key | | | year results and quarterly interim | financial highlights, performance | | | management statements | against budget and sub-group | | | • Payment of final dividend for 2021 and | business performance | | | an interim dividend for 2022 | • Economic forecasts | • Share buyback programme | Risk management | • Risk appetite metrics | • Risk reports and reports from the | | --- | --- | --- | | and regulatory | • Group Speak Up Champion – read | Board Risk Committee | | | more on page 83 | • Model risk | | | • Group Recovery Plan and PRA | • Regulatory capital in the context of | | | Resolvability Assessment Framework | potential stress events | | | submission to the PRA | • FCA Firm Evaluation | • PRA Periodic Summary Letter | Governance | • Non-executive director Board and | • Executive succession plan and | | --- | --- | --- | | | Committee appointments | development plan for 2023 | | | • Actions arising from the externally | • Key themes for Board focus | | | evaluated board effectiveness review | • Proposed format of the 2022 annual | | | • Board diversity policy | general meeting | • Corporate Governance Framework 80 Lloyds Banking Group Annual Report and Accounts 2022 ### Board oversight Our focus on Consumer Duty The Board is committed to delivering good outcomes for the Group’s customers and, as we continue to move towards How governance contributes to the delivery of our strategy becoming a truly purpose-driven business, this remains at the heart of our strategy. Our governance arrangements contribute to the development and delivery of our strategy in various ways, including by The FCA’s new Consumer Duty sets higher and clearer standards creating accountability and responsibility, information flow and of consumer protection across financial services, requiring independent insight from the non-executive directors. firms to put their customers’ needs first. As an organisation, we are already focused on the delivery of good outcomes for our The Board is responsible for establishing the Group’s strategy customers – the Consumer Duty is the next step in the evolution and reviewing delivery of that strategy by the Group Chief of how we do this and will drive broader cultural change. There will Executive, supported by the wider executive management team. be greater focus on the outcomes customers receive – whether products and services meet customer needs and offer fair value, Financial results Risk managementGovernance Financial statements Other informationStrategic report In 2022 the Board approved a new strategy and has overseen if customers understand the information with which they are the planning and changes required for its delivery. The timeline being provided and if customers are given the support required below summarises some of the key strategy-related matters to meet their financial objectives. which the Board discussed or received updates on. The Responsible Business Committee, under delegated authority from the Board, provides oversight of the implementation, and ongoing consideration, of Consumer Duty, with the Board Risk ### Focus of Board discussion or update Committee overseeing related risks. The Group has appointed two Consumer Duty Champions who will help ensure Consumer Duty is considered in senior strategic discussions. Amanda Mackenzie, Finalising our purpose-driven mission statement as Chair of the Responsible Business Committee, is the Group Jan and financial and delivery plan for the strategy Consumer Duty Champion, with John Reizenstein, non-executive director of Scottish Widows Group Limited (and Chair of its Risk Oversight Committee), fulfilling a similar role with the Insurance, Pensions and Investments business. Approving the strategy, financial plans and Our focus on cyber security and risk Feb investor communications Technological resilience is vital to the provision of a secure and reliable service to customers. The Board recognises the importance of cyber security and the Nomination and Governance Committee therefore made a priority the recruitment to the Board of additional technology expertise, resulting in Approach to implementing the strategy the appointment of Harmeen Mehta. Harmeen is Chief Digital Apr and Innovation Officer at BT and brings to the Board 25 years’ experience leading digital, engineering, IT and innovation transformation. Plans for strategy mobilisation, in particular The Group’s Information Technology and Cyber Advisory Forum design of the target operating model and (ITCAF) was established in 2018 to enable a smaller group of May technology resilience Board members, as well as directors of Lloyds Bank plc and Bank of Scotland plc, to engage in more detailed review of the Group’s IT-related operational risks. ITCAF considers matters of cyber security and cyber issues generally as well as a wide range of Board offsite discussing and reviewing strategic technology matters. This helps inform and enhance discussions progress and priorities in key business areas, at the Board and the Board Risk Committee, to which ITCAF Jun the path to net zero and mobilisation activity reports. Cyber risk is considered by the Board Risk Committee to support delivery of the strategy as part of oversight of operational resilience risk. Our focus on net zero The Board has overall oversight of environmental, social and Review of proposed strategy metrics for the Board Jul governance (ESG) matters. Sustainability and inclusivity are integral elements of our Group strategy; supporting the UK’s transition to net zero is therefore closely aligned with our purpose of Helping Britain Prosper. Our Board-level Responsible Business Committee oversees the Group’s performance as a responsible Progress on mobilisation and execution of business, including the delivery of our sustainability strategy. Sep our strategy The Group continues to make good progress against our net zero ambitions and we have published our first Group climate transition plan, including seven sector-specific Net-Zero Banking Board offsite discussing and reviewing impacts Alliance targets, in our dedicated environmental sustainability on the Group’s strategy of the changing economic report. We engage proactively with investors and other key Nov environment, strategic delivery progress, selected stakeholders throughout the year on our sustainability priorities strategic priorities and purpose update and plans. Given net zero and sustainability are at the heart of our purpose-driven strategy, with ambitious climate targets reflected in strategic objectives, the good progress already being made in this area and the Group’s existing focus on disclosure, Reviewing the draft four-year financial plan, transparency and engagement, the Board does not believe it is including the impact of the Group’s strategic Dec necessary to propose a separate climate vote at the Company’s investment plan 2023 annual general meeting at this time. We will continue to be transparent on our sustainability strategy, targets, plans and progress. Read more about the Board’s focus on net zero on page 11 and in the Lloyds Banking Group environmental sustainability report 81Lloyds Banking Group Annual Report and Accounts 2022 ### Board leadership and The Responsible Business Committee reports regularly to ### company purpose continued the Board on all of its activities, including on its colleague engagement agenda. The Board will continue to consider ### Stakeholder engagement its arrangements for engaging with the Group’s workforce to ### As in 2021, the non-executive directors ensure they remain effective and to encourage meaningful dialogue between the Board and colleagues. ### undertook a tailored engagement programme ### which allowed them to hear directly from their Examples of engagement with colleagues included: • Regular review by the Responsible Business Committee of ### key stakeholders, including customers, clients workforce engagement reports, covering key issues raised ### and colleagues. by colleagues, trends on people matters and updates on The programme was designed to help the directors better colleague sentiment understand what matters in the lives of customers and • Review by the Responsible Business Committee of the findings colleagues, the role the Group plays in supporting them and of surveys of colleague sentiment and views, including annual how the Group is performing in that regard, in turn helping and ad hoc surveys and review of the progress being made in to inform the directors’ decision making. addressing the matters colleagues have previously raised • A related annual report to the Board, summarising all A variety of activities took place under the programme, including colleague engagement activity, key themes and issues meetings with customers and clients and conversations with which colleagues have raised during the year colleagues, to understand the matters which are most important • Non-executive directors attended a number of colleague in their lives, both at and outside work, and the challenges these focus groups to discuss themes from the annual colleague stakeholders face as the external economic environment continues survey, the Group’s new strategy and values, pay and to evolve. The non-executive directors found these sessions to be of reward and hybrid working. They also attended sessions great benefit, providing many valuable insights which helped in their where they were able to observe colleagues at work, review of the proposals considered by the Board during the year. including Fraud team colleagues handling customer calls • The approach to colleague surveys will continue to evolve in the coming year, with insight from monthly ‘Pulse’ surveys Our stakeholders being used to inform the discussion topics for future non- executive director/colleague focus groups • Town Hall sessions were hosted by both the Chair and the ## Customers and clients Group Chief Executive, complemented by engagement sessions led by other senior leaders with feedback shared The Board has an ongoing commitment to understanding and with the wider Board. The Group Chief Executive also addressing customer and client needs, which remains central held sessions with colleagues from a number of specific to achieving the Group’s strategic ambitions. business areas across the Group • Board members attended a range of other events held for the Examples of Board engagement with customers and Group’s senior leaders and other colleague network events clients included: • Dedicated updates from across the organisation, which identified areas of customer and client concern, covering ## Shareholders a range of internal and external performance measures; in The Group has one of the largest shareholder bases in the addition, concerns relevant to customers and clients were UK, with more than two million shareholders including most of identified for consideration in wider proposals put to the Board our colleagues. The Board is committed to understanding the • Regular updates giving insight into the Group’s needs and expectations of all our shareholders, both private performance in delivering on its customer and client related and institutional. objectives and commitments, assisting in determining where further action was required to meet these objectives Examples of Board engagement with shareholders included: • The Chair and the Group Chief Executive attended customer • Regular updates from Investor Relations on market and client engagement events across all main regions of views and shareholder sentiment, including an annual the UK, providing an important opportunity for customers presentation from the Group’s corporate brokers on market and clients to raise their concerns directly with these dynamics and perception of the Group Board members • The Board’s Nomination and Governance Committee • Non-executive directors attended special events to provide considered correspondence received from institutional a deeper insight into the issues which customers and clients shareholders and non-governmental organisations, along have faced during the year, which included sessions on with market feedback the challenges of buying and owning a home, the practical • A number of directors engaged with shareholders, including issues faced as a consequence of the cost of living crisis, the Chair and principally the Group Chief Executive and the challenges customers face in day to day family life Chief Financial Officer, holding over 82 meetings with and the issues which our commercial and SME clients are institutional shareholders, considering matters including the routinely facing Group’s strategy, its purpose and its financial performance • The Senior Independent Director held sessions with both ## Colleagues institutional shareholders and proxy agencies to help better understand their views of the Group and to provide updates Colleagues remain a vital part of the delivery of the Group’s on a range of current topics. As Remuneration Committee strategic ambitions and the Board continues to recognise this Chair, the Senior Independent Director also engaged with in its engagement with colleagues, which has again this year shareholders on matters relevant to remuneration included a variety of sessions across the Group, to discuss • Overall, the Group undertook c.300 meetings with topical issues relating to challenges at and outside work. institutional investors, many of which were attended by management and directors Following a review in 2021 of how the Board engages with • A virtual Board Governance Event was also held in the Group’s workforce, the Board’s Responsible Business December for institutional shareholders and other key Committee has continued to be the designated body for investor stakeholders, with the opportunity to put questions workforce engagement, providing focus, but with the Board to the Chair and the chairs of the Board Committees also retaining a commitment for individual Board members to continue to engage with colleagues directly throughout the year. The Board considers these arrangements to be effective as they enable a broad range of colleague engagement activities, as described in this section. 82 Lloyds Banking Group Annual Report and Accounts 2022 ## Society and environment The Group is present in almost every community in the country and the Board therefore places great importance on engagement and action to help these communities prosper, while helping to build a more sustainable and inclusive future. Relevant engagement included: • Updates on climate, environmental and social matters, covering all aspects of the Group’s business, where the Board reviewed progress made against its stated ambitions in these areas and agreed any further action it considered was required Financial results Risk managementGovernance Financial statements Other informationStrategic report • The Board continues to be supported in environmental matters by its Responsible Business Committee. The Committee considers stakeholder views on all matters relating to the Group’s ambition to be a trusted, sustainable, inclusive and responsible business and the report of the ## Getting closer to customers Committee on its work during the year can be found on page 104 The Board is very conscious of the impact on our customers of the ongoing increases in the cost of living and the importance of supporting our customers. During the year the Board has ## Regulators and government received updates from management on the impacts on The Board continues to maintain strong and open relationships customers across our businesses, including regular feedback with the Group’s regulators and with government authorities, from the Group Chief Executive. The Board has also had the including key stakeholders such as the FCA, the PRA, HM opportunity to discuss the impact of the cost of living increase Treasury and HMRC. with our regulators. Relevant engagement included: Board members have also sought to develop further their • The Chair and individual directors, including Chairs of the understanding of customers’ needs and how the Group can Board’s Committees, held continuing discussions with support them via customer focus groups and a choice of call the FCA and PRA on a number of aspects relevant to the recordings, in each case on a range of topics. evolving regulatory agenda Find out more about how we’re helping customers • The Board regularly reviewed updates on wider Group in our social sustainability report regulatory interaction, providing a view of key areas of focus and also progress made in addressing key regulatory priorities • A meeting was held between the Board and the PRA in July to discuss the outcomes and progress of action relevant to the PRA’s Periodic Summary Meeting letter ## Suppliers The Group has a number of partners it relies on for important aspects of our operations and customer service provision and the Board recognises the importance of these supplier relationships in achieving the Group’s wider ambitions. Engagement with suppliers included: • The Board’s Audit Committee considered reports from the Group’s Sourcing and Finance teams on the efficiency of supplier payment practices, including those relating to the Group’s key suppliers, ensuring our approach continued to meet wider industry standards • The Board continued to oversee resilience in the supply chain, ensuring our most important supplier relationships were not impacted by potential material events • The Board has an ongoing zero tolerance approach ## towards modern slavery in our supply chain and receives Supporting colleagues – updates on ongoing enhancements to the Group’s supplier ## whistleblowing practices, including measures to address the risk of human trafficking and modern slavery in our wider supply chain Speak Up (the Group’s whistleblowing programme) enables colleagues to raise matters of concern. Alan Dickinson is the Group’s whistleblowing champion and is responsible for overseeing the integrity, independence and effectiveness of the Group’s whistleblowing procedures. In addition, the Audit Committee reviews reports on whistleblowing to ensure that there are arrangements in place which colleagues can use in confidence to report relevant concerns and reports on its review to the Board. 83Lloyds Banking Group Annual Report and Accounts 2022 Our strategy sets out our plan to become a truly purpose-driven ### Board leadership and organisation and our culture is a fundamental enabler of that. ### company purpose continued Board members were deeply engaged throughout the ‘Growing ## Our new values our Culture Together’ programme, participating in some of the ‘culture conversations’, allowing them both to input and hear ### During 2021 and 2022, we embarked on directly from colleagues on this subject. These outputs ensured ### ‘Growing our Culture Together’ – a rigorous that the ‘colleague voice’ was central to the creation of a draft set of values. The draft set of values was then shared with colleagues ### research programme involving thousands to be further refined, with over 12,000 giving feedback to shape the ### of colleagues across the organisation, to final set which was launched in May 2022. ### gather views and insights about our current We continued to listen to further feedback as well as external ### and aspirational culture. development with the rising importance of sustainability. We recognised the need to simplify our frameworks and enhanced ### Focusing on culture our values to guide not only how we act and behave but also We listened to our people to understand how it feels to work how we make decisions. here, the role our culture plays and what improvements could be made. As we have continued to build our purpose into everything we do throughout 2022, we have taken on board further feedback and evolved our approach. ## We collected We | data… | listened… | | --- | --- | | We looked at data and | We held ‘culture conversations’ | | information from: | where we spoke to: | | • Colleague surveys (26,600 colleagues) | • 241 colleagues through focus groups | | • CultureScope diagnostic tool insights | • 50 colleagues through one-to-one interviews | | (8,000 colleagues) | • 67 People Product Owners, Culture Leads and | | • Financial Services Culture Board survey | Subject Matter Experts | | (13,435 colleagues) | • 7 external suppliers | • Glassdoor scrapes ### We shared the themes identified from our • External organisations – Egon Zehnder, Boston ### research with over 12,000 colleagues having Consultancy Group, Deloitte, Harvard Business ### their say in how the values should be articulated Review • Our organisation’s archives – to understand our rich and diverse history of over 320 years, which acted as a stimulus when developing our values ## 26,600 358 Colleagues contributed Colleagues engaged 84 Lloyds Banking Group Annual Report and Accounts 2022 Board engagement in 2022 and beyond Collectively, these updates inform the Board of organisational Our non-executive directors continue to engage with colleagues changes impacting the workforce as well as external issues to deepen their understanding of how colleagues experience impacting colleagues and their wellbeing (such as the rise our culture through the Closer to Clients, Customers and in the cost of living). Colleagues programme. Throughout 2022, non-executive directors attended a range of focus groups where colleagues We have evolved our colleague listening strategy to an ‘always on’ discussed key themes from our annual colleague survey, approach, seeking more frequent views from colleagues. This will our new strategy and values, pay and reward to hybrid provide the Board with more timely and relevant insight to inform working. Non-executive directors have been able to apply its strategic discussions. the insights gained from these sessions along with those from other colleague events across the business to inform their Looking to the future involvement in Board discussions and strategic direction. During 2023, we will build on the work already undertaken on culture, recognising that this needs to continue evolving to For 2023 our approach continues to evolve, with insight from support the Group’s purpose. We understand the organisational Financial results Risk managementGovernance Financial statements Other informationStrategic report our monthly Pulse surveys and other relevant upcoming shifts that we need to make. These have been shared with the Board agenda items informing the discussion topics for Board, along with the actions needed to support the system, our non-executive director colleague focus groups. behaviour and symbolic changes needed to achieve them. Our Colleague Survey has provided us with a baseline for our Board monitoring of culture progress current position and we will continue to leverage our evolved The Board continues to monitor the Group’s progress on culture listening approach to understand the success of our actions and colleague sentiment drawing on insight from various sources and where further focus may be needed. – annual and monthly colleague surveys and the Financial Services Culture Board survey, as well as quarterly Workforce Engagement updates. These provide colleagues with a clear and simple framework to guide their behaviours and approach to ## We decision making. Since launching the new values, activities are underway across the organisation to deepen colleagues’ understanding ## delivered… and to ensure everyone is living the values day-to-day and embedding them into decision making – from everyday We continued to listen to further feedback, as well as choices to big strategic decisions. recognising the rising importance of sustainability. So we added an additional value, ‘Sustainable’, and refocused our values to enable colleagues to make the right decisions every day. ### People-first Sustainable We put people first to go We champion sustainability further for our customers to care for our planet • We listen and care for people • We take responsibility for the impact as individuals of our actions on nature and Britain’s • We go the extra mile to help customers, transition to net zero colleagues and communities feel more • We see the bigger picture and think supported, in control and confident through the consequences of our decisions about their future ### Bold Trust We’re bold and take action We trust each other • We innovate and do things differently to achieve more together to better serve our customers and grow • We give each other the space with purpose and support to take things on and • We challenge things that aren’t right see them through and take action to change them • We are honest with each other and explain our decisions ### Inclusive We’re inclusive | to value everyone | Our approach to | | --- | --- | | • We learn about and embrace our | developing our new values | | differences and seek out diverse | was recognised at the | | perspectives | Business Culture Awards | | • We shape what we do and what we offer | 2022 where we won Best | | around the different needs and circumstances | Brand & Values Initiative. | of our customers, colleagues and communities 85Lloyds Banking Group Annual Report and Accounts 2022 ### Board leadership and Group structure The subsidiaries of the Group are structured into the following ### company purpose continued sub-groups under Lloyds Banking Group plc, providing effective governance for the business undertaken in each sub-group: ### Group structure and ring-fencing • Ring-Fenced Banks sub-group containing Lloyds Bank plc ### governance arrangements and Bank of Scotland plc (including the Halifax and MBNA Since 1 January 2019, UK legislation has required large UK banks to businesses), serving both their UK personal and commercial separate personal banking services, such as current and savings customers accounts, from riskier activities, such as investment banking, • Non-Ring-Fenced Bank sub-group – Lloyds Bank Corporate in other parts of their business. This is called ring-fencing. The Markets plc – which provides products and services to Group Group’s structure and governance arrangements meet these customers that are not allowed within the ring-fence, as well regulatory requirements. Lloyds Bank plc and Bank of Scotland plc as serving financial institutions’ customers and holding certain are the banks, within the Group, which have been included within of the Group’s subsidiaries and branches outside the UK the ring-fence (together, the Ring-Fenced Banks). The governance • Insurance sub-group under Scottish Widows Group Limited structure focuses on ensuring: (including Scottish Widows Limited) • Independent decision-making by the Ring-Fenced Banks’ • Equity sub-group under LBG Equity Investments Limited boards – on any matters where there might be a conflict (including Lloyds Development Capital (Holdings) Limited) between the interests of the Ring-Fenced Banks and the interests of another part of the Group The boards of the Ring-Fenced Banks comprise all of the Group • Risks affecting the Ring-Fenced Banks are considered and directors plus three additional independent non-executive managed from the Ring-Fenced Banks’ perspective – including directors: Nigel Hinshelwood (Senior Independent Director), maintenance of the capital adequacy and liquidity of the Sarah Bentley and Brendan Gilligan. These Ring-Fenced Bank-only Ring-Fenced Banks directors are independent of the management and the rest of the • Clear and effective governance at both Ring-Fenced Bank and Group and their role is to act exclusively in the best interests of Lloyds Banking Group plc level – including second and third the Ring-Fenced Banks. They play a crucial role in the governance lines of defence in respect of risk management structure, with an enhanced role in managing any potential conflicts between the Ring-Fenced Banks and the Group. Lloyds Banking Group plc simplified sub-group structure ### Aligned boards Lloyds Bank Scottish LBG Equity ### 1 Corporate Widows Investments Lloyds Bank plc ### Markets plc Group Limited HBOS plc ### 1 Limited Bank of Scotland plc 1 Ring-Fenced Banks Non-Ring-Fenced Bank Insurance Equity Investments Ring-Fenced Bank-only directors Nigel Hinshelwood Sarah Bentley Brendan Gilligan Senior Independent Independent Independent Director non-executive director non-executive director Lloyds Bank plc and Lloyds Bank plc and Lloyds Bank plc and Bank of Scotland plc Bank of Scotland plc Bank of Scotland plc | Appointed: January 2019 | | Appointed: January 2019 | | Appointed: January 2019 | | | --- | --- | --- | --- | --- | --- | | Skills, experience and contribution: | | Skills, experience and contribution: | | Skills, experience and contribution: | | | • Extensive experience in the financial | | • Extensive digital and digital transformation | | • Extensive experience in core strategic | | | | services sector having worked across the UK | | experience | | finance and controllership roles in the | | | and Europe, North and South America, the | • Strong customer and marketing skills | | | financial services industry | | | Middle East and Asia Pacific | | | • Significant experience of serving on the | | | • Significant experience of large-scale | | Sarah is Chief Executive Officer and Executive | | | boards of regulated financial services | | | transformation, operations and technology | Director of Thames Water Utilities Limited and | | | businesses in the UK, France, Switzerland | | | | a Director of Water UK, the trade association | | | and Poland | | Nigel was a partner at Ernst & Young | | of the water and wastewater industry. Prior to | | | | | (subsequently Cap Gemini Ernst & Young) for | | joining Thames Water in autumn 2020, Sarah | | Brendan’s career began in the Public Audit | | | many years where he held numerous positions | | was Chief Customer Officer at Severn Trent plc | | division of KPMG in Ireland and Canada. | | | including Head of Financial Services and Chief | | and a member of its Executive Committee. | | He subsequently worked in commercial and | | | Executive Officer of Southeast Asia. | | | | consumer banking services and financing with | | | | | Before joining Severn Trent, Sarah was the | | Woodchester Investments plc and, after its | | | Before becoming a non-executive, he was the | | Managing Partner for Accenture’s Digital | | acquisition by General Electric Company, with | | | Head of HSBC UK and Deputy CEO of HSBC Bank | | business unit in the UK and Ireland. Sarah | | GE Capital until his retirement in April 2018. | | | plc. Within the HSBC Group he held a number | | previously worked internationally in a number | | | | | of executive appointments including Head | | of roles including Strategy, Marketing & | | | | | of HSBC Insurance Holdings, Chief Operating | | Propositions for BT’s Global Services division, | | | | | Officer for Europe, Middle East and Africa and | | CEO of Datapoint and Senior Vice President | | | | | Global Head of Operations. Nigel was formerly | | of eLoyalty. | | | | a Non-Executive Director of Lloyd’s of London Franchise Board. 86 Lloyds Banking Group Annual Report and Accounts 2022 ### Monitoring time commitments ## Division of responsibilities Non-executive directors are advised of time commitments for the Board and relevant Committees prior to their appointment and are required to devote such time as is necessary to discharge ### Board responsibilities their duties effectively. The time commitments of the directors are As Chair, Robin Budenberg has overall responsibility for the considered by the Board on appointment and annually thereafter leadership of the Board and for ensuring its effectiveness in all and, following the most recent review, the Board is satisfied there aspects of its operation. are no directors whose time commitments are considered to be a matter for concern. The composition of the Board helps ensure that no one individual or small group of individuals dominates the Board’s decision- External appointments, which may affect existing time making. The diversity of skills, experience and background on the commitments to the Board and its Committees, must be agreed Board enables the Board to provide constructive challenge and with the Chair and prior Board approval must be obtained. During strategic guidance and to offer specialist advice. Financial results Risk managementGovernance Financial statements Other informationStrategic report 2022, Sarah Legg was appointed a non-executive director of Severn Trent plc. The Board considered the time commitment There is a clear division of responsibilities between the leadership and potential conflicts involved prior to Sarah accepting the role of the Board and the executive leadership of the Group – please and was satisfied that she would continue to have sufficient time refer to the role summaries below. The responsibilities of the Chair, to commit to her Group Board and Committee appointments. Group Chief Executive, Senior Independent Director, Board and The executive directors do not have any significant external Committees are agreed by the Board and publicly available on appointments. Information on directors’ attendance at meetings the Group’s website at www.lloydsbankinggroup.com/who- can be found on page 79. we-are/group-overview/corporate-governance. The Chair periodically refreshes membership of the Committees. ### The right information and support The Chair, supported by the Company Secretary, ensures that ### Monitoring independence Board members receive appropriate and timely information. All The Nomination and Governance Committee monitors whether directors have access to the advice of the Company Secretary there are any relationships or circumstances which may affect and the Group provides access, at its expense, to the services a director’s independence. Following the most recent review of of independent professional advisers in order to assist directors independence, the Committee concluded that all non-executive in their role. Board Committees are also provided with sufficient directors are independent in character and judgement. Robin resources to discharge their duties. Budenberg was independent on appointment when assessed against the circumstances set out in provision 10 of the Code. Non-executive directors Non-executive directors Chair Deputy Chair and Senior The independent non-executive directors Robin Budenberg Independent Director challenge management constructively and Alan Dickinson help develop and set the Group’s strategy. They actively participate in Board decision-making and scrutinise management performance. The non-executive directors satisfy themselves on the integrity of financial information and review the Group’s risk exposures and controls. The non-executive directors, through the Robin Budenberg leads the Board and promotes As Deputy Chair, Alan Dickinson supports the Chair in Remuneration Committee, also determine high standards of corporate governance. He leads representing the Board and deputises for the Chair. the remuneration of executive directors. in building an effective and complementary Board The Deputy Chair may also represent the Group’s and sets the Board’s agenda. The Chair also leads interests to official enquiries and review bodies. Board succession planning and seeks to ensure effective communication with shareholders. As Senior Independent Director, Alan Dickinson is a sounding board for the Chair and Group Chief Executive. He acts as a conduit for the views of other non-executive directors and conducts the Chair’s annual performance appraisal. He is available to help resolve shareholders’ concerns and attends meetings with major shareholders and financial analysts to understand issues and concerns. Executive directors Company Secretary Group Chief Executive Chief Financial Officer Company Secretary Charlie Nunn William Chalmers Kate Cheetham Charlie Nunn manages and leads the Group on Under the leadership of the Group Chief Executive, As Company Secretary, Kate Cheetham advises the a day-to-day basis, making decisions on matters William Chalmers makes and implements Board on matters relating to governance, ensuring affecting the operation and performance of the decisions in all matters affecting the management good information flows and that comprehensive Group’s business and the delivery of the Board’s of financial resources. He provides specialist practical support is provided to directors. Kate approved strategy. He delegates aspects of his knowledge and experience to the Board. Together Cheetham is also responsible for maintaining the authority, as permitted under the Corporate with Charlie Nunn, William Chalmers designs, Group’s Corporate Governance Framework and Governance Framework, to other members of develops and seeks to implement strategic organising directors’ induction and training. Both the Group Executive Committee. plans and deals with the day-to-day operations the appointment and removal of the Company of the Group. Secretary are matters for the Board as a whole. 87Lloyds Banking Group Annual Report and Accounts 2022 More details about the processes for the appointments of Scott ## Composition, succession Wheway and Cathy Turner as non-executive directors can be ## and evaluation found on page 94. ### Succession planning ### Composition The Nomination and Governance Committee ensures plans The balance of skills, experience, independence and knowledge are in place for orderly succession to both Board and senior on the Board is the responsibility of the Nomination and management positions and oversees the development of a Governance Committee and is reviewed annually or whenever diverse pipeline for succession. More information about the work appointments are considered. The Nomination and Governance of the Nomination and Governance Committee on succession Committee assesses the skills, experience and knowledge of the planning can be found on pages 92 and 93. non-executive directors on an individual basis and on a collective basis – please see the table below for the results of the latest All directors intend to seek re-election or election at the assessment, which was approved on 18 January 2023. Having the Company’s annual general meeting in 2023. The Board believes right balance of skills and experience helps to ensure directors that all directors continue to be effective and committed to discharge their duties effectively. their roles. The Nomination and Governance Committee leads the process ### Evaluation for Board appointments, which makes recommendations An externally facilitated evaluation of the Board’s effectiveness to the Board. Open advertising and/or an external search wasundertakenin2022.Informationonfindingsofthatevaluation consultancy is used for the appointment of the Chair and non- can be found on page 89. executive directors. Appointments are made on merit and due consideration is given to diversity in its broadest sense, including gender, social, regional and ethnic backgrounds and cognitive and personal strengths. 3 Collective view of the skills, experience and knowledge of the Our Board in 2022 1 non-executive directors Retail/Commercial Banking Major Change Programmes 1. | Financial Markets/ Wholesale Banking/ | ESG: Environment, Sustainability | | | | --- | --- | --- | --- | | Treasury | | and Climate Change | | | Insurance ESG: Social, Inclusion and Diversity | | | 1. Male 6 | | | | and Governance | 2. Female 5 | Audit and Finance Listed Board Governance, including Investor Relations and Remuneration 2. Risk – in Financial Institutions Government/ Regulator Interface Technology/Digital Strategic Thinking Consumer/Marketing/Distribution 1. 3. 1. 44–55 4 | Good experience and knowledge | | 2. 56–65 5 | | --- | --- | --- | | Deep experience – distinctive strength | | 3. 66–75 2 | | 1 Assessment by the Nomination and Governance Committee as at 18 January 2023. | 2. | | 2 Tenure of non-executive directors 2015 2016 2017 2018 2019 2020 2021 2022 Robin Budenberg 2 1. Alan Dickinson 8 Sarah Legg 3 2. 1. White 9 (82%) Lord Lupton 5 2. Black, Amanda Mackenzie 4 Asian or Minority Harmeen Mehta 1 Ethnic 2 (18%) Cathy Turner 0 Catherine Woods 2 Age Gender diversity Ethnic diversity Scott Wheway 0 3 All data as at 31 December 2022. Gender and Length of current tenure in complete years ethnicity data remains correct as at the date 2 Non-executivedirectorsinofficeatthedateofpublicationoftheAnnualReport. of publication of the Annual Report. 88 Lloyds Banking Group Annual Report and Accounts 2022 ## Board evaluation The Board is committed to independent evaluation of its own effectiveness and that of its committees and individual directors as recommended by the UK Corporate Governance Code 2018. Given the appointment of a new Group Chief Executive in August 2021 and the Group's ongoing strategy development at that time, the Board agreed that the 2021 Board evaluation would be deferred and that an externally facilitated evaluation of its effectiveness, together with that of its Committees, would be conducted in 2022 in order to allow the review to cover the Board's effectiveness in overseeing these developments. External board review specialist Dr Tracy Long of Boardroom Review Limited conducted that evaluation. Dr Long is an independent external service provider with no connection to the Group or any individual directors. The annual evaluation, which is typically facilitated externally at least once every three years, provides an opportunity to consider ways of identifying greater efficiencies, maximising strengths and highlighting areas of further development to enable the Board continuously to improve its own performance and the performance of the Group. The Chair of the Board, with the support of the Nomination and Governance Committee, leads the Board in considering and responding to the annual review of the Board's effectiveness, which includes a review of its Committees and individual directors. Performance evaluation of the Chair is conducted by the non-executive directors, led by the Senior Independent Director, considering the views of the executive directors. The previous external evaluation was conducted in 2018, with internal evaluations having been conducted in 2019 and 2020. Given the Board's decision to defer the 2021 annual evaluation of its effectiveness until 2022, the Chair undertook additional individual assessments of the non-executive directors in January 2022 and an additional performance evaluation of the Chair was undertaken by the non-executive directors, led by the Senior Independent Director, considering the views of the executive directors also in January 2022. If directors have concerns about the Group or a proposed action which cannot be resolved, their concerns are recorded in the Board minutes. Also, on resignation, non-executive directors are encouraged to provide a written statement of any concerns to the Chair, for circulation to the Board. No such concerns were raised in 2022 or up to the date of this report. ### External Board Effectiveness Review 2022 #### Stage 1 – June 2022 to August 2022 Dr Long held an initial meeting with the Chair and then conducted one-to-one interviews with each director. Interviews with the heads of the Retail, Commercial Banking and Insurance and Wealth businesses and some of the function heads were also undertaken as part of the process. The themes of the interviews included leadership and contribution, culture and composition and use of time and information. #### Stage 2 – July 2022 to September 2022 Dr Long attended the Board and Committee meetings in July and September. This enabled Dr Long to witness and evaluate the Board and Committee processes and behaviours. #### Stage 3 – October 2022 to November 2022 Individual feedback was provided by Dr Long to each of the directors in a series of one to one meetings. The findings and proposed actions were presented to the Nomination and Governance Committee and Board in November. ### External Board Effectiveness Review 2022 The overall feedback from the review includes that: - The Board is adding value through appropriate engagement and focus; relationships are based on trust; debates are well informed, and governance is continuously reviewed; - Directors are well led and briefed by the Chair, the Committee Chairs, the Group Chief Executive and the Chief Financial Officer, with diversity of tenure and experience; - Meetings are collegiate and supportive; - There is a shared strategic perspective and regular insights on performance, customer service and ethics, technology and transformation; - There is significant attention to risk and control; and - The corporate culture is considered an asset. The Group intends to report back in its next annual report on the actions taken as a result of the review and the influence on the Board's composition. Strategic report Financial results Governance Risk management Financial statements Other information ### Key findings from the 2022 review | Theme | Strengths | Areas for further development | | --- | --- | --- | | **Board Leadership and Contribution** | - The Board has a collegiate, supportive style and an ability to add value to executive judgement. - Board agendas are flexible, balancing the priorities between strategy, performance and governance. - Non-executive directors are well prepared and papers are timely and well written. | - Consider further dedicated professional time together outside of Board meetings. - There is an opportunity for issues to be brought to the Board and Committees earlier to allow more scope for discussion. - Board refreshment with a range of tenures, skills and diversity of perspective is critical in quality decision-making. - Reviews of the composition of the Committees to ensure sufficient experience to cross-reference matters. | | **Strategy** | - The Board is focused on purpose and strategy throughout the year. - Shareholder communication and feedback to the Board is high on the agenda, noted by all directors. | - Continued awareness by all directors of the changes and challenges in the external environment. - Consider broadening the customer lens to give an even more holistic view of market changes, opportunities and risks. | | **Risk and Control** | - The Board and the Committees pay significant attention to risk and control. - Delegated committees are used appropriately for detailed review and the oversight of implementation, allowing the Board to focus on strategy and purpose. - There are extensive and knowledgeable discussions at the Board and Committees on cyber defence and data protection. | - Ongoing development of agenda and papers to encourage broader discussion on priorities. - Consider a review of the definitions of the three lines of defence. - Continue focus on learning through presentations of 'lessons learned'. | | **People, Culture and Environment** | - The Chair has set the tone and standard for the Board with continuous attention to purpose and values. - There is a positive corporate culture with strong focus on customer needs, collaboration and teamwork. - Ongoing attention to leadership and talent development. | - Ongoing commitment from the Group Chief Executive, Group Executive Committee and the Board to ensure that the culture of accountability is demonstrated from the top. - Continued focus on data, cyber, environmental issues and impact (including net zero) and inclusion and diversity. | Lloyds Banking Group Annual Report and Accounts 2022 89 Group training modules ### Composition, succession Non-executive directors are asked to complete training modules ### and evaluation continued on a quarterly basis. In 2022, these modules were on: • Information risk and cyber security ### Board training • Anti-bribery:fightingfraudandfinancialcrime The Chair is responsible for leading the development, and • Conduct Rules monitoring the effective implementation, of training policies • Speak Up (the Group’s whistleblowing programme) and procedures for the directors. On appointment, each director receives a formal and tailored induction. There is Other training also a programme of ongoing training for directors. Training sessions have been offered across a range of topics of particular interest that were chosen to complement the Board The directors are committed to their own ongoing professional agenda and facilitate advanced discussion. Where training development and the Chair discusses training with each non- was offered online, the sessions have been recorded and made executive director at least annually. The Company Secretary available to all directors. The topics are produced based on the oversees a training plan for the non-executive directors, with level of knowledge and experience of Board members. Key topics the plan for 2022 discussed at the Nomination and Governance during 2022 included: Committee at the start of the year with the non-executive • Banking Skills Refresh – Commercial and Retail directors encouraged to suggest training topics of interest. • Risk Management – Internal Capital Adequacy Assessment Process and Internal Liquidity Adequacy Assessment Process Induction • Treasury Insights – Opportunities and Risks New non-executive directors like Scott Wheway and Cathy Turner receive a tailored induction that focuses on the Group’s In addition to the above, a board incident management exercise culture and values, stakeholders, strategy, structure, operations was undertaken. and governance. CommitteespecifictrainingisagreedbyCommitteeChairsas The emphasis is on ensuring that the induction brings the and when needed such as IFRS 17 training this year for members businessanditsissuesalive,takingaccountofthespecificrole of the Audit Committee and training for members of the thedirectorhasbeenappointedtofulfilandtheirskillsand Responsible Business Committee by external and internal subject experience to date. matter experts on the themes of nature and biodiversity loss. An induction pack is provided containing key corporate Directors who take on new roles or change roles during the documents and information relating to the Group covering year attend induction or handover meetings in respect of those aspects such as the role of a director (including relevant Group new roles. policiessuchasanti-bribery,conflictsofinterest,expenses,gifts and hospitality and share dealing), the Board and its Committees, financialsandstrategy,governance,riskmanagement,culture, shareholders and training. Audit and Risk Committee Forum for non-executive directors Meetings are scheduled with the directors, the Company In November 2022 there was an inaugural Audit and Risk Secretary, Group Executive Committee members and other senior Committee Forum, which was attended by Group, Insurance managers to discuss aspects such as: and Lloyds Bank Corporate Markets Audit and Board Risk • Group strategy including key priorities and challenges Committee members as well as colleagues from the business. • Overview of the business and Group operations • The UK banking regulatory framework, key legal risks and The aims of this informal forum were to network and to corporate governance have interactive discussion to gain a shared understanding • Overview of the Board and relevant Committees and appreciation of common areas of interest. The topics • People, culture, values, purpose and remuneration discussed were strategic transformation, data, risk and • Environmental, Social and Governance priorities including controls and climate risk. It is intended that the Forum will climate and inclusion and diversity be held on an annual basis going forward. • Cyber security, data protection and operational resilience • Introduction to Finance (including meetings with auditors) • Overview of the Risk function (including the Ring-Fenced Bank RiskOffice)andAuditfunction • Capital management and liquidity • Business and Commercial Banking • MassAffluent • Consumer Relationships • Corporate and Institutional Banking • Scottish Widows Group Limited and the Insurance, Pensions and Investments sub-group • Lloyds Bank Corporate Markets plc and the Non-Ring-Fenced Bank sub-group • LBG Equity Investments and the Equity sub-group I received a comprehensive and thorough induction that provided clarity on the key issues facing the Group as a whole, together with specific insight into the insurance and pensions business. The induction equipped me with the necessary institutional knowledge to perform my roles as a non-executive director of Lloyds Banking Group and as Chair of Scottish Widows Group. Scott Wheway Non-executive director of Lloyds Banking Group plc and Chair of Scottish Widows Group 90 Lloyds Banking Group Annual Report and Accounts 2022 # Audit, risk and internal control ## Audit and risk There are formal policies and procedures in place designed to ensure the independence and effectiveness of the internal and external audit functions. Group Internal Audit is a single independent internal audit function, reporting to the Audit Committee. Further detail can be found in the sections headed 'Group Internal Audit' and 'Auditor independence and remuneration' on page 98. The Board has delegated a number of responsibilities to the Audit Committee, including monitoring and reviewing financial reporting, the effectiveness of internal controls and the risk management framework, whistleblowing, the internal audit process and the external auditor's process. The Audit Committee reports regularly to the Board on its activities, and its report for 2022, confirming how it has discharged its duties, can be found on pages 95 to 98. Requirements that the annual report is fair, balanced and understandable are considered during the drafting and reviewing process and the Board has concluded that the 2022 annual report meets this requirement. The Board is supported in this by its Audit Committee and a sign-off process involving different sections of the annual report being approved for inclusion by senior management, with additional review by the Group Disclosure Committee. The statement of directors' responsibilities can be found on page 137 and the statement of the Auditor's responsibilities for the audit of the financial statements can be found on page 208. Related information on the Company's business model and strategy can be found on pages 1 to 44. The Board is responsible for the Group's risk management and internal controls systems, including the determination of the nature and extent of risk the Company is willing to take. Risk is further managed through the Board-approved risk management framework, as discussed in the risk management report on pages 139 to 195. The Board Risk Committee assists the Board in fulfilling its risk governance and oversight responsibilities, including by the provision of advice to the Board on risk strategy and overseeing the development, implementation and maintenance of the Group's overall risk management framework, strategy, principles and policies and its risk appetite. The Board Risk Committee reports regularly to the Board on its activities and its report for 2022, confirming how it has discharged its duties, can be found on pages 99 to 103. ## Internal control ### Board responsibility The Board is responsible for, and monitors, the Group's risk management and internal control systems. These are designed to facilitate effective and efficient operations and to ensure the quality and integrity of internal and external reporting and compliance with applicable laws and regulations and for the determination of the nature and extent of the principal risks the Group is willing to take in order to achieve its strategy. The directors and senior management are committed to maintaining a robust control framework as the foundation for the delivery of effective risk management. The directors acknowledge their responsibilities in relation to the Group's risk management and internal control systems and for reviewing their effectiveness. In establishing and reviewing the risk management and internal control systems, the directors carried out a robust assessment of the emerging and principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity and reputation, the likelihood of a risk event occurring and the costs of control. The process for identification, evaluation and management of the emerging and principal risks faced by the Group is integrated into the Group's overall framework for risk governance. The risk identification, evaluation and management process also identifies whether the controls in place result in an acceptable level of risk. At Group level, a consolidated risk report and risk appetite dashboard are reviewed and regularly debated by the Group Risk Committee, Board Risk Committee and the Board to ensure that they are satisfied with the overall risk profile, risk accountabilities and mitigating actions. The report and dashboard provide a view of the Group's overall risk profile, key risks and management actions, together with performance against risk appetite and an assessment of emerging risks which could affect the Group's performance over the life of the operating plan. Information regarding the main features of the internal control and risk management systems in relation to the financial reporting process is provided within the risk management report on pages 139 to 195. The Board concluded that the Group's risk management arrangements are adequate to provide assurance that the risk management systems put in place are suitable with regard to the Group's profile and strategy. ### Control effectiveness review All material controls are recorded and assessed on a regular basis in response to triggers or at least annually. Control assessments consider both the adequacy of their design and operating effectiveness. Where a control is not effective, the root cause is established and action plans implemented to improve control design or performance. Control effectiveness against all residual risks is aggregated by risk category, reported and monitored via the monthly Key Risk Insights or Consolidated Risk Report (CRR). The Key Risk Insights/CRR are reviewed and independently challenged by the Risk division and provided to the Risk Division Executive Committee and Group Risk Committee. On an annual basis, a point in time assessment is made for control effectiveness against each risk category and across the sub-groups. The RCSA System, Key Risk Insights or CRR are the sources used for this point in time assessment and a year-on-year comparison on control effectiveness is reported to the Board. ### Reviews by the Board The effectiveness of the risk management and internal control systems is reviewed at least annually by the Board and the Audit Committee, which also receive reports of reviews undertaken by the Risk division and Group Internal Audit. The Audit Committee receives reports from the Company's auditor, Deloitte LLP (which include details of significant internal control matters that they have identified) and has a discussion with the auditor at least once a year without executives present, to ensure that there are no unresolved issues of concern. The Group's risk management and internal control systems are regularly reviewed by the Board and are consistent with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued by the Financial Reporting Council and compliant with the requirements of CRD IV. They have been in place for the year under review and up to the date of the approval of the Annual Report. The Group, Ring-Fenced Banks sub-group and Lloyds Bank Corporate Markets have achieved full compliance with BCBS 239 risk data aggregation and risk reporting requirements and actively continue to maintain this status. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 91 # Nomination and Governance Committee report ## Increasing the diversity of the Board and executive remains an ongoing focus for the Committee ![img-6.jpeg](img-6.jpeg) **Robin Budenberg** Chair, Nomination and Governance Committee Effective succession planning underpins the development of strong leadership across the Board and executive. ### Key activities in 2022 - Board and senior executive succession planning - Board recruitment and appointments - Board and Committee composition, skills and training - Outcomes from the externally facilitated Board evaluation - Inclusion and diversity ### Q&A - How has the Nomination and Governance Committee (the Committee) ensured that the membership of the Board and its Committees remains appropriate? - The Committee continually assesses the constitution of the Board and its Committees bearing in mind the strategic requirements of the Group and the need to ensure a strong, diverse and effective Board. The Board also regularly reviews the skills and experience of Board members, including requirements for the future. The appointments of Scott Wheway and Cathy Turner during 2022 helped strengthen the Board's overall breadth of experience and knowledge recognising, in particular, the significant financial services experience they both have. - What role did the Committee play in consideration of the senior executive appointments made during 2022? - The Committee's responsibilities include oversight of the development of a diverse pipeline for succession at both Board and senior executive level. The Committee is also responsible for ensuring that senior executives have the right skills, values, attitude and energy to succeed. The Committee reviews the Group Chief Executive's executive succession planning, with this being given additional focus in 2022, recognising the number of executive appointments made following the launch of the Group's new strategy. See **page 93** for more details. - What are the key areas of focus for the Committee in 2023? - Core areas of focus for 2023 will include a continued focus on succession planning at both Board and executive level, together with implementation of recommendations arising from this year's Board evaluation process. Further enhancing inclusion and diversity at Board and executive level, and beyond, will remain an ongoing area of key focus, together with managing the composition of the Board and its Committees. ### Introduction As mentioned in my introduction to the governance report on **page 72**, the Group launched an ambitious new strategy in February 2022, following which there have been a number of senior executive appointments made during the course of the year. A key area of focus for the Committee has consequently been consideration of the executive succession planning arrangements put in place by the Group Chief Executive, together with ensuring that the policy for the selection and appointment of senior executives is appropriate. Other key areas of focus for the Committee, also covered in this report, include succession planning at Board level, and the outcomes of the externally facilitated Board evaluation process. ### Committee purpose and responsibilities The purpose of the Committee is to keep the Board's governance, composition, skills, experience, knowledge, independence and succession arrangements under review and to make appropriate recommendations to the Board to ensure the Company's arrangements are consistent with the highest corporate governance standards. ### Board and Committee changes Scott Wheway joined the Board as a non-executive director, and as a member of the Nomination and Governance Committee and Board Risk Committee, on 1 August 2022, and Cathy Turner joined the Board as a non-executive director, and member of the Remuneration Committee on 1 November 2022. Scott was also appointed Chair of the Scottish Widows Group with effect from 12 September 2022. Details of the selection process for these appointments can be found on **page 94**. I would like to take this opportunity to welcome Scott and Cathy, and also to thank Stuart Sinclair for his service to the Group following his retirement as a non-executive director at the Company's annual general meeting in May 2022. ### Succession planning Consideration has been given to tenure of Board members and potential future Board retirements, and the impact of these on membership of the Board and its Committees. The Committee's ongoing review of the structure, size and composition of the Board and its Committees helps ensure that the appropriate mix of knowledge, skills, experience, and diversity is maintained. A summary of Board and Committee composition and attendance can be found on **page 79**. All changes to the Board and its Committees are overseen by the Committee. Strong succession planning remains a key focus to help ensure the continuation of an appropriate mix of skills, experience and backgrounds. The Committee also continues to consider the overall health of the executive talent pipeline, together with detailed executive succession planning. Key considerations include, for example, cultural and strategic capabilities which will help ensure the continued transformation of the Group and the delivery of its strategic aims. Further details on the Committee's approach to succession planning can be found on **page 93**. ### Board effectiveness and training As discussed in last year's report, the Board agreed the deferral of the Board evaluation due in 2021, with a view to an externally facilitated evaluation taking place during 2022. This was undertaken by an external board review specialist, Dr Tracy Long of Boardroom Review Limited, and full details of the review and its outcomes are provided on **page 89**. The Committee considered the outcomes of Dr Long's review and agreed, and recommended to the Board for approval, the action plan arising from the review. The Committee will oversee the implementation of the action plan during 2023. The Committee subsequently undertook an annual review of its effectiveness, the findings of which, together with the outcomes of the Board evaluation process as relevant to the Committee, were considered by the Committee at its January 2023 meeting; it was considered that the performance of the Committee continues to be effective. 92 Lloyds Banking Group Annual Report and Accounts 2022 The Committee also oversees training undertaken by the non-executive directors. The Chair discusses training with each non-executive director at least annually and, as set out in the summary of Board training on page 90, training sessions have been offered across a range of topics of particular interest, in addition to mandatory training requirements. Learning and engagement opportunities have been undertaken by all non-executive directors in relation to material aspects of the Group's business. ## Independence and time commitments Based on its assessment for 2022, the Committee is satisfied that, throughout the year, all non-executive directors remained independent in character and judgement. In recommending directors for election and re-election at the annual general meeting, the Committee has reviewed the performance of each non-executive director and their ability to continue meeting the time commitments required, taking into consideration individual capabilities, skills and experiences and any potential conflicts of interest that have been disclosed. The external roles held by all directors were considered to be appropriate. During the processes leading to the appointment of Scott Wheway and Cathy Turner consideration was given to their external roles. In particular, the Committee noted that Cathy Turner's role as a partner at Manchester Square Partners was on a part-time basis and considered broadly equivalent to a non-executive directorship. Fuller details of any conflicts of interest can be found on page 134. ## The Group's Corporate Governance Framework The most recent annual review of the Corporate Governance Framework was finalised in May 2022. This review resulted in a simplified and more accessible framework, while remaining compliant with relevant obligations and best practice. As part of its broader governance responsibilities, the Committee considered regular updates on developments in corporate governance during the year, including FCA Policy Statements on Diversity and Inclusion, and Consumer Duty, and the Economic Crime and Corporate Transparency Bill 2022. The Committee also considered correspondence with shareholders. ## UK Corporate Governance Code The Company applied the UK Corporate Governance Code 2018 for the year ending 31 December 2022 and complied with all the provisions. A detailed summary setting out the Company's compliance can be found on page 73. The Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board, all of which have been accepted during the year. The Committee's terms of reference can be found at www.lloydsbankinggroup.com/who-we-are/group-overview/corporate-governance. ## Committee composition, skills and experience To ensure a broad representation of experienced and independent directors, membership of the Committee currently comprises the Chair, Deputy Chair (who is also the Senior Independent Director and Chair of the Remuneration Committee), the Chair of the Responsible Business Committee, together with a further independent non-executive director (who is the Chair of Scottish Widows Group). The Senior Independent Director of the Ring-Fenced Banks also attends meetings as an observer in order to provide insights on matters relevant to the Ring-Fenced Banks when required and as part of his role in the Group's overall governance structure. The Group Chief Executive attends meetings as appropriate. Details of Committee membership and meeting attendance during the year can be found on page 79. 1 The Chair was independent on appointment. Under the Code, thereafter the test of independence is not appropriate in relation to the Chair. ## Succession planning Succession planning was a key focus for the Committee during 2022 not only at Board level but, in particular, across key senior management roles following the launch of the Group's new strategy in February 2022, which resulted in a number of new appointments. As part of its regular oversight and review of the adequacy and effectiveness of succession arrangements for executive directors and members of the senior executive, the Committee received and discussed regular updates from the Group Chief Executive covering the new operating model and executive succession planning arrangements. The strength and diversity of the internal and external appointments achieved was supported by the effectiveness of the Group's succession planning. The Chair is responsible for developing and maintaining a succession plan for the Group Chief Executive who is, in turn, primarily responsible for developing and maintaining succession plans for key leadership positions in the senior executive team. Effective succession planning assists the Group in delivering on its strategic objectives over the medium and longer term by ensuring the desired mix of skills and experience of Board members and executives, this being of particular relevance in the context of the Group's new strategy. The Board remains committed to developing talent within the executive and management levels across the Group in order to provide opportunities to develop a diverse pipeline of current and future leaders. The Committee supports the Chair in keeping the composition of the Board and its Committees under regular review and in leading the appointment process for nominations to the Board. This helps ensure continued focus on increasing the overall diversity of the Board, and capacity for future succession planning, also bearing in mind tenure of Board members and potential future retirements from the Board. The appointment process set out on the following page helps illustrate how this works in practice, highlighting the particular focus given to planning for individual roles with specific attributes. Alan Dickinson, the Deputy Chair and Senior Independent Director, will have served as a non-executive director for nine years in September 2023. When considering Alan's successor as Senior Independent Director, the Committee will give consideration to the recommendation of the FTSE Women Leaders Review that FTSE 350 companies should have at least one woman in the Chair or Senior Independent Director role, and/or one woman in the Chief Executive or Finance Director role by the end of 2025, as the Group does not meet this target as at the date of this report. The Chair leads an ongoing assessment of the Board's collective technical and governance skill set and uses a Board skills matrix to track the Board's strengths and to identify any gaps in the desired collective skills profile of the Board. Consideration is given to a range of factors such as the Group's future strategic direction and helping to ensure that due weight is given to diversity in its broadest sense. The skills matrix is considered in the appointment of all Board members. The Group's diversity commitments and outcomes of the Board evaluation process are also taken into consideration. Succession planning plays a key role in the recognition and promotion of diversity across the Board and senior management, further supported by a range of policies across the Group which promote the engagement of under-represented groups within the business in order to help continue to build a diverse talent pipeline. Further details can be found on page 34. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 93 ## Nomination and Governance Committee report continued ### Appointment process – non-executive directors In late 2021, following the announcement that Nick Prettejohn would stand down from the Board, the Board initiated a search process led by the Chair to identify an additional independent non-executive director, who would also succeed Nick as Chair of Scottish Widows Group. Similarly, following the announcement of Stuart Sinclair's intention to retire from the Board at the annual general meeting in 2022, a separate search process was initiated to identify a further independent non-executive director who would also serve as a member of the Remuneration Committee, this search similarly being led by the Chair. Competitive tender processes led to the appointment of Egon Zehnder (subsequently joined by Hedley May) for the former search process, and Russell Reynolds Associates for the latter. In each case, long lists of candidates were identified before being narrowed down to shortlists of preferred candidates who were then taken through interview processes. Initial interviews were in each case led by the Chair, supported by the Senior Independent Director and other non-executive directors, with the preferred candidates then also undertaking further meetings with certain other members of the Board and senior executive. Candidates for the Remuneration Committee related role also met with the Chief Financial Officer and the Chief People and Places Officer, while candidates for the Scottish Widows related role met with, amongst others, the Group Chief Executive and the Chief Executive Officer of Scottish Widows. The Senior Independent Director of Scottish Widows Group was also involved throughout the recruitment process for the Scottish Widows Group Chair. During both processes, the Chair kept the Board and the Committee regularly informed on progress, with discussions being held throughout. Following the interviews and additional meetings, formal assessment of the final shortlisted candidates was undertaken against defined competencies, leading to Scott Wheatley and Cathy Turner being identified as the preferred candidates for the respective roles, recognising their depth and breadth of relevant knowledge, skills and experience. The Committee's recommendations for each appointment were subsequently approved by the Board. Each of these appointments involved a formal, rigorous and transparent appointment process based on merit and objective criteria, with due consideration being given to a broad range of factors such as diversity of gender, social and ethnic backgrounds, cognitive and personal strengths and the Group's future strategic direction. Each of Egon Zehnder, Hedley May and Russell Reynolds Associates have no connection with the Group or individual directors other than conducting external search services and related activity and, in the case of Russell Reynolds Associates, additional advisory services. ### Board diversity policy The Board diversity policy (the Policy) sets out the Board's approach to diversity and provides a high-level indication of the Board's approach to inclusion and diversity in senior management roles which is governed in greater detail through the Group's policies. The Board places great emphasis on ensuring that its membership reflects diversity in its broadest sense. Consideration is given to the combination of demographics, skills, experience, race, age, gender, educational and professional background and other relevant personal attributes on the Board to provide the range of perspectives, insights and challenge needed to support good decision-making. New appointments are made on merit, taking account of the specific skills and experience, independence and knowledge needed to ensure a rounded Board and the diverse benefits each candidate can bring to the overall Board composition. Objectives for achieving Board diversity are reviewed on a regular basis. On gender diversity, the Board is committed to maintaining at least four women Board members and over time will aim to reach 50 per cent representation of men and women on the Board to match the 50 per cent ambition that the Group has set for women in senior roles. Reflecting these aspirations, the Board will also aim to meet the recommendations set out by the FISE Women Leaders Review, noting that these recommendations, together with the Parker Review recommendations, have now been reflected in the FCA's Listing Rules and are effective for financial years commencing on or after 1 April 2022. The Board supports the focus on improving gender diversity at the most senior level and, as highlighted on the previous page, will give this due consideration during the appointment process for Alan Dickinson's successor as Senior Independent Director. The Board does not currently apply the Policy (which is updated annually and was last updated in January 2023) to individual Board Committees, but is comfortable that the diversity of the Board is reflected across Committee memberships. The representation of women on the Board is currently 45.5 per cent (based on five directors being women and six directors being men). The Group has also set a target of 13 per cent of senior roles to be held by Black, Asian and Minority Ethnic executives by 2025. The Board will therefore aim to reflect this goal with regard to Board members. As at 31 December 2022, the Board continues to meet the recommendation of the Parker Review with two Black, Asian and Minority Ethnic Board members. As noted, the Board places high emphasis on ensuring the development of diversity in the senior management roles within the Group and supports and oversees the Group's ambition of achieving 50 per cent of senior roles held by women by 2025, and of 13 per cent of senior roles held by Black, Asian and Minority Ethnic colleagues by 2025 (including a minimum of 3 per cent of senior roles being held by Black Heritage colleagues). This is underpinned by a range of policies within the Group to help provide mentoring and development opportunities for women and Black, Asian and Minority Ethnic colleagues and to ensure unbiased career progression opportunities. Progress on this objective is monitored by the Board and built into its assessment of executive performance. As at 31 December 2022, the representation of women within the Group Executive Committee and their direct reports was 41.7 per cent in total (with 46.7 per cent for the Group Executive Committee and 41 per cent for their direct reports). The representation of women across all senior roles was 39.4 per cent, and Black, Asian and Minority Ethnic representation in senior roles was 10.2 per cent. The Group's Race Action Plan, which was launched during 2020, aims to drive cultural change, recruitment, and progression across the Group. This includes a goal to increase Black representation in senior roles from 0.6 per cent to at least 3 per cent by 2025. As at 31 December 2022, we have increased the representation of Black Heritage colleagues in senior roles to 1.4 per cent. Further details of the Race Action Plan, and the Group's further achievements in championing inclusion and diversity in its widest sense, can be found on page 34. A copy of the Policy is available on our website at www.lloydsbankinggroup.com/who-we-are/responsible-business/downloads and further information on the Board's broader approach to inclusion and diversity as part of its strategic priorities and continued investment in being a leading inclusive employer can be found on page 34. 94 Lloyds Banking Group Annual Report and Accounts 2022 # Audit Committee report ## Ensuring oversight of financial and narrative reporting and the internal control environment ![img-7.jpeg](img-7.jpeg) **Sarah Legg** Chair, Audit Committee Assessing the impact of economic volatility on the financial statements and ensuring appropriate disclosure have been key considerations during the year. ### Key activities in 2022 - Reviewing the continuous improvement in financial and regulatory reporting, and the effectiveness of the internal controls over financial reporting - Monitoring the implementation of IFRS 17 and its impact on the financial statements in relation to insurance contracts - Oversight of Climate Reporting with respect to the financial statements, as standards continue to evolve ### Q&A - **Q** How has the Audit Committee (the Committee) prioritised its agenda in view of economic volatility in 2022? - **A** As interest rates and inflation increased, particular attention was paid to areas of judgement and estimate that are sensitive to economic volatility ensuring that changing economic conditions have been reflected appropriately and in a timely manner. Disclosures were reviewed to ensure they support the understanding of the economic assumptions used. Where management judgement has been applied the reason for and impact of the judgements were examined. - **Q** How has the Committee considered developments in Climate Reporting during the year? - **A** Given the importance of this area, time was spent examining linkages between narrative reporting and the financial statements disclosures. Progress in the emerging area of controls over climate data and internal reporting capabilities were monitored. The Committee supports the commitment to continuous improvement in Climate Reporting, which will continue to be of focus in 2023 as external standards evolve. - **Q** Why is the work of the Committee important in respect of strategic delivery? - **A** The Committee provides oversight to the strategic development of the reporting environments, including longer-term improvements to processes and capabilities that underpin external reporting, key to wider stakeholder communication. The Committee benefits from the insight provided by internal and external audit, supporting rigorous review of strategic change. ### Introduction I am pleased to report on how the Committee has discharged its responsibilities during the year and I would like to thank fellow Committee members for their contributions throughout 2022. The Committee has also benefited from the participation of Ring-Fenced Bank directors, who attend the Committee as observers, bringing insight on matters relevant to the Ring-Fenced Banks. Their role forms an important part of the overall governance of the Group, along with the valuable contributions from the chairs of the audit committees of Scottish Widows and Lloyds Bank Corporate Markets. The Audit Committee works closely with other Board Committees, and in 2022 we initiated a joint Audit and Risk Committee Forum to discuss governance topics of common interest. In September 2022, following a rigorous selection process involving all members of the Audit Committee, we were pleased to welcome Laura Needham as our Chief Internal Auditor. Looking forward to 2023, along with the core responsibilities for the integrity of the financial reporting and control environment, the Committee will continue to monitor areas of continuous improvement on an end-to-end basis. Transition to IFRS 17, impacting insurance contracts, will receive continuing attention. We will engage on the government's proposals on audit reform, monitor developments with respect to climate-related disclosures, and oversee actions in relation to regulatory reports. ### Committee purpose and responsibilities The purpose of the Committee is to monitor and review the formal arrangements established by the Board in respect of the integrity of the financial reporting and narrative reporting of the Group and the Company, the independence and effectiveness of the internal and external audit functions, the effectiveness of the internal controls and the risk management framework and the adequacy and security of the arrangements for whistleblowing. This includes the statutory audit of the consolidated financial statements and the independence of the statutory external auditor. The Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board, all of which have been accepted during the year. A full list of responsibilities is detailed in the Committee's terms of reference, which can be found at www.lloydsbankinggroup.com/who-we-are/group-overview/corporate-governance. In satisfying its purpose, the Committee undertakes the functions detailed within Disclosure Guidance and Transparency Rule 7.1.3R. During the year the Committee considered a number of issues relating to the Group's financial reporting. These issues are summarised on the following pages, including discussion of the conclusions the Committee reached, and the key factors considered in reaching these conclusions. In addition, the Committee considered a number of other issues not related directly to financial reporting, including internal controls, internal audit and external audit. These issues are also discussed in detail on the final page of the report. ### Committee composition, skills, experience and operation The Committee acts independently of the executive to ensure the interests of shareholders are properly protected in relation to financial reporting and internal control. All members of the Committee are independent non-executive directors with competence in the financial sector, and their biographies can be found on pages 74 to 75. Sarah Legg is a Fellow of the Chartered Institute of Management Accountants and of the Association of Corporate Treasurers, with extensive knowledge of financial markets, treasury, risk management and international accounting standards. She is a member having recent and relevant financial experience for the purposes of the UK Corporate Governance Code, and is the Audit Committee financial expert for SEC purposes. During the course of the year, the Committee held separate sessions with the internal and external audit teams, without members of the executive management present. For details of how the Committee was run, see page 78. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 95 ## Audit Committee report continued The Committee undertook an annual review of its effectiveness, the findings of which, together with the outcomes of the Board evaluation process as relevant to the Committee (which, for 2022, was externally facilitated) were considered by the Committee at its January 2023 meeting. It was considered that the performance of the Committee continues to be effective. While the Committee's membership comprises the non-executive directors noted on **page 79**, all non-executive directors may attend meetings as agreed with the Chair of the Committee. The Group Financial Controller, Chief Internal Auditor, the external auditor, the Group Chief Executive, the Chief Financial Officer and the Chief Risk Officer also attend meetings as appropriate. Details of Committee membership and meeting attendance can be found on **page 79**. | Matters considered during 2022 | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | Jan | Feb | Apr | Jun | Jul | Oct | | **Reporting** | | | | | | | | Review of external reporting documents | ● | ● | ● | ● | ● | ● | | Significant accounting judgements | ● | ● | ● | ● | ● | ● | | Going concern assumption/viability statement | ● | ● | ● | ● | ● | ● | | Regulatory reporting | ● | ● | ● | ● | ● | ● | | Climate related reporting | ● | ● | ● | ● | ● | ● | | Activities of subsidiary audit committees | ● | ● | ● | ● | ● | ● | | IFRS 17 | ● | ● | ● | ● | ● | ● | | Audit and corporate governance reforms^{1} | ● | ● | ● | ● | ● | ● | | **Control environment** | | | | | | | | Control effectiveness (including Sarbanes-Oxley) | ● | ● | ● | ● | ● | ● | | Annual review of risk management framework and control effectiveness review summary | ● | ● | ● | ● | ● | ● | | **Group Audit** | | | | | | | | Reports from Group Internal Audit, including Speak Up (whistleblowing) | ● | ● | ● | ● | ● | ● | | **External audit** | | | | | | | | Reports from the external auditor including external audit plan | ● | ● | ● | ● | ● | ● | | Appointment, remuneration, non-audit services and effectiveness | ● | ● | ● | ● | ● | ● | | **Other** | | | | | | | | Audit Committee effectiveness review | ● | ● | ● | ● | ● | ● | | Finance strategy | ● | ● | ● | ● | ● | ● | ## Financial reporting During the year, and in relation to the year ended 31 December 2022, the Committee considered the following issues in relation to the Group's financial statements and disclosures, with input from management, the Risk division, Group Internal Audit and the external auditor. | | Key issues | Committee review and conclusion | | --- | --- | --- | | **Allowance for Impairments on Loans and Advances** 31 December 2022: £4,903 million 31 December 2021: £4,942 million | The Group's impairment provision is dependent on management's judgements on matters such as future interest rates, house prices and unemployment rates, as well as its assessment of a customer's current financial position and whether the exposure has suffered a significant increase in credit risk. | During the year, the Committee has challenged the judgements and estimates used to calculate the provision for expected credit losses (ECL). Judgemental adjustments for COVID-19 impacts have been largely released, with inflationary risks an increased focus area. The Committee has also overseen the Group's investment to deliver ECL assessment and sensitivity analysis with improved speed and accuracy, allowing for a more robust assessment of late-breaking news on the economic outlook and a reduced need for overlays. Note 19 to the financial statements includes details of the Group's ECLs allowances, including those resulting from management judgements (31 December 2022: £330 million, 31 December 2021: £1,284 million). The Committee has reviewed management's rationale for these provisions and has challenged whether the additional provisions are appropriate. **Conclusion:** The Committee was satisfied that the impairment provision and the disclosures provided in the financial statements were appropriate. | 96 Lloyds Banking Group Annual Report and Accounts 2022 Key issues Committee review and conclusion The directors are required to confirm The Committee assisted the Board in determining the appropriateness of adopting the Going Concern and whether they have a reasonable going concern basis of accounting and in performing the assessment of the viability of Viability Statement expectation that the Company and the Company and the Group. These assessments were based on the Group’s operating, the Group will be able to continue to funding and capital plans which included consideration of climate-related matters on the operate and meet their liabilities as Group’s performance and its projected funding and capital position. The Committee also they fall due for a specified period. The took into account the results of the Group’s stress testing activities (page 144), its principal viability statement must also disclose risks (page 39 to 41) and its emerging risks (page 43). the basis for the directors’ conclusions Conclusion: The Committee determined that the going concern basis of accounting and explain why the period chosen was appropriate, advised the Board that three years was a suitable period of review for is appropriate. the viability statement, and that the viability statement could be provided. The viability statement is disclosed within the directors’ report on page 44. The Group has open tax matters The Committee reviewed management’s assessment of the Group’s uncertain tax Uncertain Tax Positions which require it to make judgements positions, which took into account the views of the relevant tax authorities and any external about the most likely outcome for the advice it received. In particular, it considered the Group’s claim for group relief of losses Financial results Risk managementGovernance Financial statements Other informationStrategic report purposes of calculating its tax position. incurred in its former Irish banking subsidiary. Conclusion: The Committee was satisfied that the provisions and disclosures made in respect of uncertain tax positions were appropriate. The value of the Group’s defined The Committee reviewed the process used by management to determine appropriate Retirement Benefit benefit pension plan obligations, assumptions to calculate the Group’s defined benefit liabilities. These included the Obligations which has reduced significantly during discount rate, the future rate of inflation and expected mortality rates. the year as a result of the increase in 31 December 2022: Conclusion: The Committee was satisfied that management had used appropriate both gilt yields and corporate bond £28,965 million assumptions that reflected the Group’s most recent experience and were consistent credit spreads, is determined using with market data and other information. | 31 December 2021: | both financial and demographic | | | --- | --- | --- | | £47,130 million | assumptions. | | | | Determining the value of the VIF asset | The Committee considered updates from management and from the Group’s Insurance | Value-In-Force (VIF) and insurance liabilities requires Audit Committee summarising its activities, which included a review of the economic and Asset and Insurance management to make significant non-economic assumptions made by management to determine the Group’s VIF asset Liabilities estimates for both economic and non- and insurance liabilities. The most significant assumptions were in respect of workplace economic actuarial assumptions. pension persistency, annuitant longevity, and expenses. 31 December 2022: VIF asset: £5,419 million; Conclusion: The Committee was satisfied that the assumptions used to calculate the insurance liabilities: VIF asset and liabilities arising from insurance contracts and participating investment £106,893 million contracts were appropriate. 31 December 2021: The Committee also noted that no VIF asset is recognised under IFRS 17, which the Group VIF asset: £5,514 million; adopted on 1 January 2023, and that the derecognition of this asset formed part of the insurance liabilities: IFRS 17 transition adjustments as at that date. £123,423 million Whilst the Committee noted that there During the year, the Committee has discussed with management improvements that can Climate-Related has been a significant improvement in be made to the Group’s climate-related disclosures within its financial statements. The Financial Disclosures the Group’s climate change reporting Group has included within its 2022 disclosures: an analysis of vehicle types for the Group within the annual report and accounts, finance lease receivables and operating lease assets, the energy performance certificate it believes that further enhancements (EPC) distribution of the Group’s mortgage book, further detail on the climate-related risks will be possible as the availability of impacting the Group’s pension schemes and more detailed information on sector-specific robust data increases. lending. The disclosures were prepared in accordance with the Task-Force on Climate related Financial Disclosures (TCFD) recommendations. The Committee also discussed with management its plans for future disclosures, including the processes being put in place to ensure that the disclosures are robust, granular and specific to the Group. Conclusion: Whilst recognising that there is more to be done in future years, the Committee was satisfied with the Group’s climate-related disclosures in its financial statements for the year ended 31 December 2022. During 2022, the Group made The Committee has received regular updates on the Group’s conduct risk matters and the Conduct risk provisions of £255 million (2021: £1,300 progress it has made including updates on HBOS Reading. provisions million), including £50 million for Conclusion: The Committee has considered management’s assessment of the Group’s HBOS Reading (2021: £790 million). provision for conduct-related matters and was satisfied that the provisions were appropriate. Management judgement is used to determine the expected costs of remediation and, where appropriate, the related administration costs. • Specifically the Committee continued to closely monitor ### Other significant issues the deficiencies identified in respect of privileged and user The following matters were also considered by the Committee. access across certain business applications and associated IT infrastructure and the Group’s plans to address the control Risk management and internal control systems findings identified Full details of the internal control and risk management systems • The Committee was also updated on the programme of in relation to the financial reporting process are given within the continuous improvement across the SOX control environment, risk management section on pages 139 to 195. Specific related including placing greater emphasis on preventative controls matters that the Committee considered for the year included: operated across the business • The effectiveness of systems for internal control, financial reporting and risk management The Committee was satisfied that internal controls over financial • The extent of the work undertaken across the Group to ensure reporting were appropriately designed and operating effectively. that the control environment continued to operate effectively • The major findings of internal investigations into control weaknesses, fraud or misconduct and management’s response, along with any control deficiencies identified through the assessment of the effectiveness of the internal controls over financial reporting under the US Sarbanes-Oxley Act (SOX) 97Lloyds Banking Group Annual Report and Accounts 2022 ## Audit Committee report continued ### Risk-weighted assets (RWA) and regulatory reporting The focus on the quality of regulatory reporting continues to be high on the PRA's agenda. To date, a number of skilled person independent reviews have been commissioned across the industry to review the governance, controls and processes supporting the regulator reporting framework within firms. As part of our continued focus on strengthening our control environment in both financial and regulatory reporting, management established a Regulatory Reporting Review project in 2020. Involving first, second and third line, this programme has continued to review our regulatory reporting activities and where necessary, enhance our governance and control framework, with a link to longer-term and strategic initiatives also being considered. The Committee also commissioned an ongoing programme of external assurance on regulatory reporting with the focus of activity to date on risk-weighted assets. Management have provided regular updates to the Committee over the year to highlight progress made in improving the reporting control environment across a number of regulatory reports. ### Segmental reporting During the year the Group considered the impact of a restructure on its external segmental reporting. The Committee reviewed the analysis prepared by management which noted that the primary focus of the Group Executive Committee (GEC), which is the Group's chief operating decision maker, remains the Group's divisional performance and that this is reflected in the Group's reporting to GEC. The Committee agreed with management's conclusion that its operating segments are the three divisions and that it is appropriate for the Group to provide external disclosure on this basis. ### IFRS 17 The Committee has been updated on the Group's IFRS 17 implementation programme throughout 2022 and in prior years and held a session dedicated to IFRS 17 in October 2022. This session included a discussion of the financial impacts, which included the expected adjustment to the Group's opening equity at 1 January 2022, the effect that IFRS 17 will have on the Group's underlying profit and the one-off impact of modifying customer contracts to include drawdown benefits during 2022. The Committee also discussed the Group's control framework in relation to both the transition and the business as usual processes to be adopted in the future. ### Restoring trust in audit and corporate governance During the year the Committee has received updates on the government's response to the white paper 'Restoring trust in audit and corporate governance'. The Group broadly welcomes the proposals and the expected implementation approach, which will be through a combination of primary legislation, secondary legislation (statutory instruments) and regulation. Whilst this is likely to lead to an uncertain implementation timetable, it will allow the proposals to be fine-tuned to achieve the right outcome. The government has indicated that the primary legislation should receive Royal Assent in the first half of 2024. The Group has started to consider the actions that it will need to take as a result of the expected legislation; these plans will continue to be developed as the timelines and precise requirements evolve during 2023. ### Audit and Risk Committee Forum It was agreed between the Chairs of the Committee and the Board Risk Committee to hold during the year a joint forum. The purpose of the forum was to discuss governance topics of common interest between the Audit and Board Risk Committee. The themes reviewed were data, the strategic transformation of the Group and climate. In addition, the embedding of the Group's risk and control framework was considered. Further information on the forum is contained on page 90. ### Group Internal Audit In monitoring the activity, role and effectiveness of the internal audit function and their audit programme the Committee: - Approved the annual audit plan and budget, including resource - Reviewed progress against the plan through the year through updates including quarterly reports on the activities undertaken and six-monthly reports from the internal audit Quality Assurance team - Considered the major findings of significant internal audits, and management's response - Monitored the progress of internal audit's coverage of key risk themes across the Group, including Transition to Net Zero, Workforce of the Future, Customers in Financial Difficulty, Data Quality, Supplier Partnerships and Strategic Delivery - Monitored completion of the enhancements identified by the third party who assessed the effectiveness of the internal audit function in 2021 ### Speak Up (the Group's whistleblowing service) The Committee received and considered reports from management on the Group's whistleblowing arrangements. The Committee reviewed the reports to ensure there are arrangements in place which colleagues can use in confidence and without fear of retaliation, to report concerns about inappropriate and unacceptable practices, that these arrangements are well-publicised and that there is proportionate and independent investigation of such matters or appropriate follow-up. The Committee reported on its consideration of whistleblowing arrangements to the Board. ### Auditor independence and remuneration The Committee is responsible for establishing the Group's policies and procedures designed to protect the independence and objectivity of the external auditor. In April 2022, the Committee reviewed its non-audit services policy; no substantive changes were made to the policy. The policy details those services that the auditor is permitted to carry out and pre-approves certain of these services provided the fee is below a threshold; all other permitted services must be specifically approved in advance by the Committee. Prior to the engagement of the auditor for a permitted service, the policy requires that senior management confirms whether the Committee has pre-approved the service or specific approval is required. The total amount of fees paid to the auditor for both audit and non-audit related services in 2022 and further information on the policy is disclosed in note 12 to the financial statements. ### External auditor Following an external audit tender in 2018, Deloitte LLP (Deloitte) was appointed as auditor of the Company and the Group with effect from the 2021 financial year. Mike Lloyd is the statutory audit partner for the Group and attends all meetings of the Committee. The Committee oversees the relationship with the external auditor including its terms of engagement and remuneration and monitors its independence and objectivity. During 2022, the Committee reviewed Deloitte's audit plan, including the underlying methodology, and Deloitte's risk identification processes. In its assessment of Deloitte's performance and effectiveness, the Committee has considered Deloitte's interactions with the Committee; the responses to a questionnaire issued to the Group's businesses, Finance, Risk and Internal Audit; and the Financial Reporting Council's (FRC) Audit Quality Inspection Report published in July 2022. The Committee concluded that it was satisfied with the auditor's performance and recommended to the Board a proposal for the re-appointment of the auditor at the Company's Annual General Meeting. ### Statutory Audit Services compliance The Company and the Group confirm compliance with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, which relates to the frequency and governance of tenders for the appointment of the external auditor and the setting of a policy on the provision of non-audit services, for the year to 31 December 2022. There are no plans as at the date of this report to conduct a tender exercise for external audit services. 98 Lloyds Banking Group Annual Report and Accounts 2022 ## Board Risk Committee report Q What are the key areas of focus for the Committee in 2023? ## Effective risk management is A The Committee will continue to consider the following important areas: ## core to successful delivery of the • Ensuring that progress continues to be made on climate risk management and ESG ## Group’s strategy • Effective oversight of the Group’s strategic transformation • Continuing impacts of the rising cost of living, increasing interest rates, macroeconomic uncertainties and geopolitical risks • Ensuring effective support for customers in financial difficulty, delivery of Consumer Duty requirements and good customer outcomes • Effective management of operational resilience risks, Financial results Risk managementGovernance Financial statements Other informationStrategic report including supplier management, cyber and technology risks • Management of people risk and progress with delivery of the Group’s strategic and cultural transformation • Oversight of the continued embedding of the Group’s operational risk and control framework to deliver proactive and continuous risk management ### Introduction I am pleased to report on how the Committee has discharged ### Catherine Woods its responsibilities throughout 2022, a year in which the potential impacts of a range of external factors have been key ### Chair, Board Risk Committee considerations for the Committee. In addition, the Committee has focused on risks related to delivery of the Group’s strategy with key areas of focus including the management of change and execution risk, technology resilience, data, people and ### Challenges resulting from the rising cost cyber risks, and operational resilience of the Group’s critical ### of living and broader macroeconomic business processes and important business services. Changes ### uncertainties have been central to the implemented during 2021, to simplify how the Committee operates have continued in 2022 to help ensure an appropriate ### Committee’s considerations this year. level of focus on key areas of risk. Key activities in 2022 While the prevalence and some of the more direct impacts of the pandemic have largely subsided during 2022, the broader • Reviewed progress on the Group’s climate risk framework and impacts continue to be felt throughout the economy. Together scenario analysis capabilities with other events, such as the situation in Ukraine, these factors • Considered the ongoing effects of the pandemic, the rising cost have all contributed to matters such as supply chain issues, of living, increasing interest rates, and other macroeconomic inflation, higher interest rates and, ultimately, the increasing cost uncertainties, on both the Group and its customers of living which impacts the Group, and its customers. A core • Assessing the management of operational resilience risks, consideration has been how the Group can continue to best including cyber, supplier management and technology risks support its customers against this backdrop; these will remain • Considered the management of change and execution risks in key areas of focus for the Committee during the year ahead. the delivery of the Group’s strategy Understanding the impacts of climate risk also remains central • Overseeing management of economic crime risks to the Committee’s activities. • Reviewing management of the Group’s balance sheet including I would like to take this opportunity to welcome Scott Wheway structural hedge activity as a member of the Committee, following his appointment to the • Assessment of key emerging risks and oversight of strategic risks Board, and the Committee, in August 2022. Scott brings additional depth and breadth of experience of large-scale banking and Q&A insurance to the Committee’s considerations. ### Q How has the Board Risk Committee (the Committee) Committee purpose and responsibilities assessed the impacts of the rising cost of living, and broader The Committee assists the Board in fulfilling its risk governance macroeconomic uncertainties, on the Group’s customers? and oversight roles and responsibilities. The Committee is also responsible for ensuring the risk culture is fully embedded and A These areas, together with ensuring that the Group continues supports at all times the Group’s agreed risk appetite, including to focus on supporting its customers, have been key areas of the extent and categories of risk which the Board considers as discussion and debate for the Committee this year. In addition to acceptable for the Group to bear. A review and update of the these topics featuring within regular reports from the Chief Risk Committee’s terms of reference was completed during the year, Officer, the Committee has also considered a number of deep dives ensuring alignment with the Risk Coalition principles and broader and reports looking at the current and potential credit impacts best practice standards. across the Group’s commercial and retail customer portfolios, together with a focus on our capabilities and ability to support customers and businesses who may get into financial difficulty. The Committee is responsible for reviewing and reporting its conclusions to the Board on the Group’s risk management Q How is the Committee considering the risks associated with framework, which captures risk principles, policies, implementation of the Group’s new strategy? methodologies, systems, processes, procedures and people. A It also includes the review of new, or material, amendments to Consideration has been given to a wide range of areas where implementation of the Group’s new strategy gives rise to risk principles and policies, and overseeing any action resulting potential risks in relation to the execution of change and impact from material breaches of such policy. on different risk types. This included deep dives and updates across areas such as change and execution risk, technology More details on the Group’s wider approach to risk management resilience, data risk, people risk and cyber risk. The Committee can be found in the risk management section on pages 138 also focused on the operational resilience of the Group’s to 195. Full details of the Committee’s responsibilities are set critical business processes and important business services. out in its terms of reference, which can be found at www. Further information is set out on the following pages, within the lloydsbankinggroup.com/who-we-are/group-overview/ commentary on each risk type. corporate-governance. 99Lloyds Banking Group Annual Report and Accounts 2022 ## Board Risk Committee report continued ### Committee composition, skills, experience and operation As mentioned in my introduction, we welcomed Scott Whewley as a member of the Committee during the year, bringing the current membership up to four non-executive directors. Scott's appointment further enhances the Committee's breadth of experience, knowledge, and awareness of the importance of delivering the right outcomes for our customers. Two of the three designated independent non-executive directors of the Ring-Fenced Banks also attend meetings as observers in order to provide insights on matters relevant to the Ring-Fenced Banks when required and as part of their role in the Group's overall governance structure. The Chief Risk Officer has full access to the Committee and attends all meetings. The Chief Internal Auditor and members of the executive also attend meetings as appropriate. The Committee undertook an annual review of its effectiveness, the findings of which, together with the outcomes of the Board evaluation process as relevant to the Committee (which, for 2022, was externally facilitated), were considered by the Committee at its January 2023 meeting; it was considered that the performance of the Committee continues to be effective. Details of the Board evaluation process can be found on page 89. Details of Committee membership and meeting attendance can be found on page 79. As the most senior risk committee in the Group, the Committee interacts with other related risk committees, including the executive Group Risk Committee. These interactions help ensure the appropriate escalation of relevant matters to the Committee for review and consideration. ## Matters considered by the Committee During 2022, the Committee considered a wide range of risks facing the Group and its Ring-Fenced Banks, both current and forward looking, across all key areas of risk management, in addition to risk culture and risk appetite. Changes implemented during 2021 which enhanced the way the Committee operates have continued to support the Committee in focusing on key risk topics through, for example, the use of deep dives to provide greater analysis of particular areas. The following pages provide a summary of the risks considered by the Committee, with an outline of the material factors considered, and the conclusions which were ultimately reached. The Committee continues to be supported by the IT and Cyber Advisory Forum, which dedicates additional time and resource to reviewing and challenging risks associated with IT infrastructure, IT strategy, IT resilience and cyber risks, as highlighted on page 81 in Our focus on cyber security and risk. The Chair and other members of the Committee attend this Forum. The Board Risk Committee Chair is a member of the Audit Committee, in addition to the Audit Committee Chair being a member of the Board Risk Committee; this close interaction helps ensure that common issues of interest are addressed appropriately. During 2022, this was further enhanced through a Group-wide Audit and Risk Committee Forum being held which provided an opportunity for in-depth discussion on key areas of common interest. Further information about this Forum can be found on page 90. In addition, there is regular interaction with the Responsible Business Committee, especially on climate risk, and with the Remuneration Committee on the alignment of remuneration to risk performance. The Committee also reviewed regular updates from the non-Ring-Fenced Bank and Insurance sub-groups, headed up by Lloyds Bank Corporate Markets plc and Scottish Widows Group Limited respectively, summarising key discussions and decisions taken at the relevant entities' risk committees. During 2022, the Committee also considered deep dives on the Insurance sub-group and specifically on the recently acquired Embank business. ### Activities for the year | Risk type | Key issues | Committee review and conclusion | | --- | --- | --- | | **Conduct risk** | | | | **Customers in financial difficulty** | The Group's management of conduct risks and issues associated with customers in financial difficulty. | During 2022, the Committee noted the continued progress on supporting customers in financial difficulty. The significant transformation activities delivered in recent years have ensured sustained fair customer outcomes are being delivered, with enhanced support for the most vulnerable. For Business Banking and SME customers, the Committee recognised the substantial transformation to support businesses post-pandemic and noted ongoing investment to improve colleague capability and customer treatments. The Committee reviewed the emerging trends on conduct risk such as the heightened risks presented by the cost of living crisis. The work to proactively identify and engage customers most impacted by the crisis was recognised. The Committee gave support for a continued proactive response to support the challenges faced by customers. **Conclusion:** The Committee recognises the extensive work completed to support both retail and business customers in financial difficulty. Whilst significant improvements have been made, this will remain an area of focus for the Committee during 2023. The Committee will continue to monitor the ongoing activity to support customers and businesses as the cost of living crisis continues. | | **Rectifications and complaints** | The Group's management of customer rectifications; resolving customer complaints in a timely and fair manner, together with eradicating the causes for complaints through root cause analysis. | Throughout 2022, the Committee received updates on the Group's complaints and rectifications performance. The Committee was encouraged to see the progress being made in reducing the number of rectifications throughout the year. The Committee has also been kept informed of progress against Board risk appetite metrics for complaints, which are within appetite, and have been appraised of the rollout of the Group's new complaint management system. **Conclusion:** The Committee will continue to focus on customers awaiting remediation and the time taken to close customer complaints in 2023 along with root cause analysis and read-across activity to ensure learnings are taken on board to help minimise future events. | 100 Lloyds Banking Group Annual Report and Accounts 2022 Risk type Key issues Committee review and conclusion Implementation and The Committee has received updates on the Consumer Duty Programme throughout 2022. The Group’s Consumer Duty embedding of the FCA’s implementation plan was approved by the Responsible Business Committee in October in line with FCA new Consumer Duty rules requirements. As a critical element of Consumer Duty, it is vital that focus remains on the delivery of the across the Group. key cultural initiatives, the development of Group MI reporting and third-party requirements. Ongoing engagement and transparency with regulators will be critical. Conclusion: The Committee recognises the significance of the embedding of the Consumer Duty requirements and will monitor as appropriate the ongoing delivery and evolution through the key delivery dates of July 2023 and July 2024. Financial risk – covering credit and market risk Risks and external threats The Committee provided oversight of the Commercial Banking portfolio via regular credit quality papers, Financial results Risk managementGovernance Financial statements Other informationStrategic report Commercial credit to the commercial credit sector deep dives, and updates on climate risk and opportunities. Specific consideration is given to topics quality portfolio, including cost adopting a risk-based approach and this year there were spotlights on the Group’s financial sponsors of living related impacts, portfolio, leveraged and project finance exposures and the Commercial Real Estate sector. Discussion was together with sectors also held regarding risk-adjusted returns across the portfolio. potentially exposed to the impact of EU exit, Ukraine/ The Committee also reviewed the impact of the rising cost of living, increasing interest rates and Russia conflict and emerging risks across a range of sectors, including those considered more vulnerable to the wider climate risks. economic backdrop or structural change, those potentially exposed to the impacts of the UK’s exit from the EU, sectors impacted by supply chain impacts due to the Ukraine/Russia conflict, and those exposed to increased levels of physical and transitional climate risk. Conclusion: While recognising the risks in the portfolio, the Committee was satisfied that management were continuing to take appropriate action to mitigate and address current and horizon risks. Risks relating to Consumer The Committee reviewed the performance of the Consumer portfolio via regular credit quality updates. Consumer credit lending, including cost Consideration is given to topics adopting a risk-based approach and this year additional focus was quality of living related impacts given to legacy mortgage exposures (originated during the period 2006 to 2008), which continue to run and climate-related risks. off, as well as risk-adjusted returns across the portfolio. Enhanced monitoring is in place to provide early Areas such as Consumer warning of any adverse trends requiring further action and the Group continues to closely monitor and secured lending, buy- manage higher risk segments, such as customers with higher indebtedness levels or lower incomes, and to-let, motor, Business customers impacted by the rising cost of living and increasing interest rates. Banking, and unsecured portfolios, together with Conclusion: The Committee is satisfied that appropriate lending controls and monitoring are in place to customer indebtedness. control risks across the Consumer lending portfolios and that there is an effective framework in place for ongoing risk management. Management of the A key focus for the Group in 2022 has been the management of the balance sheet and resulting market Balance sheet Group’s balance sheet and liquidity risks through a period of significant increases in interest rates and uncertainty over future management and and structural hedging customer behaviour. An update was presented to the Committee providing an overview of deposit trends programme, given the as well as the future risks to changes in the volume and mix of deposits. The Committee discussed the structural hedge impact of uncertain risks associated with the current strategy, the governance framework supporting the decisions and the customer behaviour implications should customer behaviour not match expectations. in a rising interest rate environment. Conclusion: Proactive management and close monitoring of the associated risks continue, with a focus on the evolving macroeconomic outlook and the implications for customer behaviour. The Committee was satisfied that management was taking the appropriate actions to monitor and mitigate the risks, while recognising that this will remain a key priority in 2023. Model risk continues to The Committee received further updates on progress to satisfy new prudential modelling requirements Model risk be an area of significant relating to credit risk capital models (primarily the new Capital Requirements Directive (CRD) IV activity and importance, regulations) and market risk models within IBOR transition activities, in addition to the model risk both internally and management and governance approach. This included amendments being proposed following both firm externally. specific and industry-wide regulatory feedback. The Group continues to increase resources available and to enhance model risk management and governance to meet increasing internal and external demands. The Committee was also kept abreast of model risk management activity relating to advanced analytics (such as machine learning/artificial intelligence) models and associated aspects such as data ethics, and climate, as the Group continues to develop its capability in these areas. Conclusion: Communication with the PRA, to ensure that CRDIV and IBOR prudential change related submissions fulfil their requirements, continues. In terms of performance, the models continue to function adequately within the ongoing uncertain economic environment. Monitoring will continue as the economy recovers. The Committee is comfortable that the development of new model types is subject to appropriate risk control. Climate risk Climate change, Climate risk remains a key issue for the Group, with regular updates provided to the Committee on the Climate risk sustainability, and the Group’s progress to develop climate risk capabilities. This activity supports oversight of how the Group potential impact to the is meeting external expectations, including those from the PRA on managing the financial risks from Group and its customers, climate change. including those from the transition to net zero and The Committee continues to ensure that climate risk management capabilities are developing at pace, the Group’s strategic including the quantification and measurement of climate risk, and ensuring an appropriate risk appetite response. is established. In 2022, the Committee discussed the approach to developing climate scenario analysis capabilities, informed by activity from the Bank of England’s Climate Biennial Exploratory Scenario (CBES) including the second round of the exercise conducted earlier in 2022. The Committee has also been updated on the Group’s net zero strategy, supported by engagement through other committees (such as the Responsible Business Committee) to ensure appropriate oversight of the Group’s net zero ambitions. The Committee provided input on discussions regarding strategic participation choices, as well as considering potential greenwashing risks. Conclusion: The Committee has been satisfied with the progress made in climate risk management during 2022, with the expectation to expand focus in 2023 towards broader ESG themes. The Committee will continue to closely monitor climate-related risks, including the delivery of climate-related commitments, data requirements, and development of further Board risk appetite metrics. 101Lloyds Banking Group Annual Report and Accounts 2022 ### Board Risk Committee ### report continued Activities for the year continued Risk type Key issues Committee review and conclusion Operational risk The embedding of One The Group delivered on its One RCSA implementation plan by the end of 2021. Management’s focus for One RCSA Risk and Control Self- 2022 moved to embedding One RCSA and ensuring that a complete and accurate view of the Group’s risk implementation Assessment (One RCSA) and control environment is maintained through a culture of proactive and continuous risk management. as part of the Group’s The Committee has been provided with regular progress updates, including a deep dive that provided risk and control strategy practical insights from business units on One RCSA embedding and the business value that has been to deliver a stronger risk realised. culture and simplified risk and control environment. One RCSA also lays the foundations for broader review of the Group’s risk management framework, to reflect the Group’s new change model and ensure that risk management activities are actively driving safe delivery of the Group’s strategy. Management will progress this activity in 2023. In 2022, the Committee also noted good progress in designing and implementing an end-to-end accountability model that aligns to revised Group structure and strategic ambitions. Conclusion: In line with expectations, the Group is on track to embed One RCSA by the end of 2023. The Committee will continue to monitor progress alongside the implementation of end-to-end accountability and the strengthening of the control environment. Whilst it is currently fit for purpose, the Committee is supportive of the broader review of the risk management framework and will review the proposals in 2023. Operational resilience is During 2022, the Committee received reports on the Group’s identification of important business services Operational one of the Group’s most and associated impact tolerances in response to Regulatory Policy Statements on Operational Resilience resilience important non-financial published in March 2021. The Committee reviewed two Group-wide self-assessments covering progress risks. Enhancements on the enhancements needed to ensure the Group’s important business services can be recovered within (IT resilience, continue to be made to impact tolerance by March 2025. Updates have also been presented on investment and associated risk cyber, supply the Group’s resilience to impacts. In addition, the Committee reviewed a deep dive on the risks related to the Group’s payments chain/supplier better serve customers business. and to address regulatory management) priorities. All security and cloud risks have been appropriately covered. Given the significance of the risk to the Group, the Committee is supported by the IT and Cyber Advisory Forum specifically focused on IT and cyber risks. Conclusion: The Committee remains focused on the operational resilience of the Group’s critical business processes and important business services and has drawn valuable insight from the discussions this year. The Committee considers that governance of operational resilience risk is robust and supports the Group in meeting new regulatory requirements, and that activities in plan (such as migration to cloud) will enhance the ongoing resilience of key services to the Group’s customers. Legacy challenges in Data risk continues to be an area of significant regulatory and media attention. Quarterly updates have Data risk the Group’s data control been provided to the Committee on the development and mobilisation of the data strategy in response environment to enable to legacy data risk challenges. Committee members have been supportive of the plans, encouraging strategic objectives. consideration of capability and cultural factors which might inhibit progress. It has been recognised that activity must be prioritised against a broad transformation agenda. The Committee will continue to be updated on any trade-offs or delays via regular reporting. Conclusion: The Committee is supportive of the data strategy and approach, recognising the complex roadmap of initiatives planned over a number of years. Delivery of the strategy is critical, given data is a key enabler for the overall Group strategy. Ensuring the Group is able People risk remains a key risk and progress is required to deliver the Group’s strategic and cultural People risk to attract and retain the transformation over the next three years via Strategic Workforce Planning. Internal pressures coupled with right skills and capabilities a difficult external economic environment have been key considerations and the monitoring of colleague with a continued focus on sentiment and wellbeing around these continues. The Committee considered a deep dive into the people colleague wellbeing and risk profile where cost of living pressures, colleague attrition and the risk of upward reward pressure were sentiment as the Group’s deemed most material. strategic and cultural transformation evolves. Conclusion: The Committee supports the actions being taken to manage people risk and the challenges faced in the current landscape. Given its continuing importance, people risk will remain a key area of focus for 2023. Risks associated with the In view of the scale of change, the Committee discussed a deep dive on change and execution risk in Change and extensive current and 2022, which focused on activities already undertaken and how horizon risks are being managed. The execution risk future Group strategic Committee also considers change and execution risk within other linked risk types, such as operational change agenda, resilience and supplier risks, and when investment activities are discussed. The focus for 2022 has centred (strategic recognising challenges on establishing the change delivery mechanism to support the Group’s strategic growth ambitions, transformation faced in ensuring both bringing a closer relationship between investment funding, business unit change delivery and technology. oversight) successful delivery and Monitoring the safe delivery of the existing portfolio of change activity has been critical and, along with embedding of change. the continued enhancement of change risks and controls, will remain important through 2023. In addition, 2022 has seen significant focus on change capability to support the Group’s business and technology transformation plans. The IT and Cyber Advisory Forum and the Committee have maintained close evaluation of the Group’s strategic transformation, with dedicated deep dives on data, cyber and resilience, alongside a full review of how the Board will maintain ongoing effective oversight of the strategic change portfolio. Conclusion: The Committee will continue its focus on the management of change and execution risk within appetite and on monitoring progress with enhancement of the change delivery approach, the execution risk metrics, and the maturity of the new platform-based operating model to support technology and strategic change activities. 102 Lloyds Banking Group Annual Report and Accounts 2022 Risk type Key issues Committee review and conclusion The Group’s management The Committee acknowledged progress made on introducing targeted friction into the payments system, Fraud of fraud risk, while the direction of travel was supported, and it was noted that customer feedback around increased friction continuing to minimise has generally been positive. the impact to genuine customer journeys. A key Committee members supported lobbying around the scope of the Online Safety Bill, and would welcome focus is on cross-industry more activity in this area, including the funding of deterrents and working with the industry on detection engagement to prevent and prevention to minimise risk. Recent discussions have been held with the Payment Services Regulator and disrupt fraud. (PSR) around a consultation on Authorised Push Payment (APP) fraud reimbursement. Conclusion: The Committee acknowledged that fraud risk continues to be a challenging area and supported management on what has been achieved to date. The Committee also supported the next steps in championing the Fraud Lobbying Strategy messages as part of the Group’s routine and regular external engagement activity. Financial results Risk managementGovernance Financial statements Other informationStrategic report The Group’s management The Committee acknowledged the Group’s continued efforts to fight financial crime as set out in the Money laundering of financial crime risks and Money Laundering Reporting Officer’s (MLRO) Report. Committee members sought views on actions and financial compliance with the UK’s being taken in response to the FCA’s communications on cash-based money laundering through Post anti-money laundering Office counters. The MLRO confirmed that actions had been taken to limit cash deposits for both personal crime regime. and business customers with minimal negative impact for customers. The Group has also held regular engagements with the FCA on Ongoing Know Your Customer remediation and sanctions. Two financial crime deep dive papers were submitted to the Committee during 2022. Key focus areas were people risk, diversity of thought, information sharing and lobbying. In conjunction with the lobbying efforts, the Group continues to engage meaningfully with the UK Government on addressing economic crime and particularly the Home Office’s Economic Crime Plan 2.0. Conclusion: The Committee supported the overall direction of travel, in particular the strategic approach being taken, and encouraged further focus on progressing information sharing. Additionally, the Committee expressed an appreciation for the work undertaken by the Sanctions Team in response to the Russia and Ukraine conflict. Other categories Managing regulatory The Committee has provided effective oversight and ensured effective controls are in place to comply Regulatory and and litigation risk is a key with existing regulatory obligations, including consideration of these at an individual legal entity level. legal risk focus within the Group, The Committee considered regular updates on emerging regulatory and legal risks such as customer with a significant amount treatment (customers in financial difficulty, Consumer Duty, and access to cash). In addition, the of highly complex and Committee has continued to closely monitor a number of significant regulatory change and oversight interdependent regulatory programmes, such as operational resilience; resolvability; risk-free rates transition; and CRD IV regulations. interactions managed during 2022, which will Conclusion: The Group places significant focus on complex regulatory changes and litigation risk, as continue to require well as ensuring effective horizon scanning of upcoming trends and evolving risks. The Committee has management into 2023. discussed the topics raised, and will continue to closely monitor compliance with regulatory requirements in 2023. Reviewing the Group’s The Committee reviewed the Group’s emerging risk landscape and plans to evolve its approach Emerging and emerging risk landscape, for assessing emerging risks. Progress made during 2022 has enhanced the analysis of the Group’s strategic risk evolving the assessment emerging risk profiles, which has enabled the assessment of emerging risks to be refined. The Committee of strategic risk and is supportive of the updated approach and approved the revised emerging risk themes. Separately, embedding the Group’s following the launch of the new Group strategy, a review of strategic risk was undertaken, which confirmed strategic risk framework that the current strategic risk themes remain appropriate. The Committee has noted the progress made into business planning. in 2022 towards further embedding strategic risk into the Group’s planning processes and local risk management, with the strategic risk framework fully integrated into the Group’s annual financial planning cycle. Conclusion: Understanding the emerging risk landscape and the Group’s preparedness, along with the impact of risks which may arise from the Group’s strategic choices, is a key activity. In 2023, the Committee will review key emerging risks and oversee the Group’s assessment of strategic risks, considering their potential impacts and mitigating actions. 103Lloyds Banking Group Annual Report and Accounts 2022 # Responsible Business Committee report ## Responsible business is at the core of our purpose of Helping Britain Prosper ![img-8.jpeg](img-8.jpeg) Amanda Mackenzie Chair, Responsible Business Committee There is much to be done, but the strong foundations which have now been laid will shape how we do business and create a more sustainable and inclusive future. # Key activities in 2022 - Purpose and values - Environmental sustainability oversight - Nature and biodiversity - Workforce engagement and culture - Inclusion and diversity # Q&A 1 What role does the Committee play in support of the Group's purpose? 2 The Committee is deeply involved in setting out our ambition to become a truly purpose-driven organisation. We discussed which areas we should pursue to drive the most positive impact for society and how to start embedding purpose into everything we do. We recognise that this will be a multi-year journey, but I was pleased to see the progress that has already been made. 3 What are the key areas of focus for the Committee in 2023? 4 The Committee will focus on reviewing and seeing the proof that we are embedding our purpose, our culture and our Consumer Duty plan. Creating further progress on our inclusion and diversity aspirations and developing our biodiversity expertise and plans alongside our net zero targets will also be priorities. Recognising the vital role our colleagues play, we will continue to spend time listening to their feedback and input to drive culture change. # Introduction I am pleased to report how the Committee has discharged its responsibilities in 2022, my first full year as Chair. During the year, in addition to the matters within the Committee's scope as set out in this report, we spent time considering our role and reshaping the focus and agenda to ensure it fits the needs of a purpose-driven organisation. In 2022, the Committee became the designated body to fulfil the Board's responsibility for review and approval of the Consumer Duty implementation plan and oversight thereafter. I was also appointed Board champion for the Group and the Ring-Fenced Bank boards to facilitate the oversight of Consumer Duty. Reflecting our evolving role, our areas of focus in 2023 will be further embedding purpose, social and environmental matters, culture, workforce engagement and duty to customers and stakeholders. # Committee purpose and responsibilities The purpose of the Committee is to support the Board in overseeing the Company's policies, performance and priorities as a responsible business. The Committee's terms of reference can be found at www.lloydsbankinggroup.com/who-we-are/group-overview/corporate-governance. # Purpose and values The Committee reviewed the progress we have made so far on our journey to become a more purpose-driven organisation. We laid strong foundations to support our purpose and vision in 2022, and identified key focus areas which support our purpose and where we can deliver the most material positive impact. Aligned to this, the Committee oversaw the creation and evolution of the values for colleagues, guiding them on how to work together as well as how to make decisions. In our 2022 Colleague Survey, 92% of colleagues felt that delivering on our purpose will help us grow the business profitably, and 79% could see how we are becoming a more purpose-driven organisation. In 2023, we expect to see further significant progress. # Environmental sustainability oversight The Committee provided oversight and approval of the Group's external reporting and reflected on the environmental sustainability progress and priorities. Assurance was sought that targets were ambitious, aligned to our strategy and the impact on the business was understood. # Nature and biodiversity The Committee received updates on nature and biodiversity and supported proposals to prioritise efforts by sector, noting the challenges and opportunities. We ensured that a collaborative and joint learning approach was taken, building credibility through partnerships with experts such as The Soil Association. # Workforce engagement and culture The Committee is the designated body to fulfil the Board's workforce engagement obligations and receives quarterly updates on engagement activity and culture, reporting to the Board on key themes and issues. Members were supportive of the culture change framework with discussion focusing on the proposals for future colleague listening and the Board's involvement, supporting the proposal for more frequent but shorter pulse surveys. Please refer to page 82 for more details on how the Board engages with the Group's workforce. # Inclusion and diversity The Committee received regular updates on our public commitments and the strategy. We were pleased to see that progress continued to be made in increasing the representation of women and Black, Asian and Minority Ethnic colleagues in senior roles. We asked the executive to continue the focus on achieving our commitments as we build an inclusive organisation. # Committee composition, skills, experience and operation The Committee, which met on four occasions in 2022, is composed of independent non-executive directors and is attended by the Group Chief Executive. It benefits from a broad range of perspectives, insight and experience, with representatives from Group Internal Audit and the Chief Operating Officer attending meetings as appropriate. Details of Committee membership and meeting attendance can be found on page 79. The findings of the externally facilitated annual review of effectiveness were considered by the Committee at its January 2023 meeting. Based on the evaluation, the feedback was that the performance of the Committee continues to be effective. 104 Lloyds Banking Group Annual Report and Accounts 2022 Dear shareholder ## Directors’ remuneration On behalf of the Board, I am pleased to present the Directors’ ## report remuneration report for the year ended 31 December 2022. ## Remuneration Committee 2022 has been yet another extraordinarily challenging year as customers and colleagues came through COVID-19 to face ## Chair’s statement rapidly rising inflation and material increases in household costs brought on by the Ukraine war. As a result, just as our colleagues have put tremendous effort into supporting our customers, the Remuneration Committee (“Committee”) has carefully considered how best to support our colleagues, recognising that our lowest paid colleagues were the most adversely affected. The Group was one of the first large UK companies to make Financial results Risk managementGovernance Financial statements Other informationStrategic report 1 a £1,000 payment to all 63,000 colleagues in August 2022 to help with living costs. We also made information and resources available through our Healthy Finances Hub and Employee Assistance Programme to enable colleagues to support themselves and we worked closely with our recognised unions Accord and Unite to rapidly agree the 2023 pay deal, to bring certainty and support to those that needed it most. This provides pay increases of between 8 per cent and 13 per cent for around 43,000 colleagues, although the overall increase to our total pay costs was materially lower at 6.3 per cent, as spend was directed to our lowest paid colleagues. ### Alan Dickinson ### 2022 variable reward outcomes ### Chair, Remuneration Committee As a result of the Group’s strong performance in 2022, the Committee has approved a Group Performance Share (“GPS”) pool of £446 million, to reward colleagues for their commitment and contribution in another challenging year. This is a 12 per cent ### We have supported our people during the increase on the pool for 2021, reflecting also a lower collective ### Cost of Living challenges, as we did during adjustment. ### the COVID-19 pandemic. We moved quickly In determining the vesting outcome of the 2020 Executive Group | to provide a £1,000 payment to all 63,000 | | Ownership Share (“EGOS”), the Committee carefully considered | | --- | --- | --- | | | 1 | alignment with shareholder experience and whether adjustments | | colleagues | to assist with living costs in the | | were required for windfall gains. Despite targets being set before ### summer last year and also worked with our the onset of COVID-19, the Committee has not applied upward ### recognised trade unions, Accord and Unite, discretion and concluded a vesting outcome of 43.7 per cent, which reflects improvements in economic profit during the ### to rapidly agree a pay deal for 2023, to bring vesting period and strong progress against customer measures. ### certainty and support to those that needed 40 per cent of the award was weighted to Shareholder Return, ### it most. which has not vested due to share price impacts during the performance period. Awards were granted at 49.4296 pence, before the Group’s share price fell due to the onset of COVID-19 Supporting our colleagues (to an average of 31.2 pence over the remainder of 2020) and the Committee concluded that an adjustment for windfall gains was • Cost of living payment of £1,000 in August 2022 to all 63,000 therefore not required. 1 colleagues , at a value of £67 million • 2023 pay increases of between 8 per cent and 13 per cent for Customers remain central to our core values and our c.43,000 colleagues; overall increase to total pay costs lower at remuneration policies and practices support the principle of 6.3 per cent good customer outcomes, with customer measures embedded • £2,000 minimum pay award and an additional £500 cash within incentive arrangements. This is an area that we will payment for lowest paid colleagues in December continue to review and evolve in light of expectations under the • Pay increases capped at £5,000, to direct spend to those that new Consumer Duty rules and guidance. need it most ### Executive directors remuneration outcomes • No 2023 annual pay award for executive directors or members of The Board considers that Charlie Nunn has made a strong start the Group Executive Committee in his first full year as Group Chief Executive (GCE), establishing a new growth strategy, leadership team and priorities to transform the Group’s culture for long term sustainable success. He has Remuneration content overseen robust financial performance and achievement of broader Group balanced scorecard targets whilst maintaining Chair’s statement pages 105–106 a strong regulatory and risk environment. Likewise William Chalmers, Group Chief Financial Officer (CFO), has played a Remuneration at a glance page 108 critical role in the development and implementation of the 2022 annual report on remuneration pages 109–124 new strategy, as well as embedding and delivering a strong commercial and investment discipline across the Group. 2023 Directors’ Remuneration Policy pages 125–133 The Committee therefore determined that GPS (annual bonus) awards for the GCE and CFO should be in line with the Group’s performance as assessed by the Group’s balanced scorecard as outlined on page 110, with resultant awards of £1,337,821 and £688,733 respectively. The Committee has determined to grant 2023 Long Term Share Plan (LTSP) awards of 150 per cent of salary to the GCE and the CFO to reflect the Group’s performance in 2022 and other factors 1 Pro rated for reduced hours and excluded Senior Management. taken into account in the ‘pre-grant test’ as outlined on page 121. 105Lloyds Banking Group Annual Report and Accounts 2022 ## Directors' remuneration report continued The normal range for LTSP awards for executive directors is 125 to 150 per cent of salary. In addition to recognition of the Group's strong performance in 2022, the level of award for the GCE acknowledges that prior to joining Charlie Nunn agreed to voluntarily reduce the maximum opportunity from 200 per cent of salary under the approved Directors' Remuneration Policy to 150 per cent. Recognising the desire to focus on the remuneration of lower paid colleagues in this exceptional period, no annual pay award is proposed for executive directors or members of the Group Executive Committee. As reported with our results for the half year to June 2022, the Committee conducted a detailed review to determine whether further performance adjustments were required in the light of substantial provisions recognised in the accounts for the year to December 2021 for compensation to customers of HBoS Reading. These provisions resulted from the shortcomings identified by Sir Ross Cranston in the original review undertaken by Professor Griggs. The Committee carefully considered Sir Ross Cranston's findings and the previous actions taken, including: - voluntary decisions by the former GCE and the former COO to withdraw from participation in the 2019 GPS awards following the publication of the Cranston review; - downwards adjustment made to the 2021 GPS pool (£83 million) partly as a result of the significant provisions taken in 2021; and - individual adjustments already made to GPS awards for current and former Executives Having assessed all the evidence available, the Committee concluded that an adjustment of 20 per cent of the GPS awards granted during the full period of the Griggs review (impacting awards for 2017, 2018 and 2019) was appropriate for the former Group Chief Executive and former Group Chief Operating Officer. The levels of GPS forfeited in 2019 exceeded this amount and therefore further adjustments were not required. The Committee also concluded that no further adjustment was required for the former CFO who had limited direct involvement in the Griggs customer review. ## Directors' Remuneration Policy Our current Policy, approved at the 2020 annual general meeting (AGM), falls due for review this year and, as a result, the Committee has undertaken a comprehensive study over several months to consider whether any changes should be recommended to shareholders. The 2020 Policy included the implementation of a restricted share plan (the LTSP) to reflect the Group's strategy at the time and our stable long-term business model. Following the appointment of Charlie Nunn as our GCE, the Group launched its new strategy in February 2022, building on our strong foundations and our purpose of Helping Britain Prosper. As part of our strategy, we look to deepen relationships with our customers and meet more of their financial needs. This is setting the Group on a higher growth trajectory while we retain our strong focus on cost and capital discipline. In light of the revised strategy the Committee has conducted a thorough review of the Policy to ensure it supports the Group's strategic priorities and the interests of our shareholders. The Committee has considered the need to remain competitive to attract and retain key talent to deliver the strategy and reflect developments in market practice. The Committee has concluded that returning to a performance based long term incentive plan ("LTIP") would deliver stronger alignment with our strategic objectives by supporting a more demanding performance culture and providing the opportunity to directly link vesting outcomes to delivery of the strategy and the realisation of its benefits for shareholders. This is consistent with incentive arrangements for the majority of our peer banks. We consulted on proposals with a broad range of shareholders and other key stakeholders, who expressed initial support for alignment between business strategy, performance and executive remuneration outcomes. Awards will be weighted not less than 50 per cent to financial measures, with 35 per cent anticipated for strategic measures and 15 per cent to environmental measures, reflecting that the transition to a low carbon economy is at the core of our strategy and aligns with our purpose to Help Britain Prosper. It is intended that the financial measures will be Return on Tangible Equity, Relative Total Shareholder Return and Capital Generation. Targets will be set for environmental measures, reflecting the path towards our published 2030 goals (https://www.lloydsbankinggroup.com/investors/esg-information.html). The assessment of performance against strategic measures will be informed by the consideration of quantifiable Board metrics aligned to each of our four strategic growth pillars: **Deepen and innovate in Consumer** – deepen relationships and innovate intermediary positions, including growing credit card spend market share, increasing green mortgage lending and increasing assets under administration **Create a new mass affluent offering** – expand in the growing mass affluent market including increasing the number of mass affluent banking customers, banking balances and net inflows into investment propositions **Digitise and diversify our SME business** – meet more client needs with a digital-first model including increasing the number of products originated and fulfilled digitally, income growth in mid-sized SME transaction banking and grow new merchant services clients **Target our Corporate and Institutional offering** – strengthen a core business with focus on UK-linked clients, including increasing sustainable financing, growing operating income and risk weighted assets Target vesting outcomes will remain at 150 per cent of salary, in line with the current target levels for the LTSP and the previous EGOS incentive in place until 2020. The maximum proposed LTIP award will be 300 per cent of salary, lower than the 400 per cent maximum under the EGOS incentive. Whilst a performance based long term incentive will provide opportunity to reward outperformance, underperformance will lead to lower outcomes than provided under the current restricted share plan ("LTSP"), where vesting is subject to performance underpins rather than stretching performance targets. The Committee will also have the discretion to adjust the outcome for risk and conduct factors. The first LTIP awards will be granted in 2024, subject to shareholder approval of the Policy at the 2023 AGM, aligning with the horizon of our 2024 to 2026 strategic goals and the final LTSP award in 2023 based on performance in 2022. The Committee also reviewed the remuneration opportunities for executive directors to ensure they remain reflective of contribution and aligned to market. Total target compensation for William Chalmers at £2.9 million is lower than peers and between lower quartile and median when compared to FTSE30 companies. Recognising William's more than three years' experience with the Group and his business responsibilities in addition to his CFO role, the Committee propose to increase the CFO's GPS (annual bonus) maximum opportunity to 140 per cent of salary, aligned with the GCE, bringing total target compensation to £3.2 million. Whilst the fixed pay elements of the CFO's package remain lower than peers, the Committee considered an increase to bonus opportunity to be more appropriate at this time, reflecting the desired performance culture across the Group, ensuring increases in compensation reflect delivery for shareholders. Together with my Committee members I look forward to hearing your views on the remuneration arrangements outlined in the report and we hope the new Policy will receive your support at the upcoming AGM. On behalf of the Board **Alan Dickinson** Chair, Remuneration Committee 106 Lloyds Banking Group Annual Report and Accounts 2022 ## Revised Policy overview The below table sets out the revised Directors’ Remuneration Policy which will be put forward to shareholders at the 2023 AGM. The full policy can be found on pages 125 to 133. Long Base Fixed Share Short Term Total Pension Benefits Term ## Salary + + + + + = Award Variable Reward Variable Financial results Risk managementGovernance Financial statements Other informationStrategic report Current Policy Proposed changes in Policy and why • Reflective of individual role, taking account No Change of responsibilities, experience and pay in the wider Group • Base salaries are typically reviewed annually Base Salary with any increases normally taking effect from 1 April for executive directors • Ensures that total fixed remuneration is No Change commensurate with role • Maximum award is 100 per cent of base salary • Delivered in shares Fixed Share • Three year delivery with 33 per cent being Award released each year • Provides cost effective and market competitive No Change retirement benefits • Maximum allowance for executive directors is 15 per cent of base salary, aligned with that Pension available to the majority of the workforce • Flexible benefit allowance of 4 per cent of base No Change salary • Other benefits include medical insurance, car allowance and transportation Benefits Fixed | Group Performance Share (GPS) | | What: | | | --- | --- | --- | --- | | • Maximum opportunity of 140 per cent of salary | | • Maximum opportunity of 140 per cent of salary | | | | for GCE and 100 per cent of salary for other | | for executive directors | | | executive directors, with normal target level at | Why: | | Short Term 50 per cent of maximum opportunity Total target compensation for the CFO is behind Variable | • Performance adjustment including malus and | | peers and between lower quartile and median | | --- | --- | --- | | | clawback provisions apply | when compared to FTSE30 companies. Given the | | • No award can be made if threshold | | significant value the CFO delivers for the Group, | | | performance is not met by the Group or the | the Committee propose to increase the CFO’s GPS | | | individual | maximum opportunity to 140 per cent of salary, | aligned with the GCE. Long Term Share Plan (LTSP) What: • Restricted share plan with an opportunity of 150 • From 2024, awards will be granted under the per cent of base salary for the GCE and 200 per rules of the 2023 LTIP, subject to shareholder cent of base salary for other executive directors approval at the AGM in May 2023 Long Term • Vesting subject to an assessment of underpin • Awards will be granted in the form of conditional Variable | thresholds being maintained, measured over a | | rights to shares in the Group | | --- | --- | --- | | period of three years, or such longer period, as | • The maximum LTIP opportunity is 300 per cent of | | | determined by the Committee | | base salary for all executive directors | • A minimum of 50 per cent of the award being dependent on financial measures Why: The proposed structure provides greater alignment to delivery of the revised strategic aims of the Group. Variable The Group’s approach to shareholding requirements The Group currently operates a shareholding policy which includes a post-employment shareholding requirement, please see page 116 for further details. 107Lloyds Banking Group Annual Report and Accounts 2022 Directors' remuneration report continued ## 2022 Remuneration at a glance ### Our remuneration package The below summarises the different remuneration elements for executive directors. #### Base Salary To support the recruitment and retention of executive directors of the calibre required to develop and deliver the Group's strategic priorities. Base salary reflects the role of the individual, taking account of market competitiveness, responsibilities and experience, and pay in the Group as a whole. #### Fixed Share Award To ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package for executive directors with an appropriate balance of fixed and variable remuneration, in line with regulatory requirements. #### Pension To provide cost effective and market competitive retirement benefits, supporting executive director's in building long-term retirement savings. Executive director's employer pension contributions are aligned with those available to the majority of the workforce. #### Benefits To provide flexible benefits as part of a competitive remuneration package. #### Group Performance Share (Annual Bonus) To incentivise and reward the achievement of the Group's annual financial and strategic targets whilst supporting the delivery of long term superior and sustainable returns. #### Long Term Share Plan Long term variable reward opportunity to align executive management incentives and behaviours to the Group's objectives of delivering long term superior and sustainable returns. The Long Term Share Plan will incentivise stewardship over a long time horizon and promote good governance through a simple alignment with the interest of shareholders. ### 2022 Total remuneration (£000) #### Group Chief Executive – Charlie Nunn ![img-9.jpeg](img-9.jpeg) 1 Total remuneration is from 16 August to 31 December 2021. #### Chief Financial Officer – William Chalmers ![img-10.jpeg](img-10.jpeg) ![img-11.jpeg](img-11.jpeg) #### Group Chief Executive The single total remuneration for the Group Chief Executive during 2022 was £3.8 million. This is a decrease of 32 per cent compared to 2021 which included a buy-out award of £4.2 million. #### Chief Financial Officer The single total remuneration for the Chief Financial Officer during 2022 was £3.1 million. This is an increase of 34 per cent, and includes the first vesting EGOS (£948,000). ### 2022 Group balanced scorecard performance **84.1%** Our Group balanced scorecard reflects a strong business performance. Further details can be found on **page 110**. ### 2022 Group Performance Share (GPS) Pool **£446m** The Committee determined a GPS pool for 2022 of £446 million, reflecting the Group's strong financial and overall business performance. ### Long Term Share Plan (LTSF) 2023 Award 2023 Long Term Share Plan awards of 150 per cent of salary will be made to the Group Chief Executive and the Chief Financial Officer to reflect the Group's performance in 2022 and other factors taken into account in the 'pre-grant test'. The Remuneration Committee considered the awards to be appropriate, reflecting Group and individual contribution in 2022 (**see page 121**). ### 2020 Executive Group Ownership Share Total vesting **43.7%** The vesting outcome for the 2020 Executive Group Ownership Share was 43.7 per cent. 108 Lloyds Banking Group Annual Report and Accounts 2022 ## 2022 annual report on remuneration ### Executive director single total figure of remuneration (audited) Charlie Nunn William Chalmers Totals £000 2022 2021 2022 2021 2022 2021 Base salary 1,133 426 817 901 1,950 1,327 1 | Fixed Share Award | | 1,050 | 402 | 504 | 569 | 1,554 | 971 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Benefits 76 | | | 51 | 62 | 46 | 138 | 97 | | | Pension | | 170 | 64 | 123 | 122 | 293 | 186 | | | Total Fixed Pay 2,429 | | | 943 | 1,506 | 1,638 | 3,935 | 2,581 | | | | 2 | 1,338 | 349 | 689 | 705 | 2,027 | 1,054 | | | Group Performance Share | | | | | | | | Financial results Risk managementGovernance Financial statements Other informationStrategic report | 3 Long-term incentive – – 948 – 948 – Total Variable Pay 1,338 349 1,637 705 2,975 1,054 4 Other remuneration – – 1 – 1 – 5 Buy out – 4,231 – – – 4,231 Total remuneration 3,767 5,523 3,144 2,343 6,911 7,866 Less: Performance adjustment – – – – – – Total remuneration less buy-outs and performance adjustment 3,767 1,292 3,144 2,343 6,911 3,635 1 The fixed share award is part of fixed remuneration and is not subject to any performance conditions see page 126. 2 Awards for Charlie Nunn and William Chalmers will be made in March 2023 in a combination of cash and shares. 3 The 2020 Group Ownership Share (GOS) vesting (see page 112) at 43.7 per cent was confirmed by the Remuneration Committee at its meeting on 16 February 2023. The total number of shares vesting will be 2,153,182 for William Chalmers. The average share price between 1 October 2022 and 31 December 2022 44.04 pence has been used to indicate the value. The shares were awarded in 2020 based on a share price of 49.4296 pence and as such no part of the reported value is attributable to share price appreciation. 4 Other remuneration payments comprise income from all employee share plans, which arises through employer matching or discounting of employee purchases. 5 Charlie Nunn joined the Group on 16 August 2021 as Group Chief Executive and executive director. He was granted deferred share awards to replace, like for like, unvested share and cash awards from his previous employer, HSBC, forfeited as a result of joining the Group and lost opportunity bonus for 2020. ### 2022 pension and benefits (audited) | | Charlie | William | | --- | --- | --- | | | Nunn | Chalmers | | Pension/Benefits | 2022 2022 | | Pension 170,016 122,538 Car or car allowance – 12,000 1 45,000 48,026 Flexible benefits payments Private medical insurance 1,130 1,130 2 Legal Fee 29,455 – 3 Transportation 483 399 Subtotal for Total Benefits less pension 76,068 61,555 1 Includes flexible benefits allowance and holidays sold through the Group’s flexible benefits plan. 2 This relates to the tax costs in respect of the legal fees paid in 2021, which were disclosed in the 2021 annual report. 3 Transportation benefits relate to the 2021/22 tax year. ### Defined benefits pension arrangements (audited) There are no executive directors with defined benefit pension entitlements. 109Lloyds Banking Group Annual Report and Accounts 2022 For 2022, ESG metrics aligned to our public commitments on ### Directors’ remuneration report continued climate change and promoting inclusion and diversity accounted for 17.5 per cent of the scorecard. ## Our 2022 balanced As set out in the scorecard assessment table below strong performance against the financial, customer and ESG measures ## scorecard have resulted in an overall outcome of 84.1 per cent. The Committee determined that the scorecard outcome reflected Group performance and appropriately rewards the executive Our simplified balanced scorecard provides transparency on how directors for their performance within the context of overall our performance directly aligns with remuneration outcomes for stakeholder experience. 2022 GPS and 2023 LTSP awards. Our 2022 balanced scorecard Performance Range Weighted Block Measure Weighting 25% 50% 75% 100% Actual Outcome outcome Profit after tax 20% £3,765m £4,236m £4,706m £5,177m £5,555m 100% 20% Return on Tangible Equity 20% 8.3% 9.3% 10.3% 11.4% 13.5% 100% 20% Financial (50%)Non-Financial (50%) Operating Costs (excl. remediation 10% £8,482m £8,398m £8,314m £8,230m £8,342m 66.5% 6.6% and in year GPS expense) Risk Group customer dashboard 25% 60% 70% 80% 90% 80% 75% 18.8% Reducing our operational 5% 20% 32% 35% 37% 33.0% 50% 2.5% carbon emissions 1 Sustainable financing and investment 5% £9,000m £13,500m £17,000m £21,000m £26,626m 100% 5.0% 3.75% 37.7% 38.4% 39.1% 39.9% 39.4% 75% 2.8% Increasing our gender and ethnic representation in senior roles 3.75% 8.8% 9.4% 9.9% 10.5% 10.2% 75% 2.8% | | | ≥ 73 | ≥ 75 | | ≥ 76 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | ≥ 70 | | | | | | 75 | | | | | (& ≥ 2 pts | (& ≥ 5 pts | (& above high | | | | | | Culture and colleague engagement 7.50% | (& above | | | | | (+6 pts above | | 75% 5.6% | | | | above | above | performing | | | | | | | average) | | | | | average) | | | | | | average) | average) | | norm) | | | | Target Total balanced scorecard outcome 84.1% Key: A Actual 1 Includes sustainable finance for Commercial and Institutional, and Business and Commercial Banking clients, green mortgage lending (full year estimate based on September 2022 actual position), financing for EV and plug-in hybrid electric vehicles and Scottish Widows discretionary investment in climate aware strategies. Charlie Nunn – Group Chief Executive William Chalmers – Chief Financial Officer | Maximum award £1,590,750 | | | | Maximum award £818,945 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | Group balanced scorecard outcome 84.1% | | | | Group balanced scorecard outcome 84.1% | | | | | Initial scorecard outcome £1,337,821 | | | | Initial scorecard outcome £688,733 | | | | | Committee discretion – | | | | Committee discretion – | | | | | Annual GPS award/ | | £1,337,821 | | Annual GPS award/ | | £688,733 | | | % of maximum | | | 84.1% | % of maximum | | | 84.1% | | • Successfully re-launched the Group’s purpose and values, | | | | • Strong financial management with all key measures, including | | | | | | creating a strong framework to embed the new culture | | | | PBT and ROTE, ahead of target | | | | • Announced a new operating model and leadership team which | | | | • Effective balance sheet management with a pro forma CET1 | | | | | | will set us up for success in 2023 and beyond | | | | ratio of 14.1 per cent, ahead of regulatory requirements | | | | • Continued leadership throughout the Cost of Living issues, | | | | • Positive engagement with investors and brokers on both Group | | | | | | ensuring an appropriate Group-wide response to support | | | | performance and strategy | | | | | customers and colleagues | | | • Played a critical role in the strategic execution of the Group | | | | throughout 2022 110 Lloyds Banking Group Annual Report and Accounts 2022 ## Non-financial measures (50%) commentary The scorecard that the Committee used in determining the annual bonus awards for the executive directors, along with the assessment of performance against the scorecard, is detailed on **page 110**. The table below outlines the Committee's assessment of the non-financial elements of the scorecard. | Measure | Commentary | | --- | --- | | **Group customer dashboard** Our assessment of how effectively we are serving customers across all brands, products and services | - In 2022, 80 per cent of Group customer dashboard measures achieved target, reflecting strong performance relative to peers, with average rank position further improved year on year. Continued focus is required to maintain strong position in market and to further improve absolute scores across customer experience measures | | **Reducing operational carbon emissions** | - A 33 per cent reduction in emissions has been achieved in 2022 from our 2018/19 baseline. Year on year reductions in gas and refrigerants have been delivered, although increases have been seen in commuting and business travel emissions as colleagues return to offices | | **Sustainable financing and investment** | - We have exceeded our Sustainable finance and investment metric with strong performance across all contributing business lines – Commercial Banking, Consumer Lending Mortgages, Consumer Lending Transport and Scottish Widows Investments - Demand has increased for sustainable finance supported by a strong housing market earlier in the year and the increasing take up of electric vehicles. Continued strengthening of our sustainable finance teams helped us secure more transactions including a number of Sustainability Linked Loan co-ordinator roles. Investments in climate-aware strategies were always planned to deliver a greater proportion upfront towards the overall 2025 strategic outcome, but performance in 2022 also benefitted from conversion of some investment in property shares to a low carbon tilt and an earlier than anticipated launch of the BlackRock ESG Credit Insight fund | | **Increasing our gender and ethnic representation in senior roles** | - We have increased the representation of women within our senior population by 1.7 percentage points since the end of 2021, moving from 37.7 per cent to 39.4 per cent - We have increased the representation of Black, Asian and Minority Ethnic colleagues by 1.4 percentage points since the end of 2021, moving from 8.8 per cent to 10.2 per cent | | **Culture and colleague engagement** Our employee engagement index score absolute and performance versus UK norm and high performing norm | - Engagement saw a positive increase to 75 per cent in 2022 which is +6 points higher than the UK average though 3pts below the UK high performing norm (comparisons from 2019–2021) - We also saw an increase in advocacy/eNPS (a new measure introduced in 2022) and colleague mood, with continued positive perceptions of our line manager capability | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 111 ### Directors’ remuneration report continued 40 per cent of the award was weighted to Absolute Total ### 2020 Executive Group Ownership Share Shareholder Return, which has not vested due to share price In determining the vesting outcome of the 2020 Executive Group impacts during the performance period. Awards were granted Ownership Share, the Committee carefully considered alignment at 49.4296 pence, before the Group’s share price fell due to the with shareholder experience and whether adjustments were onset of COVID-19 (to an average of 31.2 pence over the remainder required for windfall gains. Despite targets being set before of 2020) and the Committee concluded that an adjustment for the onset of COVID-19, the Committee has not applied upward windfall gains was therefore not required. discretion and concluded a vesting outcome of 43.7 per cent of maximum, which reflects improvements in economic profit during the vesting period and strong progress against customer measures. 2020 Executive Group Ownership Share Performance Range Weighted 3 Block Measure Weighting Threshold Maximum Actual vesting Absolute Total Shareholder return (TSR) 40% 8% p.a 16% p.a (7.1%) p.a 0.0% 1 Economic Profit 15% £1,965m £2,948m £2,782m 12.5% Financial (65%)Non-Financial (35%) 2 Cost: Income Ratio 10% 46.4% 43.9% 46.3 2.7% FCA reportable complaints per ‘000 accounts 5% 2.65 2.52 2.47 5.0% Financial Ombudsman Service (FOS) change rate 5% 30% 25% 27% 3.3% Customer satisfaction 10% 3rd 1st 1st 10.0% Digital net promoter score 7.5% 65.3 68.3 69.2 7.5% | | +5% vs. | +2% vs. | +6% vs. | | | --- | --- | --- | --- | --- | | Employee engagement index 7.5% | | | | 2.8% | | | UK Norm | UK HP Norm | UK Norm | | Award (% maximum) vesting 43.7% 1 A measure of profit taking into account a charge for equity utilisation. 2 Cost: Income Ratio adjusted to exclude non mergers and acquisitions restructuring costs (now reported in operating costs as of 2022) to ensure comparability with original GOS target. 3 Meeting threshold performance will result in 25 per cent vesting of each metric, relative to each weighting. ### Payments for loss of office (audited) No payment for loss of office were made in 2022. ### Payments within the reporting year to past Directors (audited) As disclosed in the 2021 Directors’ remuneration report, Sir António Horta-Osório was provided with tax assistance worth £24,000 (inclusive of VAT) during 2022. There are no other payments made to past directors in 2022. ### External appointments No executive director served as a non-executive director on the Board of another company in 2022. 112 Lloyds Banking Group Annual Report and Accounts 2022 Relative importance of spend on pay The graphs illustrate the total remuneration of all Group employees compared with returns of capital to shareholders in the form of dividends and share buyback. 2022 6% £3,607 2022 8% £2,969 2021 £3,403 2021 £2,740 Financial results Risk managementGovernance Financial statements Other informationStrategic report 1 2022: Ordinary dividend in respect of the financial year ended 31 December 2 Performance-based compensation includes expense for the following 2022, partly paid in 2022 and partly to be paid in 2023 and intended share plans: Group Performance Share (2022: £421 million, 2021: £301 million), buyback. 2021: Ordinary dividend in respect of the financial year ended 31 Executive Group Ownership Share (2022: £25.3 million, 2021: 22.8 million), December 2021, partly paid in 2021 and partly paid in 2022 and share buyback. Executive Share Awards (2022: £0.2 million, 2021: £0.2 million) and LDC Assets under Management Plan (2022: £12 million, 2021: £12 million). For the 2022 performance year, the face value of awards was £446 million for Group Performance Share and £57.1 million for Long Term Share Plan. ### Comparison of returns to shareholders and Group Chief Executive total remuneration The chart below shows the historical total shareholder return (TSR) of Lloyds Banking Group plc compared with the FTSE 100 as required by the regulations. The FTSE 100 index has been chosen as it is a widely recognised equity index of which Lloyds Banking Group plc has been a constituent throughout this period. TSR indices – Lloyds Banking Group and FTSE 100 200 150 100 50 0 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019 Dec 2020 Dec 2021 Dec 2022 | | GCE 2013 2014 2015 2016 2017 2018 2019 2020 2021 | | | 4 | 2022 | | --- | --- | --- | --- | --- | --- | | GCE single figure | Sir António Horta-Osório 7,475 11,540 8,704 5,791 6,434 6,544 4,424 3,604 2,444 n/a | | | | | | of remuneration | | 1 | | | | | | Charlie Nunn | | n/a n/a n/a n/a n/a n/a n/a n/a 5,523 | | 3,767 | £000 2 William Chalmers n/a n/a n/a n/a n/a n/a n/a n/a 819 n/a 3 Annual bonus/ Sir António Horta-Osório 71% 54% 57% 77% 77% 67.60% n/a n/a 57.80% n/a GPS payout Charlie Nunn n/a n/a n/a n/a n/a n/a n/a n/a 57.80% 84.1% (% of maximum opportunity) William Chalmers n/a n/a n/a n/a n/a n/a n/a n/a 78.20% n/a Long-term Sir António Horta-Osório 54% 97% 94.18% 55% 66.30% 68.70% 49.70% 33.75% 41.80% n/a incentive vesting Charlie Nunn n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a (% of maximum opportunity) William Chalmers n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Historical TSR Performance Growth in the value of a hypothetical £100 holding since 31st December 2012 (to 31st December 2022) TSR component Sir António Horta-Osório 25.30% 30% 30% 0% 0% 0% 0% 0% 0% n/a vesting (% of LTIP Charlie Nunn n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a maximum) William Chalmers n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1 Charlie Nunn succeeded Sir António Horta-Osório as Group Chief Executive with effect from 16 August 2021 and the single figure total remuneration for 2021 includes a one-off buy-out of £4,231 million. 2 William Chalmers was the Interim Group Chief Executive from 1 May 2021 until 15 August 2021, remuneration in the table above is for this period. 3 Sir António Horta-Osório independently requested that he be withdrawn from consideration for a Group Performance Share award in 2019 and 2020. There were no GPS awards for 2020 performance. 4 2021 single figure of remuneration has been adjusted to reflect the LTIP vesting share price of 45.1038 pence instead of the average share price of 47.993 pence reported in the 2021 annual report. | | 1 | 2 | | --- | --- | --- | | Dividend and share buyback Salaries and performance-based compensation | | | | £m £m | | | 113Lloyds Banking Group Annual Report and Accounts 2022 Value of £100 invested on 31 December 2012 Lloyds Banking Group FTSE 100 index ### Directors’ remuneration report continued ### Single total figure of remuneration for Chair and non-executive directors (audited) Fees (£000) Benefits (£000) 4 Total (£000) 2022 2021 2022 2021 2022 2021 Chair and non–executive directors | Robin Budenberg | 624 | 618 | 1 | 1 | 625 | 619 | | --- | --- | --- | --- | --- | --- | --- | | Alan Dickinson | 445 | 397 | – | 1 | 445 | 398 | | Sarah Legg | 224 | 212 | 5 | 2 | 229 | 214 | | Lord Lupton | 282 | 287 | – | 1 | 282 | 288 | | Amanda Mackenzie | 175 | 164 | – | – | 175 | 164 | | Harmeen Mehta | 98 | 16 | – | – | 98 | 16 | 1 Stuart Sinclair 72 231 – – 72 231 2 Cathy Turner 19 – – – 19 – 3 Scott Wheway 189 – – – 189 – Catherine Woods 242 232 10 5 252 237 1 Stuart Sinclair retired on 12 May 2022. 2 Cathy Turner was appointed on 1 November 2022. 3 Scott Wheway was appointed on 1 August 2022. 4 The Chair’s benefits relates to private medical insurance provided since 2021 (with the value in respect of 2021, as disclosed above, restated to correct the omission in the 2021 annual report). Benefits for the other non-executive directors relates to reimbursement for expenses incurred in the course of duties. Non-executive directors do not receive variable pay. ### Directors’ share interests and share awards Directors’ interests (audited) Total Number of shares Number of options shareholding 1 Value Expected | | | Unvested | | | | Unvested | | | | | | | value at | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | subject to | | Unvested | | subject to | | | | Totals at | | 31 December | | | | | | | continued | | subject to | | continued | | Vested | 31 December | | | | | 2022 | | | Owned outright | 1 employment | | performance | | employment | | unexercised | | | 2022 | 2 | | (£000s) | | 3 | Executive directors 5 | Charlie Nunn 2,632,948 222,415 | 3,588,364 | | 6,585,447 – 13,029,174 5,920 | | | | | --- | --- | --- | --- | --- | --- | --- | | | | 4,5 | | | | 4 | | William Chalmers 6,325,447 449,505 | 9,060,823 | | | 63,494 – 15,899,269 | 5,963 | | Non-executive directors Robin Budenberg 1,500,000 – – – – 1,500,000 n/a Alan Dickinson 200,000 – – – – 200,000 n/a Sarah Legg 200,000 – – – – 200,000 n/a Lord Lupton 2,250,000 – – – – 2,250,000 n/a Amanda Mackenzie 63,567 – – – – 63,567 n/a Harmeen Mehta 20,000 – – – – 20,000 n/a 6 Stuart Sinclair 362,664 – – – – 362,664 n/a 7 Cathy Turner 424,113 – – – – 424,113 n/a 8 Scott Wheway 168,356 – – – – 168,356 n/a Catherine Woods 107,549 – – – – 107,549 n/a 1 Includes holdings of any Person Closely Associated. 2 There has been no change in shareholdings from 31 December 2022 to 22 February 2023. 3 Expected values are based on the LBG closing share price of 45.435 pence on 31 December 2022. 4 For awards granted under the 2020 Group Ownership Share (GOS) Plans, as the performance period has completed, the actual outcome of 43.7 per cent has been applied to the unvested shares to calculate the expected value. 5 For awards granted under the 2021 and 2022 Long Term Share Plan where the three-year underpin period has not completed, 100 per cent has been applied to calculate the expected value of the LTSP award in line with the applicable Remuneration Policy. 6 Stuart Sinclair retired on 12 May 2022; the number of shares shown is as of 12 May 2022. 7 Cathy Turner was appointed on 1 November 2022. 8 Scott Wheway was appointed on 1 August 2022. 9 Directors are not permitted to enter into any hedging arrangements in relation to share awards. No director uses share holding as collateral. 114 Lloyds Banking Group Annual Report and Accounts 2022 Outstanding share plan interests (audited) | | | | | Vested/ | | At 31 | | | Exercise periods | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | At 1 January | | Granted/ | Dividends | released/ | December | | Exercise | | | | | | 2022 | awarded | awarded | exercised Lapsed | | 2022 | | Price | | NotesFrom To | Charlie Nunn LTSP 2022 – 2024 3,588,364 3,588,364 2,3 Deferred GPS 370,691 148,276 222,415 4,5 awarded in 2022 (2021 GPS) Share Buy-Out 859,340 859,340 – 16/03/2022 15/03/2027 1 1,247,548 1,247,548 15/03/2023 14/03/2028 1 Financial results Risk managementGovernance Financial statements Other informationStrategic report 1,368,990 1,368,990 12/03/2024 11/03/2029 1 1,368,990 1,368,990 11/03/2025 10/03/2030 1 1,369,012 1,369,012 11/03/2026 10/03/2031 1 891,217 891,217 11/03/2027 10/03/2032 1 339,690 339,690 11/03/2028 10/03/2033 1 William Chalmers GOS 2020 – 2022 4,927,191 4,927,191 2 LTSP 2021 – 2023 1,547,340 1,547,340 2,3 LTSP 2022 – 2024 – 2,586,292 2,586,292 2,3 Deferred GPS 79,116 79,116 – 6 awarded in 2020 (2019 GPS) Deferred GPS 749,173 299,668 449,505 4,5 awarded in 2022 (2021 GPS) Share Buy-Out 686,085 686,085 – 28/01/2022 27/01/2027 7 2020 Sharesave 46,317 46,317 24.25p 01/01/2024 30/06/2024 2021 Sharesave 17,177 17,177 39.40p 01/01/2025 30/06/2025 1 When Charlie Nunn joined the Group on 16 August 2021 as Group Chief Executive and executive director he was granted deferred share awards and deferred cash to replace unvested awards from his previous employer, HSBC. Options vested on the 16 March 2022 and were exercised on 23 March 2022. Charlie Nunn retained all the shares apart from 404,092 shares which were sold at 49.965 pence to meet income tax and National Insurance contributions. The remaining 455,248 shares are subject to holding periods that mirror the shares replaced from HSBC of no hold, six months and 12 months holds. 2 All GOS and LTSP awards have a three-year performance period ending 31 December. Awards were made in the form of conditional rights to free shares. 3 LTSP awards (in the form of conditional share options) in 2022 were made over shares with a value of 150 per cent of salary for Charlie Nunn (3,588,364 shares with a face value of £1,687,500) and a value of 150 per cent for William Chalmers (2,586,292 shares with a face value of £1,216,256). Vesting is subject to underpin thresholds applicable for the first three years from grant as detailed on page 115 of the 2021 Directors’ remuneration report. Each year the Remuneration Committee will monitor the Group’s progress in relation to the underpins. The share price used to calculate the face value is the average price over the five days prior to grant (25 February 2022 to 3 March 2022), which was 47.027 pence. The underpins for this award are set out on page 115. 4 Half of GPS is deferred into shares (in the form of conditional rights to free shares). The face value of the shares awarded in respect of GPS granted in March 2022 was £174,325 (370,691 shares) for Charlie Nunn; and £352,314 (749,173 shares) for William Chalmers. As the awards represent deferral of awarded GPS they are not subject to further performance conditions. The share price used to calculate the face value is the average price over the five days prior to grant (25 February 2022 to 3 March 2022), which was 47.027 pence. 5 The first tranche of the 2021 GPS deferred award vested on 7 March 2022. The closing market price of the Group’s ordinary shares on that date was 41.255 pence. The award was settled in shares net of tax, with the resulting shares subject to a one year holding period. 6 The final tranche of 2019 GPS award vested on 7 March 2022. The closing market price of the Group’s ordinary shares on that date was 41.255 pence. The award was settled in shares net of tax. 50 per cent of the final tranche is subject to a one year holding period. 7 When William Chalmers joined the Group on 3 June 2019, he was granted deferred share awards to replace unvested awards from his former employer, Morgan Stanley. Options vested on 27 January 2022 and were exercised on 7 March 2022. William Chalmers retained all the shares apart from 322,702 shares which were sold at 41.825 pence to meet income tax and National Insurance contributions. The remaining 363,383 shares are subject to a 12-month holding period from the date of vesting on 27 January 2022. Outstanding share plan cash awards interests (audited) | | | | | | Vested / | | At 31 | | --- | --- | --- | --- | --- | --- | --- | --- | | At 1 January | | | Granted/ | | released / | December | | | | 2022 (£) | awarded (£) | | exercised (£) | | 2022 (£) Notes | | Charlie Nunn Deferred GPS cash awarded in 2022 (2021 GPS) – 104,594 – 104,594 1 William Chalmers Deferred GPS cash awarded in 2022 (2021 GPS) – 211,388 – 211,388 1 1 From 2022, half of GPS is now deferred into cash (in the form of deferred cash awards, with a face value equal to that of the relevant portion of the GPS award). As the awards represent deferral of awarded GPS they are not subject to further performance conditions. The awards will be released in two tranches; March 2023 and March 2024. 115Lloyds Banking Group Annual Report and Accounts 2022 ## Directors' remuneration report continued ### Shareholding Requirement Executives are expected to build and maintain a company shareholding in direct proportion to their remuneration in order to align their interests to those of shareholders. The minimum shareholding requirements executive directors are expected to meet are as follows: 350 per cent of base salary for the GCE and 250 per cent of base salary for other executive directors. From January 2023 individuals will have five years from appointment to achieve the shareholding requirement. In the event that exceptional individual circumstances exist resulting in an executive not being able to comply with the Policy, the Remuneration Committee will consider whether an exception should apply. In recognition of the increased variable opportunity offered by the implementation of the LTIP and to further strengthen alignment with shareholders, from 1 January 2024 the shareholding requirement applicable to the GCE will increase from 350 per cent to 400 per cent of salary and from 250 per cent to 300 per cent for other executive directors, subject to approval of the Policy at the 2023 AGM. ### Post-employment shareholding requirement Executive directors are contractually bound to a post-employment shareholding requirement of two years at a level equal to the lower of the shareholding requirements immediately prior to departure or the actual shareholding on departure. The post-employment requirement will be maintained through self-certification, with the Committee keeping this approach under review. None of those who were directors at the end of the year had any other interest in the capital of Lloyds Banking Group plc or its subsidiaries. ![img-12.jpeg](img-12.jpeg) 1 Calculated using the average share price for the period 1 January 2022 to 31 December 2022 (45.77 pence). Includes ordinary shares acquired through the vesting of the deferred Group Performance Share plan, Fixed Share Awards as the shares have no performance conditions; American Deposit Receipts (ADRs) with each one ADR equating to four shares, Executive Share Awards which have vested but have not been exercised; shares held in the Share Incentive Plan (SIP) Trust, i.e. Free, Partnership, Matching and Dividend shares which are no longer subject to forfeiture, as defined in the SIP Rules. Shares held by Person Closely Associated, as defined by the Companies Act, but broadly meaning spouse or partner and children, may also be included. 2 The GCE holds 106 per cent of his salary in shares and has until 15 August 2024 to achieve the requirement under the Policy applicable in 2022. 116 Lloyds Banking Group Annual Report and Accounts 2022 ### Chair and non-executive director fees in 2022 Following a detailed review of peer benchmarks, there is a 1 per cent increase to the annual fee for the Chair, capped at £5,000 (£629,400) to align with the maximum pay increase permitted for the broader colleague population. The basic board fee will increase by 5 per cent (£86,100) and there are no increases to other non-executive directors fees for 2023. 2023 2022 | Basic non-executive director fee | £86,100 | £82,000 | | --- | --- | --- | | Deputy Chair | £107,000 | £107,000 | | Senior Independent Director | £64,200 | £64,200 | | Audit Committee Chair | £75,000 | £75,000 | | Remuneration Committee Chair | £75,000 | £75,000 | Financial results Risk managementGovernance Financial statements Other informationStrategic report | Risk Committee Chair | £75,000 | £75,000 | | --- | --- | --- | | Responsible Business Committee Chair | £42,800 | £42,800 | | IT Forum Chair | £42,800 | £42,800 | | Audit Committee member | £34,300 | £34,300 | | Remuneration Committee member | £34,300 | £34,300 | | Risk Committee member | £34,300 | £34,300 | | Responsible Business Committee member | £16,100 | £16,100 | | IT Forum member | £16,100 | £16,100 | | Nomination and Governance Committee member | £16,100 | £16,100 | Non-executive directors may receive more than one of the above fees. ### Percentage change in remuneration levels The table below sets out the change in the directors’ base salary/fees, taxable benefits and annual bonus compared with the change in our UK-based colleagues’ pay. Lloyds Banking Group plc is not an employing entity, and therefore the disclosure below is made on a voluntary basis to compare any change with all employees of the wider Group based in the UK. This population has been chosen as the majority of our workforce are based in the UK and is considered to be the most appropriate group of employees. The same population is used for the purposes of the Chief Executive Officer pay ratio disclosure on page 118 of the report. % change in base salary/fees % change in GPS % change in benefits 2019 to 2020 2020 to 2021 2021 to 2022 2019 to 2020 2020 to 2021 4 2021 to 2022 2019 to 2020 2020 to 2021 2021 to 2022 1 All employees 4 4 6 (100) n/a 12 (32) 1 5 Executive directors 2 Charlie Nunn n/a n/a 1 n/a n/a 47 n/a n/a 4 3 William Chalmers 2 12 (9) (100) n/a (2) (1) 2 35 5,6 Non-executive directors | Robin Budenberg n/a 243 | | 1 | n/a n/a | n/a | n/a n/a | – | | --- | --- | --- | --- | --- | --- | --- | | Alan Dickinson 45 14 | | 12 | n/a n/a | n/a | n/a n/a | n/a | | Sarah Legg 131 28 | | 6 | n/a n/a | n/a | n/a n/a | n/a | | Lord Lupton 0 (8) | | (2) | n/a n/a | n/a | n/a n/a | n/a | | Amanda Mackenzie 6 (1) | | 7 | n/a n/a | n/a | n/a n/a | n/a | | Harmeen Mehta n/a n/a | | 2 | n/a n/a | n/a | n/a n/a | n/a | | Stuart Sinclair 21 (9) | (25) | | n/a n/a | n/a | n/a n/a | n/a | | Cathy Turner n/a n/a | n/a | | n/a n/a | n/a | n/a n/a | n/a | | Scott Wheway n/a n/a | n/a | | n/a n/a | n/a | n/a n/a | n/a | | Catherine Woods n/a 43 | | 4 | n/a n/a | n/a | n/a n/a | n/a | 1 Lloyds Banking Group is not a contracting entity but considers this population to be appropriate for purposes of an ‘All employees’ calculation. 2 Charlie Nunn became the Group Chief Executive in August 2021. Figures for 2021 have been annualised based on the single total figure table. 3 William Chalmers was the Interim Group Chief Executive from May to August 2021 and received a deputisation payment for this period. 4 No Group Performance Share (bonus) was paid for 2020 performance. 5 In some instances, non-executive directors may change membership or become the Chair of a Committee during the year, resulting in large year-on-year percentage changes in fees. 6 Some non-executive directors have received other benefits that relate to reimbursement for expenses incurred in the course of duties. Reimbursements of these expenses do not provide an accurate comparison to benefits received by colleagues and are therefore not included. 117Lloyds Banking Group Annual Report and Accounts 2022 ### Directors’ remuneration report continued Gender pay Ethnicity pay Our work to improve gender equality continues to be While there is currently no legal requirement to publish recognised externally: in 2022, Lloyds Banking Group was listed ethnicity pay data in the UK, we are publishing this data in The Times Top 50 Employers for Women list for the eleventh not only because it is the right thing to do, but it also year running. We were also included in the Bloomberg Gender holds us to account for the goals we have set. Equality Index for a fourth consecutive year running. Broadly, the Group has made progress in improving Black, While we have further reduced the mean pay gap to Asian and Minority Ethnic representation at senior levels. 29.3 per cent, from 32.8 per cent in 2017, it is still larger than we Senior Black, Asian and Minority Ethnic representation has would like and our progress has been too slow. Through our increased by 3.7 per cent from 5.6 per cent in January 2018 actions over the past few years, we’ve learned a lot about what (when our representation goals were set) to 9.3 per cent in April works and what doesn’t. What’s clear is that our focus needs to 2022 (based on all colleague data). However, our data shows be on creating an organisation that is more agile and reflects us that under-representation is seen at its highest amongst the social and demographic changes we are seeing. our Black Heritage colleagues and needs additional focus to progress. Further information is available at https://www. lloydsbankinggroup.com/assets/pdfs/who-we-are/ Further information is available at https://www. responsible-business/downloads/2022-reporting/lbg- lloydsbankinggroup.com/assets/pdfs/who-we-are/ gender-pay-gap-report-2022.pdf responsible-business/downloads/2022-reporting/lbg- ethnicity-pay-gap-report-2022.pdf 2022 29.3% 2022 4.6% 2021 29.9% 2021 5.3% Bonus data has been excluded, as this year’s bonus data cannot be compared like-for-like with the equivalent data for last year. This is because no bonuses were awarded for the 2020 performance year, which would normally have been paid during 2021, and therefore impacted the bonus data for the 2021 and 2022 Gender Pay Gap reporting periods. ### Chief Executive Officer pay ratio The Remuneration Committee views pay ratios as a useful reference point to inform policy setting, but also takes into consideration a number of other factors. The table below shows the ratios of the GCE’s total remuneration to the remuneration of colleagues since 2017. The change in the pay ratios for 2022 is explained in more detail on page 119. Total compensation Fixed pay | | P25 (Lower | | | P50 | P75 (Upper | P25 (Lower | | P50 | P75 (Upper | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Year Methodology | Quartile) | | (Median) | | Quartile) | Quartile) | (Median) | | Quartile) | | 2022 A | | 120:1 86:1 48:1 81:1 59:1 35:1 | | | | | | | | | 2021 A | | 316:1 225:1 120:1 93:1 66:1 38:1 | | | | | | | | | 2020 A | | 132:1 95:1 54:1 103:1 75:1 42:1 | | | | | | | | | 2019 A | | 179:1 128:1 71:1 114:1 82:1 47:1 | | | | | | | | | 2018 A | | 237:1 169:1 93:1 113:1 81:1 48:1 | | | | | | | | | 2017 A | | 245:1 177:1 97:1 113:1 82:1 48:1 | | | | | | | | Y-o-Y (2021 v 2022) (62)% (11)% Mean pay gap Mean pay gap % % 118 Lloyds Banking Group Annual Report and Accounts 2022 # **Notes to the table:** - The 2022 total remuneration for the colleagues identified at P25, P50 and P75 are as follows: £31,421, £43,760, £78,833. - The 2022 base salary for the colleagues identified at P25, P50 and P75 are as follows: £25,344, £34,086, £55,489. - The P25, P50 and P75 colleagues were determined on 31 December 2022 based on calculating total remuneration for all UK employees for the 2022 financial year. Payroll data from 1 January 2022 to 31 December 2022. - Colleague total remuneration has been calculated in line with the single total figure of remuneration. The single total figure of remuneration has been calculated for 58,113 UK colleagues within the Group for a full year including full-time equivalent base pay, vesting Group Ownership Share awards (for eligible colleagues), core benefits, pension, overtime and shift payments, travel/relocation payments (for eligible colleagues) and private medical benefit. - The average share price between 1 October 2022 and 31 December 2022 44.04 pence has been used to indicate the value of vesting Group Ownership Share awards. - The colleague identified at P50 did not receive a separate car benefit and does not participate in the long term incentive plan. As a result, the ratio does not provide a direct comparison to the total remuneration of the GCE. - Due to operational constraints, the calculation of the colleague Pension Input Figure excludes inflationary adjustments for those on the defined benefit scheme. The omission of this factor does not materially affect the outcome of the ratio and/or distort the validity of the valuation. - All other data has been calculated in line with the methodology for the single total figure of remuneration for the GCE. - In 2021 the median ratio was calculated for all three individuals undertaking the role of GCE and increased by 137 per cent year-on-year. This increase can be attributed to the one-off buy out awards granted to Charlie Nunn, an increase in the vesting LTIP and the payment of Group Performance Share (Annual Bonus), which were not awarded for 2020. Our ratios have been calculated using Methodology option A on the basis that it provided the most accurate means of identifying the median, lower and upper quartile colleagues. The ratio has been calculated taking into account the pay and benefits of 58,113 UK employees, other than the individual performing the role of GCE. The change in total remuneration ratios since 2017 is largely driven by the more volatile nature of variable pay for the CEO. The reduction in 2020 can be attributed to the decision not to make awards under the Group Performance Share Plan, reduced performance in the vesting of the 2018 Group Ownership plan compared to 2017 and the reduction in the former GCE's pension allowance from 33 per cent to 15 per cent of salary. The GCE pay ratios decreased by 62 per cent between 2021 and 2022, due to two factors. Firstly, Charlie Nunn's remuneration for 2022 did not include any value in respect of Long Term Incentive Plans, as no 2020 EGOS award was granted to him given that he was not an executive director at the time of grant. Secondly, the 2021 ratio included the one-off buy out awards granted to Charlie Nunn. In addition the 2021 ratio was calculated for all three individuals undertaking the role of GCE. Over the same time period, employee total compensation increased by 12 percent at the lower quartile, 11 per cent at the median and by 7 per cent at the upper quartile, also contributing to the decrease in pay ratios. For the majority of colleagues, year-on-year changes in remuneration are principally driven by pay increases and the impacts of Group performance and collective adjustment which has resulted in an increased bonus pool for 2022. The Group has a commitment to pay progression and a continued focus on ensuring higher pay awards for colleagues who are lower paid, or paid lower within their pay range. We are committed to reducing the pay gap between executives and wider colleagues and continue to remain focused on addressing the gap from the bottom up and not just from the top down. The Committee is thoughtful of the volatility in pay ratios due to variable reward outcomes. Although the pay ratio is used as a useful reference point to inform policy-setting, the Committee takes into account a number of other factors to assess colleague pay progression. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 119 ## Directors' remuneration report continued ### Implementation of the policy in 2023 The 2023 Directors' Remuneration Policy is subject to approval at the Annual General Meeting in May 2023. We propose to implement the Policy in the following ways subject to shareholder approval. A final 2023 Long Term Share Plan award will be granted under the existing Remuneration Policy prior to the AGM when the 2023 Remuneration Policy is intended to come into effect. | Base Salary | | | --- | --- | | Pay deal for wider workforce reflects a 6.3 per cent budget. The approach focuses on lower paid colleagues and colleagues lower in their pay range. However, no salary increases are proposed for the GCE and CFO. | Salaries will therefore remain as follows: • GCE: £1,136,250 • CFO: £818,945 | | Fixed Share Award | | | Awards remain unchanged from 2022 as follows: GCE: £1,050,000; CFO: £504,000. | Shares will be released in equal tranches over three years. (See **page 126** for further details). | | Pension | | | Pension allowances for all executive directors are set at 15 per cent of base salary. Any new executive director appointments in 2023 will also attract a maximum allowance of 15 per cent of base salary. Over 52,000 colleagues participate in the Group's Defined Contribution (DC) Pension scheme where the maximum opportunity for the workforce is 15 per cent of base salary. Executive directors employer pension contributions are therefore aligned with those available to the majority of the workforce. | In addition to the DC arrangement, the Group currently has almost 11,000 active members in defined benefit plans, with the effective cost of employer contributions into these arrangements being 40 per cent of salary. | | Benefits | | | Benefits remain unchanged from 2022. Executive directors receive a flexible benefit allowance of 4 per cent of base salary. This can be used to select benefits including life assurance and critical illness cover. | Other benefits include transportation and private medical cover. The CFO also receives a car allowance. | | Group Performance Share (Bonus) | | | The performance measures for determining any individual 2023 GPS awards for executive directors are outlined in the 2023 balanced scorecard on **page 122**. Subject to shareholder approval at the 2023 AGM individual maximum opportunities for executive directors for 2023 are 140 per cent of base salary for the GCE and the CFO. Individual awards as a percentage of maximum will directly correlate to the overall performance assessment outcome. For the 2023 performance year, any GPS opportunity will be awarded in March 2024 in a combination of cash (up to 50 per cent) and shares. | Historically, the Group has applied deferral to the GPS in excess of both regulatory and Policy requirements, inhibiting the attraction and retention of the talent necessary to deliver the Group's new strategy. From 1 January 2023 the Group will apply deferral in line with minimum regulatory requirements as set out in the Policy and consistent with the approach taken by its peers. After this change at least 60 per cent of total variable remuneration awarded to the GCE will remain deferred over a period up to 7 years maintaining strong alignment to shareholders. | 120 Lloyds Banking Group Annual Report and Accounts 2022 ## Long Term Share Plan A Long Term Share Plan award will be granted in relation to 2022 performance under the terms of the current Remuneration Policy. On the basis of the new Long Term Incentive Plan being approved by shareholders at the 2023 AGM, no further Long Term Share Plan awards would then be made to executive directors. It is an important feature of the LTSP that performance is assessed and appropriately recognised upfront in the award size as there are no performance conditions that apply after the award is granted (only underpins). This is not however a mechanical outturn and, as with GPS, the Remuneration Committee may exercise its judgement. ### Pre-grant test The decision to award Long Term Share Plan awards for 2023 is based on the performance assessment from the 2022 balanced scorecard provided on page 110. To ensure that the GCE and CFO are aligned to the long-term success of the Group and motivated to deliver the next phase of the Group's strategy and sustainable returns, the Remuneration Committee has awarded 2023 Long Term Share Plan awards of 150 per cent of salary to the GCE and the CFO to reflect the Group's performance in 2022 and other factors taken into account in the 'pre-grant test'. The normal range for awards for executive directors is 125 per cent to 150 per cent of salary. Consistent with the awards for 2021 performance granted in March 2022, these 2023 awards are subject to underpins for the first three years which align the vesting outcomes to longer-term shareholder experience and are deferred for up to seven years. In deciding the award size, the Committee considered the balanced scorecard, Group's share price, as well as the following four questions: - Has the bank lived up to its ambition to be the Best Bank for Customers? - Do the Group's financial results and capital position adequately reflect risk, conduct and any other non-financial considerations, including ESG? - Has the Group made meaningful progress in supporting the UK's transition to net zero? - Has the Group suffered a serious conduct event or has severe reputational damage arisen from the Group not living its values? The Committee concluded that the Group's strong financial and overall business performance supported the making of awards. ### Underpins The underpins that will apply to the 2023 LTSP awards are: - CET I ratio – Group CET I ratio above the guided management target each year, including all regulatory buffers - ROTE – Group ROTE exceeds the average for UK peer banks over the three years - Ordinary Dividend – Increased ordinary dividend payments over the plan period (subject to any further sector-wide regulatory constraints). The peer comparator group for the ROTE underpin is set at Barclays Group PLC, HSBC Holdings PLC, Natwest Group PLC, Santander UK PLC and Virgin Money UK PLC. ROTE will be measured on the new basis adopted from 2021 and will take into account adjustments (as appropriate) for methodology differences between peers and any other factors the Remuneration Committee considers should reasonably be reflected, including relative under or out-performance or change in business mix. Awards will not be subject to further performance conditions however vesting will be subject to three underpin thresholds applicable for the first three years from grant. Each year the Remuneration Committee will monitor the Group's progress in relation to the underpins. An assessment will be made at the end of the three year period to determine whether the underpins have been successfully maintained over the three years and to what extent the LTSP award should vest. The Remuneration Committee will also retain the right to consider other factors and apply discretion prior to making a decision on vesting. ### Pre-vest test In conjunction with the assessment of performance against the underpins, the Remuneration Committee will consider the four core questions above to satisfy itself that the performance considered in the pre-grant test has been sustainable. The Remuneration Committee will retain the right to consider other factors and apply general discretion in making a decision on the vesting of awards. This approach helps to avoid any potential unintended outcomes that might arise from the application of formulaic performance criteria in the underpins and ensure that there is a fair outcome. The Committee will explain its reasons for applying discretion in either direction, or for not doing so. ### Balanced scorecard outcomes and LTSP award range | **Scorecard performance outcome** | **0%–50%** | **50%–100%** | | --- | --- | --- | | **All LTSP grant (up to % of base salary)** | **0%–125%** | **125%–150%^{1}** | 1 Awards above 150 per cent and up to 200 per cent in line with Policy maximum reserved for exceptional circumstance or exceptional performance for all eligible colleagues other than Charlie Nunn who agreed to cap his maximum award at 150 per cent of salary. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 121 ### Directors’ remuneration report continued 2023 Group Performance Scorecard The performance measures for determining any 2023 GPS When determining the final outcome, the Remuneration Awards for the executive directors are shown in the table below. Committee may consider any personal or business area objectives and whether there has been effective, consistent and The measures and targets are set annually by the Remuneration proactive risk management and conduct outcomes across all Committee to reflect the strategic priorities of the Group and dimensions. take into account both the annual financial plan and operating plan against the backdrop of the rapidly evolving external When assessing performance, the Committee can exercise its economic and societal landscape. judgment to determine the appropriate outcome. This helps to avoid any potential unintended outcomes that might arise from For 2023 the Remuneration Committee has reduced the the application of formulaic performance criteria. weighting of the customer measure to 20 per cent, and uplifted Profit after tax to 25 per cent, to provide a more appropriate balance within the scorecard. Quantitative financial measures make up 55 per cent of the scorecard, with the remaining 45 per cent made up of non-financial measures assessed by the Remuneration Committee using quantitative inputs. Measures and weightings Targets Targets will be disclosed retrospectively in the 2023 annual report alongside the ### Profit after tax 25% level of performance achieved, as the Remuneration Committee considers such targets to be commercially sensitive. However a target range has been set in ### ROTE 20% line with our operating plan and, where applicable, forward-looking guidance. Financial (55%)Non-Financial (45%) Measures of financial and non-financial performance have been agreed by the ### Operating costs (excl. remediation and in-year GPS expense) 10% Remuneration Committee to evaluate performance during 2023. Risk Customer ### Our assessment of how effectively we are serving customers across 20% all brands, products and services Colleague ### 7.5% • Increasing our gender and ethnic representation in senior roles 1 The sustainable financing and investment ### • Culture and colleague engagement 7.5% criteria for the Group Balanced Scorecard details the financing and investment activities that are eligible for inclusion towards this Climate measure. Further information is available at: ### • Reducing our operational carbon emissions 5.0% www.lloydsbankinggroup.com/assets/pdfs/ 1 who-we-are/financing-a-green-future/ • Sustainable financing and investment ### 5.0% objective- framework.pdf 122 Lloyds Banking Group Annual Report and Accounts 2022 ## Remuneration Committee The Committee comprises of five non-executive directors from a wide background to provide a balanced and independent view on remuneration matters. Two of the three designated independent non-executive directors of the Ring-Fenced Banks also attend meetings of the Committee as observers in order to provide insights on matters relevant to the Ring-Fenced Banks and as part of their role in the Group's overall governance structure. For further details of Committee membership and attendance at meetings, please see **page 79**. During the year, Charlie Nunn as the GCE provided regular briefings to the Committee. In addition, the Committee engaged with and received updates from the Chief People and Places Officer, Total Reward Director, Chief of Staff and Chief Sustainability Officer and the Chief Risk Officer. The purpose of the Committee is to set the remuneration for all executive directors and the Chair, including pension rights and any compensation payments. It recommends and monitors the level and structure of remuneration for senior management and material risk takers. It also considers, agrees and recommends to the Board an overall remuneration policy and philosophy for the Group that is aligned with its long-term business strategy, its business objectives, its risk appetite, purpose and values and the long-term interests of the Group, and recognises the interests of relevant stakeholders, including the wider workforce. The Committee's operation is designed to ensure that no conflicts of interest arise, and in particular, the Committee ensures that no individual is present when matters relating to their own remuneration are discussed. ## Advisers Over the course of 2022, advice was provided to the Committee by Mercer and PwC. Mercer was appointed by the Committee following a competitive tender process in 2016 and was retained for part of 2022. The broader Mercer company provided unrelated advice on accounting and investments during the year. Fees payable for the provision of services in 2022 were £600 excluding VAT. The Committee conducted a competitive tender process during the year and appointed PricewaterhouseCoopers (PwC) as independent adviser to the Committee in May 2022. PwC also provided professional services to the Group in the ordinary course of business including tax, assurance and advisory services. Fees paid to PwC for advising the Committee are based partly on a fixed fee and partly on a time and materials basis. During the year, the total fees paid to PwC for services related to directors' remuneration amounted to £279,633 excluding VAT. Mercer and PwC have no other connections with the Group's directors that may impair their independence as advisers to the Committee. PwC are members of the Remuneration Consultants Group and signatories to its Code of Conduct and the Committee is therefore satisfied that the advice they provided was objective and independent. Strategic report Financial results Governance Risk management Financial statements Other information | Committee activities in the year | | | | | | | --- | --- | --- | --- | --- | --- | | | Jan | Feb | May | Sep | Nov | | **Executive directors' remuneration** | | | | | | | Executive director remuneration policy implementation, balance scorecards and pay proposals | ● | ● | ● | ● | ● | | Group Performance Share, Long Term Share Plan and individual assessment | ● | ● | ● | ● | ● | | Remuneration for other senior executives | ● | ● | ● | ● | ● | | Directors' remuneration report | ● | ● | ● | ● | ● | | Directors' remuneration policy design | ● | ● | ● | ● | ● | | **All employee remuneration** | | | | | | | Group Performance Pool, balanced scorecard performance and 2023 pay proposals | ● | ● | ● | ● | ● | | Group-wide reward, gender and ethnic pay gap | ● | ● | ● | ● | ● | | Remuneration aspects of the workforce engagement | ● | ● | ● | ● | ● | | **Reward governance** | | | | | | | Consideration of Policy, risk, control and conduct matters | ● | ● | ● | ● | ● | ## Statement of voting at Annual General Meeting The table below sets out the voting outcome at the Annual General Meeting in May 2022 in relation to the annual report on remuneration and the Remuneration Policy, last voted on in 2020. | | Votes cast in favour | | Votes cast against | | Votes withheld | | --- | --- | --- | --- | --- | --- | | | Number of shares (millions) | Percentage of votes cast | Number of shares (millions) | Percentage of votes cast | Number of shares (millions) | | 2021 annual report on remuneration (advisory vote) | 42,141 | 96.07% | 1,723 | 3.93% | 801 | | Directors' Remuneration Policy (binding vote in 2020)^{1} | 29,212 | 63.82% | 16,562 | 36.18% | 858 | $^{1}$ During 2020 we engaged with shareholders and responded to feedback on the Directors' Remuneration Policy, for more detail see page 118 of the 2020 Directors' remuneration report. Lloyds Banking Group Annual Report and Accounts 2022 123 ### Directors’ remuneration report continued ### Policy alignment to Provision 40 of the Corporate Governance Code. A summary of how the proposed Remuneration Policy addresses the principles set out in the UK Corporate Governance Code is detailed below. Clarity Proportionality • The Committee regularly consults with key shareholders • There is clear alignment between the performance of to ensure transparency on our policy and remuneration the Group, the business strategy, and the reward paid to outcomes executive directors • Targets are aligned to the Group’s strategy and purpose, • The Committee has the discretion to reduce the annual providing clarity to shareholders and stakeholders on bonus, LTIP and LTSP awards, if it considers the pay-out does the relationship between delivery of the strategy and not appropriately reflect the performance of the Group remuneration outcomes during the performance period • During the year the Group communicated directly with colleagues detailing Group performance, changes in the economic and regulatory environment and updates on key strategic initiatives. Meetings were held throughout the year between the Group and our recognised unions • Non-executive directors attended a number of colleague focus groups to discuss themes from the annual colleague survey, the Group’s new strategy and values, pay and reward and hybrid working Simplicity Risk • The Remuneration Policy has been designed so that it is • The Remuneration Policy supports the Group’s risk easy to understand and transparent, while complying with management framework all regulatory requirements and meeting the expectations • Risk and conduct considerations are taken into account of our shareholders. The purpose of each remuneration in setting the annual bonus pool element is explained in the policy and the amount paid in • The annual bonus, deferred bonus, LTIP and LTSP incorporate respect of each element is clearly set out malus and clawback provisions, and overarching Committee discretion to adjust formulaic outcomes Predictability Alignment to culture • The Remuneration Policy on pages 125 to 133 describes • Annual and long term variable remuneration are designed the purpose, operation and maximum potential for each to drive behaviours consistent with the Groups strategy, remuneration element and illustrates a range of potential purpose and values outcomes for executive directors • When considering individual executive directors’ performance, the Committee takes account of the Group’s values 124 Lloyds Banking Group Annual Report and Accounts 2022 While colleagues were not formally consulted on the Directors’ ### 2023 Directors’ Remuneration Policy Remuneration Policy, the Committee ensured that the pay and ### (Proposed) reward proposition of all colleagues were taken into account Approval for this Directors’ Remuneration Policy (“Policy”) will be in the process of developing the Policy. The remuneration of sought at the AGM on 18 May 2023 and, if approved, it will take executive directors, senior management and all colleagues has effect from that date. been considered in the development of the Policy. It is intended that approval of the Policy will be sought at three- No executive director will be involved in the determination of their year intervals, unless amendments to the Policy are required, own remuneration. To manage conflicts of interests effectively, in which case further shareholder approval will be sought. executive directors were asked to step out of committee meetings Information on how the Policy will be implemented in 2023 is and relevant papers were also redacted for individuals if required. included in the annual report on remuneration. Performance measures and link to strategy 2023 Policy Changes The performance measures selected for the GPS and LTIP will be Financial results Risk managementGovernance Financial statements Other informationStrategic report Over the course of 2022, the Committee performed a thorough set annually by the Committee taking account of the Group’s review of the Policy to inform changes for 2023; input was sought strategic priorities and its most important financial measures. from a range of stakeholders including institutional shareholders, Performance measures are selected to ensure an appropriate the main proxy advisory agencies, the Group’s main regulators balance between short and long-term strategic goals and to the Prudential Regulation Authority (“PRA”) and Financial Conduct align executive director and shareholder interests. In determining Authority (“FCA”), executive management and the Committee’s the appropriate set of measures and targets for annual bonus external advisers to ensure alignment with market practice and and LTIP awards, the Committee has discretion to vary the compliance with applicable regulations and codes of practice. performance measures, or to substitute the metrics, over the life of the Directors’ Remuneration Policy taking into account The Chair of the Committee and members of senior management the Group’s strategic plan or emerging best practice. engaged directly with a significant number of the Group’s largest shareholders both in one on one dialogue and as part of the Directors’ Remuneration Policy and Group Remuneration biennial Board Governance event and ensured the full range of Policy alignment those views were represented and carefully considered by the The only significant difference between the Policy for executive Committee as part of its discussions of changes to the Policy. directors and colleagues outside the Group Executive Committee is participation in the LTIP which is restricted to those most directly Stakeholders were supportive of the proposal to align executive accountable for the successful delivery of the Group’s strategy. reward more closely with the delivery of the Group’s new strategy by returning to a performance based long term incentive plan. The table below summarises how the Policy applies across Shareholder expectations that targets should be stretching will be the Group. given full consideration when making the first LTIP grants in 2024 (subject to Policy approval at the 2023 AGM). Directors’ Remuneration Policy and Group Remuneration Policy alignment Group Other Executive Executive Material Other directors Committee Risk Takers Employees Fixed Base salary Fixed share award / Role based allowance Pension and benefits Variable Short term incentive Long term incentive 125Lloyds Banking Group Annual Report and Accounts 2022 ### Directors’ remuneration report continued Remuneration policy table for executive directors Base Salary Purpose and link to strategy Maximum potential To support the recruitment and retention of executive directors The Committee will make no increase which it believes is of the calibre required to develop and deliver the Group’s inconsistent with the two parameters. Increases will normally strategic priorities. Base salary reflects the role of the individual, be no more than the increase awarded to the overall taking account of market competitiveness, responsibilities and employee population. However, a greater salary increase experience, and pay in the Group as a whole. may be appropriate in certain circumstances, such as a new appointment made on a salary below a market competitive Operation level, where phased increases are planned, or where there Base salaries are typically reviewed annually with any increases has been an increase in the responsibilities of an individual. normally taking effect from 1 April for executive directors. When Where increases are awarded in excess of the wider employee determining and reviewing base salary levels, the Committee population, the Committee will provide an explanation in the takes into account base salary increases for employees relevant annual report on remuneration. throughout the Group and ensures that decisions are made within the following two parameters: Performance measures • An objective assessment of the individual’s responsibilities N/A and the size and scope of their role, using objective job-sizing methodologies. Changes • Pay for comparable roles in comparable publicly listed No change to policy financial services groups of a similar size. Salary may be paid in sterling or other currency and at an exchange rate determined by the Committee. Fixed Share Award Purpose and link to strategy Maximum potential To ensure that total fixed remuneration is commensurate with The maximum award is 100 per cent of base salary. role and to provide a competitive reward package for executive directors with an appropriate balance of fixed and variable Performance measures remuneration, in line with regulatory requirements. N/A Operation Changes The fixed share award will be delivered entirely in Lloyds Banking No change to Policy Group shares, released over three years with 33 per cent being released each year following the year of award. Fixed share awards are preferred to be delivered in shares to create further alignment with shareholders over time. However, the Committee has discretion to deliver some or all of the awards in cash. Pension Purpose and link to strategy Maximum potential To provide cost effective and market competitive retirement The maximum allowance for all executive directors is set at 15 benefits, supporting executive directors in building long-term per cent of base salary in line with the majority of the workforce. retirement savings. Performance measures Operation N/A Executive directors are entitled to participate in the Group’s defined contribution scheme with company contributions set as Changes a percentage of salary. No change to Policy An individual may elect to receive some or all of their pension allowance as cash in lieu of pension contribution. 126 Lloyds Banking Group Annual Report and Accounts 2022 Benefits Purpose and link to strategy • An objective assessment of the individual’s responsibilities To provide flexible benefits as part of a competitive remuneration and the size and scope of their role, using objective job-sizing package. methodologies. • Benefits for comparable roles in comparable publicly listed Operation financial services groups of a similar size. Benefits may include those currently provided and disclosed in the annual report on remuneration. Core benefits include a Maximum potential company car or car allowance, private medical insurance, life The Committee will only make increases in the benefits insurance and other benefits that may be selected through the currently provided which it believes are consistent with the two Group’s flexible benefits plan. parameters above. Executive directors receive a flexible benefits allowance which does not currently exceed 4 per cent of base Financial results Risk managementGovernance Financial statements Other informationStrategic report Additional benefits may be provided to individuals in certain salary. circumstances such as relocation. This may include benefits such as accommodation, relocation, and travel. The Committee Performance measures retains the right to provide additional benefits depending on N/A individual circumstances. Changes When determining and reviewing the level of benefits provided, No change to policy the Committee ensures that decisions are made within the following two parameters: All-employee plans Purpose and link to strategy As You Earn (SAYE) is currently £500. The maximum value of Executive directors are eligible to participate in HMRC-approved shares that may be purchased under the Share Incentive Plan share plans which promote share ownership by giving (SIP) in any year is currently £1,800 with a two-for-one match. employees an opportunity to invest in Group shares. Currently a three-for-two match is operated up to a maximum colleague investment of £30 per month. The maximum value of Operation free shares that may be awarded in any year is £3,600. Executive directors may participate in these plans in line with HMRC guidelines currently prevailing (where relevant), on the Performance measures same basis as other eligible employees. N/A Maximum potential Changes Participation levels may be increased up to HMRC limits as No change to policy amended from time to time. The monthly savings limits for Save Group Performance Share Purpose and link to strategy Maximum potential To incentivise and reward the achievement of the Group’s annual The maximum GPS opportunity is 140 per cent of salary for the financial and strategic targets whilst supporting the delivery of executive directors. long-term superior and sustainable returns. Performance measures Operation Measures and targets are set annually by the Committee in line Measures and targets are set annually and awards are with the Group’s strategic business plan and further details are set determined by the Committee after the year end based on out in the annual report on remuneration for the relevant year. performance against the targets set. The GPS may be delivered partly in cash, shares, notes or other debt instruments including Measures consist of both financial and non-financial measures contingent convertible bonds. Where all or part of any award and the weighting of these measures will be determined is deferred, the Committee may adjust these deferred awards annually by the Committee. All assessments of performance in the event of any variation of share capital, demerger, special are ultimately subject to the Committee’s judgement, but dividend or distribution or amend the terms of the plan in measures will not vest if a 25 per cent threshold performance accordance with the plan rules. is not met. The normal ‘target’ level of the GPS is 50 per cent of maximum opportunity. The Committee is committed to Where an award or a deferred award is in shares or other share- providing transparency in its decision making in respect of linked instrument, the number of shares to be awarded may be GPS awards and will disclose historic measures and target calculated using a fair value or based on discount to market information together with information relating to how the Group value, as appropriate to reflect the fact that the directors are not has performed against those targets in the annual report on eligible for dividends on unvested deferred awards. remuneration for the relevant year except to the extent that this information is deemed to be commercially sensitive, in which The Committee applies its judgement to determine the case it will be disclosed once it is deemed not to be sensitive. payout level commensurate with business and/or individual performance or other factors as determined by the Committee. Changes The Committee may reduce the level of award (including to The maximum Group Performance Share for the CFO has been zero), apply additional conditions to the vesting, or delay the increased from 100 per cent to 140 per cent of salary. vesting of deferred awards to a specified date or until conditions Total target compensation for the CFO is behind peers and set by the Committee are satisfied, where it considers it between lower quartile and median when compared to FTSE30 appropriate. Awards may be subject to malus and clawback for companies. Given the significant value the CFO delivers for a period of up to seven years after the date of award which may the Group, the Committee propose to increase the CFO’s GPS be extended to 10 years where there is an ongoing internal or (annual bonus) maximum opportunity to 140 per cent of salary, regulatory investigation. aligned with the GCE. 127Lloyds Banking Group Annual Report and Accounts 2022 ### Directors’ remuneration report continued Long Term Incentive Plan Purpose and link to strategy Maximum potential To incentivise performance linked to the Group’s strategy and The maximum Long Term Incentive Plan opportunity is 300 per aligned to shareholder interests. cent of base salary for annual awards to all executive directors. The actual award level granted will be determined with reference Operation to a pre-grant test based on an assessment of performance by From 2024, awards will be granted under the rules of the 2023 the Committee. Long Term Incentive Plan, subject to shareholder approval at the AGM in 2023; awards will be granted in the form of conditional Performance measures rights to shares in the Group. Awards will be subject to forward looking performance measures based on financial and other strategic and environmental The grant price of shares to be awarded may be discounted measures set out in the annual report on remuneration each to reflect that the directors are not eligible for dividends on year; performance will be measured over a period of not less unvested awards. than 3 years as determined by the Committee. Awards shall vest in five equal annual instalments which will not The Committee has the discretion to change the measures or start before the third anniversary of grant; each vesting will be their weightings subject to a minimum of 50 per cent of the subject to a further holding period as required by regulation. award being dependent on financial measures. The Committee retains full discretion to amend the vesting No more than 25 per cent of the award will vest for threshold levels should the outcome not reflect business and/or individual performance. 100 per cent of the award will vest for achieving performance including risk and conduct outcomes. The the maximum performance. Where performance falls between Committee may reduce (including to zero) the level of the threshold, target and maximum levels, an intermediate number award, apply additional conditions to the vesting, or delay the of awards will vest. vesting of awards to a specified date or until conditions set by the Committee are satisfied, where it considers it appropriate. Changes Awards may be subject to malus and clawback for a period The Long Term Incentive Plan replaces the Long Term Share Plan. of up to seven years after the date of award which may be extended to 10 years where there is an ongoing internal or The proposed structure provides greater alignment to delivery of regulatory investigation the revised strategic aims of the Group. Deferral of variable remuneration and holding periods Operation remuneration is delivered in shares or other equity linked The GPS and LTIP are both considered variable remuneration for instruments subject to a minimum one year holding period. the purpose of regulatory payment and deferral requirements. Changes The payment of variable remuneration and deferral levels are No change in deferral requirements. determined at the time of award in compliance with regulatory requirements which currently require that at least 60 per cent of the aggregate variable remuneration (GPS + LTIP) is deferred up to seven years with pro rata vesting between the third and seventh year, and at least 50 per cent of total variable Performance Adjustment Performance adjustment is determined by the Remuneration • any other circumstances where the Committee consider Committee and/or Board Risk Committee and may result adjustments should be made. in a reduction of up to 100 per cent variable remuneration opportunity for the relevant period. It can be applied on a Judgement on individual performance adjustment is informed collective or individual basis. When considering collective by taking into account the severity of the issue, the individual’s adjustment, a report is submitted to the Remuneration proximity to the issue and the individual’s behaviour in relation Committee and Board Risk Committee regarding any to the issue. Individual adjustment may be applied through adjustments required to balanced scorecards or the overall GPS adjustments to balanced scorecard assessments and/or and/or LTSP outcome to reflect in-year or prior year risk matters. through reducing the variable remuneration outcome. The application of malus will generally be considered when: Awards are subject to clawback for a period of up to seven years • there is reasonable evidence of employee misbehaviour or after the date of award which may be extended to 10 years material error or that they participated in conduct which where there is an ongoing internal or regulatory investigation. resulted in losses for the Group or failed to meet appropriate standards of fitness and propriety; The application of clawback will generally be considered when: • there is material failure of risk management at a Group, • there is reasonable evidence of employee misbehaviour or business area, division and/or business unit level; material error; or • the Committee determines that the financial results for a • there is material failure of risk management at a Group, given year do not support the level of variable remuneration business area, division and/or business unit level. awarded; and/or 128 Lloyds Banking Group Annual Report and Accounts 2022 ### Discretion in relation to variable rewards Legacy awards and restrictions on payments The Committee retains discretion with regards to all variable Awards in respect of the GPS and under the Long Term Share rewards plans. This relates to: Plan will be granted in 2023 under the terms of the Directors’ remuneration policy approved by shareholders on 21 May 2020 • The timing, size and type of awards and holding periods, (the “2020 Policy”). No further awards would be made under the subject to policy maxima, regulatory requirements and the Long Term Share Plan unless the new Long Term Incentive Plan is annual setting of targets not approved by shareholders. • Where qualitative performance measures are used and performance against those measures is not commensurate The Committee reserves the right to make any remuneration with the Group’s overall financial or strategic performance over payments/awards and any payments/awards for loss of office, the performance period notwithstanding that they are not in line with the policy set out • Adjustment of targets and measures if events occur which above where the terms of the payment/award were agreed cause it to determine that it is appropriate to do so. The (i) before the 2020 policy came into effect; (ii) pursuant to the Financial results Risk managementGovernance Financial statements Other informationStrategic report Committee also retains the right to change performance 2020 policy; or (iii) at a time when the relevant individual was measures and the weighting of measures, including following not a director of the Group and, in the opinion of the Committee, feedback from regulators, shareholders and/or other the payment/award was not in consideration for the individual stakeholders; and amending the plan rules in accordance with becoming a director of the Group. Such payments/awards will their terms and or amending the basis of operation (including have been set out in the annual report on remuneration for the but not limited to the approach in respect of dividend relevant year and include awards and payments made under equivalents) including in light of any change to regulatory previous approved remuneration policies. requirements or guidance or feedback from regulators • To exercise discretion in accordance with the rules, including in relation to whether or not malus or clawback provisions would apply, in connection with recruitment, or terminations of employment, or corporate events affecting the Company • Adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends) • The exercise of the Committee’s discretion will be disclosed in accordance with regulatory requirements Illustration of application of remuneration policy The charts below illustrate possible remuneration outcomes under the following four scenarios: 1. The maximum that may be paid, assuming full GPS payout and full vesting under the new LTIP. For the LTIP, an indication of the maximum remuneration receivable assumes a share price appreciation of 50 per cent during the period in which the award is subject to performance measures. The basis of the calculation of the share price appreciation is that the share price embedded in the calculation for the ‘maximum’ bar chart is assumed to increase by 50 per cent across the performance period. 2. The expected value of remuneration for performance midway between threshold and maximum, assuming 50 per cent of maximum GPS opportunity and 50 per cent vesting of maximum LTIP opportunity. 3. The minimum that may be paid, where only the fixed element is paid (base salary, benefits, pension and the fixed share award). Amounts are based on base salaries as at 1 January 2023, 15 per cent pension allowance, benefits include 4 per cent flexible benefits allowance, private medical cover and a car allowance for CFO. Implementation of the Policy in 2023 is set out in the annual report on remuneration. Value of package (£’000) | | | Maximum – | 12% 12% 17% 37% 19% | | | | | Maximum – | 13% 3% 18% 39% 19% | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | with share price | | | | | £9,107 | with share price | | | | | | | appreciation | | 2% | | | | appreciation | | 8% | | | | | 15% 14% 21% 46% | | | | | | 16% 3% 23% 48% | | | | | Maximum | | | | £7,402 | | Maximum | | | | Charlie Nunn (GCE) | | | | 3% | William Chalmers (CFO) | | | | | 10% | Value of package (£’000) | 23% 21% 16% 35% | | | | 25% 5% 37% | | | | --- | --- | --- | --- | --- | --- | --- | | | | £4,902 | Mid-performance | | | | | | 4% | | | | 15% | 17% | £6,324 | | 47% 44% | | | | 55% 11% | | | --- | --- | --- | --- | --- | --- | --- | | Minimum | | | £2,403 | Minimum | | | | | | 9% | | | | 34% | £5,095 | | | 0 2,500 5,000 7,500 10,000 | | | | 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Mid-performance | | | | | | | | £3,293 | | | | Salary | | Fixed share | Pension | Group | | Long Term | | Share price | | | | | awards | and Benefits | Performance Share | | Incentive Plan | | appreciation | £1,492 129Lloyds Banking Group Annual Report and Accounts 2022 ### Directors’ remuneration report continued Service agreements The service contracts of all current executive directors are terminable on 12 months’ notice from the Group and six months’ notice from the individual. The Chair also has a letter of ### Approach to recruitment appointment. The Chair’s engagement may be terminated on six ### and appointment to the Board months’ notice by either party. In determining appropriate remuneration arrangements on hiring a new executive director, the Committee will take into Notice to be given Date of service account all relevant factors. This may include the experience by the Group agreement and calibre of the individual, local market practice, the existing Robin Budenberg 6 months 04 July 2020 remuneration arrangements for other executives and the business circumstances. The Committee will seek to ensure that Charlie Nunn 12 months 29 November 2020 arrangements are in the best interests of both the Group and its William Chalmers 12 months 15 March 2019 shareholders and will seek not to pay more than is necessary. The service contracts and letters of appointment are available for The Committee may make awards on hiring an external inspection at the Company’s registered office. candidate to ‘buy-out’ remuneration arrangements forfeited, or opportunities lost on leaving a previous employer. In doing so the ### Committee will take account of relevant factors including any Notice periods performance conditions attached to these awards, the form in Newly-appointed executive directors will be employed on which they were granted (e.g. cash or shares), the currency of the contracts that include the following provisions: awards, and the timeframe of awards. Any such award made will be made in accordance with the PRA’s Rulebook and made on • The individual will be required to give six months’ notice if a comparable basis to those forfeited and subject to malus and they wish to leave and the Group will give 12 months’ notice clawback at the request of the previous employer as required by other than for material misconduct or neglect or other the PRA rules. circumstances where the individual may be summarily dismissed by written notice. In exceptional circumstances, new The package will normally be aligned with the remuneration joiners will be offered a longer notice period (typically reducing policy as described in the policy report. However, the Committee to 12 months within two years of joining) retains the discretion to make appropriate remuneration • In the event of long-term incapacity, if the executive director decisions outside the standard policy to facilitate the recruitment does not perform their duties for a period of at least 26 weeks of an individual of the calibre required and in exceptional cases. (in aggregate over a 12 month period), the Group shall be entitled to terminate the executive’s employment by giving This may, for example, include the following circumstances: three months’ notice • At any time after notice to terminate is given by either the • An interim recruit, appointed to fill an executive director role on Group or the executive director, the Group may require the a short-term basis executive director to take leave for some or all of the notice • Exceptional circumstances requiring the Chair to take on an period executive function on a short-term basis • At any time, at its absolute discretion, the Group may elect • An executive director recruited from a business or location to terminate the individual’s employment by paying to the where benefits are provided that do not fall into the definition executive director, in lieu of the notice period, an amount of ‘variable remuneration forfeited’ but where the Committee equivalent to base salary, subject to mitigation as described considers it reasonable to buy-out these benefits, or where more fully in the termination payments section of this report the form of remuneration to be bought out requires a differentiated approach • Transitional arrangements for overseas hires, which might include relocation expenses and accommodation Variable remuneration awarded to a new executive director may not exceed the multiple of annualised fixed pay specified by the Group’s regulators or other such multiple approved by the Group’s shareholders or determined by the Remuneration Committee. In making any such remuneration decisions, the Committee will apply any appropriate performance measures in line with those applied to other executive directors. A full explanation will be provided of any buy-out award or discretionary payment. 130 Lloyds Banking Group Annual Report and Accounts 2022 ## Chair and non-executive director fees and benefits ### Purpose and link to strategy To provide an appropriate reward to attract and retain a high-calibre individual with the relevant skills, knowledge and experience. ### Operation The Committee is responsible for evaluating and making recommendations to the Board with regards to the Chair's fees. The Chair does not participate in these discussions. The GCE and the Chair are responsible for evaluating and making recommendations to the Board in relation to the fees of the Non-executive directors (NEDs). When determining and reviewing fee and benefit levels, the Committee ensures that decisions are made within the following parameters: - The individual's skills and experience. - An objective assessment of the individual's responsibilities and the size and scope of their role, using objective sizing methodologies. - Fees and benefits for comparable roles in comparable publicly listed financial services groups of a similar size. The Chair receives an all-inclusive fee, which is reviewed periodically plus benefits including life insurance, medical insurance and transportation. The Committee retains the right to provide additional benefits depending on individual circumstances. NEDs are paid a basic fee plus additional fees for the chair/membership of committees and for membership of Group company boards, non-board level committees and / or other specific responsibilities. Additional fees are also paid to the senior independent director and to the deputy chair to reflect additional responsibilities. Any increases normally take effect from 1 January of a given year. The Chair and the NEDs are not entitled to receive any payment for loss of office (other than in the case of the Chair's fees for the six month notice period) and are not entitled to participate in the Group's variable remuneration arrangements, all-employee share plan or pension arrangements. NEDs are reimbursed for expenses incurred in the course of their duties, such as travel and accommodation expenses, on a grossed-up basis (where applicable). ### Maximum potential Any increase in fees or benefits currently provided will be consistent with the parameters above. ### Performance metrics N/A ### Changes No change to policy. ## Letters of appointment The non-executive directors all have letters of appointment and are appointed for an initial term of three years after which their appointment may continue subject to an annual review. Non-executive directors may have their appointment terminated, in accordance with statute, regulation and the articles of association, at any time with immediate effect and without compensation. ## Date of letter of appointment | NED | Date of letter of appointment | Date of appointment | | --- | --- | --- | | Robin Budenberg^{1} | 4 July 2020 | 1 October 2020 | | Alan Dickinson | 26 June 2014 | 8 September 2014 | | Sarah Legg | 21 October 2019 | 1 December 2019 | | Lord Lupton | 2 March 2017 | 1 June 2017 | | Amanda Mackenzie | 17 April 2018 | 1 October 2018 | | Harmeen Mehta | 5 October 2021 | 1 November 2021 | | Cathy Turner | 11 October 2022 | 1 November 2022 | | Scott Whewley | 26 July 2022 | 1 August 2022 | | Catherine Woods | 22 October 2019 | 1 March 2020 | 1 Chair is subject to a 6 month notice period. All directors are subject to annual re-election by shareholders. The service contracts and letters of appointments are available for inspection at the Company's registered office. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 131 Generally, on termination of employment, unvested GPS awards, ### Directors’ remuneration report continued Group Ownership Share awards, Long Term Share Plan awards, Long Term Incentive awards and other rights to payments will lapse except where termination falls within one of the reasons ### Termination payments set out below. In the event of redundancy, the individual may It is the Group’s policy that where notice pay continues to be receive a payment in line with statutory entitlements at that time. payable after termination, it should be paid on a phased basis, If an executive director is dismissed for gross misconduct, the mitigated in the event that alternative employment is secured executive director will receive normal contractual entitlements in line with executive directors service contracts. Where it is until the date of termination and all deferred GPS, Group appropriate to make a GPS award to the individual, this should Ownership Share, Long Term Share Plan and Long Term relate to the period of actual service, rather than the full notice Incentive Plan awards will lapse. period. Any GPS payment will be determined on the basis of performance as for all continuing employees and will remain subject to performance adjustment (malus and clawback) and deferral. Termination payments Pension, benefits and other Base salary Fixed share award fixed remuneration Resignation Entitlement to base salary continues Outstanding awards continue and are Paid until date of termination including for full notice period. If employment is released at the normal time and the any period of leave required by the Group terminated prior to end of notice period, number of shares subject to the award in (subject to individual benefit scheme balance of notice pay is paid in monthly the current year will be reduced to reflect rules). instalments, offset by earnings from any the date of termination. new employment during this period. If resignation to take up a new employment, base salary would continue during any period of garden leave but may then cease if early release date agreed. Redundancy Entitlement to base salary continues Outstanding awards will normally continue Paid until date of termination including or termination by mutual for full notice period. If employment is and be released at the normal time and any period of leave required by the Group agreement terminated prior to end of notice period, the number of shares subject to the (subject to individual benefit scheme balance of notice pay is paid in monthly award in the current year will be reduced rules). instalments, offset by earnings from any to reflect the date of termination unless, new employment during this period. in the case of mutual agreement, the Committee determines that exceptional circumstances apply in which case shares may be released on termination. Retirement/ill health, Paid until date of retirement/death. For ill Outstanding awards will normally continue Paid until date of death/ retirement injury, permanent health, injury or permanent disability which and be released at the normal time and (subject to individual benefit scheme disability/death results in the loss of employment, paid for the number of shares subject to the award rules). For ill health, injury, permanent the applicable notice period (including any in the current year will be reduced to reflect disability, paid for the notice period period of leave required by the Group). the date of termination except for (i) death including any period of leave required by where shares are released on the date of the Group (subject to individual benefit termination; or (ii) in the case of permanent scheme rules). disability the Committee determines that exceptional circumstances apply in which case shares may be released on the date of termination. Change of control N/A Outstanding awards will be payable on N/A or merger the date of the Change of Control and the number of shares subject to the award will be reduced to reflect the shorter accrual period. The Committee may decide that vested awards will be exchanged for (and future awards made over) shares in the acquiring company or other relevant company. Other reason where the Entitlement to base salary continues Outstanding awards continue and are Paid until date of termination including Committee determines for full notice period. If employment is released at the normal time and the any period of leave required by the Group that the executive terminated prior to end of notice period, number of shares subject to the award in (subject to individual benefit scheme should be treated balance of notice pay is paid in monthly the current year will be reduced to reflect rules). as a good leaver instalments, offset by earnings from any the date of termination. new employment during this period. 132 Lloyds Banking Group Annual Report and Accounts 2022 Termination payments | | Group Performance Share | | | Long Term Incentive Plan | | Chair and | | | --- | --- | --- | --- | --- | --- | --- | --- | | | (Annual bonus plan) | 1,2 | | (Long term variable reward plan) | 2 | Non-executive director fees | 3 | | Resignation | Unvested deferred GPS awards and | | | Unvested awards lapse on date of | | Paid until date of leaving Board. | | | | entitlement to be considered for in-year | | | leaving (or on notice of leaving) unless | | | | | | award are forfeited on resignation | | 5 . | the Committee determines otherwise | | | | in exceptional circumstances that they will vest on the original vesting date (or exceptionally on the date of leaving). Where the award is to vest it will be subject to the original performance conditions and time pro-rating (for months worked in the performance period). Malus and clawback Financial results Risk managementGovernance Financial statements Other informationStrategic report will apply. Redundancy or For cases of redundancy, unvested Awards vest on the original vesting date Paid until date of leaving Board. termination by mutual deferred GPS awards are retained and in- (or exceptionally on the date of leaving). agreement year GPS awards are accrued until the date Vesting is subject to the performance of termination (or the commencement conditions and time pro-rating (for months of garden leave if earlier). Such awards worked in the performance period). would be subject to deferral, malus and Malus and clawback provisions will clawback. continue to apply. Retirement/ill health, Unvested deferred GPS awards are Awards vest on the original vesting date Paid until date of leaving Board. injury, permanent retained and in-year GPS awards are (or exceptionally on the date of leaving). disability accrued until the date of termination (or Vesting is subject to the performance the commencement of garden leave if conditions and time pro-rating (for months earlier). Such awards would be subject to worked in the performance period). deferral, malus and clawback. Malus and clawback provisions will continue to apply. | Death | Unvested deferred GPS awards are | Awards vest in full on the date of death | Paid until date of leaving Board. | | --- | --- | --- | --- | | | retained and in-year GPS awards are | unless in exceptional circumstances the | | | | accrued until the date of death. Deferred | Remuneration Committee determines that | | | | GPS awards vest on death in cash, unless | the performance against targets set do | | | | the Committee determines otherwise. | not support full vesting. | | | Change of control or | In-year GPS accrued up until date of | Awards vest on date of event. Vesting is | Paid until date of leaving Board. | | merger2 | change of control or merger (current | subject to the performance conditions | | | | year). Where there is a Corporate Event, | and time pro-rating (for months worked | | | | deferred GPS awards vest to the extent and | in the performance period unless | | | | timing determined by the Committee in its | determined otherwise). The Committee | | | | absolute discretion. | may decide not to time pro-rate in its | | absolute discretion. Malus and clawback provisions will continue to apply. Instead of vesting, awards may be exchanged for equivalent awards over the shares of the acquiring company or another company or equivalent cash based awards. Other reason where the Unvested deferred GPS awards retained Awards vest on the original vesting date Paid until date of leaving Board. Committee determines and in-year GPS awards are accrued (or exceptionally on the date of leaving). that the executive should until the date of termination (or the Vesting is subject to the performance be treated as a good commencement of garden leave if earlier). conditions and time pro-rating (for months leaver Deferred GPS awards vest in line with worked in the performance period). normal timeframes and are subject to Malus and clawback provisions will malus and clawback. The Committee may continue to apply. allow awards to vest early if it considers it appropriate. 1 If any GPS is to be paid to the executive director for the current year, this will be determined on the basis of performance for the period of actual service, rather than the full notice period (and so excluding any period of leave required by the Group). 2 Reference to change of control or merger includes a compromise or arrangement under section 899 of the Companies Act 2006 or equivalent. Fixed share awards may also be released/ exchanged in the event of a resolution for the voluntary winding up of the Company; a demerger, delisting, distribution (other than an ordinary dividend) or other transaction, which, in the opinion of the Committee, might affect the current or future value of any award; or a reverse takeover, merger by way of a dual listed company or other significant corporate event, as determined by the Committee. In the event of a demerger, special dividend or other transaction which would in the Committee’s opinion affect the value of awards, the Committee may allow a deferred Group Performance Share award or a long term incentive award to vest to the extent relevant performance conditions are met to that date and if the Committee so determined, on a time pro-rated basis (unless determined otherwise) to reflect the number of months of the performance period worked. 3 The Chair is entitled to six months’ notice. 4 The terms applicable on a cessation of employment to GOS Awards are as shown on page 97 of the 2017 Remuneration Policy. The terms applicable on a cessation of employment to LTSP awards as shown on page 122 of the 2020 Remuneration Policy. 5 Clarifies that entitlement to consideration for in-year GPS award is forfeit on resignation. 6 In the event that performance conditions are required to be assessed prior to the normal vesting date in connection with the leaver event, the Committee retains discretion to make such an assessment on such basis as it considers appropriate. 7 Any awards which vest pursuant to a good leaver event will remain subject to any applicable post-vesting holding period. On termination, the executive director will be entitled to payment for any accrued holiday not taken as part of any period of garden leave calculated by reference to base salary and fixed share award. The cost of legal, tax or other advice incurred by an executive director in connection with the termination of their employment and/or the cost of support in seeking alternative employment may be met up to a maximum of £100,000 (excl VAT). Additional payments may be made where required to settle legal disputes, or as consideration for new or amended post-employment restrictions. Where an executive director is in receipt of expatriate or relocation expenses at the time of termination (as at the date of the AGM no current executive directors are in receipt of such expenses), the cost of actual expenses incurred or benefits provided may continue to be reimbursed for up to 12 months after termination or, at the Group’s discretion, a one-off payment may be made to cover the costs of premature cancellation. The cost of repatriation may also be covered. 133Lloyds Banking Group Annual Report and Accounts 2022 ## Other statutory and regulatory information This directors' report on **pages 72 to 137** is our directors' report for the purposes of the Companies Act 2006 and fulfils the requirements of the corporate governance statement for the purposes of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules (DTR). ### Profit and dividends The consolidated income statement shows a statutory profit before tax for the year ended 31 December 2022 of £6,928 million (2021: £6,902 million). The directors have recommended a final dividend for 2022, which is subject to approval by the shareholders at the annual general meeting (AGM), of 1.60 pence per share, which together with the interim dividend of 0.80 pence per share represents a total dividend for the year of 2.40 pence per share, equivalent to £1.6 billion. If approved by shareholders, the final dividend will be paid on 23 May 2023. A final dividend of 1.33 pence per share totalling £930 million in respect of 2021 was paid on 19 May 2022, and an interim dividend of 0.80 pence per share totalling £545 million was paid on 12 September 2022. Further information on dividends is shown in note 44 on **page 294** and is incorporated into this directors' report by reference. The Board continues to give due consideration at each year end to the return of any surplus capital to shareholders and for 2022, the Board intends to return up to £2.0 billion through a share buyback programme in respect of the Company's ordinary shares. This represents the return of capital over and above the Board's view of the current level of capital required to grow the business, meet regulatory requirements and cover uncertainties. The share buyback programme is intended to commence as soon as is practicable and is expected to be completed, subject to continued authority from the PRA, by 29 December 2023. Given the total ordinary dividend of 2.40 pence per share and the intended share buyback, the total capital return for 2022 will be up to 5.40 pence per share, an increase of 12 per cent on the prior year, equivalent to up to £3.6 billion. The Company intends to use the authority for the repurchase of ordinary shares granted to it at the 2022 AGM to implement the proposed share buyback. Details of this existing authority are set out under 'Power of directors in relation to shares'. Shareholders will be asked to renew this authority at the 2023 AGM, in line with common practice. ### Appointment and retirement of directors The appointment and retirement of directors is governed by the Company's articles of association, the UK Corporate Governance Code and the Companies Act 2006. The Company's articles of association may only be amended by a special resolution of the shareholders in a general meeting. Scott Wheway and Cathy Turner were appointed to the Board on 1 August 2022 and 1 November 2022 respectively. Both will therefore stand for election at the forthcoming AGM. In the interests of good governance and in accordance with the provisions of the UK Corporate Governance Code, all other directors will retire, and those wishing to serve again will submit themselves for re-election at the forthcoming AGM. Biographies of the current directors are set out on **pages 74 to 75**. Details of the directors seeking election or re-election at the AGM are set out in the Notice of Meeting. ### Board composition changes Changes to the composition of the Board since 1 January 2022 up to the date of this report are shown in the table below: | | Joined the Board | Left the Board | | --- | --- | --- | | Stuart Sinclair | | 12 May 2022 | | Scott Wheway | 1 August 2022 | | | Cathy Turner | 1 November 2022 | | ### Directors' and Officers' liability insurance Throughout 2022 the Group had appropriate insurance cover in place to protect directors, including the directors who retired during the year, from liabilities that may arise against them personally in connection with the performance of their role. As well as insurance cover, the Group agrees to indemnify the directors to the maximum extent permitted by law. Further information on the Group's indemnity arrangements is provided in the directors' indemnities section. ### Directors' indemnities The directors of the Company, including the former directors who retired during the year, have entered into individual deeds of indemnity with the Company which constituted 'qualifying third-party indemnity provisions' for the purposes of the Companies Act 2006. The deeds indemnify the directors to the maximum extent permitted by law and remain in force. The deeds were in force during the whole of the financial year or from the date of appointment in respect of the directors appointed during 2022. Deeds for existing directors are available for inspection at the Company's registered office. The Company has also granted deeds of indemnity by deed poll and by way of entering into individual deeds, which constitute 'qualifying third-party indemnity provisions' to the directors of the Group's subsidiary companies, including to former directors who retired during the year and since the year end, and to Group colleagues subject to the provisions of the Senior Managers and Certification Regime. Such deeds were in force during the financial year ended 31 December 2022 and remain in force as at the date of this report. Qualifying pension scheme indemnities have also been granted to the Trustees of the Group's pension schemes, which were in force for the whole of the financial year and remain in force as at the date of this report. ### Conflicts of interest The Board has a comprehensive procedure for reviewing, and as permitted by the Companies Act 2006 and the Company's articles of association, approving actual and potential conflicts of interest. Directors have a duty to notify the Chair and Company Secretary as soon as they become aware of actual or potential conflict situations. Any changes to the commitments of directors are reported to the Nomination and Governance Committee and the Board, and a register of directors' interests is regularly reviewed and authorised by the Board to ensure the authorisation status remains appropriate. Lord Lupton is a senior adviser to Greenhill Europe, an investment bank focused on providing financial advice on significant mergers, acquisitions, restructurings, financings and capital raising to corporations, partnerships, institutions and governments. The Board has authorised the potential conflicts and requires Lord Lupton to recuse himself from discussions, should the need arise. ### Share capital Detail of the rights and obligations attaching to the Company's issued share capital may be found in note 39 to the financial statements. 134 Lloyds Banking Group Annual Report and Accounts 2022 ### Power of directors in relation to shares Substantial shareholders The Board manages the business of the Company under the Major shareholders do not have different voting rights from other powers set out in the articles of association, which include the holders of ordinary shares. Information provided to the Company directors’ ability to issue or buy back shares. The directors were by substantial shareholders pursuant to the DTR is published via granted authorities to issue and allot shares and to buy back a Regulatory Information Service. As at 31 December 2022, the shares at the 2022 AGM. Shareholders will be asked to renew these Company had been notified by its substantial shareholders under authorities at the 2023 AGM. Rule 5 of the DTR of the following interests in the Company’s shares: The authority in respect of purchase of the Company’s ordinary % of issued share shares, as granted at the 2021 AGM, was limited to 7,088,402,568 capital with rights ordinary shares, equivalent to 10 per cent of the issued ordinary to vote in all circumstances at share capital of the Company as at the latest practicable date Interest in shares general meetings 1 prior to publication of the 2021 AGM circular. Such authority was 2 Financial results Risk managementGovernance Financial statements Other informationStrategic report used during the year under review in connection with the share BlackRock Inc. 3,668,756,765 5.14% buyback programme described below, and as at 31 December Harris Associates L.P. 3 4.99% 3,546,216,787 2022 and the date of this report, a total of 4,528,731,591 ordinary shares had been repurchased. 1 Percentage provided was correct at the date of notification. 2 The most recent notification provided by BlackRock Inc. under Rule 5 of the The Company undertook an ordinary share buyback programme, DTR identifies (i) an indirect holding of 3,599,451,380 shares in the Company which was launched on 25 February 2022, and ended on representing 5.04 per cent of the voting rights in the Company, and (ii) a 11 October 2022. The programme repurchased in aggregate holding of 69,305,385 in other financial instruments in respect of the Company representing 0.09 per cent of the voting rights of the Company. BlackRock 4,528,731,591 ordinary shares, each with a nominal value of Inc.’s holding most recently notified to the Company under Rule 5 of the DTR 10 pence, for an aggregate consideration of c.£2.0 billion varies from the holding disclosed in BlackRock Inc.’s Schedule 13-G filing (aggregate nominal value of the ordinary shares £452,873,159.10) with the US Securities and Exchange Commission dated 24 January 2023, as a means by which to return surplus capital to shareholders. All which identifies beneficial ownership of 6,256,206,661 shares in the Company of the repurchased ordinary shares were cancelled, and together representing 9.3 per cent of the issued share capital in the Company. This variance is attributable to different notification and disclosure requirements represented 6.73 per cent of the called up share capital of the between these regulatory regimes. Company at completion of the programme. Further information 3 An indirect holding. in relation to the 2022 ordinary share buyback programme is provided on page 66. No further notifications have been received under Rule 5 of the DTR as at the date of this report. The authority in respect of purchase of the Company’s ordinary shares, as granted at the 2022 AGM, was limited to 7,047,917,092 ### Information incorporated by reference ordinary shares, none of which was utilised as at 31 December 2022 and the date of this report. Content Pages ### Branches Group results Summary of Group Results 51 to 54 The Group provides a wide range of banking and financial Ordinary dividends Dividends on ordinary shares 294 services through branches and offices in the UK and overseas. | | Directors’ emoluments Directors’ remuneration report | | 105 to 133 | | --- | --- | --- | --- | | Research and development activities | Internal control and | Financial reporting risk | 141 | | During the ordinary course of business, the Group develops new | financial risk | | | | | | Risk management | 38 to 43 | | products and services within the business units. | management | | | 139 to 195 Financial instruments 301 to 312 ### Change of control 315 to 335 The Company is not party to any significant agreements which | take effect, alter or terminate upon a change of control of the | Information included in | Future developments | 1 to 44 | | --- | --- | --- | --- | | Company following a takeover bid. There are no agreements | the strategic report | | | | | | Supporting disability | 34 | between the Company and its directors or employees providing compensation for loss of office or employment resulting from a Engagement with colleagues 82 takeover, except for the Company’s employee share plans which Engagement with customers, 82 to 83 contain provisions relating to a change of control set out on suppliers and others page 290. | | Disclosures required | Significant contracts | 297 to 298 | | --- | --- | --- | --- | | Capital Requirements (Country-by-Country | under Listing Rule 9.8.4R | | | | | | Dividend waivers | 294 | ### Reporting) Principal risks and Funding and liquidity 40 As required under the Capital Requirements (Country-by-Country uncertainties 179 to 184 Reporting) Regulations 2013, the Group’s related disclosures may | be found online, at www.lloydsbankinggroup.com/investors/ | | Capital position | 39 | | --- | --- | --- | --- | | financial-downloads.html. | | | 148 to 155 | | | Viability statement Risk overview | | 44 | ### Post balance sheet events Going concern Risk overview 44 Details of events since the date of the balance sheet are provided statement in note 54 on page 337. Share capital and Share capital and restrictions 290 control on the transfer of shares or voting rights Employee share schemes 290 – exercise voting rights Rights and obligations 290 attaching to the Company’s issued share capital Post balance sheet Events since the date of the 337 events balance 135Lloyds Banking Group Annual Report and Accounts 2022 This year, our overall location-based carbon emissions* were ### Other statutory and regulatory 175,411 tonnes CO 2 e; an 4.7 per cent decrease since 2020/21. While ### information continued our overall market-based carbon emissions** were 115,964 tonnes CO 2 e; an 3.1 per cent increase since 2020/21 mainly driven by ### Scope 1, 2 and 3 emissions reporting for our higher business travel and commuting related carbon emission. ### own operations Group energy consumption, electricity and gas, has reduced in The Group has reported greenhouse gas emissions and line with extensive investment on energy efficiency across our environmental performance since 2009, and since 2013 this has buildings and established hybrid workstyle. been reported in line with the requirements of the Companies Act 2006 and its applicable regulations and the Large and Medium * Include Scope 1, 2 emissions and Scope 3 category 3, 5, 6 and 7. Scope 3 Sized Companies and Groups (Accounts and Reports) Regulations category 1, 2, 4 and 15 are excluded. ** Since January 2019, our Scope 2 market-based emissions figure is zero 2008 (as amended) (i.e. Streamlined Energy and Carbon tCO 2 e, as we have procured renewable electricity mainly through our Power Reporting (‘SECR’). Our total emissions, in tonnes of CO 2 equivalent, Purchase Agreement (PPA) and Green Tariff, and renewable certificates equal are reported in the table below. Deloitte LLP has provided limited to the remainder to make up the total electricity consumption in each of the level ISAE 3000 (Revised) assurance over selected non-financial markets in which we operate. indicators. Their full, independent assurance statement is available online at www.lloydsbankinggroup.com/who-we-are/ ### Carbon emissions (tonnes CO 2 e) responsible-business/downloads.html. Oct 2021 – Oct 2020 – Oct 2019 – Oct 2018 – ### Methodology Sept 2022 Sept 2021 Sept 2020 Sept 2019 The Group follows the principles of the Greenhouse Gas (GHG) Total CO 2 e (market Protocol Corporate Accounting and Reporting Standard to 1# based 115,964.48 112,423.64 114,722.02 174,629.23 calculate Scope 1, 2 and 3 emissions from our worldwide | operations. Energy consumption is calculated according to | Total CO | 2 e | | | | --- | --- | --- | --- | --- | | guidance set out by the UK Government’s department for | | | 1# | | | | (location based) | | | 175,411.00 184,103.25 202,346.53 281,772.27 | business, energy & industrial strategy. The reporting period is Total Scope 1 and 2 1 October 2021 to 30 September 2022, which is different to that of 1# (location based) 86,944.94 103,618.21 121,333.09 150,108.22 our directors’ report (January to December 2022). This is in line with the regulations in that most of the emissions reporting year – of which UK falls within the period of the directors’ report. Scope 1 and 2 1 (location based) 86,079.33 102,593.96 120,031.65 147,726.36 Emissions are reported based on the operational control Total Scope 1 and 2 approach. Reported Scope 1 emissions are those generated from 1# (market based) 27,498.42 31,938.60 33,708.58 42,965.18 gas and oil used in buildings, emissions from fuels used in UK company owned vehicles used for business travel and fugitive – of which UK emissions from the use of air conditioning and chiller/refrigerant Scope 1 and 2 1 | plant. Reported Scope 2 emissions are generated from the use | (market based) | | 27,238.09 31,623.28 33,407.46 42,278.76 | | --- | --- | --- | --- | | of electricity and are calculated using both the location and | | 1# | | | | Total Scope 1 | | 27,498.42 31,938.60 33,708.58 42,578.56 | market-based methodologies. Reported Scope 3 emissions relate to business travel (category 6) and commuting (category Total Scope 2 # 7) undertaken by colleagues, emissions from colleagues working (market based) – – – 386.61 from home (category 7), operational waste (category 5) and Total Scope 2 the extraction and distribution of each of our energy sources 1# (location based) 59,446.52 71,679.61 87,624.51 107,529.65 – electricity, gas and oil (category 3). Scope 3 emissions do not include purchased good and services, capital goods and Total Scope 3 upstream transportation and distribution (category 1, 2 and 4) operational 1# and investments (category 15), but these figures are disclosed emissions 88,466.06 80,485.04 81,013.44 131,664.05 in the Environmental Sustainability Report 2022 which can Category 3: be found at www.lloydsbankinggroup.com/who-we-are/ Upstream Fuel responsible-business/downloads.html. and Energy 25,497.78 28,322.39 24,881.51 31,278.87 Category 5: Waste ### Intensity ratio generated in operations 201.38 246.60 389.60 2,324.83 Oct 2021 – Oct 2020 – Oct 2019 – Oct 2018 – Legacy Sept 2022 Sept 2021 Sept 2020 Sept 2019 Category 6: Business travel 6,213.28 1,266.28 11,015.96 31,423.39 GHG emissions | (CO | 2 e) per £m of | | | Category 7: | | --- | --- | --- | --- | --- | | underlying | | | | Employee | | income (Location | | | | Communicating | | | | 1 | | and Teleworking 56,553.62 50,649.77 44,726.36 66,636.96 | | Based) | | | 9.52 11.35 13.24 15.56 | | GHG emissions Further information on our Scope 3 emissions is available in our (CO 2 e) per £m of ESG Performance Review 2022 at www.lloydsbankinggroup.com/ underlying who-we-are/responsible-business/downloads.html. income (Market 1 Based) 6.30 6.93 7.50 9.64 1 Intensities have been restated for 2018/2019, 2019/20 and 2020/21 emissions data to improve the accuracy of reporting, using actual data to replace estimates, account for the historical impacts of acquired Embark Group locations and improvements to fugitive gas calculations. Underlying income figures for those years have not changed. 136 Lloyds Banking Group Annual Report and Accounts 2022 ## Global energy use (kWhs) | | Oct 2021 – Sept 2022 | Oct 2020 – Sept 2021 | Oct 2019 – Sept 2020 | Oct 2018 – Sept 2019 | | --- | --- | --- | --- | --- | | Total global energy use^{1} | 424,263,067 | 474,372,492 | 520,801,595 | 593,841,934 | | – of which UK energy use^{2} | 419,784,408 | 469,399,610 | 515,546,891 | 587,624,076 | | Total building energy^{3} | 412,888,764 | 468,602,439 | 500,486,321 | 554,278,919 | | Total company owned vehicle energy^{4} | 7,367,288 | 2,796,073 | 14,436,436 | 29,987,906 | | Total grey fleet vehicle energy^{5} | 4,007,015 | 2,973,980 | 5,878,838 | 9,575,109 | 1 Restated 2018/2019, 2019/20 and 2020/21 data to improve the accuracy of reporting, using actual data to replace estimates, historical emissions associated with Embark Group's properties, and improved escaped refrigerant related emissions. 2 Grey fleet refers to colleague and hired road vehicles being used for a business purpose. 3 Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2022 Annual Responsible Business Reporting. Deloitte's 2022 assurance statement and the 2022 Reporting Criteria are available online at www.lloydsbankinggroup.com/who-we-are/responsible-business/downloads.html. - Scope 1 emissions are emissions from activities for which the Group is responsible, including mobile and stationary combustion of fuel and operation of facilities - Scope 2 emissions are emissions from the purchase of electricity by the Group for its own use and have been calculated in accordance with GHG Protocol guidelines, in both location and market-based methodologies - Scope 3 emissions include business travel (category 6) and commuting (category 7) undertaken by colleagues, emissions from colleagues working from home (category 7), operational waste (category 5) and the extraction and distribution of each of our energy sources – electricity, gas and oil (category 3). Scope 3 emissions do not include purchased good and services, capital goods and upstream transportation and distribution (category 1, 2 and 4) and investments (category 18) - The methodology to derive reported Scope 1, 2 and 3 emissions is provided in the Lloyds Banking Group Reporting Criteria statement available online at www.lloydsbankinggroup.com/who-we-are/responsible-business/downloads.html. ## Energy efficiency Our ongoing energy optimisation programme, has resulted in 89 GWh cumulative energy savings in 2022. This workstream includes onsite optimisation and strategic alterations of building management and control systems to match the run hours of plant to core operating hours and ensures temperature settings are aligned with Group comfort guidelines. In 2022, 54 deep dives, 54 onsite optimisations, 16 remote optimisations and 529 bank holiday programmes were completed. Together with the energy optimisation programme, we have also delivered a significant LED lighting and Building Management System upgrade throughout our estate, leading to an estimated annualised 2,169 MWh electricity saving. These were the principal measures taken in 2022 to increase the Group's energy efficiency. ## Omissions Emissions associated with our supply chain, joint ventures and investments are not included in this disclosure as they fall outside the scope of our operational boundary. Further information on these sources can be found in the Environmental Sustainability Report 2022, available at www.lloydsbankinggroup.com/who-we-are/responsible-business/downloads.html. The Group does not have any emissions associated with the purchase of heat, steam or cooling for its own use and is not aware of any other material sources of emissions from our reporting. ## Independent auditor and audit information Each person who is a director at the date of approval of this report confirms that, so far as the director is aware, there is no relevant audit information of which the Company's auditor is unaware and each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of the Companies Act 2006. ## Statement of directors' responsibilities The directors are responsible for preparing the annual report, including the directors' remuneration report, and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors are required to prepare the Group and parent Company financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in international accounting standards in conformity with the requirements of the Companies Act 2006 are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and make an assessment of the company's ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the directors' remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. A copy of the financial statements is placed on our website at www.lloydsbankinggroup.com/investors/financial-downloads. The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the current directors who are in office as at the date of this report, and whose names and functions are listed on pages 74 to 75 of this annual report, confirm that, to the best of his or her knowledge: - The Group and the Company financial statements, which have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the Company - The management report contained in the strategic report and the directors' report includes a fair review of the development and performance of the business and the position of the Group and the Company together with a description of the principal risks and uncertainties they face - The annual report and accounts, taken as a whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Company and the Group's position, performance, business model and strategy The directors have also separately reviewed and approved the strategic report. On behalf of the Board Kate Cheetham Kate Cheetham Company Secretary 21 February 2023 Lloyds Banking Group plc Registered in Scotland, No. SC095000 Lloyds Banking Group Annual Report and Accounts 2022 137 Strategic report Financial results Governance Risk management Financial statements Other information ## Risk management In this section The Group’s approach to risk 139 Risk governance 142 Stress testing 144 Emerging risks 145 Full analysis of risk categories 147 ## Household ## decarbonisation ## partnership 1 ### £1,000 cashback for Halifax mortgage customers ### who use borrowing to fund installation of a ### air-source heat pump ### We’ve agreed a strategic partnership with Octopus ### Energy to provide energy efficiency home ### improvements to our customers. ### The first scheme of the partnership will offer lower ### cost air-source heat pumps to UK households. ### The move is designed to support the decarbonisation ### of domestic heating and encourage the retrofit of ### existing UK properties. The pilot has launched through ### our Halifax brand as part of our Green Living Reward ### scheme. Customers using mortgage borrowing to ### fund the switch to an air-source heat pump will ### benefit from £1,000 cashback on completion of ### the installation. Read more about our strategic partnership. 1 Terms and conditions apply. 138 Lloyds Banking Group Annual Report and Accounts 2022 Risk appetite ## Risk management The Group’s approach to setting, governing, embedding and monitoring risk appetite is detailed in the risk appetite framework, a key component of the ERMF. ### Risk management is at the heart of Helping Risk appetite is defined within the Group as the amount and type ### Britain Prosper and creating a more of risk that the Group is prepared to seek, accept or tolerate in ### sustainable and inclusive future for people delivering its strategy. ### and businesses. Business planning aims to optimise value within the Group’s risk appetite parameters and deliver on its promise to Help Britain ### Our mission is to protect our customers, Prosper. ### shareholders, colleagues and the Group, The Group’s risk appetite statement details the risk parameters ### while enabling sustainable growth. This is within which the Group operates. The statement forms part of the Group’s control framework and is embedded into its Financial results Risk managementGovernance Financial statements Other informationStrategic report ### achieved through informed risk decisions policies, authorities and limits, to guide decision-making and ### and robust risk management, supported risk management. Group risk appetite is regularly reviewed and refreshed to ensure appropriate coverage across our principal ### by a consistent risk-focused culture. risks and any emerging risks, and to align with internal or external The risk overview (pages 38 to 44) provides a summary of risk change. management within the Group and the key focus areas for 2022, The Board is responsible for approving the Group’s Board risk including maintaining support for customers. The risk overview appetite statement annually. Group Board-level metrics are also highlights the importance of the connectivity of principal, augmented by further sub-Board-level metrics and cascaded emerging and strategic risks and how they are embedded into into more detailed business appetite metrics and limits. the Group’s strategic risk management framework. The following areas are currently included in the Group Board risk This full risk management section provides a more in-depth appetite: picture of how risk is managed within the Group, detailing the Group’s emerging risks, approach to stress testing, risk Capital: the Group maintains capital levels commensurate with a governance, committee structure, appetite for risk and a full prudent level of solvency to achieve financial resilience and analysis of the principal risk categories (pages 147 to 195), the market confidence framework by which risks are identified, managed, mitigated and Change/execution: the Group has limited appetite for negative monitored. impacts on customers, colleagues, or the Group as a result of Each principal risk category is described and managed using the change activity following standard headings: definition, exposures, measurement, Climate: the Group takes action to support the transition to net mitigation and monitoring. zero, through our activities and our customers, and to maintain our resilience against the risks relating to climate change ### The Group’s approach to risk The Group operates a prudent approach to risk with rigorous Conduct: the Group delivers fair outcomes for its customers management controls to support sustainable business growth Credit: the Group has a conservative and well balanced credit and minimise losses. Through a strong and independent risk portfolio through the economic cycle, generating an appropriate function (Risk division), a robust control framework is maintained return on equity, in line with the Group’s target return on equity in to identify and escalate current and emerging risks, support aggregate sustainable growth within the Group’s risk appetite, and to drive Data: the Group has zero appetite for data related regulatory and inform good risk reward decision-making. fines or enforcement actions To comply with UK specific ring-fencing requirements, core Funding and liquidity: the Group maintains a prudent liquidity banking services are ring-fenced from other activities within profile and a balance sheet structure that limits its reliance on the overall Group. The Group’s enterprise risk management potentially volatile sources of funding framework (ERMF) and risk appetite apply across the Group. These are supplemented by sub-group specific risk management Insurance underwriting: the Insurance Group has an appetite to frameworks and risk appetites which operate within the Group take on insurance underwriting risks where they fit with our parameters. The Group’s Corporate Governance Framework strategic objectives applies across Lloyds Banking Group plc, Lloyds Bank plc, Bank of Market: the Group has effective controls in place to identify and Scotland plc and HBOS plc. It is tailored where needed to meet manage the market risk inherent in our customer and client the entity-specific needs of Lloyds Bank plc and Bank of Scotland focused activities plc, within the Ring-Fenced Bank sub-group and supplementary Model: material models are performing in line with expectations corporate governance frameworks are in place to address the specific requirements of the other sub-groups (Non-Ring-Fenced Operational: the Group has robust controls in place to manage Bank, Insurance and Equity Investments). operational losses, reputational events and regulatory breaches. It identifies and assesses emerging risks and acts to mitigate The Group’s ERMF is structured to align with the industry-accepted these internal control framework standards. Operational resilience: the Group has limited appetite for The ERMF applies to every area of the business and covers all disruption to services to customers and stakeholders from types of risk. It is reviewed, updated and approved by the Board at significant unexpected events least annually to reflect any changes in the nature of the Group’s business and external regulations, law, corporate governance People: the Group leads responsibly and proficiently, manages and industry best practice. The ERMF provides the Group with an people resource effectively, supports and develops colleague effective mechanism for developing and embedding risk policies skills and talent, creates and nurtures the right culture and meets and risk management strategies which are aligned with the legal and regulatory obligations related to its people risks faced by its businesses. It also seeks to facilitate effective Regulatory and legal: the Group interprets and complies with all communication on these matters across the Group. relevant regulation and all applicable laws (including codes of Role of the Board and senior management conduct which could have legal implications) and/or legal Key responsibilities of the Board and senior management include: obligations • Approval of the ERMF and Board risk appetite • Approval of Group-wide risk principles and policies • The cascade of delegated authority (for example to Board sub-committees and the Group Chief Executive) • Effective oversight of risk management consistent with risk appetite 139Lloyds Banking Group Annual Report and Accounts 2022 The primary role of Group Internal Audit (third line) is to help the ### Risk management Board and executive management protect the assets, reputation ### continued and sustainability of the Group. Group Internal Audit is led by the Group Chief Internal Auditor. Group Internal Audit provides Governance frameworks independent assurance to the Audit Committee and the Board The Group’s approach to risk is based on a robust control through performing reviews and engaging with committees framework and a strong risk management culture which are the and executive management, providing opinion, challenge and foundation for the delivery of effective risk management and informal advice on risk and the state of the control environment. guide the way all employees approach their work, behave and Group Internal Audit is a single independent internal audit make decisions. function, reporting to the Group Audit Committee, and the Board Governance is maintained through delegation of authority from or Board Audit Committees of the sub-groups, subsidiaries and the Board to individuals through the management hierarchy. legal entities where applicable. Senior executives are supported where required by a committee- Risk and control cycle from identification to reporting based structure which is designed to ensure open challenge and To allow senior management to make informed risk decisions, the support effective decision-making. business follows a continuous risk management approach which The Group’s risk appetite, principles, policies, procedures, controls includes producing appropriate and accurate risk reporting. The and reporting are regularly reviewed and updated where needed risk and control cycle sets out how this should be approached. to ensure they remain fully in line with regulation, law, corporate This cycle, from identification to reporting, ensures consistency governance and industry good practice. and is intended to manage and mitigate the risks impacting the The interaction of the executive and non-executive governance Group. structures relies upon a culture of transparency and openness The process for risk identification, measurement and control is that is encouraged by both the Board and senior management. integrated into the overall framework for risk governance. Risk Board-level engagement, coupled with the direct involvement of identification processes are forward-looking to ensure emerging senior management in Group-wide risk issues at Group Executive risks are identified. Risks are captured and measured using robust Committee level, ensures that escalated issues are promptly and consistent quantification methodologies. The measurement addressed and remediation plans are initiated where required. of risks includes the application of stress testing and scenario analysis, and considers whether relevant controls are in place Line managers are directly accountable for identifying and before risks are incurred. managing risks in their individual businesses, ensuring that business decisions strike an appropriate balance between risk Identified risks are reported on a regular basis to the appropriate and reward and are consistent with the Group’s risk appetite. committee. The extent of the risk is compared to the overall risk appetite as well as specific limits or triggers. When thresholds Clear responsibilities and accountabilities for risk are defined are breached, committee minutes are clear on the actions and across the Group through a three lines of defence model which time frames required to resolve the breach and bring risk within ensures effective independent oversight and assurance in tolerances. There is a clear process for escalation of risks and respect of key decisions. risk events. The Risk Committee governance framework is outlined on All key controls are recorded and assessed on a regular page 142. basis, in response to triggers or minimum annually. Control Three lines of defence model assessments consider both the adequacy of the design and The ERMF is implemented through a ‘three lines of defence’ model operating effectiveness. Where a control is not effective, the which defines clear responsibilities and accountabilities and root cause is established and action plans implemented to ensures effective independent oversight and assurance activities improve control design or performance. Control effectiveness take place covering key decisions. against all residual risks are aggregated by risk category and Business lines (first line) have primary responsibility for risk reported and monitored via the monthly Key Risk Insights Report decisions, identifying, measuring, monitoring and controlling or Consolidated Risk Report (CRR). The Key Risk Insights Report risks within their areas of accountability. They are required to and CRR are reviewed and independently challenged by the Risk establish effective governance and control frameworks for their division and provided to the Risk division Executive Committee business to be compliant with Group policy requirements, to and Group Risk Committee. On an annual basis, a point in time maintain appropriate risk management skills, mechanisms and assessment is made for control effectiveness against each risk toolkits, and to act within Group risk appetite parameters set and category and across sub-groups. The CRR data is the primary approved by the Board. source used for this point-in-time assessment and a year-on- year comparison on control effectiveness is reported to the Board. Risk division (second line) is centralised, headed by the Chief Risk Officer, providing oversight and constructive challenge to the One Risk and Control Self-Assessment (One RCSA) is part of the effectiveness of risk decisions taken by business management, Group’s risk and control strategy to deliver a stronger risk culture providing proactive advice and guidance, reviewing, challenging and simplified risk and control environment. During 2022, there has and reporting on the risk profile of the Group and ensuring that been significant effort to embed One RCSA. This will continue into mitigating actions are appropriate. 2023 as risk practices, data quality, culture and capability mature. It also has a key role in promoting the implementation of a Risk culture strategic approach to risk management reflecting the risk Based on the Group’s prudent business model, prudent appetite and ERMF agreed by the Board that encompasses: approach to risk management, and guided by the Board, the senior management articulates the core risk values to which the • Overseeing embedding of effective risk management Group aspires, and sets the tone at the top. Senior management processes establishes a strong focus on building and sustaining long- • Transparent, focused risk monitoring and reporting term relationships with customers, through the economic • Provision of expert and high-quality advice and guidance to cycle. The Group’s Code of Responsibility reinforces colleagues’ the Board, executives and management on strategic issues accountability for the risks they take and their responsibility to and horizon scanning, including pending regulatory changes prioritise their customers’ needs. • A constructive dialogue with the first line through provision of advice, development of common methodologies, understanding, education, training, and development of new risk management tools 140 Lloyds Banking Group Annual Report and Accounts 2022 Risk resources and capabilities Financial reporting risk management systems and internal Appropriate mechanisms are in place to avoid over-reliance on controls key personnel or system/technical expertise within the Group. The Group maintains risk management systems and internal Adequate resources are in place to serve customers both controls relating to the financial reporting process which are under normal working conditions and in times of stress, and designed to: monitoring procedures are in place to ensure that the level of • Ensure that accounting policies are appropriately and available resource can be increased if required. Colleagues consistently applied, transactions are recorded accurately, undertake appropriate training to ensure they have the skills and and undertaken in accordance with delegated authorities, that knowledge necessary to enable them to deliver good outcomes assets are safeguarded and liabilities are properly stated for customers. • Enable the calculation, preparation and reporting of financial, There is ongoing investment in risk systems and models alongside prudential regulatory and tax outcomes in accordance with the Group’s investment in customer and product systems applicable International Financial Reporting Standards, and processes. This drives improvements in risk data quality, statutory and regulatory requirements Financial results Risk managementGovernance Financial statements Other informationStrategic report aggregation and reporting leading to effective and efficient • Enable certifications by the Senior Accounting Officer relating risk decisions. to maintenance of appropriate tax accounting and in accordance with the 2009 Finance Act Risk decision-making and reporting • Ensure that disclosures are made on a timely basis in Risk analysis and reporting enables better understanding of risks accordance with statutory and regulatory requirements (for and returns, supporting the identification of opportunities as well example UK Finance Code for Financial Reporting Disclosure as better management of risks. and the US Sarbanes-Oxley Act) An aggregate view of the Group’s overall risk profile, key risks and • Ensure ongoing monitoring to assess the impact of emerging management actions, and performance against risk appetite, regulation and legislation on financial, prudential regulatory including the Key Risk Insights Report and CRR, is reported to and and tax reporting discussed monthly at the Group Risk Committee with regular • Ensure an accurate view of the Group’s performance to allow reporting to the Board Risk Committee and the Board. the Board and senior management to appropriately manage Rigorous stress testing exercises are carried out to assess the the affairs and strategy of the business as a whole and each of impact of a range of adverse scenarios with different probabilities its sub-groups and severities to inform strategic planning. The Group has a Disclosure Committee which assists the The Chief Risk Officer regularly informs the Board Risk Committee Group Chief Executive and Chief Financial Officer in fulfilling of the aggregate risk profile and has direct access to the Chair their disclosure responsibilities under relevant listing and and members of Board Risk Committee. other regulatory and legal requirements. In addition, the Audit Committee reviews the quality and acceptability of the Group’s financial disclosures. For further information on the Audit Committee’s responsibilities relating to financial reporting see pages 95 to 98. Exposure to risk arising from the business activities of the Group The table below provides a high level guide to how the Group’s business activities are reflected through its risk-weighted assets (RWAs), which are prepared in line with PRA prudential requirements. There are a number of risks that are not captured in RWAs including pension risk, interest rate risk, concentration risk and some RWA calculations, such as operational risk RWAs are being updated as part of the Basel 3.1 proposals. Furthermore the risk relating to Scottish Widows activities is not included in this table as Scottish Widows are subject to a different set of prudential rules (Solvency 2 regime). Details of the business activities for each division are provided in the Financial Performance Overview on pages 58 to 66. Insurance, | | | Commercial | | | Pensions and | | | Central | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Retail | | Banking | | Investments | | 1 | Items | | 2 | Group | | At 31 December 2022 | £bn | | | £bn | | £bn | | | £bn | | £bn | Risk-weighted assets (RWAs) Credit risk 93.8 59.6 0.1 11.5 165.0 3 Counterparty credit risk – 5.8 – 0.8 6.6 Market risk – 3.2 – – 3.2 Operational risk 17.9 5.7 – 0.6 24.2 Total (excluding threshold) 111.7 74.3 0.1 12.9 199.0 4 Threshold – – – 11.9 11.9 Total 111.7 74.3 0.1 24.8 210.9 1 As a separate regulated business, the Insurance business maintains its own solvency requirements, including appropriate management buffers, and reports directly to the Insurance Board. Insurance does not hold any RWAs as its assets are removed from the Group’s banking regulatory capital calculations. However, in accordance with banking capital rules part of the Group’s equity investment in Insurance is included in the calculation of threshold RWAs, while the remainder is taken as a deduction from common equity tier 1 (CET1) capital. 2 Central items includes assets held outside the main operating divisions, including the assets of Group Corporate Treasury which holds the Group’s liquidity portfolio, and other supporting functions. 3 Exposures relating to the default fund of a central counterparty and credit valuation adjustment risk are included in counterparty credit risk. 4 Threshold RWAs reflect the proportion of significant investments and deferred tax assets that are permitted to be risk-weighted instead of deducted from CET1 capital. Significant investments primarily arise from the investment in the Group’s Insurance business. 141Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued ### Risk governance The risk governance structure below is integral to effective risk management across the Group. To meet ring-fencing requirements the Boards and Board Committees of the Group and the Ring-Fenced Banks as well as relevant Committees of the Group and the Ring- Fenced Banks will sit concurrently and we refer to this as the Aligned Board Model. Please see page 78 for further information on the Aligned Board Model and the Group’s approach to ring-fencing. The Risk division is appropriately represented on key committees to ensure that risk management is discussed in these meetings. This structure outlines the flow and escalation of risk information and reporting from business areas and the Risk division to the Group Executive Committee and Board. Conversely, strategic direction and guidance is cascaded down from the Board and Group Executive Committee. The Company Secretariat supports senior and Board-level committees, and supports the Chairs in agenda planning. This gives a further line of escalation outside the three lines of defence. Risk governance structure Audit Board Risk Board Committee Committee Reporting Reporting Group Chief Executive Aggregation, Aggregation, Escalation Escalation Group and Ring Fenced Banks Risk Committee Independent Independent Challenge Challenge Risk division Primary Escalation committees and governance Business area Independent Independent Group Internal Audit Principal enterprise Challenge Challenge Risk committees Third line of defence – assurance Second line of defence – risk oversight First line of defence Reporting Reporting - Risk management Independent challenge of both first and second lines of defence Group Chief Executive Committees Risk Division Committees and Governance • Group Executive Committee (GEC) • Group Market Risk Committee • Group and Ring-Fenced Banks Risk Committees (GRC) • Group Economic Crime Prevention Committee • Group and Ring-Fenced Banks Asset and Liability Committees (GALCO) • Group Financial Risk Committee • Group and Ring-Fenced Banks Cost Management Committees • Group Capital Risk Committee • Group and Ring-Fenced Banks Contentious Regulatory Committees • Group Model Governance Committee • Group and Ring-Fenced Banks Strategic Delivery Committees • Group and Ring-Fenced Banks Net Zero Committees • Group and Ring-Fenced Banks Conduct Investigations Committees Board, Executive and Risk Committees The Group’s risk governance structure strengthens risk evaluation and management, while also positioning the Group to manage the changing regulatory environment in an efficient and effective manner. Assisted by the Board Risk and Audit Committees, the Board approves the Group’s overall governance, risk and control frameworks and risk appetite. Refer to the corporate governance section on pages 73 to 91, for further information on Board Committees. The sub-group, divisional and functional risk committees review and recommend sub-group, divisional and functional risk appetite and monitor local risk profile and adherence to appetite. 142 Lloyds Banking Group Annual Report and Accounts 2022 Executive and Risk Committees The Group Chief Executive is supported by the following: Committees Risk focus 1 Group Executive Committee (GEC) Assists the Group Chief Executive in exercising their authority in relation to material matters having strategic, cross-business area or Group-wide implications. Group and Ring-Fenced Banks Risk Responsible for the development, implementation and effectiveness of the Group’s enterprise risk Committees (GRC) management framework, the clear articulation of the Group’s risk appetite and monitoring and reviewing of the Group’s aggregate risk exposures, control environment and concentrations of risk. Group and Ring-Fenced Banks Asset and Responsible for the strategic direction of the Group’s assets and liabilities and the profit and loss Liability Committees (GALCO) implications of balance sheet management actions. The committee reviews and determines the appropriate allocation of capital, funding and liquidity, and market risk resources and makes appropriate trade-offs between risk and reward. Financial results Risk managementGovernance Financial statements Other informationStrategic report Group and Ring-Fenced Banks Cost Leads and shapes the Group’s approach to cost management, ensuring appropriate governance Management Committees and process over Group-wide cost management activities and effective control of the Group’s cost base. Group and Ring-Fenced Banks Contentious Responsible for providing senior management oversight, challenge and accountability in Regulatory Committees connection with the Group’s engagement with contentious regulatory matters as agreed by the Group Chief Executive. Group and Ring-Fenced Banks Strategic Responsible for driving execution of the Group’s investment portfolio and strategic transformation Delivery Committees agenda as agreed by the Group Chief Executive, including monitoring execution performance and progress against strategic objectives. To act as a clearing house to resolve issues on individual project areas and prioritisation across divisional and legal entity issues. Engaging in resolution of challenges that require cross-Group support to resolve, ensuring funding and project performance provides value for money for the Group, and autonomy is maintained alongside accountability for projects and platforms. Group and Ring-Fenced Banks Net Zero Responsible for providing direction and oversight of the Group’s environmental sustainability Committees strategy, including particular focus on the net-zero transition and natural capital (biodiversity) strategy. Oversight of the Group’s approach to meeting external environmental commitments and targets, including but not limited to, progress in relation to the requirements of the Net-Zero Banking Alliance (NZBA). Recommending all external material commitments and targets in relation to environmental sustainability. Group and Ring-Fenced Banks Conduct Responsible for protecting and promoting the Group’s conduct, values and behaviours by taking Investigations Committee action to rectify the most serious cases of misconduct within the Group, identifying themes and ensuring lessons are shared with the business. The Committee shall do this by making outcome decisions and recommendations (including sanctions) on investigations which have been referred to the Committee from the triage process, including the Independent Triage Panel and overseeing regular reviews of thematic outcomes and lessons learned. The Group Risk Committee is supported through escalation and ongoing reporting by divisional risk committees, cross-divisional unit committees addressing specific matters of Group-wide significance and the following second line of defence Risk committees which ensure effective oversight of risk management: Group Market Risk Committee Responsible for monitoring, oversight and challenge of market risk exposures across the Group. Reviews and proposes changes to the market risk management framework, and reviews the adequacy of data quality needed for managing market risks. It is also responsible for escalating issues of Group-level significance to GEC level (usually via GALCO) relating to the management of the Group’s market risks, including those held in the Group’s insurance companies. Group Economic Crime Prevention Committee Brings together accountable stakeholders and subject matter experts to ensure that the development and application of economic crime risk management complies with the Group’s strategic aims, Group corporate responsibility, Group risk appetite and Group economic crime prevention (fraud, anti-money laundering, anti-bribery and sanctions) policy. It provides direction and appropriate focus on priorities to enhance the Group’s economic crime risk management capabilities in line with business and customer objectives while aligning to the Group’s target operating model. Group Financial Risk Committee Responsible for overseeing, reviewing, challenging and recommending to GEC/Board Risk Committee/Board for the Group and Ring-Fenced Bank (i) annual internal stress tests, (ii) all Prudential Regulation Authority (PRA) and any other regulatory stress tests, (iii) annual liquidity stress tests, (iv) reverse stress tests, (v) Individual Liquidity Adequacy Assessment (ILAA), (vi) Internal Capital Adequacy Assessment Process (ICAAP), (vii) Pillar 3, (viii) recovery/resolution plans, and (ix) relevant ad hoc stress tests or other analysis as and when required by the Committee. Group Capital Risk Committee Responsible for providing oversight of relevant capital matters within the Group, Ring-Fenced Bank and material subsidiaries, including latest capital position and plans, capital risk appetite proposals, Pillar 2 developments (including stress testing), recovery and resolution matters and the impact of regulatory reforms and developments specific to capital. Group Model Governance Committee Responsible for supporting the Model Risk and Validation Director in fulfilling their responsibilities, from a Group-wide perspective, under the Group model governance policy through provision of debate, challenge and support of decisions. The committee will be held as required to facilitate approval of models, model changes and model-related items as required by model policy, including items related to the governance framework as a whole and its application. 1 Reference to Group within the risk focus of each committee relates to the Group and the Ring-Fenced Banks. 143Lloyds Banking Group Annual Report and Accounts 2022 Reverse stress testing ### Risk management Reverse stress testing is used to explore the vulnerabilities of the ### continued Group’s and its key legal entities’ strategies and plans to extreme adverse events that would cause the businesses to fail. Where this ### Stress testing identifies plausible scenarios with an unacceptably high risk, the Overview Group or its entities will adopt measures to prevent or mitigate Stress testing is recognised as a key risk management tool by the that and reflect these in strategic plans. Boards, senior management, the businesses and the Risk and Finance functions of all parts of the Group and its legal entities. Other stress testing activity It is fully embedded in the planning process of the Group and its The Group’s stress testing programme also involves undertaking key legal entities as a key activity in medium-term planning, and assessments of liquidity scenarios, market risk sensitivities and senior management is actively involved in stress testing activities scenarios, and business-specific scenarios (see the principal via the governance process. risk categories on pages 147 to 195 for further information on risk-specific stress testing). If required, ad hoc stress testing Scenario stress testing is used to: exercises are also undertaken to assess emerging risks, as Risk identification: well as in response to regulatory requests. This wide-ranging programme provides a comprehensive view of the potential • Understand key vulnerabilities of the Group and its key legal impacts arising from the risks to which the Group is exposed and entities under adverse economic conditions reflects the nature, scale and complexity of the Group. The Group Risk appetite: participated in Part 1 of the Bank of England’s Climate Biennial • Assess the results of the stress test against the risk appetite of Exploratory Stress test in 2021 and will leverage the experience all parts of the Group to ensure the Group and its legal entities gained through that exercise to further embed climate risk into are managed within their risk parameters risk management and stress testing activities. • Inform the setting of risk appetite by assessing the underlying Methodology risks under stress conditions The stress tests at all levels must comply with all regulatory Strategic and capital planning: requirements, achieved through comprehensive macroeconomic scenarios and a rigorous divisional, functional, risk and executive • Allow senior management and the Boards of the Group and its review and challenge process, supported by analysis and insight applicable legal entities to adjust strategies if the plan does into impacts on customers and business drivers. not meet risk appetite in a stressed scenario • Support the Internal Capital Adequacy Assessment Process The engagement of all required business, Risk and Finance teams (ICAAP) by demonstrating capital adequacy, and meet the is built into the preparation process, so that the appropriate requirements of regulatory stress tests that are used to inform analysis of each risk category’s impact upon the business plans is the setting of the Prudential Regulation Authority (PRA) and understood and documented. The methodologies and modelling management buffers (see capital risk on pages 148 to 155) of approach used for stress testing ensure that a clear link is shown the Group and its separately regulated legal entities between the macroeconomic scenarios, the business drivers for each area and the resultant stress testing outputs. All material Risk mitigation: assumptions used in modelling are documented and justified, • Drive the development of potential actions and contingency with a clearly communicated review and sign-off process. plans to mitigate the impact of adverse scenarios. Stress Modelling is supported by expert judgement and is subject to the testing also links directly to the recovery and resolution Group model governance policy. planning process of the Group and its legal entities Governance Regulatory stress tests Clear accountabilities and responsibilities for stress testing Following two years of COVID-19 pandemic crisis related stress are assigned to senior management and the Risk and Finance testing, in 2022 the PRA returned to the annual cyclical scenario functions throughout the Group and its key legal entities. This (ACS) stress test framework. The launch of the stress test was is formalised through the Group business planning and stress postponed from March 2022 to September 2022 following Russia’s testing policy and procedure, which are reviewed at least invasion in Ukraine. The 2022 ACS included submissions for both annually. the Group and Ring-Fenced Bank (RFB). The 2022 stress test The Group Financial Risk Committee (GFRC), chaired by the Chief objective was to assess the resilience of the UK banking system Risk Officer and attended by the Chief Financial Officer and other to deep simultaneous recessions in the UK and global economy, senior Risk and Finance colleagues, has primary responsibility large falls in asset prices and higher global interest rates. The for overseeing the development and execution of the Group’s submission was made to the PRA in January and results will be and Ring-Fenced Bank’s stress tests. The Lloyds Bank Corporate published in Q3 2023. Markets plc (LBCM) Risk Committee performs a similar function Internal stress tests within the scope of LBCM. On at least an annual basis, the Group conducts macroeconomic The review and challenge of the Group’s and Ring-Fenced stress tests to highlight the key vulnerabilities of the Group’s Bank’s detailed stress forecasts, the key assumptions behind and its legal entities’ business plans to adverse changes in the these, and the methodology used to translate the economic economic environment, and to ensure that there are adequate assumptions into stressed outputs conclude with the appropriate financial resources in the event of a downturn. The 2022 internal Finance and Risk sign-off. The outputs are then presented to GFRC stress scenario focussed on assessing vulnerabilities to inflation and the Board Risk Committee for review and challenge. With and rising energy prices. all regulatory exercises being approved by the Board. There is a similar process within LBCM for the governance of the LBCM- specific results. 144 Lloyds Banking Group Annual Report and Accounts 2022 Emerging risks | 01 | | | 02 | | --- | --- | --- | --- | | Emerging risk | | 02 | Principal risk | | A future internal or external | | | The Board-approved enterprise-wide risk | | | Principal risks | | categories used to monitor and report the risk | event or trend, which could have a material positive or Impact on other existing exposures posing the greatest impact to the adverse impact on the Group Group. principal risks 01 and our customers, but where the probability, timescale and/ or materiality may be difficult Emerging risks to accurately assess. 03 Financial results Risk managementGovernance Financial statements Other informationStrategic report Strategic risk A principal risk arising from: • A failure to understand the potential impact Strategic of strategic responses on existing risk types risks • Incorrect assumptions about internal or external operating environments 03 • Inappropriate strategic responses and business plans Background and framework The individual emerging risks detailed above have been taken Understanding emerging risks is an essential component of to executive level committees throughout 2022 with actions the Group’s risk management approach, enabling the Group to assigned to closely monitor their manifestation and potential identify the most pertinent risks and opportunities, and to respond opportunities. through strategic planning and appropriate risk mitigation. Pertinent emerging risks are considered as part of the Group’s Although emerging risk is not a principal risk, if left undetected strategic and business planning processes and primarily emerging risks have the potential to adversely impact the Group addressed through the Group’s strategy. or result in missed opportunities. Key initiatives to tackle the emerging challenges and capitalise on Impacts from emerging risks on the Group’s principal risks can opportunities as part of the Group’s strategy include the following: materialise via two different routes: Purpose: At the heart of the Group’s purpose are the themes of • Emerging risks can impact the Group’s principal risks directly in inclusion, sustainability and being people-first. As such, the the absence of an appropriate strategic response Group’s strategy aims to fully embed a purpose that supports a • Alternatively, emerging risks can be a source of new strategic more inclusive and sustainable future for the Group’s customers, risks, dependent on our chosen response and the underlying colleagues and shareholders. assumptions on how given emerging risks may manifest Outcomes will see products, services and activities, aligning to Where an emerging risk is considered material enough in its own societal and regulatory expectations, which drive impacts across right, the Group may choose to recognise the risk as a principal housing, financial wellbeing, businesses and jobs, communities, risk. Recent examples of this include climate risk and strategic risk. regions, and sustainability. Such elevations are considered and approved through the Board Customer proposition: As part of its strategy, the Group aims to as part of the annual refresh of the enterprise risk management enhance its proposition, better aligning to its purpose, while framework. supporting transition to a low carbon economy and adapting to Risk identification the changing demographic of both its customer base and that of The basis for risk identification is founded on collaboration the UK. between functions across the Group. The activity incorporates Key components include: internal horizon scanning and engagement with external experts • Creating better engagement, improving customer journeys to gain an external context, ensuring broad coverage. and enhancing experiences and tools to drive greater financial This activity is inherently linked with and builds upon the annual resilience and wellbeing for customers strategic planning cycle and is used to identify key external • Democratising access to wealth advice, as well as creating trends, risks and opportunities for the Group. The Group continues a step change in how the Group engages with affluent to evolve its approach for the identification and prioritisation of customers to meet their holistic needs emerging risks. During 2022, the Group enhanced its emerging risk • Supporting customers and businesses in respect of making methodology, introducing a broader range of factors to provide their homes, vehicles, properties and activities more enriched insight. sustainable Under the revised methodology, key factors considered in the • Capitalising on the Group’s existing asset and product assessment of emerging risks include: capabilities for corporate and institutional clients to play a leading role in the transition to Net Zero, addressing regional • The threat presented by a risk inequalities and supporting UK prosperity by helping • The Group’s specific vulnerability to the risk corporates trade internationally • The preparation and protection the Group has in place to manage or mitigate impacts Talent: The Group is firmly committed to being diverse, employing new ways of working, where colleagues are supported in having a The enhanced approach has delivered a more focused list of the growth mindset and empowered to make decisions at pace. Group’s key emerging risks, as detailed below, enabling greater management concentration on developing the appropriate The strategy places focus on a colleague proposition that can responses. attract and retain the best people, while leveraging talent pools across the UK and exploring in-house skills growth strategies, Notable emerging risks and their implications alongside partnerships with universities and businesses, to The Group considers the emerging risk themes detailed in the supplement scarce skill sets. risk overview section on page 43 as having the potential to increase in significance and affect the performance of the Group. For the long term, the Group intends to use its strategic workforce These risks can align to one or more of the Group’s strategic risk planning capability for understanding and meeting the evolving themes and are considered alongside the Group’s operating plan. demand of skills from its businesses and functions. This will also act as the bedrock for key strategic decisions and interventions Risk mitigation in respect of important elements of the Group’s talent strategy in Emerging risks are managed through the Group’s strategic risk the future. framework, detailed on page 195. 145Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued Technology: Simplification of the Group’s estate and leveraging contemporary technologies are core components of the Group’s strategy. The Group aims to manage the challenges of a rapidly evolving landscape by employing technology that is aligned to industry best practice refresh rates, while promoting autonomy and empowerment within teams by streamlining governance. This will be supplemented with an aligned business and technology vision and a rationalised hybrid cloud technology estate and modern engineering standards. Data: Being data-driven is central to the Group’s transformation activity. More than one third of the benefits from the Group’s business strategies are reliant on the ability to successfully leverage data. As such, managing data risk and employing strong data ethics are key considerations for the strategy. The Group has developed a data management strategy to provide the common framework and direction by uplifting data quality, simplifying data architecture, enhancing data governance and implementing market leading tools to improve its ability to deliver a data-first culture. The Group has also invested in data ethics framework and strong governance for its advanced analytics and cloud programmes. In addition to the strategic actions detailed above, the Group works closely with regulatory authorities and industry bodies to ensure that the Group can monitor external developments and identify and respond to the evolving landscape, particularly in relation to regulatory and legal risk. 146 Lloyds Banking Group Annual Report and Accounts 2022 ## Full analysis of risk categories The Group's risk framework covers all types of risk which affect the Group and could impact on the achievement of its strategic objectives. A detailed description of each category is provided on **pages 148 to 195**. Risk categories recognised by the Group are periodically reviewed to ensure that they reflect the Group risk profile in light of internal and external factors, such as the Group strategy and the regulatory environment in which it operates. No changes were made to the risk categories in 2022. | Risk categories | | | | --- | --- | --- | | Principal risk categories | Secondary risk categories | | | **Capital risk** Page 148 | – Capital | | | **Change/execution risk** Page 155 | – Change/execution | | | **Climate risk** Page 156 | – Climate | | | **Conduct risk** Page 156 | – Conduct | | | **Credit risk** Page 158 | – Retail credit | – Commercial credit | | **Data risk** Page 179 | – Data | | | **Funding and liquidity risk** Page 179 | – Funding and liquidity | | | **Insurance underwriting risk** Page 185 | – Insurance underwriting | | | **Market risk** Page 186 | – Trading book – Banking book | – Pensions – Insurance | | **Model risk** Page 191 | – Model | | | **Operational risk** Page 191 | – Business process – Economic crime financial – Economic crime fraud – External service provision | – Financial reporting – Governance – Internal service provision – IT systems | | **Operational resilience risk** Page 193 | – Operational resilience | | | **People risk** Page 194 | – People | – Health and safety | | **Regulatory and legal risk** Page 195 | – Regulatory compliance | – Legal | | **Strategic risk** Page 195 | – Strategic | | The Group considers both reputational and financial impact in the course of managing all its risks and therefore does not classify reputational impact as a separate risk category. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 147 ## Risk management continued ### Capital risk #### Definition Capital risk is defined as the risk that an insufficient quantity or quality of capital is held to meet regulatory requirements or to support business strategy, an inefficient level of capital is held or that capital is inefficiently deployed across the Group. #### Exposures A capital risk event arises when the Group has insufficient capital resources to support its strategic objectives and plans, and to meet both regulatory and external stakeholder requirements and expectations. This could arise due to a depletion of the Group's capital resources as a result of the crystallisation of any of the risks to which it is exposed, or through a significant increase in risk-weighted assets as a result of rule changes or economic deterioration. Alternatively a shortage of capital could arise from an increase in the minimum requirements for capital, leverage or MREL either at Group, Ring-Fenced Bank (RFB) sub-group or regulated entity level. The Group's capital management approach is focused on maintaining sufficient and appropriate capital resources across all regulated levels of its structure in order to prevent such exposures while optimising value for shareholders. #### Measurement The Group maintains capital levels across all regulated entities commensurate with a prudent level of solvency to achieve financial resilience and market confidence. To support this, capital risk appetite is calibrated by taking into consideration both an internal view of the amount of capital to hold as well as external regulatory requirements. The Group assesses both its regulatory capital requirements and the quantity and quality of capital resources it holds to meet those requirements through applying the regulatory capital framework set out under the Capital Requirements Directive and Regulation (CRD IV), as amended by subsequent revisions to the Directive (CRD V) and to the Regulation (CRR II), the latter applying in full from 1 January 2022 following the UK implementation of the remaining provisions of CRR II. The requirements are supplemented through additional regulation under the PRA Rulebook and associated statements of policy, supervisory statements and other regulatory guidance. Further details of the regulatory capital and leverage frameworks to which the Group is subject, including the means by which its capital and leverage requirements and capital resources are calculated, are provided in the Group's Pillar 3 disclosures. The minimum amount of total capital, under Pillar 1 of the regulatory capital framework, is set at 8 per cent of total risk-weighted assets. At least 4.5 per cent of risk-weighted assets are required to be met with common equity tier 1 (CET1) capital and at least 6 per cent of risk-weighted assets are required to be met with tier 1 capital. Minimum Pillar 1 requirements are supplemented by additional minimum requirements under Pillar 2A of the regulatory capital framework, the aggregate of which is referred to as the Group's Total Capital Requirement (TCR), and a number of regulatory capital buffers as described below. Additional minimum capital requirements under Pillar 2A are set by the PRA as a firm-specific individual Capital Requirement (ICR) reflecting a point in time estimate, which may change over time, of the minimum amount of capital to cover risks that are not fully covered by Pillar 1, such as credit concentration and operational risk, and those risks not covered at all by Pillar 1, such as pension obligation risk and interest rate risk in the banking book (IRRBB). During the year the PRA reverted to setting a variable amount for Pillar 2A (being a set percentage of risk-weighted assets), with fixed add-ons for certain risk types. The Group's Pillar 2A capital requirement has been reduced to the equivalent of around 2.7 per cent of risk-weighted assets, of which the minimum amount to be met by CET1 capital is the equivalent of around 1.5 per cent of risk-weighted assets. The Group's Pillar 2A capital requirement includes a reduction linked to the setting of a 2 per cent UK countercyclical capital buffer (CCyB) rate under normal conditions, as defined by the Bank of England's Financial Policy Committee (FPC). Following a prior PRA announcement this reduction had been temporarily offset through the PRA Buffer, with the offset subsequently removed in December 2022 following the increase in the UK CCyB rate. The Group is also required to hold a number of regulatory capital buffers which are required to be met with CET1 capital. Systemic buffers are designed to hold systemically important banks to higher capital standards, so that they can withstand a greater level of stress before requiring resolution. - Although the Group is not currently classified as a global systemically important institution (G-SII), it has been classified as an 'other' systemically important institution (O-SII) by the PRA - The O-SII buffer applies to the Group's RFB sub-group and is currently set at 2.0 per cent of the RFB sub-group's risk-weighted assets. This equates to 1.7 per cent of risk-weighted assets at Group level, with the difference reflecting the risk-weighted assets of the Group that are not in the RFB sub-group and for which the O-SII buffer does not therefore apply. It is the PRA's policy to include this in the Group's PRA Buffer. The FPC amended the O-SII buffer framework during 2022, changing the metric for determining the buffer rate from total assets to the UK leverage exposure measure. This will apply from the next review point in December 2023 which will refer to the RFB sub-group's leverage exposure measure as at 31 December 2022, with any changes applying from 1 January 2025. Based on the RFB sub-group's leverage exposure measure as at 31 December 2022, the O-SII buffer rate will be maintained at 2.0 per cent The capital conservation buffer (CCB) is a standard buffer of 2.5 per cent of risk-weighted assets designed to provide for losses in the event of stress. The countercyclical capital buffer (CCyB) is time-varying and is designed to require banks to hold additional capital to remove or reduce the build-up of systemic risk in times of credit boom, providing additional loss absorbing capacity and acting as an incentive for banks to constrain further credit growth. The amount of the buffer is determined by reference to buffer rates published by the FPC for the individual countries where the Group has relevant credit exposures. The FPC also sets the UK CCyB rate which is currently set at 1 per cent and will increase to 2 per cent in July 2023. Given the Group's UK focused business model, the Group's CCyB at 31 December 2022 was around 0.9 per cent of risk-weighted assets. The increase in the UK CCyB rate to 2 per cent would represent an equivalent increase in the Group's CCyB to around 1.8 per cent from July 2023. As part of the Group's capital planning process, forecast capital positions are subjected to stress testing to determine the adequacy of the Group's capital resources against minimum requirements, including the ICR. The PRA considers outputs from both the Group's internal stress tests and Bank of England stress tests, in conjunction with other information, as part of the process for informing the setting of a bank-specific capital buffer for the Group, known as the PRA Buffer. The PRA requires this buffer to remain confidential. Under recent Bank of England stress tests, the BoE has taken action to avoid an unwarranted de facto increase in capital requirements that could result from the interaction of IFRS 9. The stress hurdle rates for banks participating in the current Annual Cyclical Scenario stress test exercise will be adjusted to recognise the additional resilience provided by the earlier provisions taken under IFRS 9. The BoE is continuing to work on a more enduring treatment of IFRS 9 for the purposes of future stress tests. 148 Lloyds Banking Group Annual Report and Accounts 2022 All buffers are required to be met with CETI capital. Usage of the PRA Buffer would trigger a dialogue between the Group and the PRA to agree what action is required whereas a breach of the combined buffer (all other regulatory buffers, as referenced above) would give rise to mandatory restrictions upon any discretionary capital distributions. The PRA has previously communicated its expectation that banks' capital and liquidity buffers can be drawn down as necessary to support the real economy through a shock and that sufficient time would be made available to restore buffers in a gradual manner. In addition to the risk-based capital framework outlined above, the Group is also subject to minimum capital requirements under the UK Leverage Ratio Framework. The leverage ratio is calculated by dividing tier 1 capital resources by the leverage exposure which is a defined measure of on-balance sheet assets and off-balance sheet items. The minimum Tier 1 leverage ratio requirement under the UK Leverage Ratio Framework is 3.25 per cent. This is supplemented by a time-varying countercyclical leverage buffer (CCLB) requirement which is determined by multiplying the Group's CCyB rate by 35 per cent. As at 31 December 2022 the CCLB for the Group was 0.3 per cent. Following the planned increase in the UK CCyB rate, the Group's CCLB would be expected to increase to 0.6 per cent in Q3 2023. An additional leverage ratio buffer (ALRB) requirement of 0.7 per cent applies to the RFB sub-group and is determined by multiplying the RFB sub-group O-Sil buffer by 35 per cent. At Group level an equivalent buffer of 0.6 per cent applies. At least 75 per cent of the 3.25 per cent minimum leverage ratio requirement as well as 100 per cent of regulatory leverage buffers must be met by CETI capital. The leverage ratio framework does not currently give rise to higher regulatory capital requirements for the Group than the risk-based capital framework. ## Mitigation The Group has a capital management framework that includes the setting of capital risk appetite and capital planning and stress testing activities. Close monitoring of capital and leverage ratios is undertaken to ensure the Group meets regulatory requirements and risk appetite levels and deploys its capital resources efficiently. The Group monitors early warning indicators and maintains a Capital Contingency Framework as part of a Recovery Plan which are designed to identify emerging capital concerns at an early stage, so that mitigating actions can be taken, if needed. The Recovery Plan sets out a range of potential mitigating actions that could be taken in response to a stress. For example, the Group is able to accumulate additional capital through the retention of profits over time, which can be enhanced through reducing or cancelling proposed dividend payments and share buybacks, by raising new equity via, for example, a rights issue or debt exchange and by raising additional tier 1 or tier 2 capital securities. The cost and availability of additional capital is dependent upon market conditions and perceptions at the time. The Group is also able to manage the demand for capital through management actions including adjusting its lending strategy, risk hedging strategies and through business disposals. Capital policies and procedures are well established and subject to independent oversight. ## Monitoring The Group's capital is actively managed and monitoring capital ratios is a key factor in the Group's planning processes, which separately cover the RFB sub-group and key individual banking entities. Multi-year base case forecasts of the Group's capital position, based upon the Group's operating plan, are produced at least annually to inform the Group's capital plan whilst shorter term forecasts are more frequently undertaken to understand and respond to variations of the Group's actual performance against the plan. The Group's capital plan is tested for capital adequacy using relevant stress scenarios and sensitivities covering adverse economic conditions as well as other adverse factors that could impact the Group. Regular monitoring of the capital position is undertaken by a range of committees, including Group Capital Risk Committee (GCRC), Group Financial Risk Committee (GFRC), Group and Ring-Fenced Banks Asset and Liability Committees (GALCO), Group and Ring-Fenced Banks Risk Committees (GRC), Board Risk Committee (BRC) and the Board. This includes reporting of actual ratios against forecasts and risk appetite, base case and stress scenario projected ratios, and review of early warning indicators and assessment against the Capital Contingency Framework. The regulatory framework within which the Group operates continues to evolve and further detail on this is provided in the Group's Pillar 3 disclosures. The Group continues to monitor prudential developments very closely, analysing the potential capital impacts to ensure that, through organic capital generation and management actions, the Group continues to maintain a strong capital position that exceeds both minimum regulatory requirements and the Group's risk appetite and is consistent with market expectations. ## Target capital ratios The Board's view of the ongoing level of CETI capital required by the Group to grow the business, meet current and future regulatory requirements and cover uncertainties continues to be around 12.5 per cent plus a management buffer of around 1 per cent. This takes into account, amongst other considerations: - The minimum Pillar 1 CETI capital requirement of 4.5 per cent of risk-weighted assets - The Group's Pillar 2A capital requirement set by the PRA. During the year the PRA reduced the requirement, of which the minimum amount to be met by CETI capital is the equivalent of around 1.5 per cent of risk-weighted assets - The Group's current CCyB requirement which is around 0.9 per cent of risk-weighted assets - The CCB requirement of 2.5 per cent of risk-weighted assets - The RFB sub-group's O-Sil buffer of 2.0 per cent of risk-weighted assets, which equates to 1.7 per cent of risk-weighted assets at Group level - The Group's PRA Buffer - The desire to maintain a progressive and sustainable ordinary dividend policy in the context of year to year earnings movements ## Capital returns The Group has in place a progressive and sustainable ordinary dividend policy which allows for flexibility to return surplus capital to shareholders through share buybacks or special dividends. Surplus capital represents capital over and above the amount management wish to retain to grow the business, meet current and future regulatory requirements and cover uncertainties. The amount of required capital may vary from time to time depending on circumstances and by its nature there can be no guarantee that any return of surplus capital will be made. Given the Group's robust financial performance and strong capital position at the year end, the Board has recommended a final ordinary dividend of 1.60 pence per share. This is in addition to the interim ordinary dividend of 0.80 pence per share that was announced as part of the 2022 half year results and paid in September 2022. The total ordinary dividend for the year is therefore 2.40 pence per share. The Group also intends to implement a share buyback programme of up to £2.0 billion which will commence as soon as is practicable and is expected to be completed by 31 December 2023. The Board remains committed to future capital returns. Going forward, the Board intends to maintain its progressive and sustainable ordinary dividend policy alongside further returns of surplus capital at the end of the year as appropriate. The Board will continue to give due consideration at year end to the size of the final dividend payment and to the return of any surplus capital based upon the circumstances at the time. The ability of the Group to pay a dividend is also subject to constraints including the availability of distributable reserves, legal and regulatory restrictions and the Group's financial and operating performance. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 149 ## Risk management continued Distributable reserves are determined as required by the Companies Act 2006 by reference to a company's individual financial statements. At 31 December 2022 Lloyds Banking Group plc ('the Company') had accumulated distributable reserves of approximately £10 billion. Substantially all of the Company's merger reserve is available for distribution under UK company law as a result of transactions undertaken to recapitalise the Company in 2009. Lloyds Banking Group plc acts as a holding company which also issues capital and other securities to capitalise and fund the activities of the Group. The profitability of the holding company, and its ability to sustain dividend payments, is therefore dependent upon the continued receipt of dividends and interest from its main operating subsidiaries, including Lloyds Bank plc (the Ring-Fenced Bank), Lloyds Bank Corporate Markets plc (the non-Ring-Fenced Bank), IBG Equity Investments Limited and Scottish Widows Group Limited (the Insurance business). The principal operating subsidiary is Lloyds Bank plc which, at 31 December 2022, had a consolidated CET1 capital ratio that exceeded minimum regulatory requirements and internal risk appetite levels. A number of Group subsidiaries, principally those with banking and insurance activities, are subject to regulatory capital requirements which require minimum amounts of capital to be maintained relative to their size and risk. The Group actively manages the capital of its subsidiaries, which includes monitoring the regulatory capital ratios for its banking and insurance subsidiaries and, on a consolidated basis, the RFB sub-group against approved risk appetite levels. The Group operates a formal capital management policy which requires all subsidiary entities, subject to agreement by their governing bodies, to remit surplus capital to their parent companies. ### Minimum requirement for own funds and eligible liabilities (MREL) Global systemically important banks (G-SIBs) are subject to an international standard on total loss absorbing capacity (TLAC). The standard is designed to enhance the resilience of the global financial system by ensuring that failing G-SIBs have sufficient capital to absorb losses and recapitalise under resolution, whilst continuing to provide critical banking services. In the UK, the Bank of England has implemented the requirements of the international TLAC standard through the establishment of a framework which sets out minimum requirements for own funds and eligible liabilities (MREL). The purpose of MREL is to require firms to maintain sufficient own funds and eligible liabilities that are capable of credibly bearing losses or recapitalising a bank whilst in resolution. MREL can be satisfied by a combination of regulatory capital and certain unsecured liabilities (which must be subordinate to a firm's operating liabilities). Although the Group is not classified as a G-SIB it is subject to the Bank of England's MREL framework, including the statement of policy on MREL (the 'MREL SoP') which requires the Group to maintain a minimum level of MREL resources. Under the requirements of the framework, the Group operates a single point of entry (SPE) resolution strategy, with Lloyds Banking Group plc as the designated resolution entity. Applying the MREL SoP to minimum capital requirements at 31 December 2022, the Group's MREL requirement, excluding regulatory capital and leverage buffers, is the higher of 2 times Pillar 1 plus 2 times Pillar 2A, equivalent to 21.4 per cent of risk-weighted assets, or 6.5 per cent of the UK leverage ratio exposure measure. In addition, CET1 capital cannot be used to meet both MREL and capital or leverage buffers. Internal minimum requirements for own funds and eligible liabilities (internal MREL) also apply to the Group's material sub-groups and entities, including the RFB sub-group, Lloyds Bank plc, Bank of Scotland plc and Lloyds Bank Corporate Markets plc. ### Analysis of CET1 capital position The Group's pro forma CET1 capital ratio reduced by 222 basis points from 16.3 per cent at 31 December 2021 to 14.1 per cent at 31 December 2022. This initially reflected a reduction of 230 basis points on 1 January 2022 for regulatory changes which included an increase in risk-weighted assets, in addition to other related modelled impacts on CET1 capital, following: - The anticipated impact of the implementation of new CRD IV mortgage, retail unsecured and commercial banking models to meet revised regulatory standards for modelled outputs - The UK implementation of the remainder of CRR 2 which included a new standardised approach for measuring counterparty credit risk (SA-CCR) This was in addition to the reinstatement of the full deduction treatment for intangible software assets and phased reductions in IFRS 9 transitional relief. The new CRD IV models remain subject to finalisation and approval by the PRA and therefore uncertainty over the final impact remains. The impact of the regulatory changes on 1 January 2022 was subsequently offset by strong pro forma capital generation of 245 basis points during the year which reflected the following: - Banking profitability of 230 basis points, including a net impairment charge of 44 basis points reflecting the impact of the impairment charge for the year (59 basis points) net of IFRS 9 dynamic relief (15 basis points) following the increase in Stage 1 and Stage 2 expected credit losses in the second half of the year - 21 basis points for both the £300 million dividend received from the Insurance business in July 2022 and the £100 million dividend received in February 2023 - A reduction in risk-weighted assets (excluding threshold movements), post 1 January 2022 regulatory changes, generating an increase equivalent to 14 basis points and other movements of 11 basis points - Offset in part by 31 basis points related to the full 2022 fixed contributions to the Group's three main defined benefit pension schemes Capital usage resulted in a further reduction of 237 basis points on a pro forma basis, reflecting: - 81 basis points in total for the interim ordinary dividend of 0.80 pence per share paid in September 2022 and the accrual for the recommended final ordinary dividend for 2022 of 1.60 pence per share - 104 basis points to cover the accrual for the full amount of the announced £2.0 billion ordinary share buyback programme - 52 basis points for variable pension contributions made to the main defined benefit pension schemes, including £400 million of additional contributions paid in December, representing an acceleration of future planned contributions, ahead of the triennial pension fund renegotiation The ordinary share buyback will commence as soon as is practicable and the full impact will be accrued for through the Group's actual capital position during the first quarter of 2023. Excluding the pro forma Insurance dividend received in February 2023 and the full impact of the announced ordinary share buyback programme, the Group's CET1 capital ratio at 31 December 2022 was 15.1 per cent (31 December 2021: 17.3 per cent). As at 31 December 2022, static relief under the IFRS 9 transitional arrangements amounted to £232 million (31 December 2021: £353 million) and dynamic relief amounted to £358 million (31 December 2021: £428 million) through CET1 capital. On 1 January 2023 IFRS 9 static relief came to an end and the transitional factor applied to IFRS 9 dynamic relief reduced by a further 25 per cent, resulting in an overall reduction of 15 basis points. The Group's pro forma CET1 capital ratio at 31 December 2022 does not include the impact of the reduced relief. ### Total capital requirement The Group's total capital requirement (TCR) as at 31 December 2022, being the aggregate of the Group's Pillar 1 and current Pillar 2A capital requirements, was £22,550 million (31 December 2021: 22,986 million). ### Capital resources An analysis of the Group's actual capital position as at 31 December 2022 is presented in the following section. The capital position reflects the application of the transitional arrangements for IFRS 9. 150 Lloyds Banking Group Annual Report and Accounts 2022 Capital resources (audited) The table below summarises the consolidated capital position of the Group. The Group’s Pillar 3 disclosures provide a comprehensive analysis of the own funds of the Group. | At 31 Dec | | At 31 Dec | | | --- | --- | --- | --- | | | 2022 | | 2021 | | | £m | | £m | Common equity tier 1 Shareholders’ equity per balance sheet 41,980 47,011 Adjustment to retained earnings for foreseeable dividends (1,062) (947) 1 Deconsolidation adjustments 3,058 2,486 Cash flow hedging reserve 5,476 457 Financial results Risk managementGovernance Financial statements Other informationStrategic report Other adjustments (80) 547 49,372 49,554 less: deductions from common equity tier 1 Goodwill and other intangible assets (4,982) (3,026) Prudent valuation adjustment (434) (457) Removal of defined benefit pension surplus (2,803) (3,200) 1 Significant investments (4,843) (4,573) Deferred tax assets (4,445) (4,483) Common equity tier 1 capital 31,865 33,815 Additional tier 1 Other equity instruments 5,271 5,879 2 Preference shares and preferred securities 470 2,149 3 Regulatory adjustments (470) (1,598) 5,271 6,430 less: deductions from tier 1 1 Significant investments (1,100) (1,100) Total tier 1 capital 36,036 39,145 Tier 2 2,3 Other subordinated liabilities 10,260 10,959 1 Deconsolidation of instruments issued by insurance entities (1,430) (1,753) 3 Regulatory adjustments (2,323) (1,056) 6,507 8,150 less: deductions from tier 2 1 Significant investments (963) (961) 3 Total capital resources 41,580 46,334 Risk-weighted assets (unaudited) 210,859 195,967 Common equity tier 1 capital ratio (unaudited) 15.1% 17.3% Tier 1 capital ratio (unaudited) 17.1% 20.0% Total capital ratio (unaudited) 19.7% 23.6% 1 For regulatory capital purposes, the Group’s Insurance business is deconsolidated and replaced by the amount of the Group’s investment in the business. A part of this amount is deducted from capital (via ‘significant investments’ in the table above) and the remaining amount is risk-weighted, forming part of threshold risk-weighted assets. 2 Preference shares, preferred securities and other subordinated liabilities are reported as subordinated liabilities in the balance sheet. 3 Following the completion of the transition to end-point eligibility rules on 1 January 2022, legacy tier 1 and tier 2 capital instruments subject to the original CRR transitional rules have now been fully removed from regulatory capital. Included in other subordinated liabilities is a single legacy tier 2 capital instrument of £5 million that remains eligible under the extended transitional rules of CRR 2. Excluding this instrument, total capital resources at 31 December 2022 are £41,575 million and the total capital ratio is 19.7 per cent. 151Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued Movements in capital resources The key movements are set out in the table below. Common | equity | | Additional | | | Total | | --- | --- | --- | --- | --- | --- | | | tier 1 | | tier 1 | Tier 2 | capital | | | £m | | £m | £m | £m | At 31 December 2021 33,815 5,330 7,189 46,334 1 Banking business profits 5,511 – – 5,511 2 Movement in foreseeable dividend accrual (115) – – (115) Final 2021 dividend paid out on ordinary shares during the period (930) – – (930) Interim 2022 dividend paid out on ordinary shares during the period (545) – – (545) Share buyback reflected through retained profits (2,013) – – (2,013) 3 Dividends received from the Insurance business 600 – – 600 IFRS 9 transitional adjustment to retained earnings (181) – – (181) Pension deficit contributions (1,611) – – (1,611) Goodwill and other intangible assets (1,956) – – (1,956) Significant investments (270) – (2) (272) Movement in treasury shares and employee share schemes 204 – – 204 Movements in other equity, subordinated liabilities, other tier 2 items and related adjustments – (1,159) (1,643) (2,802) Distributions on other equity instruments (438) – – (438) Other movements (206) – – (206) At 31 December 2022 31,865 4,171 5,544 41,580 1 Under the regulatory capital framework, profits made by Insurance are removed from CET1 capital. However, when dividends are paid to the Group by Insurance these are recognised through CET1 capital. 2 Reflects the reversal of the brought forward accrual for the final 2021 ordinary dividend, net of the accrual for the final 2022 ordinary dividend. 3 Received in February 2022 and July 2022. CET1 capital resources have reduced by £2.0 billion over the year, primarily reflecting: • The reduction on 1 January 2022 for regulatory changes including the reinstatement of the full deduction treatment for intangible software assets in addition to phased and other reductions in IFRS 9 transitional relief • The ordinary share buyback programme announced as part of the Group’s 2021 year end results that completed during 2022 • The interim ordinary dividend paid in September 2022, the accrual for the final 2022 ordinary dividend and distributions on other equity instruments • Pension deficit contributions (fixed and variable) paid into the Group’s three main defined benefit pension schemes • Partially offset by banking business profits for the year and the receipt of dividends paid up by the Insurance business during the year AT1 capital resources have reduced by £1.2 billion and Tier 2 capital resources have reduced by £1.6 billion over the year. The reductions primarily reflect the derecognition of legacy AT1 and Tier 2 capital instruments following the completion of the transition to end- point eligibility rules for regulatory capital on 1 January 2022, instrument repurchases and the impact of interest rate increases and regulatory amortisation on eligible Tier 2 capital instruments. This was partially offset by the issuance of new AT1 and Tier 2 capital instruments, the impact of sterling depreciation and an increase in eligible provisions recognised through Tier 2 capital. Minimum requirement for own funds and eligible liabilities (MREL) An analysis of the Group’s current MREL resources is provided in the table below. | At 31 Dec | | At 31 Dec | | | --- | --- | --- | --- | | | 2022 | | 2021 | | | £m | | £m | Total capital resources 41,580 46,334 1 Ineligible AT1 and tier 2 instruments (181) (163) Amortised portion of eligible tier 2 instruments issued by Lloyds Banking Group plc 1,346 713 2 Other eligible liabilities issued by Lloyds Banking Group plc 24,085 26,070 Total MREL resources 66,830 72,954 Risk-weighted assets 210,859 195,967 MREL ratio 31.7% 37.2% Leverage exposure measure 638,815 664,362 MREL leverage ratio 10.5% 11.0% 1 Instruments with less than or equal to one year to maturity or instruments not issued out of the holding company. 2 Includes senior unsecured debt. During the year the Group issued externally £6.1 billion (sterling equivalent at point of issuance) of senior unsecured debt from Lloyds Banking Group plc which, while not included in total capital, is eligible to meet MREL. Total MREL resources reduced by £6.1 billion, driven by the reduction in total capital resources and a net reduction in other eligible liabilities. The latter largely reflected the derecognition of senior unsecured debt instruments with less than one year to maturity, calls and interest rate increases, partially offset by the new issuances and sterling depreciation. 152 Lloyds Banking Group Annual Report and Accounts 2022 Risk-weighted assets | At 31 Dec | | At 31 Dec | | | --- | --- | --- | --- | | | 2022 | | 2021 | | | £m | | £m | Foundation Internal Ratings Based (IRB) Approach 46,500 47,255 Retail IRB Approach 81,091 65,450 1 Other IRB Approach 19,764 22,572 IRB Approach 147,355 135,277 1 Standardised (STA) Approach 23,119 21,628 Credit risk 170,474 156,905 1 Securitisation 6,397 5,945 Financial results Risk managementGovernance Financial statements Other informationStrategic report Counterparty credit risk 5,911 5,261 Credit valuation adjustment risk 621 678 Operational risk 24,241 24,025 Market risk 3,215 3,153 Risk-weighted assets 210,859 195,967 2 Of which threshold risk-weighted assets 11,883 12,359 1 Threshold risk-weighted assets are now included within Other IRB Approach and Standardised (STA) Approach. In addition securitisation risk-weighted assets are now shown separately. Comparatives have been presented on a consistent basis. 2 Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital. Significant investments primarily arise from investment in the Group’s Insurance business. Risk-weighted assets have increased by £15 billion in the year, primarily reflecting: • The £16 billion increase on 1 January 2022, reflecting regulatory changes which include the anticipated impact of the implementation of new CRD IV models to meet revised regulatory standards for modelled outputs. The new CRD IV models remain subject to finalisation and approval by the PRA and therefore the resultant risk-weighted asset impact also remains subject to this • Risk-weighted assets reduced by £1 billion during the year (subsequent to the 1 January 2022 regulatory changes) to £211 billion at 31 December 2022. This largely reflected optimisation activity and Retail model reductions from the strong underlying credit performance, partly offset by the growth in balance sheet lending and the impact of foreign exchange movements 153Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued Leverage ratio The table below summarises the component parts of the Group’s leverage ratio. | At 31 Dec | | At 31 Dec | | | --- | --- | --- | --- | | | 2022 | | 2021 | | | £m | | £m | Total tier 1 capital (fully loaded) 36,036 38,594 Exposure measure Statutory balance sheet assets Derivative financial instruments 24,753 22,051 Securities financing transactions 56,646 69,673 Loans and advances and other assets 796,430 794,801 Total assets 877,829 886,525 Qualifying central bank claims (91,125) (72,741) 1 Deconsolidation adjustments Derivative financial instruments 712 (166) Loans and advances and other assets (168,531) (186,965) Total deconsolidation adjustments (167,819) (187,131) Derivatives adjustments (7,414) (3,506) Securities financing transactions adjustments 2,645 1,946 Off-balance sheet items 42,463 57,496 Amounts already deducted from tier 1 capital (12,033) (10,324) 2 Other regulatory adjustments (5,731) (7,903) Total exposure measure 638,815 664,362 3 Average exposure measure 658,435 UK leverage ratio 5.6% 5.8% 3 Average UK leverage ratio 5.5% Leverage exposure measure (including central bank claims) 729,940 737,103 Leverage ratio (including central bank claims) 4.9% 5.2% 1 Deconsolidation adjustments relate to the deconsolidation of certain Group entities that fall outside the scope of the Group’s regulatory capital consolidation, primarily the Group’s Insurance business. 2 Includes adjustments to exclude lending under the UK Government’s Bounce Back Loan Scheme (BBLS). 3 The average UK leverage ratio is based on the average of the month end tier 1 capital position and average exposure measure over the quarter (1 October 2022 to 31 December 2022). The average of 5.5 per cent compares to 5.3 per cent at the start and 5.6 per cent at the end of the quarter. Analysis of leverage movements The Group’s UK leverage ratio has reduced to 5.6 per cent, primarily reflecting the reduction in the total tier 1 capital position. This was partially offset by the £25.5 billion reduction in the leverage exposure measure which largely reflected reductions in securities financing transactions and the measure for off-balance sheet items. The securities financing transactions (SFT) exposure measure, representing the aggregate of SFT assets per the balance sheet and SFT adjustments, reduced by £12.3 billion during the year, reflecting a reduction in volumes. Off-balance sheet items reduced by £15.0 billion during the year, largely reflecting optimisation activity which has resulted in a reduction in the credit conversion factor applied to residential mortgage offers. The average UK leverage ratio was 5.5 per cent over the fourth quarter, reflecting an increase in the ratio across the quarter as the exposure measure reduced, largely driven by decreasing SFT volumes. 154 Lloyds Banking Group Annual Report and Accounts 2022 ## Application of IFRS 9 on a full impact basis for capital and leverage | | IFRS 9 full impact | | | --- | --- | --- | | | At 31 Dec 2022 | At 31 Dec 2021 | | Common equity tier 1 (£m) | 31,275 | 33,033 | | Transitional tier 1 (£m) | 35,446 | 38,363 | | Transitional total capital (£m) | 41,480 | 46,336 | | Total risk-weighted assets (£m) | 210,573 | 195,874 | | Common equity tier 1 ratio (%) | 14.9 | 16.9 | | Transitional tier 1 ratio (%) | 16.8 | 19.6 | | Transitional total capital ratio (%) | 19.7 | 23.7 | | UK leverage ratio exposure measure (£m) | 638,225 | 663,580 | | UK leverage ratio (%) | 5.6 | 5.7 | The Group applies the full extent of the IFRS 9 transitional arrangements for capital as set out under CRR Article 473a (as amended via the CRR 'Quick Fix' revisions published in June 2020). Specifically, the Group has opted to apply both paragraphs 2 and 4 of CRR Article 473a (static and dynamic relief) and in addition to apply a 100 per cent risk weight to the consequential Standardised credit risk exposure add-back as permitted under paragraph 7a of the revisions. As at 31 December 2022, static relief under the transitional arrangements amounted to £232 million (31 December 2021: £353 million) and dynamic relief amounted to £358 million (31 December 2021: £428 million) through CET1 capital. ### Stress testing The Group undertakes a wide-ranging programme of stress testing, providing a comprehensive view of the potential impacts arising from the risks to which the Group and its key legal entities are exposed. One of the most important uses of stress testing is to assess the resilience of the operational and strategic plans of the Group and its legal entities to adverse economic conditions and other key vulnerabilities. As part of this programme the Group has participated in the delayed 2022 Annual Cyclical Scenario stress test run by the Bank of England, which was submitted to the regulator during January 2023. This assesses the Group's resilience to a severe economic shock where the House Price Index (HPI) falls by 31 per cent, Commercial Real Estate (CRE) falls by 45 per cent, unemployment peaks at 8.5 per cent and the Base Rate peaks at 6 per cent. The results of this exercise will be published by the Bank of England in the third quarter of 2023. In 2022 the Group also internally assessed vulnerabilities to inflation and rising energy prices. ### G-SIB indicators Although the Group is not currently classified as a Global Systemically Important Bank (G-SIB), by virtue of the Group's leverage exposure measure exceeding €200 billion the Group is required to report G-SIB indicator metrics to the PRA. The Group's indicator metrics used within the 2022 Basel G-SIBs annual exercise will be disclosed from April 2023 and the results are expected to be made available by the Basel Committee later this year. ### Insurance business The business transacted by the insurance companies within the Group comprises of both life insurance business and general insurance business. Life insurance comprises of unit-linked, non-profit and with-profits business. Scottish Widows Limited (SW Ltd) holds the only with-profit fund managed by the Group. Each insurance company within the Group is regulated by the PRA. The Solvency II regime for insurers and insurance groups came into force from 1 January 2016. Insurance is required to calculate solvency capital requirements and available capital on a risk-based approach. Insurance calculates regulatory capital on the basis of an internal model, which has been approved by the PRA. The minimum required capital must be maintained at all times throughout the year. These capital requirements and the capital available to meet them are regularly estimated in order to ensure that capital maintenance requirements are being met. All minimum regulatory requirements of the insurance companies have been met during the year. ## Change/execution risk ### Definition Change/execution risk is defined as the risk that, in delivering its change agenda, the Group fails to ensure compliance with laws and regulation, maintain effective customer service and availability, and/or operate within the Group's risk appetite. ### Exposures Change/execution risks arise when the Group undertakes activities which require products, processes, people, systems or controls to change. These changes can be as a result of external drivers (for example, a new piece of regulation that requires the Group to put in place a new process or reporting) and/or internal drivers including business process changes, technology upgrades and strategic business or technology transformation. ### Measurement The Group currently measures change/execution risk against defined risk appetite metrics which are a combination of leading, quality and delivery indicators across the investment portfolio. These indicators are reported through internal governance structures and monthly execution risk metrics, which forms part of the Board risk appetite metrics, and are under ongoing evolution and enhancement to ensure ongoing support of the Group's change and transformation agenda. ### Mitigation The Group takes a range of mitigating actions with respect to change/execution risk. These include the following: - The Board establishes a Group-wide risk appetite and metric for change/execution risk - Ensuring compliance with the change policy and associated policies and procedures, which set out the principles and key controls that apply across the business and are aligned to the Group risk appetite - Businesses assess the potential impacts of undertaking any change activity on their ability to execute effectively, on customers and colleagues and on the potential consequences for existing business risk profiles - The implementation of effective governance and control frameworks to ensure adequate controls are in place to manage change activity and act to mitigate the change/execution risks identified. These controls are monitored in line with the change policy and enterprise risk management framework - Events and incidents related to change activities are escalated and managed appropriately in line with risk framework guidance - Ensuring there are sufficient, appropriately skilled resources to support the safe delivery of the Group's current and future change portfolio ### Monitoring Change/execution risks are monitored and reported through to the Board and Group Governance Committees in accordance with the Group's enterprise risk management framework. Risk exposures are assessed monthly through established governance in the Group's functional and divisional risk committees with escalation to Executive Committees where required. Material change/execution related risk events or incidents are escalated in accordance with the Group operational risk policy and change policy. In addition there is oversight, challenge and reporting at Risk division level to support overall management of risks and ongoing effectiveness of controls. Lloyds Banking Group Annual Report and Accounts 2022 155 Strategic report Financial results Governance Risk management Financial statements Other information requirements, including the Task Force on Climate-related ### Risk management Financial Disclosures (TCFD) recommendations. ### continued The 2022 Lloyds Banking Group environmental sustainability ### Climate risk report (pages 56 to 62) provides further detail on the key Definition processes to address some of the most material climate risks Climate risk is defined as the risk that the Group experiences facing the Group, particularly focusing on credit risk. losses and/or reputational damage, either from the impacts of The Group’s risk appetite for managing climate risk from its climate change and the transition to net zero, or as a result of the lending activities is outlined in its fourteen external sector Group’s responses to tackling climate change. statements, which form one of the ways for managing and controlling climate risk. These sector statements outline what Exposures types of activities the Group will and will not support. The Group’s Climate risk can arise from: external sector statements are publicly available on the Group • Physical risks – changes in climate or weather patterns which Responsible Business Download Centre. are acute, event driven (e.g. flood or storms), or chronic, longer- The Group continues to embed climate risk, as well as wider term shifts (e.g. rising sea levels or droughts) ESG considerations, into its credit risk framework, policies and • Transition risks – changes associated with the move towards processes. As climate risk is embedded into the credit risk net zero, including changes to policy, legislation and management framework, the Group is continuing to assess regulation, technology and changes to customer preferences; how climate risk is reflected in its credit risk policies and sector or legal risks from failing to manage these changes appetites over the short, medium and long term. The Group The Group has identified loans and advances to customers in currently looks to ensure that climate and broader ESG risks are sectors at increased risk from the impacts of climate change, considered for all commercial customers that bank with the see page 73 in the 2022 Lloyds Banking Group environmental Group, with specific commentary in new and renewal applications sustainability report. where total aggregated hard limits exceed £500,000 (excluding This has informed an analysis of the main climate risks facing automated decisioning processes for smaller counterparties). The the Group, including how these may impact across the different Group’s retail credit risk policies require due regard to be paid to principal risks within the Group’s enterprise risk management energy efficiency, Energy Performance Certificate (EPC) controls, framework. For further information see pages 14 to 17 in the 2022 and physical risks, such as flood assessments, in the mortgages Lloyds Banking Group environmental sustainability report. business, and transition risks, pace and growth of electric vehicles, within the motor portfolio. Measurement The Group considers how climate risks are incorporated into In Scottish Widows, the investment portfolio is exposed to market the measurement of expected credit losses. An assessment risk via potential investment losses and stranded assets of was performed of the Group’s internally generated economic counterparties. There are stewardship and exclusions policies in scenarios used in the measurement of expected credit losses place, along with strategic asset allocation, to seek to manage against external scenarios published by the Network for Greening transition risks. Given the short-term nature of home insurance the Financial System (NGFS). This was supplemented by an policies in the General Insurance business, the Group is able assessment of the behavioural lifetime of assets against the to review the risks regularly, and change its approach as risks expected time horizons of when climate risks may materialise. develop to mitigate long-term exposure of climate risk. Given the extended timelines related to climate risks compared Monitoring to the tenor of the Group’s lending portfolios and insights Climate risk is considered each month through the Group’s produced by the Group’s climate risk experts, no adjustments risk reporting to the Board, while more detailed updates are have been required to the expected credit losses measured as at provided half-yearly to the Board Risk Committee. This ensures 31 December 2022. Board oversight of the Group’s overall climate risk profile, plans to The Group continues to enhance its internal climate risk develop capabilities supporting climate risk management and assessment methodologies and tools to assess the physical development of climate-related risk appetite. and transition risks which could impact clients and customers. The integration of climate risk into credit decisioning (for One example is the qualitative ESG risk assessment tool for example, EPC and flood risk data in Homes) has supported the commercial clients. From a climate risk perspective, this is development of metrics which highlight the levels of physical designed to generate a score for individual clients based on their and transition risk in key portfolios, and allows the Group to transition readiness and response to managing climate risks and differentiate its lending strategy. The Group is continuing to opportunities. develop its approach to measuring and monitoring climate risk The Group also continues to evolve its climate scenario analysis and will enhance reporting going forward as understanding capabilities to assist in the identification, measurement and and capabilities increase, which will also be used to set further ongoing assessment of the climate risks that pose threats to quantitative and qualitative risk appetite metrics as appropriate. its strategic objectives. It is a fast-evolving discipline, requiring ### new skill sets and investment in data. The Group has established Conduct risk a centre of excellence to bring together the expertise and Definition resources to further develop scenario analysis capabilities, Conduct risk is defined as the risk of customer detriment across building on the experience gained in participating in the Bank of the customer lifecycle including: failures in product management, England’s Climate Biennial Exploratory Scenario (CBES) exercise distribution and servicing activities; from other risks materialising, and other internal assessments. The 2022 Lloyds Banking Group or other activities which could undermine the integrity of the environmental sustainability report (pages 63 to 67) provides market or distort competition, leading to unfair customer further information on the climate scenario analysis undertaken outcomes, regulatory censure, reputational damage or financial and next steps as the Group continues to develop its climate loss. scenario analysis approach. Customer harm or detriment is defined as consumer loss, distress Climate considerations also form part of the Group’s planning or inconvenience to customers due to breaches of regulatory and forecasting activities, with a forecast of the Group’s financed or internal requirements or our wider duty to act fairly and emissions included within the Group’s four-year financial plan, reasonably. alongside a qualitative assessment of the climate risks and Exposures opportunities for certain material sectors. The Group faces significant conduct risks, which affect all Mitigation aspects of the Group’s operations and all types of customers. The Group’s climate risk policy provides an overarching The introduction of Consumer Duty has increased regulatory framework for the management of climate risks, intended to expectations in relation to customer outcomes, including how the support appropriate consideration of climate risks across key Group demonstrates and measures them. activities. The policy also supports the Group’s climate-related external ambitions and progress against the relevant regulatory 156 Lloyds Banking Group Annual Report and Accounts 2022 Conduct risks can impact directly or indirectly on the Group’s and enabling more effective control management. Actions to customers and could materialise from a number of areas across encourage good conduct include: the Group, including: • Conduct risk appetite established at Group and divisional • Business and strategic planning that does not sufficiently level, with metrics included in the Group risk appetite to ensure consider customer needs ongoing focus • Ineffective development, management and monitoring of • Simplified and enhanced conduct policies and procedures products, their distribution (including the sales process, fair in place to ensure appropriate controls and processes that value assessment and responsible lending criteria) and post- deliver good customer outcomes, and support market integrity sales service (including the management of customers in and competition requirements financial difficulties) • Customer needs considered through divisional customer • Unclear, unfair, misleading or untimely customer plans, with integral conduct lens communications • Cultural transformation: achieving a values-led culture • A culture that is not sufficiently customer-centric through a consistent focus on behaviours to ensure the Group Financial results Risk managementGovernance Financial statements Other informationStrategic report • Poor governance of colleagues’ incentives and rewards and is transforming its culture for success in a digital world. This is approval of schemes which lead to behaviours that drive supported by strong direction and tone from senior executives unfair customer outcomes and the Board • Ineffective identification, management and oversight of legacy • Development and continued oversight of the implementation conduct issues of the vulnerability strategy continues through the Group • Ineffective management and resolution of customers’ Customer Inclusion Forum to monitor vulnerable outcomes, complaints or claims provide strategic direction and ensure consistency across the • Outsourcing of customer service and product delivery to third Group parties that do not have the same level of control, oversight • Robust product governance framework to ensure products and culture as the Group continue to offer customers fair value, and consistently meet their needs throughout their product lifecycle The Group is also exposed to the risk of engaging in activities or • Effective complaints management through responding to, and failing to manage conduct which could constitute market abuse, learning from, root causes of complaint volumes and Financial undermine the integrity of a market in which it is active, distort Ombudsman Service (FOS) change rates competition or create conflicts of interest. • Review and oversight of thematic conduct agenda items There continues to be a significant focus on market misconduct, at senior committees, ensuring holistic consideration of and action has been taken to move to risk-free rates following the key Group-wide conduct risks ending of the majority of London Inter-bank Offered Rate (LIBOR) • Robust recruitment and training, with a continued focus on measures on 1st January 2022. how the Group manages colleagues’ performance with clear There is a high level of scrutiny from regulatory bodies, the media, customer accountabilities politicians, and consumer groups regarding financial institutions’ • Ongoing engagement with third parties involved in serving the treatment of customers, especially those with characteristics Group’s customers to ensure consistent delivery of vulnerability. The Group continues to apply significant focus • Monitoring and testing of customer outcomes to ensure the to its treatment of all customers, in particular those in financial Group delivers good outcomes for customers throughout difficulties and those with characteristics of vulnerability, to the product and service lifecycle, and make continuous ensure good outcomes. improvements to products, services and processes • Continued focus on market conduct; member of the Fixed The Group continuously adapts to market developments that Income, Currencies and Commodities Markets Standard Board; could pose heightened conduct risk, and actively monitors for and committed to conducting its market activities consistent early signs of financial difficulties driven by pressures from a rising with the principles of the UK Money Markets code, the Global cost of living, rising interest rates and continuing impacts from Precious Metals Code and the FX Global Code COVID-19. • Adoption of robust change delivery methodology to enable Other key areas of focus include transparency and fairness prioritisation and delivery of initiatives to address conduct of pricing communications; ensuring victims of Authorised challenges Push Payment Fraud receive good outcomes; and increased • Continued focus on proactive identification and mitigation of expectations regarding customer outcomes due to the conduct risk in the Group’s strategy introduction of the FCA’s Consumer Duty Regulation. • Active engagement with regulatory bodies and other stakeholders to develop understanding of concerns related Measurement to customer treatment, effective competition and market To articulate its conduct risk appetite, the Group has sought more integrity, to ensure that the Group’s strategic conduct focus granularity through the use of suitable Conduct Risk Appetite continues to meet evolving stakeholder expectations Metrics (CRAMs) and tolerances that indicate where it may be • Creation of tools and additional support for customers operating outside its conduct risk appetite. impacted by the rising cost of living, including Cost-of-Living CRAMs have been designed for services and products offered Hub and interest-free overdraft buffer by the Group and are measured by a consistent set of common • A programme of work is underway to deliver the enhanced metrics. These contain a range of product design, sales and expectations of Consumer Duty process metrics (including outcome testing outputs) to provide a more holistic view of conduct risks; some products also have a Monitoring suite of additional bespoke metrics. Conduct risk is governed through divisional risk committees and significant issues are escalated to the Group Risk Committee, Each of the tolerances for the metrics are agreed for the in accordance with the Group’s Enterprise Risk Management individual product or service and are regularly tracked. At a Framework, as well as through the monthly Risk Reporting. The risk consolidated level these metrics are part of the Board risk exposures are reported, discussed and challenged at divisional appetite. The Group has, and continues to, evolve its approach risk committees. Remedial action is recommended, if required. All to conduct risk measurements, to include emerging conduct material conduct risk events are escalated in accordance with themes. the Group Operational Risk Policy. Mitigation A number of activities support the close monitoring of conduct The Group takes a range of mitigating actions with respect risk including: to conduct risk and remains focused on delivering a leading • The use of CRAMs across the Group, with a clear escalation customer experience. route to Board The Group’s ongoing commitment to good customer outcomes • Oversight and assurance activities across the three lines of sets the tone from the top and supports the development our defence values-led culture with customers at the heart, strengthening • Horizon scanning links between actions to support conduct, culture and customer 157Lloyds Banking Group Annual Report and Accounts 2022 both new business and existing exposure. Key metrics, which may ### Risk management include total exposure, expected credit loss (ECL), risk-weighted ### continued assets, new business quality, concentration risk and portfolio performance, are reported monthly to risk committees and ### Credit risk forums. Definition Credit risk is defined as the risk that parties with whom the Group Measures such as ECL, risk-weighted assets, observed credit has contracted fail to meet their financial obligations (both on performance, predicted credit quality (usually from predictive and off-balance sheet). credit scoring models), collateral cover and quality, and other credit drivers (such as cash flow, affordability, leverage and Exposures indebtedness) have been incorporated into the Group’s credit The principal sources of credit risk within the Group arise from risk management practices to enable effective risk measurement loans and advances, contingent liabilities, commitments, debt across the Group. securities and derivatives to customers, financial institutions and The Group has also continued to strengthen its capabilities and sovereigns. The credit risk exposures of the Group are set out in abilities for identifying, assessing and managing climate-related note 52 on page 317. risks and opportunities, recognising that climate change is likely In terms of loans and advances (for example mortgages, term to result in changes in the risk profile and outlook for the Group’s loans and overdrafts) and contingent liabilities (for example customers, the sectors the Group operates in and collateral/asset credit instruments such as guarantees and documentary letters valuations. For further information, please refer to the 2022 Lloyds of credit), credit risk arises both from amounts advanced and Banking Group environmental sustainability report. commitments to extend credit to a customer or bank. With In addition, stress testing and scenario analysis are used to respect to commitments to extend credit, the Group is also estimate impairment losses and capital demand forecasts potentially exposed to an additional loss up to an amount equal for both regulatory and internal purposes and to assist in to the total unutilised commitments. However, the likely amount the formulation and calibration of credit risk appetite, where of loss may be less than the total unutilised commitments, as appropriate. most retail and certain commercial lending commitments may be cancelled based on regular assessment of the prevailing As part of the ‘three lines of defence’ model, the Risk division is creditworthiness of customers. Most commercial term the second line of defence providing oversight and independent commitments are also contingent upon customers maintaining challenge to key risk decisions taken by business management. specific credit standards. The Risk division also tests the effectiveness of credit risk management and internal credit risk controls. This includes Credit risk also arises from debt securities and derivatives. The ensuring that the control and monitoring of higher risk and total notional principal amount of interest rate, exchange rate, vulnerable portfolios and sectors is appropriate and confirming credit derivative and other contracts outstanding at 31 December that appropriate loss allowances for impairment are in place. 2022 is shown on page 173. The notional principal amount does Output from these reviews helps to inform credit risk appetite and not, however, represent the Group’s credit risk exposure, which is credit policy. limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 52 on As the third line of defence, Group Internal Audit undertakes page 317. regular risk-based reviews to assess the effectiveness of credit risk management and controls. Additionally, credit risk arises from leasing arrangements where the Group is the lessor. Note 2(J) on page 223 provides details on Mitigation the Group’s approach to the treatment of leases. The Group uses a range of approaches to mitigate credit risk. Credit risk exposures in the Insurance, Pensions and Investments Prudent credit principles, risk policies and appetite division relate mostly to bond and loan assets which, together statements: the independent Risk division sets out the credit with some related swaps, are used to fund annuity commitments principles, credit risk policies and credit risk appetite statements. within Shareholder funds; plus balances held in liquidity funds to These are subject to regular review and governance, with any manage Insurance division’s liquidity requirements, and exposure changes subject to an approval process. Risk teams monitor to reinsurers. credit performance trends and the outlook. Risk teams also test The investments held in the Group’s defined benefit pension the adequacy of and adherence to credit risk policies and schemes also expose the Group to credit risk. Note 35 on page processes throughout the Group. This includes tracking portfolio 280 provides further information on the defined benefit pension performance against an agreed set of credit risk appetite schemes’ assets and liabilities. tolerances. Loans and advances, contingent liabilities, commitments, debt Robust models and controls: see model risk on page 191. securities and derivatives also expose the Group to refinance Limitations on concentration risk: there are portfolio controls on risk. Refinance risk is the possibility that an outstanding exposure certain industries, sectors and products to reflect risk appetite as cannot be repaid at its contractual maturity date. If the Group well as individual, customer and bank limit risk tolerances. Credit does not wish to refinance the exposure then there is refinance policies, appetite statements and mandates are aligned to the risk if the obligor is unable to repay by securing alternative Group’s risk appetite and restrict exposure to higher risk countries finance. This may occur for a number of reasons which may and potentially vulnerable sectors and asset classes. Note 52 on include: the borrower is in financial difficulty, because the terms page 317 provides an analysis of loans and advances to required to refinance are outside acceptable appetite at the customers by industry (for commercial customers) and product time or the customer is unable to refinance externally due to a (for retail customers). Exposures are monitored to prevent both an lack of market liquidity. Refinance risk exposures are managed excessive concentration of risk and single name concentrations. in accordance with the Group’s existing credit risk policies, These concentration risk controls are not necessarily in the form processes and controls, and are not considered to be material of a maximum limit on exposure, but may instead require new given the Group’s prudent credit risk appetite. Where heightened business in concentrated sectors to fulfil additional minimum refinance risk exists exposures are minimised through intensive policy and/or guideline requirements. The Group’s largest credit account management and, where appropriate, are classed as limits are regularly monitored by the Board Risk Committee and impaired and/or forborne. reported in accordance with regulatory requirements. Measurement Defined country risk management framework: the Group sets a The process for credit risk identification, measurement and broad maximum country risk appetite. Risk-based appetite for all control is integrated into the Board-approved framework for credit countries is set within the independent Risk division, taking into risk appetite and governance. account economic, financial, political and social factors as well as the approved business and strategic plans of the Group. Credit risk is measured from different perspectives using a range of appropriate modelling and scoring techniques at a number Specialist expertise: credit quality is managed and controlled by of levels of granularity, including total balance sheet, individual a number of specialist units within the business and Risk division, portfolio, pertinent concentrations and individual customer – for which provide for example: intensive management and control; security perfection; maintenance of customer and facility records; expertise in documentation for lending and associated 158 Lloyds Banking Group Annual Report and Accounts 2022 products; sector-specific expertise; and legal services applicable to regular monitoring and review. Collateral values are subject to to the particular market segments and product ranges offered by review, which will vary according to the type of lending, collateral the Group. involved and account performance. Such reviews are undertaken to confirm that the value recorded remains appropriate and Stress testing: the Group’s credit portfolios are subject to regular whether revaluation is required, considering, for example, account stress testing. In addition to the Group-led, PRA and other performance, market conditions and any information available regulatory stress tests, exercises focused on individual divisions that may indicate that the value of the collateral has materially and portfolios are also performed. For further information on declined. In such instances, the Group may seek additional stress testing process, methodology and governance see page collateral and/or other amendments to the terms of the facility. 144. The Group adjusts estimated market values to take account of Frequent and robust credit risk assurance: assurance of credit the costs of realisation and any discount associated with the risk is undertaken by an independent function operating within realisation of the collateral when estimating credit losses. the Risk division which are part of the Group’s second line of The Group considers risk concentrations by collateral providers defence. Their primary objective is to provide reasonable and Financial results Risk managementGovernance Financial statements Other informationStrategic report and collateral type with a view to ensuring that any potential independent assurance and confidence that credit risk is being undue concentrations of risk are identified and suitably managed effectively managed and to ensure that appropriate controls are by changes to strategy, policy and/or business plans. in place and being adhered to. Group Internal Audit also provides assurance to the Audit Committee on the effectiveness of credit The Group seeks to avoid correlation or wrong-way risk where risk management controls across the Group’s activities. possible. Under the Group’s repurchase (repo) policy, the issuer of the collateral and the repo counterparty should be neither the Collateral same nor connected. The same rule applies for derivatives. The The principal types of acceptable collateral include: Risk division has the necessary discretion to extend this rule to • Residential and commercial properties other cases where there is significant correlation. Countries with a • Charges over business assets such as premises, inventory and rating equivalent to AA- or better may be considered to have no accounts receivable adverse correlation between the counterparty domiciled in that • Financial instruments such as debt securities country and the country of risk (issuer of securities). • Vehicles Refer to note 52 on page 317 for further information on collateral. • Cash • Guarantees received from third parties Additional mitigation for Retail customers The Group uses a variety of lending criteria when assessing The Group maintains appetite parameters on the acceptability of applications for mortgages and unsecured lending. The general specific classes of collateral. approval process uses credit acceptance scorecards and For non-mortgage retail lending to small businesses, collateral involves a review of an applicant’s previous credit history using may include second charges over residential property and the internal data and information held by Credit Reference Agencies assignment of life cover. (CRA). Collateral held as security for financial assets other than loans The Group also assesses the affordability and sustainability of and advances is determined by the nature of the underlying lending for each borrower. For secured lending this includes use exposure. Debt securities, including treasury and other bills, of an appropriate stressed interest rate scenario. Affordability are generally unsecured, with the exception of asset-backed assessments for all lending are compliant with relevant regulatory securities and similar instruments such as covered bonds, which and conduct guidelines. The Group takes reasonable steps to are secured by portfolios of financial assets. Collateral is generally validate information used in the assessment of a customer’s not held against loans and advances to financial institutions. income and expenditure. However, securities are held as part of reverse repurchase In addition, the Group has in place quantitative limits such as or securities borrowing transactions or where a collateral maximum limits for individual customer products, the level of agreement has been entered into under a master netting borrowing to income and the ratio of borrowing to collateral. agreement. Derivative transactions with financial counterparties Some of these limits relate to internal approval levels and others are typically collateralised under a Credit Support Annex (CSA) are policy limits above which the Group will typically reject in conjunction with the International Swaps and Derivatives borrowing applications. The Group also applies certain criteria Association (ISDA) Master Agreement. Derivative transactions with that are applicable to specific products, for example applications non-financial customers are not usually supported by a CSA. for buy-to-let mortgages. The requirement for collateral and the type to be taken at For UK mortgages, the Group’s policy permits owner occupier origination will be based upon the nature of the transaction and applications with a maximum LTV of 95 per cent. This can the credit quality, size and structure of the borrower. For non- increase to 100 per cent for specific products where additional retail exposures, if required, the Group will often seek that any security is provided by a supporter of the applicant and held on collateral includes a first charge over land and buildings owned deposit by the Group. Applications with an LTV above 90 per cent and occupied by the business, a debenture over the assets of a are subject to enhanced underwriting criteria, including higher company or limited liability partnership, personal guarantees, scorecard cut-offs and loan size restrictions. limited in amount, from the directors of a company or limited liability partnership and key man insurance. The Group maintains Buy-to-let mortgages within Retail are limited to a maximum loan policies setting out which types of collateral valuation are size of £1,000,000 and 75 per cent LTV. Buy-to-let applications acceptable, maximum loan to value (LTV) ratios and other criteria must pass a minimum rental cover ratio of 125 per cent under that are to be considered when reviewing an application. The stressed interest rates, after applicable tax liabilities. Portfolio fundamental business proposition must evidence the ability of landlords (customers with four or more mortgaged buy-to-let the business to generate funds from normal business sources to properties) are subject to additional controls including evaluation repay a customer or counterparty’s financial commitment, rather of overall portfolio resilience. than reliance on the disposal of any security provided. The Group’s policy is to reject any application for a lending Although lending decisions are primarily based on expected cash product where a customer is registered as bankrupt or insolvent, flows, any collateral provided may impact the pricing and other or has a recent County Court Judgment or financial default terms of a loan or facility granted. This will have a financial impact registered at a CRA used by the Group above de minimis on the amount of net interest income recognised and on internal thresholds. In addition, the Group typically rejects applicants loss given default estimates that contribute to the determination where total unsecured debt, debt-to-income ratios, or other of asset quality and returns. indicators of financial difficulty exceed policy limits. The Group requires collateral to be realistically valued by an Where credit acceptance scorecards are used, new models, appropriately qualified source, independent of both the credit model changes and monitoring of model effectiveness are decision process and the customer, at the time of borrowing. independently reviewed and approved in accordance with the In certain circumstances, for Retail residential mortgages this governance framework set by the Group Model Governance may include the use of automated valuation models based on Committee. market data, subject to accuracy criteria and LTV limits. Where third parties are used for collateral valuations, they are subject 159Lloyds Banking Group Annual Report and Accounts 2022 Monitoring ### Risk management In conjunction with the Risk division, businesses identify and ### continued define portfolios of credit and related risk exposures and the key behaviours and characteristics by which those portfolios Additional mitigation for Commercial customers are managed and monitored. This entails the production and Individual credit assessment and independent sanction of analysis of regular portfolio monitoring reports for review by customer and bank limits: with the exception of small exposures senior management. The Risk division in turn produces an to small to medium-sized enterprises (SME) customers where aggregated view of credit risk across the Group, including reports certain relationship managers have limited delegated credit on material credit exposures, concentrations, concerns and other approval authority, credit risk in commercial customer portfolios management information, which is presented to senior officers, is subject to approval by the independent Risk division, which the divisional credit risk forums, Group Risk Committee and the considers the strengths and weaknesses of individual Board Risk Committee. transactions, the balance of risk and reward, and how credit risk aligns to the Group and divisional risk appetite. Exposure to Models individual counterparties, groups of counterparties or customer The performance of all models used in credit risk is monitored in risk segments is controlled through a tiered hierarchy of credit line with the Group’s model governance framework – see model authority delegations and risk-based credit limit guidances per risk on page 191. client group for larger exposures. Approval requirements for each Intensive care of customers in financial difficulty decision are based on a number of factors including, but not The Group operates a number of solutions to assist borrowers limited to, the transaction amount, the customer’s aggregate who are experiencing financial stress. The material elements facilities, any risk mitigation in place, credit policy, risk appetite, of these solutions through which the Group has granted a credit risk ratings and the nature and term of the risk. The Group’s concession, whether temporarily or permanently, are set out credit risk appetite criteria for counterparty and customer loan below. underwriting is generally the same as that for loans intended to be held to maturity. All hard loan/bond underwriting must be Forbearance approved by the Risk division. A pre-approved credit matrix may The Group’s aim in offering forbearance and other assistance to be used for ‘best efforts’ underwriting. customers in financial distress is to benefit both the customer and the Group by supporting its customers and acting in their best Counterparty credit limits: limits are set against all types of interests by, where possible, bringing customer facilities back into exposure in a counterparty name, in accordance with an agreed a sustainable position. methodology for each exposure type. This includes credit risk exposure on individual derivatives and securities financing The Group offers a range of tools and assistance to support transactions, which incorporates potential future exposures from customers who are encountering financial difficulties. Cases are market movements against agreed confidence intervals. managed on an individual basis, with the circumstances of each Aggregate facility levels by counterparty are set and limit customer considered separately and the action taken judged as breaches are subject to escalation procedures. being appropriate and sustainable for both the customer and the Group. Daily settlement limits: settlement risk arises in any situation where a payment in cash, securities or equities is made in the Forbearance measures consist of concessions towards a debtor expectation of a corresponding receipt in cash, securities or that is experiencing or about to experience difficulties in meeting equities. Daily settlement limits are established for each relevant its financial commitments. This can include modification of the counterparty to cover the aggregate of all settlement risk arising previous terms and conditions of a contract or a total or partial from the Group’s market transactions on any single day. Where refinancing of a troubled debt contract, either of which would possible, the Group uses Continuous Linked Settlement in order to not have been required had the debtor not been experiencing reduce foreign exchange (FX) settlement risk. financial difficulties. Master netting agreements The provision and review of such assistance is controlled It is credit policy that a Group-approved master netting through the application of an appropriate policy framework and agreement must be used for all derivative and traded product associated controls. Regular review of the assistance offered to transactions and must be in place prior to trading, with separate customers is undertaken to confirm that it remains appropriate, documentation required for each Group entity providing alongside monitoring of customers’ performance and the level of facilities. This requirement extends to trades with clients and the payments received. counterparties used for the Group’s own hedging activities, which The Group classifies accounts as forborne at the time a customer may also include clearing trades with Central Counterparties in financial difficulty is granted a concession. (CCPs). Balances in default or classified as Stage 3 are always considered Any exceptions must be approved by the appropriate credit to be non-performing. Balances may be non-performing but not approver. Master netting agreements do not generally result in in default or Stage 3, where for example they are within their non- an offset of balance sheet assets and liabilities for accounting performing forbearance cure period. purposes, as transactions are usually settled on a gross basis. Non-performing exposures can be reclassified as performing However, within relevant jurisdictions and for appropriate forborne after a minimum 12-month cure period, providing counterparty types, master netting agreements do reduce the there are no past due amounts or concerns regarding the full credit risk to the extent that, if an event of default occurs, all repayment of the exposure. A minimum of a further 24 months trades with the counterparty may be terminated and settled on a must pass from the date the forborne exposure was reclassified net basis. The Group’s overall exposure to credit risk on derivative as performing forborne before the account can exit forbearance. instruments subject to master netting agreements can change If conditions to exit forbearance are not met at the end of this substantially within a short period, since this is the net position of probation period, the exposure shall continue to be identified as all trades under the master netting agreement. forborne until all the conditions are met. Other credit risk transfers The Group’s treatment of loan renegotiations is included in the The Group also undertakes asset sales, credit derivative based impairment policy in note 2(H) on page 222. transactions, securitisations (including significant risk transfer transactions), purchases of credit default swaps and purchase of Customers receiving support from UK Government sponsored credit insurance as a means of mitigating or reducing credit risk programmes and/or risk concentration, taking into account the nature of assets To assist customers in financial distress, the Group participates in and the prevailing market conditions. UK Government sponsored programmes for households, including the Income Support for Mortgage Interest programme, under which the government pays the Group all or part of the interest on the mortgage on behalf of the customer. This is provided as a government loan which the customer must repay. 160 Lloyds Banking Group Annual Report and Accounts 2022 ## The Group credit risk portfolio in 2022 ### Overview The Group's portfolios are well-positioned and the Group retains a prudent approach to credit risk appetite and risk management, with strong credit origination criteria and robust LTVs in the secured portfolios. Observed credit performance remains strong, despite the continued economic uncertainty with very modest evidence of deterioration and sustained low levels of new to arrears. Looking forward there are risks from a higher inflation and interest rate environment as modelled in the Group's expected credit loss (ECL) allowance via the multiple economic scenarios (MES). The Group continues to monitor the economic environment carefully through a suite of early warning indicators and governance arrangements that ensure risk mitigating action plans are in place to support customers and protect the Group's positions. The underlying impairment charge in 2022 was £1,510 million, compared to a release of £1,385 million in 2021, reflecting a more normalised, but still low, pre-updated MES charge of £915 million (2021: a charge of £314 million) and a £595 million charge from economic outlook revisions (2021: a credit of £1,699 million). The latter includes a £400 million release from the Group's central adjustment which addressed downside risk outside of the base case conditioning assumptions in relation to COVID-19. This reporting period also coincided with the implementation of CRD IV regulatory requirements, which resulted in updates to credit risk measurement and modelling to maintain alignment between IFRS 9 and regulatory definitions of default. Most notably for UK mortgages, default was previously deemed to have occurred no later than when a payment was 180 days past due; in line with CRD IV this has now been reduced to 90 days. In addition, other indicators of mortgage default are added including end-of-term payments on past due interest-only accounts and loans considered non-performing due to recent arrears or forbearance. The Group's underlying ECL allowance on loans and advances to customers increased in the period to £5,222 million (31 December 2021: £4,477 million), largely due to the impact of the updated MES. Changes related to CRD IV default definitions have resulted in material movements between stages, although these have not materially impacted total ECL as management judgements were previously held in lieu of anticipated changes. Predominantly as a result of the CRD IV definition changes and updated MES, Stage 2 loans and advances to customers increased from £41,710 million to £65,728 million and as a percentage of total lending increased by 5.1 percentage points to 14.3 per cent (31 December 2021: 9.2 per cent). Of the total Group Stage 2 loans and advances, 92.7 per cent are up to date (31 December 2021: 86.5 per cent) with sustained low levels of new to arrears. Stage 2 coverage reduced to 3.2 per cent (31 December 2021: 3.5 per cent). Similarly, Stage 3 loans and advances increased in the period to £10,753 million (31 December 2021: £8,694 million), and as a percentage of total lending increased to 2.3 per cent (31 December 2021: 1.9 per cent). Stage 3 coverage decreased by 2.1 percentage points to 22.6 per cent (31 December 2021: 24.7 per cent) largely driven by comparatively better quality assets moving into Stage 3 through these CRD IV changes. In the period since the CRD IV changes, Stage 3 loans and advances have been stable. ## Prudent risk appetite and risk management - The Group continues to take a prudent and proactive approach to credit risk management and credit risk appetite, whilst working closely with customers to help them through cost of living pressures and any deterioration in broader economic conditions - Sector, asset and product concentrations within the portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product risk appetite parameters help manage exposure to certain higher risk and cyclical sectors, segments and asset classes - The Group's effective risk management seeks to ensure early identification and management of customers and counterparties who may be showing signs of distress - The Group will continue to work closely with its customers to ensure that they receive the appropriate level of support, including where repayments under the UK Government scheme lending fall due Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 161 ### Risk management ### continued Statutory impairment charge (credit) by division Financial assets at fair value | Loans and | | Loans and | | | | | through other | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | advances to | | advances to | | | | Debt | comprehensive | | | | Undrawn | | | | | | customers | | | banks | | securities | | | income | | Other | balances | | 2022 | 2021 | 1 | | | £m | | | £m | | £m | | | £m | £m | | £m | £m | £m | | UK mortgages 295 – – – – – 295 (273) Credit cards 556 – – – – 15 571 (52) Loans and overdrafts 452 – – – – 47 499 39 UK Motor Finance (2) – – – – – (2) (151) Other 10 – – – – – 10 (10) Retail 1,311 – – – – 62 1,373 (447) Small and Medium Businesses 190 – – – – (2) 188 (340) Corporate and Institutional Banking 249 12 6 – – 62 329 (591) Commercial Banking 439 12 6 – – 60 517 (931) Insurance, Pensions and Investments – 2 – – 22 – 24 2 Equity Investments and Central Items (399) – 1 6 – – (392) (2) Total impairment charge (credit) 1,351 14 7 6 22 122 1,522 (1,378) 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. A Underlying impairment charge (credit) by division Financial assets at fair value | Loans and | | Loans and | | | | | through other | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | advances to | | advances to | | | | Debt | comprehensive | | | | Undrawn | | | | | | customers | | | banks | | securities | | | income | | Other | balances | | 2022 | 2021 | 1,2 | | | £m | | | £m | | £m | | | £m | £m | | £m | £m | | £m | UK mortgages 295 – – – – – 295 (273) Credit cards 556 – – – – 15 571 (52) Loans and overdrafts 452 – – – – 47 499 39 UK Motor Finance (2) – – – – – (2) (151) Other 10 – – – – – 10 (10) Retail 1,311 – – – – 62 1,373 (447) Small and Medium Businesses 190 – – – – (2) 188 (346) Corporate and Institutional Banking 249 12 6 – – 62 329 (590) Commercial Banking 439 12 6 – – 60 517 (936) Insurance, Pensions and Investments – 2 – – 10 – 12 – Equity Investments and Central Items (399) – 1 6 – – (392) (2) Total underlying impairment A charge (credit) 1,351 14 7 6 10 122 1,510 (1,385) A Asset quality ratio 0.32% (0.31%) 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 2 Non lending-related fraud costs, previously reported within underlying impairment, are now included within operating costs. Comparatives have been presented on a consistent basis. 162 Lloyds Banking Group Annual Report and Accounts 2022 Group loans and advances to customers Credit risk balance sheet basis of presentation The following pages contain analysis of the Group’s loans and The balance sheet analyses which follow have been presented advances to customers by sub-portfolio. Loans and advances to on two bases; the statutory basis which is consistent with the customers are categorised into the following stages: presentation in the Group’s accounts and the underlying basis which is used for internal management purposes. A reconciliation Stage 1 assets comprise of newly originated assets (unless between the two bases has been provided. purchased or originated credit impaired), as well as those which have not experienced a significant increase in credit risk. These In the following statutory basis tables, purchased or originated assets carry an expected credit loss allowance equivalent to the credit- impaired (POCI) assets include a fixed pool of mortgages expected credit losses that result from those default events that that were purchased as part of the HBOS acquisition at a are possible within 12 months of the reporting date (12 month deep discount to face value reflecting credit losses incurred expected credit losses). from the point of origination to the date of acquisition. The residual expected credit loss (ECL) allowance and resulting low Stage 2 assets are those which have experienced a significant coverage ratio on POCI assets reflects further deterioration in the increase in credit risk since origination. These assets carry an Financial results Risk managementGovernance Financial statements Other informationStrategic report creditworthiness from the date of acquisition. Over time, these expected credit loss allowance equivalent to the expected credit POCI assets will run off as the loans redeem, pay down or as loans losses arising over the lifetime of the asset (lifetime expected are written off. credit losses). The Group uses the underlying basis to monitor the Stage 3 assets have either defaulted or are otherwise considered creditworthiness of the lending portfolio and related ECL to be credit impaired. These assets carry a lifetime expected allowances because it provides a better indication of the credit credit loss. performance of the POCI assets purchased as part of the HBOS Purchased or originated credit-impaired assets (POCI) are those acquisition. The underlying basis assumes that the lending assets that have been originated or acquired in a credit impaired state. acquired as part of a business combination were originated by This includes within the definition of credit impaired the purchase the Group and are classified as either Stage 1, 2 or 3 according of a financial asset at a deep discount that reflects impaired to the change in credit risk over the period since origination. credit losses. Underlying ECL allowances have been calculated accordingly. Total expected credit loss allowance | Statutory basis Underlying basis | | | | | A | | | --- | --- | --- | --- | --- | --- | --- | | At 31 Dec | At 31 Dec | | At 31 Dec | | At 31 Dec | | | 2022 | | 2021 | | 2022 | | 2021 | | £m | | £m | | £m | | £m | Customer related balances Drawn 4,518 3,820 4,899 4,277 Undrawn 323 200 323 200 4,841 4,020 5,222 4,477 Loans and advances to banks 15 1 15 1 Debt securities 9 3 9 3 Other assets 38 18 38 18 Total expected credit loss allowance 4,903 4,042 5,284 4,499 Reconciliation between statutory and underlying bases of gross loans and advances to customers and expected credit loss allowance on drawn balances Gross loans and advances to customers Expected credit loss allowance on drawn balances Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total £m £m £m £m £m £m £m £m £m £m At 31 December 2022 A Underlying basis 383,317 65,728 10,753 – 459,798 700 1,936 2,263 – 4,899 POCI assets (2,326) (4,564) (3,113) 10,003 – – (128) (506) 634 – Acquisition fair value adjustment – – – (381) (381) – – – (381) (381) (2,326) (4,564) (3,113) 9,622 (381) – (128) (506) 253 (381) Statutory basis 380,991 61,164 7,640 9,622 459,417 700 1,808 1,757 253 4,518 At 31 December 2021 A Underlying basis 402,415 41,710 8,694 – 452,819 919 1,377 1,981 – 4,277 POCI assets (2,392) (6,781) (2,251) 11,424 – (1) (259) (397) 657 – Acquisition fair value adjustment 13 2 – (447) (432) (3) (4) (3) (447) (457) (2,379) (6,779) (2,251) 10,977 (432) (4) (263) (400) 210 (457) Statutory basis 400,036 34,931 6,443 10,977 452,387 915 1,114 1,581 210 3,820 163Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued Movements in total expected credit loss allowance (statutory basis) Income | | | | | statement | | | Net ECL | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Opening ECL | | Write-offs | | | charge | | increase | Closing ECL at | | at 31 Dec 2021 | 1 | | 2 | | (credit) | (decrease) | | 31 Dec 2022 | and other £m £m £m £m £m UK mortgages 837 77 295 372 1,209 Credit cards 521 (329) 571 242 763 Loans and overdrafts 445 (266) 499 233 678 UK Motor Finance 298 (44) (2) (46) 252 Other 82 (6) 10 4 86 Retail 2,183 (568) 1,373 805 2,988 Small and Medium Businesses 459 (98) 188 90 549 Corporate and Institutional Banking 974 17 329 346 1,320 Commercial Banking 1,433 (81) 517 436 1,869 Insurance, Pensions and Investments 18 (2) 24 22 40 Equity Investments and Central Items 408 (10) (392) (402) 6 3 Total 4,042 (661) 1,522 861 4,903 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 2 Contains adjustments in respect of purchased or originated credit-impaired financial assets. 3 Total ECL includes £62 million relating to other non customer-related assets (31 December 2021: £22 million). A Movements in total expected credit loss allowance (underlying basis) Income | | | | | statement | | | | Net ECL | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Opening ECL | | Write-offs | | | charge | | | increase | | Closing ECL at | | | at 31 Dec 2021 | 1 | and other | | | (credit) | | (decrease) | | | 31 Dec 2022 | | | | £m | | £m | | | £m | | | £m | | £m | UK mortgages 1,284 11 295 306 1,590 Credit cards 531 (339) 571 232 763 Loans and overdrafts 445 (266) 499 233 678 UK Motor Finance 298 (44) (2) (46) 252 Other 82 (6) 10 4 86 Retail 2,640 (644) 1,373 729 3,369 Small and Medium Businesses 459 (98) 188 90 549 Corporate and Institutional Banking 974 17 329 346 1,320 Commercial Banking 1,433 (81) 517 436 1,869 Insurance, Pensions and Investments 18 10 12 22 40 Equity Investments and Central Items 408 (10) (392) (402) 6 2 Total 4,499 (725) 1,510 785 5,284 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 2 Total ECL includes £62 million relating to other non customer-related assets (31 December 2021: £22 million). 164 Lloyds Banking Group Annual Report and Accounts 2022 Loans and advances to customers and expected credit loss allowance (statutory basis) | | | | | | | | | Stage 2 | | Stage 3 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | as % of | | as % of | | | Stage 1 | | Stage 2 | | Stage 3 | | POCI | Total | total | | total | | | | £m | | £m | | £m | £m | £m | | % | | % | At 31 December 2022 Loans and advances to customers UK mortgages 257,517 41,783 3,416 9,622 312,338 13.4 1.1 Credit cards 11,416 3,287 289 – 14,992 21.9 1.9 Loans and overdrafts 8,357 1,713 247 – 10,317 16.6 2.4 UK Motor Finance 12,174 2,245 154 – 14,573 15.4 1.1 Financial results Risk managementGovernance Financial statements Other informationStrategic report Other 13,990 643 157 – 14,790 4.3 1.1 Retail 303,454 49,671 4,263 9,622 367,010 13.5 1.2 Small and Medium Businesses 30,781 5,654 1,760 – 38,195 14.8 4.6 Corporate and Institutional Banking 49,728 5,839 1,611 – 57,178 10.2 2.8 Commercial Banking 80,509 11,493 3,371 – 95,373 12.1 3.5 1 Equity Investments and Central Items (2,972) – 6 – (2,966) Total gross lending 380,991 61,164 7,640 9,622 459,417 13.3 1.7 ECL allowance on drawn balances (700) (1,808) (1,757) (253) (4,518) Net balance sheet carrying value 380,291 59,356 5,883 9,369 454,899 Customer related ECL allowance (drawn and undrawn) UK mortgages 92 553 311 253 1,209 Credit cards 173 477 113 – 763 Loans and overdrafts 185 367 126 – 678 2 UK Motor Finance 95 76 81 – 252 Other 16 18 52 – 86 Retail 561 1,491 683 253 2,988 Small and Medium Businesses 129 271 149 – 549 Corporate and Institutional Banking 144 231 925 – 1,300 Commercial Banking 273 502 1,074 – 1,849 Equity Investments and Central Items – – 4 – 4 Total 834 1,993 1,761 253 4,841 3 Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers UK mortgages – 1.3 9.1 2.6 0.4 Credit cards 1.5 14.5 50.9 – 5.1 Loans and overdrafts 2.2 21.4 64.6 – 6.6 UK Motor Finance 0.8 3.4 52.6 – 1.7 Other 0.1 2.8 33.1 – 0.6 Retail 0.2 3.0 16.5 2.6 0.8 Small and Medium Businesses 0.4 4.8 12.9 – 1.5 Corporate and Institutional Banking 0.3 4.0 57.5 – 2.3 Commercial Banking 0.3 4.4 38.9 – 2.0 Equity Investments and Central Items – 66.7 – Total 0.2 3.3 25.5 2.6 1.1 1 Contains centralised fair value hedge accounting adjustments. 2 UK Motor Finance for Stages 1 and 2 include £92 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios. 3 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £52 million, Small and Medium Businesses of £607 million and Corporate and Institutional Banking of £1 million. 165Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued | | | | | | | | | Stage 2 | | Stage 3 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | as % of | | as % of | | | Stage 1 | | Stage 2 | | Stage 3 | | POCI | Total | total | | | total | | | £m | | £m | | £m | £m | £m | | % | | % | At 31 December 2021 Loans and advances to customers UK mortgages 273,629 21,798 1,940 10,977 308,344 7.1 0.6 1 Credit cards 11,918 2,077 292 – 14,287 14.5 2.0 Loans and overdrafts 8,181 1,105 271 – 9,557 11.6 2.8 UK Motor Finance 12,247 1,828 201 – 14,276 12.8 1.4 1 Other 11,198 593 169 – 11,960 5.0 1.4 Retail 317,173 27,401 2,873 10,977 358,424 7.6 0.8 1 Small and Medium Businesses 36,134 4,992 1,747 – 42,873 11.6 4.1 1 Corporate and Institutional Banking 46,585 2,538 1,816 – 50,939 5.0 3.6 Commercial Banking 82,719 7,530 3,563 – 93,812 8.0 3.8 2 Equity Investments and Central Items 144 – 7 – 151 – 4.6 Total gross lending 400,036 34,931 6,443 10,977 452,387 7.7 1.4 ECL allowance on drawn balances (915) (1,114) (1,581) (210) (3,820) Net balance sheet carrying value 399,121 33,817 4,862 10,767 448,567 Customer related ECL allowance (drawn and undrawn) UK mortgages 49 394 184 210 837 1 Credit cards 144 249 128 – 521 Loans and overdrafts 136 170 139 – 445 3 UK Motor Finance 108 74 116 – 298 1 Other 15 15 52 – 82 Retail 452 902 619 210 2,183 1 Small and Medium Businesses 104 176 179 – 459 1 Corporate and Institutional Banking 68 122 782 – 972 Commercial Banking 172 298 961 – 1,431 Equity Investments and Central Items 400 – 6 – 406 Total 1,024 1,200 1,586 210 4,020 4 Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers UK mortgages – 1.8 9.5 1.9 0.3 1 Credit cards 1.2 12.0 56.9 – 3.7 Loans and overdrafts 1.7 15.4 67.5 – 4.7 UK Motor Finance 0.9 4.0 57.7 – 2.1 1 Other 0.1 2.5 30.8 – 0.7 Retail 0.1 3.3 22.6 1.9 0.6 1 Small and Medium Businesses 0.3 3.5 14.5 – 1.1 1 Corporate and Institutional Banking 0.1 4.8 43.1 – 1.9 Commercial Banking 0.2 4.0 31.6 – 1.5 5 Equity Investments and Central Items – – 85.7 – 4.0 Total 0.3 3.4 27.4 1.9 0.9 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail. 2 Contains centralised fair value hedge accounting adjustments. 3 UK Motor Finance for Stages 1 and 2 include £95 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios. 4 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £65 million, Small and Medium Businesses of £515 million and Corporate and Institutional Banking of £3 million. 5 Equity Investments and Central Items excludes the £400 million ECL central adjustment. 166 Lloyds Banking Group Annual Report and Accounts 2022 A Loans and advances to customers and expected credit loss allowance (underlying basis) | | | | | | | | Stage 2 | | Stage 3 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | as % of | | as % of | | | Stage 1 | | Stage 2 | | Stage 3 | | Total | total | | total | | | | £m | | £m | | £m | £m | | % | | % | At 31 December 2022 Loans and advances to customers UK mortgages 259,843 46,347 6,529 312,719 14.8 2.1 Credit cards 11,416 3,287 289 14,992 21.9 1.9 Loans and overdrafts 8,357 1,713 247 10,317 16.6 2.4 UK Motor Finance 12,174 2,245 154 14,573 15.4 1.1 Financial results Risk managementGovernance Financial statements Other informationStrategic report Other 13,990 643 157 14,790 4.3 1.1 1 Retail 305,780 54,235 7,376 367,391 14.8 2.0 Small and Medium Businesses 30,781 5,654 1,760 38,195 14.8 4.6 Corporate and Institutional Banking 49,728 5,839 1,611 57,178 10.2 2.8 Commercial Banking 80,509 11,493 3,371 95,373 12.1 3.5 2 Equity Investments and Central Items (2,972) – 6 (2,966) Total gross lending 383,317 65,728 10,753 459,798 14.3 2.3 ECL allowance on drawn balances (700) (1,936) (2,263) (4,899) Net balance sheet carrying value 382,617 63,792 8,490 454,899 Customer related ECL allowance (drawn and undrawn) UK mortgages 92 681 817 1,590 Credit cards 173 477 113 763 Loans and overdrafts 185 367 126 678 3 UK Motor Finance 95 76 81 252 Other 16 18 52 86 1 Retail 561 1,619 1,189 3,369 Small and Medium Businesses 129 271 149 549 Corporate and Institutional Banking 144 231 925 1,300 Commercial Banking 273 502 1,074 1,849 Equity Investments and Central Items – – 4 4 Total 834 2,121 2,267 5,222 4 Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers UK mortgages – 1.5 12.5 0.5 Credit cards 1.5 14.5 50.9 5.1 Loans and overdrafts 2.2 21.4 64.6 6.6 UK Motor Finance 0.8 3.4 52.6 1.7 Other 0.1 2.8 33.1 0.6 1 Retail 0.2 3.0 16.4 0.9 Small and Medium Businesses 0.4 4.8 12.9 1.5 Corporate and Institutional Banking 0.3 4.0 57.5 2.3 Commercial Banking 0.3 4.4 38.9 2.0 Equity Investments and Central Items – 66.7 Total 0.2 3.2 22.6 1.1 1 Retail balances exclude the impact of the HBOS acquisition-related adjustments. 2 Contains centralised fair value hedge accounting adjustments. 3 UK Motor Finance for Stages 1 and 2 include £92 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios. 4 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £52 million, Small and Medium Businesses of £607 million and Corporate and Institutional Banking of £1 million. 167Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued | | | | | | | | Stage 2 | | Stage 3 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | as % of | | as % of | | | Stage 1 | | Stage 2 | | Stage 3 | | Total | total | | | total | | | £m | | £m | | £m | £m | | % | | % | At 31 December 2021 Loans and advances to customers UK mortgages 276,021 28,579 4,191 308,791 9.3 1.4 1 Credit cards 11,905 2,075 292 14,272 14.5 2.0 Loans and overdrafts 8,181 1,105 271 9,557 11.6 2.8 UK Motor Finance 12,247 1,828 201 14,276 12.8 1.4 1 Other 11,198 593 169 11,960 5.0 1.4 2 Retail 319,552 34,180 5,124 358,856 9.5 1.4 1 Small and Medium Businesses 36,134 4,992 1,747 42,873 11.6 4.1 1 Corporate and Institutional Banking 46,585 2,538 1,816 50,939 5.0 3.6 Commercial Banking 82,719 7,530 3,563 93,812 8.0 3.8 3 Equity Investments and Central Items 144 – 7 151 – 4.6 Total gross lending 402,415 41,710 8,694 452,819 9.2 1.9 ECL allowance on drawn balances (919) (1,377) (1,981) (4,277) Net balance sheet carrying value 401,496 40,333 6,713 448,542 Customer related ECL allowance (drawn and undrawn) UK mortgages 50 653 581 1,284 1 Credit cards 147 253 131 531 Loans and overdrafts 136 170 139 445 4 UK Motor Finance 108 74 116 298 1 Other 15 15 52 82 2 Retail 456 1,165 1,019 2,640 1 Small and Medium Businesses 104 176 179 459 1 Corporate and Institutional Banking 68 122 782 972 Commercial Banking 172 298 961 1,431 Equity Investments and Central Items 400 – 6 406 Total 1,028 1,463 1,986 4,477 5 Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers UK mortgages – 2.3 13.9 0.4 1 Credit cards 1.2 12.2 58.2 3.7 Loans and overdrafts 1.7 15.4 67.5 4.7 UK Motor Finance 0.9 4.0 57.7 2.1 1 Other 0.1 2.5 30.8 0.7 1 Retail 0.1 3.4 20.4 0.7 1 Small and Medium Businesses 0.3 3.5 14.5 1.1 1 Corporate and Institutional Banking 0.1 4.8 43.1 1.9 Commercial Banking 0.2 4.0 31.6 1.5 6 Equity Investments and Central Items – – 85.7 4.0 Total 0.3 3.5 24.7 1.0 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail. 2 Retail balances exclude the impact of the HBOS and MBNA acquisition-related adjustments. 3 Contains centralised fair value hedge accounting adjustments. 4 UK Motor Finance for Stages 1 and 2 include £95 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios. 5 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £65 million, Small and Medium Businesses of £515 million and Corporate and Institutional Banking of £3 million. 6 Equity Investments and Central Items excludes the £400 million ECL central adjustment. 168 Lloyds Banking Group Annual Report and Accounts 2022 Stage 2 loans and advances to customers and expected credit loss allowance (statutory basis) Up to date | | | | | | | 1 | | | | 1–30 days past due | | | 2 | | | Over 30 days past duePD movements Other | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | As % of | | | | As % of | | | | | | As % of | | | | | | As % of | | | Gross | | | gross | | Gross | | gross | | Gross | | | | gross | | Gross | | | | gross | | | lending | ECL | 3 | lending | | lending | ECL 3 | lending | | lending | | ECL | 3 | lending | | lending | | ECL | 3 | lending | | | £m | £m | | | % | £m | £m | | % | | £m | £m | | | % | | £m | £m | | | % | At 31 December 2022 UK mortgages 29,718 263 0.9 9,613 160 1.7 1,633 67 4.1 819 63 7.7 Credit cards 3,023 386 12.8 136 46 33.8 98 30 30.6 30 15 50.0 Loans and overdrafts 1,311 249 19.0 234 53 22.6 125 45 36.0 43 20 46.5 Financial results Risk managementGovernance Financial statements Other informationStrategic report UK Motor Finance 1,047 28 2.7 1,045 23 2.2 122 18 14.8 31 7 22.6 Other 160 5 3.1 384 7 1.8 54 4 7.4 45 2 4.4 Retail 35,259 931 2.6 11,412 289 2.5 2,032 164 8.1 968 107 11.1 Small and Medium Businesses 4,081 223 5.5 1,060 27 2.5 339 13 3.8 174 8 4.6 Corporate and Institutional Banking 5,728 229 4.0 27 – – 30 1 3.3 54 1 1.9 Commercial Banking 9,809 452 4.6 1,087 27 2.5 369 14 3.8 228 9 3.9 Total 45,068 1,383 3.1 12,499 316 2.5 2,401 178 7.4 1,196 116 9.7 At 31 December 2021 UK mortgages 14,845 132 0.9 4,133 155 3.8 1,433 38 2.7 1,387 69 5.0 4 Credit cards 1,755 176 10.0 210 42 20.0 86 20 23.3 26 11 42.3 Loans and overdrafts 505 82 16.2 448 43 9.6 113 30 26.5 39 15 38.5 UK Motor Finance 581 20 3.4 1,089 26 2.4 124 19 15.3 34 9 26.5 4 Other 194 4 2.1 306 7 2.3 44 2 4.5 49 2 4.1 Retail 17,880 414 2.3 6,186 273 4.4 1,800 109 6.1 1,535 106 6.9 Small and Medium 4 Businesses 3,570 153 4.3 936 14 1.5 297 6 2.0 189 3 1.6 Corporate and 4 Institutional Banking 2,479 119 4.8 25 3 12.0 6 – – 28 – – Commercial Banking 6,049 272 4.5 961 17 1.8 303 6 2.0 217 3 1.4 Total 23,929 686 2.9 7,147 290 4.1 2,103 115 5.5 1,752 109 6.2 1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments. As of 31 December 2022, interest-only mortgage customers at risk of not meeting their final term payment are now directly classified as Stage 2 up to date “Other”, driving movement of gross lending from the category of Stage 2 up to date “PD movement” into “Other”. 2 Includes assets that have triggered PD movements, or other rules, given that being 1–29 days in arrears in and of itself is not a Stage 2 trigger. 3 Expected credit loss allowance on loans and advances to customers (drawn and undrawn). 4 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 169Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued A Stage 2 loans and advances to customers and expected credit loss allowance (underlying basis) Up to date | | | | | | | | 1 | | | | 1–30 days past due | | | 2 | | | Over 30 days past duePD movements Other | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | As % of | | | | | As % of | | | | | | As % of | | | | | | As % of | | | Gross | | | gross | | Gross | | | gross | | Gross | | | | gross | | | Gross | | | gross | | | lending | ECL | 3 | lending | | lending | ECL | 3 | lending | | lending | | ECL | 3 | lending | | lending | | ECL | 3 | lending | | | £m | £m | | | % | £m | £m | | | % | | £m | £m | | | % | | £m | £m | | | % | At 31 December 2022 UK mortgages 31,908 301 0.9 10,800 198 1.8 2,379 93 3.9 1,260 89 7.1 Credit cards 3,023 386 12.8 136 46 33.8 98 30 30.6 30 15 50.0 Loans and overdrafts 1,311 249 19.0 234 53 22.6 125 45 36.0 43 20 46.5 UK Motor Finance 1,047 28 2.7 1,045 23 2.2 122 18 14.8 31 7 22.6 Other 160 5 3.1 384 7 1.8 54 4 7.4 45 2 4.4 Retail 37,449 969 2.6 12,599 327 2.6 2,778 190 6.8 1,409 133 9.4 Small and Medium Businesses 4,081 223 5.5 1,060 27 2.5 339 13 3.8 174 8 4.6 Corporate and Institutional Banking 5,728 229 4.0 27 – – 30 1 3.3 54 1 1.9 Commercial Banking 9,809 452 4.6 1,087 27 2.5 369 14 3.8 228 9 3.9 Total 47,258 1,421 3.0 13,686 354 2.6 3,147 204 6.5 1,637 142 8.7 At 31 December 2021 UK mortgages 17,917 226 1.3 6,053 222 3.7 2,270 73 3.2 2,339 132 5.6 4 Credit cards 1,754 179 10.2 209 41 19.6 86 21 24.4 26 12 46.2 Loans and overdrafts 505 82 16.2 448 43 9.6 113 30 26.5 39 15 38.5 UK Motor Finance 581 20 3.4 1,089 26 2.4 124 19 15.3 34 9 26.5 4 Other 194 4 2.1 306 7 2.3 44 2 4.5 49 2 4.1 Retail 20,951 511 2.4 8,105 339 4.2 2,637 145 5.5 2,487 170 6.8 Small and Medium 4 Businesses 3,570 153 4.3 936 14 1.5 297 6 2.0 189 3 1.6 Corporate and 4 Institutional Banking 2,479 119 4.8 25 3 12.0 6 – – 28 – – Commercial Banking 6,049 272 4.5 961 17 1.8 303 6 2.0 217 3 1.4 Total 27,000 783 2.9 9,066 356 3.9 2,940 151 5.1 2,704 173 6.4 1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments. As of 31 December 2022, interest-only mortgage customers at risk of not meeting their final term payment are now directly classified as Stage 2 up to date “Other”, driving movement of gross lending from the category of Stage 2 up to date “PD movement” into “Other”. 2 Includes assets that have triggered PD movements, or other rules, given that being 1–29 days in arrears in and of itself is not a Stage 2 trigger. 3 Expected credit loss allowance on loans and advances to customers (drawn and undrawn). 4 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. The Group’s assessment of a significant increase in credit risk, and resulting categorisation of Stage 2, includes customers moving into early arrears as well as a broader assessment that an up to date customer has experienced a level of deterioration in credit risk since origination. A more sophisticated assessment is required for up to date customers, which varies across divisions and product type. This assessment incorporates specific triggers such as a significant proportionate increase in probability of default relative to that at origination, recent arrears, forbearance activity, internal watch lists and external bureau flags. Up to date exposures in Stage 2 are likely to show lower levels of expected credit loss (ECL) allowance relative to those that have already moved into arrears given that an arrears status typically reflects a stronger indication of future default and greater likelihood of credit losses. 170 Lloyds Banking Group Annual Report and Accounts 2022 ## Additional information ### ECL sensitivity to economic assumptions The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by generating four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group's base case assumptions used for medium-term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. If the base case moves adversely, it generates a new, more adverse downside and severe downside which are then incorporated into the ECL. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. The table below shows the Group's ECL for the probability-weighted, upside, base case, downside and severe downside scenarios, with the severe downside scenario incorporating adjustments made to CPI inflation and UK Bank Rate paths. The stage allocation for an asset is based on the overall scenario probability-weighted PD and hence the staging of assets is constant across all the scenarios. In each economic scenario the ECL for individual assessments and post-model adjustments is typically held constant reflecting the basis on which they are evaluated. For 31 December 2022, however, post-model adjustments in Commercial Banking have been apportioned across the scenarios to better reflect the sensitivity of these adjustments to each scenario. Judgements applied through changes to model inputs are reflected in the scenario ECL sensitivities. The probability-weighted view shows the extent to which a higher ECL allowance has been recognised to take account of multiple economic scenarios relative to the base case; the uplift being £692 million compared to £223 million at 31 December 2021. | | Probability-weighted £m | Upside £m | Base case £m | Downside £m | Severe downside £m | | --- | --- | --- | --- | --- | --- | | **Statutory basis** | | | | | | | UK mortgages | 1,209 | 514 | 790 | 1,434 | 3,874 | | Credit cards | 763 | 596 | 727 | 828 | 1,180 | | Other Retail | 1,016 | 907 | 992 | 1,056 | 1,290 | | Commercial Banking | 1,869 | 1,459 | 1,656 | 2,027 | 3,261 | | Other | 46 | 46 | 46 | 47 | 47 | | **At 31 December 2022** | **4,903** | **3,522** | **4,211** | **5,392** | **9,652** | | UK mortgages | 837 | 637 | 723 | 967 | 1,386 | | Credit cards^{1} | 521 | 442 | 500 | 569 | 672 | | Other Retail^{1} | 825 | 760 | 811 | 863 | 950 | | Commercial Banking^{1} | 1,433 | 1,295 | 1,358 | 1,505 | 1,859 | | Other^{1} | 426 | 426 | 427 | 426 | 424 | | **At 31 December 2021** | **4,042** | **3,560** | **3,819** | **4,330** | **5,291** | | **Underlying basis^{1}** | | | | | | | UK mortgages | 1,590 | 895 | 1,172 | 1,815 | 4,254 | | Credit cards | 763 | 596 | 727 | 828 | 1,180 | | Other Retail | 1,016 | 907 | 992 | 1,056 | 1,290 | | Commercial Banking | 1,869 | 1,459 | 1,656 | 2,027 | 3,261 | | Other | 46 | 46 | 46 | 47 | 47 | | **At 31 December 2022** | **5,284** | **3,903** | **4,593** | **5,773** | **10,032** | | UK mortgages | 1,284 | 1,084 | 1,170 | 1,414 | 1,833 | | Credit cards^{1} | 531 | 453 | 511 | 579 | 682 | | Other Retail^{1} | 825 | 760 | 811 | 863 | 950 | | Commercial Banking^{1} | 1,433 | 1,295 | 1,358 | 1,505 | 1,859 | | Other^{1} | 426 | 426 | 427 | 426 | 424 | | **At 31 December 2021** | **4,499** | **4,018** | **4,277** | **4,787** | **5,748** | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 171 ### Risk management ### continued The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios, with staging of assets based on each specific scenario probability of default. ECL applied through individual assessments and the majority of post-model adjustments are reported flat against each economic scenario, reflecting the basis on which they are evaluated. A probability- weighted scenario is not shown as this does not reflect the basis on which ECL is reported. Comparing the probability-weighted ECL in the table above to the base case ECL with base case scenario specific staging, as shown in the table below, results in an uplift of £820 million compared to £230 million at 31 December 2021. | | | At 31 December 2022 At 31 December 2021 | | | | | | | | | | | 1 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | Severe | | | | | | | | | Severe | | | Upside | | Base case | | Downside | | downside | | Upside | | Base case | | Downside | | downside | | | | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | | £m | Statutory basis UK mortgages 469 734 1,344 7,848 636 722 973 1,448 Credit cards 563 719 842 1,320 434 500 583 707 Other Retail 886 984 1,059 1,449 754 808 867 972 Commercial Banking 1,425 1,600 2,142 5,190 1,290 1,357 1,518 2,116 Other 46 46 47 47 425 425 425 425 Total 3,389 4,083 5,434 15,854 3,539 3,812 4,366 5,668 A Underlying basis UK mortgages 851 1,115 1,726 8,230 1,083 1,169 1,420 1,895 Credit cards 563 719 842 1,320 444 510 593 717 Other Retail 886 984 1,059 1,449 754 808 868 973 Commercial Banking 1,425 1,600 2,142 5,190 1,290 1,357 1,517 2,115 Other 46 46 47 47 425 425 425 425 Total 3,771 4,464 5,816 16,236 3,996 4,269 4,823 6,125 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. The impact of changes in the UK unemployment rate and House Price Index (HPI) have been assessed. Although such changes would not be observed in isolation, as economic indicators tend to be correlated in a coherent scenario, this gives insight into the sensitivity of the Group’s ECL to gradual changes in these two critical economic factors. The assessment has been made against the base case with the reported staging unchanged and is assessed through the direct impact on modelled ECL only, including management judgements applied through changes to model inputs. The change in univariate ECL sensitivity in the period is a result of the change in definition of default and associated model changes, and the deterioration in the base case on which the assessment has been performed. The table below shows the impact on the Group’s ECL in respect of UK mortgages of an increase or decrease in loss given default for a 10 percentage point (pp) increase or decrease in the UK House Price Index (HPI). The increase or decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario. At 31 December 2022 At 31 December 2021 10pp increase 10pp decrease 10pp increase 10pp decrease in HPI in HPI in HPI in HPI ECL impact, £m (225) 370 (112) 162 The table below shows the impact on the Group’s ECL resulting from a 1 percentage point (pp) increase or decrease in the UK unemployment rate. The increase or decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario. An immediate increase or decrease would drive a more material ECL impact as it would be fully reflected in both 12-month and lifetime PDs. | | At 31 December 2022 At 31 December 2021 | | | | | | | 1 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 1pp increase in | | | 1pp decrease in | | 1pp increase in | | 1pp decrease in | | | unemployment | | | unemployment | | unemployment | | unemployment | | | | | £m | | £m | | £m | | £m | UK mortgages 26 (21) 23 (18) Credit cards 41 (41) 20 (20) Other Retail 25 (25) 12 (12) Commercial Banking 100 (91) 52 (45) ECL impact 192 (178) 107 (95) 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 172 Lloyds Banking Group Annual Report and Accounts 2022 # **Group derivative credit risk exposures** **Derivative credit risk exposure** | | 2022 | | | | 2021 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Traded over the counter | | | Total £m | Traded over the counter | | | Total £m | | | Traded on recognised exchanges £m | Settled by central counterparties £m | Not settled by central counterparties £m | | Traded on recognised exchanges £m | Settled by central counterparties £m | Not settled by central counterparties £m | | | *Notional balances* | | | | | | | | | | Foreign exchange | – | – | 465,800 | 465,800 | – | – | 393,154 | 393,154 | | Interest rate | 31,393 | 6,422,514 | 206,006 | 6,659,913 | 214,821 | 3,695,218 | 212,825 | 4,122,864 | | Equity and other | 4,670 | – | 11,820 | 16,490 | 4,783 | – | 7,756 | 12,539 | | Credit | – | 286 | 6,403 | 6,689 | – | 397 | 6,343 | 6,740 | | **Total** | **36,063** | **6,422,800** | **690,029** | **7,148,892** | **219,604** | **3,695,615** | **620,078** | **4,535,297** | | *Fair values* | | | | | | | | | | Assets | | 1,033 | 23,643 | | | 890 | 21,113 | | | Liabilities | | (1,850) | (22,153) | | | (888) | (17,109) | | | **Net (liability) asset** | | **(817)** | **1,490** | | | **2** | **4,004** | | The total notional principal amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2022 and 31 December 2021 is shown in the table above. The notional principal amount does not, however, represent the Group's credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 52 on page 317. # **Retail** - The Retail portfolio has remained resilient and well-positioned despite pressure on consumer disposable incomes from rising interest rates, inflation and a higher cost of living. Risk management has been enhanced since the last financial crisis, with strong affordability and indebtedness controls for new lending and a prudent risk appetite approach - Despite external pressures, only very modest signs of deterioration are evident across the portfolios, arrears rates remain low and generally below pre-pandemic levels. New lending credit quality remains strong and performance is broadly stable - The Group is closely monitoring the impacts of the rising cost of living on consumers to ensure we remain close to any signs of deterioration. Lending controls are under continuous review and we have taken proactive risk actions calibrated to the latest Group macroeconomic outlook. Precautionary expected credit loss (ECL) judgements have also been raised to cover potential future deterioration from cost of living risks - The Retail impairment charge in 2022 was £1,373 million, compared to a release of £447 million for 2021 with updated macroeconomic assumptions within the ECL model driving a £600 million charge compared to a credit of £1,120 million last year. There was also a charge in relation to underlying performance of £773 million (2021: a charge of £672 million) - Existing IFRS 9 staging rules and triggers have been maintained across Retail from the 2021 year end with the exception of mortgages. The change maintains alignment between IFRS 9 Stage 3 and new regulatory definitions of default. Default continues to be considered to have occurred when there is evidence that the customer is experiencing financial difficulty which is likely to significantly affect their ability to repay the amount due. For mortgages, this was previously deemed to have occurred no later than when a payment was 180 days past due; in line with CRD IV this has now been reduced to 90 days, as well as including end-of-term payments on past due interest-only accounts and all non-performing loans. Overall ECL is not materially impacted as management judgements were previously held in lieu of these known changes. However, material movements between stages were observed, with an additional £2.8 billion of assets in Stage 3 and £6.1 billion in Stage 2 at the point of implementation, both as a result of the broader definition of default - As a result of updated macroeconomic assumptions within the ECL model, Retail customer related ECL allowance as a percentage of drawn loans and advances (coverage) increased to 0.9 per cent (31 December 2021: 0.7 per cent). As at 31 December 2022 the majority of ECL increases are reflected within Stage 2 under IFRS 9, representing cases which have observed a significant increase in credit risk since origination (SICR) - Stage 2 loans and advances now comprises 14.8 per cent of the Retail portfolio (31 December 2021: 9.5 per cent), of which 92.3 per cent are up to date, performing loans (31 December 2021: 85.0 per cent) - The CRD IV changes have increased the proportion of UK mortgage accounts reaching the broader definition of default and has resulted in a slight decrease in Stage 2 ECL coverage to 3.0 per cent (31 December 2021: 3.4 per cent) - As a result of updated macroeconomic assumptions within the ECL model, Stage 3 loans and advances have increased to 2.0 per cent of total loans and advances (31 December 2021: 1.4 per cent) while Stage 3 ECL coverage decreased to 16.4 per cent (31 December 2021: 20.4 per cent) due to a higher proportion of mortgages triggering 90 days past due, with lower coverage on average. Underlying credit deterioration remains relatively limited outside of definition of default changes # **UK mortgages** - The UK mortgages portfolio is well positioned with low arrears and a strong loan to value (LTV) profile. The Group has actively improved the quality of the portfolio over the years using robust affordability and credit controls, while the balances of higher risk portfolios originated prior to 2008 have continued to reduce - Arrears rates remain broadly stable with slight increases observed on variable rate products following UK Bank Rate rises exacerbated by attrition from customers refinancing to fixed rates - Total loans and advances increased to £312.7 billion (31 December 2021: £308.8 billion), with a small reduction in average LTV to 41.6 per cent (31 December 2021: 42.1 per cent). The proportion of balances with a LTV greater than 90 per cent increased to 1.4 per cent (31 December 2021: 0.5 per cent). The average LTV of new business decreased to 61.7 per cent (31 December 2021: 63.3 per cent) - Updated macroeconomic assumptions within the ECL model, including a forecast reduction in house prices, resulted in a net impairment charge of £295 million for 2022 compared to a credit of £273 million for 2021. Total ECL coverage increased to 0.5 per cent (31 December 2021: 0.4 per cent) - As a result of updated macroeconomic assumptions within the ECL model, Stage 2 loans and advances increased to 14.8 per cent of the portfolio (31 December 2021: 9.3 per cent), while Stage 2 ECL coverage has decreased to 1.5 per cent (31 December 2021: 2.3 per cent) due to a higher proportion of mortgage accounts reaching the broader CRD IV definition of default Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 173 UK Motor Finance ### Risk management • The UK Motor Finance portfolio increased from £14.3 billion ### continued for 2021 to £14.6 billion for 2022, with ongoing new car supply constraints being offset by continued strong demand for used • Stage 3 loans and advances has increased to 2.1 per cent of vehicles the portfolio (31 December 2021: 1.4 per cent) and due to a • There was a net impairment credit of £2 million for higher proportion of mortgage accounts reaching the broader 2022, reflecting continued low levels of losses given resilient CRD IV definition of default, Stage 3 ECL coverage decreased to used car prices. This compares to a credit of £151 million for 12.5 per cent (31 December 2021: 13.9 per cent) 2021, which benefitted from ECL releases as used car prices Credit cards materially outperformed expectations set earlier in the • Credit cards balances increased to £15.0 billion (31 December pandemic. However, used car prices have begun to fall from 2021 £14.3 billion) due to recovery in customer spend recent high levels with this trend expected to continue. ECL • The credit card portfolio is a prime book with low levels coverage decreased to 1.7 per cent (31 December 2021: 2.1 per of arrears and strong repayment rates despite recent cent) affordability pressures • Updates to Residual Value (RV) and Voluntary Termination • Updated macroeconomic assumptions within the ECL model (VT) risk held against Personal Contract Purchase (PCP) and and forward looking judgements for the increased risk from Hire Purchase (HP) lending are included within the impairment inflation and a higher cost of living resulted in an impairment charge. Continued resilience in used car prices and disposal charge of £571 million for 2022, compared to a credit of experience, partially driven by global supply issues, offset by £52 million in 2021. Total ECL coverage increased to 5.1 per cent underperformance in some segments, has resulted in broadly (31 December 2021: 3.7 per cent) flat RV and VT ECL of £92 million as at 31 December 2022 • This is reflected in Stage 2 loans and advances which (31 December 2021: £95 million) increased to 21.9 per cent of the portfolio (31 December • Stable credit performance and continued resilience in used 2021: 14.5 per cent) and Stage 2 ECL coverage which has car prices has resulted in Stage 2 ECL coverage reducing increased to 14.5 per cent (31 December 2021: 12.2 per cent) slightly to 3.4 per cent (31 December 2021: 4.0 per cent) and • Stage 3 loans and advances remained broadly stable at 1.9 Stage 3 ECL reducing to 52.6 per cent (31 December 2021: 57.7 per cent of the portfolio (31 December 2021: 2.0 per cent), while per cent) Stage 3 ECL coverage has reduced to 50.9 per cent Other (31 December 2021: 58.2 per cent) • Other loans and advances increased slightly to £14.8 billion Loans and overdrafts (31 December 2021: £12.0 billion) • Loans and advances for personal current account and • Stage 3 loans and advances remain stable at 1.1 per cent the personal loans portfolios increased to £10.3 billion (31 December 2021: 1.4 per cent) and Stage 3 coverage at 33.1 (31 December 2021: £9.6 billion) with continued recovery in per cent (31 December 2021: 30.8 per cent) customer spend and demand for credit • There was a net impairment charge of £10 million for 2022 • Updated macroeconomic assumptions within the ECL model compared to a credit of £10 million for 2021 and forward looking judgements for the increased risk from inflation and a higher cost of living resulted in an impairment charge of £499 million for the full year 2022 compared to a charge of £39 million for 2021 • Stage 2 ECL coverage increased to 21.4 per cent (31 December 2021: 15.4 per cent) and overall ECL coverage to 6.6 per cent (31 December 2021: 4.7 per cent) • Stage 3 ECL coverage reduced slightly to 64.6 per cent (31 December 2021: 67.5 per cent) 1 Retail UK mortgages loans and advances to customers (statutory basis) | At 31 Dec | | At 31 Dec | | | --- | --- | --- | --- | | | 2022 | | 2021 | | | £m | | £m | Mainstream 253,283 248,013 Buy-to-let 51,529 51,111 Specialist 7,526 9,220 Total 312,338 308,344 1 Balances include the impact of HBOS-related acquisition adjustments. A Mortgages greater than three months in arrears (excluding repossessions, underlying basis) | | Number of cases Total mortgage accounts Value of loans | | | | | 1 | | Total mortgage balances | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2022 | 2021 | 2022 | 2021 | 2022 | | 2021 | | 2022 | 2021 | | At 31 December | Cases | Cases | % | % | £m | | £m | | % | % | Mainstream 19,719 22,128 1.1 1.2 2,213 2,481 0.9 1.0 Buy-to-let 3,478 4,171 0.8 1.0 473 537 0.9 1.0 Specialist 4,323 5,491 7.0 7.5 722 892 9.3 9.4 Total 27,520 31,790 1.2 1.4 3,408 3,910 1.1 1.3 1 Value of loans represents total gross book value of mortgages more than three months in arrears; the balances exclude the impact of HBOS acquisition adjustments. The stock of repossessions increased to 807 cases at 31 December 2022, compared to 346 cases at 31 December 2021, due to the resumption of litigation action that had been suspended at the onset of the coronavirus pandemic. 174 Lloyds Banking Group Annual Report and Accounts 2022 ## Period end and average LTVs across the Retail mortgage portfolios (underlying basis)$^{1}$ | | At 31 December 2022 | | | | At 31 December 2021 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Mainstream % | Buy-to-let % | Specialist % | Total % | Mainstream % | Buy-to-let % | Specialist % | Total % | | Less than 60 per cent | 60.3 | 71.6 | 86.0 | 62.8 | 58.1 | 69.3 | 80.6 | 60.7 | | 60 per cent to 70 per cent | 19.1 | 20.3 | 7.9 | 19.0 | 19.6 | 23.8 | 11.8 | 20.1 | | 70 per cent to 80 per cent | 13.2 | 7.7 | 2.5 | 12.1 | 16.8 | 6.4 | 3.5 | 14.6 | | 80 per cent to 90 per cent | 5.7 | 0.2 | 1.2 | 4.7 | 5.0 | 0.2 | 1.3 | 4.1 | | 90 per cent to 100 per cent | 1.6 | 0.1 | 1.0 | 1.3 | 0.4 | 0.1 | 0.9 | 0.3 | | Greater than 100 per cent | 0.1 | 0.1 | 1.4 | 0.1 | 0.1 | 0.2 | 1.9 | 0.2 | | **Total** | **100.0** | **100.0** | **100.0** | **100.0** | **100.0** | **100.0** | **100.0** | **100.0** | | Average loan to value^{1} | | | | | | | | | | Stock of residential mortgages | 40.9 | 46.8 | 35.0 | 41.6 | 41.3 | 47.7 | 37.5 | 42.1 | | New residential lending | 62.3 | 58.1 | n/a | 61.7 | 63.7 | 60.4 | n/a | 63.3 | $^{1}$ Average loan to value is calculated as total loans and advances as a percentage of the total indexed collateral of these loans and advances, the balances exclude the impact of HBOS acquisition adjustments. ### Interest-only mortgages The Group provides interest-only mortgages to owner occupier mortgage customers whereby only payments of interest are made for the term of the mortgage with the customer responsible for repaying the principal outstanding at the end of the loan term. At 31 December 2022, owner occupier interest-only balances as a proportion of total owner occupier balances had reduced to 16.4 per cent (31 December 2021: 18.7 per cent). The average indexed loan to value remained low at 35.5 per cent (31 December 2021: 36.8 per cent). For existing interest-only mortgages, a contact strategy is in place during the term of the mortgage to ensure that customers are aware of their obligations to repay the principal upon maturity of the loan. Treatment strategies are in place to help customers anticipate and plan for repayment of capital at maturity and support those who may have difficulty in repaying the principal amount. A dedicated specialist team supports customers who have passed their contractual maturity date and are unable to fully repay the principal. A range of treatments are offered to customers based on their individual circumstances to create fair and sustainable outcomes. ### Analysis of owner occupier interest-only mortgages (statutory basis) | | At 31 Dec 2022 | At 31 Dec 2021 | | --- | --- | --- | | **Interest-only balances (£m)** | **42,697** | 48,128 | | Stage 1 (%) | 58.5 | 70.7 | | Stage 2 (%) | 25.3 | 17.1 | | Stage 3 (%) | 3.7 | 2.8 | | Purchased or originated credit-impaired (%) | 12.6 | 9.4 | | Average loan to value (%) | 35.5 | 36.8 | | **Maturity profile (£m)** | | | | Due | 1,931 | 1,803 | | Within 1 year | 1,453 | 1,834 | | 2 to 5 years | 8,832 | 8,889 | | 6 to 10 years | 16,726 | 17,882 | | Greater than 10 years | 13,755 | 17,720 | | **Past term interest-only balances (£m)** | **1,906** | 1,790 | | Stage 1 (%) | 0.2 | 0.7 | | Stage 2 (%) | 11.9 | 33.0 | | Stage 3 (%) | 45.6 | 29.6 | | Purchased or originated credit-impaired (%) | 42.3 | 36.7 | | Average loan to value (%) | 33.2 | 33.0 | | Negative equity (%) | 2.0 | 1.8 | $^{1}$ Balances where all interest-only elements have moved past term. Some may subsequently have had a term extension, so are no longer classed as due. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 175 ### Risk management ### continued Retail forbearance The basis of disclosure for forbearance is aligned to definitions used in the European Banking Authority’s FINREP reporting. On an underlying basis, total forbearance for the major retail portfolios has reduced by £1.2 billion to £4.5 billion. This is driven by a reduction in customers with a historical capitalisation treatment (where arrears were reset and added to the loan balance) and, following the implementation of new regulatory requirements, the removal of past term interest-only mortgages as a forbearance event where a forbearance treatment has not been granted. On a statutory basis the equivalent total forbearance position improved by £1.1 billion to £4.3 billion. The main customer treatments included are: repair, where arrears are added to the loan balance and the arrears position cancelled; instances where there are suspensions of interest and/or capital repayments; and refinance personal loans. As a percentage of loans and advances, forbearance loans decreased to 1.2 per cent at 31 December 2022 (31 December 2021: 1.6 per cent). As at 31 December 2022, 96.5 per cent of forbearance loans are captured in Stage 2 or Stage 3 for IFRS 9 and hold provision on a lifetime basis (31 December 2021: 97.3 per cent). Total expected credit losses (ECL) as a proportion of loans and advances which are forborne has increased to 12.1 per cent (31 December 2021: 10.8 per cent). Retail forborne loans and advances (statutory basis) (audited) Expected credit losses as a % of total loans and advances | | Of which | | Of which | | Of which | | which are | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Total | Stage 2 | | Stage 3 | | | POCI | forborne | 1 | | £m | | £m | | £m | | £m | | % | At 31 December 2022 UK mortgages 3,655 684 951 1,995 4.4 Credit cards 260 90 125 – 31.6 Loans and overdrafts 308 125 117 – 36.3 UK Motor Finance 77 32 42 – 32.4 Total 4,300 931 1,235 1,995 8.8 At 31 December 2021 UK mortgages 4,725 1,216 901 2,600 3.2 Credit cards 288 90 141 – 32.9 Loans and overdrafts 312 99 131 – 33.8 UK Motor Finance 102 38 62 – 37.0 Total 5,427 1,443 1,235 2,600 7.2 1 Expected credit loss allowance as a percentage of total loans and advances which are forborne is calculated excluding loans in recoveries for Credit cards, Loans and overdrafts (31 December 2022: £80 million; 31 December 2021: £87 million). A Retail forborne loans and advances (underlying basis) Expected credit losses as a % of total loans and advances | | Of which | | Of which | | which are | | | --- | --- | --- | --- | --- | --- | --- | | Total | Stage 2 | | Stage 3 | | forborne | 1 | | £m | | £m | | £m | | % | 2 At 31 December 2022 UK mortgages 3,813 1,229 2,542 8.4 Credit cards 260 90 125 31.6 Loans and overdrafts 308 125 117 36.3 UK Motor Finance 77 32 42 32.4 Total 4,458 1,476 2,826 12.1 2 At 31 December 2021 UK mortgages 4,942 2,721 2,209 7.5 Credit cards 288 90 142 32.9 Loans and overdrafts 312 99 131 33.8 UK Motor Finance 102 38 62 37.0 Total 5,644 2,948 2,544 10.8 1 Expected credit losses as a percentage of total loans and advances which are forborne are calculated excluding loans in recoveries for Credit cards, Loans and overdrafts (31 December 2022: £80 million; 31 December 2021: £87 million). 2 Balances exclude the impact of HBOS and MBNA acquisition-related adjustments. 176 Lloyds Banking Group Annual Report and Accounts 2022 ## Commercial Banking ### Portfolio overview - The Commercial portfolio credit quality remains resilient overall, with a focused approach to credit underwriting and monitoring standards and proactively managing exposures to higher risk and vulnerable sectors. While some of the Group's metrics indicate very modest deterioration, especially in consumer-led sectors, these are not considered to be material - The Group has reduced overall exposure to cyclical sectors since 2019 and continues to closely monitor credit quality, sector and single name concentrations. Sector and credit risk appetite continue to be proactively managed to ensure the Group is protected and clients are supported in the right way - The Group continues to carefully monitor the level of arrears on lending under the UK Government support schemes, including the Bounce Back Loan Scheme and the Coronavirus Business - Interruption Loan Scheme, where UK Government guarantees are in place at 100 per cent and 80 per cent respectively. The Group will continue to review customer trends and take early risk mitigating actions as appropriate, including actions to review and manage refinancing risk - The Group continues to provide early support to its more vulnerable customers through focused risk management via its Watchlist and Business Support framework. The Group will continue to balance prudent risk appetite with ensuring support for financially viable clients on their road to recovery ### Impairments - There was a net impairment charge of £517 million in 2022, compared to a net impairment credit of £936 million in 2021. This was driven by a £395 million charge from economic outlook revisions. The remaining £122 million charge was largely driven by a further material charge in the fourth quarter on a pre-existing single case - ECL allowances increased by £418 million to £1,849 million at 31 December 2022 (31 December 2021: £1,431 million). The ECL provision at 31 December 2022 includes the capture of the impact of inflationary pressures and supply chain constraints and assumes additional losses will emerge as a result of these and other emerging risks, through the multiple economic scenarios - As a result of the deterioration in the Group's forward-looking modelled economic assumptions, Stage 2 loans and advances increased by £3,963 million to £11,493 million (31 December 2021: £7,530 million), with 94.8 per cent of Stage 2 balances up to date. Stage 2 as a proportion of total loans and advances to customers increased to 12.1 per cent (31 December 2021: 8.0 per cent). Stage 2 ECL coverage was higher at 4.4 per cent (31 December 2021: 4.0 per cent) with the increase in coverage a direct result of the change in the multiple economic scenarios - Stage 3 loans and advances reduced to £3,371 million (31 December 2021: £3,563 million) and as a proportion of total loans and advances to customers, reduced to 3.5 per cent (31 December 2021: 3.8 per cent), largely as a result of net repayments and write-offs in the Corporate and Institutional Banking portfolio. Stage 3 ECL coverage increased to 38.9 per cent (31 December 2021: 31.6 per cent) predominantly driven by a further material charge on a pre-existing single case ## Commercial Banking UK Direct Real Estate - Commercial Banking UK Direct Real Estate gross lending stood at £11.0 billion at 31 December 2022 (net of exposures subject to protection through Significant Risk Transfer (SRT) securitisations) - The Group classifies Direct Real Estate as exposure which is directly supported by cash flows from property activities (as opposed to trading activities, such as hotels, care homes and housebuilders). Exposures of £5.6 billion to social housing providers are also excluded - Recognising this is a cyclical sector, total quantum (gross and net) and asset type quantum caps are in place to control origination and exposure. Focus remains on the UK market and new business has been written in line with a prudent risk appetite with conservative LTVs, strong quality of income and proven management teams. During 2022, the Group increased the reporting granularity of underlying LTV data as detailed in the LTV – UK Direct Real Estate table - Overall performance has remained resilient and although the Group saw some increase in cases on its closer monitoring Watchlist category, these are predominantly purely precautionary, and levels of this remain significantly below that seen during the pandemic. Transfers to the Group's Business Support Unit have been limited - Rent collection has largely recovered and stabilised following the coronavirus pandemic, although challenges remain in some sectors. Despite some material headwinds, including the inflationary environment and the impact of rising interest rates, which impacts debt servicing and refinance capacity, the portfolio is well-positioned and proactively managed, with conservative LTVs, good levels of interest cover, and appropriate risk mitigants in place: - CRE exposures continue to be heavily weighted towards investment real estate (c.90 per cent) rather than development. Of these investment exposures, over 89 per cent have an LTV of less than 60 per cent, with an average LTV of 40.6 per cent - c.90 per cent of CRE exposures have an interest cover ratio of greater than 2.0 times and in SME, LTV at origination has been typically limited to c.55 per cent, given prudent repayment cover criteria (including a notional base rate stress) - Approximately 47 per cent of exposures relate to commercial real estate (with no speculative development lending) with the remainder predominantly related to residential real estate. The underlying sub sector split is diversified with more limited exposure to higher risk sub sectors (c.13 per cent of exposures secured by Retail assets, with appetite tightened since 2018) - Use of SRT securitisations also acts as a risk mitigant in this portfolio, with run-off of these carefully managed and sequenced - Both investment and development lending is subject to specific credit risk appetite criteria. Development lending criteria includes maximum loan to gross development value and maximum loan to cost, with funding typically only released against completed work, as confirmed by the Group's monitoring quantity surveyor Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 177 ### Risk management ### continued LTV – UK Direct Real Estate | | | At 31 December 2022 | | 1,2,3 | | | | | At 31 December 2021 | | 1,2,3 | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Stage 1 and 2 | | Stage 3 | | Total | Total | | Stage 1 and 2 | | Stage 3 | | Total | Total | | | | £m | | £m | £m | | % | | £m | | £m | £m | | % | Investment exposures Less than 60 per cent 7,821 47 7,868 89.4 6,527 52 6,579 82.1 60 per cent to 70 per cent 503 9 512 5.8 617 5 622 7.8 70 per cent to 80 per cent 58 – 58 0.7 129 13 142 1.8 80 per cent to 100 per cent 17 13 30 0.3 84 2 86 1.1 100 per cent to 120 per cent 8 23 31 0.4 6 102 108 1.4 120 per cent to 140 per cent 1 – 1 – 4 – 4 0.1 Greater than 140 per cent 13 54 67 0.8 12 46 58 0.7 4 Unsecured 225 – 225 2.6 397 – 397 5.0 Subtotal 8,646 146 8,792 100.0 7,776 220 7,996 100.0 5 Other 346 13 359 1,460 27 1,487 Total investment 8,992 159 9,151 9,236 247 9,483 Development 900 7 907 1,233 17 1,250 6 UK Government Supported Lending 278 5 283 362 5 367 Total 10,170 171 10,341 10,831 269 11,100 1 Excludes Commercial Banking UK Direct Real Estate exposures subject to protection through Significant Risk Transfer transactions. 2 Excludes £0.6 billion in Business Banking (31 December 2021: £0.7 billion). 3 Year on year increase in less than 60 per cent driven by improved data coverage with clients moving from ‘Other’. 4 Predominantly Investment grade corporate CRE lending where the Group is relying on the corporate covenant. 5 Mainly lower value transactions where LTV not recorded on Commercial Banking UK Direct Real Estate monitoring system. Year on year decrease driven by improved data coverage with clients now reported in LTV band. 6 Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) lending to real estate clients, where government guarantees are in place at 100 per cent and 80 per cent, respectively. Commercial Banking forbearance Commercial Banking forborne loans and advances (audited) | At 31 December 2022 | | | 1 | At 31 December 2021 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | Of which | | | | Of which | | | | Total | Stage 3 | | | Total | Stage 3 | | | | £m | | £m | | £m | | £m | Type of forbearance Refinancing 13 11 14 11 Modification 3,484 2,908 3,655 2,881 Total 3,497 2,919 3,669 2,892 1 Includes £279 million (of which £254 million are guaranteed through the UK Government Bounce Back Loan Scheme) in Business Banking reported for the first time, £210 million of which is Stage 3. 178 Lloyds Banking Group Annual Report and Accounts 2022 ### Data risk Funding and liquidity risk Definition Definition Data risk is defined as the risk of the Group failing to effectively Funding risk is defined as the risk that the Group does not govern, manage and control its data (including data processed have sufficiently stable and diverse sources of funding or the by third-party suppliers), leading to unethical decisions, poor funding structure is inefficient. Liquidity risk is defined as the customer outcomes, loss of value to the Group and mistrust. risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at Exposures excessive cost. Data risk is present in all aspects of the business where data is processed, both within the Group and by third parties including Exposure colleague and contractor, prospective and existing customer Liquidity exposure represents the potential stressed outflows in lifecycle and insight processes. Data risk manifests: any future period less expected inflows. The Group considers liquidity exposure from both an internal and a regulatory • When personal data is not managed in a way that complies perspective. with General Data Protection Regulations (GDPR) and other Financial results Risk managementGovernance Financial statements Other informationStrategic report data privacy regulatory obligations Measurement • When data quality issues are not identified and managed Liquidity risk is managed through a series of measures, tests and appropriately reports that are primarily based on contractual maturities with • When data records are not created, retained, protected, behavioural overlays as appropriate. Note 52 on page 315 sets out destroyed, or retrieved appropriately an analysis of assets and liabilities by relevant maturity grouping. • When data governance fails to provide robust oversight The Group undertakes quantitative and qualitative analysis of the of data decision-making, controls and actions to ensure behavioural aspects of its assets and liabilities in order to reflect strategies are implemented effectively their expected behaviour. • When data standards are not maintained, data-related issues Mitigation are not remediated, and incomplete data that is not available The Group manages and monitors liquidity risks and ensures at the right time, to the right people, to enable business that liquidity risk management systems and arrangements are decisions to be made, and regulatory reporting requirements adequate with regard to the internal risk appetite, Group strategy to be fulfilled and regulatory requirements. Liquidity policies and procedures • When critical data mapping and data information standards are subject to independent internal oversight by Risk. Overseas are not followed, impacting compliance, traceability and branches and subsidiaries of the Group may also be required understanding of data to meet the liquidity requirements of the entity’s domestic Measurement country. Management of liquidity requirements is performed Data risk covers data governance, data management and by the overseas branch or subsidiary in line with Group policy. data privacy and ethics and is measured through a series of Liquidity risk of the Insurance business is actively managed quantitative and qualitative metrics. and monitored within the Insurance business. The Group plans funding requirements over its planning period, combining Mitigation business as usual and stressed conditions. The Group manages Mitigation strategies are adopted to reduce data governance, its liquidity position paying regard to its internal risk appetite, management, privacy and ethical risks. Control assessments are Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio logged and tracked on One Risk and Control Self-Assessment (NSFR) as required by the PRA, the Capital Requirements Directive system with supporting metrics. Investment continues to be made (CRD IV) and the Capital Requirements Regulation (CRR) liquidity to reduce data risk exposure to within appetite. Examples include: requirements. • Delivering a data strategy The Group’s funding and liquidity position is underpinned by • Enhancing data quality and capability its significant customer deposit base and is supported by • Embedding data by design and ethics strong relationships across customer segments. The Group has Monitoring consistently observed that, in aggregate, the retail deposit base The Group continues to monitor and respond to data related provides a stable source of funding. Funding concentration by regulatory initiatives i.e. new Digital Protection and Digital counterparty, currency and tenor is monitored on an ongoing Information Bill expected spring 2023 and political developments basis and, where concentrations do exist, these are managed as i.e. potential divergence of legal and regulatory requirements part of the planning process and limited by the internal funding following EU exit. and liquidity risk monitoring framework, with analysis regularly Data risk is governed through Group and sub-group committees provided to senior management. and significant issues are escalated to Group Risk Committee, To assist in managing the balance sheet, the Group operates a in accordance with the Group’s Enterprise Risk Management Liquidity Transfer Pricing (LTP) process which: allocates relevant Framework and One RCSA frameworks. interest expenses from the centre to the Group’s banking A number of activities support the close monitoring of data risk businesses within the internal management accounts; helps drive including: the correct inputs to customer pricing; and is consistent with regulatory requirements. LTP makes extensive use of behavioural • Design and monitoring of data risk appetite metrics, including maturity profiles, taking account of expected customer loan key risk indicators and key performance indicators prepayments and stability of customer deposits, modelled on • Monitoring of significant data related issues, complaints, historic data. events and breaches in accordance with Group Operational Risk and Data policies The Group can monetise liquid assets quickly, either through the • Identification and mitigation of data risk when planning and repurchase agreements (repo) market or through outright sale. implementing transformation or business change In addition, the Group has pre-positioned a substantial amount of assets at the Bank of England’s Discount Window Facility which can be used to access additional liquidity in a time of stress. The Group considers diversification across geography, currency, markets and tenor when assessing appropriate holdings of liquid assets. The Group’s liquid asset buffer is available for deployment at immediate notice, subject to complying with regulatory requirements. 179Lloyds Banking Group Annual Report and Accounts 2022 ## Risk management ### continued Liquidity risk within the insurance business may result from: the inability to sell financial assets quickly at their fair values; an insurance liability falling due for payment earlier than expected; the inability to generate cash inflows as anticipated; an unexpected large operational event; or from a general insurance catastrophe, for example, a significant weather event. Liquidity risk is actively managed and monitored within the insurance business to ensure that it remains within approved risk appetite, so that even under stress conditions, there is sufficient liquidity to meet obligations. ### Monitoring Daily monitoring and control processes are in place to address internal and regulatory liquidity requirements. The Group monitors a range of market and internal early warning indicators on a daily basis for early signs of liquidity risk in the market or specific to the Group. This captures regulatory metrics as well as metrics the Group considers relevant for its liquidity profile. These are a mixture of quantitative and qualitative measures, including: daily variation of customer balances; changes in maturity profiles; funding concentrations; changes in LCR outflows; credit default swap (CDS) spreads; and basis risks. The Group carries out internal stress testing of its liquidity and potential cash flow mismatch position over both short (up to one month) and longer-term horizons against a range of scenarios forming an important part of the internal risk appetite. The scenarios and assumptions are reviewed at least annually to ensure that they continue to be relevant to the nature of the business, including reflecting emerging horizon risks to the Group. For further information on the Group's 2022 liquidity stress testing results refer to **page 183**. The Group maintains a Liquidity Contingency Framework as part of the wider Recovery Plan which is designed to identify emerging liquidity concerns at an early stage, so that mitigating actions can be taken to avoid a more serious crisis developing. The Liquidity Contingency Framework has a foundation of robust and regular monitoring and reporting of key performance indicators, early warning indicators and Risk Appetite by both Group Corporate Treasury (GCT) and Risk up to and including Board level. Where movements in any of these metrics and indicator suites point to a potential issue, SME teams and their directors will escalate this information as appropriate. ## Funding and liquidity management in 2022 The Group has maintained its strong funding and liquidity position with a loan to deposit ratio of 96 per cent as at 31 December 2022 (94 per cent as at 31 December 2021), largely driven by increased customer lending. Overall total wholesale funding has increased to £100.3 billion as at 31 December 2022 (31 December 2021: £93.1 billion) as a result of short term funding which has increased towards more normalised levels and maintains the Group's access to diverse sources and tenors of funding. The Group's liquid assets continue to exceed the regulatory minimum and internal risk appetite, with a liquidity coverage ratio (LCR) of 144 per cent (based on a monthly rolling average over the previous 12 months) as at 31 December 2022 (31 December 2021: 135 per cent) calculated on a Group consolidated basis based on the EU Delegated Act. The increase in LCR is explained primarily by an increase in liquid assets from the Bank of England Term Funding Scheme with additional incentives for SMEs (TFSME) drawdowns in 2021. Following the implementation of structural reform, liquidity risk is managed at a legal entity level with the Group consolidated LCR, representing the composite of the Ring-Fenced Bank and Non-Ring-Fenced Bank entities. The Net Stable Funding Ratio (NSFR) was implemented on 1 January 2022. The Group monitors this metric monthly and is significantly in excess of the regulatory requirement of 100 per cent. During 2022, the Group accessed wholesale funding across a range of currencies and markets with term issuance volumes totalling £9.3 billion. The total outstanding amount of drawings from the TFSME has remained stable at £30.0 billion at 31 December 2022 (31 December 2021: £30.0 billion), with maturities in 2025, 2027 and beyond. In 2023, the Group expects to have a term wholesale issuance requirement of around £15 billion. The Group's credit ratings continue to reflect the strength of the Group's business model and balance sheet. Over the course of the year, Fitch and S&P affirmed the Group's ratings. In July, Moody's downgraded the senior and subordinated ratings for Lloyds Banking Group plc by one notch based on their Loss Given Failure methodology. This was a technical and methodological change that puts the Group in line with peer issuers. The rating agencies continue to monitor the impact of cost of living increases and rising rates for the UK banking sector. The Group's strong management, franchise and financial performance, along with the robust capital and funding position, are reflected in the Group's strong ratings. 180 Lloyds Banking Group Annual Report and Accounts 2022 Group funding requirements and sources | At 31 Dec | | At 31 Dec | | | | | --- | --- | --- | --- | --- | --- | | | 2022 | | 2021 | Change | | | | £bn | | £bn | | % | Group funding position Cash and balances at central banks 91.4 76.4 20 1 Loans and advances to banks 10.6 6.9 54 Loans and advances to customers 454.9 448.6 1 Reverse repurchase agreements – non-trading 44.9 54.8 (18) Debt securities at amortised cost 9.9 6.8 46 Financial assets at fair value through other comprehensive income 23.2 28.1 (17) Financial results Risk managementGovernance Financial statements Other informationStrategic report 2 Other assets 242.9 264.9 (8) Total Group assets 877.8 886.5 (1) 2,3 Less other liabilities (206.1) (232.8) (11) Funding requirements 671.7 653.7 3 3,4 Wholesale funding 100.3 93.1 8 Customer deposits 475.3 476.3 Repurchase agreements – non-trading 18.6 1.1 Term Funding Scheme with additional incentives for SMEs (TFSME) 30.0 30.0 Total equity 47.5 53.2 (11) Funding sources 671.7 653.7 3 1 Excludes £0.2 billion (31 December 2021: £0.1 billion) of loans and advances to banks within the Insurance business. 2 Other assets and other liabilities primarily include balances in the Group’s Insurance business and the fair value of derivative assets and liabilities. 3 Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion), previously included in other liabilities; both comparatives have been presented on a consistent basis. 4 The Group’s definition of wholesale funding aligns with that used by other international market participants; including bank deposits, debt securities in issue and subordinated liabilities. Excludes balances relating to margins of £2.6 billion (31 December 2021: £3.8 billion). Reconciliation of Group funding to the balance sheet (audited) Fair value | Included in | | | Cash | | and other | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | funding | | collateral | | | accounting | | | Balance | | | analysis | | received | | 1 | methods | | 2 | | sheet | | | £bn | | £bn | | | £bn | | | £bn | At 31 December 2022 Deposits from banks 5.1 2.7 (0.5) 7.3 3 Debt securities in issue 82.3 – (8.5) 73.8 Subordinated liabilities 12.9 – (2.2) 10.7 Total wholesale funding 100.3 2.7 Customer deposits 475.3 – – 475.3 Total 575.6 2.7 At 31 December 2021 Deposits from banks 3.3 4.3 – 7.6 3 Debt securities in issue 76.4 – (4.8) 71.6 Subordinated liabilities 13.4 – (0.3) 13.1 Total wholesale funding 93.1 4.3 Customer deposits 476.3 – – 476.3 Total 569.4 4.3 1 Repurchase agreements, previously reported within deposits from banks and customer deposits, are excluded; comparatives have been restated. 2 Includes the unamortised HBOS acquisition adjustments on subordinated liabilities, the fair value movements on liabilities held at fair value through profit or loss, and hedge accounting adjustments that impact the accounting carrying value of the liabilities. 3 Debt securities in issue included in funding analysis includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative has been presented on a consistent basis. 181Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued Analysis of 2022 total wholesale funding by residual maturity | | | | | | | | | | | | | | | Total | | Total | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Up to 1 | | 1–3 | | 3–6 | | 6–9 | | 9–12 | 1–2 | 2–5 | | Over | at 31 Dec | | at 31 Dec | | | month | months | | months | | months | | months | | years | years | five years | | | 2022 | | 2021 | | £bn | | £bn | | £bn | | £bn | | £bn | £bn | £bn | | £bn | | £bn | | £bn | Deposits from banks 3.8 0.5 0.3 0.1 0.4 – – – 5.1 3.3 Debt securities in issue: Certificates of deposit 0.9 2.1 2.0 1.6 0.4 0.2 – – 7.2 4.4 Commercial paper 2.7 5.6 3.1 0.8 0.5 – – – 12.7 8.7 Medium-term notes 1.3 0.5 2.3 1.6 1.2 7.7 18.7 12.0 45.3 42.5 Covered bonds 0.9 1.7 0.9 – – 2.7 5.7 2.2 14.1 17.0 1 Securitisation 0.2 0.3 – – – 0.2 1.3 1.0 3.0 3.8 6.0 10.2 8.3 4.0 2.1 10.8 25.7 15.2 82.3 76.4 Subordinated liabilities – – 1.1 0.7 – 0.9 3.8 6.4 12.9 13.4 2 Total wholesale funding 9.8 10.7 9.7 4.8 2.5 11.7 29.5 21.6 100.3 93.1 1 Securitisation includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative has been presented on a consistent basis. 2 The Group’s definition of wholesale funding aligns with that used by other international market participants; including bank deposits, debt securities and subordinated liabilities. Excludes balances relating to margins of £2.6 billion (31 December 2021: £3.8 billion). Total wholesale funding by currency (audited) Other Sterling 1 US Dollar Euro currencies Total £bn £bn £bn £bn £bn At 31 December 2022 23.4 43.4 25.8 7.7 100.3 At 31 December 2021 23.9 36.8 25.6 6.8 93.1 1 Wholesale funding includes significant risk transfer securitisations issued by special purpose vehicles of £1.6 billion (31 December 2021: £1.7 billion); the comparative has been presented on a consistent basis. Analysis of 2022 term issuance (audited) Other Sterling US Dollar Euro currencies Total £bn £bn £bn £bn £bn 1 Securitisation 0.2 – – – 0.2 Covered bonds 1.0 – – – 1.0 Senior unsecured notes 0.5 3.7 1.0 1.3 6.5 Subordinated liabilities – 0.8 – – 0.8 Additional tier 1 0.8 – – – 0.8 Total issuance 2.5 4.5 1.0 1.3 9.3 1 Includes significant risk transfer securitisations. 182 Lloyds Banking Group Annual Report and Accounts 2022 ## Liquidity portfolio At 31 December 2022, the Group had £144.7 billion of highly liquid unencumbered LCR eligible assets, based on a monthly rolling average over the previous 12 months post any liquidity haircuts (31 December 2021: £140.2 billion), of which £140.4 billion is LCR level 1 eligible (31 December 2021: £138.6 billion) and £4.3 billion is LCR level 2 eligible (31 December 2021: £1.6 billion). These assets are available to meet cash and collateral outflows and regulatory requirements. The insurance business manages a separate liquidity portfolio to mitigate insurance liquidity risk. ### LCR eligible assets | | Average | | Change % | | --- | --- | --- | --- | | | 2022^{1} £bn | 2021^{1} £bn | | | Cash and central bank reserves | **84.7** | 71.0 | 19 | | High quality government/MDB/agency bonds^{2} | **53.6** | 65.2 | (18) | | High quality covered bonds | **2.1** | 2.4 | (13) | | Level 1 | **140.4** | 138.6 | 1 | | Level 2^{3} | **4.3** | 1.6 | | | **Total LCR eligible assets** | **144.7** | 140.2 | 3 | 1 Based on 12 months rolling average to 31 December. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. 2 Designated multilateral development bank (MDB). 3 Includes Level 2A and Level 2B. ### LCR eligible assets by currency | | Sterling £bn | US Dollar £bn | Euro £bn | Other currencies £bn | Total £bn | | --- | --- | --- | --- | --- | --- | | **At 31 December 2022** | | | | | | | Level 1 | **103.0** | **16.3** | **21.0** | **0.1** | **140.4** | | Level 2 | **1.2** | **1.5** | **0.5** | **1.1** | **4.3** | | **Total** | **104.2** | **17.8** | **21.5** | **1.2** | **144.7** | | **At 31 December 2021** | | | | | | | Level 1 | 107.9 | 14.4 | 16.3 | – | 138.6 | | Level 2 | 0.7 | 0.4 | 0.1 | 0.4 | 1.6 | | **Total** | **108.6** | **14.8** | **16.4** | **0.4** | **140.2** | 1 Based on 12 months rolling average to 31 December. Eligible assets are calculated as an average of month-end observations over the previous 12 months post any liquidity haircuts. The Group also has a significant amount of non-LCR eligible liquid assets which are eligible for use in a range of central bank or similar facilities. Future use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions. ### Stress testing results Internal liquidity stress testing results at 31 December 2022 (calculated as an average of month end observations over the previous 12 months) showed that the Group had liquidity resources representing 147 per cent of modelled outflows over a three month period from all wholesale funding sources, retail and corporate deposits, off-balance sheet requirements, intraday requirements and rating-dependent contracts under the Group's most severe liquidity stress scenario. This scenario includes a two notch downgrade of the Group's current long-term debt rating and accompanying one notch short-term downgrade implemented instantaneously by all major rating agencies. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 183 ### Risk management ### continued Encumbered assets This disclosure provides further detail on the availability of assets that could be used to support potential future funding requirements of the Group. The disclosure is not designed to identify assets that would be available in the event of a resolution or bankruptcy. The Group Asset and Liability Committee (GALCO) monitor and manage total balance sheet encumbrance, including via a defined risk appetite. At 31 December 2022, the Group had £35.5 billion (31 December 2021: £36.9 billion) of externally encumbered on-balance sheet assets with counterparties other than central banks. The decrease in encumbered assets was primarily driven by securitisation and covered bond redemptions. The Group also had £710.3 billion (31 December 2021: £694.3 billion) of unencumbered on-balance sheet assets, and £132.0 billion (31 December 2021: £155.4 billion) of pre-positioned and encumbered assets held with central banks, the decrease in the latter is driven by amortisation in the existing collateral pool. Primarily, the Group encumbers mortgages, unsecured lending, credit card receivables and car loans through the issuance programmes and tradable securities through securities financing activity. The Group mainly pre-positions mortgage assets at central banks. On balance sheet encumbered and unencumbered assets Encumbered with Pre- Unencumbered assets counterparties other positioned not pre-positioned than central banks and with central banks encumbered assets | Securitisations | | | | held with | | | | | Other | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | and covered | | | | central | | Readily | | realisable | | | Cannot | | | | | | bonds | Other | Total | | banks | realisable | | 1 | assets | 2 | be used | 3 | Total | Total | | | £m | £m | £m | | £m | | £m | | £m | | | £m | £m | £m | At 31 December 2022 Cash and balances at central banks – – – – 85,305 – 6,083 91,388 91,388 Financial assets at fair value through 4 profit or loss 38 2,516 2,554 918 – 177,137 178,055 180,609 Derivative financial instruments – – – – – – 24,753 24,753 24,753 Loans and advances to banks – – – – 1,800 6,819 2,013 10,632 10,632 Loans and advances to customers 16,472 2,790 19,262 132,012 13,419 217,963 72,243 303,625 454,899 Reverse repurchase agreements – – – – – – 44,865 44,865 44,865 Debt securities – 1,025 1,025 – 5,692 – 3,209 8,901 9,926 Financial assets at amortised cost 16,472 3,815 20,287 132,012 20,911 224,782 122,330 368,023 520,322 Financial assets at fair value through other comprehensive income – 12,657 12,657 – 10,045 – 452 10,497 23,154 5 Other – – – – – 421 37,182 37,603 37,603 Total assets 16,510 18,988 35,498 132,012 117,179 225,203 367,937 710,319 877,829 At 31 December 2021 Cash and balances at central banks – – – – 70,275 – 6,145 76,420 76,420 Financial assets at fair value through 4 profit or loss 42 4,344 4,386 – 1,975 – 200,410 202,385 206,771 Derivative financial instruments – – – – – – 22,051 22,051 22,051 Loans and advances to banks – – – – 1,419 4,784 798 7,001 7,001 Loans and advances to customers 20,952 2,319 23,271 155,405 10,177 176,344 83,370 269,891 448,567 Reverse repurchase agreements – – – – – – 54,753 54,753 54,753 Debt securities – 1,114 1,114 3,999 – 1,722 5,721 6,835 Financial assets at amortised cost 20,952 3,433 24,385 155,405 15,595 181,128 140,643 337,366 517,156 Financial assets at fair value through other comprehensive income – 8,085 8,085 – 19,812 – 240 20,052 28,137 5 Other – – – – – 500 35,490 35,990 35,990 Total assets 20,994 15,862 36,856 155,405 107,657 181,628 404,979 694,264 886,525 1 Assets regarded by the Group to be readily realisable in the normal course of business, to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes. 2 Assets where there are no restrictions on their use to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, but are not readily realisable in the normal course of business in their current form. 3 The following assets are classified as unencumbered – cannot be used: assets held within the Group’s Insurance businesses which are generally held to either back liabilities to policyholders or to support the solvency of the Insurance subsidiaries; assets held within consolidated limited liability partnerships which provide security for the Group’s obligations to its pension schemes; assets segregated in order to meet the Financial Resilience requirements of the PRA’s Supervisory Statement 9/6 ‘Operational Continuity in Resolution’; assets pledged to facilitate the use of intra-day payment and settlement systems; and reverse repos and derivatives balance sheet ledger items. 4 Contains assets measured at fair value through profit or loss arising from contracts held with reinsurers, previously included within other assets; comparatives have been restated. 5 Other comprises: items in the course of collection from banks; investment properties; goodwill; value of in-force business; other intangible assets; tangible fixed assets; current tax recoverable; deferred tax assets; retirement benefit assets; investments in joint ventures and associates and other assets; comparatives have been restated. The above table sets out the carrying value of the Group’s encumbered and unencumbered assets, separately identifying those that are available to support the Group’s funding needs. The table does not include collateral received by the Group (i.e. from reverse repos) that is not recognised on its balance sheet, the vast majority of which the Group is permitted to repledge. 184 Lloyds Banking Group Annual Report and Accounts 2022 ### Insurance underwriting risk Mitigation Insurance underwriting risk is mitigated in a number of ways: Definition Insurance underwriting risk is defined as the risk of adverse • Risks are identified, measured, managed, monitored and developments in the timing, frequency and severity of claims for reported using the Risk and Control Self-Assessment process insured/underwritten events and in customer behaviour and in • Embedded insurance processes for underwriting, claims and expense costs, leading to reductions in earnings and/or value. expense management, pricing and product design • Annual review and setting of demographic and expense best Exposures estimate assumptions The major source of insurance underwriting risk within the Group • Exposure limits by risk type are assessed through the business arises from the Insurance business. planning process and used as a control mechanism to ensure Longevity and persistency are key risks within the life and pensions risks are taken within risk appetite business. Longevity risk arises from the annuity portfolios where • Longevity risk transfer and hedging solutions are considered policyholders’ future cash flows are guaranteed at retirement on a regular basis and since 2017 the Group has reinsured and increases in life expectancy beyond current assumptions Financial results Risk managementGovernance Financial statements Other informationStrategic report £4.2 billion of annuitant longevity. An established team of will increase the cost of annuities. Longevity risk exposures are longevity and pricing experts supports the annuity proposition expected to increase with the insurance business growth in the • General Insurance exposure to accumulations of risk and annuity market. Customer behaviour may result in increased possible catastrophes is mitigated by reinsurance cancellations or cessation of contributions, giving rise to the arrangements spread over numerous reinsurers. Detailed persistency exposure. modelling, including that of the potential losses under various The Group’s defined benefit pension schemes also expose the catastrophe scenarios, supports the choice of reinsurance Group to longevity risk. For further information please refer to the arrangements defined benefit pension schemes component of the market risk Monitoring section and note 35 to the financial statements. Insurance underwriting risks are monitored by Insurance senior Property insurance risk is a key risk within the General Insurance executive committees and ultimately the Insurance Board. business, arising from home insurance. Exposures can arise, for Significant risks from the Insurance business and the defined example, from extreme weather conditions such as flooding, benefit pension schemes are reviewed by the Group Executive when property damage claims are higher than expected. and Group Risk Committees and Board. Expenses are incurred in writing insurance business, with the risk Insurance underwriting risk exposures are monitored against of costs being higher than expected managed through regular risk appetite with persistency, expenses and GI claims also cost initiatives and operating model reviews. analysed monthly. The Insurance business monitors experiences against expectations, for example business volumes and mix, Measurement claims, expenses and persistency experience. The effectiveness Insurance underwriting risks are measured using a variety of controls put in place to manage insurance underwriting risk of techniques including stress, reverse stress and scenario is evaluated and significant divergences from experience or testing, as well as stochastic modelling. Current and potential movements in risk exposures are investigated and remedial future insurance underwriting risk exposures are assessed and action taken. aggregated across a range of stresses with risk measures based on 1-in-200 year stresses for the Insurance business’ regulatory capital assessments and other supporting measures where appropriate, including those set out in note 32 to the financial statements. 185Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued ### Market risk Definition Market risk is defined as the risk that the Group’s capital or earnings profile is affected by adverse market rates or prices, in particular interest rates, credit spreads and equity prices. Balance sheet linkages The information provided in the table below aims to facilitate the understanding of linkages between banking, trading and insurance balance sheet items and the positions disclosed in the Group’s market risk disclosures. Market risk linkage to the balance sheet Banking | | | Trading | | Non- | | | | --- | --- | --- | --- | --- | --- | --- | | | Total | book | 1 | trading | Insurance | | | 2022 | £m | | £m | £m | | £m Primary market risk factor | Assets Cash and balances at central banks 91,388 – 91,388 – Interest rate Financial assets at fair value through profit Interest rate, foreign exchange, credit spread, or loss 180,609 14,216 4,775 161,618 equity Derivative financial instruments 24,753 21,817 2,143 793 Interest rate, foreign exchange, credit spread Financial assets at amortised cost Loans and advances to banks 10,632 – 10,528 104 Interest rate Loans and advances to customers 454,899 – 454,899 – Interest rate Reverse repurchase agreements 44,865 – 44,865 – Interest rate Debt securities 9,926 – 9,926 – Interest rate, credit spread Financial assets at amortised cost 520,322 – 520,218 104 Financial assets at fair value through other comprehensive income 23,154 – 23,154 – Interest rate, foreign exchange, credit spread Value of in-force business 5,419 – – 5,419 Interest rate, equity Other assets 32,184 – 25,118 7,066 Interest rate Total assets 877,829 36,033 666,796 175,000 Liabilities Deposit from banks 7,266 – 7,266 – Interest rate Customer deposits 475,331 – 475,331 – Interest rate Repurchase agreements at amortised cost 48,596 – 48,596 – Interest rate Financial liabilities at fair value through profit or loss 17,755 12,577 5,158 20 Interest rate, foreign exchange Derivative financial instruments 24,042 17,533 4,682 1,827 Interest rate, foreign exchange, credit spread Debt securities in issue 73,819 – 73,819 – Interest rate, credit spread Liabilities arising from insurance and investment contracts 149,868 – – 149,868 Credit spread Subordinated liabilities 10,730 – 9,300 1,430 Interest rate, foreign exchange Other liabilities 22,901 – 9,254 13,647 Interest rate Total liabilities 830,308 30,110 633,406 166,792 1 Assets and liabilities are classified as Trading book if they meet the requirements as set out in the Capital Requirements Regulation, article 104. The defined benefit pension schemes’ assets and liabilities are long-term life assurance contracts as an asset in the balance included under other assets and other liabilities in this table and sheet (see note 24, page 270). note 35 on page 280 provides further information. The Group ensures that it has adequate cash and balances at The Group’s trading book assets and liabilities are originated central banks and stocks of high quality liquid assets (e.g. gilts within the Commercial Banking division. Within the Group’s or US Treasury securities) that can be converted easily into balance sheet these fall under the trading assets and liabilities cash to meet liquidity requirements. The majority of these and derivative financial instruments. The assets and liabilities are assets are asset swapped and held at fair value through other classified as trading book if they meet the requirements as set comprehensive income. Further information on these balances out in the Capital Requirements Regulation, article 104. Further can be found under funding and liquidity risk on page 179. information on these activities can be found under the Trading The majority of debt issuance originates from the Group’s capital portfolios section on page 190. and funding activities and the interest rate risk of the debt issued Derivative assets and liabilities are held by the Group for three is hedged by swapping them into a floating rate. main purposes: to provide risk management solutions for clients, The non-trading book primarily consists of customer on-balance to manage portfolio risks arising from client business and to sheet activities and the Group’s capital and funding activities, manage and hedge the Group’s own risks. Insurance business which expose it to the risk of adverse movements in market rates assets and liabilities relate to policyholder funds, as well as or prices, predominantly interest rates, credit spreads, exchange shareholder invested assets, including annuity funds. The Group rates and equity prices, as described in further detail within the recognises the value of in-force business in respect of Insurance’s Banking activities section (page 187). 186 Lloyds Banking Group Annual Report and Accounts 2022 Measurement volatility in its CET1 ratio, due to the impact of changes in foreign Group risk appetite is calibrated primarily to a number of multi- exchange rates on the retranslation of non-Sterling-denominated risk Group economic scenarios, and is supplemented with risk-weighted assets. sensitivity-based measures. The scenarios assess the impact of Equity risk unlikely, but plausible, adverse stresses on income with the worst Equity risk arises primarily from three different sources: case for banking activities, defined benefit pensions, insurance and trading portfolios reported against independently, and • The Group’s private equity exposure from investments held by across the Group as a whole. Lloyds Development Capital and its stake in BGF, both within the Equities sub-group The Group risk appetite is cascaded first to the Group Asset and • A small number of legacy strategic equity holdings, for Liability Committee (GALCO), chaired by the Chief Financial Officer, example Visa Inc Preference Shares, and recent minority where risk appetite is approved and monitored by risk type, and fintech stakes, all held in the Equities sub-group then to the Group Market Risk Committee (GMRC) where risk • A small exposure to Lloyds Banking Group share price through appetite is sub-allocated by division. These metrics are reviewed deferred shares and deferred options granted to employees as Financial results Risk managementGovernance Financial statements Other informationStrategic report regularly by senior management to inform effective decision- part of their benefits package making. Credit spread risk Mitigation Credit spread risk arises largely from: (i) the liquid asset portfolio GALCO is responsible for approving and monitoring Group held in the management of Group liquidity, comprising of market risks, management techniques, market risk measures, government, supranational and other eligible assets; (ii) the behavioural assumptions, and the market risk policy. Various Credit Valuation Adjustment (CVA) and Debit Valuation mitigation activities are assessed and undertaken across the Adjustment (DVA) sensitivity to credit spreads; (iii) a number of Group to manage portfolios and seek to ensure they remain the Group’s structured medium-term notes where the Group has within approved limits. The mitigation actions will vary dependent elected to fair value the notes through the profit and loss account; on exposure but will, in general, look to reduce risk in a cost and (iv) banking book assets in Commercial Banking held at fair effective manner by offsetting balance sheet exposures and value under IFRS 9. externalising to the financial markets dependent on market liquidity. The market risk policy is owned by Group Corporate Measurement Treasury (GCT) and refreshed annually. The policy is underpinned Interest rate risk exposure is monitored monthly using, primarily: by supplementary market risk procedures, which define specific Market value sensitivity: this methodology considers all repricing market risk management and oversight requirements. mismatches (behaviourally adjusted where appropriate) in the current balance sheet and calculates the change in market value Monitoring that would result from an instantaneous 25, 100 and 200 basis GALCO and GMRC regularly review high level market risk exposure points parallel rise or fall in the yield curve. Sterling interest rates as part of the wider risk management framework. They also are modelled with a floor below zero per cent, with negative rate make recommendations to the Board concerning overall market floors also modelled for non-Sterling currencies where risk appetite and market risk policy. Exposures at lower levels of appropriate (product-specific floors apply). The market value delegation are monitored at various intervals according to their sensitivities are calculated on a static balance sheet using volatility, from daily in the case of trading portfolios to monthly or principal cash flows excluding interest, commercial margins and quarterly in the case of less volatile portfolios. Levels of exposures other spread components and are therefore discounted at the compared to approved limits and triggers are monitored by Risk risk-free rate. and appropriate escalation procedures are in place. Interest income sensitivity: this measures the impact on future How market risks arise and are managed across the Group’s net interest income arising from various economic scenarios. activities is considered in more detail below. These include instantaneous 25, 100 and 200 basis point parallel shifts in all yield curves and the Group economic scenarios. Banking activities Sterling interest rates are modelled with a floor below zero per Exposures cent, with negative rate floors also modelled for non-Sterling The Group’s banking activities expose it to the risk of adverse currencies where appropriate (product-specific floors apply). movements in market rates or prices, predominantly interest These scenarios are reviewed every year and are designed to rates, credit spreads, exchange rates and equity prices. The replicate severe but plausible economic events, capturing risks volatility of market rates or prices can be affected by both the that would not be evident through the use of parallel shocks alone transparency of prices and the amount of liquidity in the market such as basis risk and steepening or flattening of the yield curve. for the relevant asset, liability or instrument. Unlike the market value sensitivities, the interest income Interest rate risk sensitivities incorporate additional behavioural assumptions as Yield curve risk in the Group’s divisional portfolios, and in the to how and when individual products would reprice in response to Group’s capital and funding activities, arises from the different changing rates. repricing characteristics of the Group’s non-trading assets, liabilities and off-balance sheet positions. Reported sensitivities are not necessarily predictive of future performance as they do not capture additional management Basis risk arises from the potential changes in spreads between actions that would likely be taken in response to an immediate, indices, for example where the bank lends with reference to large, movement in interest rates. These actions could reduce a central bank rate but funds with reference to a market rate, the net interest income sensitivity, help mitigate any adverse e.g. SONIA, and the spread between these two rates widens or impacts or they may result in changes to total income that are tightens. not captured in the net interest income. Optionality risk arises predominantly from embedded optionality Structural hedge: the structural hedging programme managing within assets, liabilities or off-balance sheet items where either interest rate risk in the banking book relies on assumptions made the Group or the customer can affect the size or timing of cash around customer behaviour. A number of metrics are in place to flows. One example of this is mortgage prepayment risk where monitor the risks within the portfolio. the customer owns an option allowing them to prepay when it is economical to do so. This can result in customer balances The Group has an integrated Asset and Liability Management amortising more quickly or slowly than anticipated due to (ALM) system which supports non-traded asset and liability customers’ response to changes in economic conditions. management of the Group. This provides a single consolidated tool to measure and manage interest rate repricing profiles Foreign exchange risk (including behavioural assumptions), perform stress testing Economic foreign exchange exposure arises from the Group’s and produce forecast outputs. The Group is aware that investment in its overseas operations (net investment exposures any assumptions-based model is open to challenge. A full are disclosed in note 52 on page 315). In addition, the Group incurs behavioural review is performed annually, or in response to foreign exchange risk through non-functional currency flows changing market conditions, to ensure the assumptions remain from services provided by customer-facing divisions, the Group’s debt and capital management programmes and is exposed to 187Lloyds Banking Group Annual Report and Accounts 2022 ### Risk management ### continued appropriate and the model itself is subject to annual re-validation, as required under the Group model governance policy. The key behavioural assumptions are: • Embedded optionality within products • The duration of balances that are contractually repayable on demand, such as current accounts and overdrafts, together with net free reserves of the Group • The re-pricing behaviour of managed rate liabilities, such as variable rate savings The table below shows, split by material currency, the Group’s market value sensitivities to an instantaneous parallel up and down 25 and 100 basis points change to all interest rates. Group Banking activities: market value sensitivity (audited) 2022 2021 | | Up | Down | | Up | Down | | Up | Down | | Up | Down | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 25bps | | 25bps | 100bps | | 100bps | 25bps | | 25bps | 100bps | | 100bps | | | £m | £m | | £m | £m | | £m | £m | | £m | £m | Sterling 2.6 (3.3) 6.5 (18.0) 42.3 (43.9) 161.9 (192.7) US Dollar 0.6 (0.6) 2.7 (2.1) (2.3) 2.5 (8.8) 9.5 Euro (1.6) (0.4) (6.0) (1.6) (4.7) (3.3) (17.8) (11.8) Other 0.1 (0.1) 0.3 (0.3) (0.1) 0.1 (0.3) – Total 1.7 (4.4) 3.5 (22.0) 35.2 (44.6) 135.0 (195.0) This is a risk-based disclosure and the amounts shown would be amortised in the income statement over the duration of the portfolio. The market value sensitivity to an up 100 basis points shock has decreased due to rates being higher than at year end 2021, which directly impacts expected mortgage prepayments, aligning more closely to our hedging strategy. The table below shows supplementary value sensitivity to a steepening and flattening (c.100 basis points around the three-year point) in the yield curve. This ensures there are no unintended consequences to managing risk to parallel shifts in rates. Group Banking activities: market value sensitivity to a steepening and flattening of the yield curve (audited) 2022 2021 Steepener Flattener Steepener Flattener £m £m £m £m Sterling 65.4 (75.8) 98.2 (126.9) US Dollar (11.5) 11.5 (8.0) 7.4 Euro (8.9) 4.1 (14.1) (6.2) Other 0.1 (0.1) 0.3 (0.3) Total 45.1 (60.3) 76.4 (126.0) The table below shows the banking book net interest income sensitivity on a one to three year forward-looking basis to an instantaneous parallel up 25, down 25 and up 50 basis points change to all interest rates. Group Banking activities: three year net interest income sensitivity (audited) Down 25bps Up 25bps Up 50bps Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Client-facing activity and associated hedges £m £m £m £m £m £m £m £m £m 2022 (181.1) (261.0) (377.7) 148.6 259.4 377.6 297.9 519.8 756.4 2021 (419.8) (519.6) (647.3) 187.9 273.0 401.1 368.5 536.2 792.8 188 Lloyds Banking Group Annual Report and Accounts 2022 Year 1 net interest income sensitivity, to down 25 basis points, Monitoring has decreased year-on-year due to reduced modelled margin The appropriate limits and triggers are monitored by senior compression following a significant increase in interest rates in executive committees within the Banking divisions. Banking 2022. The decrease in risk sensitivity year-on-year in the upwards assets, liabilities and associated hedging are actively monitored rate shock, is driven by structural hedge activity. and if necessary rebalanced to be within agreed tolerances. The three year net interest income sensitivity to an up 25 basis Defined benefit pension schemes points and 50 basis points shock is largely due to reinvestment of Exposures structural hedge maturities in years two and three. The Group’s defined benefit pension schemes are exposed The sensitivities are illustrative and do not reflect new business to significant risks from their assets and liabilities. The liability margin implications and/or pricing actions, other than as discount rate exposes the Group to interest rate risk and credit outlined. spread risk, which are partially offset by fixed interest assets (such as gilts and corporate bonds) and swaps. Equity and alternative The following assumptions have been applied: asset risk arises from direct asset holdings. Scheme membership Financial results Risk managementGovernance Financial statements Other informationStrategic report • Instantaneous parallel shift in interest rate curve, including exposes the Group to longevity risk. Increases to pensions in bank base rate deferment and in payment expose the Group to inflation risk. • Balance sheet remains constant For further information on defined benefit pension scheme assets • Illustrative 50 per cent deposit pass-through and liabilities please refer to note 35 on page 280. Basis risk, foreign exchange, equity and credit spread risks are Measurement measured primarily through scenario analysis by assessing Management of the schemes’ assets is the responsibility of the the impact on profit before tax over a 12-month horizon arising Trustees of the schemes who are responsible for setting the from a change in market rates, and reported within the Board investment strategy and for agreeing funding requirements with risk appetite on a monthly basis. Supplementary measures the Group. The Group will be liable for meeting any funding deficit such as sensitivity and exposure limits are applied where that may arise. As part of the triennial valuation process, the they provide greater insight into risk positions. Frequency of Group will agree with the Trustees a funding strategy to eliminate reporting supplementary measures varies from daily to quarterly the deficit over an appropriate period. appropriate to each risk type. Longevity risk is measured using both 1-in-20 year stresses (risk Mitigation appetite) and 1-in-200 year stresses (regulatory capital). The Group’s policy is to optimise reward while managing its market risk exposures within the risk appetite defined by the Mitigation Board. The Group market risk policy and procedures outlines the The Group takes an active involvement in agreeing mitigation hedging process, and the centralisation of risk from divisions strategies with the schemes’ Trustees. An interest rate and into Group Corporate Treasury (GCT), e.g. via the transfer pricing inflation hedging programme is in place to reduce liability risk. framework. GCT is responsible for managing the centralised The schemes have also reduced equity allocation and invested risk and does this through natural offsets of matching assets the proceeds in credit assets. The Trustees have put in place and liabilities, and appropriate hedging activity of the residual longevity swaps to mitigate longevity risk. The merits of longevity exposures, subject to the authorisation and mandate of GALCO risk transfer and hedging solutions are reviewed regularly. within the Board risk appetite. The hedges are externalised to the Monitoring market by derivative desks within GCT and the Commercial Bank. In addition to the wider risk management framework, governance The Group mitigates income statement volatility through hedge of the schemes includes a specialist pension committee. accounting. This reduces the accounting volatility arising from the The surplus, or deficit, in the schemes is tracked monthly Group’s economic hedging activities and any hedge accounting along with various single factor and scenario stresses which ineffectiveness is continuously monitored. consider the assets and liabilities holistically. Key metrics are The largest residual risk exposure arises from balances that are monitored monthly including the Group’s capital resources of deemed to be insensitive to changes in market rates (including the scheme, the performance against risk appetite triggers, and current accounts, a portion of variable rate deposits and the performance of the hedged asset and liability matching investable equity), and is managed through the Group’s structural positions. hedge. Consistent with the Group’s strategy to deliver stable Insurance business returns, GALCO seeks to minimise large reinvestment risk, and to Exposures smooth earnings over a range of investment tenors. The structural The main elements of market risk to which the Group is exposed hedge consists of longer-term fixed rate assets or interest rate through the Insurance business are equity, credit default spread, swaps and the amount and duration of the hedging activity is interest rate and inflation. reviewed regularly by GALCO. • Equity risk arises indirectly through the value of future While the Group faces margin compression in low rate management charges on policyholder funds. These environments, its exposure to pipeline and prepayment risk are management charges form part of the value of in-force not considered material and are hedged in line with expected business (see note 24 on page 270). Equity risk also arises in the customer behaviour. These are appropriately monitored and with-profits funds but is less material controlled through divisional Asset and Liability Committees • Credit default spread risk mainly arises from annuities where (ALCOs). policyholders’ future cash flows are guaranteed at retirement. Net investment foreign exchange exposures are managed Exposure arises if the market value of the assets moves centrally by GCT, by hedging non-Sterling asset values with differently to the liabilities they back. This exposure arises from currency borrowing. Economic foreign exchange exposures credit downgrades and defaults arising from non-functional currency flows are identified by • Interest rate risk arises through credit and interest assets which divisions and transferred and managed centrally. The Group also are mainly held to cover the annuity and general insurance has a policy of forward hedging its forecasted currency profit liabilities and loss to year end. The Group makes use of both accounting • Inflation exposure arises from inflation-linked policyholder and economic foreign exchange exposures, as an offset against benefits and future expenses the impact of changes in foreign exchange rates on the value of non-Sterling-denominated risk-weighted assets. This involves the holding of a structurally open currency position; sensitivity is minimised where, for a given currency, the ratio of the structural open position to risk-weighted assets equals the CET1 ratio. Continually evaluating this structural open currency position against evolving non-Sterling-denominated risk-weighted assets mitigates volatility in the Group’s CET1 ratio. 189Lloyds Banking Group Annual Report and Accounts 2022 ## Risk management continued ### Measurement Current and potential future market risk exposures within Insurance are assessed using a range of techniques including stress, reverse stress and scenario testing, as well as stochastic modelling. Risk measures include 1-in-200 year stresses for the Insurance business' regulatory capital assessments and other supporting measures where appropriate, including those set out in note 32 on page 279. ### Mitigation Equity and credit spread risks are closely monitored. Asset liability matching, hedging and unit matching are all used to reduce the sensitivity of equity movements. Interest rate risk in the annuity book is monitored and mitigated by investing in assets whose cash flows closely match those on the projected future liabilities. It is not possible to eliminate the risk completely as the timing of insured events is uncertain and bonds are not available for all required maturities. Other market risks (e.g. interest rate exposure outside the annuity book and inflation) are also closely monitored and where considered appropriate, hedges are put in place to reduce exposure. The costs and benefits of market risk mitigation are considered in strategy and business planning decisions, with consideration given to the impacts to various metrics. ### Monitoring Market risks in the Insurance business are monitored by Insurance senior executive committees and ultimately the Insurance Board. Monitoring includes the progression of market risk capital against risk appetite limits, as well as the sensitivity of profit before tax to combined market risk stress scenarios and in-year market movements. Asset and liability matching positions and hedges in place are actively monitored and if necessary rebalanced to be within agreed tolerances. In addition, market risk is controlled via approved investment policies and mandates. ## Trading portfolios ### Exposures The Group's trading activity is small relative to its peers. The Group's trading activity is undertaken primarily to meet the financial requirements of commercial and retail customers for foreign exchange, credit and interest rate products. These activities support customer flow and market making activities. All trading activities are performed within the Commercial Banking division. While the trading positions taken are generally small, any extreme moves in the main risk factors and other related risk factors could cause significant losses in the trading book depending on the positions at the time. The average 95 per cent 1-day trading VaR (Value at Risk; diversified across risk factors) was £1.5 million for 31 December 2022 compared to £1.0 million for 31 December 2021. Trading market risk measures are applied to all of the Group's regulatory trading books and they include daily VaR (see trading portfolios: VaR table), sensitivity-based measures, and stress testing calculations. ### Measurement The Group internally uses VaR as the primary risk measure for all trading book positions. The trading portfolios: VaR table shows some relevant statistics for the Group's 1-day 95 per cent confidence level VaR that are based on 300 historical consecutive business days to year end 2022 and year end 2021. The risk of loss measured by the VaR model is the minimum expected loss in earnings given the 95 per cent confidence. The total and average trading VaR numbers reported below have been obtained after the application of the diversification benefits across the five risk types, but does not reflect any diversification between Lloyds Bank Corporate Markets plc and any other entities. The maximum and minimum VaR reported for each risk category did not necessarily occur on the same day as the maximum and minimum VaR reported at Group level. ## Trading portfolios: VaR (1-day 95 per cent confidence level) (audited) | | At 31 December 2022 | | | | At 31 December 2021 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Close £m | Average £m | Maximum £m | Minimum £m | Close £m | Average £m | Maximum £m | Minimum £m | | Interest rate risk | 1.3 | 1.4 | 4.0 | 0.5 | 0.8 | 0.9 | 1.7 | 0.6 | | Foreign exchange risk | 0.2 | 0.1 | 0.4 | – | – | 0.1 | 0.4 | – | | Equity risk | – | – | – | – | – | – | – | – | | Credit spread risk | 0.1 | 0.1 | 0.3 | – | 0.1 | 0.1 | 0.2 | – | | Inflation risk | 0.6 | 0.4 | 1.1 | 0.2 | 0.2 | 0.3 | 0.8 | 0.2 | | All risk factors before diversification | 2.2 | 2.0 | 5.1 | 0.9 | 1.1 | 1.4 | 2.5 | 1.0 | | Portfolio diversification | (0.5) | (0.5) | | | (0.2) | (0.4) | | | | **Total VaR** | **1.7** | **1.5** | **4.0** | **0.6** | **0.9** | **1.0** | **2.1** | **0.6** | The market risk for the trading book continues to be low relative to the size of the Group and in comparison to peers. This reflects the fact that the Group's trading operations are customer-centric and focused on hedging and recycling client risks. Although it is an important market standard measure of risk, VaR has limitations. One of them is the use of a limited historical data sample which influences the output by the implicit assumption that future market behaviour will not differ greatly from the historically observed period. Another known limitation is the use of defined holding periods which assumes that the risk can be liquidated or hedged within that holding period. Also calculating the VaR at the chosen confidence interval does not give enough information about potential losses which may occur if this level is exceeded. The Group fully recognises these limitations and supplements the use of VaR with a variety of other measurements which reflect the nature of the business activity. These include detailed sensitivity analysis, position reporting and a stress testing programme. Trading book VaR (1-day 99 per cent) is compared daily against both hypothetical and actual profit and loss. The 1-day 99 per cent VaR charts for Lloyds Bank Group and Lloyds Bank Corporate Markets plc can be found in the Group's Pillar 3 disclosures. ### Mitigation The level of exposure is controlled by establishing and communicating the approved risk limits and controls through policies and procedures that define the responsibility and authority for risk taking. Market risk limits are clearly and consistently communicated to the business. Any new or emerging risks are brought within risk reporting and defined limits. ### Monitoring Trading risk appetite is monitored daily with 1-day 95 per cent VaR and stress testing limits. These limits are complemented with position level action triggers and profit and loss referrals. Risk and position limits are set and managed at both desk and overall trading book levels. They are reviewed at least annually and can be changed as required within the overall Group risk appetite framework. 190 Lloyds Banking Group Annual Report and Accounts 2022 ## Model risk ### Definition Model risk is defined as the risk of financial loss, regulatory censure, reputational damage or customer detriment, as a result of deficiencies in the development, application or ongoing operation of models and rating systems. Models are defined as quantitative methods that process input data into quantitative outputs, or qualitative outputs (including ordinal letter output) which have a quantitative measure associated with them. Model governance policy is restricted to specific categories of application of models, principally financial risk, treasury and valuation, with certain exclusions, such as prescribed calculations and project appraisal calculations. ### Exposures The Group makes extensive use of models. They perform a variety of functions including: - Capital calculation - Credit decisioning, including fraud - Pricing models - Impairment calculation - Stress testing and forecasting - Market risk measurement As a result of the wide scope and breadth of coverage, there is exposure to model risk across a number of the Group's principal risk categories. Model risk increased in 2022. The pandemic related government-led support schemes weakened the relationships between model inputs and outputs, and the current economic conditions remain outside those used to build the models, placing reliance on judgemental overlays. The Group's models are being managed to reduce this need for overlays. The control environment for model risk is being strengthened to meet revised regulatory requirements. In addition, in common with the rest of the industry, changes required to capital models following new regulations will create a temporary increase in the risk relating to these models during the period of transition. Further information on capital impacts are detailed in the capital risk section on pages 148 to 155. ### Measurement The Board risk appetite metric is the key component for measuring the Group's most material models; performance is reported monthly to the Group and Board Risk Committees. ### Mitigation The model risk management framework, established by and with continued oversight from an independent team in the Risk division, provides the foundation for managing and mitigating model risk within the Group. Accountability is cascaded from the Board and senior management via the Group enterprise risk management framework. This provides the basis for the Group's model governance policy, which defines the mandatory requirements for models across the Group, including: - The scope of models covered by the policy - Model materiality - Roles and responsibilities, including ownership, independent oversight and approval - Key principles and controls regarding data integrity, development, validation, implementation, ongoing maintenance and revalidation, monitoring, and the process for non-compliance The model owner takes responsibility for ensuring the fitness for purpose of the models and rating systems, supported and challenged by the independent specialist Group function. The above ensures all models in scope of policy, including those involved in regulatory capital calculation, are developed consistently and are of sufficient quality to support business decisions and meet regulatory requirements. ### Monitoring The Group Model Governance Committee is the primary body for overseeing model risk. Policy requires that key performance indicators are monitored for every model to ensure they remain fit for purpose and all issues are escalated appropriately. Material model issues are reported to the Group and Board Risk Committees monthly, with more detailed papers as necessary to focus on key issues. ## Operational risk ### Definition Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. ### Exposures The principal operational risks to the Group which could result in customer detriment, unfair customer outcomes, financial loss, disruption and/or reputational damage are: - A cyber-attack - Failure of IT systems, due to volume of change, and/or aged infrastructure - Internal and/or external economic crime - Failure to ensure compliance with increasingly complex and detailed regulation including anti-money laundering, anti-bribery, counter-terrorist financing, and financial sanctions and prohibitions laws and regulations A number of these risks could increase where there is a reliance on third-party suppliers to provide services to the Group or its customers. ### Measurement Operational risk is managed across the Group through an operational risk framework and operational risk policies. The operational risk framework includes a risk and control self-assessment process, risk impact likelihood matrix, risk and control indicators, risk appetite setting, a robust operational loss event management and escalation process, and a scenario analysis and operational loss forecasting process. The table below shows high level loss and event trends for the Group using Basel II categories. Based on data captured on the Group's One Risk and Control Self-Assessment, in 2022 the highest frequency of events occurred in external fraud 83.04 per cent. Execution, delivery and process management accounted for 55.72 per cent of losses by value. ### Operational risk events by risk category (losses greater than or equal to £10,000)¹ | | % of total volume | | % of total losses | | | --- | --- | --- | --- | --- | | | 2022 | 2021 | 2022 | 2021 | | Business disruption and system failures | 0.43 | 0.74 | 0.78 | 1.33 | | Clients, products and business practices | 5.01 | 7.39 | 15.90 | 40.41 | | Damage to physical assets | – | 0.07 | – | 0.01 | | Employee practices and workplace safety | 0.11 | 0.03 | 0.07 | 0.01 | | Execution, delivery and process management | 11.27 | 13.76 | 55.72 | 45.47 | | External fraud | 83.04 | 77.62 | 27.53 | 12.44 | | Internal fraud | 0.14 | 0.39 | – | 0.33 | | **Total** | **100.00** | **100.00** | **100.00** | **100.00** | ¹ Excludes losses related to PPI and provisions, the latter are outlined in note 37. 2021 breakdowns have been restated both to reflect the exclusion of provisions and due to the nature of the risk events which can evolve over time. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 191 The Group economic crime prevention policy prohibits the ### Risk management payment, offer, acceptance or request of a bribe, including ### continued ‘facilitation payments’ by any employee or agent and provides a confidential reporting service for anonymous reporting of Operational risk losses and scenario analysis is used to inform suspected or actual bribery activity. The Group economic the Internal Capital Adequacy Assessment Process (ICAAP). The crime prevention policy also sets out a framework of controls Group calculates its minimum (Pillar I) operational risk capital for compliance with legal and regulatory sanctions requirements using The Standardised Approach (TSA). Pillar II is • In addition to its efforts internally, the Group also contributes to calculated using internal and external loss data and extreme but economic crime prevention by supporting and championing plausible scenarios that may occur in the next 12 months. industry-level activity, including: Mitigation – Improving customer outcomes related to Authorised Push The Group continues to focus on changing risk management Payment (APP) fraud, incorporating recommendations from requirements, adapting the change delivery model to be the Lending Standards Board into our APP fraud strategy. more agile and developing the people skills and capabilities The Group remains a signatory to the industry code for APP needed. Risks are reported and discussed at local governance fraud, which has improved customer protection and the forums and escalated to executive management and the reimbursement of funds to victims Board as appropriate to ensure the correct level of visibility and – Representing large retail banks at the National Economic engagement. The Group employs a range of risk management Crime Centre (NECC) led Public Private Operating Board strategies, including: avoidance, mitigation, transfer (including (PPOB); co-chairing the Public Private Threat Group leading insurance) and acceptance within appetite / tolerance. Where the UK’s response to Money Laundering; chairing the Joint there is a reliance on third-party suppliers to provide services, the Money Laundering Intelligence Taskforce (JMLIT) senior Group’s sourcing policy ensures that outsourcing initiatives follow management team and providing expert resource to the a defined process including due diligence, risk evaluation and NECC’s operational threat cells ongoing assurance. – Collaborating with a peer bank to pioneer the concept of Mitigating actions to the principal operational risks are: data fusion (large scale information sharing and analysis) with the National Crime Agency (NCA) • The Group adopts a risk-based approach to mitigate the – In 2021 we undertook a bilateral data sharing exercise with a internal and external fraud risks it faces, reflecting the current different peer bank to understand the fraud prevention and emerging fraud risks within the market. Fraud risk appetite benefit for receiving and sending banks. This identified metrics holistically cover the impacts of fraud in terms of opportunities to improve real/near time identification of losses to the Group, costs of fraud systems and operations, money mules, improving the efficiency and effectiveness of and customer experience of actual and attempted fraud. alerts. The analysis has helped to influence a wider data Oversight of the appropriateness and performance of these sharing exercise led by UK Finance across seven firms metrics is undertaken regularly through business area and – Being an active member of UK Finance where we chair or Group-level committees. This approach drives a continual have representation on every economic crime committee. programme of prioritised enhancements to the Group’s This includes chairing the UK Finance Fraud Panel, which is technology and process and people-related controls; with the industry’s primary model for considering fraud issues of an emphasis on preventative controls supported by real time mutual interest. We also chair the Anti-Bribery & Corruption detective controls wherever feasible. Group-wide policies Panel; focused on key ABC issues that members are dealing and operational control frameworks are maintained and with. This Panel also interacts with key guidance bodies designed to provide customer confidence, protect the Group’s such as the Organisation for Economic Cooperation and commercial interests and reputation, comply with legal Development (OECD) and Wolfsberg Group requirements and meet regulatory requirements. The Group’s – Helping fund the Dedicated Card and Payment Crime Unit fraud awareness programme remains a key component of (DCPCU) to investigate fraud cases, target and where its fraud control environment, and awareness of fraud risk appropriate arrest and gain prosecution of offenders is supported by mandatory training for all colleagues. This – Being a member of Cifas, the largest cross sector fraud is further strengthened by material annual investment into sharing organisation, where we share and receive internal both technology and the personal development needs of and first party fraud data to detect, deter and prevent colleagues. The Group also plays an active role with other criminals exploiting our banking facilities financial institutions, industry bodies and law enforcement – Engagement with Europol and International Law agencies in identifying and combatting fraud Enforcement to share fraud and financial crime intelligence • The Group adopts a risk-based approach to mitigate cyber – Maintaining relationships with key partners such as City of risks it faces. The effective operation of the Group’s estate is London Police, United for Wildlife and the North East Business supported by an IT and Cyber Security Governance framework, Resilience Centre, for which the Money Laundering guided by a threat-based strategy which underpins Reporting Officer (MLRO) chairs the advisory board investment decisions. The ongoing protection of the estate – The Group is a member of Stop Scams UK (SSUK), which and confidentiality of material information is ensured through brings together partnerships from various industry sectors adherence to the Group Security Policy which has been to stop scams at source. The Group is involved in a new aligned to industry good practice including the NIST Cyber SSUK pilot, Project 159, which aims to provide consumers Security Framework; and material laws and regulations with a secure connection to their bank • The Group has adopted policies and procedures designed to detect and prevent the use of its banking network for money Operational resilience risk, on page 193, provides further laundering, terrorist financing, bribery, tax evasion, human information on the mitigating actions for cyber and IT resilience. trafficking, modern-day slavery and wildlife trafficking, and activities prohibited by legal and regulatory sanctions. Against a background of complex and detailed laws and regulations, and of continued criminal and terrorist activity, the Group regularly reviews and assesses its policies, procedures and organisational arrangements to keep them current, effective and consistent across markets and jurisdictions. The Group requires mandatory training on these topics for all employees. Specifically, the anti-money laundering procedures include ‘know-your-customer’ requirements, transaction monitoring technologies, reporting of suspicions of money laundering or terrorist financing to the applicable regulatory authorities, and interaction between the Group’s Financial Intelligence Unit and external agencies and other financial institutions. 192 Lloyds Banking Group Annual Report and Accounts 2022 Monitoring Measurement Monitoring and reporting of operational risk is undertaken at Operational resilience risk is managed across the Group Board, Group, entity and divisional committees. Each committee through the Group’s enterprise risk management framework monitors key risks, control effectiveness, key risk and control and operational risk policy and associated standards. Board risk indicators, events, operational losses, risk appetite metrics and appetite metrics for operational resilience are in place and are the results of independent testing conducted by Risk division and/ well understood. These specific measures are subject to ongoing or Group Internal Audit. monitoring and reporting, including a mandatory review of metrics and thresholds on at least an annual basis. To strengthen The Group maintains a formal approach to operational risk event the management of operational resilience risk, the Group escalation, whereby material events are identified, captured and mobilised an operational resilience enhancement programme escalated. Root causes of events are determined, and action which is designed to focus on end-to-end resilience and the plans put in place to ensure an optimum level of control to keep management of key risks to important processes. customers and the business safe, reduce costs, and improve efficiency. Mitigation Financial results Risk managementGovernance Financial statements Other informationStrategic report The Group has increased its focus on operational resilience and The insurance programme is monitored and reviewed regularly, has updated its operational resilience strategy to reflect changing with recommendations being made to the Group’s senior priorities of both customers and regulators. Furthermore, the Group management annually prior to each renewal. Insurers are is in the process of responding to the publication of regulatory monitored on an ongoing basis, to ensure counterparty risk is policy statements. Focus has been given to ensure compliance, minimised. A process is in place to manage any insurer rating and existing frameworks have been adapted to consider important changes or insolvencies. business services and impact tolerances. At the core of its approach to operational resilience are the Group’s important ### Operational resilience risk business services and critical business processes which drive Definition activity, including further mapping of the processes to identify Operational resilience risk is defined as the risk that the Group any additional resilience requirements such as customer impact fails to design resilience into business operations, underlying tolerances in the event of a service outage. The Group continues to infrastructure and controls (people, process, technology) so that maintain and develop playbooks that guide its response to a range it is able to withstand external or internal events which could of interruptions from internal and external threats and tests these impact the continuation of operations, and fails to respond in a through scenario-based testing and exercising. way which meets customer and stakeholder expectations and needs when the continuity of operations is compromised. The Group’s strategy considers the evolving risk management requirements, adapting the change delivery model to be more Exposures agile and develop the people skills and capabilities needed. The Ineffective operational resilience risk management could lead Group continues to review and invest in its control environment to important services not being available to customers, and in to ensure it addresses the risks it faces. Risks are reported and extreme circumstances, bank failure could result. The Group discussed at local governance forums and escalated to executive has in place a transparent and effective operating model to management and the Board as appropriate. The Group employs identify, monitor and test important business services and a range of risk management strategies, including: avoidance, critical business processes from a customer, Group and systemic mitigation, transfer (including insurance) and acceptance. Where perspective. The failure to adequately build resilience into an there is a reliance on third-party suppliers to provide services, the important business service or critical business process may occur Group’s sourcing policy ensures that outsourcing initiatives follow in a variety of ways, including: a defined process including due diligence, risk evaluation and • The Group being overly reliant on one location to deliver a ongoing assurance. critical business process Mitigating actions to the principal operational resilience risk are: • The Group not having an adequate succession plan in place for designated subject matter experts Cyber: the threat landscape associated with cyber risk continues to • The Group being overly reliant on a supplier which fails to evolve and there is significant regulatory attention on this subject. The Board continues to invest heavily to protect the Group from provide a service cyber-attacks. Investment continues to focus on improving the • A shortcoming in the Group’s ability to respond and/or recover Group’s approach to identity and access management, improving in a timely manner following a cyber incident capability to detect, respond and recover from cyber-attacks and • The Group failing to upgrade its IT systems and leaving them improved ability to manage vulnerabilities across the estate. vulnerable to failure IT resilience: the Group continues to optimise its approach to IT Effective operational resilience ensures the Group designs and operational resilience by investing in technology resilience into its systems, is able to withstand and/or recover improvements and enhancing the resilience of systems that from a significant unexpected event occurring and can continue support the Group’s critical business processes and important to provide services to its customers. A significant outage could business services, primarily through the Technology Resilience result in customers being unable to access accounts or conduct and Security Change programme. The Board optimises the role transactions, which as well as presenting significant reputational that resilient technology plays in maintaining banking services risk for the Group would negatively impact the Group’s purpose. across the wider industry. As such, the Board dedicates Operational resilience is also an area of continued regulatory and considerable time and focus to this subject at both the Board and industry focus, similar in importance to financial resilience. the Board Risk Committee, and continues to sponsor key Failure to manage operational resilience effectively could impact investment programmes that enhance resilience. the following other risk categories: People: the Group acknowledges the risks associated to the • Regulatory compliance: non-compliance with new/existing failure to maintain appropriately skilled and available colleagues. operational resilience regulations, for example, through failure The Group continues to optimise its approach to ensure that, for to identify emerging regulation or not embedding regulatory example, the right number of colleagues are capable of requirements within the Group’s policies, processes and supporting critical technology components. Key controls and procedures or identify further future emerging regulation processes are regularly reported to committee(s) and alignment • Operational risk: being unable to safely provide customers with with the Group’s strategy is closely monitored. business services Property: the Group’s property portfolio remains a key focus in • Conduct risk: an operational resilience failure may render the ensuring targeted resilience requirements are appropriately Group liable to fines from the FCA for poor conduct maintained, including energy resilience. Processes are in place to • Market risk: the Group being unable to provide key services identify key buildings where an important business service or could have ramifications for the wider market and could critical business process is performed. Depending on criticality, a impact share price number of mitigating controls are in place to manage the risk of severe critical business process disruption. The Group remains committed to investment in the upkeep of the property portfolio, primarily through the Group property upkeep investment programme. 193Lloyds Banking Group Annual Report and Accounts 2022 Measurement ### Risk management People risk is measured through a series of quantitative and ### continued qualitative indicators, aligned to key sources of people risk for the Group such as succession, diversity, retention, colleague Sourcing: the threat landscape associated with third-party engagement and wellbeing. In addition to risk appetite measures suppliers and the critical services they provide continues to and limits, people risks and controls are monitored on a monthly receive a significant amount of regulatory attention. The Group basis via the Group’s risk governance framework and reporting acknowledges the importance of demonstrating control and structures. responsibility for those important business services and critical business processes which could cause significant harm to the Mitigation Group’s customers. The Group segments its suppliers by criticality The Group takes many mitigating actions with respect to people and has processes in place to support ongoing supplier risk. Key areas of focus include: management. • Focusing on leadership and colleague engagement, through Monitoring delivery of strategies to attract, retain and develop high calibre Monitoring and reporting of operational resilience risk is people together with management of rigorous succession undertaken at Board, Group, entity and divisional committees. planning Each committee monitors key risks, control effectiveness, key risk • Continued focus on the Group’s culture and inclusivity strategy and control indicators, events, operational losses, risk appetite by developing and delivering initiatives that reinforce the metrics and the results of independent testing conducted by Risk appropriate behaviours which generate the best possible division and/or Group Internal Audit. long-term outcomes for customers and colleagues • Managing organisational capability and capacity through The Group maintains a formal approach to operational resilience divisional people strategies to ensure there are the right skills risk event escalation, whereby material events are identified, and resources to meet customers’ needs and deliver the captured and escalated. Root causes are determined, and action Group’s strategic plan plans put in place to ensure an optimum level of control to keep • Maintaining effective remuneration arrangements to customers and the business safe, reduce costs, and improve ensure they promote an appropriate culture and colleague efficiency. behaviours that meet customer needs and regulatory ### People risk expectations Definition • Ensuring colleague wellbeing strategies and support are in People risk is defined as the risk that the Group fails to provide an place to meet colleague needs, alongside skills and capability appropriate colleague and customer-centric culture, supported growth required to maximise the potential of our people by robust reward and wellbeing policies and processes; effective • Ensuring compliance with legal and regulatory requirements leadership to manage colleague resources; effective talent related to SM&CR, embedding compliant and appropriate and succession management; and robust control to ensure all colleague behaviours in line with Group policies, values and its colleague-related requirements are met. people risk priorities • Ongoing consultation with the Group’s recognised unions on Exposures changes which impact their members The Group’s management of material people risks is critical to its • Reviewing and enhancing people processes to ensure they are capacity to deliver against its strategic objectives, particularly fit for purpose and operationally resilient in the context of organisational, political and external market change and increasing digitisation. The Group is exposed to the Monitoring following key people risks: Monitoring and reporting is undertaken at Board, Group, entity and divisional committees. Key people risk metrics are reported • Failure to recruit, develop and retain a diverse workforce, with and discussed monthly at the Group People Risk Committee with the appropriate mix and required level of skills and capabilities escalation to Group Risk and Executive Committees and the Board to meet the current and future needs of the Group where required. • Non-inclusive culture, ineffective leadership, poor communication, weak performance, inappropriate All material people risk events are escalated in accordance with remuneration policies and poor colleague conduct the Group’s operational risk policy. • Ineffective management of succession planning or failure to identify appropriate talent pipeline • Failure to manage capacity, colleagues having excessive demands placed on them resulting in wellbeing issues and business objectives not being met • Failure to meet all colleague-related legal and regulatory requirements • Inadequately designed people processes that are not resilient to withstand unexpected events • The increasing digitisation of the business is changing the capability mix required and may impact the Group’s ability to attract and retain talent • Colleague engagement may be challenged by a number of factors ranging from the adjustment to hybrid working, dissatisfaction with reward, cost of living pressures, refreshed values and purpose of the business including changes to culture and ethical considerations 194 Lloyds Banking Group Annual Report and Accounts 2022 ### Regulatory and legal risk Strategic risk Definition Definition Regulatory and legal risk is defined as the risk of financial Strategic risk is defined as the risk which results from: penalties, regulatory censure, criminal or civil enforcement action • Incorrect assumptions about internal or external operating or customer detriment as a result of failure to identify, assess, environments correctly interpret, comply with, or manage regulatory and/or • Failure to understand the potential impact of strategic legal requirements. responses and business plans on existing risk types Exposures • Failure to respond or the inappropriate strategic response to The Group has a zero risk appetite for material legal or regulatory material changes in the external or internal operating breaches. The Group remains exposed to the evolving UK legal environments and regulatory landscape, such as changes to the regulatory Exposures framework and other changing regulatory standards as well The Group faces significant risks due to the changing regulatory as uncertainty arising from the current and future litigation and competitive environments in the financial services sector, Financial results Risk managementGovernance Financial statements Other informationStrategic report landscape. with an increased pace, scale and complexity of change. Measurement Customer, shareholder and employee expectations continue Regulatory and legal risks are measured against a defined risk to evolve, together with societal trends amid the recovery post appetite metric, which is an assessment of material regulatory COVID-19 and cost of living pressures. breaches and material legal incidents. Strategic risks can manifest themselves in existing principal risks Mitigation or as new exposures which could adversely impact the Group and The Group undertakes a range of key mitigating actions to its businesses. manage regulatory and legal risk. These include the following: In considering strategic risks, a key focus is the interconnectivity of • The Board has established a Group-wide risk appetite and individual risks and the cumulative effect of different risks on the metric for regulatory and legal risk Group’s overall risk profile. • Group policies and procedures set out the principles that The Group has invested in implementing a robust framework for should apply across the business which are aligned to the the identification, assessment and quantification of strategic Group risk appetite. Mandated policies and processes require risks and their incorporation into business planning and strategic appropriate control frameworks, management information, investment decisions. With Board support, in 2022 the Group standards and colleague training to be implemented to continued to invest in evolving the strategic risk management identify and manage regulatory and legal risk framework and embedding it into the Group’s day-to-day • Divisions identify, assess and implement policy and regulatory business operations. requirements and establish local controls, processes, Further information on strategic risk drivers and their potential risk procedures and resources to ensure appropriate governance implications is outlined in the risk overview on pages 38 and 44. and compliance • Divisions regularly produce management information to assist Measurement in the identification of issues and test management controls The Group assesses and monitors strategic risk implications are working effectively as part of business planning and in its day-to-day activities, • Risk and Legal functions provide oversight, proactive support ensuring they respond appropriately to internal and external and constructive challenge to the business in identifying and factors including changes to regulatory, macroeconomic and managing regulatory and legal issues competitive environments. An assessment is made of the • Risk division conducts thematic reviews to provide oversight of key strategic risks that are considered to impact the Group, regulatory compliance leveraging internal and external information and the key mitigants • Horizon scanning is conducted to identify and address or actions that could be taken in response. changes in regulatory and legal requirements 2021 saw development of the Group’s quantitative risk assessment • The Group engages with regulatory authorities and industry approach, assessing the: bodies on forthcoming regulatory changes, market reviews and investigations, ensuring programmes are established to • Connectivity of inherent risks, which can magnify their impact deliver new regulation and legislation and severity • The Group has adapted quickly to evolving regulatory • Time horizons in respect of the crystallisation of impacts, expectations due to cost of living pressures and continues to should risks manifest engage with regulatory authorities Mitigation Monitoring The range of mitigating actions includes the following: Material risks are managed through the relevant business • Horizon scanning is conducted across the Group to identify committees, with review and escalation through Group-level potential threats, risks, emerging issues and opportunities and committees where appropriate, including the escalation of any to explore future trends material regulatory breaches or material legal incidents. • The Group’s business planning processes include formal assessment of the strategic risk implications of new business, product entries and other strategic initiatives • The Group’s governance framework mandates individuals’ and committees’ responsibilities and decision-making rights, to ensure that strategic risks are appropriately reported and escalated Monitoring A review of the Group’s strategic risks is undertaken on an annual basis and the findings are reported to the Group and Board Risk Committees. Risks, alongside their control effectiveness, are articulated and reported regularly to Group and Board Risk Committees. 195Lloyds Banking Group Annual Report and Accounts 2022 36. Deferred tax 286 ## Financial statements 37. Other provisions 288 38. Subordinated liabilities 289 In this section 39. Share capital 290 Independent auditors’ report 197 40. Share premium account 291 Consolidated income statement 210 41. Other reserves 291 Consolidated statement of comprehensive income 211 42. Retained profits 293 Consolidated balance sheet 212 43. Other equity instruments 293 Consolidated statement of changes in equity 214 44. Dividends on ordinary shares 294 Consolidated cash flow statement 217 45. Share-based payments 294 46. Related party transactions 297 Notes to the consolidated financial statements 218 47. Contingent liabilities, commitments and guarantees 298 1. Basis of preparation 218 48. Structured entities 300 2. Accounting policies 218 49. Financial instruments 301 3. Critical accounting judgements and key sources of | | estimation uncertainty 227 | 50. Transfers of financial assets 312 | | --- | --- | --- | | 4. Segmental analysis 230 | | 51. Offsetting of financial assets and liabilities 313 | | 5. Net interest income 238 | | 52. Financial risk management 315 | | 6. Net fee and commission income 238 | | 53. Cash flow statement 335 | | 7. Net trading income 239 | | 54. Events since the balance sheet date 337 | | 8. Insurance premium income 239 | | 55. Future accounting developments 337 | 9. Other operating income 240 10. Insurance claims and changes in insurance and Parent company balance sheet 340 investment contract liabilities 240 Parent company statement of changes in equity 341 11. Operating expenses 241 Parent company cash flow statement 342 12. Auditors’ remuneration 242 13. Impairment 243 Notes to the parent company financial statements 343 14. Tax expense 245 1. Basis of preparation and accounting policies 343 15. Earnings per share 246 2. Financial assets at fair value through profit or loss 343 16. Financial assets at fair value through profit or loss 246 3. Amounts due from subsidiaries 343 17. Derivative financial instruments 247 4. Deferred tax 343 18. Financial assets at amortised cost 252 5. Financial liabilities at fair value through profit or loss 343 19. Allowance for expected credit losses 260 6. Debt securities in issue 343 20. Finance lease and hire purchase receivables 268 7. Subordinated liabilities 344 21. Financial assets at fair value through other 8. Share capital, share premium account and other equity comprehensive income 269 instruments 344 22. Investments in joint ventures and associates 269 9. Merger reserve and capital redemption reserve 344 23. Goodwill 270 10. Retained profits 345 24. Value of in-force business 270 11. Related party transactions 345 25. Other intangible assets 272 12. Financial instruments 346 26. Other assets 272 13. Financial risk management 347 27. Lessee disclosures 273 14. Other information 348 28. Financial liabilities at fair value through profit or loss 274 29. Debt securities in issue 274 The Group has adopted the UK Finance Code for Financial Reporting 30. Securitisations and covered bonds 274 Disclosure and these 2022 financial statements have been prepared in compliance with its principles. 31. Liabilities arising from insurance contracts and participating investment contracts 275 32. Life insurance sensitivity analysis 279 33. Liabilities arising from non-participating investment contracts 280 34. Other liabilities 280 35. Retirement benefit obligations 280 196 Lloyds Banking Group Annual Report and Accounts 2022 ## Independent auditors’ report to the Members of Lloyds Banking Group plc ## Report on the audit of the financial statements ### 1. Opinion In our opinion: • the financial statements of Lloyds Banking Group plc (the ‘Parent company’) and its subsidiaries (the ‘Group’ or ‘LBG’) give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December 2022 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with United Kingdom adopted international accounting standards and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Financial results Risk managementGovernance Financial statements Other informationStrategic report Board (IASB); • the Parent company financial statements have been properly prepared in accordance with United Kingdom adopted international accounting standards and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements which comprise the: Group Parent company • Consolidated balance sheet as at 31 December 2022; • Balance sheet as at 31 December 2022; • Consolidated income statement for the year then ended; • Statement of changes in equity for the year then ended; • Consolidated statement of comprehensive income for the • Cash flow statement for the year then ended; and year then ended; • Notes 1 to 14 to the financial statements, which include the • Consolidated statement of changes in equity for the year then accounting principles and policies. ended; • Consolidated cash flow statement for the year then ended; and • Notes 1 to 55 to the financial statements, which include the accounting principles and policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom adopted international accounting standards, and as regards the Parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. ### 2. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditors’ responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services provided to the Group and Parent company for the year are disclosed in note 12 to the financial statements. We confirm that we have not provided any non-audit services prohibited by the FRC’s Ethical Standard to the Group or the Parent company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. ### 3. Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: • Expected credit losses (Group) • Insurance actuarial assumptions (Group) • Valuation of certain complex and illiquid financial instruments held at fair value (Group) • Regulatory and litigation matters (Group) • Defined benefit obligations (Group) • IT systems that impact financial reporting (Group and Parent company) Our assessment of the level of risk for each of these areas have remained consistent with the prior year. Materiality Overall materiality used for the Group consolidated financial statements was £318 million, which was determined on the basis of profit before tax and net assets. Overall materiality used for the Parent company financial statements was £318 million, which was determined on the basis of net assets and capped at Group materiality. Scoping Our audit scope covers 88% of the Group’s revenue, 91% of the Group’s profit before tax, 97% of the Group’s total assets and 94% of the Group’s total liabilities. 197Lloyds Banking Group Annual Report and Accounts 2022 ### Independent auditors’ report continued to the Members of Lloyds Banking Group plc Our audit approach Our audit approach is risk focused and structured to reflect the Group’s organisation. It can be summarised into the following key activities that we used to obtain sufficient audit evidence required to form our opinion on the Group and Parent company financial statements: • Audit planning and risk assessment We considered the macroeconomic factors affecting the Group during the year and assessed the impact of the war in Ukraine, the current economic environment and changes to UK fiscal policy on the Group’s key judgements and sources of estimation uncertainty. The partners for the Group’s two components and those partners leading areas requiring significant audit judgement including; expected credit losses, insurance actuarial assumptions, provisions for regulatory and litigation matters, defined benefit obligations and the valuation of certain complex and illiquid financial instruments were required to consider these factors in their assessment of risk and to design testing procedures to adequately address the assessed risk. These partners also met regularly with management to understand business strategy, the Group’s accounting judgements and estimations as well as other matters which arose during the year, which could have impacted the Group’s financial reporting. Our risk assessments were further informed by detailed analytics as well as other quantitative and qualitative audit procedures, including consideration of matters such as the impact of cost of living pressures in the UK and climate change on the account balances, disclosures and company practices; • Audit work executed at component level We have identified components based on the Group’s operating segments, and two components were subject to audit procedures; UK Banking and UK Insurance. On the basis of materiality, we have removed the US component from our scope. The Group audit team was in active dialogue throughout the audit with the component audit teams responsible for the audit work. This included determining whether the work was planned and performed in accordance with the overall Group audit strategy and the requirements of our Group audit instructions to the components. We were able to satisfy ourselves that our oversight and supervision was appropriate through in- person meetings, video conferencing, and direct reviews of work completed. Furthermore, we have continued to attend the planning and clearance meetings that our components have held with the Group to engage with divisional management; • Audit procedures undertaken at both Group and Parent company level In addition to the above, we also performed audit work on the Group and Parent company financial statements including the consolidation of the Group’s results, the preparation of the financial statements, certain disclosures within the directors’ remuneration report, litigation provisions and exposures, as well as the Group’s entity level and oversight controls relevant to financial reporting. The components not covered by our audit scope are subject to analytical procedures to confirm our conclusion that there were no significant risks of material misstatement in the aggregated financial information; • Internal controls testing approach Our internal controls testing approach was informed by our scoping and risk assessment activities. We have assessed the Group’s end-to-end financial reporting processes supporting all in-scope financial statement balances and identified relevant controls to test for these balances. This included the testing of general IT controls, process level controls and entity level controls at the Group level; and • The impact of climate change on our audit In planning our audit, we have considered the impact of climate change on the Group’s operations and any subsequent impact on its financial statements. The Group sets out its assessment of the potential impact on page 156 of the Risk Management section of the Annual Report. In conjunction with our climate risk specialists, we have held discussions with the Group to understand their: – process for identifying affected operations including the governance and controls over this process, and the subsequent effect on financial reporting for the Group; and – long-term strategy to respond to climate change risks and how this is factored into the Group’s forecasts, considering publicly announced climate change commitments and any costs associated with the Group’s net zero targets. Our audit work has involved: – evaluating climate as a factor in risk assessments for potentially affected balances; – challenging the completeness of the physical and transition risks identified and considered in the Group’s climate risk assessment and the conclusion that there continues to be no material impact of climate change risk on financial reporting; – reviewing the Group’s qualitative loan portfolio analysis, and challenging the key assumptions used by the Group with reference to our own understanding of the portfolios and publicly available documentation; and – assessing disclosures in the Annual Report, and challenging the consistency between the financial statements and the remainder of the Annual Report. We have not been engaged to provide assurance over the accuracy of climate change disclosures set out at pages 136 to 137 in the Annual Report. As part of our audit procedures we are required to read and consider these disclosures to consider whether they are materially inconsistent with the financial statements or knowledge obtained in the audit and we did not identify any material inconsistencies as a result of these procedures. 198 Lloyds Banking Group Annual Report and Accounts 2022 ### 4. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group’s and Parent company’s ability to continue to adopt the going concern basis of accounting included: • using our knowledge of the Group and Parent company, the financial services industry, the financial services regulatory environment and the general economic environment, including macroeconomic pressures affecting the Group’s operations, to identify inherent risks in the business model and how such risks might affect the financial resources or ability to continue operations over the going concern period; • making inquiries of Group management about the assumptions, including climate risk considerations, used in their going concern models, and assessing the reasonableness of those assumptions and historical forecasting accuracy; • evaluating the Group’s strategic plans in light of the changing macroeconomic environment, short and longer term financial Financial results Risk managementGovernance Financial statements Other informationStrategic report budgets, funding, liquidity and capital adequacy plans including internal stress tests; • considering the Group’s operational resilience; • reading analyst reports, industry data, Bank of England reports and other external information to determine if it provided corroborative or contradictory evidence in relation to the Group’s assumptions; • reviewing correspondence and meeting with prudential and conduct regulators to assess whether there are any matters that may impact the going concern assessment; • testing the underlying data generated to prepare the forecast scenarios and determined whether there was adequate support for the assumptions underlying the forecasts; and • evaluating the Group’s disclosures on going concern against the requirements of IAS 1. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s and Parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In relation to the reporting on how the Group has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. ### 5. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Expected credit losses (Group) Key audit matter description How the scope of our audit responded to the key audit matter Refer to notes 2, 3, 13, 19 and 52 in the financial statements The Group has recognised £4.9 billion of expected credit losses (“ECL”) as at 31 December 2022. The determination of ECL consists of a number of assumptions that require a high degree of complex and subjective auditor judgement, specialised skills and knowledge, complex impairment modelling and a high degree of estimation uncertainty. Specifically, the impact of the war in Ukraine, residual economic impact of the COVID-19 pandemic, as well as the economic impact of the rising cost of living on the ECL have been particularly judgemental given the inherent uncertainty in the current economic environment. The key areas we identified as having the most significant level of management judgement were in respect of: • Multiple Economic Scenarios (“MES”); • Retail ECL; and • Commercial ECL. 199Lloyds Banking Group Annual Report and Accounts 2022 ### Independent auditors’ report continued to the Members of Lloyds Banking Group plc Key audit matter description How the scope of our audit responded to the key audit matter Multiple economic scenarios We performed the following procedures: The measurement of expected credit losses is required to reflect • Tested the controls over the generation of the multiple an unbiased probability-weighted range of possible future economic scenarios including those over the Group’s outcomes. governance processes to determine the base case, different scenarios and the weightings applied to each scenario; The Group’s economics team develops the future economic • Working with our internal economic specialists: scenarios. Firstly, a base case forecast is produced based on a – challenged and evaluated economic forecasts in the base set of conditioning assumptions, which are designed to reflect the scenario such as the unemployment rate, House Price Index, Group’s best view of future events. A full distribution of economic inflation and forecasted interest rates, and Gross Domestic scenarios around this base case is produced using a Monte Carlo Product through comparison to independent economic simulation and scenarios within that distribution are ranked using outlooks, external analysts and market data; estimated relationships with industry wide historical loss data. – challenged the appropriateness of management’s change in methodology in determining the severe downside scenario; Three scenarios are derived from the distribution as averages of – challenged and evaluated the appropriateness of constituent modelled scenarios around the 15th, 75th and 95th the methodology applied to generate alternative percentiles of the distribution which corresponds to an upside, macroeconomic scenarios, and including associated a downside and a severe downside, respectively. The severe weightings and assumptions within; downside is then adjusted to incorporate non-modelled paths for – independently replicated the multiple economic scenario inflation and interest rate assumptions. The upside, the base case model and compared the outputs of our independent model and the downside scenarios are weighted at 30% and the severe to the Group’s output to re-test scenario generation; downside at 10%. • Tested the completeness and accuracy of the data used by the model; These four scenarios are then used as key assumptions in the • Performed a stand back assessment of the appropriateness determination of the ECL allowance. of the weightings applied to each of the scenarios based on publicly available data; and The development of these multiple economic scenarios is • Evaluated the adequacy of disclosures in respect of significant inherently uncertain, highly complex, and requires significant judgements and sources of estimation uncertainty including judgement. macroeconomic scenarios. The principal consideration for our determination that the multiple economic scenarios is a critical audit matter was the high degree of management judgement which required specialised auditor knowledge and a high degree of audit effort in areas such as evaluating the forward-looking information used by management, and the weighting applied. This key audit matter is discussed in the Audit Committee’s report on page 96. 200 Lloyds Banking Group Annual Report and Accounts 2022 Key audit matter description How the scope of our audit responded to the key audit matter Retail ECL The ECL for the Retail division is determined on a collective basis We tested controls across the process to determine the ECL using impairment models to calculate a probability weighted provisions including: estimate by applying a probability of default, exposure at default • Model governance including model validation and monitoring; and a loss given default, taking account of collateral held or other • Model assumptions; loss mitigants, discounted using the effective interest rate. • The allocation of assets into stages; and • Data accuracy and completeness. The key judgements and estimates in determining the ECL for the Retail division include: Working with our internal modelling specialists, our audit • Modelling approach, modelling simplifications and procedures over the key areas of estimation covered the following: judgements, and selection of modelling data; • Model estimations, where we: • Behavioural lives; and – evaluated the appropriateness of the modelling approach Financial results Risk managementGovernance Financial statements Other informationStrategic report • The appropriate allocation of assets into the correct IFRS 9 and assumptions used; stage through the assessment of significant deterioration in – independently replicated the models for all material credit risk since origination. portfolios and compared the outputs of our independent models to the Group’s outputs; Model adjustments – assessed model performance by evaluating variations Adjustments are made to models to address known model between observed data and model predictions; and data limitations, and emerging or non-modelled risks. – developed an understanding and assessed model The current economic environment continues to be uncertain limitations and remedial actions; and and differs from recent experience which is characterised – tested the completeness and accuracy of the data used in by elevated inflation and increasing cost, increased cost of model execution and calibration. living and increasing costs of financing, which affects the debt servicing capability for borrowers. As a result, the judgements • Allocation of assets into stages, where we: around if and when the Group have recognised adjustments in – evaluated the appropriateness of quantitative and the model to account for the impacts of the current economic qualitative criteria used for allocation into IFRS 9 stages; environment and potential model weaknesses in coping with – tested the appropriateness of the stage allocation for a the current economic outlook are highly judgemental and sample of exposures; and inherently uncertain. These adjustments require specialist auditor – tested the data used by models in assigning IFRS 9 stages judgement when evaluating the completeness of adjustments, and evaluated the appropriateness of the model logic used. and the methodology, models and inputs to the adjustments. Model adjustments This key audit matter is discussed in the Audit Committee’s report In respect of the adjustment to models, we performed the following on page 96. procedures in conjunction with our specialists: • Tested the controls over the adjustments to the models; • Evaluated the methodology, approach and assumptions in developing the adjustments, and evaluated the Group’s selection of approach; • Tested the completeness and accuracy of the data used; • Performed a recalculation of the adjustments; • Evaluated the completeness of adjustments based on our understanding of model and data limitations, including those related to cost of living pressures; and • Evaluated whether duplication exists between different model adjustments and between model adjustments and core models. We haved assessed the adequacy of whether the disclosures appropriately address the uncertainty which exists in determining the ECL. 201Lloyds Banking Group Annual Report and Accounts 2022 ### Independent auditors’ report continued to the Members of Lloyds Banking Group plc Key audit matter description How the scope of our audit responded to the key audit matter Commercial ECL We tested the controls across the process to determine the ECL The ECL in the Commercial Banking division is calculated on a provisions including: collective basis for performing loans, being those in stage 1 and 2, • Model governance and arithmetical accuracy of provision and on an individual basis for larger impaired loans in stage 3. calculations; • Data accuracy and completeness; and The collective provision is determined using impairment models. • Recognition and calculation of post-model adjustments. The models use a number of significant judgements to calculate a probability weighted ECL estimate applying an appropriate We performed the following audit procedures over: probability of default, estimated exposure at default and taking • Expected credit losses determined through impairment models: account of collateral held or other loss mitigants, discounted – independently assessed the credit rating and tested whether using the effective interest rate. The key driver of the probability the exposure was in the correct stage classification against of default and, therefore, the staging of Commercial banking IFRS 9 criteria; exposures is the credit risk rating. The determination of these – assessed and challenged the model methodologies, credit risk ratings is performed on a counterparty basis for larger approach and assumptions, including those used in exposures by a credit officer and involves a high degree of developing the IMAs and PMAs; judgement and consideration of multiple sources of information. – tested the completeness and accuracy of data used; and – performed a recalculation of the IFRS 9 collective provision. Complex models and significant judgements are used to develop the probability of default, loss given default and exposure at • Expected credit losses assessed individually: default as well as applying the staging criteria under IFRS 9. – assessed the exposures to determine if they met the definition of credit impaired with a stage 3 classification; For individual provision assessments of larger exposures in stage – performed independent assessments to determine the 3, the significant judgements in determining provisions are the: appropriateness of recovery scenarios and associated cash • completeness and appropriateness of the potential workout flows, including considerations of climate risks on recoveries; scenarios identified; – evaluated valuations, including the use of internal specialists • probability assigned to each identified potential workout for business valuations; and scenarios; and – independently assessed and challenged the completeness • valuation assumptions used in determining the expected of workout scenarios identified and weightings applied. recovery strategies. We have assessed the adequacy of whether the disclosures Complex and subjective auditor judgement including specialised appropriately address the uncertainty which exists in determining knowledge is required in evaluating the methodology, models the ECL. and inputs that are inherently uncertain. This key audit matter is discussed in the Audit Committee’s report on page 96. Key observations communicated to the Audit Committee We are satisfied that the ECL provisions are reasonable and recognised in accordance with the requirements of IFRS 9. The calculations are based on appropriate methodologies using reasonable modelled assumptions, including IMAs and PMAs addressing model shortcomings. Where control deficiencies were identified, particularly in data linkage to models, compensating controls were identified and operated effectively. Overall, we are comfortable with the Group’s conclusions in respect of ECL. 202 Lloyds Banking Group Annual Report and Accounts 2022 Insurance actuarial assumptions (Group) Key audit matter description How the scope of our audit responded to the key audit matter Refer to notes 2, 3, 10, 24, 31 and 32 in the financial statements We tested controls over the Group’s processes over the insurance The valuation of the Group’s liabilities arising from insurance actuarial assumptions including: contracts and participating investment contracts (“insurance • Each key assumption; contract liabilities”) and value of in-force asset (“VIF”) involves • Data underlying each key assumption; and complex and subjective judgements about future events, both • Modelling methodologies used. internal and external to the business, which are inherently uncertain. We utilised our actuarial specialists to support our testing of the following key assumptions as set out below. The Group’s insurance contract liabilities and value of in-force asset were £106.9 billion and £5.4 billion respectively. As such, • Base mortality rates and mortality improvements used for Financial results Risk managementGovernance Financial statements Other informationStrategic report small changes in these assumptions can, individually and in annuities where we: combination, result in a material impact to the valuation of these – tested the data used in the assumption setting process; balances and therefore, a material impact to the Group’s profit – challenged base mortality assumptions and tested for the period. underlying experience investigations, including independent replication of a sample of experience studies; In particular, the following key judgements and estimations are – challenged the approach to setting long term rates of significant to the valuation of the Group’s insurance contract mortality improvement through benchmarking against liabilities and VIF: peers, taking into account specific features of the Group’s • Base mortality rates and mortality improvements used for annuity policyholders (including any adjustments for socio- annuities, reflecting the expectation of how long an annuity economic groups); and policyholder will live, including how this may be affected by the – challenged expert judgements made, including choice of current economic environment on health and the provision of model parameterisation and judgements made regarding healthcare; experience over the COVID-19 pandemic, including the • Maintenance expense assumptions and associated provisions, impact of the macroeconomic environment on policyholder reflecting the expected cost of maintaining policies until health. maturity; • Persistency assumptions and provisions, reflecting the • Maintenance expenses and persistency assumptions and expected retention of policies over time for the Workplace provisions, where we: Pensions business; – tested the data used in the assumption setting process, • Credit default assumptions, used in the Valuation Interest Rate re-performing key calculations; and for annuities; and – challenged the expert judgements used in setting these • Illiquidity Premium, used in the calculation of the risk-discount assumptions and provisions, including the treatment of rate for the VIF on annuities. expenses associated with the Group’s cost allocation process and future administration system migrations. This key audit matter is discussed in the Audit Committee’s report on page 97. • Credit default adjustment and Illiquidity Premium, where we: – assessed the appropriateness of the methodology used to set these assumptions; – tested the implementation of this methodology, through the development of our own replication tool; and – tested the data and assumptions used in the calculations of the assumptions. Key observations communicated to the Audit Committee We identified control deficiencies over the extraction of policyholder data, which impacted the controls over data used in the experience studies for the setting of the mortality and persistency assumptions set out above. These controls were remediated during the year and our testing of the remediated controls concluded that they were appropriately designed and implemented by the year-end. We are satisfied that the actuarial assumptions are individually reasonable, and the aggregate impact of these judgements on the overall valuation of the insurance contract liabilities and VIF is reasonable. 203Lloyds Banking Group Annual Report and Accounts 2022 ### Independent auditors’ report continued to the Members of Lloyds Banking Group plc Valuation of certain complex and illiquid financial instruments held at fair value (Group) Key audit matter description How the scope of our audit responded to the key audit matter Refer to notes 2, 3, 16, 49 and 52 in the financial statements We tested the controls over the valuation of financial instruments, Financial instruments are classified as level 1, 2 or 3 in accordance including controls over assumptions used in the valuation of these with IFRS 13 ‘Fair value measurement’. financial assets, and model review controls. The fair value of complex and illiquid financial instruments, We utilised our valuation specialists in our audit of the valuation involves significant judgement. The extent of judgement applied of the level 3 portfolio loans and we performed the following by the Group in valuing the Group’s financial investments varies procedures: with the nature of assets held, the markets in which they are • Challenged the appropriateness of loan valuation traded, and the valuation methodology applied. methodologies; • Calculated a range of comparable values for a sample of The Group holds several portfolios of level 3 illiquid investments modelled illiquid financial instruments using an independent totalling £7.9 billion, the largest of which is held within the valuation model and considered reasonable alternative key Insurance, Pensions and Investments division, and includes loans assumptions based on comparable securities and compared in commercial real estate, social housing, infrastructure, and results; education sectors. The valuation of these loans uses complex • Challenged the appropriateness of the internal credit ratings valuation models as they are without readily determinable methodology and tested the appropriateness for a sample of market values and were valued using significant unobservable credit files; inputs, such as loan to bond premium and calibration spread • Evaluated the consistency and appropriateness of inputs and that involved considerable judgement by management. assumptions over time, challenging both significant movements and non-movements where we expected change; and We also consider these judgements to be at risk of management • Assessed the adequacy of disclosures and sensitivity analysis. bias. Key observations communicated to the Audit Committee We are satisfied that the valuation of these certain complex and illiquid financial instruments is reasonable and in accordance with IFRS 13. Regulatory and litigation matters (Group) Key audit matter description How the scope of our audit responded to the key audit matter Refer to notes 2, 3 and 37 in the financial statements. We performed the following audit procedures: The Group operates in an environment where it is subject to • Tested the Group’s controls over the completeness of provisions, regulatory investigations, litigation and customer remediation the review of the assessment of the provision against the including allegations of fraud and misconduct. The Group is requirements of IAS 37, the review of the appropriateness of currently exposed to a number of regulatory and litigation judgements used to determined a ‘best estimate’ and the matters. The Group’s provision for these matters is £0.8 billion completeness and accuracy of data used in the process; at 31 December 2022, the most significant of which is the HBOS • Evaluated the assessment of the provisions, associated Reading matter. probabilities, and potential outcomes in accordance with IAS 37; • Verified and challenged whether the methodology, data and Significant judgement is required by the Group in determining significant judgements and assumptions used in the valuation whether, under IAS 37 Provisions, Contingent Liabilities and of the provisions are appropriate in the context of the applicable Contingent Assets: financial reporting framework; • based on the information available to the Group, the amount • In respect of HBOS Reading, we inspected information available recorded is representative of the Group’s best estimate to including outcomes for the awards made by the Foskett panel settle the obligation; and and tested the methodology applied to determine the provision; • any contingent liabilities and underlying significant estimation • Inspected correspondence and, where appropriate, made uncertainties are adequately disclosed. direct inquiry with the Group’s regulators and internal and external legal counsel; This key audit matter is discussed in the Audit Committee’s report • Where no provision was made, we critically assessed and on page 97. challenged the conclusion in the context of the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and • Evaluated whether the disclosures made in the financial statements appropriately reflect the facts and key sources of estimation uncertainty. Key observations communicated to the Audit Committee While there is significant judgement required in estimating the timing and value of future settlements, particularly in relation to the HBOS Reading matter, we are satisfied that the approach to the estimation of these provisions is consistent with the requirements of IAS 37. 204 Lloyds Banking Group Annual Report and Accounts 2022 Defined benefit obligations (Group) Key audit matter description How the scope of our audit responded to the key audit matter Refer to notes 2, 3 and 35 in the financial statements We performed the following audit procedures: The Group operates a number of defined benefit retirement • Tested the Group’s controls over the valuation of the defined schemes, the obligations for which totalled £29.0 billion at benefit obligations, including controls over the assumptions 31 December 2022. Their valuation is determined with reference setting process; and to key actuarial assumptions including mortality assumptions, • Challenged the key actuarial assumptions used by comparing discount rates and inflation rates. Due to the size of these against ranges and expectations determined by our internal schemes, small changes in these assumptions can have a actuarial experts, which are calculated with reference to the material impact on the value of the defined benefit obligation central assumptions adopted by the actuarial firms for whom and therefore, the assessment of these assumptions are a key we have reviewed and accepted their methodologies. judgement. Financial results Risk managementGovernance Financial statements Other informationStrategic report This key audit matter is discussed in the Audit Committee’s report on page 97. Key observations communicated to the Audit Committee We are satisfied that the Group’s judgements in relation to the actuarial assumptions are reasonable. IT systems that impact financial reporting (Group and Parent company) Key audit matter description How the scope of our audit responded to the key audit matter The Group’s IT environment is inherently complex due to the Our IT audit scope tested the Group’s IT controls over information number of systems it operates and its reliance on automated systems deemed relevant to the audit based on the financial data, and IT dependent manual controls. Together, these support a system configured automated controls and/or key financial reports broad range of banking and insurance products as well as the that reside within it. processing of the Group’s significant volume of transactions, which impact all account balances. We used IT specialists to support our evaluation of the risks associated with IT in the following areas: As such, IT systems within the Group form a critical component • General IT Controls, including user access and change of the Group’s financial reporting activities. Due to the significant management controls; reliance on IT systems, effective General IT Controls (GITCs) are • Key financial reports and system configured automated critical to allow reliance to be placed on the completeness and controls; and accuracy of financial data and the integrity of automated system • Cyber security risk assessment. functionality, such as system calculations. Where deficiencies in the IT control environment were identified, We identified the IT systems that impact financial reporting as a our risk assessment procedures included an assessment of those key audit matter because of the: deficiencies to determine the impact on our audit plan. Where • Pervasive reliance on complex technology that is integral relevant, the audit plan was adjusted to mitigate the unaddressed to the operation of key business processes and financial IT risk. reporting; • Reliance on technology which continues to develop in line Where we were able to identify and test appropriate mitigating with the business strategy, such as the increase in the use of controls over affected financial statement line items, our testing automation across the Group and increasing reliance on third approach remained unchanged. parties; and • Importance of the IT controls in maintaining an effective In a limited number of areas, we adopted a non-controls reliance control environment. A key interdependency exists between approach and we therefore performed additional substantive the ability to rely on IT controls and the ability to rely on procedures. financial data, system configured automated controls and system reports. IT controls, in the context of our audit scope, primarily relate to privileged access at the infrastructure level, user access security at the application level and change control. IT systems which impact financial reporting are discussed in the Audit Committee report on page 97. Key observations communicated to the Audit Committee IT control deficiencies were identified in respect of privileged user access to IT infrastructure and in application user access management. The existence of these deficiencies in the year resulted in an increased risk in relation to data, reports and automated system functionality from the affected systems. However, overall, in combination with business mitigating controls, we are satisfied that the Group’s overall IT control environment appropriately supports the financial reporting process. 205Lloyds Banking Group Annual Report and Accounts 2022 ## Independent auditors' report continued to the Members of Lloyds Banking Group plc ### 6. Our application of materiality #### 6.1 Materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: | | Group financial statements | Parent company financial statements | | --- | --- | --- | | **Materiality** | £318 million (2021: £345 million) | £318 million (2021: £345 million) | | **Basis for determining materiality** | In determining our benchmark for materiality, we have considered the metrics used by investors and other users of the financial statements. We have determined the following benchmarks to be the most relevant to users of the financial statements: • Pre-tax profit; and • Net assets The determined materiality represents 5% of pre-tax profit and 0.6% of net assets. | Parent company materiality represents 0.7% of net assets, and is capped at Group materiality. | | **Rationale for the benchmark applied** | Given the importance of these measures to investors and users of the financial statements, we have used forecasted pre-tax profit as the primary benchmark for our determination of materiality, and net assets as a supporting benchmark. Component materiality allocated across both components range between £115 million and £172 million. In 2021, the range of component materialities was between £126 million and £189 million. | The Parent company holds the Group's investments and is not profit driven. The balance sheet is the key measure of financial health that is important to shareholders since the primary concern for the Parent company is the receipt and payment of dividends. However, given the size of the entity's balance sheet, we have capped materiality the Group's materiality. | #### 6.2 Performance materiality We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. | | Group financial statements | Parent company financial statements | | --- | --- | --- | | **Performance materiality** | 70% of Group materiality at £191 million (2021: 60% at £210 million) | 70% of Parent company materiality at £191 million (2021: 60% at £210 million) | | **Basis and rationale for determining performance materiality** | In determining performance materiality, we considered the following factors: a. The quality of the control environment and whether we were able to rely on controls; b. Degree of centralisation and commonality of controls and processes; c. The uncertain economic environment; d. The nature, volume and size of uncorrected misstatements arising in the previous audit; and e. The nature, volume and size of uncorrected misstatements that remain uncorrected in the current period. In the prior year, performance materiality was set at 60% reflecting amongst other factors that it was Deloitte LLP's first year auditing the Group and Parent financial statements. | | #### 6.3 Error reporting threshold We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £16 million (2021: £17 million), as well as any differences below this threshold, which in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. 206 Lloyds Banking Group Annual Report and Accounts 2022 ### 7. Other information The other information comprises the information included in the Annual Report, other than the financial We have nothing to report statements and our auditors’ report thereon. The Directors are responsible for the other information in this regard. contained within the Annual Report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, Financial results Risk managementGovernance Financial statements Other informationStrategic report based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We summarise below our work in relation to areas of the other information including those areas upon which we are specifically required to report: Our responsibility Our report Matters we are specifically required to report Principal risks Review the confirmation and description in the light As set out in the section “Corporate governance and viability of the knowledge gathered during the audit, such as statement”, we have nothing material to report, add or statement through considering the directors’ processes to support draw attention to in respect of these matters. the statements made, challenging the Group’s key judgements and estimates, consideration of historical forecasting accuracy and evaluating macro-economic assumptions. Consider if the statements are aligned with the relevant provisions of the Code. Directors’ Report whether the part of the directors’ remuneration As set out in the section “Opinions on other matters Remuneration report to be audited is properly prepared and the prescribed by the Companies Act 2006”, in our opinion, report disclosures specified by the Companies Act have been the part of the directors’ remuneration report to be made. audited has been prepared in accordance with the Companies Act 2006. Strategic report Report whether they are consistent with the audited As set out in the section “Opinions on other matters and directors’ financial statements and are prepared in accordance prescribed by the Companies Act 2006”, in our opinion, report with applicable legal requirements. based on the work undertaken in the course of the audit, the information in these reports is consistent with the Report if we have identified any material misstatements audited financial statements and has been prepared in in either report in the light of the knowledge and accordance with applicable legal requirements. understanding of the Group and of the Parent company and their environment obtained in the course of the audit. Other reporting on other information Alternative APMs are measures that are not defined by generally In our opinion: Performance accepted accounting practice (GAAP) and therefore • the use, calculation and disclosure of APMs is Measures (APMs) are not typically included in the financial statement consistent with the Group’s published definitions and part of the Annual Report. The Group use APMs, such policies; as adjusted profit, and banking net interest margin • the use of APMs in the Group’s reporting results is in its quarterly and annual reporting of financial consistent with the guidelines produced by ESMA and performance. FRC; and • there is an appropriate balance between the use We have reviewed and assessed the Group’s of statutory metrics and APMs, together with clear calculation and reporting of these metrics to assess definitions and reconciliation for APMs used in consistency with the Group’s published definitions and financial reporting. policies for these items. We have also considered and assessed whether the use of APMs in the Group’s reporting results is consistent with the guidelines produced by regulators such as the European Securities and Markets Authority (“ESMA”) guidelines on the use of APMs and the FRC Alternative Performance Measures Thematic Review. We also considered whether there was an appropriate balance between the use of statutory metrics and APMs, in addition to whether clear definitions and reconciliation for APMs used in financial reporting have been provided. Dividends and Consider whether the dividends policy is transparent In our opinion the dividends policy is appropriately distribution and the dividends paid are consistent with the policy, disclosed and dividends paid are consistent with the policy as outlined in the strategic report on page 13. policy. 207Lloyds Banking Group Annual Report and Accounts 2022 ### Independent auditors’ report continued to the Members of Lloyds Banking Group plc ### 8. Responsibilities of Directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the Parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent company or to cease operations, or have no realistic alternative but to do so. ### 9. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditors’ report. ### 10. Extent to which the audit was considered capable of detecting irregularities, including ### fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. Identifying and assessing potential risks related to irregularities In identifying and assessing the risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following: • the nature of the industry and sector, control environment and business performance including the design of the Group’s remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets; • the Group’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was discussed by the Audit Committee on 20 February 2023; • enquiring of management, in-house legal counsel, internal audit and the Audit Committee, including obtaining and reviewing supporting documentation, concerning the Group’s policies and procedures relating to: – identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non- compliance; – detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; and – the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations; • discussing among the engagement team including significant component audit teams and involving relevant internal specialists, including tax, valuations, pensions, IT and industry specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud; and • obtaining an understanding of the legal and regulatory frameworks that the Group operates in, focusing on those laws and regulations that had a direct effect on the financial statements, such as provisions of the UK Companies Act, pensions legislation and tax legislation or that had a fundamental effect on the operations of the Group, including regulation and supervisory requirements of the Prudential Regulation Authority, Financial Reporting Council and Financial Conduct Authority. Audit response to risks identified As a result of performing the above, we identified the Group’s determination of “Expected credit losses” and “valuation of certain complex and illiquid financial instruments held at fair value” as key audit matters related to the potential risk of fraud. The key audit matters section of our report explains the matter in more detail and also describes the specific procedures in response to those key audit matters. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. In addition to the above, our procedures to respond to risks identified included the following: • reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements; • inquiring of management, the Audit Committee and in-house and external legal counsel concerning actual and potential litigation and claims; • performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; • reading minutes of meetings of those charged with governance, reviewing internal audit reports and correspondence with regulators; and • in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including specialists, and component audit teams, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. 208 Lloyds Banking Group Annual Report and Accounts 2022 # Report on other legal and regulatory requirements ## 11. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: - The information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and - The strategic report and the directors' report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and of the Parent company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors' report. ## 12. Corporate Governance Statement The Listing Rules require us to review the directors' statement in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the Group's compliance with the provisions of the UK corporate governance code specified for our review. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit: - the directors' statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 218; - the directors' explanation as to its assessment of the Group's prospects, the period this assessment covers and why the period is appropriate is set out on page 44; - the directors' statement on fair, balanced and understandable is set out on page 137; - the board's confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 91; - the section of the Annual Report that describes the review of effectiveness of risk management and internal control systems set out on page 97; and - the section describing the work of the Audit Committee set out on page 95 to 98. ## 13. Matters on which we are required to report by exception ### Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: - We have not received all the information and explanations we require for our audit; or - Adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or - The Parent company financial statements are not in agreement with the accounting records and returns. **We have nothing to report in respect of these matters.** ### Directors' remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the directors' remuneration report to be audited is not in agreement with the accounting records and returns. **We have nothing to report in respect of these matters.** ## 14. Other matters which we are required to address ### Auditor tenure Following the recommendation of the Audit Committee, we were appointed by shareholders at its annual general meeting on 12 May 2022 to audit the financial statements of Lloyds Banking Group plc for the year ended 31 December 2022 and subsequent financial periods. The period of total uninterrupted engagement of the firm is accordingly two years. ### Consistency of the audit report with the additional report to the Audit Committee Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK). ## 15. Use of our report This report is made solely to the Parent company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent company and the Parent company's members as a body, for our audit work, for this report, or for the opinions we have formed. As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these financial statements form part of the European Single Electronic Format ('ESEF') prepared Annual Financial Report filed on the National Storage Mechanism of the UK FCA in accordance with the ESEF Regulatory Technical Standard ('ESEF RTS'). This auditors' report provides no assurance over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS. **Michael Lloyd (Senior Statutory Auditor)** For and on behalf of Deloitte LLP Statutory Auditor London, United Kingdom 21 February 2023 Lloyds Banking Group Annual Report and Accounts 2022 209 Strategic report Financial results Governance Risk management Financial statements Other information ## Consolidated income statement for the year ended 31 December | | Note | 2022 £ million | 2021 £ million | 2020 £ million | | --- | --- | --- | --- | --- | | Interest income | | **17,645** | 13,258 | 14,306 | | Interest expense | | **(3,688)** | (3,892) | (3,557) | | **Net interest income** | 5 | **13,957** | 9,366 | 10,749 | | Fee and commission income | | **2,835** | 2,608 | 2,308 | | Fee and commission expense | | **(1,332)** | (1,185) | (1,148) | | Net fee and commission income | 6 | **1,503** | 1,423 | 1,160 | | Net trading income | 7 | **(19,987)** | 17,200 | 7,220 | | Insurance premium income | 8 | **9,059** | 8,283 | 8,615 | | Other operating income | 9 | **1,276** | 1,172 | 1,423 | | **Other income** | | **(8,149)** | 28,078 | 18,418 | | **Total income** | | **5,808** | 37,444 | 29,167 | | Insurance claims and changes in insurance and investment contract liabilities | 10 | **12,401** | (21,120) | (14,041) | | **Total income, net of insurance claims and changes in insurance and investment contract liabilities** | | **18,209** | 16,324 | 15,126 | | Operating expenses | 11 | **(9,759)** | (10,800) | (9,745) | | Impairment (charge) credit | 13 | **(1,522)** | 1,378 | (4,155) | | **Profit before tax** | | **6,928** | 6,902 | 1,226 | | Tax (expense) credit | 14 | **(1,373)** | (1,017) | 161 | | **Profit for the year** | | **5,555** | 5,885 | 1,387 | | Profit attributable to ordinary shareholders | | **5,021** | 5,355 | 865 | | Profit attributable to other equity holders | | **438** | 429 | 453 | | Profit attributable to equity holders | | **5,459** | 5,784 | 1,318 | | Profit attributable to non-controlling interests | | **96** | 101 | 69 | | **Profit for the year** | | **5,555** | 5,885 | 1,387 | | Basic earnings per share | 15 | **7.3p** | 7.5p | 1.2p | | Diluted earnings per share | 15 | **7.2p** | 7.5p | 1.2p | The accompanying notes are an integral part of the consolidated financial statements. 210 Lloyds Banking Group Annual Report and Accounts 2022 # Consolidated statement of comprehensive income for the year ended 31 December | | 2022 £ million | 2021 £ million | 2020 £ million | | --- | --- | --- | --- | | **Profit for the year** | **5,555** | **5,885** | **1,387** | ## Other comprehensive income *Items that will not subsequently be reclassified to profit or loss:* Post-retirement defined benefit scheme remeasurements: | Remeasurements before tax | **(3,012)** | 1,720 | 138 | | --- | --- | --- | --- | | Tax | **860** | (658) | (25) | | | **(2,152)** | 1,062 | 113 | Movements in revaluation reserve in respect of equity shares held at fair value through other comprehensive income: | Change in fair value | **44** | 61 | (50) | | --- | --- | --- | --- | | Tax | **3** | (4) | (16) | | | **47** | 57 | (66) | Gains and losses attributable to own credit risk: | Gains (losses) before tax | **519** | (86) | (75) | | --- | --- | --- | --- | | Tax | **(155)** | 34 | 20 | | | **364** | (52) | (55) | *Items that may subsequently be reclassified to profit or loss:* Movements in revaluation reserve in respect of debt securities held at fair value through other comprehensive income: | Change in fair value | **(133)** | 133 | 46 | | --- | --- | --- | --- | | Income statement transfers in respect of disposals | **(92)** | 2 | (149) | | Income statement transfers in respect of impairment | **6** | (2) | 5 | | Tax | **62** | (25) | 74 | | | **(157)** | 108 | (24) | Movements in cash flow hedging reserve: | Effective portion of changes in fair value taken to other comprehensive income | **(6,990)** | (2,279) | 730 | | --- | --- | --- | --- | | Net income statement transfers | **43** | (621) | (496) | | Tax | **1,928** | 814 | (109) | | | **(5,019)** | (2,086) | 125 | Movements in foreign currency translation reserve: | Currency translation differences (tax: £nil) | **119** | (39) | 4 | | --- | --- | --- | --- | | Transfers to income statement (tax: £nil) | **(21)** | – | 13 | | | **88** | (39) | 17 | | **Total other comprehensive (loss) income for the year, net of tax** | **(6,829)** | (950) | 110 | | **Total comprehensive (loss) income for the year** | **(1,274)** | 4,935 | 1,497 | | --- | --- | --- | --- | | Total comprehensive (loss) income attributable to ordinary shareholders | **(1,808)** | 4,405 | 975 | | --- | --- | --- | --- | | Total comprehensive income attributable to other equity holders | **438** | 429 | 453 | | Total comprehensive (loss) income attributable to equity holders | **(1,370)** | 4,834 | 1,428 | | Total comprehensive income attributable to non-controlling interests | **96** | 101 | 69 | | **Total comprehensive (loss) income for the year** | **(1,274)** | 4,935 | 1,497 | The accompanying notes are an integral part of the consolidated financial statements. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 211 # Consolidated balance sheet at 31 December | | Note | 2022 £ million | 2021 £ million | | --- | --- | --- | --- | | **Assets** | | | | | Cash and balances at central banks | | **91,388** | 76,420 | | Items in the course of collection from banks | | **242** | 147 | | Financial assets at fair value through profit or loss | 16 | **180,609** | 206,771 | | Derivative financial instruments | 17 | **24,753** | 22,051 | | Loans and advances to banks | | **10,632** | 7,001 | | Loans and advances to customers | | **454,899** | 448,567 | | Reverse repurchase agreements | | **44,865** | 54,753 | | Debt securities | | **9,926** | 6,835 | | Financial assets at amortised cost | 18 | **520,322** | 517,156 | | Financial assets at fair value through other comprehensive income | 21 | **23,154** | 28,137 | | Reinsurance assets^{1} | | **616** | 759 | | Investments in joint ventures and associates | 22 | **385** | 352 | | Goodwill | 23 | **2,655** | 2,320 | | Value of in-force business | 24 | **5,419** | 5,514 | | Other intangible assets | 25 | **4,786** | 4,196 | | Current tax recoverable | | **612** | 363 | | Deferred tax assets | 36 | **5,228** | 3,118 | | Retirement benefit assets | 35 | **3,823** | 4,531 | | Other assets^{1} | 26 | **13,837** | 14,690 | | **Total assets** | | **877,829** | 886,525 | 1 See note 1 regarding changes to presentation. The accompanying notes are an integral part of the consolidated financial statements. 212 Lloyds Banking Group Annual Report and Accounts 2022 | | Note | 2022 £ million | 2021 £ million | | --- | --- | --- | --- | | **Liabilities** | | | | | Deposits from banks | | 7,266 | 7,647 | | Customer deposits | | 475,331 | 476,344 | | Repurchase agreements at amortised cost | | 48,596 | 31,125 | | Items in the course of transmission to banks | | 372 | 316 | | Financial liabilities at fair value through profit or loss | 28 | 17,755 | 23,123 | | Derivative financial instruments | 17 | 24,042 | 18,060 | | Notes in circulation | | 1,280 | 1,321 | | Debt securities in issue | 29 | 73,819 | 71,552 | | Liabilities arising from insurance contracts and participating investment contracts | 31 | 106,893 | 123,423 | | Liabilities arising from non-participating investment contracts | 33 | 42,975 | 45,040 | | Other liabilities | 34 | 19,090 | 19,947 | | Retirement benefit obligations | 35 | 126 | 230 | | Current tax liabilities | | 8 | 6 | | Deferred tax liabilities | 36 | 216 | 39 | | Other provisions | 37 | 1,809 | 2,092 | | Subordinated liabilities | 38 | 10,730 | 13,108 | | **Total liabilities** | | **830,308** | **833,373** | | **Equity** | | | | | Share capital | 39 | 6,729 | 7,102 | | Share premium account | 40 | 18,504 | 18,479 | | Other reserves | 41 | 6,602 | 11,189 | | Retained profits | 42 | 10,145 | 10,241 | | **Ordinary shareholders' equity** | | **41,980** | **47,011** | | Other equity instruments | 43 | 5,297 | 5,906 | | **Total equity excluding non-controlling interests** | | **47,277** | **52,917** | | Non-controlling interests | | 244 | 235 | | **Total equity** | | **47,521** | **53,152** | | **Total equity and liabilities** | | **877,829** | **886,525** | The accompanying notes are an integral part of the consolidated financial statements. The directors approved the consolidated financial statements on 21 February 2023. **Robin Budenberg** Chair **Charlie Nunn** Group Chief Executive **William Chalmers** Chief Financial Officer Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 213 ## Consolidated statement of changes in equity for the year ended 31 December | | Attributable to ordinary shareholders | | | | Other equity instruments £ million | Non-controlling interests £ million | Total £ million | | --- | --- | --- | --- | --- | --- | --- | --- | | | Share capital and premium £ million | Other reserves £ million | Retained profits £ million | Total £ million | | | | | At 1 January 2022 | 25,581 | 11,189 | 10,241 | 47,011 | 5,906 | 235 | 53,152 | | **Comprehensive income** | | | | | | | | | Profit for the year | – | – | 5,021 | 5,021 | 438 | 96 | 5,555 | | *Other comprehensive income* | | | | | | | | | Post-retirement defined benefit scheme remeasurements, net of tax | – | – | (2,152) | (2,152) | – | – | (2,152) | | Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax: | | | | | | | | | Debt securities | – | (157) | – | (157) | – | – | (157) | | Equity shares | – | 47 | – | 47 | – | – | 47 | | Gains and losses attributable to own credit risk, net of tax | – | – | 364 | 364 | – | – | 364 | | Movements in cash flow hedging reserve, net of tax | – | (5,019) | – | (5,019) | – | – | (5,019) | | Movements in foreign currency translation reserve, net of tax | – | 88 | – | 88 | – | – | 88 | | Total other comprehensive loss | – | (5,041) | (1,788) | (6,829) | – | – | (6,829) | | **Total comprehensive (loss) income^{1}** | – | (5,041) | 3,233 | (1,808) | 438 | 96 | (1,274) | | **Transactions with owners** | | | | | | | | | Dividends (note 44) | – | – | (1,475) | (1,475) | – | (92) | (1,567) | | Distributions on other equity instruments | – | – | – | – | (438) | – | (438) | | Issue of ordinary shares | 105 | – | – | 105 | – | – | 105 | | Share buyback (note 41) | (453) | 453 | (2,013) | (2,013) | – | – | (2,013) | | Issue of other equity instruments (note 43) | – | – | (5) | (5) | 750 | – | 745 | | Repurchases and redemptions of other equity instruments (note 43) | – | – | (36) | (36) | (1,359) | – | (1,395) | | Movement in treasury shares | – | – | (20) | (20) | – | – | (20) | | Value of employee services: | | | | | | | | | Share option schemes | – | – | 41 | 41 | – | – | 41 | | Other employee award schemes | – | – | 183 | 183 | – | – | 183 | | Changes in non-controlling interests | – | – | (3) | (3) | – | 5 | 2 | | **Total transactions with owners** | (348) | 453 | (3,328) | (3,223) | (1,047) | (87) | (4,357) | | Realised gains and losses on equity shares held at fair value through other comprehensive income | – | 1 | (1) | – | – | – | – | | **At 31 December 2022** | 25,233 | 6,602 | 10,145 | 41,980 | 5,297 | 244 | 47,521 | 1 Total comprehensive income attributable to owners of the parent was a deficit of £1,370 million (2021: surplus of £4,834 million; 2020: surplus of £1,428 million). Further details of movements in the Group's share capital, reserves and other equity instruments are provided in notes 39, 40, 41, 42 and 43. The accompanying notes are an integral part of the consolidated financial statements. 214 Lloyds Banking Group Annual Report and Accounts 2022 | | Attributable to ordinary shareholders | | | | Other equity instruments £ million | Non-controlling interests £ million | Total £ million | | --- | --- | --- | --- | --- | --- | --- | --- | | | Share capital and premium £ million | Other reserves £ million | Retained profits £ million | Total £ million | | | | | At 1 January 2021 | 24,947 | 13,747 | 4,584 | 43,278 | 5,906 | 229 | 49,413 | | **Comprehensive income** | | | | | | | | | Profit for the year | – | – | 5,355 | 5,355 | 429 | 101 | 5,885 | | *Other comprehensive income* | | | | | | | | | Post-retirement defined benefit scheme remeasurements, net of tax | – | – | 1,062 | 1,062 | – | – | 1,062 | | Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax: | | | | | | | | | Debt securities | – | 108 | – | 108 | – | – | 108 | | Equity shares | – | 57 | – | 57 | – | – | 57 | | Gains and losses attributable to own credit risk, net of tax | – | – | (52) | (52) | – | – | (52) | | Movements in cash flow hedging reserve, net of tax | – | (2,086) | – | (2,086) | – | – | (2,086) | | Movements in foreign currency translation reserve, net of tax | – | (39) | – | (39) | – | – | (39) | | Total other comprehensive (loss) income | – | (1,960) | 1,010 | (950) | – | – | (950) | | **Total comprehensive (loss) income** | – | (1,960) | 6,365 | 4,405 | 429 | 101 | 4,935 | | **Transactions with owners** | | | | | | | | | Dividends (note 44) | – | – | (877) | (877) | – | (93) | (970) | | Distributions on other equity instruments | – | – | – | – | (429) | – | (429) | | Issue of ordinary shares | 37 | – | – | 37 | – | – | 37 | | Redemption of preference shares | 597 | (597) | – | – | – | – | – | | Movement in treasury shares | – | – | (13) | (13) | – | – | (13) | | Value of employee services: | | | | | | | | | Share option schemes | – | – | 51 | 51 | – | – | 51 | | Other employee award schemes | – | – | 131 | 131 | – | – | 131 | | Changes in non-controlling interests | – | – | (1) | (1) | – | (2) | (3) | | **Total transactions with owners** | 634 | (597) | (709) | (672) | (429) | (95) | (1,196) | | Realised gains and losses on equity shares held at fair value through other comprehensive income | – | (1) | 1 | – | – | – | – | | At 31 December 2021 | 25,581 | 11,189 | 10,241 | 47,011 | 5,906 | 235 | 53,152 | The accompanying notes are an integral part of the consolidated financial statements. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 215 # **Consolidated statement of changes in equity** continued for the year ended 31 December | | Attributable to ordinary shareholders | | | | Other equity instruments £ million | Non-controlling interests £ million | Total £ million | | --- | --- | --- | --- | --- | --- | --- | --- | | | Share capital and premium £ million | Other reserves £ million | Retained profits £ million | Total £ million | | | | | At 1 January 2020 | 24,756 | 13,695 | 3,246 | 41,697 | 5,906 | 203 | 47,806 | | **Comprehensive income** | | | | | | | | | Profit for the year | – | – | 865 | 865 | 453 | 69 | 1,387 | | *Other comprehensive income* | | | | | | | | | Post-retirement defined benefit scheme remeasurements, net of tax | – | – | 113 | 113 | – | – | 113 | | Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax: | | | | | | | | | Debt securities | – | (24) | – | (24) | – | – | (24) | | Equity shares | – | (66) | – | (66) | – | – | (66) | | Gains and losses attributable to own credit risk, net of tax | – | – | (55) | (55) | – | – | (55) | | Movements in cash flow hedging reserve, net of tax | – | 125 | – | 125 | – | – | 125 | | Movements in foreign currency translation reserve, net of tax | – | 17 | – | 17 | – | – | 17 | | Total other comprehensive income | – | 52 | 58 | 110 | – | – | 110 | | **Total comprehensive income** | – | 52 | 923 | 975 | 453 | 69 | 1,497 | | **Transactions with owners** | | | | | | | | | Dividends (note 44) | – | – | – | – | – | (41) | (41) | | Distributions on other equity instruments | – | – | – | – | (453) | – | (453) | | Issue of ordinary shares | 191 | – | – | 191 | – | – | 191 | | Movement in treasury shares | – | – | 293 | 293 | – | – | 293 | | Value of employee services: | | | | | | | | | Share option schemes | – | – | 48 | 48 | – | – | 48 | | Other employee award schemes | – | – | 74 | 74 | – | – | 74 | | Changes in non-controlling interests | – | – | – | – | – | (2) | (2) | | **Total transactions with owners** | 191 | – | 415 | 606 | (453) | (43) | 110 | | Realised gains and losses on equity shares held at fair value through other comprehensive income | – | – | – | – | – | – | – | | At 31 December 2020 | 24,947 | 13,747 | 4,584 | 43,278 | 5,906 | 229 | 49,413 | The accompanying notes are an integral part of the consolidated financial statements. 216 Lloyds Banking Group Annual Report and Accounts 2022 # Consolidated cash flow statement for the year ended 31 December | | Note | 2022 £ million | 2021^{1} £ million | 2020^{1} £ million | | --- | --- | --- | --- | --- | | **Cash flows from operating activities** | | | | | | Profit before tax | | **6,928** | 6,902 | 1,226 | | Adjustments for: | | | | | | Change in operating assets | 53(A) | **17,037** | (10,365) | (17,668) | | Change in operating liabilities | 53(B) | **15,593** | 4,954 | 35,737 | | Non-cash and other items | 53(C) | **(16,804)** | 6,063 | 9,594 | | Tax paid (net) | | **(743)** | (796) | (736) | | **Net cash provided by operating activities** | | **22,011** | 6,758 | 28,153 | | **Cash flows from investing activities** | | | | | | Purchase of financial assets | | **(7,984)** | (8,984) | (8,589) | | Proceeds from sale and maturity of financial assets | | **11,172** | 8,287 | 6,347 | | Purchase of fixed assets | | **(3,855)** | (3,228) | (2,901) | | Proceeds from sale of fixed assets | | **1,550** | 1,437 | 1,146 | | Repayment of capital by joint ventures and associates | | **36** | – | – | | Acquisition of businesses, net of cash acquired | 53(D) | **(409)** | (57) | (3) | | **Net cash provided by (used in) investing activities** | | **510** | (2,545) | (4,000) | | **Cash flows from financing activities** | | | | | | Dividends paid to ordinary shareholders | 44 | **(1,475)** | (877) | – | | Distributions on other equity instruments | | **(438)** | (429) | (453) | | Dividends paid to non-controlling interests | | **(92)** | (93) | (41) | | Interest paid on subordinated liabilities | | **(603)** | (1,303) | (1,095) | | Proceeds from issue of subordinated liabilities | | **838** | 499 | – | | Proceeds from issue of other equity instruments | | **745** | – | – | | Proceeds from issue of ordinary shares | | **31** | 25 | 144 | | Share buyback | | **(2,013)** | – | – | | Repayment of subordinated liabilities | | **(2,216)** | (1,056) | (3,874) | | Repurchases and redemptions of other equity instruments | | **(1,395)** | – | – | | Change in stake of non-controlling interests | | **5** | – | – | | **Net cash used in financing activities** | | **(6,613)** | (3,234) | (5,319) | | Effects of exchange rate changes on cash and cash equivalents | | **727** | 70 | (196) | | Change in cash and cash equivalents | | **16,635** | 1,049 | 18,638 | | Cash and cash equivalents at beginning of year | | **79,194** | 78,145 | 59,507 | | **Cash and cash equivalents at end of year** | 53(E) | **95,829** | 79,194 | 78,145 | $^{1}$ Restated, see page 218. The accompanying notes are an integral part of the consolidated financial statements. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 217 # Notes to the consolidated financial statements for the year ended 31 December ## Note 1: Basis of preparation The consolidated financial statements of Lloyds Banking Group plc and its subsidiary undertakings (the Group) have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The financial statements have also been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB). The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties, financial assets measured at fair value through other comprehensive income, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative contracts. The directors consider that it is appropriate to continue to adopt the going concern basis in preparing the financial statements. In reaching this assessment, the directors have considered the impact of climate change upon the Group's performance and projected funding and capital position. The directors have also taken into account the results from stress testing scenarios. Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2022 and which have not been applied in preparing these financial statements are given in note 55. In April 2022, the IFRS Interpretations Committee was asked to consider whether an entity includes a demand deposit as a component of cash and cash equivalents in the statement of cash flows when the demand deposit is subject to contractual restrictions on use agreed with a third party. It concluded that such amounts should be included within cash and cash equivalents. Accordingly, the Group includes mandatory reserve deposits with central banks that are held in demand accounts within cash and cash equivalents disclosed in the cash flow statement. This change has increased the Group's cash and cash equivalents at 1 January 2020 by £1,698 million (to £59,507 million) and decreased the adjustment for the change in operating assets in 2020 by £982 million (to a reduction of £17,668 million) resulting in an increase in the Group's cash and cash equivalents at 31 December 2020 of £2,678 million (to £78,145 million); and decreased the adjustment for the change in operating assets in 2021 by £137 million (to a reduction of £10,365 million) and, as a result, the Group's cash and cash equivalents at 31 December 2021 increased by £2,615 million (to £79,194 million). The change had no impact on profit after tax, total equity or the Group's earnings per share. In 2021, the Group adopted the *Interest Rate Benchmark Reform* Phase 2 amendments issued by the IASB. These amendments require that changes to expected future cash flows that both arise as a direct result of IBOR Reform and are economically equivalent to the previous cash flows are accounted for as a change to the effective interest rate with no adjustment to the asset's or liability's carrying value; no immediate gain or loss is recognised. The requirements also provide relief from the requirements to discontinue hedge accounting as a result of amending hedge documentation if the changes are required solely as a result of IBOR Reform. The following change has been made to the presentation of the Group's assets on the face of the balance sheet: - Reinsurance assets are shown separately from other assets There has been no change in the basis of accounting for any of the underlying transactions. Comparatives have been presented on a consistent basis. ## Note 2: Accounting policies The Group's accounting policies are set out below. These accounting policies have been applied consistently. ### (A) Consolidation The assets, liabilities and results of Group undertakings (including structured entities) are included in the financial statements on the basis of accounts made up to the reporting date. Group undertakings include subsidiaries, associates and joint ventures. Details of the Group's subsidiaries and related undertakings are given on **pages 352 to 360**. ### (1) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it has power over the entity, is exposed to, or has rights to, variable returns from its involvement with the entity, and has the ability to affect those returns through the exercise of its power. This generally accompanies a shareholding of more than one half of the voting rights although in certain circumstances a holding of less than one half of the voting rights may still result in the ability of the Group to exercise control. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The Group reassesses whether or not it controls an entity if facts and circumstances indicate that there have been changes to any of the above elements. Subsidiaries are fully consolidated from the date on which control is transferred to the Group; they are de-consolidated from the date that control ceases. The Group consolidates collective investment vehicles if its beneficial ownership interests give it substantive rights to remove the external fund manager of the investment activities of the fund. Where a subsidiary of the Group is the fund manager of a collective investment vehicle, the Group considers a number of factors in determining whether it acts as principal, and therefore controls the collective investment vehicle, including: an assessment of the scope of the Group's decision-making authority over the investment vehicle; the rights held by other parties including substantive removal rights without cause over the Group acting as fund manager; the remuneration to which the Group is entitled in its capacity as decision-maker; and the Group's exposure to variable returns from the beneficial interest that it holds in the investment vehicle. Consolidation may be appropriate in circumstances where the Group has less than a majority beneficial interest. Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported in other liabilities and the movement in those interests in interest expense. Structured entities are entities that are designed so that their activities are not governed by way of voting rights. In assessing whether the Group has power over such entities in which it has an interest, the Group considers factors such as the purpose and design of the entity; its practical ability to direct the relevant activities of the entity; the nature of the relationship with the entity; and the size of its exposure to the variability of returns of the entity. The treatment of transactions with non-controlling interests depends on whether, as a result of the transaction, the Group loses control of the subsidiary. Changes in the parent's ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions; any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent entity. Where the Group loses control of the subsidiary, at the date when control is lost the amount of any non-controlling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary is remeasured to its fair value; the gain or loss that is recognised in profit or loss on the partial disposal of the subsidiary includes the gain or loss on the remeasurement of the retained interest. 218 Lloyds Banking Group Annual Report and Accounts 2022 Financial results Risk managementGovernance Financial statements Other informationStrategic report 219Lloyds Banking Group Annual Report and Accounts 2022 Note 2: Accounting policies continued Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated. The acquisition method of accounting is used to account for business combinations by the Group. The consideration for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition- related costs are expensed as incurred except those relating to the issuance of debt instruments (see (E)(4) below) or share capital (see (P) below). Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. (2) Joint ventures and associates Joint ventures are joint arrangements over which the Group has joint control with other parties and has rights to the net assets of the arrangements. Joint control is the contractually agreed sharing of control of an arrangement and only exists when decisions about the relevant activities require the unanimous consent of the parties sharing control. Associates are entities over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the entity, but is not control or joint control of those policies, and is generally achieved through holding between 20 per cent and 50 per cent of the voting share capital of the entity. The Group utilises the venture capital exemption for investments where significant influence or joint control is present and the business unit operates as a venture capital business. These investments are designated on initial recognition at fair value through profit or loss. Otherwise, the Group’s investments in joint ventures and associates are accounted for using the equity method of accounting. (B) Goodwill Goodwill arises on business combinations and represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities acquired. Where the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities of the acquired entity is greater than the cost of acquisition, the excess is recognised immediately in the income statement. Goodwill is recognised as an asset at cost and is tested at least annually for impairment. For impairment testing, goodwill is allocated to the cash generating unit (CGU) or groups of CGUs that are expected to benefit from the business combination. The Group’s CGUs are largely product based for its Retail and Insurance businesses and client based for its Commercial Banking business. An impairment loss is recognised if the carrying amount of a CGU is determined to be greater than its recoverable amount. The recoverable amount of a CGU is the higher of its fair value less costs to sell and its value in use. If an impairment is identified the carrying value of the goodwill is written down immediately through the income statement and this is not subsequently reversed. At the date of disposal of a subsidiary, the carrying value of attributable goodwill is included in the calculation of the profit or loss on disposal. (C) Other intangible assets Intangible assets which have been determined to have a finite useful life are amortised on a straight-line basis over their estimated useful life as follows: up to 7 years for capitalised software; 10 to 15 years for brands and other intangible assets. Intangible assets with finite useful lives are reviewed at each reporting date to assess whether there is any indication that they are impaired. If any such indication exists the recoverable amount of the asset is determined and in the event that the asset’s carrying amount is greater than its recoverable amount, it is written down immediately. Certain brands have been determined to have an indefinite useful life and are not amortised. Such intangible assets are assessed annually to determine whether the asset is impaired and to reconfirm that an indefinite useful life remains appropriate. In the event that an indefinite life is inappropriate, a finite life is determined and a further impairment review is performed on the asset. (D) Revenue recognition (1) Net interest income Interest income and expense are recognised in the income statement using the effective interest method for all interest-bearing financial instruments, except for those classified at fair value through profit or loss. The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the expected life of the financial instrument. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument to the gross carrying amount of the financial asset (before adjusting for expected credit losses) or to the amortised cost of the financial liability, including early redemption fees, other fees, and premiums and discounts that are an integral part of the overall return. In the case of financial assets that are purchased or originated credit-impaired, the effective interest rate is the rate that discounts the estimated future cash flows to the amortised cost of the instrument. Direct incremental transaction costs related to the acquisition, issue or disposal of a financial instrument are also taken into account. Interest income from non-credit impaired financial assets is recognised by applying the effective interest rate to the gross carrying amount of the asset; for credit impaired financial assets, the effective interest rate is applied to the net carrying amount after deducting the allowance for expected credit losses. Impairment policies are set out in (H) below. (2) Fee and commission income and expense Fees and commissions receivable which are not an integral part of the effective interest rate are recognised as income as the Group fulfils its performance obligations. The Group’s principal performance obligations arising from contracts with customers are in respect of value added current accounts, credit cards and debit cards. These fees are received, and the Group provides the service, monthly; the fees are recognised in income on this basis. The Group also receives certain fees in respect of its asset finance business where the performance obligations are typically fulfilled towards the end of the customer contract; these fees are recognised in income on this basis. Where it is unlikely that the loan commitments will be drawn, loan commitment fees are recognised in fee and commission income over the life of the facility, rather than as an adjustment to the effective interest rate for the lending expected to be drawn. Incremental costs incurred to generate fee and commission income are charged to fee and commission expense as they are incurred. (3) Other Dividend income is recognised when the right to receive payment is established. Revenue recognition policies specific to trading income are set out in (E)(3) below; those relating to life insurance and general insurance business are detailed below (see (M) below); and those relating to leases are set out in (J)(1) below. ### Notes to the consolidated financial statements continued for the year ended 31 December 220 Lloyds Banking Group Annual Report and Accounts 2022 Note 2: Accounting policies continued (E) Financial assets and liabilities On initial recognition, financial assets are classified as measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss, depending on the Group’s business model for managing those financial assets and whether the resultant cash flows represent solely payments of principal and interest. The Group assesses its business models at a portfolio level based on its objectives for the relevant portfolio, how the performance of the portfolio is managed and reported, and the frequency of asset sales. Financial assets with embedded derivatives are considered in their entirety when considering their cash flow characteristics. The Group reclassifies financial assets only when its business model for managing those assets changes. A reclassification will only take place when the change is significant to the Group’s operations and will occur at a portfolio level and not for individual instruments; reclassifications are expected to be rare. Equity investments are measured at fair value through profit or loss unless the Group elects at initial recognition to account for the instruments at fair value through other comprehensive income. For these instruments, principally strategic investments, dividends are recognised in profit or loss but fair value gains and losses are not subsequently reclassified to profit or loss following derecognition of the investment. The Group initially recognises loans and advances, deposits, debt securities in issue and subordinated liabilities when the Group becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of securities and other financial assets and trading liabilities are recognised on trade date, being the date that the Group is committed to purchase or sell an asset. Financial assets are derecognised when the contractual right to receive cash flows from those assets has expired or when the Group has transferred its contractual right to receive the cash flows from the assets and either: substantially all of the risks and rewards of ownership have been transferred; or the Group has neither retained nor transferred substantially all of the risks and rewards, but has transferred control. Financial liabilities are derecognised when the obligation is discharged, cancelled or expires. (1) Financial instruments measured at amortised cost Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. Where the contractual cash flows introduce exposure to risks or volatility unrelated to a basic lending arrangement such as changes in equity prices or commodity prices, the payments do not comprise solely principal and interest. Financial assets measured at amortised cost are predominantly loans and advances to customers and banks, reverse repurchase agreements and certain debt securities used by the Group to manage its liquidity. Loans and advances and reverse repurchase agreements are initially recognised when cash is advanced to the borrower at fair value inclusive of transaction costs. Interest income is accounted for using the effective interest method (see (D) above). Financial liabilities are measured at amortised cost, except for trading liabilities and other financial liabilities designated at fair value through profit or loss on initial recognition which are held at fair value. Where changes are made to the contractual cash flows of a financial asset or financial liability that are economically equivalent and arise as a direct consequence of interest rate benchmark reform, the Group updates the effective interest rate and does not recognise an immediate gain or loss. (2) Financial assets measured at fair value through other comprehensive income Financial assets that are held to collect contractual cash flows and for subsequent sale, where the assets’ cash flows represent solely payments of principal and interest, are recognised in the balance sheet at their fair value, inclusive of transaction costs. Interest calculated using the effective interest method and foreign exchange gains and losses on assets denominated in foreign currencies are recognised in the income statement. All other gains and losses arising from changes in fair value are recognised directly in other comprehensive income, until the financial asset is either sold or matures, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement; other than in respect of equity shares, for which the cumulative revaluation amount is transferred directly to retained profits. The Group recognises a charge for expected credit losses in the income statement (see (H) below). As the asset is measured at fair value, the charge does not adjust the carrying value of the asset, and this is reflected in other comprehensive income. (3) Financial instruments measured at fair value through profit or loss Financial assets are classified at fair value through profit or loss where they do not meet the criteria to be measured at amortised cost or fair value through other comprehensive income or where they are designated at fair value through profit or loss to reduce an accounting mismatch. All derivatives are carried at fair value through profit or loss, other than those in effective cash flow and net investment hedging relationships. Derivatives are carried on the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer to note 49(3) (Financial instruments: Financial assets and liabilities carried at fair value) for details of valuation techniques and significant inputs to valuation models. Derivatives embedded in a financial asset are not considered separately; the financial asset is considered in its entirety when determining whether its cash flows are solely payments of principal and interest. Derivatives embedded in financial liabilities and insurance contracts (unless the embedded derivative is itself an insurance contract) are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. In accordance with IFRS 4 Insurance Contracts, a policyholder’s option to surrender an insurance contract for a fixed amount is not treated as an embedded derivative. The assets backing the insurance and investment contracts issued by the Group do not meet the criteria to be measured at amortised cost or fair value through other comprehensive income as they are managed on a fair value basis and accordingly are measured at fair value through profit or loss. Similarly, trading securities, which are debt securities and equity shares acquired principally for the purpose of selling in the short term or which are part of a portfolio which is managed for short-term gains, do not meet these criteria and are also measured at fair value through profit or loss. Financial assets measured at fair value through profit or loss are recognised in the balance sheet at their fair value. Fair value gains and losses together with interest coupons and dividend income are recognised in the income statement within net trading income. Financial results Risk managementGovernance Financial statements Other informationStrategic report 221Lloyds Banking Group Annual Report and Accounts 2022 Note 2: Accounting policies continued Financial liabilities are measured at fair value through profit or loss where they are trading liabilities or where they are designated at fair value through profit or loss in order to reduce an accounting mismatch; where the liabilities are part of a group of liabilities (or assets and liabilities) which is managed, and its performance evaluated, on a fair value basis; or where the liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would otherwise need to be separately accounted for. Financial liabilities measured at fair value through profit or loss are recognised in the balance sheet at their fair value. Fair value gains and losses are recognised in the income statement within net trading income in the period in which they occur, except in the case of financial liabilities designated at fair value through profit or loss where gains and losses attributable to changes in own credit risk are recognised in other comprehensive income. The fair values of assets and liabilities traded in active markets are based on current bid and offer prices, respectively, which include the expected effects of potential changes to laws and regulations, risks associated with climate change and other factors. If the market is not active the Group establishes a fair value by using valuation techniques. The fair values of derivative financial instruments are adjusted where appropriate to reflect credit risk (via credit valuation adjustments (CVAs), debit valuation adjustments (DVAs) and funding valuation adjustments (FVAs)), market liquidity and other risks. (4) Borrowings Borrowings (which include deposits from banks, customer deposits, repurchase agreements, debt securities in issue and subordinated liabilities) are recognised initially at fair value, being their issue proceeds net of transaction costs incurred. These instruments are subsequently stated at amortised cost using the effective interest method. Preference shares and other instruments which carry a mandatory coupon or are redeemable on a specific date are classified as financial liabilities. The coupon on these instruments is recognised in the income statement as interest expense. Securities which carry a discretionary coupon and have no fixed maturity or redemption date are classified as other equity instruments. Interest payments on these securities are recognised as distributions from equity in the period in which they are paid. An exchange of financial liabilities on substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The difference between the carrying amount of a financial liability extinguished and the new financial liability is recognised in profit or loss together with any related costs or fees incurred. When a financial liability is exchanged for an equity instrument, the new equity instrument is recognised at fair value and any difference between the carrying value of the liability and the fair value of the new equity instrument is recognised in profit or loss. (5) Sale and repurchase agreements (including securities lending and borrowing) Securities sold subject to repurchase agreements (repos) continue to be recognised on the balance sheet where substantially all of the risks and rewards are retained. Funds received for repos carried at fair value are included within trading liabilities. Conversely, securities purchased under agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards of ownership, are measured at amortised cost or at fair value. Those measured at fair value are recognised within trading securities. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities borrowing and lending transactions are typically secured; collateral takes the form of securities or cash advanced or received. Securities lent to counterparties are retained on the balance sheet. Securities borrowed are not recognised on the balance sheet, unless these are sold to third parties, in which case the obligation to return them is recorded at fair value as a trading liability. Cash collateral given or received is treated as a loan and advance measured at amortised cost or customer deposit. (F) Hedge accounting As permitted by IFRS 9, the Group continues to apply the requirements of IAS 39 to its hedging relationships. Changes in the fair value of all derivative instruments, other than those in effective cash flow and net investment hedging relationships, are recognised immediately in the income statement. As noted in (2) and (3) below, the change in fair value of a derivative in an effective cash flow or net investment hedging relationship is allocated between the income statement and other comprehensive income. Hedge accounting allows one financial instrument, generally a derivative such as a swap, to be designated as a hedge of another financial instrument such as a loan or deposit or a portfolio of such instruments. At the inception of the hedge relationship, formal documentation is drawn up specifying the hedging strategy, the hedged item, the hedging instrument and the methodology that will be used to measure the effectiveness of the hedge relationship in offsetting changes in the fair value or cash flow of the hedged risk. The effectiveness of the hedging relationship is tested both at inception and throughout its life and if at any point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued. Note 17 provides details of the types of derivatives held by the Group and presents separately those designated in hedge relationships. Where there is uncertainty arising from interest rate benchmark reform, the Group assumes that the interest rate benchmark on which the hedged cash flows and/or the hedged risk are based, or the interest rate benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of interest rate benchmark reform. The Group does not discontinue a hedging relationship during the period of uncertainty arising from the interest rate benchmark reform solely because the actual results of the hedge are not highly effective. Where the contractual terms of a financial asset, financial liability or derivative are amended, on an economically equivalent basis, as a direct consequence of interest rate benchmark reform, the uncertainty arising from the reform is no longer present. In these circumstances, the Group amends the hedge documentation to reflect the changes required by the reform; these changes to the documentation do not in and of themselves result in the discontinuation of hedge accounting or require the designation of a new hedge relationship. (1) Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk; this also applies if the hedged asset is classified as a financial asset at fair value through other comprehensive income. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income statement. The cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement using the effective interest method over the period to maturity. 222 Lloyds Banking Group Annual Report and Accounts 2022 Notes to the consolidated financial statements continued for the year ended 31 December Note 2: Accounting policies continued (2) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income in the cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (3) Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income, the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of. The hedging instruments used in net investment hedges may include non-derivative liabilities as well as derivative financial instruments. (G) Offset Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right of offset and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Cash collateral on exchange traded derivative transactions is presented gross unless the collateral cash flows are always settled net with the derivative cash flows. In certain situations, even though master netting agreements exist, the lack of management intention to settle on a net basis results in the financial assets and liabilities being reported gross on the balance sheet. (H) Impairment of financial assets The impairment charge in the income statement reflects the change in expected credit losses, including those arising from fraud. Expected credit losses are recognised for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets (other than equity investments) measured at fair value through other comprehensive income, and certain loan commitments and financial guarantee contracts. Expected credit losses are calculated as an unbiased and probability-weighted estimate using an appropriate probability of default, adjusted to take into account a range of possible future economic scenarios, and applying this to the estimated exposure of the Group at the point of default after taking into account the value of any collateral held, repayments, or other mitigants of loss and including the impact of discounting using the effective interest rate. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is made for expected credit losses resulting from default events that are possible within the next 12 months (12-month expected credit losses). In the event of a significant increase in credit risk since origination, allowance (or provision) is made for expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime expected credit losses). Financial assets where 12-month expected credit losses are recognised are considered to be Stage 1; financial assets which are considered to have experienced a significant increase in credit risk since initial recognition are in Stage 2; and financial assets which have defaulted or are otherwise considered to be credit-impaired are allocated to Stage 3. Some Stage 3 assets, mainly in Commercial Banking, are subject to individual rather than collective assessment. Such cases are subject to a risk-based impairment sanctioning process, and these are reviewed and updated at least quarterly, or more frequently if there is a significant change in the credit profile. The collective assessment of impairment aggregates financial instruments with similar risk characteristics, such as whether the facility is revolving in nature or secured and the type of security held against financial assets. An assessment of whether credit risk has increased significantly since initial recognition considers the change in the risk of default occurring over the remaining expected life of the financial instrument. In determining whether there has been a significant increase in credit risk, the Group uses quantitative tests based on relative and absolute probability of default (PD) movements linked to internal credit ratings together with qualitative indicators such as watchlists and other indicators of historical delinquency, credit weakness or financial difficulty. The use of internal credit ratings and qualitative indicators ensures alignment between the assessment of staging and the Group’s management of credit risk which utilises these internal metrics within distinct retail and commercial portfolio risk management practices. However, unless identified at an earlier stage, the credit risk of financial assets is deemed to have increased significantly when more than 30 days past due. The use of a payment holiday in and of itself has not been judged to indicate a significant increase in credit risk, with the underlying long-term credit risk deemed to be driven by economic conditions and captured through the use of forward-looking models. These portfolio-level models are capturing the anticipated volume of increased defaults and therefore an appropriate assessment of staging and expected credit loss. Where the credit risk subsequently improves such that it no longer represents a significant increase in credit risk since initial recognition, the asset is transferred back to Stage 1. Assets are transferred to Stage 3 when they have defaulted or are otherwise considered to be credit-impaired. Default is considered to have occurred when there is evidence that the customer is experiencing financial difficulty which is likely to affect significantly the ability to repay the amount due. IFRS 9 contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due which the Group now uses for all its products following changes to the definition of default for UK Mortgages on 1 January 2022. In addition, other indicators of mortgage default are added including end-of-term payments on past due interest-only accounts and loans considered non-performing due to recent arrears or forbearance. The use of payment holidays is not considered to be an automatic trigger of regulatory default and therefore does not automatically trigger Stage 3. Days past due will also not accumulate on any accounts that have taken a payment holiday including those already past due. In certain circumstances, the Group will renegotiate the original terms of a customer’s loan, either as part of an ongoing customer relationship or in response to adverse changes in the circumstances of the borrower. In the latter circumstances, the loan will remain classified as either Stage 2 or Stage 3 until the credit risk has improved such that it no longer represents a significant increase since origination (for a return to Stage 1), or the loan is no longer credit-impaired (for a return to Stage 2). On renegotiation the gross carrying amount of the loan is recalculated as the present value of the renegotiated or modified contractual cash flows, which are discounted at the original effective interest rate. Renegotiation may also lead to the loan and associated allowance being derecognised and a new loan being recognised initially at fair value. Purchased or originated credit-impaired financial assets (POCI) include financial assets that are purchased or originated at a deep discount that reflects incurred credit losses. At initial recognition, POCI assets do not carry an impairment allowance; instead, lifetime expected credit losses are incorporated into the calculation of the effective interest rate. All changes in lifetime expected credit losses subsequent to the assets’ initial recognition are recognised as an impairment charge. Financial results Risk managementGovernance Financial statements Other informationStrategic report 223Lloyds Banking Group Annual Report and Accounts 2022 Note 2: Accounting policies continued A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have been received or there is no realistic prospect of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement. For both secured and unsecured retail balances, the write-off takes place only once an extensive set of collections processes has been completed, or the status of the account reaches a point where policy dictates that continuing attempts to recover are no longer appropriate. For commercial lending, a write-off occurs if the loan facility with the customer is restructured, the asset is under administration and the only monies that can be received are the amounts estimated by the administrator, the underlying assets are disposed and a decision is made that no further settlement monies will be received, or external evidence (for example, third-party valuations) is available that there has been an irreversible decline in expected cash flows. (I) Property, plant and equipment Property, plant and equipment (other than investment property) is included at cost less accumulated depreciation. The value of land (included in premises) is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between the cost and the residual value over their estimated useful lives, as follows: the shorter of 50 years and the remaining period of the lease for freehold/long and short leasehold premises; the shorter of 10 years and, if lease renewal is not likely, the remaining period of the lease for leasehold improvements; 10 to 20 years for fixtures and furnishings; and 2 to 8 years for other equipment and motor vehicles. The assets’ residual values and useful lives are reviewed and, if appropriate, revised at each balance sheet date. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In assessing the recoverable amount of assets the Group considers the effects of potential or actual changes in legislation, customer behaviour, climate-related risks and other factors on the asset’s CGU. In the event that an asset’s CGU carrying amount is determined to be greater than its recoverable amount the asset is written down immediately. Investment property comprises freehold and long leasehold land and buildings that are held either to earn rental income or for capital accretion or both, primarily within the life insurance funds. In accordance with the guidance published by the Royal Institution of Chartered Surveyors, investment property is carried at fair value based on current prices for similar properties, adjusted for the specific characteristics of the property (such as location or condition). If this information is not available, the Group uses alternative valuation methods such as discounted cash flow projections or recent prices in less active markets. These valuations are reviewed at least annually by independent professionally qualified valuers. Investment property being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be valued at fair value. (J) Leases Under IFRS 16, a lessor is required to determine whether a lease is a finance or operating lease. A lessee is not required to make this determination. (1) As lessor Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all of the risks and rewards of ownership to the lessee but not necessarily legal title. All other leases are classified as operating leases. When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable, net of allowances for expected credit losses and residual value impairment, within loans and advances to banks and customers. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance lease income. Finance lease income is recognised in interest income over the term of the lease using the net investment method (before tax) so as to give a constant rate of return on the net investment in the lease. Unguaranteed residual values are reviewed regularly to identify any impairment. Operating lease assets are included within other assets at cost and depreciated over their estimated useful lives. The depreciation charge is based on the asset’s residual value and the life of the lease. Operating lease rental income is recognised on a straight-line basis over the life of the lease. The Group evaluates non-lease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted for separately. (2) As lessee Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Assets and liabilities arising from a lease are initially measured on a present value basis. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the Group’s incremental borrowing rate appropriate for the right-of-use asset arising from the lease, and the liability recognised within other liabilities. Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise IT equipment and small items of office furniture. (K) Employee benefits Short-term employee benefits, such as salaries, paid absences, performance-based cash awards and social security costs, are recognised over the period in which the employees provide the related services. (1) Pension schemes The Group operates a number of post-retirement benefit schemes for its employees including both defined benefit and defined contribution pension plans. A defined benefit scheme is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, dependent on one or more factors such as age, years of pensionable service and pensionable salary. A defined contribution plan is a pension plan into which the Group pays fixed contributions; there is no legal or constructive obligation to pay further contributions. 224 Lloyds Banking Group Annual Report and Accounts 2022 Notes to the consolidated financial statements continued for the year ended 31 December Note 2: Accounting policies continued (i) Defined benefit schemes Scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method. The defined benefit scheme liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. The Group’s income statement charge includes the current service cost of providing pension benefits, past service costs, net interest expense (income), and plan administration costs that are not deducted from the return on plan assets. Past service costs, which represents the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment, are recognised when the plan amendment or curtailment occurs. Net interest expense (income) is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Remeasurements, comprising actuarial gains and losses, the return on plan assets (excluding amounts included in net interest expense (income) and net of the cost of managing the plan assets), and the effect of changes to the asset ceiling (if applicable) are reflected immediately in the balance sheet with a charge or credit recognised in other comprehensive income in the period in which they occur. Remeasurements recognised in other comprehensive income are reflected immediately in retained profits and will not subsequently be reclassified to profit or loss. The Group’s balance sheet includes the net surplus or deficit, being the difference between the fair value of scheme assets and the discounted value of scheme liabilities at the balance sheet date. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from the schemes. In assessing whether a surplus is recoverable, the Group considers (i) its current right to obtain a refund or a reduction in future contributions and (ii) the rights of other parties existing at the balance sheet date. In determining the rights of third parties existing at the balance sheet date, the Group does not anticipate any future acts by other parties. (ii) Defined contribution schemes The costs of the Group’s defined contribution plans are charged to the income statement in the period in which they fall due. (2) Share-based compensation The Group operates a number of equity-settled, share-based compensation plans in respect of services received from certain of its employees. The value of the employee services received in exchange for equity instruments granted under these plans is recognised as an expense over the vesting period of the instruments, with a corresponding increase in equity. This expense is determined by reference to the fair value of the number of equity instruments that are expected to vest. The fair value of equity instruments granted is based on market prices, if available, at the date of grant. In the absence of market prices, the fair value of the instruments at the date of grant is estimated using an appropriate valuation technique, such as a Black-Scholes option pricing model or a Monte Carlo simulation. The determination of fair values excludes the impact of any non-market vesting conditions, which are included in the assumptions used to estimate the number of options that are expected to vest. At each balance sheet date, this estimate is reassessed and if necessary revised. Any revision of the original estimate is recognised in the income statement, together with a corresponding adjustment to equity. Cancellations by employees of contributions to the Group’s Save As You Earn plans are treated as non-vesting conditions and the Group recognises, in the year of cancellation, the amount of the expense that would have otherwise been recognised over the remainder of the vesting period. Modifications are assessed at the date of modification and any incremental charges are charged to the income statement. (L) Taxation Tax expense comprises current and deferred tax. Current and deferred tax are charged or credited in the income statement except to the extent that the tax arises from a transaction or event which is recognised, in the same or a different period, outside the income statement (either in other comprehensive income, directly in equity, or through a business combination), in which case the tax appears in the same statement as the transaction that gave rise to it. The tax consequences of the Group’s dividend payments (including distributions on other equity instruments), if any, are charged or credited to the statement in which the profit distributed originally arose. Current tax is the amount of corporate income taxes expected to be payable or recoverable based on the profit for the period as adjusted for items that are not taxable or not deductible, and is calculated using tax rates and laws that were enacted or substantively enacted at the balance sheet date. Current tax includes amounts provided in respect of uncertain tax positions when management expects that, upon examination of the uncertainty by His Majesty’s Revenue and Customs (HMRC) or other relevant tax authority, it is more likely than not that an economic outflow will occur. Provisions reflect management’s best estimate of the ultimate liability based on their interpretation of tax law, precedent and guidance, informed by external tax advice as necessary. Changes in facts and circumstances underlying these provisions are reassessed at each balance sheet date, and the provisions are remeasured as required to reflect current information. For the Group’s long-term insurance businesses, the tax expense is analysed between tax that is payable in respect of policyholders’ returns and tax that is payable on the shareholders’ returns. This allocation is based on an assessment of the rates of tax which will be applied to the returns under the current UK tax rules. Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet. Deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the balance sheet date, and which are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax liabilities are generally recognised for all taxable temporary differences but not recognised for taxable temporary differences arising on investments in subsidiaries where the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future. Deferred tax liabilities are not recognised on temporary differences that arise from goodwill which is not deductible for tax purposes. Deferred tax assets are recognised to the extent it is probable that taxable profits will be available against which the deductible temporary differences can be utilised, and are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are not recognised in respect of temporary differences that arise on initial recognition of assets and liabilities acquired other than in a business combination. Deferred tax is not discounted. Financial results Risk managementGovernance Financial statements Other informationStrategic report 225Lloyds Banking Group Annual Report and Accounts 2022 Note 2: Accounting policies continued (M) Insurance The Group undertakes both life insurance and general insurance business. Insurance and participating investment contracts are accounted for under IFRS 4 Insurance Contracts, which permits (with certain exceptions) the continuation of accounting practices for measuring insurance and participating investment contracts that applied prior to the adoption of IFRS. The Group, therefore, continues to account for these products using UK GAAP and UK established practice. Products sold by the life insurance business are classified into three categories: • Insurance contracts – these contracts transfer significant insurance risk and may also transfer financial risk. The Group defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event which are significantly more than the benefits payable if the insured event were not to occur. These contracts may or may not include discretionary participation features • Investment contracts containing a discretionary participation feature (participating investment contracts) – these contracts do not transfer significant insurance risk, but contain a contractual right which gives the holder the right to receive, in addition to the guaranteed benefits, further additional discretionary benefits or bonuses that are likely to be a significant proportion of the total contractual benefits and the amount and timing of which is at the discretion of the Group, within the constraints of the terms and conditions of the instrument and based upon the performance of specified assets • Non-participating investment contracts – these contracts do not transfer significant insurance risk or contain a discretionary participation feature For certain investment contracts, the contract can be partly invested in units which contain a discretionary participation feature (DPF) and partly in units without. Where switching levels for similar contracts are deemed to be significant, new investment contracts which contain an option to switch into investment contracts with DPF have been classified as participating investment contracts. Where the switching levels are not deemed to be significant, a new contract is split, with units containing a DPF being allocated as a participating investment contract and the units without a DPF as a non-participating investment contract. The general insurance business issues only insurance contracts. (1) Life insurance business (i) Accounting for insurance and participating investment contracts Premiums and claims Premiums received in respect of insurance and participating investment contracts are recognised as revenue when due except for unit-linked contracts on which premiums are recognised as revenue when received. Claims are recorded as an expense on the earlier of the maturity date or the date on which the claim is notified. Liabilities Changes in the value of liabilities are recognised in the income statement through insurance claims and changes in insurance and investment contract liabilities. • Insurance and participating investment contracts in the Group’s with-profit funds Liabilities of the Group’s with-profit funds, including guarantees and options embedded within products written by these funds, are stated at their realistic values in accordance with the Prudential Regulation Authority’s realistic capital regime, except that projected transfers out of the funds into other Group funds are recorded in the unallocated surplus (see below). Further details on valuation under the realistic capital regime are included in note 31 Liabilities arising from insurance contracts and participating investment contracts. • Insurance contracts which are not unit-linked or in the Group’s with-profit funds A liability for contractual benefits that are expected to be incurred in the future is recorded when the premiums are recognised. The liability is calculated by estimating the future cash flows over the duration of in-force policies and discounting them back to the valuation date allowing for probabilities of occurrence. The liability will vary with movements in interest rates and with the cost of life insurance and annuity benefits where future mortality is uncertain. Assumptions are made in respect of all material factors affecting future cash flows, including future interest rates, mortality and costs. Further details on valuation are included in note 31 Liabilities arising from insurance contracts and participating investment contracts. • Insurance and participating investment contracts which are unit-linked Liabilities for unit-linked insurance contracts and participating investment contracts are stated at the bid value of units plus an additional allowance where appropriate (such as for any excess of future expenses over charges). The liability is increased or reduced by the change in the unit prices and is reduced by policy administration fees, mortality and surrender charges and any withdrawals. Benefit claims in excess of the account balances incurred in the period are also charged through insurance claims and changes in insurance and investment contract liabilities. Revenue consists of fees deducted for mortality, policy administration and surrender charges. Unallocated surplus Any amounts in the with-profit funds not yet determined as being due to policyholders or shareholders are recognised as an unallocated surplus which is shown separately from liabilities arising from insurance contracts and participating investment contracts. (ii) Accounting for non-participating investment contracts The Group’s non-participating investment contracts are primarily unit-linked. These contracts are accounted for as financial liabilities whose value is contractually linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit-linked financial liabilities is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable. Investment returns (including movements in fair value and investment income) allocated to those contracts are recognised in the income statement through insurance claims and changes in insurance and investment contract liabilities. Deposits and withdrawals are not accounted for through the income statement but are accounted for directly in the balance sheet as adjustments to the non-participating investment contract liability. The Group receives investment management fees in the form of an initial adjustment or charge to the amount invested. These fees are in respect of services rendered in conjunction with the issue and management of investment contracts where the Group actively manages the consideration received from its customers to fund a return that is based on the investment profile that the customer selected on origination of the contract. These services comprise an indeterminate number of acts over the lives of the individual contracts and, therefore, the Group defers these fees and recognises them over the estimated lives of the contracts, in line with the provision of investment management services. 226 Lloyds Banking Group Annual Report and Accounts 2022 Notes to the consolidated financial statements continued for the year ended 31 December Note 2: Accounting policies continued Costs which are directly attributable and incremental to securing new non-participating investment contracts are deferred. This asset is subsequently amortised over the period of the provision of investment management services and its recoverability is reviewed in circumstances where its carrying amount may not be recoverable. If the asset is greater than its recoverable amount it is written down immediately through fee and commission expense in the income statement. All other costs are recognised as expenses when incurred. (iii) Value of in-force business The Group recognises as an asset the value of in-force business in respect of insurance contracts and participating investment contracts. The asset represents the present value of the shareholders’ interest in the profits expected to emerge from those contracts written at the balance sheet date. This is determined after making appropriate assumptions about future economic and operating conditions such as future mortality and persistency rates and includes allowances for both non-market risk and for the realistic value of financial options and guarantees. Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. The asset in the consolidated balance sheet is presented gross of attributable tax and movements in the asset are reflected within other operating income in the income statement. The Group’s contractual rights to benefits from providing investment management services in relation to non-participating investment contracts acquired in business combinations and portfolio transfers are measured at fair value at the date of acquisition. The resulting asset is amortised over the estimated lives of the contracts. At each reporting date an assessment is made to determine if there is any indication of impairment. Where impairment exists, the carrying value of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement. (2) General insurance business The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included in insurance premium income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred in the balance sheet within liabilities arising from insurance contracts and participating investment contracts on a basis that reflects the length of time for which contracts have been in-force and the projected incidence of risk over the term of the contract and only credited to the income statement when earned. Broking commission is recognised when the underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is made for the effect of future policy terminations based upon past experience. The underwriting business makes provision for the estimated cost of claims notified but not settled and claims incurred but not reported at the balance sheet date. The provision for the cost of claims notified but not settled is based upon a best estimate of the cost of settling the outstanding claims after taking into account all known facts. In those cases where there is insufficient information to determine the required provision, statistical techniques are used which take into account the cost of claims that have recently been settled and make assumptions about the future development of the outstanding cases. Similar statistical techniques are used to determine the provision for claims incurred but not reported at the balance sheet date. Claims liabilities are not discounted. (3) Liability adequacy test At each balance sheet date liability adequacy tests are performed to ensure the adequacy of insurance and participating investment contract liabilities net of related deferred cost assets and value of in-force business. In performing these tests, current best estimates of discounted future contractual cash flows and claims handling and policy administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to the income statement, initially by writing off the relevant assets and subsequently by establishing a provision for losses arising from liability adequacy tests. (4) Reinsurance The presentation of contracts entered into by the Group with reinsurers under which the Group is compensated for amounts payable on one or more other contracts issued by the Group is dependent on whether the contract with the reinsurer transfers significant insurance risk to the reinsurer. Where the reinsurance contract transfers significant insurance risk, it is classified as an insurance contract and the asset is recognised separately on the balance sheet. Where the reinsurance contract does not transfer significant insurance risk to the reinsurer, the assets arising from contracts held with reinsurers are presented within financial assets at fair value through profit or loss. (i) Contracts with reinsurers that transfer significant insurance risk Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured contracts and in accordance with the terms of each reinsurance contract and are regularly reviewed for impairment. Premiums payable for reinsurance contracts are recognised as an expense when due within insurance premium income. Changes in the reinsurance recoverable assets are recognised in the income statement through insurance claims and changes in insurance and investment contract liabilities. (ii) Contracts with reinsurers that do not transfer significant insurance risk Contracts that do not transfer significant insurance risk to the reinsurer are recognised within financial assets at fair value through profit or loss as they are within a portfolio of financial assets that is managed, and whose performance is evaluated, on a fair value basis. These contracts, while legally reinsurance contracts, do not meet the definition of a reinsurance contract under IFRS. Investment returns (including movements in fair value and investment income) allocated to these contracts are recognised in insurance claims and changes in insurance and investment contract liabilities. (N) Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow or net investment hedges. Non-monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Translation differences on equities and similar non-monetary items held at fair value through profit and loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non- monetary financial assets measured at fair value through other comprehensive income, such as equity shares, are included in the fair value reserve in equity unless the asset is a hedged item in a fair value hedge. Financial results Risk managementGovernance Financial statements Other informationStrategic report 227Lloyds Banking Group Annual Report and Accounts 2022 Note 2: Accounting policies continued The results and financial position of all Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: the assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on the acquisition of a foreign entity, are translated into sterling at foreign exchange rates ruling at the balance sheet date; and the income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions, in which case income and expenses are translated at the dates of the transactions. Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income and accumulated in a separate component of equity together with exchange differences arising from the translation of borrowings and other currency instruments designated as hedges of such investments (see (F)(3) above). On disposal or liquidation of a foreign operation, the cumulative amount of exchange differences relating to that foreign operation is reclassified from equity and included in determining the profit or loss arising on disposal or liquidation. (O) Provisions and contingent liabilities Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will be required to settle the obligations and they can be reliably estimated. Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those present obligations where the outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the financial statements but are disclosed unless they are remote. Provision is made for expected credit losses in respect of irrevocable undrawn loan commitments and financial guarantee contracts (see (H) above). (P) Share capital Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. Dividends paid on the Group’s ordinary shares are recognised as a reduction in equity in the period in which they are paid. Where the Company or any member of the Group purchases the Company’s share capital, the consideration paid is deducted from shareholders’ equity as treasury shares until they are cancelled; if these shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity. (Q) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash and non-mandatory deposits held with central banks, mandatory deposits held with central banks in demand accounts and amounts due from banks with an original maturity of less than three months that are available to finance the Group’s day-to-day operations. Note 3: Critical accounting judgements and key sources of estimation uncertainty The preparation of the Group’s financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In preparing the financial statements, the Group has considered the impact of climate-related risks on its financial position and performance. While the effects of climate change represent a source of uncertainty, the Group does not consider there to be a material impact on its judgements and estimates from the physical, transition and other climate-related risks in the short term. The significant judgements, apart from those involving estimation, made by management in applying the Group’s accounting policies in these financial statements (critical judgements) and the key sources of estimation uncertainty that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year (key sources of estimation uncertainty), which together are considered critical to the Group’s results and financial position, are as follows: Allowance for expected credit losses Critical judgements: Determining an appropriate definition of default against which a probability of default, exposure at default and loss given default parameter can be evaluated Establishing the criteria for a significant increase in credit risk (SICR) The use of management judgement alongside impairment modelling processes to adjust inputs, parameters and outputs to reflect risks not captured by models Key source of estimation uncertainty: Base case and multiple economic scenarios (MES) assumptions, including the rate of unemployment and the rate of change of house prices, required for creation of MES scenarios and forward-looking credit parameters The Group recognises an allowance for expected credit losses (ECLs) for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets (other than equity investments) measured at fair value through other comprehensive income and certain loan commitment and financial guarantee contracts. At 31 December 2022, the Group’s expected credit loss allowance was £4,903 million (2021: £4,042 million), of which £4,580 million (2021: £3,842 million) was in respect of drawn balances. The calculation of the Group’s expected credit loss allowances and provisions against loan commitments and guarantees under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. Further information on the critical accounting judgements and key sources of estimation uncertainty (see above) and other significant judgements and estimates is set out in note 19. ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 3: Critical accounting judgements and key sources of estimation uncertainty continued #### Valuation of assets and liabilities arising from insurance business | **Critical judgement:** | Future economic and operating conditions | | --- | --- | | **Key sources of estimation uncertainty:** | Future investment returns Future mortality rates Future expenses | These judgements and estimates are subject to significant uncertainty. At 31 December 2022, the Group recognised a value of in-force business asset of £5,244 million (2021: £5,317 million) and an acquired value of in-force business asset of £175 million (2021: £197 million). The value of in-force business asset represents the estimated present value of future profits expected to arise from the portfolio of in-force life insurance and participating investment contracts. The valuation of this asset requires judgements to be made about future economic and operating conditions which are inherently uncertain and changes could significantly affect the value attributed to this asset. These judgements are used to determine appropriate assumptions for the asset's valuation including the appropriate risk-free rate, retail price inflation and expense inflation. The methodology used to value this asset and the key assumptions that have been made in determining the carrying value of the value of in-force business asset at 31 December 2022 are set out in note 24. At 31 December 2022, the Group carried total liabilities arising from insurance contracts and participating investment contracts of £106,893 million (2021: £123,423 million). Elements of the valuations of liabilities arising from insurance contracts and participating investment contracts require management to estimate future investment returns, future mortality rates and future expenses. These estimates are subject to significant uncertainty. The methodology used to value these liabilities and the key assumptions that have been made in determining their carrying value are set out in note 31. The effect of changes to critical estimates used by management to determine the life insurance assets and liabilities is set out in note 32, which presents the impact of changes to the estimates made on the Group's profit before tax and shareholders' equity as management believes that this analysis best presents these sensitivities in a manner that helps the user of the financial statements to understand the judgements made by management and the level of estimation uncertainty. #### Defined benefit pension scheme obligations | **Critical judgement:** | Determination of an appropriate yield curve | | --- | --- | | **Key sources of estimation uncertainty:** | Discount rate applied to future cash flows Expected lifetime of the schemes' members Expected rate of future inflationary increases | The net asset recognised in the balance sheet at 31 December 2022 in respect of the Group's defined benefit pension scheme obligations was £3,732 million comprising an asset of £3,823 million and a liability of £91 million (2021: a net asset of £4,404 million comprising an asset of £4,531 million and a liability of £127 million). The Group's accounting policy for its defined benefit pension scheme obligations is set out in note 2(k). The accounting valuation of the Group's defined benefit pension schemes' liabilities requires management to make a number of assumptions. The key sources of estimation uncertainty are the discount rate applied to future cash flows, the expected lifetime of the schemes' members and the expected rate of future inflationary increases. Income statement and balance sheet sensitivities to changes in the critical accounting estimates and other actuarial assumptions are provided in part (v) of note 35. #### Uncertain tax positions | **Critical judgement:** | Interpreting tax rules on the Group's open tax matters | | --- | --- | The Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In 2013, HMRC informed the Group that its interpretation of the UK rules means that the group relief is not available. In 2020, HMRC concluded their enquiry into the matter and issued a closure notice. The Group's interpretation of the UK rules has not changed and hence it has appealed to the First Tier Tax Tribunal, with a hearing expected in 2023. If the final determination of the matter by the judicial process is that HMRC's position is correct, management estimate that this would result in an increase in current tax liabilities of approximately £875 million (including interest) and a reduction in the Group's deferred tax asset of approximately £295 million. The Group, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due. The Group makes other estimates in relation to tax which do not require significant judgements, see further discussion in note 36. 228 Lloyds Banking Group Annual Report and Accounts 2022 ### Note 3: Critical accounting judgements and key sources of estimation uncertainty continued Regulatory and legal provisions | **Critical judgements:** | Determining the scope of reviews required by regulators The impact of legal decisions that may be relevant to claims received Determining whether a reliable estimate is available for obligations arising from past events | | --- | --- | | **Key sources of estimation uncertainty:** | The number of future complaints The proportion of complaints that will be upheld The average cost of redress | At 31 December 2022, the Group carried provisions of £803 million (2021: £1,156 million) against the cost of making redress payments to customers and the related administration costs in connection with historical regulatory breaches. Determining the amount of the provisions, which represent management's best estimate of the cost of settling these issues, requires the exercise of significant judgement and estimation. It will often be necessary to form a view on matters which are inherently uncertain, such as the scope of reviews required by regulators, and to estimate the number of future complaints, the extent to which they will be upheld, the average cost of redress and the impact of decisions reached by legal and other review processes that may be relevant to claims received. Consequently the continued appropriateness of the underlying assumptions is reviewed on a regular basis against actual experience and other relevant evidence and adjustments made to the provisions where appropriate. Management has applied significant judgement in determining the provision required for HBOS Reading; further details are provided in note 37. #### Fair value of financial instruments | **Key source of estimation uncertainty:** | Interest rate spreads, earnings multiples and interest rate volatility | | --- | --- | At 31 December 2022, the carrying value of the Group's financial instrument assets held at fair value was £228,516 million (2021: £256,959 million), and its financial instrument liabilities held at fair value was £84,772 million (2021: £86,223 million). The Group's valuation control framework and a description of level 1, 2 and 3 financial assets and liabilities is set out in note 49(2). The valuation techniques for level 3 financial instruments involve management judgement and estimates, the extent of which depends on the complexity of the instrument and the availability of market observable information. In addition, in line with market practice, the Group applies credit, debit and funding valuation adjustments in determining the fair value of its uncollateralised derivative positions. A description of these adjustments is set out in note 49. A quantitative analysis of the sensitivities to market risk arising from the Group's trading portfolios is set out in the tables marked audited on page 188. #### Capitalised software enhancements | **Critical judgement:** | Assessing future trading conditions that could affect the Group's business operations | | --- | --- | | **Key source of estimation uncertainty:** | Estimated useful life of internally generated capitalised software | At 31 December 2022, the carrying value of the Group's capitalised software enhancements was £4,060 million (2021: £3,435 million). In determining the estimated useful life of capitalised software enhancements, management consider the product's lifecycle and the Group's technology strategy; assets are reviewed annually to assess whether there is any indication of impairment and to confirm that the remaining estimated useful life is still appropriate. For the year ended 31 December 2022, the amortisation charge was £833 million (2021: £892 million), and at 31 December 2022, the weighted-average remaining estimated useful life of the Group's capitalised software enhancements was 4.5 years (2021: 4.7 years). If the Group reduced by one year the estimated useful life of those assets with a remaining estimated useful life of more than two years at 31 December 2022, the 2023 amortisation charge would be approximately £200 million higher. #### Consideration of climate change Financial statement preparation includes the consideration of the impact of climate change on the Group's financial statements. There has been no material impact identified on the financial reporting judgement and estimates. In particular, the directors considered the impact of climate change in respect of the: - Going concern of the Group for a period of at least 12 months from the date of approval of the financial statements - Assessment of impairment of non-financial assets including goodwill - Carrying value and useful economic lives of property, plant and equipment - Fair value of financial assets and liabilities. These are generally based on market indicators which include the market's assessment of climate risk - Economic scenarios used for measurement of expected credit losses and the behavioural lifetime of assets against the expected time horizons of when climate risks may materialise - Forecasting of the Group's future UK taxable profits, which impacts deferred tax recognition Whilst there is currently no material short-term impact of climate change expected, the Group acknowledges the long-term nature of climate risk and continues to monitor and assess climate risks highlighted in the risk management section on page 156. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 229 230 Lloyds Banking Group Annual Report and Accounts 2022 Notes to the consolidated financial statements continued for the year ended 31 December Note 4: Segmental analysis Lloyds Banking Group provides a wide range of banking and financial services in the UK and in certain locations overseas. The Group Executive Committee (GEC) has been determined to be the chief operating decision-maker, as defined by IFRS 8 Operating Segments, for the Group. The Group’s operating segments reflect its organisational and management structures. The GEC reviews the Group’s internal reporting based around these segments in order to assess performance and allocate resources. They consider interest income and expense on a net basis and consequently the total interest income and expense for all reportable segments is presented net. The segments are differentiated by the type of products provided and by whether the customers are individuals or corporate entities. The segmental results and comparatives are presented on an underlying basis (pre-tax), the basis reviewed by the chief operating decision-maker. The underlying basis is derived from the recognition and measurement principles of IFRS with the effects of the following excluded in arriving at underlying profit: • Restructuring costs relating to merger, acquisition and integration activities • Volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group’s hedging arrangements and that arising in the insurance businesses, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets • Payment protection insurance remediation provisions, excluding litigation costs For the purposes of the underlying income statement, operating lease depreciation (net of gains on disposal of operating lease assets) is shown as an adjustment to total income. During the year ended 31 December 2022, there were changes as a result of the Group restructure effective from 1 July 2022 and other methodology changes (comparatives have been restated accordingly): • Business Banking and Commercial Cards moved from Retail to Commercial Banking. Wealth moved from Insurance and Wealth to Retail • Insurance and Wealth was renamed Insurance, Pensions and Investments • The Group reviewed and updated its methodology for liquidity transfer pricing between segments • The Group revised the treatment of restructuring costs and all such costs other than those relating to merger, acquisition and integration activities are now reported within operating costs in arriving at underlying profit • Non lending-related fraud costs, previously included within underlying impairment, are now reported as part of operating costs (this has not impacted the statutory impairment charge) Following the restructure, the Group completed a review and determined that it had three operating and reportable segments: Retail; Commercial Banking; and Insurance, Pensions and Investments: • Retail offers a broad range of financial services products to personal customers, including current accounts, savings, mortgages, credit cards, unsecured loans, motor finance and leasing solutions • Commercial Banking serves small and medium businesses as well as corporate and institutional clients, providing lending, transactional banking, working capital management, debt financing and risk management services • Insurance, Pensions and Investments offers insurance, investment and pension management products and services Other comprises income and expenditure not attributed to the Group’s operating segments. These amounts include those arising from the Group’s equities business, residual net interest income after transfer pricing (including the central recovery of the Group’s distributions on other equity instruments) and certain gains from gilt sales. Inter-segment services are generally recharged at cost, although some attract a margin. In particular, a profit margin is charged on the internal commission arrangements between the branch network and other distribution channels and the insurance product manufacturing businesses within the Group. Inter-segment lending and deposits are generally entered into at market rates, except that non-interest bearing balances are priced at a rate that reflects the external yield that could be earned on such funds. For the majority of those derivative contracts entered into by business units for risk management purposes, the business unit recognises the net interest income or expense on an accrual accounting basis and transfers the remainder of the movement in the fair value of the derivative to the central function where the resulting accounting volatility is managed where possible through the establishment of hedge accounting relationships. Any change in fair value of the hedged instrument attributable to the hedged risk is also recorded within the central function. This allocation of the fair value of the derivative and change in fair value of the hedged instrument attributable to the hedged risk avoids accounting asymmetry in segmental results and leads to accounting volatility, which is managed centrally and reported within Other. ## Note 4: Segmental analysis continued | | Retail £m | Commercial Banking £m | Insurance, Pensions and Investments £m | Other £m | Underlying basis total £m | | --- | --- | --- | --- | --- | --- | | **Year ended 31 December 2022** | | | | | | | Net interest income | 9,774 | 3,447 | (101) | 52 | 13,172 | | Other income, net of insurance claims and changes in insurance and investment contract liabilities | 1,731 | 1,565 | 1,576 | 377 | 5,249 | | **Total underlying income, net of insurance claims and changes in insurance and investment contract liabilities** | **11,505** | **5,012** | **1,475** | **429** | **18,421** | | Operating lease depreciation^{1} | (368) | (5) | – | – | (373) | | **Net income** | **11,137** | **5,007** | **1,475** | **429** | **18,048** | | Operating costs | (5,175) | (2,496) | (1,042) | (122) | (8,835) | | Remediation | (92) | (133) | (30) | – | (255) | | **Total costs** | **(5,267)** | **(2,629)** | **(1,072)** | **(122)** | **(9,090)** | | Underlying impairment (charge) credit | (1,373) | (517) | (12) | 392 | (1,510) | | **Underlying profit before tax** | **4,497** | **1,861** | **391** | **699** | **7,448** | | External income | 12,055 | 4,330 | 1,526 | 510 | 18,421 | | Inter-segment (expense) income | (550) | 682 | (51) | (81) | – | | **Segment underlying income, net of insurance claims and changes in insurance and investment contract liabilities** | **11,505** | **5,012** | **1,475** | **429** | **18,421** | | **Segment external assets** | **372,485** | **147,477** | **175,212** | **182,655** | **877,829** | | **Segment customer deposits** | **310,765** | **163,828** | – | **738** | **475,331** | | **Segment external liabilities** | **314,091** | **202,070** | **169,182** | **144,965** | **830,308** | 1 Net of profits on disposal of operating lease assets of £197 million. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 231 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 4: Segmental analysis** continued | | Retail £m | Commercial Banking £m | Insurance, Pensions and Investments £m | Other £m | Underlying basis total £m | | --- | --- | --- | --- | --- | --- | | **Year ended 31 December 2022** | | | | | | | **Analysis of segment underlying other income, net of insurance claims and changes in insurance and investment contract liabilities:** | | | | | | | Fee and commission income: | | | | | | | Current accounts | 421 | 225 | – | – | 646 | | Credit and debit card fees | 735 | 460 | – | – | 1,195 | | Commercial banking and treasury fees | – | 310 | – | 1 | 311 | | Unit trust and insurance broking | – | – | 85 | – | 85 | | Factoring | – | 79 | – | – | 79 | | Other fees and commissions | 64 | 169 | 271 | 15 | 519 | | Total fee and commission income | 1,220 | 1,243 | 356 | 16 | 2,835 | | Fee and commission expense | (665) | (315) | (334) | (18) | (1,332) | | Net fee and commission income | 555 | 928 | 22 | (2) | 1,503 | | Operating lease rental income | 1,065 | 12 | – | – | 1,077 | | Rental income from investment properties | – | – | 144 | 1 | 145 | | Gains less losses on disposal of financial assets at fair value through other comprehensive income | – | – | – | 92 | 92 | | Trading income | 69 | (793) | – | 1,320 | 596 | | Insurance and other, net of insurance claims and changes in insurance and investment contract liabilities | 227 | 28 | 2,771 | (1,190) | 1,836 | | Other external income, net of insurance claims and changes in insurance and investment contract liabilities | 1,361 | (753) | 2,915 | 223 | 3,746 | | Inter-segment other income | (185) | 1,390 | (1,361) | 156 | – | | **Segment other income, net of insurance claims and changes in insurance and investment contract liabilities** | **1,731** | **1,565** | **1,576** | **377** | **5,249** | | **Other segment items reflected in income statement above:** | | | | | | | Depreciation and amortisation | 1,216 | 207 | 142 | 831 | 2,396 | | Movement in value of in-force business | – | – | (80) | – | (80) | | Defined benefit scheme charges | 72 | 28 | 7 | 18 | 125 | | **Non-income statement segment items:** | | | | | | | Additions to fixed assets | 2,146 | 101 | 151 | 1,457 | 3,855 | | Investments in joint ventures and associates at end of year | 4 | – | – | 381 | 385 | 232 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 4: Segmental analysis continued | | Retail £m | Commercial Banking £m | Insurance, Pensions and Investments £m | Other £m | Underlying basis total £m | | --- | --- | --- | --- | --- | --- | | Year ended 31 December 2021^{1} | | | | | | | Net interest income | 8,577 | 2,602 | (103) | 87 | 11,163 | | Other income, net of insurance claims and changes in insurance and investment contract liabilities | 1,597 | 1,442 | 1,406 | 615 | 5,060 | | **Total underlying income, net of insurance claims and changes in insurance and investment contract liabilities** | 10,174 | 4,044 | 1,303 | 702 | 16,223 | | Operating lease depreciation^{2} | (442) | (18) | – | – | (460) | | **Net income** | 9,732 | 4,026 | 1,303 | 702 | 15,763 | | Operating costs | (4,987) | (2,288) | (899) | (138) | (8,312) | | Remediation | (360) | (830) | (123) | 13 | (1,300) | | **Total costs** | (5,347) | (3,118) | (1,022) | (125) | (9,612) | | Underlying impairment credit | 447 | 936 | – | 2 | 1,385 | | **Underlying profit before tax** | 4,832 | 1,844 | 281 | 579 | 7,536 | | External income | 11,260 | 3,883 | 1,323 | (243) | 16,223 | | Inter-segment (expense) income | (1,086) | 161 | (20) | 945 | – | | **Segment underlying income, net of insurance claims and changes in insurance and investment contract liabilities** | 10,174 | 4,044 | 1,303 | 702 | 16,223 | | **Segment external assets** | 364,179 | 144,390 | 195,039 | 182,917 | 886,525 | | **Segment customer deposits** | 308,412 | 167,530 | – | 402 | 476,344 | | **Segment external liabilities** | 312,594 | 204,641 | 188,372 | 127,766 | 833,373 | 1 Restated, see page 230. 2 Net of profits on disposal of operating lease assets of £249 million. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 233 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 4: Segmental analysis** continued | | Retail £m | Commercial Banking £m | Insurance, Pensions and Investments £m | Other £m | Underlying basis total £m | | --- | --- | --- | --- | --- | --- | | Year ended 31 December 2021 | | | | | | | **Analysis of segment underlying other income, net of insurance claims and changes in insurance and investment contract liabilities:** | | | | | | | Fee and commission income: | | | | | | | Current accounts | 425 | 213 | – | – | 638 | | Credit and debit card fees | 533 | 350 | – | – | 883 | | Commercial banking and treasury fees | – | 376 | – | 37 | 413 | | Unit trust and insurance broking | – | – | 113 | – | 113 | | Factoring | – | 76 | – | – | 76 | | Other fees and commissions | 65 | 183 | 213 | 24 | 485 | | Total fee and commission income | 1,023 | 1,198 | 326 | 61 | 2,608 | | Fee and commission expense | (571) | (271) | (313) | (30) | (1,185) | | Net fee and commission income | 452 | 927 | 13 | 31 | 1,423 | | Operating lease rental income | 1,046 | 13 | – | – | 1,059 | | Rental income from investment properties | – | – | 186 | – | 186 | | Gains less losses on disposal of financial assets at fair value through other comprehensive income | – | (5) | – | 3 | (2) | | Trading income | 52 | 926 | – | 345 | 1,323 | | Insurance and other, net of insurance claims and changes in insurance and investment contract liabilities | 136 | 119 | 1,766 | (950) | 1,071 | | Other external income, net of insurance claims and changes in insurance and investment contract liabilities | 1,234 | 1,053 | 1,952 | (602) | 3,637 | | Inter-segment other income | (89) | (538) | (559) | 1,186 | – | | **Segment other income, net of insurance claims and changes in insurance and investment contract liabilities** | **1,597** | **1,442** | **1,406** | **615** | **5,060** | | **Other segment items reflected in income statement above:** | | | | | | | Depreciation and amortisation | 1,525 | 283 | 170 | 847 | 2,825 | | Movement in value of in-force business | – | – | (70) | – | (70) | | Defined benefit scheme charges | 91 | 30 | 9 | 106 | 236 | | **Non-income statement segment items:** | | | | | | | Additions to fixed assets | 1,921 | 179 | 117 | 1,011 | 3,228 | | Investments in joint ventures and associates at end of year | 6 | – | – | 346 | 352 | 1 Restated, see page 230. 234 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 4: Segmental analysis continued | | Retail £m | Commercial Banking £m | Insurance, Pensions and Investments £m | Other £m | Underlying basis total £m | | --- | --- | --- | --- | --- | --- | | Year ended 31 December 2020^{1} | | | | | | | Net interest income | 8,380 | 2,528 | (118) | (17) | 10,773 | | Other income, net of insurance claims and changes in insurance and investment contract liabilities | 1,606 | 1,428 | 1,241 | 240 | 4,515 | | **Total underlying income, net of insurance claims and changes in insurance and investment contract liabilities** | 9,986 | 3,956 | 1,123 | 223 | 15,288 | | Operating lease depreciation^{2} | (856) | (28) | – | – | (884) | | **Net income** | 9,130 | 3,928 | 1,123 | 223 | 14,404 | | Operating costs | (4,967) | (2,281) | (832) | (122) | (8,202) | | Remediation | (125) | (210) | (50) | 6 | (379) | | **Total costs** | (5,092) | (2,491) | (882) | (116) | (8,581) | | Underlying impairment charge | (2,128) | (1,561) | (2) | (390) | (4,081) | | **Underlying profit (loss) before tax** | 1,910 | (124) | 239 | (283) | 1,742 | | External income | 11,499 | 3,600 | 1,238 | (1,049) | 15,288 | | Inter-segment (expense) income | (1,513) | 356 | (115) | 1,272 | – | | **Segment underlying income, net of insurance claims and changes in insurance and investment contract liabilities** | 9,986 | 3,956 | 1,123 | 223 | 15,288 | | **Segment external assets** | 350,779 | 151,093 | 182,284 | 187,113 | 871,269 | | **Segment customer deposits** | 279,610 | 170,262 | – | 779 | 450,651 | | **Segment external liabilities** | 284,634 | 214,022 | 176,646 | 146,554 | 821,856 | 1 Restated, see page 230. 2 Net of profits on disposal of operating lease assets of £127 million. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 235 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 4: Segmental analysis** continued | | Retail £m | Commercial Banking £m | Insurance, Pensions and Investments £m | Other £m | Underlying basis total £m | | --- | --- | --- | --- | --- | --- | | Year ended 31 December 2020^{1} | | | | | | | **Analysis of segment underlying other income, net of insurance claims and changes in insurance and investment contract liabilities:** | | | | | | | Fee and commission income: | | | | | | | Current accounts | 429 | 186 | – | – | 615 | | Credit and debit card fees | 447 | 301 | – | – | 748 | | Commercial banking and treasury fees | – | 274 | – | – | 274 | | Unit trust and insurance broking | – | – | 146 | – | 146 | | Factoring | – | 76 | – | – | 76 | | Other fees and commissions | 71 | 183 | 194 | 1 | 449 | | Total fee and commission income | 947 | 1,020 | 340 | 1 | 2,308 | | Fee and commission expense | (585) | (234) | (303) | (26) | (1,148) | | Net fee and commission income | 362 | 786 | 37 | (25) | 1,160 | | Operating lease rental income | 1,103 | 17 | – | – | 1,120 | | Rental income from investment properties | – | – | 191 | – | 191 | | Gains less losses on disposal of financial assets at fair value through other comprehensive income | – | – | – | 149 | 149 | | Lease termination income | – | 5 | – | – | 5 | | Trading income | 64 | 792 | – | 204 | 1,060 | | Insurance and other, net of insurance claims and changes in insurance and investment contract liabilities | 198 | 349 | 1,338 | (1,055) | 830 | | Other external income, net of insurance claims and changes in insurance and investment contract liabilities | 1,365 | 1,163 | 1,529 | (702) | 3,355 | | Inter-segment other income | (121) | (521) | (325) | 967 | – | | **Segment other income, net of insurance claims and changes in insurance and investment contract liabilities** | **1,606** | **1,428** | **1,241** | **240** | **4,515** | | **Other segment items reflected in income statement above:** | | | | | | | Depreciation and amortisation | 1,760 | 263 | 159 | 550 | 2,732 | | Movement in value of in-force business | – | – | 76 | – | 76 | | Defined benefit scheme charges | 100 | 32 | 9 | 106 | 247 | | **Non-income statement segment items:** | | | | | | | Additions to fixed assets | 1,684 | 112 | 125 | 980 | 2,901 | | Investments in joint ventures and associates at end of year | 4 | – | – | 292 | 296 | $^{1}$ Restated, see page 230. # **Geographical areas** The Group's operations are predominantly UK-based and as a result an analysis between UK and non-UK activities is not provided. 236 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 4: Segmental analysis continued ### Reconciliation of underlying basis to statutory results The underlying basis is the basis on which financial information is presented to the chief operating decision-maker which excludes certain items included in the statutory results. The table below reconciles the statutory results to the underlying basis. | | Removal of: | | | | Underlying basis £m | | --- | --- | --- | --- | --- | --- | | | Lloyds Banking Group statutory £m | Volatility, restructuring and other items^{1} £m | Insurance gross up^{2} £m | PPI remediation £m | | | **Year ended 31 December 2022** | | | | | | | Net interest income | 13,957 | 226 | (1,011) | – | 13,172 | | Other income, net of insurance claims and changes in insurance and investment contract liabilities | 4,252 | 120 | 877 | – | 5,249 | | Operating lease depreciation^{3} | | (373) | – | – | (373) | | **Total income, net of insurance claims and changes in insurance and investment contract liabilities / Net income** | **18,209** | **(27)** | **(134)** | **–** | **18,048** | | Operating expenses | (9,759) | 535 | 134 | – | (9,090) | | Impairment charge | (1,522) | 12 | – | – | (1,510) | | **Profit before tax** | **6,928** | **520** | **–** | **–** | **7,448** | | | Removal of: | | | | Underlying basis £m | | --- | --- | --- | --- | --- | --- | | | Lloyds Banking Group statutory £m | Volatility, restructuring and other items^{4} £m | Insurance gross up^{2} £m | PPI remediation £m | | | **Year ended 31 December 2021** | | | | | | | Net interest income | 9,366 | 255 | 1,542 | – | 11,163 | | Other income, net of insurance claims and changes in insurance and investment contract liabilities | 6,958 | (139) | (1,759) | – | 5,060 | | Operating lease depreciation^{5} | | (460) | – | – | (460) | | **Total income, net of insurance claims and changes in insurance and investment contract liabilities / Net income** | **16,324** | **(344)** | **(217)** | **–** | **15,763** | | Operating expenses | (10,800) | 971 | 217 | – | (9,612) | | Impairment credit | 1,378 | 7 | – | – | 1,385 | | **Profit before tax** | **6,902** | **634** | **–** | **–** | **7,536** | | | Removal of: | | | | Underlying basis £m | | --- | --- | --- | --- | --- | --- | | | Lloyds Banking Group statutory £m | Volatility, restructuring and other items^{6} £m | Insurance gross up^{2} £m | PPI remediation £m | | | **Year ended 31 December 2020** | | | | | | | Net interest income | 10,749 | 174 | (150) | – | 10,773 | | Other income, net of insurance claims and changes in insurance and investment contract liabilities | 4,377 | 165 | (27) | – | 4,515 | | Operating lease depreciation^{7} | | (884) | – | – | (884) | | **Total income, net of insurance claims and changes in insurance and investment contract liabilities / Net income** | **15,126** | **(545)** | **(177)** | **–** | **14,404** | | Operating expenses | (9,745) | 905 | 174 | 85 | (8,581) | | Impairment (charge) credit | (4,155) | 71 | 3 | – | (4,081) | | **Profit before tax** | **1,226** | **431** | **–** | **85** | **1,742** | 1 In the year ended 31 December 2022 this comprises the effects of market volatility and asset sales (losses of £252 million); the amortisation of purchased intangibles (£70 million); restructuring (£88 million of merger, acquisition and integration costs); and the fair value unwind (losses of £18 million). 2 The Group's insurance businesses' income statements include income and expenditure which are attributable to the policyholders of the Group's long-term assurance funds. These items have no impact in total upon the profit attributable to equity shareholders and, in order to provide a clearer representation of the underlying trends within the business, these items are shown net within the underlying results. 3 Net of profits on disposal of operating lease assets of £197 million (2021: £249 million; 2020: £127 million). 4 Comprises the effects of market volatility and asset sales (gain of £87 million); the amortisation of purchased intangibles (£70 million); restructuring (£452 million, including a software write-off as a result of investment in new technology and systems infrastructure together with merger, acquisition and integration costs); and the fair value unwind (losses of £199 million). 5 Comprises the effects of market volatility and asset sales (losses of £59 million); the amortisation of purchased intangibles (£69 million); restructuring (£70 million of merger, acquisition and integration costs); and the fair value unwind (losses of £233 million). Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 237 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 5: Net interest income** | | Weighted average effective interest rate | | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | --- | --- | --- | | | 2022 % | 2021 % | 2020 % | | | | | Interest income: | | | | | | | | Loans and advances to banks and reverse repurchase agreements | **1.29** | 0.12 | 0.24 | **1,313** | 104 | 203 | | Loans and advances to customers and reverse repurchase agreements | **3.00** | 2.51 | 2.72 | **15,217** | 12,633 | 13,704 | | Debt securities | **1.85** | 1.46 | 1.81 | **168** | 80 | 97 | | Financial assets held at amortised cost | **2.70** | 2.15 | 2.35 | **16,698** | 12,817 | 14,004 | | Financial assets at fair value through other comprehensive income | **3.97** | 1.67 | 1.10 | **947** | 441 | 302 | | **Total interest income^{1}** | **2.75** | 2.13 | 2.30 | **17,645** | 13,258 | 14,306 | | Interest expense: | | | | | | | | Deposits from banks | **1.87** | 0.75 | 0.84 | **(148)** | (74) | (113) | | Customer deposits | **0.40** | 0.12 | 0.32 | **(1,387)** | (426) | (1,091) | | Repurchase agreements at amortised cost | **1.82** | 0.10 | 0.36 | **(842)** | (22) | (117) | | Debt securities in issue^{2} | **2.21** | 1.13 | 1.37 | **(1,636)** | (900) | (1,313) | | Lease liabilities | **2.19** | 2.12 | 2.39 | **(29)** | (32) | (41) | | Subordinated liabilities | **6.39** | 6.92 | 6.29 | **(681)** | (932) | (1,057) | | Liabilities held at amortised cost | **0.97** | 0.50 | 0.74 | **(4,723)** | (2,386) | (3,732) | | Amounts payable to unitholders in consolidated open-ended investment vehicles^{3} | **(9.47)** | 12.53 | (1.58) | **1,035** | (1,506) | 175 | | **Total interest expense^{4}** | **0.74** | 0.80 | 0.69 | **(3,688)** | (3,892) | (3,557) | | **Net interest income** | | | | **13,957** | 9,366 | 10,749 | 1 Includes £21 million (2021: £10 million; 2020: £10 million) of interest income on liabilities with negative interest rates, £37 million (2021: £47 million; 2020: £47 million) in respect of interest income on finance leases and £687 million (2021: £701 million) in respect of hire purchase receivables. 2 The impact of the Group's hedging arrangements is included on this line; excluding this impact the weighted average effective interest rate in respect of debt securities in issue would be 3.67 per cent (2021: 1.77 per cent; 2020: 2.28 per cent). 3 Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported in other liabilities and the movement in these interests in interest expense. 4 Includes £23 million (2021: £2 million; 2020: £24 million) of interest expense on assets with negative interest rates. Included within interest income is £272 million (2021: £174 million; 2020: £171 million) in respect of credit-impaired financial assets. Net interest income also includes a debit of £43 million (2021: credit of £621 million; 2020: credit of £496 million) transferred from the cash flow hedging reserve (see note 41). # **Note 6: Net fee and commission income** | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Fee and commission income: | | | | | Current accounts | **646** | 638 | 615 | | Credit and debit card fees | **1,195** | 883 | 748 | | Commercial banking and treasury fees | **311** | 413 | 274 | | Unit trust and insurance broking | **85** | 113 | 146 | | Factoring | **79** | 76 | 76 | | Other fees and commissions | **519** | 485 | 449 | | Total fee and commission income | **2,835** | 2,608 | 2,308 | | Fee and commission expense | **(1,332)** | (1,185) | (1,148) | | **Net fee and commission income** | **1,503** | 1,423 | 1,160 | Fees and commissions which are an integral part of the effective interest rate form part of net interest income shown in note 5. Fees and commissions relating to instruments that are held at fair value through profit or loss are included within net trading income shown in note 7. In determining the disaggregation of fees and commissions the Group has considered how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors, including those that are impacted by climate-related factors. It has determined that the above disaggregation by product type provides useful information that does not aggregate items that have substantially different characteristics and is not too detailed. 238 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 6: Net fee and commission income continued At 31 December 2022, the Group held on its balance sheet £173 million (31 December 2021: £201 million) in respect of services provided to customers and £74 million (31 December 2021: £84 million) in respect of amounts received from customers for services to be provided after the balance sheet date. Current unsatisfied performance obligations amount to £149 million (31 December 2021: £157 million); the Group expects to receive substantially all of this revenue by 2024. Income recognised during the year included £8 million (2021: £16 million) in respect of amounts included in the contract liability balance at the start of the year and £1 million (2021: £2 million) in respect of amounts from performance obligations satisfied in previous years. The most significant performance obligations undertaken by the Group are in respect of current accounts, the provision of other banking services for commercial customers and credit and debit card services. In respect of current accounts, the Group receives fees for the provision of bank account and transaction services such as ATM services, fund transfers, overdraft facilities and other value-added offerings. For commercial customers, alongside its provision of current accounts, the Group provides other corporate banking services including factoring and commitments to provide loan financing. Loan commitment fees are included in fees and commissions where the loan is not expected to be drawn down by the customer. The Group receives interchange and merchant fees, together with fees for overseas use and cash advances, for provision of card services to cardholders and merchants. ## Note 7: Net trading income | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Foreign exchange translation (losses) gains | (1,318) | 212 | 12 | | Gains on foreign exchange trading transactions | 255 | 394 | 527 | | Total foreign exchange | (1,063) | 606 | 539 | | Investment property (losses) gains (note 26) | (511) | 575 | (209) | | Securities and other (losses) gains (see below) | (18,413) | 16,019 | 6,890 | | **Net trading income** | **(19,987)** | **17,200** | **7,220** | Securities and other gains comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss as follows: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Net income arising on assets and liabilities mandatorily held at fair value through profit or loss: | | | | | Financial instruments held for trading^{1} | (1,049) | 141 | 724 | | Other financial instruments mandatorily held at fair value through profit or loss: | | | | | Debt securities, loans and advances | (7,677) | (1,153) | 3,554 | | Equity shares | (9,533) | 17,096 | 2,729 | | | **(18,259)** | **16,084** | **7,007** | | Net expense arising on assets and liabilities designated at fair value through profit or loss | (154) | (65) | (117) | | **Securities and other (losses) gains** | **(18,413)** | **16,019** | **6,890** | $^{1}$ Includes hedge ineffectiveness in respect of fair value hedges (2022: loss of £41 million, 2021: gain of £177 million; 2020: gain of £547 million) and cash flow hedges (2022: loss of £10 million, 2021: loss of £89 million; 2020: loss of £2 million). ## Note 8: Insurance premium income | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | **Life insurance** | | | | | Gross premiums: | | | | | Life and pensions, excluding annuities | 7,711 | 7,515 | 6,941 | | Annuities | 1,190 | 531 | 1,378 | | | **8,901** | **8,046** | **8,319** | | Ceded reinsurance premiums | (369) | (376) | (333) | | Net earned premiums | **8,532** | **7,670** | **7,986** | | **Non-life insurance** | | | | | Net earned premiums | 527 | 613 | 629 | | **Total insurance premium income** | **9,059** | **8,283** | **8,615** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 239 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 9: Other operating income** | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Operating lease rental income | **1,077** | 1,059 | 1,120 | | Rental income from investment properties (note 26) | **145** | 186 | 191 | | Gains less losses on disposal of financial assets at fair value through other comprehensive income (note 41) | **92** | (2) | 149 | | Movement in value of in-force business (note 24) | **(80)** | (70) | 76 | | Liability management | **(31)** | (22) | (145) | | Share of results of joint ventures and associates (note 22) | **10** | 2 | (13) | | Other | **63** | 19 | 45 | | **Total other operating income** | **1,276** | 1,172 | 1,423 | # **Note 10: Insurance claims and changes in insurance and investment contract liabilities** | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | **Life insurance and participating investment contracts** | | | | | Claims and surrenders | **(8,270)** | (9,063) | (7,670) | | Change in insurance and participating investment contracts (note 31) | **16,624** | (7,474) | (4,590) | | | **8,354** | (16,537) | (12,260) | | **Non-participating investment contracts** | | | | | Change in non-participating investment contracts | **4,166** | (4,581) | (1,938) | | | **12,520** | (21,118) | (14,198) | | Reinsurers' share^{1} | **234** | 285 | 418 | | | **12,754** | (20,833) | (13,780) | | Change in unallocated surplus | **60** | 35 | 57 | | **Total life insurance and investment contracts** | **12,814** | (20,798) | (13,723) | | **Non-life insurance** | | | | | Total non-life insurance claims, net of reinsurance | **(413)** | (322) | (318) | | **Total insurance claims and changes in insurance and investment contract liabilities** | **12,401** | (21,120) | (14,041) | $^{1}$ Reinsurers' share compromises a credit of £nil (2021: charge of £5 million) in respect of contracts classified as financial assets at fair value through profit or loss and a credit of £234 million (2021: credit of £290 million) in respect of contracts classified as reinsurance contracts. Total non-life insurance claims, net of reinsurance, in 2022 included weather-related claims of £116 million (2021: £30 million). Of this, £108 million (2021: £11 million) was related to severe weather events. Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Deaths | **(731)** | (790) | (694) | | Maturities including surrenders | **(6,161)** | (6,915) | (5,514) | | Annuities | **(1,213)** | (1,194) | (1,171) | | Other | **(165)** | (164) | (291) | | **Total life insurance gross claims and surrenders** | **(8,270)** | (9,063) | (7,670) | 240 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 11: Operating expenses | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Staff costs: | | | | | Salaries | **2,511** | 2,405 | 2,568 | | Performance-based compensation (see below) | **458** | 335 | 117 | | Social security costs | **341** | 308 | 287 | | Pensions and other post-retirement benefit schemes (note 35) | **455** | 538 | 566 | | Restructuring costs | **50** | 92 | 166 | | Other staff costs | **257** | 207 | 131 | | | **4,072** | 3,885 | 3,835 | | Premises and equipment costs: | | | | | Rent and rates | **100** | 118 | 117 | | Repairs and maintenance | **137** | 169 | 174 | | Other^{1} | **95** | (26) | 176 | | | **332** | 261 | 467 | | Other expenses: | | | | | Communications and data processing | **1,438** | 1,181 | 1,013 | | Advertising and promotion | **170** | 161 | 187 | | Professional fees | **265** | 210 | 189 | | UK bank levy | **148** | 132 | 211 | | Regulatory and legal provisions (note 37) | **255** | 1,300 | 464 | | Other | **683** | 845 | 643 | | | **2,959** | 3,829 | 2,707 | | Depreciation and amortisation: | | | | | Depreciation of property, plant and equipment^{2} | **1,471** | 1,839 | 2,046 | | Amortisation of acquired value of in-force non-participating investment contracts (note 24) | **22** | 24 | 26 | | Amortisation of other intangible assets (note 25) | **903** | 962 | 660 | | | **2,396** | 2,825 | 2,732 | | Goodwill impairment (note 23) | **–** | – | 4 | | **Total operating expenses** | **9,759** | 10,800 | 9,745 | 1 Net of profits on disposal of operating lease assets of £197 million (2021: £249 million; 2020: £127 million). 2 Comprising depreciation in respect of premises £114 million (2021: £123 million; 2020: £127 million), equipment £561 million (2021: £779 million; 2020: £680 million), operating lease assets £570 million (2021: £709 million; 2020: £1,011 million) and right-of-use assets £226 million (2021: £228 million; 2020: £238 million). ### Performance-based compensation The tables below analyse the Group's performance-based compensation costs between those relating to the current performance year and those relating to earlier years. | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Performance-based compensation expense comprises: | | | | | Awards made in respect of the year ended 31 December | **349** | 313 | 22 | | Awards made in respect of earlier years | **109** | 22 | 95 | | | **458** | 335 | 117 | | | **2022 £m** | 2021 £m | 2020 £m | | Performance-based compensation expense deferred until later years comprises: | | | | | Awards made in respect of the year ended 31 December | **128** | 110 | 30 | | Awards made in respect of earlier years | **20** | 22 | 31 | | | **148** | 132 | 61 | Performance-based awards expensed in 2022 include cash awards amounting to £144 million (2021: £134 million; 2020: £12 million). ### Average headcount The average number of persons on a headcount basis employed by the Group during the year was as follows: | | 2022 | 2021 | 2020 | | --- | --- | --- | --- | | UK | **62,587** | 64,250 | 67,881 | | Overseas | **785** | 826 | 784 | | **Total** | **63,372** | 65,076 | 68,665 | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 241 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 12: Auditors' remuneration** Fees payable to the Company's auditors by the Group are as follows: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Fees payable for the: | | | | | – audit of the Company's current year annual report | 1.9 | 1.8 | 1.7 | | – audits of the Company's subsidiaries | 29.5 | 23.7 | 22.4 | | – total audit fees in respect of the statutory audit of Group entities^{2} | 31.4 | 25.5 | 24.1 | | – services normally provided in connection with statutory and regulatory filings or engagements | 6.3 | 4.8 | 3.7 | | Total audit fees^{3} | 37.7 | 30.3 | 27.8 | | Other audit-related fees^{4} | 1.5 | 0.5 | 0.5 | | All other fees^{5} | 5.0 | 1.2 | 0.9 | | Total non-audit services^{6} | 6.5 | 1.7 | 1.4 | | **Total fees payable to the Company's auditors by the Group** | **44.2** | **32.0** | **29.2** | 1. Deloitte LLP became the Group's statutory auditor in 2021. PricewaterhouseCoopers LLP was the statutory auditor during 2020. 2. As defined by the Financial Reporting Council (FRC). 3. As defined by the Securities and Exchange Commission (SEC). 4. As defined by the SEC. Total non-audit services as defined by the FRC include all fees other than audit fees in respect of the statutory audit of Group entities. These fees totalled £12.8 million in 2022 (2021: £9.5 million; 2020: £5.1 million). The following types of services are included in the categories listed above: **Audit fees:** This category includes fees in respect of the audit of the Group's annual financial statements (including work related to the adoption of new accounting standards) and other services in connection with regulatory filings. Other services supplied pursuant to legislation relate primarily to costs incurred in connection with client asset assurance and with the Sarbanes-Oxley Act requirements associated with the audit of the Group's financial statements filed on its Form 20-F. **Other audit-related fees:** This category includes fees in respect of services for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements, for example acting as reporting accountants in respect of debt prospectuses required by the Listing Rules. **All other fees:** This category includes other assurance services not related to the performance of the audit or review of the financial statements, for example, the review of controls operated by the Group on behalf of a third party. The auditors are not engaged to provide tax services. It is the Group's policy to use the auditors only on assignments in cases where their knowledge of the Group means that it is neither efficient nor cost effective to employ another firm of accountants. The Group has procedures that are designed to ensure auditor independence, including prohibiting certain non-audit services. All audit and non-audit assignments must be pre-approved by the Audit Committee on an individual engagement basis; for certain types of non-audit engagements where the fee is 'de minimis' the Audit Committee has pre-approved all assignments subject to confirmation by management. On a quarterly basis, the Audit Committee receives and reviews a report detailing all pre-approved services and amounts paid to the auditors for such pre-approved services. During the year, the auditors also earned fees payable by entities outside the consolidated Lloyds Banking Group in respect of the following: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Audits of Group pension schemes | 0.4 | 0.4 | 0.1 | | Audits of the unconsolidated Open-Ended Investment Companies managed by the Group | 0.2 | 0.3 | 0.4 | | Reviews of the financial position of corporate and other borrowers | – | 0.3 | 1.4 | 1. Deloitte LLP became the Group's statutory auditor in 2021. PricewaterhouseCoopers LLP was the statutory auditor during 2020. 242 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 13: Impairment | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | --- | --- | --- | --- | --- | --- | | **Year ended 31 December 2022** | | | | | | | Impact of transfers between stages | (24) | 581 | 357 | – | 914 | | Other changes in credit quality | (278) | 90 | 663 | 78 | 553 | | Additions and repayments | 132 | 113 | (69) | (58) | 118 | | Methodology and model changes | 2 | 11 | (47) | (29) | (63) | | Other items | – | – | – | – | – | | | (144) | 214 | 547 | (9) | 608 | | **Total impairment (credit) charge** | **(168)** | **795** | **904** | **(9)** | **1,522** | In respect of: | Loans and advances to banks | 12 | 2 | – | – | 14 | | --- | --- | --- | --- | --- | --- | | Loans and advances to customers | (217) | 694 | 883 | (9) | 1,351 | | Debt securities | 7 | – | – | – | 7 | | Financial assets at amortised cost | (198) | 696 | 883 | (9) | 1,372 | | Other assets | – | – | 22 | – | 22 | | Impairment charge on drawn balances | (198) | 696 | 905 | (9) | 1,394 | | Loan commitments and financial guarantees | 24 | 99 | (1) | – | 122 | | Financial assets at fair value through other comprehensive income | 6 | – | – | – | 6 | | **Total impairment (credit) charge** | **(168)** | **795** | **904** | **(9)** | **1,522** | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | --- | --- | --- | --- | --- | --- | | **Year ended 31 December 2021** | | | | | | | Impact of transfers between stages | 75 | (481) | 339 | – | (67) | | Other changes in credit quality | (331) | (320) | 252 | (48) | (447) | | Additions and repayments | (246) | (389) | (96) | (87) | (818) | | Methodology and model changes | (63) | 15 | 6 | – | (42) | | Other items | 2 | 4 | (10) | – | (4) | | | (638) | (690) | 152 | (135) | (1,311) | | **Total impairment (credit) charge** | **(563)** | **(1,171)** | **491** | **(135)** | **(1,378)** | In respect of: | Loans and advances to banks | (5) | – | – | – | (5) | | --- | --- | --- | --- | --- | --- | | Loans and advances to customers | (454) | (1,025) | 498 | (135) | (1,116) | | Debt securities | – | – | – | – | – | | Financial assets at amortised cost | (459) | (1,025) | 498 | (135) | (1,121) | | Other assets | – | – | 2 | – | 2 | | Impairment (credit) charge on drawn balances | (459) | (1,025) | 500 | (135) | (1,119) | | Loan commitments and financial guarantees | (102) | (146) | (9) | – | (257) | | Financial assets at fair value through other comprehensive income | (2) | – | – | – | (2) | | **Total impairment (credit) charge** | **(563)** | **(1,171)** | **491** | **(135)** | **(1,378)** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 243 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 13: Impairment** continued | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | --- | --- | --- | --- | --- | --- | | Year ended 31 December 2020 | | | | | | | Impact of transfers between stages | (169) | 940 | 698 | – | 1,469 | | Other changes in credit quality | 946 | 22 | 1,192 | 167 | 2,327 | | Additions and repayments | 98 | 177 | (48) | (30) | 197 | | Methodology and model changes | (44) | 170 | 26 | – | 152 | | Other items | – | – | 10 | – | 10 | | | 1,000 | 369 | 1,180 | 137 | 2,686 | | **Total impairment charge** | **831** | **1,309** | **1,878** | **137** | **4,155** | # *In respect of:* | Loans and advances to banks | 5 | – | – | – | 5 | | --- | --- | --- | --- | --- | --- | | Loans and advances to customers | 697 | 1,151 | 1,865 | 137 | 3,850 | | Debt securities | 1 | – | – | – | 1 | | Financial assets at amortised cost | 703 | 1,151 | 1,865 | 137 | 3,856 | | Other assets | – | – | 5 | – | 5 | | Impairment charge on drawn balances | 703 | 1,151 | 1,870 | 137 | 3,861 | | Loan commitments and financial guarantees | 123 | 158 | 8 | – | 289 | | Financial assets at fair value through other comprehensive income | 5 | – | – | – | 5 | | **Total impairment charge** | **831** | **1,309** | **1,878** | **137** | **4,155** | The impairment charge contained no release (2021: release of £77 million; 2020: charge of £41 million) in respect of residual value impairment and voluntary terminations within the Group's UK motor finance business. The Group's impairment charge comprises the following items: # **Impact of transfers between stages** The net impact on the impairment charge of transfers between stages. # **Other changes in credit quality** Changes in loss allowance as a result of movements in risk parameters that reflect changes in customer quality, but which have not resulted in a transfer to a different stage. This also contains the impact on the impairment charge as a result of write-offs and recoveries, where the related loss allowances are reassessed to reflect ultimate realisable or recoverable value. # **Additions and repayments** Expected loss allowances are recognised on origination of new loans or further drawdowns of existing facilities. Repayments relate to the reduction of loss allowances resulting from the repayments of outstanding balances that have been provided against. # **Methodology and model changes** Increase or decrease in impairment charge as a result of adjustments to the models used for expected credit loss calculations; as changes to either the model inputs or the underlying assumptions, as well as the impact of changing the models used. Movements in the Group's impairment allowances are shown in note 18. 244 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 14: Tax expense ### (A) Analysis of tax (expense) credit for the year | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | UK corporation tax: | | | | | Current tax on profit for the year | (1,152) | (1,472) | (480) | | Adjustments in respect of prior years | 31 | 94 | 355 | | | (1,121) | (1,378) | (125) | | Foreign tax: | | | | | Current tax on profit for the year | (74) | (51) | (27) | | Adjustments in respect of prior years | (9) | 21 | 25 | | | (83) | (30) | (2) | | Current tax expense | (1,204) | (1,408) | (127) | | Deferred tax: | | | | | Current year | (390) | 546 | 611 | | Adjustments in respect of prior years | 221 | (155) | (323) | | Deferred tax (expense) credit | (169) | 391 | 288 | | **Tax (expense) credit** | **(1,373)** | **(1,017)** | **161** | The tax (expense) credit is made up as follows: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Tax (expense) credit attributable to policyholders | (40) | (163) | 4 | | Shareholder tax (expense) credit | (1,333) | (854) | 157 | | **Tax (expense) credit** | **(1,373)** | **(1,017)** | **161** | ### (B) Factors affecting the tax (expense) credit for the year The UK corporation tax rate for the year was 19.0 per cent (2021: 19.0 per cent; 2020: 19.0 per cent). An explanation of the relationship between tax (expense) credit and accounting profit is set out below. | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Profit before tax | 6,928 | 6,902 | 1,226 | | UK corporation tax thereon | (1,316) | (1,311) | (233) | | Impact of surcharge on banking profits | (339) | (439) | (107) | | Non-deductible costs: conduct charges | (5) | (185) | (24) | | Non-deductible costs: bank levy | (28) | (22) | (38) | | Other non-deductible costs | (72) | (83) | (74) | | Non-taxable income | 134 | 40 | 59 | | Tax relief on coupons on other equity instruments | 83 | 81 | 86 | | Tax-exempt gains on disposals | 67 | 140 | 81 | | Tax losses where no deferred tax recognised | 11 | (1) | (58) | | Remeasurement of deferred tax due to rate changes | (53) | 954 | 350 | | Differences in overseas tax rates | (63) | (19) | 15 | | Policyholder tax | (65) | (63) | (46) | | Policyholder deferred tax asset in respect of life assurance expenses | 33 | (69) | 49 | | Adjustments in respect of prior years | 243 | (40) | 104 | | Tax effect of share of results of joint ventures | (3) | – | (3) | | **Tax (expense) credit** | **(1,373)** | **(1,017)** | **161** | On 17 November 2022 the UK Government confirmed its intention to implement the G20-OECD Inclusive Framework Pillar 2 rules in the UK, including a Qualified Domestic Minimum Top-Up Tax rule. This legislation, which is expected to be enacted in 2023, will seek to ensure that UK-headquartered multinational enterprises pay a minimum tax rate of 15 per cent on UK and overseas profits arising after 31 December 2023. As the UK rate of corporation tax in 2024 will be 25 per cent, and the Group's business is primarily in the UK, the impact of these rules on the Group is not expected to be material. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 245 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 15: Earnings per share** | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Profit attributable to ordinary shareholders – basic and diluted | **5,021** | 5,355 | 865 | | | **2022 million** | **2021 million** | **2020 million** | | Weighted-average number of ordinary shares in issue – basic | **68,847** | 70,937 | 70,606 | | Adjustment for share options and awards | **835** | 848 | 650 | | Weighted-average number of ordinary shares in issue – diluted | **69,682** | 71,785 | 71,256 | | Basic earnings per share | **7.3p** | 7.5p | 1.2p | | Diluted earnings per share | **7.2p** | 7.5p | 1.2p | Basic earnings per share are calculated by dividing the net profit attributable to equity shareholders by the weighted-average number of ordinary shares in issue during the year, which has been calculated after deducting 198 million (2021: 19 million; 2020: 28 million) ordinary shares representing the Group's holdings of own shares in respect of employee share schemes. For the calculation of diluted earnings per share the weighted-average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares that arise in respect of share options and awards granted to employees. The number of shares that could have been acquired at the annual average price of the Company's shares based on the monetary value of the subscription rights attached to outstanding share options and awards is determined. This is deducted from the number of shares issuable under such options and awards to leave a residual bonus amount of shares which are added to the weighted-average number of ordinary shares in issue, but no adjustment is made to the profit attributable to equity shareholders. There were 63 million anti-dilutive share options and awards excluded from the calculation of diluted earnings per share (2021: 143 million; 2020: 647 million). # **Note 16: Financial assets at fair value through profit or loss** These assets are comprised as follows: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Trading assets £m | Other financial assets mandatorily at fair value through profit or loss £m | Total £m | Trading assets £m | Other financial assets mandatorily at fair value through profit or loss £m | Total £m | | Loans and advances to banks | 16 | 3,329 | 3,345 | 486 | 3,684 | 4,170 | | Loans and advances to customers | 11,766 | 9,761 | 21,527 | 14,435 | 10,933 | 25,368 | | Debt securities: | | | | | | | | Government securities | 2,185 | 7,872 | 10,057 | 6,579 | 11,101 | 17,680 | | Other public sector securities | – | 2,516 | 2,516 | – | 2,731 | 2,731 | | Bank and building society certificates of deposit | – | 7,133 | 7,133 | – | 6,297 | 6,297 | | Asset-backed securities: | | | | | | | | Mortgage-backed securities | 7 | 228 | 235 | 12 | 421 | 433 | | Other asset-backed securities | 14 | 171 | 185 | 3 | 272 | 275 | | Corporate and other debt securities | 228 | 17,693 | 17,921 | 245 | 19,557 | 19,802 | | | **2,434** | **35,613** | **38,047** | **6,839** | **40,379** | **47,218** | | Treasury and other bills | – | 62 | 62 | – | 19 | 19 | | Contracts held with reinsurers | – | 10,906 | 10,906 | – | 12,371 | 12,371 | | Equity shares | – | 106,722 | 106,722 | – | 117,625 | 117,625 | | **Total** | **14,216** | **166,393** | **180,609** | **21,760** | **185,011** | **206,771** | Other financial assets mandatorily at fair value through profit or loss include assets backing insurance contracts and investment contracts of £161,618 million (31 December 2021: £179,988 million). Included within these assets are investments in unconsolidated structured entities of £68,913 million (31 December 2021: £74,916 million), see note 48. For amounts included above which are subject to repurchase and reverse repurchase agreements see note 52. 246 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 17: Derivative financial instruments The fair values and notional amounts of derivative instruments are set out in the following table: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Contract/ notional amount £m | Fair value assets £m | Fair value liabilities £m | Contract/ notional amount £m | Fair value assets £m | Fair value liabilities £m | | **Trading and other** | | | | | | | | Exchange rate contracts: | | | | | | | | Spot, forwards and futures | 75,619 | 1,135 | 1,266 | 60,638 | 611 | 663 | | Currency swaps | 373,735 | 7,181 | 7,480 | 319,882 | 3,451 | 3,171 | | Options purchased | 7,820 | 417 | – | 5,045 | 371 | – | | Options written | 7,049 | – | 470 | 5,660 | – | 428 | | | **464,223** | **8,733** | **9,216** | **391,225** | **4,433** | **4,262** | | Interest rate contracts: | | | | | | | | Interest rate swaps | 6,108,594 | 14,073 | 12,308 | 3,582,028 | 14,775 | 10,814 | | Forward rate agreements | 75,499 | 3 | 4 | 6,437 | 1 | 1 | | Options purchased | 18,875 | 864 | – | 19,145 | 1,907 | – | | Options written | 23,245 | – | 986 | 18,483 | – | 1,590 | | Futures | 31,335 | 26 | 34 | 214,983 | 19 | 13 | | | **6,257,548** | **14,966** | **13,332** | **3,841,076** | **16,702** | **12,418** | | Credit derivatives | 6,689 | 134 | 118 | 6,740 | 95 | 175 | | Equity and other contracts | 16,490 | 845 | 849 | 12,539 | 735 | 878 | | **Total derivative assets/liabilities – trading and other** | **6,744,950** | **24,678** | **23,515** | **4,251,580** | **21,965** | **17,733** | | **Hedging** | | | | | | | | Derivatives designated as fair value hedges: | | | | | | | | Interest rate and other swaps | 152,662 | 10 | 503 | 172,695 | 46 | 308 | | Currency swaps | 35 | 1 | – | 34 | 7 | – | | | **152,697** | **11** | **503** | **172,729** | **53** | **308** | | Derivatives designated as cash flow hedges: | | | | | | | | Interest rate swaps | 249,703 | 1 | 3 | 109,093 | 6 | 1 | | Exchange rate forward rate agreements | 1,542 | 63 | 21 | 1,895 | 27 | 18 | | | **251,245** | **64** | **24** | **110,988** | **33** | **19** | | **Total derivative assets/liabilities – hedging** | **403,942** | **75** | **527** | **283,717** | **86** | **327** | | **Total recognised derivative assets/liabilities** | **7,148,892** | **24,753** | **24,042** | **4,535,297** | **22,051** | **18,060** | The notional amount of the contract does not represent the Group's exposure to credit risk, which is limited to the current cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure; a large proportion of the Group's derivatives are held through exchanges such as London Clearing House and are collateralised through those exchanges. Further details are provided in note 52 Credit risk. The Group holds derivatives as part of the following strategies: - Customer driven, where derivatives are held as part of the provision of risk management products to Group customers - To manage and hedge the Group's interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy adopted by the Group is to utilise a combination of fair value and cash flow hedge approaches as described in note 52 - Derivatives held in policyholder funds as permitted by the investment strategies of those funds The principal derivatives used by the Group are as follows: - Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying principal amounts. Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate, applied to a notional principal amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of interest on a future loan or deposit, for a specified period and commencing on a specified future date - Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency option gives the buyer, on payment of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of exchange on or before a specified future date - Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place - Equity derivatives are also used by the Group as part of its equity-based retail product activity to eliminate the Group's exposure to fluctuations in various international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to buy or sell a specified amount of equities, or basket of equities, in the form of published indices on or before a specified future date Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 247 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 17: Derivative financial instruments** continued Details of the Group's hedging instruments are set out below: | At 31 December 2022 | Maturity | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | Up to 1 month £m | 1–3 months £m | 3–12 months £m | 1–5 years £m | Over 5 years £m | Total £m | | **Fair value hedges** | | | | | | | | **Interest rate** | | | | | | | | Cross currency swap | | | | | | | | Notional | – | – | – | – | 35 | 35 | | Average fixed interest rate | – | – | – | – | 1.28% | | | Average EUR/GBP exchange rate | – | – | – | – | 1.38 | | | Interest rate swap | | | | | | | | Notional | 1,904 | 12,765 | 37,488 | 64,307 | 36,198 | 152,662 | | Average fixed interest rate | 1.51% | 0.17% | 0.72% | 1.92% | 1.94% | | | **Cash flow hedges** | | | | | | | | **Foreign exchange** | | | | | | | | Currency swap | | | | | | | | Notional | – | – | 509 | 1,004 | 29 | 1,542 | | Average EUR/GBP exchange rate | – | – | 1.15 | 1.10 | 1.04 | | | Average USD/GBP exchange rate | – | – | 1.24 | 1.25 | – | | | **Interest rate** | | | | | | | | Interest rate swap | | | | | | | | Notional | 4,741 | 6,472 | 26,175 | 161,391 | 50,924 | 249,703 | | Average fixed interest rate | 3.01% | 1.18% | 2.36% | 2.40% | 1.60% | | | **At 31 December 2021** | | | | | | | | Maturity | | | | | | | | | Up to 1 month £m | 1–3 months £m | 3–12 months £m | 1–5 years £m | Over 5 years £m | Total £m | | **Fair value hedges** | | | | | | | | **Interest rate** | | | | | | | | Cross currency swap | | | | | | | | Notional | – | – | – | – | 34 | 34 | | Average fixed interest rate | – | – | – | – | 1.28% | | | Average EUR/GBP exchange rate | – | – | – | – | 1.38 | | | Interest rate swap | | | | | | | | Notional | 1,396 | 2,784 | 18,568 | 121,878 | 28,069 | 172,695 | | Average fixed interest rate | 2.84% | 1.31% | 0.95% | 0.68% | 1.94% | | | **Cash flow hedges** | | | | | | | | **Foreign exchange** | | | | | | | | Currency swap | | | | | | | | Notional | 46 | 200 | 821 | 828 | – | 1,895 | | Average USD/GBP exchange rate | 1.36 | 1.36 | 1.36 | 1.35 | 1.27 | | | **Interest rate** | | | | | | | | Interest rate swap | | | | | | | | Notional | 1,000 | 625 | 10,428 | 58,896 | 38,144 | 109,093 | | Average fixed interest rate | 0.00% | 0.23% | 0.55% | 0.81% | 0.65% | | 248 Lloyds Banking Group Annual Report and Accounts 2022 Financial results Risk managementGovernance Financial statements Other informationStrategic report 249Lloyds Banking Group Annual Report and Accounts 2022 Note 17: Derivative financial instruments continued The carrying amounts of the Group’s hedging instruments are as follows: Carrying amount of the hedging instrument At 31 December 2022 Contract/ notional amount £m Assets £m Liabilities £m Changes in fair value used for calculating hedge ineffectiveness £m Fair value hedges Interest rate Currency swaps 35 1 – (2) Interest rate swaps 152,662 10 503 1,286 Cash flow hedges Foreign exchange Currency swaps 1,542 63 21 198 Interest rate Interest rate swaps 249,703 1 3 (6,990) Carrying amount of the hedging instrument At 31 December 2021 Contract/ notional amount £m Assets £m Liabilities £m Changes in fair value used for calculating hedge ineffectiveness £m Fair value hedges Interest rate Currency swaps 34 7 – (2) Interest rate swaps 172,695 46 308 946 Cash flow hedges Foreign exchange Currency swaps 1,895 27 18 (6) Interest rate Interest rate swaps 109,093 6 1 (2,642) All amounts are held within derivative financial instruments. # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 17: Derivative financial instruments** continued The Group's hedged items are as follows: | At 31 December 2022 | Carrying amount of the hedged item | | Accumulated amount of fair value adjustment on the hedged item | | Change in fair value of hedged item for ineffectiveness assessment £m | Cash flow hedging reserve | | | --- | --- | --- | --- | --- | --- | --- | --- | | | Assets £m | Liabilities £m | Assets £m | Liabilities £m | | Continuing hedges £m | Discontinued hedges £m | | **Fair value hedges** | | | | | | | | | **Interest rate** | | | | | | | | | Fixed rate mortgages^{1} | 73,282 | – | (2,602) | – | (3,198) | | | | Fixed rate issuance^{2} | – | 52,190 | – | 2,392 | 4,223 | | | | Fixed rate bonds^{3} | 19,259 | – | (1,549) | – | (2,350) | | | | **Cash flow hedges** | | | | | | | | | **Foreign exchange** | | | | | | | | | Foreign currency issuance^{3} | | | | | (198) | 134 | 90 | | Customer deposits^{4} | | | | | – | – | 3 | | **Interest rate** | | | | | | | | | Customer loans^{1} | | | | | 5,636 | (5,587) | (868) | | Central bank balances^{5} | | | | | 2,703 | (2,130) | (965) | | Customer deposits^{4} | | | | | (1,295) | 1,781 | (76) | | | | | | | | | | | At 31 December 2021 | Carrying amount of the hedged item | | Accumulated amount of fair value adjustment on the hedged item | | Change in fair value of hedged item for ineffectiveness assessment £m | Cash flow hedging reserve | | | | Assets £m | Liabilities £m | Assets £m | Liabilities £m | | Continuing hedges £m | Discontinued hedges £m | | **Fair value hedges** | | | | | | | | | **Interest rate** | | | | | | | | | Fixed rate mortgages^{1} | 88,791 | – | (872) | – | (2,080) | | | | Fixed rate issuance^{2} | – | 58,648 | – | 1,967 | 2,071 | | | | Fixed rate bonds^{3} | 25,019 | – | 342 | – | (758) | | | | **Cash flow hedges** | | | | | | | | | **Foreign exchange** | | | | | | | | | Foreign currency issuance^{3} | | | | | (15) | (28) | 76 | | Customer deposits^{4} | | | | | 21 | – | – | | **Interest rate** | | | | | | | | | Customer loans^{1} | | | | | 1,873 | (742) | 378 | | Central bank balances^{5} | | | | | 767 | (212) | (78) | | Customer deposits^{4} | | | | | (110) | 43 | (109) | 1 Included within loans and advances to customers. 2 Included within debt securities in issue. 3 Included within financial assets at fair value through other comprehensive income. 4 Included within customer deposits. 5 Included within cash and balances at central banks. The accumulated amount of fair value hedge adjustments remaining in the balance sheet for hedged items that have ceased to be adjusted for hedging gains and losses is a liability of £1,988 million relating to fixed rate issuances of £760 million and mortgages of £1,228 million (2021: liability of £1,071 million relating to fixed rate issuances of £793 million and mortgages of £278 million). 250 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 17: Derivative financial instruments continued Gains and losses arising from hedge accounting are summarised as follows: | At 31 December 2022 | Gain (loss) recognised in other comprehensive income £m | Hedge ineffectiveness recognised in the income statement^{1} £m | Amounts reclassified from reserves to income statement as: | | | | --- | --- | --- | --- | --- | --- | | | | | Hedged cash flows will no longer occur £m | Hedged item affected income statement £m | Income statement line item that includes reclassified amount | | **Fair value hedges** | | | | | | | **Interest rate** | | | | | | | Fixed rate mortgages | | 22 | | | | | Fixed rate issuance | | (49) | | | | | Fixed rate bonds | | (14) | | | | | **Cash flow hedges** | | | | | | | **Foreign exchange** | | | | | | | Foreign currency issuance | 198 | – | – | (22) | Interest expense | | Customer deposits | 3 | – | – | – | Interest expense | | **Interest rate** | | | | | | | Customer loans | (6,145) | (30) | – | 53 | Interest income | | Central bank balances | (2,831) | – | – | 26 | Interest income | | Customer deposits | 1,785 | 20 | – | (14) | Interest expense | | At 31 December 2021 | Gain (loss) recognised in other comprehensive income £m | Hedge ineffectiveness recognised in the income statement^{1} £m | Amounts reclassified from reserves to income statement as: | | | | --- | --- | --- | --- | --- | --- | | | | | Hedged cash flows will no longer occur £m | Hedged item affected income statement £m | Income statement line item that includes reclassified amount | | **Fair value hedges** | | | | | | | **Interest rate** | | | | | | | Fixed rate mortgages | | 207 | | | | | Fixed rate issuance | | (23) | | | | | Fixed rate bonds | | (7) | | | | | **Cash flow hedges** | | | | | | | **Foreign exchange** | | | | | | | Foreign currency issuance | 16 | – | 3 | (18) | Interest expense | | Customer deposits | 28 | – | – | – | Interest expense | | **Interest rate** | | | | | | | Customer loans | (1,830) | (43) | – | (456) | Interest income | | Central bank balances | (515) | (27) | – | (180) | Interest income | | Customer deposits | 22 | 1 | – | 30 | Interest expense | 1 Hedge ineffectiveness is included in the income statement within net trading income. In 2021 there was a loss of £3 million (2022: £nil) reclassified from the cash flow hedging reserve for which hedge accounting had previously been used but for which the hedged future cash flows are no longer expected to occur. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 251 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 18: Financial assets at amortised cost** Year ended 31 December 2022 | | Gross carrying amount | | | | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **Loans and advances to banks** | | | | | | | | | | | | At 1 January 2022 | 7,002 | – | – | – | 7,002 | 1 | – | – | – | 1 | | Exchange and other adjustments | 558 | – | – | – | 558 | – | – | – | – | – | | Transfers to Stage 2 | (3) | 3 | – | – | – | – | – | – | – | – | | Impact of transfers between stages | (3) | 3 | – | – | – | – | – | – | – | – | | Other changes in credit quality | – | – | – | – | – | – | – | – | – | – | | Additions and repayments | 3,063 | 24 | – | – | 3,087 | 7 | – | – | – | 7 | | Charge to the income statement | – | – | – | – | – | 5 | 2 | – | – | 7 | | **At 31 December 2022** | **10,620** | **27** | **–** | **–** | **10,647** | **12** | **2** | **–** | **–** | **14** | | **Allowance for impairment losses** | **(13)** | **(2)** | **–** | **–** | **(15)** | **13** | **2** | **–** | **–** | **15** | | **Net carrying amount** | **10,607** | **25** | **–** | **–** | **10,632** | | | | | | | **Loans and advances to customers** | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | At 1 January 2022 | 400,036 | 34,931 | 6,443 | 10,977 | 452,387 | 915 | 1,114 | 1,581 | 210 | 3,820 | | Exchange and other adjustments^{1} | (393) | 15 | (23) | 12 | (389) | 2 | – | 39 | 65 | 106 | | Transfers to Stage 1 | 8,330 | (8,257) | (73) | – | – | 176 | (167) | (9) | – | – | | Transfers to Stage 2 | (35,046) | 35,448 | (402) | – | – | (66) | 135 | (69) | – | – | | Transfers to Stage 3 | (1,250) | (2,528) | 3,778 | – | – | (8) | (158) | 166 | – | – | | Impact of transfers between stages | (27,966) | 24,663 | 3,303 | – | – | (120) | 701 | 268 | – | 849 | | Other changes in credit quality | – | – | – | – | – | (18) | 511 | 356 | – | 849 | | Additions and repayments | 9,314 | 1,555 | (1,337) | (1,354) | 8,178 | (311) | 74 | 665 | 78 | 506 | | Methodology and model changes | – | – | – | – | – | 110 | 98 | (91) | (58) | 59 | | (Credit) charge to the income statement | – | – | – | – | – | 2 | 11 | (47) | (29) | (63) | | Advances written off | – | – | (928) | (13) | (941) | (217) | 694 | 883 | (9) | 1,351 | | Recoveries of advances written off in previous years | – | – | 182 | – | 182 | – | – | (928) | (13) | (941) | | **At 31 December 2022** | **380,991** | **61,164** | **7,640** | **9,622** | **459,417** | **700** | **1,808** | **1,757** | **253** | **4,518** | | **Allowance for impairment losses** | **(700)** | **(1,808)** | **(1,757)** | **(253)** | **(4,518)** | | | | | | | **Net carrying amount** | **380,291** | **59,356** | **5,883** | **9,369** | **454,899** | | | | | | | *Drawn ECL coverage^{2} (%)* | **0.2** | **3.0** | **23.0** | **2.6** | **1.0** | | | | | | # **Reverse repurchase agreements** | **At 31 December 2022** | **44,865** | **–** | **–** | **–** | **44,865** | | --- | --- | --- | --- | --- | --- | | **Allowance for impairment losses** | **–** | **–** | **–** | **–** | **–** | | **Net carrying amount** | **44,865** | **–** | **–** | **–** | **44,865** | 1 Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind, derecognising assets as a result of modifications and adjustments in respect of purchased or originated credit-impaired financial assets (POCI). Where a POCI asset's expected credit loss is less than its expected credit loss on purchase or origination, the increase in its carrying value is recognised within gross loans, rather than as a negative impairment allowance. 2 Allowance for expected credit losses on loans and advances to customers as a percentage of gross loans and advances to customers. 252 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 18: Financial assets at amortised cost continued | | Gross carrying amount | | | | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **Debt securities** | | | | | | | | | | | | At 1 January 2022 | 6,827 | 9 | 2 | – | 6,838 | 1 | – | 2 | – | 3 | | Exchange and other adjustments | 408 | – | (1) | – | 407 | – | – | (1) | – | (1) | | Transfers to Stage 1 | 9 | (9) | – | – | – | – | – | – | – | – | | Impact of transfers between stages | 9 | (9) | – | – | – | – | – | – | – | – | | Other changes in credit quality | – | – | – | – | – | – | – | – | – | – | | Additions and repayments | 2,690 | – | – | – | 2,690 | 3 | – | – | – | 3 | | Charge to the income statement | – | – | – | – | – | 4 | – | – | – | 4 | | **At 31 December 2022** | **9,934** | **–** | **1** | **–** | **9,935** | **7** | **–** | **–** | **–** | **7** | | **Allowance for impairment losses** | **(8)** | **–** | **(1)** | **–** | **(9)** | **8** | **–** | **1** | **–** | **9** | | **Net carrying amount** | **9,926** | **–** | **–** | **–** | **9,926** | | | | | | | **Total financial assets at amortised cost** | **445,689** | **59,381** | **5,883** | **9,369** | **520,322** | | | | | | The total allowance for impairment losses includes £92 million (2021: £95 million) in respect of residual value impairment and voluntary terminations within the Group's UK motor finance business. Movements in Retail UK mortgage balances were as follows: | | Gross carrying amount | | | | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **Retail – UK mortgages** | | | | | | | | | | | | At 1 January 2022 | 273,629 | 21,798 | 1,940 | 10,977 | 308,344 | 48 | 394 | 184 | 210 | 836 | | Exchange and other adjustments | – | – | – | 12 | 12 | – | – | 28 | 65 | 93 | | Transfers to Stage 1 | 5,107 | (5,096) | (11) | – | – | 28 | (27) | (1) | – | – | | Transfers to Stage 2 | (26,043) | 26,204 | (161) | – | – | (14) | 25 | (11) | – | – | | Transfers to Stage 3 | (444) | (1,793) | 2,237 | – | – | – | (63) | 63 | – | – | | Impact of transfers between stages | (21,380) | 19,315 | 2,065 | – | – | (25) | 254 | 98 | – | 327 | | Other changes in credit quality | – | – | – | – | – | (11) | 189 | 149 | – | 327 | | Additions and repayments | 5,268 | 670 | (585) | (1,354) | 3,999 | 36 | (9) | 54 | 78 | 159 | | Methodology and model changes | – | – | – | – | – | 18 | (10) | (45) | (58) | (95) | | Charge (credit) to the income statement | – | – | – | – | – | – | (12) | (55) | (29) | (96) | | Advances written off | – | – | (28) | (13) | (41) | 43 | 158 | 103 | (9) | 295 | | Recoveries of advances written off in previous years | – | – | 24 | – | 24 | – | – | (28) | (13) | (41) | | **At 31 December 2022** | **257,517** | **41,783** | **3,416** | **9,622** | **312,338** | **91** | **552** | **311** | **253** | **1,207** | | **Allowance for impairment losses** | **(91)** | **(552)** | **(311)** | **(253)** | **(1,207)** | | | | | | | **Net carrying amount** | **257,426** | **41,231** | **3,105** | **9,369** | **311,131** | | | | | | | *Drawn ECL coverage (%)* | – | 1.3 | 9.1 | 2.6 | 0.4 | | | | | | 1 Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind, derecognising assets as a result of modifications and adjustments in respect of purchased or originated credit-impaired financial assets (POCI). Where a POCI asset's expected credit loss is less than its expected credit loss on purchase or origination, the increase in its carrying value is recognised within gross loans, rather than as a negative impairment allowance. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 253 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 18: Financial assets at amortised cost** continued Movements in Retail credit cards were as follows: | | Gross carrying amount | | | | Allowance for expected credit losses | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | | **Retail – credit cards** | | | | | | | | | | At 1 January 2022 | 11,918 | 2,077 | 292 | 14,287 | 96 | 218 | 128 | 442 | | Exchange and other adjustments | (13) | (2) | – | (15) | 4 | 2 | (16) | (10) | | Transfers to Stage 1 | 569 | (566) | (3) | – | 48 | (47) | (1) | – | | Transfers to Stage 2 | (1,319) | 1,358 | (39) | – | (16) | 36 | (20) | – | | Transfers to Stage 3 | (184) | (191) | 375 | – | (3) | (43) | 46 | – | | Impact of transfers between stages | (934) | 601 | 333 | – | (26) | 185 | 73 | 232 | | Other changes in credit quality | | | | | 3 | 131 | 98 | 232 | | Additions and repayments | 445 | 611 | (14) | 1,042 | 15 | 22 | 227 | 264 | | Methodology and model changes | | | | | (1) | 33 | (5) | 27 | | Charge to the income statement | | | | | 3 | 27 | 3 | 33 | | Advances written off | | | (413) | (413) | 20 | 213 | 323 | 556 | | Recoveries of advances written off in previous years | | | 91 | 91 | | | (413) | (413) | | **At 31 December 2022** | **11,416** | **3,287** | **289** | **14,992** | **120** | **433** | **113** | **666** | | **Allowance for impairment losses** | **(120)** | **(433)** | **(113)** | **(666)** | | | | | | **Net carrying amount** | **11,296** | **2,854** | **176** | **14,326** | | | | | | *Drawn ECL coverage (%)* | **1.1** | **13.2** | **39.1** | **4.4** | | | | | Movements in Commercial Banking lending were as follows: | | Gross carrying amount | | | | Allowance for expected credit losses | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | | **Commercial Banking** | | | | | | | | | | At 1 January 2022 | 82,719 | 7,530 | 3,563 | 93,812 | 125 | 260 | 956 | 1,341 | | Exchange and other adjustments | 748 | 6 | (20) | 734 | 4 | (2) | 41 | 43 | | Transfers to Stage 1 | 1,723 | (1,676) | (47) | – | 55 | (55) | – | – | | Transfers to Stage 2 | (5,807) | 5,950 | (143) | – | (11) | 19 | (8) | – | | Transfers to Stage 3 | (404) | (326) | 730 | – | (2) | (14) | 16 | – | | Impact of transfers between stages | (4,488) | 3,948 | 540 | – | (44) | 131 | 7 | 94 | | Other changes in credit quality | | | | | (2) | 81 | 15 | 94 | | Additions and repayments | 1,530 | 9 | (587) | 952 | 35 | 36 | 192 | 263 | | Methodology and model changes | | | | | 59 | 57 | (9) | 107 | | Charge to the income statement | | | | | (7) | (18) | – | (25) | | Advances written off | | | (127) | (127) | 85 | 156 | 198 | 439 | | Recoveries of advances written off in previous years | | | 2 | 2 | | | (127) | (127) | | **At 31 December 2022** | **80,509** | **11,493** | **3,371** | **95,373** | **214** | **414** | **1,070** | **1,698** | | **Allowance for impairment losses** | **(214)** | **(414)** | **(1,070)** | **(1,698)** | | | | | | **Net carrying amount** | **80,295** | **11,079** | **2,301** | **93,675** | | | | | | *Drawn ECL coverage (%)* | **0.3** | **3.6** | **31.7** | **1.8** | | | | | 254 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 18: Financial assets at amortised cost continued Movements in the allowance for expected credit losses in respect of undrawn balances were as follows: | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **Undrawn balances** | | | | | | | At 1 January 2022 | 109 | 86 | 5 | – | 200 | | Exchange and other adjustments | 1 | – | – | – | 1 | | Transfers to Stage 1 | 19 | (19) | – | – | – | | Transfers to Stage 2 | (9) | 10 | (1) | – | – | | Transfers to Stage 3 | (1) | (2) | 3 | – | – | | Impact of transfers between stages | (15) | 81 | (1) | – | 65 | | | (6) | 70 | 1 | – | 65 | | Other items taken to the income statement | 30 | 29 | (2) | – | 57 | | Charge (credit) to the income statement | 24 | 99 | (1) | – | 122 | | **At 31 December 2022** | **134** | **185** | **4** | **–** | **323** | The Group's total impairment allowances were as follows: | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | *In respect of:* | | | | | | | Loans and advances to banks | 13 | 2 | – | – | 15 | | UK mortgages | 91 | 552 | 311 | 253 | 1,207 | | Credit cards | 120 | 433 | 113 | – | 666 | | Other | 275 | 409 | 259 | – | 943 | | Retail | 486 | 1,394 | 683 | 253 | 2,816 | | Commercial Banking | 214 | 414 | 1,070 | – | 1,698 | | Other | – | – | 4 | – | 4 | | Loans and advances to customers | 700 | 1,808 | 1,757 | 253 | 4,518 | | Debt securities | 8 | – | 1 | – | 9 | | Financial assets at amortised cost | 721 | 1,810 | 1,758 | 253 | 4,542 | | Other assets | – | – | 38 | – | 38 | | Provisions in relation to loan commitments and financial guarantees | 134 | 185 | 4 | – | 323 | | **Total** | **855** | **1,995** | **1,800** | **253** | **4,903** | | Expected credit loss in respect of financial assets at fair value through other comprehensive income (memorandum item) | 9 | – | – | – | 9 | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 255 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 18: Financial assets at amortised cost** continued Year ended 31 December 2021 | | Gross carrying amount | | | | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **Loans and advances to banks** | | | | | | | | | | | | At 1 January 2021 | 8,066 | – | – | – | 8,066 | 6 | – | – | – | 6 | | Exchange and other adjustments | (11) | – | – | – | (11) | – | – | – | – | – | | Other changes in credit quality | | | | | | (5) | – | – | – | (5) | | Additions and repayments | (1,053) | – | – | – | (1,053) | – | – | – | – | – | | Credit to the income statement | | | | | | (5) | – | – | – | (5) | | At 31 December 2021 | 7,002 | – | – | – | 7,002 | 1 | – | – | – | 1 | | Allowance for impairment losses | (1) | – | – | – | (1) | | | | | | | Net carrying amount | 7,001 | – | – | – | 7,001 | | | | | | # **Loans and advances to customers** | At 1 January 2021 | 375,300 | 51,659 | 6,490 | 12,511 | 445,960 | 1,372 | 2,145 | 1,982 | 261 | 5,760 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Exchange and other adjustments^{1} | (2,686) | (39) | (81) | 68 | (2,738) | (3) | (6) | (1) | 121 | 111 | | Transfers to Stage 1 | 18,705 | (18,665) | (40) | – | – | 564 | (553) | (11) | – | – | | Transfers to Stage 2 | (12,009) | 12,724 | (715) | – | – | (48) | 155 | (107) | – | – | | Transfers to Stage 3 | (872) | (1,822) | 2,694 | – | – | (13) | (220) | 233 | – | – | | Impact of transfers between stages | 5,824 | (7,763) | 1,939 | – | – | (428) | 195 | 221 | – | (12) | | Other changes in credit quality | | | | | | 75 | (423) | 336 | – | (12) | | Additions and repayments | 21,598 | (8,926) | (1,007) | (1,565) | 10,100 | (245) | (271) | 255 | (48) | (309) | | Methodology and model changes | | | | | | (221) | (346) | (99) | (87) | (753) | | (Credit) charge to the income statement | | | | | | (63) | 15 | 6 | – | (42) | | Advances written off | | | (1,058) | (37) | (1,095) | (454) | (1,025) | 498 | (135) | (1,116) | | Recoveries of advances written off in previous years | | | 160 | – | 160 | | | (1,058) | (37) | (1,095) | | At 31 December 2021 | 400,036 | 34,931 | 6,443 | 10,977 | 452,387 | | | | | | | Allowance for impairment losses | (915) | (1,114) | (1,581) | (210) | (3,820) | | | | | | | Net carrying amount | 399,121 | 33,817 | 4,862 | 10,767 | 448,567 | | | | | | | Drawn ECL coverage (%) | 0.2 | 3.2 | 24.5 | 1.9 | 0.8 | | | | | | # **Reverse repurchase agreements** | At 31 December 2021 | 54,753 | – | – | – | 54,753 | | --- | --- | --- | --- | --- | --- | | Allowance for impairment losses | – | – | – | – | – | | Net carrying amount | 54,753 | – | – | – | 54,753 | $^{1}$ Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind, derecognising assets as a result of modifications and adjustments in respect of purchased or originated credit-impaired financial assets (POCI). Where a POCI asset's expected credit loss is less than its expected credit loss on purchase or origination, the increase in its carrying value is recognised within gross loans, rather than as a negative impairment allowance. 256 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 18: Financial assets at amortised cost continued | | Gross carrying amount | | | | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **Debt securities** | | | | | | | | | | | | At 1 January 2021 | 5,406 | – | 2 | – | 5,408 | 1 | – | 2 | – | 3 | | Exchange and other adjustments | (20) | – | – | – | (20) | – | – | – | – | – | | Transfers to Stage 2 | (6) | 6 | – | – | – | – | – | – | – | – | | Impact of transfers between stages | (6) | 6 | – | – | – | – | – | – | – | – | | Additions and repayments | 1,447 | 3 | – | – | 1,450 | – | – | – | – | – | | Charge to the income statement | – | – | – | – | – | – | – | – | – | – | | At 31 December 2021 | 6,827 | 9 | 2 | – | 6,838 | 1 | – | 2 | – | 3 | | Allowance for impairment losses | (1) | – | (2) | – | (3) | – | – | – | – | – | | Net carrying amount | 6,826 | 9 | – | – | 6,835 | – | – | – | – | – | | Total financial assets at amortised cost | 467,701 | 33,826 | 4,862 | 10,767 | 517,156 | – | – | – | – | – | Movements in Retail UK mortgage balances were as follows: | | Gross carrying amount | | | | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **Retail – UK mortgages** | | | | | | | | | | | | At 1 January 2021 | 251,418 | 29,018 | 1,859 | 12,511 | 294,806 | 104 | 468 | 191 | 261 | 1,024 | | Exchange and other adjustments^{1} | – | – | – | 68 | 68 | – | – | 18 | 121 | 139 | | Transfers to Stage 1 | 10,109 | (10,105) | (4) | – | – | 66 | (66) | – | – | – | | Transfers to Stage 2 | (6,930) | 7,425 | (495) | – | – | (5) | 37 | (32) | – | – | | Transfers to Stage 3 | (147) | (942) | 1,089 | – | – | – | (35) | 35 | – | – | | Impact of transfers between stages | 3,032 | (3,622) | 590 | – | – | (58) | 84 | 48 | – | 74 | | Other changes in credit quality | – | – | – | – | – | 3 | 20 | 51 | – | 74 | | Additions and repayments | 19,179 | (3,598) | (490) | (1,565) | 13,526 | (14) | (32) | (30) | (48) | (124) | | Methodology and model changes | – | – | – | – | – | 8 | (52) | (33) | (87) | (164) | | Credit to the income statement | – | – | – | – | – | (53) | (10) | 6 | – | (57) | | Advances written off | – | – | (28) | (37) | (65) | (56) | (74) | (6) | (135) | (271) | | Recoveries of advances written off in previous years | – | – | 9 | – | 9 | – | – | (28) | (37) | (65) | | At 31 December 2021 | 273,629 | 21,798 | 1,940 | 10,977 | 308,344 | 48 | 394 | 184 | 210 | 836 | | Allowance for impairment losses | (48) | (394) | (184) | (210) | (836) | – | – | – | – | – | | Net carrying amount | 273,581 | 21,404 | 1,756 | 10,767 | 307,508 | – | – | – | – | – | | Drawn ECL coverage (%) | – | 1.8 | 9.5 | 1.9 | 0.3 | – | – | – | – | – | 1 Exchange and other adjustments includes the impact of movements in exchange rates, discount unwind, derecognising assets as a result of modifications and adjustments in respect of purchased or originated credit-impaired financial assets (POCI). Where a POCI asset's expected credit loss is less than its expected credit loss on purchase or origination, the increase in its carrying value is recognised within gross loans, rather than as a negative impairment allowance. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 257 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 18: Financial assets at amortised cost continued Movements in Retail credit cards were as follows: | | Gross carrying amount | | | | Allowance for expected credit losses | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | | **Retail – credit cards** | | | | | | | | | | At 1 January 2021 | 11,301 | 3,273 | 340 | 14,914 | 155 | 458 | 153 | 766 | | Exchange and other adjustments | (29) | (7) | (1) | (37) | 7 | 13 | (13) | 7 | | Transfers to Stage 1 | 1,610 | (1,605) | (5) | – | 190 | (188) | (2) | – | | Transfers to Stage 2 | (513) | 558 | (45) | – | (10) | 34 | (24) | – | | Transfers to Stage 3 | (137) | (259) | 396 | – | (4) | (77) | 81 | – | | Impact of transfers between stages | 960 | (1,306) | 346 | – | (115) | 46 | 71 | 2 | | Other changes in credit quality | | | | | 61 | (185) | 126 | 2 | | Additions and repayments | (314) | 117 | (35) | (232) | (65) | (50) | 230 | 115 | | Methodology and model changes | | | | | (62) | (18) | (10) | (90) | | (Credit) charge to the income statement | | | | | – | – | – | – | | Advances written off | | | (444) | (444) | (66) | (253) | 346 | 27 | | Recoveries of advances written off in previous years | | | 86 | 86 | | | (444) | (444) | | At 31 December 2021 | 11,918 | 2,077 | 292 | 14,287 | 96 | 218 | 128 | 442 | | Allowance for impairment losses | (96) | (218) | (128) | (442) | | | | | | Net carrying amount | 11,822 | 1,859 | 164 | 13,845 | | | | | | *Drawn ECL coverage (%)* | 0.8 | 10.5 | 43.8 | 3.1 | | | | | Movements in Commercial Banking lending were as follows: | | Gross carrying amount | | | | Allowance for expected credit losses | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | Total £m | | **Commercial Banking** | | | | | | | | | | At 1 January 2021 | 78,868 | 15,058 | 3,576 | 97,502 | 299 | 733 | 1,290 | 2,322 | | Exchange and other adjustments | 151 | (1) | (77) | 73 | (3) | (5) | 18 | 10 | | Transfers to Stage 1 | 5,744 | (5,729) | (15) | – | 192 | (191) | (1) | – | | Transfers to Stage 2 | (3,146) | 3,273 | (127) | – | (19) | 48 | (29) | – | | Transfers to Stage 3 | (335) | (284) | 619 | – | (2) | (29) | 31 | – | | Impact of transfers between stages | 2,263 | (2,740) | 477 | – | (176) | 40 | 6 | (130) | | Other changes in credit quality | | | | | (5) | (132) | 7 | (130) | | Additions and repayments | 1,437 | (4,787) | (215) | (3,565) | (101) | (133) | (159) | (393) | | Methodology and model changes | | | | | (65) | (203) | (2) | (270) | | Credit to the income statement | | | | | – | – | – | – | | Advances written off | | | (200) | (200) | (171) | (468) | (154) | (793) | | Recoveries of advances written off in previous years | | | 2 | 2 | | | (200) | (200) | | At 31 December 2021 | 82,719 | 7,530 | 3,563 | 93,812 | 125 | 260 | 956 | 1,341 | | Allowance for impairment losses | (125) | (260) | (956) | (1,341) | | | | | | Net carrying amount | 82,594 | 7,270 | 2,607 | 92,471 | | | | | | *Drawn ECL coverage (%)* | 0.2 | 3.5 | 26.8 | 1.4 | | | | | 258 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 18: Financial assets at amortised cost continued Movements in the allowance for expected credit losses in respect of undrawn balances were as follows: | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **Undrawn balances** | | | | | | | At 1 January 2021 | 212 | 234 | 13 | – | 459 | | Exchange and other adjustments | (1) | (2) | 1 | – | (2) | | Transfers to Stage 1 | 78 | (78) | – | – | – | | Transfers to Stage 2 | (8) | 8 | – | – | – | | Transfers to Stage 3 | (1) | (6) | 7 | – | – | | Impact of transfers between stages | (69) | 18 | (4) | – | (55) | | | – | (58) | 3 | – | (55) | | Other items taken to the income statement | (102) | (88) | (12) | – | (202) | | Credit to the income statement | (102) | (146) | (9) | – | (257) | | At 31 December 2021 | 109 | 86 | 5 | – | 200 | The Group's total impairment allowances were as follows: | | Allowance for expected credit losses | | | | | | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | *In respect of:* | | | | | | | Loans and advances to banks | 1 | – | – | – | 1 | | UK mortgages | 48 | 394 | 184 | 210 | 836 | | Credit cards | 96 | 218 | 128 | – | 442 | | Other | 246 | 242 | 307 | – | 795 | | Retail | 390 | 854 | 619 | 210 | 2,073 | | Commercial Banking | 125 | 260 | 956 | – | 1,341 | | Other | 400 | – | 6 | – | 406 | | Loans and advances to customers | 915 | 1,114 | 1,581 | 210 | 3,820 | | Debt securities | 1 | – | 2 | – | 3 | | Financial assets at amortised cost | 917 | 1,114 | 1,583 | 210 | 3,824 | | Other assets | – | – | 18 | – | 18 | | Provisions in relation to loan commitments and financial guarantees | 109 | 86 | 5 | – | 200 | | **Total** | **1,026** | **1,200** | **1,606** | **210** | **4,042** | | Expected credit loss in respect of financial assets at fair value through other comprehensive income (memorandum item) | 3 | – | – | – | 3 | The movement tables are compiled by comparing the position at 31 December to that at the beginning of the year. Transfers between stages are deemed to have taken place at the start of the reporting period, with all other movements shown in the stage in which the asset is held at 31 December, with the exception of those held within purchased or originated credit-impaired, which are not transferable. Additions and repayments comprise new loans originated and repayments of outstanding balances throughout the reporting period. Loans which are written off in the period are first transferred to Stage 3 before acquiring a full allowance and subsequent write-off. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 259 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 19: Allowance for expected credit losses The calculation of the Group's expected credit loss allowances and provisions against loan commitments and guarantees, which are set out in note 18, under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below: #### Definition of default The probability of default (PD) of an exposure, both over a 12-month period and over its lifetime, is a key input to the measurement of the ECL allowance. Default has occurred when there is evidence that the customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due. The definition of default adopted by the Group is described in note 2(H) Impairment of financial assets. IFRS 9 contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due which the Group now uses for all its products following changes to the definition of default for UK mortgages on 1 January 2022. In addition, other indicators of mortgage default were added including end-of-term payments on past due interest-only accounts and loans considered non-performing due to recent arrears or forbearance, aligning the definition of Stage 3 credit-impaired for IFRS 9 to the CRD IV prudential regulatory definition of default. This change in definition of default contributes to the £1.5 billion increase in Stage 3 UK mortgages during the period. #### Lifetime of an exposure A range of approaches, segmented by product type, has been adopted by the Group to estimate a product's expected life. These include using the full contractual life and taking into account behavioural factors such as early repayments, extensions and refinancing. For non-revolving retail assets, the Group has assumed the expected life for each product to be the time taken for all significant losses to be observed. For revolving retail products, the Group has considered the losses beyond the contractual term over which the Group is exposed to credit risk. For commercial overdraft facilities, the average behavioural life has been used. Changes to the assumed expected lives of the Group's assets could impact the ECL allowance recognised by the Group. The assessment of SICR and corresponding lifetime loss, and the PD, of a financial asset designated as Stage 2, or Stage 3, is dependent on its expected life. #### Significant increase in credit risk Performing assets are classified as either Stage 1 or Stage 2. An ECL allowance equivalent to 12 months' expected losses is established against assets in Stage 1; assets classified as Stage 2 carry an ECL allowance equivalent to lifetime expected losses. Assets are transferred from Stage 1 to Stage 2 when there has been a significant increase in credit risk (SICR) since initial recognition. Credit-impaired assets are transferred to Stage 3 with a lifetime expected losses allowance. The Group uses both quantitative and qualitative indicators to determine whether there has been a SICR for an asset. For Retail, the following tables set out the retail master scale (RMS) grade triggers which result in a SICR for financial assets and the PD boundaries for each RMS grade. #### SICR triggers for key Retail portfolios | Origination grade | 1 | 2 | 3 | 4 | 5 | 6 | 7 | | --- | --- | --- | --- | --- | --- | --- | --- | | Mortgages SICR grade | 5 | 5 | 6 | 7 | 8 | 9 | 10 | | Credit cards, loans and overdrafts SICR grade | 4 | 5 | 6 | 7 | 8 | 9 | 10 | | RMS grade | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | PD boundary 19 | 0.10 | 0.40 | 0.80 | 1.20 | 2.50 | 4.50 | 7.50 | 10.00 | 14.00 | 20.00 | 30.00 | 45.00 | 99.99 | 100.00 | 1 Probability-weighted annualised lifetime probability of default. For Commercial a doubling of PD with a minimum increase in PD of 1 per cent and a resulting change in the underlying grade is treated as a SICR. The Group uses the internal credit risk classification and watchlist as qualitative indicators to identify a SICR. The Group does not use the low credit risk exemption in its staging assessments. The use of a payment holiday in and of itself has not been judged to indicate a significant increase in credit risk, nor forbearance, with the underlying long-term credit risk deemed to be driven by economic conditions and captured through the use of forward-looking models. These portfolio level models are capturing the anticipated volume of increased defaults and therefore an appropriate assessment of staging and expected credit loss. All financial assets are assumed to have suffered a SICR if they are more than 30 days past due; credit cards, loans and overdrafts financial assets are also assumed to have suffered a SICR if they are in arrears on three or more separate occasions in a rolling 12-month period. Financial assets are classified as credit-impaired if they are 90 days past due. A Stage 3 asset that is no longer credit-impaired is transferred back to Stage 2 as no cure period is applied to Stage 3. UK mortgages is an exception to this rule where a probation period is enforced for non-performing, forborne and defaulted exposures in accordance with prudential regulation. If an exposure that is classified as Stage 2 no longer meets the SICR criteria, which in some cases capture customer behaviour in previous periods, it is moved back to Stage 1. The setting of precise trigger points combined with risk indicators requires judgement. The use of different trigger points may have a material impact upon the size of the ECL allowance. The Group monitors the effectiveness of SICR criteria on an ongoing basis. 260 Lloyds Banking Group Annual Report and Accounts 2022 Financial results Risk managementGovernance Financial statements Other informationStrategic report 261Lloyds Banking Group Annual Report and Accounts 2022 Note 19: Allowance for expected credit losses continued Generation of multiple economic scenarios The estimate of expected credit losses is required to be based on an unbiased expectation of future economic scenarios. The approach used to generate the range of future economic scenarios depends on the methodology and judgements adopted. The Group’s approach is to start from a defined base case scenario, used for planning purposes, and to generate alternative economic scenarios around this base case. The base case scenario is a conditional forecast underpinned by a number of conditioning assumptions that reflect the Group’s best view of key future developments. If circumstances appear likely to materially deviate from the conditioning assumptions, then the base case scenario is updated. The base case scenario is central to a range of future economic scenarios generated by simulation of an economic model, for which the same conditioning assumptions apply as in the base case scenario. These scenarios are ranked by using estimated relationships with industry-wide historical loss data. With the base case already pre-defined, three other scenarios are identified as averages of constituent scenarios located around the 15th, 75th and 95th percentiles of the distribution. The full distribution is therefore summarised by a practical number of scenarios to run through ECL models representing an upside, the base case, and a downside scenario weighted at 30 per cent each, together with a severe downside scenario weighted at 10 per cent. The scenario weights represent the distribution of economic scenarios and not subjective views on likelihood. The inclusion of a severe downside scenario with a smaller weighting ensures that the non-linearity of losses in the tail of the distribution is adequately captured. Macroeconomic projections may employ reversionary techniques to adjust the paths of economic drivers towards long-run equilibria after a reasonable forecast horizon. The Group does not use such techniques to force the MES scenarios to revert to the base case planning view. Utilising such techniques would be expected to be immaterial for expected credit losses since loss sensitivity is highest over the initial five years of the projections. Most assets are expected to have matured, or reached the end of their behavioural life before the five-year horizon. A forum under the chairmanship of the Chief Economist meets at least quarterly to review and, if appropriate, recommend changes to the method by which economic scenarios are generated, for approval by the Chief Financial Officer and Chief Risk Officer. In June 2022, the Group judged it appropriate to include an adjusted severe downside scenario to incorporate a high CPI inflation and UK Bank Rate profiles and to adopt this adjusted severe downside scenario to calculate the Group’s ECL. This is because the historic macroeconomic and loan loss data upon which the scenario model is calibrated imply an association of downside economic outcomes with easier monetary policy, and therefore low interest rates. The adjustment is considered to better reflect the risks around the Group’s base case view in an economic environment where supply shocks are the principal concern. The Group has continued to include a non-modelled severe downside scenario for Group ECL calculations for 31 December 2022 reporting. Base case and MES economic assumptions The Group’s base case economic scenario has been revised in light of the ongoing war in Ukraine, reversals in UK fiscal policy, and a continuing global shift towards a more restrictive monetary policy stance against a backdrop of elevated inflation pressures. The Group’s updated base case scenario has three conditioning assumptions: first, the war in Ukraine remains ‘local’, i.e. without overtly involving neighbouring countries, NATO or China; second, the UK labour market participation rate remains below pre-pandemic levels, impeding the economy’s supply capacity; and third, the Bank of England accommodates above-target inflation in the medium term, recognising the economic costs that might arise from a rapid return to the two per cent target. Based on these assumptions and incorporating the economic data published in the fourth quarter, the Group’s base case scenario is for a contraction in economic activity and a rise in the unemployment rate alongside declines in residential and commercial property prices, following increases in UK Bank Rate in response to persistent inflationary pressures. Risks around this base case economic view lie in both directions and are largely captured by the generation of alternative economic scenarios. The Group has accommodated the latest available information at the reporting date in defining its base case scenario and generating alternative economic scenarios. The scenarios include forecasts for key variables in the fourth quarter of 2022, for which actuals may have since emerged prior to publication. Scenarios by year The key UK economic assumptions made by the Group are shown in the following tables across a number of measures explained below. Annual assumptions Gross domestic product (GDP) and Consumer Price Index (CPI) inflation are presented as an annual change, house price growth and commercial real estate price growth are presented as the growth in the respective indices over each year. Unemployment rate and UK Bank Rate are averages over the year. Five-year average The five-year average reflects the average annual growth rate, or level, over the five-year period. It includes movements within the current reporting year, such that the position as of 31 December 2022 covers the five years 2022 to 2026. The inclusion of the reporting year within the five-year period reflects the need to predict variables which remain unpublished at the reporting date and recognises that credit models utilise both level and annual changes. The use of calendar years maintains a comparability between the annual assumptions presented. Five-year start to peak and trough The peak or trough for any metric may occur intra year and therefore not be identifiable from the annual assumptions, therefore they are also disclosed. For GDP, house price growth and commercial real estate price growth, the peak, or trough, reflects the highest, or lowest cumulative quarterly position reached relative to the start of the five-year period, which as of 31 December 2022 is 1 January 2022. Given these metrics may exhibit increases followed by greater falls, the start to trough movements quoted may be smaller than the equivalent ‘peak to trough’ movement (and vice versa for start to peak). Unemployment, UK Bank Rate and CPI Inflation reflect the highest, or lowest, quarterly level reached in the five-year period. ### Notes to the consolidated financial statements continued for the year ended 31 December ### Note 19: Allowance for expected credit losses continued | | | | | | | | 2022 to 2026 | | | Start to | | Start to | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2022 | 2023 | 2024 | 2025 | | 2026 | | average | | peak | 1 | trough | 1 | | At 31 December 2022 | % | % | % | | % | % | | | % | | % | | % | Upside Gross domestic product 4.1 0.1 1.1 1.7 2.1 1.8 6.5 0.4 Unemployment rate 3.5 2.8 3.0 3.3 3.4 3.2 3.8 2.8 House price growth 2.4 (2.8) 6.5 9.0 8.0 4.5 24.8 (1.1) Commercial real estate price growth (9.4) 8.5 3.5 2.6 2.3 1.3 7.2 (9.4) UK Bank Rate 1.94 4.95 4.98 4.63 4.58 4.22 5.39 0.75 CPI inflation 9.0 8.3 4.2 3.3 3.0 5.5 10.7 2.9 Base case Gross domestic product 4.0 (1.2) 0.5 1.6 2.1 1.4 4.3 (1.1) Unemployment rate 3.7 4.5 5.1 5.3 5.1 4.8 5.3 3.6 House price growth 2.0 (6.9) (1.2) 2.9 4.4 0.2 6.4 (6.3) Commercial real estate price growth (11.8) (3.3) 0.9 2.8 3.1 (1.8) 7.2 (14.8) UK Bank Rate 1.94 4.00 3.38 3.00 3.00 3.06 4.00 0.75 CPI inflation 9.0 8.3 3.7 2.3 1.7 5.0 10.7 1.6 Downside Gross domestic product 3.9 (3.0) (0.5) 1.4 2.1 0.8 1.2 (3.6) Unemployment rate 3.8 6.3 7.5 7.6 7.2 6.5 7.7 3.6 House price growth 1.6 (11.1) (9.8) (5.6) (1.5) (5.4) 6.4 (24.3) Commercial real estate price growth (13.9) (15.0) (3.7) 0.4 1.4 (6.4) 7.2 (29.6) UK Bank Rate 1.94 2.93 1.39 0.98 1.04 1.65 3.62 0.75 CPI inflation 9.0 8.2 3.3 1.3 0.3 4.4 10.7 0.2 Severe downside Gross domestic product 3.7 (5.2) (1.0) 1.3 2.1 0.1 0.7 (6.4) Unemployment rate 4.1 9.0 10.7 10.4 9.7 8.8 10.7 3.6 House price growth 1.1 (14.8) (18.0) (11.5) (4.2) (9.8) 6.4 (40.1) Commercial real estate price growth (17.3) (28.8) (9.9) (1.3) 3.2 (11.6) 7.2 (47.8) UK Bank Rate – modelled 1.94 1.41 0.20 0.13 0.14 0.76 3.50 0.12 2 UK Bank Rate – adjusted 2.44 7.00 4.88 3.31 3.25 4.18 7.00 0.75 CPI inflation – modelled 9.0 8.2 2.6 (0.1) (1.6) 3.6 10.7 (1.7) 2 CPI inflation – adjusted 9.7 14.3 9.0 4.1 1.6 7.7 14.8 1.5 Probability-weighted Gross domestic product 4.0 (1.8) 0.2 1.5 2.1 1.2 3.4 (1.8) Unemployment rate 3.7 5.0 5.8 5.9 5.7 5.2 5.9 3.6 House price growth 1.9 (7.7) (3.2) 0.7 2.9 (1.2) 6.4 (9.5) Commercial real estate price growth (12.3) (5.8) (0.8) 1.6 2.3 (3.1) 7.2 (18.6) UK Bank Rate – modelled 1.94 3.70 2.94 2.59 2.60 2.76 3.89 0.75 2 UK Bank Rate – adjusted 1.99 4.26 3.41 2.91 2.91 3.10 4.31 0.75 CPI inflation – modelled 9.0 8.3 3.6 2.1 1.4 4.9 10.7 1.3 2 CPI inflation – adjusted 9.1 8.9 4.3 2.5 1.7 5.3 11.0 1.6 1 Since the level of property prices peaked during 2022, peak to trough declines for house price growth and commercial real estate price growth are larger than the start to trough declines over the period shown. 2 The adjustment to UK Bank Rate and CPI inflation in the severe downside is considered to better reflect the risks around the Group’s base case view in an economic environment where supply shocks are the principal concern. | | | | First | Second | | Third | | Fourth | | | First | Second | | Third | | Fourth | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | quarter | | quarter | | quarter | | quarter | | quarter | | quarter | | quarter | | quarter | | | Base case scenario by quarter | 1 | | 2022 | | 2022 | 2022 | | 2022 | | | 2023 | | 2023 | 2023 | | 2023 | | | At 31 December 2022 | | | % | | % | | % | | % | | % | | % | | % | | % | Gross domestic product 0.6 0.1 (0.3) (0.4) (0.4) (0.4) (0.2) (0.1) Unemployment rate 3.7 3.8 3.6 3.7 4.0 4.4 4.7 4.9 House price growth 11.1 12.5 9.8 2.0 (3.0) (8.4) (9.8) (6.9) Commercial real estate price growth 18.0 18.0 8.4 (11.8) (16.9) (19.8) (15.9) (3.3) UK Bank Rate 0.75 1.25 2.25 3.50 4.00 4.00 4.00 4.00 CPI inflation 6.2 9.2 10.0 10.7 10.0 8.9 8.0 6.1 1 Gross domestic product is presented quarter-on-quarter. House price growth, commercial real estate growth and CPI inflation are presented year-on-year, i.e. from the equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter. 262 Lloyds Banking Group Annual Report and Accounts 2022 ### Note 19: Allowance for expected credit losses continued | | | | | | | | | | | 2021 to 2025 | | | Start to | | Start to | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2021 | 2022 | | 2023 | | 2024 | | 2025 | | | average | | peak | | trough | | | At 31 December 2021 | % | | % | | % | | % | | % | | | % | | % | | % | Upside Gross domestic product 7.1 4.0 1.4 1.3 1.4 3.0 12.6 (1.3) Unemployment rate 4.4 3.3 3.4 3.5 3.7 3.7 4.9 3.2 House price growth 10.1 2.6 4.9 4.7 3.6 5.1 28.5 1.2 Commercial real estate price growth 12.4 5.8 0.7 1.0 (0.6) 3.7 20.9 0.8 UK Bank Rate 0.14 1.44 1.74 1.82 2.03 1.43 2.04 0.10 1 CPI inflation 2.6 5.9 3.3 2.6 3.3 3.5 6.5 0.6 Financial results Risk managementGovernance Financial statements Other informationStrategic report Base case Gross domestic product 7.1 3.7 1.5 1.3 1.3 2.9 12.3 (1.3) Unemployment rate 4.5 4.3 4.4 4.4 4.5 4.4 4.9 4.3 House price growth 9.8 0.0 0.0 0.5 0.7 2.1 11.0 1.2 Commercial real estate price growth 10.2 (2.2) (1.9) 0.1 0.6 1.2 10.2 0.8 UK Bank Rate 0.14 0.81 1.00 1.06 1.25 0.85 1.25 0.10 1 CPI inflation 2.6 5.9 3.0 1.6 2.0 3.0 6.5 0.6 Downside Gross domestic product 7.1 3.4 1.3 1.1 1.2 2.8 11.4 (1.3) Unemployment rate 4.7 5.6 5.9 5.8 5.7 5.6 6.0 4.3 House price growth 9.2 (4.9) (7.8) (6.6) (4.7) (3.1) 9.2 (14.8) Commercial real estate price growth 8.6 (10.1) (7.0) (3.4) (0.3) (2.6) 8.6 (12.8) UK Bank Rate 0.14 0.45 0.52 0.55 0.69 0.47 0.71 0.10 1 CPI inflation 2.6 5.8 2.8 1.3 1.6 2.8 6.4 0.6 Severe downside Gross domestic product 6.8 0.9 0.4 1.0 1.4 2.1 7.6 (1.3) Unemployment rate 4.9 7.7 8.5 8.1 7.6 7.3 8.5 4.3 House price growth 9.1 (7.3) (13.9) (12.5) (8.4) (6.9) 9.1 (30.2) Commercial real estate price growth 5.8 (19.6) (12.1) (5.3) (0.5) (6.8) 6.9 (30.0) UK Bank Rate 0.14 0.04 0.06 0.08 0.09 0.08 0.25 0.02 1 CPI inflation 2.6 5.8 2.3 0.5 0.9 2.4 6.5 0.4 Probability-weighted Gross domestic product 7.0 3.4 1.3 1.2 1.3 2.8 11.6 (1.3) Unemployment rate 4.6 4.7 5.0 5.0 4.9 4.8 5.0 4.3 House price growth 9.6 (1.4) (2.3) (1.7) (1.0) 0.6 9.6 1.2 Commercial real estate price growth 9.9 (3.9) (3.7) (1.2) (0.1) 0.1 9.9 (0.3) UK Bank Rate 0.14 0.82 0.99 1.04 1.20 0.83 1.20 0.10 1 CPI inflation 2.6 5.9 2.9 1.7 2.2 3.1 6.5 0.6 1 For 31 December 2021 scenarios, CPI numbers were translations of modelled Retail Price Index excluding mortgage interest payments (RPIX) estimates. | | | | First | Second | | Third | | Fourth | | | First | Second | | Third | | Fourth | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | quarter | | quarter | | quarter | | quarter | | quarter | | quarter | | quarter | | quarter | | | Base case scenario by quarter | 1 | | 2021 | | 2021 | 2021 | | 2021 | | | 2022 | 2022 | | 2022 | | 2022 | | | At 31 December 2021 | | | % | | % | | % | | % | | % | | % | | % | | % | Gross domestic product (1.3) 5.4 1.1 0.4 0.1 1.5 0.5 0.3 Unemployment rate 4.9 4.7 4.3 4.3 4.4 4.3 4.3 4.3 House price growth 6.5 8.7 7.4 9.8 8.4 6.1 3.2 0.0 Commercial real estate price growth (2.9) 3.4 7.5 10.2 8.4 5.2 0.9 (2.2) UK Bank Rate 0.10 0.10 0.10 0.25 0.50 0.75 1.00 1.00 CPI inflation 0.6 2.1 2.8 4.9 5.3 6.5 6.3 5.3 1 Gross domestic product is presented quarter-on-quarter. House price growth, commercial real estate growth and CPI inflation are presented year-on-year, i.e. from the equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter. 263Lloyds Banking Group Annual Report and Accounts 2022 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 19: Allowance for expected credit losses** continued **ECL sensitivity to economic assumptions** The table below shows the Group's ECL for the probability-weighted, upside, base case, downside and severe downside scenarios, with the severe downside scenario incorporating adjustments made to CPI inflation and UK Bank Rate paths. The stage allocation for an asset is based on the overall scenario probability-weighted PD and hence the staging of assets is constant across all the scenarios. In each economic scenario the ECL for individual assessments and post-model adjustments is typically held constant reflecting the basis on which they are evaluated. For 31 December 2022, however, post-model adjustments in Commercial Banking have been apportioned across the scenarios to better reflect the sensitivity of these adjustments to each scenario. Judgements applied through changes to model inputs are reflected in the scenario ECL sensitivities. The probability-weighted view shows the extent to which a higher ECL allowance has been recognised to take account of multiple economic scenarios relative to the base case; the uplift being £692 million compared to £223 million at 31 December 2021. | | At 31 December 2022 | | | | | At 31 December 2021 | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Probability-weighted £m | Upside £m | Base case £m | Downside £m | Severe downside £m | Probability-weighted £m | Upside £m | Base case £m | Downside £m | Severe downside £m | | UK mortgages | 1,209 | 514 | 790 | 1,434 | 3,874 | 837 | 637 | 723 | 967 | 1,386 | | Credit cards | 763 | 596 | 727 | 828 | 1,180 | 521 | 442 | 500 | 569 | 672 | | Other Retail | 1,016 | 907 | 992 | 1,056 | 1,290 | 825 | 760 | 811 | 863 | 950 | | Commercial Banking | 1,869 | 1,459 | 1,656 | 2,027 | 3,261 | 1,433 | 1,295 | 1,358 | 1,505 | 1,859 | | Other | 46 | 46 | 46 | 47 | 47 | 426 | 426 | 427 | 426 | 424 | | **ECL allowance** | **4,903** | **3,522** | **4,211** | **5,392** | **9,652** | **4,042** | **3,560** | **3,819** | **4,330** | **5,291** | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. The table below shows the Group's ECL for the upside, base case, downside and severe downside scenarios, with staging of assets based on each specific scenario probability of default. ECL applied through individual assessments and the majority of post-model adjustments are reported flat against each economic scenario, reflecting the basis on which they are evaluated. A probability-weighted scenario is not shown as this does not reflect the basis on which ECL is reported. Comparing the probability-weighted ECL in the table above to the base case ECL with base case scenario specific staging, as shown in the table below, results in an uplift of £820 million compared to £230 million at 31 December 2021. | | At 31 December 2022 | | | | At 31 December 2021 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Upside £m | Base case £m | Downside £m | Severe downside £m | Upside £m | Base case £m | Downside £m | Severe downside £m | | UK mortgages | 469 | 734 | 1,344 | 7,848 | 636 | 722 | 973 | 1,448 | | Credit cards | 563 | 719 | 842 | 1,320 | 434 | 500 | 583 | 707 | | Other Retail | 886 | 984 | 1,059 | 1,449 | 754 | 808 | 867 | 972 | | Commercial Banking | 1,425 | 1,600 | 2,142 | 5,190 | 1,290 | 1,357 | 1,518 | 2,116 | | Other | 46 | 46 | 47 | 47 | 425 | 425 | 425 | 425 | | **ECL allowance** | **3,389** | **4,083** | **5,434** | **15,854** | **3,539** | **3,812** | **4,366** | **5,668** | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. The table below shows the percentage of assets that would be recorded in Stage 2 for the upside, base case, downside and severe downside scenarios, if stage allocation was based on each specific scenario. | | At 31 December 2022 | | | | At 31 December 2021 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Upside % | Base case % | Downside % | Severe downside % | Upside % | Base case % | Downside % | Severe downside % | | UK mortgages | 8.5 | 11.3 | 12.7 | 59.9 | 6.6 | 6.8 | 7.9 | 10.1 | | Credit cards | 16.2 | 20.8 | 24.0 | 37.7 | 11.9 | 13.7 | 16.4 | 20.0 | | Other Retail | 9.1 | 10.7 | 12.1 | 21.7 | 9.3 | 9.6 | 10.5 | 13.0 | | Commercial Banking | 6.1 | 6.9 | 17.2 | 49.9 | 7.5 | 7.7 | 9.3 | 20.1 | | **Percentage of assets in Stage 2** | **8.2** | **10.5** | **14.2** | **55.1** | **6.5** | **6.6** | **7.7** | **11.6** | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 264 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 19: Allowance for expected credit losses continued The impact of changes in the UK unemployment rate and House Price Index (HPI) have been assessed. Although such changes would not be observed in isolation, as economic indicators tend to be correlated in a coherent scenario, this gives insight into the sensitivity of the Group's ECL to gradual changes in these two critical economic factors. The assessment has been made against the base case with the reported staging unchanged and is assessed through the direct impact on modelled ECL only, including management judgements applied through changes to model inputs. The change in univariate ECL sensitivity in the period is a result of the change in definition of default and associated model changes, and the deterioration in the base case on which the assessment has been performed. The table below shows the impact on the Group's ECL resulting from a 1 percentage point (pp) increase or decrease in the UK unemployment rate. The increase or decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario. An immediate increase or decrease would drive a more material ECL impact as it would be fully reflected in both 12-month and lifetime PDs. | | At 31 December 2022 | | At 31 December 2021^{1} | | | --- | --- | --- | --- | --- | | | 1pp increase in unemployment £m | 1pp decrease in unemployment £m | 1pp increase in unemployment £m | 1pp decrease in unemployment £m | | UK mortgages | 26 | (21) | 23 | (18) | | Credit cards | 41 | (41) | 20 | (20) | | Other Retail | 25 | (25) | 12 | (12) | | Commercial Banking | 100 | (91) | 52 | (45) | | **ECL impact** | **192** | **(178)** | **107** | **(95)** | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. The table below shows the impact on the Group's ECL in respect of UK mortgages of an increase or decrease in loss given default for a 10 percentage point (pp) increase or decrease in the UK House Price Index (HPI). The increase or decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario. | | At 31 December 2022 | | At 31 December 2021 | | | --- | --- | --- | --- | --- | | | 10pp increase in HPI | 10pp decrease in HPI | 10pp increase in HPI | 10pp decrease in HPI | | **ECL impact, £m** | **(225)** | **370** | **(112)** | **162** | ### Individual assessments Stage 3 ECL in Commercial Banking is largely assessed on an individual basis using bespoke assessment of loss for each specific client. These assessments are carried out by the Business Support Unit based on detailed reviews and expected recovery strategies. While these assessments are based on the Group's latest economic view, the use of Group-wide multiple economic scenarios and weightings is not considered appropriate for these cases due to their individual characteristics. In place of this, a range of case-specific outcomes are considered with any alternative better or worse outcomes that carry a 25 per cent likelihood taken into account in establishing a probability-weighted ECL. At 31 December 2022, individually assessed provisions for Commercial Banking were £1,008 million (2021: £905 million) which reflected a range of £908 million to £1,140 million (2021: £741 million to £1,024 million), based on the range of alternative outcomes considered. ### Application of judgement in adjustments to modelled ECL Impairment models fall within the Group's model risk framework with model monitoring, periodic validation and back testing performed on model components (i.e. probability of default, exposure at default and loss given default). Limitations in the Group's impairment models or data inputs may be identified through the ongoing assessment and validation of the output of the models. In these circumstances, management make appropriate adjustments to the Group's allowance for impairment losses to ensure that the overall provision adequately reflects all material risks. These adjustments are determined by considering the particular attributes of exposures which have not been adequately captured by the impairment models and range from changes to model inputs and parameters, at account level, through to more qualitative post-model adjustments. Post-model adjustments are not typically calculated under each distinct economic scenario used to generate ECL, but on final modelled ECL. All adjustments are reviewed quarterly and are subject to internal review and challenge, including by the Audit Committee, to ensure that amounts are appropriately calculated and that there are specific release criteria identified. The coronavirus pandemic and the various support measures resulted in an economic environment which differed significantly from the historical economic conditions upon which the impairment models had been built. As a result there was a greater need for management judgements to be applied alongside the use of models at 31 December 2021. During 2022 the direct impact of the pandemic on both economic and credit performance has reduced, resulting in the release of all material judgements required specifically to capture COVID-19 risks. Conversely, the intensifying inflationary pressures alongside rising interest rates within the Group's outlook have created further risks not deemed to be fully captured by ECL models. This has required judgements to be added to capture affordability risks from inflationary and rising interest rate pressures. At 31 December 2022 management judgement resulted in additional ECL allowances totalling £330 million (2021: £1,284 million). Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 265 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 19: Allowance for expected credit losses continued The table below analyses total ECL allowance by portfolio, separately identifying the amounts that have been modelled, those that have been individually assessed and those arising through the application of management judgement. | | Modelled ECL £m | Individually assessed £m | Judgements due to: | | | Total ECL £m | | --- | --- | --- | --- | --- | --- | --- | | | | | COVID-19 £m | Inflationary risk £m | Other £m | | | **At 31 December 2022** | | | | | | | | UK mortgages | 946 | – | – | 49 | 214 | 1,209 | | Credit cards | 698 | – | – | 93 | (28) | 763 | | Other Retail | 903 | – | 1 | 53 | 59 | 1,016 | | Commercial Banking | 972 | 1,008 | – | – | (111) | 1,869 | | Other | 46 | – | – | – | – | 46 | | **Total** | **3,565** | **1,008** | **1** | **195** | **134** | **4,903** | | **At 31 December 2021** | | | | | | | | UK mortgages | 292 | – | 67 | 52 | 426 | 837 | | Credit cards | 436 | – | 94 | – | (9) | 521 | | Other Retail^{2} | 757 | – | 18 | – | 50 | 825 | | Commercial Banking^{2} | 342 | 905 | 200 | – | (14) | 1,433 | | Other^{2} | 26 | – | 400 | – | – | 426 | | **Total** | **1,853** | **905** | **779** | **52** | **453** | **4,042** | 1 Judgements introduced to address the impact that COVID-19 and resulting interventions have had on the Group's economic outlook and observed loss experience, which have required additional model limitations to be addressed. In 2021, there was a £400 million other COVID-19 judgement to recognise the risk that the conditioning assumptions assumed in the base case economic scenario were invalidated by future events. 2 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. ### Judgements due to inflationary risk #### UK mortgages: £49 million (2021: £52 million) These adjustments comprise: ##### Inflationary and interest rate pressures: £49 million (2021: £52 million) There has been only modest evidence of credit deterioration in the UK mortgages portfolio through 2022 despite the high levels of inflation and the rising interest rate environment. Mortgage ECL models use bank base rate as a driver of predicted defaults and that has contributed to the elevated levels of ECL at 31 December 2022. However, there remains a potential risk to affordability from continued inflationary pressures combined with higher interest rates, and that this may not be fully captured by the Group's ECL models. This risk is to customers maturing from low fixed rate deals, the building impact on variable rate holders and lower levels of real household income. The level of risk is somewhat mitigated from stressed affordability assessments applied at loan origination which means most customers are anticipated to be able to absorb payment shocks. A judgemental uplift in ECL has therefore been taken in specific segments of the mortgages portfolio, either where inflation is expected to present a more material risk, or where segments within the model do not use bank base rate as a material driver of predicted defaults. At 31 December 2021 additional judgemental ECL was taken in UK mortgages to recognise the heightened risk of interest rates increasing rapidly compared to the base case outlook. This judgement quantified incremental losses from adopting an alternative severe downside scenario with a 4 per cent interest rate peak. This judgement is no longer required given the Group's base case outlook, and modelled ECL, now captures an equivalent interest rate view within the base case alongside an adjusted severe scenario with a 7 per cent interest rate peak. #### Credit cards: £93 million (2021: £nil) and Other Retail: £53 million (2021: £nil) These adjustments comprise: ##### Inflationary risk on Retail segments: Credit Cards: £93 million (2021: £nil) and Other Retail: £53 million (2021: £nil) The Group's ECL models for credit cards and personal loan portfolios use predictions of wage growth to account for future affordability stress. As rapidly increasing inflation erodes nominal wage growth, adjustments have been made to the econometric models to account for real, rather than nominal, income to produce adjusted predicted defaults. These adjustments include the specific risk to affordability from increased housing costs, not captured by CPI. As these adjustments are made within predicted default models, they are calculated under each economic scenario and impact the staging of assets through increased PDs. Alongside these portfolio-wide adjustments management have also made an additional uplift to ECL for customers with lower income levels and higher indebtedness deemed most vulnerable to inflationary pressures and interest rate rises. Although this segment of customers has not exhibited any greater stress to date, uplifts have been applied to recognise continued inflation and interest rates pose a greater proportionate risk in future periods. Management believe that this is an appropriate way to account for the aggregate inflationary risk in these unsecured portfolios and will continue to monitor both actual economic and customer outcomes to ensure that this adjustment remains reasonable and appropriate. 266 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 19: Allowance for expected credit losses continued ### Other judgements #### UK mortgages: £214 million (2021: £426 million) These adjustments principally comprise: Increase in time to repossession: £118 million (2021: £87 million) Due to the Group suspending mortgage litigation activity between late-2014 and mid-2018 due to policy changes for the treatment of arrears, and as collections strategy normalises post COVID-19 pandemic, the Group's experience of possessions data on which our models rely on is limited. This reflects an adjustment made to allow for an increase in the time assumed between default and repossession. Provision coverage is uplifted to the equivalent levels of those accounts already in repossession on an estimated shortfall of balances expected to flow to possession. A further adjustment is made to accounts which have been in default for more than 24 months, with an arrears balance increase in the last six months. These accounts have their probability of possession set to 70 per cent based on observed historical losses incurred on accounts that were of an equivalent status. The increase in the judgement reflects a lower modelled coverage that requires a larger adjustment to reach the required levels. Asset recovery values: £69 million (2021: £21 million) Due to low repossession volumes, sales data informing the estimated level of discount in the event of repossessions has been limited, impacting the ability to update model parameters. Despite these low volumes, since 2020 the observed asset recovery sale values have remained broadly the same on the limited volumes seen, however the indexed valuation within the model has shown an increasing trend due to HPI increases, therefore management consider it appropriate to uplift ECL to reflect expected recovery values. Adjustment for specific segments: £25 million (2021: £54 million) The Group monitors risks across specific segments of its portfolios which may not be fully captured through wider collective models. Judgemental increases applied to probability of default on forborne accounts (31 December 2021: £18 million) have been removed as models now include forborne accounts in Stage 3 assets. The judgement for fire safety and cladding uncertainty has reduced to £25 million (31 December 2021: £36 million). Though experience remains limited the risk is considered sufficiently material to address through judgement, given that there is evidence of assessed cases having defective cladding, or other fire safety issues, but this risk has reduced throughout the year. #### Credit cards: £(28) million (2021: £(9) million) and Other Retail: £59 million (2021: £50 million) These adjustments principally comprise: Lifetime extension on revolving products: Credit cards: £82 million (2021: £41 million) and Other Retail: £14 million (2021: £5 million) An adjustment is required to extend the lifetime used for Stage 2 exposures on Retail revolving products from a three year modelled lifetime, which reflected the outcome data available when the model was developed. Previously this was deemed to be six years by increasing default probabilities through the extrapolation of the default trajectory observed throughout the three years and beyond. During 2022, work was undertaken to reassess the expected lifetime for these assets, which concluded in an extension of the expected lifetime from six to ten years, resulting in an increase to this adjustment. Adjustments to loss given defaults (LGDs): Credit cards: £(96) million (2021: £(37) million) and Other Retail: £13 million (2021: £24 million) A number of adjustments have been made to the loss given default assumptions used within unsecured and motor credit models. These include judgements held previously, notably in relation to the alignment of MBNA credit card cure rates as collection strategies harmonise. Alongside this, new adjustments have also been raised to capture recent improvements in observed cure rates offset by updates to recovery cost assumptions. These adjustments will be released once incorporated into models through future recalibration which is pending model development. Motor default suppression: Other Retail: £13 million (2021: £nil) Used car prices have continued to rise through 2022 with lower actual defaults materialising than anticipated. Management consider it appropriate to uplift ECL to account for the risk that prices return back to more normalised levels. #### Commercial Banking: £(111) million (2021: £(14) million) These adjustments principally comprise: Adjustments to loss given defaults (LGDs): £(105) million (2021: £(25) million) The modelling approach for loss given default for commercial exposures has been reviewed. Management deem ECL should be adjusted to mitigate limitations identified in the approach which are causing loss given defaults to be inflated. These include the benefit from amortisation of exposures relative to collateral values at default and a move to an exposure-weighted approach being adopted. These temporary adjustments will be addressed through future model development. Corporate insolvency rates: £(35) million (2021: £nil) During 2022, the volume of UK corporate insolvencies showed an increasing trend to above December 2019 levels, revealing a marked dislocation between observed UK corporate insolvencies and the Group's credit performance. This dislocation gives rise to uncertainty over the drivers of observed trends and the appropriateness of the Group's Commercial Banking model response which uses observed UK corporate insolvencies data. Given the Group's asset quality remains strong with very low new defaults, a negative adjustment was deemed appropriate by management to address potential overstatement of Commercial Banking ECL. #### Climate risk The Group considers how climate risks are incorporated into the measurement of expected credit losses. An assessment was performed of the Group's internally generated economic scenarios used in the measurement of expected credit losses against external scenarios published by the Network for Greening the Financial System (NGFS). This was supplemented by an assessment of the behavioural lifetime of assets against the expected time horizons of when climate risks may materialise. Given the extended timelines related to climate risks compared to the tenor of the Group's lending portfolios and insights produced by the Group's climate risk experts, no adjustments have been required to the expected credit losses measured as at 31 December 2022. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 267 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 20: Finance lease and hire purchase receivables** The Group's finance lease and hire purchase receivables are classified as loans and advances to customers and accounted for at amortised cost. These balances are analysed as follows: | | Finance leases | | Hire purchase | | | --- | --- | --- | --- | --- | | | 2022 £m | 2021 £m | 2022 £m | 2021 £m | | Not later than 1 year | **223** | 346 | **6,339** | 4,752 | | Later than 1 year and not later than 2 years | **223** | 143 | **3,896** | 4,541 | | Later than 2 years and not later than 3 years | **119** | 230 | **3,725** | 3,998 | | Later than 3 years and not later than 4 years | **54** | 118 | **2,975** | 2,828 | | Later than 4 years and not later than 5 years | **40** | 54 | **388** | 816 | | Later than 5 years | **299** | 337 | **275** | 374 | | **Gross investment** | **958** | 1,228 | **17,598** | 17,309 | | Unearned future finance income | **(181)** | (232) | **(1,458)** | (1,359) | | Rentals received in advance | **(11)** | (14) | **(111)** | (89) | | **Net investment** | **766** | 982 | **16,029** | 15,861 | The net investment represents amounts recoverable as follows: | | Finance leases | | Hire purchase | | | --- | --- | --- | --- | --- | | | 2022 £m | 2021 £m | 2022 £m | 2021 £m | | Not later than 1 year | **177** | 277 | **5,646** | 4,032 | | Later than 1 year and not later than 2 years | **192** | 110 | **3,468** | 4,172 | | Later than 2 years and not later than 3 years | **96** | 200 | **3,456** | 3,781 | | Later than 3 years and not later than 4 years | **38** | 96 | **2,856** | 2,754 | | Later than 4 years and not later than 5 years | **27** | 38 | **358** | 767 | | Later than 5 years | **236** | 261 | **245** | 355 | | **Net investment** | **766** | 982 | **16,029** | 15,861 | Equipment leased to customers under finance leases and hire purchase receivables relates to financing transactions to fund the purchase of aircraft, ships, motor vehicles and other items. There was an allowance for uncollectable finance lease receivables included in the allowance for impairment losses of £14 million (2021: £18 million) and for hire purchase receivables of £238 million (2021: £275 million). The Group's finance lease and hire purchase assets are comprised as follows: | | Finance leases | | Hire purchase | | | --- | --- | --- | --- | --- | | | 2022 £m | 2021 £m | 2022 £m | 2021 £m | | Electric vehicles | **8** | 3 | **578** | 430 | | Internal combustion engine vehicles | **176** | 142 | **10,817** | 10,713 | | Hybrid vehicles | **5** | 3 | **741** | 524 | | Other | **577** | 834 | **3,893** | 4,194 | | **Net investment** | **766** | 982 | **16,029** | 15,861 | 268 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 21: Financial assets at fair value through other comprehensive income | | 2022 £m | 2021 £m | | --- | --- | --- | | Debt securities: | | | | Government securities | 11,211 | 14,613 | | Asset-backed securities | 146 | 70 | | Corporate and other debt securities | 11,514 | 13,134 | | | **22,871** | 27,817 | | Treasury and other bills | – | 85 | | Equity shares | 283 | 235 | | **Total financial assets at fair value through other comprehensive income** | **23,154** | 28,137 | All assets were assessed at Stage 1 at 31 December 2021 and 2022. ## Note 22: Investments in joint ventures and associates The Group's share of results of, and investments in, equity accounted joint ventures and associates comprises: | | Joint ventures | | | Associates | | | Total | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 2022 £m | 2021 £m | 2020 £m | 2022 £m | 2021 £m | 2020 £m | 2022 £m | 2021 £m | 2020 £m | | **Share of income statement amounts:** | | | | | | | | | | | Income | 108 | 90 | 72 | 7 | 4 | 4 | 115 | 94 | 76 | | Expenses | (85) | (80) | (78) | (20) | (11) | (11) | (105) | (91) | (89) | | Impairment | – | – | – | – | – | – | – | – | – | | Profit (loss) before tax | 23 | 10 | (6) | (13) | (7) | (7) | 10 | 3 | (13) | | Tax | – | (1) | – | – | – | – | – | (1) | – | | **Share of post-tax results** | **23** | 9 | (6) | **(13)** | (7) | (7) | **10** | 2 | (13) | | Share of other comprehensive income | – | – | – | – | – | – | – | – | – | | Share of total comprehensive income | **23** | 9 | (6) | **(13)** | (7) | (7) | **10** | 2 | (13) | ### Share of balance sheet amounts: | Current assets | 324 | 421 | 58 | 23 | 382 | 444 | | --- | --- | --- | --- | --- | --- | --- | | Non-current assets | 227 | 169 | 3 | 12 | 230 | 181 | | Current liabilities | (97) | (142) | (11) | (5) | (108) | (147) | | Non-current liabilities | (119) | (126) | – | – | (119) | (126) | | **Share of net assets at 31 December** | **335** | 322 | **50** | 30 | **385** | 352 | ### Movement in investments over the year: | At 1 January | 322 | 279 | 30 | 17 | 352 | 296 | | --- | --- | --- | --- | --- | --- | --- | | Exchange and other adjustments | (17) | – | (6) | – | (23) | – | | Additional investments | 56 | 34 | 39 | 20 | 95 | 54 | | Repayment of capital | (36) | – | – | – | (36) | – | | Share of post-tax results | 23 | 9 | (13) | (7) | 10 | 2 | | Dividends paid | (13) | – | – | – | (13) | – | | **Share of net assets at 31 December** | **335** | 322 | **50** | 30 | **385** | 352 | The Group's unrecognised share of losses of associates for the year was £nil (2021: £nil; 2020: £nil). For entities making losses, subsequent profits earned are not recognised until previously unrecognised losses are extinguished. The Group's unrecognised share of losses net of unrecognised profits on a cumulative basis of associates is £2 million (2021: £2 million; 2020: £2 million) and of joint ventures is £5 million (2021: £5 million; 2020: £5 million). Where entities have statutory accounts drawn up to a date other than 31 December, management accounts are used for Group reporting. Included within the investment in joint ventures at 31 December 2022 is £68 million (2021: £73 million) of lending carried at amortised cost. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 269 ## Notes to the consolidated financial statements continued ### Note 23: Goodwill | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | 2,320 | 2,320 | | Acquisition of businesses (see below) | 335 | – | | **At 31 December** | **2,655** | **2,320** | | Cost^{1} | 2,999 | 2,664 | | Accumulated impairment losses | (344) | (344) | | **At 31 December** | **2,655** | **2,320** | 1 For acquisitions made prior to 1 January 2004, the date of transition to IFRS, cost is included net of amounts amortised up to 31 December 2003. On 31 January 2022, the Group completed the acquisition of 100 per cent of the share capital of Embark Group Limited (Embark), which together with its subsidiaries operates an investment and retirement platform business, enhancing the Group's Wealth business capabilities, and has been consolidated into the Group's results from that date. The total fair value of the purchase consideration was £377 million, settled in cash, and goodwill of £324 million has been recognised on the transaction. None of the goodwill recognised is deductible for tax purposes. Acquisition-related costs of £4 million have been included in operating expenses for the year ended 31 December 2022. The revenue included in the consolidated statement of comprehensive income since 31 January 2022 contributed by Embark was £81 million, with net loss after tax of £9 million over the same period. Had Embark been consolidated from 1 January 2022, the consolidated statement of comprehensive income would have included revenue of £87 million and a net loss after tax of £12 million. The goodwill relating to the acquisition of Embark has been allocated to the Group's Life and pensions business as it is expected to benefit from the synergies of the acquisition. In addition, goodwill of £11 million arose on the Group's acquisition of Cavendish Online during the year. The goodwill held in the Group's balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to the appropriate cash generating unit; of the total balance of £2,655 million (2021: £2,320 million), £2,171 million, or 82 per cent (2021: £1,836 million, 79 per cent), including the £324 million arising on the acquisition of Embark in the year, has been allocated to the Life and pensions cash generating unit; £302 million, or 11 per cent (2021: £302 million, 13 per cent) has been allocated to the Credit card cash generating unit in the Group's Retail division; and £165 million, or 6 per cent (2021: £166 million, 7 per cent) to the Motor business cash generating unit. The recoverable amount of the goodwill relating to Scottish Widows is based on a value-in-use calculation. The calculation uses pre-tax projections of future cash flows based upon budgets and plans approved by management covering a four-year period, the related run-off of existing business in-force and a discount rate (pre-tax) of 11.2 per cent. The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market conditions (which will reflect current and future risks, such as climate and expected economic activity conditions) and competitor activity. The discount rate is determined with reference to internal measures and available industry information. New business cash flows beyond the four-year period have been extrapolated using a reducing balance growth rate that falls from 3.5 per cent down to 2.0 percent after 20 years, which does not exceed the long-term average growth rate for the life assurance market. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of the goodwill relating to Scottish Widows to fall below its balance sheet carrying value. The recoverable amount of the goodwill relating to the Motor business is based on a value-in-use calculation using post-tax cash flow projections based on financial budgets and plans approved by management covering a four-year period and a discount rate (post-tax) of 10 per cent, based on the Group's cost of equity. The cash flows beyond the four-year period are extrapolated using a growth rate of 3.5 per cent which does not exceed the long-term average growth rates for the markets in which the Motor business participates. Management believes that any reasonably possible change in the key assumptions, including from the impacts of climate change or climate-related legislation, would not cause the recoverable amount of the goodwill relating to the Motor business to fall below the balance sheet carrying value. The recoverable amount of the goodwill relating to Credit cards has been based on a value-in-use calculation using post-tax cash flow projections based on financial budgets and plans approved by management covering a four-year period and a discount rate (post-tax) of 10 per cent, based on the Group's cost of equity. The cash flows beyond the four-year period assume 3.5 per cent growth. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of the goodwill relating to Credit cards to fall below the balance sheet carrying value. ### Note 24: Value of in-force business #### Key assumptions The impacts of reasonably possible changes in the key assumptions made in respect of the Group's life insurance business, which include the impact on the value of in-force business, are disclosed in note 32. The principal features of the methodology and process used for determining key assumptions used in the calculation of the value of in-force business are set out below: #### Economic assumptions Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. In practice, to achieve the same result, where the cash flows are either independent of or move linearly with market movements, a method has been applied known as the 'certainty equivalent' approach whereby it is assumed that all assets earn a risk-free rate and all cash flows are discounted at a risk-free rate. The certainty equivalent approach covers all investment assets relating to insurance and participating investment contracts, other than the annuity business (where an illiquidity premium is included, see below). A market-consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated to be consistent with the market price of relevant options at each valuation date. Further information on options and guarantees can be found in note 31. 270 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 24: Value of in-force business continued The liabilities in respect of the Group's UK annuity business are matched by a portfolio of fixed interest securities, including a large proportion of corporate bonds and illiquid loan assets. The value of the in-force business asset for UK annuity business has been calculated after taking into account an estimate of the market premium for illiquidity in respect of corporate bond holdings and relevant illiquid loan assets. In determining the market premium for illiquidity, a range of inputs are considered which reflect actual asset allocation and relevant observable market data. The illiquidity premium is estimated to be 160 basis points at 31 December 2022 (31 December 2021: 88 basis points). The risk-free rate is derived from the relevant swap curve with a deduction for credit risk. The table below shows the resulting range of yields and other key assumptions at 31 December: | | 2022 % | 2021 % | | --- | --- | --- | | Risk-free rate (value of in-force non-annuity business)^{1} | **1.94 to 4.55** | (0.16) to 3.60 | | Risk-free rate (value of in-force annuity business)^{1} | **3.54 to 6.15** | 0.72 to 4.49 | | Risk-free rate (financial options and guarantees)^{1} | **1.94 to 4.55** | (0.16) to 3.60 | | Retail price inflation | **3.70** | 3.28 | | Expense inflation | **4.00** | 3.58 | 1 All risk-free rates are quoted as the range of rates implied by the relevant forward swap curve. ### Non-market risk An allowance for non-market risk is made through the choice of best estimate assumptions based upon experience, which generally will give the mean expected financial outcome for shareholders and hence no further allowance for non-market risk is required. However, in the case of operational risk, reinsurer default and the with-profit funds these can be asymmetric in the range of potential outcomes for which an explicit allowance is made. ### Non-economic assumptions Future mortality, morbidity, expenses, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on management's view of future experience. Further information on these assumptions is given in note 31 and the effect of changes in key assumptions is given in note 32. The value of in-force business asset in the consolidated balance sheet is comprised as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | Acquired value of in-force non-participating investment contracts | **175** | 197 | | Value of in-force insurance and participating investment contracts | **5,244** | 5,317 | | **Total value of in-force business** | **5,419** | 5,514 | The movement in the acquired value of in-force non-participating investment contracts over the year is as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | **197** | 221 | | Amortisation (note 11) | **(22)** | (24) | | **At 31 December** | **175** | 197 | The acquired value of in-force non-participating investment contracts includes £106 million (2021: £119 million) in relation to OEIC business. ### Movement in value of in-force business The movement in the value of in-force insurance and participating investment contracts over the year is as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | **5,317** | 5,396 | | Exchange and other adjustments | **7** | (9) | | Movements in the year: | | | | New business | **416** | 321 | | Existing business: | | | | Expected return | **(360)** | (355) | | Experience variances | **18** | 84 | | Assumption changes | **247** | (465) | | Economic variance | **(401)** | 345 | | Movement in the value of in-force business (note 9) | **(80)** | (70) | | **At 31 December** | **5,244** | 5,317 | This breakdown shows the movement in the value of in-force business only, and does not represent the full contribution that each item in the breakdown makes to profit before tax. This will also contain changes in the other assets and liabilities of the relevant businesses, including the effects of changes in assumptions used to value the liabilities. The presentation of economic variance includes the impact of financial market conditions being different at the end of the year from those included in assumptions used to calculate new and existing business returns. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 271 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 25: Other intangible assets** | | Brands £m | Core deposit intangible £m | Purchased credit card relationships £m | Customer- related intangibles £m | Capitalised software enhancements £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | | *Cost:* | | | | | | | | At 1 January 2021 | 596 | 2,770 | 1,002 | 538 | 5,894 | 10,800 | | Additions and acquisitions | – | – | – | – | 1,017 | 1,017 | | Disposals and write-offs | – | – | – | – | (460) | (460) | | At 31 December 2021 | 596 | 2,770 | 1,002 | 538 | 6,451 | 11,357 | | Exchange and other adjustments | – | – | – | – | (1) | (1) | | Additions and acquisitions | 5 | – | – | 34 | 1,452 | 1,491 | | Disposals and write-offs | (12) | – | – | – | (186) | (198) | | **At 31 December 2022** | **589** | **2,770** | **1,002** | **572** | **7,716** | **12,649** | | *Accumulated amortisation:* | | | | | | | | At 1 January 2021 | 216 | 2,770 | 551 | 538 | 2,585 | 6,660 | | Exchange and other adjustments | – | – | – | – | (1) | (1) | | Charge for the year (note 11) | – | – | 70 | – | 892 | 962 | | Disposals and write-offs | – | – | – | – | (460) | (460) | | At 31 December 2021 | 216 | 2,770 | 621 | 538 | 3,016 | 7,161 | | Exchange and other adjustments | – | – | 1 | 3 | (7) | (3) | | Charge for the year (note 11) | – | – | 70 | – | 833 | 903 | | Disposals and write-offs | (12) | – | – | – | (186) | (198) | | **At 31 December 2022** | **204** | **2,770** | **692** | **541** | **3,656** | **7,863** | | **Balance sheet amount at 31 December 2022** | **385** | **–** | **310** | **31** | **4,060** | **4,786** | | Balance sheet amount at 31 December 2021 | 380 | – | 381 | – | 3,435 | 4,196 | Brands arising from the acquisition of Bank of Scotland in 2009 are recognised on the Group's balance sheet and have been determined to have an indefinite useful life. The carrying value at 31 December 2022 was £380 million (2021: £380 million). The Bank of Scotland name has been in existence for over 300 years and there are no indications that the brand should not have an indefinite useful life. The recoverable amount has been based on a value-in-use calculation. The calculation uses post-tax projections for a four-year period of the income generated by the Bank of Scotland cost generating unit, a discount rate of 10 per cent and a future growth rate of 3.5 per cent. Management believes that any reasonably possible change in the key assumptions would not cause the recoverable amount of the Bank of Scotland brand to fall below its balance sheet carrying value. # **Note 26: Other assets** | | 2022 £m | 2021 £m | | --- | --- | --- | | Property, plant and equipment: | | | | Investment properties (see below) | 2,532 | 3,612 | | Premises | 871 | 817 | | Equipment | 1,285 | 1,634 | | Operating lease assets (see below) | 4,816 | 4,196 | | Right-of-use assets (note 27) | 1,156 | 1,318 | | | **10,660** | **11,577** | | Settlement balances | 416 | 434 | | Prepayments | 1,224 | 1,022 | | Deferred acquisition and origination costs | 54 | 64 | | Other assets | 1,483 | 1,593 | | **Total other assets** | **13,837** | **14,690** | 272 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 26: Other assets continued ### Investment properties The Group's investments properties are predominantly held by the Insurance, Pensions and Investments business where they back policyholder liabilities. They are valued by external Chartered Surveyors using industry standard techniques based on guidance from the Royal Institute of Chartered Surveyors. The valuation methodology includes an assessment of general market conditions and sector level transactions and takes account of expectations of occupancy rates, rental income and growth. Property valuations undergo individual scrutiny using cash flow analysis to factor in the timing of rental reviews, capital expenditure, lease incentives, dilapidation and operating expenses; these reviews utilise both observable and unobservable inputs. Within the fair value hierarchy, all of the Group's investment properties are categorised as level 3 (see note 49 for details of levels in the fair value hierarchy). The table below analyses movements in level 3 investment properties, which are carried at fair value. | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | 3,612 | 3,347 | | Acquisition of new properties | 60 | 18 | | Additional expenditure on existing properties | 50 | 68 | | Change in fair value (note 7) | (511) | 575 | | Disposals | (679) | (396) | | **At 31 December** | **2,532** | **3,612** | Rental income of £145 million (2021: £186 million) and direct operating expenses of £32 million (2021: £25 million) arising from investment properties that generate rental income have been recognised in the income statement. Capital expenditure in respect of investment properties which had been contracted for but not recognised in the financial statements was £119 million (2021: £78 million). ### Operating lease assets where the Group is lessor Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. At 31 December the future minimum rentals receivable under non-cancellable operating leases were as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | Within 1 year | 912 | 848 | | 1 to 2 years | 620 | 561 | | 2 to 3 years | 322 | 288 | | 3 to 4 years | 102 | 86 | | 4 to 5 years | 11 | 8 | | Over 5 years | – | – | | **Total future minimum rentals receivable** | **1,967** | **1,791** | Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. Operating lease assets are comprised as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | Electric vehicles | 1,610 | 728 | | Internal combustion engine vehicles | 2,042 | 2,531 | | Hybrid vehicles | 1,159 | 928 | | Other | 5 | 9 | | **Total operating lease assets** | **4,816** | **4,196** | ## Note 27: Lessee disclosures The table below sets out the movement in the Group's right-of-use assets, which are primarily in respect of premises, and are recognised within other assets (note 26). | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | 1,318 | 1,500 | | Exchange and other adjustments | 3 | (9) | | Additions | 98 | 73 | | Disposals | (37) | (18) | | Depreciation charge for the year | (226) | (228) | | **At 31 December** | **1,156** | **1,318** | The Group's lease liabilities are recognised within other liabilities (note 34). The maturity analysis of the Group's lease liabilities on an undiscounted basis is set out in the liquidity risk section of note 52. The total cash outflow for leases in the year ended 31 December 2022 was £210 million (2021: £256 million). The amount recognised within interest expense in respect of lease liabilities is disclosed in note 5. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 273 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 28: Financial liabilities at fair value through profit or loss** | | 2022 £m | 2021 £m | | --- | --- | --- | | Liabilities designated at fair value through profit or loss: | | | | Debt securities in issue | 5,159 | 6,537 | | Other | 19 | 4 | | | 5,178 | 6,541 | | Trading liabilities: | | | | Liabilities in respect of securities sold under repurchase agreements | 11,037 | 14,962 | | Short positions in securities | 1,540 | 1,620 | | | 12,577 | 16,582 | | **Total financial liabilities at fair value through profit or loss** | **17,755** | **23,123** | Liabilities designated at fair value through profit or loss primarily represent debt securities in issue which either contain substantive embedded derivatives which would otherwise need to be recognised and measured at fair value separately from the related debt securities, or which are accounted for at fair value to significantly reduce an accounting mismatch. The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2022 was £11,195 million, which was £6,036 million higher than the balance sheet carrying value (2021: £10,558 million, which was £4,021 million higher than the balance sheet carrying value). At 31 December 2022 there was a cumulative £324 million decrease in the fair value of these liabilities attributable to changes in credit spread risk; this is determined by reference to the quoted credit spreads of Lloyds Bank plc, the issuing entity within the Group. Of the cumulative amount, a decrease of £519 million arose in 2022 and an increase of £86 million arose in 2021. For the fair value of collateral pledged in respect of repurchase agreements see note 52. In addition to the liabilities above, the Group's non-participating investment contracts (see note 33) are held at fair value through profit or loss. # **Note 29: Debt securities in issue** | | 2022 £m | 2021 £m | | --- | --- | --- | | Senior unsecured notes issued | 36,819 | 37,354 | | Covered bonds (note 30) | 14,242 | 17,409 | | Certificates of deposit issued | 7,225 | 4,454 | | Securitisation notes (note 30) | 2,780 | 3,672 | | Commercial paper | 12,753 | 8,663 | | **Total debt securities in issue** | **73,819** | **71,552** | # **Note 30: Securitisations and covered bonds** # **Securitisation programmes** Loans and advances to customers include loans securitised under the Group's securitisation programmes, the majority of which have been sold by subsidiary companies to bankruptcy remote structured entities. As the structured entities are funded by the issue of debt on terms whereby the majority of the risks and rewards of the portfolio are retained by the subsidiary, the structured entities are consolidated fully and all of these loans are retained on the Group's balance sheet, with the related notes in issue included within debt securities in issue. # **Covered bond programmes** Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of covered bonds by the Group. The Group retains all of the risks and rewards associated with these loans and the partnerships are consolidated fully with the loans retained on the Group's balance sheet and the related covered bonds in issue included within debt securities in issue. 274 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 30: Securitisations and covered bonds continued The Group's principal securitisation and covered bond programmes, together with the balances of the advances subject to these arrangements and the carrying value of the externally held notes in issue at 31 December, are listed below. Notes in issue, previously reported gross of internal holdings, are presented net; comparatives have been presented on a consistent basis. The notes in issue are reported in note 29. | | 2022 | | 2021 | | | --- | --- | --- | --- | --- | | | Loans and advances securitised £m | Externally held notes in issue £m | Loans and advances securitised £m | Externally held notes in issue £m | | **Securitisation programmes** | | | | | | UK residential mortgages and commercial loans | 15,805 | 2,035 | 19,129 | 2,543 | | Credit card receivables | 12,776 | 223 | 11,615 | 595 | | Motor vehicle finance | 401 | 149 | 235 | 141 | | Dutch residential mortgages | 402 | 399 | 427 | 426 | | **Total securitisation programmes (notes 28 and 29)^{1}** | **29,384** | **2,806** | **31,406** | **3,705** | | **Covered bond programmes** | | | | | | Residential mortgage-backed | 27,400 | 13,742 | 35,896 | 16,909 | | Social housing loan-backed | 831 | 500 | 833 | 500 | | **Total covered bond programmes (note 29)** | **28,231** | **14,242** | **36,729** | **17,409** | | **Total securitisation and covered bond programmes** | | **17,048** | | **21,114** | 1 Including assets backing notes held internally within the Group. 2 Includes £28 million (2021: £33 million) of securitisation notes held at fair value through profit or loss. Cash deposits of £3,896 million (2021: £3,558 million) which support the debt securities issued by the structured entities, the term advances related to covered bonds and other legal obligations, are held by the Group. Additionally, the Group has certain contractual arrangements to provide liquidity facilities to some of these structured entities. At 31 December 2022 these obligations had not been triggered; the maximum exposure under these facilities was £25 million (2021: £52 million). The Group has two covered bond programmes, for which limited liability partnerships have been established to ring-fence asset pools and guarantee the covered bonds issued by the Group. At the reporting date the Group had over-collateralised these programmes as set out in the table above to meet the terms of the programmes, to secure the rating of the covered bonds and to provide operational flexibility. From time to time, the obligations of the Group to provide collateral may increase due to the formal requirements of the programmes. The Group may also voluntarily contribute collateral to support the ratings of the covered bonds. The Group recognises the full liabilities associated with its securitisation and covered bond programmes within debt securities in issue, although the obligations of the Group in respect of its securitisation issuances are limited to the cash flows generated from the underlying assets. The Group could be required to provide additional support to a number of the securitisation programmes to support the credit ratings of the debt securities issued, in the form of increased cash reserves and the holding of subordinated notes. Further, certain programmes contain contractual obligations that require the Group to repurchase assets should they become credit-impaired or as otherwise required by the transaction documents. The Group has not provided financial or other support by voluntarily offering to repurchase assets from any of its public securitisation programmes during 2022 (2021: none). ## Note 31: Liabilities arising from insurance contracts and participating investment contracts Insurance contract and participating investment contract liabilities are comprised as follows: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Gross £m | Reinsurance^{1} £m | Net £m | Gross £m | Reinsurance^{1} £m | Net £m | | Life insurance (see (1) below): | | | | | | | | Insurance contracts | 95,745 | (595) | 95,150 | 109,200 | (740) | 108,460 | | Participating investment contracts | 10,541 | – | 10,541 | 13,623 | – | 13,623 | | | **106,286** | **(595)** | **105,691** | **122,823** | **(740)** | **122,083** | | Non-life insurance contracts (see (2) below): | | | | | | | | Unearned premiums | 246 | (17) | 229 | 312 | (16) | 296 | | Claims outstanding | 361 | (2) | 359 | 288 | – | 288 | | | **607** | **(19)** | **588** | **600** | **(16)** | **584** | | **Total** | **106,893** | **(614)** | **106,279** | **123,423** | **(756)** | **122,667** | 1 Reinsurance balances are reported within assets. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 275 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 31: Liabilities arising from insurance contracts and participating investment contracts continued #### (1) Life insurance The movement in life insurance contract and participating investment contract liabilities over the year can be analysed as follows: | | Insurance contracts £m | Participating investment contracts £m | Gross £m | Reinsurance £m | Net £m | | --- | --- | --- | --- | --- | --- | | At 1 January 2021 | 102,424 | 13,041 | 115,465 | (820) | 114,645 | | New business | 3,427 | 40 | 3,467 | (110) | 3,357 | | Changes in existing business | 3,437 | 570 | 4,007 | 190 | 4,197 | | Change in liabilities charged to the income statement (note 10) | 6,864 | 610 | 7,474 | 80 | 7,554 | | Exchange and other adjustments | (88) | (28) | (116) | – | (116) | | At 31 December 2021 | 109,200 | 13,623 | 122,823 | (740) | 122,083 | | New business | 4,151 | 18 | 4,169 | (98) | 4,071 | | Changes in existing business | (17,693) | (3,100) | (20,793) | 243 | (20,550) | | Change in liabilities charged to the income statement (note 10) | (13,542) | (3,082) | (16,624) | 145 | (16,479) | | Exchange and other adjustments | 87 | – | 87 | – | 87 | | **At 31 December 2022** | **95,745** | **10,541** | **106,286** | **(595)** | **105,691** | Liabilities for insurance contracts and participating investment contracts can be split into with-profit fund liabilities, accounted for using the PRA's realistic capital regime (realistic liabilities), and non-profit fund liabilities, accounted for using a prospective actuarial discounted cash flow methodology, as follows: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | With-profit fund £m | Non-profit fund £m | Total £m | With-profit fund £m | Non-profit fund £m | Total £m | | Insurance contracts | 5,778 | 89,967 | 95,745 | 7,232 | 101,968 | 109,200 | | Participating investment contracts | 5,435 | 5,106 | 10,541 | 6,641 | 6,982 | 13,623 | | **Total** | **11,213** | **95,073** | **106,286** | **13,873** | **108,950** | **122,823** | #### With-profit fund realistic liabilities ##### (i) Business description Scottish Widows Limited has the only with-profit funds within the Group. The primary purpose of the conventional and unitised business written in the with-profit funds is to provide a smoothed investment vehicle to policyholders, protecting them against short-term market fluctuations. Pay-outs may be subject to a guaranteed minimum pay-out if certain policy conditions are met. With-profit policyholders are entitled to at least 90 per cent of the distributed profits, with the shareholders receiving the balance. The policyholders are also usually insured against death and the policy may carry a guaranteed annuity option at retirement. ##### (ii) Method of calculation of liabilities With-profit liabilities are stated at their realistic value, the main components of which are: - With-profit benefit reserve, the total asset shares for with-profit policies - Cost of options and guarantees (including guaranteed annuity options) - Deductions levied against asset shares - Planned enhancements to with-profit benefit reserve - Impact of the smoothing policy ##### (iii) Assumptions Key assumptions used in the calculation of with-profit liabilities, which reflect the impacts of COVID-19 that has also increased the level of uncertainty (in particular in relation to persistency and mortality assumptions) and the processes for determining these, are: #### Investment returns and discount rates With-profit fund liabilities are valued on a market-consistent basis, achieved by the use of a valuation model which values liabilities on a basis calibrated to tradable market option contracts and other observable market data. The with-profit fund financial options and guarantees are valued using a stochastic simulation model where all assets are assumed to earn, on average, the risk-free yield and all cash flows are discounted using the risk-free yield. The risk-free yield is defined as the spot yield derived from the relevant swap curve, adjusted for credit risk. Further information on significant options and guarantees is given below. #### Guaranteed annuity option take-up rates Certain pension contracts contain guaranteed annuity options that allow the policyholder to take an annuity benefit on retirement at annuity rates that were guaranteed at the outset of the contract. For contracts that contain such options, key assumptions in determining the cost of options are economic conditions in which the option has value, mortality rates and take-up rates of other options. The financial impact is dependent on the value of corresponding investments, interest rates and longevity at the time of the claim. 276 Lloyds Banking Group Annual Report and Accounts 2022 # Note 31: Liabilities arising from insurance contracts and participating investment contracts continued # Investment volatility The calibration of the stochastic simulation model uses implied volatilities of derivatives where possible, or historical volatility where it is not possible to observe meaningful prices. # Mortality The mortality assumptions for the main classes of business are set with regard to recent Group experience and general industry trends, all of which are adjusted for smoker status and age/gender specific factors. The mortality tables used in the valuation are summarised below: | | 2022 | 2021 | | --- | --- | --- | | Annuities | 94% Bespoke tables CMI2021_{M/F}_{7.25}_{3.0/2.8}‰_{0.0/0.2}A_2013 | 94% Bespoke tables CMI2020_{M/F}_{7.25}_{3.0/2.8}‰_{0.3/0.4}A_2013 | | Whole of life assurance | Bespoke tables | Bespoke tables | | Term assurance | 88%-111% of TxxL08 tables | 88%-111% of TxxL08 tables | | Pensions | 64%-77% of TxxL08 tables | 64%-77% of TxxL08 tables | | Savings | 62%-74% of AxC00 tables | 55%-80% of AxC00 tables | # Lapse rates (persistency) Lapse rates refer to the rate of policy termination or the rate at which policyholders stop paying regular premiums due under the contract. Historical persistency experience is analysed using statistical techniques. As experience can vary considerably between different product types and for contracts that have been in force for different periods, the data is broken down into broadly homogenous groups for the purposes of this analysis. The most recent experience is considered along with the results of previous analyses and management's views on future experience, taking into consideration potential changes in future experience that may result from guarantees and options becoming more valuable under adverse market conditions, in order to determine a 'best estimate' view of what persistency will be. In determining this best estimate view a number of factors are considered, including the credibility of the results (which will be affected by the volume of data available), any exceptional events that have occurred during the period under consideration, any known or expected trends in underlying data and relevant published market data. # (iv) Options and guarantees within the With-Profit Funds The most significant options and guarantees provided from within the With-Profit Funds are in respect of guaranteed minimum cash benefits on death, maturity, retirement or certain policy anniversaries, and guaranteed annuity options on retirement for certain pension policies. For those policies written in Scottish Widows pre-demutualisation containing potentially valuable options and guarantees, under the terms of the demutualisation scheme a separate memorandum account was set up, within the With-Profit Fund originally held in Scottish Widows plc and subsequently transferred into Scottish Widows Limited, called the Additional Account, which is available, inter alia, to meet any additional costs of providing guaranteed benefits in respect of those policies. The Additional Account had a value at 31 December 2022 of £1.9 billion (2021: £2.5 billion). The eventual cost of providing benefits on policies written both pre and post demutualisation is dependent upon a large number of variables, including future interest rates and equity values, demographic factors, such as mortality, and the proportion of policyholders who seek to exercise their options. The ultimate cost will therefore not be known for many years. As noted above, the liabilities of the With-Profit Funds are valued using a market-consistent stochastic simulation model which places a value on the options and guarantees capturing both their intrinsic value and time value. The most significant economic assumptions included in the model are risk-free yield and investment volatility. # Non-profit fund liabilities # (i) Business description The Group principally writes the following types of life insurance contracts within its non-profit funds. Shareholder profits on these types of business arise from management fees and other policy charges. # Unit-linked business This includes unit-linked pensions and unit-linked bonds, the primary purpose of which is to provide an investment vehicle where the policyholder is also insured against death. # Life insurance The policyholder is insured against death or permanent disability, usually for predetermined amounts. Such business includes whole of life and term assurance and long-term creditor policies. # Annuities The policyholder is entitled to payments for the duration of their life and is therefore insured against surviving longer than expected. # (ii) Method of calculation of liabilities The non-profit fund liabilities are determined on the basis of recognised actuarial methods and involve estimating future policy cash flows over the duration of the in-force book of policies, and discounting the cash flows back to the valuation date allowing for probabilities of occurrence. # (iii) Assumptions Generally, assumptions used to value non-profit fund liabilities are prudent in nature and therefore contain a margin for adverse deviation. This margin for adverse deviation is based on management's judgement and reflects management's views on the inherent level of uncertainty. In calculating the value of non-profit fund liabilities, the impacts of COVID-19, which have increased the level of uncertainty, have been considered, in particular in relation to persistency and mortality. The key assumptions used in the measurement of non-profit fund liabilities are: Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 277 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 31: Liabilities arising from insurance contracts and participating investment contracts continued #### Interest rates The rates of interest used are determined by reference to a number of factors including the redemption yields on fixed interest assets at the valuation date. Margins for risk are allowed for in the assumed interest rates, including reductions made to the available yields to allow for default risk based upon the credit rating of the securities allocated to the insurance liability. #### Mortality and morbidity The mortality assumptions for the main classes of business are as follows: | | 2022 | 2021 | | --- | --- | --- | | Annuities | **94% Bespoke tables** CMI2021_{M/F}_{7.25}_{3.0/2.8}‰_{0.0/0.2}A_2013 | 94% Bespoke tables CMI2020_{M/F}_{7.25}_{3.0/2.8}‰_{0.3/0.4}A_2013 | | Whole of life assurance | **Bespoke tables** | Bespoke tables | | Term assurance | **88%-111% of TxxL08 tables** | 88%-111% of TxxL08 tables | | Pensions | **64%-77% of TxxL08 tables** | 64%-77% of TxxL08 tables | | Savings | **62%-74% of AxC00 tables** | 55%-80% of AxC00 tables | #### Lapse rates (persistence) Lapse rates are allowed for on some non-profit fund contracts. The process for setting these rates is as described for with-profit liabilities, however a prudent scenario is assumed by the inclusion of a margin for adverse deviation within the non-profit fund liabilities. #### Maintenance expenses Allowance is made for future policy costs explicitly. Expenses are determined by reference to an internal analysis of current and expected future costs plus a margin for adverse deviation. Explicit allowance is made for future expense inflation. #### Key changes in assumptions A detailed review of the Group's demographic and expense assumptions in 2022 resulted in a net gain of £348 million (2021: net gain of £43 million). The following were the key impacts on profit before tax: - Change in persistency assumptions (£229 million increase (2021: £15 million decrease)) - Change in the assumption in respect of current and future mortality and morbidity rates (£112 million increase (2021: £149 million increase)) - Change in expense assumptions (£9 million increase (2021: £94 million decrease)) These amounts include the impacts of movements in liabilities and value of the in-force business in respect of insurance contracts and participating investment contracts. #### (iv) Options and guarantees outside the With-Profit Funds A number of typical guarantees are provided outside the With-Profit Funds such as guaranteed payments on death (for example term assurance) or guaranteed income for life (for example annuities). Caps and floors on inflation-linked increases to benefits and premiums across the annuities and protection business form additional guarantees within the Group's insurance business. Key assumptions affecting the time value of these guarantees are inflation, inflation volatility and interest rates. At 31 December 2022, additional reserves of £74 million were held to cover the time value of these guarantees. In addition, certain personal pension policyholders in Scottish Widows, for whom reinstatement to their occupational pension scheme was not an option, have been given a guarantee that their pension and other benefits will correspond in value to the benefits of the relevant occupational pension scheme. The key assumptions affecting the ultimate value of the guarantee are future salary growth, gilt yields at retirement, annuitant mortality at retirement, marital status at retirement and future investment returns. There is currently a provision, calculated on a deterministic basis, of £30 million (2021: £61 million) in respect of those guarantees. #### (2) Non-life insurance For non-life insurance contracts, the methodology and assumptions used in relation to determining the bases of the earned premium and claims provisioning levels are derived for each individual underwritten product. Assumptions represent the Group's estimates of the most likely or expected outcome, with a margin added for uncertainty reserves. There has been no significant change in the assumptions and methodologies used for setting reserves. The movements in non-life insurance contract liabilities and reinsurance assets over the year have been as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | **Provisions for unearned premiums** | | | | Gross provision at 1 January | 312 | 330 | | Increase in the year | 494 | 624 | | Release in the year | (560) | (642) | | Change in provision for unearned premiums charged (credited) to income statement | (66) | (18) | | Gross provision at 31 December | 246 | 312 | | Reinsurers' share | (17) | (16) | | **Net provision at 31 December** | **229** | **296** | These provisions represent the liability for short-term insurance contracts for which the Group's obligations are not expired at the year end. 278 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 31: Liabilities arising from insurance contracts and participating investment contracts continued | | 2022 £m | 2021 £m | | --- | --- | --- | | **Claims outstanding** | | | | Gross claims outstanding at 1 January | 288 | 265 | | Cash paid for claims settled in the year | (342) | (305) | | Increase in liabilities charged to the income statement^{1} | 415 | 328 | | | 73 | 23 | | **Gross claims outstanding at 31 December** | 361 | 288 | | Reinsurers' share | (2) | – | | **Net claims outstanding at 31 December** | 359 | 288 | | Notified claims | 208 | 177 | | Incurred but not reported | 151 | 111 | | **Net claims outstanding at 31 December** | 359 | 288 | 1 Of which an increase of £402 million (2021: increase of £367 million) was in respect of current year claims and an increase of £13 million (2021: decrease of £39 million) was in respect of prior year claims. These claims liabilities are not discounted because they are typically settled within three years. ## Note 32: Life insurance sensitivity analysis The following table demonstrates the effect of reasonably possible changes in key assumptions on profit before tax and equity disclosed in these financial statements assuming that the other assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated. These amounts include movements in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating investment contracts. The impact is shown in one direction but can be assumed to be reasonably symmetrical. | | Change in variable | 2022 | | 2021 | | | --- | --- | --- | --- | --- | --- | | | | Increase (reduction) in profit before tax £m | Increase (reduction) in equity £m | Increase (reduction) in profit before tax £m | Increase (reduction) in equity £m | | **Critical accounting estimates** | | | | | | | Annuitant mortality^{1} | 5% reduction | (188) | (152) | (301) | (244) | | Future maintenance and investment expenses^{2} | 10% reduction | 309 | 250 | 355 | 288 | | Widening of credit default spreads^{3} | 0.25% addition | (284) | (230) | (433) | (351) | | Increase in illiquidity premia^{4} | 0.10% addition | 114 | 92 | 190 | 154 | | **Other accounting estimates** | | | | | | | Non-annuitant mortality and morbidity^{5} | 5% reduction | 22 | 18 | 13 | 11 | | Lapse rates^{6} | 10% reduction | 122 | 99 | 88 | 71 | | Risk-free rate^{7} | 0.25% reduction | 44 | 35 | 44 | 35 | | Guaranteed annuity option take up^{8} | 5% addition | (2) | (2) | (2) | (2) | | Equity investment volatility^{9} | 1% addition | (2) | (1) | (2) | (1) | 1 This sensitivity shows the impact on the annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate. 2 This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate. 3 This sensitivity shows the impact of a 25 basis point increase in credit default spreads on corporate bonds and the corresponding reduction in market values. Swap curves, the risk-free rate and illiquidity premia are all assumed to be unchanged. 4 This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity premia. It assumes the overall spreads on assets are unchanged and hence market values are unchanged. Swap curves and the non-annuity risk-free rate are both assumed to be unchanged. The increased illiquidity premium increases the annuity risk-free rate. 5 This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate. 6 This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate. 7 This sensitivity shows the impact on the value of in-force business, financial options and guarantee costs, statutory reserves and asset values of reducing the risk-free rate by 25 basis points. 8 This sensitivity shows the impact of a flat 5 per cent addition to the expected rate. 9 This sensitivity shows the impact of a flat 1 per cent addition to the expected rate. Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 279 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 33: Liabilities arising from non-participating investment contracts** The movement in liabilities arising from non-participating investment contracts may be analysed as follows: | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | 45,040 | 38,452 | | New business | 3,148 | 4,187 | | Changes in existing business | (5,213) | 2,401 | | **At 31 December** | **42,975** | **45,040** | The balances above are shown gross of reinsurance. As at 31 December 2022, related reinsurance balances were £2 million (2021: £3 million); reinsurance balances are reported within assets. Liabilities arising from non-participating investment contracts are categorised as level 2. See note 49 for details of levels in the fair value hierarchy. # **Note 34: Other liabilities** | | 2022 £m | 2021 £m | | --- | --- | --- | | Settlement balances | 1,125 | 541 | | Unitholders' interest in consolidated Open-Ended Investment Companies^{1} | 10,413 | 12,080 | | Unallocated surplus within insurance businesses | 248 | 308 | | Lease liabilities | 1,317 | 1,475 | | Other creditors and accruals | 5,987 | 5,543 | | **Total other liabilities** | **19,090** | **19,947** | 1 Where a collective investment vehicle is consolidated, the interests of parties other than the Group are reported at fair value in other liabilities. The maturity analysis of the Group's lease liabilities on an undiscounted basis is set out in the liquidity risk section of note 52. # **Note 35: Retirement benefit obligations** | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | **Charge to the income statement** | | | | | Defined benefit pension schemes | 123 | 234 | 244 | | Other post-retirement benefit schemes | 2 | 2 | 3 | | Total defined benefit schemes | 125 | 236 | 247 | | Defined contribution pension schemes | 330 | 302 | 319 | | **Total charge to the income statement (note 11)** | **455** | **538** | **566** | | | 2022 £m | 2021 £m | | --- | --- | --- | | **Amounts recognised in the balance sheet** | | | | Retirement benefit assets | 3,823 | 4,531 | | Retirement benefit obligations | (126) | (230) | | **Total amounts recognised in the balance sheet** | **3,697** | **4,301** | The total amounts recognised in the balance sheet relate to: | | 2022 £m | 2021 £m | | --- | --- | --- | | Defined benefit pension schemes | 3,732 | 4,404 | | Other post-retirement benefit schemes | (35) | (103) | | **Total amounts recognised in the balance sheet** | **3,697** | **4,301** | 280 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 35: Retirement benefit obligations continued ### Pension schemes #### Defined benefit schemes ##### (i) Characteristics of and risks associated with the Group's schemes The Group has established a number of defined benefit pension schemes in the UK and overseas. All significant schemes are based in the UK, with the three most significant being the main sections of the Lloyds Bank Pension Scheme No. 1, the Lloyds Bank Pension Scheme No. 2 and the HBOS Final Salary Pension Scheme. At 31 December 2022, these schemes represented 94 per cent of the Group's total gross defined benefit pension assets (2021: 94 per cent). These schemes provide retirement benefits calculated as a proportion of final pensionable salary depending upon the length of pensionable service; the minimum retirement age under the rules of the schemes at 31 December 2022 is generally 55, although certain categories of member are deemed to have a protected right to retire at 50. The Group operates both funded and unfunded pension arrangements; the majority, including the three most significant schemes, are funded schemes in the UK. All of these UK funded schemes are operated as separate legal entities under trust law, are in compliance with the Pensions Act 2004 and are managed by a Trustee Board (the Trustee) whose role is to ensure that their scheme is administered in accordance with the scheme rules and relevant legislation, and to safeguard the assets in the best interests of all members and beneficiaries. The Trustee is solely responsible for setting investment policy and for agreeing funding requirements with the employer through the funding valuation process. The Board of Trustees must be composed of representatives of the scheme membership along with a combination of independent and employer appointed trustees to comply with legislation and scheme rules. A valuation to determine the funding status of each scheme is carried out at least every three years, whereby scheme assets are measured at market value and liabilities (technical provisions) are measured using prudent assumptions. If a deficit is identified a recovery plan is agreed between the employer and the scheme Trustee and sent to the Pensions Regulator for review. The Group has not provided for these deficit contributions as the future economic benefits arising from these contributions are expected to be available to the Group. The Group's overseas defined benefit pension schemes are subject to local regulatory arrangements. The most recent triennial funding valuations of the Group's three main defined benefit pension schemes showed an aggregate ongoing funding deficit of £7.3 billion as at 31 December 2019 (a funding level of 85.7 per cent). Under the agreed recovery plan, £0.8 billion plus a further 30 per cent of in-year capital distributions to ordinary shareholders, up to a limit on total deficit contributions of £2.0 billion per annum, is payable until the 2019 deficit has been removed. These schemes continue to have a funding deficit, but are in a significantly stronger financial position than at 31 December 2021, when the deficit was c.£4.0 billion. During 2022, deficit contributions of £2.2 billion were paid into these schemes and the Group expects to make a further fixed contribution of £0.8 billion in the first half of 2023, consistent with 2021 and 2022. The Group expects to have substantially agreed the triennial valuation with the Trustee by the end of the third quarter of 2023, along with a revised contribution schedule in respect of any remaining deficit. Trustee agreement will be conditional upon prior feedback from the Pensions Regulator. The Group also expects that future contributions will become increasingly contingent in nature, such that they are only paid into the schemes if required. The deficit contributions are in addition to the regular contributions to meet benefits accruing over the year, and to cover the expenses of running the schemes. The Group expects to pay contributions of at least £1.1 billion to its defined benefit schemes in 2023. During 2009, the Group made one-off contributions to the Lloyds Bank Pension Scheme No. 1 and Lloyds Bank Pension Scheme No. 2 in the form of interests in limited liability partnerships for each of the two schemes which hold assets to provide security for the Group's obligations to the two schemes. At 31 December 2022, the limited liability partnerships held assets of £6.3 billion. The limited liability partnerships are consolidated fully in the Group's balance sheet. The Group has also established three private limited companies which hold assets to provide security for the Group's obligations to the HBOS Final Salary Pension Scheme, a section of the Lloyds Bank Pension Scheme No. 1 and the Lloyds Bank Offshore Pension Scheme. At 31 December 2022 these held assets of £4.5 billion in aggregate. The private limited companies are consolidated fully in the Group's balance sheet. The terms of these arrangements require the Group to maintain assets in these vehicles to agreed minimum values in order to secure obligations owed to the relevant Group pension schemes. The Group has satisfied this requirement during 2022. The last funding valuations of other Group schemes were carried out on a number of different dates. In order to report the position under IAS 19 as at 31 December 2022, the most recent valuation results for all schemes have been updated by qualified independent actuaries. The funding valuations use a more prudent approach to setting the discount rate and more conservative longevity and inflation assumptions than the IAS 19 valuations. In a judgment in 2018, the High Court confirmed the requirement to equalise the Guaranteed Minimum Pension (GMP) benefits of men and women accruing between 1990 and 1997 from contracting out of the State Earnings Related Pension Scheme. The Group recognised a past service cost of £108 million in respect of equalisation in 2018 and, following agreement of the detailed implementation approach with the Trustee, a further £33 million was recognised in 2019. A further hearing was held during 2020 which confirmed the extent of the Trustee's obligation to revisit past transfers out of the schemes. The amount of any additional liability as a result of this judgment is still being reviewed but is not considered likely to be material. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 281 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 35: Retirement benefit obligations** continued # (ii) Amounts in the financial statements | | 2022 £m | 2021 £m | | --- | --- | --- | | **Amount included in the balance sheet** | | | | Present value of funded obligations | (28,965) | (47,130) | | Fair value of scheme assets | 32,697 | 51,534 | | **Net amount recognised in the balance sheet** | **3,732** | **4,404** | | **Net amount recognised in the balance sheet** | | | | At 1 January | 4,404 | 1,578 | | Net defined benefit pension charge | (123) | (234) | | Actuarial gains on defined benefit obligation | 17,222 | 1,267 | | Return on plan assets | (20,302) | 449 | | Employer contributions | 2,530 | 1,344 | | Exchange and other adjustments | 1 | – | | **At 31 December** | **3,732** | **4,404** | | **Movements in the defined benefit obligation** | | | | At 1 January | (47,130) | (49,549) | | Current service cost | (180) | (213) | | Interest expense | (902) | (704) | | Remeasurements: | | | | Actuarial losses – experience | (1,186) | (426) | | Actuarial gains (losses) – demographic assumptions | 288 | (146) | | Actuarial gains – financial assumptions | 18,120 | 1,839 | | Benefits paid | 2,048 | 2,034 | | Past service cost | (4) | (11) | | Settlements | 13 | 22 | | Exchange and other adjustments | (32) | 24 | | **At 31 December** | **(28,965)** | **(47,130)** | | **Analysis of the defined benefit obligation** | | | | Active members | (3,088) | (5,837) | | Deferred members | (8,515) | (16,167) | | Pensioners | (16,013) | (23,171) | | Dependants | (1,349) | (1,955) | | **At 31 December** | **(28,965)** | **(47,130)** | | **Changes in the fair value of scheme assets** | | | | At 1 January | 51,534 | 51,127 | | Return on plan assets excluding amounts included in interest income | (20,302) | 449 | | Interest income | 997 | 733 | | Employer contributions | 2,530 | 1,344 | | Benefits paid | (2,048) | (2,034) | | Settlements | (13) | (23) | | Administrative costs paid | (34) | (38) | | Exchange and other adjustments | 33 | (24) | | **At 31 December** | **32,697** | **51,534** | 282 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 35: Retirement benefit obligations continued The expense recognised in the income statement for the year ended 31 December comprises: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Current service cost | 180 | 213 | 206 | | Net interest amount | (95) | (29) | (23) | | Settlements | – | 1 | 2 | | Past service cost – plan amendments | 4 | 11 | 5 | | Plan administration costs incurred during the year | 34 | 38 | 54 | | **Total defined benefit pension expense** | **123** | **234** | **244** | ### (iii) Composition of scheme assets | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Quoted £m | Unquoted £m | Total £m | Quoted £m | Unquoted £m | Total £m | | Equity instruments | 7 | 47 | 54 | 617 | 36 | 653 | | Debt instruments^{1}: | | | | | | | | Fixed interest government bonds | 3,007 | – | 3,007 | 10,512 | – | 10,512 | | Index-linked government bonds | 15,497 | – | 15,497 | 23,969 | – | 23,969 | | Corporate and other debt securities | 3,978 | – | 3,978 | 13,399 | – | 13,399 | | | **22,482** | **–** | **22,482** | 47,880 | – | 47,880 | | Property | – | 116 | 116 | – | 139 | 139 | | Pooled investment vehicles | 2,730 | 15,863 | 18,593 | 1,192 | 13,346 | 14,538 | | Money market instruments, cash, derivatives and other assets and liabilities | 1,069 | (9,617) | (8,548) | 319 | (11,995) | (11,676) | | **At 31 December** | **26,288** | **6,409** | **32,697** | 50,008 | 1,526 | 51,534 | 1 Of the total debt instruments, £20,369 million (2021: £42,568 million) were investment grade (credit ratings equal to or better than '888'). The assets of all of the funded plans are held independently of the Group's assets in separate trustee-administered funds. The pension schemes' pooled investment vehicles comprise: | | 2022 £m | 2021 £m | | --- | --- | --- | | Equity funds | 1,421 | 3,696 | | Hedge and mutual funds | 240 | 1,407 | | Alternative credit funds | 2,222 | 3,884 | | Property funds | 1,604 | 1,541 | | Infrastructure funds | 1,193 | 1,389 | | Liquidity funds | 11,527 | 2,031 | | Bond and debt funds | 354 | 561 | | Other | 32 | 29 | | **At 31 December** | **18,593** | **14,538** | The Trustee's approach to investment is focused on acting in the members' best financial interests, with the integration of ESG (Environmental, Social and Governance) considerations into investment management processes and practices. This policy is reviewed annually (or more frequently as required) and has been shared with the schemes' investment managers for implementation. Climate change is one of the risks the schemes manage given its potential financial impact on valuation of assets. ### (iv) Assumptions The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows: | | 2022 % | 2021 % | | --- | --- | --- | | Discount rate | 4.93 | 1.94 | | Rate of inflation: | | | | Retail Price Index (RPI) | 3.13 | 3.21 | | Consumer Price Index (CPI) | 2.69 | 2.92 | | Rate of salary increases | 0.00 | 0.00 | | Weighted-average rate of increase for pensions in payment | 2.84 | 2.88 | On 25 November 2020 the Chancellor of the Exchequer announced the outcome of a consultation into a reform of the calculation of RPI. It is now expected that from 2030 RPI will be aligned with CPIH (the Consumer Price Index including owner occupiers' housing costs). To determine the RPI assumption a term-dependent inflation curve has been used adjusting for an assumed inflation risk premium. In the period to 2030 a gap of 100 basis points has been assumed between RPI and CPI; thereafter a 10 basis point gap has been assumed. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 283 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 35: Retirement benefit obligations** continued | | Men | | Women | | | --- | --- | --- | --- | --- | | | 2022 Years | 2021 Years | 2022 Years | 2021 Years | | Life expectancy for member aged 60, on the valuation date | **26.7** | 27.1 | **28.8** | 29.1 | | Life expectancy for member aged 60, 15 years after the valuation date | **27.8** | 28.1 | **30.0** | 30.3 | The mortality assumptions used in the UK scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which were adjusted in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 at 31 December 2022 is assumed to live for, on average, 26.7 years for a male and 28.8 years for a female. In practice there will be much variation between individual members but these assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed, the table also shows the life expectancy for members aged 45 now, when they retire in 15 years time at age 60. The Group uses the CMI mortality projections model and in line with actuarial industry recommendations has placed no weight on 2020 and 2021 mortality experience. The persistence of excess deaths during 2022 has highlighted the potential longer term impacts of COVID-19 and the Group has applied a 4 per cent scaling factor to its base mortality tables at December 2022 to allow for this impact on member mortality. This led to a 0.1 per cent reduction in the defined benefit obligation. # (v) Amount, timing and uncertainty of future cash flows # **Risk exposure of the defined benefit schemes** While the Group is not exposed to any unusual, entity-specific or scheme-specific risks in its defined benefit pension schemes, it is exposed to a number of significant risks, detailed below: **Inflation rate risk:** The majority of the plans' benefit obligations are linked to inflation both in deferment and once in payment. Higher inflation will lead to higher liabilities although this will be materially offset by holdings of inflation-linked gilts and, in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation. **Interest rate risk:** The defined benefit obligation is determined using a discount rate derived from yields on AA-rated corporate bonds. A decrease in corporate bond yields will increase plan liabilities although this will be materially offset by an increase in the value of bond holdings and through the use of derivatives. **Longevity risk:** The majority of the schemes' obligations are to provide benefits for the life of the members so increases in life expectancy will result in an increase in the plans' liabilities. **Investment risk:** Scheme assets are invested in a diversified portfolio of debt securities, equities and other return-seeking assets. If the assets underperform the discount rate used to calculate the defined benefit obligation, it will reduce the surplus or increase the deficit. Volatility in asset values and the discount rate will lead to volatility in the net pension asset on the Group's balance sheet and in other comprehensive income. To a lesser extent this will also lead to volatility in the pension expense in the Group's income statement. In addition, the schemes themselves are exposed to liquidity risk with the need to ensure that liquid assets held are sufficient to meet benefit payments as they fall due and there is sufficient collateral available to support their hedging activity. The ultimate cost of the defined benefit obligations to the Group will depend upon actual future events rather than the assumptions made. The assumptions made are unlikely to be borne out in practice and as such the cost may be higher or lower than expected. # **Sensitivity analysis** The effect of reasonably possible changes in key assumptions on the value of scheme liabilities and the resulting pension charge in the Group's income statement and on the net defined benefit pension scheme asset, for the Group's three most significant schemes, is set out below. The sensitivities provided assume that all other assumptions and the value of the schemes' assets remain unchanged, and are not intended to represent changes that are at the extremes of possibility. The calculations are approximate in nature and full detailed calculations could lead to a different result. It is unlikely that isolated changes to individual assumptions will be experienced in practice. Due to the correlation of assumptions, aggregating the effects of these isolated changes may not be a reasonable estimate of the actual effect of simultaneous changes in multiple assumptions. | | Effect of reasonably possible alternative assumptions | | | | | --- | --- | --- | --- | --- | | | Increase (decrease) in the income statement charge | | (Increase) decrease in the net defined benefit pension scheme surplus | | | | 2022 £m | 2021 £m | 2022 £m | 2021 £m | | Inflation (including pension increases)^{1}: | | | | | | Increase of 0.1 per cent | **13** | 12 | **251** | 481 | | Decrease of 0.1 per cent | **(13)** | (12) | **(245)** | (475) | | Discount rate^{2}: | | | | | | Increase of 0.1 per cent | **(25)** | (24) | **(379)** | (774) | | Decrease of 0.1 per cent | **24** | 23 | **388** | 795 | | Expected life expectancy of members: | | | | | | Increase of one year | **38** | 44 | **745** | 1,934 | | Decrease of one year | **(39)** | (42) | **(762)** | (1,852) | 1 At 31 December 2022, the assumed rate of RPI inflation is 3.13 per cent and CPI inflation 2.69 per cent (2021: RPI 3.21 per cent and CPI 2.92 per cent). 2 At 31 December 2022, the assumed discount rate is 4.93 per cent (2021: 1.94 per cent). 284 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 35: Retirement benefit obligations continued ### Sensitivity analysis method and assumptions The sensitivity analysis above reflects the impact on the liabilities of the Group's three most significant schemes which account for over 90 per cent of the Group's defined benefit obligations. While differences in the underlying liability profiles for the remainder of the Group's pension arrangements mean that they may exhibit slightly different sensitivities to variations in these assumptions, the sensitivities provided above are indicative of the impact across the Group as a whole. The inflation assumption sensitivity applies to the assumed rate of increase in both the Consumer Price Index (CPI) and the Retail Price Index (RPI), and includes the impact on the rate of increases to pensions, both before and after retirement. These pension increases are linked to inflation (either CPI or RPI) subject to certain minimum and maximum limits. The sensitivity analysis (including the inflation sensitivity) does not include the impact of any change in the rate of salary increases as pensionable salaries have been frozen since 2 April 2014. The life expectancy assumption has been applied by allowing for an increase/decrease in life expectation from age 60 of one year, based upon the approximate weighted average age for each scheme. While this is an approximate approach and will not give the same result as a one year increase in life expectancy at every age, it provides an appropriate indication of the potential impact on the schemes from changes in life expectancy. There was no change in the methods and assumptions used in preparing the sensitivity analysis from the prior year. ### Asset-liability matching strategies The main schemes' assets are invested in a diversified portfolio. Whilst c.50 per cent are held to generate the long-term returns required to support the funding position of the schemes, the remainder is invested in liability-driven investment (LDI) strategies which hedge the material risk exposures of the schemes. The investment strategy is not static and will evolve to reflect the structure of liabilities within the schemes. Specific strategies for each pension plan are independently determined by the responsible governance body for each scheme and in consultation with the employer. A significant goal of the strategies adopted by the schemes is to reduce volatility caused by changes in market expectations of interest rates and inflation. In the main schemes, this is achieved by investing scheme assets in bonds, primarily fixed interest gilts and index linked gilts, and by entering into interest rate and inflation swap arrangements. The assets in these LDI strategies represented 48 per cent of scheme assets at 31 December 2022. These investments are structured to take into account the profile of scheme liabilities and actively managed to reflect both changing market conditions and changes to the liability profile. At 31 December 2022 the asset-liability matching strategy mitigated around 119 per cent of the liability sensitivity to interest rate movements and around 123 per cent of the liability sensitivity to inflation movements. In addition, a small amount of interest rate sensitivity arises through holdings of corporate and other debt securities. The higher level of hedging provides greater protection to the funding position of the schemes. The schemes' funding position remained robust and did not experience any material impact from the market volatility seen in the latter part of last year. Asset prices fell in line with the broader market and hedges fell in value as interest rates rose, and a similar impact was experienced on liability valuations which also fell in value given the portfolio was almost fully hedged. The Group's schemes use LDI strategies to achieve this outcome and, as the hedging was maintained throughout the crisis, the strategy performed as expected. All collateral requirements in respect of the LDI strategies were met, with no support required from the Group beyond payment of scheduled contributions. On 28 January 2020, the main schemes entered into a £10 billion longevity insurance arrangement to hedge part of the schemes' exposure to unexpected increases in life expectancy. This arrangement forms part of the schemes' investment portfolio and will provide income to the schemes in the event that pensions are paid out for longer than expected. The transaction was structured as a pass-through with Scottish Widows as the insurer, and onwards reinsurance to Pacific Life Re Limited. On 28 January 2022, the Lloyds Bank Pension Scheme No. 1 entered into an additional £5.5 billion longevity insurance arrangement. The transaction is structured as a pass-through with Scottish Widows as the insurer, and onwards reinsurance to SCOR SE – UK Branch. At 31 December 2022 the value of scheme assets included £(100) million representing the value of the longevity swaps (after allowing for the impact on the IAS 19 liabilities of the revisions to the base mortality assumptions). In total the schemes have now hedged around 32 per cent of their longevity risk exposure. ### Maturity profile of defined benefit obligation The following table provides information on the weighted average duration of the defined benefit pension obligation and the distribution and timing of benefit payments: | | 2022 Years | 2021 Years | | --- | --- | --- | | Duration of the defined benefit obligation | 15 | 17 | | Maturity analysis of benefits expected to be paid: | | | | | 2022 £m | 2021 £m | | Within 12 months | 1,409 | 1,352 | | Between 1 and 2 years | 1,464 | 1,450 | | Between 2 and 5 years | 4,678 | 4,651 | | Between 5 and 10 years | 8,930 | 8,993 | | Between 10 and 15 years | 9,296 | 9,668 | | Between 15 and 25 years | 17,479 | 18,671 | | Between 25 and 35 years | 12,720 | 13,846 | | Between 35 and 45 years | 6,138 | 6,987 | | In more than 45 years | 1,685 | 2,116 | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 285 ## Notes to the consolidated financial statements continued for the year ended 31 December ## Note 35: Retirement benefit obligations continued ### Maturity analysis method and assumptions The projected benefit payments are based on the assumptions underlying the assessment of the obligations, including allowance for expected future inflation. They are shown in their undiscounted form and therefore appear large relative to the discounted assessment of the defined benefit obligations recognised in the Group's balance sheet. They are in respect of benefits that have been accrued prior to the respective year-end date only and make no allowance for any benefits that may have been accrued subsequently. ### Defined contribution schemes The Group operates a number of defined contribution pension schemes in the UK and overseas, principally Your Tomorrow and the defined contribution sections of the Lloyds Bank Pension Scheme No. 1. During the year ended 31 December 2022 the charge to the income statement in respect of defined contribution schemes was £330 million (2021: £302 million; 2020: £319 million), representing the contributions payable by the employer in accordance with each scheme's rules. ### Other post-retirement benefit schemes The Group operates a number of schemes which provide post-retirement healthcare benefits to certain employees, retired employees and their dependants. The principal scheme relates to former Lloyds Bank staff and under this scheme the Group has undertaken to meet the cost of post-retirement healthcare for all eligible former employees (and their dependants) who retired prior to 1 January 1996. The Group has entered into an insurance contract to provide these benefits and a provision has been made for the estimated cost of future insurance premiums payable. For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 31 December 2022 by qualified independent actuaries. The principal assumptions used were as set out above, except that the rate of increase in healthcare premiums has been assumed at 6.74 per cent (2021: 6.82 per cent). Movements in the other post-retirement benefits obligation: | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | (103) | (109) | | Actuarial gains | 68 | 4 | | Insurance premiums paid | 3 | 3 | | Charge for the year | (2) | (2) | | Exchange and other adjustments | (1) | 1 | | **At 31 December** | **(35)** | **(103)** | ## Note 36: Deferred tax The Group's deferred tax assets and liabilities are as follows: | Statutory position | 2022 £m | 2021 £m | Tax disclosure | 2022 £m | 2021 £m | | --- | --- | --- | --- | --- | --- | | Deferred tax assets | 5,228 | 3,118 | Deferred tax assets | 8,627 | 7,095 | | Deferred tax liabilities | (216) | (39) | Deferred tax liabilities | (3,615) | (4,016) | | **Asset at 31 December** | **5,012** | **3,079** | **Asset at 31 December** | **5,012** | **3,079** | The statutory position reflects the deferred tax assets and liabilities as disclosed in the consolidated balance sheet and takes into account the ability of the Group to net assets and liabilities where there is a legally enforceable right of offset. The tax disclosure of deferred tax assets and liabilities ties to the amounts outlined in the tables below which splits the deferred tax assets and liabilities by type, before such netting. Movements in deferred tax assets and liabilities (before taking into consideration the offsetting of balances within the same taxing jurisdiction) can be summarised as follows: | Deferred tax assets | Tax losses £m | Property, plant and equipment £m | Provisions £m | Share-based payments £m | Pension liabilities £m | Derivatives £m | Asset revaluations £m | Other temporary differences £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | At 1 January 2021 | 4,064 | 668 | 254 | 29 | 56 | 159 | 29 | 268 | 5,527 | | Credit (charge) to the income statement | 959 | 76 | 12 | (8) | 15 | 541 | (29) | (49) | 1,517 | | Credit (charge) to other comprehensive income | – | – | 36 | – | (2) | – | – | – | 34 | | Other credit to equity | – | – | – | 17 | – | – | – | – | 17 | | At 31 December 2021 | 5,023 | 744 | 302 | 38 | 69 | 700 | – | 219 | 7,095 | | Credit (charge) to the income statement | 39 | (238) | 113 | (5) | (22) | (205) | 8 | 62 | (248) | | Credit (charge) to other comprehensive income | – | – | (155) | – | – | 1,928 | – | – | 1,773 | | Acquisitions | 4 | – | – | – | – | – | – | – | 4 | | Other credit to equity | – | – | – | 3 | – | – | – | – | 3 | | **At 31 December 2022** | **5,066** | **506** | **260** | **36** | **47** | **2,423** | **8** | **281** | **8,627** | 286 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 36: Deferred tax continued | Deferred tax liabilities | Capitalised software enhancements £m | Long-term assurance business £m | Acquisition fair value £m | Pension assets £m | Derivatives £m | Asset revaluation £m | Other temporary differences £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | At 1 January 2021 | (228) | (843) | (372) | (392) | (756) | – | (240) | (2,831) | | (Charge) credit to the income statement | (47) | (319) | 20 | (93) | (567) | (27) | (93) | (1,126) | | (Charge) credit to other comprehensive income | – | – | – | (846) | 814 | (29) | – | (61) | | Exchange and other adjustments | – | – | – | – | – | – | 2 | 2 | | At 31 December 2021 | (275) | (1,162) | (352) | (1,331) | (509) | (56) | (331) | (4,016) | | (Charge) credit to the income statement | 118 | 107 | 21 | 29 | (32) | – | (164) | 79 | | Credit to other comprehensive income | – | – | – | 283 | – | 56 | – | 339 | | Acquisitions | (5) | – | (1) | – | – | – | – | (6) | | Exchange and other adjustments | – | – | – | – | – | – | (11) | (11) | | **At 31 December 2022** | **(162)** | **(1,055)** | **(332)** | **(1,019)** | **(541)** | – | **(506)** | **(3,615)** | 1 Financial assets at fair value through other comprehensive income At 31 December 2022 the Group carried net deferred tax assets on its balance sheet of £5,228 million (2021: £3,118 million) principally relating to tax losses carried forward. Estimation of income taxes includes the assessment of recoverability of deferred tax assets. Deferred tax assets are only recognised to the extent that they are considered more likely than not to be recoverable based on existing tax laws and forecasts of future taxable profits against which the underlying tax deductions can be utilised. The Group has recognised a deferred tax asset of £5,066 million (2021: £5,023 million) in respect of trading losses carried forward. Substantially all of these losses have arisen in Bank of Scotland plc and Lloyds Bank plc, and they will be utilised as taxable profits arise in those legal entities in future periods. The Group's expectations of future UK taxable profits require management judgement, and take into account the Group's long-term financial and strategic plans and anticipated future tax-adjusting items. In making this assessment, account is taken of business plans, the Board-approved operating plan and the expected future economic outlook as set out in the strategic report, as well as the risks associated with future regulatory, climate-related and other change, in order to produce a base case forecast of future UK taxable profits. Under current law there is no expiry date for UK trading losses not yet utilised, and given the forecast of future profitability and the Group's commitment to the UK market, in management's judgement it is more likely than not that the value of the losses will be recovered by the Group while still operating as a going concern. Banking tax losses that arose before 1 April 2015 can only be used against 25 per cent of taxable profits arising after 1 April 2016, and they cannot be used to reduce the surcharge on banking profits. These restrictions in utilisation mean that the value of the deferred tax asset in respect of tax losses is only expected to be fully recovered by 2036 (2021: 2047) in the base case forecast. The rate of recovery of the Group's tax loss asset is not a straight line, being affected by the relative profitability of the different legal entities in future periods, and the relative size of their tax losses carried forward. It is expected in the base case that 90 per cent of the value will be recovered by 2032, when Bank of Scotland plc will have utilised all of its available tax losses. It is possible that future tax law changes could materially affect the timing of recovery and the value of these losses ultimately realised by the Group. ### Deferred tax not recognised A deferred tax asset of £46 million (2021: £5 million) has been recognised in respect of the future tax benefit of certain expenses of the life assurance business. The increase is mainly due to investment market falls in 2022, which have increased the amount of unutilised expenses carried forward and expected to be offset against taxable investment returns in the medium term. The deferred tax asset not recognised in respect of the remaining expenses is £125 million (2021: £226 million), and these expenses can be carried forward indefinitely. The unrecognised deferred tax asset has decreased in 2022 mainly due to higher expected investment returns in the long term projections for the life insurance business driven by interest rate rises. This has reduced the net amount of unutilised expenses in the long term. Deferred tax assets of £156 million (2021: £167 million) have not been recognised in respect of £619 million of UK tax losses and other temporary differences which can only be used to offset future capital gains. UK capital losses can be carried forward indefinitely. No deferred tax has been recognised in respect of foreign trade losses where it is not more likely than not that we will be able to utilise them in future periods. Of the asset not recognised, £53 million (2021: £41 million) relates to losses that will expire if not used within 20 years, and £9 million (2021: £7 million) relates to losses with no expiry date. As a result of parent company exemptions on dividends from subsidiaries and on capital gains on disposal there are no significant taxable temporary differences associated with investments in subsidiaries, branches, associates and joint arrangements. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 287 # **Notes to the consolidated financial statements** continued # **Note 37: Other provisions** | | Provisions for financial commitments and guarantees £m | Regulatory and legal provisions £m | Other £m | Total £m | | --- | --- | --- | --- | --- | | At 1 January 2022 | 200 | 1,156 | 736 | 2,092 | | Exchange and other adjustments | 1 | 17 | 27 | 45 | | Provisions applied | – | (625) | (413) | (1,038) | | Charge for the year | 122 | 255 | 333 | 710 | | **At 31 December 2022** | **323** | **803** | **683** | **1,809** | # **Provisions for financial commitments and guarantees** Provisions are recognised for expected credit losses on undrawn loan commitments and financial guarantees. See also note 18. # **Regulatory and legal provisions** In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators and other governmental authorities on a range of matters. The Group also receives complaints in connection with its past conduct and claims brought by or on behalf of current and former employees, customers, investors and other third parties and is subject to legal proceedings and other actions. Where significant, provisions are held against the costs expected to be incurred in relation to these matters and matters arising from related internal reviews. During the year ended 31 December 2022 the Group charged a further £255 million in respect of legal actions and other regulatory matters and the unutilised balance at 31 December 2022 was £803 million (31 December 2021: £1,156 million). The most significant items are as follows. # **HBOS Reading – review** The Group continues to apply the recommendations from Sir Ross Cranston's review, issued in December 2019, including a reassessment of direct and consequential losses by an independent panel (the Foskett Panel), an extension of debt relief and a wider definition of de facto directors. The Foskett Panel's full scope and methodology was published on 7 July 2020. The Foskett Panel's stated objective is to consider cases via a non-legalistic and fair process and to make their decisions in a generous, fair and common sense manner, assessing claims against an expanded definition of the fraud and on a lower evidential basis. Following the emergence of the first outcomes of the Foskett Panel through 2021, the Group charged a further £790 million in the year ended 31 December 2021. This included operational costs in relation to Dame Linda Dobbs's review, which is considering whether the issues relating to HBOS Reading were investigated and appropriately reported by the Group during the period from January 2019 to January 2017, and other programme costs. A significant proportion of the charge related to the estimated future awards from the Foskett Panel had shared outcomes on a limited subset of the total population which covers a wide range of businesses and different claim characteristics. The estimated awards provision recognised at 31 December 2021 was therefore materially dependent on the assumption that the limited number of awards to date were representative of the full population of cases. In June 2022, the Foskett Panel announced an alternative option, in the form of a fixed sum award which could be accepted as an alternative to participation in the full re-review process, to support earlier resolution of claims for those deemed by the Foskett Panel to be victims of the fraud. Around half the population have now had outcomes via this new process. Extrapolating the Group's experience to date resulted in an increase to the provision of £50 million in the year (all in the fourth quarter). Notwithstanding the settled claims and the increase in coverage which builds confidence in the full estimated cost, uncertainties remain and the final outcome could be different from the current provision once the re-review is concluded by the Foskett Panel. There is no confirmed timeline for the completion of the Foskett Panel re-review process nor the review by Dame Linda Dobbs. The Group is committed to implementing Sir Ross's recommendations in full. # **Payment protection insurance** The Group has incurred costs for PPI over a number of years totalling £21,960 million. The Group continues to challenge PPI litigation cases, with mainly legal fees and operational costs associated with litigation activity recognised within regulatory and legal provisions, including a charge in the fourth quarter. PPI litigation remains inherently uncertain, with a number of key court judgments due to be delivered in 2023. # **Customer claims in relation to insurance branch business in Germany** The Group continues to receive claims from customers in Germany relating to policies issued by Clerical Medical Investment Group Limited (subsequently renamed Scottish Widows Limited), with smaller numbers of claims received from customers in Austria and Italy. The total provision made to 31 December 2022, was £709 million (31 December 2021: £695 million) with £11 million utilisation of the provision during the year, leaving an unutilised provision at 31 December 2022 of £88 million. The ultimate financial effect, which could be significantly different from the current provision, will be known only once all relevant claims have been resolved. # **Other** Following the sale of TSB Banking Group plc, the Group raised a provision of £665 million in relation to various ongoing commitments in respect of the divestment. At 31 December 2022, a provision of £22 million remained unutilised; the Group expects the majority of the remaining provision to be utilised in the next twelve months and the provision to be fully utilised by 31 December 2024. The Group carries provisions of £112 million (2021: £114 million) in respect of dilapidations, rent reviews and other property-related matters. Provisions are also made for staff and other costs related to Group restructuring initiatives at the point at which the Group becomes committed to the expenditure; at 31 December 2022 provisions of £112 million (31 December 2021: £189 million) were held. The Group carries provisions of £86 million (2021: £94 million) for indemnities and other matters relating to legacy business disposals in prior years. Whilst there remains significant uncertainty as to the timing of the utilisation of the provisions, the Group expects the majority of the remaining provisions to have been utilised by 31 December 2026. 288 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 38: Subordinated liabilities The movement in subordinated liabilities during the year was as follows: | | Preference shares £m | Preferred securities £m | Undated £m | Dated £m | Total £m | | --- | --- | --- | --- | --- | --- | | At 1 January 2021 | 962 | 1,743 | 509 | 11,047 | 14,261 | | **Issued during the year:** | | | | | | | 1.985% Fixed Rate Reset Dated Subordinated Tier 2 Notes due 2031 (£500 million) | – | – | – | 500 | 500 | | 3.369% Fixed Rate Reset Dated Subordinated Notes due 2041 (US$1,175 million) | – | – | – | 380 | 380 | | | – | – | – | 880 | 880 | | **Repurchases and redemptions during the year:** | | | | | | | 6.475% Non-cumulative Preference Shares callable 2024 (£186 million) | (8) | – | – | – | (8) | | 6.413% Non-cumulative Fixed to Floating Rate Preference Shares callable 2035 (US$750 million) | (182) | – | – | – | (182) | | 6.657% Non-cumulative Fixed to Floating Rate Preference Shares callable 2037 (US$750 million) | (157) | – | – | – | (157) | | 9.25% Non-cumulative Irredeemable Preference Shares (£300 million) | (79) | – | – | – | (79) | | 9.75% Non-cumulative Irredeemable Preference Shares (£100 million) | (14) | – | – | – | (14) | | 7.754% Non-cumulative Perpetual Preferred Securities (Class B) (£150 million) | – | (156) | – | – | (156) | | Series 2 (US$500 million) | – | – | (94) | – | (94) | | Series 3 (US$600 million) | – | – | (121) | – | (121) | | Floating Rate Primary Capital Notes (US$250 million) | – | – | (24) | – | (24) | | Series 1 (US$750 million) | – | – | (96) | – | (96) | | 9.375% Subordinated Bonds 2021 (£500 million) | – | – | – | (200) | (200) | | 5.374% Subordinated Fixed Rate Notes 2021 (£160 million) | – | – | – | (145) | (145) | | 6% Subordinated Notes 2033 (US$750 million) | – | – | – | (141) | (141) | | | (440) | (156) | (335) | (486) | (1,417) | | Foreign exchange movements | 15 | 17 | – | (56) | (24) | | Other movements (cash and non-cash)^{2} | (49) | 57 | – | (600) | (592) | | At 31 December 2021 | 488 | 1,661 | 174 | 10,785 | 13,108 | | **Issued during the year:** | | | | | | | 7.953% Fixed Rate Reset Dated Subordinated notes 2033 (US$1,000 million) | – | – | – | 838 | 838 | | **Repurchases and redemptions during the year:** | | | | | | | 12% Fixed to Floating Rate Perpetual Tier 1 Capital Securities callable 2024 (US$2,000 million) | – | (1,399) | – | – | (1,399) | | 13% Sterling Step-up Perpetual Capital Securities callable 2029 (£700 million) | – | (221) | – | – | (221) | | 7.281% Perpetual Regulatory Tier One Securities (Series B) (£150 million) | – | (22) | – | – | (22) | | 7.881% Guaranteed Non-voting Non-cumulative Preferred Securities (£245 million) | – | (12) | – | – | (12) | | 12% Perpetual Subordinated Bonds (£100 million) | – | – | (22) | – | (22) | | 5.75% Undated Subordinated Step-up Notes (£600 million) | – | – | (4) | – | (4) | | 7.625% Dated Subordinated Notes 2025 (£750 million) | – | – | – | (502) | (502) | | | – | (1,654) | (26) | (502) | (2,182) | | Foreign exchange movements | 8 | (6) | – | 699 | 701 | | Other movements (cash and non-cash)^{2} | (26) | (1) | 2 | (1,710) | (1,735) | | **At 31 December 2022** | **470** | **–** | **150** | **10,110** | **10,730** | 1 Issuances in the year generated cash inflows of £838 million (2021: £499 million); the repurchases and redemptions resulted in cash outflows of £2,216 million (2021: £1,056 million). 2 Other movements include cash payments in respect of interest on subordinated liabilities in the year amounted to £603 million (2021: £1,303 million) offset by the interest expense in respect of subordinated liabilities of £681 million (2021: £932 million). Certain of the above securities were issued or redeemed under exchange offers, which did not result in an extinguishment of the original financial liability for accounting purposes. These securities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer, other than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination of specific subordinated liabilities is determined in respect of the issuer and any guarantors of that liability. The claims of holders of preference shares and preferred securities are generally junior to those of the holders of undated subordinated liabilities, which in turn are junior to the claims of holders of the dated subordinated liabilities. The Group has not had any defaults of principal or interest or other breaches with respect to its subordinated liabilities during 2022 (2021: none). The Company has in issue various classes of preference shares which are all classified as liabilities under accounting standards. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 289 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 38: Subordinated liabilities** continued Preference shares | | 2022 Number of shares | 2021 Number of shares | 2020 Number of shares | 2022 | | 2021 £m | 2020 £m | | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | £m | % of share capital | | | | 6% Non-Cumulative Redeemable Preference shares of GBP0.25 | **400** | 400 | 400 | – | – | – | – | | 6.475% Non-Cumulative Preference shares of GBP0.25 | **47,273,816** | 47,273,816 | 56,472,211 | **12** | **0.07** | 12 | 14 | | 9.25% Non-Cumulative Irredeemable Preference shares of GBP0.25 | **252,510,147** | 252,510,147 | 299,987,729 | **63** | **0.37** | 63 | 75 | | 9.75% Non-Cumulative Irredeemable Preference shares of GBP0.25 | **43,630,285** | 43,630,285 | 55,740,886 | **11** | **0.06** | 11 | 14 | | 6.413% Non-Cumulative Fixed/Floating Rate Callable Preference shares of USD0.25 | **48,990** | 48,990 | 374,810 | – | – | – | – | | 6.657% Non-Cumulative Fixed/Floating Rate Callable Preference shares of USD0.25 | **37,627** | 37,627 | 434,350 | – | – | – | – | The rights and obligations attaching to these shares are set out in the Company's articles of association, a copy of which can be obtained from Companies House or from our website (www.lloydsbankinggroup.com/who-we-are/group-overview/corporate-governance.html) and, in respect of the 6% Non-Cumulative Redeemable Preference shares, in Companies House form 128(1) filed at Companies House on 12 January 2005, a copy of which is available from Companies House (www.companieshouse.gov.uk), and, in respect of the other classes of preference shares, in the prospectus dated 20 November 2008 and published on the National Storage Mechanism on that date, a copy of which prospectus is available on the National Storage Mechanism (www.data.fca.org.uk/#/nsm/nationalstoragemechanism). # **Note 39: Share capital** Issued and fully paid ordinary share capital | Ordinary shares of 10p (formerly 25p) each | 2022 Number of shares | 2021 Number of shares | 2020 Number of shares | 2022 | | 2021 £m | 2020 £m | | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | £m | % of share capital | | | | At 1 January | **71,022,593,135** | 70,839,206,060 | 70,052,557,838 | **7,102** | | 7,084 | 7,005 | | Issued under employee share schemes | **793,990,660** | 183,387,075 | 786,648,222 | **80** | | 18 | 79 | | Share buyback programme (note 41) | **(4,528,731,591)** | – | – | **(453)** | | – | – | | **At 31 December** | **67,287,852,204** | 71,022,593,135 | 70,839,206,060 | **6,729** | **99.50** | 7,102 | 7,084 | # **Ordinary shares** As permitted by the Companies Act 2006, the Company removed references to authorised share capital from its articles of association at the annual general meeting on 5 June 2009. This change took effect from 1 October 2009. There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and: - Certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws) - Where directors and certain employees of the Company require the approval of the Company to deal in the Company's shares - Pursuant to the rules of some of the Company's employee share plans where certain restrictions may apply while the shares are subject to the plans Where, under an employee share plan operated by the Company, participants are the beneficial owners of shares but not the registered owners, the voting rights are normally exercised by the registered owner at the direction of the participant. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions at that time. All of the Company's issued ordinary share capital is listed and none of the shares have any multiple or unequal voting rights, each share carries one vote. In addition, the Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. The directors have authority to allot and issue ordinary and preference shares and to make market purchases of ordinary and preference shares as granted at the annual general meeting on 12 May 2022. The authority to issue shares and the authority to make market purchases of shares will expire at the next annual general meeting. Shareholders will be asked, at the annual general meeting, to give similar authorities. Subject to any rights or restrictions attached to any shares, on a show of hands at a general meeting of the Company every holder of shares present in person or by proxy and entitled to vote has one vote and on a poll every member present and entitled to vote has one vote for every share held. The holders of ordinary shares, who held 100 per cent of the total ordinary share capital at 31 December 2022, are entitled to receive the Company's report and accounts, attend, speak and vote at general meetings and appoint proxies to exercise voting rights. Holders of ordinary shares may also receive a dividend (subject to the provisions of the Company's articles of association) and on a winding up may share in the assets of the Company. The rights and obligations attached to the Company's ordinary shares are set out in the Company's articles of association, a copy of which can be found at www.lloydsbankinggroup.com/who-we-are/group-overview/corporate-governance.html. # **Preference shares** The Company has in issue various classes of preference shares which are all classified as liabilities under accounting standards and which are included in note 38. 290 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 40: Share premium account | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | **18,479** | 17,863 | 17,751 | | Issued under employee share schemes | **25** | 19 | 112 | | Redemption of preference shares^{1} | – | 597 | – | | **At 31 December** | **18,504** | 18,479 | 17,863 | 1 During the year ended 31 December 2021, the Company redeemed certain tranches of its preference shares, which had been accounted for as subordinated liabilities. On redemption an amount of £17 million was transferred from the distributable merger reserve to the capital redemption reserve and £597 million was transferred from the distributable merger reserve to the share premium account, with these amounts representing the nominal value of the shares redeemed and premium upon original issuance respectively. ## Note 41: Other reserves | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Merger reserve | **7,149** | 7,149 | 7,763 | | Capital redemption reserve | **4,932** | 4,479 | 4,462 | | Revaluation reserve in respect of debt securities held at fair value through other comprehensive income | **50** | 207 | 99 | | Revaluation reserve in respect of equity shares held at fair value through other comprehensive income | **57** | 9 | (47) | | Cash flow hedging reserve | **(5,476)** | (457) | 1,629 | | Foreign currency translation reserve | **(110)** | (198) | (159) | | **At 31 December** | **6,602** | 11,189 | 13,747 | The merger reserve primarily comprises the premium on shares issued in January 2009 as part of the recapitalisation of the Group and the acquisition of HBOS plc. The capital redemption reserve represents transfers from distributable reserves in accordance with companies' legislation upon the redemption of ordinary and preference share capital. The revaluation reserves in respect of debt securities and equity shares held at fair value through other comprehensive income represent the cumulative after-tax unrealised change in the fair value of financial assets so classified since initial recognition; or in the case of financial assets obtained on acquisitions of businesses, since the date of acquisition. The cash flow hedging reserve represents the cumulative after-tax gains and losses on effective cash flow hedging instruments that will be reclassified to the income statement in the periods in which the hedged item affects profit or loss. The foreign currency translation reserve represents the cumulative after-tax gains and losses on the translation of foreign operations and exchange differences arising on financial instruments designated as hedges of the Group's net investment in foreign operations. Movements in other reserves were as follows: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | **7,149** | 7,763 | 7,763 | | Redemption of preference shares (note 40) | – | (614) | – | | **At 31 December** | **7,149** | 7,149 | 7,763 | | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | **4,479** | 4,462 | 4,462 | | Redemption of preference shares (note 40) | – | 17 | – | | Shares cancelled under share buyback programme (see below) | **453** | – | – | | **At 31 December** | **4,932** | 4,479 | 4,462 | On 25 February 2022 the Group commenced a share buyback programme to repurchase outstanding ordinary shares; the Group bought back and cancelled 4,529 million shares under the programme, which completed in October 2022, for a total consideration, including expenses, of £2,013 million. Upon cancellation £453 million, being the nominal value of the shares repurchased, was transferred to the capital redemption reserve. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 291 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 41: Other reserves** continued | Revaluation reserve in respect of debt securities held at fair value through other comprehensive income | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | 207 | 99 | 123 | | Change in fair value | (133) | 133 | 46 | | Deferred tax | 31 | (45) | 29 | | Current tax | 8 | – | (2) | | | (94) | 88 | 73 | | Income statement transfers in respect of disposals (note 9) | (92) | 2 | (149) | | Deferred tax | 23 | 20 | 47 | | | (69) | 22 | (102) | | Impairment recognised in the income statement | 6 | (2) | 5 | | **At 31 December** | **50** | **207** | **99** | | Revaluation reserve in respect of equity shares held at fair value through other comprehensive income | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | 9 | (47) | 19 | | Change in fair value | 44 | 61 | (50) | | Deferred tax | 3 | (4) | (16) | | | 47 | 57 | (66) | | Realised gains and losses transferred to retained profits | – | – | (16) | | Deferred tax | 1 | (1) | 16 | | | 1 | (1) | – | | **At 31 December** | **57** | **9** | **(47)** | | Cash flow hedging reserve | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | (457) | 1,629 | 1,504 | | Change in fair value of hedging derivatives | (6,990) | (2,279) | 730 | | Deferred tax | 1,940 | 646 | (244) | | | (5,050) | (1,633) | 486 | | Net income statement transfers | 43 | (621) | (496) | | Deferred tax | (12) | 168 | 135 | | | 31 | (453) | (361) | | **At 31 December** | **(5,476)** | **(457)** | **1,629** | | Foreign currency translation reserve | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | (198) | (159) | (176) | | Currency translation differences arising in the year | 119 | (39) | 4 | | Income statement transfers | (31) | – | 13 | | **At 31 December** | **(110)** | **(198)** | **(159)** | 292 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 42: Retained profits | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | **10,241** | 4,584 | 3,246 | | Profit attributable to ordinary shareholders | **5,021** | 5,355 | 865 | | Post-retirement defined benefit scheme remeasurements | **(2,152)** | 1,062 | 113 | | Gains and losses attributable to own credit risk (net of tax) | **364** | (52) | (55) | | Dividends paid (note 44) | **(1,475)** | (877) | – | | Share buyback programme (note 41) | **(2,013)** | – | – | | Issue costs of other equity instruments (net of tax) | **(5)** | – | – | | Repurchase and redemption costs of other equity instruments | **(36)** | – | – | | Movement in treasury shares | **(20)** | (13) | 293 | | Value of employee services: | | | | | Share option schemes | **41** | 51 | 48 | | Other employee award schemes | **183** | 131 | 74 | | Change in non-controlling interests | **(3)** | (1) | – | | Realised gains and losses on equity shares held at fair value through other comprehensive income | **(1)** | 1 | – | | **At 31 December** | **10,145** | 10,241 | 4,584 | 1 During 2020 the Group derecognised, on redemption, financial liabilities on which cumulative fair value movements relating to own credit of £1 million net of tax (2022: £nil; 2021: £nil), had been recognised directly in retained profits. Retained profits are stated after deducting £196 million (2021: £205 million; 2020: £230 million) representing 688 million (2021: 434 million; 2020: 592 million) treasury shares held. The payment of dividends by subsidiaries and the ability of members of the Group to lend money to other members of the Group may be subject to regulatory or legal restrictions, the availability of reserves and the financial and operating performance of the entity. A number of Group subsidiaries, principally those with banking and insurance activities, are subject to regulatory capital requirements which require minimum amounts of capital to be maintained relative to their size and risk. The Group actively manages the capital of its subsidiaries, which includes monitoring the regulatory capital ratios for its banking and insurance subsidiaries and, on a consolidated basis, the Ring-Fenced Bank sub-group, against approved risk appetite levels. ## Note 43: Other equity instruments | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | **5,906** | 5,906 | 5,906 | | **Issued during the year:** | | | | | £750 million Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Contingent Convertible Securities | **750** | – | – | | Repurchases and redemptions during the year | **750** | – | – | | Profit for the year attributable to other equity holders | **(1,359)** | – | – | | Distributions on other equity instruments | **438** | 429 | 453 | | **At 31 December** | **(438)** | (429) | (453) | | | **5,297** | 5,906 | 5,906 | During the year ended 31 December 2022 the Group issued £750 million of 8.5 per cent Fixed Rate Reset Additional Tier 1 (AT1) securities and repurchased £1,359 million of 7.625 per cent Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Contingent Convertible Securities. The AT1 securities are Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities with no fixed maturity or redemption date. The principal terms of the AT1 securities are described below: - The securities rank behind the claims against Lloyds Banking Group plc of (a) unsubordinated creditors, (b) claims which are, or are expressed to be, subordinated to the claims of unsubordinated creditors of Lloyds Banking Group plc but not further or otherwise or (c) whose claims are, or are expressed to be, junior to the claims of other creditors of Lloyds Banking Group, whether subordinated or unsubordinated, other than those whose claims rank, or are expressed to rank, pari passu with, or junior to, the claims of the holders of the AT1 securities in a winding-up occurring prior to a conversion event being triggered - The securities bear a fixed rate of interest until the first reset date. After the first reset date or any reset date thereafter, in the event that they are not redeemed, the AT1 securities will bear interest at rates fixed periodically in advance for five-year periods based on market rates - Interest on the securities will be due and payable only at the sole discretion of Lloyds Banking Group plc, and Lloyds Banking Group plc may at any time elect to cancel any interest payment (or any part thereof) which would otherwise be payable on any interest payment date. There are also certain restrictions on the payment of interest as specified in the terms - The securities are undated and are repayable, at the option of Lloyds Banking Group plc, in whole at the first call date or period, or on any fifth anniversary after the first call date or period. In addition, the AT1 securities are repayable, at the option of Lloyds Banking Group plc, in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the PRA - The securities convert into ordinary shares of Lloyds Banking Group plc, at a pre-determined price, should the Common Equity Tier 1 ratio of the Group fall below 7.0 per cent Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 293 ## Notes to the consolidated financial statements continued ### Note 44: Dividends on ordinary shares The directors have recommended a final dividend, which is subject to approval by the shareholders at the annual general meeting on 18 May 2023, of 1.60 pence per ordinary share (2021: 1.33 pence per ordinary share), equivalent to £1,062 million, before the impact of any cancellations of shares under the Group's announced buyback programme (2021: £930 million, following cancellations of shares under the Group's 2022 buyback programme up to the record date), which will be paid on 23 May 2023. These financial statements do not reflect the recommended dividend. Dividends paid during the year were as follows: | | 2022 pence per share | 2021 pence per share | 2020 pence per share | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | --- | --- | --- | | Final dividend recommended by directors at previous year end | **1.33** | 0.57 | – | **930** | 404 | – | | Interim dividend paid in the year | **0.80** | 0.67 | – | **545** | 473 | – | | | **2.13** | 1.24 | – | **1,475** | 877 | – | The trustees of the following holdings of Lloyds Banking Group plc shares in relation to employee share schemes retain the right to receive dividends but have chosen to waive their entitlement to the dividends on those shares as indicated: the Lloyds Banking Group Share Incentive Plan (holding at 31 December 2022: 32,377,089 shares, 31 December 2021: 16,514,487 shares, waived rights to all dividends) and the Lloyds Banking Group Employee Share Ownership Trust (holding at 31 December 2022: 311,540,740 shares, 31 December 2021: 9,998,474 shares, waived rights to all dividends). ### Note 45: Share-based payments #### Charge to the income statement The charge to the income statement is set out below: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Deferred bonus plan | **289** | 179 | 81 | | Executive and SAYE plans: | | | | | Options granted in the year | **10** | 10 | 13 | | Options granted in prior years | **42** | 37 | 62 | | | **52** | 47 | 75 | | Share plans: | | | | | Shares granted in the year | **9** | 18 | 16 | | Shares granted in prior years | **26** | 24 | 24 | | | **35** | 42 | 40 | | **Total charge to the income statement** | **376** | 268 | 196 | During the year ended 31 December 2022 the Group operated the following share-based payment schemes, all of which are mainly equity settled. #### Group Performance Share plan The Group operates a Group Performance Share plan that is part equity settled. Bonuses in respect of employee service in 2022 have been recognised in the charge in line with the proportion of the deferral period completed. #### Save-As-You-Earn schemes Eligible employees may enter into contracts through the Save-As-You-Earn (SAYE) schemes to save up to £500 per month and, at the expiry of a fixed term of three years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discounted price of no less than 90 per cent of the market price at the start of the invitation period. Movements in the number of share options outstanding under the SAYE schemes are set out below: | | 2022 | | 2021 | | | --- | --- | --- | --- | --- | | | Number of options | Weighted average exercise price (pence) | Number of options | Weighted average exercise price (pence) | | Outstanding at 1 January | **1,180,563,291** | **30.63** | 1,120,138,915 | 30.39 | | Granted | **217,611,519** | **39.38** | 236,923,744 | 39.40 | | Exercised | **(23,359,526)** | **37.75** | (6,924,434) | 30.57 | | Forfeited | **(20,961,259)** | **29.20** | (22,815,078) | 28.78 | | Cancelled | **(47,687,607)** | **33.88** | (51,479,310) | 32.57 | | Expired | **(49,248,343)** | **46.29** | (95,280,546) | 49.03 | | **Outstanding at 31 December** | **1,256,918,075** | **31.30** | 1,180,563,291 | 30.63 | | **Exercisable at 31 December** | **263,302** | **47.92** | 336,561 | 51.03 | The weighted average share price at the time that the options were exercised during 2022 was £0.49 (2021: £0.47). The weighted average remaining contractual life of options outstanding at the end of the year was 1.88 years (2021: 2.46 years). The weighted average fair value of SAYE options granted during 2022 was £0.07 (2021: £0.09). The fair values of the SAYE options have been determined using a standard Black-Scholes model. 294 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 45: Share-based payments continued ### Other share option plans #### Executive Share Plans – buyout and retention awards Share options may be granted to senior employees under the Lloyds Banking Group Executive Share Plan 2003, Lloyds Banking Group Executive Group Ownership Share Plan and the Deferred Bonus Scheme 2021 specifically to facilitate recruitment (to compensate new recruits for any lost share awards), and also to make grants to key individuals for retention purposes. In some instances, grants may be made subject to individual performance conditions. Participants are not entitled to any dividends paid during the vesting period. | | 2022 | | 2021 | | | --- | --- | --- | --- | --- | | | Number of options | Weighted average exercise price (pence) | Number of options | Weighted average exercise price (pence) | | Outstanding at 1 January | 14,032,762 | Nil | 8,477,084 | Nil | | Granted | 10,278,224 | Nil | 13,610,204 | Nil | | Exercised | (3,333,322) | Nil | (7,110,663) | Nil | | Vested | – | Nil | – | Nil | | Forfeited | (33,409) | Nil | (385,184) | Nil | | Lapsed | (477,784) | Nil | (558,679) | Nil | | **Outstanding at 31 December** | **20,466,471** | **Nil** | **14,032,762** | **Nil** | | **Exercisable at 31 December** | **1,638,202** | **Nil** | **708,939** | **Nil** | The weighted average fair value of options granted in the year was £0.44 (2021: £0.42). The fair values of options granted have been determined using a standard Black-Scholes model. The weighted average share price at the time that the options were exercised during 2022 was £0.46 (2021: £0.43). The weighted average remaining contractual life of options outstanding at the end of the year was 6.0 years (2021: 6.3 years). Included in the above are awards to the Chief Financial Officer and the Group Chief Executive. William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019. He was granted deferred share awards over 4,086,632 shares, to replace unvested awards from his former employer, Morgan Stanley, that were forfeited as a result of him joining the Group. | | 2022 Number of shares | 2021 Number of shares | | --- | --- | --- | | Outstanding at 1 January | 686,085 | 1,810,712 | | Exercised | (686,085) | (1,124,627) | | **Outstanding at 31 December** | **–** | **686,085** | Charlie Nunn joined the Group on 16 August 2021 as Group Chief Executive. He was granted deferred share awards over 8,301,708 shares to replace unvested awards from his former employer, HSBC, that were forfeited as a result of him joining the Group. | | 2022 Number of shares | 2021 Number of shares | | --- | --- | --- | | Outstanding at 1 January | 7,444,787 | – | | Granted | – | 8,301,708 | | Exercised | (859,340) | (856,921) | | **Outstanding at 31 December** | **6,585,447** | **7,444,787** | The weighted average fair value of awards granted in 2021 was £0.40. ### Other share plans #### Lloyds Banking Group Executive Group Ownership Share Plan The plan, introduced in 2006, is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of the Group over a three-year period. Awards are made within limits set by the rules of the plan, with the limits determining the maximum number of shares that can be awarded equating to three times annual salary. In exceptional circumstances this may increase to four times annual salary. At the end of the performance period for the 2019 grant, the targets had not been fully met and therefore these awards vested in 2022 at a rate of 41.80 per cent. | | 2022 Number of shares | 2021 Number of shares | | --- | --- | --- | | Outstanding at 1 January | 350,873,627 | 533,987,527 | | Granted | – | – | | Vested | (50,703,778) | (39,621,415) | | Forfeited | (98,741,356) | (144,437,243) | | Dividend award | 966,016 | 944,758 | | **Outstanding at 31 December** | **202,394,509** | **350,873,627** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 295 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 45: Share-based payments continued Awards in respect of the 2020 grant are due to vest in 2023 at a rate of 43.70 per cent. In previous years participants were entitled to any dividends paid in the vesting period. However, following a regulatory change prohibiting the payment of dividends on such awards, the number of shares awarded has been determined by applying a discount factor to the share price on award to exclude the value of estimated future dividends. Details of the performance conditions for the plan are provided in the Directors' remuneration report. #### Lloyds Banking Group Long Term Share Plan The plan, introduced in 2021, replaced the Executive Group Ownership Share Plan and is intended to provide alignment to the Group's aim of delivering sustainable returns to shareholders, supported by its values and behaviours. | | 2022 Number of shares | 2021 Number of shares | | --- | --- | --- | | Outstanding at 1 January | 77,883,068 | – | | Granted | 108,513,202 | 83,456,304 | | Vested | – | – | | Forfeited | (14,448,527) | (5,573,236) | | Dividend award | – | – | | **Outstanding at 31 December** | **171,947,743** | **77,883,068** | The weighted average fair value of awards granted in the year was £0.36 (2021: £0.36). #### Assumptions at 31 December 2022 The fair value calculations at 31 December 2022 for grants made in the year, using Black-Scholes models and Monte Carlo simulation, are based on the following assumptions: | | SAYE | Executive Share Plans | Long Term Share Plan | | --- | --- | --- | --- | | Weighted average risk-free interest rate | 4.33% | 3.20% | 1.01% | | Weighted average expected life | 3.3 years | 1.2 years | 3.6 years | | Weighted average expected volatility | 28% | 27% | 33% | | Weighted average expected dividend yield | 5.3% | 5.3% | 5.3% | | Weighted average share price | £0.42 | £0.47 | £0.43 | | Weighted average exercise price | £0.39 | Nil | Nil | Expected volatility is a measure of the amount by which the Group's shares are expected to fluctuate during the life of an option. The expected volatility is estimated based on the historical volatility of the closing daily share price over the most recent period that is commensurate with the expected life of the option. The historical volatility is compared to the implied volatility generated from market traded options in the Group's shares to assess the reasonableness of the historical volatility and adjustments made where appropriate. #### Share Incentive Plans ##### Free shares An award of shares may be made annually to employees up to a maximum of £3,600. The shares awarded are held in trust for a mandatory period of three years on the employee's behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non-market based condition. If an employee leaves the Group within this three-year period for other than a 'good' reason, all of the shares awarded will be forfeited. No award was made in 2022. On 25 March 2021, the Group made an award of 1,017 shares to all eligible employees. The number of shares awarded was 67,658,976, with an average fair value of £0.42 based on the market price at the date of award. ##### Matching shares The Group undertakes to match shares purchased by employees up to the value of £45 per month; these matching shares are held in trust for a mandatory period of three years on the employee's behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non-market based condition. If an employee leaves within this three-year period for other than a 'good' reason, all of the matching shares are forfeited. Similarly, if the employees sell their purchased shares within three years, their matching shares are forfeited. The number of shares awarded relating to matching shares in 2022 was 43,378,504 (2021: 46,621,026), with an average fair value of £0.45 (2021: £0.44), based on market prices at the date of award. ##### Fixed share awards Fixed share awards were introduced in 2014 in order to ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package for certain Lloyds Banking Group employees, with an appropriate balance of fixed and variable remuneration, in line with regulatory requirements. The fixed share awards are delivered in Lloyds Banking Group plc shares, and were initially released over five years with 20 per cent being released each year following the year of award. From June 2020, the fixed share awards are released over three years with one third being released each year following the year of award. The number of shares purchased in relation to fixed share awards in 2022 was 7,261,080 (2021: 8,320,948) with an average fair value of £0.47 (2021: £0.45) based on market prices at the date of the award. The fixed share award is not subject to any performance conditions, performance adjustment or clawback. On an employee leaving the Group, there is no change to the timeline for which shares will become unrestricted. 296 Lloyds Banking Group Annual Report and Accounts 2022 ## 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: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | **Compensation** | | | | | Salaries and other short-term benefits | 12 | 10 | 13 | | Post-employment benefits | – | – | – | | Share-based payments | 16 | 15 | 13 | | **Total compensation** | **28** | **25** | **26** | Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £nil (2021: £nil; 2020: £nil). | | 2022 million | 2021 million | 2020 million | | --- | --- | --- | --- | | **Share option plans** | | | | | At 1 January | – | – | – | | Granted, including certain adjustments (includes entitlements of appointed key management personnel) | – | – | – | | Exercised/lapsed (includes entitlements of former key management personnel) | – | – | – | | **At 31 December** | **–** | **–** | **–** | | | 2022 million | 2021 million | 2020 million | | --- | --- | --- | --- | | **Share plans** | | | | | At 1 January | 74 | 117 | 101 | | Granted, including certain adjustments (includes entitlements of appointed key management personnel) | 29 | 19 | 46 | | Exercised/lapsed (includes entitlements of former key management personnel) | (31) | (62) | (30) | | **At 31 December** | **72** | **74** | **117** | The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information relating to other transactions between the Group and its key management personnel: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | **Loans** | | | | | At 1 January | 3 | 2 | 2 | | Advanced (includes loans to appointed key management personnel) | 1 | 1 | – | | Repayments (includes loans to former key management personnel) | (2) | – | – | | **At 31 December** | **2** | **3** | **2** | The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 1.01 per cent and 30.15 per cent in 2022 (2021: 0.39 per cent and 22.93 per cent; 2020: 0.39 per cent and 24.20 per cent). No provisions have been recognised in respect of loans given to key management personnel (2021 and 2020: £nil). | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | **Deposits** | | | | | At 1 January | 11 | 10 | 23 | | Placed (includes deposits of appointed key management personnel) | 37 | 26 | 25 | | Withdrawn (includes deposits of former key management personnel) | (38) | (25) | (38) | | **At 31 December** | **10** | **11** | **10** | Deposits placed by key management personnel attracted interest rates of up to 5.0 per cent (2021: 1.0 per cent; 2020: 2.0 per cent). Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 297 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 46: Related party transactions continued At 31 December 2022, the Group did not provide any guarantees in respect of key management personnel (2021 and 2020: none). At 31 December 2022, transactions, arrangements and agreements entered into by the Group's banking subsidiaries with directors and connected persons included amounts outstanding in respect of loans and credit card transactions of £2.0 thousand with two directors and no connected persons (2021: £0.9 million with two directors and one connected person; 2020: £0.6 million with four directors and two connected persons). #### Subsidiaries Details of the Group's subsidiaries and related undertakings are given on **pages 352 to 360**. In accordance with IFRS 10 Consolidated Financial Statements, transactions and balances with subsidiaries have been eliminated on consolidation. #### Pension funds The Group provides banking and some investment management services to certain of its pension funds. At 31 December 2022, customer deposits of £155 million (2021: £480 million) related to the Group's pension funds. As disclosed in note 35, the Group's main pension funds have entered into a longevity insurance arrangement that was structured as a pass-through involving Scottish Widows. #### Collective investment vehicles The Group manages 125 (2021: 145) collective investment vehicles, such as Open-Ended Investment Companies (OECs) and of these 73 (2021: 73) are consolidated. The Group invested £196 million (2021: £427 million) and redeemed £486 million (2021: £820 million) in the unconsolidated collective investment vehicles during the year and had investments, at fair value, of £1,491 million (2021: £1,965 million) at 31 December. The Group earned fees of £80 million from the unconsolidated collective investment vehicles during 2022 (2021: £96 million). #### Joint ventures and associates At 31 December 2022 there were loans and advances to customers of £21 million (2021: £14 million) outstanding and balances within customer deposits of £58 million (2021: £22 million) relating to joint ventures and associates. During the year the Group paid fees of £5 million (2021: £7 million) to its Schroders Personal Wealth joint venture and also made payments of £18 million (2021: £10 million) under the terms of agreements put in place on the establishment of the joint venture. In addition to the above balances, the Group has a number of other associates held by its venture capital business that it accounts for at fair value through profit or loss. At 31 December 2022, these companies had total assets of £4,709 million (2021: £3,889 million), total liabilities of £5,557 million (2021: £4,412 million) and for the year ended 31 December 2022 had turnover of £4,196 million (2021: £3,686 million) and made a net loss of £228 million (2021: net loss of £187 million). In addition, the Group has provided £1,466 million (2021: £1,265 million) of financing to these companies on which it received £98 million (2021: £86 million) of interest income in the year. ### Note 47: Contingent liabilities, commitments and guarantees #### Interchange fees With respect to multi-lateral interchange fees (MIFs), the Group is not a party in the ongoing or threatened litigation which involves the card schemes Visa and Mastercard (as described below). However, the Group is a member/licensee of Visa and Mastercard and other card schemes. The litigation in question is as follows: - Litigation brought by or on behalf of retailers against both Visa and Mastercard in the English Courts, in which retailers are seeking damages on grounds that Visa and Mastercard's MIFs breached competition law (this includes a judgment of the Supreme Court in June 2020 upholding the Court of Appeal's finding in 2018 that certain historic interchange arrangements of Mastercard and Visa infringed competition law) - Litigation brought on behalf of UK consumers in the English Courts against Mastercard Any impact on the Group of the litigation against Visa and Mastercard remains uncertain at this time, such that it is not practicable for the Group to provide an estimate of any potential financial effect. Insofar as Visa is required to pay damages to retailers for interchange fees set prior to June 2016, contractual arrangements to allocate liability have been agreed between various UK banks (including the Group) and Visa Inc; as part of Visa Inc's acquisition of Visa Europe in 2016. These arrangements cap the maximum amount of liability to which the Group may be subject and this cap is set at the cash consideration received by the Group for the sale of its stake in Visa Europe to Visa Inc in 2016. In 2016, the Group received Visa preference shares as part of the consideration for the sale of its shares in Visa Europe. A release assessment is carried out by Visa on certain anniversaries of the sale (in line with the Visa Europe sale documentation) and as a result, some Visa preference shares may be converted into Visa Inc Class A common stock. Any such release and any subsequent sale of Visa common stock does not impact the contingent liability. #### LIBOR and other trading rates Certain Group companies, together with other panel banks, have been named as defendants in ongoing private lawsuits, including purported class action suits, in the US in connection with their roles as panel banks contributing to the setting of US Dollar, Japanese Yen and Sterling London Interbank Offered Rate and the Australian BBSW reference rate. Certain Group companies are also named as defendants in (i) UK-based claims; and (ii) two Dutch class actions, raising LIBOR manipulation allegations. A number of claims against the Group in the UK relating to the alleged mis-sale of interest rate hedging products also include allegations of LIBOR manipulation. It is currently not possible to predict the scope and ultimate outcome on the Group of any private lawsuits or any related challenges to the interpretation or validity of any of the Group's contractual arrangements, including their timing and scale. As such, it is not practicable to provide an estimate of any potential financial effect. 298 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 47: Contingent liabilities, commitments and guarantees continued ### Tax authorities The Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In 2013, HMRC informed the Group that its interpretation of the UK rules means that the group relief is not available. In 2020, HMRC concluded their enquiry into the matter and issued a closure notice. The Group's interpretation of the UK rules has not changed and hence it has appealed to the First Tier Tax Tribunal, with a hearing expected in 2023. If the final determination of the matter by the judicial process is that HMRC's position is correct, management estimate that this would result in an increase in current tax liabilities of approximately £875 million (including interest) and a reduction in the Group's deferred tax asset of approximately £295 million. The Group, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due. There are a number of other open matters on which the Group is in discussions with HMRC (including the tax treatment of certain costs arising from the divestment of TSB Banking Group plc), none of which is expected to have a material impact on the financial position of the Group. ### Motor commission review Following the FCA's Motor Market review, the Group has received a number of complaints, some of which are with the Financial Ombudsman Service, in respect of commission arrangements. It is currently not possible to predict the ultimate outcome of the complaints, including the financial impact or the scope or nature of remediation requirements, if any, or any related challenges to the interpretation or validity of any of the Group's historical motor commission arrangements. ### Other legal actions and regulatory matters In addition, in the course of its business the Group is subject to other complaints and threatened or actual legal proceedings (including class or group action claims) brought by or on behalf of current or former employees, customers, investors or other third parties, as well as legal and regulatory reviews, challenges, investigations and enforcement actions, which could relate to a number of issues, including financial, environmental or other regulatory matters, both in the UK and overseas. Where material, such matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established based on management's best estimate of the amount required at the relevant balance sheet date. In some cases it will not be possible to form a view, for example because the facts are unclear or because further time is needed to assess properly the merits of the case, and no provisions are held in relation to such matters. In these circumstances, specific disclosure in relation to a contingent liability will be made where material. However, the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position, operations or cash flows. Where there is a contingent liability related to an existing provision the relevant disclosures are included within note 37. ### Contingent liabilities, commitments and guarantees arising from the banking business | | 2022 £m | 2021 £m | | --- | --- | --- | | **Contingent liabilities** | | | | Acceptances and endorsements | 58 | 191 | | Other: | | | | Other items serving as direct credit substitutes | 781 | 510 | | Performance bonds, including letters of credit, and other transaction-related contingencies | 2,147 | 2,043 | | | 2,928 | 2,553 | | **Total contingent liabilities** | **2,986** | **2,744** | The contingent liabilities of the Group arise in the normal course of its banking business and it is not practicable to quantify their future financial effect. | | 2022 £m | 2021 £m | | --- | --- | --- | | **Commitments and guarantees** | | | | Forward asset purchases and forward deposits placed | 39 | 61 | | Undrawn formal standby facilities, credit lines and other commitments to lend: | | | | Less than 1 year original maturity: | | | | Mortgage offers made | 17,144 | 17,807 | | Other commitments and guarantees | 79,925 | 88,454 | | | 97,069 | 106,261 | | 1 year or over original maturity | 46,687 | 36,411 | | **Total commitments and guarantees** | **143,795** | **142,733** | Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £74,692 million (2021: £71,158 million) was irrevocable. ### Capital commitments Excluding commitments in respect of investment property (note 26), capital expenditure contracted but not provided for at 31 December 2022 amounted to £1,663 million (2021: £1,034 million). Of this amount, £1,663 million (2021: £1,034 million) related to assets to be leased to customers under operating leases. The Group's management is confident that future net revenues and funding will be sufficient to cover these commitments. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 299 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 48: Structured entities The Group's interests in structured entities are both consolidated and unconsolidated. Details of the Group's interests in consolidated structured entities are set out in note 30 for securitisations and covered bond vehicles, note 35 for structured entities associated with the Group's pension schemes, and below in part (A) and (B). Details of the Group's interests in unconsolidated structured entities are included below in part (C). #### (A) Asset-backed conduits In addition to the structured entities discussed in note 30, which are used for securitisation and covered bond programmes, the Group sponsors an active asset-backed conduit, Cancara, which invests in client receivables and debt securities. The total consolidated exposure of Cancara at 31 December 2022 was £2,357 million (2021: £1,745 million), comprising £1,464 million of loans and advances (2021: £889 million), £850 million of debt securities (2021: £780 million) and £43 million of financial assets at fair value through profit or loss (2021: £76 million). All lending assets and debt securities held by the Group in Cancara are restricted in use, as they are held by the collateral agent for the benefit of the commercial paper investors and the liquidity providers only. The Group provides liquidity facilities to Cancara under terms that are usual and customary for standard lending activities in the normal course of the Group's banking activities. During 2022 there have continued to be planned drawdowns on certain liquidity facilities for balance sheet management purposes, supporting the programme to provide funding alongside the proceeds of the asset-backed commercial paper issuance. The Group could be asked to provide support under the contractual terms of these arrangements including, for example, if Cancara experienced a shortfall in external funding, which may occur in the event of market disruption. The external assets in Cancara are consolidated in the Group's financial statements. #### (B) Consolidated collective investment vehicles and limited partnerships The assets of the Insurance business held in consolidated collective investment vehicles, such as Open-Ended Investment Companies and limited partnerships, are not directly available for use by the Group. However, the Group's investment in the majority of these collective investment vehicles is readily realisable. As at 31 December 2022, the total carrying value of these consolidated collective investment vehicle assets and liabilities held by the Group was £54,749 million (2021: £60,352 million). The Group has no contractual arrangements (such as liquidity facilities) that would require it to provide financial or other support to the consolidated collective investment vehicles; the Group has not previously provided such support and has no current intentions to provide such support. #### (C) Unconsolidated collective investment vehicles and limited partnerships The Group's direct interests in unconsolidated structured entities comprise investments in collective investment vehicles, such as Open-Ended Investment Companies, and limited partnerships with a total carrying value of £68,913 million at 31 December 2022 (2021: £74,916 million), included within financial assets designated at fair value through profit and loss (see note 16). These investments include both those entities managed by third parties and those managed by the Group. At 31 December 2022, the total asset value of these unconsolidated structured entities, including the portion in which the Group has no interest, was £2,176 billion (2021: £2,597 billion). Given the nature of these investments, the Group's maximum exposure to loss is equal to the carrying value of the investment. However, the Group's investments in these entities are primarily held to match policyholder liabilities in the Insurance division and the majority of the risk from a change in the value of the Group's investment is matched by a change in policyholder liabilities. The collective investment vehicles are primarily financed by investments from investors in the vehicles. During the year the Group has not provided any non-contractual financial or other support to these entities and has no current intention of providing any financial or other support. There were no transfers from/to these unconsolidated collective investment vehicles and limited partnerships. The Group considers itself the sponsor of a structured entity where it is primarily involved in the design and establishment of the structured entity and further where the Group transfers assets to the structured entity, markets products associated with the structured entity in its own name and/or provides guarantees regarding the structured entity's performance. The Group sponsors a range of diverse investment funds and limited partnerships where it acts as the fund manager or equivalent decision-maker and markets the funds under one of the Group's brands. The Group earns fees from managing the investments of these funds. The investment management fees that the Group earned from these entities, including those in which the Group held no ownership interest at 31 December 2022, are reported in note 6. 300 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 49: Financial instruments ### (1) Measurement basis of financial assets and liabilities The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance sheet heading. | | Derivatives designated as hedging instruments £m | Mandatorily held at fair value through profit or loss | | Designated at fair value through profit or loss £m | At fair value through other comprehensive income £m | Held at amortised cost £m | Insurance-related contracts £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | Held for trading £m | Other £m | | | | | | | **At 31 December 2022** | | | | | | | | | | **Financial assets** | | | | | | | | | | Cash and balances at central banks | – | – | – | – | – | 91,388 | – | 91,388 | | Items in the course of collection from banks | – | – | – | – | – | 242 | – | 242 | | Financial assets at fair value through profit or loss | – | 14,216 | 166,393 | – | – | – | – | 180,609 | | Derivative financial instruments | 75 | 24,678 | – | – | – | – | – | 24,753 | | Loans and advances to banks | – | – | – | – | – | 10,632 | – | 10,632 | | Loans and advances to customers | – | – | – | – | – | 454,899 | – | 454,899 | | Reverse repurchase agreements | – | – | – | – | – | 44,865 | – | 44,865 | | Debt securities | – | – | – | – | – | 9,926 | – | 9,926 | | Financial assets at amortised cost | – | – | – | – | – | 520,322 | – | 520,322 | | Financial assets at fair value through other comprehensive income | – | – | – | – | 23,154 | – | – | 23,154 | | Reinsurance assets | – | – | – | – | – | – | 616 | 616 | | **Total financial assets** | **75** | **38,894** | **166,393** | **–** | **23,154** | **611,952** | **616** | **841,084** | | **Financial liabilities** | | | | | | | | | | Deposits from banks | – | – | – | – | – | 7,266 | – | 7,266 | | Customer deposits | – | – | – | – | – | 475,331 | – | 475,331 | | Repurchase agreements at amortised cost | – | – | – | – | – | 48,596 | – | 48,596 | | Items in course of transmission to banks | – | – | – | – | – | 372 | – | 372 | | Financial liabilities at fair value through profit or loss | – | 12,577 | – | 5,178 | – | – | – | 17,755 | | Derivative financial instruments | 527 | 23,515 | – | – | – | – | – | 24,042 | | Notes in circulation | – | – | – | – | – | 1,280 | – | 1,280 | | Debt securities in issue | – | – | – | – | – | 73,819 | – | 73,819 | | Liabilities arising from insurance contracts and participating investment contracts | – | – | – | – | – | – | 106,893 | 106,893 | | Liabilities arising from non-participating investment contracts | – | – | – | 42,975 | – | – | – | 42,975 | | Other | – | – | – | – | – | 1,317 | 248 | 1,565 | | Subordinated liabilities | – | – | – | – | – | 10,730 | – | 10,730 | | **Total financial liabilities** | **527** | **36,092** | **–** | **48,153** | **–** | **618,711** | **107,141** | **810,624** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 301 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 49: Financial instruments** continued | | Derivatives designated as hedging instruments £m | Mandatorily held at fair value through profit or loss | | Designated at fair value through profit or loss £m | At fair value through other comprehensive income £m | Held at amortised cost £m | Insurance-related contracts £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | Held for trading £m | Other £m | | | | | | | **At 31 December 2021** | | | | | | | | | | **Financial assets** | | | | | | | | | | Cash and balances at central banks | – | – | – | – | – | 76,420 | – | 76,420 | | Items in the course of collection from banks | – | – | – | – | – | 147 | – | 147 | | Financial assets at fair value through profit or loss | – | 21,760 | 185,011 | – | – | – | – | 206,771 | | Derivative financial instruments | 86 | 21,965 | – | – | – | – | – | 22,051 | | Loans and advances to banks | – | – | – | – | – | 7,001 | – | 7,001 | | Loans and advances to customers | – | – | – | – | – | 448,567 | – | 448,567 | | Reverse repurchase agreements | – | – | – | – | – | 54,753 | – | 54,753 | | Debt securities | – | – | – | – | – | 6,835 | – | 6,835 | | Financial assets at amortised cost | – | – | – | – | – | 517,156 | – | 517,156 | | Financial assets at fair value through other comprehensive income | – | – | – | – | 28,137 | – | – | 28,137 | | Reinsurance assets | – | – | – | – | – | – | 759 | 759 | | **Total financial assets** | **86** | **43,725** | **185,011** | **–** | **28,137** | **593,723** | **759** | **851,441** | | **Financial liabilities** | | | | | | | | | | Deposits from banks | – | – | – | – | – | 7,647 | – | 7,647 | | Customer deposits | – | – | – | – | – | 476,344 | – | 476,344 | | Repurchase agreements at amortised cost | – | – | – | – | – | 31,125 | – | 31,125 | | Items in course of transmission to banks | – | – | – | – | – | 316 | – | 316 | | Financial liabilities at fair value through profit or loss | – | 16,582 | – | 6,541 | – | – | – | 23,123 | | Derivative financial instruments | 327 | 17,733 | – | – | – | – | – | 18,060 | | Notes in circulation | – | – | – | – | – | 1,321 | – | 1,321 | | Debt securities in issue | – | – | – | – | – | 71,552 | – | 71,552 | | Liabilities arising from insurance contracts and participating investment contracts | – | – | – | – | – | – | 123,423 | 123,423 | | Liabilities arising from non-participating investment contracts | – | – | – | 45,040 | – | – | – | 45,040 | | Other | – | – | – | – | – | 1,475 | 308 | 1,783 | | Subordinated liabilities | – | – | – | – | – | 13,108 | – | 13,108 | | **Total financial liabilities** | **327** | **34,315** | **–** | **51,581** | **–** | **602,888** | **123,731** | **812,842** | 302 Lloyds Banking Group Annual Report and Accounts 2022 Financial results Risk managementGovernance Financial statements Other informationStrategic report 303Lloyds Banking Group Annual Report and Accounts 2022 Note 49: Financial instruments continued (2) Fair value measurement Fair value is the price that would be received on sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is a measure as at a specific date and may be significantly different from the amount which will actually be paid or received on maturity or settlement date. Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments to those held by the Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been determined using valuation techniques which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Valuation techniques used include discounted cash flow analysis and pricing models and, where appropriate, comparison to instruments with characteristics similar to those of the instruments held by the Group. The Group measures valuation adjustments for its derivative exposures on the same basis as the derivatives are managed. The carrying amount of the following financial instruments is a reasonable approximation of fair value: cash and balances at central banks, items in the course of collection from banks, items in course of transmission to banks and notes in circulation. Liabilities arising from non-participating investment contracts are carried at fair value. Fair values have not been disclosed for discretionary participating investment contracts. There is currently no agreed definition of fair valuation for discretionary participation features applied under IFRS and therefore the range of possible fair values of these contracts cannot be measured reliably. Because a variety of estimation techniques are employed and significant estimates made, comparisons of fair values between financial institutions may not be meaningful. Readers of these financial statements are thus advised to use caution when using this data to evaluate the Group’s financial position. Fair value information is not provided for items that are not financial instruments or for other assets and liabilities which are not carried at fair value in the Group’s consolidated balance sheet. These items include intangible assets, such as brands and acquired credit card relationships; premises and equipment; and shareholders’ equity. These items are material and accordingly the Group believes that any fair value information presented would not represent the underlying value of the Group. Valuation control framework The key elements of the control framework for the valuation of financial instruments include model validation, product implementation review and independent price verification. These functions are carried out by appropriately skilled risk and finance teams, independent of the business area responsible for the products. Model validation covers both qualitative and quantitative elements relating to new models. In respect of new products, a product implementation review is conducted pre and post-trading. Pre-trade testing ensures that the new model is integrated into the Group’s systems and that the profit and loss and risk reporting are consistent throughout the trade lifecycle. Post-trade testing examines the explanatory power of the implemented model, actively monitoring model parameters and comparing in-house pricing to external sources. Independent price verification procedures cover financial instruments carried at fair value. The frequency of the review is matched to the availability of independent data, monthly being the minimum. Valuation differences in breach of established thresholds are escalated to senior management. The results from independent pricing and valuation reserves are reviewed monthly by senior management. Formal committees, consisting of senior risk, finance and business management, meet at least quarterly to discuss and approve valuations in more judgemental areas, in particular for unquoted equities, structured credit, over-the-counter options and the credit valuation adjustment (CVA), funding valuation adjustment (FVA) and other valuation adjustments. Valuation of financial assets and liabilities Assets and liabilities carried at fair value or for which fair values are disclosed have been classified into three levels according to the quality and reliability of information used to determine the fair values. Level 1 Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1 predominantly comprise listed equity shares, treasury bills and other government securities. Level 2 Level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a market that is not considered to be active or valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market data. Examples of such financial instruments include most over-the-counter derivatives, financial institution issued securities, certificates of deposit and certain asset-backed securities. Level 3 Level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Such instruments would include the Group’s venture capital and unlisted equity investments which are valued using various valuation techniques that require significant management judgement in determining appropriate assumptions, including earnings multiples and estimated future cash flows. Certain of the Group’s asset-backed securities, loans and advances recognised at fair value and derivatives are also classified as level 3. Transfers out of the level 3 portfolio arise when inputs that could have a significant impact on the instrument’s valuation become market observable after previously having been non-market observable. In the case of asset-backed securities this can arise if more than one consistent independent source of data becomes available. Conversely, transfers into the portfolio arise when consistent sources of data cease to be available. ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 49: Financial instruments continued #### (3) Financial assets and liabilities carried at fair value ##### (A) Financial assets, excluding derivatives ###### Valuation hierarchy At 31 December 2022, the Group's financial assets carried at fair value, excluding derivatives, totalled £203,763 million (2021: £234,908 million). The table below analyses these financial assets by balance sheet classification, asset type and valuation methodology (level 1, 2 or 3, as described on **page 303**). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year. | | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | | --- | --- | --- | --- | --- | | **At 31 December 2022** | | | | | | Financial assets at fair value through profit or loss | | | | | | Loans and advances to banks | – | 3,345 | – | 3,345 | | Loans and advances to customers | – | 13,644 | 7,883 | 21,527 | | Debt securities: | | | | | | Government securities | 10,050 | 7 | – | 10,057 | | Other public sector securities | – | 2,516 | – | 2,516 | | Bank and building society certificates of deposit | – | 7,133 | – | 7,133 | | Asset-backed securities: | | | | | | Mortgage-backed securities | – | 235 | – | 235 | | Other asset-backed securities | – | 122 | 63 | 185 | | Corporate and other debt securities | 77 | 16,105 | 1,739 | 17,921 | | | 10,127 | 26,118 | 1,802 | 38,047 | | Treasury and other bills | 62 | – | – | 62 | | Contracts held with reinsurers | – | 10,906 | – | 10,906 | | Equity shares | 105,103 | – | 1,619 | 106,722 | | **Total financial assets at fair value through profit or loss** | **115,292** | **54,013** | **11,304** | **180,609** | | Financial assets at fair value through other comprehensive income | | | | | | Debt securities: | | | | | | Government securities | 10,854 | 357 | – | 11,211 | | Asset-backed securities | – | 87 | 59 | 146 | | Corporate and other debt securities | 536 | 10,978 | – | 11,514 | | | 11,390 | 11,422 | 59 | 22,871 | | Treasury and other bills | – | – | – | – | | Equity shares | – | – | 283 | 283 | | **Total financial assets at fair value through other comprehensive income** | **11,390** | **11,422** | **342** | **23,154** | | **Total financial assets carried at fair value, excluding derivatives** | **126,682** | **65,435** | **11,646** | **203,763** | 304 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 49: Financial instruments continued | | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | | --- | --- | --- | --- | --- | | **At 31 December 2021** | | | | | | Financial assets at fair value through profit or loss | | | | | | Loans and advances to banks | – | 4,170 | – | 4,170 | | Loans and advances to customers | – | 15,575 | 9,793 | 25,368 | | Debt securities: | | | | | | Government securities | 17,668 | 12 | – | 17,680 | | Other public sector securities | – | 2,731 | – | 2,731 | | Bank and building society certificates of deposit | – | 6,297 | – | 6,297 | | Asset-backed securities: | | | | | | Mortgage-backed securities | – | 433 | – | 433 | | Other asset-backed securities | – | 177 | 98 | 275 | | Corporate and other debt securities | – | 18,123 | 1,679 | 19,802 | | | 17,668 | 27,773 | 1,777 | 47,218 | | Treasury and other bills | 19 | – | – | 19 | | Contracts held with reinsurers | – | 12,371 | – | 12,371 | | Equity shares | 115,882 | – | 1,743 | 117,625 | | **Total financial assets at fair value through profit or loss** | **133,569** | **59,889** | **13,313** | **206,771** | | Financial assets at fair value through other comprehensive income | | | | | | Debt securities: | | | | | | Government securities | 14,613 | – | – | 14,613 | | Asset-backed securities | – | – | 70 | 70 | | Corporate and other debt securities | 644 | 12,490 | – | 13,134 | | | 15,257 | 12,490 | 70 | 27,817 | | Treasury and other bills | 85 | – | – | 85 | | Equity shares | – | – | 235 | 235 | | **Total financial assets at fair value through other comprehensive income** | **15,342** | **12,490** | **305** | **28,137** | | **Total financial assets carried at fair value, excluding derivatives** | **148,911** | **72,379** | **13,618** | **234,908** | ### Movements in level 3 portfolio The table below analyses movements in level 3 financial assets, excluding derivatives, carried at fair value (recurring measurement). | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Financial assets at fair value through profit or loss £m | Financial assets at fair value through other comprehensive income £m | Total level 3 assets carried at fair value, excluding derivatives (recurring basis) £m | Financial assets at fair value through profit or loss £m | Financial assets at fair value through other comprehensive income £m | Total level 3 assets carried at fair value, excluding derivatives (recurring basis) £m | | At 1 January | 13,313 | 305 | 13,618 | 15,046 | 346 | 15,392 | | Exchange and other adjustments | 15 | 3 | 18 | 4 | (11) | (7) | | (Losses) gains recognised in the income statement within other income | (1,609) | (2) | (1,611) | 183 | – | 183 | | Gains recognised in other comprehensive income within the revaluation reserve in respect of financial assets at fair value through other comprehensive income | – | 44 | 44 | – | 69 | 69 | | Purchases/increases to customer loans | 959 | 3 | 962 | 1,709 | 8 | 1,717 | | Sales/repayments of customer loans | (1,320) | (11) | (1,331) | (2,765) | (107) | (2,872) | | Transfers into the level 3 portfolio | 197 | – | 197 | 171 | – | 171 | | Transfers out of the level 3 portfolio | (251) | – | (251) | (1,035) | – | (1,035) | | **At 31 December** | **11,304** | **342** | **11,646** | **13,313** | **305** | **13,618** | | Losses recognised in the income statement, within other income, relating to the change in fair value of those assets held at 31 December | (1,596) | – | (1,596) | (71) | – | (71) | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 305 ## Notes to the consolidated financial statements continued for the year ended 31 December ## Note 49: Financial instruments continued Valuation methodology for financial assets, excluding derivatives ### Loans and advances to customers and banks The fair value of these assets is determined using discounted cash flow techniques. The discount rates are derived from market observable interest rates, a risk margin that reflects loan credit ratings and an incremental illiquidity premium based on historical spreads at origination on similar loans. ### Debt securities Debt securities measured at fair value and classified as level 2 are valued by discounting expected cash flows using an observable credit spread applicable to the particular instrument. Where there is limited trading activity in debt securities, the Group uses valuation models, consensus pricing information from third-party pricing services and broker or lead manager quotes to determine an appropriate valuation. Debt securities are classified as level 3 if there is a significant valuation input that cannot be corroborated through market sources or where there are materially inconsistent values for an input. Asset classes classified as level 3 mainly comprise venture capital investments. ### Equity investments Unlisted equity and fund investments are valued using different techniques in accordance with the Group's valuation policy and International Private Equity and Venture Capital Guidelines. Depending on the business sector and the circumstances of the investment, unlisted equity valuations are based on earnings multiples, net asset values or discounted cash flows. - A number of earnings multiples are used in valuing the portfolio including price earnings, earnings before interest and tax and earnings before interest, tax, depreciation and amortisation. The particular multiple selected is appropriate for the size and type of business being valued and is derived by reference to the current market-based multiple. Consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when selecting the appropriate multiple - Discounted cash flow valuations use estimated future cash flows, usually based on management forecasts, with the application of appropriate exit yields or terminal multiples and discounted using rates appropriate to the specific investment, business sector or recent economic rates of return. Recent transactions involving the sale of similar businesses may sometimes be used as a frame of reference in deriving an appropriate multiple - For fund investments the most recent capital account value calculated by the fund manager is used as the basis for the valuation and adjusted, if necessary, to align valuation techniques with the Group's valuation policy Unlisted equity investments and investments in property partnerships held in the life assurance funds are valued using third-party valuations. Management take account of any pertinent information, such as recent transactions and information received on particular investments, to adjust the third-party valuations where necessary. ## (B) Financial liabilities, excluding derivatives ### Valuation hierarchy At 31 December 2022, the Group's financial liabilities carried at fair value, excluding derivatives, comprised its financial liabilities at fair value through profit or loss and totalled £17,755 million (2021: £23,123 million). The table below analyses these financial liabilities by balance sheet classification and valuation methodology (level 1, 2 or 3, as described on page 303). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year. | | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | | --- | --- | --- | --- | --- | | **At 31 December 2022** | | | | | | Financial liabilities at fair value through profit or loss | | | | | | Debt securities and other liabilities designated at fair value through profit or loss | – | 5,133 | 45 | 5,178 | | Trading liabilities: | | | | | | Liabilities in respect of securities sold under repurchase agreements | – | 11,037 | – | 11,037 | | Short positions in securities | 1,505 | 35 | – | 1,540 | | | 1,505 | 11,072 | – | 12,577 | | **Total financial liabilities carried at fair value, excluding derivatives** | **1,505** | **16,205** | **45** | **17,755** | | At 31 December 2021 | | | | | | Financial liabilities at fair value through profit or loss | | | | | | Debt securities in issue designated at fair value through profit or loss | – | 6,504 | 37 | 6,541 | | Trading liabilities: | | | | | | Liabilities in respect of securities sold under repurchase agreements | – | 14,962 | – | 14,962 | | Short positions in securities | 1,569 | 51 | – | 1,620 | | | 1,569 | 15,013 | – | 16,582 | | **Total financial liabilities carried at fair value, excluding derivatives** | **1,569** | **21,517** | **37** | **23,123** | The Group's non-participating investment contracts (see note 33) were all categorised as level 2. 306 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 49: Financial instruments continued ### Movements in level 3 portfolio The table below analyses movements in the level 3 financial liabilities portfolio, excluding derivatives. | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | 37 | 45 | | Gains recognised in the income statement within other income | (4) | (5) | | Additions | 33 | 4 | | Redemptions | (3) | (7) | | Transfers out of the level 3 portfolio | (18) | – | | **At 31 December** | **45** | **37** | | Gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities held at 31 December | (4) | (4) | ### Valuation methodology for financial liabilities, excluding derivatives #### Liabilities held at fair value through profit or loss These principally comprise debt securities in issue which are classified as level 2 and their fair value is determined using techniques whose inputs are based on observable market data. The carrying amount of the securities is adjusted to reflect the effect of changes in own credit spreads and the resulting gain or loss is recognised in other comprehensive income. In the year ended 31 December 2022, the own credit adjustment arising from the fair valuation of £5,178 million (2021: £6,541 million) of the Group's debt securities in issue designated at fair value through profit or loss resulted in a gain of £519 million (2021: loss of £86 million), before tax, recognised in other comprehensive income. #### Trading liabilities in respect of securities sold under repurchase agreements The fair value of these liabilities is determined using discounted cash flow techniques. The discount rates are derived from observable repurchase agreement rate curves specific to the type of security sold under the repurchase agreement. ### (C) Derivatives #### Valuation hierarchy All of the Group's derivative assets and liabilities are carried at fair value. At 31 December 2022, such assets totalled £24,753 million (2021: £22,051 million) and liabilities totalled £24,042 million (2021: £18,060 million). The table below analyses these derivative balances by valuation methodology (level 1, 2 or 3, as described on page 303). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and level 2 during the year. | | 2022 | | | | 2021 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | Level 1 £m | Level 2 £m | Level 3 £m | Total £m | | Derivative assets | 78 | 24,122 | 553 | 24,753 | 44 | 21,114 | 893 | 22,051 | | Derivative liabilities | (39) | (23,395) | (608) | (24,042) | (62) | (17,054) | (944) | (18,060) | ### Movements in level 3 portfolio The table below analyses movements in level 3 derivative assets and liabilities carried at fair value. | | 2022 | | 2021 | | | --- | --- | --- | --- | --- | | | Derivative assets £m | Derivative liabilities £m | Derivative assets £m | Derivative liabilities £m | | At 1 January | 893 | (944) | 981 | (1,374) | | Exchange and other adjustments | 47 | (37) | (4) | 4 | | Gains (losses) recognised in the income statement within other income | 72 | 204 | (182) | 292 | | Purchases (additions) | 48 | (46) | 214 | (328) | | (Sales) redemptions | (21) | 38 | (116) | 462 | | Transfers out of the level 3 portfolio | (486) | 177 | – | – | | **At 31 December** | **553** | **(608)** | **893** | **(944)** | | Gains (losses) recognised in the income statement, within other income, relating to the change in fair value of those assets or liabilities held at 31 December | 222 | 125 | (219) | 324 | #### Valuation methodology for derivatives Where the Group's derivative assets and liabilities are not traded on an exchange, they are valued using valuation techniques, including discounted cash flow and options pricing models, as appropriate. The types of derivatives classified as level 2 and the valuation techniques used include: - Interest rate swaps which are valued using discounted cash flow models; the most significant inputs into those models are interest rate yield curves which are developed from publicly quoted rates - Foreign exchange derivatives that do not contain options which are priced using rates available from publicly quoted sources - Credit derivatives which are valued using standard models with observable inputs, except for the items classified as level 3, which are valued using publicly available yield and credit default swap (CDS) curves - Less complex interest rate and foreign exchange option products which are valued using volatility surfaces developed from publicly available interest rate cap, interest rate swaption and other option volatilities; option volatility skew information is derived from a market standard consensus pricing service. For more complex option products, the Group calibrates its models using observable at-the-money data; where necessary, the Group adjusts for out-of-the-money positions using a market standard consensus pricing service Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 307 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 49: Financial instruments continued Complex interest rate and foreign exchange products where inputs to the valuation are significant, material and unobservable are classified as level 3. Where credit protection, usually in the form of credit default swaps, has been purchased or written on asset-backed securities, the security is referred to as a negative basis asset-backed security and the resulting derivative assets or liabilities have been classified as either level 2 or level 3 according to the classification of the underlying asset-backed security. Certain unobservable inputs used to calculate CVA, FVA, and own credit adjustments, are not significant in determining the classification of the derivative and debt instruments. Consequently, these inputs do not form part of the level 3 sensitivities presented. #### Derivative valuation adjustments Derivative financial instruments which are carried in the balance sheet at fair value are adjusted where appropriate to reflect credit risk, market liquidity and other risks. #### (i) Uncollateralised derivative valuation adjustments The following table summarises the movement on this valuation adjustment account during 2021 and 2022: | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | 456 | 474 | | Income statement credit | (75) | (18) | | **At 31 December** | **381** | **456** | | Represented by: | | | | | 2022 £m | 2021 £m | | Credit Valuation Adjustment | 294 | 306 | | Debit Valuation Adjustment | (55) | (26) | | Funding Valuation Adjustment | 142 | 176 | | | **381** | **456** | Credit and Debit Valuation Adjustments (CVA and DVA) are applied to the Group's over-the-counter derivative exposures with counterparties that are not subject to strong interbank collateral arrangements. These exposures largely relate to the provision of risk management solutions for corporate customers within the Commercial Banking division. A CVA is taken where the Group has a positive future uncollateralised exposure (asset). A DVA is taken where the Group has a negative future uncollateralised exposure (liability). These adjustments reflect interest rates and expectations of counterparty creditworthiness and the Group's own credit spread respectively. The CVA is sensitive to: - The current size of the mark-to-market position on the uncollateralised asset - Expectations of future market volatility of the underlying asset - Expectations of counterparty creditworthiness Market Credit Default Swap (CDS) spreads are used to develop the probability of default for quoted counterparties. For unquoted counterparties, internal credit ratings and market sector CDS curves and recovery rates are used. The loss given default (LGD) is based on market recovery rates and internal credit assessments. The combination of a one-notch deterioration in the credit rating of derivative counterparties and a ten per cent increase in LGD increases the CVA by £73 million. Current market value is used to estimate the projected exposure for products not supported by the model, which are principally complex interest rate options that are traded in very low volumes. For these, the CVA is calculated on an add-on basis (although no such adjustment was required at 31 December 2022). The DVA is sensitive to: - The current size of the mark-to-market position on the uncollateralised liability - Expectations of future market volatility of the underlying liability - The Group's own CDS spread A one per cent rise in the CDS spread would lead to an increase in the DVA of £109 million. The risk exposures that are used for the CVA and DVA calculations are strongly influenced by interest rates. Due to the nature of the Group's business the CVA/DVA exposures tend to be on average the same way around such that the valuation adjustments fall when interest rates rise. A one per cent rise in interest rates would lead to a £51 million fall in the overall valuation adjustment to £188 million. The CVA model used by the Group does not assume any correlation between the level of interest rates and default rates. The Group has also recognised a Funding Valuation Adjustment to adjust for the net cost of funding uncollateralised derivative positions. This adjustment is calculated on the expected future exposure discounted at a suitable cost of funds. A ten basis points increase in the cost of funds will increase the funding valuation adjustment by £13 million. #### (ii) Market liquidity The Group includes mid to bid-offer valuation adjustments against the expected cost of closing out the net market risk in the Group's trading positions within a time frame that is consistent with historical trading activity and spreads that the trading desks have accessed historically during the ordinary course of business in normal market conditions. At 31 December 2022, the Group's derivative trading business held mid to bid-offer valuation adjustments of £61 million (2021: £63 million). 308 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 49: Financial instruments continued ### (D) Sensitivity of level 3 valuations | Valuation techniques | Significant unobservable inputs^{1} | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | Carrying value £m | Effect of reasonably possible alternative assumptions^{2} | | Carrying value £m | Effect of reasonably possible alternative assumptions^{3} | | | | | | Favourable changes £m | Unfavourable changes £m | | Favourable changes £m | Unfavourable changes £m | | **Financial assets at fair value through profit or loss** | | | | | | | | | Loans and advances to customers | Discounted cash flows | 7,883 | 356 | (385) | 9,793 | 502 | (460) | | Debt securities | Discounted cash flows | 162 | 9 | (9) | 191 | 13 | (13) | | Equity and venture capital investments | Market approach | 1,907 | 84 | (84) | 1,692 | 191 | (191) | | | Underlying asset/net asset value (incl. property prices)^{4} | 771 | 81 | (88) | 892 | 123 | (131) | | Unlisted equities, debt securities and property partnerships in the life funds | Underlying asset/net asset value (incl. property prices), broker quotes or discounted cash flows^{3} | 581 | 2 | (33) | 745 | 22 | (16) | | | | **11,304** | | | **13,313** | | | | **Financial assets at fair value through other comprehensive income** | | | | | | | | | Asset-backed securities | Lead manager or broker quote/consensus pricing | 59 | – | – | 70 | 4 | (4) | | Equity and venture capital investments | Underlying asset/net asset value (incl. property prices)^{3} | 283 | 15 | (15) | 235 | 14 | (14) | | | | **342** | | | **305** | | | | **Derivative financial assets** | | | | | | | | | Interest rate derivatives | Option pricing model | 553 | 9 | (7) | 893 | 10 | (23) | | | | **12,199** | | | **14,511** | | | | **Level 3 financial assets carried at fair value** | | | | | | | | | **Financial liabilities at fair value through profit or loss** | | | | | | | | | Securitisation notes and other | Discounted cash flows | 45 | 1 | (1) | 37 | 1 | (1) | | | | **45** | | | **1** | | | | **Derivative financial liabilities** | | | | | | | | | Interest rate derivatives | Option pricing model | 608 | – | – | 944 | – | – | | | | **608** | | | **944** | | | | **Level 3 financial liabilities carried at fair value** | | | | | | | | | | | **653** | | | **981** | | | 1 Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table. 2 Ranges are shown where appropriate and represent the highest and lowest inputs used in the level 3 valuations. 3 Underlying asset/net asset values represent fair value. 4 2021: -50bps/210bps. 5 2021: +/-7%. 6 2021: 3.5/14.9. 7 2021: 13%/168%. 8 2021: +/-50bps. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 309 310 Lloyds Banking Group Annual Report and Accounts 2022 Notes to the consolidated financial statements continued for the year ended 31 December Note 49: Financial instruments continued Unobservable inputs Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows: • Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives depends on the behaviour of those underlying references through time • Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality; higher spreads lead to a lower fair value • Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of possible outcomes • Earnings multiples are used to value certain unlisted equity investments. The earnings multiples used are derived from those of listed entities operating in the same sector with adjustments made for factors such as the size of the company and the quality of its earnings. The majority of the Group’s venture capital investments are valued using an estimate of the company’s maintainable earnings before interest, tax, depreciation and amortisation and in accordance with the International Private Equity and Venture Capital Valuation Guidelines. A higher earnings multiple will result in a higher fair value Reasonably possible alternative assumptions Valuation techniques applied to many of the Group’s level 3 instruments often involve the use of two or more inputs whose relationship is interdependent. The calculation of the effect of reasonably possible alternative assumptions included in the table above reflects such relationships. Debt securities Reasonably possible alternative assumptions have been determined in respect of the Group’s structured credit investments by flexing credit spreads. Derivatives Reasonably possible alternative assumptions have been determined in respect of swaptions in the Group’s derivative portfolios which are priced using industry standard option pricing models. Such models require interest rate volatilities which may be unobservable at longer maturities. To derive reasonably possible alternative valuations these volatilities have been flexed within a range of 17 per cent to 105 per cent (2021: 13 per cent to 168 per cent). Unlisted equity, venture capital investments and investments in property partnerships The valuation techniques used for unlisted equity and venture capital investments vary depending on the nature of the investment. Reasonably possible alternative valuations for these investments have been calculated by reference to the approach taken, as appropriate to the business sector and investment circumstances and as such the following inputs have been considered: • For valuations derived from earnings multiples, consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when selecting an appropriate multiple • The discount rates used in discounted cash flow valuations • In line with International Private Equity and Venture Capital Guidelines, the values of underlying investments in fund investment portfolios (4) Financial assets and liabilities carried at amortised cost (A) Financial assets Valuation hierarchy The table below analyses the fair values of those financial assets of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3, as described on page 303). Financial assets carried at amortised cost are mainly classified as level 3 due to significant unobservable inputs used in the valuation models. Where inputs are observable, debt securities are classified as level 1 or 2. Carrying value £m Fair value £m Valuation hierarchy Level 1 £m Level 2 £m Level 3 £m At 31 December 2022 Loans and advances to banks 10,632 10,632 – – 10,632 Loans and advances to customers: Stage 1 380,291 376,056 – – 376,056 Stage 2 59,356 58,672 – – 58,672 Stage 3 5,883 5,974 – – 5,974 Purchased or originated credit-impaired 9,369 9,369 – – 9,369 454,899 450,071 – – 450,071 Reverse repurchase agreements 44,865 44,865 – 44,865 – Debt securities 9,926 9,930 167 9,647 116 Financial assets at amortised cost 520,322 515,498 167 54,512 460,819 ## Note 49: Financial instruments continued | | Carrying value £m | Fair value £m | Valuation hierarchy | | | | --- | --- | --- | --- | --- | --- | | | | | Level 1 £m | Level 2 £m | Level 3 £m | | **At 31 December 2021** | | | | | | | Loans and advances to banks | 7,001 | 6,997 | – | – | 6,997 | | Loans and advances to customers: | | | | | | | Stage 1 | 399,121 | 401,537 | – | – | 401,537 | | Stage 2 | 33,817 | 34,617 | – | – | 34,617 | | Stage 3 | 4,862 | 4,851 | – | – | 4,851 | | Purchased or originated credit-impaired | 10,767 | 10,767 | – | – | 10,767 | | | 448,567 | 451,772 | – | – | 451,772 | | Reverse repurchase agreements | 54,753 | 54,753 | – | 54,753 | – | | Debt securities | 6,835 | 6,876 | – | 6,739 | 137 | | **Financial assets at amortised cost** | **517,156** | **520,398** | **–** | **61,492** | **458,906** | ### Valuation methodology #### Loans and advances to banks The carrying value of short-dated loans and advances to banks is assumed to be their fair value. The fair value of other loans and advances to banks is estimated by discounting the anticipated cash flows at a market discount rate adjusted for the credit spread of the obligor or, where not observable, the credit spread of borrowers of similar credit quality. #### Loans and advances to customers The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. Due to their short-term nature, the carrying value of variable rate loans and balances relating to lease financing is assumed to be their fair value. To determine the fair value of loans and advances to customers, loans are segregated into portfolios of similar characteristics. A number of techniques are used to estimate the fair value of fixed rate lending; these take account of expected credit losses based on historic trends, prevailing market interest rates and expected future cash flows. For retail exposures, fair value is usually estimated by discounting anticipated cash flows (including interest at contractual rates) at market rates for similar loans offered by the Group and other financial institutions. Certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference to market rates for similar loans of maturity equal to the remaining fixed interest rate period. The fair value of commercial loans is estimated by discounting anticipated cash flows at a rate which reflects the effects of interest rate changes, adjusted for changes in credit risk. #### Reverse repurchase agreements The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments. #### Debt securities The fair values of debt securities are determined predominantly from lead manager quotes and, where these are not available, by alternative techniques including reference to credit spreads on similar assets with the same obligor, market standard consensus pricing services, broker quotes and other research data. ### (b) Financial liabilities #### Valuation hierarchy The table below analyses the fair values of those financial liabilities of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3, as described on page 303). | | Carrying value £m | Fair value £m | Valuation hierarchy | | | | --- | --- | --- | --- | --- | --- | | | | | Level 1 £m | Level 2 £m | Level 3 £m | | **At 31 December 2022** | | | | | | | Deposits from banks | 7,266 | 7,268 | – | 7,268 | – | | Customer deposits | 475,331 | 475,147 | – | 475,147 | – | | Repurchase agreements at amortised cost | 48,596 | 48,596 | – | 48,596 | – | | Debt securities in issue | 73,819 | 71,975 | – | 71,975 | – | | Subordinated liabilities | 10,730 | 10,065 | – | 10,065 | – | | **At 31 December 2021** | | | | | | | Deposits from banks | 7,647 | 7,647 | – | 7,647 | – | | Customer deposits | 476,344 | 476,506 | – | 476,506 | – | | Repurchase agreements at amortised cost | 31,125 | 31,125 | – | 31,125 | – | | Debt securities in issue | 71,552 | 74,665 | – | 74,665 | – | | Subordinated liabilities | 13,108 | 14,804 | – | 14,804 | – | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 311 ## Notes to the consolidated financial statements continued for the year ended 31 December ## Note 49: Financial instruments continued Valuation methodology ### Deposits from banks and customer deposits The fair value of bank and customer deposits repayable on demand is assumed to be equal to their carrying value. The fair value for all other deposits is estimated using discounted cash flows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities. ### Repurchase agreements The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments. ### Debt securities in issue The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities in issue is calculated based on quoted market prices where available. Where quoted market prices are not available, fair value is estimated using discounted cash flow techniques at a rate which reflects market rates of interest and the Group's own credit spread. ### Subordinated liabilities The fair value of subordinated liabilities is determined by reference to quoted market prices where available or by reference to quoted market prices of similar instruments. Subordinated liabilities are classified as level 2, since the inputs used to determine their fair value are largely observable. ### (5) Reclassifications of financial assets There have been no reclassifications of financial assets in 2021 or 2022. ## Note 50: Transfers of financial assets There were no significant transferred financial assets which were derecognised in their entirety, but with ongoing exposure. Details of transferred financial assets that continue to be recognised in full are as follows. The Group enters into repurchase and securities lending transactions in the normal course of business that do not result in derecognition of the financial assets as substantially all of the risks and rewards, including credit, interest rate, prepayment and other price risks are retained by the Group. In all cases, the transferee has the right to sell or repledge the assets concerned. As set out in note 30, included within financial assets measured at amortised cost are loans transferred under the Group's securitisation and covered bond programmes. As the Group retains all or a majority of the risks and rewards associated with these loans, including credit, interest rate, prepayment and liquidity risk, they remain on the Group's balance sheet. Assets transferred into the Group's securitisation and covered bond programmes are not available to be used by the Group while the assets are within the programmes. However, the Group retains the right to remove loans from the covered bond programmes where they are in excess of the programme's requirements. In addition, where the Group has retained some of the notes issued by securitisation and covered bond programmes, the Group has the ability to sell or pledge these retained notes. The table below sets out the carrying values of the transferred assets and the associated liabilities. For repurchase and securities lending transactions, the associated liabilities represent the Group's obligation to repurchase the transferred assets. For securitisation programmes, the associated liabilities represent the external notes in issue (note 30). The liabilities shown in the table below have recourse to the transferred assets. | | 2022 | | 2021 | | | --- | --- | --- | --- | --- | | | Carrying value of transferred assets £m | Carrying value of associated liabilities £m | Carrying value of transferred assets £m | Carrying value of associated liabilities £m | | **Repurchase and securities lending transactions** | | | | | | Financial assets at fair value through profit or loss | 6,370 | 1,483 | 4,345 | 2,030 | | Financial assets at fair value through other comprehensive income | 8,803 | 6,990 | 8,085 | 6,244 | | **Securitisation programmes** | | | | | | Financial assets at amortised cost: | | | | | | Loans and advances to customers^{1} | 29,384 | 2,806 | 31,406 | 3,705 | 1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £22,343 million (31 December 2021: £24,010 million). 312 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 51: Offsetting of financial assets and liabilities The following information relates to financial assets and liabilities which have been offset in the balance sheet and those which have not been offset but for which the Group has enforceable master netting agreements or collateral arrangements in place with counterparties. | | Gross amounts of assets and liabilities^{1} £m | Amount offset in the balance sheet^{2} £m | Net amounts presented in the balance sheet £m | Related amounts where set off in the balance sheet not permitted^{1} | | Potential net amounts if offset of related amounts permitted £m | | --- | --- | --- | --- | --- | --- | --- | | | | | | Cash collateral received/pledged £m | Non-cash collateral received/pledged £m | | | **At 31 December 2022** | | | | | | | | **Financial assets** | | | | | | | | Financial assets at fair value through profit or loss: | | | | | | | | Excluding reverse repurchase agreements | 168,828 | – | 168,828 | – | (1,127) | 167,701 | | Reverse repurchase agreements | 32,064 | (20,283) | 11,781 | (87) | (11,694) | – | | | 200,892 | (20,283) | 180,609 | (87) | (12,821) | 167,701 | | Derivative financial instruments | 76,437 | (51,684) | 24,753 | (3,951) | (15,839) | 4,963 | | Financial assets at amortised cost: | | | | | | | | Loans and advances to banks | 10,632 | – | 10,632 | (2,823) | – | 7,809 | | Loans and advances to customers | 458,229 | (3,330) | 454,899 | (907) | (2,171) | 451,821 | | Reverse repurchase agreements | 55,675 | (10,810) | 44,865 | – | (44,865) | – | | Debt securities | 9,926 | – | 9,926 | – | – | 9,926 | | | 534,462 | (14,140) | 520,322 | (3,730) | (47,036) | 469,556 | | Financial assets at fair value through other comprehensive income | 23,154 | – | 23,154 | – | (6,202) | 16,952 | | **Financial liabilities** | | | | | | | | Deposits from banks | 7,266 | – | 7,266 | (2,169) | – | 5,097 | | Customer deposits | 476,255 | (924) | 475,331 | (1,869) | (2,171) | 471,291 | | Repurchase agreements at amortised cost | 59,406 | (10,810) | 48,596 | – | (48,596) | – | | Financial liabilities at fair value through profit or loss: | | | | | | | | Excluding repurchase agreements | 6,718 | – | 6,718 | – | – | 6,718 | | Repurchase agreements | 31,320 | (20,283) | 11,037 | – | (11,037) | – | | | 38,038 | (20,283) | 17,755 | – | (11,037) | 6,718 | | Derivative financial instruments | 78,132 | (54,090) | 24,042 | (3,731) | (14,490) | 5,821 | 1 The Group enters into derivatives and repurchase and reverse repurchase agreements with various counterparties which are governed by industry standard master netting agreements. The Group holds and provides cash and securities collateral in respective of derivative transactions covered by these agreements. The right to set off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32. 2 Net of impairment allowances. 3 The amounts offset in the balance sheet as shown above mainly represent derivatives and repurchase agreements with central clearing houses which meet the criteria for offsetting under IAS 32. The effects of over-collateralisation have not been taken into account in the above table. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 313 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 51: Offsetting of financial assets and liabilities continued | | Gross amounts of assets and liabilities^{2} £m | Amount offset in the balance sheet^{3} £m | Net amounts presented in the balance sheet £m | Related amounts where set off in the balance sheet not permitted^{4} | | Potential net amounts if offset of related amounts permitted £m | | --- | --- | --- | --- | --- | --- | --- | | | | | | Cash collateral received/pledged £m | Non-cash collateral received/pledged £m | | | At 31 December 2021 | | | | | | | | **Financial assets** | | | | | | | | Financial assets at fair value through profit or loss: | | | | | | | | Excluding reverse repurchase agreements | 191,850 | – | 191,850 | – | (2,456) | 189,394 | | Reverse repurchase agreements | 33,834 | (18,913) | 14,921 | (20) | (14,901) | – | | | 225,684 | (18,913) | 206,771 | (20) | (17,357) | 189,394 | | Derivative financial instruments | 50,205 | (28,154) | 22,051 | (5,658) | (12,645) | 3,748 | | Financial assets at amortised cost: | | | | | | | | Loans and advances to banks | 7,001 | – | 7,001 | (1,731) | – | 5,270 | | Loans and advances to customers | 449,732 | (1,165) | 448,567 | (798) | (1,506) | 446,263 | | Reverse repurchase agreements | 64,474 | (9,721) | 54,753 | – | (54,753) | – | | Debt securities | 6,835 | – | 6,835 | – | (267) | 6,568 | | | 528,042 | (10,886) | 517,156 | (2,529) | (56,526) | 458,101 | | Financial assets at fair value through other comprehensive income | 28,137 | – | 28,137 | – | (4,981) | 23,156 | | **Financial liabilities** | | | | | | | | Deposits from banks | 7,647 | – | 7,647 | (5,678) | – | 1,969 | | Customer deposits | 477,509 | (1,165) | 476,344 | – | (1,506) | 474,838 | | Repurchase agreements at amortised cost | 40,846 | (9,721) | 31,125 | – | (31,125) | – | | Financial liabilities at fair value through profit or loss: | | | | | | | | Excluding repurchase agreements | 8,161 | – | 8,161 | – | – | 8,161 | | Repurchase agreements | 33,875 | (18,913) | 14,962 | – | (14,962) | – | | | 42,036 | (18,913) | 23,123 | – | (14,962) | 8,161 | | Derivative financial instruments | 46,214 | (28,154) | 18,060 | (2,529) | (15,063) | 468 | 1 The Group enters into derivatives and repurchase and reverse repurchase agreements with various counterparties which are governed by industry standard master netting agreements. The Group holds and provides cash and securities collateral in respective of derivative transactions covered by these agreements. The right to set off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32. 2 Net of impairment allowances. 3 The amounts offset in the balance sheet as shown above mainly represent derivatives and repurchase agreements with central clearing houses which meet the criteria for offsetting under IAS 32. The effects of over-collateralisation have not been taken into account in the above table. 314 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management As a bancassurer, financial instruments are fundamental to the Group's activities and, as a consequence, the risks associated with financial instruments represent a significant component of the risks faced by the Group. The primary risks affecting the Group through its use of financial instruments are: market risk, which includes interest rate risk and foreign exchange risk; credit risk; liquidity risk; capital risk; and insurance risk. The following disclosures provide quantitative and qualitative information about the Group's exposure to these risks. ### Market risk #### (A) Interest rate risk Interest rate risk arises from the different repricing characteristics of the Group's assets and liabilities. Liabilities are generally either insensitive to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be varied at the Group's discretion and that for competitive reasons generally reflect changes in the UK Bank Rate, set by the Bank of England. The rates on the remaining liabilities are contractually fixed for their term to maturity. Many banking assets are sensitive to interest rate movements; there is a large volume of managed rate assets such as variable rate mortgages which may be considered as a natural offset to the interest rate risk arising from the managed rate liabilities. However, a significant proportion of the Group's lending assets, for example many personal loans and mortgages, bear interest rates which are contractually fixed. Interest rate sensitivity analysis relating to the Group's Banking activities is set out in the tables marked audited on page 188. The Group's risk management policy is to optimise reward while managing its market risk exposures within the risk appetite defined by the Board. The largest residual risk exposure arises from balances that are deemed to be insensitive to changes in market rates (including current accounts, a portion of variable rate deposits and investable equity), and is managed through the Group's structural hedge. The structural hedge consists of longer-term fixed rate assets or interest rate swaps and the amount and duration of the hedging activity is reviewed regularly by the Group Asset and Liability Committee. The Group establishes hedge accounting relationships for interest rate risk components using cash flow hedges and fair value hedges. The Group is exposed to cash flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt. The derivatives used to manage the structural hedge may be designated into cash flow hedges to manage income statement volatility. The economic items related to the structural hedge, for example current accounts, are not eligible hedged items under IAS 39 for inclusion into accounting hedge relationships. The Group is exposed to fair value interest rate risk on its fixed rate customer loans, its fixed rate customer deposits and the majority of its subordinated debt, and to cash flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt. The Group applies netting between similar risks before applying hedge accounting. Hedge ineffectiveness arises during the management of interest rate risk due to residual unhedged risk. Sources of ineffectiveness, which the Group may decide to not fully mitigate, can include basis differences, timing differences and notional amount differences. The effectiveness of accounting hedge relationships is assessed between the hedging derivatives and the documented hedged item, which can differ to the underlying economically hedged item. At 31 December 2022 the aggregate notional principal of interest rate and other swaps (predominantly interest rate) designated as fair value hedges was £152,662 million (2021: £172,695 million) with a net fair value liability of £493 million (2021: liability of £262 million) (note 17). The gains on the hedging instruments were £1,284 million (2021: gains of £944 million). The losses on the hedged items attributable to the hedged risk were £1,325 million (2021: losses of £767 million). The gains and losses relating to the fair value hedges are recorded in net trading income. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2022 was £249,703 million (2021: £109,093 million) with a net fair value liability of £2 million (2021: asset of £5 million) (note 17). In 2022, ineffectiveness recognised in the income statement that arises from cash flow hedges was a loss of £10 million (2021: loss of £69 million). #### Interest rate benchmark reform The Group continues to manage the transition to alternative benchmark rates under its Group-wide IBOR transition programme. The Group has transitioned substantially all of its non-USD LIBOR products and continues to work with customers to transition a small number of remaining contracts that either have yet to transition or have defaulted to the relevant synthetic LIBOR benchmark in the interim. USD LIBOR transition is expected to complete by 30 June 2023. While the volume of outstanding transactions impacted by IBOR benchmark reforms continues to reduce, the Group does not expect material changes to its risk management approach. The material risks identified include the following: **Conduct and litigation risk.** The Group may be exposed to conduct and litigation charges as a direct result of inappropriate or negligent actions taken during IBOR transition resulting in detriment to the customer. The Group is working closely with its counterparties to avoid this outcome. **Market risk.** IBOR transition is expected to lead to changes in the Group's market risk profile which will continue to be monitored and managed within the appropriate risk appetites. The key change is expected to be on the management of basis risk profile during the period when alternative benchmark rates are referenced in contracts up to the cessation of the in-scope IBOR index. **Credit risk.** Clients may wish to renegotiate the terms of existing transactions as a consequence of IBOR reform. This could lead to a change in the credit risk exposure of the client depending on the outcome of the negotiations. The Group will continue to monitor and manage changes within the appropriate risk appetites. **Accounting risk.** If IBOR transition is finalised in a manner that does not permit the application of the reliefs introduced in the IFRS Phase 2 amendments, the financial instrument may be required to be derecognised and a new instrument recognised. In addition, where instruments used in hedge accounting relationships are transitioned either at different times or to different benchmarks, this may result in additional volatility to the income statement either through hedge accounting ineffectiveness or failure of the hedge accounting relationships. **Operational risk.** Additional operational risks may arise due to the IBOR transition programme impacting all businesses and functions within the Group and leading to the implementation of changes to technology, operations, client communication and the valuation of in-scope financial instruments. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 315 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 52: Financial risk management continued The majority of the Group's USD LIBOR exposures are expected to transition through industry-led transition programmes managed by the London Clearing House and Futures exchanges, or through the International Swaps and Derivatives Association (ISDA) protocol. Other contracts (primarily loans) maturing after June 2023 are being managed through the Group's existing processes, either transitioning to an alternative benchmark rate or allowed to fallback under existing contract protocols or through US legislation. At 31 December 2022, the Group had the following significant exposures impacted by interest rate benchmark reform which had yet to transition to the replacement benchmark rate: | | At 31 December 2022 | | | | At 31 December 2021 | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | GBP LIBOR £m | USD LIBOR £m | Other^{1} £m | Total £m | GBP LIBOR £m | USD LIBOR £m | Other £m | Total £m | | **Non-derivative financial assets** | | | | | | | | | | Financial assets at fair value through profit or loss | 106 | 36 | – | 142 | 1,753 | 268 | – | 2,021 | | Loans and advances to banks | – | 67 | – | 67 | – | 4,106 | – | 4,106 | | Loans and advances to customers | 762 | 1,077 | 43 | 1,882 | 3,542 | 5,975 | – | 9,517 | | Debt securities | – | – | – | – | 126 | – | – | 126 | | Financial assets at amortised cost | 762 | 1,144 | 43 | 1,949 | 3,668 | 10,081 | – | 13,749 | | Financial assets at fair value through other comprehensive income | – | – | – | – | 16 | – | – | 16 | | | **868** | **1,180** | **43** | **2,091** | **5,437** | **10,349** | **–** | **15,786** | | **Non-derivative financial liabilities** | | | | | | | | | | Customer deposits | – | 84 | – | 84 | – | 74 | – | 74 | | Financial liabilities at fair value through profit or loss | – | 100 | – | 100 | – | 100 | 3 | 103 | | Debt securities in issue | – | 52 | – | 52 | – | 54 | 26 | 80 | | | **–** | **236** | **–** | **236** | **–** | **228** | **29** | **257** | | **Derivative notional/contract amount** | | | | | | | | | | Interest rate | 840 | 193,228 | 1,223 | 195,291 | 12,734 | 286,921 | – | 299,655 | | Cross currency | – | 29,452 | 1,124 | 30,576 | – | 42,229 | – | 42,229 | | | **840** | **222,680** | **2,347** | **225,867** | **12,734** | **329,150** | **–** | **341,884** | 1 Balances within Other include Canadian Dollar Offered Rate for which a cessation announcement, effective after 28 June 2024, was published on 16 May 2022. As at 31 December 2022, the LIBOR balances in the above table relate to contracts that have not transitioned to an alternative benchmark rate. In the case of Sterling LIBOR, these are contracts that have cash flows determined on a synthetic LIBOR basis. Of the £222,680 million of USD derivative notional balances as at 31 December 2022, £55,973 million relate to contracts with their final LIBOR fixing prior to LIBOR cessation and £129,442 million relate to exchange traded futures or contracts settled through the London Clearing House. Of the remaining £37,265 million, £36,872 million are fallback-eligible. In respect of the Group's hedge accounting relationships, for the purposes of determining whether: - A forecast transaction is highly probable - Hedged future cash flows are expected to occur - A hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk - An accounting hedging relationship should be discontinued because of a failure of the retrospective effectiveness test the Group considers the interest rate benchmark, on which the hedged risk or the cash flows of the hedged item or hedging instrument are based is not altered by uncertainties resulting from interest rate benchmark reform. By 31 December 2022, the Group had transitioned its Sterling, Euro, Japanese Yen and Swiss Franc LIBOR hedge accounting models to risk-free rates. The Group plans to complete the transition of its USD LIBOR hedge accounting models ahead of the 30 June 2023 cessation date. The Group's most significant remaining LIBOR hedge accounting relationship in relation to benchmark reform is USD LIBOR, of which: - The notional amount of the hedged items that the Group has designated into cash flow hedge relationships that is directly affected by the interest rate benchmark reform is £1,771 million (2021: £3,258 million). These are principally loans and advances to customers in Commercial Banking. - The interest rate benchmark reforms also affect assets and liabilities designated in fair value hedges. At 31 December 2022, these assets had a notional value of £1,864 million and liabilities had a notional value of £17,540 million. At 31 December 2021, such assets had a notional value of £3,370 million and liabilities had a notional value of £22,437 million. These fair value hedges principally relate to debt securities in issue. - At 31 December 2022, the notional amount of the hedging instruments in hedging relationships to which these amendments apply was £19,755 million, of which £17,926 million relates to fair value hedges and £1,829 million relates to cash flow hedges. At 31 December 2021, the notional amount of the hedging instruments in hedging relationships to which these amendments applied was £27,873 million, of which £24,615 million related to fair value hedges and £3,258 million related to cash flow hedges. 316 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued ### (B) Foreign exchange risk The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign exchange exposures in the non-trading book are managed centrally within allocated exposure limits. Trading book exposures in the authorised trading centres are allocated exposure limits. The limits are monitored daily by the local centres and reported to the market and liquidity risk function in London. Associated VaR and the closing, average, maximum and minimum are disclosed in the tables marked audited on **page 190**. The Group manages foreign currency accounting exposure via cash flow hedge accounting, utilising currency swaps and forward foreign exchange trades. Risk arises from the Group's investments in its overseas operations. The Group's structural foreign currency exposure is represented by the net asset value of the foreign currency equity and subordinated debt investments in its subsidiaries and branches. Gains or losses on structural foreign currency exposures are taken to reserves. The Group ceased all hedge accounting of the currency translation risk of the net investment in foreign operations in 2018. The Group's main overseas operations are in the Americas and Europe. Details of the Group's structural foreign currency exposures are as follows: | Foreign currency of Group operations | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Euro £m | US Dollar £m | Other non-Sterling £m | Euro £m | US Dollar £m | Other non-Sterling £m | | **Exposure** | **1,843** | **209** | **5** | **115** | **134** | **7** | ### Credit risk The Group's credit risk exposure arises in respect of the instruments below and predominantly in the United Kingdom. Credit risk appetite is set at Board level and is described and reported through a suite of metrics devised from a combination of accounting and credit portfolio performance measures, which include the use of various credit risk rating systems as inputs and assess credit risk at a counterparty level using three components: (i) the probability of default by the counterparty on its contractual obligations; (ii) the current exposures to the counterparty and their likely future development, from which the Group derives the exposure at default; and (iii) the likely loss ratio on the defaulted obligations, the loss given default. The Group uses a range of approaches to mitigate credit risk, including internal control policies, obtaining collateral, using master netting agreements and other credit risk transfers, such as asset sales and credit derivatives based transactions. ### (A) Maximum credit exposure The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account is taken of any collateral held and the maximum exposure to loss, which includes amounts held to cover unit-linked and With Profits Funds liabilities, is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions and financial guarantees, their contractual nominal amounts. | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Maximum exposure £m | Offset^{1} £m | Net exposure £m | Maximum exposure £m | Offset^{1} £m | Net exposure £m | | Financial assets at fair value through profit or loss^{2,3} | | | | | | | | Loans and advances | **24,872** | – | **24,872** | 29,538 | – | 29,538 | | Debt securities, treasury and other bills | **38,109** | – | **38,109** | 47,237 | – | 47,237 | | Contracts held with reinsurers | **10,906** | – | **10,906** | 12,371 | – | 12,371 | | | **73,887** | – | **73,887** | 89,146 | – | 89,146 | | Derivative financial instruments | **24,753** | **(12,330)** | **12,423** | 22,051 | (11,600) | 10,451 | | Financial assets at amortised cost, net^{4} | | | | | | | | Loans and advances to banks, net^{4} | **10,632** | – | **10,632** | 7,001 | – | 7,001 | | Loans and advances to customers, net^{4} | **454,899** | **(2,171)** | **452,728** | 448,567 | (1,506) | 447,061 | | Reverse repurchase agreements, net^{4} | **44,865** | – | **44,865** | 54,753 | – | 54,753 | | Debt securities, net^{4} | **9,926** | – | **9,926** | 6,835 | – | 6,835 | | | **520,322** | **(2,171)** | **518,151** | 517,156 | (1,506) | 515,650 | | Financial assets at fair value through other comprehensive income^{4} | **22,871** | – | **22,871** | 27,902 | – | 27,902 | | Reinsurance assets | **616** | – | **616** | 759 | – | 759 | | Off-balance sheet items: | | | | | | | | Acceptances and endorsements | **58** | – | **58** | 191 | – | 191 | | Other items serving as direct credit substitutes | **781** | – | **781** | 510 | – | 510 | | Performance bonds, including letters of credit, and other transaction-related contingencies | **2,147** | – | **2,147** | 2,043 | – | 2,043 | | Irrevocable commitments and guarantees | **74,692** | – | **74,692** | 71,158 | – | 71,158 | | | **77,678** | – | **77,678** | 73,902 | – | 73,902 | | | **720,127** | **(14,501)** | **705,626** | 730,916 | (13,106) | 717,810 | 1 Offset items comprise deposit amounts available for offset and amounts available for offset under master netting arrangements that do not meet the criteria under IAS 32 to enable loans and advances and derivative assets respectively to be presented net of these balances in the financial statements. 2 Excluding equity shares. 3 Includes assets within the Group's unit-linked funds for which credit risk is borne by the policyholders and assets within the Group's With-Profits Funds for which credit risk is largely borne by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back related contract liabilities. 4 Amounts shown net of related impairment allowances. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 317 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 52: Financial risk management continued #### (B) Concentrations of exposure The Group's management of concentration risk includes portfolio controls on certain industries, sectors and products to reflect risk appetite as well as individual, customer and bank limit risk tolerances. Credit policies and appetite statements are aligned to the Group's risk appetite and restrict exposure to higher risk countries and potentially vulnerable sectors and asset classes. Exposures are monitored to prevent both an excessive concentration of risk and single name concentrations. The Group's largest credit limits are regularly monitored by the Board Risk Committee and reported in accordance with regulatory requirements. As part of its credit risk policy, the Group considers sustainability risk (which incorporates Environmental (including climate), Social and Governance) in the assessment of Commercial Banking facilities. At 31 December 2022 the most significant concentrations of exposure were in mortgages (comprising 71 per cent of total loans and advances to customers) and to financial, business and other services (comprising 8 per cent of the total). | | 2022 £m | 2021 £m | | --- | --- | --- | | Agriculture, forestry and fishing | 7,447 | 7,729 | | Energy and water supply | 2,552 | 1,978 | | Manufacturing | 3,619 | 4,110 | | Construction | 4,066 | 4,440 | | Transport, distribution and hotels | 13,170 | 13,463 | | Postal and telecommunications | 2,526 | 2,109 | | Property companies | 21,499 | 23,923 | | Financial, business and other services | 37,666 | 33,533 | | Personal: | | | | Mortgages^{1} | 323,923 | 319,655 | | Other | 26,154 | 24,604 | | Lease financing | 766 | 982 | | Hire purchase | 16,029 | 15,861 | | **Total loans and advances to customers before allowance for impairment losses** | **459,417** | **452,387** | | Allowance for impairment losses (note 18) | (4,518) | (3,820) | | **Total loans and advances to customers** | **454,899** | **448,567** | $^{1}$ Includes both UK and overseas mortgage balances. The Group's operations are predominantly UK-based and as a result an analysis of credit risk exposures by geographical region is not provided. #### (C) Credit quality of assets ##### Loans and advances The analysis of lending has been prepared based on the division in which the asset is held; with the business segment in which the exposure is recorded reflected in the ratings system applied. The internal credit ratings systems used by the Group differ between Retail and Commercial, reflecting the characteristics of these exposures and the way that they are managed internally; these credit ratings are set out below. All probabilities of default (PDs) include forward-looking information and are based on 12-month values, with the exception of credit-impaired. | Retail | | Commercial | | | --- | --- | --- | --- | | Quality classification | IFRS 9 PD range | Quality classification | IFRS 9 PD range | | RMS 1–3 | 0.00–0.80% | CMS 1–5 | 0.000–0.100% | | RMS 4–6 | 0.81–4.50% | CMS 6–10 | 0.101–0.500% | | RMS 7–9 | 4.51–14.00% | CMS 11–14 | 0.501–3.000% | | RMS 10 | 14.01–20.00% | CMS 15–18 | 3.001–20.000% | | RMS 11–13 | 20.01–99.99% | CMS 19 | 20.001–99.999% | | RMS 14 | 100.00% | CMS 20–23 | 100.000% | Stage 3 assets include balances of £727 million (2021: £650 million) (with outstanding amounts due of £1,360 million (2021: £1,279 million)) which have been subject to a partial write-off and where the Group continues to enforce recovery action. Stage 2 and Stage 3 assets with a carrying amount of £126 million (2021: £1,546 million) were modified during the year. No material gain or loss was recognised by the Group. As at 31 December 2022 assets that had been previously modified while classified as Stage 2 or Stage 3 and were classified as Stage 1 amounted to £5,279 million (2021: £6,658 million). 318 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued | Gross drawn exposures and expected credit loss allowance | Drawn exposures | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | At 31 December 2022 Loans and advances to banks | CMS 1-5 | 1,223 | - | - | - | 1,223 | - | - | - | - | - | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | CMS 6-10 | 9,366 | - | - | - | 9,366 | 11 | - | - | - | 11 | | CMS 11-14 | 28 | 27 | - | - | 55 | - | 2 | - | - | 2 | | CMS 15-18 | 3 | - | - | - | 3 | 2 | - | - | - | 2 | | CMS 19 | - | - | - | - | - | - | - | - | - | - | | CMS 20-23 | - | - | - | - | - | - | - | - | - | - | | | 10,620 | 27 | - | - | 10,647 | 13 | 2 | - | - | 15 | Loans and advances to customers Retail – UK mortgages | RMS 1-3 | 250,937 | 24,844 | - | - | 275,781 | 81 | 180 | - | - | 261 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 6,557 | 11,388 | - | - | 17,945 | 10 | 140 | - | - | 150 | | RMS 7-9 | 23 | 2,443 | - | - | 2,466 | - | 72 | - | - | 72 | | RMS 10 | - | 734 | - | - | 734 | - | 24 | - | - | 24 | | RMS 11-13 | - | 2,374 | - | - | 2,374 | - | 136 | - | - | 136 | | RMS 14 | - | - | 3,416 | 9,622 | 13,038 | - | - | 311 | 253 | 564 | | | 257,517 | 41,783 | 3,416 | 9,622 | 312,338 | 91 | 552 | 311 | 253 | 1,207 | Retail – credit cards | RMS 1-3 | 3,587 | 5 | - | - | 3,592 | 7 | - | - | - | 7 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 6,497 | 1,441 | - | - | 7,938 | 66 | 70 | - | - | 136 | | RMS 7-9 | 1,332 | 1,246 | - | - | 2,578 | 47 | 167 | - | - | 214 | | RMS 10 | - | 227 | - | - | 227 | - | 52 | - | - | 52 | | RMS 11-13 | - | 368 | - | - | 368 | - | 144 | - | - | 144 | | RMS 14 | - | - | 289 | - | 289 | - | - | 113 | - | 113 | | | 11,416 | 3,287 | 289 | - | 14,992 | 120 | 433 | 113 | - | 666 | Retail – loans and overdrafts | RMS 1-3 | 659 | 1 | - | - | 660 | 2 | - | - | - | 2 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 5,902 | 451 | - | - | 6,353 | 90 | 24 | - | - | 114 | | RMS 7-9 | 1,724 | 657 | - | - | 2,381 | 69 | 83 | - | - | 152 | | RMS 10 | 53 | 199 | - | - | 252 | 5 | 45 | - | - | 50 | | RMS 11-13 | 19 | 405 | - | - | 424 | 3 | 163 | - | - | 166 | | RMS 14 | - | - | 247 | - | 247 | - | - | 126 | - | 126 | | | 8,357 | 1,713 | 247 | - | 10,317 | 169 | 315 | 126 | - | 610 | Retail – UK Motor Finance | RMS 1-3 | 8,969 | 743 | - | - | 9,712 | 66 | 9 | - | - | 75 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 2,778 | 930 | - | - | 3,708 | 25 | 20 | - | - | 45 | | RMS 7-9 | 425 | 325 | - | - | 750 | 2 | 13 | - | - | 15 | | RMS 10 | - | 99 | - | - | 99 | - | 8 | - | - | 8 | | RMS 11-13 | 2 | 148 | - | - | 150 | - | 26 | - | - | 26 | | RMS 14 | - | - | 154 | - | 154 | - | - | 81 | - | 81 | | | 12,174 | 2,245 | 154 | - | 14,573 | 93 | 76 | 81 | - | 250 | Retail – other | RMS 1-3 | 12,588 | 328 | - | - | 12,916 | 9 | 4 | - | - | 13 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 1,311 | 213 | - | - | 1,524 | 4 | 11 | - | - | 15 | | RMS 7-9 | - | 90 | - | - | 90 | - | 3 | - | - | 3 | | RMS 10 | - | 5 | - | - | 5 | - | - | - | - | - | | RMS 11-13 | 91 | 7 | - | - | 98 | - | - | - | - | - | | RMS 14 | - | - | 157 | - | 157 | - | - | 52 | - | 52 | | | 13,990 | 643 | 157 | - | 14,790 | 13 | 18 | 52 | - | 83 | | **Total Retail** | **303,454** | **49,671** | **4,263** | **9,622** | **367,010** | **486** | **1,394** | **683** | **253** | **2,816** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 319 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 52: Financial risk management** continued | Gross drawn exposures and expected credit loss allowance continued | Drawn exposures | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **At 31 December 2022** | | | | | | | | | | | | *Commercial Banking* | | | | | | | | | | | | CMS 1–5 | 13,573 | 33 | – | – | 13,606 | 2 | – | – | – | 2 | | CMS 6–10 | 32,070 | 512 | – | – | 32,582 | 37 | 3 | – | – | 40 | | CMS 11–14 | 31,591 | 5,627 | – | – | 37,218 | 128 | 93 | – | – | 221 | | CMS 15–18 | 3,275 | 4,508 | – | – | 7,783 | 47 | 244 | – | – | 291 | | CMS 19 | – | 813 | – | – | 813 | – | 74 | – | – | 74 | | CMS 20–23 | – | – | 3,371 | – | 3,371 | – | – | 1,070 | – | 1,070 | | | 80,509 | 11,493 | 3,371 | – | 95,373 | 214 | 414 | 1,070 | – | 1,698 | | *Other* | (2,972) | – | 6 | – | (2,966) | – | – | 4 | – | 4 | | **Total loans and advances to customers** | **380,991** | **61,164** | **7,640** | **9,622** | **459,417** | **700** | **1,808** | **1,757** | **253** | **4,518** | | *In respect of:* | | | | | | | | | | | | Retail | 303,454 | 49,671 | 4,263 | 9,622 | 367,010 | 486 | 1,394 | 683 | 253 | 2,816 | | Commercial Banking | 80,509 | 11,493 | 3,371 | – | 95,373 | 214 | 414 | 1,070 | – | 1,698 | | Other^{1} | (2,972) | – | 6 | – | (2,966) | – | – | 4 | – | 4 | | **Total loans and advances to customers** | **380,991** | **61,164** | **7,640** | **9,622** | **459,417** | **700** | **1,808** | **1,757** | **253** | **4,518** | | ^{1} Drawn exposures include centralised fair value hedge accounting adjustments. | | | | | | | | | | | | **Reverse repurchase agreements** | | | | | | | | | | | | *Banks* | | | | | | | | | | | | CMS 1–5 | 3,292 | – | – | – | 3,292 | – | – | – | – | – | | CMS 6–10 | 494 | – | – | – | 494 | – | – | – | – | – | | CMS 11–14 | – | – | – | – | – | – | – | – | – | – | | CMS 15–18 | – | – | – | – | – | – | – | – | – | – | | CMS 19 | – | – | – | – | – | – | – | – | – | – | | CMS 20–23 | – | – | – | – | – | – | – | – | – | – | | | 3,786 | – | – | – | 3,786 | – | – | – | – | – | | *Customers* | | | | | | | | | | | | CMS 1–5 | 9,094 | – | – | – | 9,094 | – | – | – | – | – | | CMS 6–10 | 31,985 | – | – | – | 31,985 | – | – | – | – | – | | CMS 11–14 | – | – | – | – | – | – | – | – | – | – | | CMS 15–18 | – | – | – | – | – | – | – | – | – | – | | CMS 19 | – | – | – | – | – | – | – | – | – | – | | CMS 20–23 | – | – | – | – | – | – | – | – | – | – | | | 41,079 | – | – | – | 41,079 | – | – | – | – | – | | **Total reverse repurchase agreements** | **44,865** | **–** | **–** | **–** | **44,865** | **–** | **–** | **–** | **–** | **–** | 320 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued | Gross undrawn exposures and expected credit loss allowance | Undrawn exposures | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | At 31 December 2022 Retail – UK mortgages | RMS 1–3 | 16,003 | 159 | – | – | 16,162 | – | – | – | – | – | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4–6 | 83 | 62 | – | – | 145 | 1 | – | – | – | 1 | | RMS 7–9 | – | 25 | – | – | 25 | – | – | – | – | – | | RMS 10 | – | 7 | – | – | 7 | – | – | – | – | – | | RMS 11–13 | – | 21 | – | – | 21 | – | 1 | – | – | 1 | | RMS 14 | – | – | 17 | 67 | 84 | – | – | – | – | – | | | 16,086 | 274 | 17 | 67 | 16,444 | 1 | 1 | – | – | 2 | Retail – credit cards | RMS 1–3 | 39,384 | 30 | – | – | 39,414 | 16 | – | – | – | 16 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4–6 | 14,355 | 2,975 | – | – | 17,330 | 32 | 28 | – | – | 60 | | RMS 7–9 | 580 | 422 | – | – | 1,002 | 5 | 8 | – | – | 13 | | RMS 10 | – | 46 | – | – | 46 | – | 2 | – | – | 2 | | RMS 11–13 | – | 76 | – | – | 76 | – | 6 | – | – | 6 | | RMS 14 | – | – | 45 | – | 45 | – | – | – | – | – | | | 54,319 | 3,549 | 45 | – | 57,913 | 53 | 44 | – | – | 97 | Retail – loans and overdrafts | RMS 1–3 | 4,174 | 2 | – | – | 4,176 | 4 | – | – | – | 4 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4–6 | 1,618 | 386 | – | – | 2,004 | 6 | 12 | – | – | 18 | | RMS 7–9 | 253 | 159 | – | – | 412 | 6 | 18 | – | – | 24 | | RMS 10 | 6 | 36 | – | – | 42 | – | 7 | – | – | 7 | | RMS 11–13 | – | 61 | – | – | 61 | – | 15 | – | – | 15 | | RMS 14 | – | – | 17 | – | 17 | – | – | – | – | – | | | 6,051 | 644 | 17 | – | 6,712 | 16 | 52 | – | – | 68 | Retail – UK Motor Finance | RMS 1–3 | 318 | – | – | – | 318 | – | – | – | – | – | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4–6 | 1,259 | – | – | – | 1,259 | 2 | – | – | – | 2 | | RMS 7–9 | 347 | 1 | – | – | 348 | – | – | – | – | – | | RMS 10 | – | – | – | – | – | – | – | – | – | – | | RMS 11–13 | – | – | – | – | – | – | – | – | – | – | | RMS 14 | – | – | – | – | – | – | – | – | – | – | | | 1,924 | 1 | – | – | 1,925 | 2 | – | – | – | 2 | Retail – other | RMS 1–3 | 702 | – | – | – | 702 | – | – | – | – | – | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4–6 | 198 | – | – | – | 198 | 3 | – | – | – | 3 | | RMS 7–9 | – | – | – | – | – | – | – | – | – | – | | RMS 10 | – | – | – | – | – | – | – | – | – | – | | RMS 11–13 | – | – | – | – | – | – | – | – | – | – | | RMS 14 | – | – | – | – | – | – | – | – | – | – | | | 900 | – | – | – | 900 | 3 | – | – | – | 3 | | **Total Retail** | **79,280** | **4,468** | **79** | **67** | **83,894** | **75** | **97** | **–** | **–** | **172** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 321 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 52: Financial risk management** continued | Gross undrawn exposures and expected credit loss allowance continued | Undrawn exposures | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **At 31 December 2022** | | | | | | | | | | | | *Commercial Banking* | | | | | | | | | | | | CMS 1–5 | 17,047 | – | – | – | 17,047 | 2 | – | – | – | 2 | | CMS 6–10 | 29,141 | 135 | – | – | 29,276 | 21 | 2 | – | – | 23 | | CMS 11–14 | 9,808 | 1,647 | – | – | 11,455 | 28 | 33 | – | – | 61 | | CMS 15–18 | 779 | 800 | – | – | 1,579 | 8 | 43 | – | – | 51 | | CMS 19 | – | 85 | – | – | 85 | – | 10 | – | – | 10 | | CMS 20–23 | – | – | 48 | – | 48 | – | – | 4 | – | 4 | | | **56,775** | **2,667** | **48** | **–** | **59,490** | **59** | **88** | **4** | **–** | **151** | | *Other* | | | | | | | | | | | | CMS 1–5 | 121 | – | – | – | 121 | – | – | – | – | – | | CMS 6–10 | – | – | – | – | – | – | – | – | – | – | | CMS 11–14 | 279 | – | – | – | 279 | – | – | – | – | – | | CMS 15–18 | – | – | – | – | – | – | – | – | – | – | | CMS 19 | – | – | – | – | – | – | – | – | – | – | | CMS 20–23 | – | – | 11 | – | 11 | – | – | – | – | – | | | **400** | **–** | **11** | **–** | **411** | **–** | **–** | **–** | **–** | **–** | | **Total** | **136,455** | **7,135** | **138** | **67** | **143,795** | **134** | **185** | **4** | **–** | **323** | | *In respect of:* | | | | | | | | | | | | Retail | 79,280 | 4,468 | 79 | 67 | 83,894 | 75 | 97 | – | – | 172 | | Commercial Banking | 56,775 | 2,667 | 48 | – | 59,490 | 59 | 88 | 4 | – | 151 | | Other | 400 | – | 11 | – | 411 | – | – | – | – | – | | **Total** | **136,455** | **7,135** | **138** | **67** | **143,795** | **134** | **185** | **4** | **–** | **323** | 322 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued | Gross drawn exposures and expected credit loss allowance | Drawn exposures | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | At 31 December 2021 ### Loans and advances to banks | CMS 1-5 | 5,161 | - | - | - | 5,161 | 1 | - | - | - | 1 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | CMS 6-10 | 1,780 | - | - | - | 1,780 | - | - | - | - | - | | CMS 11-14 | 61 | - | - | - | 61 | - | - | - | - | - | | CMS 15-18 | - | - | - | - | - | - | - | - | - | - | | CMS 19 | - | - | - | - | - | - | - | - | - | - | | CMS 20-23 | - | - | - | - | - | - | - | - | - | - | | | 7,002 | - | - | - | 7,002 | 1 | - | - | - | 1 | ### Loans and advances to customers #### Retail – UK mortgages | RMS 1-3 | 270,649 | 9,785 | - | - | 280,434 | 48 | 146 | - | - | 194 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 2,971 | 8,288 | - | - | 11,259 | - | 104 | - | - | 104 | | RMS 7-9 | 9 | 2,258 | - | - | 2,267 | - | 64 | - | - | 64 | | RMS 10 | - | 355 | - | - | 355 | - | 15 | - | - | 15 | | RMS 11-13 | - | 1,112 | - | - | 1,112 | - | 65 | - | - | 65 | | RMS 14 | - | - | 1,940 | 10,977 | 12,917 | - | - | 184 | 210 | 394 | | | 273,629 | 21,798 | 1,940 | 10,977 | 308,344 | 48 | 394 | 184 | 210 | 836 | #### Retail – credit cards$^{1}$ | RMS 1-3 | 5,076 | 15 | - | - | 5,091 | 9 | - | - | - | 9 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 6,023 | 1,092 | - | - | 7,115 | 58 | 43 | - | - | 101 | | RMS 7-9 | 819 | 623 | - | - | 1,442 | 29 | 71 | - | - | 100 | | RMS 10 | - | 112 | - | - | 112 | - | 22 | - | - | 22 | | RMS 11-13 | - | 235 | - | - | 235 | - | 82 | - | - | 82 | | RMS 14 | - | - | 292 | - | 292 | - | - | 128 | - | 128 | | | 11,918 | 2,077 | 292 | - | 14,287 | 96 | 218 | 128 | - | 442 | #### Retail – loans and overdrafts | RMS 1-3 | 1,426 | 2 | - | - | 1,428 | 5 | - | - | - | 5 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 5,794 | 499 | - | - | 6,293 | 79 | 23 | - | - | 102 | | RMS 7-9 | 938 | 286 | - | - | 1,224 | 39 | 33 | - | - | 72 | | RMS 10 | 18 | 74 | - | - | 92 | 2 | 14 | - | - | 16 | | RMS 11-13 | 5 | 244 | - | - | 249 | 1 | 83 | - | - | 84 | | RMS 14 | - | - | 271 | - | 271 | - | - | 139 | - | 139 | | | 8,181 | 1,105 | 271 | - | 9,557 | 126 | 153 | 139 | - | 418 | #### Retail – UK Motor Finance | RMS 1-3 | 8,758 | 465 | - | - | 9,223 | 79 | 6 | - | - | 85 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 2,904 | 844 | - | - | 3,748 | 22 | 19 | - | - | 41 | | RMS 7-9 | 583 | 298 | - | - | 881 | 5 | 15 | - | - | 20 | | RMS 10 | - | 69 | - | - | 69 | - | 7 | - | - | 7 | | RMS 11-13 | 2 | 152 | - | - | 154 | - | 27 | - | - | 27 | | RMS 14 | - | - | 201 | - | 201 | - | - | 116 | - | 116 | | | 12,247 | 1,828 | 201 | - | 14,276 | 106 | 74 | 116 | - | 296 | #### Retail – other$^{2}$ | RMS 1-3 | 9,715 | 228 | - | - | 9,943 | 3 | 4 | - | - | 7 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | RMS 4-6 | 1,386 | 265 | - | - | 1,651 | 11 | 8 | - | - | 19 | | RMS 7-9 | - | 88 | - | - | 88 | - | 3 | - | - | 3 | | RMS 10 | - | 2 | - | - | 2 | - | - | - | - | - | | RMS 11-13 | 97 | 10 | - | - | 107 | - | - | - | - | - | | RMS 14 | - | - | 169 | - | 169 | - | - | 52 | - | 52 | | | 11,198 | 593 | 169 | - | 11,960 | 14 | 15 | 52 | - | 81 | | **Total Retail** | **317,173** | **27,401** | **2,873** | **10,977** | **358,424** | **390** | **854** | **619** | **210** | **2,073** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 323 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 52: Financial risk management** continued | Gross drawn exposures and expected credit loss allowance continued | Drawn exposures | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **At 31 December 2021** | | | | | | | | | | | | *Commercial Banking^{1}* | | | | | | | | | | | | CMS 1–5 | 21,950 | 39 | – | – | 21,989 | 4 | – | – | – | 4 | | CMS 6–10 | 26,073 | 310 | – | – | 26,383 | 23 | – | – | – | 23 | | CMS 11–14 | 32,512 | 3,466 | – | – | 35,978 | 84 | 76 | – | – | 160 | | CMS 15–18 | 2,184 | 2,858 | – | – | 5,042 | 14 | 145 | – | – | 159 | | CMS 19 | – | 857 | – | – | 857 | – | 39 | – | – | 39 | | CMS 20–23 | – | – | 3,563 | – | 3,563 | – | – | 956 | – | 956 | | | 82,719 | 7,530 | 3,563 | – | 93,812 | 125 | 260 | 956 | – | 1,341 | | *Other^{2}* | 144 | – | 7 | – | 151 | 400 | – | 6 | – | 406 | | **Total loans and advances to customers** | **400,036** | **34,931** | **6,443** | **10,977** | **452,387** | **915** | **1,114** | **1,581** | **210** | **3,820** | | *In respect of:* | | | | | | | | | | | | Retail | 317,173 | 27,401 | 2,873 | 10,977 | 358,424 | 390 | 854 | 619 | 210 | 2,073 | | Commercial Banking | 82,719 | 7,530 | 3,563 | – | 93,812 | 125 | 260 | 956 | – | 1,341 | | *Other^{2}* | 144 | – | 7 | – | 151 | 400 | – | 6 | – | 406 | | **Total loans and advances to customers** | **400,036** | **34,931** | **6,443** | **10,977** | **452,387** | **915** | **1,114** | **1,581** | **210** | **3,820** | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 2 Drawn exposures include centralised fair value hedge accounting adjustments and expected credit loss allowance includes a central adjustment of £400 million that was applied in respect of uncertainty in the economic outlook. # **Reverse repurchase agreements** | *Banks* | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | CMS 1–5 | 2,901 | – | – | – | 2,901 | – | – | – | – | – | | CMS 6–10 | 631 | – | – | – | 631 | – | – | – | – | – | | CMS 11–14 | – | – | – | – | – | – | – | – | – | – | | CMS 15–18 | – | – | – | – | – | – | – | – | – | – | | CMS 19 | – | – | – | – | – | – | – | – | – | – | | CMS 20–23 | – | – | – | – | – | – | – | – | – | – | | | 3,532 | – | – | – | 3,532 | – | – | – | – | – | | *Customers* | | | | | | | | | | | | CMS 1–5 | 13,364 | – | – | – | 13,364 | – | – | – | – | – | | CMS 6–10 | 37,807 | – | – | – | 37,807 | – | – | – | – | – | | CMS 11–14 | 50 | – | – | – | 50 | – | – | – | – | – | | CMS 15–18 | – | – | – | – | – | – | – | – | – | – | | CMS 19 | – | – | – | – | – | – | – | – | – | – | | CMS 20–23 | – | – | – | – | – | – | – | – | – | – | | | 51,221 | – | – | – | 51,221 | – | – | – | – | – | | **Total reverse repurchase agreements** | **54,753** | **–** | **–** | **–** | **54,753** | **–** | **–** | **–** | **–** | **–** | 324 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued | Gross undrawn exposures and expected credit loss allowance | Undrawn exposures | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **At 31 December 2021** | | | | | | | | | | | | *Retail – UK mortgages* | | | | | | | | | | | | RMS 1–3 | 16,947 | 67 | – | – | 17,014 | 1 | – | – | – | 1 | | RMS 4–6 | 24 | 25 | – | – | 49 | – | – | – | – | – | | RMS 7–9 | – | 3 | – | – | 3 | – | – | – | – | – | | RMS 10 | – | – | – | – | – | – | – | – | – | – | | RMS 11–13 | – | – | – | – | – | – | – | – | – | – | | RMS 14 | – | – | 13 | 72 | 85 | – | – | – | – | – | | | 16,971 | 95 | 13 | 72 | 17,151 | 1 | – | – | – | 1 | | *Retail – credit cards^{a}* | | | | | | | | | | | | RMS 1–3 | 47,427 | 81 | – | – | 47,508 | 23 | 2 | – | – | 25 | | RMS 4–6 | 8,811 | 2,160 | – | – | 10,971 | 22 | 22 | – | – | 44 | | RMS 7–9 | 242 | 172 | – | – | 414 | 3 | 3 | – | – | 6 | | RMS 10 | – | 31 | – | – | 31 | – | 1 | – | – | 1 | | RMS 11–13 | – | 58 | – | – | 58 | – | 3 | – | – | 3 | | RMS 14 | – | – | 55 | – | 55 | – | – | – | – | – | | | 56,480 | 2,502 | 55 | – | 59,037 | 48 | 31 | – | – | 79 | | *Retail – loans and overdrafts* | | | | | | | | | | | | RMS 1–3 | 5,123 | 3 | – | – | 5,126 | 4 | – | – | – | 4 | | RMS 4–6 | 1,180 | 228 | – | – | 1,408 | 5 | 4 | – | – | 9 | | RMS 7–9 | 97 | 48 | – | – | 145 | 1 | 5 | – | – | 6 | | RMS 10 | 1 | 11 | – | – | 12 | – | 2 | – | – | 2 | | RMS 11–13 | – | 29 | – | – | 29 | – | 6 | – | – | 6 | | RMS 14 | – | – | 18 | – | 18 | – | – | – | – | – | | | 6,401 | 319 | 18 | – | 6,738 | 10 | 17 | – | – | 27 | | *Retail – UK Motor Finance* | | | | | | | | | | | | RMS 1–3 | 277 | – | – | – | 277 | – | – | – | – | – | | RMS 4–6 | 1,180 | – | – | – | 1,180 | 2 | – | – | – | 2 | | RMS 7–9 | 527 | – | – | – | 527 | – | – | – | – | – | | RMS 10 | – | – | – | – | – | – | – | – | – | – | | RMS 11–13 | 1 | – | – | – | 1 | – | – | – | – | – | | RMS 14 | – | – | – | – | – | – | – | – | – | – | | | 1,985 | – | – | – | 1,985 | 2 | – | – | – | 2 | | *Retail – other^{a}* | | | | | | | | | | | | RMS 1–3 | 598 | – | – | – | 598 | – | – | – | – | – | | RMS 4–6 | 298 | – | – | – | 298 | 1 | – | – | – | 1 | | RMS 7–9 | – | – | – | – | – | – | – | – | – | – | | RMS 10 | – | – | – | – | – | – | – | – | – | – | | RMS 11–13 | – | – | – | – | – | – | – | – | – | – | | RMS 14 | – | – | – | – | – | – | – | – | – | – | | | 896 | – | – | – | 896 | 1 | – | – | – | 1 | | **Total Retail** | **82,733** | **2,916** | **86** | **72** | **85,807** | **62** | **48** | **–** | **–** | **110** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 325 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 52: Financial risk management** continued | Gross undrawn exposures and expected credit loss allowance continued | Undrawn exposures | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total £m | | **At 31 December 2021** | | | | | | | | | | | | **Commercial Banking^{1}** | | | | | | | | | | | | CMS 1-5 | 26,935 | 1 | - | - | 26,935 | 2 | - | - | - | 2 | | CMS 6-10 | 19,455 | 47 | - | - | 19,502 | 15 | - | - | - | 15 | | CMS 11-14 | 7,926 | 1,212 | - | - | 9,138 | 24 | 18 | - | - | 42 | | CMS 15-18 | 453 | 347 | - | - | 800 | 6 | 17 | - | - | 23 | | CMS 19 | - | 33 | - | - | 33 | - | 3 | - | - | 3 | | CMS 20-23 | - | - | 67 | - | 67 | - | - | 5 | - | 5 | | | 54,769 | 1,640 | 67 | - | 56,476 | 47 | 38 | 5 | - | 90 | | **Other** | | | | | | | | | | | | CMS 1-5 | 102 | - | - | - | 102 | - | - | - | - | - | | CMS 6-10 | 144 | - | - | - | 144 | - | - | - | - | - | | CMS 11-14 | 193 | - | - | - | 193 | - | - | - | - | - | | CMS 15-18 | - | - | - | - | - | - | - | - | - | - | | CMS 19 | - | - | - | - | - | - | - | - | - | - | | CMS 20-23 | - | - | 11 | - | 11 | - | - | - | - | - | | | 439 | - | 11 | - | 450 | - | - | - | - | - | | **Total** | **137,941** | **4,556** | **164** | **72** | **142,733** | **109** | **86** | **5** | **-** | **200** | | **In respect of:** | | | | | | | | | | | | Retail | 82,733 | 2,916 | 86 | 72 | 85,807 | 62 | 48 | - | - | 110 | | Commercial Banking | 54,769 | 1,640 | 67 | - | 56,476 | 47 | 38 | 5 | - | 90 | | Other | 439 | - | 11 | - | 450 | - | - | - | - | - | | **Total** | **137,941** | **4,556** | **164** | **72** | **142,733** | **109** | **86** | **5** | **-** | **200** | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. # **Average PD grade** The table below shows the average PD for the major portfolios used in the calculation of ECL and therefore Stage 2 average PD reflects the lifetime value. These reflect the forward-looking view under the Group's base case scenario prior to the application of MES and post-model adjustments which further impact ECL. | | 2022 | | 2021^{1} | | | --- | --- | --- | --- | --- | | | Stage 1 average PD % | Stage 2 average PD % | Stage 1 average PD % | Stage 2 average PD % | | **Retail** | | | | | | UK mortgages | 0.26 | 15.48 | 0.17 | 12.44 | | Credit cards | 2.06 | 20.89 | 1.58 | 17.82 | | Loans and overdrafts | 3.36 | 29.75 | 2.42 | 23.57 | | UK Motor Finance | 0.71 | 11.24 | 0.81 | 12.00 | | **Commercial Banking** | | | | | | Loans and advances to customers | 0.88 | 18.50 | 0.95 | 22.32 | 1 Reflects the new organisation structure, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been presented on a consistent basis. 326 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued ### Cash and balances at central banks Significantly all of the Group's cash and balances at central banks of £91,388 million (2021: £76,420 million) are due from the Bank of England, the Federal Reserve Bank of New York or the Deutsche Bundesbank. ### Debt securities held at amortised cost An analysis by credit rating of the Group's debt securities held at amortised cost is provided below: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Investment grade^{1} £m | Other^{2} £m | Total £m | Investment grade^{3} £m | Other^{4} £m | Total £m | | Government securities | 268 | – | 268 | 202 | – | 202 | | Asset-backed securities: | | | | | | | | Mortgage-backed securities | 3,712 | – | 3,712 | 1,457 | – | 1,457 | | Other asset-backed securities | 1,946 | 2 | 1,948 | 1,590 | 18 | 1,608 | | | 5,658 | 2 | 5,660 | 3,047 | 18 | 3,065 | | Corporate and other debt securities | 3,993 | 14 | 4,007 | 3,558 | 13 | 3,571 | | Gross exposure | 9,919 | 16 | 9,935 | 6,807 | 31 | 6,838 | | Allowance for impairment losses | | | (9) | | | (3) | | **Total debt securities held at amortised cost** | | | **9,926** | | | **6,835** | 1 Credit ratings equal to or better than '888'. 2 Other comprises sub-investment grade (2022: £111; 2021: £18 million) and not rated (2022: £16 million; 2021: £13 million). ### Financial assets at fair value through other comprehensive income (excluding equity shares) An analysis of the Group's financial assets at fair value through other comprehensive income is included in note 21. The credit quality of the Group's financial assets at fair value through other comprehensive income (excluding equity shares) is set out below: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Investment grade^{1} £m | Other^{2} £m | Total £m | Investment grade^{3} £m | Other^{4} £m | Total £m | | Debt securities: | | | | | | | | Government securities | 11,196 | 15 | 11,211 | 14,600 | 13 | 14,613 | | Asset-backed securities | 95 | 51 | 146 | 15 | 55 | 70 | | Corporate and other debt securities | 11,470 | 44 | 11,514 | 13,088 | 46 | 13,134 | | | 22,761 | 110 | 22,871 | 27,703 | 114 | 27,817 | | Treasury and other bills | – | – | – | 85 | – | 85 | | **Total financial assets at fair value through other comprehensive income** | **22,761** | **110** | **22,871** | **27,788** | **114** | **27,902** | 1 Credit ratings equal to or better than '888'. 2 Other comprises sub-investment grade (2022: £71 million; 2021: £72 million) and not rated (2022: £39 million; 2021: £42 million). Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 327 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 52: Financial risk management continued #### Debt securities, treasury and other bills, and contracts held with reinsurers held at fair value through profit or loss An analysis of the Group's financial assets at fair value through profit or loss is included in note 16. Substantially all of the loans and advances to customers and banks recognised at fair value through profit or loss have an investment grade rating. The credit quality of the Group's debt securities, treasury and other bills, and contracts held with reinsurers held at fair value through profit or loss is set out below: | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Investment grade^{1} £m | Other^{2} £m | Total £m | Investment grade^{1} £m | Other^{2} £m | Total £m | | Trading assets: | | | | | | | | Debt securities: | | | | | | | | Government securities | 2,185 | – | 2,185 | 6,579 | – | 6,579 | | Asset-backed securities: | | | | | | | | Mortgage-backed securities | 7 | – | 7 | 12 | – | 12 | | Other asset-backed securities | 14 | – | 14 | 3 | – | 3 | | | 21 | – | 21 | 15 | – | 15 | | Corporate and other debt securities | 216 | 12 | 228 | 245 | – | 245 | | **Total trading assets** | **2,422** | **12** | **2,434** | **6,839** | **–** | **6,839** | Other financial assets mandatorily at fair value through profit or loss: | Debt securities: | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | Government securities | 7,871 | 1 | 7,872 | 11,097 | 4 | 11,101 | | Other public sector securities | 2,510 | 6 | 2,516 | 2,722 | 9 | 2,731 | | Bank and building society certificates of deposit | 7,129 | 4 | 7,133 | 6,294 | 3 | 6,297 | | Asset-backed securities: | | | | | | | | Mortgage-backed securities | 228 | – | 228 | 421 | – | 421 | | Other asset-backed securities | 171 | – | 171 | 272 | – | 272 | | | 399 | – | 399 | 693 | – | 693 | | Corporate and other debt securities | 14,932 | 2,761 | 17,693 | 16,692 | 2,865 | 19,557 | | | 32,841 | 2,772 | 35,613 | 37,498 | 2,881 | 40,379 | | Treasury and other bills | 62 | – | 62 | 19 | – | 19 | | Contracts held with reinsurers | 10,822 | 84 | 10,906 | 12,371 | – | 12,371 | | **Total other financial assets mandatorily at fair value through profit or loss** | **43,725** | **2,856** | **46,581** | **49,888** | **2,881** | **52,769** | | **Total held at fair value through profit or loss** | **46,147** | **2,868** | **49,015** | **56,727** | **2,881** | **59,608** | 1 Credit ratings equal to or better than 'BBB'. 2 Other comprises sub-investment grade (2022: £1,256 million; 2021: £1,491 million) and not rated (2022: £1,612 million; 2021: £1,390 million). Credit risk in respect of trading and other financial assets at fair value through profit or loss held within the Group's unit-linked funds is borne by the policyholders and credit risk in respect of with-profits funds is largely borne by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back those contract liabilities. #### Derivative assets An analysis of derivative assets is given in note 17. The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the Group's net credit risk relating to derivative assets of £12,423 million (2021: £10,451 million), cash collateral of £3,951 million (2021: £5,658 million) was held and a further £36 million was due from OECD banks (2021: £253 million). | | 2022 | | | 2021 | | | | --- | --- | --- | --- | --- | --- | --- | | | Investment grade^{1} £m | Other^{2} £m | Total £m | Investment grade^{1} £m | Other^{2} £m | Total £m | | Trading and other | 23,326 | 1,352 | 24,678 | 20,193 | 1,772 | 21,965 | | Hedging | 53 | 22 | 75 | 81 | 5 | 86 | | **Total derivative financial instruments** | **23,379** | **1,374** | **24,753** | **20,274** | **1,777** | **22,051** | 1 Credit ratings equal to or better than 'BBB'. 2 Other comprises sub-investment grade (2022: £1,031 million; 2021: £1,471 million) and not rated (2022: £343 million; 2021: £306 million). 328 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued ### Financial guarantees and irrevocable loan commitments Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less. Most commitments to extend credit are contingent upon customers maintaining specific credit standards. #### (b) Collateral held as security for financial assets The principal types of collateral accepted by the Group include: residential and commercial properties; charges over business assets such as premises, inventory and accounts receivable; financial instruments, cash and guarantees from third-parties. The terms and conditions associated with the use of the collateral are varied and are dependent on the type of agreement and the counterparty. The Group holds collateral against loans and advances and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral below. Collateral held as security for financial assets at fair value through profit or loss and for derivative assets is also shown below. The Group holds collateral in respect of loans and advances to banks and customers as set out below. The Group does not hold collateral against debt securities, comprising asset-backed securities and corporate and other debt securities, which are classified as financial assets held at amortised cost. #### Loans and advances to banks There were reverse repurchase agreements which are accounted for as collateralised loans within loans and advances to banks with a carrying value of £3,786 million (2021: £3,532 million), against which the Group held collateral with a fair value of £247 million (2021: £620 million). These transactions were generally conducted under terms that are usual and customary for standard secured lending activities. #### Loans and advances to customers ##### Retail lending ##### Mortgages An analysis by loan to value ratio of the Group's residential mortgage lending is provided below. The value of collateral used in determining the loan to value ratios has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowances for indexation error and dilapidations. The market takes into account many factors, including environmental considerations such as flood risk and energy efficient additions, in arriving at the value of a home. In some circumstances, where the discounted value of the estimated net proceeds from the liquidation of collateral (i.e. net of costs, expected haircuts and anticipated changes in the value of the collateral to the point of sale) is greater than the estimated exposure at default, no credit losses are expected and no ECL allowance is recognised. | | Drawn balances | | | | | Expected credit loss allowance | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total gross £m | Stage 1 £m | Stage 2 £m | Stage 3 £m | POCI £m | Total gross £m | | **At 31 December 2022** | | | | | | | | | | | | Less than 70 per cent | 210,457 | 33,205 | 3,161 | 8,845 | 255,668 | 51 | 330 | 210 | 117 | 708 | | 70 per cent to 80 per cent | 31,788 | 5,264 | 170 | 359 | 37,581 | 25 | 124 | 55 | 42 | 246 | | 80 per cent to 90 per cent | 11,942 | 2,604 | 48 | 149 | 14,743 | 12 | 59 | 20 | 19 | 110 | | 90 per cent to 100 per cent | 3,319 | 606 | 13 | 113 | 4,051 | 3 | 18 | 7 | 18 | 46 | | Greater than 100 per cent | 11 | 104 | 24 | 156 | 295 | – | 21 | 19 | 57 | 97 | | **Total** | **257,517** | **41,783** | **3,416** | **9,622** | **312,338** | **91** | **552** | **311** | **253** | **1,207** | | **At 31 December 2021** | | | | | | | | | | | | Less than 70 per cent | 217,830 | 19,766 | 1,717 | 9,872 | 249,185 | 31 | 247 | 98 | 110 | 486 | | 70 per cent to 80 per cent | 42,808 | 1,632 | 134 | 572 | 45,146 | 11 | 80 | 38 | 26 | 155 | | 80 per cent to 90 per cent | 12,087 | 253 | 52 | 184 | 12,576 | 5 | 28 | 23 | 16 | 72 | | 90 per cent to 100 per cent | 779 | 46 | 14 | 135 | 974 | – | 10 | 7 | 16 | 33 | | Greater than 100 per cent | 125 | 101 | 23 | 214 | 463 | 1 | 29 | 18 | 42 | 90 | | **Total** | **273,629** | **21,798** | **1,940** | **10,977** | **308,344** | **48** | **394** | **184** | **210** | **836** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 329 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 52: Financial risk management continued The energy performance certificate (EPC) profile of the security associated with the Group's UK mortgage portfolio is shown below: | EPC profile | 2022 | | 2021 | | | --- | --- | --- | --- | --- | | | £m | % | £m | % | | A | 731 | 0.2 | 563 | 0.2 | | B | 37,075 | 11.9 | 34,070 | 11.0 | | C | 60,086 | 19.2 | 54,636 | 17.7 | | D | 93,010 | 29.8 | 88,752 | 28.8 | | E | 35,015 | 11.2 | 35,086 | 11.4 | | F | 6,990 | 2.2 | 7,258 | 2.4 | | G | 1,519 | 0.5 | 1,546 | 0.5 | | Unrated properties | 77,912 | 25.0 | 86,433 | 28.0 | | **Total** | **312,338** | **100.0** | **308,344** | **100.0** | The above data is sourced using the latest available government EPC information as at the relevant balance sheet date. The Group has no EPC data available for 25.0 per cent (2021: 28.0 per cent) of the UK mortgage portfolio, these are classified as unrated properties. EPC ratings are not considered to be a material credit risk factor, and do not form part of the Group's credit risk calculations. #### Other The majority of non-mortgage retail lending is unsecured. At 31 December 2022, Stage 3 non-mortgage lending amounted to £475 million, net of an impairment allowance of £372 million (2021: £498 million, net of an impairment allowance of £435 million). Stage 1 and Stage 2 non-mortgage retail lending amounted to £53,825 million (2021: £49,147 million). Lending decisions are predominantly based on an obligor's ability to repay rather than reliance on the disposal of any security provided. Where the lending is secured, collateral values are rigorously assessed at the time of loan origination and are thereafter monitored in accordance with business unit credit policy. The Group's credit risk disclosures for unimpaired non-mortgage retail lending show assets gross of collateral and therefore disclose the maximum loss exposure. The Group believes that this approach is appropriate. #### Commercial lending ##### Reverse repurchase transactions At 31 December 2022 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of £41,079 million (2021: £51,221 million), against which the Group held collateral with a fair value of £33,468 million (2021: £52,690 million), all of which the Group was able to repledge. These transactions were generally conducted under terms that are usual and customary for standard secured lending activities. ##### Stage 3 secured lending The value of collateral is re-evaluated and its legal soundness re-assessed if there is observable evidence of distress of the borrower; this evaluation is used to determine potential loss allowances and management's strategy to try to either repair the business or recover the debt. At 31 December 2022, Stage 3 secured commercial lending amounted to £410 million, net of an impairment allowance of £160 million (2021: £636 million, net of an impairment allowance of £198 million). The fair value of the collateral held in respect of impaired secured commercial lending was £484 million (2021: £693 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured commercial lending, the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group's exposure. Stage 3 secured commercial lending and associated collateral relates to lending to property companies and to customers in the financial, business and other services; transport, distribution and hotels; and construction industries. ##### Stage 1 and Stage 2 secured lending For Stage 1 and Stage 2 secured commercial lending, the Group reports assets gross of collateral and therefore discloses the maximum loss exposure. The Group believes that this approach is appropriate as collateral values at origination and during a period of good performance may not be representative of the value of collateral if the obligor enters a distressed state. Stage 1 and Stage 2 secured commercial lending is predominantly managed on a cash flow basis. On occasion, it may include an assessment of underlying collateral, although, for Stage 3 lending, this will not always involve assessing it on a fair value basis. No aggregated collateral information for the entire unimpaired secured commercial lending portfolio is provided to key management personnel. 330 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued ### Financial assets at fair value through profit or loss (excluding equity shares) Included in financial assets at fair value through profit or loss are reverse repurchase agreements treated as collateralised loans with a carrying value of £11,781 million (2021: £14,921 million). Collateral is held with a fair value of £9,598 million (2021: £15,640 million), all of which the Group is able to repledge. At 31 December 2022, £5,232 million had been repledged (2021: £7,251 million). In addition, securities held as collateral in the form of stock borrowed amounted to £26,368 million (2021: £14,100 million). Of this amount, £14,375 million (2021: £6,538 million) had been resold or repledged as collateral for the Group's own transactions. These transactions were generally conducted under terms that are usual and customary for standard secured lending activities. ### Derivative assets, after offsetting of amounts under master netting arrangements The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the net derivative assets after offsetting of amounts under master netting arrangements of £12,423 million (2021: £10,451 million), cash collateral of £3,951 million (2021: £5,658 million) was held. ### Irrevocable loan commitments and other credit-related contingencies At 31 December 2022, the Group held irrevocable loan commitments and other credit-related contingencies of £77,678 million (2021: £73,902 million). Collateral is held as security, in the event that lending is drawn down, on £16,442 million (2021: £17,149 million) of these balances. ### Collateral repossessed During the year, £219 million of collateral was repossessed (2021: £86 million), consisting primarily of residential property. In respect of retail portfolios, the Group does not take physical possession of properties or other assets held as collateral and uses external agents to realise the value as soon as practicable, generally at auction, to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with appropriate insolvency regulations. In certain circumstances the Group takes physical possession of assets held as collateral against commercial lending. In such cases, the assets are carried on the Group's balance sheet and are classified according to the Group's accounting policies. ### (E) Collateral pledged as security The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted under terms that are usual and customary for standard securitised borrowing contracts. ### Repurchase transactions #### Amortised cost There are balances arising from repurchase transactions with banks of £33,009 million (2021: £30,085 million), which include amounts due under the Bank of England's Term Funding Scheme with additional incentives for SMEs (TFSME); the fair value of the collateral provided under these agreements at 31 December 2022 was £40,366 million (2021: £39,918 million). There are balances arising from repurchase transactions with customers of £15,587 million (2021: £1,040 million); the fair value of the collateral provided under these agreements at 31 December 2022 was £13,461 million (2021: £903 million). #### Financial liabilities at fair value through profit or loss The fair value of collateral pledged in respect of repurchase transactions, accounted for as secured borrowing, where the secured party is permitted by contract or custom to repledge was £10,427 million (2021: £14,350 million). ### Securities lending transactions The following on-balance sheet financial assets have been lent to counterparties under securities lending transactions: | | 2022 £m | 2021 £m | | --- | --- | --- | | Financial assets at fair value through profit or loss | 1,463 | 2,348 | | Financial assets at fair value through other comprehensive income | 5,429 | 1,918 | | **Total** | **6,892** | **4,266** | ### Securitisations and covered bonds In addition to the assets detailed above, the Group also holds assets that are encumbered through the Group's asset-backed conduits and its securitisation and covered bond programmes. Further details of these assets are provided in note 30. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 331 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 52: Financial risk management** continued # **Liquidity risk** Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost. Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturity. The Group carries out monthly stress testing of its liquidity position against a range of scenarios, including those prescribed by the PRA. The Group's liquidity risk appetite is also calibrated against a number of stressed liquidity metrics. The table below analyses assets and liabilities of the Group, other than liabilities arising from insurance and investment contracts, into relevant maturity groupings based on the remaining contractual period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category. Liabilities arising from insurance and investment contracts are analysed on a behavioural basis. Certain balances, included in the table below on the basis of their residual maturity, are repayable on demand upon payment of a penalty. # **(A) Maturities of assets and liabilities** | | Up to 1 month £m | 1–3 months £m | 3–6 months £m | 6–9 months £m | 9–12 months £m | 1–2 years £m | 2–5 years £m | Over 5 years £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | **At 31 December 2022** | | | | | | | | | | | **Assets** | | | | | | | | | | | Cash and balances at central banks | 91,388 | – | – | – | – | – | – | – | 91,388 | | Financial assets at fair value through profit or loss | 12,019 | 8,108 | 3,269 | 2,186 | 858 | 2,827 | 7,565 | 143,777 | 180,609 | | Derivative financial instruments | 2,896 | 1,823 | 1,069 | 656 | 637 | 1,424 | 2,828 | 13,420 | 24,753 | | Loans and advances to banks | 4,756 | 763 | 896 | 700 | 352 | 78 | 3,084 | 3 | 10,632 | | Loans and advances to customers | 17,535 | 7,628 | 10,337 | 8,849 | 9,952 | 33,886 | 78,857 | 287,855 | 454,899 | | Reverse repurchase agreements | 14,530 | 10,908 | 11,600 | 4,035 | 285 | 2,924 | 583 | – | 44,865 | | Debt securities | 7 | 219 | 73 | 275 | 77 | 874 | 6,475 | 1,926 | 9,926 | | Financial assets at amortised cost | 36,828 | 19,518 | 22,906 | 13,859 | 10,666 | 37,762 | 88,999 | 289,784 | 520,322 | | Financial assets at fair value through other comprehensive income | 310 | 273 | 391 | 456 | 665 | 2,324 | 9,334 | 9,401 | 23,154 | | Other assets | 1,683 | 1,071 | 189 | 700 | 211 | 357 | 922 | 32,470 | 37,603 | | **Total assets** | **145,124** | **30,793** | **27,824** | **17,857** | **13,037** | **44,694** | **109,648** | **488,852** | **877,829** | | **Liabilities** | | | | | | | | | | | Deposits from banks | 3,988 | 364 | 141 | 139 | 408 | 4 | 2,222 | – | 7,266 | | Customer deposits | 446,311 | 8,074 | 5,628 | 2,953 | 4,695 | 3,887 | 3,402 | 381 | 475,331 | | Repurchase agreements at amortised cost | 12,203 | 6,183 | – | – | – | – | 30,210 | – | 48,596 | | Financial liabilities at fair value through profit or loss | 5,245 | 2,363 | 1,526 | 1,431 | 665 | 615 | 1,476 | 4,434 | 17,755 | | Derivative financial instruments | 3,197 | 1,647 | 942 | 739 | 779 | 2,030 | 3,850 | 10,858 | 24,042 | | Debt securities in issue | 5,562 | 9,761 | 8,646 | 3,940 | 2,114 | 10,124 | 23,964 | 9,708 | 73,819 | | Liabilities arising from insurance and investment contracts | 1,288 | 1,828 | 2,598 | 2,434 | 2,324 | 9,172 | 27,618 | 102,606 | 149,868 | | Other liabilities | 6,137 | 1,246 | 393 | 1,486 | 521 | 523 | 753 | 11,842 | 22,901 | | Subordinated liabilities | – | – | 541 | 662 | – | 915 | 3,770 | 4,842 | 10,730 | | **Total liabilities** | **483,931** | **31,466** | **20,415** | **13,784** | **11,506** | **27,270** | **97,265** | **144,671** | **830,308** | 332 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued | | Up to 1 month £m | 1–3 months £m | 3–6 months £m | 6–9 months £m | 9–12 months £m | 1–2 years £m | 2–5 years £m | Over 5 years £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | **At 31 December 2021** | | | | | | | | | | | **Assets** | | | | | | | | | | | Cash and balances at central banks | 76,420 | – | – | – | – | – | – | – | 76,420 | | Financial assets at fair value through profit or loss | 10,706 | 8,280 | 6,093 | 2,840 | 878 | 1,784 | 7,553 | 168,637 | 206,771 | | Derivative financial instruments | 1,607 | 804 | 633 | 304 | 309 | 947 | 1,997 | 15,450 | 22,051 | | Loans and advances to banks | 4,350 | 332 | 327 | 11 | 32 | 29 | 1,918 | 2 | 7,001 | | Loans and advances to customers | 15,279 | 8,624 | 9,792 | 10,949 | 11,107 | 32,096 | 77,714 | 283,006 | 448,567 | | Reverse repurchase agreements | 13,678 | 15,111 | 16,651 | 5,107 | 2,526 | 762 | 918 | – | 54,753 | | Debt securities | 19 | 1,217 | 19 | 71 | 305 | 220 | 2,735 | 2,249 | 6,835 | | Financial assets at amortised cost | 33,326 | 25,284 | 26,789 | 16,138 | 13,970 | 33,107 | 83,285 | 285,257 | 517,156 | | Financial assets at fair value through other comprehensive income | 341 | 598 | 122 | 322 | 1,552 | 3,029 | 8,861 | 13,312 | 28,137 | | Other assets | 1,509 | 1,200 | 185 | 528 | 147 | 515 | 948 | 30,958 | 35,990 | | **Total assets** | **123,909** | **36,166** | **33,822** | **20,132** | **16,856** | **39,382** | **102,644** | **513,614** | **886,525** | | **Liabilities** | | | | | | | | | | | Deposits from banks | 2,313 | 376 | 353 | 177 | 223 | 353 | 3,774 | 78 | 7,647 | | Customer deposits | 456,077 | 6,177 | 3,165 | 2,053 | 1,296 | 4,883 | 2,327 | 366 | 476,344 | | Repurchase agreements at amortised cost | 1,011 | 92 | 10 | 3 | – | – | 30,009 | – | 31,125 | | Financial liabilities at fair value through profit or loss | 5,711 | 4,921 | 2,439 | 1,969 | 224 | 212 | 1,748 | 5,899 | 23,123 | | Derivative financial instruments | 1,674 | 826 | 470 | 341 | 352 | 1,105 | 1,962 | 11,330 | 18,060 | | Debt securities in issue | 4,020 | 5,555 | 5,476 | 6,320 | 4,129 | 10,152 | 22,496 | 13,404 | 71,552 | | Liabilities arising from insurance and investment contracts | 1,532 | 2,076 | 2,921 | 2,894 | 3,312 | 10,606 | 30,663 | 114,459 | 168,463 | | Other liabilities | 3,721 | 2,876 | 631 | 1,024 | 778 | 567 | 743 | 13,611 | 23,951 | | Subordinated liabilities | 21 | – | 96 | – | – | 1,307 | 6,464 | 5,220 | 13,108 | | **Total liabilities** | **476,080** | **22,899** | **15,561** | **14,781** | **10,314** | **29,185** | **100,186** | **164,367** | **833,373** | The above tables are provided on a contractual basis. The Group's assets and liabilities may be repaid or otherwise mature earlier or later than implied by their contractual terms and readers are, therefore, advised to use caution when using this data to evaluate the Group's liquidity position. In particular, amounts in respect of customer deposits are usually contractually payable on demand or at short notice. However, in practice, these deposits are not usually withdrawn on their contractual maturity. The table below analyses financial instrument liabilities of the Group, excluding those arising from insurance and participating investment contracts, on an undiscounted future cash flow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the balance sheet date, balances with no fixed maturity are included in the over 5 years category. | | Up to 1 month £m | 1–3 months £m | 3–12 months £m | 1–5 years £m | Over 5 years £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | | **At 31 December 2022** | | | | | | | | Deposits from banks | 3,925 | 369 | 714 | 2,227 | 135 | 7,370 | | Customer deposits | 449,801 | 6,717 | 11,635 | 7,417 | 382 | 475,952 | | Repurchase agreements at amortised cost | 12,501 | 6,188 | 904 | 33,054 | 38 | 52,685 | | Financial liabilities at fair value through profit or loss | 5,297 | 2,397 | 3,725 | 2,293 | 4,747 | 18,459 | | Debt securities in issue | 6,108 | 12,625 | 15,517 | 39,527 | 11,623 | 85,400 | | Liabilities arising from non-participating investment contracts | 42,975 | – | – | – | – | 42,975 | | Lease liabilities | 13 | 54 | 166 | 582 | 700 | 1,515 | | Subordinated liabilities | 27 | 113 | 1,648 | 6,741 | 12,384 | 20,913 | | **Total non-derivative financial liabilities** | **520,647** | **28,463** | **34,309** | **91,841** | **30,009** | **705,269** | | **Derivative financial liabilities** | | | | | | | | Gross settled derivatives – outflows | 55,671 | 43,380 | 40,826 | 34,808 | 20,677 | 195,362 | | Gross settled derivatives – inflows | (52,383) | (41,255) | (39,132) | (34,015) | (20,130) | (186,915) | | Gross settled derivatives – net flows | 3,288 | 2,125 | 1,694 | 793 | 547 | 8,447 | | Net settled derivative liabilities | 13,078 | 82 | 130 | 752 | 1,501 | 15,543 | | **Total derivative financial liabilities** | **16,366** | **2,207** | **1,824** | **1,545** | **2,048** | **23,990** | Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 333 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 52: Financial risk management** continued | | Up to 1 month £m | 1–3 months £m | 3–12 months £m | 1–5 years £m | Over 5 years £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | | **At 31 December 2021** | | | | | | | | Deposits from banks | 2,318 | 358 | 789 | 4,213 | 233 | 7,911 | | Customer deposits | 456,306 | 6,161 | 6,540 | 7,255 | 676 | 476,938 | | Repurchase agreements at amortised cost | 1,419 | 492 | 243 | 30,987 | 7 | 33,148 | | Financial liabilities at fair value through profit or loss | 6,371 | 5,037 | 4,071 | 2,130 | 5,826 | 23,435 | | Debt securities in issue | 5,804 | 5,722 | 16,728 | 34,562 | 10,606 | 73,422 | | Liabilities arising from non-participating investment contracts | 45,040 | – | – | – | – | 45,040 | | Lease liabilities | 2 | 64 | 167 | 605 | 927 | 1,765 | | Subordinated liabilities | 54 | 78 | 677 | 9,558 | 9,114 | 19,481 | | **Total non-derivative financial liabilities** | **517,314** | **17,912** | **29,215** | **89,310** | **27,389** | **681,140** | | **Derivative financial liabilities** | | | | | | | | Gross settled derivatives – outflows | 39,184 | 30,271 | 32,267 | 39,429 | 21,709 | 162,860 | | Gross settled derivatives – inflows | (38,231) | (29,283) | (31,453) | (38,137) | (19,834) | (156,938) | | Gross settled derivatives – net flows | 953 | 988 | 814 | 1,292 | 1,875 | 5,922 | | Net settled derivative liabilities | 12,099 | 60 | 52 | 429 | 1,350 | 13,990 | | **Total derivative financial liabilities** | **13,052** | **1,048** | **866** | **1,721** | **3,225** | **19,912** | The majority of the Group's non-participating investment contract liabilities are unit-linked. These unit-linked products are invested in accordance with unit fund mandates. Clauses are included in policyholder contracts to permit the deferral of sales, where necessary, so that linked assets can be realised without being a forced seller. The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of £17 million (2021: £20 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years. An analysis of the Group's total wholesale funding by residual maturity and by currency is set out on **page 182**. Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows: | | Up to 1 month £m | 1–3 months £m | 3–12 months £m | 1–5 years £m | Over 5 years £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | | **At 31 December 2022** | **826** | **1,288** | **4,967** | **22,967** | **76,845** | **106,893** | | At 31 December 2021 | 1,101 | 1,603 | 6,108 | 26,928 | 87,683 | 123,423 | For insurance contracts which are neither unit-linked nor in the Group's with-profit funds, in particular annuity liabilities, the aim is to invest in assets such that the cash flows on investments match those on the projected future liabilities. The following tables set out the amounts and residual maturities of the Group's off-balance sheet contingent liabilities, commitments and guarantees. | | Up to 1 month £m | 1–3 months £m | 3–6 months £m | 6–9 months £m | 9–12 months £m | 1–3 years £m | 3–5 years £m | Over 5 years £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | **At 31 December 2022** | | | | | | | | | | | Acceptances and endorsements | 47 | 11 | – | – | – | – | – | – | 58 | | Other contingent liabilities | 355 | 744 | 263 | 240 | 144 | 554 | 181 | 447 | 2,928 | | **Total contingent liabilities** | **402** | **755** | **263** | **240** | **144** | **554** | **181** | **447** | **2,986** | | Lending commitments and guarantees | 68,984 | 2,419 | 17,641 | 1,586 | 6,439 | 12,787 | 14,329 | 19,571 | 143,756 | | Other commitments | – | – | – | – | – | – | 10 | 29 | 39 | | **Total commitments and guarantees** | **68,984** | **2,419** | **17,641** | **1,586** | **6,439** | **12,787** | **14,339** | **19,600** | **143,795** | | **Total contingents, commitments and guarantees** | **69,386** | **3,174** | **17,904** | **1,826** | **6,583** | **13,341** | **14,520** | **20,047** | **146,781** | | **At 31 December 2021** | | | | | | | | | | | Acceptances and endorsements | 11 | 180 | – | – | – | – | – | – | 191 | | Other contingent liabilities | 219 | 658 | 328 | 184 | 154 | 295 | 258 | 457 | 2,553 | | **Total contingent liabilities** | **230** | **838** | **328** | **184** | **154** | **295** | **258** | **457** | **2,744** | | Lending commitments and guarantees | 70,437 | 4,269 | 20,021 | 3,662 | 7,872 | 20,060 | 11,595 | 4,756 | 142,672 | | Other commitments | – | – | – | – | – | 17 | – | 44 | 61 | | **Total commitments and guarantees** | **70,437** | **4,269** | **20,021** | **3,662** | **7,872** | **20,077** | **11,595** | **4,800** | **142,733** | | **Total contingents, commitments and guarantees** | **70,667** | **5,107** | **20,349** | **3,846** | **8,026** | **20,372** | **11,853** | **5,257** | **145,477** | 334 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 52: Financial risk management continued ### Capital risk Capital is actively managed on an ongoing basis for both the Group and its regulated banking subsidiaries, with associated capital policies and procedures subjected to regular review. The Group assesses both its regulatory capital requirements and the quantity and quality of capital resources it holds to meet those requirements through applying the capital directives and regulations implemented in the UK by the Prudential Regulation Authority (PRA) and supplemented through additional regulation under the PRA Rulebook and associated statements of policy, supervisory statements and other regulatory guidance. Regulatory capital ratios are considered a key part of the budgeting and planning processes and forecast ratios are reviewed by the Group Asset and Liability Committee. Target capital levels take account of current and future regulatory requirements, capacity for growth and to cover uncertainties. Details of the Group's capital resources are provided in the table marked audited on **page 151**. Each insurance company within the Group is regulated by the PRA. The insurance businesses are required to calculate solvency capital requirements and available capital in accordance with Solvency II. The Insurance business of the Group calculates regulatory capital on the basis of an internal model, which was approved by the PRA on 5 December 2015, with the latest major change to the model approved in November 2020. The capital position of the Group's insurance businesses is reviewed on a regular basis by the Insurance, Pensions and Investments Executive Committee. ### Insurance risk Insurance underwriting risk is the risk of adverse developments in the timing, frequency and severity of claims for insured/underwritten events and in customer behaviour, leading to reductions in earnings and/or value and arises within the Group's Insurance business. Insurance underwriting risk is measured using a variety of techniques including stress, reverse stress and scenario testing, as well as stochastic modelling. Current and potential future insurance underwriting risk exposures are assessed and aggregated on a range of stresses including risk measures based on 1-in-200 year stresses for the Insurance business's regulatory capital assessments and other supporting measures where appropriate. The Group also mitigates insurance underwriting risk via the use of reinsurance arrangements. ## Note 53: Cash flow statement ### (A) Change in operating assets | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Change in financial assets held at amortised cost | **(1,639)** | (2,379) | (6,652) | | Change in financial assets at fair value through profit or loss | **26,179** | (15,565) | (8,147) | | Change in derivative financial instruments | **(7,704)** | 6,132 | (2,894) | | Change in other operating assets | **201** | 1,447 | 25 | | **Change in operating assets** | **17,037** | (10,365) | (17,668) | 1 Restated, see page 218. ### (B) Change in operating liabilities | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Change in deposits from banks and repurchase agreements | **2,536** | 6,266 | 3,287 | | Change in customer deposits and repurchase agreements | **13,340** | 17,295 | 38,805 | | Change in financial liabilities at fair value through profit or loss | **(4,849)** | 391 | 1,085 | | Change in derivative financial instruments | **5,982** | (9,258) | 1,534 | | Change in debt securities in issue | **1,651** | (15,896) | (10,142) | | Change in investment contract liabilities | **(2,065)** | 6,588 | 993 | | Change in other operating liabilities | **(1,002)** | (432) | 175 | | **Change in operating liabilities** | **15,593** | 4,954 | 35,737 | 1 Includes a decrease of £158 million (2021: decrease of £197 million; 2020: decrease of £172 million) in respect of lease liabilities. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 335 # **Notes to the consolidated financial statements** continued for the year ended 31 December # **Note 53: Cash flow statement** continued # **(C) Non-cash and other items** | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Depreciation and amortisation | **2,396** | 2,825 | 2,732 | | Revaluation of investment properties | **511** | (575) | 209 | | Allowance for loan losses | **1,372** | (1,121) | 3,856 | | Write-off of allowance for loan losses, net of recoveries | **(759)** | (935) | (1,377) | | Impairment charge (credit) relating to undrawn balances | **122** | (257) | 289 | | Impairment of financial assets at fair value through other comprehensive income | **6** | (2) | 5 | | Change in insurance contract liabilities | **(16,590)** | 7,328 | 4,554 | | Regulatory and legal provisions | **255** | 1,300 | 464 | | Other provision movements | **(80)** | (66) | 85 | | Net charge in respect of defined benefit schemes | **125** | 236 | 247 | | Foreign exchange impact on balance sheet^{1} | **(291)** | 140 | 865 | | Interest expense on subordinated liabilities | **697** | 1,320 | 1,080 | | Net gain on sale of financial assets at fair value through other comprehensive income | **(92)** | 2 | (149) | | Hedging valuation adjustments on subordinated debt | **(1,871)** | (781) | 280 | | Value of employee services | **224** | 182 | 122 | | Transactions in own shares | **(20)** | (13) | 293 | | Accretion of discounts and amortisation of premiums and issue costs | **462** | (306) | (82) | | Share of post-tax results of associates and joint ventures | **(10)** | (2) | 13 | | Transfers to income statement from reserves | **43** | (621) | (496) | | Profit on disposal of tangible fixed assets | **(121)** | (268) | (81) | | Other non-cash items | **(38)** | (159) | (38) | | **Total non-cash items** | **(13,659)** | 8,227 | 12,871 | | Contributions to defined benefit schemes | **(2,533)** | (1,347) | (1,153) | | Payments in respect of regulatory and legal provisions | **(625)** | (817) | (2,241) | | Other | **13** | – | 117 | | **Total other items** | **(3,145)** | (2,164) | (3,277) | | **Non-cash and other items** | **(16,804)** | 6,063 | 9,594 | 1 When considering the movement on each line of the balance sheet, the impact of foreign exchange rate movements is removed in order to show the underlying cash impact. # **(D) Acquisition of Group undertakings and businesses** | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | Net assets acquired: | | | | | Intangible assets | **68** | – | – | | Other assets | **131** | 3 | – | | Other liabilities | **(146)** | – | – | | Goodwill arising on acquisition | **335** | – | – | | **Cash consideration** | **388** | 3 | – | | Less cash and cash equivalents acquired | **(74)** | – | – | | **Net cash outflow arising from acquisition of subsidiaries and businesses** | **314** | 3 | – | | Acquisition of and additional investment in joint ventures | **95** | 54 | 3 | | **Net cash outflow from acquisitions in the year** | **409** | 57 | 3 | 336 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 53: Cash flow statement continued ### (E) Analysis of cash and cash equivalents as shown in the balance sheet | | 2022 £m | 2021^{1} £m | 2020^{1} £m | | --- | --- | --- | --- | | Cash and balances at central banks | 91,388 | 76,420 | 73,257 | | Less mandatory reserve deposits^{2} | (2,111) | (2,178) | (1,875) | | | 89,277 | 74,242 | 71,382 | | Loans and advances to banks and reverse repurchase agreements | 14,418 | 10,533 | 10,746 | | Less amounts with a maturity of three months or more | (7,866) | (5,581) | (3,983) | | | 6,552 | 4,952 | 6,763 | | **Total cash and cash equivalents** | **95,829** | **79,194** | **78,145** | 1 Restated, see page 218. 2 Mandatory reserve deposits are held with local central banks in accordance with statutory requirements. Where these deposits are not held in demand accounts and are not available to finance the Group's day-to-day operations they are excluded from cash and cash equivalents. Included within cash and cash equivalents at 31 December 2022 is £37 million (2021: £76 million; 2020: £84 million) of restricted cash and cash equivalents is held within the Group's long-term insurance and investments operations, which is not immediately available for use in the business. ## Note 54: Events since the balance sheet date ### Acquisition of Tusker On 21 February 2023, Lloyds Bank Asset Finance Limited, a wholly-owned subsidiary of the Group, acquired 100 per cent of the ordinary share capital of Hamsard 3352 Limited ("Tusker"), which together with its subsidiaries operates a vehicle management and leasing business. The acquisition will enable the Group to expand its salary sacrifice proposition within motor finance. Cash consideration was approximately £300 million. As a result of the limited time available between the acquisition and the approval of these financial statements, the Group is still in the process of finalising the fair value of the individual assets and liabilities acquired including the associated identifiable intangible assets and goodwill. 1 Subject to customary adjustments. ### Share buyback The Board has announced its intention to implement an ordinary share buyback of up to £2.0 billion. This represents the return to shareholders of capital surplus to that required to provide capacity to grow the business, meet current and future regulatory requirements and cover uncertainties. The share buyback programme will commence as soon as is practicable and is expected to be completed, subject to continued authority from the PRA, by 31 December 2023. ## Note 55: Future accounting developments The following pronouncements are not applicable for the year ending 31 December 2022 and have not been applied in preparing these financial statements. Save as disclosed below, the impact of these accounting changes is still being assessed by the Group and reliable estimates cannot be made at this stage. With the exception of the minor amendments detailed below, as at 21 February 2023 these pronouncements have been endorsed for use in the United Kingdom. ### IFRS 17 Insurance Contracts IFRS 17 Insurance Contracts replaces IFRS 4 Insurance Contracts and is effective for annual periods beginning on or after 1 January 2023. The Group's initial application date was 1 January 2023 and its transition date was 1 January 2022. On transition, the Group will use the full retrospective approach for business written since 1 January 2016 using Solvency II modelling tools developed when Solvency II was implemented, which are only available to support the calculation of IFRS 17 results from that date. The fair value approach will be used for business written prior to 1 January 2016 and valuations supporting Solvency II at the transition date will be used to support the fair value calculation for transition for that business. ### Comparative information As permitted by IFRS 17, the Group's financial statements at and for the year ended 31 December 2023 will include restated comparatives for the year ended 31 December 2022 only. Comparative information for the year ended 31 December 2021 will be presented in accordance with IFRS 4. ### IFRS 17 recognition and measurement IFRS 17 requires insurance contracts, including reinsurance contracts, and investment contracts with discretionary participation features to be recognised on the balance sheet as the total of the fulfilment cash flows and the contractual service margin: - The fulfilment cash flows consist of the present value of future cash flows calculated using best estimate assumptions, together with an explicit risk adjustment for non-financial risk and are required to be remeasured at each reporting date - The contractual service margin (CSM) represents the unearned profit on the insurance contracts and investment contracts with discretionary participation features Changes to estimates of fulfilment cash flows which relate to future service are taken to the CSM, except where onerous contracts are identified or where the Group takes advantage of the risk mitigation options available under IFRS 17. The Group calculates the risk adjustment by applying margins to best estimate cashflows relating to non-financial risks (such as mortality or persistency). The risk adjustment will be released to the income statement as risk expires. For reinsurance contracts held, the CSM represents the net cost or net gain of purchasing reinsurance and the risk adjustment represents the amount of risk transferred from the underlying contracts held. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 337 ## Notes to the consolidated financial statements continued for the year ended 31 December ### Note 55: Future accounting developments continued #### Expected impact: comparison with IFRS 4 Under IFRS 4, the Group recognises a value in-force asset and the expected profit of an insurance contract at its inception. Under IFRS 17, the expected profit for providing insurance contract services will be recognised in the CSM and released to the income statement throughout the contract period over which the insurance contract services are provided. The risk adjustment is released commensurate with the expiry of non-financial risk associated with the valuation of best estimate cash flows. The value in-force asset recognised by the Group at 31 December 2021 will be derecognised on transition. IFRS 17 will impact the timing of profit recognition for the insurance contracts and investment contracts with discretionary participation features issued by the Group. However, it will not change the total profit recognised over the lifetime of these contracts as compared to IFRS 4, or the capital position or cash flows of the Group and its insurance companies. The change in the measurement basis of the Group's liabilities, the derecognition of the VIF and the recognition, within the CSM, of a proportion of the previously recognised profits from insurance contracts will result in a reduction to the Group's retained earnings on transition. #### Establishing cash flows within the boundary of an insurance contract IFRS 17 requires cash flows to be included within the boundary of an insurance contract if they arise from substantive rights and obligations that exist during the reporting period where the Group can compel a policyholder to pay premiums or where the Group has a substantive obligation to provide the policyholder with services. The Group has assessed the contract boundary for insurance contracts it sells and has established relevant fulfilment cash flows accordingly, and the assumption framework which applies to determining the best estimate of those cash flows on an on-going basis. In particular, this includes the assumptions around increments on pensions business which are expected within the contract boundary and the extent to which the contract boundary is substantially changed upon contact modification as a result of new product features being added. #### Level of aggregation of insurance contracts IFRS 17 requires identification of portfolios of insurance contracts that have similar risks and that are managed together. In determining the appropriate level of aggregation, the Group has considered the relative risks and how these are managed within the business, in addition to factors such as geography, sales channel and product taxation basis. CSM is measured on initial recognition for cohorts of insurance contracts within these portfolios that are issued not more than a year apart. These cohorts are further disaggregated into CSM groups according to a profitability assessment and other product characteristics. As a result, the Group has identified the following portfolios: individual annuities, bulk annuities, protection products and workplace and other pensions. Within these portfolios, the Group expects to have approximately 25 CSM groups during 2023, in addition to those established at transition to IFRS 17. #### Separating components of contracts IFRS 17 also requires certain components of insurance contracts to be separated, including investment components. Investment components reflect amounts due to policy holders, akin to deposits, so are not recognised in the income statement. #### Disaggregation of insurance finance income or expenses Insurance finance income or expenses comprise changes in the carrying amount of a group of insurance contracts arising from the effect of the time value of money and the effects of financial risk. IFRS 17 provides an accounting policy choice between: - including insurance finance income or expenses for the period in the income statement; or - disaggregating insurance finance income and expenses for the period to include in the income statement an amount determined by a systematic allocation, and the residual amount in other comprehensive income (OCI). The Group has elected to recognise total insurance finance income or expenses in profit or loss in the period in which they arise. This decision is based on IFRS 9 Financial Instruments. Under IFRS 9, the Group measures assets backing insurance contracts at fair value through profit or loss (FVTPL). #### Accounting for the Group's principal insurance businesses **Annuity and protection business:** The general measurement model will be used for the Group's annuity and protection business. The discount rates are locked in at the inception of the contract in determining the value of the CSM. The subsequent effects of changes in discount rates on the best estimate of the insurance contract liabilities will be recognised in the income statement in the period in which they arise, as an accounting policy choice. The Group will use discount rates based on the liquidity of the associated liabilities and, accordingly, will apply illiquidity premia to its annuity and whole of life businesses. For immediate annuity contracts, the CSM will be recognised in income over the life of the contracts based on the maximum claim payable for each period and for protection contracts, CSM will be recognised in the income statement commensurate with the sum assured. **Unit-linked and with-profits business:** There is an adaptation of the general measurement model for contracts with direct participation features, the variable fee approach, which results in changes in variable fees, including those arising from changes in economic assumptions, being taken to the CSM. The expected profit will be recognised within the CSM and released to the income statement over the coverage period. **General insurance business:** The Group has applied the option available under IFRS 17 to use the simplified approach (the premium allocation approach), mainly for short duration contracts. The insurance revenue recognised in the income statement in the period reflects the expected premium receipts allocated to the period, after adjusting for the time value of money and the effect of financial risk. The amortisation of insurance acquisition cash flows is taken to the income statement on the basis of the passage of time. #### Balance sheet impact at 1 January 2022 On restatement, the reduction in the Group's total equity as of 1 January 2022 was approximately £1.9 billion, driven by the derecognition of the value in-force asset, the move to best estimate of contract liabilities, the creation of the new CSM liability and the establishment of the risk adjustment. The CSM of all insurance contracts issued and net of reinsurance contracts held at 1 January 2022 was approximately £1.9 billion and the risk adjustment, net of reinsurance, recognised at that date was approximately £1.5 billion. The Group expects that approximately £300 million of the CSM and risk adjustment, gross of reinsurance, held at 1 January 2022 will be released and recognised in the income statement during the year ended 31 December 2022. These amounts will be finalised during the first quarter of 2023 following the completion of further work being undertaken by the Group. 338 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 55: Future accounting developments continued ### Equity impact at 31 December 2022 During 2022, the Group has added a drawdown feature to its existing longstanding and workplace pension business. This is a contract modification that results in a substantially different contract boundary, and IFRS 17 requires that the contracts and associated CSM (approximately £0.4 billion) at the time of the modification are derecognised and the modified contracts together with a new CSM (approximately £1.7 billion) are recognised as if they were new contracts. The Group estimates these contract modifications will increase the CSM by approximately £1.3 billion and reduce its equity by approximately £1.3 billion (before the impact of IFRS 17 tax transitional adjustments) given the charge recognised in the income statement in 2022 on an IFRS 17 basis. The estimate has been prepared assuming these contract modifications occurred on the 1 January 2022. As these contract modifications occurred throughout 2022, the Group will undertake further work during the first quarter of 2023 to finalise the financial impact of the contract modifications using the actual dates these contract modifications occurred during 2022. ### Income statement impact Whilst IFRS 17 does not change the total profit recognised over the life of an insurance contract or investment contract with discretionary participation features, it does change both the phasing of profit recognition and the amounts recognised within individual income statement line items, including other income and operating expenses. Under IFRS 17, the Group is required to defer substantially all of the expected profit through the recognition of a CSM on the balance sheet (losses on groups of onerous contracts and recoveries of such losses, to the extent they are covered by reinsurance contracts held, are recognised in the income statement immediately); the CSM is subsequently released to the income statement over the coverage period of the product. The expected profit includes estimated future premiums and claims together with administration costs such as claims handling costs, costs incurred to provide contractual policyholder benefits and policy administration and maintenance costs. As a result, a reduction is expected in the amounts to be disclosed as other income, operating income and operating expenses under IFRS 17, in respect of the relevant IFRS 17 income statement line items that will be presented from 2023. The Group continues to refine and finalise the new accounting processes and models and has not, therefore, presented the impact of IFRS 17 for the year ended 31 December 2022 including impacts on financial metrics such as earnings per share. Further work will be undertaken during the first quarter of 2023 to finalise the impact of IFRS 17 on the Group's income statement and earnings per share for the year ended 31 December 2022 and on its balance sheet at 31 December 2022. ### Minor amendments to other accounting standards The IASB has issued a number of minor amendments to IFRSs effective 1 January 2023 (including IAS 1 *Presentation of Financial Statements* and IAS 8 *Accounting Policies, Changes in Accounting Estimates and Errors*). These amendments are not expected to have a significant impact on the Group. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 339 # Parent company balance sheet at 31 December | | Note | 2022 £ million | 2021 £ million | | --- | --- | --- | --- | | **Assets** | | | | | Cash and cash equivalents | | **48** | 50 | | Financial assets at fair value through profit or loss | 2 | **20,292** | 20,362 | | Derivative financial instruments | | **1,197** | 793 | | Amounts due from subsidiaries | 3 | **-** | - | | Debt securities | | **2,279** | 2,033 | | Loans to subsidiaries | 11 | **14,119** | 14,238 | | Investment in subsidiaries | 11 | **49,609** | 49,142 | | Current tax recoverable | | **4** | 28 | | Deferred tax assets | 4 | **93** | 26 | | Other assets | | **-** | 2 | | **Total assets** | | **87,641** | 86,674 | | **Liabilities** | | | | | Due to subsidiaries^{1} | | **27** | 200 | | Financial liabilities at fair value through profit or loss | 5 | **13,865** | 9,748 | | Derivative financial instruments | | **1,550** | 414 | | Debt securities in issue | 6 | **15,366** | 17,748 | | Other liabilities^{1} | | **125** | 61 | | Subordinated liabilities | 7 | **9,218** | 8,105 | | **Total liabilities** | | **40,151** | 36,276 | | **Equity** | | | | | Share capital | 8 | **6,729** | 7,102 | | Share premium account | 8 | **18,504** | 18,479 | | Merger reserve | 9 | **6,806** | 6,806 | | Capital redemption reserve | 9 | **4,932** | 4,479 | | Retained profits^{2} | 10 | **5,222** | 7,626 | | **Shareholders' equity** | | **42,193** | 44,492 | | Other equity instruments | 8 | **5,297** | 5,906 | | **Total equity** | | **47,490** | 50,398 | | **Total equity and liabilities** | | **87,641** | 86,674 | 1 Due to subsidiaries, previously reported within other liabilities, is shown separately. Comparatives have been presented on a consistent basis. 2 The parent company recorded a profit after tax for the year of £1,399 million (2021: £3,905 million). The accompanying notes are an integral part of the parent company financial statements. The directors approved the parent company financial statements on 21 February 2023. **Robin Budenberg** Chair **Charlie Nunn** Group Chief Executive **William Chalmers** Chief Financial Officer 340 Lloyds Banking Group Annual Report and Accounts 2022 # Parent company statement of changes in equity for the year ended 31 December | | Attributable to ordinary shareholders | | | | | Other equity instruments £ million | Total £ million | | --- | --- | --- | --- | --- | --- | --- | --- | | | Share capital and premium £ million | Merger reserve £ million | Capital redemption reserve £ million | Retained profits £ million | Total £ million | | | | At 1 January 2020 | 24,756 | 7,420 | 4,462 | 3,950 | 40,588 | 5,906 | 46,494 | | **Total comprehensive income^{1}** | – | – | – | 849 | 849 | 453 | 1,302 | | **Transactions with owners** | | | | | | | | | Dividends | – | – | – | – | – | – | – | | Distributions on other equity instruments | – | – | – | – | – | (453) | (453) | | Issue of ordinary shares | 191 | – | – | – | 191 | – | 191 | | Movement in treasury shares | – | – | – | (52) | (52) | – | (52) | | Value of employee services: | | | | | | | | | Share option schemes | – | – | – | 48 | 48 | – | 48 | | Other employee award schemes | – | – | – | 74 | 74 | – | 74 | | **Total transactions with owners** | 191 | – | – | 70 | 261 | (453) | (192) | | At 31 December 2020 | 24,947 | 7,420 | 4,462 | 4,869 | 41,698 | 5,906 | 47,604 | | **Total comprehensive income^{1}** | – | – | – | 3,476 | 3,476 | 429 | 3,905 | | **Transactions with owners** | | | | | | | | | Dividends | – | – | – | (877) | (877) | – | (877) | | Distributions on other equity instruments | – | – | – | – | – | (429) | (429) | | Issue of ordinary shares | 37 | – | – | – | 37 | – | 37 | | Redemption of preference shares | 597 | (614) | 17 | – | – | – | – | | Movement in treasury shares | – | – | – | (24) | (24) | – | (24) | | Value of employee services: | | | | | | | | | Share option schemes | – | – | – | 51 | 51 | – | 51 | | Other employee award schemes | – | – | – | 131 | 131 | – | 131 | | **Total transactions with owners** | 634 | (614) | 17 | (719) | (682) | (429) | (1,111) | | At 31 December 2021 | 25,581 | 6,806 | 4,479 | 7,626 | 44,492 | 5,906 | 50,398 | | **Total comprehensive income^{1}** | – | – | – | 961 | 961 | 438 | 1,399 | | **Transactions with owners** | | | | | | | | | Dividends | – | – | – | (1,475) | (1,475) | – | (1,475) | | Distributions on other equity instruments | – | – | – | – | – | (438) | (438) | | Issue of ordinary shares | 105 | – | – | – | 105 | – | 105 | | Share buyback | (453) | – | 453 | (2,013) | (2,013) | – | (2,013) | | Issue of other equity instruments | – | – | – | (5) | (5) | 750 | 745 | | Repurchase and redemptions of other equity instruments | – | – | – | (37) | (37) | (1,359) | (1,396) | | Movement in treasury shares | – | – | – | (59) | (59) | – | (59) | | Value of employee services: | | | | | | | | | Share option schemes | – | – | – | 41 | 41 | – | 41 | | Other employee award schemes | – | – | – | 183 | 183 | – | 183 | | **Total transactions with owners** | (348) | – | 453 | (3,365) | (3,260) | (1,047) | (4,307) | | **At 31 December 2022** | 25,233 | 6,806 | 4,932 | 5,222 | 42,193 | 5,297 | 47,490 | 1 No statement of comprehensive income has been shown for the parent company, as permitted by section 408 of the Companies Act 2006. Total comprehensive income comprises only the profit for the year. The accompanying notes are an integral part of the parent company financial statements. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 341 ## Parent company cash flow statement for the year ended 31 December | | 2022 £ million | 2021 £ million | 2020 £ million | | --- | --- | --- | --- | | **Cash flows from operating activities** | | | | | Profit before tax | **1,331** | 3,893 | 1,257 | | Adjustments for: | | | | | Fair value and exchange adjustments and other non-cash items | **21** | 1,134 | (512) | | Change in other assets | **(177)** | (7,028) | (1,815) | | Change in other liabilities and other items | **1,626** | (3,322) | 6,401 | | Dividends received | **(1,120)** | (3,600) | (1,135) | | Distributions on other equity instruments received | **(338)** | (423) | (492) | | Tax received | **27** | 2 | – | | **Net cash provided (used in) by operating activities** | **1,370** | (9,344) | 3,704 | | **Cash flows from investing activities** | | | | | Return of capital contribution | **4** | 4 | 4 | | Dividends received | **1,120** | 3,600 | 1,135 | | Distributions on other equity instruments received | **338** | 423 | 492 | | Acquisitions of and capital injections to subsidiaries | **(250)** | (3,209) | (1,170) | | Return of capital by subsidiaries | **–** | 4,130 | – | | Amounts advanced to subsidiaries | **(3,148)** | (974) | (5,827) | | Repayment of loans to subsidiaries | **4,234** | 6,727 | 2,004 | | Interest received on loans to subsidiaries | **408** | 461 | 261 | | **Net cash provided by (used in) investing activities** | **2,706** | 11,162 | (3,101) | | **Cash flows from financing activities** | | | | | Dividends paid to ordinary shareholders | **(1,475)** | (877) | – | | Distributions on other equity instruments | **(438)** | (429) | (453) | | Interest paid on subordinated liabilities | **(370)** | (793) | (316) | | Proceeds from issue of subordinated liabilities | **838** | 499 | – | | Proceeds from issue of other equity instruments | **745** | – | – | | Proceeds from issue of ordinary shares | **31** | 25 | 144 | | Share buyback | **(2,013)** | – | – | | Repayment of subordinated liabilities | **–** | (200) | – | | Repurchase and redemptions of other equity instruments | **(1,396)** | – | – | | **Net cash used in financing activities** | **(4,078)** | (1,775) | (625) | | Change in cash and cash equivalents | **(2)** | 43 | (22) | | Cash and cash equivalents at beginning of year | **50** | 7 | 29 | | **Cash and cash equivalents at end of year** | **48** | 50 | 7 | The accompanying notes are an integral part of the parent company financial statements. 342 Lloyds Banking Group Annual Report and Accounts 2022 # Notes to the parent company financial statements for the year ended 31 December ## Note 1: Basis of preparation and accounting policies The financial statements of Lloyds Banking Group plc have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The financial statements have also been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB). The financial information has been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities at fair value through profit or loss and all derivative contracts. The accounting policies of the Company are the same as those of the Group which are set out in note 2 to the consolidated financial statements. Investments in subsidiaries are carried at historical cost, less any provisions for impairment. Fees payable to the Company's auditors by the Group are set out in note 12 to the consolidated financial statements. ## Note 2: Financial assets at fair value through profit or loss | | 2022 £m | 2021 £m | | --- | --- | --- | | Debt securities | 20,292 | 20,362 | The assets held at fair value through profit or loss represent holdings of debt securities issued by subsidiaries. The contractual terms of such instruments contain certain write-down and conversion features and so are not considered to satisfy the solely payments of principal and interest test. ## Note 3: Amounts due from subsidiaries These comprise short-term lending to subsidiaries, repayable on demand. As required by IFRS 9, the Company has established an allowance for impairment losses for amounts due from its subsidiaries (31 December 2022: £16 million; 31 December 2021: £3 million) based on the probability of its subsidiaries defaulting on the amounts payable in the next 12 months. The carrying value of the amounts owed by subsidiaries is a reasonable approximation to fair value. ## Note 4: Deferred tax As at 31 December 2022 the Company carried a deferred tax asset of £93 million (2021: £26 million); there was no deferred tax liability at 31 December 2022 or 31 December 2021. The movement in the deferred tax asset during 2022 primarily related to financial liabilities at fair value through profit and loss (giving rise to a £62 million credit to the income statement). ## Note 5: Financial liabilities at fair value through profit or loss Financial liabilities designated at fair value through profit or loss represent debt securities in issue which are accounted for at fair value to significantly reduce an accounting mismatch. The changes in the credit risk of these liabilities are linked to the changes in credit risk on corresponding assets that the Company holds at fair value through profit or loss, representing debt securities issued by subsidiaries. Given the economic relationship between these assets and liabilities, the Company presents changes in the credit risk of its liabilities in profit or loss in order to avoid creating or enlarging an accounting mismatch. The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2022 was £14,433 million, which was £568 million higher than the balance sheet carrying value (2021: £9,388 million which was £360 million lower than the balance sheet carrying value). At 31 December 2022 there was a cumulative £425 million increase in the fair value of these liabilities attributable to changes in credit risk (2021: increase of £542 million), of which a £117 million decrease arose in 2022 and a £1 million increase arose in 2021; this is determined by reference to the quoted credit spreads of the Company. ## Note 6: Debt securities in issue These comprise notes issued by the Company in a number of currencies, although predominantly Euros and US Dollars, with maturity dates ranging up to 2038. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 343 # **Notes to the parent company financial statements** continued for the year ended 31 December # **Note 7: Subordinated liabilities** These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. Any repayments of subordinated liabilities require the consent of the Prudential Regulation Authority. | | Preference shares £m | Undated £m | Dated £m | Total £m | | --- | --- | --- | --- | --- | | At 1 January 2021 | 723 | 10 | 7,027 | 7,760 | | **Issued in the year^{1}:** | | | | | | 1.985% Fixed Rate Reset Dated Subordinated Tier 2 Notes due 2031 | – | – | 499 | 499 | | 3.369% Fixed Rate Reset Dated Subordinated Notes due 2041 (US$1,175 million) | – | – | 352 | 352 | | | – | – | 851 | 851 | | **Repurchases and redemptions during the year^{1}:** | | | | | | 6.475% Non-cumulative Preference Shares callable 2024 (£186 million) | (8) | – | – | (8) | | 6.413% Non-cumulative Fixed to Floating Rate Preference Shares callable 2035 (US$750 million) | (140) | – | – | (140) | | 6.657% Non-cumulative Fixed to Floating Rate Preference Shares callable 2037 (US$750 million) | (143) | – | – | (143) | | 9.25% Non-cumulative Irredeemable Preference Shares (£300 million) | (41) | – | – | (41) | | 9.75% Non-cumulative Irredeemable Preference Shares (£100 million) | (14) | – | – | (14) | | | (346) | – | – | (346) | | Foreign exchange and other movements (cash and non-cash) | (37) | – | (123) | (160) | | At 31 December 2021 | 340 | 10 | 7,755 | 8,105 | | **Issued in the year^{1}:** | | | | | | 7.953% Fixed Rate Reset Dated Subordinated notes 2033 (US$1,000 million) | – | – | 838 | 838 | | | – | – | 838 | 838 | | Foreign exchange and other movements (cash and non-cash) | (15) | – | 290 | 275 | | **At 31 December 2022** | **325** | **10** | **8,883** | **9,218** | 1 Issuances in the year generated cash inflows of £838 million (2021: £499 million); the repurchases and redemptions resulted in cash outflows of £nil (2021: £200 million). Cash payments in respect of interest on subordinated liabilities in the year amounted to £370 million (2021: £793 million). # **Note 8: Share capital, share premium account and other equity instruments** Details of the Company's share capital, share premium account and other equity instruments are as set out in notes 39, 40 and 43 to the consolidated financial statements. # **Note 9: Merger reserve and capital redemption reserve** The merger reserve comprises the premium on shares issued on 13 January 2009 under the placing and open offer and shares issued on 16 January 2009 on the acquisition of HBOS plc, offset by adjustments on the redemption of preference shares. Substantially all of the Company's merger reserve is available for distribution. Movements in the merger reserve were as follows: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | 6,806 | 7,420 | 7,420 | | Redemption of preference shares^{1} | – | (614) | – | | **At 31 December** | **6,806** | **6,806** | **7,420** | 1 During the year ended 31 December 2021, the Company redeemed certain tranches of its preference shares, which had been accounted for as subordinated liabilities. On redemption an amount of £17 million was transferred from the distributable merger reserve to the capital redemption reserve and £597 million was transferred from the distributable merger reserve to the share premium account, with these amounts representing the nominal value of the shares redeemed and premium upon original issuance respectively. The capital redemption reserve represents transfers from the merger reserve in accordance with companies' legislation and amounts transferred from share capital following the cancellation of shares. Movements in the capital redemption reserve were as follows: | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | 4,479 | 4,462 | 4,462 | | Redemption of preference shares | – | 17 | – | | Shares cancelled under share buyback programme^{1} | 453 | – | – | | **At 31 December** | **4,932** | **4,479** | **4,462** | 1 See note 41 to the consolidated financial statements. 344 Lloyds Banking Group Annual Report and Accounts 2022 ## Note 10: Retained profits | | 2022 £m | 2021 £m | 2020 £m | | --- | --- | --- | --- | | At 1 January | 7,626 | 4,869 | 3,950 | | Profit attributable to ordinary shareholders | 961 | 3,476 | 849 | | Dividends paid^{1} | (1,475) | (877) | – | | Issue costs of other equity instruments (net of tax) | (5) | – | – | | Repurchase and redemption costs of other equity instruments | (37) | – | – | | Share buyback programme | (2,013) | – | – | | Movement in treasury shares | (59) | (24) | (52) | | Value of employee services: | | | | | Share option schemes | 41 | 51 | 48 | | Other employee award schemes | 183 | 131 | 74 | | **At 31 December** | **5,222** | **7,626** | **4,869** | 1 Details of the Company's dividends are as set out in note 44 to the consolidated financial statements. ## Note 11: Related party transactions ### Key management personnel The key management personnel of the Group and the Company are the same. The relevant disclosures are given in note 46 to the consolidated financial statements. The Company has no employees (2021: nil). As discussed in note 2 to the consolidated financial statements, the Group provides share-based compensation to employees through a number of schemes; these are all in relation to shares in the Company and the costs of providing those benefits are treated as capital contributions to the employing companies in the Group. ### Investment in subsidiaries | | Ordinary share capital | | Other capital instruments | | Total | | | --- | --- | --- | --- | --- | --- | --- | | | 2022 £m | 2021 £m | 2022 £m | 2021 £m | 2022 £m | 2021 £m | | At 1 January | 42,993 | 42,076 | 6,149 | 7,827 | 49,142 | 49,903 | | Additions and capital injections | 250 | 660 | – | 2,549 | 250 | 3,209 | | Capital contributions | 221 | 164 | – | – | 221 | 164 | | Return of capital contributions | (4) | (4) | – | – | (4) | (4) | | Capital repayments and redemptions | – | 97 | – | (4,227) | – | (4,130) | | **At 31 December** | **43,460** | **42,993** | **6,149** | **6,149** | **49,609** | **49,142** | Details of the subsidiaries and related undertakings are given on **pages 352 to 360** and are incorporated by reference. Certain subsidiary companies currently have insufficient distributable reserves to make dividend payments; however, there were no further significant restrictions on any of the Company's subsidiaries in paying dividends or repaying loans and advances. All regulated banking and insurance subsidiaries are required to maintain capital at levels agreed with the regulators; this may impact the ability of those subsidiaries to make distributions. ### Loans to subsidiaries | | 2022 £m | 2021 £m | | --- | --- | --- | | At 1 January | 14,238 | 20,107 | | Exchange and other adjustments | 967 | (186) | | New advances | 3,148 | 974 | | Repayments | (4,234) | (6,727) | | **At 31 December** | **14,119** | **14,238** | At 31 December 2022, the Company had £27 million (2021: £200 million) which was due to subsidiaries. In addition, at 31 December 2022 the Company had interest rate and currency swaps with Lloyds Bank plc and Lloyds Bank Corporate Markets plc with an aggregate notional principal amount of £58,982 million and a net negative fair value of £353 million (2021: notional principal amount of £49,320 million and a net positive fair value of £379 million). Of this amount an aggregate notional principal amount of £13,788 million and a net negative fair value of £646 million (2021: notional principal amount of £15,642 million and a net positive fair value of £379 million) were designated as fair value hedges to manage the Company's issuance of subordinated liabilities. ### Guarantees As part of the Group's participation in the Bank of England's Sterling Monetary Framework, the Company guarantees certain of its subsidiaries' liabilities to the Bank of England. ### Other related party transactions Related party information in respect of other related party transactions is given in note 46 to the consolidated financial statements. Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 345 ## Notes to the parent company financial statements continued for the year ended 31 December ### Note 12: Financial instruments #### Measurement basis of financial assets and liabilities The accounting policies in note 2 to the consolidated financial statements describe how different classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the Company's financial assets and liabilities by category and by balance sheet heading. | | Derivatives designated as hedging instruments £m | Mandatorily held at fair value through profit or loss | | Designated at fair value through profit or loss £m | Held at amortised cost £m | Total £m | | --- | --- | --- | --- | --- | --- | --- | | | | Held for trading £m | Other £m | | | | | **At 31 December 2022** | | | | | | | | **Financial assets** | | | | | | | | Cash and cash equivalents | – | – | – | – | 48 | 48 | | Financial assets at fair value through profit or loss | – | – | 20,292 | – | – | 20,292 | | Derivative financial instruments | 47 | 1,150 | – | – | – | 1,197 | | Amounts due from subsidiaries | – | – | – | – | – | – | | Debt securities | – | – | – | – | 2,279 | 2,279 | | Loans to subsidiaries | – | – | – | – | 14,119 | 14,119 | | **Total financial assets** | **47** | **1,150** | **20,292** | **–** | **16,446** | **37,935** | | **Financial liabilities** | | | | | | | | Due to subsidiaries | – | – | – | – | 27 | 27 | | Financial liabilities at fair value through profit or loss | – | – | – | 13,865 | – | 13,865 | | Derivative financial instruments | 693 | 857 | – | – | – | 1,550 | | Debt securities in issue | – | – | – | – | 15,366 | 15,366 | | Subordinated liabilities | – | – | – | – | 9,218 | 9,218 | | **Total financial liabilities** | **693** | **857** | **–** | **13,865** | **24,611** | **40,026** | | **At 31 December 2021** | | | | | | | | **Financial assets** | | | | | | | | Cash and cash equivalents | – | – | – | – | 50 | 50 | | Financial assets at fair value through profit or loss | – | – | 20,362 | – | – | 20,362 | | Derivative financial instruments | 392 | 401 | – | – | – | 793 | | Amounts due from subsidiaries | – | – | – | – | – | – | | Debt securities | – | – | – | – | 2,033 | 2,033 | | Loans to subsidiaries | – | – | – | – | 14,238 | 14,238 | | **Total financial assets** | **392** | **401** | **20,362** | **–** | **16,321** | **37,476** | | **Financial liabilities** | | | | | | | | Due to subsidiaries | – | – | – | – | 200 | 200 | | Financial liabilities at fair value through profit or loss | – | – | – | 9,748 | – | 9,748 | | Derivative financial instruments | 13 | 401 | – | – | – | 414 | | Debt securities in issue | – | – | – | – | 17,748 | 17,748 | | Subordinated liabilities | – | – | – | – | 8,105 | 8,105 | | **Total financial liabilities** | **13** | **401** | **–** | **9,748** | **26,053** | **36,215** | Note 49 to the consolidated financial statements outlines the valuation hierarchy into which financial instruments measured at fair value are categorised. 346 Lloyds Banking Group Annual Report and Accounts 2022 ### Note 12: Financial instruments continued Fair values of financial assets and liabilities The valuation techniques for the Company’s financial instruments are as discussed in note 49 to the consolidated financial statements. Valuation hierarchy The table below analyses the assets and liabilities of the Company. With the exception of derivatives and those financial assets and liabilities carried at fair value through profit or loss, all assets and liabilities are held at amortised cost. They are categorised into levels 1 to 3 based on the degree to which their fair value is observable. No assets or liabilities were categorised as level 1 (2021: none). 2022 2021 | | | | Valuation hierarchy | | | | | | | Valuation hierarchy | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Carrying | | Fair | | | | | Carrying | | Fair | | | | | | | | value | value | Level 2 | | Level 3 | | | value | value | Level 2 | | Level 3 | | | | | £m | £m | | £m | | £m | | £m | £m | | £m | | £m | Financial results Risk managementGovernance Financial statements Other informationStrategic report | Financial assets at fair value through profit or loss 20,292 20,292 20,292 – 20,362 20,362 20,362 – Derivative financial instruments 1,197 1,197 1,197 – 793 793 793 – Amounts due from subsidiaries – – – – – – – – Debt securities 2,279 2,279 2,279 – 2,033 2,019 2,019 – Loans to subsidiaries 14,119 14,119 14,119 – 14,238 14,238 14,238 – Total financial assets 37,887 37,887 37,887 – 37,426 37,412 37,412 – Due to subsidiaries 27 27 27 – 200 200 200 – Financial liabilities at fair value through profit or loss 13,865 13,865 13,865 – 9,748 9,748 9,748 – Derivative financial instruments 1,550 1,550 1,550 – 414 414 414 – Debt securities in issue 15,366 14,663 14,663 – 17,748 18,520 18,520 – Subordinated liabilities 9,218 8,221 8,221 – 8,105 8,946 8,946 – Total financial liabilities 40,026 38,326 38,326 – 36,215 37,828 37,828 – The carrying amount of cash and cash equivalents (2022: £48 million; 2021: £50 million) is a reasonable approximation of fair value. ### Note 13: Financial risk management ### Market risk The Company is exposed to interest rate risk and currency risk on its debt securities in issue and its subordinated debt. As discussed in note 11, the Company has entered into interest rate and currency swaps with its subsidiaries, Lloyds Bank plc and Lloyds Bank Corporate Markets plc, to manage these risks. ### Credit risk The majority of the Company’s credit risk arises from amounts due from its wholly owned subsidiaries, principally Lloyds Bank plc. ### Liquidity risk The table below analyses financial instrument liabilities of the Company, on an undiscounted future cash flow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category. | Up to 1 | | 1–3 | | 3–12 | 1–5 | Over | | | --- | --- | --- | --- | --- | --- | --- | --- | | month | months | | months | | years | 5 years | Total | | £m | | £m | | £m | £m | £m | £m | At 31 December 2022 Financial liabilities at fair value through profit or loss 38 108 1,099 12,436 2,419 16,100 Debt securities in issue 1,175 2,503 3,500 9,918 3,683 20,779 Subordinated liabilities 27 43 1,036 5,395 8,780 15,281 Total non-derivative financial liabilities 1,240 2,654 5,635 27,749 14,882 52,160 Derivative financial liabilities Gross settled derivatives – outflows 2,457 3,359 6,228 – – 12,044 Gross settled derivatives – inflows (2,343) (3,263) (6,028) – – (11,634) Gross settled derivatives – net flows 114 96 200 – – 410 Net settled derivative liabilities 456 36 193 384 183 1,252 Total derivative financial liabilities 570 132 393 384 183 1,662 347Lloyds Banking Group Annual Report and Accounts 2022 ### Notes to the parent company financial statements continued for the year ended 31 December ### Note 13: Financial risk management continued | Up to 1 | | | 1–3 | | 3–12 | 1–5 | Over | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | month | | months | | months | | years | 5 years | Total | | | £m | | £m | | £m | £m | £m | £m | At 31 December 2021 Financial liabilities at fair value through profit or loss 36 1,153 862 7,942 – 9,993 Debt securities in issue 1,235 91 1,972 8,608 6,158 18,064 Subordinated liabilities 24 39 282 5,486 7,233 13,064 Total non-derivative financial liabilities 1,295 1,283 3,116 22,036 13,391 41,121 Derivative financial liabilities Gross settled derivatives – outflows 1,834 1,153 3,635 2,014 577 9,213 Gross settled derivatives – inflows (1,756) (1,120) (3,558) (1,915) (538) (8,887) Gross settled derivatives – net flows 78 33 77 99 39 326 Net settled derivative liabilities 45 6 (8) 10 – 53 Total derivative financial liabilities 123 39 69 109 39 379 The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of £1 million (2021: £1 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years. ### Note 14: Other information Lloyds Banking Group plc was incorporated as a public limited company and registered in Scotland under the UK Companies Act 1985 on 21 October 1985 with the registered number SC095000. Lloyds Banking Group plc’s registered office is The Mound, Edinburgh EH1 1YZ, Scotland, and its principal executive offices in the UK are located at 25 Gresham Street, London EC2V 7HN. 348 Lloyds Banking Group Annual Report and Accounts 2022 ## Other information In this section Shareholder information 350 Subsidiaries and related undertakings 352 Forward-looking statements 361 Financial results Risk managementGovernance Financial statements Other informationStrategic report ## Energy ## efficient ## branches ### Reduce energy consumption of our branches ### by 3.7 GWh per annum when fully implemented ### We have worked in partnership with Mitie to ### develop our energy optimisation capabilities for ### smaller buildings, and rolled out remote energy ### management solutions at scale alongside other ### energy efficiency and carbon saving measures ### such as LED lighting and heating, ventilation, ### and air conditioning (HVAC) retrofit. ### Our connected branches project will help us in ### reducing energy consumption by 3.7 GWh per ### annum when fully rolled out. ### Following a successful pilot in 101 branches in 2021, ### we have now expanded the rollout to an additional ### 450 branches, investing over £3.9 million in remote ### connectivity and building controls. Read more on our sustainability strategy. 349Lloyds Banking Group Annual Report and Accounts 2022 ## Shareholder information ### Annual general meeting (AGM) The annual general meeting will be held at the SEC Armadillo, Exhibition Way, Glasgow, G3 8YW on Thursday 18 May 2023 at 11am. Further details about the meeting, including the proposed resolutions and where shareholders can stream the meeting live, can be found in our Notice of AGM which will be available shortly on our website at www.lloydsbankinggroup.com. ### Reports and communications The Group issues regulatory announcements through the Regulatory News Service (RNS); shareholders can subscribe for free via the Investors section of our website at www.lloydsbankinggroup.com, where our statutory reports and shareholder communications are available. A summary of the scheduled reports and communications to be issued in 2023 is set out below: Available format Report/Communication Month Online Email RNS Paper Preliminary results and publication of annual report and accounts Feb Pillar 3 report Mar/Aug Group Chief Executive update to shareholders Mar Mailing of annual report and accounts, annual review or performance summary Mar Notice of AGM and voting materials Mar Q1 interim management statement May 1 Country analysis Jul Interim results Jul Q3 interim management statement Oct 1 To be published on the Group’s website by 26 July 2023 in accordance with the Capital Requirements (Country-by-Country Reporting) Regulations 2013. ### Share dealing facilities We offer a choice of four share dealing services for our UK shareholders and customers. To see the full range of services available for each, please use the contact details below: Service Provider Telephone Dealing Internet Dealing | Bank of Scotland Share Dealing 0345 606 1188 | www.bankofscotland.co.uk/sharedealing | | --- | --- | | Halifax Share Dealing 03457 22 55 25 | www.halifax.co.uk/sharedealing | | Lloyds Bank Direct Investments 0345 60 60 560 | www.lloydsbank.com/share-dealing.asp | | IWeb Share Dealing 03450 707 129 | www.iweb-sharedealing.co.uk/share-dealing-home.asp | Note: All internet services are available 24/7. Telephone dealing services are available between 8am and 9pm, Monday to Friday, excluding English and Welsh public holidays. To open a share dealing account with any of these services, you must be 18 years of age or over and be resident in the UK, Jersey, Guernsey or the Isle of Man. ### Share dealing for the Lloyds Banking Group shareholder account Share dealing services for the Lloyds Banking Group shareholder account are provided by Equiniti Shareview Dealing, operated by Equiniti Financial Services Limited. Details of the services provided can be found either on the shareholder information page of our website at www.lloydsbankinggroup.com or by contacting Equiniti using the contact details provided on the next page. ### Share price information Shareholders can access both the latest and historical share prices via our website at www.lloydsbankinggroup.com as well as listings in most national newspapers. For a real time buying or selling price, you will need to contact a stockbroker, or you can contact the share dealing providers detailed above. ### Individual Saving Accounts (ISAs) There are a number of options for investing in Lloyds Banking Group shares through an ISA. For details of services and products provided by the Group please contact Bank of Scotland Share Dealing, Halifax Share Dealing or Lloyds Bank Direct Investments using the contact details above. ### Key dates 13 April 2023 Shares quoted ex-dividend 14 April 2023 Record Date 2 May 2023 Final date for joining or leaving the dividend reinvestment plan 3 May 2023 Q1 interim management statement 18 May 2023 Annual general meeting 23 May 2023 Dividend paid 26 July 2023 Half year results 25 October 2023 Q3 interim management statement 350 Lloyds Banking Group Annual Report and Accounts 2022 ## Analysis of shareholders | Balance ranges | Total number of holdings | Percentage of holders | Total number of shares | Percentage issued capital | | --- | --- | --- | --- | --- | | 1–999 | 1,837,395 | 81.55% | 541,289,528 | 0.80% | | 1,000–9,999 | 356,315 | 15.81% | 945,527,402 | 1.41% | | 10,000–99,999 | 55,953 | 2.48% | 1,433,572,451 | 2.13% | | 100,000–999,999 | 2,457 | 0.11% | 571,592,456 | 0.85% | | 1,000,000–4,999,999 | 459 | 0.02% | 1,117,726,619 | 1.66% | | 5,000,000–9,999,999 | 161 | 0.01% | 1,124,602,350 | 1.67% | | 10,000,000–49,999,999 | 270 | 0.01% | 6,161,045,946 | 9.16% | | 50,000,000–99,999,999 | 80 | 0.00% | 5,684,064,973 | 8.45% | | 100,000,000–499,999,999 | 84 | 0.00% | 16,670,996,249 | 24.78% | | 500,000,000–999,999,999 | 16 | 0.00% | 12,565,279,567 | 18.67% | | 1,000,000,000–99,999,999,999 | 9 | 0.00% | 20,472,154,663 | 30.42% | | Totals | 2,253,199 | 100.00% | 67,287,852,204 | 100.00% | ## American Depositary Receipts (ADRs) Our shares are traded in the USA through a New York Stock Exchange-listed sponsored ADR facility with The Bank of New York Mellon as the depositary. The ADRs are traded on the New York Stock Exchange under the symbol LYG. The CUSIP number is 539439109 and the ratio of ADRs to ordinary shares is 1:4. For details contact: BNY Mellon Shareowner Services, 150 Royall St., Suite 101 Canton, MA 02021. Telephone: 1-866-259-0336 (US toll free), international callers: +1 201-680-6825. Alternatively visit www.adrbnymellon.com or email shrelations@cpushareownerservices.com. ## Security – share fraud and scams Shareholders should exercise caution when unsolicited callers offer the chance to buy or sell shares with promises of huge returns. If it sounds too good to be true, it usually is and we would ask that shareholders take steps to protect themselves. We strongly recommend seeking advice from an independent financial adviser authorised by the Financial Conduct Authority (FCA). Shareholders can verify whether a firm is authorised via the Financial Services Register which is available at www.fca.org.uk. If a shareholder is concerned that they may have been targeted by such a scheme, please contact the FCA Consumer Helpline on 0800 111 6768 or use the online 'Share Fraud Reporting Form' available from their website (see above). We would also recommend contacting the Police through Action Fraud on 0300 123 2040 or visiting www.actionfraud.org.uk for further information. ### Important shareholder and registrar information **Company website** www.lloydsbankinggroup.com **Shareholder information** help.shareview.co.uk (from here you will be able to email your query securely) **Registrar** Equiniti Limited Aspect House, Spencer Road, Lancing West Sussex BN99 6DA **Shareholder helpline** 0371 384 2990* from within the UK +44 121 415 7066 from outside the UK - Lines are open from 8.30am to 5.30pm Monday to Friday, excluding English and Welsh public holidays. The company registrar is Equiniti Limited. They provide a shareholder service, including a telephone helpline and shareview which is a free secure portfolio service. ### Register today to manage your shareholding online Get online in just three easy steps: - **Step 1** Register at www.shareview.co.uk/info/register - **Step 2** Receive your activation code in post - **Step 3** Log on ![img-13.jpeg](img-13.jpeg) Strategic report Financial results Governance Risk management Financial statements Other information Lloyds Banking Group Annual Report and Accounts 2022 351 Name of undertaking Notes ## Subsidiaries and Cavendish Online Ltd 21 ii iii viii ## related undertakings xxii xxiii xxiv xxv In compliance with section 409 of the Companies Act 2006, the xxvi xxvii following comprises a list of all related undertakings of the Group, xxviii as at 31 December 2022. The list includes each undertaking’s Cedar Holdings Ltd 13 i ‡ registered office and the percentage of the class(es) of shares CF Asset Finance Ltd 13 i ‡ held by the Group. All shares held are ordinary shares unless Charterhall Nominees Ltd 14 i Cheltenham & Gloucester plc 12 i indicated otherwise in the notes. Citra Development Company (No. 1) Ltd 1 i Citra Living Ltd 1 i ### Subsidiary undertakings Citra Living Properties (No. 1) Ltd 1 i The Group directly or indirectly holds 100% of the share class and Clerical Medical Finance plc 20 i a majority of voting rights (including where the undertaking does Clerical Medical Financial Services Ltd 20 i not have share capital as indicated) in the following undertakings. Clerical Medical Investment Fund Managers Ltd 4 i All material subsidiary undertakings are consolidated by Lloyds Clerical Medical Non Sterling Property Company S.A.R.L. 22 xiii Cloak Lane Funding S.A.R.L. 56 i Banking Group. Cloak Lane Investments S.A.R.L. 56 i CM Venture Investments Ltd 23 i v ‡ Name of undertaking Notes Conquest Securities Ltd 1 v xiii A G Finance Ltd 50 ii iii Corbiere Asset Investments Ltd 1 ii iii A.C.L. Ltd 1 i Dalkeith Corporation 24 i ACL Autolease Holdings Ltd 1 i Dunstan Investments (UK) Ltd 1 i ADF No.1 Pty Ltd 8 i E.B.S. Pensioneer Trustees Ltd 14 i Alex Lawrie Factors Ltd 9 i EBS Pensions Ltd 14 i Alex. Lawrie Receivables Financing Ltd 9 i EBS Self-Administered Personal Pension Plan Trustees Ltd 14 i Alpha Trustees Ltd 14 i Embark Corporate Services Ltd 14 ii Amberdate Ltd 1 i v Embark Digital Studio Ltd 14 i Anglo Scottish Utilities Partnership 1 + * Embark Group Ltd 14 ii # Aquilus Ltd 13 i ‡ Embark Investment Services Ltd 14 i Automobile Association Personal Finance Ltd 4 i Embark Investment Services Nominees Ltd 14 i Avalon Investment Services (Nominees) Ltd 14 i Embark Investments Ltd 14 i Avalon SIPP Trustees Ltd 14 i Embark Pensions Trustees Ltd 14 i Bank of Scotland (B G S) Nominees Ltd 5 * Embark Services Ltd 14 i Bank of Scotland Branch Nominees Ltd 5 i Embark Trustees Ltd 14 i Bank of Scotland Central Nominees Ltd 5 * Eurolead Services Holdings Ltd 9 i Bank of Scotland Edinburgh Nominees Ltd 5 * First Retail Finance (Chester) Ltd 4 i Bank of Scotland Equipment Finance Ltd 13 i ‡ Forthright Finance Ltd 47 i Bank of Scotland plc 5 i v France Industrial Premises Holding Company 28 i Bank of Scotland Structured Asset Finance Ltd 1 i General Leasing (No. 12) Ltd 1 i Bank of Scotland Transport Finance 1 Ltd 13 i ‡ General Reversionary and Investment Company 20 i # Bank of Wales Ltd 47 i Gresham Nominee 1 Ltd 1 i Barents Leasing Ltd 1 i Gresham Nominee 2 Ltd 1 i Birchcrown Finance Ltd 1 v xiii Halifax Financial Brokers Ltd 4 i Birmingham Midshires Financial Services Ltd 4 i ‡ Halifax Financial Services (Holdings) Ltd 4 i Birmingham Midshires Mortgage Services Ltd 13 i ‡ Halifax Financial Services Ltd 4 i Black Horse (TRF) Ltd 1 i Halifax General Insurance Services Ltd 4 i Black Horse Finance Holdings Ltd 1 ii ix Halifax Group Ltd 4 i Black Horse Finance Management Ltd 1 i Halifax Leasing (March No.2) Ltd 1 i Black Horse Group Ltd 1 i v Halifax Leasing (September) Ltd 1 i Black Horse Ltd 1 i Halifax Life Ltd 4 i Black Horse Offshore Ltd 7 i Halifax Ltd 4 i Boltro Nominees Ltd 1 i Halifax Loans Ltd 4 i BOS (Ireland) Property Services Ltd 52 i ‡ Halifax Pension Nominees Ltd 1 i BOS (Ireland) Property Services 2 Ltd 16 i Halifax Share Dealing Ltd 4 i BOS (Shared Appreciation Mortgages (Scotland)) Ltd 4 i Halifax Vehicle Leasing (1998) Ltd 4 i BOS (Shared Appreciation Mortgages (Scotland) No. 2) Ltd 4 i HBOS Covered Bonds LLP 4 * BOS (Shared Appreciation Mortgages (Scotland) No. 3) Ltd 4 i HBOS Final Salary Trust Ltd 5 i BOS (Shared Appreciation Mortgages) No. 1 plc 4 # i HBOS Financial Services Ltd 20 i BOS (Shared Appreciation Mortgages) No. 2 plc 4 # i HBOS International Financial Services Holdings Ltd 20 i BOS (Shared Appreciation Mortgages) No. 3 plc 4 # i HBOS Investment Fund Managers Ltd 4 ii BOS (Shared Appreciation Mortgages) No. 4 plc 4 # i HBOS plc 5 i iv vi BOS (Shared Appreciation Mortgages) No. 5 plc 4 i HBOS Social Housing Covered Bonds LLP 47 * BOS (Shared Appreciation Mortgages) No. 6 plc 4 i HBOS UK Ltd 5 i BOS (USA) Fund Investments Inc. 11 xiv Heidi Finance Holdings (UK) Ltd 1 i BOS (USA) Inc. 11 i Hill Samuel Bank Ltd 1 i BOS Mistral Ltd 1 i Hill Samuel Finance Ltd 1 v xx BOS Personal Lending Ltd 4 ii iii Hill Samuel Leasing Co. Ltd 1 i BOSSAF Rail Ltd 1 i Home Shopping Personal Finance Ltd 4 i British Linen Leasing (London) Ltd 5 i Horizon Capital 2000 Ltd 5 i British Linen Leasing Ltd 5 i Hornbuckle Mitchell Trustees Ltd 14 i British Linen Shipping Ltd 5 i Housing Growth Partnership III GP LLP 1 * Capital 1945 Ltd 47 i Housing Growth Partnership III LP 1 * Capital Bank Leasing 3 Ltd 13 i ‡ Housing Growth Partnership Manager Ltd 1 i Capital Bank Leasing 5 Ltd 47 i HSDL Nominees Ltd 4 i Capital Bank Leasing 12 Ltd 5 i HVF Ltd 1 i Capital Bank Property Investments (3) Ltd 47 i Hyundai Car Finance Ltd 50 ii iii Capital Personal Finance Ltd 4 i IBOS Finance Ltd 47 i Cardnet Merchant Services Ltd 1 # ^ iii vi Intelligent Finance Software Ltd 4 i ‡ Cashfriday Ltd 9 i International Motors Finance Ltd 50 ii # Caveminster Ltd 1 i Kanaalstraat Funding C.V. 35 * Katrine Leasing Ltd 39 i ‡ LB Healthcare Trustee Ltd 1 i LB Share Schemes Trustees Ltd 1 i ‡ 352 Lloyds Banking Group Annual Report and Accounts 2022 | Name of undertaking Notes | Name of undertaking Notes | | | --- | --- | --- | | LBCF Ltd 9 i | Lloyds Engine Capital (No.1) U.S LLC 11 * | | | LBG Brasil Administração LTDA 38 i | Lloyds Far East S.A.R.L. 56 i | | | LBG Capital Holdings Ltd 1 i ^ | Lloyds General Leasing Ltd 1 i | | | LBG Equity Investments Ltd 1 i ^ | Lloyds Holdings (Jersey) Ltd 7 i | | | LBI Leasing Ltd 1 i | Lloyds Hypotheken B.V. 37 i | | | LDC (General Partner) Ltd 40 i | Lloyds Industrial Leasing Ltd 1 i | | | LDC (Managers) Ltd 40 i | Lloyds International Management Services (Jersey) Ltd 7 i | | | LDC (Nominees) Ltd 40 i | Lloyds International Pty Ltd 8 i | | | LDC GP LLP 41 * | Lloyds Investment Bonds Ltd 13 i ‡ | | | LDC I LP 41 * | Lloyds Investment Securities No.5 Ltd 1 i | | | LDC II LP 41 * | Lloyds Leasing (North Sea Transport) Ltd 1 i | | | LDC III LP 41 * | Lloyds Leasing Developments Ltd 1 i | | | LDC IV LP 41 * | Lloyds Offshore Global Services Private Ltd 48 i | | | LDC V LP 41 * | Lloyds Plant Leasing Ltd 1 i | Financial results Risk managementGovernance Financial statements Other informationStrategic report | | LDC VI LP 41 * | Lloyds Portfolio Leasing Ltd 1 i | | | LDC VII LP 41 * | Lloyds Project Leasing Ltd 1 i | | | LDC VIII LP 40 * | Lloyds Property Investment Company No. 4 Ltd 1 i | | | LDC IX LP 40 * | Lloyds Secretaries Ltd 1 i | | | LDC X LP 40 * | Lloyds Securities Inc. 11 i | | | LDC XI LP 40 * | Lloyds TSB Pacific Ltd 51 i | | | LDC XII LP 40 * | Lloyds UDT Asset Rentals Ltd 13 i ‡ | | | LDC Parallel XII LP 40 * | Lloyds UDT Leasing Ltd 1 i | | | LDC Parallel (Nominees) Ltd 40 i | Lloyds UDT Ltd 13 i ‡ | | | Legacy Renewal Company Ltd 5 i | Lloyds Your Tomorrow Trustee Ltd 1 i | | | Lex Autolease (CH) Ltd 1 i | Loans.co.uk Ltd 47 i | | | Lex Autolease (VC) Ltd 1 i | London Taxi Finance Ltd 1 ii iii | | | Lex Autolease Carselect Ltd 1 i | Lotus Finance Ltd 50 ii iii | | | Lex Autolease Ltd 1 i | LTGP Limited Partnership Incorporated 34 * | | | Lex Vehicle Leasing (Holdings) Ltd 13 ii iii xi ‡ | Maritime Leasing (No. 19) Ltd 1 i | | | Lex Vehicle Leasing Ltd 13 i ‡ | MBNA Europe Finance Ltd 46 i | | | Lime Street (Funding) Ltd 13 i ‡ | MBNA Europe Holdings Ltd 47 i | | | Lloyds (Gresham) Ltd 1 i xi | MBNA Ltd 47 i | | | Lloyds (Nimrod) Specialist Finance Ltd 1 i | MBNA R & L S.A.R.L. 53 i | | | Lloyds America Securities Corporation 11 i | MBNA Receivables Ltd 32 i | | | Lloyds Asset Leasing Ltd 1 i | Membership Services Finance Ltd 4 i | | | Lloyds Bank (Colonial & Foreign) Nominees Ltd 1 i | Mitre Street Funding S.A.R.L. 56 i | | | Lloyds Bank (I.D.) Nominees Ltd 1 i | NFU Mutual Finance Ltd 47 ii viii # | | | Lloyds Bank (International Services) Ltd 7 i | Nominees (Jersey) Ltd 7 i | | | Lloyds Bank Asset Finance Ltd 1 i | Nordic Leasing Ltd 13 i ‡ | | | Lloyds Bank Commercial Finance Ltd 9 i | NWS Trust Ltd 5 i | | | Lloyds Bank Commercial Finance Scotland Ltd 43 i | Pacific Leasing Ltd 1 i | | | Lloyds Bank Corporate Asset Finance (HP) Ltd 1 i | Pensions Management (S.W.F.) Ltd 25 * | | | Lloyds Bank Corporate Asset Finance (No.1) Ltd 1 i | Perry Nominees Ltd 1 i | | | Lloyds Bank Corporate Asset Finance (No.2) Ltd 1 i | PIPS Asset Investments Ltd 1 ii iii | | | Lloyds Bank Corporate Asset Finance (No.3) Ltd 1 i | Prestonfield Investments Ltd 5 i | | | Lloyds Bank Corporate Asset Finance (No.4) Ltd 1 i | Proton Finance Ltd 50 ii iii | | | Lloyds Bank Corporate Markets plc 1 i ^ | R.F. Spencer and Company Ltd 9 i | | | Lloyds Bank Corporate Markets Wertpapierhandelsbank GmbH 17 i | Ranelagh Nominees Ltd 1 i | | | Lloyds Bank Covered Bonds LLP 26 * | Retail Revival (Burgess Hill) Investments Ltd 1 i | | | Lloyds Bank Covered Bonds (LM) Ltd 26 i | Saint Michel Holding Company No1 28 i | | | Lloyds Bank Equipment Leasing (No. 1) Ltd 1 i | Saint Michel Investment Property 28 i | | | Lloyds Bank Equipment Leasing (No. 7) Ltd 1 i | Saint Witz 2 Holding Company No1 28 i | | | Lloyds Bank Equipment Leasing (No. 9) Ltd 1 i | Saint Witz 2 Investment Property 28 i | | | Lloyds Bank Financial Services (Holdings) Ltd 1 i v | Savban Leasing Ltd 1 i | | | Lloyds Bank General Insurance Holdings Ltd 1 i | Scotland International Finance B.V. 35 i | | | Lloyds Bank General Insurance Ltd 1 i | Scottish Widows Administration Services (Nominees) Ltd 25 i | | | Lloyds Bank General Leasing (No. 3) Ltd 1 i | Scottish Widows Administration Services Ltd 1 i | | | Lloyds Bank General Leasing (No. 5) Ltd 13 i ‡ | Scottish Widows Auto Enrolment Services Ltd 1 i | | | Lloyds Bank General Leasing (No. 11) Ltd 1 i | Scottish Widows Europe 27 i | | | Lloyds Bank General Leasing (No. 17) Ltd 13 i ‡ | Scottish Widows Financial Services Holdings 3 i | | | Lloyds Bank GmbH 29 i | Scottish Widows’ Fund and Life Assurance Society 25 * | | | Lloyds Bank Insurance Services Ltd 1 i | Scottish Widows Group Ltd 3 ii ^ | | | Lloyds Bank Leasing (No. 6) Ltd 1 i | Scottish Widows Industrial Properties Europe B.V. 18 i | | | Lloyds Bank Leasing Ltd 1 i | Scottish Widows Ltd 1 i | | | Lloyds Bank Maritime Leasing (No. 10) Ltd 1 i | Scottish Widows Pension Trustees Ltd 3 i | | | Lloyds Bank Maritime Leasing (No. 17) Ltd 13 i ‡ | Scottish Widows Property Management Ltd 31 i ‡ | | | Lloyds Bank MTCH Ltd 1 i | Scottish Widows Schroder Personal Wealth (ACD) Ltd 1 i | | | Lloyds Bank Nominees Ltd 1 i | Scottish Widows Schroder Personal Wealth Ltd 1 i | | | Lloyds Bank Offshore Pension Trust Ltd 33 i | Scottish Widows Schroder Wealth Holdings Ltd 1 ii # | | | Lloyds Bank Pension ABCS (No 1) LLP 1 * | Scottish Widows Services Ltd 3 i | | | Lloyds Bank Pension ABCS (No 2) LLP 1 * | Scottish Widows Trustees Ltd 25 i | | | Lloyds Bank Pension Trust (No. 1) Ltd 1 i | Scottish Widows Unit Funds Ltd 3 i | | | Lloyds Bank Pension Trust (No. 2) Ltd 1 i | Scottish Widows Unit Trust Managers Ltd 1 i | | | Lloyds Bank Pensions Property (Guernsey) Ltd 34 ii iii | Seabreeze Leasing Ltd 1 i | | | Lloyds Bank plc 1 ^ i vii | Seaspirit Leasing Ltd 1 i | | | Lloyds Bank Property Company Ltd 1 i | Share Dealing Nominees Ltd 4 i | | | Lloyds Bank S.F. Nominees Ltd 1 i | Shogun Finance Ltd 50 ii iii | | | Lloyds Bank Subsidiaries Ltd 1 i | St Andrew’s Group Ltd 20 i | | | Lloyds Bank Trustee Services Ltd 1 i | St Andrew’s Insurance plc 20 i | | | Lloyds Banking Group Pensions Trustees Ltd 1 i | St Andrew’s Life Assurance plc 20 i | | | Lloyds Capital GP Ltd 10 i | St. Mary’s Court Investments 1 i | | | Lloyds Corporate Services (Jersey) Ltd 7 i | Standard Property Investment (1987) Ltd 5 ii # | | | Lloyds Development Capital (Holdings) Ltd 40 i | Sterling ISA Managers (Nominees) Ltd 14 i | | 353Lloyds Banking Group Annual Report and Accounts 2022 Name of undertaking Notes ### Subsidiaries and related Gresham Receivables (No. 30) UK Ltd 49 ‡ ### undertakings continued Gresham Receivables (No. 31) UK Ltd 49 ‡ Gresham Receivables (No. 32) UK Ltd 54 Name of undertaking Notes Gresham Receivables (No. 33) UK Ltd 49 ‡ Sterling ISA Managers Ltd 14 i Gresham Receivables (No. 34) UK Ltd 54 Sussex County Homes Ltd 4 i Gresham Receivables (No.35) Ltd 32 Suzuki Financial Services Ltd 50 ii # Gresham Receivables (No.36) UK Ltd 54 SW Funding plc 3 i # Gresham Receivables (No.37) UK Ltd 54 SW No.1 Ltd 3 i Gresham Receivables (No.38) UK Ltd 54 The Adviser Centre Ltd 14 i Gresham Receivables (No.39) UK Ltd 54 The Agricultural Mortgage Corporation plc 45 i Gresham Receivables (No.40) UK Ltd 54 The British Linen Company Ltd 5 i Gresham Receivables (No.41) UK Ltd 54 The Mortgage Business plc 4 i Gresham Receivables (No.44) UK Ltd 54 Thistle Leasing + * Gresham Receivables (No.45) UK Ltd 54 Tower Hill Property Investments (7) Ltd 47 i # Gresham Receivables (No.46) UK Ltd 54 Tower Hill Property Investments (10) Ltd 47 i # Gresham Receivables (No.47) UK Ltd 54 Tranquility Leasing Ltd 1 i Gresham Receivables (No.48) UK Ltd 54 Uberior (Moorfield) Ltd 5 i Guildhall Asset Purchasing Company (No.11) UK Ltd 54 Uberior Co-Investments Ltd 5 i Housing Association Risk Transfer 2019 DAC 42 Uberior ENA Ltd 5 i Leicester Securities 2014 Ltd 2 ‡ Uberior Equity Ltd 5 i Lingfield 2014 I Holdings Ltd 26 Uberior Europe Ltd 5 i Lingfield 2014 I plc 6 ‡ Uberior Fund Investments Ltd 5 i Lloyds Bank Covered Bonds (Holdings) Ltd 26 Uberior Infrastructure Investments Ltd 5 i Molineux RMBS 2016-1 plc 26 Uberior Infrastructure Investments (No.2) Ltd 1 i Molineux RMBS Holdings Ltd 26 Uberior Investments Ltd 5 i Penarth Asset Securitisation Holdings Ltd 26 Uberior Trading Ltd 5 i Penarth Funding 1 Ltd 26 Uberior Ventures Australia Pty Ltd 8 i Penarth Funding 2 Ltd 26 Uberior Ventures Ltd 5 i Penarth Master Issuer plc 26 UDT Budget Leasing Ltd 13 i ‡ Penarth Receivables Trustee Ltd 26 United Dominions Leasing Ltd 1 i Permanent Funding (No. 1) Ltd 26 United Dominions Trust Ltd 1 i Permanent Funding (No. 2) Ltd 26 Upsaala Ltd 52 i ‡ Permanent Holdings Ltd 26 Vine Street XII LP 41 * Permanent Master Issuer plc 26 Ward Nominees (Abingdon) Ltd 1 i Permanent Mortgages Trustee Ltd 26 Ward Nominees (Birmingham) Ltd 1 i Permanent PECOH Holdings Ltd 26 Ward Nominees (Bristol) Ltd 1 i Permanent PECOH Ltd 26 Waverley – Fund II Investor LLC 24 i Salisbury Securities 2015 Ltd 36 Waverley – Fund III Investor LLC 24 i Salisbury II Securities 2016 Ltd 36 Waymark Asset Investments Ltd 1 ii iii Salisbury II-A Securities 2017 Ltd 36 West Craigs Ltd 5 i Salisbury III Securities 2019 DAC 42 Wood Street Leasing Ltd 1 i SARL Hiram 44 SAS Compagnie Fonciere De France 44 The Group has determined that it has the power to exercise SCI De L’Horloge 44 control over the following entities without having the majority of SCI Rambuteau CFF 44 the voting rights of the undertakings. Unless otherwise stated, the Stichting Holding Candide Financing 19 undertakings do not have share capital or the Group does not Stichting Security Trustee Candide 2021-1 B.V. 19 hold any shares. Syon Securities 2019 DAC 42 Syon Securities 2020 DAC 42 | Name of undertaking Notes | Syon Securities 2020-2 DAC 42 | | --- | --- | | Addison Social Housing Holdings Ltd 36 | Thistle Investments (AMC) Ltd 26 | | Cancara Asset Securitisation Ltd 32 | Thistle Investments (ERM) Ltd 26 | | Candide Financing 2021-1 B.V. 19 | Wetherby II Securities 2018 DAC 55 | | Cardiff Auto Receivables Securitisation 2018-1 plc 6 ‡ | Wetherby III Securities 2019 DAC 42 | | Cardiff Auto Receivables Securitisation 2019-1 plc 26 | Wetherby Securities 2017 Ltd 36 | | Cardiff Auto Receivables Securitisation 2022-1 plc 26 | Wilmington Cards 2021-1 plc 26 | | Cardiff Auto Receivables Securitisation Holdings Ltd 26 | Wilmington Cards Holdings Ltd 26 | | Celsius European Lux 2 S.A.R.L. 30 | Wilmington Receivables Trustee Ltd 26 | | Cheltenham Securities 2017 Ltd 36 | Bank of Scotland Foundation • 5 | | Deva Financing Holdings Ltd 26 | Lloyds Bank Foundation for England & Wales • 57 | | Deva Financing plc 6 ‡ | Lloyds Bank Foundation for the Channel Islands • 57 | | Edgbaston RMBS 2010-1 plc 6 ‡ | MBNA General Foundation • 47 | | Edgbaston RMBS Holdings Ltd 26 | The Halifax Foundation for Northern Ireland • 15 | Elland RMBS 2018 plc 26 • A charitable foundation funded but not owned or controlled by Lloyds Banking Elland RMBS Holdings Ltd 26 Group Fontwell II Securities 2020 DAC 42 Fontwell Securities 2016 Ltd 36 Gresham Receivables (No. 3) Ltd 32 Gresham Receivables (No. 10) Ltd 32 Gresham Receivables (No.11) UK Ltd 49 ‡ Gresham Receivables (No. 13) UK Ltd 54 Gresham Receivables (No. 14) UK Ltd 49 ‡ Gresham Receivables (No. 15) UK Ltd 54 Gresham Receivables (No. 16) UK Ltd 54 Gresham Receivables (No. 19) UK Ltd 49 ‡ Gresham Receivables (No. 20) Ltd 32 Gresham Receivables (No. 24) Ltd 32 Gresham Receivables (No. 25) UK Ltd 49 ‡ Gresham Receivables (No. 26) UK Ltd 49 ‡ Gresham Receivables (No.27) UK Ltd 54 Gresham Receivables (No.28) Ltd 32 Gresham Receivables (No.29) Ltd 32 354 Lloyds Banking Group Annual Report and Accounts 2022 ### Associated undertakings The Group has a participating interest in the following undertakings. % of share class held by immediate parent company (or by the Group Name of undertaking where this varies) Registered office address Notes 239 Kingsway Hove Ltd 50% Cayuga House 2a, Addison Road, Hove, East Sussex, United Kingdom, ii BN3 1TN 4755AS Ltd 50% Kingsnorth House, Blenheim Way, Birmingham, West Midlands, England, B44 8LS ii Addison Social Housing Ltd 20% 1 Bartholomew Lane, London, EC2N 2AX i Airline Services And Components Group Ltd 94.45% Squire Patton Boggs (UK) LLP (Ref: Csu), Rutland House, 148 Edmund Street, ii & Birmingham, B3 2JR Albany Bidco Ltd 75.32% Acora House, Albert Drive, Burgess Hill, West Sussex, United Kingdom, RH15 9TN ii & Financial results Risk managementGovernance Financial statements Other informationStrategic report Aldreth Developments Ltd 50% No 1 Railshead Road, St Margarets, Isleworth, Middlesex, United Kingdom, TW7 ii 7EP Alfred Investments LLP n/a 64 Parchment Street, Winchester, England, SO23 8AT * Alfred Homes Properties LLP n/a 64 Parchment Street, Winchester, England, SO23 8AT * Alfred Investments Properties Ltd 50% 64 Parchment Street, Winchester, England, SO23 8AT i Allan Water Homes (Chryston) Ltd 50% 24B Kenilworth Road, Bridge Of Allan, Stirling, Scotland, FK9 4DU ii Alphabet Bidco Ltd 99.25% Phoenix House Smeaton Close, Rabans Lane, Industrial Area, Aylesbury, xviii & Buckinghamshire, United Kingdom, HP19 8UW Angus International Safety Group Ltd 88.93% Station Road, High Bentham, Near Lancaster, LA2 7NA xvii & 88.93% xviii Antler Amberley LLP n/a Portland House, Park Street, Bagshot, England, GU19 5AQ * Aquavista Watersides Topco Ltd 92.69% Sawley Marina, Long Eaton, Nottinghamshire, United Kingdom, NG10 3AE ii & Ashtons Group Holdings Ltd 99% Unit 4 74 Dyke Road Mews, Brighton, BN1 3JD ii & Aspire Technology Enterprise Ltd 99.25% Pipewell Quay, Pipewellgate, Gateshead, Tyne And Wear, United Kingdom, NE8 ii & 2BJ Bacchus Newco Ltd 89.25% Park Lane Industrial Estates, Park Lane Off Wigan Road, Ashton in Makerfield, ii & Wigan, WN4 0BZ, United Kingdom Backhouse (Westbury) JV Ltd 50% C/O DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United ii Kingdom Backhouse (Castle Cary) JV Ltd 50% C/O DAC Beachcroft LLP, Portwall Place, Portwall Lane, Bristol, BS1 9HS, United ii Kingdom BCIS Holdings Ltd 99.25% Atlas House, 1 King Street, London, England, EC2V 8AU ii & Beckstones (Rheda Park) Ltd 50% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 ii 9BN Bergamot Ventures Ltd 100% 6th Floor, 25 Farringdon Street, London, EC4A 4AB iii ~ BH Stoke Golding Property LLP n/a Grovelands Business Park, West Haddon Road, East Haddon, Northampton, NN6 * 8FB Biozone Scientific Group Ltd 99.25% Browne Jacobson Llp (Cs) 1st Floor, The Mount, 72 Paris Street, Exeter, EX1 2JY ii & Blue Bay Travel Group Ltd 99.17% A4 Bellringer Road, Trentham Business Quarter, Stoke-On-Trent, ST4 8GB xviii & BoS Mezzanine Partners Fund LP n/a Fourth Floor, 7 Castle Street, Edinburgh, EH2 3AH * Bowbridge Homes (Frisby) Ltd 50% Unit 4 Shieling Court, Corby, England, NN18 9QD ii Bowbridge Homes (Raunds) Ltd 50% Unit 4 Shieling Court, Corby, England, NN18 9QD ii Bowland Fold (Halton) Ltd 25% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 i 9BN Bramble Foods Group Ltd 99.25% Crosby Road, Market Harborough, Leicestershire, England, LE16 9EE ii & Briar Homes (Darnley) Ltd 50% Radleigh House, 1 Golf Road, Clarkston, Glasgow, G76 7HU ii Briar Homes (Dealston) Ltd 50% Radleigh House, 1 Golf Road, Clarkston, Glasgow, G76 7HU ii Briar Homes (Investments) Ltd 100% Radleigh House, 1 Golf Road, Clarkston, Glasgow, G76 7HU ii Brington North Holdco Ltd 50% 25 Gresham Street, London, EC2V 7HN i Burnham SPV Ltd 50% Weir House, Hurst Road, East Molesey, Surrey, KT8 9AY ii Caedmon Homes (St Johns Mews) Ltd 50% C/O Azets Wynyard Park House, Wynyard Avenue, Wynyard, United Kingdom, ii TS22 5TB Caedmon Homes Ltd 50% C/O Azets Wynyard Park House, Wynyard Avenue, Wynyard, United Kingdom, ii TS22 5TB Caedmon Homes Kirby Hill Ltd 50% C/O Azets Holdings Ltd Wynyard Park House, Wynyard Avenue, Wynyard, United ii Kingdom, TS22 5TB Cardel Group Ltd 89.25% 5 The Marquis Business Centre, Royston Road, Baldock, SG7 6XL xviii & Chianti Holdings Ltd 99% Troy Mills Troy Road, Horsforth, Leeds, England, LS18 5GN ii & City & General Securities Ltd 100% 10 Upper Berkeley Street, London, W1H 7PE iii & Cleanslate Ashford Ltd 50% Chobham Farm, Sandpit Hall Road, Chobham, Surrey, GU24 8HA ii Columbus UK Holdings Ltd 99% 1 Fore Street Avenue, Moorgate, London, United Kingdom, EC2Y 9DT ii & Connect Health Group Ltd 99% The Light Box, Quorum Business Park, Benton Lane, Newcastle Upon Tyne, United ii 99% xviii & Kingdom, NE12 8EU Connery Ltd 20% 44 Esplanade, St. Helier, Jersey, JE4 9WG i & Couple Holdco Ltd 26.70% 353 Buckingham Avenue, Slough, England, SL1 4PF ii & Crossco (1462) Ltd 99.25% 23a Falcon Court, Preston Farm Industrial Estate, Stockton-On-Tees, ii & United Kingdom, TS18 3TX Croud Holdings Ltd 99% Cannon Place, 78 Cannon Street, London, England, EC4N 6AF ii & Cruden Homes (Aberlady) Ltd 50% 16 Walker Street, Edinburgh, EH3 7LP ii Cruden Homes (Barton Avenue) Ltd 50% 16 Walker Street, Edinburgh, EH3 7LP i Cruden Homes (Longniddry) Ltd 50% 16 Walker Street, Edinburgh, EH3 7LP ii Cruden Homes (West Craigs) Ltd 50% 16 Walker Street, Edinburgh, EH3 7LP i Cruden Ventures Ltd 100% 16 Walker Street, Edinburgh, EH3 7LP ii D.U.K.E. Real Estate Ltd 100% Cromwell Property Group Spaces, Lochrin Square, 1 Lochrin Square, 92-98 iii ~ Fountainbridge, Edinburgh, United Kingdom, EH3 9QA Devonshire Homes (Ilfracombe) Ltd 100% Devonshire House, Lowman Green, Tiverton, United Kingdom, EX16 4LA ii Devonshire Homes (St Austell) Ltd 50% Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA, United Kingdom ii Duchy Homes (Bowgreave) Ltd 50% Middleton House, Westland Road, Leeds, LS11 5UH ii Duchy Homes (Chapelgarth) Ltd 50% Park House, Westland Road, Leeds, West Yorkshire, United Kingdom, LS11 5UH ii Duchy Homes (Elwick) Ltd 50% Middleton House, Westland Road, Leeds, United Kingdom, LS11 5UH ii Duchy Homes (North Cave) Ltd 50% Middleton House, Westland Road, Leeds, LS11 5UH ii Duchy Homes (RGI) Ltd 50% Park House, Westland Road, Leeds, West Yorkshire, United Kingdom, LS11 5UH ii 355Lloyds Banking Group Annual Report and Accounts 2022 ### Subsidiaries and related undertakings continued % of share class held by immediate parent company (or by the Group Name of undertaking where this varies) Registered office address Notes Duchy Homes (Winterley) Ltd 50% Middleton House, Westland Road, Leeds, LS11 5UH ii Duncan and Todd Holdings Ltd 89.25% 6 Queens Road, Aberdeen, AB15 4ZT ii & Durkan Growth Ltd 50% Unit 4 Elstree Way, Borehamwood, England, WD6 1JD ii Durkan (Onslow) Ltd 25% Unit 4 Elstree Way, Borehamwood, England, WD6 1JD i Eamont Chase (Penrith) Ltd 25% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 i 9BN Ediston Homes Sauchie Ltd 50% 39/1 George Street, Edinburgh, EH2 2HN ii Eiger Bidco Ltd 99.25% 4 Webster Court, Carina Park, Westbrook, Warrington, United Kingdom, WA5 8WD ii & Ensco 997 Ltd 30.76% The Yard, Dodd Lane, Westhoughton, Bolton, BL5 3NU x 32.74% xv & Ensco 1314 Ltd 99% 34 Bow Street, London, United Kingdom, WC2E 7AU ii 99% xxii & Ensco 1322 Ltd 99% Newbury House, 20 Kings Road West, Newbury, Berkshire, RG14 5XR ii & Ensco 1327 Ltd 99% First Floor, 65 Gresham Street, London, England, EC2V 7NQ ii & Ensco 1337 Ltd 99% Cotton Tree Lane, Colne, BB8 7BH ii & Ensco 1375 Ltd 99% Westgate House, 9 Holborn, London, United Kingdom, EC1N 2LL ii & Ensek Holdings Ltd 99.17% Hounds Gate, 30-34 Hounds Gate, Nottingham, NG1 7AB xviii & Erris Homes (Almondbury) Ltd 50% Howard House, Limewood Approach, Leeds, England, LS14 1NG ii Eudoros Bidco Ltd 99.25% 5 Soho Street, London, England, W1D 3DG xviii & Europa Property Company (Northern) Ltd 100% Europa House, 20 Esplanade, Scarborough, North Yorkshire, YO11 2AQ viii Eutopia Exeter Gateway Ltd 50% The Stables, Little Coldharbour Farm, Tong Lane, Lamberhurst, Tunbridge Wells, ii Kent, England, TN3 8AD Evolution Funding Group Ltd 99% Thompson Close, Whittington Moor, Chesterfield, S41 9AZ ii & Express Engineering (Group) Ltd 99% Kingsway North, Team Valley Trading Estate, Gateshead, NE11 0EG ii 99% xvii 99% xviii & 99.35% xxi Farries Field (Stainburn) Ltd 50% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 ii 9BN FDL Salterns Ltd 50% 2 Poole Road, Bournemouth, BH2 5QY ii FHR European Ventures LLP n/a C/O CMS Cameron Mckenna LLP, 78 Cannon Street, London, EC4N 6AF * FSP Corporate Ltd 99% Now Building Here & Now, Thames Valley Park, Reading, Berkshire, England, RG6 ii & 1WG Generate Topco Ltd 98.02% Diplocks Yard, 73 North Road, Brighton, East Sussex, United Kingdom, BN1 1YD xviii & Ginger Acquisition Company Ltd 89.25% Tudno Mill, Smith Street, Ashton-Under-Lyne, OL7 0DB, United Kingdom ii & Global Autocare Holding Ltd 99% The Hub, Gelderd Lane, Leeds, England, LS12 6AL ii & Hamsard 3667 Ltd 99.25% Park House, Clifton Park, York, North Yorkshire, YO30 5PB ii & Hazel Newco Ltd 99.25% Bradwood Court, St Crispin Way, Haslingden, Rossendale, Lancashire, United xviii & Kingdom, BB4 4PW HB Developments (NW) Ltd 50% V&R Accountancy Services Crompton House, Three Tuns Lane, Formby, Liverpool, ii England, L37 4AQ Hedge End Place (Durkan) LLP n/a 4 Elstree Gate, Elstree Way, Borehamwood, Hertfordshire, WD6 1JD * § Hedge End Place Hold Co Ltd 100% 25 Gresham Street, London, EC2V 7HN i Hercules Topco Ltd 99.25% 5th Floor, The Grange, 100 High Street, Southgate, London, England, N14 6BN ii & Highlands Bidco Ltd 99% Unit 4 Queen Anne Drive, Newbridge, Scotland, EH28 8LN ii & Hollins Homes (Aston) Ltd 50% Suite 4, No. 1 King Street, Manchester, M2 6AW, United Kingdom ii Hollins Homes (Bartle) Ltd 25% Suite 4, 1 King Street, Manchester, M2 6AW, United Kingdom i Hollins Homes (Galgates) Ltd 25% 1 King Street, Manchester, M2 6AW, United Kingdom i Hollins Homes (Loveclough) Ltd 50% Suite 4, 1 King Street, Manchester, M2 6AW, United Kingdom ii Hollins Homes (Newton) Ltd 50% Suite 4, No. 1 King Street, Manchester, M2 6AW, United Kingdom ii Hollins Homes RGI Ltd 50% Suite 4, 1 King Street, Manchester, M2 6AW, United Kingdom ii Hollins Homes (Utopia) Ltd 50% Suite 4, 1 King Street, Manchester, M2 6AW, United Kingdom ii Hollins Homes (Wingates) Ltd 50% Suite 4, 1 King Street, Manchester, M2 6AW, United Kingdom ii Homes By Carlton (MSTG1) Ltd 50% Carlton House, 15 Parsons Court, Welbury Way, Newton Aycliffe, County Durham, ii DL5 6ZE Horse Health Wessex Holdings Ltd 99.25% Copied Hall Farm Winsor Road, Winsor, Southampton, Hampshire, ii & United Kingdom, SO40 2HE Housing Growth Partnership II GP LLP n/a 25 Gresham Street, London, EC2V 7HN * Housing Growth Partnership II LP n/a 25 Gresham Street, London, EC2V 7HN * Housing Growth Partnership GP LLP n/a 25 Gresham Street, London, EC2V 7HN * Housing Growth Partnership Ltd 50% 25 Gresham Street, London, EC2V 7HN ii iii Housing Growth Partnership LP n/a 25 Gresham Street, London, EC2V 7HN * Iglufastnet Ltd 89.25% 2nd Floor, 165 The Broadway, Wimbledon, London, United Kingdom, SW19 1NE ii 59.55% xxiii & IEG Group Ltd 99.25% Queens Court, Wilmslow Road, Alderley Edge, England, SK9 7RR ii & James Taylor Homes (Investment) Ltd 50% James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom ii James Taylor Homes (Kingston) Ltd 50% James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom ii James Taylor Homes (Newton Longville) Ltd 50% James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom ii James Taylor Homes (Verulamium) Ltd 25% James Taylor House, St. Albans Road East, Hatfield, AL10 0HE, United Kingdom i Kenmore Capital 2 Ltd 100% Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX iii ~ ‡ Kenmore Capital 3 Ltd 100% Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX iii ~ ∞ Kenmore Capital Ltd 100% Grant Thornton UK LLP, 110 Queen Street, Glasgow, G1 3BX iii ~ ‡ KERV Group Ltd 99% Unit 1b, 1 Finsbury Avenue, London, United Kingdom, EC2M 2PG ii & KHL 2017 Ltd 84.4% C/O Rsm Uk Restructuring Advisory Llp 5th Floor, Central Square, 29 Wellington ii 84.4% iii & ‡ Street, Leeds, LS1 4DL Kier HGP Holdings LLP n/a 2nd Floor, Optimum House, Clippers Quay, Salford, England, M50 3XP * 356 Lloyds Banking Group Annual Report and Accounts 2022 % of share class held by immediate parent company (or by the Group Name of undertaking where this varies) Registered office address Notes Kingswood Mobility Group Ltd 99.25% Browne Jacobson Llp (Cs) Mowbray House, Castle Meadow Road, Nottingham, ii & England, NG2 1BJ Kruger Bidco Ltd 99% Rhino House, Deans Road, Ellesmere Port, United Kingdom, CH65 4DR ii & Lonsdale Park (Hackthorpe) Ltd 50% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 ii 9BN Lucida Broking Holdings Ltd 89.25% St James House, 27-43 Eastern Road, Romford, Essex, United Kingdom, RM1 3NH ii & Mableford Ltd 50% Lindum Business Park, Station Road, North Hykeham, Lincoln, LN6 3QX, United ii Kingdom Mansion House Group (Sandbach) Ltd 50% 8-10 Old Market Place, Altrincham, Cheshire, United Kingdom, WA14 4DF ii Meadow Rigg (Burneside Road) Ltd 25% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 i 9BN Financial results Risk managementGovernance Financial statements Other informationStrategic report Measured Identity Hub Ltd 97.92% 3 Long Acres, Willow Farm, Castle Donington, Derbyshire, DE74 2UG ii & MFS Groupco Ltd 99% York House, Wetherby Road, Long Marston, YO26 7NH ii & M&GP (No. 2) Ltd 50% 6 Lancaster Way, Ermine Business Park, Huntingdon, Cambridgeshire, United ii Kingdom, PE29 6XU Motability Operations Group plc 39.98% City Gate House, 22 Southwark Bridge Road, London, SE1 9HB i 40% v Neilson Active Holidays Group Ltd 89.25% Locksview, Brighton Marina, Brighton, BN2 5HA ii & North Kensington Gate HGP Ltd 100% 124 Finchley Road, London, United Kingdom, NW3 5JS ii Northern Edge Ltd 39.4% Titanium 1 King’s Inch Place, Renfrew, Glasgow, PA4 8WF iii & Oakfield Park (Kirkby Londsdale) LLP n/a 4 Cowper Road, Gilwilly Industrial Estate, Penrith, CA11 9BN * Odyssey Bidco Ltd 99% Hjp Audley House, Northbridge Road, Berkhamsted, Hertfordshire, ii & United Kingdom, HP4 1EH Omnium Leasing Company n/a n/a + * Onapp (Topco) II Ltd 82.5% 3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 ii & 100% v 4FJ Onapp (Topco) Ltd 82.5% 3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 xvii & 82.5% xviii 4FJ Origin (Topco) Ltd 50% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 ii 9BN Osprey Aviation Services (UK) Ltd 89.25% Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU xvii & 89.25% xviii PAM Healthcare Ltd 99.25% Holly House, 73-75 Sankey Street, Warrington, WA1 1SL ii & Panther Partners Ltd 89% 16 Kirby Street, London, EC1N 8TS xvii 89% xviii & Park Bidco Ltd 99% Liliput Road, Brackmills Industrial Estate, Northampton, United Kingdom, NN4 7DT ii & Pennine View (Calthwaite) Ltd 25% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 i 9BN Pertemps Network Group Ltd 93.83% Meriden Hall, Main Road, Meriden, Coventry, CV7 7PT iii & PG Somerset Legion Ltd 50% C/O Pg Group Office, 1 Number One Bristol, Lewins Mead, Bristol, United Kingdom, ii BS1 2NJ PIHL Equity Administration Ltd 100% Cavendish House, 18 Cavendish Square, London, W1G 0PJ iii PL & HGP Ltd 50% 3rd Floor Tower House, 10 Southampton Street, London, United Kingdom, WC2E ii 7HA PPCE Holdings Ltd 89.25% Suite 3 Regency House, 91 Western Road, Brighton, BN1 2NW xviii & ‡ Project Airscope Bidco Ltd 99.25% Express Networks 2, 3 George Leigh Street, Manchester, United Kingdom, M4 5DL xviii & Project Avatar Ltd 99.25% Unit 2 And 3 Jessop Court, Waterwells Business Park, Quedgeley, Gloucester, xviii & United Kingdom, GL2 2AP Project Balloon Bidco Ltd 79.16% First Floor, 85 Great Portland Street, London, W1W 7LT ii & Project Bridgerton Bidco Ltd 99.22% 33 Charlotte Street, London, England, W1T 1RR ii & Project Fusion Bidco Ltd 99.25% 46 - 48 Queen Charlotte Street, Bristol, BS1 4HX xviii & Project Galaxy UK Topco Ltd 28.22% 3rd Floor Q5 Quorum Business Park, Benton Lane, Newcastle Upon Tyne, United ii & Kingdom, NE12 8BS Project Sketch Ltd 88.30% 11 Vantage Way, Erdington, Birmingham, B24 9GZ ii & Project Sutton Bidco Ltd 99.25% Chawston House, Chawston Lane, Chawston, Bedford, Bedfordshire, United ii & Kingdom, MK44 3BH Quantum (Flimwell) Ltd 50% Kings Parade, Lower Coombe Street, Croydon, CR0 1AA ii Quentin Park (Cumwhinton) Ltd 50% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 ii 9BN Ramco Acquisition Ltd 88.74% Brodies House, 31-33 Union Grove, Aberdeen, AB10 6SD xii 88.74% xvi & 0.17% xix RDIL 2021 Ltd 99.25% Old Printers Yard, 156 South Street, Dorking, Surrey, United Kingdom, RH4 2HF xviii & Rocket Science Holdings Ltd 99.17% Unit 2, Origin Business Park, Rainsford Road, Park Royal, London, NW10 7FW xviii & Sanders Brow (Armathwaite) Ltd 50% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 ii 9BN Satago Financial Solutions Ltd 100% 4th Floor, 120 Regent Street, London, United Kingdom, W1B 5FE iii ScarlettAbbott (Topco) Ltd 99.25% The Old Chapel, 27a Main Street, Fulford, York, North Yorkshire, United Kingdom, ii & YO10 4PJ Scenic Topco Ltd 89.25% Unit 1B, Pentwyn Business Centre, Wharfedale Road, Cardiff, Wales, CF23 7HB ii & Scotia (Brechin) Ltd 100% Ca’D’Oro Building, 45 Gordon Street, Glasgow, Scotland, G1 3PE ii Seahawk Bidco Ltd 89.25% Unit 2 Springfield Court, Summerfield Road, Bolton, BL3 2NT, United Kingdom xviii & SGI Holdings Ltd 99% Alton House, Alton Business Park, Alton Road, Ross-on-Wye, HR9 5BP ii & Shaken Udder Group Ltd 99.25% Heathwell Farm, Simpsons Lane, Tiptree, Colchester, United Kingdom, CO5 0PP ii & SOLO Topco Ltd 99% Onecom House, 4400 Parkway, Whiteley, Fareham, Hampshire, PO15 7FJ ii & Southwark Estates (One) Ltd 100% 51 Welbeck Street, London, England, W1G 9HL ii SSP Topco Ltd 89.25% Fourth Floor D Mill, Dean Clough, Halifax, United Kingdom, HX3 5AX ii & Stancliffe Homes (Bentley) Ltd 50% Office 3 Markham Lane, Markham Vale, Chesterfield, England, S44 5HY ii Stewart Milne (Glasgow) Ltd 100% The Mound, Edinburgh, EH1 1YZ, United Kingdom ii ~ Stewart Milne (West) Ltd 100% The Mound, Edinburgh, EH1 1YZ, United Kingdom ii ~ Stratus (Holdings) Ltd 82.5% 3MC Middlemarch Business Park, Siskin Drive, Coventry, West Midlands, England, xvii 82.5% xviii & CV3 4FJ 357Lloyds Banking Group Annual Report and Accounts 2022 ### Subsidiaries and related undertakings continued % of share class held by immediate parent company (or by the Group Name of undertaking where this varies) Registered office address Notes Stonewood Partnerships (Pudding Pie) Ltd 25% The Stonewood Office, West Yatton Lane, Castle Combe, Chippenham, United i Kingdom, SN14 7EY Stonewood Partnerships (RGI) Ltd 50% The Stonewood Office, West Yatton Lane, Castle Combe, Chippenham, United ii Kingdom, SN14 7EY Teviot Developments Holdings Ltd 100% 1/1, 15 North Claremont Street, Glasgow, United Kingdom, G3 7NR ii The Edwin Group Ltd 99% First Floor (South) Cathedral Buildings, Dean Street, Newcastle Upon Tyne, ii & United Kingdom, NE1 1PG The EMS Group Ltd 99.25% The Refinery, South Road, Ellesmere Port, United Kingdom, CH65 4LE xviii & The Exceed Partnership LP n/a C/O Spencer Gardner Dickins 3 Coventry Innovation Village, Cheetah Road, * Coventry, CV1 2TL The Orchards (Burgh by Sands) Ltd 50% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 ii 9BN The Power Industrial Group Ltd 82.5% C/O TENEO FINANCIAL ADVISORY LIMITED, 156 Great Charles Street Queensway, ii & ‡ 82.5% xviii Birmingham, B3 3HN The Woodlands (Carlisle) Ltd 25% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 i 9BN Timec 1667 Ltd 99% Floor 6 Arden House, Regent Centre, Gosforth, Newcastle Upon Tyne, Tyne And ii & Wear, United Kingdom, NE3 3LU Tolia Bidco Ltd 99.25% Suite 1, 7th Floor 50 Broadway, London, United Kingdom, SW1H 0DB ii & Topco Coffee Ltd 99.25% Lodge Farm Barn, Elvetham Park Estate, Hartley Wintney, Hampshire, xviii & United Kingdom, RG27 8AS Topsmiths Ltd 99.25% 6 Kingsland Trading Estate, St. Philips Road, Bristol, Somerset, England, BS2 0JZ ii & United House Group Holdings Ltd 81.5% 26 Kings Hill Avenue, Kings Hill, West Malling, Kent, ME19 4AE ii & Verde Bidco Ltd 99.25% Cannon Green, 1 Suffolk Lane, London, England, EC4R 0AX xviii & Wakefield Gardens (Lazonby) Ltd 25% 4 Cowper Road, Gilwilly Industrial Estate, Penrith, Cumbria, United Kingdom, CA11 i 9BN Walnut Newco Ltd 99.25% C/O Roxburgh Milkins Limited Merchants House North, Wapping Road, Bristol, ii & United Kingdom, BS1 4RW WCCTV Group Ltd 99.25% Charles Babbage House, Kingsway Business Park, Rochdale, United Kingdom, ii & OL16 4NW Whiteburn Viewforth Development Ltd 100% 1 Jackson’s Entry, Edinburgh, Scotland, EH8 8PJ ii Whittington Facilities Ltd 100% C/O Teneo Restructuring Limited 156 Great Charles Street, Queensway, xv Δ Birmingham, West Midlands, B3 3HN ZWPV Ltd 89.25% Zip World Base Camp, Denbigh Street, Llanrwst, LL26 0LL ii & ### Collective Investment Vehicles The following comprises a list of the Group’s and other external collective investment vehicles (CIV), where the shareholding is greater than or equal to 20% of the nominal value of any class of shares, or a book value greater than 20% of the CIV’s assets. | | % of fund held by | | | % of fund held by | | --- | --- | --- | --- | --- | | | immediate parent | | | immediate parent | | | (or by the Group | | | (or by the Group | | Name of undertaking | where this varies) Notes | Name of undertaking | | where this varies) Notes | | ABRDN OEIC I 8 | | BLACKROCK FIXED INCOME DUBLIN FUNDS 9 | | | | abrdn European Real Estate Share Fund 38.84% | | iShares Emerging Markets Government Bond | | 61.52% | | abrdn Sterling Bond Fund 77.29% | | | Index Fund (IE) | | | | | iShares Emerging Markets Local Government | | 79.78% | ABRDN OEIC IV 8 Bond Index Fund (IE) abrdn Global Corporate Bond Tracker Fund 93.85% abrdn UK Equity Enhanced Index Fund 88.08% BNY MELLON INVESTMENT FUNDS 10 BNY Mellon Global Absolute Return Fund 78.79% ABRDN OEIC VI 8 BNY Mellon Global Equity Fund 31.26% abrdn Emerging Markets Equity Enhanced 59.80% BNY Mellon Global Multi-Strategy Fund 41.08% Index Fund BNY Mellon Multi Asset Growth Fund 21.65% AGFE UK REAL ESTATE SENIOR DEBT FUND LP 74.64% 22 BNY Mellon Sustainable UK Opportunities Fund60.11% BNY Mellon UK Income Fund 25.65% ARTEMIS INSTITUTIONAL FUNDS 3 BNY Mellon US Opportunities Fund 35.16% | Artemis SmartGARP Paris-Aligned Global | | 45.79% | | | --- | --- | --- | --- | | | Equity Fund | | HBOS INTERNATIONAL INVESTMENT FUNDS ICVC 1 | | BLACKROCK AUTHORISED CONTRACTUAL SCHEME 1 9 | | | European Fund 93.69% | | ACS 60:40 Global Equity Tracker Fund 40.64% | | | Far Eastern Fund 79.62% | | ACS Climate Transition World Equity Fund 95.60% | | | International Growth Fund 55.04% | | ACS Japan Equity Tracker Fund 75.84% | | | Japanese Fund 94.59% | | ACS UK Equity Tracker Fund 62.25% | | | North American Fund 95.53% | | ACS World Multifactor Equity Tracker Fund 58.30% | | | HBOS PROPERTY INVESTMENT FUNDS ICVC 1 | | BlackRock ACS US Equity Tracker Fund 72.11% | | | UK Property Fund 51.98% | | BLACKROCK COLLECTIVE INVESTMENT FUNDS 9 | | | HBOS SPECIALISED INVESTMENT FUNDS ICVC 1 | | BlackRock Global Corporate ESG Insights | | 78.93% | Cautious Managed Fund 50.64% | Bond Fund Ethical Fund 81.43% iShares Global Property Securities Equity 44.73% Fund of Investment Trusts 39.36% Index Fund Smaller Companies Fund 63.60% 358 Lloyds Banking Group Annual Report and Accounts 2022 | | % of fund held by | | % of fund held by | | --- | --- | --- | --- | | | immediate parent | | immediate parent | | | (or by the Group | | (or by the Group | | Name of undertaking | where this varies) Notes | Name of undertaking | where this varies) Notes | | Special Situations Fund 49.64% | | Balanced Growth Portfolio 24.17% | | Cash Fund 99.51% HBOS UK INVESTMENT FUNDS ICVC 1 International Equity Tracker Fund 60.30% UK Equity Income Fund 57.20% Progressive Growth Portfolio 1 44.35% UK Equity Tracker Fund 59.73% UK Growth Fund 59.57% SCOTTISH WIDOWS OVERSEAS GROWTH 2 INVESTMENT FUNDS ICVC HLE ACTIVE MANAGED PORTFOLIO AUSGEWOGEN 55.16% 18 American Growth Fund 78.64% HLE ACTIVE MANAGED PORTFOLIO DYNAMISCH 41.80% 18 European Growth Fund 87.35% Global Growth Fund 58.90% HLE ACTIVE MANAGED PORTFOLIO KONSERVATIV 39.12% 18 Global Select Growth Fund 51.32% | INVESCO AMERICAN INVESTMENT SERIES 11 | Japan Growth Fund 97.73% | | Financial results Risk managementGovernance Financial statements Other informationStrategic report | | --- | --- | --- | --- | | Invesco US Equity Fund 31.31% | Pacific Growth Fund 68.49% | | | | LAZARD INVESTMENT FUNDS 16 | SCOTTISH WIDOWS PROPERTY AUTHORISED | 2 | | | Lazard Developing Markets Fund 91.78% | CONTRACTUAL SCHEME | | | Scottish Widows Pooled Property ACS Fund 1 100% LEGG MASON GLOBAL FUNDS 5 Scottish Widows Pooled Property ACS Fund 2 100% Legg Mason Western Asset Multi-Asset Credit 40.85% Fund | | | | SCOTTISH WIDOWS TRACKER AND SPECIALIST | 2 | | --- | --- | --- | --- | --- | | MGI FUNDS PLC 14 | | | INVESTMENT FUNDS ICVC | | | Mercer Diversified Retirement Fund 71.64% | | | Emerging Markets Fund 81.51% | | | Mercer Multi Asset Defensive Fund 31.95% | | | UK Equity Tracker Fund 89.20% | | | Mercer Multi Asset Growth Fund 65.69% | | | UK Fixed Interest Tracker Fund 95.32% | | | Mercer Multi Asset High Growth Fund 61.05% | | | UK Index-Linked Tracker Fund 99.03% | | | Mercer Multi Asset Moderate Growth Fund 65.44% | | | UK Tracker Fund 45.04% | | | Mercer Passive Sustainable Global Equity | | 67.64% | SCOTTISH WIDOWS UK AND INCOME INVESTMENT | 2 | | | Feeder Fund | | FUNDS ICVC | | | MORGAN STANLEY INVESTMENT FUNDS 12 | | | Environmental Investor Fund 76.47% | | | Global Credit Fund 44.92% | | | Ethical Fund 84.55% | | UK Equity Income Fund 24.69% NORDEA 1, SICAV 7 UK Growth Fund 57.67% Nordea 1 – GBP Diversified Return Fund 26.69% SEI GLOBAL MASTER FUND PLC 13 RETAIL AUTHORISED UNIT TRUSTS 9 The SEI Moderate Fund 35.27% BlackRock Balanced Growth Portfolio Fund 38.65% The SEI Factor Allocation Global Equity Fund 52.76% SCHRODER FUNDS ICAV 15 The SEI Defensive Fund 51.21% Schroder Sterling Liquidity Fund 93.10% The SEI Growth Fund 32.88% Schroder Sterling Short Duration Bond Fund 95.45% SPW INVESTMENT PORTFOLIO ICVC 20 SCHRODER INTERNATIONAL SELECTION FUND 19 SPW IPS Growth Portfolio 44.12% Emerging Market Bond 70.54% SPW IPS Income Portfolio 42.46% Global Climate Leaders 27.08% SPW MULTI MANAGER ICVC 20 Multi Asset Total Return 20.50% SPW Multi-Manager UK Equity Income Fund 23.54% Sustainable Emerging Markets Synergy 99.26% SSGA 4 SCHRODER MATCHING PLUS 19 State Street AUT Asia Pacific ex Japan Screened 96.77% Schroder Matching Plus Bespoke 98.68% (ex Controversies and CW) Index Equity Fund Investment Fund 10 | | | State Street AUT Emerging Market Screened (ex | | 100% | | --- | --- | --- | --- | --- | | SCOTTISH WIDOWS INCOME AND GROWTH FUNDS | 2 | | Controversies and CW) Index Equity Fund | | | ICVC | | State Street AUT Europe ex UK Screened (ex | | 96.72% | | Adventurous Growth Fund 44.12% | | | Controversies and CW) Index Equity Fund | | | Balanced Growth Fund 30.23% | | THE SVS LEVITAS FUNDS 21 | | | | Corporate Bond 1 Fund 85.25% | | TM Levitas A Fund 65.00% | | | | Corporate Bond PPF Fund 100% | | TM Levitas B Fund 62.51% | | | ESG Sterling Corporate Bond Tracker Fund 100% UBS INVESTMENT FUNDS ICVC 17 Global Tactical Asset Allocation 1 Fund 84.28% UBS Global Optimal Fund 29.00% Progressive Growth Fund 45.32% UK Index Linked Gilt Fund 100% UNIVERSE, THE CMI GLOBAL NETWORK 6 CMIG Access 80% 100% | SCOTTISH WIDOWS INVESTMENT SOLUTIONS FUNDS | | | 2 | | | --- | --- | --- | --- | --- | | ICVC | | | | CMIG Focus Euro Bond 99.91% | | Corporate Bond Fund 72.07% | | | | CMIG GA 70 Flexible 100% | | Developed Asia Pacific (ex Japan ex Korea) | | 98.30% | | CMIG GA 80 Flexible 100% | | | Equity Tracker Fund | | | CMIG GA 90 Flexible 100% | | Developed Europe (ex UK) Equity Tracker Fund 95.07% | | | | Continental Euro Equity 97.95% | | Fundamental Index Emerging Markets Equity | | 90.75% | | Euro Bond 61.97% | | | Fund | | | Euro Cautious 90.58% | | Fundamental Index Global Equity Fund 94.19% | | | | Euro Currency Reserve 95.78% | | Fundamental Index UK Equity Fund 88.78% | | | | European Enhanced Equity 100% | | Fundamental Low Volatility Index Emerging | | 93.15% | | Japan Enhanced Equity 97.84% | | | Markets Equity Fund | | | Pacific Enhanced Basin 77.79% | | Fundamental Low Volatility Index Global | | 97.55% | | UK Equity 83.61% | Equity Fund US Bond 90.38% Fundamental Low Volatility Index UK Equity 85.38% US Currency Reserve 65.91% Fund US Enhanced Equity 89.05% Gilt Fund 95.47% US Tracker 37.80% High Income Bond Fund 61.17% International Bond Fund 76.61% Japan Equity Fund 93.21% Strategic Income Fund 65.97% US Equity Fund 90.21% SCOTTISH WIDOWS MANAGED INVESTMENT FUNDS 2 ICVC 359Lloyds Banking Group Annual Report and Accounts 2022 Principal place of business for Collective Investment Vehicles Registered office addresses (1) Trinity Road, Halifax, West Yorkshire, HX1 2RG (1) 25 Gresham Street, London, EC2V 7HN (2) 69 Morrison Street, Edinburgh, United Kingdom, EH3 8BW (2) 13-18 City Quay, Dublin, D02 ED70 (3) Cassini House, 57 St James’s Street, London, SW1A 1LD (3) 69 Morrison Street, Edinburgh, EH3 8YF (4) 20 Churchill Place, Canary Wharf, London, E14 5HJ (4) Trinity Road, Halifax, West Yorkshire, HX1 2RG (5) Riverside Two Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2, (5) The Mound, Edinburgh, EH1 1YZ Ireland (6) 40a Station Road, Upminster, Essex, RM14 2TR (6) Lemanik Asset Management S.A, 106 route d’Arlon, L-8210, Mamer, (7) 9 Broad Street, St Helier, Jersey, JE2 3RR Luxembourg (8) Minter Ellison, Governor Macquarie Tower, Level 40, 1 Farrer Place, Sydney, (7) 562, Rue de Neudorf, L-2220, Luxembourg NSW 2000, Australia (8) Abrdn Fund Managers Ltd, 280 Bishopsgate, London, EC2M 4AG (9) 1 Brookhill Way, Banbury, Oxon, OX16 3EL (9) BlackRock Fund Managers Ltd, 12 Throgmorton Avenue, London, EC2N 2DL (10) 6th Floor, 125 London Wall, London, EC2Y 5AS (10) BNY Mellon Investment Funds, BNY Mellon Centre, 160 Queen Victoria Street, (11) The Corporation Trust Company, Corporation Trust Center, 1209 Orange London, EC4V 4LA Street, Wilmington, Delaware 19801 (11) Invesco Fund Managers Ltd, Perpetual Park, Perpetual Park Drive, Henley- (12) Barnett Way, Gloucester, GL4 3RL on-Thames, Oxfordshire, RG9 1HH (13) 1 More London Place, London, SE1 2AF (12) MSIM Fund Management (Ireland) Ltd, The Observatory, 7-11 Sir John (14) 100 Cannon Street, London, EC4N 6EU Rogerson’s Quay, Dublin 2, DO2 VC42, Ireland (15) 2 North Queen Street, Belfast, Northern Ireland, BT15 1ES (13) SEI Investments Global Ltd, Styne House, Upper Hatch Street, Dublin 2, (16) Suite 6, Rineanna House, Shannon Free Zone, Co. Clare, Ireland Ireland (17) Thurn-Und-Taxis-Platz 6, 60313, Frankfurt am Main, Germany (14) 70 Sir John Rogerson’s Quay, Dublin 2, Ireland (18) Hoogoorddreef, 151101BA, Amsterdam, Netherlands (15) Schroder Investment Management Ltd, Ten Earlsfort Terrace, Dublin 2, DO2 (19) Basisweg 10, Amsterdam, 1043AP, Netherlands T380 (20) 33 Old Broad Street, London, EC2N 1HZ (16) 50 Stratton Street, London, W1J 8LL (21) 20 Cathedral Yard, Exeter, EX1 1HB (17) UBS Asset Management (UK) Ltd, 5 Broadgate, London, EC2M 2QS (22) Citco REIF Services (Luxembourg) S.A., Carré Bonn, 20, Rue de la Poste, (18) Oppenheim Asset Management Services S.à r.l., 2, Boulevard Konrad L-2346 Luxembourg Adenauer, L-1115 Luxembourg (23) 51-59 Circular Road, Douglas, IM1 1AZ, Isle of Man (19) 5, Rue Hohenhof, L-1736, Senningerberg, Luxembourg (24) Corporation Service Company, 251 Little Falls Drive, Wilmington, DE 19808, (20) Schroder Personal Wealth (ACD), 25 Gresham Street, London, EC2V 7HN USA (21) Thesis Unit Trust Management Ltd, Exchange Building, St. John’s Street, (25) 69 Morrison Street, Edinburgh, United Kingdom, EH3 8BW Chichester, West Sussex, PO19 1UP (26) 1 Bartholomew Lane, London, EC2N 2AX, United Kingdom (22) 3rd Floor South, 55 Baker Street, London, W1U 8EW (27) 1, Avenue du Bois, L–1251 Luxembourg (28) SAB Formalities, 23 Rue de Roule, Paris, 75001, France (29) Karl-Liebknecht-STR. 5, D-10178 Berlin, Germany (30) 20 Rue de la Poste, L-2346 Luxembourg * The undertaking does not have share capital (31) Atria One, 144 Morrison Street, Edinburgh, EH3 8EX + The undertaking does not have a registered office (32) 26 New Street, St. Helier, Jersey, JE2 3RA # In relation to Subsidiary Undertakings, an undertaking external to the (33) 3rd Floor, IFC5, Castle Street, St Helier, JE2 3BY, Jersey Group holds shares (34) P O Box 186, Royal Chambers, St Julian’s Avenue, St. Peter Port, GY1 4HP, ^ Shares held directly by Lloyds Banking Group plc Guernsey & The Group holds voting rights of between 20% and 49.9% (35) De Entrée 254, 1101 EE, Amsterdam, Netherlands ~ The Group holds voting rights of 50% (36) 44 Esplanade, St. Helier, Jersey, JE4 9WG ‡ The undertaking is in liquidation (37) Fascinatio Boulevard 1302, 2909VA Capelle aan den IJssel, Netherlands ∞ The undertaking is in Administrative Receivership (38) Avenida Dr. Chucri Zaidan, n° 296, cj 231 e 51, Bairro Vila Cordeiro, Cidade Δ The undertaking is in Administration de São Paulo, Estado de São Paulo, Cep 04583-110 Brazil § The undertaking has applied for Strike Off (39) 2nd Floor, Liberation House, Castle Street, St. Helier, JE1 1EY, Jersey (i) Ordinary Shares (40) 1 Vine Street, London, W1J 0AH (ii) A Ordinary Shares (41) 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ (iii) B Ordinary Shares (42) 5th Floor, The Exchange, George’s Dock, IFSC, Dublin 1, Ireland (iv) Non-Voting Preference Shares (43) 110 St. Vincent Street, Glasgow, G2 4QR (v) Preference Shares (44) 8 Avenue Hoche, 75008, Paris, France (vi) Non-Voting Deferred Shares (45) Keens House, Anton Mill Road, Andover, Hampshire, SP10 2NQ (vii) Redeemable Non-voting Shares (46) Glategny Court, Glategny Esplanade, St. Peter Port, GY1 1WR, Guernsey (viii) C Ordinary Shares (47) Cawley House, Chester Business Park, Chester, CH4 9FB, United Kingdom | (ix) B Ordinary Non-Voting Shares | (48) 6/12, Primrose Road, Bangalore, 560025, India | | | --- | --- | --- | | (x) Preferred A Ordinary Shares | (49) 7th Floor 21 Lombard Street London, EC3V 9AH | | | (xi) Redeemable Preference Shares | (50) St William House, Tresillian Terrace, Cardiff, CFl0 5BH | | | (xii) A4 Ordinary Shares | (51) 18th Floor, United Centre, 95 Queensway, Hong Kong | | | (xiii) Ordinary Non-Voting Shares | (52) McStay Luby, Dargan House, 21-23 Fenian Street, Dublin 2, Ireland | | | (xiv) Common Stock | (53) 1A Heienhaff, Senningerberg, L-1736 Luxembourg | | | (xv) Preferred B Ordinary Shares | (54) Wilmington Trust SP Services (London) Limited, Third Floor, 1 King’s Arms | | | (xvi) A3 Ordinary Shares | | Yard, London, EC2R 7AF | | (xvii) A2 Ordinary Shares | (55) 1-2 Victoria Buildings, Haddington Road, Dublin 4, Ireland | | | (xviii) A1 Ordinary Shares | (56) 17 Boulevard F.W. Raiffeisen, L-2411 Luxembourg | | | (xix) Z Ordinary Shares | (57) Society Building, 8 All Saints Street, London, England, N1 9RL | | (xx) Ordinary Limited Voting Shares (xxi) LN Deferred Shares (xxii) D Ordinary Shares (xxiii) E Ordinary Shares (xxiv) F Ordinary Shares (xxv) G Ordinary Shares (xxvi) H Ordinary Shares (xxvii) I Ordinary Shares (xxviii) J Ordinary Shares 360 Lloyds Banking Group Annual Report and Accounts 2022 monetary policy in jurisdictions in which the Group operates; ## Forward-looking statements natural pandemic (including but not limited to the COVID-19 This document contains certain forward-looking statements pandemic) and other disasters; risks concerning borrower and within the meaning of Section 21E of the US Securities Exchange counterparty credit quality; risks affecting insurance business Act of 1934, as amended, and section 27A of the US Securities and defined benefit pension schemes; risks related to the Act of 1933, as amended, with respect to the business, strategy, uncertainty surrounding the integrity and continued existence plans and/or results of Lloyds Banking Group plc together of reference rates; changes in laws, regulations, practices and with its subsidiaries (the Group) and its current goals and accounting standards or taxation; changes to regulatory capital expectations. Statements that are not historical or current or liquidity requirements and similar contingencies; the policies facts, including statements about the Group’s or its directors’ and actions of governmental or regulatory authorities or courts and/or management’s beliefs and expectations, are forward together with any resulting impact on the future structure of looking statements. Words such as, without limitation, ‘believes’, the Group; risks associated with the Group’s compliance with ‘achieves’, ‘anticipates’, ‘estimates’, ‘expects’, ‘targets’, ‘should’, a wide range of laws and regulations; assessment related to ‘intends’, ‘aims’, ‘projects’, ‘plans’, ‘potential’, ‘will’, ‘would’, ‘could’, resolution planning requirements; risks related to regulatory ‘considered’, ‘likely’, ‘may’, ‘seek’, ‘estimate’, ‘probability’, ‘goal’, actions which may be taken in the event of a bank or Group ‘objective’, ‘deliver’, ‘endeavour’, ‘prospects’, ‘optimistic’ and similar failure; exposure to legal, regulatory or competition proceedings, expressions or variations on these expressions are intended to investigations or complaints; failure to comply with anti-money identify forward looking statements. These statements concern or laundering, counter terrorist financing, anti-bribery and sanctions may affect future matters, including but not limited to: projections regulations; failure to prevent or detect any illegal or improper or expectations of the Group’s future financial position, including activities; operational risks; conduct risk; technological changes profit attributable to shareholders, provisions, economic profit, and risks to the security of IT and operational infrastructure, dividends, capital structure, portfolios, net interest margin, systems, data and information resulting from increased threat capital ratios, liquidity, risk-weighted assets (RWAs), expenditures of cyber and other attacks; technological failure; inadequate or or any other financial items or ratios; litigation, regulatory failed internal or external processes or systems; risks relating to and governmental investigations; the Group’s future financial ESG matters, such as climate change (and achieving climate performance; the level and extent of future impairments and change ambitions), including the Group’s ability along with the write-downs; the Group’s ESG targets and/or commitments; government and other stakeholders to measure, manage and statements of plans, objectives or goals of the Group or its mitigate the impacts of climate change effectively, and human management and other statements that are not historical fact; rights issues; the impact of competitive conditions; failure to expectations about the impact of COVID-19; and statements of attract, retain and develop high calibre talent; the ability to assumptions underlying such statements. By their nature, forward achieve strategic objectives; the ability to derive cost savings and looking statements involve risk and uncertainty because they other benefits including, but without limitation, as a result of any relate to events and depend upon circumstances that will or may acquisitions, disposals and other strategic transactions; inability occur in the future. Factors that could cause actual business, to capture accurately the expected value from acquisitions; strategy, plans and/or results (including but not limited to the assumptions and estimates that form the basis of the Group’s payment of dividends) to differ materially from forward looking financial statements; and potential changes in dividend policy. statements include, but are not limited to: general economic A number of these influences and factors are beyond the Group’s and business conditions in the UK and internationally; political control. Please refer to the latest Annual Report on Form 20-F filed instability including as a result of any UK general election and any by Lloyds Banking Group plc with the US Securities and Exchange further possible referendum on Scottish independence; acts of Commission (the SEC), which is available on the SEC’s website at hostility or terrorism and responses to those acts, or other such www.sec.gov, for a discussion of certain factors and risks. Lloyds events; geopolitical unpredictability; the war between Russia and Banking Group plc may also make or disclose written and/or Ukraine; the tensions between China and Taiwan; market related oral forward-looking statements in other written materials and risks, trends and developments; exposure to counterparty risk; in oral statements made by the directors, officers or employees instability in the global financial markets, including within the of Lloyds Banking Group plc to third parties, including financial Eurozone, and as a result of the exit by the UK from the European analysts. Except as required by any applicable law or regulation, Union (EU) and the effects of the EU-UK Trade and Cooperation the forward-looking statements contained in this document Agreement; the ability to access sufficient sources of capital, are made as of today’s date, and the Group expressly disclaims liquidity and funding when required; changes to the Group’s any obligation or undertaking to release publicly any updates credit ratings; fluctuations in interest rates, inflation, exchange or revisions to any forward looking statements contained in rates, stock markets and currencies; volatility in credit markets; this document whether as a result of new information, future volatility in the price of the Group’s securities; tightening of events or otherwise. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments. This report is printed on Amadeus Silk paper and board, Forest Stewardship Council® (FSC®) certified and sourced from well managed forests and other controlled sources. The paper is Elemental Chlorine Free (ECF). The manufacturing mill holds ISO14001 (EMAS) and EU Ecolabel certificated for environmental management. The paper is carbon balanced with the World Land Trust, an international conservation charity, who offset carbon emissions through the preservation of high conservation land. The inks used are vegetable oil based and 100% of the dry waste created during manufacturing is diverted from landfill. Printed in the UK by Pureprint Group, CarbonNeutral®, ISO 14001 and FSC® certified. 361Lloyds Banking Group Annual Report and Accounts 2022 ### Lloyds Banking Group Annual Report and Accounts 2022 ### Head office ### 25 Gresham Street ### London EC2V 7HN ### +44 (0)20 7626 1500 ### www.lloydsbankinggroup.com ### Registered office ### The Mound ### Edinburgh EH1 1YZ ### Registered in Scotland no. SC095000